Challenging the 4% Rule

[Newroad]

Hi Gilgongo.

Ignoring the kid's JISA's for the minute (as they by definition are not relevant) and only looking at the SIPP's and ISA's, they are currently

35% passive global equity
35% active global equity
15% passive global investment grade bonds
15% active (mostly) global high yield bonds

By default, I would probably look to keep that mix.

Regards, Newroad

[DiamondEcho]

Another aspect to an 'SWR' is something I'd consider simply being realistic. At the point I/we retire I'd anticipate fully enjoying the rewards for a while; nice holidays, a new perhaps sporty car, well you can imagine the stereotype. The point being to enjoy it young[er]. Because I look at my now aged parents, comfortably retired but I see they no longer have an appetite for foreign travel, and are entirely happy with their 10+ year old basic car.
My point being is I entirely understand this, it ties with human nature, so the SWR however derived cannot realistically be a straight line from start to end, it should have the capacity to recognise earlier spending-appetite and be front-loaded into a progressive wind-down to a narrower and more basic set of expenses.

Or maybe there is no algorithmnic tool and you throw yourself into it, enjoy the early years and keep on estimating the capital v income v estimated budget as you go on...

[dealtn]

Anyone here funding their retirement by at least partly selling down their share portfolios?

How do you prioritise what you sell - winners or losers first?

In exactly the same way as during the "accumulation phase". All shares are constantly* reviewed looking at their current valuation against their future prospects and expected future valuation as part of a buy/sell/hold decision and replacement with alternative assets/shares. The fact that "cash" is required for withdrawal and "income" is no real different to when "income" provides "cash" that is surplus and available for investment in the portfolio for potential withdrawal in the future.

*In practice that review might be daily in a brief checking for company news, or price movement, with a more thorough review leading to investment decisions and portfolio changes weekly/monthly.

[Steveam]

@DiamondEcho makes a very good point about expenditure patterns but don’t assume that the expenditure will be downwards. I used to be very happy to walk/take public transport (I no longer drive and live in a large city) but I now prefer to get “taxis” … After a health issue I’ve chosen to spend on having greater help around the house and garden and, should we able to travel again, I might pay for a companion.

Best wishes,

Steve

[AsleepInYorkshire]

@DiamondEcho makes a very good point about expenditure patterns but don’t assume that the expenditure will be downwards. I used to be very happy to walk/take public transport (I no longer drive and live in a large city) but I now prefer to get “taxis” … After a health issue I’ve chosen to spend on having greater help around the house and garden and, should we able to travel again, I might pay for a companion.

Best wishes,

Steve

Totally off-topic but must be said nonetheless. Look after yourself

AiY(D)

[CryptoPlankton]

Anyone here funding their retirement by at least partly selling down their share portfolios?

How do you prioritise what you sell - winners or losers first?

In exactly the same way as during the "accumulation phase". All shares are constantly* reviewed looking at their current valuation against their future prospects and expected future valuation as part of a buy/sell/hold decision and replacement with alternative assets/shares. The fact that "cash" is required for withdrawal and "income" is no real different to when "income" provides "cash" that is surplus and available for investment in the portfolio for potential withdrawal in the future.

*In practice that review might be daily in a brief checking for company news, or price movement, with a more thorough review leading to investment decisions and portfolio changes weekly/monthly.

Blimey, that all sounds like quite a rigmarole - it's easy to see how people who'd rather spend less time on such dry activities (and can afford to do so) are happy to just live off the natural yield from their investments! Does asset allocation/rebalancing feature much, or do the continuing investment cases for the individual holdings trump that consideration? If the latter, is that because the game has already been convincingly won and asset allocation isn't a concern?

I have to admit I still don't really understand your thinking about "income" from equity investments. I get the impression that your regular outgoings don't really require any significant withdrawal from them - whether that is because of pension payments or just that you retain a significant pool of cash? I don't mean to be nosy, but the "money is fungible" mantra doesn't, in itself, explain the practical mechanics of how you derive "income". If it's not too impertinent, may I ask if I am right in thinking that, generally speaking, your investments are surplus to requirements? I only ask as, if that's the case, then you will have different objectives (and a different outlook) to those who need to draw from them to help fund their day to day living.

[1nvest]

Anyone here funding their retirement by at least partly selling down their share portfolios?

How do you prioritise what you sell - winners or losers first?

For a broad accumulation stock index fund selling some shares each month (ii includes a 'free' trade) a few days prior to end of month (T+3) so that the cash is available at the end/start of month, like a regular wage to the amounts and time one prefers.

[dealtn]

Anyone here funding their retirement by at least partly selling down their share portfolios?

How do you prioritise what you sell - winners or losers first?

