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

DiggerUK

2unlimited91 said:

To come back to the topic: the only 4% rule that really works is to buy an index-linked annuity. (You will have to wait until you're about 70 or so before you can get as much as 4%, or more for a joint annuity.)

Making your money last until you die, but at the same time not pointlessly leaving money over that you would have rather spent, is not some insoluble conundrum. It is a problem with a known solution: annuities. And yet there seems to be very little love for annuities.

I've never really considered annuities, they mainly seem out of fashion due to the returns having fallen from times past. But it's a quiet day at the office, so I ran my details through The Money Advice Service annuities calculator  It seems the case that I could get 3.6% per £100k with RPI rises,  I'm sure that figure could be improved on.

I will ponder the possibility, I view it as unlikely we will follow through because we will eventually have a good index linked cash flow. But as your post makes clear, fannying  around with elaborate financial concoctions is totally unnecessary..._

Sailtheworld

Thrugelmir said:

MaxiRobriguez said:

coyrls said:

MaxiRobriguez said:

The 4% withdrawal is a figure which supposedly means you'll never reduce your capital

That is not the case, the 4% figure (i.e. 4% of the value of your investments at retirement, increased by inflation each year, not a 4% withdrawal each year), was what could be withdrawn, with an acceptable success rate, without running out of money over a defined period.  There are arguments to be had about the method and the assumptions used by studies that led to the 4% figure but it has nothing to do with never reducing your capital.

Mr Money Moustache describes the 4% rate as:

"At the most basic level, you can think of it like this: imagine you have your ‘stash of retirement savings invested in stocks or other assets. They pay dividends and appreciate in price at a total rate of 7% per year, before inflation. Inflation eats 3% on average, leaving you with 4% to spend reliably, forever."

So some very much do see it as a "never reduce capital"

When did inflation last average 3%? The statement sounds very much dated. 

It's the gap between inflation and equity risk premium that's important. Over the last couple of hundred years it's averaged about 4%.

Sailtheworld

DiggerUK said:

2unlimited91 said:

To come back to the topic: the only 4% rule that really works is to buy an index-linked annuity. (You will have to wait until you're about 70 or so before you can get as much as 4%, or more for a joint annuity.)

Making your money last until you die, but at the same time not pointlessly leaving money over that you would have rather spent, is not some insoluble conundrum. It is a problem with a known solution: annuities. And yet there seems to be very little love for annuities.

I've never really considered annuities, they mainly seem out of fashion due to the returns having fallen from times past. But it's a quiet day at the office, so I ran my details through The Money Advice Service annuities calculator  It seems the case that I could get 3.6% per £100k with RPI rises,  I'm sure that figure could be improved on.

I will ponder the possibility, I view it as unlikely we will follow through because we will eventually have a good index linked cash flow. But as your post makes clear, fannying  around with elaborate financial concoctions is totally unnecessary..._

What if you could get 3.6% and keep the capital? Fannying about with elaborate financial concoctions (aka a few sums) and you could get a reasonable idea of the risks involved and whether they were worth it.

Malthusian

2unlimited91 said:

Making your money last until you die, but at the same time not pointlessly leaving money over that you would have rather spent, is not some insoluble conundrum. It is a problem with a known solution: annuities. And yet there seems to be very little love for annuities.

There is nothing "pointless" about leaving money left over unless you believe that the universe will cease to exist when you die.

Or if you end up with absolutely nothing whose welfare you care about - no kids, no nephews/ieces, no charities - and only a few people will be in that sad state of affairs, most of whom will die penniless anyway.

If I value my heirs' enjoyment of whatever I leave, then holding onto the money is a win-win - either I enjoy spending it, or they do, I'm happy either way. If I buy an annuity it becomes a win-lose bet on how long I can live (and be compos mentis enough to appreciate the income). I don't value the enjoyment of my money by the rest of the annuity pool.

2unlimited91

Sailtheworld said:

What if you could get 3.6% and keep the capital? Fannying about with elaborate financial concoctions (aka a few sums) and you could get a reasonable idea of the risks involved and whether they were worth it.

Why do you hate annuities?

Annuities are the answer to the problem of how to use capital to achieve the maximum possible secure income over one's remaining lifetime. You're not offering a rival answer to the same problem, but an answer to a different problem, i.e. how to maximize a not-really-secure-but-it-will-probably-be-OK-provided-that-you-can-be-flexible-about-what-income-you-draw-if-it-comes-to-that income while also preserving the real value of the capital.

