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

kinger101

itwasntme001 said:

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.

I believe the 4% rule was set based on performance of US markets, so that needs to be taken into account.  But the "statistical confidence" is the probability of not running out of money in the past.based on historic market performance  It doesn't give the probability of what will happen in the future.  

DiggerUK

This  "FIRE 4%" is old wine in a new bottle, it is a modern presentation of a very old argument. Viewing it all as sexed up small talk from a sales rep is a good place to begin.

It doesn't take any great wit to realise that not only can't you put a quart in a pint pot, you can't get a quart out of a pint pot either. So the secret is to make sure you have funds for retirement, no great skill to that, you simply put by and save what you can.

If you ask a hundred posters on MSE what is the best way to do that, you will get at least a hundred and one proposals. My twopennerth on this is to start by ignoring 'FIRE4%'..._

Prism

DiggerUK said:

This  "FIRE 4%" is old wine in a new bottle, it is a modern presentation of a very old argument. Viewing it all as sexed up small talk from a sales rep is a good place to begin.

It doesn't take any great wit to realise that not only can't you put a quart in a pint pot, you can't get a quart out of a pint pot either. So the secret is to make sure you have funds for retirement, no great skill to that, you simply put by and save what you can.

If you ask a hundred posters on MSE what is the best way to do that, you will get at least a hundred and one proposals. My twopennerth on this is to start by ignoring 'FIRE4%'..._

The trouble with the simple save and see what you end up with approach is that it doesn't help somebody understand at what age can they afford to work less or fully retire. How much set aside will they need to do this and how much can they spend each year without it running out. No harm in having a plan even if its just a guideline, helped by the fact that for all of their random nature, over the long run markets are reasonably predictable.

Thrugelmir

EthicsGradient said:

Malthusian said:

If 2% is all you need you may as well buy an inflation-linked annuity.

I thought I'd check what annuity rates currently are, just to see what they imply about sustainable rates of withdrawal. If Hargreaves Lansdown are accurate, we find that for a 55 year old, they pay just 1.6% for one linked to RPI, though 2.0% for one escalating at 3% a year. The former seems very ungenerous; and also implies they think inflation will be more than 3% pa over the long term. Which is surprising, and depressing.

You might be receiving the annuity for another 45 years. Calculate the impact of compounding over that time frame.

ffacoffipawb

EthicsGradient said:

Malthusian said:

If 2% is all you need you may as well buy an inflation-linked annuity.

I thought I'd check what annuity rates currently are, just to see what they imply about sustainable rates of withdrawal. If Hargreaves Lansdown are accurate, we find that for a 55 year old, they pay just 1.6% for one linked to RPI, though 2.0% for one escalating at 3% a year. The former seems very ungenerous; and also implies they think inflation will be more than 3% pa over the long term. Which is surprising, and depressing.

Looks like an average assumption of 3.4%.

torrence

The 4% rule is outdated and not a safe rate in todays low yield world. When Bengen published his paper at the time bond yields (the safe asset allocation) were higher, and the retirement period was 30 years. With longterm Treasuries yields where they are now, and if you are planning for 40+ years, then you probably need a rising equity glidepath in the first decade of drawdown arriving at 70-80% equities thereafter to sustain a 3% safe withdrawal rate. 

Gary1984

I'm at least 15 years away from retiring but probably think about this more than someone my age should. My plan would be to start taking 4% of the pot but be flexible by using some of the guyton klinger rules. In years where my fund returns are negative don't increase my drawdown for inflation. Also ensure my annual withdrawal stays between the guardrails of 3.2% and 4.8% of total fund by adjusting withdrawal up or down by 10% as required. 

I'd probably go with something like a 85:15 equities to cash mix and use the cash following any significant drop in equity values. The cash would be in a savings ladder split into 3 or 4 separate pots. I also plan on deferring my state pension as long as it continues to offer better value than an annuity. Downsizing or equity release would be a last resort. So much could change between now and then though! 

Audaxer

Notepad_Phil said:

Audaxer said:

AnotherJoe said:

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.

If all someone plans to withdraw is 2% plus inflation, I am not sure it is worth the risk of investing it. If for example you had £100k in cash savings, even at 0% interest, and you withdrew £2k per year increasing at 2% per year for inflation, you would still have nearly £19k left after 30 years. 

If you could guarantee that inflation would remain at 2% then I'd agree - however I'm pretty sure that there will be at least some outbreaks of higher inflation from time to time which could cause problems, even if someone is being proactive with where their money is kept.

That true, but if there was a period of significantly higher inflation, I'm not sure that investment growth would cover these high inflation rises either. I have a DB pension which has annual increases capped at a maximum of 2.5% (which is only 2% after tax). So that pension would also suffer if there was significant inflation rises.

Audaxer

Gary1984 said:

I'm at least 15 years away from retiring but probably think about this more than someone my age should. My plan would be to start taking 4% of the pot but be flexible by using some of the guyton klinger rules. In years where my fund returns are negative don't increase my drawdown for inflation. Also ensure my annual withdrawal stays between the guardrails of 3.2% and 4.8% of total fund by adjusting withdrawal up or down by 10% as required. 

I'd probably go with something like a 85:15 equities to cash mix and use the cash following any significant drop in equity values. The cash would be in a savings ladder split into 3 or 4 separate pots. I also plan on deferring my state pension as long as it continues to offer better value than an annuity. Downsizing or equity release would be a last resort. So much could change between now and then though! 

That sounds like a good drawdown plan, and impressive that you are planning in such detail 15 years from retirement. 

The only thing I wouldn't be sure about is deferring the State Pension, as deferment doesn't benefit you as much as it previously did. I retired early and don't get the State Pension for another 4 years. I intend to continue to make voluntary NI payments over the next 4 years to get me up to the maximum value, but I can't myself see me deferring it.

Gary1984

There's a good chance the deferral rules would have changed again by then anyway so it may be moot in any case. As it stands though I like the idea of deferring as it gives a very decent hedge against a) living too long and b) inflation. If you defer 5 years onmax contributions I think it would get you up to about £1000 p/m. I think I could just about live on this if I absolutely had to and that would remove some of the fear of completely depleting my drawdown fund.