Foolishness of the 4% rule

[Deleted User] · 4 September 2021 at 10:03PM

Yes, the increase are escalated with inflation.

Nobody is confident about living to mid 80s. Some have reasons to expect an early death. Thats a different scenario. Otherwise, mortality tables are readily available and the chances of a 67 year old living passed 85 are high. The financial risk isn’t about dying early. Its about outliving your money.

A 67 year old can easily end up living to 100. Assuming that returns over the next 30 years will match last 20 years is optimistic. Particularly so because the consequences of an error are very unpleasant. Its possible that the weather over the next 3 days will be exactly like today and yesterday, but I wouldn’t want to bet all I have on it.

pensionpawn · 4 September 2021 at 10:08PM

NedS said:

Deleted_User said:

My point? Why do you need the extra secure income from delaying your SP?
So you can safely spend more in the early years before receiving your SP - as well as after.

So you can sleep easy when inflation is rampant and investments are suffering a prolonged bear market run, knowing that you have enough secure income to cover your essential living costs and you don't have to cut back on necessities.
If you've already got that from DB pensions and/or some other source (an annuity maybe), then you probably don't need to convert some of your DC/savings into extra state pension.
It's really quite simple - you have £10,000 to invest and you are 65/66/67 years old. Do you want a guaranteed 5.8% return, inflation linked for life (even better under the triple lock)? You may fancy your chances of doing better in the market, you may not. Your choice.

Your assumptions being:
1. That the individuals pension pot has fallen sufficiently to necessitate a drastic reduction in draw down. E.g. would you have to significantly reduce a £12k5 draw down from a £0.5M pot in a bear market?
2. That the individual doesn't have sufficient cash reserves to whether a bear market. E.g. would 6 years in cash be sufficient?
3. That the individual doesn't have £0.5M equity in their house that they could partially release?
4. That ~£19k SP is insufficient in a bear market and that taking an additional 2 x £3k (to achieve £25k tax free pa) is unachievable in a bear market?
6. The key question, that you really need to guarantee an extra 5.8% SP pa at the expense of not being able to pass more to your spouse if you check out before your delayed SP

With reference to your last sentence, I'm not trying to 'do better' by not delaying SP, you've completely missed my point. I'm merely maximising what I may pass on to my spouse as I do not need more wealth. What I covet most is retiring as soon as possible after 55 because I can rely on a full SP from 67. As you each, each to their own....

Notepad_Phil · 5 September 2021 at 10:55AM

pensionpawn said:
With reference to your last sentence, I'm not trying to 'do better' by not delaying SP, you've completely missed my point. I'm merely maximising what I may pass on to my spouse as I do not need more wealth. What I covet most is retiring as soon as possible after 55 because I can rely on a full SP from 67. As you each, each to their own....

I too want to maximise what I can pass onto my spouse, but I also want to minimise the amount of effort she needs to do to look after our portfolio once I'm no longer around as she's not as interested in such matters as I am. Consequently we're planning to defer her state pension whilst I'll be taking mine straight away - this may not be suitable for everyone, but it works for us.

Prism · 5 September 2021 at 11:03AM

Stargunner said:

Deleted_User said:

Stargunner said:

By delaying your sp for 1 year and missing out on approx £10k of income, you will only get approx £500 a year more, so it will hardly help you sleep easy.

If you invest £10000 in your late 60s and you only live for 10 years you will leave behind your investment, but if you had of bought your so called annuity you will leave nothing.

Actually, by delaying you get 580 plus inflation annually for life guaranteed.

By taking 10K and investing you get 300 plus inflation annually based on 3% SWR and your capital could still run out before you die.

Inflation is added to the state pension but are you sure that it is also added to the additional £580

The average return on a passive interest tracker over the last 20 years has been far in excess of 3%

if you have more than enough to fund your retirement and are confident that you will live at least until your mid eighties I can see the benefit of deferring, but if not then I can’t.

And yet we still don't know if those returns over the last 20 years support a withdrawal rate of 3% as we are only 20 years in. Its not looking especially good for a 2000 retiree.

DT2001 · 6 September 2021 at 4:41PM

A really good thread from what I thought an obvious statement (that the 4% rule is foolish) if taken at headline value!
As has been argued there are circumstances to defer taking your SP as soon as you can. We each have our own set of criteria so need to adapt the ‘rules’ to us.

