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Foolishness of the 4% rule

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  • MoJoeGo
    MoJoeGo Posts: 175 Forumite
    100 Posts Name Dropper
    MoJoeGo said:
    MoJoeGo said:
    jamesd said:
    As described above this is a pure strawman.  How many people would just blindly pick a number the day they retire and then draw that much down forever, refusing to take any other precautions such as 3 years' cash buffer, and stubbornly refuse to adjust despite their portfolio shrinking.
    ...
    I'm pretty keen on retiring early, so I have been working on the basis of 3%, i.e. to cover a longer time period than 4% was designed for.  This is despite being on track for full new state pension, and having a deferred DB pension amount to about half SP, together these two would cover my basic needs, so I like to believe my plans are pretty cautious.
    People are expected to use the constant inflation-adjusted income rule though it is recommended by assorted people including me to recalculate income since it doesn't incorporate market gains and assumes you're living through the historic worst case. If you do live through something worse you'd be expected to notice and react. But US average for this rule is 7% and it starts at only 4.1 or 4.2%, both for 30 years, so it's extremely cautious. Start at the UK 4% rule level and blindly follow it and your chance of failure is very low.

    At 3% you're planning on either worse than historic UK performance or living more than 45 years or using less than optimal investments, since 45 years US calculated 4% rule starts at 4.1% with 65% equities. Deducting the usual 0.3 for the UK that's 3.8%. Deducting a third* of say 0.6% in total costs cuts it to 3.6% for 45 years.

    *you don't deduct 100% of the costs on the initial balance because the balance and hence the costs decrease during the almost but not quite failing worst case. The right number turns out to be around a third of costs but there is variation. I pretty uniformly use a third or 30% because it's close enough, correct for the common 30 year US case and the error margin is lost in the market unpredictability noise.
    Or of course 3% is enough for your needs - for the missus and me, that should produce about 30k each, and then there's the state pension to come later. My guess is that will be more than enough for a very comfy retirement, and also a good amount to pass on to our children...
    Lets say you have 1 million pounds at the start of your retirement in 2022. Your portfolio drops to 300K on January 2nd 2023.  How much are you going to withdraw? 


    Seriously though, that would still give 18k between us at 3%, and whilst it would be frugal, we'd not exactly be on the breadline. Perhaps downsize, assuming the house was still worth more than when it was built in 1730...

    Ok, so you are using variable percentage withdrawal rather than Safe Withdrawal Rate.  In the latter case you’d be withdrawing 30k plus inflation. 
    Personally I'd go the latter but again, Mrs MJG is pretty conservative and I'm sure she'd be expecting us to cut our cloth based on a periodic mark to market of the portfolio... I may need to suggest engaging an IFA at some point!
  • Thrugelmir
    Thrugelmir Posts: 89,546 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Photogenic
    edited 28 August 2021 at 6:50PM
    Ibrahim5 said:
    You would have to have a different figure for people who use IFAs because the IFA takes out a large proportion of the investment returns for their fees.
    No you wouldn't. SWR is only about what level of withdrawal a pot can sustain, not what you spend it on. Two retirees with identical pots that are identically managed will have identical SWR, but the one without an IFA will have a bit more money to spend on other things. So if you have investment fees, taxes, debt payments, holidays, food etc they are all just expenses you need to pay for with your SWR.
    The comment is valid because people mean different things when they say “4% SWR”. Many use the number to apply after taxes and investment fees.  Regardless, fundamental problem is letter “S” in “SWR”. Mathematically there can be no “safe” and constant rate of withdrawal from a highly variable portfolio.
    Yes it's a bit of a mine field because people make assumptions and don't take the time to understand the parameters of the modeling. "SWR" depends greatly on a whole set of assumptions, but it does not include anything about what you spend the money on be it taxes, investments fees or rent. If it was to include things like investment fees it would be even more of a moving target. And, being cynical, I can see how financial advisors like Bergen would want to exclude them as they might take up to half of your initial spending when your retire.
    Investment returns are influenced by rates of corporate tax.  That's a minefield that's already being laid ahead. Though hasn't appeared to have registered yet with many investors given their expected growth rates in the years ahead. 
    The might be the case, and its history will be included in as part of the investment return data sets. SWR models don't tell you anything about the future. Maybe the misunderstanding of SWR models is quite well expressed in the title of this thread. 4% SWR isn't foolish, but it can be applied foolishly.
    SWR's have to follow rules to accomodate the future. There's no default safe option. However many hours one spends compiling data sets of historic periods when investing was a very different activity than it is today for a whole range of reasons. .
  • [Deleted User]
    [Deleted User] Posts: 0 Newbie
    1,000 Posts Third Anniversary Name Dropper
    edited 28 August 2021 at 10:02PM
    MoJoeGo said:
    MoJoeGo said:
    MoJoeGo said:
    jamesd said:
    As described above this is a pure strawman.  How many people would just blindly pick a number the day they retire and then draw that much down forever, refusing to take any other precautions such as 3 years' cash buffer, and stubbornly refuse to adjust despite their portfolio shrinking.
    ...
    I'm pretty keen on retiring early, so I have been working on the basis of 3%, i.e. to cover a longer time period than 4% was designed for.  This is despite being on track for full new state pension, and having a deferred DB pension amount to about half SP, together these two would cover my basic needs, so I like to believe my plans are pretty cautious.
    People are expected to use the constant inflation-adjusted income rule though it is recommended by assorted people including me to recalculate income since it doesn't incorporate market gains and assumes you're living through the historic worst case. If you do live through something worse you'd be expected to notice and react. But US average for this rule is 7% and it starts at only 4.1 or 4.2%, both for 30 years, so it's extremely cautious. Start at the UK 4% rule level and blindly follow it and your chance of failure is very low.

