Author Topic: If US SWR is highest at 4%, shouldn't all UK investors buy US shares?  (Read 5329 times)

shelivesthedream

  • Magnum Stache
  • ******
  • Posts: 4811
  • Location: London, UK
I have read several articles recently about the SWR in different countries. The UK and Australia are generally put at around 3.5% or slightly above. If your annual spending is 25,000, you need a stash of 625,000 at 4% and 715,000 at 3.5%. That's an extra 90,000! That could be years of extra work! However, these percentages are not based on UK or US people but rather UK or US stock markets. It's not about where you live but rather where your investments are.

Why aren't all UK investors investing exclusively in US index funds in order to permit a SWR of 4% rather than 3.5%?

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 6752
Re: If US SWR is highest at 4%, shouldn't all UK investors buy US shares?
« Reply #1 on: February 22, 2016, 07:02:00 AM »
I have read several articles recently about the SWR in different countries. The UK and Australia are generally put at around 3.5% or slightly above. If your annual spending is 25,000, you need a stash of 625,000 at 4% and 715,000 at 3.5%. That's an extra 90,000! That could be years of extra work! However, these percentages are not based on UK or US people but rather UK or US stock markets. It's not about where you live but rather where your investments are.

Why aren't all UK investors investing exclusively in US index funds in order to permit a SWR of 4% rather than 3.5%?

Same reason even all US investors shouldn't be investing exclusively in US index funds...global diversification.

FernFree

  • 5 O'Clock Shadow
  • *
  • Posts: 75
  • Age: 50
  • Location: Austin, TX
  • On my way!
Re: If US SWR is highest at 4%, shouldn't all UK investors buy US shares?
« Reply #2 on: February 22, 2016, 07:05:16 AM »
I've been wondering that myself when reading posts about SWR and how in some countries they are very low.  Is there something blocking people from investing in other stock markets?  I think it was Japan that had near zero SWR for several years.

And then on the other side of that coin, are there countries that have SWR higher than 4% and should we track that and invest accordingly?  FireCalc uses US stock market data -- are there any tools that do the same calculations off of other indices?

nereo

  • Senior Mustachian
  • ********
  • Posts: 10792
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: If US SWR is highest at 4%, shouldn't all UK investors buy US shares?
« Reply #3 on: February 22, 2016, 07:20:29 AM »
I have read several articles recently about the SWR in different countries. The UK and Australia are generally put at around 3.5% or slightly above. If your annual spending is 25,000, you need a stash of 625,000 at 4% and 715,000 at 3.5%. That's an extra 90,000! That could be years of extra work! However, these percentages are not based on UK or US people but rather UK or US stock markets. It's not about where you live but rather where your investments are.

Why aren't all UK investors investing exclusively in US index funds in order to permit a SWR of 4% rather than 3.5%?
I suppose part of the reason is that the 4% WR has been backwards-facing and tested on the largest economy of the 20th century. Looking forward there's already a large disagreement about whether the 500 largest publicly traded companies in the US (e.g. the SP500) will offer returns no worse than they did during the last ~century+.  This is one facet of the ongoing argument about whether 4% is "too safe" or "not nearly safe enough" going forward.

In comparison, the UK and AUS are much smaller (5th and 12th by GDP) developed economies and less diverse.  Most economists discount their future growth relative to the US; both have bigger challenges with shifting demographics than the US (i.e. shrinking workforce and aging population).   Of course these are all long-range predictions and it's each economy may fare better or worse than current predictions.  Most of the articles suggesting a 3.5% WR for the UK are based on similar historical data.  In other words, in the past the UK's economy was not as robust as the US economy.

One of the key things that gets overlooked when considering WR over several decades is that a bad stretch of years is often more important for portfolio survival than the average annualized returns.  In that light, the diversity of the US economy is appealing.  Of course some carefully considered global exposure could give you even greater diversity.

So back to your question - should UK and AUS investors exclusively hold US index funds to permit a 4% WR?  I have no idea.
(it depends on whether 'expert' opinions turn out to be true or not).

maizeman

  • Magnum Stache
  • ******
  • Posts: 3696
Re: If US SWR is highest at 4%, shouldn't all UK investors buy US shares?
« Reply #4 on: February 22, 2016, 07:27:38 AM »
Those safe withdrawal rate studies are based on historical data for each country. A difference in SWR between countries could mean one of two things: A) the economies of some countries either inherently grow faster/produce less volatility over the long term or B) the historical data in the USA used by early safe withdrawal rate studies just happens to be an outlier and paints a deceptively positive picture of the future for retirees (both in the USA and elsewhere)*.

