Anyone Adjusting SWR Based on ZIRP?

[Tekward]

Acronyms for 500 Alex.

I'm a FISER (Financially Independent Semi-Early Retired) and was wondering if the current Zero Interest Rate Policy is driving some adjustment since there are fewer low-risk positive returns available.

 

[stepford]

While ZIRP certainly lowers nominal returns are real returns really that much different or is the decrease in nominal return largely balanced by reduced inflation? If the latter I don't see any big reason to change my assumptions.

 

[2017ish]

Search the site for discussions of "Pfau."

Although we are going to go with a fixed percentage (aka "variable") withdrawal, we've put the date off until our assets are anticipated to reach "we could do it if we really had to" on 1% SWR. So, yeah, ZIRP and Schiller P/E have definitely had an influence on our planning.

 

[MasterBlaster]

Search the site for discussions of "Pfau."

Although we are going to go with a fixed percentage (aka "variable") withdrawal, we've put the date off until our assets are anticipated to reach "we could do it if we really had to" on 1% SWR. So, yeah, ZIRP and Schiller P/E have definitely had an influence on our planning.

<Pfau in a nutshell>
Because of ZIRP every asset class has inflated, therefore expected returns going forward are modest, therefore historical SWR's are larger than can be expected. The traditional 4% SWR is no longer safe but perhaps 3% is.

Here's one of the Pfau articles plus another one that that discuss the concept:

http://www.fa-mag.com/news/why-4--could-fail-22881.html

Forget the 4% Withdrawal Rule - TIME

 

[marko]

But...! (Going academic here)

Couldn't one argue that ZIRP will better contain inflation thus offsetting the need for higher returns?

As a result, a 4% SWR would remain valid as inflation (a negative) and returns (a positive) both make up the SWR?

One might also argue that ZIRP will increase returns due to easy cash. That could lead to a higher SWR with inflation contained and higher returns.

[edit]: Ooops! I see that stepford already said that.

 

[marko]

On second thought, it seems to me that the SWR is calculated on ups and downs of the market over decades. Some years--decades--the markets run wild and other years not so much but if we're looking out 30 years or so, I wonder if such musings could be dangerous.

Back in the late 70's with 15% inflation, I wonder what the pundits would've suggested as a SWR.

There's great danger in saying "oh, the market has been on fire for the past 5 years...I'm going to increase my SWR to 6%"

 

[mrfeh]

Search the site for discussions of "Pfau."

Although we are going to go with a fixed percentage (aka "variable") withdrawal, we've put the date off until our assets are anticipated to reach "we could do it if we really had to" on 1% SWR. So, yeah, ZIRP and Schiller P/E have definitely had an influence on our planning.

Holy smokes. 1% WR seems like total overkill to me.

4% worked through the great depression. If folks need to be conservative (and I do believe in being careful), go to 3% (that is our WR).

At 2% you should never have to sell anything, as dividends should pay the bills.

 

[2017ish]

On second thought, it seems to me that the SWR is calculated on ups and downs of the market over decades. Some years--decades--the markets run wild and other years not so much but if we're looking out 30 years or so, I wonder if such musings could be dangerous.

Back in the late 70's with 15% inflation, I wonder what the pundits would've suggested as a SWR.

Yeah, that's the rejoinder to Wade. Still, the combination of ZIRP and the shiller 10 strikes me as unusual. Given that we'd have a hard time getting back in after quitting and that a bit more time before retirement is not intolerable for either of us, we're playing better safe than sorry--especially given DW's family history of longevity.

 

[daylatedollarshort]

I use my own spreadsheet with inflation and returns as variables and run it with returns of 0 - 1% over inflation. A zero real return over 40 years would allow a 2.5% withdrawal rate, and a TIPS ladder as of this writing would provide more than a zero real return, with relatively low volatility and risk. Current TIPS rates are here:

United States Government Bonds - Bloomberg

 

[2017ish]

Holy smokes. 1% WR seems like total overkill to me.

4% worked through the great depression. If folks need to be conservative (and I do believe in being careful), go to 3% (that is our WR).

