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Does the FIRE 4% rule work in neutral sideways markets?

Obviously it doesn't work with bear markets as you're withdrawing 4% every year on top of whatever losses the market takes so as the years go on the 4% you withdraw will become less and less until markets pick up again. However it the market stays range bound for years, wouldn't withdrawing 4% severely reduce your capital for future withdraws especially with inflation thrown in the mix too.

Would you say that retiring early to live on dividends is actually very risky because all it takes is 1 multi year bear market followed by side ways movement for another few years and your retirement pot is probably -50% which means your income is now -50%.
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  • Thrugelmir
    Thrugelmir Posts: 89,546 Forumite
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    Unsure what the FIRE 4% rule is. The original study (for which the detailed data was never published), was based on the US markets with a split of 50% equities and 50% US Treasuries. Nor were fees factored into the findings. 

    Dividends are far from guaranteed. Nor do all companies either pay them or at a rate which is sufficient to provide a high level of income. 
  • Unsure what the FIRE 4% rule is. The original study (for which the detailed data was never published), was based on the US markets with a split of 50% equities and 50% US Treasuries. Nor were fees factored into the findings. 

    Dividends are far from guaranteed. Nor do all companies either pay them or at a rate which is sufficient to provide a high level of income. 
    The 4% rule is basically the percentage you can theoretically withdraw from your capital each year without it losing significant value over a long period of time and I think it's workout out based on the last 100 years of market data. So bull markets, bear markets and sideways markets, withdrawing 4% should still allow your capital to at least maintain it's value with inflation.

    My problem with this is the last 100 years we've never really had a bear market followed by a very long sideways market. In most cases the market went bullish again pretty quickly. I just want to know if this strategy would work if the market traded sideways for 10 or 15 years for example.
  • Audaxer
    Audaxer Posts: 3,547 Forumite
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    Would you say that retiring early to live on dividends is actually very risky because all it takes is 1 multi year bear market followed by side ways movement for another few years and your retirement pot is probably -50% which means your income is now -50%.
    If you have an income portfolio taking natural income from dividends and your pot was to fall by 40% or 50%, while dividends are also likely to fall, especially in the current climate, dividends are unlikely to fall by as large a percentage.  Funds will have to cut dividends but a number of Investments Trusts have continued to increase dividends every year for many decades, so I think they are a good option if looking for natural income in retirement.
  • Audaxer said:
    Would you say that retiring early to live on dividends is actually very risky because all it takes is 1 multi year bear market followed by side ways movement for another few years and your retirement pot is probably -50% which means your income is now -50%.
    If you have an income portfolio taking natural income from dividends and your pot was to fall by 40% or 50%, while dividends are also likely to fall, especially in the current climate, dividends are unlikely to fall by as large a percentage.  Funds will have to cut dividends but a number of Investments Trusts have continued to increase dividends every year for many decades, so I think they are a good option if looking for natural income in retirement.
    Oh yeah my bad, I keep thinking dividends are inherently linked to share price. So if your capital generates £20,000 a year in dividends and the market drops 40%, your dividend payout won't necessarily drop by 40% as well. 
  • AnotherJoe
    AnotherJoe Posts: 19,622 Forumite
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    Its not a rule. Maybe a rule of thumb. But if you retired and needed all that 4% you are on thin ice.
    4% is the historical max you can take out (and there are various tricks to increase that) but better to be on say 2% providing what you need, and then if there is a 50% crash, well no worries.
    Also, hopefully whatever your level of withdrawal is, you also have an element within that of discretionary spending.
    So if markets did fall 50% in one short period, maybe you'd  postpone the £20k Maldives holiday for a while.
    OTOH if the market crash means you dont need to make a choice between Heinz and Tesco value beans, but you cant afford beans at all, well you retired too early. Not a problem if you can go back to work.
  • Malthusian
    Malthusian Posts: 11,053 Forumite
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    edited 15 June 2020 pm30 11:39PM
    A reminder that the 4% rule is not a decumulation strategy, it is a rule of thumb to use in accumulation to check whether your pension fund is on track to generate enough income.
    Nobody in the history of finance has ever retired on a drawdown fund and withdrawn 4% of the initial fund each year and increased their withdrawal by the rate of inflation every single year, without paying any attention to the fund value, until death or fund exhaustion. If you disagree then name two people who did.

