The 4% Rule

[SoBo65]

I have to say, I think Itsallaguess is spot on there. The next generation are simply not going to have the luxury of defined benefits pensions that in effect arrive like a salary cheque does each month. It never ceases to amaze me how even very bright people in very responsible jobs know virtually nothing about personal finance. The vast majority of pople I know who are in a pension scheme have no idea how it works or where their money is. It scares me to think that in a couple of decades or so, millions of people will be retiring and suddenly they will have responsibilty for investing a considerable sum to generate an income. Likely >99% of thse people will have no clue where to start. Unfortunately a lot of these same people will fall prey to weath managers or financial advisors whose first priority is enhancing their own wealth rather than those of their clients.

I work with a number of people who are earning six figure salaries and have not got a clue about personal financial planning (even worse because we are in the financial services sector), examples are they forgo employer matching of additional pension contributions (matched up to 5% on top of standard 10%, so if you put in 5% the total is 20%), they are happy to lose their personal allowance above £100k by not taking any action any mitigating action on pension or employer share schemes - I too wonder what will happen to people when they are looking to retire......

[Wuffle]

SoBo65's work colleagues might indeed just be daft but could I suggest a mitigating factor.
There is an undercurrent of acceptance among some of my social circle that we are all playing the parental heart attack lottery.

[kempiejon]

SoBo65's work colleagues might indeed just be daft but could I suggest a mitigating factor.
There is an undercurrent of acceptance among some of my social circle that we are all playing the parental heart attack lottery.

“Hey mum please die suddenly, in good health, in a mortgage free home rather waste my inheritance on your care or later life living costs.”
As bad as having kids to be carers.

[roger4]

In the interests of clarity for Itsallaguess I conducted an assessment of my financial state in retirement 9 years before I retired and came to the conclusion I could/would not be able to afford to live in UK. I therefore began to look at alternative places of residence. The result is I now live in Sri Lanka where the cost of living is much lower.
My pensions consist of a small Army pension (less than £500 per month) and the state pension (just over £500 per month and frozen at 2011 levels). I also had defined contribution pension scheme that I transferred here under QROPS. Then the pension rules changed and I was able to access all this pension and did so to complete building my house.
Despite the frozen state pension I and my wife live quite well and manage to salt away some of my income.

I believe my original post was misunderstood in that I was trying to say that one lives within one's means. In that context, fretting about a percentage is wasted energy.

[xeny]

I believe my original post was misunderstood in that I was trying to say that one lives within one's means. In that context, fretting about a percentage is wasted energy.

Almost all of your income appears to be fixed, or defined - you're given a certain amount rather than choosing how much you get.

If you're planning to live off investments, understanding how much you can plan to withdraw in a year without killing the golden goose is deciding what your means are, which is essential to determine before deciding how to live within them.

At least thinking about the % seems unfortunately unavoidable.

[TUK020]

In the interests of clarity for Itsallaguess I conducted an assessment of my financial state in retirement 9 years before I retired and came to the conclusion I could/would not be able to afford to live in UK. I therefore began to look at alternative places of residence. The result is I now live in Sri Lanka where the cost of living is much lower.
My pensions consist of a small Army pension (less than £500 per month) and the state pension (just over £500 per month and frozen at 2011 levels). I also had defined contribution pension scheme that I transferred here under QROPS. Then the pension rules changed and I was able to access all this pension and did so to complete building my house.
Despite the frozen state pension I and my wife live quite well and manage to salt away some of my income.

I believe my original post was misunderstood in that I was trying to say that one lives within one's means. In that context, fretting about a percentage is wasted energy.

Reputed to be a very beautiful part of the world.
Do you have a plan to mitigate exchange rate/inflation risks?

[roger4]

for TUK020.

No plan as such but there is sufficient excess income that losses can be tolerated without hardship as the balance of my QROPS fund is invested locally. The Sri Lankan Rupee has been devaluing itself over time. When I first came here it was 180 per pound and is currently (after the reduction in Pound Sterling over the past week) at 212. The excess income is sufficient to tolerate an exchange rate of about 120 before we would feel the pinch.

[TUK020]

for TUK020.