In exactly the same way as during the "accumulation phase". All shares are constantly* reviewed looking at their current valuation against their future prospects and expected future valuation as part of a buy/sell/hold decision and replacement with alternative assets/shares. The fact that "cash" is required for withdrawal and "income" is no real different to when "income" provides "cash" that is surplus and available for investment in the portfolio for potential withdrawal in the future.

*In practice that review might be daily in a brief checking for company news, or price movement, with a more thorough review leading to investment decisions and portfolio changes weekly/monthly.

Blimey, that all sounds like quite a rigmarole - it's easy to see how people who'd rather spend less time on such dry activities (and can afford to do so) are happy to just live off the natural yield from their investments! Does asset allocation/rebalancing feature much, or do the continuing investment cases for the individual holdings trump that consideration? If the latter, is that because the game has already been convincingly won and asset allocation isn't a concern?

I have to admit I still don't really understand your thinking about "income" from equity investments. I get the impression that your regular outgoings don't really require any significant withdrawal from them - whether that is because of pension payments or just that you retain a significant pool of cash? I don't mean to be nosy, but the "money is fungible" mantra doesn't, in itself, explain the practical mechanics of how you derive "income". If it's not too impertinent, may I ask if I am right in thinking that, generally speaking, your investments are surplus to requirements? I only ask as, if that's the case, then you will have different objectives (and a different outlook) to those who need to draw from them to help fund their day to day living.

I have just had a "significant" birthday taking me into my 50s (my wife has yet to hit that milestone), neither of us are receiving any pension income (indeed we are contributing to one through employer schemes).

My wife earns around £20k annually in the education/health sectors. I earn £9k annually through employment - potentially £12k.

We have a 7 figure investment portfolio.

I look at that portfolio, as described above (almost) daily. No real different to coming to this site daily - it's routine, almost habit like. Most of the time I am just checking the news on any share (and more macro matters) and the current price(s), and mentally adjusting any movements, or updates about why I am holding any share.

Frequency of checking however is far removed from frequency of trading. I would reckon my average hold period is over 3 years for any particular investment.

It's no more a rigmarole than owning a car and "checking" how much petrol is left, when was the last service, when's the MOT due etc. And deciding on replacing the car, or not, on a 3 year plus timescale (both of ours are around 5 years with no need or intention of changing).

If the real return on equity is around 5%, and a portfolio's life of maybe 50 years, by being attentive if anyone can increase that return to 6% (or better avoid it being 4%) that is a huge difference in value even on small portfolios, and "income". It doesn't sound much but run it in excel if you need convincing. Most people won't be bothered. Most people here, at least I think, have recognised negating fees and middle-men charges is avoiding a serious drag on portfolio growth/return. This is simply an extension of that process.

[CryptoPlankton]

Frequency of checking however is far removed from frequency of trading. I would reckon my average hold period is over 3 years for any particular investment.

It's no more a rigmarole than owning a car and "checking" how much petrol is left, when was the last service, when's the MOT due etc. And deciding on replacing the car, or not, on a 3 year plus timescale (both of ours are around 5 years with no need or intention of changing).

It sounds like a fairly sizeable "fleet" of shares to keep an eye on with an average holding period of 3 years and:

with a more thorough review leading to investment decisions and portfolio changes weekly/monthly.

Mind you, I can talk, I've just had a tot up of all my holdings and there are probably far too many for someone with my attitude to portfolio management!

Anyway, thanks for the reply, but I'm still in the dark about your asset allocation and the current/intended mechanics of drawdown from the portfolio. I am interested in answers to MrFoolish's question as I have a ring-fenced group of "growth" equities that I intend to draw "bonus" cash from in the future and the question of how to go about deciding what to sell is the one incompletely answered issue in my retirement investment strategy.

[Hariseldon58]

Anyone here funding their retirement by at least partly selling down their share portfolios?

How do you prioritise what you sell - winners or losers first?

I started doing this in my late 40’s and been doing it for 15 years now.

Sell assets in taxable portfolio to utilise CGT allowances and reinvest in ISA and SIPP for myself and Mrs Hari, but sell more than necessary and use this to keep a cash balance sufficient for a year or so.

Sell some assets in SIPP to utilise basic rate tax allowances, when this became possible.

ALl dividends in tax free accounts are reinvested, taxable dividends are spent.

Share sales can help in the rebalancing process.

There is clearly a flaw in the process, the taxable account becomes depleted….the end is clearly in site (and I used a chunk for a new motorhome last year…)

Subsequently all assets are held in accumulation style where practicable and simply rebalance, shares in the good times and bonds in the bad times.

[dealtn]

Frequency of checking however is far removed from frequency of trading. I would reckon my average hold period is over 3 years for any particular investment.

