4% SWR Rule in Other Countries

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Leesbro63
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4% SWR Rule in Other Countries

Post by Leesbro63 » Fri Oct 20, 2017 3:29 pm

Somewhere recently I heard that the 4% rule did not work in 6 of 8 developed countries looked at. Honestly I didn't get all the info and should have. But this brings to mind the obvious question: Is the 4% rule just a fluke of the USA in the 20th century? (I sincerely apologize for starting YET ANOTHER SWR thread...but I think this is a good question).

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Re: 4% SWR Rule in Other Countries

Post by Stryker » Fri Oct 20, 2017 4:46 pm

Does The 4% Rule Work Around The World?

by Wade Pfau, Ph.D., CFA
June 30, 2016

-------------------------------------------

Also old bogleheads thread started in 2007

viewtopic.php?t=9609

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siamond
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Re: 4% SWR Rule in Other Countries

Post by siamond » Fri Oct 20, 2017 4:55 pm

That is indeed a good question... Check the last part of thIs blog entry (this uses a 70/30 asset allocation):

https://finpage.blog/2017/03/25/investi ... ld-part-2/

Personally, I reached a few conclusions a while ago:
- just looking at the US history is indeed narrow thinking and probably misleading
- don't bet on a single country, hedge your bets, mix up domestic and international
- use a variable withdrawal method, not a constant one

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Tyler9000
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Re: 4% SWR Rule in Other Countries

Post by Tyler9000 » Fri Oct 20, 2017 6:31 pm

Withdrawal Rates are a special interest of mine, and you might enjoy the article I wrote recently on this topic:

Your Home Country Is Inseparable From Your Withdrawal Rate

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Re: 4% SWR Rule in Other Countries

Post by Leesbro63 » Fri Oct 20, 2017 10:16 pm

Tyler9000 wrote:
Fri Oct 20, 2017 6:31 pm
Withdrawal Rates are a special interest of mine, and you might enjoy the article I wrote recently on this topic:

Your Home Country Is Inseparable From Your Withdrawal Rate
So what’s your point? That 4%, which didn’t work in most other similar places, so therefore we shouldn’t have confidence in it?

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Re: 4% SWR Rule in Other Countries

Post by Tyler9000 » Fri Oct 20, 2017 10:46 pm

Leesbro63 wrote:
Fri Oct 20, 2017 10:16 pm
So what’s your point? That 4%, which didn’t work in most other similar places, so therefore we shouldn’t have confidence in it?
The point is that people outside of the US should not blindly follow advice designed for US investors using portfolio, currency, and inflation assumptions that do not apply to them. They can, however, apply the same withdrawal rate calculation methodologies to their own countries and portfolios to make educated decisions. Rather than pushing over-simplified rules of thumb, Portfolio Charts offers tools to empower people to actively learn about how asset allocation choices affect retirement scenarios outside of the US. You can definitely still achieve a 4% withdrawal rate, but your portfolio may look a little different than the very specific US stock/bond split typically studied.

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Re: 4% SWR Rule in Other Countries

Post by siamond » Fri Oct 20, 2017 10:54 pm

Tyler9000 wrote:
Fri Oct 20, 2017 10:46 pm
You can definitely still achieve a 4% withdrawal rate, but your portfolio may look a little different than the very specific US stock/bond split typically studied.
Hm. Tyler, a little Nisiprius on your shoulder should have made you write:
You could definitely still have achieved a 4% withdrawal rate, but your portfolio would have looked a little different than the very specific US stock/bond split typically studied.

I am not being pedantic here, as there was no way somebody would have predicted in foresight which type of portfolio would have been optimal for a given country. And consequently, yes, we cannot have confidence in the so-called "4% rule".

PS. I actually would also take exception with the title of your article ("Your Home Country Is Inseparable From Your Withdrawal Rate"). First, the Nisi rule, it should have been written using a past tense ("was"). And next, I think you're kind of inferring that each country has its own specific dynamics which will repeat themselves in the future, and I am not too sure this is quite true.

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Re: 4% SWR Rule in Other Countries

Post by Tyler9000 » Fri Oct 20, 2017 11:22 pm

siamond wrote:
Fri Oct 20, 2017 10:54 pm
Hm. Tyler, a little Nisiprius on your shoulder should have made you write:
You could definitely still have achieved a 4% withdrawal rate, but your portfolio would have looked a little different than the very specific US stock/bond split typically studied.
Fair enough. :sharebeer I'm usually pretty careful about the Nisi rule but got a little carried away.

siamond wrote:
Fri Oct 20, 2017 10:54 pm
I am not being pedantic here, as there was no way somebody would have predicted in foresight which type of portfolio would have been optimal for a given country.
I don't disagree, but I have a different perspective.