No plan as such but there is sufficient excess income that losses can be tolerated without hardship as the balance of my QROPS fund is invested locally. The Sri Lankan Rupee has been devaluing itself over time. When I first came here it was 180 per pound and is currently (after the reduction in Pound Sterling over the past week) at 212. The excess income is sufficient to tolerate an exchange rate of about 120 before we would feel the pinch.

Enjoy the weather. Right time of year for a beach barbeque?

[gbjbaanb]

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,

The biggest problem is inflation. That original 4% was to take 4% of the portfolio initially and increase it at a rate of inflation (so £24k in year 1, £24k + 1.8% in year 2 etc), which is why a lot of talk around income investment considers rising dividends to be so important.

So if you found some 4% yielding trusts or funds, that raised their dividend by the required amount every year, then you're good forever, you'll spend your income only, never even dipping into the capital.

[ursaminortaur]

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,

The biggest problem is inflation. That original 4% was to take 4% of the portfolio initially and increase it at a rate of inflation (so £24k in year 1, £24k + 1.8% in year 2 etc), which is why a lot of talk around income investment considers rising dividends to be so important.

So if you found some 4% yielding trusts or funds, that raised their dividend by the required amount every year, then you're good forever, you'll spend your income only, never even dipping into the capital.

You are forgetting the inevitable busts which eventually occur which lead to both falls in capital values and suspensions or cutting of dividends. The original study by William Bengen in 1994 which gave rise to the 4% rule was based upon surviving such events. It looked at the historical performance of the US stock and bond markets starting in 1926 and the conclusion was that for any continuous 30 year period initially withdrawing 4% and then in subsequent years increasing that withdrawal by inflation would not have caused an investor to have run out of money despite things like the crashes of 1929 and 1973 and recession of 1937.

http://www.retailinvestor.org/pdf/Bengen1.pdf

Assuming a minimum requirement of 30 years of portfolio longevity, a first- year withdrawal of 4 percent [Figure l(b)], followed by inflation-adjusted withdrawals in subsequent years, should be safe. In no past case has it caused a portfolio to be exhausted before 33 years, and in most cases it will lead to portfolio lives of 50 years or longer.

So the 4% rule only supports you not running out of money for 30 (actually 33) years.

[gbjbaanb]

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,

The biggest problem is inflation. That original 4% was to take 4% of the portfolio initially and increase it at a rate of inflation (so £24k in year 1, £24k + 1.8% in year 2 etc), which is why a lot of talk around income investment considers rising dividends to be so important.

So if you found some 4% yielding trusts or funds, that raised their dividend by the required amount every year, then you're good forever, you'll spend your income only, never even dipping into the capital.

You are forgetting the inevitable busts which eventually occur which lead to both falls in capital values and suspensions or cutting of dividends.

I'm not, my post mentioned living off income only. I think Bengen was considering a 4% reduction in capital that would be replenished each year from growth, the US not being too dividend-friendly. My post was more HYP-alike where capital value is irrelevant, both if it goes up and if it goes down (though you can tweak away if you like, and possibly should to maintain the 4%+inflation income rate)

[ursaminortaur]

The biggest problem is inflation. That original 4% was to take 4% of the portfolio initially and increase it at a rate of inflation (so £24k in year 1, £24k + 1.8% in year 2 etc), which is why a lot of talk around income investment considers rising dividends to be so important.

So if you found some 4% yielding trusts or funds, that raised their dividend by the required amount every year, then you're good forever, you'll spend your income only, never even dipping into the capital.

You are forgetting the inevitable busts which eventually occur which lead to both falls in capital values and suspensions or cutting of dividends.

I'm not, my post mentioned living off income only. I think Bengen was considering a 4% reduction in capital that would be replenished each year from growth, the US not being too dividend-friendly. My post was more HYP-alike where capital value is irrelevant, both if it goes up and if it goes down (though you can tweak away if you like, and possibly should to maintain the 4%+inflation income rate)

Although companies are reluctant to cut dividends it still happens in a financial crisis hence you cannot rely on your dividend stream being maintained and growing enough to provide 4% + inflation forever. Most of those living off a HYP investment recognise this and have a cash buffer which they can live off if necessary during such bad times so that they don't have to sell off investments to fund their spending. And of course if you have a large cash buffer then you need even higher returning investments to return 4% of your total pot (investments + cash buffer) in dividends.

