How to improve your sustainable withdrawal rate

Thus far we’ve explored why the 4% rule doesn’t work in the real world, and established a more sustainable withdrawal rate (SWR) for UK / global investors. Please read those articles if you’ve not already done so, in order to get the most out of this piece.

Now for the good bit! We’re going to talk about why you can use a higher SWR if – and only if – you’re prepared to execute a withdrawal plan that’s considerably more sophisticated than the 4% rule.

To raise our SWR we’re continuing to use the layer cake concept advocated by leading retirement researchers William Bengen and Michael Kitces.

The layer cake personalises our SWR by applying a suite of plus and minus factors.

• The last post was all about the bad stuff. We saw how it forced my SWR down to 3%.

• Now I’m going to layer on all the positives, and test my approach using global historical data.

Without wanting to ruin the surprise, I was pretty shocked by the results you’re about to see and I think I’ll need to be more cautious than the test suggests when the rubber really hits the road.

Even Kitces is very clear about the layer cake’s limitations:

Although the ‘layer cake’ approach of safe withdrawal rates does allow for planners to adapt a safe withdrawal rate to a client’s specific circumstances, there are several important caveats to be aware of.

The first and most significant is that many of the factors discussed here were evaluated in separate research studies, and it is not necessarily clear whether they are precisely additive.

Okay, so remember my SWR is currently bottomed out at 3%.

Let’s head for the top!

Diversification sweetener

Our baseline SWR assumes we’re invested in a Developed World 50:50 equity / bond portfolio. Yet there’s plenty of evidence that a stronger equity tilt and more diversification increases your SWR, especially over longer time horizons.

The shotgun spread of long-term equity returns means that an equity-heavy portfolio can shoot the lights out sometimes. However it also falls far short of the target on unlucky occasions. Bonds can staunch the bleeding when equities haemorrhage, yet too much bondage may also cripple you over time.

Early Retirement Now (ERN) sums up the dilemma:

Stocks have a lot of short-term risks, but in the long-term stock returns are tied to economic growth and thus, in the very long-term, real returns become less risky due to that.

Bonds have relatively little short-term risk around their trend growth rate, but their trend growth path itself has a lot of risk in stark contrast to stocks.

The answer isn’t to simply load up 80-100% in equities and hang on for dear life. Rather we can aim to alter our asset allocation as we go.

Michael McClung in his brilliant retirement portfolio book, Living Off Your Money, recommends an eve-of-retirement bond allocation of 50% for a 30-year time horizon, or 55%-65% for longer stretches.

The reason for starting retirement with a heavy bond load is that you’re particularly susceptible to sequence of return risk in the closing years of accumulation and the opening decade of deaccumulation. You can protect yourself during this period with high-quality government bonds.

Kitces has shown how an ill-timed stock market crash can setback your retirement plans like an asteroid strike scuppered talking dinosaurs. He also explains how the sequence of returns in the first 10 to 15 years of your retirement can seal your fate for good or bad.

It’s important to have enough bonds to deal with these threats, and to deploy your bonds effectively.

McClung in particular has developed techniques to help you do this – see the ‘dynamic asset allocation’ section below. The trick is that you allow your bond allocation to wax and wane according to market conditions.

More generally, the historical data sampled by Kitces, Bengen, McClung and others tells us that broad diversification beyond bonds works in retirement just like it does during the accumulation phase.

They cite evidence in favour of diversifying your retirement portfolio with:

• Risk factors like small cap and value
• The global portfolio including emerging markets
• REITs

Kitces offers a diversification bonus of +0.5% SWR for significant multi-asset class diversification. It seems daft not to take it.

The Accumulator’s layer cake SWR:

3% + 0.5% diversification = 3.5%

Dynamic asset allocation

The best way to protect yourself from sequence of return risk? Live off your bonds when equities are down.

Beyond that you can further improve your portfolio’s life expectancy by using a rebalancing method that increases equities exposure when they’re seemingly cheap, and only replenishes bonds when equities have seriously outperformed.

This is dynamic asset allocation. It’s a super-charged version of ‘buy low, sell high.’ You can read about McClung’s version – called ‘Prime Harvesting’ – by downloading a free sample of his book.

Techniques such as dynamic asset allocation will test your risk tolerance because in extreme market conditions you may eat all your bonds and end up 100% in equities. Steer clear if you’re cautious.

Otherwise Kitces awards 0.2% to your SWR for dynamic allocation.

The Accumulator’s layer cake SWR:

3.5% + 0.2% dynamic asset allocation = 3.7%

Flexible spending and dynamic withdrawal rates

Here is the big SWR cherry on top. If you can cut your spending during a downturn then you gain a massive advantage over a constant inflation-adjusted withdrawal plan.

Dynamic withdrawal rates mean you adjust your spending in sympathy with your portfolio’s fortunes. Like managing a forest, being able to conserve your resources when they’re under stress is obviously more sustainable than consuming an ever greater percentage when the rot sets in.

Flexibility is key. Retirement researchers have devised all kinds of rules that allow you to spend more when the market soars, but you must also spend less when there’s trouble at mill.

McClung does a masterful job of analysing various dynamic withdrawal rates in his book, while ERN has written a sobering series exploring how much you might have to cut back using one of the better known spending systems.

In practice, cutting back is what all retirees do if their money runs short. The risk is that extra spending early in retirement may force us to spend less later if the cookie doesn’t crumble our way.

That gamble may be easier to take if you believe that retirees spend less later in life. What do you reckon? The evidence is patchy and may not apply to you. I’ve read research that concludes retirees spend more if they have it, but spend less on average because most end up with less to spend.

Kitces’ flexible spending modifier:

• +0.5% SWR for modest spending cuts in bear markets and/or plan to decrease spending in later life.

• +1% SWR for substantial (10%+) spending cuts in bear markets and/or plan to make significant cuts in later life.

I think Mrs Accumulator and I can handle 20% spending cuts so I plan to use Michael McClung’s EM dynamic withdrawal rules. Our State Pensions should meet near 70% of our estimated outgoings later on. I’m gonna claim the full 1% bonus!

The Accumulator’s layer cake SWR:

3.7% + 1% flexibility bonus = 4.7%

My new world portfolio SWR

My personal SWR was creamed by negative factors in the last post. It finished up at just 3%.

Now it stands at 4.7% and I’m stunned.

What does it all add up to in cold hard cash?

Well, we’d like an annual retirement income of £25,000, so our retirement wealth target at 4.7% SWR is:

(1 / 4.7) x 100 x £25,000 = £531,750

In contrast our target at 3% SWR was £833,333, which was 57% higher.

Wow. Just wow.

If I use the ‘4.7% rule’ then we’re FI already!

The sniff test

The big question is does this layer cake business pass mustard?

The research shows that your SWR changes dynamically as you shift the parameters. I can test these moving goalposts using global historical data thanks to the fantastic Timeline app.

Timeline is commercial software created by retirement researcher Abraham Okusanya. It’s aimed at financial planners who want to model portfolio withdrawal plans.

Timeline is very well designed, loaded with great features, and delivers the Holy Grail of global / UK appropriate datasets. I think it’s worth paying an IFA to run your numbers through it if they have access.¹

My 4.7% SWR achieved a 99% success rating on Timeline – success means historical me didn’t run out of money in 99% of scenarios.

