Sequence of Return Risk

This is a very interesting topic as many people were opposed to diversifying outside of AU. Some also preferred no EM exposure and some preferred only US exposure. In this downturn, though, there is no telling which country will come out less damaged economically.

At this current rate USA, Spain, Italy and potentially Oz is getting destroyed economically. What about countries that are doing well without shutting down? Hong Kong, South Korea, Japan, Taiwan and Singapore - are we going to see the rise of Asia for the next decade?

I'm grateful I have a good amount of overseas diversification at the moment. In a downturn is where you can really assess your asset allocation and risk tolerance.

 

I keep looking for better strategies to manage retirement income expenditure etc. The SMSF due to forced increasing withdrawal rates introduces some issues. However unless I’m missing something when it comes to this outside Super, given OUR personal circumstances, it has always seemed easy.

We simply keep 6 - 12 months living expenses in cash which is topped up with incoming dividends / distributions / SMSF pensions. Any excess over this amount is reinvested. Couldn’t be more simple.

Given the hard work / saving over our lifetime to get to this stage we place no restrictions on spending such as paying ourselves a set monthly income but use some common sense. Life is too short so we never feel guilty about enjoying the fruits of our labor.

I really like the concept of 100% equities but reducing this just a little to establish a small cash buffer provides great protections against forced selling during savage bear markets, liquidity, peace of mind and is so easy to administer. So far I’ve not found anything easier.

 

China's going to come out massively on top after this, and probably close the gap with the US to 5-6 years only. In the GFC, they ran far ahead of Europe as Eurozone imploded. Who cared about China pre 2008?

Australia will be an economic beneficiary in time, but of course there will be some geopolitical decision in time too

 

Ben Felix video that fits into this thread.

 

Interesting @dunno , a 2.5% withdrawal rate sounds abysmal! I understand the lower expected returns of equities in future, but it’s quite difficult for any early retiree to achieve that outcome. I was expecting something like 3.5% as a relatively safe outcome for high stock allocation (80%+).

I remember yourself implementing a fixed withdrawal rate and adjusting for wage inflation. Do you ever see yourself implementing or recommending the semi dynamic withdrawal strategy as mentioned in the video and vanguard?

 

Hi @blob2004

2.5% is abysmal, it equates to allowing for 40 years with zero real growth.

But if you want to force a consistent inflation adjusted cash flow over many years from a volatile asset with no historical chance of running out of money then its reasonably accurate on global data. However, such a static way of approaching things is not optimal.

In my spending model I have a floor of “x” times ordinary earnings. But above that floor kicking in my model is very much dynamic. Only a dynamic model can hope to achieve a balance between not running out and underspending.



My model works like the below diagram.


If you are not interested in building your own model and stress testing it as I was then the Vanguard option is probably as good as I have seen for a simple dynamic model. Typical of them, fairly under-stated but there is no way they chanced on those settings without a tonne of thought and testing. It back tests against the historical data very well without an overwhelming whiff of being curve fitted and provides flexibility to deal with an unknown future with some sense of stability in spending.

 

Hey @dunno thanks for that. What do you see as ordinary earnings?

Do you use CAPE? Or do you simple adjust your spending based on how much the market performed in the previous year?

It's often difficult to assess where the market is right now re:valuation as the CAPE has been elevated for a long time.

 

I just use the ABS AWOTE headline figure. Currently its $1,658.70 pw, so about $86,489p.a
Its easily found and keeps pace with wages which is my chosen measure of purchasing power inflation.

I do incorporate a valuation judgement but its not CAPE and yes any valuation by its very nature is subjective, but I find a educated guess better than nothing for trimming the sails in this area.

The current numbers produced by my model calculates a steady state spending rate between 5050 and 7600 on the XAO. Between those two figures is noise around fair value that doesn't impact the spending potential calculations in my model. Above 7,600 and the dynamic calculation would start ramping up spending to exploit good times.

Below 5050 the dynamic calculation starts reigning in the spending figure to weather tougher times The taper in spending would currently continue until approx. 3500 on the XAO at which point my floor calculation of 3x AWOTE would be higher than the dynamic calculation and stay as the spending level until the index recovers back above 3,500 and the dynamic calc become greater than the floor or until I run out of capital.

