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  • FIRST POST
    • TBC15
    • By TBC15 31st Aug 17, 11:30 AM
    • 226Posts
    • 79Thanks
    TBC15
    The 4% Rule
    • #1
    • 31st Aug 17, 11:30 AM
    The 4% Rule 31st Aug 17 at 11:30 AM
    I came across this http://www.madfientist.com/michael-kitces-interview/ some may find useful.

    It’s American centric but still worth a listen.

    Makes a change from reading about the subject.
    Last edited by TBC15; 31-08-2017 at 11:55 AM. Reason: American centric
Page 5
    • ams25
    • By ams25 4th Sep 17, 9:59 PM
    • 94 Posts
    • 75 Thanks
    ams25
    There is a natural tendency to downplay painful events. The preponderance of posts about winning investments rather that losing ones reminds me of the town where all the children are above average.
    Originally posted by bostonerimus
    I have experienced many highs and lows in my 33 years of investing..and made more mistakes than I would like to admit or remember. Ironically my own active stock picking has been pretty poor (some wins, too many losses) but its the active funds picked over the last 25 years or so and mostly left to prosper that have made the money. I would tell my younger self to ignore individual stocks (except fun money) and run a mile from the AIM market
    • Mutton Geoff
    • By Mutton Geoff 5th Sep 17, 9:16 AM
    • 957 Posts
    • 1,002 Thanks
    Mutton Geoff
    The financial industry would have to embroil the world in a disaster based on greed, or a totally unsuitable leader of the free world would start WW3, or UK led by a leader totally out of touch with reality exits EU in such a kack handed fashion British plumbers are going to Poland.

    How likely is that to happen?
    Originally posted by TBC15

    Exactly. If you'd timed it right and put a £1 accumulator bet on Leicester winning the league, Brexit and Trump becoming president, you'd have won £4,530,906!


    http://uk.businessinsider.com/odds-leicester-brexit-trump-betting-winning-ladbrokes-2016-11


    Nobody knows what the future will hold so if you plan "worst case", you won't be disappointed.


    If you wanted to have a pension close to the national living wage (c £17k a year) and you can be sure of the state pension of £8,300 pa, then you still need to top that up with £8,700 a year. Based on a 4% drawdown scheme, you'll need pension pot of £217,500 when you reach state retirement age. Much more if you want to retire early.


    Plenty of calculators online to work out how much to save to achieve this, needless to say, the earlier you start, the better since Einstein said compound interest is the 8th wonder of the world.


    As an example, take someone who started saving at 21 and stopped when they were 30. Then take another saver who starts at 30 and stops when they retire at 70. Due to compound interest, the first person, who only saved for 10 years, would have a bigger pot than the second who saved for 40 years.


    Even more impressive, if a parent put the same monthly saving into a newborn baby account for just two years and stopped, that baby would have even more than the two examples above when they retired at 70.


    The earlier you start saving for a pension, the better. Unfortunately this would come at a time when life itself has greater demands on your spare cash.


    http://www.telegraph.co.uk/finance/personalfinance/investing/10742396/When-saving-for-10-years-pays-more-than-saving-for-40.html
    Compensations/Refunds from Banks & Institutions - £4,165 | Stooz Profits - £7,636 | Quidco - £3,963

    All with a big thank you to Martin and MSE.com from Mutton Geoff!
    • bostonerimus
    • By bostonerimus 5th Sep 17, 12:49 PM
    • 1,123 Posts
    • 632 Thanks
    bostonerimus

