Foolishness of the 4% rule

pensionpawn

Deleted_User said:

bostonerimus said:

So did that make you work longer than perhaps you needed to?
If I wanted to work on 2%, I’d have at least 2-3 more years of work.  

I’d rather be flexible, monitor things (too!) closely for those ‘riskier’ early years, & enjoy my freedom.

I've always been frugal and saved aggressively because that's what I learned from my parents who lived through the Depression, so I started early and I've had the advantage of long term compounding. I was also lucky to live through a time when equity and bond markets have produced excellent long term results. In my mid 40s I was on track to retire in my mid 50s with a low SWR, but I wanted to further reduce the risk and worry inherent in relying directly on drawdown invested in markets and so I changed jobs to one with a DB pension and started paying down the mortgage aggressively. I retired at age 53 and now live off the DB pension and income from a mortgage free rental property and my "retirement pot" continues to grow as dividends and spare income are reinvested. As I don't need income from my pot I have an aggressive 80/20 portfolio and don't worry about volatility.

This reads like a recipe for leaving a large inheritance. Not a fan.  They say its hard to change from a saving mode to a spending mode and people who lived frugally all their lives have real trouble spending their large wealth in retirement. 

Indeed, I have no intention of leaving a large inheritance (other than to my wife) as we intend to dispose (spend, save, help out the kids) of all of our pension(s) whilst we're alive, and more importantly, whilst we're still capable of enjoying it. Our state pensions are our annuities and I don't agree with delaying SP as we'll be eating into wealth that can be passed to surviving spouse and the SP dies with you! Need extra money from your late 70's then unlock some of the wealth accumulated in your house. I see the 4% rule as guidance more than a rule. We're planning to take a minimum of our personal allowances out each year, which with wife following the UFPLS route is ~ £30k pa tax free. If we need additional funds for an unexpected capital cost, I'll just take it and pay the tax. We're keeping over a year's worth of income in cash as insurance. This isn't the dry run, I'd rather find that I'm down to our SPs with a ton of equity in our house in our 80's, not the richest person in the cemetery! Tomorrow isn't promised, enjoy what you have as soon as you can though know what you need for the future!

[Deleted User]

Our state pensions are our annuities and I don't agree with delaying SP as we'll be eating into wealth that can be passed to surviving spouse and the SP dies with you! 

One behavioural problem for people is that they like to feel rich.  Seeing a lot of money in the financial statements feels good, they dont want to see the pot reduced and it  forces them to reject what is really an awesome deal by taking state pension early.  They call it “Scrooge McDuck effect.” Envision Scrooge McDuck diving into his vault of gold coins. He loves to touch and feel his money. This is what we are describing.

Important to think of an annuity as part of your wealth.  The cost of annuity should be added to the overall net wealth value.    State Pension - ditto.  The larger your annuity for life, the larger your fixed income component.  And the actual value of extra you get by delaying is double what you forfeit by delaying. It allows  to take on more risk with the remainder of your portfolio.  Basically delaying SP  means more spending money, both before and after taking it.  And more growth in your liquid portfolio.

Delaying SP is also longivity  insurance.  Means you are pooling the risk. Without this risk pooling one has to be needlessly conservative with the spending budget.  People who live longer get mortality credits for the ones who don’t.  If a person delays and dies in his 70s, he still “won” because he was able to safely spend more up until that point. 

The issue of leaving money to your spouse depends on personal circumstances. Usually a spouse can delay SP too - and get a larger annual inflation protected payment  for life.  Typically SP isn’t the only source of income.  After one spouse dies, spending needs become less than for a couple.  Worst case, you can usually take a life insurance and still be left with more ability to spend annually.  Of course if SPs are a couples main source of income then they just can’t afford to delay and need to start as early as possible. 

MK62

DT2001 said:

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

Yep.....there's no way to square this circle.

As the future is unknown (events, returns, inflation death date etc), then today, there is no way to come up with a reasonable 30 year retirement withdrawal plan without being flexible on those withdrawals.....imho anyone who believes otherwise is deluding themselves.

The 4% "rule" is a reasonable estimate for a starting point for a 30 year plan, given historical average returns, inflation etc......nothing more.

You just have to accept that if you start higher than that, say 5%, you are increasing the prospects of having to make larger cuts to your income in the future, while reducing your prospects of dying "rich".........while on the flip side, starting lower, say 3%, reduces the prospect of having to make larger cuts to your future income, but increases your prospects of dying rich.....

Some of the withdrawal plans (VPW, GK etc), if followed, will give a high degree of confidence of meeting the 30 yr target (or whatever you set that span at).......but you need to do the modelling and ensure that you can live with the income cuts that some of the modelling will give you.......it's pointless to follow the plan in good years, only to abandon it when the first bad year arrives (and those are practically guaranteed at some point over the 30 years).

Personally, the biggest caveat I would caution against in planning, is using averages over long periods, such as 30 years........say 2.5%pa for inflation......and say 4%pa for returns.......it can give you a highly distorted outcome......in decumulation, the sequence of "real" returns (inflation must also be considered) can give dramatically different outcomes over long periods, even if the "averages" over the period are the same. 

pensionpawn

Deleted_User said:

Our state pensions are our annuities and I don't agree with delaying SP as we'll be eating into wealth that can be passed to surviving spouse and the SP dies with you! 

One behavioural problem for people is that they like to feel rich.  Seeing a lot of money in the financial statements feels good, they dont want to see the pot reduced and it  forces them to reject what is really an awesome deal by taking state pension early.  They call it “Scrooge McDuck effect.” Envision Scrooge McDuck diving into his vault of gold coins. He loves to touch and feel his money. This is what we are describing.