[1nvest]

From at least 1750, you could lend to the state (buy bonds) in return for a 4% real return. People could save for their retirement with reasonable confidence. Since post WW1 the state has tended to seek to pay 0% real, inducing uncertainties and risks having to be taken by individuals. Nowadays, the state seeks to stuff the people and grab their wealth (including from pension funds) to spend as it sees fit. Healthcare is going the same way, collectively insuring each other is headed the US way of if you can't independently pay - tough. Capitalism is headed the wrong way and will likely die as a consequence. Will it sustain another 20 to 30 years - looking increasingly doubtful. We've already seen the legal counterfeiting being abused to first buy up government debts, then corporate debts, and now stocks. As/when a Labour government is elected that could be pushed even further - why not buy up all housing stock (impose a wealth tax, increase Council taxes to drive down prices and up inheritance tax levels/decrease allowances). All a consequence of capitalism not sharing the benefits of the likes of technology/robotics more fairly around but instead seeing the benefits predominately being retained by the few. The few will of course manage to side step the issue - such as by buying their own island.

[1nvest]

Will fiat currency sustain for another 30 years? http://www.goldtelegraph.com/fiat-currency-fails

Under a fiat system Alice deposits £10,000 into a bank, the bank lends Bob £10,000 to buy a car, Bob buys a car from Charlie the car dealer, and Charlie deposits the £10,000 into the bank. Fine - provided both Alice and Charlie don't bank-run - where everyone wants their money out at the same time. Even then the system can usually cope, but what if the bank run is by the Chinese against the US$. For centuries the Pound was the dominant reserve currency and that was backed by gold (the original Pound back in 750 was a pound weight of silver). Nowadays the primary reserve currency is the US$ and where money is nothing other than a system based on trust, that increasingly China could undermine at any time.

[colin]

Will fiat currency sustain for another 30 years? http://www.goldtelegraph.com/fiat-currency-fails

Under a fiat system Alice deposits £10,000 into a bank, the bank lends Bob £10,000 to buy a car, Bob buys a car from Charlie the car dealer, and Charlie deposits the £10,000 into the bank. Fine - provided both Alice and Charlie don't bank-run - where everyone wants their money out at the same time. Even then the system can usually cope, but what if the bank run is by the Chinese against the US$. For centuries the Pound was the dominant reserve currency and that was backed by gold (the original Pound back in 750 was a pound weight of silver). Nowadays the primary reserve currency is the US$ and where money is nothing other than a system based on trust, that increasingly China could undermine at any time.

I don 't think it works that way ,banks create money by lending more than they have on deposit otherwise there could be no economic growth or inflation.

[James]

Will fiat currency sustain for another 30 years? http://www.goldtelegraph.com/fiat-currency-fails

Under a fiat system Alice deposits £10,000 into a bank, the bank lends Bob £10,000 to buy a car, Bob buys a car from Charlie the car dealer, and Charlie deposits the £10,000 into the bank. Fine - provided both Alice and Charlie don't bank-run - where everyone wants their money out at the same time. Even then the system can usually cope, but what if the bank run is by the Chinese against the US$. For centuries the Pound was the dominant reserve currency and that was backed by gold (the original Pound back in 750 was a pound weight of silver). Nowadays the primary reserve currency is the US$ and where money is nothing other than a system based on trust, that increasingly China could undermine at any time.

I don 't think it works that way ,banks create money by lending more than they have on deposit otherwise there could be no economic growth or inflation.

It's called fractional reserve banking. Lots of explainers online, including:
https://www.youtube.com/watch?v=-09ap6zIB6I

[1nvest]

I don 't think it works that way, banks create money by lending more than they have on deposit otherwise there could be no economic growth or inflation.

Under the gold standard that the UK as the primary reserve currency used for centuries, gold and money were interchangeable. Finite and couldn't be abused (it was via various means such as Copper nose 'enry who intermixed copper into silver coins such that when the silver plating wore with use the nose on his impression on coins showed the copper beneath). Issac Newton as Master of the MInt (Chancellor of the Exchequer) pegged the value of gold/money and that level remained fixed for decades/centuries. Banks were custodial, your money was segregated and stored securely for whenever you might want it returned, nowadays your deposit into a bank becomes their money to do with what they like in return for a promise to (maybe) return it when you desire.

