Key Post Retirement planning - My experience

Steven's second chart above demonstrates why a sustainable withdrawal amount is lower than the average rate of return on a portfolio.

Over the period, the MSCI World Index returned pretty close to 5% pa. However, if you had taken 5% of the initial balance and withdrew the same amount every year, the portfolio would have completely bombed out within 20 years.

Why?

Because the sequence of returns was lousy. There simply wasn't enough left within the portfolio to sufficiently recover from the earlier market drawdowns.

It's also worth noting that Steven hasn't adjusted the amount withdrawn every year for inflation. That makes a significant difference - the % change in the CPI from Jan 2000 to May 2020 was 40.3%.

Unless a retiree is prepared to accept a huge variation in the amount they can safely withdraw from an ARF every year, having an all-equity portfolio in retirement is probably unwise.
 
Thank you Steven. That is really helpful.

Edit: Presumably there’s a mistake in that second most recent graph? It looks worse, notwithstanding the lower withdrawal rate.
 
Gordon Gekko said:
Thank you Steven. That is really helpful.

Edit: Presumably there’s a mistake in that second most recent graph? It looks worse, notwithstanding the lower withdrawal rate.
Click to expand...

The second most recent graph withdraw a fixed amount of €82,500 (5% of initial amount) with no adjustment. It is the highest withdrawal rate and bombs out
 
SBarrett said:
The second most recent graph withdraw a fixed amount of €82,500 (5% of initial amount) with no adjustment. It is the highest withdrawal rate and bombs out
Click to expand...

Sorry if I’m missing it because I’m on my phone, but did you post what a 4% withdrawal rate (not fixed) looks like? i.e. mandatory ARF drawdown. Many thanks.
 
SBarrett said:
Yeah, that was the last chart I put up
Click to expand...
Are you sure Steven?

Your chart showing variable withdrawals @5% finishes up at around €1.2m, whereas your chart showing variable withdrawals @4% finishes up at around €650k. That can't be right.

Are you sure your last chart isn't showing what a fixed withdrawal calculated @4% of the initial value would have looked like?
 
Sarenco said:
Are you sure Steven?

Your chart showing variable withdrawals @5% finishes up at around €1.2m, whereas your chart showing variable withdrawals @4% finishes up at around €650k. That can't be right.

Are you sure your last chart isn't showing what a fixed withdrawal calculated @4% of the initial value would have looked like?
Click to expand...

You're correct. I didn't see the (not fixed) bit. I haven't put up a flat 4% withdrawal rate.
 
I don't think you have to draw down at that percentage, it's just that the tax is applied as if you did. Or you can withdraw and reinvest.

Thanks for the example charts interesting to see what current retirees faced.

Every withdrawal strategy and every equity portfolio has risk.

Back to my original point, if you need to meet a given spending budget (have a specified retirement income) plus future inflation from a portfolio, the drawdown should be less than 4 percent of the original portfolio when you start to draw down. And ideally more like 3 percent to reduce risk of funds running out before you die.

But these are all just rule of thumbs based on past volatility and Monte Carlo simulations. They are not guarantee.

I haven't seen any high quality analysis looking at different bond:stock allocations, or at the effect of the forced Irish imputed distribution to see what a safe drawdown rate would be over a wide range of potential future outcomes.
 
Last time I read about SWR, I remember considering just before retirement it seemed worthwhile to have built up a few years worth of spending in cash/near cash, to protect against sequence of return risk, and then spend that cash, effectively returning to a very high(100?) percent equity portfolio. Or if you were 60/40, when in downturn draw from cash/bond side and don't rebalance to lock in.

Something like that is roughly what's in my plan at the moment, but I'd research it more before acting on it.

I also like the idea that an average house rented out will get you 30 percent of an average income.
 
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