    Plenty of calculators online to work out how much to save to achieve this, needless to say, the earlier you start, the better since Einstein said compound interest is the 8th wonder of the world.
    Originally posted by Mutton Geoff
    "All you have to do is deposit one penny in a savings account in your own era, and when you arrive at the End of Time the operations of compound interest means that the fabulous cost of your meal has been paid for."
    Misanthrope in search of similar for mutual loathing
    • bigadaj
    • By bigadaj 5th Sep 17, 7:16 PM
    • 10,708 Posts
    • 7,002 Thanks
    bigadaj
    "All you have to do is deposit one penny in a savings account in your own era, and when you arrive at the End of Time the operations of compound interest means that the fabulous cost of your meal has been paid for."
    Originally posted by bostonerimus
    That's not an an American quote.
    • westv
    • By westv 5th Sep 17, 7:31 PM
    • 4,351 Posts
    • 1,970 Thanks
    westv
    "All you have to do is deposit one penny in a savings account in your own era, and when you arrive at the End of Time the operations of compound interest means that the fabulous cost of your meal has been paid for."
    Originally posted by bostonerimus
    That's not an an American quote.
    Originally posted by bigadaj
    Sounds a bit Hitchhiker's Guide to me.
    • bostonerimus
    • By bostonerimus 5th Sep 17, 8:58 PM
    • 1,123 Posts
    • 632 Thanks
    bostonerimus
    That's not an an American quote.
    Originally posted by bigadaj
    No it's not, neither am I, but if I was, I could still quote it. There's no tariff on quotations.... yet. And yes, it is from HHGTTG.
    Misanthrope in search of similar for mutual loathing
    • michaels
    • By michaels 5th Sep 17, 10:17 PM
    • 19,757 Posts
    • 90,261 Thanks
    michaels
    Surely 'The resturant at the end of the Universe'?
    Cool heads and compromise
    • westv
    • By westv 5th Sep 17, 10:26 PM
    • 4,351 Posts
    • 1,970 Thanks
    westv
    Surely 'The resturant at the end of the Universe'?
    Originally posted by michaels
    Which is part of the HHGTTG "trilogy".
    • bigadaj
    • By bigadaj 5th Sep 17, 11:20 PM
    • 10,708 Posts
    • 7,002 Thanks
    bigadaj
    No it's not, neither am I, but if I was, I could still quote it. There's no tariff on quotations.... yet. And yes, it is from HHGTTG.
    Originally posted by bostonerimus
    But currently not offered as an investment option by vanguard I believe.....
    • bostonerimus
    • By bostonerimus 6th Sep 17, 1:03 AM
    • 1,123 Posts
    • 632 Thanks
    bostonerimus
    But currently not offered as an investment option by vanguard I believe.....
    Originally posted by bigadaj
    US Vanguard does offer Certificates of Deposits, but the terms max out at around 10 years, so you're right, they don't over an interest bearing investment that will mature when the Universe ends. That's why I haven't put much effort into the time machine.
    Misanthrope in search of similar for mutual loathing
    • jerrysimon
    • By jerrysimon 6th Sep 17, 8:56 AM
    • 251 Posts
    • 185 Thanks
    jerrysimon
    Interesting. I retired last March aged 56. I think my 20s and 30s were the toughest years for us financially with a mortgage and two children. I certainly didn't have my biggest pay rises in those years.

    Financially things began to get much easier around 45-50 after our kids finished university and ultimately when I paid off my mortgage when my father died and left me enough to do so.

    By then I had started buying new cars though nothing super extravagant. Currently have a 3 year old Corsa.

    Looking back then I should probably have not used all the money to pay off the mortgage and maybe should have used our increased salaries to build up my wifes pension more i.e. started her SIPP at about 50 rather than in the last 18 months before I retired. Looking even further back, it would have been good to increases our pensions at the same rate in parallel so we each had a pension that used up our full tax allowance, rather than the 85% to 15% pension value split we now have with me paying tax and her not. Having said that I only found this forum 2 years ago. Better late than never!

    We were both lucky to have DB pensions and of course we never really imagined the kind of equity we would have in our house. Equity is of course of no use unless you can release it, which would only be our back stop if needed.

    So far we are surviving reasonably comfortably on £1600 a month with no debts.
    Last edited by jerrysimon; 06-09-2017 at 9:10 AM.
    • bostonerimus
    • By bostonerimus 6th Sep 17, 12:55 PM
    • 1,123 Posts
    • 632 Thanks
    bostonerimus
    We were both lucky to have DB pensions and of course we never really imagined the kind of equity we would have in our house. Equity is of course of no use unless you can release it, which would only be our back stop if needed.

    So far we are surviving reasonably comfortably on £1600 a month with no debts.
    Originally posted by jerrysimon
    Is your DB pension index linked? If it isn't then you'll probably need to top it up from your other investments as you get older, although spending often decreases as you get into the latter stages of retirement.

