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Safe Withdraw Rate - is FTSE different from S&P?

Including Financial Independence and Retiring Early (FIRE)
petronius
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Safe Withdraw Rate - is FTSE different from S&P?

#118605

Postby petronius » February 16th, 2018, 2:43 pm

I am trying to device an optimal investing strategy for retirement.

The studies on SWR pointing at 3-4% are mostly based on US shares.

Clearly, it is now perfectly possible for UK investors to buy US index funds/ETFs, although there are tax and currency issues to be considered.

In general, I wonder if large-cap UK shares (that are strongly involved in international business) should be considered intrinsically less profitable than their US counterpart, and if so why.

FTSE100 shares offer larger dividend yields than S&P500 shares. To which degree can this explain the difference in performance over the past fifty years?

I have tried to find good data on total returns for the two indices over such a period, but with little success so far.

Can anybody comment on this and point me in the right direction?

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Re: Safe Withdraw Rate - is FTSE different from S&P?

#118616

Postby gbjbaanb » February 16th, 2018, 3:01 pm

Morningstar has a report on SWR for UK retirees (there's a link to the pdf in this article)

http://www.morningstar.co.uk/uk/news/14 ... n-pot.aspx

First, that while the historical performance of stock and bond markets in the UK has been relatively similar to the global average, future expected returns in the UK, especially in the near-term, are likely to be considerably lower


(they say 2.5% to 3% based on the "new normal" of stock market returns that do not match the environment of past markets - mainly because interest rates are so low, but I doubt that will last for the next 30 years!)

But as you can (and probably should) get a wide range of stocks and funds and bonds to see you through troublesome times in one region or sector, I don't see what you shouldn't have exposure to S&P 500 anyway, and all the other regional Asian, Japanese, European indexes too. You can buy trackers that match any region in the world without having to worry about individual shares or foreign tax treatment.

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Re: Safe Withdraw Rate - is FTSE different from S&P?

#118632

Postby Lootman » February 16th, 2018, 3:39 pm

Personally I would use the same rate for both the UK and the US. The reason is that if you look at the earnings yield of the two markets, they are about the same. The difference is that UK shares give more of their returns in dividends whereas the US does mainly in the form of growth.

Dividend cover is about twice as high with US shares, which prefer to return capital to shareholders via buybacks in many cases.

For a SWR it really doesn't matter how the return is derived. So I can't see a reason to use a different number than the 4% that has been accepted wisdom for decades, and which has evidently worked.

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Re: Safe Withdraw Rate - is FTSE different from S&P?

#118671

Postby syrio » February 16th, 2018, 6:01 pm

Safe withdrawal rates vary depending on country. Both the performance of local stockmarkets and inflation are different.

https://retirementresearcher.com/4-rule ... und-world/

There is no reason to suppose that a large cap UK share is intrinsically less profitable than a US counterpart, however the UK stockmarket as a whole has had considerably worse performance than the S&P 500. The UK market is dominated by a small number of relatively unattractive industries. Resources, banking etc.

http://topforeignstocks.com/2015/03/21/ ... nd-sp-500/

> FTSE100 shares offer larger dividend yields than S&P500 shares. To which degree can this explain the difference in performance over the past fifty years?

They have larger dividend yields as investors see them as less attractive - and it seems that they have been right to do so based on past performance.

I would personally go for an all world fund with perhaps a small tilt to the UK, while still recognising that the US market does seem to be particularly highly valued at the moment.

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Re: Safe Withdraw Rate - is FTSE different from S&P?

#118716

Postby Longtermyieldman » February 16th, 2018, 9:40 pm

I believe that the only safe withdrawal rate is zero. Living on share sales is in my view a risky game, because when there's a downturn and prices fall, many units must be sold to achieve a given level of 'income', which can destroy value quickly. My preference is therefore to live off the natural yield of a portfolio, with a cash buffer to cover the gap between spending and several years' depressed income. With that approach, the emphasis is thus on selecting assets that are likely to grow their distributions at least as fast as inflation.

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Re: Safe Withdraw Rate - is FTSE different from S&P?

#118727

Postby Alaric » February 16th, 2018, 10:50 pm

Longtermyieldman wrote:IMy preference is therefore to live off the natural yield of a portfolio, with a cash buffer to cover the gap between spending and several years' depressed income. With that approach, the emphasis is thus on selecting assets that are likely to grow their distributions at least as fast as inflation.


UK Investment Trusts will manage that for you for a price, even retaining a reserve to stabilise dividends. Most of the "withdrawal rate" analysis comes from the USA where UK style Investment Trusts don't really exist or don't have the same tax concessions.

If you live off natural yield, you are ultimately bequeathing assets to your heirs, thus not spending it on yourself during your lifetime.

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Re: Safe Withdraw Rate - is FTSE different from S&P?

#118728

Postby Lootman » February 16th, 2018, 11:02 pm

Longtermyieldman wrote:I believe that the only safe withdrawal rate is zero.

You can take that view if you want, and invest 100% of your capital in the lowest risk asset you can find, such as gilts or US treasuries.

However you pay a high price for such peace of mind:

1) You will need far more capital than otherwise. Either you work until you die or you have a far more lower quality lifestyle

2) You forego the opportunity cost of the growth and dividends that you would get from shares or other investments

3) In view of (1) and (2) above, your strategy only works for those who are so rich that the question is moot anyway

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Re: Safe Withdraw Rate - is FTSE different from S&P?

#118730

Postby Alaric » February 16th, 2018, 11:12 pm

Lootman wrote:You can take that view if you want, and invest 100% of your capital in the lowest risk asset you can find, such as gilts or US treasuries.


I thought the opposite was suggested. You invest in a higher risk asset class such as dividend paying equities. The risk mitigation is that you either don't spend all the dividends, thereby building a reserve, or that you are able to cut your expenditure in the event of a dividend downturn. It's a strategy for a lifetime as you can never run out of money because you aren't selling assets. It's an implicit assumption that the assets never become worthless in their own right.

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Re: Safe Withdraw Rate - is FTSE different from S&P?

#118731

Postby Lootman » February 16th, 2018, 11:15 pm

Alaric wrote:
Lootman wrote:You can take that view if you want, and invest 100% of your capital in the lowest risk asset you can find, such as gilts or US treasuries.

I thought the opposite was suggested. You invest in a higher risk asset class such as dividend paying equities. The risk mitigation is that you either don't spend all the dividends, thereby building a reserve, or that you are able to cut your expenditure in the event of a dividend downturn. It's a strategy for a lifetime as you can never run out of money because you aren't selling assets. It's an implicit assumption that the assets never become worthless in their own right.

Personally i do not see that it makes any difference whether the company pays any dividends or not. Only that its total return exceeds 4% a year, which historically it has always done easily.

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Re: Safe Withdraw Rate - is FTSE different from S&P?

#118768

Postby petronius » February 17th, 2018, 10:37 am

Excellent discussion, thanks.

I personally like the idea of a cap-weighted global tracker. Pure efficient market theory in action.

However, I am also tempted to apply some sort sort of CAPE-based weighting, whereby I hold proportionally fewer shares with higher CAPE and viceversa.

It is a case of trying to get Eugene Fama in bed with Robert Shiller, I guess...

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Re: Safe Withdraw Rate - is FTSE different from S&P?

#119010

Postby Quint » February 19th, 2018, 10:07 am

My understanding is that the 4% SWR made a couple of assumptions.

1. That this is the only source of income.
2. That the income needs to be withdrawn monthly.

Having a cash buffer of at least 1 - 2 years living expenses and if a TR approach is used where investments can be top sliced at a time of choosing rather than on a set date each month then an income of more than 4% is possible, but i would not rely on it.