    At 3% you're planning on either worse than historic UK performance or living more than 45 years or using less than optimal investments, since 45 years US calculated 4% rule starts at 4.1% with 65% equities. Deducting the usual 0.3 for the UK that's 3.8%. Deducting a third* of say 0.6% in total costs cuts it to 3.6% for 45 years.

    *you don't deduct 100% of the costs on the initial balance because the balance and hence the costs decrease during the almost but not quite failing worst case. The right number turns out to be around a third of costs but there is variation. I pretty uniformly use a third or 30% because it's close enough, correct for the common 30 year US case and the error margin is lost in the market unpredictability noise.
    Or of course 3% is enough for your needs - for the missus and me, that should produce about 30k each, and then there's the state pension to come later. My guess is that will be more than enough for a very comfy retirement, and also a good amount to pass on to our children...
    Lets say you have 1 million pounds at the start of your retirement in 2022. Your portfolio drops to 300K on January 2nd 2023.  How much are you going to withdraw? 


    Seriously though, that would still give 18k between us at 3%, and whilst it would be frugal, we'd not exactly be on the breadline. Perhaps downsize, assuming the house was still worth more than when it was built in 1730...

    Ok, so you are using variable percentage withdrawal rather than Safe Withdrawal Rate.  In the latter case you’d be withdrawing 30k plus inflation. 
    Personally I'd go the latter but again, Mrs MJG is pretty conservative and I'm sure she'd be expecting us to cut our cloth based on a periodic mark to market of the portfolio... I may need to suggest engaging an IFA at some point!
    In my opinion Mrs MJG is spot on. Use her as your FA.  Its not “conservative”.  Its basic common sense.  Can’t withdraw from a variable portfolio at a constant rate. 