I think most people who read those comparative SWR studies assume the explanation is B, so their takeaway, regardless of where, is "save more" rather than "move all my investments to the USA." My own view is that when you look at the data for many countries, smaller countries tend to have lower SWR than large ones, so potentially the USA's higher SWR is at least in part because someone buying the domestic stock market in the USA is getting a broader slice of the total work stock market than someone buying the domestic stock market in, say, Finland. As a result the person invested only in the US stock market has a more diverse and, potentially, less volatile portfolio which would mean the same overall rate of growth would support a high SWR. If that's really the explanation, you could actually get even more benefit by buying a whole world stock index instead of buying US stocks alone.

As I typed this up it looks like several other folks have already posted making about the same points.

*It makes complete sense that option B would be at least part of the explanation: stock market data for the US doesn't go back far enough to include a war with major fighting and destruction of infrastructure on US soil, something that has happened in many other countries in the past century or so. There is pretty much no SWR that would allow an investor in Japan to maintain their preexisting lifestyle in a period that included the year 1945.

Jack

  • Magnum Stache
  • ******
  • Posts: 4734
  • Location: Atlanta, GA
Re: If US SWR is highest at 4%, shouldn't all UK investors buy US shares?
« Reply #5 on: February 22, 2016, 08:11:14 AM »
First of all, it's worth noting that if you look at things like target-date funds, even US-based funds have 30-40% of their stock allocation in ex-US funds (e.g. 36% international for VFFVX). A 100% US allocation isn't really appropriate for anyone, even folks in the US, let alone people everywhere else.

See also: https://www.bogleheads.org/wiki/Domestic/International

The other issue specific to ex-US investors tilting towards the US the way an American typically would, is that you increase your currency risk (at least, if your home country's currency isn't pegged to the US dollar).

TL;DR: As an American, I'm tempted to have some home-country bias because our SWR has historically been so low (I had been 100% VTSAX until recently, but my tIRA finally hit $20K so I just bought into VTIAX and am working on increasing my international up to at least 30% of my overall portfolio). If I were anywhere else, I'd seriously consider sticking to a straight all-world market cap allocation.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28022
  • Age: -999
  • Location: Seattle, WA
Re: If US SWR is highest at 4%, shouldn't all UK investors buy US shares?
« Reply #6 on: February 22, 2016, 08:16:48 AM »
Currency risk is a potential problem.

That being said, if I was somewhere outside the U.S., I'd definitely be weighted somewhat in the US & international, and not completely domestically.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

nereo

  • Senior Mustachian
  • ********
  • Posts: 10792
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: If US SWR is highest at 4%, shouldn't all UK investors buy US shares?
« Reply #7 on: February 22, 2016, 08:34:55 AM »
First of all, it's worth noting that if you look at things like target-date funds, even US-based funds have 30-40% of their stock allocation in ex-US funds (e.g. 36% international for VFFVX). A 100% US allocation isn't really appropriate for anyone, even folks in the US, let alone people everywhere else.


One point i'd like to make - even when looking only at the SP500 (the largest 500 publicly traded companies in the US) - about 1/3 of the aggregate profits are made outside the US.  So there's some international 'exposure' there, but perhaps it's not 1:1 since the companies are still rooted in the US and subject to its laws, trends and recessions (putting aside tax tricks like the dutch-irish double apple pancake corporate shift... or whatever the latest one is now)

the question I have is: how best to factor this in when I'm considering what amount of domestic-vs-international exposure I want?

Grog

  • Bristles
  • ***
  • Posts: 296
Re: If US SWR is highest at 4%, shouldn't all UK investors buy US shares?
« Reply #8 on: February 22, 2016, 09:25:57 AM »
We need a SWR for the msci world (or FTSE developed)...that would probably be the index of choice to diversify internationally....but to do that you'll need a local inflation coefficient and you would have to take in account exchange rate...a nightmare

Sent from my YD201 using Tapatalk


cerat0n1a

  • Handlebar Stache
  • *****
  • Posts: 1480
  • Location: England
Re: If US SWR is highest at 4%, shouldn't all UK investors buy US shares?
« Reply #9 on: February 22, 2016, 09:38:15 AM »
I'd say that UK investors should definitely aim to have some %age in US shares, same in Europe, Asia, Emerging markets. I guess the historic rates reflect the fact that the US stock market has probably out-performed others during the period in question. No real reason to expect that to continue though.

