Foolishness of the 4% rule

[Deleted User]

marlot said:

Deleted_User said:

Malthusian said:

For years the only purpose of RPI-linked annuities has been to enable people to calculate the value of a DB pension at "open market rates" so they can point out how valuable they are.

I have never encountered one in the wild (though plenty of level annuities). Due to how long it takes to make up the income forgone, combined with the fact that expenditure generally decreases as you get older, they don't make sense for anybody. Unless you are so terrified of running out of money that the only difference an annuity makes is how much money you have available to stuff into shoeboxes.

Hardly anyone sells RPI linked annuities so they are not competitively priced.  Seem to be used primarily to claim that “annuities are bad”. 

Given that the RPI measure itself has been under threat for some time, it would be brave to buy an RPI link.

I think it's now due to go in 2028.

I'd love it to persist longer - two of my DB pensions are RPI linked.

What will replace it?  

MK62

Deleted_User said:

marlot said:

Deleted_User said:

Malthusian said:

For years the only purpose of RPI-linked annuities has been to enable people to calculate the value of a DB pension at "open market rates" so they can point out how valuable they are.

I have never encountered one in the wild (though plenty of level annuities). Due to how long it takes to make up the income forgone, combined with the fact that expenditure generally decreases as you get older, they don't make sense for anybody. Unless you are so terrified of running out of money that the only difference an annuity makes is how much money you have available to stuff into shoeboxes.

Hardly anyone sells RPI linked annuities so they are not competitively priced.  Seem to be used primarily to claim that “annuities are bad”. 

Given that the RPI measure itself has been under threat for some time, it would be brave to buy an RPI link.

I think it's now due to go in 2028.

I'd love it to persist longer - two of my DB pensions are RPI linked.

What will replace it?  

Currently looks like CPIH!

Terron

The 4% rule is not foolish, not nonsense, and not ridiculous.
He obviously looked at what people wanted from a pension - a secure, inflation proof income - like a good DB pension or the SP. Then he looked at what it would take to produce such an income from a given pot. All perfectly reasonable.
It has limitations and there are improvements that have been found, but the core idea is sound.
It is also simple enough to be useful in setting savings targets.

[Deleted User]

Simple in this case does not translate to “makes any sense”. Just makes a nonsensical rule popular which is not a good thing

Sea_Shell

The 4% rule isn't perfect, but surely it's a starting point to get people thinking about their pensions, their plans and their spending needs.

More people actually engaging with their pension savings, and the possible shortcomings of it, must be a good thing.

Better that than pay no attention to it until you reach SP age, and then realise it falls way short of what you'd hoped.

If everyone had a pot that could give them 4% and cover their retirement needs, they're in a better position than those who don't.

Terron

Deleted_User said:

Simple in this case does not translate to “makes any sense”. Just makes a nonsensical rule popular which is not a good thing

I just explained how it does make sense. Don't just claim it doesn't. Explain why.
BTW I have read through this thread, and you previous comments do not make the case that it doesn't.

[Deleted User]

Terron said:

Deleted_User said:

Simple in this case does not translate to “makes any sense”. Just makes a nonsensical rule popular which is not a good thing

I just explained how it does make sense. Don't just claim it doesn't. Explain why.
BTW I have read through this thread, and you previous comments do not make the case that it doesn't.

I'll just be repeating myself.  If you are invested in a market then the market could go down by 90% or up by 50% within a year or 2.  It's not reasonable to expect a "safe" AND "constant" rate of return from such a variable function.  If this year you have 1000 potatoes and next year you may have 2000 potatoes or possibly 10 potatoes you can't "safely" withdraw 100 potatoes every year. Mathematical nonsense.  

Moshe Milevsky provides a colourful practical example in the podcast in the original post.  It's either "safe" or "constant".  