    If you want a constant withdrawal, buy an annuity. Or a partial annuity - to cover your basic needs. Then you can be more aggressive with your liquid portfolio and use it for discretionary  spending. 
  • bostonerimus
    bostonerimus Posts: 5,617 Forumite
    Sixth Anniversary 1,000 Posts Name Dropper
    edited 28 August 2021 at 7:28PM
    Ibrahim5 said:
    You would have to have a different figure for people who use IFAs because the IFA takes out a large proportion of the investment returns for their fees.
    No you wouldn't. SWR is only about what level of withdrawal a pot can sustain, not what you spend it on. Two retirees with identical pots that are identically managed will have identical SWR, but the one without an IFA will have a bit more money to spend on other things. So if you have investment fees, taxes, debt payments, holidays, food etc they are all just expenses you need to pay for with your SWR.
    The comment is valid because people mean different things when they say “4% SWR”. Many use the number to apply after taxes and investment fees.  Regardless, fundamental problem is letter “S” in “SWR”. Mathematically there can be no “safe” and constant rate of withdrawal from a highly variable portfolio.
    Yes it's a bit of a mine field because people make assumptions and don't take the time to understand the parameters of the modeling. "SWR" depends greatly on a whole set of assumptions, but it does not include anything about what you spend the money on be it taxes, investments fees or rent. If it was to include things like investment fees it would be even more of a moving target. And, being cynical, I can see how financial advisors like Bergen would want to exclude them as they might take up to half of your initial spending when your retire.
    Investment returns are influenced by rates of corporate tax.  That's a minefield that's already being laid ahead. Though hasn't appeared to have registered yet with many investors given their expected growth rates in the years ahead. 
    The might be the case, and its history will be included in as part of the investment return data sets. SWR models don't tell you anything about the future. Maybe the misunderstanding of SWR models is quite well expressed in the title of this thread. 4% SWR isn't foolish, but it can be applied foolishly.
    SWR's have to follow rules to accomodate the future. There's no default safe option. However many hours one spends compiling data sets of historic periods when investing was a very different activity than it is today for a whole range of reasons. .
    That's where people make the mistake. Bergen's SWR is purely historical. In it's most sophisticated forms it uses Monte Carlo to create many scenarios, but anyone using the results dogmatically is assuming future returns will be better than the worst case scenarios as there's no mechanism to modulate spending other than index linking. This runs in to the obvious problem that we don't know the future and we will live through only one set of market returns and it might be one of the 5% that fail drastically. Bergen SWR explicitly avoids rules to accommodate the future as the goal was to find one index linked SWR "to rule them all" so his clients would have stable income for their whole retirement. GK type algorithms allow for greater variability of income to extend the length of retirement, increase the probability of success or increase the withdrawal in good times, but you have to be prepared to cut your spending in bad times. Annuities and DB pensions certainly have some advantages...one might be lower blood pressure.
    “So we beat on, boats against the current, borne back ceaselessly into the past.”
  • Thrugelmir
    Thrugelmir Posts: 89,546 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Photogenic
    edited 28 August 2021 at 9:38PM
    Ibrahim5 said:
    You would have to have a different figure for people who use IFAs because the IFA takes out a large proportion of the investment returns for their fees.
    No you wouldn't. SWR is only about what level of withdrawal a pot can sustain, not what you spend it on. Two retirees with identical pots that are identically managed will have identical SWR, but the one without an IFA will have a bit more money to spend on other things. So if you have investment fees, taxes, debt payments, holidays, food etc they are all just expenses you need to pay for with your SWR.
    The comment is valid because people mean different things when they say “4% SWR”. Many use the number to apply after taxes and investment fees.  Regardless, fundamental problem is letter “S” in “SWR”. Mathematically there can be no “safe” and constant rate of withdrawal from a highly variable portfolio.
    Yes it's a bit of a mine field because people make assumptions and don't take the time to understand the parameters of the modeling. "SWR" depends greatly on a whole set of assumptions, but it does not include anything about what you spend the money on be it taxes, investments fees or rent. If it was to include things like investment fees it would be even more of a moving target. And, being cynical, I can see how financial advisors like Bergen would want to exclude them as they might take up to half of your initial spending when your retire.
    Investment returns are influenced by rates of corporate tax.  That's a minefield that's already being laid ahead. Though hasn't appeared to have registered yet with many investors given their expected growth rates in the years ahead. 
    The might be the case, and its history will be included in as part of the investment return data sets. SWR models don't tell you anything about the future. Maybe the misunderstanding of SWR models is quite well expressed in the title of this thread. 4% SWR isn't foolish, but it can be applied foolishly.
    SWR's have to follow rules to accomodate the future. There's no default safe option. However many hours one spends compiling data sets of historic periods when investing was a very different activity than it is today for a whole range of reasons. .
    That's where people make the mistake. Bergen's SWR is purely historical. In it's most sophisticated forms it uses Monte Carlo to create many scenarios, but anyone using the results dogmatically is assuming future returns will be better than the worst case scenarios as there's no mechanism to modulate spending other than index linking. This runs in to the obvious problem that we don't know the future and we will live through only one set of market returns and it might be one of the 5% that fail drastically. Bergen SWR explicitly avoids rules to accommodate the future as the goal was to find one index linked SWR "to rule them all" so his clients would have stable income for their whole retirement. GK type algorithms allow for greater variability of income to extend the length of retirement, increase the probability of success or increase the withdrawal in good times, but you have to be prepared to cut your spending in bad times. Annuities and DB pensions certainly have some advantages...one might be lower blood pressure.
    The greater mistake is to suggest that Bergen is relevant to investors in the UK. 


