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I was using the excellent SWR Toolbox 2.0 workbook and, somewhat by accident, came across two things I would not have expected:
1. In the Parameters, setting "Project Future Real Returns" values to 0% (or near-0%) still yields low-ish failure probabilities and 2-4% failsafe SWRs. How could this be?
2. There does seem to be some formula dependence between the "Portfolio Today" in the Cash Flow Assist tab and the SWR/Failure Rate calcs on the first tab. Why would this be the case? Shouldn't SWRs be dependent only on the Parameters entered, and independent of portfolio amount?
Thanks much
Thanks! Both great questions!
- All SWRs are still calculated with historical return data. The "project future returns" merely attached some "made up" returns at the end of the simulation of some of the cohorts. Say, you run a 60-year horizon simulation and the 1965 cohort uses actual data 1965-2020 and then the "made up" data 2021-2025. That would have a tiny impact on the SWR. Sequence Risk implies that the later returns during the last few years of the retirement have essentially no impact on the SWR
- The cash flows are entered in $. The SWR in %. If you have a $2,000 future Social Security payment starting 20 years into your retirement, then that will raise your sustainable retirement budget. But the % impact differs depending on your portfolio size. In % terms, it makes a difference if a fixed $2000 future income is spread over a $1m or $5m portfolio.