Is the 4% rule still applicable today?

westv

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?

I've not read that anywhere. As has already been mentioned, something between 3-3.5% is suggested for the UK as a starting point. Simples.

seacaitch

I use a simple amortization-based withdrawal method, in combination with an intentionally lesser-volatility portfolio*, and my "max income" varies with the investment market weather; I flex with the wind, and by course-correcting regularly shouldn't run out of money - and if I live as long as "projected", I shouldn't accidentally leave a giant fortune behind either...

In the good times, like at present, I don't normally take the max income as I usually don't need it all (but could if I wished to and will sometimes), so this prudence slightly raises future "max income" and reduces the impact on future income of the large portfolio drawdowns that lie ahead.

NB today, my spreadsheet assumes I'll be withdrawing for a further 33 years at a current-year withdrawal of 3.6%, which is approx in the ballpark of the Safe Withdrawal Rate numbers being floated up-thread.


*compared to if I was just trying to maximise long term returns regardless of the journey; the portfolio is valuation sensitive, so allocations flex somewhat depending on "expected returns" - art rather than science.

Bostonerimus1

Understanding Bengen/Trinity is a good starting point for drawdown approaches. The starting percentage for Bengen wiill depend on the data and parameters used, but it's a rule of thumb that let's you do some planning. Once you have a good grasp of the principles behind Bengen you can go on to other drawdown methods like Guyton Klinger etc. and see hove the might work for you

https://www.bogleheads.org/wiki/Withdrawal_methods

dunstonh

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. 

GDB2222

I really don't understand how people come up with these 'rules'. My wife is 71, and according to national statistics, she has an average life expectancy of 17 years (to age 88).  However, she has a 25% chance of living to 94, and a 10% chance of living to 98 (27 years). 

So, assuming I die before her, do we need our joint pensions to run out in 17 years or 27 years? Or, maybe longer, as she has a 5% chance of living to 100?   Her mum, by the way, lived to over 90, despite smoking heavily. 



 

SouthCoastBoy

GDB2222 said:

I really don't understand how people come up with these 'rules'. My wife is 71, and according to national statistics, she has an average life expectancy of 17 years (to age 88).  However, she has a 25% chance of living to 94, and a 10% chance of living to 98 (27 years). 

So, assuming I die before her, do we need our joint pensions to run out in 17 years or 27 years? Or, maybe longer, as she has a 5% chance of living to 100?   Her mum, by the way, lived to over 90, despite smoking heavily. 



 

Nobody has a crystal ball, all my pension planning is completed on the basis I will live to 100

lostsoul1234

oh my god!!!

QrizB

GDB2222 said:

I really don't understand how people come up with these 'rules'.

Modelling and back-testing. The maths is pretty straightforward, but you need to understand the assumptions.

GDB2222 said:

So, assuming I die before her, do we need our joint pensions to run out in 17 years or 27 years? Or, maybe longer, as she has a 5% chance of living to 100?

Ideally, you don't want your pensions to ever run out. Not even if you set a new record and live to be 125.

Withdrawal strategies are a topic in themselves, but the simple & guaranteed-not-to-fail option is to buy an annuity.

kempiejon

SouthCoastBoy said:

Nobody has a crystal ball, all my pension planning is completed on the basis I will live to 100

You have to pick a number and I chose 100 too; too small risks failure. There's a long time twixt now and then to flex the plans, my current models have me die with plenty.

nicknameless

gm0 said:

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.

I really like your post.  I've gone for a risk-based approach to withdrawal having read around many different approaches.  Only 2 months in so it hasn't exactly stood the test of time yet lol.