Foolishness of the 4% rule

michaels

DT2001 said:

I took the thread heading as the original Bill Bengen theory. Your approach michaels tries to take into account where the market is at the time you retire which is better.
As a result of your comments I ended up listening to a podcast on madfientist.com when Michael Kitces is interviewed about the 4% rule and the correlation between CAPE 10 and future returns. Also the importance of the 1st 10/15 years of retirement - compounding in drawdown I suppose.

If you are investing globally do you weight your portfolio towards those countries with lower than historically (for them) CAPE 10 indices which theoretically will allow a higher SWR or where you might be psychologically happier (say U.K., Europe, USA) and a lower SWR?

Have you created your own CAPE 10 figure to reflect where you are invested?

Thanks, I will try and find the podcast.

The tool I am using is actually only showing results based on the S&P 500.  My investment is 30% cash and 70% global equities index (or will be if I rebalance following the recent run up in shares)

DT2001

https://www.madfientist.com/michael-kitces-interview/

Should have added this link

Justso65

I may be naive here and much of this discussion is new information to me that I love to research.

My situation is I have a DB pension I am planning to defer until 67 at which time it is calculating to give me £18k at today’s value.  Add to that the SP kicking in at the same time gives me around £27k.  Again add to that a £14k spouse DB pension gives a combined £41k at 67 and another SP in the near future.

So, I then want to fill that gap from now, 57, to those DB and SP numbers at 67 with what is currently a £450k DC pot and about £140k in savings and a small amount of investments.  I understand it’s silly to plan to raid the whole of that DC pot between now and 67 but I am working on the basis of a 4% withdrawal rate after taking into account a TFLS.  So worst case, and this is just an example, circa £110k TFLS leaving around £340k invested at some mix  Then taking 4% from that, add savings and TFLS money, and I get slightly more than my current take home pay in my hand.  My 4% (S)WR then covers my needs and whatever is left at 67 is able to augment the figures I stated at the start.  Worst case it is zero but anything above that is a bonus.  However, the worst case still leaves me and my wife safely covered with guaranteed income at 67.  

Does the above stand up to scrutiny or is it sadly naive?

Time4T_Accounts

A lot can happen in 10 years : have you covered off the event that no-one really likes to think about ... how the survivor is provided for in the event of the early death of one of you?

Justso65

My wife has her own savings and house is paid off.  If I leave the party early I understand she gets what’s left in my pot tax free along with any remaining savings.  My DB pension will provide a bit too and she has her own DB pension.  She’d be fine. 

[Deleted User]

Does the above stand up to scrutiny or is it sadly naive?

Subject to having a well thought through asset allocation, its not naive. Will work. Your main risk is that you will leave a lot of money on the table at the end of your story. 

ukdw

Justso65 said:

I may be naive here and much of this discussion is new information to me that I love to research.

My situation is I have a DB pension I am planning to defer until 67 at which time it is calculating to give me £18k at today’s value.  Add to that the SP kicking in at the same time gives me around £27k.  Again add to that a £14k spouse DB pension gives a combined £41k at 67 and another SP in the near future.

So, I then want to fill that gap from now, 57, to those DB and SP numbers at 67 with what is currently a £450k DC pot and about £140k in savings and a small amount of investments.  I understand it’s silly to plan to raid the whole of that DC pot between now and 67 but I am working on the basis of a 4% withdrawal rate after taking into account a TFLS.  So worst case, and this is just an example, circa £110k TFLS leaving around £340k invested at some mix  Then taking 4% from that, add savings and TFLS money, and I get slightly more than my current take home pay in my hand.  My 4% (S)WR then covers my needs and whatever is left at 67 is able to augment the figures I stated at the start.  Worst case it is zero but anything above that is a bonus.  However, the worst case still leaves me and my wife safely covered with guaranteed income at 67.  

Does the above stand up to scrutiny or is it sadly naive?

I think using the DC pot to bridge the intervening years prior to SP and DB is quite a good use of it.

Looks like you will have a combined gross income of about £50k once you both have your DBs and SPs - so the simplest thing to do would be to withdrawn up to £50k a year in real terms from your DC/Savings in the intervening years - which will leave about £100k of your savings left.  

