Are we on the right track?

JohnWinder

Some maths has been put to work here: https://www.bogleheads.org/forum/viewtopic.php?t=225497

bd10

One point I feel worth mentioning is the assumption of realistic withdrawal rate. I read round the subject of FIRE movement that motivated me to look into this in a bit more detail. Question: Is 4% a safe rate of withdrawal, or what's the probability to run out funds prematurely.

If the desired retirement age is 55 and if we assume a 90 year life expectancy, using S&P 500 past (!) equity returns of 8.4% and 3% inflation, the probability of running out of funds within 35 years is about 37%. Instead of using mean returns I ran a monte carlo simulation of past returns.

 Withdrawal rate (%): 4

  <yr     prob.

 --------------

   10      0.05

   15      2.30

   20      9.67

   25     19.76

   30     29.33

   35     36.52

   40     42.49

   45     46.76

   50     50.29

 --------------

The next thing I would keep in mind is that this is based on past returns sampled over 40+ years of historical returns. Personally I am lowering the expected returns over the decades to come on the account of the trend of deglobalisation and aging population in the West. For my own budgeting I would feel comfortable with 3% tops which would reduce the risk of out of funds to 19% within 35 years of retirement.

 Withdrawal rate (%): 3

  <yr     prob.

 --------------

   10      0.01

   15      0.42

   20      3.14

   25      7.88

   30     13.49

   35     19.31

   40     23.88

   45     27.76

   50     31.05

 --------------

Last but not least, I always assume zero state pension. I would not wish to bet my retirement on any assumptions that today's state pension will still in place when I'll call it a day. Another reason to err on the side of caution is the cost of care.

Just a thought.

Thrugelmir

bd10 said:

One point I feel worth mentioning is the assumption of realistic withdrawal rate. I read round the subject of FIRE movement that motivated me to look into this in a bit more detail. Question: Is 4% a safe rate of withdrawal, or what's the probability to run out funds prematurely.

If the desired retirement age is 55 and if we assume a 90 year life expectancy, using S&P 500 past (!) equity returns of 8.4% and 3% inflation, the probability of running out of funds within 35 years is about 37%. Instead of using mean returns I ran a monte carlo simulation of past returns.

 Withdrawal rate (%): 4

  <yr     prob.

 --------------

   10      0.05

   15      2.30

   20      9.67

   25     19.76

   30     29.33

   35     36.52

   40     42.49

   45     46.76

   50     50.29

 --------------

The next thing I would keep in mind is that this is based on past returns sampled over 40+ years of historical returns. Personally I am lowering the expected returns over the decades to come on the account of the trend of deglobalisation and aging population in the West. For my own budgeting I would feel comfortable with 3% tops which would reduce the risk of out of funds to 19% within 35 years of retirement.

 Withdrawal rate (%): 3

  <yr     prob.

 --------------

   10      0.01

   15      0.42

   20      3.14

   25      7.88

   30     13.49

   35     19.31

   40     23.88

   45     27.76

   50     31.05

 --------------

Last but not least, I always assume zero state pension. I would not wish to bet my retirement on any assumptions that today's state pension will still in place when I'll call it a day. Another reason to err on the side of caution is the cost of care.

Just a thought.

If you are using the S&P 500 then you'll need to factor fluctuating currency exchange rates into your numbers.  Timing of withdrawls will also determine the eventual outcome with markets moving every day. 

bd10

Absolutely. This was just a simplified version to illustrate the risk of ruin in terms of probabilities. The S&P had a stellar run which is my main point of criticism of the FIRE movement. We'll be emerging out of covid in a world with is multi-polar. China will overtake USA of one believes OECD forecasts into 2040-2060. That's why I doubt we'll see a repeat of these past returns.

I ran some numbers for my household and with a £1m pot NPV mind you so that's about £1.4m+ in a few decades' time, I'd be comfortable to retire with an annual inflation adjusted £40k I withdraw/pay from capital gains excluding any state pension (which I assume to be a big fat zero). Still saving towards that goal. But that's the number for me. We are on the cusp of a pension crisis not just here in UK but Europe as well.

Of course I'd be taking a punt on future tax laws. As for timing of withdrawals or market timing, that's why I did the MC simulation of 12k runs to see the probability distribution.