The UK stock market is overweight in things like oil, mining, finance and underweight in things like technology. So apart from anything else, if you have a FTSE index tracker, you're more exposed to the fortunes of holes in the ground than if you have a "world" index tracker. The FTSE-100 is still ~15% lower than it was at the end of 1999. The Aussie stock market is even more commodities biased.

There are some advantages to a home market bias, though. Your retirement expenses will be in pounds, not dollars, euros or yen. The pound has dropped like a stone over recent weeks, but it might just as well move the other way. A pound buys you $1.40 today; it was $1.70+ in summer of 2014. That more than outweighs the 3.5%<->4% difference.

There are also some tax and paperwork advantages to owning UK shares. Although you can hold international shares within your ISA, the US (for one) doesn't recognise it, so you still have to fill out forms relating to dividend taxation & withholding tax on a regular basis.

Tyler

  • Handlebar Stache
  • *****
  • Posts: 1158
Re: If US SWR is highest at 4%, shouldn't all UK investors buy US shares?
« Reply #10 on: February 22, 2016, 09:56:53 AM »
Currency risk is a potential problem.

That being said, if I was somewhere outside the U.S., I'd definitely be weighted somewhat in the US & international, and not completely domestically.

+1

Lots of people outside of the US invest in US markets, but one should realize that investing in US markets does not guarantee a 4% SWR everywhere. Two related factors work against you.

1) Currency risk. The value of your investments may change based on exchange rates, introducing a new variable completely unrelated to the performance of the underlying companies or funds.  This is something people investing in their own home country don't have to worry about.

2) Lack of inflation protection. If you live in the US and products get more expensive, your stocks (and many other assets) also tend to get more expensive. The market you are a part of reacts to inflation and moves together.  The reaction may not completely offset your costs, but it generally helps over time. If you live in the UK and products get more expensive, your US stocks are in a completely different economy and may not keep up. Inflation is really important in SWR calculations, and it's why many people recommend to invest primarily in your home country.

International diversification is good, but international concentration has its downsides.

maizeman

  • Magnum Stache
  • ******
  • Posts: 3696
Re: If US SWR is highest at 4%, shouldn't all UK investors buy US shares?
« Reply #11 on: February 22, 2016, 10:08:04 AM »
We need a SWR for the msci world (or FTSE developed)...that would probably be the index of choice to diversify internationally....but to do that you'll need a local inflation coefficient and you would have to take in account exchange rate...a nightmare

Sent from my YD201 using Tapatalk

The other problem seems to be that there doesn't appear to be good (freely available) historical data on what the return of an international index fund would be going back nearly as far as some of the national datasets. If the data (for example) only goes back to 1975 and you're simulating 30 year retirements, that only gives you ten annual intervals to work with.

Books like this one (http://press.princeton.edu/titles/7239.html) indicate that older data does exist, it's just a matter of someone being willing to release the raw data the authors based their analysis on online as a csv file (heck, I'd take a giant scanned PDF of printed tables that needed to be hand transcribed).

With that plus exchange rate and inflation data for any given country we would actually be able to test how much of a difference international diversification makes.

daverobev

  • Magnum Stache
  • ******
  • Posts: 3382
  • Location: France
Re: If US SWR is highest at 4%, shouldn't all UK investors buy US shares?
« Reply #12 on: February 22, 2016, 10:16:11 AM »
Also remember tax treatment is different.

On US shares in your ISA, you will still lose 15% tax on divis to the US govt. In your SIPP, I don't believe you will. Unregistered (ie, outside an ISA/SIPP), you'll lose 15% to the US.

Whereas for British shares, you'll pay no tax in the ISA at all, ever; and unreg, there is a very generous tax allowance.

I wouldn't worry about the past. The world is much more globally integrated now. Investing in the FTSE 100, you are getting some exposure to emerging markets, etc (I mean, do invest in an EM ETF too, I'm just saying the FTSE 100 is not just the UK).

