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

Thrugelmir

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! 

85:15 equities / cash appears little more than a mish mash of ideas without any foundation.  

Gary1984

The idea is the 15% of cash is 3-4 years of drawdown money to be used so that I don't have to sell equities following a downturn. I would hope equities would then recover sufficiently to restore this buffer before the cash runs out. I thought this cash buffer idea was a fairly well established strategy? I wouldn't need the full cash holding at any time so I'd have a mix of instant access and 1/2/3 year fixed bonds so that the money is available when I needed it. 

Prism

Gary1984 said:

The idea is the 15% of cash is 3-4 years of drawdown money to be used so that I don't have to sell equities following a downturn. I would hope equities would then recover sufficiently to restore this buffer before the cash runs out. I thought this cash buffer idea was a fairly well established strategy? I wouldn't need the full cash holding at any time so I'd have a mix of instant access and 1/2/3 year fixed bonds so that the money is available when I needed it. 

Thats pretty much what I intend on doing

Linton

Audaxer said:

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.

2.5% cap doesn’t mean 2% after tax unless all your initial pension is tax free and only the inflation increases are taxed. If all your pension is taxed at basic rate then 2.5% means 2.5%.

DiggerUK

Prism said:

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.

It doesn't really matter if they can, or can't, figure out when they can retire. You can only save what you can save, nobody can manufacture resources out of thin air. So if all you have is a pint in a quart pot, that's what you've got, you cut your cloth accordingly.
Thats why I always bang on about being mortgage free as quick as possible, if all Digger Mansions had was our state pensions we could survive. We do have more pension than that plus our savings. 'Ceteris paribus' next stop for us is a slow cruise to the grave.

Just because our retirement savings are in gold makes no difference to our calculations about what our spending level in retirement will be compared to others here, we also can't take a quart out of a pint pot. Pirates code rules at Digger Mansions..._

Audaxer

Gary1984 said:

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. 

Fair enough. I was just thinking that assuming your normal SP age is 67, deferring 5 years would take you to 72. That would mean that you would miss 5 years SP at say £10k or so per year. So it depends how long it would take the difference from the increased SP from 72 to make up the £50k or so you are giving up over the deferral years. If you were to take the SP at 67 and just save it over the first 5 years that seems to me quite a good cushion against future inflation rises?

Prism

DiggerUK said:

Prism said:

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.

It doesn't really matter if they can, or can't, figure out when they can retire. You can only save what you can save, nobody can manufacture resources out of thin air. So if all you have is a pint in a quart pot, that's what you've got, you cut your cloth accordingly.
Thats why I always bang on about being mortgage free as quick as possible, if all Digger Mansions had was our state pensions we could survive. We do have more pension than that plus our savings. 'Ceteris paribus' next stop for us is a slow cruise to the grave.

Just because our retirement savings are in gold makes no difference to our calculations about what our spending level in retirement will be compared to others here, we also can't take a quart out of a pint pot. Pirates code rules at Digger Mansions..._

I would say that the majority of people talking about the 4% rule or FIRE or in fact most forms of retirement based on personal pensions of one form or another are heavily invested in stocks and bonds. Therefore the working assumption is that in fact you can manufacture resources out of thin air and turn that pint into a quart (or 10) simply by doing nothing but waiting. And if people do use such an assumption it allows them to plan for a life where they can spend more than they ever saved and quite possibly have a retirement which is longer and richer (in many ways) than their working life. Its possible that sticking to taking out 4% of your sum each year won't work for ever but its also entirely possible for someone to take 4% and end up with vastly more than they started with or remotely need. The guidance, which admittedly is sometime vague and overly complex, is designed to help someone navigate that path.

The facts is that most people cannot save enough alone in their working life to get through retirement at the level they would like without the 'magic' uplift of stocks and shares along the way. If someone can do that then great. They can retire happily with what they have (cash, savings, gold or whatever) and simply spend as they go with no great expectations of any other above inflation increase. 

bowlhead99

DiggerUK said:
It doesn't really matter if they can, or can't, figure out when they can retire. You can only save what you can save, nobody can manufacture resources out of thin air. So if all you have is a pint in a quart pot, that's what you've got, you cut your cloth accordingly.

