Foolishness of the 4% rule

Mothman

My understanding was that the triple lock did not apply to extra/additional state pension but that it was index-linked. Not sure if that's correct.

Time4T_Accounts

Just to say thank you from the sidelines to all of the contributors to this most illuminating discussion.

Audaxer

Deleted_User said:

Stargunner said:

Deleted_User said:

Stargunner said:

DairyQueen said:

Audaxer said:

Deleted_User said:

DB+State pension monies which trickle in from 60-67 years of age, the better!

Delaying state pension to 70 makes sense for everyone who can get by without drawing it. 

As deferring the new state pension increases at I think around 5.8% per year, I'm wondering how long it would take to recoup the missed pension if you have deferred it for say 4 years from age 66 to 70?

I happened to be reading about this today. AJ Bell have crunched the numbers and they are quoted on this link.

Assuming inflationary increases at 2.5%, SPA of 66, and 4 year deferral, the break even is age 81. Quids in if you live to 90 and centenarians are laughing all the way to the bank.

That is the gamble as we don’t know how long we will still be here

Not really a “gamble”.  You are guaranteed a decent inflation protected raise in perpetuity.  Unless you consider fear of dying young and missing out on a few quid as a “gamble”.  And even then you should be able to safely spend more in your late 60s from your DC pot then you would have being able to draw from your state pension.  

For every year you defer you are giving up around £9k per year of income. For every year you defer you will get around £500 added to your pension when you decide to take it. 

The more you spend from your DC pot the more it will go down, so why would you want to do that.

If you deferred for 3 years and then died 10 years later you would of missed out on around £27k of income from the 3 years that you deferred and gained around £15k extra pension income. Your beneficiaries would be missing out on around £12k

Why exist on £ 6000, assuming 3% SWR  on £ 200,000, and then live in fear, when inflation protected £ 11,600 may be obtained annually by buying an annuity with a 5.8% rate, equivalent to delaying your state pension for 1 year? You thus get an effective annuity for all of life and minus all the fear. 

If the person in your example is already receiving a DB pension, that along with the State Pension and a withdrawal rate of 3% from their DC pot, may be more that enough to give them a very comfortable retirement. In that situation they would not living in fear of inflation or depriving themselves in any way, so no need to defer their State Pension. 

[Deleted User]

Audaxer said:

Deleted_User said:

Stargunner said:

Deleted_User said:

Stargunner said:

DairyQueen said:

Audaxer said:

Deleted_User said:

DB+State pension monies which trickle in from 60-67 years of age, the better!

Delaying state pension to 70 makes sense for everyone who can get by without drawing it. 

As deferring the new state pension increases at I think around 5.8% per year, I'm wondering how long it would take to recoup the missed pension if you have deferred it for say 4 years from age 66 to 70?

I happened to be reading about this today. AJ Bell have crunched the numbers and they are quoted on this link.

Assuming inflationary increases at 2.5%, SPA of 66, and 4 year deferral, the break even is age 81. Quids in if you live to 90 and centenarians are laughing all the way to the bank.

That is the gamble as we don’t know how long we will still be here

Not really a “gamble”.  You are guaranteed a decent inflation protected raise in perpetuity.  Unless you consider fear of dying young and missing out on a few quid as a “gamble”.  And even then you should be able to safely spend more in your late 60s from your DC pot then you would have being able to draw from your state pension.  

For every year you defer you are giving up around £9k per year of income. For every year you defer you will get around £500 added to your pension when you decide to take it. 

The more you spend from your DC pot the more it will go down, so why would you want to do that.

If you deferred for 3 years and then died 10 years later you would of missed out on around £27k of income from the 3 years that you deferred and gained around £15k extra pension income. Your beneficiaries would be missing out on around £12k

Why exist on £ 6000, assuming 3% SWR  on £ 200,000, and then live in fear, when inflation protected £ 11,600 may be obtained annually by buying an annuity with a 5.8% rate, equivalent to delaying your state pension for 1 year? You thus get an effective annuity for all of life and minus all the fear. 

If the person in your example is already receiving a DB pension, that along with the State Pension and a withdrawal rate of 3% from their DC pot, may be more that enough to give them a very comfortable retirement. In that situation they would not living in fear of inflation or depriving themselves in any way, so no need to defer their State Pension. 

If someone living on a guaranteed DB pension of 11.6K refuses to convert it to a DC pot of 200k (which most should refuse) then delaying your state pension is equally the best approach. Its the exact same equation and risks. 

If you have more than enough in inflation protected DB income already - then you are right.  Delaying state pension might be counterproductive. 

jamesd

Deleted_User said:

MoJoeGo said:

Deleted_User said:

Lets say you have 1 million pounds at the start of your retirement in 2022. Your portfolio drops to 300K on January 2nd 2023.  How much are you going to withdraw? 