At 2% you should never have to sell anything, as dividends should pay the bills.

If we were doing SWR, there is no way I'd go that low--we'd have to accumulate a huge sum of money to live the way we want to live. But, that would be enough to get by without travel or fine dining, or good wine, if we truly had to. Our actual spending plan is to pull 4 or 5% out each year of previous year's (or maybe pro-rated quarterly) closing net balance. That 1% is just our benchmark/goal and, multiplied by 4-5, gives us the means to do things we've put off .... Thus, we initially spend more than a safe SWR, with recognition that we might have to pull back.

 

[marko]

I use my own spreadsheet with inflation and returns as variables and run it with returns of 0 - 1% over inflation. A zero real return over 40 years would allow a 2.5% withdrawal rate, and a TIPS ladder as of this writing would provide more than a zero real return, with relatively low volatility and risk. Current TIPS rates are here:

United States Government Bonds - Bloomberg

Right. And I will offer that 40 years is a long, long time...a lot can change in that period.

 

[MasterBlaster]

Yeah, that's the rejoinder to Wade. Still, the combination of ZIRP and the shiller 10 strikes me as unusual. Given that we'd have a hard time getting back in after quitting and that a bit more time before retirement is not intolerable for either of us, we're playing better safe than sorry--especially given DW's family history of longevity.

The problem that many have with the Shiller PE10 is that the look-back includes the great recession. Therefore the "E" part of the PE10 ratio is then suspect as is the PE10 measure's usefulness.

Still, by many other measures equities are overvalued. It's just that PE10 may not be the right yardstick to measure with.

 

[daylatedollarshort]

Right. And I will offer that 40 years is a long, long time...a lot can change in that period.

I am not sure I understand what your point is. What kinds of changes do you mean?

 

[Danmar]

My plan is very simple, just spend pensions and divs. Portfolio yields have been in the 3.25-4.00% range since the crises. Currently at a high of about 3.95%. I am very confident that this is sustainable but could reduce spending to match any div cuts of which there really haven't been any, even during the crises. In good years I intend to liquidate maybe 2-3% of portfolio and keep in cash to buffer any possible issues. Retired 9 years, 65 years old.

 

[marko]

I am not sure I understand what your point is. What kinds of changes do you mean?

What I mean is this: Your projections on zero returns (and perhaps zero inflation) over 40 years show a 2.5% SWR; unless I misunderstood your premise.

My point was that 40 years is a long time and over that time, 40 years of zero growth was pretty unlikely, meaning that your position represents a worst case scenario.

By changes, I mean that there would be years of high growth and years of negative growth. The market would change over 40 years with new offerings and potentials. MFs, Index Funds and ETFs didn't exist 40 years ago, so there is all sorts of new potential for growth.

 

[unclemick]

Acronyms for 500 Alex.

I'm a FISER (Financially Independent Semi-Early Retired) and was wondering if the current Zero Interest Rate Policy is driving some adjustment since there are fewer low-risk positive returns available.

No.

heh heh heh - I was waaay too cheap/frugal my first 20 years of ER and am trying to make up by spending more since leaving it to charity doesn't really thrill me.

 

[daylatedollarshort]

What I mean is this: Your projections on zero returns (and perhaps zero inflation) over 40 years show a 2.5% SWR; unless I misunderstood your premise.

My point was that 40 years is a long time and over that time, 40 years of zero growth was pretty unlikely, meaning that your position represents a worst case scenario.

By changes, I mean that there would be years of high growth and years of negative growth. The market would change over 40 years with new offerings and potentials. MFs, Index Funds and ETFs didn't exist 40 years ago, so there is all sorts of new potential for growth.

My point is even at zero interest rates over 40 years a 2.5% safe withdrawal rate is possible with a relatively low risk, low volatility TIPS ladder. If you had another ~.5% average rolling yield with a TIPS ladder, there is a ~3% safe withdrawal rate with low volatility and risk. A liability matching portfolio, including a TIPS ladder, might not be for everyone, but suitable for the risk adverse who get sick feelings from 50% potential stock mark drops.

