Author Topic: Does 4% SWR work outside of the US? (Specifically in Aus)  (Read 3534 times)

EngineerMum

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Does 4% SWR work outside of the US? (Specifically in Aus)
« on: December 04, 2014, 05:06:33 PM »
Just a quick question, and feel free to link me to a previous thread if it's been answered elsewhere, but does the 4% SWR relate specifically to conditions in the US? Is it fairly safe to work with in other countries (specifically for my case, in Australia)?
Similarly, does FIRECALC / FIRESIM work with O/S conditions?
Thanks

deborah

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Re: Does 4% SWR work outside of the US? (Specifically in Aus)
« Reply #1 on: December 04, 2014, 05:33:24 PM »
For Australia it's 3.6% historically - I think it goes down to 0.7% for Japan. This is something that has always concerned me. The US is higher than everywhere else, but if you look at it, there is usually only one major disaster in each set of figures - like the hyperinflation in Germany between the two world wars that also causes their figures to be abysmal. Also, I'm not sure whether the Australian figures make sense any more. For example, franking has only existed for a short time, and I'm not sure whether it is accounted for in the Australian dataset. I would really like to get my hands on the Australian dataset to play with.

nereo

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Re: Does 4% SWR work outside of the US? (Specifically in Aus)
« Reply #2 on: December 04, 2014, 05:42:29 PM »
firecalc/firesim work using the data set from the SP500 compiled first by Robert Schiller and the inflation estimates for the united states.
Ergo, as long as you can invest in a mixture of the SP500 and US-Treasury type bonds (which I believe you can, even in Australia) then the only difference would be differences in inflation and currency exchange which will alter things slightly.

A few countries have seen their economies collapse due to hyperinflation (see: Zimbabwe).  A few have had long periods of deflation that the US has never experienced (see: Japan). Other countries have seen their currencies change drastically in relation to the US over the span of a few decades (see: Canada, Iran) So FireCalc has none of these situations when it runs its simulations. 

It's kind of a roundabout answer, but there you go.  Hope it helps.

TN_Steve

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Re: Does 4% SWR work outside of the US? (Specifically in Aus)
« Reply #3 on: December 04, 2014, 05:49:43 PM »
Dr. Wade Pfau has looked at this in the course of his deep dives into SWR.  In the paper that pretty much brought him into public view, he notes:   Australia boasts the distinction of being the only country with both a higher return (the highest of all) and lower volatility than the UShttp://www3.grips.ac.jp/~pinc/data/10-12.pdf  He has data for 17 countries in that article.  (If you want a better format, google the title--better graphs/tables are out there)

Thus, to the extent that past performance in the USA supports a 4% SWR under present conditions, Australia would be similarly situated.  BUT, Pfau, among many others (but by no means everyone), has serious qualms about 4% going forward in USA, especially for periods longer than 30 years.  And, as noted by deborah, are the conditions the same now as in the past (for USA as well as AUS)

As for the calculators, nereo answered it.

pzxc

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Re: Does 4% SWR work outside of the US? (Specifically in Aus)
« Reply #4 on: December 04, 2014, 07:17:51 PM »
You can debate the merits of various country's economies (quite fun actually), but an important point to remember is that your SWR is determined by where your money is invested, not where you are living.  You can reside in X country and keep your money in the US and/or world markets.

arebelspy

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Re: Does 4% SWR work outside of the US? (Specifically in Aus)
« Reply #5 on: December 04, 2014, 07:40:35 PM »

You can debate the merits of various country's economies (quite fun actually), but an important point to remember is that your SWR is determined by where your money is invested, not where you are living.  You can reside in X country and keep your money in the US and/or world markets.

That's only half of it.

The other half is where you're spending the money.

With your scenario you've introduced currency risk to add to the inflation risk.

If you're invested in the US market but spending elsewhere, and elsewhere has double the inflation and the currency rises versus the dollar, you're in for some pain.

It's not just as simple as where it's invested.
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deborah

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Re: Does 4% SWR work outside of the US? (Specifically in Aus)
« Reply #6 on: December 04, 2014, 07:48:20 PM »
On page 17 of that article it has the SWR for Australia (under perfect conditions) as 3.68% (this is the figure and the paper I recall).

There are several assumptions that pzxc and nereo make. The first is that if you live in country x, just use the US index to get a better SWR. However, the lower SWRs for other countries are often due to inflation and currency exchange - the very things that you don't really adjust for if you have your investments elsewhere - because your price of living has gone up with relation to the investments you have.

Secondly, if you are an Australian investing in Australian shares, you get franking credits, which you can use to adjust your taxation (and in ER you would probably get this money back). A number of other nations have similar schemes, but these are often available only to their own tax payers, not to those of other countries. So if you invest overseas you can get a lower return than people in that country get. The SWR comparisons between countries assume that you will be in your own domestic market. For instance current Australian bond rates (while they have been poor over the past few years) are nothing like as poor as current US bond rates, but our interest rates are also higher, so the comparison within Australia of the yields of various investments may be similar to the same comparison within the US.

Thirdly, the world today looks nothing like what it was fifty years ago, when currencies were fixed (not floating), and trade barriers were enormous. When the UK joined the EEC, Australia was hit hard by the changes in trade rules for Commonwealth Countries that also occurred, and that is the main reason for our lowest SWR. You can look at each country and its lowest point - the main cause will usually be something that could have hurt any country. It is very difficult to believe that past SWRs have much relation to the present, but no-one appears to have come up with a better crystal ball.
« Last Edit: December 04, 2014, 07:50:11 PM by deborah »

pzxc

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Re: Does 4% SWR work outside of the US? (Specifically in Aus)
« Reply #7 on: December 04, 2014, 07:59:03 PM »
That's only half of it.

The other half is where you're spending the money.

With your scenario you've introduced currency risk to add to the inflation risk.

If you're invested in the US market but spending elsewhere, and elsewhere has double the inflation and the currency rises versus the dollar, you're in for some pain.

It's not just as simple as where it's invested.

Aha! Very good point. I did not consider that.

But there are two mitigating factors:

(1) The ratio of your spending needs to your overall wealth determines how much you actually need to keep in local currency and how much can be safely invested elsewhere.  The richer you are, the easier it is to pull off living in a volatile economy safely this way. And the more MUSTACHIAN you are (low spending), the easier it is.

(2) Currency fluctuates, but if something happens that affects the currency in a major way (realizing the inherent currency risk in keeping ALL your money invested elsewhere)... then perhaps you are going to be wanting to leave that country anyway?  It probably signifies political or civil turmoil of one kind or another...

When talking SWR and FIRE, it's so easy for all of us (*especially* the geeks) to try to plan for EVERY contingency and set up a "self-sustaining", infinite time period stable equilibrium.  But there is a lot of power in the fact that we adapt --  You know, like if you retire and then it happens to be a crash right after, means you retired at the worst time for how the scenarios will play out, you can always go back to work part-time, etc etc

So if you WANT to live in a third world country that isn't doing so hot economically (though I wouldn't recommend it), you could keep all your money in vanguard, only transfer monthly or quarterly what you need, and if the economy goes to total shit then just leave while the writing is on the wall and before people are lined up and shot.  :)

Of course that doesn't work for Zimbabwe, but come on how bad of a worst case scenario are we trying to dream up here :P

EngineerMum

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Re: Does 4% SWR work outside of the US? (Specifically in Aus)
« Reply #8 on: December 05, 2014, 07:00:38 AM »
Gosh it's nice when a question gets a range of intelligent and helpful responses inside a day. Thanks folks!