Seriously though, that would still give 18k between us at 3%, and whilst it would be frugal, we'd not exactly be on the breadline. Perhaps downsize, assuming the house was still worth more than when it was built in 1730...

Ok, so you are using variable percentage withdrawal rather than Safe Withdrawal Rate.  In the latter case you’d be withdrawing 30k plus inflation. 

18k isn't credibly low enough. The reason is what it takes to achieve the situation postulated.

A 70% one day drop in combined equity and bond markets is far worse than anything seen in the history used to develop the rules. It implies something that both destroys the value of most companies listed in the UK, even though many have global assets, and the UK financial system during one day. IF global rather than UK investments are used then similar global corporate apocalypse is required, again likely requiring a massive nuclear exchange but this time requiring at a minimum the inclusion of the United States, China, Russia and India to achieve the level of losses postulated.

Nobody using any safe withdrawal method should expect to be able to continue following the historically valid rules after such an event. In such circumstances the viable withdrawal rate would fall to or close to zero due to the absence of a functioning financial system.

Can you come up with any scenario that could credibly achieve that level of wealth destruction in one day other than global nuclear war involving most major countries?

jamesd

Thrugelmir said:

The greater mistake is to suggest that Bergen is relevant to investors in the UK. 

Since constant inflation adjusted income has also been calculated for the UK and most major and minor global markets the method is entirely valid for the UK, if you accept its premise that if you encounter something worse than seen in the historical dataset you'll have to adjust. Of course 4% itself isn't relevant to the UK because the one calculated for the UK is that minus 0.3.

jamesd

IvanOpinion said:

Being close to retirement I have been putting numbers into many different online calculators and the one thing that springs to mind is that they ALL try to tell you that you need to give them more money to be 'safe'.  At the minute I am of the impression that this is deliberate and these calculators are more about upselling than they are about informing.

In general they assume that you're going to buy an annuity and compared to using the safe withdrawal rate approach that's roughly comparable to throwing away half of your money on day one.

Regrettably if you want a better answer that includes things like investments and state pension deferral combined with eventual annuity purchasing you're going to need to do more yourself.

bostonerimus

I think the elephant in the room in this "4% foolishness" discussion is the cost of financial fees. They were mentioned in passing above, but it's important to consider that they might take 50% of you initial retirement income ie they could cut your spendable income in half...

jamesd

Albermarle said:

I also note there is risk in not following that super-safe approach.  I temper that with flexibility, & other personal circumstances and possibilities.

Vanguard call this approach The Dynamic Spending Rule .

Setting a strategy for retirement withdrawals | Vanguard

Basically a compromise between SWR, and % of portfolio , probably similar to GK rules ( if I understood them )

Personally I like a good compromise !

It has some similarities. Here's a simplified (edge cases and where to take income from removed) Guyton-Klinger rule set for the UK 40 years timescale:

For the first year take 5.5% of your pot (charges included in this, not deducted from it). The upper guardrail is this plus 20%, so 6.6%, used in the capital preservation rule. The prosperity rule is this minus 20%, so 4.4%.

In subsequent years, first take the previous year's income and increase it by uncapped inflation unless portfolio total return was negative, in which case leave it unchanged.
Calculate what percentage of the current pot value the new income would be.

If not in the final fifteen years of the plan, check that new income percentage against the upper guardrail of 6.6%. If it's higher than that, cut the newly calculated income by 10% and use that for the coming year. End of this year's calculation.

If not in the final fifteen years of the plan, check that new income percentage against the 4.4% prosperity rule. If it's less, increase the planned income by 10%, End of this year's calculation.

There are additional rules to take profits during up years into cash and to say which assets are drawn down first.

The page you linked to has example rules which say:

Start with your choice of initial percentage in the first year.
In subsequent years if the portfolio grew by more than 5%, increase spending by 5%. If it fell by more than 1.5%, reduce spending by 1.5%.

This ruleset is less kind during high inflation since it only adjusts based on investment results. The investment thresholds are narrower so those rules will be applied more often (at least using the example values).

A caveat is that I haven't read the full paper so I'm just using the summary description on the web page.

[Deleted User]

18k isn't credibly low enough. The reason is what it takes to achieve the situation postulated.
A 70% one day drop in combined equity and bond markets is far worse than anything seen in the history used to develop the rules…

Who said “one day”?  In 1929 the stock market lost 85% so 70% is credible. Under SWR you keep withdrawing the same amount regardless so the speed of the crash isn’t all that relevant.  

Are you assuming 50% in bonds? In 1929 the interest rates dropped and bonds went up. Today the interest rates cant go much lower.  Some say we have a bubble in bonds. Given investors are guaranteed a loss in real terms, I see the logic in that argument.