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

Audaxer

bowlhead99 said:

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. 

Thanks bowlhead, I take your point looking at that example. However, if the total of all your DB pensions was to amount to say, a total of £20,000 gross and you had a personal tax allowance of £12,500, you would be paying £1,500 tax and your net pay would be £18,500. If all your pensions then increased by 2.5% gross that would take the gross pay to £20,500 and the net pay would now be £18,900. That means that the £400 increase in net pension income is only a 2.16% increase from £18,500.

If the personal tax allowance had also increased with inflation by 2.5%, then it would have meant the net increase to the pension income would also be 2.5%, but the personal tax allowance did not increase this tax year, so I hadn’t included that in my calculations.  

Prism

DiggerUK said:

It is bizarre how anybody can consider it plausible, that after continuously  removing funds from the various retirement pots that have been mentioned, that those funds will not eventually deplete over time, possibly to nothing.

It is inevitable that everything we have put by over time will reduce, there is no magic fix to prevent that happening. As soon as the penny drops that there is no philosophers stone, and that once you start spending by taking from your retirement stores, it will eventually go, the better.

There is much spoken and written of work/life balances; that will influence and impact what you eventually do put by. But there seems to be no grasp of the similar nuances needed to be grappled with between a retirement/life balance when the wage isn't there anymore.

Here at Digger Mansions we like to keep things simple, but watch in bewilderment at the intricate schlieffen style plans being hatched....and we all know how long that plan lasted.

It is rather satisfying to find that after eleven years on MSE,  putting our retirement savings in to gold, that we don't have to justify  our decision against the storm of scorn and abuse that we met with along the way.

Keep things simple.._

I imagine that the reason that you find it difficult to imagine how you could withdraw a reasonable % of your funds every year, and increase that withdrawal along with inflation and then most probably end up at the end of your life with significantly more than you started retirement is that you don't use equities and bonds. Did you ever did in the days pre gold?

As an example, from the Trinity Study which is the basis of this 4% rule. If someone started of with a simple 50/50 split between equities and bonds and had $1000, then withdrew 4% per year (increasing with inflation) for 30 years then the average amount they would end up with would have been $3000 dollars at the end.

The reason that so much time is spent discussing this is because although it worked for the last 100 years it might not always work in the future. Its also a US study and the UK investor might have slightly different characteristics. It also leaves you with a whole stack of cash that you never spent - might be better to withdraw more and end up with less, but not overdo it.

Linton

DiggerUK said:

It is bizarre how anybody can consider it plausible, that after continuously  removing funds from the various retirement pots that have been mentioned, that those funds will not eventually deplete over time, possibly to nothing.

It is inevitable that everything we have put by over time will reduce, there is no magic fix to prevent that happening. As soon as the penny drops that there is no philosophers stone, and that once you start spending by taking from your retirement stores, it will eventually go, the better.

There is much spoken and written of work/life balances; that will influence and impact what you eventually do put by. But there seems to be no grasp of the similar nuances needed to be grappled with between a retirement/life balance when the wage isn't there anymore.

Here at Digger Mansions we like to keep things simple, but watch in bewilderment at the intricate schlieffen style plans being hatched....and we all know how long that plan lasted.

It is rather satisfying to find that after eleven years on MSE,  putting our retirement savings in to gold, that we don't have to justify  our decision against the storm of scorn and abuse that we met with along the way.

Keep things simple.._

Not a problem I have experienced.  Since retirement 15 years ago our net assets have remained pretty constant despite a comfortable lifestyle and the absence of major external finance such as a good DB pension.  OK, that ignores inflation and one could argue that eventually the value could all disappear, impossible to prove either way.

The trick is to manage your affairs such that, despite your date of death being unknown,  your assets outlast you and your dependents whilst providing for all your needs and most of your wants whilst alive.  That is why a possibly intricate strategy, financial plan and ongoing monitoring is required.  Without this you run the risk of finding that your assets are inadequate at a time when it is impossible to do anything about it, apart from jeopardising satisfaction of your needs and wants.

MarkCarnage

ffacoffipawb said:

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%.

