The 4% Rule
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bostonerimus wrote: »If you plan far enough ahead an income property is doable. I bought mine 20 years ago. It's a "2 family house" and I used rent to help with the mortgage and now use the rent for income as the mortgage is paid off. The value of the house is about 20% of my portfolio, I would certainly not want to have it worth more than 50% of my net worth.
Easy with hindsight to blow ones own trumpet, to validate ones decisions. As a consequence generalise. When not everyones circumstances are identical. 20 years ago the UK property market was very different. Much in the same way that the 4% rule was first published in 1994. Very different times. US 10 year Treasury stock hasn't yielded over 4% since 2007. Next 30 years may paint a very different picture.0 -
Thrugelmir wrote: »Easy with hindsight to blow ones own trumpet, to validate ones decisions. As a consequence generalise. When not everyones circumstances are identical. 20 years ago the UK property market was very different. Much in the same way that the 4% rule was first published in 1994. Very different times. US 10 year Treasury stock hasn't yielded over 4% since 2007. Next 30 years may paint a very different picture.
The diversification of a rental property worked well for me and I think it's still worth considering. I'm just describing what has worked for me; rental property, index funds and aggressive saving. I hope people will find my experience useful and that it doesn't come off sounding like boasting, but I don't need any other validation than the fact that I retired at age 52 with a 7 figure retirement and investment portfolio and no need to use any of it for retirement income so I'm not worried about the 4% rule .......now I am boasting.“So we beat on, boats against the current, borne back ceaselessly into the past.”0 -
That depends how long it lasts. Your typical market blip that corrects within a year or so can be covered by a sensible level of cash reserves. A Japanese-style 'lost decade' isn't something you can reasonably cover in this way and needs a mechanism to reduce / not index withdrawals.Is there a need to cut your spending if you have a suitable cash reserve?0 -
Use caution with that because it assumes that 100% of the portfolio is invested in UK equities and UK gilts. It's unlikely that you're going to be doing that and not doing it will probably raise your SWR.The article linked above, or more usefully the full paper linked within, gives a perspective for the UK and takes fees into account. This indicates a uk equivalent to 4% (which is based on US data) is around 3%.
Why wait, given that objective? And why fixed with inflation growth? Surely something like Guyton-Klinger with Guyton's sequence of return risk reduction method and Blanchett's approach to picking a success rate target would be a better fit?But as the Kitces interview also makes clear, the 4% is all about dealing with the worst period history has thrown at us - so getting through the first 10 years in reasonable shape likely would enable you to increase the %. ...given you want to spend more while you are younger, I am going with 3% for a 40+ year retirement....but will continuously review.
You're clearly paying attention, so will be able to adjust beyond what Guyton-Klinger does if you do see a bad initial five to ten years. And Guyton's rule seems to deal with the current market valuation effects, particularly if you dodge both equities and bonds.
The sort of thing I just mentioned, but substituting P2P lending for bonds.How are others handling this. What % are people using or what alternative approaches?
Not, but given that Guyton has rules that deal with high ten year cyclically adjusted price/earnings by cutting the proportion of equities there's no reason in the US to accept 4% now, because he's dealt with the bulk of sequence of return risk.The 4% in the US is based on picking a really unforeseen bad time to retire. ... The financial industry would have to embroil the world in a disaster based on greed, or a totally unsuitable leader of the free world would start WW3, or UK led by a leader totally out of touch with reality exits EU in such a kack handed fashion British plumbers are going to Poland. ... How likely is that to happen?0 -
Or better, just don't use bonds. For the US, low interest rate studies suggest bills (money market) rather than bonds. But in the UK at the moment we can do better than that using peer to peer lending, even beating long term UK equity market return of about 5% plus inflation.bostonerimus wrote: »Also with bond markets probably going to underperform the historical averages for the next decade it might be better to start with 3.5%.0 -
By all means go below 4% if you are working to an absolute bare-bones budget and therefore have only 2 choices - a)take your full, index linked income every year; or b)starve.
If, on the other hand, you have enough slack in your budget that you could actually cut your spending if and when the market tanks and you have the presence of mind to do so rather than go on blindly spending like a loony, then in the real world it really makes no sense to go below 4%.
No, but that misses the key point: you're not supposed to be reducing it even if you don't have a cash reserve. The safe withdrawal rate allows for bad years. It's bad five to ten years that should prompt reconsideration and you can reduce the chance of that review needing an adjustment by using more modern rules like Guyton-Klinger.Is there a need to cut your spending if you have a suitable cash reserve?
They have bearing because they show a wide range of situations. I currently have 31% or so in fixed interest via peer to peer lending and expect to be above 50% by next summer. That's a big increase from my historic under 1% but won't reach my current 70% target by then. Still, about ten percent in largely fixed interest or equivalent VCTs should help.Thrugelmir wrote: »Who is holding 40% of their portfolio in fixed interest at the current time? We are in uncharted territory. Where historic charts have offer no bearing.
This era - low interest rates - suggests bills (money market) instead of bonds according to a US study. Peer to peer outside a pension is also readily accessible to anyone who wants to use it. We're not stuck with just equities and bonds. There's also the option of using investment trusts with high alternative investment components, like the well regarded RIT Capital Partners or Personal Assets. I may well use them if I can't find a good way to get into P2P lending with my target amount.Thrugelmir wrote: »For the majority of people these [equities and bonds] are the only options.... Not so much the next 30 years, as investing heavily in fixed interest now with potentially a huge downside. ... A very diferent era.0 -
Nothing wrong with mentioning results sometimes. I went from nil semi-net worth to about half a million Pounds in about 11 years, accumulating something over 90% of my total of net pay and gross pension contributions over that timeframe.bostonerimus wrote: »I hope people will find my experience useful and that it doesn't come off sounding like boasting, but I don't need any other validation than the fact that I retired at age 52 with a 7 figure retirement and investment portfolio and no need to use any of it for retirement income so I'm not worried about the 4% rule .......now I am boasting.
I've had the advantage of investing mostly during a long bull market, with really substantial sums not invested until after the 2008 drops.
Semi-net worth because I exclude mortgage debt, which is a hair over ten percent of assets. So I can keep a continuous sequence before and after mortgage acquisition. Most of my accumulation was done by an average new investment rate above 60% of net pay plus gross pension contributions, in the same sort of vein as extreme financial independence fans.
There are parts of the UK where houses and flats can be bought for under £60,000, though under £70,000 increases the selection. A fair amount of diversification is possible without a huge amount of money if you pick your areas and use mortgages. You could undoubtedly do the same in the cheaper US markets if you wanted more properties. It's worth thinking about if you don't mind the work, have a big enough total portfolio value and want the diversification.bostonerimus wrote: »The diversification of a rental property worked well for me and I think it's still worth considering.0 -
If you plan far enough ahead an income property is doable. I bought mine 20 years ago. It's a "2 family house" and I used rent to help with the mortgage and now use the rent for income as the mortgage is paid off. The value of the house is about 20% of my portfolio, I would certainly not want to have it worth more than 50% of my net worth.
Property isn't an investment that will work for all elderly people.
Doing DIY and climbing ladders might me fine if your a fit and practical 55 year old, but maybe not if your disabled and in your 80s.
You can always pay people to do things but of course that affects the return.
A small number of properties (especially 1) is a risk compared to a diversified portfolio.0 -
Property isn't an investment that will work for all elderly people.
Doing DIY and climbing ladders might me fine if your a fit and practical 55 year old, but maybe not if your disabled and in your 80s.
You can always pay people to do things but of course that affects the return.
A small number of properties (especially 1) is a risk compared to a diversified portfolio.
That's a rather niche view.
Many elderly people have buy to let properties, frequently from the Mis guided view that it's better than 'gambling' with the stock market, but it meets their objectives.
I'd say that the number of btl investors doing their own diy is in the minority, and gas and electrics aren't possible to do now in any case.
Many people wil also have one or more btl as well as investments, whether they be unwrapped, isa or pension, and in that scenario of people understand their market and are happy to put up with potential hassle or pay an agent then they are perfectly acceptable and arguably a useful diversifier.0 -
Property isn't an investment that will work for all elderly people.
Doing DIY and climbing ladders might me fine if your a fit and practical 55 year old, but maybe not if your disabled and in your 80s.
You can always pay people to do things but of course that affects the return.
A small number of properties (especially 1) is a risk compared to a diversified portfolio.
Being a landlord certainly isn't for everyone and comes with it's own worries and responsibilities, but it's been successful for me. I only own one rental property as I don't want to have too much money in any one investment. Back in 1997 (when I was 36) I bought a 2 family home and I rent out the ground floor and live upstairs. I do the simple repairs, but get professionals in when my skills are not up to it. eg I installed a new waste disposal for my tenant last weekend, but had a contractor do a major renovation last year. After all expenses the annual rental income is about 6% of the current market value of the flat and provides a nice alternative to income from equites and fixed income. There has also been substantial capital appreciation. There are issues with that as I'll have to pay capital gains tax if I ever sell, so the property route should probably only be considered after things like pensions and ISAs are funded.“So we beat on, boats against the current, borne back ceaselessly into the past.”0
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