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The 4% Rule

Including Financial Independence and Retiring Early (FIRE)
uryjm
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The 4% Rule

#288119

Postby uryjm » March 2nd, 2020, 10:26 pm

I've got approx £600k in a SIPP and I'm 56 years old.
If I retire tomorrow, and withdraw 4% a year from this fund, at what point does it run out?
On one of the life calculators on the web, I should see 82 years old before I kick the bucket. Even if I last longer than that, what will 4% of the remaining fund look like at 82, given standard assumptions on investment growth (my SIPP is all invested in a Vanguard 80/20 LifeStrategy fund).
Thanks in advance for any guidance,

Alaric
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Re: The 4% Rule

#288122

Postby Alaric » March 2nd, 2020, 10:36 pm

uryjm wrote:If I retire tomorrow, and withdraw 4% a year from this fund, at what point does it run out?


If you can consistently earn more than 4% after charges then never.

If you want your 4% income to increase with inflation, you are going to need to earn more than 6%. Income based ITs and funds or indeed any income focused equity investments stand a reasonable chance.

JohnB
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Re: The 4% Rule

#288128

Postby JohnB » March 2nd, 2020, 10:53 pm

A simplistic view is that if your SIPP earns dividends at 3.5% and has capital growth of inflation+1%, and your fees are less than 0.5%, your money won't ever run out, and even if you start withdrawing a small excess of capital you will be OK over 50 years.

But its a lot more complicated than that, as dividends go up and down, markets go up and down (you may have noticed last week), and while a particular withdrawal rate will be fine 80% of the time, leaving you a range of outcomes from zero to loads-a-money, 20% of the time the money will run out. There have been millions of words written on the different techniques for looking at old market data to see if a particular rate is robust at a X% probability level, and whether you could tweak the outcome by raising or lowering the rate as market conditions change. Millions more words discuss whether current markets act like historical ones. So much depends when you start, having £600k in March 2020 can sustain a greater rate than it could in January 2020. Search on "Safe Withdrawal Rate or SWR" to read them.

Most people think 4% is too bullish, 3.5% will leave a few chances of failure, and 3% will leave you rich and dead.

So much depends on your attitude to risk, and whether your spending is discretionary. If you are too cautious you will never retire, and few people are bold enough to keep withdrawing the same sums after a market crash.

(And there's the issue that spending is not constant in retirement, state pensions may or not appear, as might aliens)

baldchap
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Re: The 4% Rule

#288152

Postby baldchap » March 3rd, 2020, 7:58 am

Largely agree with answers above. This tool is useful for withdrawals as well as deposits
https://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php

Out of interest, is it rumoured changes to the age at which a Sipp becomes accessible that is making you consider taking it now?

DeBriele
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Re: The 4% Rule

#288155

Postby DeBriele » March 3rd, 2020, 8:47 am

Playing with tools like this can be useful:

http://engaging-data.com/will-money-last-retire-early/

DB

(previously posted on LF somewhere, but I can't recall who/where/when to thank)

kempiejon
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Re: The 4% Rule

#288188

Postby kempiejon » March 3rd, 2020, 11:26 am


uryjm
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Re: The 4% Rule

#288295

Postby uryjm » March 3rd, 2020, 7:29 pm

Are they thinking about changing rule on accessing a SIPP? I wasn't aware of that.
I was more interested in how others approach a tapered way of spending their pension. I feel the way the system is structured, most of my money will be there when I'll be able to enjoy it least - but a fear of spending too much in my sixties, just in case I need it in my seventies and eighties, is a difficult mental barrier to get around. Even although I'm pretty certain I'll be okay doesn't stop me being cautious right now. Which is partly why I'm still working, the security of a regular wage after thirty years of earning is difficult to walk away from ....and then having to replace that by spending my hard earned money!
As so often, the answer seems to be "It's up to you" - your attitude to risk, to life and living it, to security, to the fear of change. It sometimes seems easier to just work it all out on spreadsheets and then (still!) do nothing.

Alaric
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Re: The 4% Rule

#288298

Postby Alaric » March 3rd, 2020, 7:34 pm

uryjm wrote:Are they thinking about changing rule on accessing a SIPP?


There's pencilled in plan that access to SIPPs and other pension plans should be ten years before the State Pension Age, which is due to increase to 67 and higher. One of the pre-Budget rumours was that the process of raising the age from 55 would be accelerated.

