Is the 4% rule still applicable today?

Bostonerimus1

Linton said:

OldScientist said:

Linton said:

Bostonerimus1 said:

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.

Yes but the comparisons made so far assume that the diy investment portfolio will be the same or equivalent to an IFA's.  If you are confident in choosing your portfolio, then fine.  However if you get it wrong the costs to future income could be far higher.

It has to be the case that IFAs as a body will on average, before fees, get something close to the market average returns. AFAIK, there are no data on the effectiveness of IFAs in purely investing terms (but perhaps others do have that info). In other words, the comparisons are good enough.

In terms of DIY investing, the philosophy on these boards (and bogleheads) is that either holding a single multi-asset fund or holding global equity and global bond (hedged) index funds is likely to be good enough. The first, and most important, decision for the DIY investor is then what should the allocation to equities be (with good enough starting points for further discussion being around 80% in accumulation and 60% in retirement*). Personally, I think the biggest problem for DIY investors is psychological, e.g., when panic sets in during a downturn - there were even threads on the bogleheads forum after the GFC suggesting a 'Plan B' of getting out of equities for those who couldn't stomach seeing their portfolios shrink further). For some, an IFA might provide a useful 'cool head' in such times (otherwise, these boards might be useful!)

*Personally, I think the 'risk' concept (i.e., volatility) is not a useful one in retirement since one aim is to secure core income (e.g., through gilt ladders or annuities).

That assumes that the primary objective of a retirement portfolio where the outcome really matters is to maximise long term return. I would contend that a better objective is suffficient return at appropriate risk.  In particular the current and future  risk of losing sleep and possibly panicking in a market fall. The levels of sufficient return and appropriate risk are both highly dependent on a good understanding of the customer.

An SWR does not help much since it is based on just avoiding running out of money at the worst time.

The fascinating thing about personal finances is the "personal" bit with everyone being slightly different. I started with a 60/40 Boglehead type approach balancing risk and return using the "Efficient Frontier" and ran lots of SWR calculations, but after the  bursting of the dot-com bubble and 9/11 I decided to take a job with a DB pension option and to leave a small deferred annuity I had to compound rather than taking the option to cash it out. I projected 30 years into the future and with SP, DB etc I saw that I'd have a comfortable amount of retirement income. With that set I then went with a more aggressive asset allocation, but basically still a simple 3 fund strategy and was able to stay invested and buy through all the subsequent crashes...2008 in particular. I'm now retired the plan has worked out well and so I'm now almost 100% equities and invest for growth because my SWR is 0% and I don't really mind if my pension pot gets clobbered.

af1963

Johnnyboy11 said:

I have issue with the SWR. Say you'd retired two years ago and invested 100% of your pot in a global equities tracker, which will have risen by around 30% since then. Why wouldn't you just re-baseline your SWR and pretend that your just retired, again?

Missed seeing this at the time, so apologies for resurrecting this bit of the discussion - but I agree that this "locking" of your SWR to the value of your portfolio at one specific date can lead to some odd results.

Triplets Alice, Bob and Charlie each have £1m pension pots  (for simplicity, no longer contributing to them)

Alice retires with hers.  Her 4% SWR is £40k per year

Bob waits a year, during which everyone's pot rises by 50% to £1.5m ( minus Alice's withdrawal, in her case).  Bob retires with a SWR of £60k

There's a big crash during the following year and everyone's pot halves to £750k, minus any income taken.  Charlie retires with a SWR of £30k

Alice's actual funds are (approx) £670k, Bob's are £710k, and Charlie's are £750k.  And yet Charlie is supposed to stick to spending half of what Bob does, and 25% less than Alice, for life. 

Gary1984

Indeed. This is probably the best argument for using some sort of guardrails approach. Instead of 4% of the initial, target something like 3.5% to 4.5% of the current fund. Start with 4% and increase for inflation each year but if your current withdrawal rate exceeds 4.5% of the current pot then reduce it by 10%. Similarly if your withdrawal rate goes below 3.5% increase it by 10%.

So in the above scenario Alice's rate is 40/670 = 6% so she reduces her withdrawal from 40k to 36k and continues to make similar reductions each year until she's back in range.

Bob (60/710 = 8.5%) should reduce as well but will probably have a few more years of reductions than Alice before he gets back in range unless investments bounce back quickly.

Obviously there's an infinite choice in parameters when setting the guardrails and haircut/boost to incomes but it seems more intuitive than just setting a rate and sticking to it no matter what.