Other comments in this thread were talking about going to 1% SWR with more risk and volatility. One could get more than 1% putting everything in 30 year TIPS, living off the interest, not touch principal and the portfolio would be indexed to inflation.

 

[Senator]

My rentals should produce more than enough to live on, even if rents decrease. Hopefully, the S&P will continue to provide some sort of dividend, now it is just over 2%.

As long as we do not have a 20 year bear market, I am fine. Even a flat market is OK.

 

[nun]

Yes look for posts that include "Pfau" and "Guyton". Lots of info on withdrawal strategies. The 4% SWR is probably optimistic given current bond returns and the possibility that we might be going into a bear market.

 

[MooreBonds]

But...! (Going academic here)

Couldn't one argue that ZIRP will better contain inflation thus offsetting the need for higher returns?

As a result, a 4% SWR would remain valid as inflation (a negative) and returns (a positive) both make up the SWR?

One might also argue that ZIRP will increase returns due to easy cash. That could lead to a higher SWR with inflation contained and higher returns.

I would rather have higher rates with zero real return than "zero" nominal rates with zero real return for 2 reasons:

1) Temporary status - typically, higher inflation with higher nominal rates have been relatively short-lived. So, you would hope that the surge in inflation would not last too much longer, and would then return to a somewhat positive real return. And if I had to bet, I'd say it would take less time for higher inflation to reduce down, than for near zero inflation to surge up.

2) Substitution effect easier - which position would you rather be in, with 50% of your portfolio:

1% nominal average return (mix of short-term, intermediate term bonds) giving you less than minimum bare-bones budget to live on, causing you to dip heavier into principal to fund just bare essentials,
or
6% nominal average return, giving you a decent cash flow, and an ability to decide what you want to substitute for to offset the higher cash flow.

I'd rather have the latter, because at least you have the (hopeful) option/choice to keep buying the more expensive steak, or use the same cash flow and just buy more chicken....take a cruise around the Caribbean and go to Mexico instead of a more expensive trip to Italy. In the former scenario, you barely have enough cash to meet your basic needs without any ability to substitute for cheaper goods, because you already are just to get by.

 

[nun]

Posts like this make me glad of my 3% minimum annual interest (currently producing 4% because of declared extra interest) from TIAA-Traditional account. Assuming 4% initial withdrawals and 2% inflation I can do that for about 33 years before I run out of money.

 

[alaska55]

If we are going to have low inflation and low returns for the next 10 years, I would start looking at some investment grade perferred stock yielding 5 to 6 1/2% to replace some of my bond funds. That's if your already retired.

 

[marko]

If we are going to have low inflation and low returns for the next 10 years, I would start looking at some investment grade perferred stock yielding 5 to 6 1/2% to replace some of my bond funds. That's if your already retired.

But again, low inflation and low returns might be the same as higher inflation and higher returns. Isn't 1% inflation+2% returns the same as 3% inflation and 4% returns?

Having said that I still believe that a 30-40 year SWR calculation takes into account decades of good performance, decades of bad performance, decades of high or low inflation in the number crunching.

 

[Totoro]

But again, low inflation and low returns might be the same as higher inflation and higher returns. Isn't 1% inflation+2% returns the same as 3% inflation and 4% returns?

Not entirely I think.

When you transition from +2% nomimal to +4% nominal due to higher inflation, somewhere along the road, the principal typically loses value (depending on how you structured the portfolio).

That means that if you depend on eating into principal (slowly) over the years, the portfolio will last a shorter time. In addition there are inflation targets of central banks.

I much rather have a 4% interest, 2% real vs. 2% interest and 0% real for those two reasons. The higher the interest rate, the lower the chance it will go up. That in turn gives me confidence to lock in rates for longer times.

 

[nun]

Having said that I still believe that a 30-40 year SWR calculation takes into account decades of good performance, decades of bad performance, decades of high or low inflation in the number crunching.

Yes it does, but how it takes those into account is important. It might just use a rolling average of historical data or it might use a Monte Carlo method to "randomize" the returns. Pfau's latest paper uses current bond and equity market data to estimate baseline returns and then applies a statistical variation derived from historical data.