The bottom 10% of scenarios did require me to cut spending drastically to actually avoid running out of money though. That may not be your idea of success.

On the other hand, every path above the 10th percentile was comfy, and the best case scenario near-tripled my income for years. I used all the layer cake assumptions – good and bad – to get the result but was able to leave our State Pensions in reserve.

However that doesn’t tell me that my 4.7% rule is safe or even sustainable. We live in the future, not the past. I won’t experience the historical data in retirement, though hopefully I won’t face anything worse.

The truth is that a lower SWR is safer no matter how much kung-fu you know, so I’m not actually going to adopt a 4.7% SWR.

4% it is

So after everything we’ve been through I’m going to choose 4%.

Editor: You clutz! You total time-waster! Is this your idea of a joke?

Okay look, it’s thousands of words later and I’m as aghast as anyone, but I’m not using that 4% rule.

• I’d have to use a 3% SWR to live with naive, constant inflation-adjusted rules.

• But 4% with all the layer cake trimmings works with McClung’s system and it comfortably performs in Timeline.

In short, I am only happy to choose 4% because it leaves me room for manoeuvre when allied with the withdrawal techniques we’ve touched on in this series.

I also have – and must have – a Plan B.

Maybe my ability to use complex techniques will ebb through my eighties and nineties? Maybe I won’t even make it that far – a big problem given Mrs Accumulator’s interest in dynamic withdrawal rates continues to hover around zero. (“But look, they’re dynamic!”)

Plan B is to switch to a simpler, safer Floor and Upside strategy when our State Pensions kick in and annuity rates tip in our favour.

Aside from that we’ll maintain an emergency fund, there’s always the house to sell or reverse mortgage, and there are side hustles to hustle if we have to.

More than anything, digging into the research has taught me that a SWR is a very personal number. Like inside leg measurement personal. And it’s probably not even a number.

Really, it’s a floating set of coordinates that give you something to aim for. Your final destination can only be known when you arrive.

Take it steady,

The Accumulator

1. For a fixed fee of course.

from Monevator https://monevator.com/how-to-improve-your-sustainable-withdrawal-rate/

Weekend reading: People forget that people forget

What caught my eye this week.

I debated a Tweet of Morgan Housel’s this week, after that excellent financial writer retweeted President Trump’s suggestion that Boeing should rebrand its 737 MAX after two fatal crashes. Morgan thought this good advice from the President. I wasn’t convinced.¹

Here it is as a screenshot (I’m not sure if you can embed conversations from Twitter):

You’ll see Morgan has 132 Likes for his Tweet. And you’ll notice my pithy reply had zero.

Morgan replied to me with the example of Arthur Anderson, the scandal-struck Enron accountancy firm that was ultimately renamed Accenture.

A snappy riposte that eight people Liked – including me!

A couple of people Liked my subsequent comments, but really, I mean literally a couple. On the numbers, Morgan had won.

Here’s the thing though. I am right.

Edgy material

Whenever I wonder what my presumed source of edge is as an investor, ten minutes on Twitter puts me right.

I reminds me people prefer to be outraged. People prefer to be melodramatic. People emphasize the recent and close at hand to an insane degree.

Well-read Morgan knows all this of course, and he could easily have written my reply to him on another day. But all his many followers? I doubt it.

So as I say, I’m right. People forget.

A few examples:

• In 2015 the US Mexican food chain Chipotle saw its shares crash from around $750 to around $250 in the wake of several E Coli outbreaks. Sales fell because people didn’t want to get poisoned. I heard numerous analysts repeatedly write the stock off as dead money. But last year’s revenues were Chipotle’s highest-ever, and it’s smashing expectations again. People forget.

• After being revealed to have cheated emissions tests, Volkswagen was condemned as having not just trashed its own brand but also that of German manufacturing writ large. It was a scandal! There’d be boycotts, big fines, maybe a restructuring. Yet 2018 was Volkswagen’s best year for car sales ever. People forget.

• In 1989 we saw the Exxon Valdez oil spill in Alaska – one of the worst in history – which trashed the environment and saw Exxon receive additional criticism for its slow response. Never mind, by 2006 it was the most valuable company in the world. People forget.

• Or how about the terrible behaviour of all the Wall Street banks in the run up to the financial crisis? So bad it almost brought down the global economy. You remember, that guy wrote that book they made into a film. Never again! The big banks had to be broken up! Even I ranted! But were they subsequently taken apart for their sins – by disgusted customers if not by regulators? Yeah, not so much. The biggest Wall Street banks are far bigger than they were before the crisis. People – boom – forget.

I could go on and on – these are just the examples that first popped into my head.

In fact it’s harder to think of companies that didn’t recover from a public relations scandal!

I know what you’re thinking – there was the Ratner jewelry debacle in the 1980s, when the CEO Gerald Ratner told a business conference that his products were cheap because they were “total crap”. Hundreds of stores were closed in the aftermath. You won’t find a Ratner-branded shop on the High Street today.

True, but that’s because the company was rebranded Signet in the 1990s. It’s now listed in New York and is valued at well over $1bn. So it didn’t die – but it did feel the need to rebrand. I guess we can chalk this one up as a win for Trumpian thinking.

Anyway I’m not saying companies don’t fail. They do, all the time. But in my experience it’s rarely because of a one-time issue. The fail because their products or practices become out of step with their markets.

And of course we have to remember survivorship bias – doubtless I’m forgetting companies that did disappear because they, well, disappeared.

But the point stands – much of the time people forget. They forget the terrible thing that happened a few years ago. They forget who it happened to. They even forget bull markets follow bear markets, as the Of Dollars and Data blog explained well this week.

They forget that they forget.

There are many things eroding edge in the financial markets. But the collective wisdom of Twitter isn’t one of them.

From Monevator

Debate: Should you count your own home in your net worth ‘number’? – Monevator

[Nearly 1,000 of you have voted in the debate and at the time of writing Yes is winning with 52.7%, versus No’s 47.3%. I know, uncanny! Perhaps we could hold a second EU referendum on the cheap on Monevator. ]

From the archive-ator: What you need to know about risk tolerance – Monevator

News

Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!²

Why almost every adult in the UK could receive a payout from Mastercard… – BBC

…but how likely is it that you’ll get the touted £300? – Guardian

Defaults rise ‘significantly’ on unsecured loans in first quarter of 2019 – P2P Finance News

Half of England is owned by less than 1% of its population – Guardian

UK retail sales smash expectations in March due to shoppers splurging on food… – ThisIsMoney

…but house price growth slumps to lowest level since 2012, with London down 3.8% – ThisIsMoney

“Why I went viral on Twitter after talking about being evicted on Sky News” – Guardian

A deep dive into the financial planning requirements of younger people – Kitces

Products and services

In praise of the flexible ISA – Simple Living in Somerset

Free trading apps: Investment freedom or false economy? [Search result] – FT

M&S cuts prices on 500 popular items in price war, but Lidl is still cheapest – ThisIsMoney

Ratesetter will pay you £100 [and me a cash bonus] if you invest £1,000 for a year – Ratesetter