MK62

This kind of misses the point of the SWR plan......it doesn't attempt to vary withdrawals with the changing portfolio value......it's simply a function to say that historically if you take X% of the initial portfolio value, and increase that withdrawal by inflation each year, then the plan would have worked in YY% of all historical 30yr periods. It's based on worst case, so of course if your portfolio does better than the worst case in the past, you'll end up with a surplus (unless you take action).......if it does worse, then it'll be a deficit (again, unless you take action)....but taking action means changing the plan.

In the end I suspect very few will follow SWR to the letter though......more likely is that they may start in the SWR ballpark and make periodic adjustments as they go ......

Linton

Gary1984 said:

Indeed. This is probably the best argument for using some sort of guardrails approach. Instead of 4% of the initial, target something like 3.5% to 4.5% of the current fund. Start with 4% and increase for inflation each year but if your current withdrawal rate exceeds 4.5% of the current pot then reduce it by 10%. Similarly if your withdrawal rate goes below 3.5% increase it by 10%.

So in the above scenario Alice's rate is 40/670 = 6% so she reduces her withdrawal from 40k to 36k and continues to make similar reductions each year until she's back in range.

Bob (60/710 = 8.5%) should reduce as well but will probably have a few more years of reductions than Alice before he gets back in range unless investments bounce back quickly.

Obviously there's an infinite choice in parameters when setting the guardrails and haircut/boost to incomes but it seems more intuitive than just setting a rate and sticking to it no matter what.

The problem I see with approaches which automatically increase or decrease drawdown is how you implement them in reality. If your guardrail suddenly cuts your income by 10% how do you decrease your expenditure accordingly?

Most of one’s ongoing expenditure is fixed well in advance, eg utilities,  council tax, just keeping to the standard of living you are used to. Holidays, particularly expensive ones, may be booked a year  previously.  Anything you can do quickly seems pretty petty. Go for cheaper wines? Turn the winter heating down by a degree? Cancel your booking for a visit to your favourite restaurant?

Conversely in a market boom why take extra drawdown if you don’t actually need the money?

Your retirement financial management strategy should be based on your needs, you should not expect to change your lifestyle to meet the ongoing requirements of the strategy.

Cobbler_tone

It’s fair to say that the average Joe on here discussing withdrawal rates doesn’t have to worry about it. Most will be popping their clogs the wealthiest they have ever been.
If you are the breadline I can see the relevance. If you have a really high risk strategy you could be really wealthy or have enough to adjust your approach.
I’d imagine most people have an idea of what they have/need and cut their cloth accordingly without over complicating things. Working in today’s money is not a bad approach.
We don’t see horror stories of people retiring too early very often. Maybe people only share the good news?

OldScientist

Linton said:

Gary1984 said:

Indeed. This is probably the best argument for using some sort of guardrails approach. Instead of 4% of the initial, target something like 3.5% to 4.5% of the current fund. Start with 4% and increase for inflation each year but if your current withdrawal rate exceeds 4.5% of the current pot then reduce it by 10%. Similarly if your withdrawal rate goes below 3.5% increase it by 10%.

So in the above scenario Alice's rate is 40/670 = 6% so she reduces her withdrawal from 40k to 36k and continues to make similar reductions each year until she's back in range.

Bob (60/710 = 8.5%) should reduce as well but will probably have a few more years of reductions than Alice before he gets back in range unless investments bounce back quickly.

Obviously there's an infinite choice in parameters when setting the guardrails and haircut/boost to incomes but it seems more intuitive than just setting a rate and sticking to it no matter what.

The problem I see with approaches which automatically increase or decrease drawdown is how you implement them in reality. If your guardrail suddenly cuts your income by 10% how do you decrease your expenditure accordingly?

Most of one’s ongoing expenditure is fixed well in advance, eg utilities,  council tax, just keeping to the standard of living you are used to. Holidays, particularly expensive ones, may be booked a year  previously.  Anything you can do quickly seems pretty petty. Go for cheaper wines? Turn the winter heating down by a degree? Cancel your booking for a visit to your favourite restaurant?

Conversely in a market boom why take extra drawdown if you don’t actually need the money?

Your retirement financial management strategy should be based on your needs, you should not expect to change your lifestyle to meet the ongoing requirements of the strategy.

One approach is to build sufficient income flooring (e.g., SP, DB pension, RPI annuity, or inflation linked gilt ladder) to cover 'core' or 'essential' expenditure and, possibly, even some 'adaptive' or 'discretionary' expenditure.

For example, if your portfolio income is half your total income (e.g., if it is equal to the total amount of guaranteed income), then a 10% drop in portfolio income is only a 5% drop in total income. For those with much larger portfolios (and whose portfolio income is a much larger proportion of their total income), then the purchase of additional flooring can help reduce the effect of market conditions on total income. The alternative, with a strictly applied constant inflation adjusted withdrawals approach, is that  income from the portfolio will drop to zero at an unknown time in the future - for me that was an unacceptable risk to lifestyle.

