Consequence for SWR estimates of _not_ having USD as home currency.

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Stork
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Consequence for SWR estimates of _not_ having USD as home currency.

Post by Stork »

We have been working with Big ERN's spreadsheet (found on earlyretirementnow.com) to guesstimate our safe withdrawal rate and found it illuminating even if may not be true. We also read a few published papers, in particular from Javier Estrada.

What struck us is that the basis for the majority of the calculations are different from ours: they are in USD and based on SP500 (or similar) whereas our home currency is Euro.

Does anyone know what happens to SWRs if the base currency is not USD? It gives an extra variable, but as there in times of crisis often is a flight to USD (last seen this spring) it could be reducing downturns and thereby sequence risk.
homebuyer6426
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Re: Consequence for SWR estimates of _not_ having USD as home currency.

Post by homebuyer6426 »

Do you mean that the investments you are making are in USD, but your home currency is not? Or are both in Euro?
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Re: Consequence for SWR estimates of _not_ having USD as home currency.

Post by Stork »

homebuyer6426 wrote: Thu Aug 18, 2022 10:29 am Do you mean that the investments you are making are in USD, but your home currency is not? Or are both in Euro?
At the moment the stocks are VWCE, so ~59% US shares. I don't see how you can have an internationally diversified portfolio without the US market being the largest single market you invest in, one way or the other.
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Re: Consequence for SWR estimates of _not_ having USD as home currency.

Post by Laurizas »

Stork wrote: Thu Aug 18, 2022 10:05 am Does anyone know what happens to SWRs if the base currency is not USD?
https://portfoliocharts.com/2015/11/17/ ... ates-work/
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Re: Consequence for SWR estimates of _not_ having USD as home currency.

Post by homebuyer6426 »

TedSwippet wrote: Thu Aug 18, 2022 12:28 pm
lexluthor22 wrote: Thu Aug 18, 2022 12:14 pm as suggested by the forum am planning to start putting some money into Vanguard FTSE All-World UCITS ETF (USD) Accumulating, alias VWCE. However am curious if there's anything similar offered by Vanguard but in EUR rather than in USE. I've tried googling and looking around but I've only found VWRL which is distributing and not accumulating.
VWCE trades in EUR on several EU exchanges. The fact that its base (denomination) currency is USD is irrelevant. Full details in this wiki article:

Non-US investors and ETF currencies - Bogleheads
Saw this similar question and answer that might help.
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Stork
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Re: Consequence for SWR estimates of _not_ having USD as home currency.

Post by Stork »

homebuyer6426 wrote: Thu Aug 18, 2022 1:58 pm
TedSwippet wrote: Thu Aug 18, 2022 12:28 pm SNIP
VWCE trades in EUR on several EU exchanges. The fact that its base (denomination) currency is USD is irrelevant. Full details in this wiki article:

Non-US investors and ETF currencies - Bogleheads
Saw this similar question and answer that might help.
Thanks, I am aware of that and my doubts are a bit different. The problem is that we want an estimate of a SWR in Euros with the majority of investments elsewhere, which gives another variable in the equation.

To give an example: Imagine an investor in Euroland with a portfolio of 100% SP500. If the Euro tend to fall relative to USD at time of "corrections", the sequence risk will be lower with SWR in Euro than SWR in USD.

At the last couple of crashes rest of world markets have fallen by about as much as US markets when compared in USD (they are highly correlated).

Is my doubt clearer now?
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squirrel1963
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Re: Consequence for SWR estimates of _not_ having USD as home currency.

Post by squirrel1963 »

Stork wrote: Fri Aug 19, 2022 2:00 am
homebuyer6426 wrote: Thu Aug 18, 2022 1:58 pm
TedSwippet wrote: Thu Aug 18, 2022 12:28 pm SNIP
VWCE trades in EUR on several EU exchanges. The fact that its base (denomination) currency is USD is irrelevant. Full details in this wiki article:

Non-US investors and ETF currencies - Bogleheads
Saw this similar question and answer that might help.
Thanks, I am aware of that and my doubts are a bit different. The problem is that we want an estimate of a SWR in Euros with the majority of investments elsewhere, which gives another variable in the equation.

To give an example: Imagine an investor in Euroland with a portfolio of 100% SP500. If the Euro tend to fall relative to USD at time of "corrections", the sequence risk will be lower with SWR in Euro than SWR in USD.

At the last couple of crashes rest of world markets have fallen by about as much as US markets when compared in USD (they are highly correlated).

Is my doubt clearer now?
All right so you are introducing some amount of currency risk. I'm planning to eventually move to Europe myself. My thoughts so far are to keep some individual treasuries directly in Europe, for instance BTP (Italy treasuries) or Bünd, then use some refill strategy from stocks which tried to avoid doing FX when exhnage rate is against you.
This is in line with BH philosophy of keeping bonds (or at least some bonds) in your home currency, so let's say maybe half USD and half EUR.
Be careful if you are US citizen you can only buy individual bonds on account of PFIC. You can in theory buy Corporate bonds ETF in EUR but you need to use mark to market election. It will probably work ok but there are some restrictions wrt offsetting losses, which can probably be worked around by selling at year end to mark to market inelegible losses.

All in all though it seems tough to avoid currency risk. On the other hand I view it as a benefit, if USD is strong you just sell US bonds, if EUR is strong you sell EUR bonds, and refill EUR when USD is strong.
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Re: Consequence for SWR estimates of _not_ having USD as home currency.

Post by German Expat »

We are currently in Switzerland might retire here. Actually with the current plan I will retire here and only when my wife retires a couple years later we will have a decision to make.
We are investing still in the US with a high international portion of our stock part. Bonds is US only in our IRA's in the US but we do have some forced retirement plans in Switzerland (2nd pillar) in Swiss Francs.
While the Swiss Franc is a currency that usually strengthens to the USD the inflation rate is much lower (3.4% in June 2022). This can offset some of the currency gains.

We don't do anything special to hedge for it but plan to retire with more then we strictly need so there is a reserve in our numbers (while I plan to use VPW when we retire I use 3.5% as a rough estimate if we have enough).

For us it should work out ok as long as the bottom does not fall out from the USD but if this is the case we will have different macro economic issues.
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Re: Consequence for SWR estimates of _not_ having USD as home currency.

Post by Stork »

squirrel1963 wrote: Fri Aug 19, 2022 2:59 am ...

All in all though it seems tough to avoid currency risk. On the other hand I view it as a benefit, if USD is strong you just sell US bonds, if EUR is strong you sell EUR bonds, and refill EUR when USD is strong.
If you invest internationally you do get currency risk, end off. The question is if the currency tends to work for or against you when it really matters, i.e. in a crash? As the Euro (incl. the predecessor the ERM) has only existed since 1992, we only have really have easy data for dot-com and GFC.

The plan is to keep the ballast part Euro hedged.
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