Being able to live off the natural yield (or slightly less than the natural yield) of a portfolio is the best available option.

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Re: Safe Withdraw Rate - is FTSE different from S&P?

#119023

Postby Quint » February 19th, 2018, 11:52 am

That is very true. Hence, the cash buffer. Mine can cover 5 years total loss of income, 10 years 50% loss. The income we have set has included some slack so that can be cut back by 10 to 20%.

I also have a portfolio dedicated to funding holidays, travel and hobbies. In a worse case scenario this expenditure can be reduced and still be generous or can subsidise loss of income.

This is to get me through the period of 55 - 67 years when state pension kicks in.

Plan F would be to do some work to subsidise dividend income if it is anticipated to be prolonged. We intend to keep our human capital viable.

The absolute worse case scenario is to go back to work full time.

Excluding nuclear war, in which case i doubt anything will matter any more.

You can only go so far.
Last edited by Quint on February 19th, 2018, 11:57 am, edited 1 time in total.

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Re: Safe Withdraw Rate - is FTSE different from S&P?

#119029

Postby Quint » February 19th, 2018, 12:21 pm

1nv35t wrote:
Quint wrote:Being able to live off the natural yield (or slightly less than the natural yield) of a portfolio is the best available option.

If you spend all of dividends then sooner or later that will tend to lead to over-spending, no different to revising a SWR taken from total returns upwards to unsustainable levels. Your purchase power from dividend income will vary considerably. In inflation and tax adjusted terms dividends are volatile (and taxation risk tends to increase with yields i.e. state/economic stress).

If you spend only part of dividends and deposit the rest in cash reserves or reinvest them, then again that is no different to applying a SWR type procedure on total returns.

SWR provides a constant amount of purchase power, that revises for inflation. The difficulty however is determining a appropriate 'safe' (nothing is truly safe) choice of sustainable SWR for your needs. The Trinity Study indicated 4% as being a reasonable choice, that survived all 30 year periods i.e. catered for the worst case. More generally (on average) did better than that. That 4% figure however is gross. In net terms its more like 3.5%.

In the worst case that led to nothing remaining after 30 years. For heirs/longevity you have to revise the figure down. A 2% net SWR for instance is more inclined to have a reasonable amount still remaining even in the worst case, a substantial amount in the average case. At current low inflation/yields (high prices) valuations however the inclination is more towards a lower end result/outcome.

At achieving capital value of 50x yearly spending (2% net SWR) you've won the game, more than likely will be OK and a good chance of leaving a massive inheritance. For those that can just about reach 28x (3.4% SWR) then likely they'll also be OK, inheritance/longevity cover might be satisfactory. At 5%+ type SWR (20x or less), the odds can be reasonable, but less in the way of assurance of either covering your needs or leaving any inheritance. A HYP for instance that had a payout of 4% dividend yield might tempt all of that to be spent. That is no different to applying a initial 4% SWR process, but where instead of inflation adjusting that amount you accept that the figure might rise or fall each year, perhaps with the intent to revise your lifestyle/spending up/down (and perhaps significantly downwards at times).


Agreed.

Safe withdrawal rate is relative. Nothing is 100% safe. Dying early while still at work when you could have stopped is least favorable outcome for us.

I will let you know how we get on :D

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Re: Safe Withdraw Rate - is FTSE different from S&P?

#119203

Postby MoVert » February 20th, 2018, 7:38 am

I found myself wasting far too many hours cogitating when I hit my HYP income goals, safety margin etc. Too many years of hard saving conditioned me . I simpy couldn't spent all my income. But I didn't want to just plough it back into my HYP either. I started picking at other options slowly, and then stumbled across permanent protfolio. The interesting thing for me now looking much more to safety and preserving income stream is the low maximum drawdown and the surprisingly high safe withdrawal rate (5%!). See the 4th from last graph https://portfoliocharts.com/portfolio/permanent-portfolio-uk/.