  • cfw1994
    cfw1994 Posts: 2,128 Forumite
    Part of the Furniture 1,000 Posts Hung up my suit! Name Dropper
    edited 28 August 2021 at 9:38PM
    Ibrahim5 said:
    You would have to have a different figure for people who use IFAs because the IFA takes out a large proportion of the investment returns for their fees.
    No you wouldn't. SWR is only about what level of withdrawal a pot can sustain, not what you spend it on. Two retirees with identical pots that are identically managed will have identical SWR, but the one without an IFA will have a bit more money to spend on other things. So if you have investment fees, taxes, debt payments, holidays, food etc they are all just expenses you need to pay for with your SWR.
    The comment is valid because people mean different things when they say “4% SWR”. Many use the number to apply after taxes and investment fees.  Regardless, fundamental problem is letter “S” in “SWR”. Mathematically there can be no “safe” and constant rate of withdrawal from a highly variable portfolio.
    Yes it's a bit of a mine field because people make assumptions and don't take the time to understand the parameters of the modeling. "SWR" depends greatly on a whole set of assumptions, but it does not include anything about what you spend the money on be it taxes, investments fees or rent. If it was to include things like investment fees it would be even more of a moving target. And, being cynical, I can see how financial advisors like Bergen would want to exclude them as they might take up to half of your initial spending when your retire.
    Investment returns are influenced by rates of corporate tax.  That's a minefield that's already being laid ahead. Though hasn't appeared to have registered yet with many investors given their expected growth rates in the years ahead. 
    The might be the case, and its history will be included in as part of the investment return data sets. SWR models don't tell you anything about the future. Maybe the misunderstanding of SWR models is quite well expressed in the title of this thread. 4% SWR isn't foolish, but it can be applied foolishly.
    SWR's have to follow rules to accomodate the future. There's no default safe option. However many hours one spends compiling data sets of historic periods when investing was a very different activity than it is today for a whole range of reasons. .
    That's where people make the mistake. Bergen's SWR is purely historical. In it's most sophisticated forms it uses Monte Carlo to create many scenarios, but anyone using the results dogmatically is assuming future returns will be better than the worst case scenarios as there's no mechanism to modulate spending other than index linking. This runs in to the obvious problem that we don't know the future and we will live through only one set of market returns and it might be one of the 5% that fail drastically. Bergen SWR explicitly avoids rules to accommodate the future as the goal was to find one index linked SWR "to rule them all" so his clients would have stable income for their whole retirement. GK type algorithms allow for greater variability of income to extend the length of retirement, increase the probability of success or increase the withdrawal in good times, but you have to be prepared to cut your spending in bad times. Annuities and DB pensions certainly have some advantages...one might be lower blood pressure.
    The greater mistake is to suggest that Bergen is relevant to investors in the UK. 

    Each to their own....I'd suggest that thinking the UK is something to be treated on it's own in the current global economy would be a greater mistake.....

    Never understand why some people think these things should be UK-specific.  The UK is generally held to be less than 4-6% of global GDP....I would suggest it unwise to be blinkered to only consider UK topics where investing is concerned.   IMHO, of course: other views are value.

