Foolishness of the 4% rule

[Deleted User]

Think about an all singing and dancing inflation protected civil service DB pension.  Think what multiplier you would take to convert it to a DC pension. 

Now reverse the process.  Three years’ worth of payments from your State Pension become your DC pot and the resulting pension increment becomes your DB pension.  I guarantee that the multiplier is a hell of a lot better than the analogous of 2, 3 or 4% “SWR” that the people are discussing here. 

[Deleted User]

michaels said:

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 DC pot

Precisely 

Audaxer

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.  

But if you have a spouse, and you were to pass away before you had recouped the deferred pension, your overall pot left to your spouse could be much lower than it would have been if you hadn't deferred. Even more so if you had been more aggressive with your DC drawdown.

bostonerimus

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….

Thanks for keeping me humble...I was explaining the stuff when all along I had the name wrong between my brian brain and fingers.

The big criticism of Bengen/Trinity by many retirement planners is that it ignores what happens to your pot over time and calculates a withdrawal rate based purely on the starting size of the pot and I don't think that's how people actually behave, but it is a good starting point to get your bearings and then you can implement one of the variable withdrawal strategies.

[Deleted User]

Audaxer said:

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.  

But if you have a spouse, and you were to pass away before you had recouped the deferred pension, your overall pot left to your spouse could be much lower than it would have been if you hadn't deferred. Even more so if you had been more aggressive with your DC drawdown.

We are getting into the woods. Spouse may inherit an extra state pension payment when you die.  In general I am assuming that the spouse has his/her own pension provisions and that when you die the income need will be reduced vs a couple and more than met from the combination of their assets/pension and the inherited pot. There will be some special cases for which this assumption does not work and when the individual expects to die young. 

michaels

Deleted_User said:

michaels said:

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 DC pot

Precisely 

Thanks for spotting my 'deliberate' mistake.

The spouse issue is relevant.  The pre 2016 scheme did have a spousal benefit and much more generous deferral rate

Stargunner

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.  

For every year you defer you are giving up around £9k per year of income. For every year you defer you will get around £500 added to your pension when you decide to take it. 

The more you spend from your DC pot the more it will go down, so why would you want to do that.

If you deferred for 3 years and then died 10 years later you would of missed out on around £27k of income from the 3 years that you deferred and gained around £15k extra pension income. Your beneficiaries would be missing out on around £12k

Audaxer

Deleted_User said:

Audaxer said:

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.  

But if you have a spouse, and you were to pass away before you had recouped the deferred pension, your overall pot left to your spouse could be much lower than it would have been if you hadn't deferred. Even more so if you had been more aggressive with your DC drawdown.

We are getting into the woods. Spouse may inherit an extra state pension payment when you die.  In general I am assuming that the spouse has his/her own pension provisions and that when you die the income need will be reduced vs a couple and more than met from the combination of their assets/pension and the inherited pot. There will be some special cases for which this assumption does not work and when the individual expects to die young. 

As other posters have said above, the spouse issue is relevant and worth at least considering for most. It may be better for the joint retirement pot to have £27k extra in it by the time you are 70 rather than your higher state pension.

Madrick

Stargunner said:

. For every year you defer you will get around £500 added to your pension when you decide to take it.

So for those of us, for example males aged 60, who were due to take state pension benefits aged 65, who have had the Deffered Pension forced upon them so have to wait until 67.....

Will we get an extra £1k per year? 😂

But if we wait until 69 we would do

But in reality we would not lose out on £18k of deffered payments, more like £36k

Twice as bad for women

AlwaysSomething

Madrick said:

So for those of us, for example males aged 60, who were due to take state pension benefits aged 65, who have had the Deffered Pension forced upon them so have to wait until 67.....

Will we get an extra £1k per year? 😂

But if we wait until 69 we would do

But in reality we would not lose out on £18k of deffered payments, more like £36k

Twice as bad for women

It's an actuarial reduction for living longer. Your father's generation expected to retire at 65 and live to 72, so 7 years of pension. You should expect to retire at 67 and live to 85, so 18 years of pension. You are getting a great deal.
Contrast this with the United States where no politician has ever been brave enough to raise the retirement age, and their national pension fund is projected to run out of money in 2035.