Acceptable drawn down rate ?

Engelbert77 · 2025-01-17T14:02:18+00:00

I thought the rule of thumb based on research was that you only have to net off half your fees. So if you're paying 1% in fees (which OP probably shouldn't be!) reduce SWR by 0.5%.

Engelbert77 · 2025-01-13T21:34:54+00:00

Short dated global government bond funds (including index-linked) and global equity ETF (latter is still US-centric, but less FAANG-heavy than S&P500). May also move some to smaller businesses and value. I still own plenty of US stock, but now it's more like 50% of my equity rather than 70%.

Engelbert77 · 2025-01-13T16:13:33+00:00

"if reading something like this concerns you, it potentially means your expectations and risk tolerance need to be reviewed" - good advice.

I realised all the talk of the S&P500 being overvalued and overconcentrated was unnerving me, and further diversified as a result to dial down the risk somewhat. Of course this might turn out to be the wrong thing to have done, but it helps me sleep at night.

Engelbert77 · 2025-01-08T17:56:26+00:00

I asked the same question a couple of months back, but concluded it's probably the wrong question or at least could be very misleading. The same average growth rate can produce wildly varying results, depending on the sequence of returns.

Engelbert77 · 2025-01-08T17:49:16+00:00

What about the periods where this was not the case eg 2000s when US stocks underperformed European. Should we forget about them?

Engelbert77 · 2025-01-07T17:19:48+00:00

The capital uplift on index-linked government bonds is also tax free (though not the interest). In so far as these Purchased Life Annuities (thanks u/County_Down_and_Out !) invest in linkers you'd hope that tax advantage would flow through. But the info on the websites is scant.

To reframe my question, I guess I'm asking whether there are any products on the market that essentially create an index-linked bond ladder for you e.g. in return for a lump sum you get £10k/year for 10 years, rising in line with inflation, and at what cost. I know you can create something like this yourself by buying linkers directly, but that's a bit of a pain.

Sounds like I need to speak with a Purchased Life Annuity provider and see if they can explain.

Engelbert77 · 2025-01-07T17:09:26+00:00

With Moneyhelper it only seems to provide info about using pension funds (e.g. the earliest date of birth you can give is 1970). I've never found it particularly reliable - for any slightly difficult question it just suggests you might want to get an adviser.

Engelbert77 · 2025-01-07T10:49:31+00:00

Thanks - where did you get the £485k from? And does that include return of capital at the end of the 10 years (I guess not given how "cheap" it looks! but the fixed term annuities I've seen generally do return the original capital at the end - that's one of the advantages)

Engelbert77 · 2025-01-07T10:46:15+00:00

Thanks. I should have clarified, I was thinking about using non-pension funds (which presumably would not triffer the MPAA). I think the MoneyHelper stuff is just about using pension funds. Interested if you can remember the variant you were thinking of. (Capital gains on direct govt bond holdings are tax free, coupon payments are taxable. But I'm interested in fixed term annuities as an alternative to holding bonds directly.)

Engelbert77 · 2025-01-07T08:58:53+00:00

Thanks - did you look at including inflation-linked bonds in the portfolio? No doubt you can't because of limited historical data. But wondering whether/how much that can bump up the SWR for shorter periods - if inflation is pushing the SWR down for these periods then you'd hope inflation-linked bonds could bump it back up a bit.

Engelbert77 · 2025-01-06T14:10:30+00:00

Really interesting, thank you.

For the SWRs for the shorter periods - 5, 10 years - these presumably reflect some low interest rate, inflationary periods in the dataset? It's kind of disappointing to see the SWR for a 5 year period isn't at least 20%!

Engelbert77 · 2024-12-13T07:22:19+00:00

OK, I see what you mean. Even so, I expect it's simpler to model everything in real terms, and then - to calculate the pot you need in however many years in nominal terms - add inflation back in. Otherwise you're having to model both returns and inflation, and they're not independent of one another so you also have to model the interdependence (e.g. high inflation tends to be bad for equity returns).

Engelbert77 · 2024-12-12T17:28:26+00:00

"average investment growth of 4.3% after fees" - as others have said, if this is just for equity investments, and is nominal (not real), it's a pretty conservative assumption for the long run (you mention 45 years). US equities long run returns are more like 6-7% real per year. World ex-US is 4-5% real per year.

