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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: Mairuiming on July 03, 2016, 09:14:45 AM

Title: Real interest rate and safe withdrawal rate
Post by: Mairuiming on July 03, 2016, 09:14:45 AM

Hi,

I would like to understand how shall we adjust safe withdrawal rate (SWR of recommended 4%) as per real interest rate (ROI minus inflation).

Why I ask this:
I am from India. For last 25 years, India has seen average inflation of 8% per year.
Inflation of next few years may not be very different.

I would like to understand whether the 4% SWR has to be adjusted downwards in order to meet high inflation numbers ?
If yes, then do we have any guideline ?

Thanks, Ravi

Title: Re: Real interest rate and safe withdrawal rate
Post by: MDM on July 03, 2016, 04:13:09 PM

Good question.  No guideline that I know of.

See Safe withdrawal rates - Bogleheads (https://www.bogleheads.org/wiki/Safe_withdrawal_rates) for a general overview, and 2010 09 Pfau International Perspective on Safe Withdrawal Rates - 10-12.pdf (http://www3.grips.ac.jp/~pinc/data/10-12.pdf) for a study of SWRs in other countries (unfortunately India was not included).

Title: Re: Real interest rate and safe withdrawal rate
Post by: wotan on July 04, 2016, 08:29:07 AM

http://arichlife.passionsaving.com/

Title: Re: Real interest rate and safe withdrawal rate
Post by: dandarc on July 04, 2016, 09:23:31 AM

Quote from: MDM on July 03, 2016, 04:13:09 PM

Good question.  No guideline that I know of.

See Safe withdrawal rates - Bogleheads (https://www.bogleheads.org/wiki/Safe_withdrawal_rates) for a general overview, and 2010 09 Pfau International Perspective on Safe Withdrawal Rates - 10-12.pdf (http://www3.grips.ac.jp/~pinc/data/10-12.pdf) for a study of SWRs in other countries (unfortunately India was not included).

Table 3 is very interesting - failure rate at 4% in Japan which looks like the worst country based on SAFEMAX  / 90% success is only 37.5%.  Some countries where you'd think you'd be better off with a 4% withdrawal rate, based on some of the other figures, you're actually worse off than that.

Title: Re: Real interest rate and safe withdrawal rate
Post by: Mrs. S on July 04, 2016, 09:41:52 AM

Hi Ravi,
I am from India as well and we have done a few calculations for pure FI number. When we say that India has had inflation rate of over 8% in part 25 years the average return had be far more than that.
http://m.economictimes.com/markets/stocks/news/sensex-has-given-9x-returns-in-last-20-years-it-is-time-to-be-a-buyer-now/articleshow/49448753.cms
http://www.jagoinvestor.com/2009/10/4-charts-which-will-change-your.html#.V3qDGU_hXr9

Like all markets there are no doubt bad and good years but on the historical front it looked like a winning battle. For our calculations were did a detailed spreadsheet assuming 6%inflation and ran various  return scenarios.  What we found was a 3% scenario works most of the times is you want you can check out projections in our blog in the signature below

SWR of 4%assumes 3%inflation and 7%returns which allowed you to use York 4%of your corpus and still not easy from the invested amount.