Having just done by irregular tot up of investments and cash and looked back to about the 1st lockdown it occurred to me that the timing of applying the 4% rule (that you are not going to alter??) can have a large effect on your income. We have seen roughly a 1/3 increase in funds from the bottom despite being cautiously invested as semi/retirement date is flexible (both self employed with little work from day 1 of lockdown for 5 months to full time contracts. We had been aiming for a gradual slowdown and lots of travel - now OH enjoying f/t role so more into retirement fund as not spending it on hols). We also missed part of the bounce as we cashed in some investments on the way down to provide for the unknown income level. Some will have seen even bigger fluctuations. So if we’d retired day 1 lockdown with a pot of 750k we could take £30 using 4% rule. Retire now with £1m (easy maths with those figures 😊) and we could take £40k.
A big difference but both in theory assured of the same chance of success but the 1st leaving a larger pot to heirs?
Potentially you miss out on the opportunity to spend a considerable amount if you retire at the ‘wrong’ time.
So GK v VPW? Are there figures/worksheets adapted for the U.K. ?

Having said all of that as another poster pointed out having the ability to vary spending as well makes a huge difference.

Thank you Mordko for posing the question - thought provoking.

[Deleted User] · 6 September 2021 at 5:06PM

So GK v VPW? Are there figures/worksheets adapted for the U.K. ?

To adapt VPW worksheet to the UK you have to replace $ with £. The advantage of VPW is availability of tools, complete transparency and flexibility as it was developed by Bogleheads community and is easy to implement and adjust to personal circumstances. Its “Open source”, if you like, but from a practical point of view the difference with GK is minor.

There are lots of similar variable withdrawals methods, GK is one of them. All of them are somewhat similar and far superior to the highly misleading “SWR”. Not quite sure why GK is quite so popular on this board.

michaels · 6 September 2021 at 10:32PM

DT2001 said:

A really good thread from what I thought an obvious statement (that the 4% rule is foolish) if taken at headline value!
As has been argued there are circumstances to defer taking your SP as soon as you can. We each have our own set of criteria so need to adapt the ‘rules’ to us.

Having just done by irregular tot up of investments and cash and looked back to about the 1st lockdown it occurred to me that the timing of applying the 4% rule (that you are not going to alter??) can have a large effect on your income. We have seen roughly a 1/3 increase in funds from the bottom despite being cautiously invested as semi/retirement date is flexible (both self employed with little work from day 1 of lockdown for 5 months to full time contracts. We had been aiming for a gradual slowdown and lots of travel - now OH enjoying f/t role so more into retirement fund as not spending it on hols). We also missed part of the bounce as we cashed in some investments on the way down to provide for the unknown income level. Some will have seen even bigger fluctuations. So if we’d retired day 1 lockdown with a pot of 750k we could take £30 using 4% rule. Retire now with £1m (easy maths with those figures 😊) and we could take £40k.
A big difference but both in theory assured of the same chance of success but the 1st leaving a larger pot to heirs?
Potentially you miss out on the opportunity to spend a considerable amount if you retire at the ‘wrong’ time.
So GK v VPW? Are there figures/worksheets adapted for the U.K. ?

Having said all of that as another poster pointed out having the ability to vary spending as well makes a huge difference.

Thank you Mordko for posing the question - thought provoking.

IN the SWR spreasheet it gives SWRs given the relationship between the current market level and its peak, it would be possible to conclude that if the market is a t hen the SWR is 4% but if it is 10/20/30% below peak then a higher SWR is possible. Which sort of address the point about how income for ever seems to only depend on the value of a pot at a single moment in time.

Sea_Shell · 7 September 2021 at 6:56AM

michaels said:

DT2001 said:

A really good thread from what I thought an obvious statement (that the 4% rule is foolish) if taken at headline value!
As has been argued there are circumstances to defer taking your SP as soon as you can. We each have our own set of criteria so need to adapt the ‘rules’ to us.

Having just done by irregular tot up of investments and cash and looked back to about the 1st lockdown it occurred to me that the timing of applying the 4% rule (that you are not going to alter??) can have a large effect on your income. We have seen roughly a 1/3 increase in funds from the bottom despite being cautiously invested as semi/retirement date is flexible (both self employed with little work from day 1 of lockdown for 5 months to full time contracts. We had been aiming for a gradual slowdown and lots of travel - now OH enjoying f/t role so more into retirement fund as not spending it on hols). We also missed part of the bounce as we cashed in some investments on the way down to provide for the unknown income level. Some will have seen even bigger fluctuations. So if we’d retired day 1 lockdown with a pot of 750k we could take £30 using 4% rule. Retire now with £1m (easy maths with those figures 😊) and we could take £40k.
A big difference but both in theory assured of the same chance of success but the 1st leaving a larger pot to heirs?
Potentially you miss out on the opportunity to spend a considerable amount if you retire at the ‘wrong’ time.
So GK v VPW? Are there figures/worksheets adapted for the U.K. ?

Having said all of that as another poster pointed out having the ability to vary spending as well makes a huge difference.

Thank you Mordko for posing the question - thought provoking.

IN the SWR spreasheet it gives SWRs given the relationship between the current market level and its peak, it would be possible to conclude that if the market is a t hen the SWR is 4% but if it is 10/20/30% below peak then a higher SWR is possible. Which sort of address the point about how income for ever seems to only depend on the value of a pot at a single moment in time.

