The 4% Rule

TBC15

Frenske wrote: »

Gosh I would have thought it would have been more than 4% unless you expect very little growth in the future.

The 4% in the US is based on picking a really unforeseen bad time to retire.

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?

bostonerimus

ams25 wrote: »

the research I referenced above was uk focused (slightly lower returns) and allowed 1% for fees.

Yep, and they come up with safe return rates of 2.5% to 3% for 30 years with 5% failure rate and 60% equities. Just remember that the classic US "4% rule" does not take financial expenses like fund and IFA fees into account.

Malthusian

TBC15 wrote: »

in such a kack handed fashion British plumbers are going to Poland.

There could be a sitcom in that. I've even come up with a title - Do Widzenia, Pet.

Truly it would capture the spirit of the unprecedented times we live in like nothing ever seen before.

TBC15

Malthusian wrote: »

There could be a sitcom in that. I've even come up with a title - Do Widzenia, Pet.

Truly it would capture the spirit of the unprecedented times we live in like nothing ever seen before.

I must admit I was unsure about the spelling of kack until I looked it up on google and then I realised I’d hit the moose on the head.

Triumph13

By all means go below 4% if you are working to an absolute bare-bones budget and therefore have only 2 choices - a)take your full, index linked income every year; or b)starve.
If, on the other hand, you have enough slack in your budget that you could actually cut your spending if and when the market tanks and you have the presence of mind to do so rather than go on blindly spending like a loony, then in the real world it really makes no sense to go below 4%.

TBC15

Triumph13 wrote: »

By all means go below 4% if you are working to an absolute bare-bones budget and therefore have only 2 choices - a)take your full, index linked income every year; or b)starve.
If, on the other hand, you have enough slack in your budget that you could actually cut your spending if and when the market tanks and you have the presence of mind to do so rather than go on blindly spending like a loony, then in the real world it really makes no sense to go below 4%.

Is there a need to cut your spending if you have a suitable cash reserve?

Thrugelmir

bostonerimus wrote: »

"4%" will get you through 95% of the combination of 30 year US stock and bond markets with a 60/40 portfolio. Also remember that your initial "4%" goes up each year with inflation. You'll have to be very unlucky to run out of money in 30 years.

Who is holding 40% of their portfolio in fixed interest at the current time? We are in uncharted territory. Where historic charts have offer no bearing.

bostonerimus

Thrugelmir wrote: »

Who is holding 40% of their portfolio in fixed interest at the current time? We are in uncharted territory. Where historic charts have offer no bearing.

Any future period is uncharted. Historically 60/40 has been a good balance of risk and reward, but as you point out it might not be good over the next 30 years. So you could look at alternative income sources like real estate and its a good strategy to adjust spending so that you can cover a good portion of your retirement income with things like state or defined benefit pensions. So far my retirement withdrawal rate is around -3% as I'm reinvesting dividends and living of rental income and a small pension......you should plan to not be entirely wedded to the stock and bond markets if possible.

Thrugelmir

bostonerimus wrote: »

you should plan to not be entirely wedded to the stock and bond markets if possible.

For the majority of people these are the only options. Rental income is fine if one builds a portfolio of properties. Otherwise it's all eggs in one basket scenario. Which is contrary to any sound investment advice.

Any future period is uncharted. Historically 60/40 has been a good balance of risk and reward, but as you point out it might not be good over the next 30 years.

Not so much the next 30 years, as investing heavily in fixed interest now with potentially a huge downside. Investors continue to chase yield. Without any thought to the risks. Nor can one invest in Government stocks at a decent yield to provide a backbone to the portfolio. A very diferent era.

bostonerimus

Thrugelmir wrote: »

For the majority of people these are the only options. Rental income is fine if one builds a portfolio of properties. Otherwise it's all eggs in one basket scenario. Which is contrary to any sound investment advice.

If you plan far enough ahead an income property is doable. I bought mine 20 years ago. It's a "2 family house" and I used rent to help with the mortgage and now use the rent for income as the mortgage is paid off. The value of the house is about 20% of my portfolio, I would certainly not want to have it worth more than 50% of my net worth.

Not so much the next 30 years, as investing heavily in fixed interest now with potentially a huge downside. Investors continue to chase yield. Without any thought to the risks. Nor can one invest in Government stocks at a decent yield to provide a backbone to the portfolio. A very diferent era.

Yep, government bonds for the next 10 years look like dogs, but who knows.......maybe look at corporates a bit more.