Foolishness of the 4% rule

[Deleted User]

michaels said:

Deleted_User said:

dean350 said:

Seeing your portfolio drop massively in retirement and carrying on drawing 4% does require big cojones. However its nearly the same psychology as during the accumulation phase when markets drop and you decide to up your share purchases. Relying on DC pots requires firstly faith and a good dose of mental self discipline.

Nope. Purchasing during accumulation regardless of what the stock market is doing would be smart.  You are buying at a discount when the market drops.  Withdrawal SWR after a substantial drop in the early phases of retirement is dumb. You are depleting your pot. May never recover. Major risk of running out of funds. Sequence of return risk.  

Also, “deciding to up share purchases” implies market timing.  Does not work.

Withdrawing from cash/bonds when markets are down implies market timing.  Does not work?

Withdrawing during the withdrawal phase does not imply market timing, no. Rebalancing does not imply market timing either. 

“Deciding to up share purchases” during accumulation implies you are sitting on cash and waiting for the market to drop. Its the “deciding” that gives me indigestion. 

IvanOpinion

I remember reading some articles recently in which various IFAs discussed the SWR.  The overall consensus seemed to be that they would suggest 3.25-3.5% to their clients.

So, working on the assumption that they will, on average, be charging fees of about 0.5%-1%, and will probably be erring on the side of caution, then, assuming you do not use an IFA, that would put the SWR in the ballpark of 4%.

Thrugelmir

Deleted_User said:

dean350 said:

Seeing your portfolio drop massively in retirement and carrying on drawing 4% does require big cojones. However its nearly the same psychology as during the accumulation phase when markets drop and you decide to up your share purchases. Relying on DC pots requires firstly faith and a good dose of mental self discipline.

 You are buying at a discount when the market drops. 

Which suggests that stock markets are hopelessly inefficient at pricing individual company shares. Not a view I've ever heard expressed from any investment professional in my many years of investing either. With regards to any stock market index. 

[Deleted User]

IvanOpinion said:

I remember reading some articles recently in which various IFAs discussed the SWR.  The overall consensus seemed to be that they would suggest 3.25-3.5% to their clients.

So, working on the assumption that they will, on average, be charging fees of about 0.5%-1%, and will probably be erring on the side of caution, then, assuming you do not use an IFA, that would put the SWR in the ballpark of 4%.

The podcast in the original post has top experts discussing the issue. 

Anonymous101

IvanOpinion said:

I remember reading some articles recently in which various IFAs discussed the SWR.  The overall consensus seemed to be that they would suggest 3.25-3.5% to their clients.

So, working on the assumption that they will, on average, be charging fees of about 0.5%-1%, and will probably be erring on the side of caution, then, assuming you do not use an IFA, that would put the SWR in the ballpark of 4%.

Perhaps the fee's would be applicable on a proportion of the investments but certainly not on all of it.

Cash, Premium bonds and S&S ISA's (although the providers do have their own fee structures) for example wouldn't incur any IFA fee's. Its only certain pensions to which it would be applied. Even then I'd be loathed to pay for ongoing advice once I had set my drawdown up. I think the fee's would be much lower than simply applying 0.5-1% to the entire portfolio.

Thrugelmir

Anonymous101 said:

IvanOpinion said:

I remember reading some articles recently in which various IFAs discussed the SWR.  The overall consensus seemed to be that they would suggest 3.25-3.5% to their clients.

So, working on the assumption that they will, on average, be charging fees of about 0.5%-1%, and will probably be erring on the side of caution, then, assuming you do not use an IFA, that would put the SWR in the ballpark of 4%.

Perhaps the fee's would be applicable on a proportion of the investments but certainly not on all of it.

Cash, Premium bonds and S&S ISA's (although the providers do have their own fee structures) for example wouldn't incur any IFA fee's. Its only certain pensions to which it would be applied. Even then I'd be loathed to pay for ongoing advice once I had set my drawdown up. I think the fee's would be much lower than simply applying 0.5-1% to the entire portfolio.

Inflation is likely to cost you over 1% on cash for the foreseeable future. 

Anonymous101

Thrugelmir said:

Anonymous101 said:

IvanOpinion said:

I remember reading some articles recently in which various IFAs discussed the SWR.  The overall consensus seemed to be that they would suggest 3.25-3.5% to their clients.

