Safe Withdrawal Rate in Germany and Other Countries

[plank]

I found this paper somewhere on the forums here and need some help interpreting it.  Is it possible that the SWR for Germany is just over 1%?  That doesn't sound right to me and is definitely discouraging news as it would push FIRE into standard retirement age even with my super frugal lifestyle. 

Is the 1% SWR accurate?  Is there a reason to think that I can count on 1%, 4%, or another percentage in the future?

I'm a novice with this kind of info, so any help interpreting it would be appreciated.

[Ambergris]

Is it possible that the SWR for Germany is just over 1%?...Is the 1% SWR accurate?  Is there a reason to think that I can count on 1%, 4%, or another percentage in the future?

Pfau's work is important and well respected. However, the reason why the SWR for Germany is so low is because it is based on what happened to the German economy during the 20th century, for the most part. All of the 20th century. This means it had to survive all the things that happened to the German stock and bond markets during Weimar/post WWII. In fact, Pfau remarks in the conclusion:

...some of the worst outcomes were connected with World Wars I and II, and investors who are confident that world war is a relic of the past may feel comfortable ignoring those cases, or may at least assume that enjoying a comfortable retirement would be the last thing on their minds...

As you can imagine, Germany has changed a bit in the last 70 years, and is much, much closer to the stable economic and political model responsible for a lot of the US's relative success during the same period. If you think that can continue, then you might want to use an SWR closer to the US model (although most people here think that 4% is too high for those wanting to retire for 40+ years. 3% is better).

On the other hand, coming out of those bad times was connected to some spectacular growth in investments, which we may also be past. So it might be wise even for the US-ians to lower their expectations for SWRs.

[TN_Steve]

Also, note that Dr. Pfau was primarily focused in that paper (and others) on warning US residents to not be complacent about a 4% SWR.  US was economically blessed during 20th century; query if it will continue to be so....

[schnell]

Why would it? You can have the exact same portfolio as someone from the US. The only difference is tax (25+% on dividends etc). So the SWR should be like 3%. Noone will recommend you to invest in german stocks only. Also, the 4% rule is based on a 50% stocks 50% bonds portfolio, isn't it?

[johnny847]

Why would it? You can have the exact same portfolio as someone from the US. The only difference is tax (25+% on dividends etc). So the SWR should be like 3%. Noone will recommend you to invest in german stocks only. Also, the 4% rule is based on a 50% stocks 50% bonds portfolio, isn't it?

Because the 4% rule came from backtesting portfolios invested in US securities. Not international ones.
While I think a 1% safe withdrawal rate for Germany is nonsense (I doubt that the German economy is somehow going to be that much worse than the US economy for the next 30+ years), I wouldn't count on 4% being the "right" number either

[schnell]

True, but you can just buy the same stocks the study was based on. Just order an S&P500 Index Fond and T-Bills. No problem today if you don't consider exchange rate issues. Also, check out other investment advice for German investors on this forum. The Dax is quite risky and you are probably better offer buying the Stoxx Europe 600 Index (or Eurostoxx 600) if you don't want currency risk. However, right now just the exchange rate between Dollar and Euro would have given you like a 30% return (or loss) depending on what securities you own (US or european ones)

[schnell]

I also think that 4% is just a number to visualize how much money, more or less, you will need. When stocks run bad you should probably not withdraw 4% and if they run better you can probably safely withdraw 4% or more. However, if you starve or get kicked out of your flat because you can only withdraw 3% instead of 4% and are not able to pay your bills you're doing something wrong. You will probably have to adapt to the situation and, in the worst case, be ready to to do some part time job. So in my opinion you should be able to live comfortably with just 1% withdrawel rate once you are old because it will be harder to work then.

For me there is no doubt that I will "work" at least until I'm 60 even if I could live off my stock returns when I'm 40 (my aim). The only reason for "early retirement" for me is that I can just get a 3 month vacation whenever I want and work whenever I want and in the field I want. Not to not work ever again.

Summing up: 4% is just a number to get you an idea of how much money you need, it's not a constant and you should't rely on it.