Some portfolios have definitely been more consistent than others, and consistent (or volatile) portfolios typically have not suddenly changed their nature. I believe that when you aim for high consistency rather than high returns, the ability to predict performance within a reasonable margin of error gets a little more realistic. And because of how the math works, consistent portfolios are also generally good at supporting desirable withdrawal rates. So IMHO the goal should not be to attempt to predict the optimal retirement portfolio in the future, but to use what we know about the past to target a sufficiently dependable "good enough" plan. (Of course no plan is bulletproof, and even the best one does not absolve you from the responsibility to monitor how things go along the way and adjust accordingly.)

siamond wrote:
Fri Oct 20, 2017 10:54 pm
PS. I actually would also take exception with the title of your article ("Your Home Country Is Inseparable From Your Withdrawal Rate"). First, the Nisi rule, it should have been written using a past tense ("was"). And next, I think you're kind of inferring that each country has its own specific dynamics which will repeat themselves in the future, and I am not too sure this is quite true.
I'll respectfully disagree on this specific verb tense point. Withdrawal rates have been dependent on your home country in the past and will remain that way in the future. Your point about repeating dynamics is true, though. Nothing is set in stone, but see my note on consistency above. And it's also why I'm personally partial to portfolios that have done consistently well regardless of the home country, as I think it speaks to the robustness of the strategy in different economic conditions.

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Re: 4% SWR Rule in Other Countries

Post by hilink73 » Sat Oct 21, 2017 2:47 am

Tyler9000 wrote:
Fri Oct 20, 2017 6:31 pm
Withdrawal Rates are a special interest of mine, and you might enjoy the article I wrote recently on this topic:

Your Home Country Is Inseparable From Your Withdrawal Rate
Thanks for your article.
Living in Switzerland, I have the feeling for having a deeper look at this.
High income, but also very high cost of living, low inflation rate, but also low interest rates (at the moment), the Swiss Franc being surrounded by the Euro.
What could possibly go wrong?

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Re: 4% SWR Rule in Other Countries

Post by Valuethinker » Sat Oct 21, 2017 6:14 am

Leesbro63 wrote:
Fri Oct 20, 2017 3:29 pm
Somewhere recently I heard that the 4% rule did not work in 6 of 8 developed countries looked at. Honestly I didn't get all the info and should have. But this brings to mind the obvious question: Is the 4% rule just a fluke of the USA in the 20th century? (I sincerely apologize for starting YET ANOTHER SWR thread...but I think this is a good question).
Indexed Linked Gilts (UK TIPS) are yielding c. -1.5%

10 year conventional Gilt yielding 1.0%

No the 4% "rule" won't work in the UK at current interest rates.

It was never a "Rule" in any case (or not a "Law"). It was just a guideline.

If you can flex your cost of living such that you draw down less in bear markets, then it will work much better. So if it is simply a way to control consumption in your withdrawal/ retirement phase, then that's not too bad.

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Re: 4% SWR Rule in Other Countries

Post by siamond » Sat Oct 21, 2017 9:16 am

Tyler9000 wrote:
Fri Oct 20, 2017 11:22 pm
Nothing is set in stone, but see my note on consistency above. And it's also why I'm personally partial to portfolios that have done consistently well regardless of the home country, as I think it speaks to the robustness of the strategy in different economic conditions.
The trouble I have is that the title (and some of the content) of your article could be interpreted as implying that one should look at their own country's past and nothing else. I don't believe this is what you meant, and indeed specific economic conditions (and returns) that happened in a given country may very well appear in another country in the future (or something similar at least), and that is one of the key lessons to get from those per-country returns in my humble opinion. Hence the desire to figure a plan that would have done reasonably well in most cases and hedge your bets. And then I'm in sync with you. :wink:

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Re: 4% SWR Rule in Other Countries

Post by Tyler9000 » Sat Oct 21, 2017 10:36 am

siamond wrote:
Sat Oct 21, 2017 9:16 am
specific economic conditions (and returns) that happened in a given country may very well appear in another country in the future (or something similar at least), and that is one of the key lessons to get from those per-country returns in my humble opinion. Hence the desire to figure a plan that would have done reasonably well in most cases and hedge your bets.
I agree. Well said.

No matter what country you live in, looking at how various portfolios performed around the world can be very educational and help you form a plan less susceptible to home country bias.

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Re: 4% SWR Rule in Other Countries

Post by xxd091 » Sat Oct 21, 2017 2:25 pm

Hi All
Well into retirement now -in the UK
Retirement/Withdrawal Portfolio has evolved over time especially as Vanguard has moved into the UK
Have made enough so avoiding loss of capital is a priority
30% Equities and 70% Bonds have allowed a 3.5-4% withdrawal rate over the last 14 yrs-may not be the case going forward ?
Equities are a global eq fund and Bonds are Global but hedged to the Pound(thanks Vanguard!)
Seems to work so far allowing access to the world economic gains -not just UK -with currency variations smoothed out
xxd09

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Re: 4% SWR Rule in Other Countries

Post by halfnine » Sat Oct 21, 2017 3:12 pm

siamond wrote:
Fri Oct 20, 2017 4:55 pm
That is indeed a good question... Check the last part of thIs blog entry (this uses a 70/30 asset allocation):

https://finpage.blog/2017/03/25/investi ... ld-part-2/

Personally, I reached a few conclusions a while ago:
- just looking at the US history is indeed narrow thinking and probably misleading
- don't bet on a single country, hedge your bets, mix up domestic and international
- use a variable withdrawal method, not a constant one
This.