Online platform connects the dots for aspiring landlords [Search result] – FT

Portfolio Charts has beefed up its asset coverage, so go have a play – Portfolio Charts

Acorn Income Fund: Small caps with an income twist – IT Investor

Homes with stained glass windows [Gallery] – Guardian

Comment and opinion

Retiring from retiring – YoungFIGuy

The unbearable lightness of money diaries – WireCutter

Consider doing what you really want to, especially when you’re young – Bone Fide Wealth

The real benefit of being rich – Mr Money Mustache

Larry Swedroe tracks and scores [typically woeful] economic ‘sure thing’ forecasts – ETF.com

Overcoming a reluctance to spend in retirement [Mini podcast] – The Compound Show

10 behavioural advantages that amateur investors have over pros –  Behavioural Investing

Unloaded – Humble Dollar

How to value a pot stock – Bloomberg

Investing in a Danish alternative energy company – DIY Investor UK

Michael Mauboussin: Looking for easy games in bonds [PDF] – Blue Mountain Capital

Warren Buffett’s Berkshire Hathaway as an alternative to multi-factor funds – Factor Research

Brexit

Jonathan Pie: The rise of the right [Video] – via YouTube

What it’s like to debate Brexit [Short silly video] – via Twitter

Amazon Kindle and Spring Sale bargains

How to Have A Good Day by Caroline Webb – £0.99 on Kindle

Eat Well for Less by Jo Scarratt-Jones- £1.99 on Kindle

Mortality by Christopher Hitchens – £1.39 on Kindle

What You See is What You Get by Alan Sugar – £0.99 on Kindle

Amazon’s Spring Sale touting TWO free audio books with its Audible trial – Amazon

Off our beat

A selection of ironic London ‘rental opportunities of the week’ – Vice

Let nature heal climate and biodiversity crises, say campaigners – Guardian

Why we’ll never all be happy again – A Wealth of Common Sense

New Ways of Seeing: Can John Berger’s classic help decode the digital age? – Guardian

Impermanence – Seth’s Blog

More Pie: On the Extinction Rebellion protests [Video] – via Twitter

Bedroom confidential: What sex therapists hear from the couch – Guardian

Dogs who chew holes through blankets – via Twitter

And finally…

“Sceptical investors make their money when the bookie is mispricing the horse’s chances. In other words, where the market gets the odds wrong.”
– John Stepek, The Sceptical Investor

Like these links? Subscribe to get them every Friday!

1. Aside: Wow, how little of that paragraph would have made sense a decade okay? Tweets, retweets, public debates, Boeing having a safety problem, and – yikes – President Trump.
2. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.

from Monevator https://monevator.com/people-forget-that-people-forget/

Things to consider when moving into a new office space

Whether you’re an existing business owner looking for a new location for your business, or you’re just starting up in the world of business; there are many factors you should think about before you choose a new office space. The first factor which springs to mind is how much the building will cost. Whether you purchase the office outright or rent on a monthly basis, some offices can be a lot more expensive than others, for a whole number of reasons.

If it’s the first time you’ve had to look for an office space and your company is relatively small, then it’s usually a fairly straightforward process in terms of the factors you need to consider. For existing business owners, not only do you have to take your business into consideration, but also the staff who’ve worked for you in previous locations and relocating to new premises will affect them.

If you’re looking to relocate your business and want to know how to look after both your company and staff, here are some areas you may want to take into consideration.

What’s the appearance of the building like?

It’s important than when you go to view a new office space, you pay close attention to its appearance and overall quality. Most businesses prefer to be based in newer buildings, but this doesn’t necessarily mean they’re better. It’s more likely that older buildings will potentially need a touch of maintenance work being carried out so make sure you ask about this during your viewing appointment. Whether your building is old or new, if it has been left empty for a while then it’s worth hiring in professionals such as Real Cleaning, who can provide an industrial clean for the office, prior to your company moving in.

How accessible is the premises for employees?

The chances are, if you’re looking for an office space then you’re more than likely to have a number of employees working for you. With this in mind, it’s important to make sure you take them into consideration when choosing a new location. It’s a given that most people have to travel a fair distance to get to work but you don’t want to make the journey excessively longer than usual, as this could start turning people away from your company. Also looking into local transport links and facilities within the surrounding area always a plus when you’re looking to recruit new people; as well as free onsite parking.

Is the building well equipped for clients?

The line of work your company is in may mean you don’t often invite clients to your office, but this isn’t often the case. If your office is often visited by clients for meetings and events, you want to make sure you have meeting rooms which are equipped to deal with these occasions. Making sure there are meeting rooms of a good size, which can also house phones, screens and furniture is a must, to ensure your office is fully equipped for any type of meeting.

Here are just a few factors you should take into consideration if you’re planning on moving into a new office space. It’s important you carefully consider all your options before selecting new premises, by following the points mentioned and a host of others.

from Finance Girl http://www.financegirl.co.uk/things-to-consider-when-moving-into-a-new-office-space/

The financial costs of being a single parent

Debate: Should you count your own home in your net worth ‘number’?

We’ve not one but two of our favourite bloggers guest posting today. What’s more they’re going at each other head-to-head! Roll up, roll up, for a bare knuckle cage fight – personal finance style! Okay, not really, Mr YFG and Fire v London are too polite for that. But we hope you enjoy their gentle jousting nonetheless.

There’s a divisive issue that has been tearing the nation apart forever. Bloggers are at odds over it. Family members squabble over it. Maybe you’ve even put off retiring because of it.

No, we’re not talking about Brexit. This is a far more ancient disagreement than that mere whippersnapper!

We’re thinking of the age-old question as to whether your home is an asset and an investment. And even if it is, whether you should count it as part of ‘the number’ you need in order to declare yourself financially-free and able to retire early, should that float your boat.

Parliament isn’t getting a great rap at the moment, but we see merit in a serious debate. So let’s have at it!

At the end you’ll even get to give your (indicative) vote.

• Proposing the motion “This house believes it deserves to be included in your net worth” is FIRE v London, who is here to make the argument FOR including your home in your Financial Independence (FI) net worth figure.

• Opposing the motion is Mr YFG, who will make the argument AGAINST.

And are you sitting down, dear reader? Because there’s a twist…

Warren Buffett’s wise sidekick Charlie Munger once said:

“It’s bad to have an opinion you’re proud of if you can’t state the arguments for the other side better than your opponents.”

We’re going to put this to the test: Each debater is arguing the opposite of what they believe.

Let’s see if we change anybody’s mind. (Maybe even our own?)

We now call upon FIRE v London to get proceedings underway.

FIRE v London: Property should be counted in your net worth

Gentle readers, the argument I am putting forward today is nothing short of simple common sense.

Property is big!

Property is the biggest type of asset out there. In the UK it is 51% of our net worth, dwarfing all other types of asset.

Why would retail investors like us FIRE¹ types ignore the biggest asset class?

Of course not all properties are residential properties. And not all residential properties are your home. But what we are discussing in this debate is your primary home – where the FIREr lives – and whether this home, and any associated mortgage, counts in the Net Worth calculation you tend to do for FIRE.

The average home in the UK is worth around £250k. In London it’s more than £480k.

For most people, the savings needed for Financial Independence are around £1m. So in that context, the house you live in is an important number – potentially half of the total assets required.

Why would we possibly exclude the most important asset from the calculation?

Big as an asset but also big as an expense

Of course, property is also the biggest cost for most households. It is around 22% of disposable income in the UK on average, and a lot more for #GenerationRent – who in London pay on average more than £1,600 per month to rent a home.

From the point of view on somebody on the FIRE path, this is important. To be Financially Independent one needs to be able to meet all your living expenses, and this obviously includes housing costs. If you own your own house outright, with no mortgage, you’ll have a significantly lower cost of living.

So, in fact, this house believes not only that your primary home, as an asset, should be included in your net worth, but that your housing costs should be included in your assessment of FIRE. You can no more disentangle your primary home, as an asset, than you can forget about paying for electricity and broadband.

So far, so much common sense.

Rent vs buy? An important side question

In fact once you move beyond common sense, there are good practical arguments for considering both your asset and your housing costs in your FIRE deliberations.

It may even be that – counter-intuitively – renting rather than owning turns out to make FIRE more achievable.

Certainly in parts of London with low rental yields, renting may prove significantly cheaper, especially if you can obtain decent investment returns on the freed up capital.

This house might be better off sold! But you won’t know if you don’t consider it in your net worth.

UK property has important tax benefits

But never mind the size of it, look at the quality. Property is not just a large asset, it is also – especially as your primary home – one of the best assets. Particularly here in the UK.

In the UK property holds a special place in the heart and mind of everybody – not just those Englishmen whose ‘home is their castle’.  In Britain, property investment is ‘safe as houses’. Property is a ‘one way bet’. Stocks and shares? That’s ‘gambling on the stock market’, whereas you can put your trust in ‘bricks and mortar’.

As you can see almost every week in the Sunday Times’ Fame & Fortune column, where successful people make these arguments all the time. And they are successful people, so their arguments must be right, right?

In the UK, the taxman agrees with Fame & Fortune. Property is taxed differently to other types of asset. Crucially, there is no capital gains to pay on your primary home. If you pay off your mortgage, live in your home rent-free, and ultimately have no capital gains to pay, your primary home – the single biggest chunk of wealth for most of us – attracts no tax.

As in most places, here in the UK property is also arguably the key asset that it makes sense to borrow to buy. This means that you can get leveraged returns on it. This means you’d be crazy not to – especially for your own home, where mortgage rates are particularly low.

So, property is different. It is a large and obvious asset for retail investors to buy. In owning it you eliminate rent as a housing cost. There is no tax to pay, and you can leverage up your returns. You’d be foolish not to invest in it.

Let’s hear no more nonsense about excluding it from your net worth. Property is too big to exclude, and too attractive to exclude. That’s why this house believes it deserves to be included in your net worth!

But now I turn to Mr YFG, who is going to oppose the motion.

My YFG: Does my asset look big in this?

Whilst my honourable friend is right to call our home big, the case for it being an asset is less clear.

That’s because our homely abodes don’t generate any income or cash towards our FIRE target.

As Robert Kiyosaki of Rich Dad, Poor Dad fame points out, a home creates a negative cash outflow. For example, a mortgage, maintenance costs, bills and taxes. That makes it a liability!

My friend and rival also correctly points out that whether you should rent versus own your own home is a serious question to ask. This follows from the above. A bigger, more valuable house means you need to hold greater and greater amounts of other assets to balance out the cash outflow.

It also means leaving money on the table. The research shows that in the UK, investing in the stock market has beaten investing in property.  Money in your house is money out of the market. Money out of the market is the lost returns needed to finance FIRE.

Overall, the bigger your house, the harder it is to reach FIRE!

Alternative facts

Putting aside whether a house is an asset or not – can we even claim it’s big?

Valuing a home is very difficult. Unlike shares in an ETF (or FIRE bloggers), no two houses are alike. Sure, we can get a valuation from our local slick-backed-hair estate agent. But the ‘true’ value is only known when you come to sell.

Those mansions in Florida were quite valuable until they weren’t. Likewise the owners of former homes in Dunwich thought little was safer than houses… until the North Sea developed a taste for bricks and mortar.

This means that if you include your own home in your assets column the number is a little bit ‘fake news’.  It’s not a ‘real’ number like the cash in your bank account. It may never be realised.

Liquidity

The main point of our FIRE stash is to fund our living costs. All those craft beers and avocado on toast won’t pay for themselves! And this is very difficult with a house.

As mentioned above, a home generates negative cash flow. But even thinking in capital terms, it’s tricky to realise capital amounts, too.

Unlike stocks and shares, we can’t just sell piecemeal amounts of our own home into the market as needed. Nobody would be interested in buying a quarter of my guest bedroom, and not only because of the mound of bric-a-brac I’ve stored in there.

To realise money from our own house we have to sell it all or else take out big remortgages. That makes your own home a really bad investment for funding living costs.

Mums and their sons

My honourable friend is quite right: An Englishman’s home is his castle. I love my home. And this level of emotion makes it very difficult to stay rational.

My home is the best home. Just like my mum’s son is the best son in the world.

So when it comes to my home, I have a huge blind spot. I’ll always be tempted to bump the value of my home up in a way that I can’t with my index fund investments.

My home is more than a number in a spreadsheet. As a rational accountant I must guard against that, and discount whatever value I magic up for my home.

In summary my case is this: we can’t categorically say a home is an asset as it loses money. Whilst it’s a big expense, it’s hard to put a real number on it. Any number we do conjure up is contingent on a future star-crossed home we’re in love with making it rain in our bank account. And even that number is probably unrealistically high because who doesn’t love their home?

My case rests.

Who is right? You decide

Well, there you have it. Two opposing points of view on a key question facing any ambitious seeker of Financial Independence.

What do you think?  If you rent, is buying your own home part of your financial plan? If you own already, what will your financial independence look like in the future? What arguments are we missing?

Please vote in the poll and expand your thoughts in the comments below!

• You can read more from Fire v London and Young FI Guy on their own blogs.

Should you include your home in your Financial Independence net worth sums?

• Yes
• No

Vote

1. Financial Independence Retire Early.

from Monevator https://monevator.com/debating-own-home-net-worth/

Six Easy Ways to Improve Your Credit Score

Weekend reading: There’s no silver bullet to finish off Brexit

Warning: Brexit. My house, my opinion. Feel free to skip.

And so one of the finest dark comedies ever created has come to an end. But sadly, while we’ll see no more of Fleabag, we’ll get yet another season of Brexit: Britain Breaking Badly.

At least the schedulers are in on the joke. The new cliffhanger is set for 31 October – Halloween. Talk about comic noir.

You can’t make this stuff up. The last episode culminated with patriotic Brexiteers blaming the Queen for the dire state of Brexit. Nothing would surprise me now.

A polar bear strolling around Westminister? ERG members cooking meth in a taco truck on the South Bank?

Bring it on.

The Shining

Rising above another week of political misery, however, was one bravely recanting Leave supporter.

Peter Oborne – a former Brexit cheerleader for the Daily Mail – wrote:

Brexit has paralysed the system. It has turned Britain into a laughing stock. And it is certain to make us poorer and to lead to lower incomes and lost jobs.

We Brexiteers would be wise to acknowledge all this. It’s past time we did. We need to acknowledge, too, that that we will never be forgiven if and when Brexit goes wrong. Future generations will look back at what we did and damn us.

So I argue, as a Brexiteer, that we need to take a long deep breath. We need to swallow our pride, and think again.

Maybe it means rethinking the Brexit decision altogether.

Oborne presents a laundry list as to why Brexit has failed to-date – and why it was probably a doomed project to begin with.

Obviously I agree with him, but I’d rather buy him a pint than listen to Remainers asking what took him so long. Any Leave voters coming to their senses deserve a smile not “I told you so”.

After all, Oborne’s volte-face is what Remain voters daily expect from the Leave contingent. Surely with the empty promises of the Leave leadership revealed as student political fantasy, ever more will want to call the whole thing off?

You’d think so. Yet in reality – indeed faced with reality – few seem to be changing their minds.

Perhaps that was why Oborne’s piece struck a chord. It wasn’t so much what he was saying – the case against Brexit is plain enough. It’s what the rest of the 17.4m are not saying.

Much more typical is this response I received on Twitter to one of my (doubtless tedious) anti-Brexit tweets:

Brexit would have been easy if the Commission had acted in good faith, the PM believed in ‘Leave’ and understood how to negotiate, MPs honoured manifesto commitments and the civil service and metropolitan elites weren’t determined to undermine the referendum. So much 4 democracy!

Such sentiment is rampant on social media. But you also see it in newspaper interviews and on TV.

One Brexiteer debating with Oborne even said on live TV that she thought Oborne might be a plant or that he’d been bought off.

The same woman said “not a single person has changed their mind” while standing next to this man who had clearly changed his mind.

It’s Orwellian stuff.

The Thing

Then again – rounding up to the nearest million – perhaps she’s right.

Three years in and Leavers still don’t understand the EU is an extremely powerful trading bloc, doing the business on behalf of its several hundred million citizens. They still don’t admit that as one nation against more than two dozen we don’t “hold all the cards”. They still don’t admit they had no plan.

Instead we just hear claims that a True Brexiteer would have negotiated a better outcome. This despite the fact that Brexit extremists can’t even negotiate with their own party – and caved in to vote for a deal they lamented days before as ‘vassalage’.

These are not serious people.

There’s also no admission Brexit has already cost the UK £66bn according to S&P.

As I’ve warned before, the economic price of any Brexit will show up mostly in a lower GDP like this, for the foreseeable future – maybe decades. It’s pretty much guaranteed by the laws of economics.

Not a bang, but a wimpier UK PLC.

It won’t be something you can photograph or stick on a bus though, so they’ll blame something else. Or someone else.

The Omen

Meanwhile the prophet Farage is readying his followers for a new political push to the sunlit uplands.

And the man who once told his followers to ignore “clever people” who warned that smoking was bad for you will find plenty of credulous takers.

How is this still possible?

There’s little point reasoning with the Barry Blimps, of course. But I don’t believe there are 17m Blimps in the UK.

There are however plenty who believed what the likes of Farage said in 2016 – statements since revealed to be mostly at best fantasies and at worst lies.

Yet instead of thinking again, the more vocal Leave supporters are doubling down and calling for a no-deal exit. It’s profoundly depressing.

I do have time – as I’ve said repeatedly – for sovereignty-first Leave voters¹ who accept the economic cost of Brexit and who own the motley coalition that made up the 52% rather than denying it. Such people are rare, however.

And while I personally want to see a new Referendum informed by everything we’ve learned over the past 30 months, I used to concede a soft Brexit might be better than no Brexit, for the sake of national coherence.

But I’m less sure of that today.

Most Leavers are willfully ignoring the unfolding evidence. They will never be happy. Any deal will be a ‘betrayal’ of the impossibilities they were promised, while a disruptive no-deal will be the fault of the other side for not landing a deal.

What’s the point in indulging them – and in all of us paying for it?

As for the investing consequences, it seems everything is still on the table. Even a no-deal Brexit – hitherto dodged, both in theory and in practice – could yet come about, though it now seems the unlikeliest outcome.

I discussed the ramifications of different Brexits in a previous post. Have a look there for more.

Have a great weekend!

From Monevator

What is a sustainable withdrawal rate for a world portfolio? – Monevator

From the archive-ator: The surprisingly savage way tax reduces your returns – Monevator

News

Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!²

Labour considers house price inflation target for Bank of England – Guardian

OECD says the world’s Millennials are being squeezed out of the middle class – CNBC

Thinking about having a baby? Don’t forget to do the maths first [Search result] – FT

‘That’s legal tender, pal’: bill aims to force shops to take Scottish notes – Guardian

US college graduates sell stake in themselves to Wall Street – Bloomberg

At least some of the 0.01% are waking up to the US wealth distribution problem – Barry Ritholz

Products and services

Reminder: Rolled-over NS&I index-linked certificates will track CPI instead of RPI from 1 May – NS&I

Freetrade app review – Quietly Saving

Eight steps to creating the perfect LinkedIn profile – ThisIsMoney

What is a ‘portfolio ISA’ wrapper and who offers them? – ThisIsMoney

NatWest offers table-topping £175 current account welcome bonus, plus 2% cashback on bills – T.I.M.

Ratesetter will pay you £100 [and me a cash bonus] if you invest £1,000 for a year – Ratesetter

How to track down the fate of an old building society account – ThisIsMoney

Selftrade’s stocks and shares ISA is now flexible [Was emailed, no web story] – Selftrade

We both get a £50 credit if you invest £500 within 30 days on Seedrs via my link – Seedrs

Homes for sale that were once a pub [Gallery] – Guardian

Comment and opinion

What’s your investment faith? – Morningstar

You have to live it to believe it – Morgan Housel

The secret life of an armchair trader [Search result] – FT

What to do when it feels like you’ve hit the wall in your financial progress – The Simple Dollar

Sequence of returns risk and the (un)luckiest generations – A Wealth of Common Sense

My First Million: Paul Tustain, founder of BullionVault [Search result] – FT

The money we don’t talk about – Of Dollars and Data

“I set myself up as a virtual assistant after I had a brain tumour” – Guardian

The world’s oldest people don’t stress about (or even save much) money – Next Avenue

The definition of prosperity needs a rethink – Financial Samurai

Why Vanguard’s push into commodity futures isn’t as exciting as it seems – RCM Alternatives

Thoughts from Seth Klarman: The Oracle of Boston – Humble Dollar

Rightmove’s shares look dear,  but could yet be good value such is its quality – UK Value Investor

Brexit

Civil servants stand down no-deal planning after spending £1.5bn – Politics Home

Britain already £66bn poorer due to Brexit – Metro

Brexit exposes painful disconnect between England and Britain – Bloomberg

Personal relationships and the Brexit divide – Mariella Frostrup

Daily Telegraph forced to correct false Brexit claim by Boris Johnson – Guardian

“Brexit is the will of the people who were lied to” [Video] – James O’Brien via Twitter

Through the Brexit looking glass – Simple Living in Somerset

Amazon Kindle and Spring Sale bargains

How to Have A Good Day by Caroline Webb – £0.99 on Kindle

Eat Well for Less by Jo Scarratt-Jones- £1.99 on Kindle

Mortality by Christopher Hitchens – £1.39 on Kindle

What You See is What You Get by Alan Sugar – £0.99 on Kindle

Get three months of Amazon Music for free if you sign up before 19 April – Amazon

Amazon’s Spring Sale also touting TWO free audio books with its Audible trial – Amazon

Off our beat

Mysterious infection spanning the world in climate of secrecy – New York Times

Why are walruses walking off cliffs to their deaths? – The Atlantic

Black hole – first ever image, how it was assembled with an algorithm, inevitable controversy [Video]

The hidden meanings you might have missed in Fleabag – The Tab

And finally…

“The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them.”
– Peter Lynch, One Up On Wall Street

Like these links? Subscribe to get them every Friday!

