The 4% Rule

bostonerimus

atush wrote: »

yet no mention of pitfalls such as maintenance, repairs, vandalism, unpaid rent etc.

renting property is a business. It needs to be treated as such, and not passed off as an easy option to financially unsophisticated individuals.

I did mention expenses, renovations (I just put $30k into my rental) and the possibility of unrented times. I get work references and ask to see a few pay cheques and in 20 years I've never had an issue collecting rent. I think living upstairs helps with that and I can keep an eye on the place, that's why I recommend only buying locally and best of all living in the same building. I usually work with a year long lease. Being a landlord is a responsibility and it is a business and people need to run the numbers carefully. You also have a responsibility to your tenants to provide good, safe accommodation. BTL is not simple, but it is a nice diversification away form stocks and fixed income and can be rewarding if done well. My last tenant was with me fro 11 years, two cats, two boyfriends and only moved because she got a job in Boise. I kept her rent below market because she was such a good tenant.

Incidentally I'm now off out to deposit an $1800 cheque for September's rent.

bostonerimus

atush wrote: »

Dont, unless you are based int he USA. Look here for UK centric information.

US bloggers and information is ok for basic financial principles, but you need to be aware of UK tax and investment accounts and the rules that govern them. The principles are universal, but their application will depend on location.

ams25

maia_evo wrote: »

Im a newbie to learning about financial independence (and new to the MSE forum) and I have picked up all of my knowledge so far from US based bloggers and podcasters.

I did wonder whether:

a) the 4% often quoted by US people would be the same within the UK
b) how do you account for the fact you don't need to leave any capital to anyone once you pass on?

Please do suggest any UK based people talking about this in layperson language.

You could try this site (Finalytiq). and the article below, for a UK perspective.

https://finalytiq.co.uk/morningstar-research-safe-withdrawal-rate-still-pretty-safe/

The more I read on this topic, the more I feel comfortable that 3% is a good (prudent) number for uk investors ..if you can make it work (ie it will generate a comfortable income taking into account any other income ie DB and state pensions, BTL etc) with the proviso that you are flexible (using a rules based approach or otherwise) and increase the rate if markets are favourable. You may still need to decrease if they are bad, but less so than if you start at 4%.

When I run my numbers through cfiresim.com with 4% my success rate goes down to 70%, versus 93% at 3%. For now, I feel better with 3%. But i am looking to make my capital last 40+ years and leave a legacy...so that does make a difference.

bostonerimus

ams25 wrote: »

You could try this site (Finalytiq). and the article below, for a UK perspective.

https://finalytiq.co.uk/morningstar-research-safe-withdrawal-rate-still-pretty-safe/

The more I read on this topic, the more I feel comfortable that 3% is a good (prudent) number for uk investors ..if you can make it work (ie it will generate a comfortable income taking into account any other income ie DB and state pensions, BTL etc) with the proviso that you are flexible (using a rules based approach or otherwise) and increase the rate if markets are favourable. You may still need to decrease if they are bad, but less so than if you start at 4%.

When I run my numbers through cfiresim.com with 4% my success rate goes down to 70%, versus 93% at 3%. For now, I feel better with 3%. But i am looking to make my capital last 40+ years and leave a legacy...so that does make a difference.

Don't be too dogmatic about withdrawal rates, keep the loop closed between account balances and withdrawals and adjust as required. Take a look at the various variable withdrawal algorithms that are less "set and forget" than the straight 4% rule. If you are going for 3% you need to monitor fees closely as they could take a big bite out of your annual income.

ams25

bostonerimus wrote: »

Don't be too dogmatic about withdrawal rates, keep the loop closed between account balances and withdrawals and adjust as required. If you are going for 3% you need to monitor fees closely as they could take a big bite out of your annual income.

I see it as providing a basis for planning, but am far from dogmatic about it. As stated, will review annually in line with markets and personal situation. The 3% does allow for fees..but yes it brings home how costs matter. I have a mix of low cost passive index funds and active funds, the latter only where I think they are adding sufficient value to warrant the higher cost.

bostonerimus

ams25 wrote: »

I have a mix of low cost passive index funds and active funds, the latter only where I think they are adding sufficient value to warrant the higher cost.

Ahh...yes.........that's always the reason given for owning active funds.

jamesd

Thrugelmir wrote: »

for VCT's. When one delves deeper , the high charging structures removes the gloss somewhat.

