Safe Withdrawal Rates – ERN #8

Safe Withdrawal Rates – ERN #8

Today’s post is our eighth visit to ERN’s excellent series of articles on Safe Withdrawal Rates.

Case Study Lessons

Last time around, we finished looking at ERN’s series of 25 blog posts on Safe Withdrawal Rates (SWRs).

Today we’ll cover three things:

  1. Lessons from ten retirement case studies ERN has written up
  2. ERN’s own retirement plan
  3. My retirement plan

ERN’s retirement plan was how I first came across him.

  • It was written a year ago as part of a “chain gang” of posts by bloggers on the subject.

I also took part, and it will be interesting to see if anything has changed since then.

ERN has ten lessons from ten case studies.

Here’s how he describes the subjects of the case studies:

  1. “John Smith”: Seven-figure net worth, but not quite ready for FIRE yet. Big ERN would recommend a few more years in the workforce!
  2. “Captain Ron”: Early retirement on a sailboat. How much can they withdraw from their $3m portfolio to stay afloat (pun intended) in retirement?
  3. “Rene”: No need to worry about the recent layoff: You are more than ready for early retirement!
  4. “Mrs. Greece”: More than ready to retire due to large portfolio size and moderate living expenses, especially if the husband keeps working!
  5. “Mrs. Wish I Could Surf”: Alternative investments (real estate hard money loans). Keep the mortgage or pay it off? Either way, more than ready to retire!
  6. “Mr. Corporate”: Geographic Arbitrage by moving to a low-cost European country. Roth Conversions and zero tax liability!
  7. “Ms. Almost FI”: Your name is a misnomer. You are ready to retire now even when self-funding substantial long-term care expenses in the future!
  8. “Mr. Corporate Refugee”: How to deal with a large portion of the net worth tied up in a house in a high-cost-of-living area?
  9. “Mrs. Wanderlust”: Substantial supplemental cash flows due to buying an RV and then selling it later.
  10. “Mr. and Mrs. Shirts”: Ready to retire this year, but should Mr. Shirts work for another nine months for some additional big payday?

And here’s his summary table of the results:

Case Study summaries

Case Study summaries

Let’s start by listing the lessons that we can safely ignore, because they are specific to ERN’s experience and / or to the US:

  1. Case studies are a lot of work
    • I agree with this one – my coaching work has taken up far more time than I expected.
  2. People are more prepared for FIRE than they think
  3. The Roth Conversion Ladder works
    • This is a US-specific tax loophole to move money from one kind of shelter to a more favourable one with fewer penalties.
    • Our SIPP / ISA system in the UK is similar, but more straightforward.
    • The key tax wrinkle here for early retirees is the LTA, which caps how much you can efficiently withdraw from your SIPP.
    • I’ll cover this in more detail in a later post, but the key point is to use your tax allowances to the full each year – in this respect decumulation is no different to accumulation.
    • VCT and EIS  (and their attendant income tax relief) can also have a role to play).
    • But there’s no “annual conversion” method similar to the Roth ladder.
  4. Zero taxes in retirement is a myth
    • Pensions have always been taxable in the UK, and the tax-free personal allowance has only recently come close to the level where you could live off it, so I doubt that many in the UK suffer this illusion.
    • In any case, VAT and council tax apply to everyone.
    • Dividends are also taxed nowadays, even within the basic 20% tax bracket.
    • There is one potential loophole to explore further (moving to Portugal), but it’s not for everyone.

That leaves six lessons for us to explore in more detail.

Withdrawal math

Withdrawal math(s) is harder than saving math(s).

Savings maths is simple:

  1. How much do you want to spend each year?
  2. What do you think is a safe withdrawal rate?
  3. Divide spending by SWR to get a target pot size.
  4. Live within your means and invest the surplus each year.
  5. Repeat until your pot hits your target.

In retirement, you can’t afford to run out of money.

  • But you don’t know what the sequence of market returns will be.
  • And you don’t know when you will die.

We need to look at tail events (worst-case scenarios) and many options for withdrawal strategies.


ERN’s case’s studies produced SWRs between 3.75% and 6%.

  • Only 3 out of 10 were below 4%, which is less damning than the theory might have predicted.

A lot of subjects had other pensions to look forward to.

  • This is something that will become less important over the next decade, at least in the UK.

He had no volunteers in their 30s, which is why no-one worked out at 3.25%.

Ideal asset allocation

As we saw in the earlier articles, 75% equities is the best weight.

  • ERN says that anywhere between 70% and 80% will do.

This contrasts with the Trinity study range of 50% to 100% equities.

Taxable accounts

ERN has a broad definition of taxable accounts.

  • He includes 401(k)s, which are the equivalent of our SIPPs.
  • You get tax breaks on the way in, but the money you take out is taxable (only 75% of it is in the UK).

The LTA does present problems, and I would probably advise people not to fill their SIPP to the brim.

  • But for high rate taxpayers, the rebate and the tax-free compounding outweigh the problems at the back-end.
Alternative investments

ERN was shocked how few people had assets other than stocks and bonds.

  • Two subjects had property investments and one had P2P loans.

I’m surprised so few had property, as it’s pretty popular here in the UK.

  • In fact, the big problem here is persuading people to move from property and cash into stocks.

ERN likes property for early retirees because it generates inflation-linked cash flows.