2unlimited91

Malthusian said:

2unlimited91 said:

Making your money last until you die, but at the same time not pointlessly leaving money over that you would have rather spent, is not some insoluble conundrum. It is a problem with a known solution: annuities. And yet there seems to be very little love for annuities.

There is nothing "pointless" about leaving money left over unless you believe that the universe will cease to exist when you die.

You're misinterpreting my post. It is about priorities: for some people, leaving more capital over when they die is less important than having more money, or a more secure stream of money, to spend as long as they are alive. If you are rich enough, this may not be an issue for you.

It is not necessarily about leaving nothing over. Personally, I fully expect to leave a mortgage-free home over. But I may well eventually annuitize some or all of my SIPP, to give me more secure income — and to reduce the need to "fanny around" with investments, which I quite enjoy now, but I suspect simplicity will have more attraction as I get older.

Prism

2unlimited91 said:

Sailtheworld said:

What if you could get 3.6% and keep the capital? Fannying about with elaborate financial concoctions (aka a few sums) and you could get a reasonable idea of the risks involved and whether they were worth it.

Why do you hate annuities?

Annuities are the answer to the problem of how to use capital to achieve the maximum possible secure income over one's remaining lifetime. You're not offering a rival answer to the same problem, but an answer to a different problem, i.e. how to maximize a not-really-secure-but-it-will-probably-be-OK-provided-that-you-can-be-flexible-about-what-income-you-draw-if-it-comes-to-that income while also preserving the real value of the capital.

Mainly because FIRE, being the topic of discussion on this thread typically assumes you want to retire in the 45-55 age range. Try and get an annuity at that age and see what it pays. Most people I imagine would rather take the risks of the markets rather than settle for such a low amount for the rest of their life. Now, maybe from the age of 70 when the rates are better... 

DiggerUK

2unlimited91 said:

Malthusian said:

2unlimited91 said:

Making your money last until you die, but at the same time not pointlessly leaving money over that you would have rather spent, is not some insoluble conundrum. It is a problem with a known solution: annuities. And yet there seems to be very little love for annuities.

There is nothing "pointless" about leaving money left over unless you believe that the universe will cease to exist when you die.

......and to reduce the need to "fanny around" with investments, which I quite enjoy now, but I suspect simplicity will have more attraction as I get older.

Let me assure you, OCD is a lifestyle that you can grow out of..._

Sailtheworld

2unlimited91 said:

Sailtheworld said:

What if you could get 3.6% and keep the capital? Fannying about with elaborate financial concoctions (aka a few sums) and you could get a reasonable idea of the risks involved and whether they were worth it.

Why do you hate annuities?

Annuities are the answer to the problem of how to use capital to achieve the maximum possible secure income over one's remaining lifetime. You're not offering a rival answer to the same problem, but an answer to a different problem, i.e. how to maximize a not-really-secure-but-it-will-probably-be-OK-provided-that-you-can-be-flexible-about-what-income-you-draw-if-it-comes-to-that income while also preserving the real value of the capital.

You draw money from a pot so need to think about the risks of a long retirement. Alternatively you could take an annuity and think about the risks of living a short retirement instead.Slightly different problem but same thought process. I can't imagine spending a working life building capital and then losing control of it in exchange for a secure income. I think I'd prefer to build in a margin of error and enjoy managing my finances anyway. I can always change my mind later.

coastline

If you research average UK pension pot it varies either side of £100,000. Applying SWR to that we are roughly talking £80 a week at 4% and £60 a week at 3%. Basically its a little more in your pocket at 4%. The link below shows many in drawdown and taking 4% - 8% . Maybe they're doing this as the workforce hasn't saved enough ? At times it's not their fault considering all the hurdles in life.
https://www.fca.org.uk/data/retirement-income-market-data
Still need to save more and this link shows £200 a month is common. Asking most people to save £500 a month is unrealistic or even impossible. £500 a month for 30 years might produce a pot of £400,000 leaving a pension of £12,000 plus the state pension of £8,000. Really think the governments idea with savings is to remove as many from extra state benefits as possible not to produce healthy sums in retirement.
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/836637/Personal_Pensions_and_Pensions_Relief_Statistics.pdf