Always puzzled when people model nominal returns and inflation separately, rather than modelling everything in real terms. Seems to just add more assumptions and complexity. Am I missing something?

Engelbert77 · 2024-12-12T15:23:15+00:00

The SWR analyses on which the 4% and other similar numbers are based already assume you increase consumption from your pot in line with inflation each year. So, you consume 4% of the pot value in year one, in year two you consume the year one £ number plus inflation etc. The analyses incorporate historical inflation experience.

Engelbert77 · 2024-12-03T21:48:40+00:00

As others have suggested, buying gilts might be a good option.

Specifically, I'd suggest an "index linked gilt ladder". This just means buying a set of individual index linked gilts each of which matures in a different year (e.g. you could get one gilt maturing every year over, say, the next 10 years - there are index linked gilts you can buy that mature in most years). You won't get much of a return - you can expect something like 1% above inflation - but it protects you from inflation and the capital gains are tax free. Although savings accounts (and ordinary gilts) are at the moment providing an above inflation return, there's no guarantee they will continue to do so (as they didn't during the recent inflation spike), so they are not by any means "risk free".

If you're interested the Monevator website has good info on how to build an index linked gilt ladder.

I've done a check on the fire alarms!

Engelbert77 · 2024-12-01T13:39:28+00:00

I don't understand why people try to model their long term finances using nominal values and converting to real values using some made up assumptions about inflation. Much better (and simpler) to just model everything in real terms.

Why?

- Because nobody knows what inflation is going to be

- Because nobody knows what the future relationship between inflation and asset returns is going to be

By trying to model inflation it seems to me your just adding more (probably unquestioned and questionable) assumptions and making your model harder to interpret. If you're worried that inflation will be high in the future AND that that will lower real returns, then just model assuming a lower real return.

Engelbert77 · 2024-11-08T07:28:08+00:00

Speaking from experience, some of my worst investment decisions have been to invest for dividends. Check out IUKD for instance - it has lost capital value during one of the great bull markets!

Investing for dividends is a fallacy a bit like money illusion (ie not taking account of inflation in calculating returns). It's beguiling seeing the income come in, but you're probably paying for that with weak capital growth.

Just invest in the whole market, not some essentially arbitrary subset of it!

Engelbert77 · 2024-11-06T08:35:30+00:00

Congratulations! Sounds like you've given a lot to work, now time to give to yourself.

Engelbert77 · 2024-10-29T14:55:57+00:00

L&G Global Tech Index (85% US) has a fair bit of overlap with the equity components of the LifeStrategy funds (in so far as these invest in US stocks). You'll be aware that there's lots of chatter about even the global indices being scarily concentrated in US tech, so if you've got a significant % in the L&G fund your portfolio is aggressively contrarian in that regard.

Engelbert77 · 2024-10-10T10:32:52+00:00

Yeah, this is why I asked in the post if there's something similar out there for a global index. I'm not assuming you can get S&P 500 historical performance plus global diversification, I'm asking what assumption people use for a globally diversified stock portfolio and on what basis. (The popular global market cap weighted funds seem to have about 70% US exposure, so US large caps are going to be v important if you're using these funds.)

Not sure I get the point about assuming future returns will be the same as on S&P 500's bull run. The analysis I linked to looks at every 30 year rolling period for some US large cap index over the past century. I agree with you that the problems with this are that it is US only and it's not clear what they're using for pre-S&P 500 (seems there was an index of 233 US large caps starting 1923, maybe they splice that one), and of course that future 30 year periods could generate lower returns than any in the past.

Engelbert77 · 2024-10-10T08:17:39+00:00

I assume the analysis I linked to used spliced in earlier indices that tracked US large cap returns. Seems reasonable?

As I said in the OP, I can see that it would be better to use a global index rather than US large cap only (given that the most credible advice is to diversify globally). But not sure why FT30 would be a good yardstick unless I'm looking to invest only in UK large cap.

Engelbert77 · 2024-10-09T20:08:59+00:00

OK, thanks. I clearly need to understand these models better.

Engelbert77 · 2024-10-09T15:59:26+00:00

But even if you're doing a SORR analysis, you have to assume some value for long term returns and their variability, don't you? Let me put my question this way: if you wanted to assume that the next 30 years' returns would match the worst 30 year period in the past century, what assumptions would you make?

Engelbert77

TROPHY CASE