It's no more a rigmarole than owning a car and "checking" how much petrol is left, when was the last service, when's the MOT due etc. And deciding on replacing the car, or not, on a 3 year plus timescale (both of ours are around 5 years with no need or intention of changing).

It sounds like a fairly sizeable "fleet" of shares to keep an eye on with an average holding period of 3 years and:

with a more thorough review leading to investment decisions and portfolio changes weekly/monthly.

Mind you, I can talk, I've just had a tot up of all my holdings and there are probably far too many for someone with my attitude to portfolio management!

Anyway, thanks for the reply, but I'm still in the dark about your asset allocation and the current/intended mechanics of drawdown from the portfolio. I am interested in answers to MrFoolish's question as I have a ring-fenced group of "growth" equities that I intend to draw "bonus" cash from in the future and the question of how to go about deciding what to sell is the one incompletely answered issue in my retirement investment strategy.

25 - 30 shares maybe, with others on a watchlist. It's not onerous to me. I guess like everything that is part of a routine it is just done. It certainly feels more "hobby" than "job".

I don't have a single strategy I can expand upon. Some are value, contrarian plays, where I look to double capital in the 1 - 5 year range, others are high ROCE enterprises that look to stay that way well into the future. There is no one-trick pony. I invest solely with a Total Return view, I don't care about dividends (strictly not true as they are tax events to be preferably avoided often) but inevitably a portfolio the size of mine kicks off plenty of cash which, whilst annoying, limits the number of times I need to consider selling anything to raise "income".

If my expenditure patterns change, although that is more likely to be downwards in the near term as 2 children leave private education, perhaps to university, I might need to realise additional "income" from investment sales. In truth, outside of buying a significantly larger, or additional property (or a new Centre-Forward!) that doesn't seem likely.

[CryptoPlankton]

I don't have a single strategy I can expand upon. Some are value, contrarian plays, where I look to double capital in the 1 - 5 year range, others are high ROCE enterprises that look to stay that way well into the future. There is no one-trick pony. I invest solely with a Total Return view, I don't care about dividends (strictly not true as they are tax events to be preferably avoided often) but inevitably a portfolio the size of mine kicks off plenty of cash which, whilst annoying, limits the number of times I need to consider selling anything to raise "income".

So, though you don't seem to recognise it as such, you do (to my way of thinking, at least) derive much of your "income" largely from the natural yield of your investments. This doesn't add anything to the discussion on selling down investments to fund retirement, but does help me finally understand why I have been confused by many of your earlier posts related to this subject. (I get that you see it differently so no need to elaborate.)

(Btw, I know you won't divulge it, but I'd love to know your football club! Maybe you'd let on what division they are in?)

[dealtn]

I don't have a single strategy I can expand upon. Some are value, contrarian plays, where I look to double capital in the 1 - 5 year range, others are high ROCE enterprises that look to stay that way well into the future. There is no one-trick pony. I invest solely with a Total Return view, I don't care about dividends (strictly not true as they are tax events to be preferably avoided often) but inevitably a portfolio the size of mine kicks off plenty of cash which, whilst annoying, limits the number of times I need to consider selling anything to raise "income".

So, though you don't seem to recognise it as such, you do (to my way of thinking, at least) derive much of your "income" largely from the natural yield of your investments. This doesn't add anything to the discussion on selling down investments to fund retirement, but does help me finally understand why I have been confused by many of your earlier posts related to this subject. (I get that you see it differently so no need to elaborate.)

(Btw, I know you won't divulge it, but I'd love to know your football club! Maybe you'd let on what division they are in?)

Define "income" and "natural yield". I largely disagree but I suspect that is down to differences here as I don't disagree I (or my broker account at least) receive a 5 figure sum annually through dividends. My wife the same.

(I really don't like the idea of being publicly identifiable here so won't identify the Club sorry - but I would reckon 99% of football fans would have heard of it, and maybe 90% of the man on the street, though that's not particularly helpful by way of a reply).

[AsleepInYorkshire]

(I really don't like the idea of being publicly identifiable here so won't identify the Club sorry - but I would reckon 99% of football fans would have heard of it, and maybe 90% of the man on the street, though that's not particularly helpful by way of a reply).

Reminds me of the advert "Who are Accrington Stanley"

AIY

[1nvest]

Anyone here funding their retirement by at least partly selling down their share portfolios?

How do you prioritise what you sell - winners or losers first?

For a broad accumulation stock index fund selling some shares each month (ii includes a 'free' trade) a few days prior to end of month (T+3) so that the cash is available at the end/start of month, like a regular wage to the amounts and time one prefers.

