Safe Withdrawal Rate - how much is enough

[Adamski]

I was watching a video on FIRE which got me thinking about SWR and how much you need to retire. I thought the guy was wildly off the mark with a target "2.5% swr".

After stockmarket losses in 2022 and high inflation for the last two years, I guess many people will be thinking FIRE is an impossible dream.

A lot of financial advisers and commentators seem to think you need a hell of a lot to retire. Along the lines of 2.5% SWR.

Example, if you need an income of £40k per year. Divide by 2.5%, £1.6 million. But if you are married, double that. And excludes your house, maybe some of your pensions too. You're going to have to be in the top 1% by a long way. I wonder if they're just finding excuses to work as long as humanly possible.

I think there's several reasons why you may need less than they think.

The SWR model assumes you'll live off the interest and not touch the principal. If you start with £x you'll end up with £x in todays money, the principal untouched as a legacy to pass on.

It assumes no state pensions. (Even though we have the lowest state pension in advanced countries, some people think it'll be greatly reduced, even though politically difficult.) An early retiree needs to finance the gap to the state pension and work pensions. Then any shortfall will be a lot smaller.

It assumes you'll be a high spender for life. But generally older people slow up their spending as they age. Of course there plenty of exceptions.

Also many people do continue earning after early retirement etire, they may receive inheritances, they may do equity release (although wouldn't recommend that last one).

I think the standard fnancial advice is not realistic by only looking at the downsides and not the upsides. Do you agree?

[Arborbridge]

I was watching a video on FIRE which got me thinking about SWR and how much you need to retire. I thought the guy was wildly off the mark with a target "2.5% swr".

After stockmarket losses in 2022 and high inflation for the last two years, I guess many people will be thinking FIRE is an impossible dream.

A lot of financial advisers and commentators seem to think you need a hell of a lot to retire. Along the lines of 2.5% SWR.

Example, if you need an income of £40k per year. Divide by 2.5%, £1.6 million. But if you are married, double that. And excludes your house, maybe some of your pensions too. You're going to have to be in the top 1% by a long way. I wonder if they're just finding excuses to work as long as humanly possible.

I think there's several reasons why you may need less than they think.

The SWR model assumes you'll live off the interest and not touch the principal. If you start with £x you'll end up with £x in todays money, the principal untouched as a legacy to pass on.

It assumes no state pensions. (Even though we have the lowest state pension in advanced countries, some people think it'll be greatly reduced, even though politically difficult.) An early retiree needs to finance the gap to the state pension and work pensions. Then any shortfall will be a lot smaller.

It assumes you'll be a high spender for life. But generally older people slow up their spending as they age. Of course there plenty of exceptions.

Also many people do continue earning after early retirement etire, they may receive inheritances, they may do equity release (although wouldn't recommend that last one).

I think the standard fnancial advice is not realistic by only looking at the downsides and not the upsides. Do you agree?

I've retired happily on far less than that in my pension pot, and still have plenty enough outings, pay for the best seats at Covent Garden whenever I feel like it plus foreign travel. And as for doubling it if married, that is nonsense. Two people can live together more cheaply than one x two - and these days a spouse will often have some resources or a pension too.

In short, that seems a pessimistic view. I'm not sure what these coves expect, but I'd say they've set a high bar to create a story.

Arb.

[tacpot12]

The SWR model doesn't assumes you'll live off the interest and not touch the principal. It assumes that you will drawdown on the principle as well, you might have read a faulty explanation of safe withdrawal rate theory (which is a large field).

Many of the tools that allow you to calculate a SWR for your circumstances allow you to factor in State and DB pensions, plus other income streams such as rental properties. cFIREsim is my personal favourite.

I have argued on LemonFool and MoneySavingExpert forums that the 4% rule which is most often stated as 'the' safe withdrawal rate is an underestimate of what is safe for many UK residents. While it is true that investment returns are a little lower in the UK than in the USA (where the 4% rule originated), the difference is more than made up by the impact of the state pension (assuming you have one). My own SWR for my personal pension is north of 6%, in part because I have a full state pension, two small DB pensions that are inflation linked, and some rental property income.

Even the 'inventor' of the 4% rule has said that it was never intended to be a rule for all. It was only ever envisaged to be a very generalised figure.

So I partially agree with your assertion that much advice on safe withdrawal rates is not realistic (because it tends to give more weight to the downsides than the upsides), but I would point out that the impact of a downside outcome is much higher than an upside outcome, so this imbalance is not unreasonable. I would also disagree that any of this is 'standard' financial advice. There is no SWR that is correct for more than one person, in part, because it embodies their view of risk as to what is safe and what is unsafe. My own simulations with cFIREsim had a 95% success rate for my SWR if I live to age 100, which is safe enough for me, but might not be for someone else.

[Lootman]

I have argued on LemonFool and MoneySavingExpert forums that the 4% rule which is most often stated as 'the' safe withdrawal rate is an underestimate of what is safe for many UK residents. While it is true that investment returns are a little lower in the UK than in the USA (where the 4% rule originated), the difference is more than made up by the impact of the state pension (assuming you have one).

The US has a state pension as well, called Social Security Retirement Benefits. It is much more generous than the UK state pension AND only needs 10 years of contributions rather than 30/35 here.

Personally I think 4% is perfectly adequate for most people given that long-term the stock market gives you more than twice that.

[Urbandreamer]

I was watching a video on FIRE which got me thinking about SWR and how much you need to retire. I thought the guy was wildly off the mark with a target "2.5% swr".
......
I think the standard fnancial advice is not realistic by only looking at the downsides and not the upsides. Do you agree?

I think a youtube video, while clearly of interest, is likely not the "standard" financial advice.
As has been said, it's arguable if indeed there can be standard financial advice.

I'm a fan of a book called "Beyond the 4% rule", which amongst it's many points argues, that people are not blind models.
If the economy goes into recession, people pull in their belts ad spend less.

The entire concept of the "safe withdrawal rate" is at best a rule of thumb.

Calculators can estimate accounting for things like spouses pension pot, state pension, defined benefit pension etc, but they can't reliably predict the future. They are just the best guess.

Pick your own SWF, 2%, 3.5%, 4% etc. You are as likely or as unlikely to be correct as others. FWIW I chose 3.7% for predictions. Strangely some of the calculators refused to recognize that choosing absurdly low rates would extend my life much beyond 100.

Of course the 4% back tested model had you depleting the pot in 30 years, which may be why a FIRE video argues that a lower rate is needed if you require the pot to last 50 years, rather than 30 years. That would not be about how much you need, but how long you need it for, wouldn't it?

[DrFfybes]

A lot of financial advisers and commentators seem to think you need a hell of a lot to retire. Along the lines of 2.5% SWR.

Example, if you need an income of £40k per year. Divide by 2.5%, £1.6 million. But if you are married, double that. And excludes your house, maybe some of your pensions too. You're going to have to be in the top 1% by a long way. I wonder if they're just finding excuses to work as long as humanly possible.

Considering 95% of the population never amass that much, it is blatantly rubbish.

First off is the definition of "need". If a married couple "need" £80k pa to live off then that means 95% of the UK is in poverty. Most working couples don't have anything near that, let alone retired ones. We live in a house far bigger than our needs, eat well, travel, run 5 vehicles, and spend under £40k pa if you ignore all the odd jobs a 230 year old house requires, in fact we probably duck under that if we include them.

But the SWR figure is pretty meaningless to try and generalise, as the biggest risk is of a market crash. If you can ride that out for a few years then chances are you will be fine.

So, have a cash buffer of say 2 years' money (premium bonds and a cash account or short term Gilts if you can be bothered) and then your options open up, as if markets plummet you can stop withdrawing. People FIREing will usually be higher earners and/or accomplished savers. If you plan at taking 5% to fund a comfortable retirement and find your assets are depleting, then there is scope to trim your spend slightly to keep it on track.

The thing people have got complacent about is that we have had a very long and fairly sustained growth in the Gloal economy for nearly a century. OK, there has been the odd hiccup, but y and large over any 10 year period things have gone upwards. The population is growing in number and wealth, which grows profit, which grows the market. This could change, but considering we've had semi global conflicts and a plague in the last 3 years it is looking fairly robust at the moment.

My own SWR for my personal pension is north of 6%, in part because I have a full state pension, two small DB pensions that are inflation linked, and some rental property income.

This is important. If your ONLY source of income is investments then you might be inclined to be more cautious, especially for someone in their early 50s, but if you have other income sources you can afford to take a bit more out and hope the returns cover it. Besides, with full SP you're over 67, so even if you put it in a shoebox and take 6% pa it won't be far short of seeing you out

Paul

[Adamski]

Thanks for responses - food for thought. My withdrawal rate (both) about 3.5% at the moment. Yes, think its good as a rule of thumb but not a hard and fast rule. I'll check out the Firesim tool. Cheers

[hiriskpaul]

I was watching a video on FIRE which got me thinking about SWR and how much you need to retire. I thought the guy was wildly off the mark with a target "2.5% swr".

After stockmarket losses in 2022 and high inflation for the last two years, I guess many people will be thinking FIRE is an impossible dream.

A lot of financial advisers and commentators seem to think you need a hell of a lot to retire. Along the lines of 2.5% SWR.

Example, if you need an income of £40k per year. Divide by 2.5%, £1.6 million. But if you are married, double that. And excludes your house, maybe some of your pensions too. You're going to have to be in the top 1% by a long way. I wonder if they're just finding excuses to work as long as humanly possible.

I think there's several reasons why you may need less than they think.

The SWR model assumes you'll live off the interest and not touch the principal. If you start with £x you'll end up with £x in todays money, the principal untouched as a legacy to pass on.

It assumes no state pensions. (Even though we have the lowest state pension in advanced countries, some people think it'll be greatly reduced, even though politically difficult.) An early retiree needs to finance the gap to the state pension and work pensions. Then any shortfall will be a lot smaller.

It assumes you'll be a high spender for life. But generally older people slow up their spending as they age. Of course there plenty of exceptions.

Also many people do continue earning after early retirement etire, they may receive inheritances, they may do equity release (although wouldn't recommend that last one).

I think the standard fnancial advice is not realistic by only looking at the downsides and not the upsides. Do you agree?

Actually it does not assume that. That would be a perpetual withdrawal rate.

You might find this series of articles interesting. US based, but illuminating and he dispels lots of myths with detailed back testing.

https://earlyretirementnow.com/safe-wit ... te-series/

[xxd09]

“Safe” withdrawal rate is only one aspect of producing a retirement income
Other major factors are -desired expenditure-size of pension pot and other savings-willingness to take risk as per your desired asset allocation -how much you want to leave to children etc etc
These major variables show how personal the retirees decision is on his chosen withdrawal rate
A guideline I used was the 4% rule but probably now the 3% rule is safer ie a £100000 in a 60/40 portfolio should safely provide a sustainable income of £3000+ pa
Sadly the sums involved are therefore large but reality is a better guide than wishful thinking
xxd09