Does the 4% SWR work for Switzerland?

#1

During the last months, I did a lot of reading about the 4% SWR. The math behind it is understood and the generally available data conclusive. However, the most of the math is done based on US data and why should this apply to me as a individual living in Switzerland?

My doubt became stronger when confronted with data from the Investment Management Specialization of University of Geneva I attend via Coursera.

The take aways are:

  • Index performance: S&P 500 (1970-2017) goes from 90 to 2275
  • Currency conversion rate: USD to CHF (1970-2017) goes from 4.3 to 1
  • Index performance overlaid with the currency convertation rate gives you a currency adjusted performance that is 4.3 less (2275/4.3=529)

Based on this data alone, the 4% SWR does not work for people living in Switzerland and investing in the US.

However, there are more factors to take into account:

  • Different inflation rates
  • Differents developments of purchasing power parity
  • Stuff I did not yet think about

All of this comparing and converting reduces the accuracy of the conclusions you are able to make. They are not based on the country you live in.

Hence, it would be much easier to do calculations similar to the Trinity Study with Swiss data. The problem here is that we do not have indexes that reach back further than 1988 (SMI).

My questions to the community:

  • Did you already do some solid SWR calculations for individuals living in Switzerland?
  • If so, what factors were you taking into account?
  • Are there good sources of data to perform those calculations? (Historic Swiss Index, SMI calculated back to 1900, Swiss inflation Rate, Swiss PPP development, etc.)

I’m looking forward to your feedback. All the better when I am too skeptical or going into the wrong direction.

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[Guidepost] to the Swiss Mustachian Investment Forum
Is 4% SWR really safe?
#2

I don’t think the 4% rule works in Switzerland, for at least three reasons :
-The wealth tax would lower it to at least 3,5%
-The trinity study was based on a 25 years horizon. The criteria was : after 25 years, would there still be money left in your portfolio? If someone retires at 40, the trinity study would just guarantee that when he is 65, he will still have money left in 95% of the cases. I hope this person will leave much older than 65. I feel like for us the tie horizon needs to be at least 40 years.
-The Swiss Market does not seem to be as dynamic as the US one. The recoveries are in general much stronger in the US…

Furthermore, your currency question seems valid, although we don’t know how both currencies will evolve in the future.

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#3

@ElMago

S&P500 and SMI don’t include dividends. S&P500 total return and SMI total return should be used. In fact, these indexes are still wrong, because the U.S keep 15% of dividends.

Some links for the SMI TR
https://www.six-swiss-exchange.com/indices/security_info_fr.html?id=CH0000222130CHF9
https://www.google.com/finance?q=INDEXSWX:SMIC&sq=SMI&sp=20&ei=UICUUaiVOoqirAGeYQ

@Julianek and ElMago Have a look at this simulation to see what would be the withdrawal rate of each asset

@Julianek In Switzerland, there is a wealth tax, however, no capital gain tax as in U.S. If you run the number, living in US or Switzerland doesn’t have a big impact.
A wealth tax of 0.56% would be the same as having a 8% income tax on your 7% capital gains and dividends each year.
0.561000000=0.080.07*1000000

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#4

this should spark the debate. The 4% in Switzerland only works 74% of the time (succes rate) for 60/40 portfolio vs 95% of US. But still 4% is already really conservative.


You have to consider we have a much better state safety net. EVen in case of failure, if you have paid your AHV completely, you get 28.8k per year, so more or less your spouse if she/he worked. With a combined 45-55k p.y. even if your portfolio is depleted a tru Mustachian should be able to survive. And we don’t have the health insurance risiko that the US have. So I sould argue is much easier to retire with 4% in CH than in US

You can find all sort of past data on the website of MSCI index. From 1969 for Switzerland:

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#5

Thanks for the whitepaper and right, I forgot the MSCI data. This should help do to simulations

There are two cases:

1 All your stocks and bonds are invested in the Swiss market. On my understanding, the whitepaper mentioned this case.

2 All your stocks and bonds are invested outside Switzerland or with really low exposure to Switzerland (for exemple: 100% MSCI World). In this case, inflation and currency exchange would have an impact.

I think only the second case is interesting,I strongly believe that your allocation shouldn’t be higher that the size of your home market (3% for the Swiss market)

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#6

Thank you all for your feedback! It’s great to have such support but it also means effort to process all the input :wink:

If I have to formulate my initial question a bit more general, I would ask what the factors are which have to be taken into account to get from the 4% SWR rule of thumb to something that is a reliable tool to predict a SWR for someone living and earning money in Switzerland.

@Julianek: Thank you for your input regarding time underlying assumptions of Bengen’s study

@wapiti:

  • Thanks for the portfoliocharts.com link. Great stuff.
  • Regarding dividends: Are they really included in Bengen’s study? If you assume you invest 100% into and SPI Index you can expect a 2+% dividend return per year without touching the principal. So the gap that would have to be closed by touching the principal is only 2%

@Grog:

  • Great whitepaper. Thank you for sharing!
  • If I’m correct, all the simulations assume that you do not have any further income to hedge against the sequence of return risks. An early retiree in his 30s or 40s would be able to make some extra money if his principal gets severely reduced in the early years of retirement.
  • If you have Pillar 1, 2 and 3a waiting for you, the worst case would be to finish your principal before official retirement and trade your time for money for a few more years.

Anyhow, I will have to get more into the details … saving until you can live from dividends alone will take too long :wink:

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#7

to get from the 4% SWR rule of thumb to something that is a reliable tool to predict a SWR for someone living and earning money in Switzerland.

I think this is not possible: These SWR simulations are of statistical nature, giving you chances of success based on thistorical data.

I remember a webpage doing deeper analysis based on the trinity study, where they looked at 60y horizons (retire at 30 and live to 90). unfortuanately i lost the link it was somewhere in MMM’s forum’s inverstor alley… but i remember that they clearly pointed out that 100% stocks gives you highest chances, and 3.5% SWR was their “conclusive” result. In case i find it again, i will for sure post it

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#8

@ElMago I was pointing out dividends because they are an important part of your return and are also quite higher on the Swiss stock in comparison to U.S or E.M

It seems that dividends are included:
https://www.wsj.com/articles/SB10001424127887323869604578370814013248682
"When you talk about taking a 4% withdrawal from your portfolio, are dividends included in that 4%? My average dividends (not reinvested) are 2%. Does that mean it would be safe to withdraw 6% including dividends?

A: When academics are trying to figure out just how much income retirees can extract from their savings, they commonly look at what is known as the “total return” of a given investment. The total return includes dividends paid on stocks and coupon payments for bonds."

@ have a look at this calculator https://portfoliocharts.com/portfolio/retirement-spending/
There are few ways to withdraw your money:
Constant $
Baseline %
Constant %
VPW (Variable Percentage Withdrawal)

@nugget https://portfoliocharts.com/portfolio/withdrawal-rates/ gives you a safe withdrawal rate (at the end of the period your capital is 0) and a perpetual rate (your initial capital is never used)

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#9

you made me search for it, and i found it!

the second part should be most interesting

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#10

Nugget, this link is a gold mine!

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#11

Great stuff … thanks for sharing. I fear that once you would use Swiss data, the SWR would habe to be even more conservative.

#12

I personally have more the approach to diversify globally, so this limits the variation of the SWR from country to country.

However, since “globally” means >50% US-based, there remains the issue of long term currency-risk. I have not yet figured out how to go about it or if it is relevant

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#13

I don’t understand how people consider the SWR more conservative for Switzerland. If you retire here, you have access to good and relatively cheap health insurance, AVS/AHV and so on. 4% for US happen like in two 30-y period. Most of the time a 7% SWR would have been fine. If something happens you can always have different back-up plan built in, like go back working, spent more time cooking and cutting down expenses, avoid vacation and so on. I don’t understand working 5 years more to go to 3% to avoid maybe having to work a couple of years (in black swan worst case situations) with 4%. It really doesn’t make sense. And the advantag is that you can use your money to go by during the crisis and start working again when the economy recovers to refill your bucket.

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#14

I would like to highlight that if you are no more employed before 65, you will still need to pay AVS/AHV. That not a lot, but interesting

You can find the table here
https://www.ahv-iv.ch/p/2.03.f page 8

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#15

This discussion made me look for some numbers about the AVS =>

#16

@wapiti, @ParaStachian : With these tables, someone who retires with a 1,5 million CHF net worth will have to pay almost 3kCHF of AVS per year. Compared to the 60CHF he could withdraw with the 4% rule, that would make 5% of his budget! Totally non-negligible.

@Grog : Sorry but I disagree. I still think the 4% rule is flawed in Switzerland, and also in the US. Let us try to find pro and counterarguments in a constructive way. I will suppose that most of the community invest in a indexing way.

Good points for Switzerland :

  • Taxation. I made a mistake in my first post, and a very big advantage of Switzerland is that capital gains on the stock market are not taxed. They are in the US. Depending on your investing style, that can be a really great advantage. On the less bright side, we just saw that 5% of your budget will go in the AVS contribution.

-Bad for Switzerland :
If you decide to index the Swiss market :


As I said already, the Swiss market has been les dynamic than the US one, hence less returns. I cannot find older historical data, I would be interested if someone can provide them.
If you decide to index the US market instead of the swiss market :

Well the dollar has been continually losing value against the franc. 30% in 20 years… That makes 1.3% of relative loss per year. Of course past returns are not the same as future returns, but still, with the available data, a swiss investor would have earned much less returns than his american fellows.

