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Is the 4% rule still applicable today?
Comments
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Lifestyle funds are also subject to market ups and downs. The volatility of UK bond funds in recent years has shown that Lifestyling can be dangerous. OldScientist points out that you'd ideally have an inflation linked Gilt ladder of the correct maturities as you approach retirement. When people had DB pensions there was no need for Lifestyling. Money was put into the DB pot for a guaranteed lifetime income at retirement. In the US some insurance companies offer a "deferred annuity" which is very similar to a DB pension, but the payout is linked to your lifetime contribution amounts and mortality credits rather than some salary calculation. I have such a deferred annuity called TIAA-Traditional which was the default retirement fund with my first US employer and I plan to turn it into a lifetime annuity soon.Triumph13 said:A fascinating little analysis OldScientist. Thank you. Is the reason you have upped the variable percentage by 0.2% pa because you are aiming for portfolio depletion? I'm always nervous of such an approach in case one ends up living longer than expected. Fortunately I have inheritance as a key aim so I'm happy with a constant perecntage.
Plenty of off the shelf lifestyling funds are available Bostoneremus1 where assets are progressively moved into suitable gilt funds to try to minimise last minute volatility in the amount of annuity income that can be purchased. They have long been the standard for work DC pensions before the drawdown freedoms came in and are probably worth the marginally higher fees for most people vs trying to manage the locking in of annuity rates themselves. I do agree that, unless annuity rates crash again in another bond bubble, we definitely need to move back to annuities being the default position for the average pensioner. I fear that won't happen until we have an awful lot of people screw up their drawdown.
All our SWR modeling and anxiety comes about because DC pension pots are inherently volatile even Lifestyle ones. If people could buy into a deferred annuity early in their work career they would have a very safe way to provide a base of retirement income and then they could invest in equities for some growth. The deferred annuity isn't really an investment it's an insurance product and they often come with lots of fees and complexities so there are pitfalls to be avoided, but it would be nice to see it as another retirement option, especially if an annuity is in your long term planning.And so we beat on, boats against the current, borne back ceaselessly into the past.0 -
Bostonerimus1 said:
Lifestyle funds are also subject to market ups and downs. The volatility of UK bond funds in recent years has shown that Lifestyling can be dangerous. OldScientist points out that you'd ideally have an inflation linked Gilt ladder of the correct maturities as you approach retirement. When people had DB pensions there was no need for Lifestyling. Money was put into the DB pot for a guaranteed lifetime income at retirement. In the US some insurance companies offer a "deferred annuity" which is very similar to a DB pension, but the payout is linked to your lifetime contribution amounts and mortality credits rather than some salary calculation. I have such a deferred annuity called TIAA-Traditional which was the default retirement fund with my first US employer and I plan to turn it into a lifetime annuity soon.Triumph13 said:A fascinating little analysis OldScientist. Thank you. Is the reason you have upped the variable percentage by 0.2% pa because you are aiming for portfolio depletion? I'm always nervous of such an approach in case one ends up living longer than expected. Fortunately I have inheritance as a key aim so I'm happy with a constant perecntage.
Plenty of off the shelf lifestyling funds are available Bostoneremus1 where assets are progressively moved into suitable gilt funds to try to minimise last minute volatility in the amount of annuity income that can be purchased. They have long been the standard for work DC pensions before the drawdown freedoms came in and are probably worth the marginally higher fees for most people vs trying to manage the locking in of annuity rates themselves. I do agree that, unless annuity rates crash again in another bond bubble, we definitely need to move back to annuities being the default position for the average pensioner. I fear that won't happen until we have an awful lot of people screw up their drawdown.
All our SWR modeling and anxiety comes about because DC pension pots are inherently volatile even Lifestyle ones. If people could buy into a deferred annuity early in their work career they would have a very safe way to provide a base of retirement income and then they could invest in equities for some growth. The deferred annuity isn't really an investment it's an insurance product and they often come with lots of fees and complexities so there are pitfalls to be avoided, but it would be nice to see it as another retirement option, especially if an annuity is in your long term planning.
Sorry, I was assuming your deferred annuities were just a short term thing purchased close to retirement, rather than a whole career thing. I can't imagine they are cheap, given they are taking on all the risks that lead employers to close DB schemes!Bostonerimus1 said:
Lifestyle funds are also subject to market ups and downs. The volatility of UK bond funds in recent years has shown that Lifestyling can be dangerous. OldScientist points out that you'd ideally have an inflation linked Gilt ladder of the correct maturities as you approach retirement. When people had DB pensions there was no need for Lifestyling. Money was put into the DB pot for a guaranteed lifetime income at retirement. In the US some insurance companies offer a "deferred annuity" which is very similar to a DB pension, but the payout is linked to your lifetime contribution amounts and mortality credits rather than some salary calculation. I have such a deferred annuity called TIAA-Traditional which was the default retirement fund with my first US employer and I plan to turn it into a lifetime annuity soon.Triumph13 said:A fascinating little analysis OldScientist. Thank you. Is the reason you have upped the variable percentage by 0.2% pa because you are aiming for portfolio depletion? I'm always nervous of such an approach in case one ends up living longer than expected. Fortunately I have inheritance as a key aim so I'm happy with a constant perecntage.