  • I agree, but it’s a lot of work compared to a global multi-asset portfolio of ETFs and ITs.
Home ownership

Every subject owned their own home.

  • ERN likes home ownership because it reduces sequencing risk by lowering your expenses (fixing your costs of shelter).

The imputed rent is also outside the tax system (as are the capital gains in the UK).

  • So unless you are planning a nomadic retirement, buy a house.
ERN’s retirement plan

The first point that ERN makes is that this is not a drawdown plan.

  • He intends to preserve his initial capital forever.

That’s partly because he expects his retirement to last for 60 years.

  • Amortising his pot over that time period leads to such a small drawdown in the early years that he might as well stick with zero.

That’s my plan too (capital preservation, not living for another sixty years) – but I’m also comfortable with running down the capital should we hit bad times in retirement.

A lot of the early part of ERN’s article is about practicalities.

  • He’s not retired yet (at the time of writing) and has things to sort out first.
  • He lives in a high cost of living area (HCOL) and plans to move somewhere cheaper when he retires.

For our purposes today, we can ignore this.

ERN portfolio

ERN portfolio

Here’s his projected portfolio at the time of retirement.

  • That’s a lot of options – half comes from the home sale.

Note that some of the investments will be converted into a house after they relocate.

  • ERN expects that to cost less than $300K (£225K), a number we in the UK can only dream about.

ERN plans to spend $80K to $105K pa (£60K to £80K) – that’s a bit more than me.

  • But of course ERN has to think about health care.

ERN income plan

ERN income plan

Here’s ERN’s income plan.

  • His tax bill on that $126K should be just $3K – not bad.

Tax brackets

Tax brackets

ERN explains in some detail why he won’t be using a Roth conversion ladder.

  • But it doesn’t make much sense to someone from the UK.

The key point seems to be that ERN’s option trading uses up his tax-free allowance, which makes the Roth conversion less attractive.

Put drawdowns

Put drawdowns

ERN also explains that his put writing strategy has low sequencing risk, because its drawdowns are lower than for stocks.

  • He says this is because in periods of market stress, investors overpay for downside protection.

I intend to explore something similar (but without leverage) using multi-asset trend following (MATS).

  • I’ll look at ERN’s option strategy in more detail in a future post.

I’ve taken less from ERN’s plan than I expected, perhaps because it is so unusual and US-centric.

Mike’s drawdown plan

On to my own plan from last year, which I will update as necessary.

Assets 2018

Assets 2018

I have a nine-point checklist:

  1. Age: I am now 57, and have been semi-retired for 6 years.
    • My other half (OH) is now 55, and continues to work (she enjoys it).
    • My life expectancy is 86, and OH’s is 88 – 29 and 33 years respectively.
  2. Since I am semi-retired, we have a good idea of our needs (income requirements).
    • We have no kids, and would only move to a lower-cost area (we live in central London).
    • We have to look after OH’s mum at the moment.
    • After that we’ll probably travel for a few years, and then settle into a quiet life.
  3. We know from this series of articles that we need assets equivalent to 31 times our annual spend (SWR of 3.25% pa).
    • We have more than 100 times, so we could run a withdrawal rate of 1%.
  4. Healthcare is “free” in the UK, so we don’t need to worry about that.
    • We do need to worry about social care.
    • For now, we’ll budget £200K for end-of-life care in a home, but there may be tax plans ahead that will change this.
  5. Income is multi-source:
    • OH is still working.
    • We both qualify for state pensions (£16K pa between us) in 2026 and 2029 respectively.
    • I have two workplace DB pensions and OH has one (much larger) DB pension – all three should produce another £16K pa, starting from 2020 to 2022.
  6. We both have (multiple) SIPPs.
    • I am already drawing income, and OH is eligible as soon as she decides to retire.
  7. We both have ISAs.
    • I will spend these last because the income is tax-free.
    • If we had children, we might think differently.
  8. We have very few taxable assets.
    • I’m not counting SIPPs here, as ERN would.

Account types

Account types

To make the most of the LTA (and maximise cash flow), I withdraw up to the basic-rate income tax limit each year.

  • I also expect UK taxes to rise in the future, so I want to shelter money as quickly as possible.
  • ISAs will probably do better than pensions, so that’s my direction of travel.

Including the tax-free lump sum contribution, I withdraw around £60K pa.

  • This will reduce as DB and then the state pension kick in.

£20K goes straight into an ISA.

  • I use VCT and EIS to offset my income tax.
  • This takes £23K up front, with £7K claimed back at the end of the year.

So I have around £24K pa to live on.

  • As the VCT / EIS portfolio matures, there will be additional tax-free income from this.

I also have to think about inheritance tax at some point.

  • This probably means that we will get married.
  • And we’ll build up AIM and EIS portfolios.

Most of our assets are inflation-proofed.

  • At the moment, I remain as worried by deflation as by inflation.

If we had a smaller pot, I would be worried about my low equity allocation (38% rather than 75%).

  • But with a larger pot, we have enough.

I also have a lot of cash at the moment, to be mostly deployed after the next crash.

That’s it for today.

  • We’ve finally come to the end of our deep dive into withdrawal rates and drawdown strategies.

I’ll be back in a few weeks with a summary of what we’ve learned across the eight posts so far.

Until next time.

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Mike Rawson

Mike is the owner of 7 Circles, and a private investor living in London. He has been managing his own money for 30 years, with some success.

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