    Having a DB pension obviously takes the pressure of your investments for retirement income. You don't have to worry about the 4% rule as much. However, you should still be invested to grow your money. You might think that you started saving and investing a little late, but you could still easily have 40 years of investing to go. Some people say that with a DB pension you can afford to take more risk with the rest of your money and some say that you don't need to take much risk at all. I think such a situation divides the optimists from the pessimists.
    Last edited by bostonerimus; 06-09-2017 at 12:59 PM.
    Misanthrope in search of similar for mutual loathing
    • jerrysimon
    • By jerrysimon 6th Sep 17, 1:37 PM
    • 251 Posts
    • 185 Thanks
    jerrysimon
    Yes they are both indexed linked and of course we will have our state pensions at 66.5 and 67. Mine is missing about 6 years contributions (I was opted out or whatever you call it) for the new maximum and hers about 3 years. We may top these up but not at the moment.

    We have about 50K of savings/from my lump sum from my DB pension. At the moment that is split between my wife and I in Santander accounts earning a miserly 1.5% Hadn't thought about saving in retirement lol. I was going to use the lump sum to do stuff round the house and maybe buy and fit a new kitchen and bathroom. Problem is you know it would be hard to replace that money. We are just finishing paying off the car at £200/m so technically we could save some or all of that then, as we are use to not having that money at the moment.

    My wifes DB pension is still unclaimed as she found a small p/t job for 4 hours a week. As this pays 3K a year we dont need her pension. I will do another SIPP for her this year (put in £2,880) and when she finally draws her pension there will also be another 3K lump sum.
    Last edited by jerrysimon; 06-09-2017 at 1:47 PM.
    • westv
    • By westv 6th Sep 17, 3:09 PM
    • 4,351 Posts
    • 1,970 Thanks
    westv

    Some people say that with a DB pension you can afford to take more risk with the rest of your money and some say that you don't need to take much risk at all. I think such a situation divides the optimists from the pessimists.
    Originally posted by bostonerimus
    I suppose it can depend on whether you want to leave a pot when you've gone. We have nobody we particularly want to leave cash to so I may be turning the "success rate" on cfiresim down to maybe 70%-80% or so.
  • jamesd
    Some of the success rates in that link look awfully low (assuming I'm reading it right).
    Originally posted by westv
    Lower than normally used, which was a big part of what he was trying to change, US advisers using success rates that he believes are too high, thereby depriving their customers of income or retired years unnecessarily.

    Say a person has 8k of state pension and a matching guaranteed income could be bought for 3% of capital spent. That values the state pension at £8000 / 0.03 = £266,667. Assume the person also has £266,667 in investments and has an £8,000 a year minimum spending level. That's 50% nondiscretionary spending and guaranteed income 50% of wealth. Assuming historic returns he suggests these success rates should be used:

    28% low income stability preference
    47% mid income stability preference
    76% high income stability preference

    If the SP is the same but savings three times as much and nondiscretionary spending is £16k that's 50% nondiscretionary and guaranteed income 25% of wealth:

    47% low income stability preference
    76% mid income stability preference
    93% high income stability preference

    For simplicity I've assumed investments generate 3% income, same as my buying state pension assumption.

    If using cfiresim's Guyton-Klinger rules you can set the minimum income to model your income stability requirement.

    For that 28% success rate the reasoning is that since you're comfortable living on the £8k state pension it's better to spend more while younger and more likely to be alive and accept that 72% of the time your income would have dropped to the £8k by the end of the 30 years. So only 28% of the time failing to spend all of your money (wasting some) before dying.
    Last edited by jamesd; 06-09-2017 at 3:15 PM.
    • westv
    • By westv 6th Sep 17, 4:12 PM
    • 4,351 Posts
    • 1,970 Thanks
    westv
    Lower than normally used, which was a big part of what he was trying to change, US advisers using success rates that he believes are too high, thereby depriving their customers of income or retired years unnecessarily.
    Originally posted by jamesd
    Do the figures assume the guaranteed income is received from the date of retirement?
    • Ed_Zep
    • By Ed_Zep 6th Sep 17, 4:13 PM
    • 331 Posts
    • 259 Thanks
    Ed_Zep
    Madfientist podcasts are very good. I also recommend Mr Money Mustache and JL Collins.

