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

tibbles209

Agreed, you'd have to be pretty reckless to continue withdrawing at exactly the same rate in the face of a rapidly depleting pot, and equally pretty tightfisted to watch your balance skyrocket without considering loosening the purse strings a bit. I think there is a lot of merit in annuitising your basic expenditure and drawing down for the rest as it takes the danger out of the equation while still offering a very good chance of a significant upside. 

Audaxer

tibbles209 said:

Audaxer said:

If sensibly invested, at a low withdrawal percentage like 2.42%, increasing with inflation, I agree that you are unlikely to run out of capital, but I'm not so confident that you would have at least the same level of real-time capital that you started with, especially if there was a bad sequence of returns at the start of your retirement?

When I play around with modelling software (using a 70/30 global portfolio and a 40 year retirement) I am getting a higher real-terms ending balance about ~85% of the time, with the median real-terms ending balance being ~4x the initial balance, and a failure rate (i.e. running out of money before the end of the 40 years) of about 2.5%. 

That's good to know. However if I continued drawing out only 2.4% plus inflation, and got to 90 years old with 4 times my starting balance, I'd probably have been too cautious with my withdrawal strategy and spending. 

Sea_Shell

tibbles209 said:

Agreed, you'd have to be pretty reckless to continue withdrawing at exactly the same rate in the face of a rapidly depleting pot, and equally pretty tightfisted to watch your balance skyrocket without considering loosening the purse strings a bit. 

This I definitely agree with.    Whatever "budget" you set yourself, needs to be flexible, not set in stone.   So as long as your fixed basic costs are well covered for pretty much any (bad) situation, then the rest you can juggle as you go.   

Last year, without trying, we effectively had £4000 left of our "budgeted" spends and this year looks to be even more, so that gives us £8000-£9000 of additional wiggle room to spread our over the coming years.

That's our plan.....winging it!!!

Sailtheworld

2unlimited91 said:

Sailtheworld said:

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.

Wow. I didn't expect you to make me change my mind (not something that really happens in these discussions ), but after you've spelled out your attitude to annuities, it seems even stranger to me than it did before.

You seriously want to be a rich corpse? You can't keep control of your capital when you're dead. The way I look at it: ensuring you have a sufficient income for your remaining life is taking control of your finances.

Dying just after buying an annuity would be a loss in many ways (the things you wouldn't get to do; the people you wouldn't get to see grow up), but it isn't a financial loss. You had a sufficient income for the spending needs of your remaining lifetime; the income and the needs are both gone; the latter is a tragic loss, the former isn't because the income is no longer needed.

That all is assuming that you would only buy an annuity to cover your expected spending. If you chose to buy one with capital that you were planning eventually to give away to other people or causes, then that would be taking a genuine financial gamble on your own longevity, which would lose if you die early. I wouldn't recommend using annuities like that.

You would "prefer to build in a margin of error", i.e. save more than necessary for your retirement, rather than buying an annuity. Certainly there is no need to buy an annuity, if you means are comfortably more than your needs are ever likely to be. Most people don't have that luxury, however, so it is not just a question of preference.

Yes I'd rather build in a margin of error (or take the risk), keep control of the capital and leave anything left over to my kids. That might mean working longer but current annuity rates are such that working longer needs to be considered anyway. Of course it won't matter a jot to me when I'm dead but right now, in life, I see dropping dead shortly after taking an annuity as a financial mistake.

Even for an early retiree planning on taking an annuity at 70 a calculation needs to be done about how to draw down capital without depleting it to last from, say, 60 to 70. I can't really see what the big deal is about extending that and why 70 is the best time to take an annuity.

