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Foolishness of the 4% rule
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Deleted_User said: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.Also, “deciding to up share purchases” implies market timing. Does not work.“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.I think....1
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michaels said:Deleted_User said: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.Also, “deciding to up share purchases” implies market timing. Does not work.“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.2
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jamesd said:bostonerimus said: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...
US first, the original US finding was actually around 4.15% and 4% actually ended up covering inexpensive costs. But in the UK the calculated value including (not deducting) all costs is 3.7% so that's not applicable here.
However, if you want to lose half of the 3.7% in costs (fees and investment charges) then you're postulating that they are around three times the 1.85% deduction, so 5.55% a year. That's possible but not likely.
The reason for this is that in the depleting capital value cases that set the limiting safe withdrawal rate, the capital value is decreasing. Since the costs are generally a percentage of invested capital, the costs each year are falling, so are no longer 100% of the costs on the initial capital value. Around thirty percent or a third turns out to be the effect on the relevant limiting cases used for the SWR.
What that implies is that 1.5% in total costs (including those incurred inside funds) would reduce the UKs 3.7% to 3.2% for you and 0.5% going in costs.
If you don't live through the bad times then the costs will be higher as a percentage but you're also getting a higher income if you use a variable SWR that makes increases or recalculate constant inflation-adjusted income.
“So we beat on, boats against the current, borne back ceaselessly into the past.”0 -
Secret2ndAccount said:I think we can get a good look at what we are all discussing here if we consider what happens in the event of a large stock-market crash.
With SWR you ignore the crash and bat on regardless. That means you have to start out with a cautious withdrawal rate in order to survive through the crash. If a big crash doesn't occur, you could have a lot of unspent money left at the end.
With this method it is recommended to hold several years worth of drawdown in cash, to avoid drawing down during a crash.
If you want to be rich, live like you're poor; if you want to be poor, live like you're rich.0 -
I think these methods were developed in a different time, when bonds were not correlated with stocks, and bonds gave a positive return over inflation. You held an asset allocation like 60% equity/40% bonds. In the good years, you sold equities; in the bad years, you sold bonds. Currently, the bonds suck - they don't return above inflation, and they are as likely as equities to go down in a crash. Therefore people are advocating holding cash instead of bonds. So instead of a 60/40 portfolio, you could hold an 80/20 mix with a large cash buffer. It amounts to almost the same thing. The current concern is the lack of growth in the fixed income part, be it cash or bonds - both failing to keep up with inflation. It's not been a problem because of strong equity growth keeping the portfolios healthy. Here's hoping for the future.
One of the plusses of SWR is that it's simple enough for almost anyone to do it. You buy VLS60, and you cash in a bit every year. We need someone to lay out (and back-test) an alternative set of rules if you add in a cash buffer. What is a good or a bad year? When do you spend the cash part? When do you replenish it? How big should it be, and does that vary with age? Operating a cash buffer increases the difficulty of running the plan.1 -
Bravepants said:Secret2ndAccount said:I think we can get a good look at what we are all discussing here if we consider what happens in the event of a large stock-market crash.
With SWR you ignore the crash and bat on regardless. That means you have to start out with a cautious withdrawal rate in order to survive through the crash. If a big crash doesn't occur, you could have a lot of unspent money left at the end.
With this method it is recommended to hold several years worth of drawdown in cash, to avoid drawing down during a crash.0 -
Secret2ndAccount said:I think these methods were developed in a different time, when bonds were not correlated with stocks, and bonds gave a positive return over inflation. You held an asset allocation like 60% equity/40% bonds. In the good years, you sold equities; in the bad years, you sold bonds. Currently, the bonds suck - they don't return above inflation, and they are as likely as equities to go down in a crash. Therefore people are advocating holding cash instead of bonds. So instead of a 60/40 portfolio, you could hold an 80/20 mix with a large cash buffer. It amounts to almost the same thing. The current concern is the lack of growth in the fixed income part, be it cash or bonds - both failing to keep up with inflation. It's not been a problem because of strong equity growth keeping the portfolios healthy. Here's hoping for the future.
One of the plusses of SWR is that it's simple enough for almost anyone to do it. You buy VLS60, and you cash in a bit every year. We need someone to lay out (and back-test) an alternative set of rules if you add in a cash buffer. What is a good or a bad year? When do you spend the cash part? When do you replenish it? How big should it be, and does that vary with age? Operating a cash buffer increases the difficulty of running the plan.1 -
..I read it that the original author of the "theory" analysed all the various annual performance scenarios and concluded that during the time period they were analysing 4% was a "safe" withdrawal rate that would have meant your pot would last you at least 30/35 years?ie I see it as a guide to help you know when you have (probably) got enough to retire and nothing more?I would be surprised if anybody used it as a hard and fast rule and stubbornly just took out 4% (plus inflation) of their starting pot every year regardless of what was happening in the markets?I much prefer the idea of the flexi drawdown options, but I still can't grasp the various calculations you need to make each year?.."It's everybody's fault but mine...."2
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Nobel Prize winner William F. Sharpe, (he of the Sharpe Ratio) has described this as 'the Nastiest, Hardest Problem in Finance' (unfortunately I can't find a citation but loads of people seem to attribute it to him).
I think you could argue until the cows come home over the SWR and VPW , GK etc, at the end of the day there is no perfect solution, because we don't know the future performance and we don't know the date of death.
However being aware of such methods and understanding what they are trying to achieve at least puts you ahead of the majority of people who may just blindly draw down an amount without thinking of the consequences, meaning you are unlikely to start drawing down double digit% because you fancy a holiday!
I do think some on this board appear way too cautious in their approach to this, but who am I to judge! At some point you have to either take a !!!!!! or get of the pot!.0 -
NoMore said:
I do think some on this board appear way too cautious in their approach to this, but who am I to judge! At some point you have to either take a !!!!!! or get of the pot!.4
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