It's not really an assumption. Implied inflation is priced off the yield curves for conventional v index linked gilts out to 40 years, or more accurately the swaps market deriving from them. It's been stubbornly above 3% for some years, which is in part a function of the flawed UK RPI measure which overstates inflation by about 0.7-1%. 
The reason that annuity quotes linked to RPI are dearer than 3% escalation is outcome uncertainty. The latter is bounded by 3%, whilst the former is uncapped.....go back 30 years and you'll find inflation a lot higher than 3%, go back 40 years and it was 3 times or more that level. 
Annuity pricing in relation to real income levels probably isn't that much different from what it's been for much of its history (if one strips out the effect of mortality improvements) . Higher rates for level annuities in the past were a function of money illusion as much as anything. 

DiggerUK

"Did you ever in the days pre gold?"

Have we been invested in equities, bonds and the like....yes. But we never worshiped at the altar of the markets, always highly cautious of the risks involved. But we did know how to read a market in boom and recognise the difference between that and a bust in the offing.  Most here carry on as normal without a sideways glance at the crisis in the making, happily oblivious to any need to have defensive positions in their 'portfolio'

"The trick is to manage your affairs such that, despite your date of death being unknown,  your assets outlast you and your dependents whilst providing for all your needs and most of your wants whilst alive."

Thats all fine 'n dandy for those in a position to provide for a comfortable retirement. A lot of people never get anywhere near such a position, and it's not because they're  n'er do wells who lack drive and ambition. All they can do is put by what they can and no amount of prudent management can improve the lot for many.
Those who disparage such a plan miss the fact that for many it is all they can do. I have to say I  find it a snotty attitude.

Digger Mansions has no idea when we will die but I tell you this, our intention is to die as near penniless as we possibly can. We have never been reckless with our finances, and we will not start now, we will continue to keep things simple..._

barnstar2077

DiggerUK said:

"Did you ever in the days pre gold?"

Have we been invested in equities, bonds and the like....yes. But we never worshiped at the altar of the markets, always highly cautious of the risks involved. But we did know how to read a market in boom and recognise the difference between that and a bust in the offing.  Most here carry on as normal without a sideways glance at the crisis in the making, happily oblivious to any need to have defensive positions in their 'portfolio'

"The trick is to manage your affairs such that, despite your date of death being unknown,  your assets outlast you and your dependents whilst providing for all your needs and most of your wants whilst alive."

Thats all fine 'n dandy for those in a position to provide for a comfortable retirement. A lot of people never get anywhere near such a position, and it's not because they're  n'er do wells who lack drive and ambition. All they can do is put by what they can and no amount of prudent management can improve the lot for many.
Those who disparage such a plan miss the fact that for many it is all they can do. I have to say I  find it a snotty attitude.

Digger Mansions has no idea when we will die but I tell you this, our intention is to die as near penniless as we possibly can. We have never been reckless with our finances, and we will not start now, we will continue to keep things simple..._

I believe it depends on where you are in life on whether or not you should be taking a defensive position.  For a lot of people (who are ten years or so out from needing to access their money) continuing to invest while ignoring the roller-coaster is the right thing to do.

DiggerUK

barnstar2077 said:

DiggerUK said:

"Did you ever in the days pre gold?"

Have we been invested in equities, bonds and the like....yes. But we never worshiped at the altar of the markets, always highly cautious of the risks involved. But we did know how to read a market in boom and recognise the difference between that and a bust in the offing.  Most here carry on as normal without a sideways glance at the crisis in the making, happily oblivious to any need to have defensive positions in their 'portfolio'

"The trick is to manage your affairs such that, despite your date of death being unknown,  your assets outlast you and your dependents whilst providing for all your needs and most of your wants whilst alive."

Thats all fine 'n dandy for those in a position to provide for a comfortable retirement. A lot of people never get anywhere near such a position, and it's not because they're  n'er do wells who lack drive and ambition. All they can do is put by what they can and no amount of prudent management can improve the lot for many.
Those who disparage such a plan miss the fact that for many it is all they can do. I have to say I  find it a snotty attitude.

Digger Mansions has no idea when we will die but I tell you this, our intention is to die as near penniless as we possibly can. We have never been reckless with our finances, and we will not start now, we will continue to keep things simple..._

I believe it depends on where you are in life on whether or not you should be taking a defensive position.  

That is straight out of the training school manual for officers in the first world war. In both war and peace the finest minds always have 'fall back positions' worked out in all areas of life. 

It is just reckless not to have defensive positions in financial matters in place..._

barnstar2077

DiggerUK said:

barnstar2077 said:

DiggerUK said:

"Did you ever in the days pre gold?"

Have we been invested in equities, bonds and the like....yes. But we never worshiped at the altar of the markets, always highly cautious of the risks involved. But we did know how to read a market in boom and recognise the difference between that and a bust in the offing.  Most here carry on as normal without a sideways glance at the crisis in the making, happily oblivious to any need to have defensive positions in their 'portfolio'

"The trick is to manage your affairs such that, despite your date of death being unknown,  your assets outlast you and your dependents whilst providing for all your needs and most of your wants whilst alive."

Thats all fine 'n dandy for those in a position to provide for a comfortable retirement. A lot of people never get anywhere near such a position, and it's not because they're  n'er do wells who lack drive and ambition. All they can do is put by what they can and no amount of prudent management can improve the lot for many.
Those who disparage such a plan miss the fact that for many it is all they can do. I have to say I  find it a snotty attitude.

Digger Mansions has no idea when we will die but I tell you this, our intention is to die as near penniless as we possibly can. We have never been reckless with our finances, and we will not start now, we will continue to keep things simple..._

I believe it depends on where you are in life on whether or not you should be taking a defensive position.  

That is straight out of the training school manual for officers in the first world war. In both war and peace the finest minds always have 'fall back positions' worked out in all areas of life. 

It is just reckless not to have defensive positions in financial matters in place..._

We were talking about our portfolios.  If the defensive positions you refer to are the emergency funds that everyone should have, then fair enough.

If only I had one of the "finest minds" that you speak of too, how smug I would feel sharing my wisdom with the masses.

DiggerUK

barnstar2077 said:

DiggerUK said:

barnstar2077 said:

DiggerUK said:

"Did you ever in the days pre gold?"

Have we been invested in equities, bonds and the like....yes. But we never worshiped at the altar of the markets, always highly cautious of the risks involved. But we did know how to read a market in boom and recognise the difference between that and a bust in the offing.  Most here carry on as normal without a sideways glance at the crisis in the making, happily oblivious to any need to have defensive positions in their 'portfolio'

"The trick is to manage your affairs such that, despite your date of death being unknown,  your assets outlast you and your dependents whilst providing for all your needs and most of your wants whilst alive."

Thats all fine 'n dandy for those in a position to provide for a comfortable retirement. A lot of people never get anywhere near such a position, and it's not because they're  n'er do wells who lack drive and ambition. All they can do is put by what they can and no amount of prudent management can improve the lot for many.
Those who disparage such a plan miss the fact that for many it is all they can do. I have to say I  find it a snotty attitude.

Digger Mansions has no idea when we will die but I tell you this, our intention is to die as near penniless as we possibly can. We have never been reckless with our finances, and we will not start now, we will continue to keep things simple..._

I believe it depends on where you are in life on whether or not you should be taking a defensive position.  

That is straight out of the training school manual for officers in the first world war. In both war and peace the finest minds always have 'fall back positions' worked out in all areas of life. 

It is just reckless not to have defensive positions in financial matters in place..._

We were talking about our portfolios.  If the defensive positions you refer to are the emergency funds that everyone should have, then fair enough.
If only I had one of the "finest minds" that you speak of too, how smug I would feel sharing my wisdom with the masses.

I regard a defensive position in a slightly different light than simply emergency funds. As they would be in cash, then yes, an emergency fund does also double as a defensive position,  but only just.
What is far more important to take on board is the safety of the roller coaster as you describe it. A basic examination of the world as is at the moment should make anybody ask 'how often is this rollercoaster serviced, has it got all its certification, is it properly staffed and supervised'.....don't get so churlish, if you're having fun on the ride, fine, just keep your arms and legs inside the car at all times. 

From were I'm sitting, the ride looks a bit tatty at the moment, but as Mr. Barnum said, "there's one........."..._

Malthusian

DiggerUK said:

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.

Unless you can produce video evidence of a 100g lump of gold producing another 5g of gold, yes it is.

Businesses by contrast can add value to their inputs through the effort of their employees, sell that value for more than their costs and distribute the profit either via interest or dividends.