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Re: Safe Withdraw Rate - is FTSE different from S&P?

#123956

Postby Mercenary » March 11th, 2018, 2:35 pm

Alaric wrote:If you live off natural yield, you are ultimately bequeathing assets to your heirs, thus not spending it on yourself during your lifetime.


Indeed, which is an issue for people such as me who do not have that legacy requirement. This scenario seems to be relatively poorly addressed in the literature and is often overlooked in people's responses who focus on income only drawdown and consider any capital drawdown as being a path to the poorhouse (only true if you make silly assumptions and do not create a contingency fund).

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Re: Safe Withdraw Rate - is FTSE different from S&P?

#123961

Postby Mercenary » March 11th, 2018, 2:44 pm

Lootman wrote:Personally i do not see that it makes any difference whether the company pays any dividends or not. Only that its total return exceeds 4% a year, which historically it has always done easily.


I think you touch on a key trend, which may be about to change, which is also relevant in any US versus UK discussion: share buy backs. These have been rampant, especially in the US, as companies have gorged on cheap credit. However this is drying up (and higher rates could cripple these over-indebted companies). However such practices do favour a more total return rather than dividend versus growth return evaluation approach. The current repatriation of overseas corporate funds following the US tax changes will no doubt continue this theme, for a select few companies, for a few more months. The UK seems to have not followed such an approach to such an extent. And there are several UK companies who have been undertaking share buy-backs which are now beginning to look troublesome.

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Re: Safe Withdraw Rate - is FTSE different from S&P?

#123967

Postby Mercenary » March 11th, 2018, 2:56 pm

MoVert wrote:I found myself wasting far too many hours cogitating when I hit my HYP income goals, safety margin etc. Too many years of hard saving conditioned me . I simpy couldn't spent all my income. But I didn't want to just plough it back into my HYP either. I started picking at other options slowly, and then stumbled across permanent protfolio. The interesting thing for me now looking much more to safety and preserving income stream is the low maximum drawdown and the surprisingly high safe withdrawal rate (5%!). See the 4th from last graph https://portfoliocharts.com/portfolio/permanent-portfolio-uk/.


Well done for mentioning this. I looked at them all and kept coming back to this one, especially given the current state of the economies and markets. I would modify it slightly, as does everyone, some to the point it's now not such a portfolio!

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Re: Safe Withdraw Rate - is FTSE different from S&P?

#124009

Postby tjh290633 » March 11th, 2018, 5:21 pm

Lootman wrote:Personally i do not see that it makes any difference whether the company pays any dividends or not. Only that its total return exceeds 4% a year, which historically it has always done easily.

But has it done it each year? One catastrophic year capital value-wise would put you in the mire.

TJH

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Re: Safe Withdraw Rate - is FTSE different from S&P?

#124014

Postby Lootman » March 11th, 2018, 5:38 pm

tjh290633 wrote:
Lootman wrote:Personally i do not see that it makes any difference whether the company pays any dividends or not. Only that its total return exceeds 4% a year, which historically it has always done easily.

But has it done it each year? One catastrophic year capital value-wise would put you in the mire.

Not every year but it doesn't have to. For instance from 2007 to 2009 we had two successive years when the market went down. Similarly 2000 and 2001. The cited method still worked because there were several years either side of those bear markets when we had good gains.

The long term average annualised return from shares in the UK and the US has typically been somewhere between 8% and 10%, with about one third of that coming in dividends. So there is a fair margin of safety over a good number of years.

Where the system might break down if there is a multi-year bear market where shares lose 70% or 80% of their value. But in that case I suspect that dividends would be significantly hit as well, just as they were in 2008. Or where your timing was very unlucky and your drawdown started just when a long bear market started.

Also note that not emphasising HY shares doesn't necessarily mean that my portfolio yields zero. In fact it yields about 3%, so I am really only taking out about 1% of capital each year.


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