    American-centric all of them but never mind. It's still interesting information if you're interested in financial independence (who wouldn't be?)

    I sometimes listen to Dave Ramsey but it's more of a phone-in where he advises people who aren't very good with money.
    • Terron
    • By Terron 7th Sep 17, 6:43 PM
    • 97 Posts
    • 95 Thanks
    Terron
    The numbers in the UK might not be the best for BTL right now. The housing market certainly has a bubbly feel to it in many areas and I wouldn't want to pin my hopes on buying in a place like Aberdeen with an economy heavily reliant on oil and fishing. Good places are probably university towns where there's a nice turnover of students and young professionals. I would always want to live close to any rental I owned. It's just as possible to buy poor BTLs as it is to buy poor stocks or funds.
    Originally posted by bostonerimus
    Student lets are possibly not the best choice at the moment. Student numbers are falling, for demographic reasons as well as Brexit. and instututional investors are moving into the area. The RLA magazine this month has a table showing Durham as giving the best yield for student lets at 5.22%, but that would be too low for me to consider.

    I invested in BTLs 200 miles from where I was living, but it was the area where I grew up and I had contacts there. I later moved back to the area but let my previous home that is now 200 miles away.

    I average over 7% net returns after all costs, including full management by letting agents. I was not expecting much in the way of capital growth from the newer properties, but with Manchester booming I might get some. The population of central Manchester was just 500 in 1990. It is now 25,000 and expected to grow by another 10,000, but there is no primary school. I expect many of the young professionals who have been attracted to the new apartments in the centre to want to move to surrounding areas in a few years.

    The extra tax on BTL does not affect me much currently as I don't quite earn enough. It has persuaded me to buy my last 2 properties through a company from which I intend to pay a directors pension extracting the money tax free.

    When I start taking my pension my income would be high enough to force me to pay the extra tax, but I intend to sell my former home (little if any CGT) and use the proceeds to pay down mortgages in my own name. With the help of the tax free lump sums from my pensions I should end up mortgage free in my own name and thus exempt from any extra tax.
  • jamesd
    Do the figures assume the guaranteed income is received from the date of retirement?
    Originally posted by westv
    Yes.

    People should look to manage the risk from that using approaches that are a good idea anyway:

    1. lower than usual equity returns over 10-15 years are well inversely correlated with cyclically adjusted price/earnings ratio, so you know in advance when you'll need to pay more attention to returns because of a higher than usual chance of sustained low returns. Like now in many equity markets.
    2. you should use Guyton's sequence of return risk reduction approach to mostly eliminate the effect of 1. You don't have to just take the risk, you can mitigate it. I am.
    3. at times of low interest rates in the US, like now, money markets beat bonds. So use them or other fixed interest instead. I am, with P2P lending.

    Even someone who chooses not to do 2 and 3 can just watch and adjust spending down more and earlier if they live through five to ten years of low returns at the start. Whether that's a 4% rule type of approach or something more modern and capable like Guyton-Klinger.

    The day one income level isn't immutable. If you like you can recalculate the safe withdrawal rate every year, but best to give at least a year or two of recovery time after a big equity drop so it doesn't bounce around excessively. If markets are still down and not recovering after five years action should be taken to deal with the potential of being in one of the worst parts of the range of outcomes. Better an early smallish cut than a big one later if you want to stay away from your income floor.
    • Triumph13
    • By Triumph13 11th Sep 17, 11:41 AM
    • 1,104 Posts
    • 1,355 Thanks
    Triumph13
    As an example, take someone who started saving at 21 and stopped when they were 30. Then take another saver who starts at 30 and stops when they retire at 70. Due to compound interest, the first person, who only saved for 10 years, would have a bigger pot than the second who saved for 40 years.


    Even more impressive, if a parent put the same monthly saving into a newborn baby account for just two years and stopped, that baby would have even more than the two examples above when they retired at 70.
    Originally posted by Mutton Geoff
    Hmm. This only works if you have average returns of 7% or above. If you used 5% - which historically is much more representative of the long term real returns on equities - then the 30 to 70 person ends up with 56% more than the 21 to 30 and more than double the 0 to 2.
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