I have concluded that the 4% rule and for that matter backtested results are great for showing me which country has won and which risks have historically shown up in different countries at different times. But, it certainly does not predict which will be the winning country or what risks will show up in the future.
siamond wrote: indeed specific economic conditions (and returns) that happened in a given country may very well appear in another country in the future (or something similar at least), and that is one of the key lessons to get from those per-country returns in my humble opinion. Hence the desire to figure a plan that would have done reasonably well in most cases and hedge your bets.
Exactly. As such, my IPS requires my strategy to be valid for at least a few countries.

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Re: 4% SWR Rule in Other Countries

Post by texasdiver » Sun Oct 22, 2017 11:12 am

I scanned through the article twice but could not discern whether the model portfolios for each country were in that country's markets or in globally diversified investments.

For example, the Japanese investor has a 35% failure rate with a 4% withdrawal. Is that for a Japanese investor invested in JAPANESE equities and bonds? Or a Japanese investor who owns a globally diversified portfolio like say Vanguard Total World Stock and Total World Bond funds? Because I don't think investors in any modern developed nation are in any way constrained to maintaining their investments in home-country equities and bonds.

In other words, what exactly is causing the high failure rates in some countries? Is it the failure of the home country markets? Or some other economic conditions in the home country (exchange rates, inflation etc.) that would cause a diversified global portfolio to fail regardless?

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Re: 4% SWR Rule in Other Countries

Post by tibbitts » Sun Oct 22, 2017 12:03 pm

Leesbro63 wrote:
Fri Oct 20, 2017 10:16 pm
Tyler9000 wrote:
Fri Oct 20, 2017 6:31 pm
Withdrawal Rates are a special interest of mine, and you might enjoy the article I wrote recently on this topic:

Your Home Country Is Inseparable From Your Withdrawal Rate
So what’s your point? That 4%, which didn’t work in most other similar places, so therefore we shouldn’t have confidence in it?
That conclusion seems obvious, without or without this article.

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Re: 4% SWR Rule in Other Countries

Post by siamond » Sun Oct 22, 2017 12:39 pm

texasdiver wrote:
Sun Oct 22, 2017 11:12 am
I scanned through the article twice but could not discern whether the model portfolios for each country were in that country's markets or in globally diversified investments.

For example, the Japanese investor has a 35% failure rate with a 4% withdrawal. Is that for a Japanese investor invested in JAPANESE equities and bonds? Or a Japanese investor who owns a globally diversified portfolio like say Vanguard Total World Stock and Total World Bond funds? Because I don't think investors in any modern developed nation are in any way constrained to maintaining their investments in home-country equities and bonds.
Given the details of your question, you're referring to Wade Pfau's recent article issued in Jun-16. As indicated in the intro, this was actually an update to the older study Wade issued in Sep-10, where the full context is described in more details.

Your first assumption is correct, Wade's studies assume an all-domestic (stocks & bonds) portfolio. And you're also correct that a Japanese investor would have been in better shape with some international diversifying, as I explored in this three-parts blog article on International investing, and also in this more focused study of the Japanese crisis. Bottomline is simple: hedging your bets is (usually) a good idea, notably when you don't have the advantage of hindsight.
texasdiver wrote:
Sun Oct 22, 2017 11:12 am
In other words, what exactly is causing the high failure rates in some countries? Is it the failure of the home country markets? Or some other economic conditions in the home country (exchange rates, inflation etc.) that would cause a diversified global portfolio to fail regardless?
Well, this is really a mix. European markets and Japan got devastated by in-territory world wars, this had a huge impact (not visible in more recent studies starting in 1970). Japan played weird games with currency exchanges while managing a purely domestic crisis in the late 80s, adding insult to injury. Italy and Spain got a severe inflation issue in recent decades. But then the oil crisis in the 70s and the 2008/09 crisis hit everybody...

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Re: 4% SWR Rule in Other Countries

Post by hilink73 » Sun Oct 22, 2017 2:39 pm

siamond wrote:
Sun Oct 22, 2017 12:39 pm


Your first assumption is correct, Wade's studies assume an all-domestic (stocks & bonds) portfolio. And you're also correct that a Japanese investor would have been in better shape with some international diversifying, as I explored in this three-parts blog article on International investing, and also in this more focused study of the Japanese crisis. Bottomline is simple: hedging your bets is (usually) a good idea, notably when you don't have the advantage of hindsight.
Hi Siamond, thanks for these articles.
Haven't finished them yet but it seems that Switzerland is not the easiest part of the world to live in investing wise.
From glancing over the article (will get for a thorough read later) I feel that much of this is due to the currencies exchange rate risk.
I'm already diversified across the globe (equities) but what else do I need? Would that be the hint to overweight the Swiss market in my portfolio?

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Re: 4% SWR Rule in Other Countries

Post by siamond » Sun Oct 22, 2017 5:38 pm

hilink73 wrote:
Sun Oct 22, 2017 2:39 pm
From glancing over the article (will get for a thorough read later) I feel that much of this is due to the currencies exchange rate risk.
I'm already diversified across the globe (equities) but what else do I need? Would that be the hint to overweight the Swiss market in my portfolio?
I would suggest you stay widely diversified, and then eat some Swiss cheese if you have some cravings to do something, anything! :wink:

Yeah, I don't think there is much more one can do, just invest with the world (on the equity side; the bonds side doesn't seem to really matter, domestic or diversified) and go with the ride...

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Re: 4% SWR Rule in Other Countries

Post by heyyou » Sun Oct 22, 2017 10:15 pm

Seems like most studies are trying to optimize spending for unknown future returns for an unknown length of time. Consider instead to just continue to live within your means by annually adjusting your spending to your recent portfolio size and an age based factor. Maybe smooth your spending by averaging three years of withdrawals.

Yes, you need a method of choosing an annual WD amount, but let go of the illusion of having a fixed real WD amount for the next three decades set on your retirement day asset level. Besides sequence of returns risk early in retirement, the greater risk of Bengen's 4% SWR is significant underspending for your entire retirement since the rate was chosen to fit the worst cases. That is a very expensive price for just a little certainty. You will probably be one of the richest residents of the graveyard.

Doesn't the logic of somewhat variable spending based on your specific returns seem better than choosing the average of a very small sample of 30 year periods, most of them overlapping?

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Re: 4% SWR Rule in Other Countries

Post by siamond » Sun Oct 22, 2017 10:45 pm

heyyou wrote:
Sun Oct 22, 2017 10:15 pm
Doesn't the logic of somewhat variable spending based on your specific returns seem better than choosing the average of a very small sample of 30 year periods, most of them overlapping?
Choosing an AA is one thing. Choosing a withdrawal method is another. Those are orthogonal topics. Both can benefit from examining the lessons of the past. One cannot predict the future, but one can definitely try to be smarter by being more adaptive to various types of situations. I do agree that choosing a (robust) variable withdrawal method is part of it. This doesn't tell you which (robust) AA to use though.

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Re: 4% SWR Rule in Other Countries

Post by randomguy » Sun Oct 22, 2017 11:51 pm

Valuethinker wrote:
Sat Oct 21, 2017 6:14 am
Leesbro63 wrote:
Fri Oct 20, 2017 3:29 pm
Somewhere recently I heard that the 4% rule did not work in 6 of 8 developed countries looked at. Honestly I didn't get all the info and should have. But this brings to mind the obvious question: Is the 4% rule just a fluke of the USA in the 20th century? (I sincerely apologize for starting YET ANOTHER SWR thread...but I think this is a good question).
Indexed Linked Gilts (UK TIPS) are yielding c. -1.5%

10 year conventional Gilt yielding 1.0%

No the 4% "rule" won't work in the UK at current interest rates.

It was never a "Rule" in any case (or not a "Law"). It was just a guideline.

If you can flex your cost of living such that you draw down less in bear markets, then it will work much better. So if it is simply a way to control consumption in your withdrawal/ retirement phase, then that's not too bad.

It is a big stretch to say the 4% rule "won't work" because of Interest rates. If stocks return say 3% real for the next 30 years (About 50% of hte UK historical average), it doesn't matter that your bonds lost 1.5%. You will still have high enough returns for the 4% rule to work out. It might work. It might not. And even if it fails, it is likely to be 1 or 2 years out of the next 100 years (i.e you retire in the year the markets drop 30%) while the rest are fine.

The problem of course with all this stuff is it is backwards looking. Will Europe engage in 2 world wars and a half dozen revolutions over the next 100 years? Will the trends that drove the US economy for the past 100 years continue or stall out? And so on.The next 100 years will not be like the last. maybe they will be better (i.e. maybe the 2008 economic collapse would have been a 2nd great depression if the government didn't act) or worse (pick any of a zillion cases from US/China slugging it out, effects of aging population, trade wars,...). Nobody can really tell you. Everyone makes predications and you only hear about the ones that work.

It should be pointed out that in a lot of countries no SWR was safe. Going to 1% wouldn't have helped you when the revolution came and they confiscated all private property. Even diversification doesn't help if you lose access to the money.

But yes the 4% rule is a just a fluke. If he would have started with a diversified international portofolio with a bunch of small value stocks, we would be talking about the 5% rule instead. If he started in Czarist Russia, we would be talking about the 0% rule.

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Re: 4% SWR Rule in Other Countries

Post by ryman554 » Mon Oct 23, 2017 8:41 am

Valuethinker wrote:
Sat Oct 21, 2017 6:14 am
Leesbro63 wrote:
Fri Oct 20, 2017 3:29 pm
Somewhere recently I heard that the 4% rule did not work in 6 of 8 developed countries looked at. Honestly I didn't get all the info and should have. But this brings to mind the obvious question: Is the 4% rule just a fluke of the USA in the 20th century? (I sincerely apologize for starting YET ANOTHER SWR thread...but I think this is a good question).
Indexed Linked Gilts (UK TIPS) are yielding c. -1.5%

10 year conventional Gilt yielding 1.0%

No the 4% "rule" won't work in the UK at current interest rates.

It was never a "Rule" in any case (or not a "Law"). It was just a guideline.

If you can flex your cost of living such that you draw down less in bear markets, then it will work much better. So if it is simply a way to control consumption in your withdrawal/ retirement phase, then that's not too bad.
Why not? "Bonds" earn 1.5% real in this case.

I don't see anybody suggesting that a 4% SWR is from a 100% bond portfolio, but if we go there and also falsely assume that it is also only for a 30 year retirement, under the conservative assumption that all interest is earned on the end of year balance, you don't run out of money until year 31. It would succeed, in this case 100% of the time, under the original definition, even though I wouldn't be particularly happy with the outcome.