    Of course one could drop the 4% to 3.5%, as some commentators suggest.
    Equally, one could read how Bergen felt it too low anyway, and could raise it  ;)
    Plan for tomorrow, enjoy today!
  • Thrugelmir
    Thrugelmir Posts: 89,546 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Photogenic
    edited 28 August 2021 at 10:12PM
    cfw1994 said:
    Ibrahim5 said:
    You would have to have a different figure for people who use IFAs because the IFA takes out a large proportion of the investment returns for their fees.
    No you wouldn't. SWR is only about what level of withdrawal a pot can sustain, not what you spend it on. Two retirees with identical pots that are identically managed will have identical SWR, but the one without an IFA will have a bit more money to spend on other things. So if you have investment fees, taxes, debt payments, holidays, food etc they are all just expenses you need to pay for with your SWR.
    The comment is valid because people mean different things when they say “4% SWR”. Many use the number to apply after taxes and investment fees.  Regardless, fundamental problem is letter “S” in “SWR”. Mathematically there can be no “safe” and constant rate of withdrawal from a highly variable portfolio.
    Yes it's a bit of a mine field because people make assumptions and don't take the time to understand the parameters of the modeling. "SWR" depends greatly on a whole set of assumptions, but it does not include anything about what you spend the money on be it taxes, investments fees or rent. If it was to include things like investment fees it would be even more of a moving target. And, being cynical, I can see how financial advisors like Bergen would want to exclude them as they might take up to half of your initial spending when your retire.
    Investment returns are influenced by rates of corporate tax.  That's a minefield that's already being laid ahead. Though hasn't appeared to have registered yet with many investors given their expected growth rates in the years ahead. 
    The might be the case, and its history will be included in as part of the investment return data sets. SWR models don't tell you anything about the future. Maybe the misunderstanding of SWR models is quite well expressed in the title of this thread. 4% SWR isn't foolish, but it can be applied foolishly.
    SWR's have to follow rules to accomodate the future. There's no default safe option. However many hours one spends compiling data sets of historic periods when investing was a very different activity than it is today for a whole range of reasons. .
    That's where people make the mistake. Bergen's SWR is purely historical. In it's most sophisticated forms it uses Monte Carlo to create many scenarios, but anyone using the results dogmatically is assuming future returns will be better than the worst case scenarios as there's no mechanism to modulate spending other than index linking. This runs in to the obvious problem that we don't know the future and we will live through only one set of market returns and it might be one of the 5% that fail drastically. Bergen SWR explicitly avoids rules to accommodate the future as the goal was to find one index linked SWR "to rule them all" so his clients would have stable income for their whole retirement. GK type algorithms allow for greater variability of income to extend the length of retirement, increase the probability of success or increase the withdrawal in good times, but you have to be prepared to cut your spending in bad times. Annuities and DB pensions certainly have some advantages...one might be lower blood pressure.
    The greater mistake is to suggest that Bergen is relevant to investors in the UK. 

    Each to their own....I'd suggest that thinking the UK is something to be treated on it's own in the current global economy would be a greater mistake.....

    Never understand why some people think these things should be UK-specific.  The UK is generally held to be less than 4-6% of global GDP....I would suggest it unwise to be blinkered to only consider UK topics where investing is concerned.   IMHO, of course: other views are value.
    My comment was purely in relation to Bergen's (unpublished) work, nothing else.  

    (PS. As an investor you'd be unwise to invest solely on the basis of global GDP. As you'd find yourself highly exposed to China and other less desirable markets). 
  • bostonerimus
    bostonerimus Posts: 5,617 Forumite
    Sixth Anniversary 1,000 Posts Name Dropper
    Ibrahim5 said:
    You would have to have a different figure for people who use IFAs because the IFA takes out a large proportion of the investment returns for their fees.
    No you wouldn't. SWR is only about what level of withdrawal a pot can sustain, not what you spend it on. Two retirees with identical pots that are identically managed will have identical SWR, but the one without an IFA will have a bit more money to spend on other things. So if you have investment fees, taxes, debt payments, holidays, food etc they are all just expenses you need to pay for with your SWR.
    The comment is valid because people mean different things when they say “4% SWR”. Many use the number to apply after taxes and investment fees.  Regardless, fundamental problem is letter “S” in “SWR”. Mathematically there can be no “safe” and constant rate of withdrawal from a highly variable portfolio.
    Yes it's a bit of a mine field because people make assumptions and don't take the time to understand the parameters of the modeling. "SWR" depends greatly on a whole set of assumptions, but it does not include anything about what you spend the money on be it taxes, investments fees or rent. If it was to include things like investment fees it would be even more of a moving target. And, being cynical, I can see how financial advisors like Bergen would want to exclude them as they might take up to half of your initial spending when your retire.
    Investment returns are influenced by rates of corporate tax.  That's a minefield that's already being laid ahead. Though hasn't appeared to have registered yet with many investors given their expected growth rates in the years ahead. 
    The might be the case, and its history will be included in as part of the investment return data sets. SWR models don't tell you anything about the future. Maybe the misunderstanding of SWR models is quite well expressed in the title of this thread. 4% SWR isn't foolish, but it can be applied foolishly.
    SWR's have to follow rules to accomodate the future. There's no default safe option. However many hours one spends compiling data sets of historic periods when investing was a very different activity than it is today for a whole range of reasons. .
    That's where people make the mistake. Bergen's SWR is purely historical. In it's most sophisticated forms it uses Monte Carlo to create many scenarios, but anyone using the results dogmatically is assuming future returns will be better than the worst case scenarios as there's no mechanism to modulate spending other than index linking. This runs in to the obvious problem that we don't know the future and we will live through only one set of market returns and it might be one of the 5% that fail drastically. Bergen SWR explicitly avoids rules to accommodate the future as the goal was to find one index linked SWR "to rule them all" so his clients would have stable income for their whole retirement. GK type algorithms allow for greater variability of income to extend the length of retirement, increase the probability of success or increase the withdrawal in good times, but you have to be prepared to cut your spending in bad times. Annuities and DB pensions certainly have some advantages...one might be lower blood pressure.
    The greater mistake is to suggest that Bergen is relevant to investors in the UK. 