Go 30-40% UK + developed EU, 20+% emerging, nice chunk of rest of world developed (inc. US), and some bonds, and you'll be fine.

dreams_and_discoveries

  • Pencil Stache
  • ****
  • Posts: 929
  • Location: London, UK
Re: If US SWR is highest at 4%, shouldn't all UK investors buy US shares?
« Reply #13 on: March 05, 2016, 08:23:02 AM »
I've been pondering this debate recently, after a looking over a lot of charts of index performance over the years.......the US market seems to outperform, which I suppose should be expected as the home of capitalism...


seattlecyclone

  • Magnum Stache
  • ******
  • Posts: 4982
  • Age: 34
  • Location: Seattle, WA
    • My blog
Re: If US SWR is highest at 4%, shouldn't all UK investors buy US shares?
« Reply #14 on: March 05, 2016, 10:55:27 AM »
I'd say investors everywhere should have a fair amount of exposure to the US market, simply because US companies are such a large fraction of the world's market cap. You should have some bias toward your home country to hedge against currency risks and such, but it seems reasonable to put most of your stock allocation into a market-cap-weighted whole world fund.

daverobev

  • Magnum Stache
  • ******
  • Posts: 3382
  • Location: France
Re: If US SWR is highest at 4%, shouldn't all UK investors buy US shares?
« Reply #15 on: March 12, 2016, 03:44:02 PM »
I'd say investors everywhere should have a fair amount of exposure to the US market, simply because US companies are such a large fraction of the world's market cap. You should have some bias toward your home country to hedge against currency risks and such, but it seems reasonable to put most of your stock allocation into a market-cap-weighted whole world fund.

And the truth is, those "US" companies are global companies that happen to be domiciled in the US. Visa, Mastercard, Amex, GE, 3M, JNJ, Colgate, Apple, MicroSoft - you'll find their products the world over. And they are owned by people the world over, too.

cerat0n1a

  • Handlebar Stache
  • *****
  • Posts: 1480
  • Location: England
Re: If US SWR is highest at 4%, shouldn't all UK investors buy US shares?
« Reply #16 on: March 13, 2016, 01:29:17 AM »
And the truth is, those "US" companies are global companies that happen to be domiciled in the US. Visa, Mastercard, Amex, GE, 3M, JNJ, Colgate, Apple, MicroSoft - you'll find their products the world over. And they are owned by people the world over, too.

Not sure if it's still true, as this was before the US mostly outsourced actually making stuff to China, but I remember reading in the late 90s that the UK economy earned more from shareholdings (and bonds) of US manufacturing industry than from its own manufacturing industry.

Spud

  • 5 O'Clock Shadow
  • *
  • Posts: 90
  • Location: Southwest England, UK.
Re: If US SWR is highest at 4%, shouldn't all UK investors buy US shares?
« Reply #17 on: March 13, 2016, 01:36:28 AM »
On US shares in your ISA, you will still lose 15% tax on divis to the US govt.

Hi Dave,

Just so I understand the part I've quoted you on above - there is a 15% tax on dvidends for US shares held in a UK ISA?

If I have understood that correctly, I have a question about that.

I've got quite a bit of money in this fund in my stocks and shares ISA - https://www.vanguard.co.uk/uk/portal/detail/mf/overview?portId=9218&assetCode=EQUITY##overview

The fund is domiciled in the UK but tracks the S&P Total Market Index which is based in the US.

Will I be paying 15% tax on my dividends?

cerat0n1a

  • Handlebar Stache
  • *****
  • Posts: 1480
  • Location: England
Re: If US SWR is highest at 4%, shouldn't all UK investors buy US shares?
« Reply #18 on: March 13, 2016, 03:56:36 AM »

Just so I understand the part I've quoted you on above - there is a 15% tax on dvidends for US shares held in a UK ISA?

If I have understood that correctly, I have a question about that.

I've got quite a bit of money in this fund in my stocks and shares ISA - https://www.vanguard.co.uk/uk/portal/detail/mf/overview?portId=9218&assetCode=EQUITY##overview

The fund is domiciled in the UK but tracks the S&P Total Market Index which is based in the US.

Will I be paying 15% tax on my dividends?

I'm no expert, so don't rely on the following being correct, but my understanding is as follows.

This is a not a US share. It's an investment in a UK based OEIC. That particular fund is not paying you dividends, the dividends are re-invested. So the benefit of the ISA wrapper is that you avoid capital gains tax.

