Safe Withdrawal Rates – ERN #7
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I have been reading ERN for quite a while now. His SWR articles in particular are great. Thank you for providing such a succinct summary of them.
I think there is a clearer explanation of the cash bucket surprise given in the comments to ERN’s SWR #25. Specifically: “Having a cash bucket effectively re-indexes the cohort to which you belong”.
This comment is possibly best appreciated by looking at a graph of historic SWR versus year of retirement (for the relevant circumstances e.g.: retirement duration; portfolio mix (stocks/bonds/geography/size/value); etc) and counting up how many successive cohort start years fall below your target withdrawal rate. That then gives you, to a first order approximation, the duration in years of the required cash bucket for your own set of circumstances. Personal factors can then be used to “tweak” the duration of the bucket, as required.
An example of the kind of graph I have in mind (albeit for rather different circumstances to those Ed examines) is the first figure in https://retirementresearcher.com/trinity-study-updates/
What do you think?
I think you’re right, but I also think that most of the benefit of the cash bucket is psychological. People don’t want to sell equities in a bear market, so the obvious size for a cash bucket is the recovery period for a bear (maybe four years).
ERN points out in the other article on cash buffers that in real terms the recovery period is longer, probably too long in terms of the amount of cash you would need to hold. But the psychological benefit of a four-year bucket remains.
The “surprise” element is specific to ERN, not me, as I always liked cash buffers.
I think that the “mini-equity glide path” concept is probably easier to get across to people than cohort stuff. Of course, even the glide path is not easy, since it runs in the opposite direction (more equities as you age) than the stuff people have been taught by IFAs and fund managers.
Agree totally with the psychological benefit.
And, according to ERNs figures, there may also be, in certain years, a financial benefit/saving to be had too – see his first Figure in his Part #25. I think this may be what “surprised” ERN.
So the question arises what duration cash bucket (that is not replenished if/when spent) should I aim for, to use ERN’s words, “on the side”.
The duration of a downturn (or downturns if/when they run together or are very closely separated) seems like a pretty good place to start. However, ERN’s analysis of the duration (in real terms) of downturns (in his Part #12 I think), is indeed pretty scary and would IMO require far too much cash. Hence a better way to determine the duration of an adequate cash bucket is required. My post is just a proposal for a method to estimate this duration.
Sure, but I don’t think it’s a particularly easy one to sell to the average reader of this blog (compared with “keep four years of spending in cash”).
You always have to prioritise your efforts on the things that you are worst at. I have lots of cash so a buffer is not my problem. Because I live in London, I have lots of property, which is a problem. I don’t see how to get my equity allocation up to the optimal 75%.
My consolation is that my withdrawal rate is so far below the SWR that it shouldn’t matter.