Right, but when you are 30 or 40 or 50 and getting a salary, and know that from ~60 to ~95 you won't want to get a salary and will need investments / pension to live off, it can certainly make sense to consider what sort of income you would be looking to take over those 35 years and what amount of cash, gold, investments etc it may take to fund those decades of spending, so that you can work towards it. 

I can save what I can save and it will grow to what it will grow to.  But what I could save is a smaller number if I do all the things I might like to do such as spending large amounts on holidays and possessions and takeaways and mortgage overpayments rather than investing it; and what I could save is a larger number if I forgo relatively more of the luxuries and live relatively closer to poverty now, or maybe sacrifice some family life or free time to focus on extra qualifications or advancing my career to get more income which trickles down into extra savings, to provide for a more comfortable or even luxurious, rather than breadline, retirement.

If I used some sort of rule of thumb about withdrawal rates to determine what I could take from a given level of 'retirement starting pot' during retirement, I could then make some judgements on whether I should try to get myself in a position where what I 'can save' is higher, or whether I am perhaps missing out on doing nice things with my life right now in an effort to make sure I 'can save' more when actually I could get away with saving less, and still be notionally on track to the 'rule of thumb' target, while recognising that market conditions (interest rates, growth rates etc) will move all over the place while I am both accumulating and decumulating. 

Some people with particularly low incomes don't really have the option of upping their saving amount, but others do, and it's a saving and investment forum, so you might expect people to wonder about what number they need to achieve to give them a theoretical income, and then they can take action to attempt to change their habits (maybe buy a property and pay it off to reduce housing costs in retirement, maybe change their spending habits for more or less discretionary expenditure, maybe change their career to something more mentally rewarding rather than financially rewarding once the financial side looks like it will pretty much take care of itself, etc etc) 

The notion that it's all out of ones control so just "save whatever you can, it'll be what it will be" seems an approach which would be used out of necessity by those with low incomes (because it's all they can do) and perhaps by the wealthier/ higher income people (because they'll probably be fine and don't need to worry). But for everyone else the 'save what you can' is just a cop out, mental laziness - because what you can save largely depends on what you are willing to sacrifice now or in retirement. If you can do some sort of sensible guesstimate of what money would be available to you in retirement based on a pot at the beginning of retirement, you can create goals, objectives to work towards changing the size of that pot.

Malthusian

Audaxer said:

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.

I haven't run the numbers for a while, but while in itself State Pension deferral is less attractive, running down a drawdown fund while deferring State Pension can be more attractive than using the same drawdown fund to buy an annuity.

Say State Pension is £9,000pa and you have a drawdown pension fund of £48,000 - enough to replace the State Pension for 5 years allowing for inflation increases.

If you buy an inflation linked annuity at 2.9% you get combined guaranteed income of £10,400pa for life.

If you defer your State Pension for five years while spending the drawdown fund down to zero, 5x5.8%pa gives you a State Pension of £11,931pa.

Put that way it sounds like a no-brainer, but only if you want to exchange your drawdown fund for a guaranteed income that ends on your death in the first place (with zero widow/er's pension).

coyrls

Malthusian said:

Audaxer said:

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.

I haven't run the numbers for a while, but while in itself State Pension deferral is less attractive, running down a drawdown fund while deferring State Pension can be more attractive than using the same drawdown fund to buy an annuity.

Say State Pension is £9,000pa and you have a drawdown pension fund of £48,000 - enough to replace the State Pension for 5 years allowing for inflation increases.

If you buy an inflation linked annuity at 2.9% you get combined guaranteed income of £10,400pa for life.

If you defer your State Pension for five years while spending the drawdown fund down to zero, 5x5.8%pa gives you a State Pension of £11,931pa.

Put that way it sounds like a no-brainer, but only if you want to exchange your drawdown fund for a guaranteed income that ends on your death in the first place (with zero widow/er's pension).

Or another way of thinking about it would be, should I "pay" whatever percentage £48,000 is of my total drawdown pot to fund a base guaranteed income of £11,931pa to provide some income security that can be supplemented by drawdown from the remainder of my pot.