The worst case after one of you dies - looks like your wife needing to survive on about £32k after loss of your SP and I assume half of your DB, backed up by £100k worth of savings which could create a further £4k - £5k income.   You could boost this by withdrawing a bit less than the £50k mentioned above.

Justso65

ukdw said:

Justso65 said:

I may be naive here and much of this discussion is new information to me that I love to research.

My situation is I have a DB pension I am planning to defer until 67 at which time it is calculating to give me £18k at today’s value.  Add to that the SP kicking in at the same time gives me around £27k.  Again add to that a £14k spouse DB pension gives a combined £41k at 67 and another SP in the near future.

So, I then want to fill that gap from now, 57, to those DB and SP numbers at 67 with what is currently a £450k DC pot and about £140k in savings and a small amount of investments.  I understand it’s silly to plan to raid the whole of that DC pot between now and 67 but I am working on the basis of a 4% withdrawal rate after taking into account a TFLS.  So worst case, and this is just an example, circa £110k TFLS leaving around £340k invested at some mix  Then taking 4% from that, add savings and TFLS money, and I get slightly more than my current take home pay in my hand.  My 4% (S)WR then covers my needs and whatever is left at 67 is able to augment the figures I stated at the start.  Worst case it is zero but anything above that is a bonus.  However, the worst case still leaves me and my wife safely covered with guaranteed income at 67.  

Does the above stand up to scrutiny or is it sadly naive?

I think using the DC pot to bridge the intervening years prior to SP and DB is quite a good use of it.

Looks like you will have a combined gross income of about £50k once you both have your DBs and SPs - so the simplest thing to do would be to withdrawn up to £50k a year in real terms from your DC/Savings in the intervening years - which will leave about £100k of your savings left.  

The worst case after one of you dies - looks like your wife needing to survive on about £32k after loss of your SP and I assume half of your DB, backed up by £100k worth of savings which could create a further £4k - £5k income.   You could boost this by withdrawing a bit less than the £50k mentioned above.

My plan is to crystalize £40k per year for 10 years.  Probably with a 3 year buffer.  Take £10k TFLS and the personal tax allowance each time giving around £22.5k tax free.  Top up with £14k from savings.  It wipes out the savings over 10 years but leaves around £17.5k per £40k still in the pension and able to grow.  Potentially a lot more in my pension after 10 years than the £100k your method leaves in my savings.  More available if I depart before 75 and still there to call on to top up if I need to.  I may slow down this withdrawal rate with the occasional bit of short term work or maintain the withdrawal rate and use short term work to top up savings or augment my pension.  Fortunately, the industry I work in has lots of opportunity for short term work.

ukdw

Justso65 said:

My plan is to crystalize £40k per year for 10 years.  Probably with a 3 year buffer.  Take £10k TFLS and the personal tax allowance each time giving around £22.5k tax free.  Top up with £14k from savings.  It wipes out the savings over 10 years but leaves around £17.5k per £40k still in the pension and able to grow.  Potentially a lot more in my pension after 10 years than the £100k your method leaves in my savings.  More available if I depart before 75 and still there to call on to top up if I need to.  I may slow down this withdrawal rate with the occasional bit of short term work or maintain the withdrawal rate and use short term work to top up savings or augment my pension.  Fortunately, the industry I work in has lots of opportunity for short term work.

Sounds good - However if you fancy spending a bit more while you are younger, I wouldn't personally worry too much about completely avoiding 20% tax - because unless you depart before 75 it is probably only be deferring the tax until after your DBs/SPs start.

I personally had a big debate with myself about whether to go for £12.5k drawdowns or £50k drawdowns - I went for £12.5k for a while, but kept thinking I might regret not using any of the 20% band (and risking paying a higher rate in the future),  so in the end I changed to £50k for the next few years, with excess drawdowns being reinvested into S&S ISAs.

Thrugelmir

Deleted_User said:

Does the above stand up to scrutiny or is it sadly naive?

Subject to having a well thought through asset allocation, its not naive. Will work. Your main risk is that you will leave a lot of money on the table at the end of your story. 

Then the woodland I leave behind as my legacy will be even bigger.