Is the 4% rule still applicable today?

MK62

You could, but then you'd be following a variable percentage plan and not the SWR.........

The SWR initial percentage rate is calculated from historic "worst case" market data, and that rate would be the same regardless of the 30% rise over those previous two years....however, any recalculated rate might be higher as then you'd be calculating for a period 2 years shorter.....

PS.....that said, like others have posted I doubt many follow the SWR plan to the letter anyway......

If you mean re-baseline as in using the same percentage, but against the now higher portfolio value, again, you could (and I suspect many do just that tbh), but then you aren't sticking to the plan.......if the portfolio fell by 30%, you aren't supposed to "re-baseline" either.......but again, I suspect many would.

Bostonerimus1

westv said:

Bostonerimus1 said:

seacaitch said:

While the "4% rule of thumb" (or 3.5% or 3.25% ) should remain useful to accumulators as an indication of the scale of investment/savings pot required to fund a "decent-length" retirement (something which novices might otherwise greatly underestimate!), I suspect that for retirees amortization-based withdrawal (ABW) strategies may come to supplant the various SWR-based methods. Once you recognise that a rigid SWR approach, in the face of ever-changing circumstances, is a bit daft, such that nobody's really going to follow it, then all the various tweaks of SWR can begin to seem like polishing turds, and you'd be better adopting an approach in which continuous adjustment to the task in hand is inherent and not a bolt-on.

Perhaps the strongest active advocate for amortization-based approaches is Ben Matthew:
https://www.linkedin.com/in/bmathecon/

...with detailed articles like this:
https://www.whitecoatinvestor.com/amortization-based-withdrawal-vs-safe-withdrawal-rates

...while developing his comprehensive and well-regarded TPAW tool found here:
https://tpawplanner.com/
https://tpawplanner.com/learn

...plus, he's highly responsive to questions and requests on this dedicated 35-page Bogleheads thread:
https://www.bogleheads.org/forum/viewtopic.php?t=331368


I've been using a "simple" (slightly hardcore) amortization withdrawal approach for over twenty years, and will do so hopefully for a further 30+ years, guided by the PMT spreadsheet function plus current portfolio size (so adjusts to actual mkt performance and past spending), current asset allocation & real return forecasts (so adjusts to anticipated future returns), forecast longevity (so adjusts to the passage of time & health outlook). This makes my spending plan responsive to reality, continually evolving as things change, never running out, nor unintentionally leaving a giant fortune unspent in old age.

For less hardcore and more sophisticated ABW approaches, I'd suggest taking a look at the TPAW Planner mentioned.

You might consider constant inflation adjusted withdrawals to be daft, but the initial goal was to support inflation adjusted retirement spending in the face of market volatility. The whole point is to maintain your spending power and so has a very different philosophy to the various adjustable withdrawal approaches. The biggest issue I have with SWR is the assumption that future markets will be similar to past ones. That convinced me to base my retirement income generation on SP, DB pensions and annuities. Everyone's withdrawal phase will be different and so it's essential to understand the options.

Everything to do with pensions can only be based on what we know now. As of today's date, a withdrawal of 3 point whatever % is sustainable. Whether that changes we can't know but withdrawals have to start somewhere.

Well in my next sentence I explain my response to the unknowability of future markets; I decided to transfer that risk to others by using SP, DB pensions and annuities to provide retirement income and I would advocate that those type of investments should be the core of everyone's retirement income. When the basics of life are covered from guaranteed income sources the pressure comes off your drawdown from DC pensions etc. So far we have concentrated on the level of withdrawals from DC pensions, but there is another side to the equation and that's how much you spend. If you can reduce spending that also takes pressure off withdrawals. This is why I think it's good to pay off your mortgage while you are still working and go into retirement entirely debt free.

Bostonerimus1

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?

Because your SWR rate includes times of such bounty and anticipates bad years. Of course 3.5% SWR etc could be seen as a very conservative amount as most often it will leave you with a large pot when you die. But that is all part of the parameter/risk/caveat balancing act.

GDB2222

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.)  i also am not at all sure about the assumption that we will spend less as we get older? Surely, we will need more help in the house as we grow older? 

Pat38493

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?

This is indeed a limitation of SWR.  If you look at the ERN spreadsheet that is mentioned in one of the articles linked about, it introduced the concept of SWR figures based on market drawdown level - i.e. he tried to give us different SWR based on the current market drawdown or CAPE levels from the historic data.

Pure SWR does not know where markets are in the economic cycle at any point in time.

Another way to sort of handle this is to take the view that if markets are down by 30%, you could tolerate a lower probability of success in your SWR - you could maybe go with an 80% success scenario because markets are depressed.  If Markets are at all time high, you may wish to go for a 100% or 95%+ scenario.

But as you point out, nobody is going to truly follow SWR to the letter unless they take out exactly those amounts, and put them in an non interest bearing account each year, and if they have money left over at year end that they didn't spend, give it to charity.  In reality I doubt anyone is doing this.

The flip side to your example is if markets crashed 40% - you then re-run your SWR and now it looks like you should not have retired.

Pat38493

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.)  i also am not at all sure about the assumption that we will spend less as we get older? Surely, we will need more help in the house as we grow older? 

Yes that's true, but the available data seems to show that most people spend less as they get older even if they end up spending more on help in the home, as they spend less on holidays and outings.  

Only a quite small minority of people end up needing a care homse, and even then only a much smaller minority need it for long periods of time.

In many cases, those who own property tend to see their property as a hedge against care home fees, because if you try to budget for them in a cash flow plan, you will never retire unless you are already very wealthy!

Cobbler_tone

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! 

Pat38493

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! 

I heard a podcast recently where an IFA mentioned that in a 30 year career, as far as he can remember he only had one client who exhausted their entire wealth, including the value of their property, on care home fees.

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

Linton

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.)  i also am not at all sure about the assumption that we will spend less as we get older? Surely, we will need more help in the house as we grow older? 

The implied figures seem high to me:

-The chance of someone going into a care home is less than 1/3.  The published figures of % of people in particular age groups in care homes cannot be used as a guide as they dont account for people who die before they would have gone into a care home.
 - The average 2025 cost is apparently £67K/year so assuming £100K+ seems a bit excessive.
 - SP and any pensions will continue to be paid and will cover some of the charges.
 - selling one's house may be possible
 
I have no explicit provision for care home charges as I think it is pointless assuming you have planned prudently.  Whether you use SWR or some other method to determine your drawdown, if your worst case assumptions prove pessimistic, as they probably will, you could end up richer than when you started.  I did not make an assumption in my plans of reducing normal on-going spending as one ages as it seemed imprudent..

It is possible that extreme global economic conditions will ruin your plans.  However that is always the case, the future is unknown.  At some point you have to accept that there are limits to what a finite drawdown pot can cope with.

Cobbler_tone

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!