Thrugelmir

bd10 said:

Absolutely. This was just a simplified version to illustrate the risk of ruin in terms of probabilities. The S&P had a stellar run which is my main point of criticism of the FIRE movement. We'll be emerging out of covid in a world with is multi-polar. China will overtake USA of one believes OECD forecasts into 2040-2060. That's why I doubt we'll see a repeat of these past returns.

I ran some numbers for my household and with a £1m pot NPV mind you so that's about £1.4m+ in a few decades' time, I'd be comfortable to retire with an annual inflation adjusted £40k I withdraw/pay from capital gains excluding any state pension (which I assume to be a big fat zero). Still saving towards that goal. But that's the number for me. We are on the cusp of a pension crisis not just here in UK but Europe as well.

Of course I'd be taking a punt on future tax laws. As for timing of withdrawals or market timing, that's why I did the MC simulation of 12k runs to see the probability distribution.

US companies are also at all time highs of indebtedness. Share buybacks need to be funded somehow. 

bd10

Can't argue with that.  We'll see a possible first symbolic hike in 2023, maybe tapering to begin end of this year plus 5% inflation is painful for everyone. To get a real return > 5% will be challenging over the next few years I fear. Welcome to years of financial repression.

YellowStarling

bd10 said:

Absolutely. This was just a simplified version to illustrate the risk of ruin in terms of probabilities. The S&P had a stellar run which is my main point of criticism of the FIRE movement. We'll be emerging out of covid in a world with is multi-polar. China will overtake USA of one believes OECD forecasts into 2040-2060. That's why I doubt we'll see a repeat of these past returns.

I ran some numbers for my household and with a £1m pot NPV mind you so that's about £1.4m+ in a few decades' time, I'd be comfortable to retire with an annual inflation adjusted £40k I withdraw/pay from capital gains excluding any state pension (which I assume to be a big fat zero). Still saving towards that goal. But that's the number for me. We are on the cusp of a pension crisis not just here in UK but Europe as well.

Of course I'd be taking a punt on future tax laws. As for timing of withdrawals or market timing, that's why I did the MC simulation of 12k runs to see the probability distribution.

If you believe other regions will overtake the current/historic leader(s), then why not factor that into your anticipated returns (i.e. maintain a 4% withdrawal rate on the assumption that the same ~8% average annual returns are possible, albeit from another source).  Or does the lack of an ~8% return demonstrated by anywhere other than a globe dominated by the US prevent you from assuming something (China/Asia/"Emerged" markets) will simply plug the gap perfectly to the same 8% tune?

The above is meant light-heartedly for the purposes of discussion, as I share similar concerns and happen to use 2.5-3% in my own modelling (partly to err on the side of caution wrt historic returns, partly to err on the side of caution wrt historic average inflation rates, partly to cover any other challenges as yet unknown - either policy or a life expectancy that touches 100+!).

Albermarle

Last but not least, I always assume zero state pension. I would not wish to bet my retirement on any assumptions that today's state pension will still in place when I'll call it a day. Another reason to err on the side of caution is the cost of care.

This is an assumption based on zero evidence . You should base your strategy on what is known today .
 In any case whilst we have democratic government , no political party would ever stop the state pension as it would be political suicide and not just for the next election.
Just look at the headlines because they are thinking about not honouring the triple lock this time and pensions may 'only' go up by 5% or so. 
Pensioners vote and in big numbers , so ....

Of course over a long period the age at which you receive it will continue to creep upwards, and there maybe other tweaks , but getting rid of it altogether seems implausible. 

MaxiRobriguez

Albermarle said:

Last but not least, I always assume zero state pension. I would not wish to bet my retirement on any assumptions that today's state pension will still in place when I'll call it a day. Another reason to err on the side of caution is the cost of care.

This is an assumption based on zero evidence . You should base your strategy on what is known today .

Depends on the strategy.

If you want absolute confidence in ability not to run out of money then having a target which includes no reliance on the state pension is sensible, likewise so would using smaller-than-average compound growth assumptions and higher-than-expected living cost needs.

Then if those scenarios don't play out, you increase your buffer further still. 

solidpro

Nasa said:

Thrugelmir said:

Is the BTL owned outright or is there a mortgage attached? 

Yes I have a 349k mortgage at 1.43% fixed

You have a BTL worth £304k and a mortage on that BTL for £349k?