Growth still occurs under a gold standard, inflation however is broadly zero, equal amounts of both inflation and deflation. The fundamental reason for fiat is that you can't stuff money into a mattress and see its purchase power (broadly) maintained - you are forced to 'invest' it in order to attempt to maintain its purchase power and where the state sees deflation as a 'risk' to be avoided at all cost. It is a means for the state to confiscate wealth from individuals, investing involves movement of money and taxation against movements (dividends, cash deposit interest etc.) is the migration of some of your wealth over to the state (or others (costs etc.)).

From at least 1750 up to WW1 rather than stuffing money into a mattress or leaving it locked away in a banks vault, you could lend to the state, in return for around a 4% annualised real reward, and in return the state could deploy that money in order to fund growth/economic activity. Good for all concerned. Under a fiat system the state will raid pension funds, strive to confiscate your wealth ...etc. - good for only some. And that sooner or later is abused to the extreme, leading to its collapse/failure (good for relatively few).

Anyone predicting a 4% SWR forward time for the next 30 years should factor in that current fiat system is reaching levels at which its closer to failure point than not when compared to historic past fiat failures. Globally $10 TRILLION is being added in attempts to fend of Corona induced deflation and we're headed towards central banks breaking the rules to not buy equities and instead are buying equities - speculating - where for some such speculation will backfire - big time. In contrast if on the gold standard deflation would have been taken on the nose and thereafter the tendency was for good subsequent rebounds back up again.

[1nvest]

Informative reads ...

The European Central Bank throws away the rulebook to bail out Italy
https://moneyweek.com/economy/eu-econom ... -out-italy ("Christine Lagarde messed up badly by arguing that the spreads were of no concern of the ECB at a recent press conference.")

Is fractional reserve banking dangerous?
https://moneyweek.com/318997/is-fractio ... -dangerous

[ursaminortaur]

I don 't think it works that way, banks create money by lending more than they have on deposit otherwise there could be no economic growth or inflation.

Under the gold standard that the UK as the primary reserve currency used for centuries, gold and money were interchangeable. Finite and couldn't be abused (it was via various means such as Copper nose 'enry who intermixed copper into silver coins such that when the silver plating wore with use the nose on his impression on coins showed the copper beneath). Issac Newton as Master of the MInt (Chancellor of the Exchequer) pegged the value of gold/money and that level remained fixed for decades/centuries. Banks were custodial, your money was segregated and stored securely for whenever you might want it returned, nowadays your deposit into a bank becomes their money to do with what they like in return for a promise to (maybe) return it when you desire.

It is a myth that precious metal backed currencies are stable they were often debased by the monarch or government and even as happened in Britain switched between standards.

https://en.wikipedia.org/wiki/Pound_sterling#Medieval

The early pennies were struck from fine silver (as pure as was available). However, in 1158, a new coinage was introduced by King Henry II (known as the Tealby penny) which was struck from 0.925 (92.5%) silver. This became the standard until the 20th century and is today known as sterling silver, named after its association with the currency.[citation needed] Sterling silver is harder than the 0.999 (99.9%) fine silver that was traditionally used and so sterling silver coins did not wear down as rapidly as fine silver coins. The English currency was almost exclusively silver until 1344 when the gold noble was successfully introduced into circulation. However, silver remained the legal basis for the pound sterling until 1816.

During the time of Henry III, the pound sterling equalled the tower (weight) pound.[31] In the 28th year of Edward I (around 1300), the tale (money) pound, or pound sterling, first began to differ from (weigh less than) the tower pound, from which it originated, for by indenture[clarification needed] of that year the pound weight was to contain 20s. 3d. in tale pound.[31]:14 In the 27th year of Edward III (around 1354), the pound sterling was now only 80% of the pound weight, or 9 oz 12 dwt (or 9.6 oz) tower.[31]:15 By an Act of the 13th year of Henry IV's reign (around 1412), the pound weight of standard silver was to contain thirty shillings in tale, or one and a half pounds sterling; thus the pound sterling reduced to two-thirds of a pound weight, or 8 oz tower.[31]:18 The pound sterling was adjusted in weight several more times subsequently.

In the reign of Henry IV (1399–1413), the penny was reduced in weight to 15 grains (0.97 g) of silver, with a further reduction to 12 grains (0.78 g) in 1464.