JohnW
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Re: The 4% Rule

#288354

Postby JohnW » March 4th, 2020, 12:58 am

I think you need to tell us what you mean by '4% a year'. Because if you take 4% each year of the fund's value you'll be left with 96% of the fund (+/- earnings) at the end of each and any year. You'll never run out, but some years you mightn't eat well.

ursaminortaur
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Re: The 4% Rule

#288429

Postby ursaminortaur » March 4th, 2020, 11:23 am

JohnW wrote:I think you need to tell us what you mean by '4% a year'. Because if you take 4% each year of the fund's value you'll be left with 96% of the fund (+/- earnings) at the end of each and any year. You'll never run out, but some years you mightn't eat well.


I would assume he is referring to William P Bengen's 1994 study which suggested that initially withdrawing 4% annually and then uprating that withdrawal each year by inflation should last at least 30 years. Bengen tested this against the US stocks and bond markets for the US markets back to 1926.

https://retirementresearcher.com/the-4-rule-and-the-search-for-a-safe-withdrawal-rate/

In the early 1990s, William Bengen read misguided claims in the popular press that average portfolio returns could guide the calculation of sustainable retirement withdrawal rates. If stocks average 7% after inflation, then plugging a 7% return into a spreadsheet suggests that retirees could withdraw 7% each year without ever dipping into their principal.

Bengen recognized the naivety of this calculation, because it ignores the real-world volatility experienced around that 7% return, and he sought to determine what would have worked historically for hypothetical retirees at different points in the past. He used Ibbotson Associates data extending back to 1926 for U.S. financial markets. His research introduced the concept of sequence of returns risk to the financial planning profession.

The problem he set up is simple: a new retiree makes plans for withdrawing some inflation-adjusted amount from their savings at the end of each year for a 30-year retirement period. For a 65-year old, this leads to a maximum planning age of 95, which Bengen felt was reasonably conservative.

What is the highest withdrawal amount as a percentage of retirement date assets that, with inflation adjustments, will be sustainable for the full thirty years? He looked at rolling thirty-year periods from history, such as 1926 to 1955, 1927 to 1956, and so on. He found that with a 50/50 asset allocation to stocks and bonds (the S&P 500 and intermediate term government bonds), the worst-case scenario experienced in U.S. history was for a hypothetical 1966 retiree who could have withdrawn 4.15% at most.

Thus we have what is known as the “4% rule.”

ursaminortaur
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Re: The 4% Rule

#288432

Postby ursaminortaur » March 4th, 2020, 11:36 am

kempiejon wrote:and I like https://www.firecalc.com/


You might also want to look at

http://www.cfiresim.com/

and my favourite

https://www.flexibleretirementplanner.com/wp/

fca2019
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Re: The 4% Rule

#288463

Postby fca2019 » March 4th, 2020, 1:45 pm

600k in a sipp! A big number. I'd be tempted to draft a notice letter by 5pm!

The answer is never, the theory is you live off the gains and not the principal. 4% as a figure is a source of literally endless debate online!!

kempiejon
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Re: The 4% Rule

#288475

Postby kempiejon » March 4th, 2020, 2:18 pm

ursaminortaur wrote:
kempiejon wrote:and I like https://www.firecalc.com/


You might also want to look at

http://www.cfiresim.com/

and my favourite

https://www.flexibleretirementplanner.com/wp/


cfiresim I've used, your fav I can't get to on work's system but it's nice to have alternatives to play with

Alaric
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Re: The 4% Rule

#288485

Postby Alaric » March 4th, 2020, 2:59 pm

ursaminortaur wrote:I would assume he is referring to William P Bengen's 1994 study which suggested that initially withdrawing 4% annually and then uprating that withdrawal each year by inflation should last at least 30 years. Bengen tested this against the US stocks and bond markets for the US markets back to 1926.


For that period, could you not always get at least 2.5% on bonds in money terms? Over the last twelve years, it would have been a struggle to get even a risk free 1.5%.

ursaminortaur
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Re: The 4% Rule

#288490

Postby ursaminortaur » March 4th, 2020, 3:37 pm

Alaric wrote:
ursaminortaur wrote:I would assume he is referring to William P Bengen's 1994 study which suggested that initially withdrawing 4% annually and then uprating that withdrawal each year by inflation should last at least 30 years. Bengen tested this against the US stocks and bond markets for the US markets back to 1926.


