Foolishness of the 4% rule

[Deleted User]

Audaxer said:

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?

Its a simple calc but would miss the point.

You can actually afford to spend more safely in earlier as well as later years by deferring your state pension.  Its like buying an inflation-protected annuity with 3 years’ Pension income, accept at a much lower cost.  And that means you don’t need to keep a much larger amount in risky investments to try and protect the amount equivalent to 5.8% per year in inflation protected DB. 

cfw1994

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. 

Why stop at 3 years delay?  Why not 5, or 10? 😉
I know it might make sense..,.but it kind of does depend on your needs, & indeed health, at that point in time.  & seeing as it is over 10 years away, I’ll consider the options closer to the time….

DT2001 said:

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….

4.2%?
He raised it to 4.5 recently 😉

Be flexible.  Be careful.  Monitor and adjust accordingly.

Stargunner

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. 

If you delayed it for 3 years wouldn’t it take around 15 years to get back the 3 years worth of pension that you have missed out on and could have invested if you didn’t need it

[Deleted User]

Why stop at 3 years delay?  Why not 5, or 10? 😉

It makes sense to delay as much as possible assuming you get a good increment which beats annuity rates. 

Stargunner

Deleted_User said:

Why stop at 3 years delay?  Why not 5, or 10? 😉

It makes sense to delay as much as possible assuming you get a good increment which beats annuity rates. 

If your state pension start date is after Apr 2016 you only get around an extra £10 per week for every year that you defer. So you would only benefit from doing this providing that you live well into your 80’s

Albermarle

Stargunner said:

Deleted_User said:

Why stop at 3 years delay?  Why not 5, or 10? 😉

It makes sense to delay as much as possible assuming you get a good increment which beats annuity rates. 

If your state pension start date is after Apr 2016 you only get around an extra £10 per week for every year that you defer. So you would only benefit from doing this providing that you live well into your 80’s

I think the point is if you were looking for more fixed/guaranteed income , then deferring the SP is a better deal than buying an annuity.
If you are not looking for more guaranteed income then probably not so attractive.

DairyQueen

Audaxer said:

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?

I happened to be reading about this today. AJ Bell have crunched the numbers and they are quoted on this link.

Assuming inflationary increases at 2.5%, SPA of 66, and 4 year deferral, the break even is age 81. Quids in if you live to 90 and centenarians are laughing all the way to the bank.

Stargunner

DairyQueen said:

Audaxer said:

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?

I happened to be reading about this today. AJ Bell have crunched the numbers and they are quoted on this link.

Assuming inflationary increases at 2.5%, SPA of 66, and 4 year deferral, the break even is age 81. Quids in if you live to 90 and centenarians are laughing all the way to the bank.

That is the gamble as we don’t know how long we will still be here

[Deleted User]

Stargunner said:

DairyQueen said:

Audaxer said:

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?

I happened to be reading about this today. AJ Bell have crunched the numbers and they are quoted on this link.

Assuming inflationary increases at 2.5%, SPA of 66, and 4 year deferral, the break even is age 81. Quids in if you live to 90 and centenarians are laughing all the way to the bank.

That is the gamble as we don’t know how long we will still be here

Not really a “gamble”.  You are guaranteed a decent inflation protected raise in perpetuity.  Unless you consider fear of dying young and missing out on a few quid as a “gamble”.  And even then you should be able to safely spend more in your late 60s from your DC pot then you would have being able to draw from your state pension.  

michaels

Deleted_User said:

Stargunner said:

DairyQueen said:

Audaxer said:

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?

I happened to be reading about this today. AJ Bell have crunched the numbers and they are quoted on this link.

Assuming inflationary increases at 2.5%, SPA of 66, and 4 year deferral, the break even is age 81. Quids in if you live to 90 and centenarians are laughing all the way to the bank.

That is the gamble as we don’t know how long we will still be here

Not really a “gamble”.  You are guaranteed a decent inflation protected raise in perpetuity.  Unless you consider fear of dying young and missing out on a few quid as a “gamble”.  And even then you should be able to safely spend more in your late 60s from your DC pot then you would have being able to draw from your state pension.  

This is the key bit, because you have hedged some longevity/inflation risk you can be more 'aggressive' in your drawdown from your DB pot