Plenty of off the shelf lifestyling funds are available Bostoneremus1 where assets are progressively moved into suitable gilt funds to try to minimise last minute volatility in the amount of annuity income that can be purchased. They have long been the standard for work DC pensions before the drawdown freedoms came in and are probably worth the marginally higher fees for most people vs trying to manage the locking in of annuity rates themselves. I do agree that, unless annuity rates crash again in another bond bubble, we definitely need to move back to annuities being the default position for the average pensioner. I fear that won't happen until we have an awful lot of people screw up their drawdown.
All our SWR modeling and anxiety comes about because DC pension pots are inherently volatile even Lifestyle ones. If people could buy into a deferred annuity early in their work career they would have a very safe way to provide a base of retirement income and then they could invest in equities for some growth. The deferred annuity isn't really an investment it's an insurance product and they often come with lots of fees and complexities so there are pitfalls to be avoided, but it would be nice to see it as another retirement option, especially if an annuity is in your long term planning.
The key thing with lifestyling funds is that although the bond funds can be volatile, they naturally move in the opposite direction to annuity rates, so the eventual annuity yield is much less volatile.0 -
Deferred Annuities use similar risk and mortality maths as annuities and act like a turbo charged saving account because the money is locked up. Then at retirement the account balance can be used to purchase a lifetime annuity. My deferred annuity had a minimum annual interest rate of 3% and was up to 7% for high interest rate years. The usual comparisons between DC/SWR and annuities/lifetime income apply. They are an option, but one that takes long term planning and might not work for people who regularly change jobs or who want the greater returns offered by the greater risks of equity and bond funds. They are popular in the US with academics, teachers and Government employers as even if they change universities etc their new employer will have a retirement plan with the same deferred annuity. They can be bought by anyone and receive tax benefits, but outside of the sectors I mentioned they are not popular with the glitz and excitement of DC wrapped equity and bond funds being far more popular. It would be interesting to understand why they are not available in the UK and why they didn't form part of the transition from DB to DC pensions.Triumph13 said:Bostonerimus1 said:
Lifestyle funds are also subject to market ups and downs. The volatility of UK bond funds in recent years has shown that Lifestyling can be dangerous. OldScientist points out that you'd ideally have an inflation linked Gilt ladder of the correct maturities as you approach retirement. When people had DB pensions there was no need for Lifestyling. Money was put into the DB pot for a guaranteed lifetime income at retirement. In the US some insurance companies offer a "deferred annuity" which is very similar to a DB pension, but the payout is linked to your lifetime contribution amounts and mortality credits rather than some salary calculation. I have such a deferred annuity called TIAA-Traditional which was the default retirement fund with my first US employer and I plan to turn it into a lifetime annuity soon.Triumph13 said:A fascinating little analysis OldScientist. Thank you. Is the reason you have upped the variable percentage by 0.2% pa because you are aiming for portfolio depletion? I'm always nervous of such an approach in case one ends up living longer than expected. Fortunately I have inheritance as a key aim so I'm happy with a constant perecntage.
Plenty of off the shelf lifestyling funds are available Bostoneremus1 where assets are progressively moved into suitable gilt funds to try to minimise last minute volatility in the amount of annuity income that can be purchased. They have long been the standard for work DC pensions before the drawdown freedoms came in and are probably worth the marginally higher fees for most people vs trying to manage the locking in of annuity rates themselves. I do agree that, unless annuity rates crash again in another bond bubble, we definitely need to move back to annuities being the default position for the average pensioner. I fear that won't happen until we have an awful lot of people screw up their drawdown.
All our SWR modeling and anxiety comes about because DC pension pots are inherently volatile even Lifestyle ones. If people could buy into a deferred annuity early in their work career they would have a very safe way to provide a base of retirement income and then they could invest in equities for some growth. The deferred annuity isn't really an investment it's an insurance product and they often come with lots of fees and complexities so there are pitfalls to be avoided, but it would be nice to see it as another retirement option, especially if an annuity is in your long term planning.
