Foolishness of the 4% rule

bostonerimus

NoMore said:

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!.

The drawdown amount is only one side of the equation, the other being how much you spend. So while SWR is a number that depends on a vast matrix of parameters at least the retiree can control how much they spend. So at least as much effort should go into budget planning as SWR calculations...or assumptions. Being able to sensibly reduce spending is even a necessity of variable withdrawal strategies and you should have a list of things to cut out in tough times.

Sea_Shell

Thrugelmir said:

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!.

When you cease paid work. You lose the ability to replenish lost capital through your own endeavours. In the midsts of a global pandemic with some markets highly priced and interest rates at rock bottom. Hardly surprising there's concern.  

You jump. 

You hope you've attached your parachute securely.

If it tears on the way down....start flapping your arms!!!

cfw1994

Sea_Shell said:

Thrugelmir said:

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!.

When you cease paid work. You lose the ability to replenish lost capital through your own endeavours. In the midsts of a global pandemic with some markets highly priced and interest rates at rock bottom. Hardly surprising there's concern.  

You jump. 

You hope you've attached your parachute securely.

If it tears on the way down....start flapping your arms!!!

As a veteran of...er.....3 solo parachute jumps in my crazy youth, I was pleased others had attached them securely!   Maybe the sky-diving equivalent of using an IFA, albeit as a one-off payment rather than on-going drain on the end result....
Speaking of which, indoor skydiving is a hoot: if you've never had a go, sign up!

Some of this fiscal discussion is, of course, as much a mental decision-making issue as a fiscal science.
Indeed, the financial element is arcane wizardry based in large part on future-looking & therefore unknown things.   
If one is of nervous disposition and character, one can always continue to work....if not, strap up, and leap out!

Thrugelmir

Sea_Shell said:

Thrugelmir said:

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!.

When you cease paid work. You lose the ability to replenish lost capital through your own endeavours. In the midsts of a global pandemic with some markets highly priced and interest rates at rock bottom. Hardly surprising there's concern.  

You jump. 

You hope you've attached your parachute securely.

If it tears on the way down....start flapping your arms!!!

No thought to where you are going to land? 

Sea_Shell

Thrugelmir said:

Sea_Shell said:

Thrugelmir said:

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!.

When you cease paid work. You lose the ability to replenish lost capital through your own endeavours. In the midsts of a global pandemic with some markets highly priced and interest rates at rock bottom. Hardly surprising there's concern.  

You jump. 

You hope you've attached your parachute securely.

If it tears on the way down....start flapping your arms!!!

No thought to where you are going to land? 

Wherever the wind takes me!!

Hopefully a soft landing.... preferably on a beach, with a cocktail bar!! 🍹🍹

marlot

>> 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!.

Yes, the "I'll just work one more year" trap is real.

I've been fortunate in the markets being good to me for my first three years of retirement.

pip895

Another point that doesn't seem to be fully addressed in these methods is that many people will want to vary the rate of drawdown depending on the ups and downs of other income sources.  Part time work/ state pension / DB pensions kicking in or even selling of an investment property/downsizing/equity release.

bostonerimus

pip895 said:

Another point that doesn't seem to be fully addressed in these methods is that many people will want to vary the rate of drawdown depending on the ups and downs of other income sources.  Part time work/ state pension / DB pensions kicking in or even selling of an investment property/downsizing/equity release.

The various variable withdrawal rates can be used to react to market variations, but all these drawdown strategies assume that you have a pot and you want it to last for a certain amount of time with a certain threshold probability. If you have income from something like state pension then that might reduce your drawdown amount and increase the probable size of your estate when you die. 

[Deleted User]

pip895 said:

Another point that doesn't seem to be fully addressed in these methods is that many people will want to vary the rate of drawdown depending on the ups and downs of other income sources.  Part time work/ state pension / DB pensions kicking in or even selling of an investment property/downsizing/equity release.

Bogleheads and FWF addressed the issue of DB and state pension sources (VPW method). 

This worksheet requires you to enter the amount and starting date and to specify if it will be corrected by inflation: https://www.dropbox.com/s/okm7kzk2lwxgllu/VPW-Accumulation-And-Retirement-Worksheet.xlsx?dl=0

https://drive.google.com/open?id=14h82Y8Mgij0JQmf64cNCjt_5gofXMaN6e4R72-dvjJw

In the spreadsheet you can have multiple DB pensions starting at various dates and it will do the bridging calcs for you. 

Investment property… I would handle it as part of your overall investment pot but would be very conservative with the estimate because its not a liquid asset. 

DT2001

bostonerimus said:

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...

That's not a likely reduction in SWR.

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.

As your withdrawal amount increases with inflation and you spend down your pot the proportion of fees to SWR income is certainly going to reduce and if you spread that over the full length or retirement you can make things look "not too scary". I put that in quote because even 0.5% off the SWR is a load of money and too much in my opinion. Of course this assumes your fees stay at the same percentage of your pot as it falls - I can easily believe that as your pot decreases IFAs etc will increase their percentage fee. When you are working financial fees are often ignored because they don't seem much immediately, but when drawdown starts they reduce your income directly and immediately and by large amounts. The simple fact is that in the first few years of retirement many UK retiree's largest expense will be financial fees. If you take out 3.2% then you will have to pay financial fees out of that. If they are 1.5% then you'll be left with 1.7% to spend. You could increase your withdrawal but that tempts sequence of return risk. I think the better approach is to reduce your fees. 

Wasn’t the figure of 3.2% after costs not before?
How are you suggesting you reduce fees and does this affect your risk level or make your portfolio more or less complex?
Maybe part of the strategy should be buying an annuity later on when the % ‘return is higher thus avoiding more on going fees.

The key that continually comes out from this discussion is the need to be flexible - investment and withdrawals.