For larger amounts, unexpected expenses of say £50K when you have a £300K portfolio between you and partner, then with £100K outside of ISA in a shared/joint general account you might be able to sell £50K of stock value without hitting the yearly CGT gain exemption amount. To counter £50K of stock exposure reduction inside of ISA sell £50K of stock and replace that with 2x stock. You're then in effect borrowing cash from the portfolio at a rate comparable to what leveraged funds pay to scale up exposure, similar to cash or short term treasury rates. But only if you expect that money to turn back around again, perhaps paying for a storm damaged roof replacement where you anticipate a insurance claim reimbursing that expense. When so, replace the stock outside of ISA, and re-rotate the 2x inside ISA back into 1x

For FT250 that might involve VMID both in and outside of ISA, with the optionality to rotate the VMID inside ISA into 2MCL

Avoids having to 'sell low', large expense coinciding with when stocks are down.

A factor is that leveraged funds did become a no-no some years back and you may have to jump through some hoops to gain access to such funds such as taking online brief tests to verify that you're aware of the risks ...etc. With that in mind I always keep some relatively small amount of 2MCL holdings running within my ISA's so that the brokerage is less inclined to ask for re-verification that you're a 'sophisticated investor'.

[vand]

Most standard FIRE & standard literature assumes that all your major life expenses are paid off by the time you retire because it makes the maths easier and predictions easier, and the 4% rule, or really any drawdown strategy, is not really designed to account for large bulky future expenses. This can present real world problems if you have unexpected expenses which can derail your retirement plans... (then again, when doesn't a large unexpected expense ever not derail any financial plan?!)

You need to plan ahead for for larger expenses..

Personally I am planning to carry a large interest-only mortgage with me for as long as I can when I hit the RE button in a few years. 10yr fixed rate is available at the moment for around 2.1% which I have to say looks very appealing if those sort of deals are available when I retire.

To know how much I need today to pay that off, I simply apply a suitable discount rate to the future capital and interest payments to arrive at the net present value I need today. For example if I take out that 10yr mortgage on £100k and think that my investments can grow at 10%/yr over that time (it only needs to do it nominally as mortgage and capital is all calcuated nominally) then I need about an additional £48k in my FIRE pot to that hit that target. If I'm aiming to pay it off after 20yrs instead of 10 then I only need 30k today to make it happen...

You can use the same thinking if you think you'll need the roof on your home replaced at some future date, or a replacement car, etc.

[Lootman]

Most standard FIRE & standard literature assumes that all your major life expenses are paid off by the time you retire because it makes the maths easier and predictions easier, and the 4% rule, or really any drawdown strategy, is not really designed to account for large bulky future expenses. This can present real world problems if you have unexpected expenses which can derail your retirement plans... (then again, when doesn't a large unexpected expense ever not derail any financial plan?!)

You need to plan ahead for for larger expenses..

Note however that in the UK the risk of such financial disasters is mitigated by the broad provision of welfare. So for example getting sick in America can be financially ruinous. There is no government-paid residential elder care there. And bankrupting lawsuits are more common there.

And yet a 4% SWR is typically considered adequate in the US. One could argue that the safe SWR for the UK should be higher because of the lower risk of financial trauma due to life events.

[1nvest]

To know how much I need today to pay that off, I simply apply a suitable discount rate to the future capital and interest payments to arrive at the net present value I need today.

SWR is much the same. The easiest way to measure it is to use compounded inflation adjusted (real) values for gains/losses and deduct 4%/year from that. 1.0 with 0% annualised real gain with 0.04 deducted each year ... lasts 25 years.
1.0
0.96
0.92
... progression.

The 'official' SWR if there is one as such is based on a assumed 60/40 stock/bond asset allocation and a 30 year time horizon, where the worst historic cases drew down to zero remaining. That could be considered as too long a horizon, most 65 year old retirees wont live to being 90 (25 years) let alone 95. Or if they do then often their home value might cover 'all-inclusive' care-home costs such that other spending is zero anyway.

0% real for 25 years covering 4% SWR may seem relatively conservative/safe, however what those that suggest it will be lower in forward time are saying is that a 'bad sequence of returns' is anticipated. If for instance you actually endured a -50% real loss in the earlier years that's similar to starting with 0.5 instead of 1.0 and to compensate for that the SWR has to be reduced to 2% instead ... or something along those lines. That however is very pessimistic, large earlier years real declines followed by 0% real subsequent returns for (2.5+) decades. Whilst one or the other may reasonably occur, its less likely that both will occur. Large declines are more inclined to see reasonable/good subsequent gains, as might large gains just prior to retiring be inclined to subsequently seeing below average real gains.

Your approach can be reversed, assume that a future spending can be adjusted by the future expected real interest rate back down to a present day value. