Safe Withdrawal Rate - how much is enough
Posted: January 23rd, 2024, 1:52 pm
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?
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?