Add in an equity component (say 50/50) that earns only 6.5% real (very close to long-term average), you end up with a perpetual stream of income (modulo variance in return).

(edit: I do agree that the 4% isn't a physical law, but there were a series of posts from ... I don't recall! ... discussing the worldwide return on equities since the renaissance which did propose that equities could return north of 5% real, on average, everywhere, if my feeble memory recalls correctly. I also agree that this assumes relative stability of the investment country and lack of government confiscation events)

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Re: 4% SWR Rule in Other Countries

Post by Valuethinker » Mon Oct 23, 2017 10:22 am

randomguy wrote:
Sun Oct 22, 2017 11:51 pm
Valuethinker wrote:
Sat Oct 21, 2017 6:14 am
Leesbro63 wrote:
Fri Oct 20, 2017 3:29 pm
Somewhere recently I heard that the 4% rule did not work in 6 of 8 developed countries looked at. Honestly I didn't get all the info and should have. But this brings to mind the obvious question: Is the 4% rule just a fluke of the USA in the 20th century? (I sincerely apologize for starting YET ANOTHER SWR thread...but I think this is a good question).
Indexed Linked Gilts (UK TIPS) are yielding c. -1.5%

10 year conventional Gilt yielding 1.0%

No the 4% "rule" won't work in the UK at current interest rates.

It was never a "Rule" in any case (or not a "Law"). It was just a guideline.

If you can flex your cost of living such that you draw down less in bear markets, then it will work much better. So if it is simply a way to control consumption in your withdrawal/ retirement phase, then that's not too bad.

It is a big stretch to say the 4% rule "won't work" because of Interest rates. If stocks return say 3% real for the next 30 years (About 50% of hte UK historical average), it doesn't matter that your bonds lost 1.5%. You will still have high enough returns for the 4% rule to work out. It might work. It might not. And even if it fails, it is likely to be 1 or 2 years out of the next 100 years (i.e you retire in the year the markets drop 30%) while the rest are fine.
Sequence of returns risk. See the UK stock market in the 1970s.

It matters a lot if your risk free asset returns -1.5% real.

The "4% rule" which is a guideline is really a proxy of an annuity rate without the longevity insurance fully provided.

Fixed annuity at age 65, 50% survivor bonus (have to check that latter), is something like £4,000 per £100k of premium right now. So "4% rule" but with a steadily declining standard of living (our State Pension, inflation indexed is way below what US SS offers).

Inflation indexed annuity is about £2,500.

(updated post for more recent quotes on annuity rates).

So by annuitizing you can do a 2.5% rule.
The problem of course with all this stuff is it is backwards looking. Will Europe engage in 2 world wars and a half dozen revolutions over the next 100 years? Will the trends that drove the US economy for the past 100 years continue or stall out? And so on.The next 100 years will not be like the last. maybe they will be better (i.e. maybe the 2008 economic collapse would have been a 2nd great depression if the government didn't act) or worse (pick any of a zillion cases from US/China slugging it out, effects of aging population, trade wars,...). Nobody can really tell you. Everyone makes predications and you only hear about the ones that work.
The real problem is valuations both of the risk free asset and of equities.
It should be pointed out that in a lot of countries no SWR was safe. Going to 1% wouldn't have helped you when the revolution came and they confiscated all private property. Even diversification doesn't help if you lose access to the money.

But yes the 4% rule is a just a fluke. If he would have started with a diversified international portofolio with a bunch of small value stocks, we would be talking about the 5% rule instead. If he started in Czarist Russia, we would be talking about the 0% rule.
Precisely. Where you start matters. And sequence of returns matters.

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Re: 4% SWR Rule in Other Countries

Post by Valuethinker » Mon Oct 23, 2017 10:52 am

ryman554 wrote:
Mon Oct 23, 2017 8:41 am
Valuethinker wrote:
Sat Oct 21, 2017 6:14 am
Leesbro63 wrote:
Fri Oct 20, 2017 3:29 pm
Somewhere recently I heard that the 4% rule did not work in 6 of 8 developed countries looked at. Honestly I didn't get all the info and should have. But this brings to mind the obvious question: Is the 4% rule just a fluke of the USA in the 20th century? (I sincerely apologize for starting YET ANOTHER SWR thread...but I think this is a good question).
Indexed Linked Gilts (UK TIPS) are yielding c. -1.5%

10 year conventional Gilt yielding 1.0%

No the 4% "rule" won't work in the UK at current interest rates.

It was never a "Rule" in any case (or not a "Law"). It was just a guideline.

If you can flex your cost of living such that you draw down less in bear markets, then it will work much better. So if it is simply a way to control consumption in your withdrawal/ retirement phase, then that's not too bad.
Why not? "Bonds" earn 1.5% real in this case.
Minus 1.5% real in this case.
I don't see anybody suggesting that a 4% SWR is from a 100% bond portfolio, but if we go there and also falsely assume that it is also only for a 30 year retirement, under the conservative assumption that all interest is earned on the end of year balance, you don't run out of money until year 31. It would succeed, in this case 100% of the time, under the original definition, even though I wouldn't be particularly happy with the outcome.
You put 100% into indexed linked gilts, and you pull out 4% each year-- but that 4% *rises* as a portion of total capital, each year, because your ILGs are paying a negative real yield.

Put it another way, put it all into gilts, then you lose 3% on your capital value every year. And of course your standard of living is steadily falling-- because you are only getting nominal 1% on it.
Add in an equity component (say 50/50) that earns only 6.5% real (very close to long-term average), you end up with a perpetual stream of income (modulo variance in return).
Seen UK stock market performance 1968-1979? Put half into UK equities, and lose most of it to inflation. Oh and 1972-74 you had a -80% real return-- you didn't catch that back up until the mid 1980s.

Sequence of return risk is the key here.
(edit: I do agree that the 4% isn't a physical law, but there were a series of posts from ... I don't recall! ... discussing the worldwide return on equities since the renaissance which did propose that equities could return north of 5% real, on average, everywhere, if my feeble memory recalls correctly. I also agree that this assumes relative stability of the investment country and lack of government confiscation events)
1. we wouldn't accept those numbers for hedge fund return - we'd scream survivor bias! The reality is that no doubt a family such as the Rothschild family or the Wallenbergs probably has had that kind of return since the Renaissance but there were plenty of others that did not.

2. there weren't real equity markets before the 19th century, or so few (London, Amsterdam?) as to be almost irrelevant. In fact the Joint Stock Company was only allowed in England in 1854, so as a shareholder before then, you had unlimited personal liability.

randomguy
Posts: 5544
Joined: Wed Sep 17, 2014 9:00 am

Re: 4% SWR Rule in Other Countries

Post by randomguy » Mon Oct 23, 2017 11:35 am

Valuethinker wrote:
Mon Oct 23, 2017 10:22 am
randomguy wrote:
Sun Oct 22, 2017 11:51 pm
Valuethinker wrote:
Sat Oct 21, 2017 6:14 am
Leesbro63 wrote:
Fri Oct 20, 2017 3:29 pm
Somewhere recently I heard that the 4% rule did not work in 6 of 8 developed countries looked at. Honestly I didn't get all the info and should have. But this brings to mind the obvious question: Is the 4% rule just a fluke of the USA in the 20th century? (I sincerely apologize for starting YET ANOTHER SWR thread...but I think this is a good question).
Indexed Linked Gilts (UK TIPS) are yielding c. -1.5%

10 year conventional Gilt yielding 1.0%

No the 4% "rule" won't work in the UK at current interest rates.

It was never a "Rule" in any case (or not a "Law"). It was just a guideline.

If you can flex your cost of living such that you draw down less in bear markets, then it will work much better. So if it is simply a way to control consumption in your withdrawal/ retirement phase, then that's not too bad.

It is a big stretch to say the 4% rule "won't work" because of Interest rates. If stocks return say 3% real for the next 30 years (About 50% of hte UK historical average), it doesn't matter that your bonds lost 1.5%. You will still have high enough returns for the 4% rule to work out. It might work. It might not. And even if it fails, it is likely to be 1 or 2 years out of the next 100 years (i.e you retire in the year the markets drop 30%) while the rest are fine.
Sequence of returns risk. See the UK stock market in the 1970s.

It matters a lot if your risk free asset returns -1.5% real.

The "4% rule" which is a guideline is really a proxy of an annuity rate without the longevity insurance fully provided.

Fixed annuity at age 65, 50% survivor bonus (have to check that latter), is something like £4,000 per £100k of premium right now. So "4% rule" but with a steadily declining standard of living (our State Pension, inflation indexed is way below what US SS offers).

Inflation indexed annuity is about £2,500.

(updated post for more recent quotes on annuity rates).

So by annuitizing you can do a 2.5% rule.
The problem of course with all this stuff is it is backwards looking. Will Europe engage in 2 world wars and a half dozen revolutions over the next 100 years? Will the trends that drove the US economy for the past 100 years continue or stall out? And so on.The next 100 years will not be like the last. maybe they will be better (i.e. maybe the 2008 economic collapse would have been a 2nd great depression if the government didn't act) or worse (pick any of a zillion cases from US/China slugging it out, effects of aging population, trade wars,...). Nobody can really tell you. Everyone makes predications and you only hear about the ones that work.
The real problem is valuations both of the risk free asset and of equities.
It should be pointed out that in a lot of countries no SWR was safe. Going to 1% wouldn't have helped you when the revolution came and they confiscated all private property. Even diversification doesn't help if you lose access to the money.

But yes the 4% rule is a just a fluke. If he would have started with a diversified international portofolio with a bunch of small value stocks, we would be talking about the 5% rule instead. If he started in Czarist Russia, we would be talking about the 0% rule.
Precisely. Where you start matters. And sequence of returns matters.
At a high level the point is simply you can't say it "Won't" work by looking at a couple pieces of data. That is making the same mistake that people saying 4% is safe do when extrapolating out based on historical data. Maybe towards valuations are low because we are in a low inflation/low yield world and will be for the next 50 years. Or maybe not. Odds are the 4% rule will work out fine as it is unlikely the next 30 years will be worse than the worst periods in history. But there is always some chance things are worse. We can debate forever if that chance is 1% or 10%. And you can debate how much you want to worry about it rather than reacting when it happens.

