hiriskpaul wrote:Lootman wrote:EthicsGradient wrote:I think the FT Adviser article shows that wanting a return of 5% above inflation, over decades, can be risky. If you start that at a market high point, you could run out of money. I'd hope that few people plan for 5% plus inflation anyway. 4% is sometimes quoted (and effectively what the FT Adviser article says their "dynamic spending" method could have achieved), but that may be ambitious too.
The quoted rates that you often see for a safe withdrawal rate, such as 5% or 4% a year, are typically quoted before inflation, not after it. That said the long term return from equities is something like 4% or 5% annually after inflation, i.e. a real return.
When drawing an income from a portfolio, long term returns are not the whole story. Sequence of returns really matters as well. As an example, using data from the Barclays Equity Gilts study, a portfolio consisting of 100% UK equities produced a total real (RPI adjusted) return of about 6.4% between 1968 and 1998. A 60/40 portfolio of equities/T bills managed only 5.4%. So simplistic total return logic might suggest that the 100% equities portfolio would be the best performer when drawing down over the 30 year period. However, with a 4% SWR, that portfolio would have run out of money after 20 years. In comparison, the lower performing 60/40 portfolio still had 28% of the money left after 30 years. That's inflation adjusted, ie 28% in 1968 pounds.
2 things are important to note here:
1) The highest performing portfolio ran out of money even though the real returns were 2.4% greater than the drawdown rate;
2) The lower performing portfolio was the better choice for drawdown.
If the day after starting withdrawals the portfolio value halves, then in effect a 4% SWR has risen to a 8% SWR relative to the ongoing portfolio value. For those accumulating then stocks halving is a good thing as new money buys twice as many shares. Your higher reward example is perhaps suggestive that a bad sequence of returns occurred i.e. accumulators did well due to stock declines.
50/50 initial stock/bonds where bonds are spent first transitions to 100/0, averages 75/25. Conceptually both the bucket (50/50 -> 100/0 and constant weighted 75/25 might be expected to yield similar overall rewards, however the bucket approach is safer in having lower early years sequence of returns risk. In later years more often good gains followed by a decline are less harmful as that might be just giving back some of the gains rather than eating ones own capital.
Combining additional factors such as relative valuations and averaging (average in over 2 timepoints a year apart or whatever), and you can bolster the 4% suggested historic worst case SWR upward. 4% SWR is based on the worst case 30 year period, all others by definition were better.
75/25 constant weighted is said to have had a 99% chance of supporting a 4% SWR for 30 years
With buckets and relative valuations that's likely increased to a 100%, IF forward time is within historic limits. For many the risk of not seeing another 30 years is a far greater risk. IIRC even in the worst cases where 4% SWR failed it still served 20+ years prior to failure.
Some might target 6% SWR with a reasonable chance of success, when so however you ideally also need a plan B in case of failure, such as a small separate pot that is set aside to accumulate and cover longevity (such as if the main pot does fail). Perhaps selecting asset(s) for that growth pot that may do well under the circumstances that drove the main pot to fail. That plan B could perhaps even be as simple as just having combined state and occupational pensions to cover (perhaps lower later life) spending that are yet to be received. If I'm 60 and newly retired, and at 68 will have combined £20K/year state and occupational pensions and could live off that alone, whilst also owning a home that provides late life care home cost cover then even if all my liquid wealth was blown by age 68 I'd be OK, such that I could push for a 14% SWR. In that context a 4% or even 5% SWR is pretty low. My actual SWR is however lower still, as I have heirs in mind, investing more for their benefit than myself.