Linton

The way I managed retirement planning both in the time leading up to retirement 15 years ago and subsequently is:
1) Build a year by year model of pensions/ISAs/drawdown pots/regular expenditure/one-off expenditure with historically pessimistic assumptions on inflation and investment return.  This enables the calculation of the maximum level of regular expenditure that will leave us with somewhat more than enough money for care costs in our extreme old age.  This level of expenditure is taken as our annual budget.  This approach also permits the planning for individual major expenditures outside the normal budget - eg for foreign holidays, major work on the house.
2) Any money within budget can be withdrawn and spent without worry.
3) The plan is updated at least weekly with the latest data (it's largely automatic and so no great effort) and the budget adjusted accordingly.  Since any change is spread over the rest of our lifetime and we have significant guaranteed income the budget does not vary much and as it is for the next 12 months there is never a need to slam on the brakes or raid the emergency fund in a panic should a major crash occur.  Also no consideration of SWRs or clever drawdown techniques.

If you are thinking of taking an annuity in later life in current circumstances I would agree with Sailthewind's implication that 70 is too young.  In my view you need to wait until you get the benefits of mortality drag - 80-85 would be a better age in my view.  Also at that age expenditure should be less variable and so there would be less need for the flexibility of drawdown,

2unlimited91

I would suggest around 70 as the youngest age to consider buying an annuity nowadays, not as the right sort of age for all annuity buyers. For some, it will make sense to wait until a significantly older age, when you do (as Linton says) get the benefits of mortality drag. An earlier purchase (i.e. around 70) may make sense if you have less margin for error in achieving your target income, or are less comfortable "fannying around" with investments.

Audaxer

Linton said:

 Since any change is spread over the rest of our lifetime and we have significant guaranteed income the budget does not vary much and as it is for the next 12 months there is never a need to slam on the brakes or raid the emergency fund in a panic should a major crash occur.  Also no consideration of SWRs or clever drawdown techniques.

If the natural income from your income portfolio was to fall by 50% over the next year, would you not need to draw income from your emergency cash buffer for your regular expenditure?  

Linton

Audaxer said:

Linton said:

 Since any change is spread over the rest of our lifetime and we have significant guaranteed income the budget does not vary much and as it is for the next 12 months there is never a need to slam on the brakes or raid the emergency fund in a panic should a major crash occur.  Also no consideration of SWRs or clever drawdown techniques.

If the natural income from your income portfolio was to fall by 50% over the next year, would you not need to draw income from your emergency cash buffer for your regular expenditure?  

I do not expect it to happen since general equity income is less than 25% of the total and general UK equity income just over half that.  However provided there was enough notice from a steadily declining income stream rather than a sudden cut-off then there would be no need to raid the cash.

The desired approach would be at the next scheduled rebalance to have some mixture of moving investment into the income portfolio assuming that income generator capital values had dropped as well which would be likely and if necessary extracting a cash lump sum out of the investments as a whole.

Of course if the equity income drop comes with a similar global dividend, share price and bond income collapse we would be in a rather more difficult situation and something more drastic would be required.

Thrugelmir

Audaxer said:

Linton said:

 Since any change is spread over the rest of our lifetime and we have significant guaranteed income the budget does not vary much and as it is for the next 12 months there is never a need to slam on the brakes or raid the emergency fund in a panic should a major crash occur.  Also no consideration of SWRs or clever drawdown techniques.

If the natural income from your income portfolio was to fall by 50% over the next year, would you not need to draw income from your emergency cash buffer for your regular expenditure?  

Not so much the short term fall in natural income, but the the length of time it could take for income levels to return to pre Covid levels. 

Linton

Thrugelmir said:

Audaxer said:

Linton said:

 Since any change is spread over the rest of our lifetime and we have significant guaranteed income the budget does not vary much and as it is for the next 12 months there is never a need to slam on the brakes or raid the emergency fund in a panic should a major crash occur.  Also no consideration of SWRs or clever drawdown techniques.

If the natural income from your income portfolio was to fall by 50% over the next year, would you not need to draw income from your emergency cash buffer for your regular expenditure?  

Not so much the short term fall in natural income, but the the length of time it could take for income levels to return to pre Covid levels. 

Yes.  At some point it could become a strategic allocation issue in that the amount of income generating capital needed to provide the level of steady income I want may not be sustainable against the competing needs for Growth and Wealth Preservation.