One useful thing to consider is the threshold at which performance fee charging starts. Past losses mean that for the Albion VCT it still hasn't recovered to the point where a performance fee is payable. Still other charges but returns after charges are where I tend to look and those are even more readily available than the charge information. For AAVC from the year ending 31 Mach 2017 report:

"The ongoing charges ratio for the year to 31 March 2017 was 2.4 per cent. (2016: 2.5 per cent.). The ongoing charges ratio has been calculated using The Association of Investment Companies’ (AIC) recommended methodology. This figure shows shareholders the total recurring annual running expenses (including investment management fees charged to capital reserve) as a percentage of the average net assets attributable to shareholders. The Directors expect the ongoing charges ratio for the year ahead to be approximately 2.4 per cent. The cap on total annual normal expenses, including the management fee, is 3.0 per cent. of the net asset value."

Performance fee: "the Company has entered into a management performance incentive arrangement with the Manager. Under the incentive arrangement, the Company will pay an incentive fee to the Manager of an amount equal to 8 per cent. of the excess total return above 5 per cent. per annum, paid out annually in cash as an addition to the management fee. Any shortfall of the target return will be carried forward into subsequent periods and the incentive fee will only be paid once all previous and current target returns have been met.

For the year to 31 March 2017, no incentive fee became due to the Manager (2016: £nil).

No further performance fee will become due until the hurdle rate comprising net asset value, plus dividends from 31 March 2004, has been reached. As of 31 March 2017 the total return from 31 March 2004 amounted to 166.9 pence per share which compared to the hurdle of 213.3 pence per share at that date."

jamesd

bostonerimus wrote: »

The biggest plus for me is that the rent is income for me that is not linked to the stock market and being freed from the "4% rule" is great.

That's one reason I like UK P2P. Next year I'm anticipating an under 40% P2P portion of my total investments paying me the equivalent of about 5.5%+ of 100% of the whole value. No need for me to sell equities during a downturn with that level of ongoing income.

jamesd

maia_evo wrote: »

I did wonder whether:

a) the 4% often quoted by US people would be the same within the UK
b) how do you account for the fact you don't need to leave any capital to anyone once you pass on?

Please do suggest any UK based people talking about this in layperson language.

a) See Drawdown: safe withdrawal rates. That's a fairly practical toolkit with links to the relevant references which explain why it says what it says, so you can adjust it to meet your preferences. Some worked examples linked from here.

b) 1. You don't use the 4% rule. In 96% of historic cases the starting nominal value (no inflation adjustment) was higher at death than the starting value and two thirds of the time at least twice the starting value. Even a more modern set of rules like Guyton-Klinger which starts higher will under-spend potential if you don't recalculate from time to time if you're seeing performance better than roughly the worst 50%. Whether using the 4% rule or something more modern you can expect to need to rebase every ten years or so or leave a lot of money unspent at the time you die.

2. Know that spending tends to decline as people get older, and more for well off than less well off, with something like a 35% drop between 65 and 80. Plan to spend more than young and cut back later, you probably will anyway. The unspent money went into savings, it wasn't due to running out.

maia_evo wrote: »

learning about financial independence

The key secret to very rapid financial independence is [STRIKE]saving[/STRIKE] spending far less than you earn, with that being your real lifetime sustainable spending level. The lower the percentage, the faster you get to FI. Took me something like 7-8 years to get to around £12k of income as my initial target for "could retire and live on this indefinitely". 11-12 years in and I'm now well above my can retire base target, that being median retired household income of about £24k a year at the moment. I typically say i was investing more than 60% of my (net pay plus gross pension contributions) and have accumulated more than 90% of the total of those two over the 11-12 years. At the moment I'm working on changed objectives to increase the flexibility in where I can live, padding my spending if I don't. I'm still at the point where an extra year of working makes a significant difference to the pot size and since I don't hate my work it's not an unreasonable trade off. But I'm also well past the point where I don't need to worry at all about becoming unemployed, just whether I want to work more or not. My current expected investment income next year from about 40% of my investments is higher than the median male full time gross weekly earnings for the place where I live in 2015.

marlot

jamesd wrote: »

...

The key secret to very rapid financial independence is saving far less than you earn,...

I think you mean spending!