4% SWR rule….well, rules are there to be broken!

cfw1994

Curious news this week, for those familiar with the so-called ‘4% Rule’.

Bill Bengen was the ‘creator’ of this rule back in 1994.

Previously, he suggested it was perhaps too low, and could be 4.7%.

Well, he is now 70, & has suggested current conditions make it hard to call, & perhaps 4.4% is wiser.  Others, as we see on discussions here from time to time, suggest less.

It also turns out he has most of his money in cash - 20% equities, 10% bonds and 70% cash.   If only he told the rest of us that back in November 🤣

I note that a pack of cards and some willing pals is the secret to a happy life ♠️♣️♥️♦️😎👍

Have a sunny day 😎

billy2shots

If your pot is so large and your outgoings so small as a direct comparison then cash is king. 

As long as you factor in inflation and are still happy then why not. 

20% equity and 10% bond holding to attempt to keep pace with inflation plus the odd bonus during good years is a good position if you can secure it. 

Building up a decent pot whilst managing lifestyle creep is key to arriving at a comfortable position like this. 

Silvertabby

When the pension freedoms were announced many LGPS members - both deferred and current - transferred their benefits to personal pension schemes.

I doubt many of these people had any intention of sticking to a SWR, even if they had heard of such a thing....

From the conversations I had during the transfer processes, it was clear that many saw this as being on par with a small lottery win, and were going to spend the proceeds on a big family wedding, new car, new kitchen, holiday, etc.

At the time, my colleagues and I gave it 10 years before the complaints started to rattle in (" no-one told me that I would lose my pension").  The clock is ticking.

SouthCoastBoy

cfw1994 said:

Curious news this week, for those familiar with the so-called ‘4% Rule’.

Bill Bengen was the ‘creator’ of this rule back in 1994.

Previously, he suggested it was perhaps too low, and could be 4.7%.

Well, he is now 70, & has suggested current conditions make it hard to call, & perhaps 4.4% is wiser.  Others, as we see on discussions here from time to time, suggest less.

It also turns out he has most of his money in cash - 20% equities, 10% bonds and 70% cash.   If only he told the rest of us that back in November 🤣

I note that a pack of cards and some willing pals is the secret to a happy life ♠️♣️♥️♦️😎👍

Have a sunny day 😎

I wonder what the 20% equities in monetary terms is? I'm 40% cash and I feel that is too much.

m_c_s

Bill Bengen recently talked about his original research and discovery of the so called 4% rule and his latest research here
https://www.youtube.com/watch?v=3qqFXMEbCJ8

Fascinating listening to him and he was a rocket scientist!

Thrugelmir

m_c_s said:

Bill Bengen recently talked about his original research and discovery of the so called 4% rule and his latest research here
https://www.youtube.com/watch?v=3qqFXMEbCJ8

Fascinating listening to him and he was a rocket scientist!

Rocket scientists were the downfall of LTCM in 1998. 

BritishInvestor

cfw1994 said:

Curious news this week, for those familiar with the so-called ‘4% Rule’.

Bill Bengen was the ‘creator’ of this rule back in 1994.

Previously, he suggested it was perhaps too low, and could be 4.7%.

Well, he is now 70, & has suggested current conditions make it hard to call, & perhaps 4.4% is wiser.  Others, as we see on discussions here from time to time, suggest less.

It also turns out he has most of his money in cash - 20% equities, 10% bonds and 70% cash.   If only he told the rest of us that back in November 🤣

I note that a pack of cards and some willing pals is the secret to a happy life ♠️♣️♥️♦️😎👍

Have a sunny day 😎

The 4.7% refers to a more diversified portfolio

"Since 2006, he has revised that portfolio to add international stocks and midsize, small-cap and microcap U.S. stocks as well as Treasury bills. That raised returns and supported a safe withdrawal rate he increased to 4.7%."

But from a UK POV the number has historically been far lower.

"Others, as we see on discussions here from time to time, suggest less."

Sounds sensible, given that his analysis bears no resemblance whatsoever to most investors.

"Another threat is high stock valuations. Stocks are currently trading at roughly 36 times corporate earnings over the past decade, according to Nobel laureate Robert Shiller’s CAPE, or cyclically adjusted price-to-earnings, ratio.

“That is double the historic average,” said Mr. Bengen. “While low interest rates justify higher stock valuations to some extent, I think the market is expensive.”"