Tudor
During the reigns of Henry VIII and Edward VI, the silver coinage was drastically debased, although the pound was redefined to the troy pound of 5,760 grains (373 g) in 1526.[citation needed] In 1544, a silver coinage was issued containing just one-third silver and two-thirds copper—equating to 0.333 silver, or 33.3 per cent pure.[citation needed] The result was a coin copper in appearance but relatively pale in colour. In 1552, a new silver coinage was introduced, struck in sterling silver.[32] However, the penny's weight was reduced to 8 grains (0.52 g), so 1 troy pound of sterling silver produced 60 shillings of coins.[32] This silver standard was known as the "60-shilling standard" and lasted until 1601 when a "62-shilling standard" was introduced, reducing the penny's weight to ​7 23⁄31 grains (0.50 g).



The UK only fully switched from silver to gold in 1844 prior to that it had had a rather debased bimetal system and before that had been on a silver standard.

The major reason for the change was that Britain had pretty much run out of silver as it was all being used to purchase goods from China - the Chinese not being interested in buying manufactured goods from europe but the europeans and british being very keen on buying tea, silks and other goods from China in exchange for silver. The balance of trade was only corrected by force with the opium wars.

https://en.wikipedia.org/wiki/Gold_standard#Silver

From 1750 to 1870, wars within Europe as well as an ongoing trade deficit with China (which sold to Europe but had little use for European goods) drained silver from the economies of Western Europe and the United States. Coins were struck in smaller and smaller numbers, and there was a proliferation of bank and stock notes used as money.

United Kingdom

In the 1790s, the United Kingdom suffered a silver shortage. It ceased to mint larger silver coins and instead issued "token" silver coins and overstruck foreign coins. With the end of the Napoleonic Wars, the Bank of England began the massive recoinage programme that created standard gold sovereigns, circulating crowns, half-crowns and eventually copper farthings in 1821. The recoinage of silver after a long drought produced a burst of coins. The United Kingdom struck nearly 40 million shillings between 1816 and 1820, 17 million half crowns and 1.3 million silver crowns.

The 1819 Act for the Resumption of Cash Payments set 1823 as the date for resumption of convertibility, which was reached by 1821. Throughout the 1820s, small notes were issued by regional banks. This was restricted in 1826, while the Bank of England was allowed to set up regional branches. In 1833 however, Bank of England notes were made legal tender and redemption by other banks was discouraged. In 1844, the Bank Charter Act established that Bank of England notes were fully backed by gold and they became the legal standard. According to the strict interpretation of the gold standard, this 1844 act marked the establishment of a full gold standard for British money.

[1nvest]

Gold as a currency has : liquidity (the mechanisms for buying and selling gold are well established, well regulated, and global); Independence from fiat currencies (not issued by a government); No counter-party risk; Also it has a degree of multi-year inverse correlation to stocks.

For a US investor who yearly 50/50 stock/gold across 1980's and 1990's, the price of gold sank -44%, but they ended that two decades with over 8 times as many ounces of gold at the start.

Yes currencies have attempted to peg to gold, but all fiat currencies ultimately have failed. Sooner or later the pressures to debase arise, and when fiat currencies are backed by nothing at all its even more tempting for the 'legal counterfeiter' to abuse that position and print/spend money at the cost of all other notes in circulation. In September 1931 the Bank of England had to break the Pound away from the gold standard, as largescale holders of Pounds were converting those notes into gold and British gold was being taken out of the country. In August 1971 President Nixon did the same for the US$ for the exact same reasons.

The major reason for the change was that Britain had pretty much run out of silver as it was all being used to purchase goods from China - the Chinese not being interested in buying manufactured goods from europe but the europeans and british being very keen on buying tea, silks and other goods from China in exchange for silver. The balance of trade was only corrected by force with the opium wars.

And here we are yet again, buying from China, not exporting much in return. Yet another Opium war in the making? No! Fortunately if China stopped buying the US$ (Treasury's) it wouldn't make much difference, in fact they did pretty well stop buying back in 2011. Similarly if they dumped the US Treasury's they do hold then whilst it would cause a short term shock/decline, so others would take up that slack. https://www.forbes.com/sites/gordonchan ... 71f7f162c4

Whilst some central banks have dumped their gold (Canada) in total faith of fiat, most central banks still keep stockpiles of gold - just in case.