You think it does make sense?  Great.  You did not actually provide an argument that the 4% rule makes sense.  You just said "that's what people want".  Wanting is cool.  I want all sorts of things.  It's neither here nor there as far as making sense is concerned.  Then you said "he looked what would it take".  The problem is that it was a fundamentally flawed approach.  He used a probabilistic approach based on 100 years' worth of data and made an assumption about next 30 years being the same.  I can throw a coin 3 times and get heads and then the forth time it will fall through the crack altogether.  100 years' is a really short dataset in the context of modern retirement.  

Personally, I have a strong suspicion that real-world retirees have more common sense than continue drawing the same amount regardless of whether the market doubled or halved. 

And if you really want a rate of withdrawal that is both constant and safe, then there are practical ways of achieving it. Just not the "4% rule". 

Terron

Deleted_User said:

Terron said:

Deleted_User said:

Simple in this case does not translate to “makes any sense”. Just makes a nonsensical rule popular which is not a good thing

I just explained how it does make sense. Don't just claim it doesn't. Explain why.
BTW I have read through this thread, and you previous comments do not make the case that it doesn't.

I'll just be repeating myself.  If you are invested in a market then the market could go down by 90% or up by 50% within a year or 2.  It's not reasonable to expect a "safe" AND "constant" rate of return from such a variable function. If this year you have 1000 potatoes and next year you may have 2000 potatoes or possibly 10 potatoes you can't "safely" withdraw 100 potatoes every year. Mathematical nonsense.  

Moshe Milevsky provides a colourful practical example in the podcast in the original post.  It's either "safe" or "constant".  

You think it does make sense?  Great.  You did not actually provide an argument that the 4% rule makes sense.  You just said "that's what people want".  Wanting is cool.  I want all sorts of things.  It's neither here nor there as far as making sense is concerned.  Then you said "he looked what would it take".  The problem is that it was a fundamentally flawed approach.  He used a probabilistic approach based on 100 years' worth of data and made an assumption about next 30 years being the same.  I can throw a coin 3 times and get heads and then the forth time it will fall through the crack altogether.  100 years' is a really short dataset in the context of modern retirement.  

Personally, I have a strong suspicion that real-world retirees have more common sense than continue drawing the same amount regardless of whether the market doubled or halved. 

And if you really want a rate of withdrawal that is both constant and safe, then there are practical ways of achieving it. Just not the "4% rule". 

Now that's largely nonsense.
You say it is not reasonable to expect a safe and constant income from a pension, but that is just what good DB pensions and the SP promise. It is entirely reasonable to hope for the same from a DC pension. 
It may have been that it was not possible as you suggest, but the research contradicts that. The best guide to the future we have - the past - says it is possible. Maybe the future will be worst that the worst of the part of the past that was considered, but it is not nonsense to consider that unlikely. You seem to disagree with that. That's fine. That is a reasonable point to disagree with it, but claiming it makes it nonsense is just you being nonsensical.
Tossing a coin is an entirely random event. The stock markets are not entirely random. That is a false comparison.
Your claim that is is mathematical nonsense is itself nonsense. The mathematics is sound. Your analogy is the nonsense.
Your claim that I did not provide an argument is just a lie. You may disagree with it, but I certainly provided one. You apparent misunderstanding of it does not change that.
What real world retirees might do is irrelevant to whether the rule makes sense. The point of the research was to see is such a strategy could have coped with the worst the market has thrown at it in the past, and the answer was yes. Unless the future is worst that the past (including the great depression, WW2, and the 70s inflation) the strategy would cope. If people did adjust their spending that would just make it even safer.
The 4% (or 3.5% for the UK) rule has been shown to have worked for over 100 years. It is entirely reasonable and sensible to assume it is very likely to work for another 30, or that if things get so bad that it stops working you will have more serious things to worry about.

Certainly there are other options that are likely to be better, but that does not make the 4% rule nonsense or even wrong, just not optimal.

[Deleted User]

Cool. Good luck. 

[Deleted User]

Great book, by the way.  https://www.goodreads.com/book/show/40242274-a-random-walk-down-wall-street