Is the 4% rule still applicable today?

tony4147

I’ve read a number of articles that Bill Bengen who came up with the 4% rule for drawdown is stating that he believes it is more appropriate to be drawing between 5.25% and 5.5% due to ‘today’s’ economic environment.

What are people’s thoughts on this?

SouthCoastBoy

Personally I think 3 or 3.5% is more appropriate, especially for somebody retirining in their 50s or early 60s

GazzaBloom

In real life, I don't think a fixed percentage withdrawal is pragmatic. Life is full of twists and turns and spending through retirement will be variable as may your asset allocation and returns from those assets.

Bengen's forumla is designed to survive a worst case scenario so unless you encounter a 30 year worst case retirement they will shovelling wheelbarrow loads of cash into your grave with you.

It may be useful as a finger in the air for crude retirement planning but is not as useful as detailed cashflow modelling using either historical inflation and asset return data or some Monte Carlo simulation.

The key to unlocking the answer as to whether I had enough saved to retire was getting a good handle on what spending in retirement would be and then cash flow modelling it.

I retired last December and not really sure what my percentage withdrawals are set at, it's not that important to me, but I do know it varies through the plan.

ali_bear

   There is talk in the media about the tech bubble and a looming debt crisis. So, yes withdraw at a high rate now - you'll be needing the cash soon. 

JoeCrystal

To be fair, is he saying this is for US market or for UK market? Would thought it be lower for the UK market.

PhoneBook

I'm in my mid-70's, half of our savings are in stocks & shares ISAs, the other half in a drawdown SIPP, both are around 60/40 equity/bonds. I'm taking 5% pa from the SIPP. Add that to our state pensions and we cover all routine spending. ISA savings held in reserve for occasional holiday and future bills like new boiler, new carpets, whatever. Could probably afford to take slightly more out of the SIPP but still being cautious.

MK62

Bottom line is that there's no way to know.....my view is that the "4% rule" is a starting point to put you in the ballpark for a 30yr retirement, but there are many variables which can have a significant effect.....

kempiejon

I think the 4% rule is just a handy ready reckoner, largely debunked for UK FIRE seekers in the 2020s. I ran my own numbers and concluded that 3.876%  or perhaps 3.877% suits my asset allocation. Income set when drawdown commences, double check portfolio condition value and asset allocation every 7 years. Of course uplifted by CPHI each year checking the portfolio size to reconsider a new ratio if I'm still kicking hard once I'm in my later 70s.

But I hate making prediction about the future.

gm0

Canon on these threads.  

Is for somebody (often dunstonh but Southcoastboy this time) to remind people that a UK investor (still investing globally not UK only) has a lower MSWR than 4% than a US one even under the Bergen study simulation general assumptions otherwise.  3.0% -3.5% being often quoted. We are not consuming nor investing in USD.  GBP FX therefore matters along with other US vs rest differences.  This is usually in the currency of the "safe" MSWR (year 1 figure) for an indexed fixed withdrawal for an assumed duration (sometimes 30 or 40).  And an indexation approach (which is often 3% or sometimes if a UK commentator an assumed level of CPI).

It is also canon for someone else (whither jamesd) to make the valid in its own way point - that it is both lifestyle attractive/necessary/possible to "front load" a higher WR.  Not don a hair shirt as a one time decision at setup.  And keep doing that WR indexed for 40 years ignoring the world.  If you want "that" - then self annuitisation (ladder), or buying annuities provides an option.  Stock market invested drawdown doesn't. 

The argument rests on it being possible to react to changing circumstances - for discretionary element of income.  So if the "terrible" sequence early in retirement begins to turn up then - you reduce the income.    There are two principal objections

1.  This sort of conditional reactive approach is harder to make programmatic and model out.  But there are (tested by modelling) methods which embed a level of reactivity beyond a fixed % and indexation.  GuytonKlinger. Variable % and numerous cap and collar bounded but variable approachs.  For a deep dive "living off you money" - Michael McClung is a good bet.  The problem remains that you need a solid mechanism to commit to with some sense to it for making decisions on when to raise or not raise or cut income.  Seeing how you feel at the time is not such an approach due to well known issues with loss aversion, recency bias, panic/fomo etc.  Some of the WR rules are parameterised but in many cases the parameters are derived from back testing (which is circular) as we are again setting up based on avoiding failing in worst ever known sequence prior for the worst cohort i.e just before failures appear.

In the end nothing built on Bergen or similar models is predictive.  A bad solution will not backtest well. Or fail with MC analysis with insufficiently extreme conditions for returns and inflation.   So it can find what seem to be "bad" ideas because they already fail in known, previously encountered conditions.  This is helpful. But not predictive of absolute or relative success of A over B for unknown future conditions and sequences.

OldScientist

Taking constant inflation adjusted withdrawals (i.e., 'safe' withdrawal rates or the 4% 'rule') from a highly variable portfolio has two significant problems
1) In future retirements worse than the historical worst case, the portfolio will become exhausted before the end of the planning period (as others have said, the 4% rule was for historical US retirees with a 30 year planning horizon - it varied from country to country and with planning horizon. For the UK, historical data suggest 3.0% to 3.5% for a 30 year retirement).
2) In future retirements much better than the worst case, the retiree will die with a load of money unspent. Good if there is a strong legacy motive, but not good otherwise.

The conditions in future retirements are completely unknown and unknowable and the outcomes are critically dependent on the initial withdrawal.

An alternative solution ('floor and upside') is to build inflation adjusted income beyond the state pension using more appropriate tools (e.g., RPI annuity or collapsing inflation linked gilt ladder) and use a variable withdrawal strategy for the portfolio which will spend more in good retirements (reducing the amount left over) but not run out of money (although the withdrawals could become small in real terms). Constant percentage withdrawals (e.g., take 5% of the of the remaining portfolio) are simplest, but methods using gradually increasing percentages also exist (e.g., see https://www.bogleheads.org/wiki/Amortization_based_withdrawal or ABW, of which VPW, https://www.bogleheads.org/wiki/Variable_percentage_withdrawal is probably the most well known).

This approach doesn't require a prediction of what markets might do in the future and is not critically dependent on the choice of initial withdrawal rate.

MeteredOut

Personally, I wish people would stop calling it a "rule".