The “4% SWD Rule” is based, simplistically, on the following assumptions:
- On average 7% return on investments is possible.
- On average inflation runs at 3%
- Leaving 4% in eternity.
The studies done [Trinity Study] are done for the USA, using American historical data and so the question must be posed:
Validity for South Africa ?
So I need to hunt down some local SA stats, but my gut instinct is the following:
- Inflation is running at 6-8% currently, while the despotic maniac just north of the border has not enough space on the page for Zim’s inflation figures.
- Returns in sunny SA of 15 to 18% appear to be achievable,
- That leaves say 15 – 8 = 7%.
So, assuming that we never have the doomsday Zimbabwe experience, 4% appears to be quite achievable with some buffer.
The biggest threats to this?
- Africa is not America !!
- If the USA falls apart, there are plenty options to relocate internationally for them to a lower cost of living location. How possible is that of someone living in South Africa? Certainly don’t want to relocate to a place like Rwanda. So in that regard, our currency value and severe lack of other options compared to USA citizens are a big red flag.
- Medical aid inflation. This is a big unknown made worse by the fact that the probability of needing to rely on it increases as you age.
- The first world have way better safety nets for their citizens than here [social security, subsidised medical, passports that work etc etc] Not that easy for South Africans.
Some further reading on the subject by others more qualified to comment than I: