Foolishness of the 4% rule

Thrugelmir

bostonerimus said:

cfw1994 said:

Thrugelmir said:

bostonerimus said:

Thrugelmir said:

bostonerimus said:

Thrugelmir said:

bostonerimus said:

Deleted_User said:

bostonerimus 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.

You have additional income sources though. Rather different to someone who is dependent on their SWR for a high % of their income and needs to plan accordingly. 

bostonerimus

Thrugelmir said:

bostonerimus said:

cfw1994 said:

Thrugelmir said:

bostonerimus said:

Thrugelmir said:

bostonerimus said:

Thrugelmir said:

bostonerimus said:

Deleted_User said:

bostonerimus 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.

You have additional income sources though. Rather different to someone who is dependent on their SWR for a high % of their income and needs to plan accordingly. 

That's true, but I did the planning and stress testing before I had the pension and didn't include the rental income. It was intended to inform the rate of saving and investing return I needed to amass a "safe" retirement pot amount.

bostonerimus

michaels said:

bostonerimus said:

cfw1994 said:

Thrugelmir said:

bostonerimus said:

Thrugelmir said:

bostonerimus said:

Thrugelmir said:

bostonerimus said:

Deleted_User said:

bostonerimus 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 had bought a variable annuity many years ago and also have other income sources, but my goal was to see if I could live off just the natural yield from my portfolio. That's the original old fashioned income withdrawal rate. 

IvanOpinion

Being close to retirement I have been putting numbers into many different online calculators and the one thing that springs to mind is that they ALL try to tell you that you need to give them more money to be 'safe'.  At the minute I am of the impression that this is deliberate and these calculators are more about upselling than they are about informing.

cfw1994

bostonerimus said:

Thrugelmir said:

bostonerimus said:

cfw1994 said:

Thrugelmir said:

bostonerimus said:

Thrugelmir said:

bostonerimus said:

Thrugelmir said:

bostonerimus said:

Deleted_User said:

bostonerimus 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.

You have additional income sources though. Rather different to someone who is dependent on their SWR for a high % of their income and needs to plan accordingly. 

That's true, but I did the planning and stress testing before I had the pension and didn't include the rental income. It was intended to inform the rate of saving and investing return I needed to amass a "safe" retirement pot amount.

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.

IvanOpinion said:

Being close to retirement I have been putting numbers into many different online calculators and the one thing that springs to mind is that they ALL try to tell you that you need to give them more money to be 'safe'.  At the minute I am of the impression that this is deliberate and these calculators are more about upselling than they are about informing.

Heh heh!  

You may be right!

I strongly suspect that anyone using financial advisors are working longer than they might need to.
No FA/IFA can run the risk of you running out of money: that would be terrible for their business!
The only real way to ‘guarantee’ that is to take the @bostonerimus approach, & work off super-safe % SWR numbers.

Unless some want to step in and confirm they happily recommend & work with 4% or G-K rules?

Note, I am not saying that is wrong, & I recognise that most people are risk-averse (& most retirement risk aversity tests perhaps lean people that way 😉).
Many also need help managing their money: we are, generally speaking, a terrible nation at training/educating people how to manage money.

It makes perfect sense…..but it does take some ‘play’ years away from people.  

I also note there is risk in not following that super-safe approach.  I temper that with flexibility, & other personal circumstances and possibilities.

Albermarle

I also note there is risk in not following that super-safe approach.  I temper that with flexibility, & other personal circumstances and possibilities.

Vanguard call this approach The Dynamic Spending Rule .

Setting a strategy for retirement withdrawals | Vanguard

Basically a compromise between SWR, and % of portfolio , probably similar to GK rules ( if I understood them )

Personally I like a good compromise !

MoJoeGo

Deleted_User said:

MoJoeGo said:

Deleted_User said:

MoJoeGo said:

Deleted_User said:

MoJoeGo said:

jamesd said:

kuratowski 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. 

If it were a very protracted downturn then I'd agree but the whole idea of having a decent cash buffer is to ride out the bumps, and using your example, avoid having to go from 60k to 18k from one year to the next...

cfw1994

Albermarle said:

I also note there is risk in not following that super-safe approach.  I temper that with flexibility, & other personal circumstances and possibilities.

Vanguard call this approach The Dynamic Spending Rule .

Setting a strategy for retirement withdrawals | Vanguard

Basically a compromise between SWR, and % of portfolio , probably similar to GK rules ( if I understood them )

Personally I like a good compromise !

That is well written!
I feel like it describes (broadly) how we plan to operate (dynamic spending) pretty well.  

I agree that being flexible and able to compromise is a strong help.
Covid19 made us all compromise on travel….& we all have our other own goals/hopes/aspirations that we can perhaps temper should markets take a tumble.

Stubod

..I always considered the 4% "rule" to be just a general guide that gives you an indication as to whether you have enough to go?

I would be amazed if anybody just blindly took out the 4% of the starting pot each year (adjusted for inflation), without considering the actual state of their portfolio!

We need significantly more than 4% for the first year, (probably double), but significantly less once private and state pensions kick in, (more like 1 or 2%?) and we also have a cash pot "just in case".

bostonerimus

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.