1. Even if I see such max-sovereignty as a hollow victory in practice, and Britain ultimately weaker post-Brexit in terms of most of the measures of power that matter in 2019. At least sovereignty is credible argument.
2. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.

from Monevator https://monevator.com/weekend-reading-theres-no-silver-bullet-to-finish-off-brexit/

Ultimate Tips for Reducing Debt Concerns

Debt adversely affects mental and physical wellbeing and can dominate our thinking during the day. Although debt is a serious concern, I have taken a light-hearted approach in looking at ways to save/make money and reduce the load:

SELL YOUR GRANNY

Not really! In times of need cast your sentimentality to one side and search those cupboards, garages, attics and any nook and cranny to find stuff which is saleable. There are many ways to take piggy to market including car boot sales, E-Bay, Facebook and garage sales.

Gumtree estimates that on average each UK household has circa £2500 of items which are no longer needed! You could also offer to sell friend’s and family’s unwanted things (excluding Granny of course) for an agreed commission. So de-clutter, make money, reduce debt and create space!

PENNIES MAKE POUNDS

You wake in the morning and your first thought is money or the lack of it. Followed by a sinking feeling, your motivation levels are low and you believe there is no way out of this money mess. Don’t despair, dig deep and treat each day as a battle to be won against the war on debt! One way people gain a sense of achievement is to list every single penny they have saved or made on a daily basis. Walking or cycling instead of taking the car, ditching the newspapers for online content, saving money on meals by creatively using leftovers and shopping when supermarkets action their reduced to clear offers are some ways to make savings. By recording your savings on a daily basis you will increase your focus and sense of achievement. Just do the maths; if you save 50 pennies a day then you will have made £182.50 pounds per year.

PACK UP YOUR TROUBLES IN YOUR OLD KIT BAG

Pack up your troubles in your old kit bag was a popular WW1 marching song, listened to by Snoopy when dreaming of being a WW1 flying ace and featured in various American musicals and movies.  

Putting your various debts into one consolidated loan may well be worth looking at if the overall single payment is less than what is currently being paid. This approach may well be appropriate to some of the people who recently participated in a UK debt survey which showed that just under half of all respondents do not know what their debt to income ratio is and also that they have no financial plans for 2019/20. There are many credible companies offering consolidated loan plans so shop around for the best terms.

BE A FREEGAN – UNUSUAL BUT EFFECTIVE

A freegan is someone who retrieves food, often from supermarkets, which has been discarded as waste but which is still edible. From sandwiches, bananas and meat to non-food products supermarkets chuck away thousands of pounds worth of edible food every day. Why? Due to their super vigilant and exacting standards items which are considered less than perfect, such as slightly bruised or wonky looking fruit, or beyond the sell-by date but not the best before date, will be discarded in order to maintain the company’s image.

Freeganism is becoming increasingly popular as debt to income ratios rise. A note of caution though, freeganism is legally a grey area, however no one in the UK has been convicted of this practice. Also and if you have access to a garden or an allotment, why not grow your own fruit and veg. This was common practice in the UK up until the 1950s and is experiencing something of a renaissance since the start of the financial crisis in 2008.   

RESIST THE DEVIL

No one enjoys being in debt, living for the next pay-check and feeling like they are walking through mud each day. Debt research reveals 33% of UK respondents enter into debt without knowing how they will pay it back suggesting they give into temptation without thinking through the consequences. The trick here is to build a strong-mindedness and resist temptation and tell the Devil to go to hell!

Short to medium term pain for long term gain and freedom from debt is a price well worth paying. Good luck!

from Finance Girl http://www.financegirl.co.uk/ultimate-tips-for-reducing-debt-concerns/

Do I need to show my boarding pass at airport shops? (video & guide)

It’s one of those niggling frustrations. You want to buy something at the airport and you’re badgered for your boarding pass in order to purchase. Many people ask me if they need to bother, so here’s my quick video answer… Some frequently asked questions… After I originally posted this video on social media, there were a few...

from Martin Lewis' Blog https://blog.moneysavingexpert.com/2017/05/need-show-boarding-pass-airport-shops-video-guide/

Martin Lewis: Had a PPI payout? If so, you can reclaim the tax on it

If you're one of the millions of people who've shared in the £34,000,000,000 of PPI repaid (so far), you may have paid tax you didn't need to. If so, and your payout happened in the last four years, you are due this money back.

from Martin Lewis' Blog https://blog.moneysavingexpert.com/2019/04/martin-lewis--had-a-ppi-payout---if-so-you-can-reclaim-the-tax-o/

What is a sustainable withdrawal rate for a world portfolio?

The 4% rule does not work as advertised, so where does that leave folk with dreams of retiring one day? If a 4% Sustainable Withdrawal Rate (SWR) is unsafe then what’s a better number to use?

First up, the 4% rule has inspired some excellent research. You can use that research to find a baseline SWR that will help you calculate a reasonable retirement target figure. If you’re retired or near retirement, that SWR also offers you a simple formula for drawing down your nest egg at a prudent rate.

What we want is a SWR that survives contact with reality, so let’s dig into the evidence.

The World portfolio SWR baseline

Wade Pfau is the leading researcher on international withdrawal rates. He used historical returns from 1900 – 2015 to calculate a SWR of:

• 3.45% for a Developed World portfolio (50:50 world equities / world bonds)
  3.36% for a UK portfolio (50:50 UK equities / UK bonds)

This theoretically means that you could withdraw an inflation adjusted 3.45% from your Developed World portfolio annually – without running out of money – throughout a 30 year retirement, no matter when you retired from 1900 to 1986. I say theoretically because in the real world the SWR shrinks before the headwinds we discuss below.

We’ll use the Developed World portfolio SWR from here on in because it best tallies with the diversified Total World portfolio we think makes most sense for UK investors.

Failure rate bonus

It’s not often we’re rewarded for failure but our SWR goes up to 3.93% if we’re prepared to accept a 10% failure rate, according to Pfau. This means the money would have run out before our 30 years was up in 10% of all historical scenarios. I think this is an acceptable failure rate because:

• A conservative SWR strategy leaves plenty of money on the table in the majority of scenarios.
  People avoid running out of money by cutting their withdrawals when they see their portfolio burning up.
  The 10% failure rate is reduced by the probability you die before your nest egg dwindles. Scroll down to the Probability: Will you need all that money? section for more.

OK, so a 3.93% SWR it is. How much do we need to retire on then? 1 / 3.93 x 100 = 25.45 times by our annual retirement income need.

