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

Malthusian

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.

How appropriate that in a discussion about working out your retirement objectives, and whether you need to take positive action to increase your chances of meeting them, Digger is saying that you should bury your head in the ground.

Leaving the world of pointless truisms and returning to reality, nobody saves what they can save, nor should they. Everyone who is not on the verge of starvation could save more of their income. You either try to figure out a good balance between the present and the future or don't bother and trust to luck. People generally come to MSE because they're tired of not thinking about money and trusting to luck.

The vast majority of people could increase their earning potential significantly if they put their mind to it, so it is possible to manufacture resources out of thin air. It may not necessarily be worth the effort for them personally. But if they worked out that they were a long way short of meeting their expectations in retirement, that might be the kick up the !!!!!! they needed to study for a new qualification or work out how to get a promotion. If they instead decided not to bother because "I can only save what I can save and I'll just live on whatever that amounts to" they're going to be worse off than they could have been.

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

Very few people are in the fortunate position they can afford everything they want in retirement while sacrificing some of their retirement fund on the altar of zero-yield shiny metal.

People who invest in assets with a positive expectation of real return will be able to afford a higher standard of living in retirement than people who invest the same amount in zero-yield shiny metal. That is not crystal-ball gazing, those are the economic laws of physics.

Audaxer

Linton said:

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%.

Linton, I'm not sure that I understand that. I have 2 DB pensions, the total of which is over my personal tax allowance, so I already do pay tax at 20% on the part over my personal tax allowance. So if one of my DB pensions rises by say 2.5% gross, that surely means my net income will rise by 2%?  Am I missing something here?

bowlhead99

Audaxer said:

Linton said:
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%.

Linton, I'm not sure that I understand that. I have 2 DB pensions, the total of which is over my personal tax allowance, so I already do pay tax at 20% on the part over my personal tax allowance. So if one of my DB pensions rises by say 2.5% gross, that surely means my net income will rise by 2%?  Am I missing something here?

Yes you are missing something. Let's say your state pension and first DB pension consumes your personal allowance.

Lets say the second DB pension is £10000 a year and you pay 20% tax on it so it is £8000 net to you.

Then the pension starts to pay 2.5% more: £10250 a year.  You get the £10250 and pay 20% tax so it is £8200 net to you.

After that 'pay rise' you are getting £8200 instead of £8000 net. It's 2.5% higher, just like the gross is 2.5% higher.

If your net income rose by 2% from £8000, it would only be £8160. 

DiggerUK

Malthusian said:

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 

Very few people are in the fortunate position they can afford everything they want in retirement while sacrificing some of their retirement fund on the altar of zero-yield shiny metal.

People who invest in assets with a positive expectation of real return will be able to afford a higher standard of living in retirement than people who invest the same amount in zero-yield shiny metal. That is not crystal-ball gazing, those are the economic laws of physics.

Your truism that gold is a shiny metal is noted. However it is not a zero yield.
But just like all other options to save for retirement it had to be paid for, just as your 'portfolio' had to be paid for. Sorry to provide you with another truism, but if you ain't got the money, then you can have the wildest plans for a comfortable and secure retirement, it's just that it won't happen if you can't buy the gold or any other type of investment. 

Trust me on this, it's the prime law in physics...."Matter can neither be created nor destroyed"

Gary1984

Audaxer said:

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?

I just see it as insurance against living too long. I won't be bothered if I fail to recoup my 50k as I'll be dead and I would have died young enough that my pension pot should have seen me through. However if I live to 100 the additional guaranteed and inflation linked income will be very welcome!

MaxiRobriguez

"Does FIRE 4% work in neutral sideways markets"

Answer is depends.

The 4% withdrawal is a figure which supposedly means you'll never reduce your capital, which requires you to get to a position whereby the capital is sufficiently large enough, and that the asset allocation protects you enough against market downturns so that you have a proportion in cash that can be used as the withdrawal.

If you get to that position, then dividend coverage should limit any lack of capital growth in the meantime. 

Me personally, I like the concept but I'd rather assume growth rates of 3-4% and withdrawal of 2%. Means having to pay more in, but gives extra buffer room later on if returns aren't quite as successful as hoped. 

Notepad_Phil

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.

It might take a few years to catch up, but provided you are invested in a sensible manner across the globe then I'd rather take the chance of equities over pretty much anything else - though inflation linked bonds might have proven handy if you had been able to see very high inflation coming

bowlhead99

DiggerUK said

But just like all other options to save for retirement it had to be paid for, just as your 'portfolio' had to be paid for. Sorry to provide you with another truism, but if you ain't got the money, then you can have the wildest plans for a comfortable and secure retirement, it's just that it won't happen if you can't buy the gold or any other type of investment. 

Trust me on this, it's the prime law in physics...."Matter can neither be created nor destroyed"

Acknowledging that we will need money to buy the gold or other type of investment because we can't create matter or financial instruments, how did you decide how much money you would need, to provide for the comfortable and secure retirement? 

Is the answer really just to save some arbitrary amount of money within the bounds of 'what you can afford' without any rule of thumb for how much needs to be put away, and simply see how much that turns out to be - with the intention that you'll have at least a few pounds per year to top up your state pension and hopefully 'some more, whatever that happens to be'.  Rolling the dice to see where your contributions land you is a bit of a cavalier attitude when you could instead give some thought not just to what you 'can' put away (a flexible number) but to what you 'should' aim to put away for a particular type of lifestyle now and in the future.

Most people (about three quarters) are not currently in a defined benefit pension scheme - because as of the last round of stats from ONS, they're part of either the 24% of employees who are not in a workplace pension scheme at all, or the almost two thirds of employees in pension schemes which are DC or group personal / stakeholder pension. So without a contractually agreed fixed payment throughout retirement for them and their dependants / spouses, they will generally need to manage contributions to ensure they are not one of the people who, as you say, 'aint got the money' when they get to retirement age.  Any sensible model to estimate how much 'got the money' one needs to have, to support a particular level of income drawdown, should be welcome?

coyrls

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.

DiggerUK

bowlhead99 said:

DiggerUK said

But just like all other options to save for retirement it had to be paid for, just as your 'portfolio' had to be paid for. Sorry to provide you with another truism, but if you ain't got the money, then you can have the wildest plans for a comfortable and secure retirement, it's just that it won't happen if you can't buy the gold or any other type of investment. 

Trust me on this, it's the prime law in physics...."Matter can neither be created nor destroyed"

Acknowledging that we will need money to buy the gold or other type of investment because we can't create matter or financial instruments, how did you decide how much money you would need, to provide for the comfortable and secure retirement?  Is the answer really just to save some arbitrary amount of money within the bounds of 'what you can afford' without any rule of thumb for how much needs to be put away, and simply see how much that turns out to be.........

I can't pull out of my pocket any more than I have in it, nobody can. It's impossible to put that truism more simply, Mr. Micawber understood that economic fact of life fully, and so has Digger Mansions.
We didn't set out with any target for retirement other than to put by as much as we could for it. There are wise ways to go down that road, and not so wise ways, Mr. Micawber also believed something would turn up to sort problems out, we always accepted it's our problem to sort out, not fates.

What is in the pot at the end of the day is what's in it. Then you divvy it up, so much for guns, so much for butter..._