Sorry, I was assuming your deferred annuities were just a short term thing purchased close to retirement, rather than a whole career thing. I can't imagine they are cheap, given they are taking on all the risks that lead employers to close DB schemes!Bostonerimus1 said:
Lifestyle funds are also subject to market ups and downs. The volatility of UK bond funds in recent years has shown that Lifestyling can be dangerous. OldScientist points out that you'd ideally have an inflation linked Gilt ladder of the correct maturities as you approach retirement. When people had DB pensions there was no need for Lifestyling. Money was put into the DB pot for a guaranteed lifetime income at retirement. In the US some insurance companies offer a "deferred annuity" which is very similar to a DB pension, but the payout is linked to your lifetime contribution amounts and mortality credits rather than some salary calculation. I have such a deferred annuity called TIAA-Traditional which was the default retirement fund with my first US employer and I plan to turn it into a lifetime annuity soon.Triumph13 said:A fascinating little analysis OldScientist. Thank you. Is the reason you have upped the variable percentage by 0.2% pa because you are aiming for portfolio depletion? I'm always nervous of such an approach in case one ends up living longer than expected. Fortunately I have inheritance as a key aim so I'm happy with a constant perecntage.
Plenty of off the shelf lifestyling funds are available Bostoneremus1 where assets are progressively moved into suitable gilt funds to try to minimise last minute volatility in the amount of annuity income that can be purchased. They have long been the standard for work DC pensions before the drawdown freedoms came in and are probably worth the marginally higher fees for most people vs trying to manage the locking in of annuity rates themselves. I do agree that, unless annuity rates crash again in another bond bubble, we definitely need to move back to annuities being the default position for the average pensioner. I fear that won't happen until we have an awful lot of people screw up their drawdown.
All our SWR modeling and anxiety comes about because DC pension pots are inherently volatile even Lifestyle ones. If people could buy into a deferred annuity early in their work career they would have a very safe way to provide a base of retirement income and then they could invest in equities for some growth. The deferred annuity isn't really an investment it's an insurance product and they often come with lots of fees and complexities so there are pitfalls to be avoided, but it would be nice to see it as another retirement option, especially if an annuity is in your long term planning.
The key thing with lifestyling funds is that although the bond funds can be volatile, they naturally move in the opposite direction to annuity rates, so the eventual annuity yield is much less volatile.And so we beat on, boats against the current, borne back ceaselessly into the past.0 -
I would imagine that a key factor would be cost as those guaranteed returns are nominal rather than real. DB pensions generally invest funds for the liabilities relating to younger members in equities, moving to bonds for those closer to retirement, so a decent amount of inflation beating returns are baked into the costings. When they shifted to DC the assumption in the illustrations used was very much that a similar approach would be taken by individuals, allowing them to claim you had a decent chance of doing as well as the old schemes, you were just taking more risk. The deferred annuity route would be baking in lower returns and thus a lower pension, albeit with less risk in return. A harder sell.Bostonerimus1 said:
Deferred Annuities use similar risk and mortality maths as annuities and act like a turbo charged saving account because the money is locked up. Then at retirement the account balance can be used to purchase a lifetime annuity. My deferred annuity had a minimum annual interest rate of 3% and was up to 7% for high interest rate years. The usual comparisons between DC/SWR and annuities/lifetime income apply. They are an option, but one that takes long term planning and might not work for people who regularly change jobs or who want the greater returns offered by the greater risks of equity and bond funds. They are popular in the US with academics, teachers and Government employers as even if they change universities etc their new employer will have a retirement plan with the same deferred annuity. They can be bought by anyone and receive tax benefits, but outside of the sectors I mentioned they are not popular with the glitz and excitement of DC wrapped equity and bond funds being far more popular. It would be interesting to understand why they are not available in the UK and why they didn't form part of the transition from DB to DC pensions.Triumph13 said:Bostonerimus1 said:
Lifestyle funds are also subject to market ups and downs. The volatility of UK bond funds in recent years has shown that Lifestyling can be dangerous. OldScientist points out that you'd ideally have an inflation linked Gilt ladder of the correct maturities as you approach retirement. When people had DB pensions there was no need for Lifestyling. Money was put into the DB pot for a guaranteed lifetime income at retirement. In the US some insurance companies offer a "deferred annuity" which is very similar to a DB pension, but the payout is linked to your lifetime contribution amounts and mortality credits rather than some salary calculation. I have such a deferred annuity called TIAA-Traditional which was the default retirement fund with my first US employer and I plan to turn it into a lifetime annuity soon.Triumph13 said:A fascinating little analysis OldScientist. Thank you. Is the reason you have upped the variable percentage by 0.2% pa because you are aiming for portfolio depletion? I'm always nervous of such an approach in case one ends up living longer than expected. Fortunately I have inheritance as a key aim so I'm happy with a constant perecntage.
Plenty of off the shelf lifestyling funds are available Bostoneremus1 where assets are progressively moved into suitable gilt funds to try to minimise last minute volatility in the amount of annuity income that can be purchased. They have long been the standard for work DC pensions before the drawdown freedoms came in and are probably worth the marginally higher fees for most people vs trying to manage the locking in of annuity rates themselves. I do agree that, unless annuity rates crash again in another bond bubble, we definitely need to move back to annuities being the default position for the average pensioner. I fear that won't happen until we have an awful lot of people screw up their drawdown.
All our SWR modeling and anxiety comes about because DC pension pots are inherently volatile even Lifestyle ones. If people could buy into a deferred annuity early in their work career they would have a very safe way to provide a base of retirement income and then they could invest in equities for some growth. The deferred annuity isn't really an investment it's an insurance product and they often come with lots of fees and complexities so there are pitfalls to be avoided, but it would be nice to see it as another retirement option, especially if an annuity is in your long term planning.
Sorry, I was assuming your deferred annuities were just a short term thing purchased close to retirement, rather than a whole career thing. I can't imagine they are cheap, given they are taking on all the risks that lead employers to close DB schemes!Bostonerimus1 said:
Lifestyle funds are also subject to market ups and downs. The volatility of UK bond funds in recent years has shown that Lifestyling can be dangerous. OldScientist points out that you'd ideally have an inflation linked Gilt ladder of the correct maturities as you approach retirement. When people had DB pensions there was no need for Lifestyling. Money was put into the DB pot for a guaranteed lifetime income at retirement. In the US some insurance companies offer a "deferred annuity" which is very similar to a DB pension, but the payout is linked to your lifetime contribution amounts and mortality credits rather than some salary calculation. I have such a deferred annuity called TIAA-Traditional which was the default retirement fund with my first US employer and I plan to turn it into a lifetime annuity soon.Triumph13 said:A fascinating little analysis OldScientist. Thank you. Is the reason you have upped the variable percentage by 0.2% pa because you are aiming for portfolio depletion? I'm always nervous of such an approach in case one ends up living longer than expected. Fortunately I have inheritance as a key aim so I'm happy with a constant perecntage.
Plenty of off the shelf lifestyling funds are available Bostoneremus1 where assets are progressively moved into suitable gilt funds to try to minimise last minute volatility in the amount of annuity income that can be purchased. They have long been the standard for work DC pensions before the drawdown freedoms came in and are probably worth the marginally higher fees for most people vs trying to manage the locking in of annuity rates themselves. I do agree that, unless annuity rates crash again in another bond bubble, we definitely need to move back to annuities being the default position for the average pensioner. I fear that won't happen until we have an awful lot of people screw up their drawdown.
All our SWR modeling and anxiety comes about because DC pension pots are inherently volatile even Lifestyle ones. If people could buy into a deferred annuity early in their work career they would have a very safe way to provide a base of retirement income and then they could invest in equities for some growth. The deferred annuity isn't really an investment it's an insurance product and they often come with lots of fees and complexities so there are pitfalls to be avoided, but it would be nice to see it as another retirement option, especially if an annuity is in your long term planning.
The key thing with lifestyling funds is that although the bond funds can be volatile, they naturally move in the opposite direction to annuity rates, so the eventual annuity yield is much less volatile.0 -
Agreed. Annuities fulfill a particular function in your personal finances and the deferred annuities I'm talking about usually serve as the fixed income portion of a portfolio along with some equity funds. I left my first job after 3 years and had $9000 in my deferred annuity. I have not added to it since for various reasons and thirty four years later it is worth $67k so the average annual interest rate has been 6%...definitely not spectacular and far behind equities over the same time. But I know people who have added 5% or 10% of their salary to it all their working life and are retiring with balances of many $100ks. This thread is about SWR and people rightly worry about how to do drawdown and Lifestyling as they fret about buying an annuity. There are also those with poor financial skills who might like something like a deferred annuity as a guaranteed add on to SP. It's just another way of looking at things.Triumph13 said:
I would imagine that a key factor would be cost as those guaranteed returns are nominal rather than real. DB pensions generally invest funds for the liabilities relating to younger members in equities, moving to bonds for those closer to retirement, so a decent amount of inflation beating returns are baked into the costings. When they shifted to DC the assumption in the illustrations used was very much that a similar approach would be taken by individuals, allowing them to claim you had a decent chance of doing as well as the old schemes, you were just taking more risk. The deferred annuity route would be baking in lower returns and thus a lower pension, albeit with less risk in return. A harder sell.Bostonerimus1 said:
Deferred Annuities use similar risk and mortality maths as annuities and act like a turbo charged saving account because the money is locked up. Then at retirement the account balance can be used to purchase a lifetime annuity. My deferred annuity had a minimum annual interest rate of 3% and was up to 7% for high interest rate years. The usual comparisons between DC/SWR and annuities/lifetime income apply. They are an option, but one that takes long term planning and might not work for people who regularly change jobs or who want the greater returns offered by the greater risks of equity and bond funds. They are popular in the US with academics, teachers and Government employers as even if they change universities etc their new employer will have a retirement plan with the same deferred annuity. They can be bought by anyone and receive tax benefits, but outside of the sectors I mentioned they are not popular with the glitz and excitement of DC wrapped equity and bond funds being far more popular. It would be interesting to understand why they are not available in the UK and why they didn't form part of the transition from DB to DC pensions.Triumph13 said:Bostonerimus1 said:
Lifestyle funds are also subject to market ups and downs. The volatility of UK bond funds in recent years has shown that Lifestyling can be dangerous. OldScientist points out that you'd ideally have an inflation linked Gilt ladder of the correct maturities as you approach retirement. When people had DB pensions there was no need for Lifestyling. Money was put into the DB pot for a guaranteed lifetime income at retirement. In the US some insurance companies offer a "deferred annuity" which is very similar to a DB pension, but the payout is linked to your lifetime contribution amounts and mortality credits rather than some salary calculation. I have such a deferred annuity called TIAA-Traditional which was the default retirement fund with my first US employer and I plan to turn it into a lifetime annuity soon.Triumph13 said:A fascinating little analysis OldScientist. Thank you. Is the reason you have upped the variable percentage by 0.2% pa because you are aiming for portfolio depletion? I'm always nervous of such an approach in case one ends up living longer than expected. Fortunately I have inheritance as a key aim so I'm happy with a constant perecntage.
Plenty of off the shelf lifestyling funds are available Bostoneremus1 where assets are progressively moved into suitable gilt funds to try to minimise last minute volatility in the amount of annuity income that can be purchased. They have long been the standard for work DC pensions before the drawdown freedoms came in and are probably worth the marginally higher fees for most people vs trying to manage the locking in of annuity rates themselves. I do agree that, unless annuity rates crash again in another bond bubble, we definitely need to move back to annuities being the default position for the average pensioner. I fear that won't happen until we have an awful lot of people screw up their drawdown.
All our SWR modeling and anxiety comes about because DC pension pots are inherently volatile even Lifestyle ones. If people could buy into a deferred annuity early in their work career they would have a very safe way to provide a base of retirement income and then they could invest in equities for some growth. The deferred annuity isn't really an investment it's an insurance product and they often come with lots of fees and complexities so there are pitfalls to be avoided, but it would be nice to see it as another retirement option, especially if an annuity is in your long term planning.
Sorry, I was assuming your deferred annuities were just a short term thing purchased close to retirement, rather than a whole career thing. I can't imagine they are cheap, given they are taking on all the risks that lead employers to close DB schemes!Bostonerimus1 said:
Lifestyle funds are also subject to market ups and downs. The volatility of UK bond funds in recent years has shown that Lifestyling can be dangerous. OldScientist points out that you'd ideally have an inflation linked Gilt ladder of the correct maturities as you approach retirement. When people had DB pensions there was no need for Lifestyling. Money was put into the DB pot for a guaranteed lifetime income at retirement. In the US some insurance companies offer a "deferred annuity" which is very similar to a DB pension, but the payout is linked to your lifetime contribution amounts and mortality credits rather than some salary calculation. I have such a deferred annuity called TIAA-Traditional which was the default retirement fund with my first US employer and I plan to turn it into a lifetime annuity soon.Triumph13 said:A fascinating little analysis OldScientist. Thank you. Is the reason you have upped the variable percentage by 0.2% pa because you are aiming for portfolio depletion? I'm always nervous of such an approach in case one ends up living longer than expected. Fortunately I have inheritance as a key aim so I'm happy with a constant perecntage.
Plenty of off the shelf lifestyling funds are available Bostoneremus1 where assets are progressively moved into suitable gilt funds to try to minimise last minute volatility in the amount of annuity income that can be purchased. They have long been the standard for work DC pensions before the drawdown freedoms came in and are probably worth the marginally higher fees for most people vs trying to manage the locking in of annuity rates themselves. I do agree that, unless annuity rates crash again in another bond bubble, we definitely need to move back to annuities being the default position for the average pensioner. I fear that won't happen until we have an awful lot of people screw up their drawdown.
All our SWR modeling and anxiety comes about because DC pension pots are inherently volatile even Lifestyle ones. If people could buy into a deferred annuity early in their work career they would have a very safe way to provide a base of retirement income and then they could invest in equities for some growth. The deferred annuity isn't really an investment it's an insurance product and they often come with lots of fees and complexities so there are pitfalls to be avoided, but it would be nice to see it as another retirement option, especially if an annuity is in your long term planning.