The index numbers refrenced above slowly change with the passage of time and actual index movements.

 

I like this guy. I’m now in a position to start contemplating spending rates, and something in the 2.5 to 3% range gross seems about right to me. I’ll likely have another income stream but I don’t figure that in to planning at the moment, so that would result in lower portfolio withdrawal.

I do like the dynamic spending model, rather than valuation I’ll keep it real simple ; when the Uber drivers are talking stocks it’s time to buy cars and boats.

 

I like 2% or less as distributions alone across a globally diversified portfolio including a generous safety buffer risk free component does the job without rarely if at all having to ever worry about withdrawal strategies. My wife’s mandatory requirement of a cash account that magically gets topped up without having to do a thing is how I’ve set it up. Near set and forget.

Fortunately at our age with tax planning there’s little difference between gross and net. Less tax obviously helps lower the withdrawal rate so an important aspect in any financial plan.

 

You’ll have enough capital to live for a thousand years at that rate I’m the same boat at the moment with an asset base basically fully tax paid.

I think the simple takeaways are be prepared to reign in withdrawals during serious downturns - this is easier if you are at full fat FIRE obviously, and buy your toys, take expensive holidays in times of froth....and expect anything to happen as recent history will demonstrate.

 

Of course for many such a low withdrawal rate is aspirational but it also depends on one’s lifestyle. I shudder at how little many FIRE types live on.

 

Gee, talk about a low withdrawal rate! Anything below a 3% (or even 2%!) withdrawal rate I think you will really end up being the richest guy in the cemetery

What is the point of all that money compounding when you will never use it?

Unless of course you are assuming a zero or even negative real growth over 30+ years...

 

Thanks to the pandemic many other than the FIRE type wouldn't have realised that you don't need that much to be happy.

 

Maybe you want to have enough for your time and for your children's time and why not there children's time. If you are in a position to live comfortably on 2% why spend 3%.
I guess it really depends on how you want to live and how much 2% is in real dollars.
Also at 2% your portfolio should continue to grow. The larger the portfolio the more money that 2% is.

 

I suppose it depends on one's willingness to work for longer.

If i reach 3.5% I'm out and going to semi-retire immediately, spending most of my time with my family and friends. However I do understand the cohort willing to toughen it out for an extra 5-10 years of work to get the withdrawal rate below 3%.

P.S. Hope I haven't offended you guys @The Falcon @Nodrog I think you have done remarkably well to only need such a low withdrawal rate! I can only dream of such a portfolio haha.

 

You have to remember these lower withdrawal rates relate to historical success of 95%+ and future investment returns been relatively lower. There are plenty of situations where 4% would have resulted in one's wealth soaring.

Volatile asset/unknown future/fixed income problems can perhaps be better managed with things like a willingness/ability to return to work or working part time in the highest risk portion of retirement. As has just been discussed, obviously many here have done exceptionally well and following that path is ideal but not the only and most practical way for most perhaps.

The great thing about this problem is that just about everyone gets plenty of time to ponder it. I certainly haven't come up with a definite plan, plenty of time to adapt. Right now the focus is on building the nest egg with high risk/return assets and hopefully get to a place to make a reasonable decision about SORR management - very easy for me to drop to 75%, 50% or even 25% time/wage.

 

No offence taken at all. Old school perhaps but not that uncommon for income focused investors. Investing unfortunately is as much about luck / when and where we’re born as skill. Aim for aspirational but even if you fall well short you will be far better off than at least 80% of the population!

 

We didn’t work longer @blob2004 we just let compounding do it’s thing over the long term and retired when we were ready. We have always spent less than we earned and invested the difference both inside and outside super. In retirement we are still doing the same. So the 2% withdrawal rate was never a goal it just happened.

 

Ditto. We never had any particular amount / income we planned to retire on when achieved. We just kept saving / investing until one day we decided the time was right for many reasons, not just financial.

There’s just too many curveballs that happen in life so simply save / invest as best you can and see where it takes you. You generally know when the time is right to retire.