-Regarding cheap healthcare insurances : I don’t know about you, but although I agree that currently in Switzerland healthcare a insurances are relatively cheap, it seems that the premiums have been constantly raising in the last few years. Between 2016 and 2017, the cheapest insurance available for me made a 10% jump in its premiums. At this rate, cheap healthcare won’t be cheap for long.

-Neutral points : Social Security. As I said in the AVS topic, it really depends in how much you contribute. I saw in your presentation post that you plan to retire at age 50, so I guess you will have contributed around 30 years, which is a lot, so you will have a substantial retirement rent from AVS. For other people like me, my contributions won’t be much more than 10 years, so the rent from social security is much less substantial…

Points that are independent of USA/Switzerland :
-As pointed several times in the topic and in Nugget’s link, the 4% SWR only guarantees that after 25 years, i still have some money left. With the trinity study criteria, if you have 50 CHF on your bank account after 25 years it is a success. So if I retire around 40 :
-I expect to live much longer than 40+25 = 65 years.
-Since I did not contribute a lot to AVS, if i only have 50 CHF when i’ll be 65 i am screwed.
-Good luck to find someone willing to hire you if there is a tail event when you are 55/60.

Plus, on the qualitative side : early retirement at a young age means that you will be able to do what you would like to do if money was not a decisional factor. It would be very crushing for the soul to go back to unwanted work (and it is not a supposition : Charlie Munger explained perfectly the “deprival super reaction tendency”, which is one of the cognitive biases we are subject to. See for instance his speech on the 25 factors of human misjudgment or this page : http://www.safalniveshak.com/latticework-mental-models-deprival-super-reaction-tendency/).

I am very open to counter arguments, but the points listed in my post make me think that overall, the 4% rule is still flawed. On the contrary, I would be very glad if you’d show me where I could be wrong :slight_smile:

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#17

so if you retire at 35 you still have to pay AVS/AHV until 65, and what matters are not the total money you put in but how many consecutive years did you pay. So even retiring you caould have a good revenue from AHV. Second you can’t compare price index to price index: SMI gives you slightly more dividend (3% instead of 2% as the SP500). this is a drag on price development that in US is driven by share buyback. On top of it inflation in US is around 2%, in CH 0%. Dollar lose value 1 % p.a., again you can buy less francs every year.
In the end MSCI USA (USD) is 9.54%pa since 31 Mai 1994, MSCI Switzerland (USD) is 9.11%pa since 31 Mai 1994. They returned the same amount of money with same currency.

I’m just pointing out that working 5 years more when you are young (like from 40 to 45) is abig risk anyway. Nothing is given, you just have to choose which risk is more substantial :wink:

https://www.msci.com/documents/10199/f0f13c98-d5fd-43f3-8908-9f12c2fb3a4a

https://www.msci.com/documents/10199/67a768a1-71d0-4bd0-8d7e-f7b53e8d0d9f

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#18

Those are very good points you are making, be it for the indexes or the AHV. I did not realize that is is the total amount of contribution years that counts, not the amount of years worked. That puts everything back in the balance!

Now the important point is just to not fool ourselves with the meaning of the 4% rule. It just guarantees that there will still be some money left on the bank account after 25 years in 95% of cases. Not 40 years, not 60 years. In a lot of cases, that will be less money than at the beginning of retirement. Everyone can choose to use this rule or not depending on his own situation.

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#19

Exactly. To go back in topic: what do you mean in the title with “work”? What is a your definition of “work” or “success” ?
Because as you said the rule as it is it only guarantees some money left after 30 years in 95% of the cases or something like this. But this is very rigid. This means always spending 4% of initial capital, adjusted for inflation, with disregard if we are in a crisis or whatever. I don’t believe any normal mustachian would still go for vacation and eating out once a week during a 50% crash of the stock market because “that was the plan”. Many of us living from investment will be very careful about the money during a crash.
Sequence of return is important. I read on MMM forums that if there are no crash in the first 3-5 years than you are set for life. So sometimes it comes down to luck.
I think a better discussion would be: what’s the best withdrawal strategy and from there try to estimate total capital you need. Because the 4% rule is a very stupid strategy.

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#20

I totally agree. The Idea behind the original questions was: How big has the principal to be to enable early retirement? The 4% SWR is just one method of trying to get to an answer and according the feedback I got from all you, it is not the most rigid base for such a estimation.

So, I conclude the answer is “Maybe, but most likely not”.

@Grog: Any concrete suggestions about sizing of principal and withdrawal strategies - or vice versa, as you suggest?

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