So it’s the 3.93% rule? In other words, the 4% rule basically does work, you total time-waster?

No! Like Monty Python’s Black Knight our SWR is about to get chopped down to size. Or maybe eaten is the more appropriate analogy…

SWR layer cake

Your personal SWR depends on ingredients such as:

• Investment fees
  Taxes
  Length of retirement
  Asset allocation
  Sequence of returns
  And more

These factors vary by person and help explain why the 4% rule is one size that fits no-one. To narrow the uncertainty William Bengen (father of the 4% rule) proposed the withdrawal plan layer cake.

The layer cake customises our SWR by adding bonuses and penalties for various factors that may influence our retirement outcome. The concept was expanded by Michael Kitces – the renowned financial planner and retirement researcher – and it’s Kitces framework we’ll use to hone our baseline SWR.

Beware that the layer cake is a confection that stands on a pedestal of assumptions. As Kitces says:

Although the “layer cake” approach of safe withdrawal rates does allow for planners to adapt a safe withdrawal rate to a client’s specific circumstances, there are several important caveats to be aware of. The first and most significant is that many of the factors discussed here were evaluated in separate research studies, and it is not necessarily clear whether they are precisely additive.

Ongoing SWR research certainly implies that your specific cake mix will raise or lower the profile of individual ingredients. For example, Early Retirement Now (ERN) shows that higher equity allocations have historically enabled higher SWRs over long retirement lengths.

Double beware: the layer cake is made with US data. The assumptions may not hold to the same degree using international datasets.

TL;DR – the layer cake approach is art as much as science, but is more sophisticated than the naive 4% rule.

OK, let’s bake our SWR cake.

Deduct fees

Our SWR is nibbled away by investment fees. Fund fees, platform fees, advisor fees – any percentage slice of your returns that you can’t account for in your annual income requirement.

Happily, if your portfolio’s percentage fees amount to 0.5% then you don’t just chip that off your SWR. There’s good evidence that the loss isn’t that bad.

Multiply your total expenses by 50% instead. For example: 0.5 (fees) x 0.5 = 0.25% SWR deduction.

The Accumulator’s layer cake:
SWR 3.93% – 0.25% fees = 3.68%

Retirement length

This is a biggie. So far we’re assuming that we’re willing to cark it within 30 years of retiring. But what if you’re not feeling so co-operative? The mechanism is simple: the quicker you clear off the higher your SWR. Plan on hanging around? You incur an SWR penalty for loitering.

ERN uses US data to show that SWRs gradually decline as retirement stretches from 40 – 60 years, tending to level out at some point along the curve, especially if your SWR is conservative.

The Ultimate Guide to Safe Withdrawal Rates – Part 1: Introduction

I haven’t found publically available data for retirements over 30 years using global historical data, so let’s apply Kitces’ time horizon modifier:

+1% SWR for 20 year time horizon
-0.5% SWR for 40+ years

Intriguingly, Kitces’ modifier tallies with results published by Morningstar in their research paper, Safe Withdrawal Rates for Retirees in the United Kingdom. https://media.morningstar.com/uk%5CMEDIA%5CResearch_paper%5CUK_Safe_Withdrawal_Rates_ForRetirees.pdf

They use a proprietary formula to estimate SWRs for UK retirees using a diversified portfolio tilted towards UK securities. The Morningstar results offer:

+1% to 1.3% SWR for retirement lengths ranging from 20 to 25 years (depending on equities allocation and failure rate).
-0.4% to -0.6% SWR for retirement lengths ranging from 35 to 40 years (depending on equities allocation and failure rate of 90%).

I’d like a long and happy retirement, please. I’ll take the -0.5% hit on 40 years plus.

The Accumulator’s layer cake:
SWR 3.68% – 0.5% retirement length = 3.18%

Taxes – uh-oh

You can’t avoid death and taxes they say (but watch me try!) and both these subjects loom large in our SWR calculations.

The baseline SWR does predict your death but not your tax rate because that’s a lot of work. Time for a shortcut.

The simplest thing to do is work out the gross income you need. For example, you need £25,000 to live on and you estimate it will all come from taxable sources e.g. your SIPP and State Pension.

£25,000 – £12,500 tax-free personal allowance = £12,500 (taxed at 20%)
£12,500 / 0.8 = £15,625 (the gross income you need)
£12,500 + £15,625 = £28,125 (the total gross income you need to live on £25K a year)

£28,125 / 3.18% SWR = £884,433 target wealth required to retire and pay your taxes.

If you intended to draw down £12,500 of your £25,000 from ISAs then you wouldn’t have any more tax to pay. In which case you’d need to accumulate £12,500 / 3.18% = £393,081 in your ISAs and the same again in your SIPP.

Think tax rates will be different in the far future? You’re right. Feel free to input whatever tax schedule you prophesise.

The Accumulator’s layer cake:
SWR 3.18% with taxes accounted for by gross income estimate.

Leave legacy

Want to leave something for the kids? Then you’ll need to lower your SWR. The baseline case assumes you’re prepared to spend your last penny. Kitces has shown that the baseline will leave a large legacy in most 30-year scenarios, and only less than your starting capital in 10% of cases (US data alert). https://www.kitces.com/blog/url-upside-potential-sequence-of-return-risk-in-retirement-median-final-wealth/
If you want to improve your chances of leaving 100% of your nominal capital then Bengen and Kitces suggest cutting your SWR by 0.2%. Raise the penalty for more glorious legacies.

I don’t have kids, so…

The Accumulator’s layer cake:
SWR 3.18% – 0% legacy = 3.18%

Market valuations

Since the Global Financial Crisis in 2008, bond yields have collapsed and equity prices soared. Many credible commentators predict we now live in a low growth world with weaker expected returns https://monevator.com/the-gordon-equation-how-to-calculate-expected-returns-for-equities/ relative to historical norms.

Wade Pfau warns that lower bond yields diminish the chances of the 4% rule working in the US for portfolios with 50% bond allocations.

ERN shows that high US equity valuations bring down the SWR over long time horizons.

The Ultimate Guide to Safe Withdrawal Rates – Part 3: Equity Valuation

However, the rest of the world is not as expensive as the US. Equity valuations are commonly measured using the CAPE ratio. https://monevator.com/the-cyclically-adjusted-pe-ratio-pe10-or-shiller-pe/

The US CAPE ratio is over 30 versus its historical average of 16 – pricey!
https://www.multpl.com/shiller-pe

World CAPE is 23 versus an average of 20. A little high but not too rich.
https://www.starcapital.de/en/research/stock-market-valuation/

UK CAPE is 16 – right around average.

But the world doesn’t look pricey overall, not like the US. According to Star Capital paper: PREDICTING STOCK MARKET RETURNS USING THE SHILLER CAPE, p.8 ] (this includes emerging markets) p.9 for averages – The World is in 75th percentile (i.e. pricey)
A CAPE of 15-20 could qualify as average. Below 13 looks like it would be low.
https://www.starcapital.de/en/research/research-in-charts/

[Amazing table on subsequent 10-15 yr returns p.10]

That suggests high equity valuations are less worrisome to globally diversified investors than to home-biased American investors expecting their stellar run to continue.

