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Is the 4% SWR applied to foreign countries?
Old 03-09-2007, 09:37 AM   #1
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Is the 4% SWR applied to foreign countries?

Hello,

I'm getting a little confused about this 4% SWR thing. I live in Brazil and here the investiments are somewhat different than the US. I mean specifically about government bonds. It is very easy to buy bonds that yield 8%+inflation/year. Some years ago it was easy to find bonds giving 20%/year, and our inflation is about 3-5%. Even the government savings account gives about 5%+inflation. What would be the problem to live, for example, with the 8% that the bonds would give and never even touch the "real" money. Is my math ok or am I doing something wrong?

I am 23, with a net worth of 300K+ (150k house fully paid and 150k invested at some "bank bonds" giving 12%/year) and I am really confused about how much I need to save. I expect that my expenses will be about 70k/year when I retire.

Thanks in advance!
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Re: Is the 4% SWR applied to foreign countries?
Old 03-09-2007, 03:03 PM   #2
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Re: Is the 4% SWR applied to foreign countries?

To come up with a SWR for different countries if most of your holdings are tied to that country you first have to start by collecting the data on the stock & bond instruments. Then you could start generating correlations and other data and then the SWR for that country.

In emerging countries, both the stock and bond markets tend to show more volatility and the SWR could potentially be lower because of that. Also the data set could be too small to draw meaningful conclusions. Also the US comaratuvely has had long periods of low inflation compared to other contries.

Some things to think about - the biggest question is what are the majority of your holdings in?
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Re: Is the 4% SWR applied to foreign countries?
Old 03-09-2007, 03:50 PM   #3
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Re: Is the 4% SWR applied to foreign countries?

Quote:
Originally Posted by Leonardo

I'm getting a little confused about this 4% SWR thing. I live in Brazil and here the investiments are somewhat different than the US. I mean specifically about government bonds. It is very easy to buy bonds that yield 8%+inflation/year. Some years ago it was easy to find bonds giving 20%/year, and our inflation is about 3-5%. Even the government savings account gives about 5%+inflation. What would be the problem to live, for example, with the 8% that the bonds would give and never even touch the "real" money. Is my math ok or am I doing something wrong?
Your math is ok, you can get an 8% SWR (just remember you need to reinvest the inflation portion of the interest payment for this to work) provided you can get that interest rate forever. The big questions are how long will the bonds continue to pay the 8%+inflation/yr and how secure are the bonds (i.e. how likely is a default)?
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Re: Is the 4% SWR applied to foreign countries?
Old 03-09-2007, 10:27 PM   #4
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Re: Is the 4% SWR applied to foreign countries?

Quote:
Originally Posted by Leonardo
It is very easy to buy bonds that yield 8%+inflation/year.
Holy crap. I'm moving to Brazil. The long-term return from stocks has been 5-7% real, so these bonds sound like a great deal.

According to this article, the bonds are fairly new and money is moving out of them due to recent deflation. This may be a once-in-a-lifetime opportunity to back up the truck.

link

Edit: I take it all back.

Inflation-indexed bonds apparently have a long history in Brazil, and the government fiddled with the indexing during times of high inflation. Not so great.

article
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Re: Is the 4% SWR applied to foreign countries?
Old 03-10-2007, 01:54 PM   #5
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Re: Is the 4% SWR applied to foreign countries?

Honestly, to me the risk of a default is currently 0. Although this happened in the past, the political situation is very different now and the major parties don't even want to talk about it.

I am relieved that my math is not wrong. The only problem as it was said it is to keep this rate of interest, which is higher than other countries.

I don't really worry about high inflation as the central bank is being very rigid in the last 8 years or so trying to keep inflation at bay by raising the interest rates. Also, the central bank is virtually independent from the government.

The only problem that I can see is a too low inflation or even a deflation, because then the central bank can really cut the interest rates to something like 4% real return. In that case my income would be cut in half... not a good thing. However, I can't see this historically high inflation country dealing with this kind of problem or just keep part of the money invested at stocks. Is this a good idea?
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Re: Is the 4% SWR applied to foreign countries?
Old 03-10-2007, 02:58 PM   #6
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Re: Is the 4% SWR applied to foreign countries?

Quote:
Originally Posted by Leonardo
Honestly, to me the risk of a default is currently 0. Although this happened in the past, the political situation is very different now and the major parties don't even want to talk about it.
Sorry, I don't want to insult your country ( I hear it's a beautiful place) but something about Brazil and zero default risk in the same sentence makes me want to laugh.

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Re: Is the 4% SWR applied to foreign countries?
Old 03-10-2007, 04:26 PM   #7
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Re: Is the 4% SWR applied to foreign countries?

Brazil has had a lot better fiscal track record than most other Latin American countries, especially in the recent past. This is the primary reason Bush made his first stop in Brazil. It is very much into IMF approved territory. It has also made admirable progress in energy self-sufficiency and thus a positive impact to its balance of payments.

Still, it is not clear how well Brazil will keep inflation under control longer term, so I would not count on a well managed central bank rate like I would in Europe, Canada or USA. The currency could be at risk of further devaluation which means the OP should keep some of his investments (if possible) in US/European equities (through ETFs or similar).

P.S. 4% SWR applies to Canada as well as Western Europe, e.g. the G7. Over the longer term, the markets are highly correlated with USA (reversion to the mean).
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