Yes. I keep looking at the numbers and thinking, "well we knew we'd be OK 2 years ago with a pot of £X, WD at 3%, but now our pot is up 28% in that 2 years". So if we were retiring today, our "day one" pot (even after our spends for the last 2 years) could now provide £X+28% for the same 3%

I doubt we'll come anywhere near that "new" amount, so we'll just jog along as we are.

michaels · 7 September 2021 at 10:48AM

Sea_Shell said:

michaels said:

DT2001 said:

A really good thread from what I thought an obvious statement (that the 4% rule is foolish) if taken at headline value!
As has been argued there are circumstances to defer taking your SP as soon as you can. We each have our own set of criteria so need to adapt the ‘rules’ to us.

Having just done by irregular tot up of investments and cash and looked back to about the 1st lockdown it occurred to me that the timing of applying the 4% rule (that you are not going to alter??) can have a large effect on your income. We have seen roughly a 1/3 increase in funds from the bottom despite being cautiously invested as semi/retirement date is flexible (both self employed with little work from day 1 of lockdown for 5 months to full time contracts. We had been aiming for a gradual slowdown and lots of travel - now OH enjoying f/t role so more into retirement fund as not spending it on hols). We also missed part of the bounce as we cashed in some investments on the way down to provide for the unknown income level. Some will have seen even bigger fluctuations. So if we’d retired day 1 lockdown with a pot of 750k we could take £30 using 4% rule. Retire now with £1m (easy maths with those figures 😊) and we could take £40k.
A big difference but both in theory assured of the same chance of success but the 1st leaving a larger pot to heirs?
Potentially you miss out on the opportunity to spend a considerable amount if you retire at the ‘wrong’ time.
So GK v VPW? Are there figures/worksheets adapted for the U.K. ?

Having said all of that as another poster pointed out having the ability to vary spending as well makes a huge difference.

Thank you Mordko for posing the question - thought provoking.

IN the SWR spreasheet it gives SWRs given the relationship between the current market level and its peak, it would be possible to conclude that if the market is a t hen the SWR is 4% but if it is 10/20/30% below peak then a higher SWR is possible. Which sort of address the point about how income for ever seems to only depend on the value of a pot at a single moment in time.

Yes. I keep looking at the numbers and thinking, "well we knew we'd be OK 2 years ago with a pot of £X, WD at 3%, but now our pot is up 28% in that 2 years". So if we were retiring today, our "day one" pot (even after our spends for the last 2 years) could now provide £X+28% for the same 3%

I doubt we'll come anywhere near that "new" amount, so we'll just jog along as we are.

So these are numbers out of the SWR Toolbox spreadsheet, (they are our numbers so include state pensions and a few other bits of income not just a starting pot, with a 44 year retirement horizon)

SWR to target Failure Rates, Conditional on S&P500 Drawdown

SWR to target Failure Rates, Conditional on S&P500 Drawdown
S&P500 High	Down 0-10%	Down 10-20%	Down 20-30%	Down>30%
4.05%	4.10%	4.29%	4.53%	4.89%

Which is pretty much what you would expect, the 'higher' the markets relative to their history, the lower the SWR turned out to be.

However does this help in your comparison of 2 years ago and today which (covid blip apart) has been a continuous bull run? Basically 2 years ago you would have wanted to apply the 'S&P500 High' rate of 4.05%. Since then the market is up by about 2/3rds and yet the same 'market high' rate would apply. Makes sense if you think share prices follow a random walk path but not if you believe in some form of 'reversion to mean'.

[As an aside this particular model allows you to add assumptions for the future in order for it to also cover retirement periods that started in the last 10-44 years that no longer have 40 years complete history. Under the default assumption of 2% real terms equity growth it is the cohort that started in 2000 that is the lower bound that generates the SWR. If you go pessimistic over the next 10 years - based on reversion to mean - and set a zero or negative 2% average annual return over the next 10 years before a return to 2% growth then the 4.05% SWR falls to 3.92% or 3.79% respectively]

DT2001 · 7 September 2021 at 3:05PM

I took the thread heading as the original Bill Bengen theory. Your approach michaels tries to take into account where the market is at the time you retire which is better.
As a result of your comments I ended up listening to a podcast on madfientist.com when Michael Kitces is interviewed about the 4% rule and the correlation between CAPE 10 and future returns. Also the importance of the 1st 10/15 years of retirement - compounding in drawdown I suppose.

If you are investing globally do you weight your portfolio towards those countries with lower than historically (for them) CAPE 10 indices which theoretically will allow a higher SWR or where you might be psychologically happier (say U.K., Europe, USA) and a lower SWR?

Have you created your own CAPE 10 figure to reflect where you are invested?

Foolishness of the 4% rule

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