So, working on the assumption that they will, on average, be charging fees of about 0.5%-1%, and will probably be erring on the side of caution, then, assuming you do not use an IFA, that would put the SWR in the ballpark of 4%.

Perhaps the fee's would be applicable on a proportion of the investments but certainly not on all of it.

Cash, Premium bonds and S&S ISA's (although the providers do have their own fee structures) for example wouldn't incur any IFA fee's. Its only certain pensions to which it would be applied. Even then I'd be loathed to pay for ongoing advice once I had set my drawdown up. I think the fee's would be much lower than simply applying 0.5-1% to the entire portfolio.

Inflation is likely to cost you over 1% on cash for the foreseeable future. 

True, but the inflation should be taken into account as part of your returns shouldn't it?
That's the way I deal with it and as I understood it that's the way the 4% rule of thumb dealt with it too.

As an aside I was thinking about the title of this thread and the assumption that people would blindly follow the trinity study.
Far as I can tell the study was an academic exercise to determine what the safe withdrawal rate would have been given a set of parameters. Its interesting and useful, but it shouldn't be intended as a rule to be followed.

Its not the rule (or study) that's foolish. Its the idea that it was ever intended as a rule that is foolish.
I'm not sure how I'd describe someone that just blindly follows the 4% drawdown finding of the study.

Thrugelmir

Anonymous101 said:

Thrugelmir said:

Anonymous101 said:

IvanOpinion said:

I remember reading some articles recently in which various IFAs discussed the SWR.  The overall consensus seemed to be that they would suggest 3.25-3.5% to their clients.

So, working on the assumption that they will, on average, be charging fees of about 0.5%-1%, and will probably be erring on the side of caution, then, assuming you do not use an IFA, that would put the SWR in the ballpark of 4%.

Perhaps the fee's would be applicable on a proportion of the investments but certainly not on all of it.

Cash, Premium bonds and S&S ISA's (although the providers do have their own fee structures) for example wouldn't incur any IFA fee's. Its only certain pensions to which it would be applied. Even then I'd be loathed to pay for ongoing advice once I had set my drawdown up. I think the fee's would be much lower than simply applying 0.5-1% to the entire portfolio.

Inflation is likely to cost you over 1% on cash for the foreseeable future. 

True, but the inflation should be taken into account as part of your returns shouldn't it?

If some markets generate negative returns then any positive inflation rate (as we may likely to experience in the short term), is going to compound the issue of generating an overall positive return on the overall portfolio above the rate of inflation. 

Prism

Part of the idea behind the 4% rule is simply to guide that in cases when we do get inflation and you do get years and years of negative returns then historical it has still worked out ok. Of course a small cut in the withdrawal rate either using a formal process like guardrails or an informal one like not taking the inflation increase for a while will help. But in the end there is nothing wrong with the pot getting smaller.

Anonymous101

Thrugelmir said:

Anonymous101 said:

Thrugelmir said:

Anonymous101 said:

IvanOpinion said:

I remember reading some articles recently in which various IFAs discussed the SWR.  The overall consensus seemed to be that they would suggest 3.25-3.5% to their clients.

So, working on the assumption that they will, on average, be charging fees of about 0.5%-1%, and will probably be erring on the side of caution, then, assuming you do not use an IFA, that would put the SWR in the ballpark of 4%.

Perhaps the fee's would be applicable on a proportion of the investments but certainly not on all of it.

Cash, Premium bonds and S&S ISA's (although the providers do have their own fee structures) for example wouldn't incur any IFA fee's. Its only certain pensions to which it would be applied. Even then I'd be loathed to pay for ongoing advice once I had set my drawdown up. I think the fee's would be much lower than simply applying 0.5-1% to the entire portfolio.

Inflation is likely to cost you over 1% on cash for the foreseeable future. 

True, but the inflation should be taken into account as part of your returns shouldn't it?

If some markets generate negative returns then any positive inflation rate (as we may likely to experience in the short term), is going to compound the issue of generating an overall positive return on the overall portfolio above the rate of inflation. 

Agreed. The principle of inflation being factored into the 4% calculation still stands though. Although I suppose if you think this period of inflation is going to be extraordinary you could adjust the 4% down. The study did pick up some pretty high inflationary periods though. The 70's in particular. Perhaps we're on the cusp of another period of Stagflation now? It feels that way to me.