JohnW wrote:Second one: read up on the 4% rule if you're unfamiliar with it; it's something like 'if you can get by on only 4% of your retirement savings in the first year, you won't run out until 30 years'. There's fine print, but roughly it. Similarly, if you get by with spending about 1.8% each year you've got a perpetual endowment. Familiarising yourself with figures like that will give the confidence you need.
Many hate what asset allocation I do due to holding substantial amounts of gold, however for my own figures when I went through all of that I came out with a 4% lower, 6% average SWR for a perpetual (generational) style. Founded on the Talmud style, as they advocated millennia ago, of a third each in land (home(s)), commerce (stocks) and reserves (gold). i.e. that 4% minimum includes home value as well, not just liquid assets wealth, but also includes the 'imputed rent' benefit element - as though I were both landlord and tenant (liability matched rent is safer than having to find/pay rent (or be collecting rent with all of the risks that involves)).
Fundamentally stocks and home are similar in reward expectancy, both see share/house price increases, one pays dividends, the other avoids having to find/pay rent (imputed rent benefit). A third in each, along with a third in gold is a form of 67/33 equity/gold asset allocation. Equities tend to do well during periods of positive real yields, gold does well during periods of negative real yields such as if inflation spikes sharply. Around two thirds of time are spend in the former, one third of time in the latter. 50/50 stock/gold is a form of barbell of two extremes, that combined converge to be like a central bond bullet i.e. 67/33 equity/gold is somewhat like a 33/67 equity/bond blend but is more volatile over shorter periods of time.
Backtesting that for all start years since 1896 for me produced satisfactory results where primarily the focus was on security (safety) over that of maximising potential rewards. 2.6% worst case SWR excluding (1.4% average/proportioned) imputed rent (so 4% combined worst case), a additional 2% real gain in the average case on top of that.
For actual assets I prefer £ invested in land (home(s)), along with US$ (primary reserve currency) invested in stocks, and gold is a form of global currency. So asset diversification of land, stocks and commodity (gold).
2.6% SWR worst case, where home value is included as part of total wealth/investments is for me 'more than enough'.
Many say that a home is illiquid, shouldn't be included as can't easily be rebalanced etc. however I'm not inclined to rebalance. Jack (John) Bogle didn't rebalance either, observing that non-rebalanced tended to (on average) achieve the same/similar rewards as rebalancing, but that avoided the cost and taxable events that rebalancing induces. Just let the assets ride long term, but where you could always opt to rebalance at any time if you deemed that to be appropriate. Looking at just liquid assets, 50/50 stock/gold, with a 4% SWR applied and started January 2000 and by 2018 that was down to 18% in stock by 2018 (US data) i.e. click the 'Asset Drift' tab in this link
https://tinyurl.com/yh5c5ppr If you add all-stock to that and compare then you'll see just how poorly a all stock asset allocation with a 4% SWR was by comparison. Over other periods it swings the other way around and stocks might rise to being 90% or more weightings. Likely you'd be more inclined to avoid such extremes by opting to rebalance prior to reaching such levels, subject to it being cost/tax efficient to do so whenever you deemed that one or the other was too excessively weighted.
Your 1.8% figure looks to me due to being a consequence of the wrong asset allocation, I suspect including just stocks and bonds, which in the very broad sense are somewhat similar and correlated (but yes over short periods can exhibit inverse correlations).
I also see the land/stock/gold as a form of old-money asset allocation (art, land, gold generational wealth), but where art is replaced by stocks. A study of Keynes art collection value was found to have yielded very similar total returns as stocks, but by contrast I have little knowledge of art or investing in art so for me stocks are more appropriate.
Others that include their home value as part of 'investments' and that prefer to rebalance, might include some UK stock as a proxy for part of 'land' value for liquidity. The additional capital from including home value can substantially reduce your SWR % figure and reducing that even a little can make a big difference to safety. I also run with the mindset that push come to shove and I could always downsize or move to a less expensive area. Indeed with the kids now pretty much flighted I have less need for a larger family home anyway and post Covid was hoping to 'diversify' the home value anyway. Perhaps two or three flats between which I migrate seasonally. Personally I fancy Portugal for one, which I'd be more inclined to winter in rather than hot summers. I can't see a need to rent that out during the summer months and likely would prefer not to, but if financial needs demanded that could be another source of some income, as might the otherwise unoccupied home in the UK. It's nice having a house/garden, but when only part time occupied apartments have the better quality of being able to be simply 'shutdown/left' for months at a time.
Wild guess, but say Bob's home value is 600K and there's the other 400K of present liquid wealth (rounding), 1M combined total. 2.6% lower end SWR = 26K, excluding imputed rent (in effect rent all found/paid on top of that). 32K pensions on top of that in a few years time and ... comfortable. And that's the lower end, on average the portfolio value might still grow 2% real on top of that (20K), some/all of which could be drawn in a piecemeal manner (if/when evident). With wealth preserved (in real terms), and where at 67 the state pension is also paid on top.
Others of whom I know have managed to retire on far far less and live relatively frugal lifestyles such as on a barge where electricity and internet times are limited etc. Or that have a relatively low value home base from which they spend most of their time 'trecking' around in a low cost 'backpack' manner and are some of the most fun to be with (content) individuals that I know.
To me it looks like Bob/wife are very comfortably placed. Having 'won the game' primarily wealth preservation should be utmost in mind and stocks/land/commodity assets diversified across £/$/global-currency diversification is one way to elevate such wealth preservation (which can also be cost/tax efficient).