Stubod

I think the problem is some people are assuming that 4%, (or 3.5% in UK or whatever), is a "rule", when it is in fact only a guide to give an indication on what is achievable based on historical data, no more, no less?

michaels

Linton said:

Gary1984 said:

Indeed. This is probably the best argument for using some sort of guardrails approach. Instead of 4% of the initial, target something like 3.5% to 4.5% of the current fund. Start with 4% and increase for inflation each year but if your current withdrawal rate exceeds 4.5% of the current pot then reduce it by 10%. Similarly if your withdrawal rate goes below 3.5% increase it by 10%.

So in the above scenario Alice's rate is 40/670 = 6% so she reduces her withdrawal from 40k to 36k and continues to make similar reductions each year until she's back in range.

Bob (60/710 = 8.5%) should reduce as well but will probably have a few more years of reductions than Alice before he gets back in range unless investments bounce back quickly.

Obviously there's an infinite choice in parameters when setting the guardrails and haircut/boost to incomes but it seems more intuitive than just setting a rate and sticking to it no matter what.

The problem I see with approaches which automatically increase or decrease drawdown is how you implement them in reality. If your guardrail suddenly cuts your income by 10% how do you decrease your expenditure accordingly?

Most of one’s ongoing expenditure is fixed well in advance, eg utilities,  council tax, just keeping to the standard of living you are used to. Holidays, particularly expensive ones, may be booked a year  previously.  Anything you can do quickly seems pretty petty. Go for cheaper wines? Turn the winter heating down by a degree? Cancel your booking for a visit to your favourite restaurant?

Conversely in a market boom why take extra drawdown if you don’t actually need the money?

Your retirement financial management strategy should be based on your needs, you should not expect to change your lifestyle to meet the ongoing requirements of the strategy.

I think that depends on what proportion of income is baseline day to day spend. For example for us that might be about half of total expected income, then another 30% is for irregular big spends on things like house maintenance and repairs and cars that we save into pots until needed and then 20% for highly discretionary stuff, holidays etc. The latter two categories can be flexed a fair bit.

So we are in a position to accept a flexible income.  I guess if you do a lot of your 'discretionary spending via fixed monthly payments / long term commitments such as car lease, expensive phone and TV contracts, holidays booked far in advance rather than last minute bargains then a much greater proportion of your income is committed rather than flexible.

Cobbler_tone

michaels said:

Linton said:

Gary1984 said:

Indeed. This is probably the best argument for using some sort of guardrails approach. Instead of 4% of the initial, target something like 3.5% to 4.5% of the current fund. Start with 4% and increase for inflation each year but if your current withdrawal rate exceeds 4.5% of the current pot then reduce it by 10%. Similarly if your withdrawal rate goes below 3.5% increase it by 10%.

So in the above scenario Alice's rate is 40/670 = 6% so she reduces her withdrawal from 40k to 36k and continues to make similar reductions each year until she's back in range.

Bob (60/710 = 8.5%) should reduce as well but will probably have a few more years of reductions than Alice before he gets back in range unless investments bounce back quickly.

Obviously there's an infinite choice in parameters when setting the guardrails and haircut/boost to incomes but it seems more intuitive than just setting a rate and sticking to it no matter what.

The problem I see with approaches which automatically increase or decrease drawdown is how you implement them in reality. If your guardrail suddenly cuts your income by 10% how do you decrease your expenditure accordingly?

Most of one’s ongoing expenditure is fixed well in advance, eg utilities,  council tax, just keeping to the standard of living you are used to. Holidays, particularly expensive ones, may be booked a year  previously.  Anything you can do quickly seems pretty petty. Go for cheaper wines? Turn the winter heating down by a degree? Cancel your booking for a visit to your favourite restaurant?

Conversely in a market boom why take extra drawdown if you don’t actually need the money?

Your retirement financial management strategy should be based on your needs, you should not expect to change your lifestyle to meet the ongoing requirements of the strategy.

I think that depends on what proportion of income is baseline day to day spend. 

That is the bottom line really.
A lot of people on here have a good base of a DB pension. Others will buy a decent annuity.
It is common sense really. If you have £1m in a pot and intend to spend £50k for 25 years and the markets plummet for a few years, you are probably going to start twitching, or realise you probably aren't going to have £50k a year.
If anything (IMO) it bolsters the argument of getting a healthy guaranteed income of buying an annuity.