    Bergen is an old study using US data, but the idea and methodology are equally relevant in the UK, you just have to start off with the relevant data sets. It's certainly invalid to assume that a UK retiree only invests in UK markets and will probably now have a high percentage of US stocks and equally the US investor will have more non-US equity and bonds than they did in the 80s and 90s. The important thing is to actually understand what Bergen or GK etc are telling you and the assumptions baked into the results rather than just taking out 4% without regard to your own individual parameters and circumstances.
    “So we beat on, boats against the current, borne back ceaselessly into the past.”
  • bostonerimus
    bostonerimus Posts: 5,617 Forumite
    Sixth Anniversary 1,000 Posts Name Dropper
    cfw1994 said:
    Ibrahim5 said:
    You would have to have a different figure for people who use IFAs because the IFA takes out a large proportion of the investment returns for their fees.
    No you wouldn't. SWR is only about what level of withdrawal a pot can sustain, not what you spend it on. Two retirees with identical pots that are identically managed will have identical SWR, but the one without an IFA will have a bit more money to spend on other things. So if you have investment fees, taxes, debt payments, holidays, food etc they are all just expenses you need to pay for with your SWR.
    The comment is valid because people mean different things when they say “4% SWR”. Many use the number to apply after taxes and investment fees.  Regardless, fundamental problem is letter “S” in “SWR”. Mathematically there can be no “safe” and constant rate of withdrawal from a highly variable portfolio.
    Yes it's a bit of a mine field because people make assumptions and don't take the time to understand the parameters of the modeling. "SWR" depends greatly on a whole set of assumptions, but it does not include anything about what you spend the money on be it taxes, investments fees or rent. If it was to include things like investment fees it would be even more of a moving target. And, being cynical, I can see how financial advisors like Bergen would want to exclude them as they might take up to half of your initial spending when your retire.
    Investment returns are influenced by rates of corporate tax.  That's a minefield that's already being laid ahead. Though hasn't appeared to have registered yet with many investors given their expected growth rates in the years ahead. 
    The might be the case, and its history will be included in as part of the investment return data sets. SWR models don't tell you anything about the future. Maybe the misunderstanding of SWR models is quite well expressed in the title of this thread. 4% SWR isn't foolish, but it can be applied foolishly.
    SWR's have to follow rules to accomodate the future. There's no default safe option. However many hours one spends compiling data sets of historic periods when investing was a very different activity than it is today for a whole range of reasons. .
    That's where people make the mistake. Bergen's SWR is purely historical. In it's most sophisticated forms it uses Monte Carlo to create many scenarios, but anyone using the results dogmatically is assuming future returns will be better than the worst case scenarios as there's no mechanism to modulate spending other than index linking. This runs in to the obvious problem that we don't know the future and we will live through only one set of market returns and it might be one of the 5% that fail drastically. Bergen SWR explicitly avoids rules to accommodate the future as the goal was to find one index linked SWR "to rule them all" so his clients would have stable income for their whole retirement. GK type algorithms allow for greater variability of income to extend the length of retirement, increase the probability of success or increase the withdrawal in good times, but you have to be prepared to cut your spending in bad times. Annuities and DB pensions certainly have some advantages...one might be lower blood pressure.
    The greater mistake is to suggest that Bergen is relevant to investors in the UK. 