    4% is the historical max you can take out (and there are various tricks to increase that)
    No, more like the historical minimum. 4% is the level at which very few people run out of money, only those who retire at a really terrible starting point. As you never know whether you're one of the unlucky ones, and lots of people will get unlucky on a regular basis, taking more than 4% is risky. That doesn't mean if you do it you're going to run out of money, but it does mean you have a greater need for a contingency plan to cut back if the markets take a nose dive.

    but better to be on say 2% providing what you need, and then if there is a 50% crash, well no worries.

    Except that you've almost certainly spent all of the time in which there isn't a market crash (which is most of the time) living like a relative pauper for no reason. If you don't worry about the steadily accumulating pile of money that you'll never spend then you're doing FIRE, money, whatever you want to call it, wrong.
    If you're content to live on the income that 2% per year provides, you should have retired much much earlier. Your kids (nieces / nephews, recipients of your charitable work, whoever) would much rather have had your time than your inheritance.
    If 2% is all you need you may as well buy an inflation-linked annuity.
    The biggest problem of drawdown - as confirmed by research in Australia, where income drawdown has been the norm for longer than in the UK - is not people running out of money but people never spending their drawdown fund for fear of exhausting it.

    So if markets did fall 50% in one short period, maybe you'd  postpone the £20k Maldives holiday for a while.

    Sure, because your daughter can always get married some other year. :-)
  • Sailtheworld
    Sailtheworld Posts: 1,551 Forumite
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    Obviously it doesn't work with bear markets as you're withdrawing 4% every year on top of whatever losses the market takes so as the years go on the 4% you withdraw will become less and less until markets pick up again. However it the market stays range bound for years, wouldn't withdrawing 4% severely reduce your capital for future withdraws especially with inflation thrown in the mix too.
    There's no point at the age of 30 getting too worried about the exact amount you can take out of a fund in 25 years time and live on for the rest of your life. It's just a rule of thumb for planning purposes - if you have a pot that's worth 25 x your spending then you're looking good to retire.
  • AnotherJoe
    AnotherJoe Posts: 19,622 Forumite
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    Not sure I follow your reasoning there M.
    Maybe I'm in an unusual position but I don't spend anywhere near 4% simply because I neither need to or want to. The only way I could spend 4% is by spending it on stuff I don't want. 
    My point which perhaps I didn't explain well enough was, if you get to The point where your bare minimum needs are covered by 4% and retire at that point, you've got no safety net. 
    It's FIRE, nor FIRASAYC (retire early, not as soon as you can)
    Maybe some are not spending because of fear, but maybe others because their investments worked out fine and they spend what they need and the rest gives them a buffer that lets them sleep soundly. 
    You write as if it's an obligation to spend as much as you can. 

  • Malthusian
    Malthusian Posts: 11,053 Forumite
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    I did get a little bit evangelical there about the virtues of spending retirement funds. There will be plenty of people whose assets pay for everything they want at a lower withdrawal rate than 4%. And enjoyed the paid work that generated those assets so the charge of working too long doesn't stick. Or accumulated a perfectly-sized retirement fund and then had an inheritance / windfall.
    Underspending in retirement is so endemic (as confirmed by the Australian research) that I sometimes feel the need to come out swinging against it.
    A symptom of this problem is people who say 4% is too optimistic (it isn't) due to misconceptions about how decumulation works - which don't apply to you if you are happy spending less than 4%. Typical misconceptions include "it's not safe because yields are less than 4%" (the 4% rule allows for some capital depletion), which is lurking behind the first half of the OP.
  • itwasntme001
    itwasntme001 Posts: 1,214 Forumite
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    Just to be clear the "4% rule" is meant to be for those retiring at traditional ages (i.e. in their 60s).  The statistical confidence of not running out of money using the 4% rule is 99% I believe (although maybe 95%).  If you use the rule in your 30s or 40s say this confidence does fall sharply lower, possibly to a level you would not be comfortable retiring at.  All this ignores flexibility in going back to work, cutting spending at the right time etc.  But it is worth pointing out that blindly following the 4% rule at the age of 30 or 40 and having no flexibility, is taking a lot of risk that has a decent chance of endangering the funding of the retirement.
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