Moreover, the World SWR already incorporates losses far beyond the worst the US suffered. The World’s dataset includes the hyperinflation and physical destruction of two World Wars that ravaged the Japanese, German, Italian, Austrian and French markets. That should mean the World SWR can cope with a wider range of nightmare scenarios than a US SWR buoyed by the bounty of the American Century.

Kitces valuation recommendation is:

+0.5% SWR for average valuation environment
+1 SWR for low valuation environment

Kitces also says:
Consider reducing the safe withdrawal rate in extreme combinations of high valuation and low interest rate environments.

Certainly Developed World bond yields are low but equity markets don’t seem overcooked on aggregate. I’m going to play it cautiously and round down my SWR to 3% due to the low interest bond situation.

The Accumulator’s layer cake:
SWR 3.18% – 0.18% valuations = 3%

My world portfolio SWR

I’ve battered my personal SWR with every negative factor going and ended up with an SWR of 3%. My desired income in retirement is £25,000, so my retirement target at 3% SWR is:

1 / 3 x100 = 33.3333 x £25,000 = £833,333

But the story doesn’t end there. We can add another set of tiers to our layer cake to make our SWR rise again. Like blowtorching an edible Paul Hollywood on Bake Off, these moves require upgrading your skills so we’ll get into that in next week’s post.

If you want to keep things simple and just apply your SWR at a constant inflation-adjusted rate to produce a predictable retirement income then the steps above are surely better than naively relying on the 4% rule. The important thing is to be conservative with your assumptions, understand how SWRs work and have a back-up plan. https://monevator.com/secure-retirement-income/

from Monevator https://monevator.com/what-is-a-sustainable-withdrawal-rate-for-a-world-portfolio/

Weekend reading: Don’t mess with pensions. They’re working.

What caught my eye this week.

Ten million UK workers will increase their pension contributions from today, which should mean a more prosperous retirement for them down the line.

No, Monevator didn’t just benefit from a promotion from Oprah Winfrey or Richard & Judy that delivered us few million extra readers overnight.

In fact many of those millions who are about to spend less and save more are probably only vaguely aware of the fact. That’s the genius of the pension auto-enrollment scheme – started in 2012, and the true reason for the imminent extra saving.

Auto-enrollment makes it easier to do the right thing by doing nothing. So far the opt-out rate is a mere 9%. Still, I think it’s fair to say the higher contribution rates are needed – and they need to stick – to deliver these workers the retirement income they’ll expect.

This could yet be a challenge. The new contribution rates may look measly to some super-savers around here. But they will take a meaningful chunk of change out of pay packets, as this graphic from the BBC illustrates:

Higher personal tax allowances – also starting today – will ease the pain. Head over to the BBC for the full story.

Pensions and property

Even the invariably spiky Merryn Somerset-Webb in the FT hails the success of auto-enrollment, and describes UK pensions as in “fabulous shape”.

The UK pension system is well-funded by international standards, and auto-enrollment means our level of pension assets is increasing faster than elsewhere.

There’s just one potential snag, Merryn warns, which is that some wonks believe pension savings should be accessible to young people in need of a house deposit.

No no no!

A pension is a backstop. It comes with tax relief for the very specific reason that it is designed to stop you being reliant on the state in your retirement.

Once the money is in it is in, you can’t lose it gambling or in bankruptcy; you can’t create negative equity with it; and you can’t fritter it way on the internet (not until you are 55, anyway).

Allowing pensions to be accessed to pump up the housing market might seem a good way of addressing housing inequality, but even if it was (we both think it isn’t) it would destroy the integrity of the pensions system, says Merryn.

I agree. Lifetime ISAs are mutant hybrid enough!

From Monevator

The Slow & Steady Passive Portfolio: Q1 2019 update – Monevator

From the archive-ator: Why I don’t use the FIRE acronym for financial freedom – Monevator

News

Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!¹

New year taxes: The key changes [Search result] – FT

Super-rich pay average 10% inheritance tax, versus 20% paid by wealthy – Guardian

House prices hold up better than expected amid Brexit doubts… – Guardian

…or perhaps you prefer to focus on the 1.6% fall in March – ThisIsMoney

Bridgewater’s Ray Dalio warns US inequality risks social conflict [Search result] – FT

[US] super-savers spend less on housing – Market Watch

Hedge funds raise minimums as costs rise and returns dwindle – Institutional Investor

The US market doesn’t look that outrageously expensive – via Business Insider

Products and services

‘Bundled’ Amazon product reviews mislead consumers – Guardian

MPs demand more scrutiny following high-profile mini-bond wipe-out – ThisIsMoney

Pension Partners: 80% of ETF assets are managed by three companies – via Twitter

End of the line for Nationwide’s 5%-paying regular savings account – ThisIsMoney

Ratesetter will pay you £100 [and me a cash bonus] if you invest £1,000 for a year – Ratesetter

Online shopping: ASOS to crackdown on ‘serial returners’ – ThisIsMoney

Do tactical allocation funds deliver? – Morningstar

Comment and opinion

Fees versus fines – Morgan Housel

What’s your next dollar worth? – Khe Hy

Buy yourself a f*cking latte – Barry Ritholz

Are your annual return expectations realistic? – MoneySense

How some of the world’s oldest people make their money last – Next Avenue [via AR]

Getting real – Humble Dollar

The mystery of preferring a ‘spend only the dividends’ strategy – The Retirement Cafe

How can you best communicate what risk means to you? – The Value Perspective

Key information I’d like to see in a KID – IT Investor

An interesting look at how a US active investor reviews his fund portfolio – M.F.O.

O tempora! O mores! – Simple Living in Somerset

JP Morgan CEO Jamie Dimon’s annual letter is usually worth reading – JP Morgan

Some thoughts on a seed investment gone right – Points and Figures

Lessons learned on successful start-up growth from an AirBnB insider – Medium

Brexit

The United Kingdom has gone mad – New York Times

Anger and frustration: How Brexit is affecting our mental health – Guardian

89-year old Betty Boothroyd delivers blistering Brexit attack – via Twitter

Robert Peston shows Boris Johnson doesn’t understand single market – via Twitter

Nicola Sturgeon notes Jacob Rees-Mogg’s hypocrisy about our EU power – via Twitter

A video game version of Hard Brexit [Video] – via Twitter

Brexit’s macho drama queens set to be knocked out by reality – Guardian

Kindle book bargains

Eat Well for Less by Jo Scarratt-Jones- £1.99 on Kindle

What You Get is What You See by Alan Sugar – £0.99 on Kindle

Off our beat

Demographic time-bomb: Finland sends a warning to Europe [Search result] – FT

Recycling isn’t about the planet. It’s about profit – Slate

The share of Americans not having sex hits a record high – Washington Post

This is Boring: The niche London conference that became a hit – Eventbrite

10 animals being eaten into extinction – Guardian

Arms Sales: US vs USSR (1950-2017) [Video] – Visual Capitalist

And finally…

“The world of work today is overflowing with systems, processes, tools, and assumptions that are deeply flawed and that push directly against our ability to express what is unique about each of us in the work we do every day.”
– Marcus Buckingham and Ashley Goodall, Nine Lies About Work

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1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.

from Monevator https://monevator.com/weekend-reading-dont-mess-with-pensions-theyre-working/