    Each to their own....I'd suggest that thinking the UK is something to be treated on it's own in the current global economy would be a greater mistake.....

    Never understand why some people think these things should be UK-specific.  The UK is generally held to be less than 4-6% of global GDP....I would suggest it unwise to be blinkered to only consider UK topics where investing is concerned.   IMHO, of course: other views are value.

    Of course one could drop the 4% to 3.5%, as some commentators suggest.
    Equally, one could read how Bergen felt it too low anyway, and could raise it  ;)
    Having worked on several large engineering projects I never like working at the limits so when I first started planning my drawdown I used 2% and stress tested below that.
    “So we beat on, boats against the current, borne back ceaselessly into the past.”
  • michaels
    michaels Posts: 29,119 Forumite
    Part of the Furniture 10,000 Posts Photogenic Name Dropper
    cfw1994 said:
    Ibrahim5 said:
    You would have to have a different figure for people who use IFAs because the IFA takes out a large proportion of the investment returns for their fees.
    No you wouldn't. SWR is only about what level of withdrawal a pot can sustain, not what you spend it on. Two retirees with identical pots that are identically managed will have identical SWR, but the one without an IFA will have a bit more money to spend on other things. So if you have investment fees, taxes, debt payments, holidays, food etc they are all just expenses you need to pay for with your SWR.
    The comment is valid because people mean different things when they say “4% SWR”. Many use the number to apply after taxes and investment fees.  Regardless, fundamental problem is letter “S” in “SWR”. Mathematically there can be no “safe” and constant rate of withdrawal from a highly variable portfolio.
    Yes it's a bit of a mine field because people make assumptions and don't take the time to understand the parameters of the modeling. "SWR" depends greatly on a whole set of assumptions, but it does not include anything about what you spend the money on be it taxes, investments fees or rent. If it was to include things like investment fees it would be even more of a moving target. And, being cynical, I can see how financial advisors like Bergen would want to exclude them as they might take up to half of your initial spending when your retire.
    Investment returns are influenced by rates of corporate tax.  That's a minefield that's already being laid ahead. Though hasn't appeared to have registered yet with many investors given their expected growth rates in the years ahead. 
    The might be the case, and its history will be included in as part of the investment return data sets. SWR models don't tell you anything about the future. Maybe the misunderstanding of SWR models is quite well expressed in the title of this thread. 4% SWR isn't foolish, but it can be applied foolishly.
    SWR's have to follow rules to accomodate the future. There's no default safe option. However many hours one spends compiling data sets of historic periods when investing was a very different activity than it is today for a whole range of reasons. .
    That's where people make the mistake. Bergen's SWR is purely historical. In it's most sophisticated forms it uses Monte Carlo to create many scenarios, but anyone using the results dogmatically is assuming future returns will be better than the worst case scenarios as there's no mechanism to modulate spending other than index linking. This runs in to the obvious problem that we don't know the future and we will live through only one set of market returns and it might be one of the 5% that fail drastically. Bergen SWR explicitly avoids rules to accommodate the future as the goal was to find one index linked SWR "to rule them all" so his clients would have stable income for their whole retirement. GK type algorithms allow for greater variability of income to extend the length of retirement, increase the probability of success or increase the withdrawal in good times, but you have to be prepared to cut your spending in bad times. Annuities and DB pensions certainly have some advantages...one might be lower blood pressure.
    The greater mistake is to suggest that Bergen is relevant to investors in the UK. 

    Each to their own....I'd suggest that thinking the UK is something to be treated on it's own in the current global economy would be a greater mistake.....

    Never understand why some people think these things should be UK-specific.  The UK is generally held to be less than 4-6% of global GDP....I would suggest it unwise to be blinkered to only consider UK topics where investing is concerned.   IMHO, of course: other views are value.

    Of course one could drop the 4% to 3.5%, as some commentators suggest.
    Equally, one could read how Bergen felt it too low anyway, and could raise it  ;)
    Having worked on several large engineering projects I never like working at the limits so when I first started planning my drawdown I used 2% and stress tested below that.
    At 2% you could just buy an index linked annuity and forget about it....
    I think....
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