What would be really fun is to see how a globally weighted portfolio (for both stocks and bonds) has done in terms of SWR for the past 100 years. I have seen people try it from 1970 on (you get a high SWR becasue of the time period) but have never seen one starting in say 1910 or so.

ryman554
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Joined: Sun Jan 12, 2014 9:44 pm

Re: 4% SWR Rule in Other Countries

Post by ryman554 » Mon Oct 23, 2017 3:55 pm

Valuethinker wrote:
Mon Oct 23, 2017 10:52 am
ryman554 wrote:
Mon Oct 23, 2017 8:41 am
Valuethinker wrote:
Sat Oct 21, 2017 6:14 am
Leesbro63 wrote:
Fri Oct 20, 2017 3:29 pm
Somewhere recently I heard that the 4% rule did not work in 6 of 8 developed countries looked at. Honestly I didn't get all the info and should have. But this brings to mind the obvious question: Is the 4% rule just a fluke of the USA in the 20th century? (I sincerely apologize for starting YET ANOTHER SWR thread...but I think this is a good question).
Indexed Linked Gilts (UK TIPS) are yielding c. -1.5%

10 year conventional Gilt yielding 1.0%

No the 4% "rule" won't work in the UK at current interest rates.

It was never a "Rule" in any case (or not a "Law"). It was just a guideline.

If you can flex your cost of living such that you draw down less in bear markets, then it will work much better. So if it is simply a way to control consumption in your withdrawal/ retirement phase, then that's not too bad.
Why not? "Bonds" earn 1.5% real in this case.
Minus 1.5% real in this case.
Ah. Yeah, that won't work. =) But in this case, *cash* is getting your 1.5% real and the argument holds. Given the inflation that the UK is experiencing (from those I know over there), I can't believe that the UK TIPS are what we think they are.

Then if you are getting 1% from 10 year notes, you're still getting 2.5% real, are you not? Yeah, inflation risk and all, but..

Valuethinker
Posts: 34680
Joined: Fri May 11, 2007 11:07 am

Re: 4% SWR Rule in Other Countries

Post by Valuethinker » Tue Oct 24, 2017 4:34 am

ryman554 wrote:
Mon Oct 23, 2017 3:55 pm
Valuethinker wrote:
Mon Oct 23, 2017 10:52 am
ryman554 wrote:
Mon Oct 23, 2017 8:41 am
Valuethinker wrote:
Sat Oct 21, 2017 6:14 am
Leesbro63 wrote:
Fri Oct 20, 2017 3:29 pm
Somewhere recently I heard that the 4% rule did not work in 6 of 8 developed countries looked at. Honestly I didn't get all the info and should have. But this brings to mind the obvious question: Is the 4% rule just a fluke of the USA in the 20th century? (I sincerely apologize for starting YET ANOTHER SWR thread...but I think this is a good question).
Indexed Linked Gilts (UK TIPS) are yielding c. -1.5%

10 year conventional Gilt yielding 1.0%

No the 4% "rule" won't work in the UK at current interest rates.

It was never a "Rule" in any case (or not a "Law"). It was just a guideline.

If you can flex your cost of living such that you draw down less in bear markets, then it will work much better. So if it is simply a way to control consumption in your withdrawal/ retirement phase, then that's not too bad.
Why not? "Bonds" earn 1.5% real in this case.
Minus 1.5% real in this case.
Ah. Yeah, that won't work. =) But in this case, *cash* is getting your 1.5% real and the argument holds. Given the inflation that the UK is experiencing (from those I know over there), I can't believe that the UK TIPS are what we think they are.
I am very confused by what you write. Can you clarify?

Cash is getting about -3.0% in the UK right now.
Given the inflation that the UK is experiencing (from those I know over there), I can't believe that the UK TIPS are what we think they are.
Inflation is just about 3%. UK Indexed Linked Gilts are yielding -1.5% (it depends on your tax rate).

As the annuity rates for RPI linked annuities show, you can't do a 4% SWR. You get a bit over 2%.
Then if you are getting 1% from 10 year notes, you're still getting 2.5% real, are you not? Yeah, inflation risk and all, but..
No you are getting a negative real return. I don't know where you are getting this 2.5% real from?

I'd snap their hand off if ILGs paid 2.5%. There was a National Savings Certificate that paid 1%, issued 6 years ago. That was good news, albeit in fact the equivalent nominal gilt would have done better (inflation fell faster than expected). I think they then offered a new one offering 0.5%, but the amounts one can buy are quite limited.
Last edited by Valuethinker on Tue Oct 24, 2017 4:40 am, edited 1 time in total.

Valuethinker
Posts: 34680
Joined: Fri May 11, 2007 11:07 am

Re: 4% SWR Rule in Other Countries

Post by Valuethinker » Tue Oct 24, 2017 4:39 am

randomguy wrote:
Mon Oct 23, 2017 11:35 am
Valuethinker wrote:
Mon Oct 23, 2017 10:22 am
randomguy wrote:
Sun Oct 22, 2017 11:51 pm
Valuethinker wrote:
Sat Oct 21, 2017 6:14 am
Leesbro63 wrote:
Fri Oct 20, 2017 3:29 pm
Somewhere recently I heard that the 4% rule did not work in 6 of 8 developed countries looked at. Honestly I didn't get all the info and should have. But this brings to mind the obvious question: Is the 4% rule just a fluke of the USA in the 20th century? (I sincerely apologize for starting YET ANOTHER SWR thread...but I think this is a good question).
Indexed Linked Gilts (UK TIPS) are yielding c. -1.5%

10 year conventional Gilt yielding 1.0%

No the 4% "rule" won't work in the UK at current interest rates.