[johnny847]

True, but you can just buy the same stocks the study was based on. Just order an S&P500 Index Fond and T-Bills. No problem today if you don't consider exchange rate issues. Also, check out other investment advice for German investors on this forum. The Dax is quite risky and you are probably better offer buying the Stoxx Europe 600 Index (or Eurostoxx 600) if you don't want currency risk. However, right now just the exchange rate between Dollar and Euro would have given you like a 30% return (or loss) depending on what securities you own (US or european ones)

You just disproved yourself. You can't just simply ignore currency issues.

Summing up: 4% is just a number to get you an idea of how much money you need, it's not a constant and you should't rely on it.

Of course it's not a constant. It's just a rule of thumb that says with high probability, your portfolio will not run out during your retirement if you only withdraw an inflation adjusted 4% a year. What I'm saying is that probability of success that the 4% rule gives you for US stocks is not going to be the same as the probability of success in the German markets. Nor will it be the same if you use US stocks but expect to retire using Euros, not dollars.
It's like saying you did an experiment on donkeys, and then you expect the same conclusions will be true for horses. I mean, they're pretty similar, so you can probably expect similar results. But until you run the same experiment on horses, you cannot logically conclude anything for horses--your experiment was for donkeys.

[neonlight]

Fwiw, there is an article about Germany and others ' SWR. Germany is just slightly below 4%

https://portfoliocharts.com/2017/06/09/your-home-country-is-inseparable-from-your-withdrawal-rate/

[Alps]

It took me a while to find it in the paper, but he assumes for each country that you are only invested in stocks and bonds from that country alone. This assumption is likely incorrect for most on the forum here (as I think even most US mustachians invest in some kind of all-world funds).

So yes, the main difference for you would be the exchange rates and wealth tax. I think 3% is reasonable for Germany as another poster suggested.

[Tyler]

Is the 1% SWR accurate?  Is there a reason to think that I can count on 1%, 4%, or another percentage in the future?

Yes and no.  Yes, the 1% SWR conclusion is accurate.  But no, I would not count on it being as low as 1% in the future.

The thing about SWRs is that they do not attempt to predict the future at all.  They measure the worst retirement timeframes for a given country.  The study you are looking at uses stock and bond data since 1900, and that timeframe covers two world wars that Germany lost.  Nothing in that timeframe for the US economy that the 4% rule was derived from can come even close to the hyperinflation in the Weimar Republic where 1 USD was worth 4 trillion German marks in 1923.  Can you imagine retiring in that situation?  Me neither.  I'm honestly impressed that a 1% SWR held up.

So the numbers are what they are, but I also don't expect that worst case situation to repeat in Germany any time soon so I wouldn't hang my hat on a 1% SWR.  However, I wouldn't automatically assume a 4% SWR either.  They're a lot more complicated than people think, especially once you start accounting for international data sets, diverse stock options (beyond a total market fund), exchange rates, and local inflation.  For example, because of local inflation and exchange rates a US retiree and a German retiree investing in the exact same US stock and bond funds will experience very different SWRs!

Definitely check out the article that Neonlight references above, and take the time to play with the Withdrawal Rates calculator that has a setting for Germany.  In that setting, "total domestic market" is German stocks, bonds are German bunds, and it also accounts for German inflation and exchange rates.  All data is since 1970, which is long enough to cover lots of economic conditions while bypassing the WWII fallout.  And you can also add international stocks to the mix if you like rather than focusing exclusively on the German market.

[neonlight]

It took me a while to find it in the paper, but he assumes for each country that you are only invested in stocks and bonds from that country alone. This assumption is likely incorrect for most on the forum here (as I think even most US mustachians invest in some kind of all-world funds).

So yes, the main difference for you would be the exchange rates and wealth tax. I think 3% is reasonable for Germany as another poster suggested.

True, what one needs to do is to see if the return of the local stock market is as good as US stocks, if it's equal or better then my guess is we can assume the return rate is also equal or better.

Another to take note of the exchange rate, if USD is getting stronger against the local currency, say at 1% per annum. This is also your earnings once you bring back the money to your country. Of course nothing is for sure too in exchange rates.