For that period, could you not always get at least 2.5% on bonds in money terms? Over the last twelve years, it would have been a struggle to get even a risk free 1.5%.


Yes, there have been a lot of recent suggestions that 4% is overly optimistic today (or even then if investing in non-US markets). Also this only looked at drawing down for 30 years - a lot of those retiring today (especially if they are FIRE enthusiasts retiring early) would want the money to last longer than that.

ursaminortaur
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Re: The 4% Rule

#288492

Postby ursaminortaur » March 4th, 2020, 3:46 pm

kempiejon wrote:
ursaminortaur wrote:
kempiejon wrote:and I like https://www.firecalc.com/


You might also want to look at

http://www.cfiresim.com/

and my favourite

https://www.flexibleretirementplanner.com/wp/


cfiresim I've used, your fav I can't get to on work's system but it's nice to have alternatives to play with


The online version requires Java but you can also download a standalone version to run directly on your pc (Windows, Mac and Linux).

It has a lot more options for tailoring things - eg splitting your investments into taxable (savings outside of a tax wrapper), tax deferred (savings inside a pension) and non-taxable (eg ISA savings in the UK)

1nvest
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Re: The 4% Rule

#288501

Postby 1nvest » March 4th, 2020, 4:11 pm

The US was a right tail (good case) outcome over the period across which the 4% SWR was measured. Nearly the best case. Pick any good/great case and the outcome will tend to look good any way you look at it. In practice however its better to use the median/middle as a guide. The 1970s' to present has also been a transition from very high to very low inflation/interest rates - which is good for price appreciation (of both stocks and bonds).

Take out the great case (historic US) and interest rate decline biases and some decades saw 0% real total returns, maybe even less. If you're drawing 4%/year from that then ... well around half might have been spent within a relatively short period of time (decade) and making it more like a 8% SWR type rate thereafter.

2% SWR seems a better choice, but where on average real gains might be 2% - 4% (maybe more) on top of that (discretionary additional withdrawals).
I've got approx £600k in a SIPP and I'm 56 years old.
If I retire tomorrow

I wouldn't go with SWR, instead something like ...

So maybe a 8K state pension from age 70 onwards (guesses on my behalf, I've lost total track of what projected pension age and amounts are nowadays). If I draw 25K/year from now age 56 until age 69, and then reduce that to 17K/year thereafter when being supplemented with 8K/year pension (so still £25K/year), then assuming 0% real (after inflation) investment returns that would last until age 87/88 or so (back of napkin calculation, you'd have to put all of that into a spreadsheet for your particular circumstances). Is £25K/year enough (bearing in mind that is net, so perhaps compares to a £37K/year gross wage type amount). And if your investments actually achieve >0% real then either that's more spending, or accumulates some for heirs, or late life care costs.

If you were pondering whether 4% SWR on £666K/year (£26.6K/year) was safe for you to retire early, then the above £25K/year might also fit in with that i.e. you have enough, no need to continue working just to add to what heirs might inherit. And if 0% real gains is also 'enough' then you might also be swayed more away from taking unnecessary risk (away from all-stock to a alternative more diverse asset allocation that are less prone to perhaps seeing the capital value (share prices) and dividends halved in the days after you lumped all-in). And yes, even if you already own the shares that's still lumping all in at one time point. Buy and hold is just the option to be fully loaded each and every day.

Edit: Just noticed the devil in me read you had £666K. :evil: Concept remains the same however.

1nvest
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Re: The 4% Rule

#288511

Postby 1nvest » March 4th, 2020, 4:45 pm

Couldn't resist ... my first table

Alaric
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Re: The 4% Rule

#288513

Postby Alaric » March 4th, 2020, 4:49 pm

If you earn absolutely nothing on an investment, a withdrawal rate of 4% lasts 25 years. If there's a State Pension to take into account, it lasts that bit longer.

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Re: The 4% Rule

#288516

Postby xxd09 » March 4th, 2020, 5:07 pm

I gather that the 4% was a guide during the good times in years gone by
Now the consensus is 3-3.5% for the classic 60/40 portfolio
Aged 73- retired 17 years -I have found this to be true
xxd09


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