Foolishness of the 4% rule

CloesUnc

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.

Hi Bostonerimus,

I was just please wondering how did you decide whether to take your DB pension early compared to drawing from your pot and deferring your DB for higher guaranteed income?

This is a choice I have to make at some point and I'm curious regarding others' thought processes.

Thanks.

cfw1994

CloesUnc said:

Hi Bostonerimus,

I was just please wondering how did you decide whether to take your DB pension early compared to drawing from your pot and deferring your DB for higher guaranteed income?

This is a choice I have to make at some point and I'm curious regarding others' thought processes.

Thanks.

FWIW, I do NOT plan to take my (smallish) DB pensions early, and indeed have factored their %LTA numbers into my TFLS-withdrawal transactions on the main DC pot I am now relying on until they kick in.

I figure that as I get older, I might be less inclined to want to spend my spare time dabbling in the financial side of things, therefore the higher the DB+State pension monies which trickle in from 60-67 years of age, the better!

It does mean that the DC pot will be pillaged a little more earlier on, but that makes sense to me.   

Never underestimate the value of a decent spreadsheet to try to plot & plan things along the way....ours looks along the lines of this:



#NothingIsGuaranteedExceptDeath&Taxes

[Deleted User]

DB+State pension monies which trickle in from 60-67 years of age, the better!

Delaying state pension to 70 makes sense for everyone who can get by without drawing it. 

[Deleted User]

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. 

bostonerimus

CloesUnc 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.

Hi Bostonerimus,

I was just please wondering how did you decide whether to take your DB pension early compared to drawing from your pot and deferring your DB for higher guaranteed income?

This is a choice I have to make at some point and I'm curious regarding others' thought processes.

Thanks.

Full disclosure I'm a UK expat living in the USA and joined the forum as I'm thinking of returning to the UK sometime.
I did take my DB pension early at age 55. I put together a few spreadsheets and looked at the greater DB amount with deferral, but the breakeven point tends to be in the early 80s and basically I'd rather have the sufficient guaranteed income early to make retirement less stressful. Ultimately I just considered the DB pension as part of my fixed income allocation. I had another small DB pension from an early job and I took the cash value for that as I didn't need any more guaranteed income.

bostonerimus

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. 

I have a few charities and three nieces to whom I hope to leave money. I have a good lifestyle, but don't feel the need to spend for no reason.

CloesUnc

bostonerimus said:

CloesUnc 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.

Hi Bostonerimus,

I was just please wondering how did you decide whether to take your DB pension early compared to drawing from your pot and deferring your DB for higher guaranteed income?

This is a choice I have to make at some point and I'm curious regarding others' thought processes.

Thanks.

Full disclosure I'm a UK expat living in the USA and joined the forum as I'm thinking of returning to the UK sometime.
I did take my DB pension early at age 55. I put together a few spreadsheets and looked at the greater DB amount with deferral, but the breakeven point tends to be in the early 80s and basically I'd rather have the sufficient guaranteed income early to make retirement less stressful. Ultimately I just considered the DB pension as part of my fixed income allocation. I had another small DB pension from an early job and I took the cash value for that as I didn't need any more guaranteed income.

Understood. This is what I think also.

I have a DB with NRA of 67, but if I retire at 55  I don't think I would want to wait that long, given I also aim to have full SP by then. I could defer to age 60 (to coincide with the NRA of another DB), but the breakeven point (total amount returned over the years) is around 80 whether I take it at 55 or 60.  

The point is that I can reduce the amount I draw from my ISA each year to much less than any of the prescribed SWRs if I draw the DB, and I could also even invest from the pension into my ISA.

bostonerimus

Retirement planning isn't always about maximizing your income, there's the quality of life to be considered too. I didn't want to have to worry about doing drawdown so my goal was to get enough guaranteed income to live comfortably and as soon as that happened I retired so I could spend time on other things. I could easily have worked longer, got a bigger DB amount and saved even more to my retirement pot, but the extra years to do exactly what I wanted were more important.

Audaxer

Deleted_User said:

DB+State pension monies which trickle in from 60-67 years of age, the better!

Delaying state pension to 70 makes sense for everyone who can get by without drawing it. 

As deferring the new state pension increases at I think around 5.8% per year, I'm wondering how long it would take to recoup the missed pension if you have deferred it for say 4 years from age 66 to 70?

DT2001

bostonerimus said:

DT2001 said:

As tacpot12 says not applicable to the U.K. however if it makes you question the size of your ‘pot’ and your strategy for withdrawal it is a starting point.
Bill Bengen said it was actually 4.2% and I think he used 4.5% personally by diversifying into more asset classes.

It would be foolish to apply the rule and then ignore what is happening around you for the set 30 years of your retirement!

It was for the US market and written in the early 90’s.

As the discussion says flexibility is the key. In the U.K. how many people only have an investment pot to fund their retirement?

What strategy does the OP use?

Bill Bergen type SWR derives an inflation linked withdrawal rate that gives a certain probability of success over various lengths of retirements. The 4% rule of thumb (and that's all it is) is generally quoted for a 30 year retirement and a 50:50 asset allocation. The whole point was to come up with a stable number that a retiree could rely on throughout retirement. So ignoring market fluctuations is exactly the point of Bill Bergen's initial SWR modeling. You might think that the premise is poor, but to understand the modeling you need to understand that premise.

Bill Bergen was an American baseball pitcher😀
Bill BeNgen’s research was dubbed, by the media, the 4% rule despite actually being 4.15% and he amended it later with greater diversification.
You cannot rely on the figure of 4% blindly, it is based on past performance in the US (pre 1990) utilising just two asset classes.

In his talk with Michael Kitces, Bill Bengen says
I use about a 4.2% number to start. But you know every client's situation is different. I had clients that were 5.5% because they are expecting a large inheritance, let's say five years down the road, that they're fairly certain of. And I have clients who were down at 3% because they had a pension plan that had no inflation adjustment. So over time, they were going to have appreciating demands put on their portfolio to support their income stream. So, yeah, we start with four, but there's a wide spectrum around it.

It is a starting point….