It was never a "Rule" in any case (or not a "Law"). It was just a guideline.

If you can flex your cost of living such that you draw down less in bear markets, then it will work much better. So if it is simply a way to control consumption in your withdrawal/ retirement phase, then that's not too bad.

It is a big stretch to say the 4% rule "won't work" because of Interest rates. If stocks return say 3% real for the next 30 years (About 50% of hte UK historical average), it doesn't matter that your bonds lost 1.5%. You will still have high enough returns for the 4% rule to work out. It might work. It might not. And even if it fails, it is likely to be 1 or 2 years out of the next 100 years (i.e you retire in the year the markets drop 30%) while the rest are fine.
Sequence of returns risk. See the UK stock market in the 1970s.

It matters a lot if your risk free asset returns -1.5% real.

The "4% rule" which is a guideline is really a proxy of an annuity rate without the longevity insurance fully provided.

Fixed annuity at age 65, 50% survivor bonus (have to check that latter), is something like £4,000 per £100k of premium right now. So "4% rule" but with a steadily declining standard of living (our State Pension, inflation indexed is way below what US SS offers).

Inflation indexed annuity is about £2,500.

(updated post for more recent quotes on annuity rates).

So by annuitizing you can do a 2.5% rule.
The problem of course with all this stuff is it is backwards looking. Will Europe engage in 2 world wars and a half dozen revolutions over the next 100 years? Will the trends that drove the US economy for the past 100 years continue or stall out? And so on.The next 100 years will not be like the last. maybe they will be better (i.e. maybe the 2008 economic collapse would have been a 2nd great depression if the government didn't act) or worse (pick any of a zillion cases from US/China slugging it out, effects of aging population, trade wars,...). Nobody can really tell you. Everyone makes predications and you only hear about the ones that work.
The real problem is valuations both of the risk free asset and of equities.
It should be pointed out that in a lot of countries no SWR was safe. Going to 1% wouldn't have helped you when the revolution came and they confiscated all private property. Even diversification doesn't help if you lose access to the money.

But yes the 4% rule is a just a fluke. If he would have started with a diversified international portofolio with a bunch of small value stocks, we would be talking about the 5% rule instead. If he started in Czarist Russia, we would be talking about the 0% rule.
Precisely. Where you start matters. And sequence of returns matters.
At a high level the point is simply you can't say it "Won't" work by looking at a couple pieces of data. That is making the same mistake that people saying 4% is safe do when extrapolating out based on historical data. Maybe towards valuations are low because we are in a low inflation/low yield world and will be for the next 50 years. Or maybe not. Odds are the 4% rule will work out fine as it is unlikely the next 30 years will be worse than the worst periods in history. But there is always some chance things are worse. We can debate forever if that chance is 1% or 10%. And you can debate how much you want to worry about it rather than reacting when it happens.

What would be really fun is to see how a globally weighted portfolio (for both stocks and bonds) has done in terms of SWR for the past 100 years. I have seen people try it from 1970 on (you get a high SWR becasue of the time period) but have never seen one starting in say 1910 or so.
The "4% SWR" is an approximation of what you can achieve with an annuity.

The annuity rates are what the market will give you right now-- a little over 2% for an inflation linked annuity.

If you want to accept an increased probability of failure, that changes the argument.

So we have answered the original question. The "4% Rule" does not work given current financial market conditions for GBP (pound sterling) investors.

ryman554
Posts: 977
Joined: Sun Jan 12, 2014 9:44 pm

Re: 4% SWR Rule in Other Countries

Post by ryman554 » Tue Oct 24, 2017 8:22 am

Valuethinker wrote:
Tue Oct 24, 2017 4:34 am
ryman554 wrote:
Mon Oct 23, 2017 3:55 pm

Ah. Yeah, that won't work. =) But in this case, *cash* is getting your 1.5% real and the argument holds. Given the inflation that the UK is experiencing (from those I know over there), I can't believe that the UK TIPS are what we think they are.
I am very confused by what you write. Can you clarify?

Cash is getting about -3.0% in the UK right now.
Then I'm fundamentally confused about what TIPS are supposed to do. Please help me understand: (and, yeah, it does look like I bungled lots of stuff up real vs. nominal upstream -- it's a public education/shaming for me!)

I thought TIPS were an inflation protected security -- and by definition/construction got a 0% real rate of return, modulo some small market lag, based on some reasonable estimate of the real inflation (or deflation, in this case) rate.

If TIPS are negative, then you are in a deflationary period, and you would be better off holding cash under your mattress. Yes, in the USA, TIPS are guaranteed to be no worse than cash, so can't go negative.

If you are saying that the UK is getting 3% inflation (which seems about right!), why aren't the TIPS equivalent doing the same?

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