Important to think of an annuity as part of your wealth.  The cost of annuity should be added to the overall net wealth value.    State Pension - ditto.  The larger your annuity for life, the larger your fixed income component.  And the actual value of extra you get by delaying is double what you forfeit by delaying. It allows  to take on more risk with the remainder of your portfolio.  Basically delaying SP  means more spending money, both before and after taking it.  And more growth in your liquid portfolio.

Delaying SP is also longivity  insurance.  Means you are pooling the risk. Without this risk pooling one has to be needlessly conservative with the spending budget.  People who live longer get mortality credits for the ones who don’t.  If a person delays and dies in his 70s, he still “won” because he was able to safely spend more up until that point. 

The issue of leaving money to your spouse depends on personal circumstances. Usually a spouse can delay SP too - and get a larger annual inflation protected payment  for life.  Typically SP isn’t the only source of income.  After one spouse dies, spending needs become less than for a couple.  Worst case, you can usually take a life insurance and still be left with more ability to spend annually.  Of course if SPs are a couples main source of income then they just can’t afford to delay and need to start as early as possible. 

My father retired at 65 in the '80's on a full SP and maybe some British Rail pension. His words to me, at 65, was I came into the good money (last few years of work) too old to really enjoy it. He enjoyed a 20 year retirement however did little more than enjoy a comfortable home life. The majority of those reaching SP age are not going to be jetting around the world, buying sports cars, extending the house with a pool, take up extreme sports etc. Most will be happy that their home is secure and warm, they can treat themselves to eating out and a holiday regularly, enjoy Sky tv, help their kids etc. My point? Why do you need the extra secure income from delaying your SP? What are you planning to spend it on and could the vast equity in most peoples home provide the insurance instead? Currently a couple can expect ~£19k SP income, which to be honest isn't scraping by. That can be easily bumped up to £25k tax free by drawing down ~ 2 x £3k from your private pension. If your pot is anything higher than £100k that's not exactly burning through your life savings. Personally, time is more important than money. Time is finite, productive enjoyable time could be considerably less. Preserving my pot (to potentially pass to my wife) is a higher priority than burning through my pot longer than necessary to achieve I higher SP that I will probably not need / spend. I just need (want?) a certain pot size and then I'm moving into de-accumulation mode. I have an idea of what the road ahead looks like, as my brother is 16 years older than me, and he's not exactly living the rock star life and has more money than he knows what to do with. I intend to reduce my hours from the new financial year so that I have more time (and hopefully more energy) with the family and see how my reduced net pay (planned to be close to my draw down figure) meets my expected retirement income requirements.

[Deleted User]

My point? Why do you need the extra secure income from delaying your SP?

So you can safely spend more in the early years before receiving your SP - as well as after. 

NedS

Deleted_User said:

My point? Why do you need the extra secure income from delaying your SP?

So you can safely spend more in the early years before receiving your SP - as well as after. 

So you can sleep easy when inflation is rampant and investments are suffering a prolonged bear market run, knowing that you have enough secure income to cover your essential living costs and you don't have to cut back on necessities.

If you've already got that from DB pensions and/or some other source (an annuity maybe), then you probably don't need to convert some of your DC/savings into extra state pension.

It's really quite simple - you have £10,000 to invest and you are 65/66/67 years old. Do you want a guaranteed 5.8% return, inflation linked for life (even better under the triple lock)? You may fancy your chances of doing better in the market, you may not. Your choice.

Stargunner

By delaying your sp for 1 year and missing out on approx £10k of income, you will only get approx £500 a year more, so it will hardly help you sleep easy. 

If you invest £10000 in your late 60s and you only live for 10 years you will leave behind your investment, but if you had of bought your so called annuity you will leave nothing. 

[Deleted User]

Stargunner said:

By delaying your sp for 1 year and missing out on approx £10k of income, you will only get approx £500 a year more, so it will hardly help you sleep easy. 

If you invest £10000 in your late 60s and you only live for 10 years you will leave behind your investment, but if you had of bought your so called annuity you will leave nothing. 

Actually, by delaying you get 580 plus inflation annually for life guaranteed.

By taking 10K and investing you get 300 plus inflation annually based on 3% SWR and your capital could still run out before you die. 

Audaxer

Deleted_User said:

Our state pensions are our annuities and I don't agree with delaying SP as we'll be eating into wealth that can be passed to surviving spouse and the SP dies with you! 

One behavioural problem for people is that they like to feel rich.  Seeing a lot of money in the financial statements feels good, they dont want to see the pot reduced and it  forces them to reject what is really an awesome deal by taking state pension early.  

By taking the State Pension at 66, I would definitely not be taking it early, just deciding not to defer it. I've been paying voluntary NI contributions for the last few years, and will be for the next few years to get my SP up to the maximum amount, so that's hardly a behavioural problem.

Stargunner

Deleted_User said:

Stargunner said:

By delaying your sp for 1 year and missing out on approx £10k of income, you will only get approx £500 a year more, so it will hardly help you sleep easy. 

If you invest £10000 in your late 60s and you only live for 10 years you will leave behind your investment, but if you had of bought your so called annuity you will leave nothing. 

Actually, by delaying you get 580 plus inflation annually for life guaranteed.

By taking 10K and investing you get 300 plus inflation annually based on 3% SWR and your capital could still run out before you die. 

Inflation is added to the state pension but are you sure that it is also added to the additional £580

The average return on a passive interest tracker over the last 20 years has been far in excess of 3%

if you have more than enough to fund your retirement and are confident that you will live at least until your mid eighties I can see the benefit of deferring, but if not then I can’t.