After that, it all gets a bit complicated. There's 3 factors.

- where the investor is based and what taxes they personally pay. In this case, that's simple - it's an ISA and you have no extra tax to pay, (the fund is one that is tagged as "reporting" or "distributing.")
- where the fund is "domiciled" and what tax treaties it can take advantage of. In your case, that's the UK.
- where the actual income or profits are coming from and whether they have withholding taxes and similar. In this case, that's the USA and the fund itself is paying the tax.

As I understand it, the S&P-500 net total return index that you're tracking is calculated assuming that 30% dividend tax is being paid. In reality, the fund is only paying ~15% dividend tax in the US and that extra money is used by them to reduce the tracking error. If you look at the pdfs on the side of the page you link to, there'll be plenty more detail about exactly how much is being paid etc. Remember that the biggest holdings (Apple, Google etc.) mostly don't pay dividends, so the overall dividend yield isn't a high amount (1.56%).

So in summary, yes, 15% dividend tax is being taken off before you even see it, but there's nothing you can do about it and it has a relatively small effect (15% of 1.56% is 0.23% p.a). Only time you should think about it is if you have other investments outside the ISA wrapper, because it might make sense to shelter those ahead of US investments.

deborah

  • Walrus Stache
  • *******
  • Posts: 8796
  • Location: Australia or another awesome area
Re: If US SWR is highest at 4%, shouldn't all UK investors buy US shares?
« Reply #19 on: March 13, 2016, 04:31:29 AM »
Same with Australia - US stocks don't give anything like the return domestic stocks give, because of the different tax regimes and how foreigners owning US shares are treated - especially in comparison with how domestic shares are treated.

Besides which, if you look at the SWR datasets, the reason that the Australian SWR is lower is TWO years. I consider that to mean that any country could have something similar happen. Similarly, other datasets have a small blip. The fact that the US didn't have that blip during the 20th Century really has no bearing on what it will do in the 21st.

Spud

  • 5 O'Clock Shadow
  • *
  • Posts: 90
  • Location: Southwest England, UK.
Re: If US SWR is highest at 4%, shouldn't all UK investors buy US shares?
« Reply #20 on: March 18, 2016, 12:31:16 AM »
If you look at the pdfs on the side of the page you link to, there'll be plenty more detail about exactly how much is being paid etc. Remember that the biggest holdings (Apple, Google etc.) mostly don't pay dividends, so the overall dividend yield isn't a high amount (1.56%).

I don't understand this. Surely the largest most profitable and successful companies should pay a dividend as, well, they can afford it. I'm a complete novice so please bear with me. Could someone please explain?

cerat0n1a

  • Handlebar Stache
  • *****
  • Posts: 1480
  • Location: England
Re: If US SWR is highest at 4%, shouldn't all UK investors buy US shares?
« Reply #21 on: March 18, 2016, 03:37:50 AM »
I don't understand this. Surely the largest most profitable and successful companies should pay a dividend as, well, they can afford it. I'm a complete novice so please bear with me. Could someone please explain?

It's up to the board of companies how much dividend they pay. Dividends typically represent some part of the profit, with some part being retained by the company to grow the business. However, it's not the only way that the companies profit can be returned to shareholders; another is to buyback shares. Basically the company spends its money to buy shares from shareholders and (in theory, at least) cancel them, so that there are fewer shares and therefore each one is worth more. As you can see from the thread, dividends may be taxed as income in many jurisdictions and therefore some shareholders may prefer buybacks over dividends. For someone like me, who is hoping to derive an income from share ownership, buybacks are not so good, because selling small numbers of shares has a relatively high cost %wise.

Many companies try to operate a progressive dividend policy, where the dividend is increased each year and a cut in the dividend only happens when there's a crisis - some companies have managed to keep increasing dividends for decades. Other companies (particularly US tech companies) don't pay any dividend at all - their argument is that they are growing quickly and need to invest their profits in continued growth and therefore it doesn't make sense to return money to shareholders. Paying a dividend would be an admission that they were "mature" and couldn't continue to grow rapidly.

So, if you buy say Apple or Alphabet (Google) you're hoping to make money from the company growing and the shares becoming more valuable. If you buy (for example), United Utilities here in the UK, which provides water and electricity, it's mainly the dividend that you're buying it for.

Does that help?