Is the 4% rule still applicable today?

Cobbler_tone

Linton said:

Cobbler_tone said:

Pat38493 said:

Cobbler_tone said:

GDB2222 said:

Do folk allow for say 2 or 3 years in a care home costing £2k a week at the end of life? (About 1 in 3 of us will be in this position.) 

What is your source for this stat? In my personal circle, family and close friends this is not my lived experience.
I don't know of a single person who ended in a care home and at most some temporary care at home towards the end of life. Maybe fortunate to have supportive families.
However, based on your conjecture most people will be in a property worth £300k which would cover those needs, after any capital is accessed.

I find it pretty sad if people actually budget (especially if it means working longer, negatively impacting their health) on the off chance they need one. It would become self fulfilling, i.e. you work your way into a care home! 

Your experience seems to be typical - the % of people who actually need long term care if pretty small.

The numbers (albeit a couple of years old) back up that although many people do self fund care, it will be nowhere near 1 in 3.
March 2022-23 figures...372,000 care home residents, 137,000 of these were self funded. 
Population of over 9m over 70's, or 3m over 80's.

Care homes and estimating the self-funding population, England - Office for National Statistics

Anyway...if everyone tried to save additional wealth 'just in case' they needed a care home, I am sure it would be another nail in the economy!

Also I am some what surprised by the 9M over 70 and 3M over 80 figures which implies that there are 6M in the 70-80 age range half of whom dont reach 80. This does not seem to correspond to the median age at death.

That is not how an aging population works. A higher percentage of the over 70's will live beyond 80, i.e. the 3m will increase.

By 2047 the number of over 85's is projected to double, so maybe a fair assumption that the requirement of care homes will increase....along with of course fewer children.

Cus

The care home finances worry does seem to be based on personal experience. I know someone who has reserved £1mn in case they need 10 years at a private expensive home, based on their own experience of an older family member spending similar.  The reality is that most would not be able to do that, so naturally would hope that they don't need it.

GDB2222

Cus said:

The care home finances worry does seem to be based on personal experience. I know someone who has reserved £1mn in case they need 10 years at a private expensive home, based on their own experience of an older family member spending similar.  The reality is that most would not be able to do that, so naturally would hope that they don't need it.

Around here, in London, £100k a year is around the going rate for a fairly decent care home. More if you need nursing. 

The 1 in 3 figure I quoted was for a married couple, and it’s about right. Clearly, that’s come as a surprise to many people here. 

The usual way this works is that the husband gets ill first, and the wife nurses him at home until he dies, presumably with some help. However, if that’s not practical, there’s a problem as she can’t sell the house she’s living in to pay for nursing home fees.  

OldScientist

michaels said:

dunstonh said:

tony4147 said:

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?

This is a UK site, and most posters will be UK-based.  So, using US data is not appropriate.

UK data is closer to 3% for people in their 50s and 3.5% in their 60s.    (its just under 3.5% at state pension age).

It is worth noting that the worst 1 year period for bonds was October 2021-Sept 22 and Mar 2008 to Feb 2009 for equities.   So, the worst years since reliable records began both occurred in the last 20 years.   Records are there to be broken. 

Are those percentages based on UK investors holding a globally diversified portfolio of stocks and bonds including currency impacts of doing so as surely simply looking at returns using UK registered stocks and bonds would not reflect how a typical UK investor would invest?

There is only one (AFAIK) published difference in SWR between a UK investor holding UK stocks or a global index (see https://www.advisorperspectives.com/articles/2014/03/04/does-international-diversification-improve-safe-withdrawal-rates)

Very limited results are presented, but for a 50% equity, 50% bond portfolio a UK retiree saw a MSWR (i.e., the worst case) of

Domestic stocks: 3.05%
Global stocks: 3.26%

In other words, for this one result, an increase of around 20 bp was found.

However, the level of precision (i.e., 2 decimal places) used in this case is not sensible from a practical basis for the following reasons:

1) For years prior to 1948, there were at least four different datasets of inflation values for the UK each of which gave different MSWR values (about 15 bp difference between highest and lowest)
2) There are slight differences in the equity returns from different databases since it depends on exactly what stocks are included in the index (e.g., for the UK, the returns from the FT30 are used in the Barclays Equity Gilt Study until the FTSE100 was implemented) and how they are weighted (e.g., the FT30 was equal weighted and not cap weighted). The Dimson et al database (used in Pfau's paper I linked above) is probably as good as these things are going to get (since they have used a wide range of stocks, ex-div dates, immediate reinvestment of dividends, etc.).
3) Going from annual data to monthly data (little of the latter is freely available for the UK before 1970 or so) for the US led to differences in the MSWR of between 15 and 75 bp depending on the equity allocation (higher for higher allocations).
4) Changing the maturity of fixed income led to differences in the MSWR of up to 60 bp (lower for higher equity allocations) with the highest value for intermediate maturities - the generic 'bonds' used in the UK databases (including the Dimson et al.) are usually of longer maturity.

So, overall, quoting the historical MSWR to the nearest 50 bp is probably good enough, particularly since the SWR for the next 30 or 40 years is unknown (it could lie between the historical worst and best cases of 3.0% to 11% or it could be higher or lower). IMV, the SWR that comes out of the constant inflation adjusted withdrawal strategy is a guideline not a rule (and, again IMV, is too sensitive to the initial choice of withdrawal to form a robust practical solution).

Ibrahim5

The average IFA fee is 0.8% so 4% without an IFA is equivalent to 3.2% with an adviser's fingers in your pot. That's assuming an adviser is as good at managing the investments, which in my experience they are nowhere near.

westv

Ibrahim5 said:

The average IFA fee is 0.8% so 4% without an IFA is equivalent to 3.2% with an adviser's fingers in your pot. That's assuming an adviser is as good at managing the investments, which in my experience they are nowhere near.

I thought it was closer to 0.5% which equates to 0.25% reduction over the length of drawdown.

Bostonerimus1

westv said:

Ibrahim5 said:

The average IFA fee is 0.8% so 4% without an IFA is equivalent to 3.2% with an adviser's fingers in your pot. That's assuming an adviser is as good at managing the investments, which in my experience they are nowhere near.

I thought it was closer to 0.5% which equates to 0.25% reduction over the length of drawdown.

But at the start of drawdown a 0.5% fee reduces your spending by 0.5%. So the impact of fees are highest right where sequence of returns risk is highest, of course this assumes fees stay the same. I think it's best to go into retirement with your fixed costs reduced as much as possible, so no mortgage and IFA and fund fees as low as possible. I you can DIY that's an obvious way to give a 16% (0.5%/3.0%) boost to your income.

westv

Bostonerimus1 said:

westv said:

Ibrahim5 said:

The average IFA fee is 0.8% so 4% without an IFA is equivalent to 3.2% with an adviser's fingers in your pot. That's assuming an adviser is as good at managing the investments, which in my experience they are nowhere near.

I thought it was closer to 0.5% which equates to 0.25% reduction over the length of drawdown.

But at the start of drawdown a 0.5% fee reduces your spending by 0.5%. So the impact of fees are highest right where sequence of returns risk is highest, of course this assumes fees stay the same. I think it's best to go into retirement with your fixed costs reduced as much as possible, so no mortgage and IFA and fund fees as low as possible. I you can DIY that's an obvious way to give a 16% (0.5%/3.0%) boost to your income.

If you going to look at it that way, then you should always take less in the first few years as there will always be deductions of some sort or another. 

Bostonerimus1

westv said:

Bostonerimus1 said:

westv said:

Ibrahim5 said:

The average IFA fee is 0.8% so 4% without an IFA is equivalent to 3.2% with an adviser's fingers in your pot. That's assuming an adviser is as good at managing the investments, which in my experience they are nowhere near.

I thought it was closer to 0.5% which equates to 0.25% reduction over the length of drawdown.

But at the start of drawdown a 0.5% fee reduces your spending by 0.5%. So the impact of fees are highest right where sequence of returns risk is highest, of course this assumes fees stay the same. I think it's best to go into retirement with your fixed costs reduced as much as possible, so no mortgage and IFA and fund fees as low as possible. I you can DIY that's an obvious way to give a 16% (0.5%/3.0%) boost to your income.

If you going to look at it that way, then you should always take less in the first few years as there will always be deductions of some sort or another. 

Yes you go into drawdown to get money to pay of things. I'm just saying that any cost the amortizes to reduce your SWR so significantly should be look at. When you think that your annual IFA etc fees could be 10% or 20% of your retirement expenditures then controlling them is very important when you come to do a budget.

Ibrahim5

Well according to the FCA 0.8% is the average fee. So with a pension pot of £500K if you took out 4% that would be £20K. The IFAs fees are £4k, so the adviser is taking 20% of your income.