Many investors have portfolios with far higher multiples. 

NedS

BritishInvestor said:

cfw1994 said:

Curious news this week, for those familiar with the so-called ‘4% Rule’.

Bill Bengen was the ‘creator’ of this rule back in 1994.

Previously, he suggested it was perhaps too low, and could be 4.7%.

Well, he is now 70, & has suggested current conditions make it hard to call, & perhaps 4.4% is wiser.  Others, as we see on discussions here from time to time, suggest less.

It also turns out he has most of his money in cash - 20% equities, 10% bonds and 70% cash.   If only he told the rest of us that back in November 🤣

I note that a pack of cards and some willing pals is the secret to a happy life ♠️♣️♥️♦️😎👍

Have a sunny day 😎

The 4.7% refers to a more diversified portfolio

"Since 2006, he has revised that portfolio to add international stocks and midsize, small-cap and microcap U.S. stocks as well as Treasury bills. That raised returns and supported a safe withdrawal rate he increased to 4.7%."

But from a UK POV the number has historically been far lower.

Is that for a UK investor invested solely in the FTSE All Share and UK government bonds, or a UK investor invested globally in a diversified portfolio of stocks (large, medium and small cap) and bonds? I don't know many UK investors that would choose a FTSE UK All Share tracker over a global tracker.

Presumably the conclusion of that study was that when further diversification was added by increasing the mix of mid and small cap companies (which historically out-perform large cap), the SWR increases. I really do not understand the implication that a UK investor with a truly globally diversified portfolio would be significantly worse off than a US investor investing exclusively in the US. And if that were the case, then surely we would all just buy US market trackers, not global trackers, and ignore the rest of the world.

BritishInvestor

NedS said:

BritishInvestor said:

cfw1994 said:

Curious news this week, for those familiar with the so-called ‘4% Rule’.

Bill Bengen was the ‘creator’ of this rule back in 1994.

Previously, he suggested it was perhaps too low, and could be 4.7%.

Well, he is now 70, & has suggested current conditions make it hard to call, & perhaps 4.4% is wiser.  Others, as we see on discussions here from time to time, suggest less.

It also turns out he has most of his money in cash - 20% equities, 10% bonds and 70% cash.   If only he told the rest of us that back in November 🤣

I note that a pack of cards and some willing pals is the secret to a happy life ♠️♣️♥️♦️😎👍

Have a sunny day 😎

The 4.7% refers to a more diversified portfolio

"Since 2006, he has revised that portfolio to add international stocks and midsize, small-cap and microcap U.S. stocks as well as Treasury bills. That raised returns and supported a safe withdrawal rate he increased to 4.7%."

But from a UK POV the number has historically been far lower.

Is that for a UK investor invested solely in the FTSE All Share and UK government bonds, or a UK investor invested globally in a diversified portfolio of stocks (large, medium and small cap) and bonds? I don't know many UK investors that would choose a FTSE UK All Share tracker over a global tracker.

Presumably the conclusion of that study was that when further diversification was added by increasing the mix of mid and small cap companies (which historically out-perform large cap), the SWR increases. I really do not understand the implication that a UK investor with a truly globally diversified portfolio would be significantly worse off than a US investor investing exclusively in the US. And if that were the case, then surely we would all just buy US market trackers, not global trackers, and ignore the rest of the world.

This is for a global portfolio, but obviously with UK inflation to deal with, which was brutal in the 1970s (a quick look shows the US was a fair bit lower during that time).

Debatable whether small and mid outperform large (unless you take factor tilts - see link below), but they can act as diversifiers, so when large-cap is taking a beating they may be more robust.

https://www.aqr.com/Insights/Perspectives/There-is-No-Size-Effect-Daily-Edition

bostonerimus

The probability distributions associated with various withdrawal rates assume certain asset allocations, withdrawal periods and investment return distributions. An appropriate withdrawal rate and asset allocation for an individual will depend on their age, spending requirements and size of their pot. So there are really no “rules” here, just mathematical models and assumptions that need to be applied to individual circumstances. 

For me I could be all cash, but stay 80% equities as I don’t mind the ups and downs of the market or inflation - to a point.

michaels

Had I retired last November, my SWR in April 22 (current) money terms would have been about £42k.

Should I retire today my SWR on the same basis would be more like £38k due to price increases and market falls.

Not sure how useful such a calculation really is given this?!