Is the 4% rule still applicable today?

Pat38493

Even if the 4% rule worked, it's not much use in the UK unless you are retiring at exactly the same time you take your state pension (or you don't have one).  Other than that you are going to have uneven income anyway so the 4% rule won't apply to your real withdrawals.

As others have said, the 4% rule failed in some cases when applied to UK historical scenarios, and was only supposed to be good for a 30 year retirement.

Most UK retirees will end up drawing move money out in the early years and less in the later years, partly due to state pension kicking in and partly due to being less active and mobile.  

Statements that you should draw 5+% due to "current market conditions" imply that the expert, no matter how famous, can predict the future, and beyond that, logically any such statement means you can only draw that % this year, as next year he might say it's 2% due to market conditions!

Bostonerimus1

Pat38493 said:

Even if the 4% rule worked, it's not much use in the UK unless you are retiring at exactly the same time you take your state pension (or you don't have one).  Other than that you are going to have uneven income anyway so the 4% rule won't apply to your real withdrawals.

As others have said, the 4% rule failed in some cases when applied to UK historical scenarios, and was only supposed to be good for a 30 year retirement.

Most UK retirees will end up drawing move money out in the early years and less in the later years, partly due to state pension kicking in and partly due to being less active and mobile.  

Statements that you should draw 5+% due to "current market conditions" imply that the expert, no matter how famous, can predict the future, and beyond that, logically any such statement means you can only draw that % this year, as next year he might say it's 2% due to market conditions!

All Bengen/Trinity does is to estimate the maximum withdrawal rate a pot of money can sustain if invested in a particular asset allocation for say 30 years with say a 95% probability of success. Other income sources don't change that maths, but they might well change you income needs and reduce your required drawdown amount leaving more for the bairns to fight over.

Linton

Bostonerimus1 said:

Pat38493 said:

Even if the 4% rule worked, it's not much use in the UK unless you are retiring at exactly the same time you take your state pension (or you don't have one).  Other than that you are going to have uneven income anyway so the 4% rule won't apply to your real withdrawals.

As others have said, the 4% rule failed in some cases when applied to UK historical scenarios, and was only supposed to be good for a 30 year retirement.

Most UK retirees will end up drawing move money out in the early years and less in the later years, partly due to state pension kicking in and partly due to being less active and mobile.  

Statements that you should draw 5+% due to "current market conditions" imply that the expert, no matter how famous, can predict the future, and beyond that, logically any such statement means you can only draw that % this year, as next year he might say it's 2% due to market conditions!

All Bengen/Trinity does is to estimate the maximum withdrawal rate a pot of money can sustain if invested in a particular asset allocation for say 30 years with say a 95% probability of success. Other income sources don't change that maths, but they might well change you income needs and reduce your required drawdown amount leaving more for the bairns to fight over.

I think this is an important point.  In my view their work is simply a calculation of outcomes based on a particular asset allocation and drawdown strategy given a particular pattern of historic economic circumstances in a particular country. It does not claim AFAIK that the asset allocation and drawdown strategy they use are in some sense optimal, whatever that may mean.

So an x% rule may well be useful as a sanity check when planning retirement, but no more than that.  It does not provide any guarantees, nor does it provide a recommended strategy for how one should actually manage one’s finances after retirement.

MK62

A 30yr index linked gilt ladder will currently give a UK retiree a starting withdrawal rate of 4.4%, so perhaps retirees should bear that in mind when considering their starting withdrawal rate under a Bengen style drawdown plan......

GDB2222

What is the effective tax rate on any money left in the drawdown fund after the pension owner and spouse have died - assuming the IHT nil rate band has been used up?

artyboy

GDB2222 said:

What is the effective tax rate on any money left in the drawdown fund after the pension owner and spouse have died - assuming the IHT nil rate band has been used up?

40% IHT to start with, PLUS the marginal tax rate of whoever it is left to, so potentially as much as a further 45% on top, which comes out at a worst case scenario of 67%

Except that it could be even worse than that, in that once your estate exceeds £2m, your RNRB is reduced by £1 for every £2 of extra estate value (in the same way as personal allowance if you have income above £100k).

Just brings another dimension to the need for effective estate planning!

MallyGirl

Hence the shift in my mindset to drawdown all I can up to the 20% threshold, putting excess into an ISA. At least then our daughter will only have to pay the 40% IHT and not also get hit paying income tax on any that is left.

GDB2222

artyboy said:

GDB2222 said:

What is the effective tax rate on any money left in the drawdown fund after the pension owner and spouse have died - assuming the IHT nil rate band has been used up?

40% IHT to start with, PLUS the marginal tax rate of whoever it is left to, so potentially as much as a further 45% on top, which comes out at a worst case scenario of 67%

Except that it could be even worse than that, in that once your estate exceeds £2m, your RNRB is reduced by £1 for every £2 of extra estate value (in the same way as personal allowance if you have income above £100k).

Just brings another dimension to the need for effective estate planning!

One solution is to buy an annuity, I suppose.  That’s not very attractive at younger ages, but it would make sense later on. 

Bostonerimus1

MallyGirl said:

Hence the shift in my mindset to drawdown all I can up to the 20% threshold, putting excess into an ISA. At least then our daughter will only have to pay the 40% IHT and not also get hit paying income tax on any that is left.

This is also my strategy. I face a couple of issues being in the USA and thinking about a return to the UK. The UK has a higher top rate of tax and the US mandates a certain level of withdrawals from DC accounts at age 75. So I'm paying US tax on DC withdrawals at a marginal rate of 22% now so I can get it into a "ROTH" DC retirement account which is tax free in the USA and the UK. However, right now the US IHT on my estate would be 0% and if I move back to the UK it would be 40% on most of it. To avoid some of that 40% tax hit I'm giving to family members before I move to the UK to make use of the generous gift rules in the US.

artyboy

GDB2222 said:

artyboy said:

GDB2222 said:

What is the effective tax rate on any money left in the drawdown fund after the pension owner and spouse have died - assuming the IHT nil rate band has been used up?

40% IHT to start with, PLUS the marginal tax rate of whoever it is left to, so potentially as much as a further 45% on top, which comes out at a worst case scenario of 67%

Except that it could be even worse than that, in that once your estate exceeds £2m, your RNRB is reduced by £1 for every £2 of extra estate value (in the same way as personal allowance if you have income above £100k).

Just brings another dimension to the need for effective estate planning!

One solution is to buy an annuity, I suppose.  That’s not very attractive at younger ages, but it would make sense later on. 

Or just draw down at an accelerated rate and pass on what you don't need to whoever you have in mind as your beneficiaries.

Hopefully at least one of us will survive long enough (ie 7 years) after executing on that plan, although we are resigned to paying a decent chunk of 40% income tax on both our pots in doing so.