The key thing with lifestyling funds is that although the bond funds can be volatile, they naturally move in the opposite direction to annuity rates, so the eventual annuity yield is much less volatile.
FYI I recently got an annuity quote for a flat single lifetime annuity with a 10 year guarantee starting at age 65 from my $67k of $6.6k/year which is a payout rate of 9.8%. This is a couple of percent above the going rate because of the length of time I've held the deferred annuity.And so we beat on, boats against the current, borne back ceaselessly into the past.1 -
Yes, the rising percentage of portfolio will result in a smaller (but not depleted) portfolio since it extracts more income - it is less extreme than VPW, which in one form will completely deplete the portfolio at the end of the planning period. The following graphs show real portfolio value (top row) and real WR (lower row) at various percedntiles (0=worst case, 10, 25, 50=median, 75, and 99=best case) as a function of time for rising PoP (left column) and constant PoPTriumph13 said:A fascinating little analysis OldScientist. Thank you. Is the reason you have upped the variable percentage by 0.2% pa because you are aiming for portfolio depletion? I'm always nervous of such an approach in case one ends up living longer than expected. Fortunately I have inheritance as a key aim so I'm happy with a constant perecntage.
Plenty of off the shelf lifestyling funds are available Bostoneremus1 where assets are progressively moved into suitable gilt funds to try to minimise last minute volatility in the amount of annuity income that can be purchased. They have long been the standard for work DC pensions before the drawdown freedoms came in and are probably worth the marginally higher fees for most people vs trying to manage the locking in of annuity rates themselves. I do agree that, unless annuity rates crash again in another bond bubble, we definitely need to move back to annuities being the default position for the average pensioner. I fear that won't happen until we have an awful lot of people screw up their drawdown.
As expected, the amount in the portfolio was lower for the rising case and the withdrawals after 10-20 years were higher in the worst cases, but lower towards the end.
A smaller increase in the percentage (e.g., 0.1 pp per year instead of 0.2) will make the graphs closer to constant case. Again, this is, yet another, decision to be made. Personally, a rising percentage makes sense for us since we are unlikely to need income from our portfolio once our state pensions are in payment (we were aiming for a peak income after 10-15 years and then zero after that).
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Pat38493 said:This is a graph produced by a historic stress testing tool, using a £1m portfolio in an uncrystallised pension.. Withdrawals are £40K per year net after tax, increasing with historic inflation.
Retiring at age 60.
864 scenarios were modelled starting in 1915 using historic market data.
No state pension assumed.
100% Equities in this case but you can simulate various allocations. 0.3% charges.
According to this software, there is a 99% chance of reaching age 98, and in no case would you run out of money before age 89. 98 was chosen as it's the date when there is less than 10% probability of being alive.
So according to this tool, the 4% rule actually works in 99% of the time for UK retirees if you use 100% equity allocation! In fact it's even more than 4% since I input £40K net spend and there was £6K of tax in year 1, giving 4.6% withdrawal rate. This seems to go against other research findings but there you go.
The software uses UFPLS withdrawals to model the tax payable throughout the plan.
If you add in a full new state pension from age 67, the success rate unsurprisingly goes to 100%.
Red line is the worst case scenario which was 1915. 1969 also failed but you ran out of money at age 94. 2000-2008 is not included as there are not enough years after that for the model to work.
She shaded bands are the likely (30 to 70 percentile), less likely, and rare scenarios.
The bigger thing to note around SWR, is that even in the less likely lower scenario band, you ended up with more money than you started - if using this approach you will highly likely be able to increase your spend over time.
Also interesting to note - reducing the equity allocation below 100% gives worse results, but any equity allocation 50% or more gave 95%+ success rates and 100% to age 81.
An interesting graph (if it unfortunate that the software you are using is no longer available to new retail clients). That 100% stocks for UK retirees improved SWR is fairly well known (e.g., see https://blog.iese.edu/jestrada/files/2018/03/MaxWR.pdf ), but the removal of data before 1915 does skew the results (I'm not sure why 1915 was chosen, except that for the UK it was the first year in which dated gilts, as opposed to consols, were issued in significant numbers).
For example, the SWR as a function of start year is plotted in the following graph (50% UK stocks, 50% US stocks and a 38 year retirement period to match 60 to 97 in your graph). The vertical and horizontal dashed lines indicate 1915 and 4.6%, respectively.
Using this data set shows that there was a decade of poor results (below 4.6%) in the run up to 1915 (which are ignore in your graph) together with 1969 (which you did find in your results) and 1972-1973 (the latter caused by the high proportion of UK stocks I've used and the UK crash in the early 1970s - the UK stocks market was 10% of the global market in 1987 - not sure about the 1970s, but Figure 4 in https://doi.org/10.1016/j.jfineco.2021.09.008 suggest around 10% or so).
It would be interesting to know exactly what the portfolio of 100% stocks was in your model (e.g., global cap weighted or some other combination).
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Yes this is indeed an interesting point.OldScientist said:Pat38493 said:This is a graph produced by a historic stress testing tool, using a £1m portfolio in an uncrystallised pension.. Withdrawals are £40K per year net after tax, increasing with historic inflation.
Retiring at age 60.
864 scenarios were modelled starting in 1915 using historic market data.
No state pension assumed.
100% Equities in this case but you can simulate various allocations. 0.3% charges.
According to this software, there is a 99% chance of reaching age 98, and in no case would you run out of money before age 89. 98 was chosen as it's the date when there is less than 10% probability of being alive.
So according to this tool, the 4% rule actually works in 99% of the time for UK retirees if you use 100% equity allocation! In fact it's even more than 4% since I input £40K net spend and there was £6K of tax in year 1, giving 4.6% withdrawal rate. This seems to go against other research findings but there you go.
The software uses UFPLS withdrawals to model the tax payable throughout the plan.
If you add in a full new state pension from age 67, the success rate unsurprisingly goes to 100%.
Red line is the worst case scenario which was 1915. 1969 also failed but you ran out of money at age 94. 2000-2008 is not included as there are not enough years after that for the model to work.
She shaded bands are the likely (30 to 70 percentile), less likely, and rare scenarios.
The bigger thing to note around SWR, is that even in the less likely lower scenario band, you ended up with more money than you started - if using this approach you will highly likely be able to increase your spend over time.
Also interesting to note - reducing the equity allocation below 100% gives worse results, but any equity allocation 50% or more gave 95%+ success rates and 100% to age 81.
An interesting graph (if it unfortunate that the software you are using is no longer available to new retail clients). That 100% stocks for UK retirees improved SWR is fairly well known (e.g., see https://blog.iese.edu/jestrada/files/2018/03/MaxWR.pdf ), but the removal of data before 1915 does skew the results (I'm not sure why 1915 was chosen, except that for the UK it was the first year in which dated gilts, as opposed to consols, were issued in significant numbers).
For example, the SWR as a function of start year is plotted in the following graph (50% UK stocks, 50% US stocks and a 38 year retirement period to match 60 to 97 in your graph). The vertical and horizontal dashed lines indicate 1915 and 4.6%, respectively.
Using this data set shows that there was a decade of poor results (below 4.6%) in the run up to 1915 (which are ignore in your graph) together with 1969 (which you did find in your results) and 1972-1973 (the latter caused by the high proportion of UK stocks I've used and the UK crash in the early 1970s - the UK stocks market was 10% of the global market in 1987 - not sure about the 1970s, but Figure 4 in https://doi.org/10.1016/j.jfineco.2021.09.008 suggest around 10% or so).
It would be interesting to know exactly what the portfolio of 100% stocks was in your model (e.g., global cap weighted or some other combination).
I was using a sample 100% portfolio that's included with the model. Behind the scenes it translates this into percentages of a number of preset categories - see the 2 screenshots below.
If I changed the allocation to 100% global equities to represent the global passive tracker fund that many DIY retirees would use, the % success goes down 4 clicks to 95% - it's a known trick that adding value stocks and small cap stocks into the mix will eliminate some failures in SWR calculations, but I think the jury is out on whether this effect is still valid as it didn't work for about the last 30 years.
On the other hand, if you have a complicated allocation like that one below you are probably using an IFA - therefore if I increased the charges from 0.3% to 1%, the results are pretty much the same again - 95% success.
To me for my retirement plan, I am just as interested when the earliest failure is coming, as the overall % - 99% success, but with all the faiures after only 7 years is still much riskier than 99% with only failing at 95 years old. In my case, from the time we are both 67, 90%+ of our forecasted needs are covered by DB/SP sources. However the test below is just a simple test of the 4% rule not related to my own plan.
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Another tweak that can be made to retirement portfolios that models have shown improves SWR is a rising equity allocation with age after retirement. Here's a paper by Pfau.OldScientist said:
Yes, the rising percentage of portfolio will result in a smaller (but not depleted) portfolio since it extracts more income - it is less extreme than VPW, which in one form will completely deplete the portfolio at the end of the planning period. The following graphs show real portfolio value (top row) and real WR (lower row) at various percedntiles (0=worst case, 10, 25, 50=median, 75, and 99=best case) as a function of time for rising PoP (left column) and constant PoPTriumph13 said:A fascinating little analysis OldScientist. Thank you. Is the reason you have upped the variable percentage by 0.2% pa because you are aiming for portfolio depletion? I'm always nervous of such an approach in case one ends up living longer than expected. Fortunately I have inheritance as a key aim so I'm happy with a constant perecntage.
Plenty of off the shelf lifestyling funds are available Bostoneremus1 where assets are progressively moved into suitable gilt funds to try to minimise last minute volatility in the amount of annuity income that can be purchased. They have long been the standard for work DC pensions before the drawdown freedoms came in and are probably worth the marginally higher fees for most people vs trying to manage the locking in of annuity rates themselves. I do agree that, unless annuity rates crash again in another bond bubble, we definitely need to move back to annuities being the default position for the average pensioner. I fear that won't happen until we have an awful lot of people screw up their drawdown.
As expected, the amount in the portfolio was lower for the rising case and the withdrawals after 10-20 years were higher in the worst cases, but lower towards the end.
A smaller increase in the percentage (e.g., 0.1 pp per year instead of 0.2) will make the graphs closer to constant case. Again, this is, yet another, decision to be made. Personally, a rising percentage makes sense for us since we are unlikely to need income from our portfolio once our state pensions are in payment (we were aiming for a peak income after 10-15 years and then zero after that).
https://www.financialplanningassociation.org/article/journal/JAN14-reducing-retirement-risk-rising-equity-glide-path
The allocation to bond/fixed income at retirement is to reduce sequence of returns risk, but as the diminishes as you age you go to more equities for their greater potential return. This sort of approach is psychologically easier to use when you have taken pressure off your SWR by reducing fixed costs and maybe with partial annuitization...but of course an annuity is the ultimate in conservative fixed income ;-)
But we might be missing the fear behind the original question. The 4% rule is derived from historical data from stock and bond markets and in times like these is that really a sensible way to approach retirement. The world looks scary to many people and uncertainty is not conducive to long term planning and if the economy changes significantly from what it was in the past then the 4% rule will become irrelevant; for all we know it already is.And so we beat on, boats against the current, borne back ceaselessly into the past.0 -
Fear? I didn't notice any fear.Bostonerimus1 said:
Another tweak that can be made to retirement portfolios that models have shown improves SWR is a rising equity allocation with age after retirement. Here's a paper by Pfau.OldScientist said:
Yes, the rising percentage of portfolio will result in a smaller (but not depleted) portfolio since it extracts more income - it is less extreme than VPW, which in one form will completely deplete the portfolio at the end of the planning period. The following graphs show real portfolio value (top row) and real WR (lower row) at various percedntiles (0=worst case, 10, 25, 50=median, 75, and 99=best case) as a function of time for rising PoP (left column) and constant PoPTriumph13 said:A fascinating little analysis OldScientist. Thank you. Is the reason you have upped the variable percentage by 0.2% pa because you are aiming for portfolio depletion? I'm always nervous of such an approach in case one ends up living longer than expected. Fortunately I have inheritance as a key aim so I'm happy with a constant perecntage.
Plenty of off the shelf lifestyling funds are available Bostoneremus1 where assets are progressively moved into suitable gilt funds to try to minimise last minute volatility in the amount of annuity income that can be purchased. They have long been the standard for work DC pensions before the drawdown freedoms came in and are probably worth the marginally higher fees for most people vs trying to manage the locking in of annuity rates themselves. I do agree that, unless annuity rates crash again in another bond bubble, we definitely need to move back to annuities being the default position for the average pensioner. I fear that won't happen until we have an awful lot of people screw up their drawdown.
As expected, the amount in the portfolio was lower for the rising case and the withdrawals after 10-20 years were higher in the worst cases, but lower towards the end.
A smaller increase in the percentage (e.g., 0.1 pp per year instead of 0.2) will make the graphs closer to constant case. Again, this is, yet another, decision to be made. Personally, a rising percentage makes sense for us since we are unlikely to need income from our portfolio once our state pensions are in payment (we were aiming for a peak income after 10-15 years and then zero after that).
https://www.financialplanningassociation.org/article/journal/JAN14-reducing-retirement-risk-rising-equity-glide-path
The allocation to bond/fixed income at retirement is to reduce sequence of returns risk, but as the diminishes as you age you go to more equities for their greater potential return. This sort of approach is psychologically easier to use when you have taken pressure off your SWR by reducing fixed costs and maybe with partial annuitization...but of course an annuity is the ultimate in conservative fixed income ;-)
But we might be missing the fear behind the original question. The 4% rule is derived from historical data from stock and bond markets and in times like these is that really a sensible way to approach retirement. The world looks scary to many people and uncertainty is not conducive to long term planning and if the economy changes significantly from what it was in the past then the 4% rule will become irrelevant; for all we know it already is.0
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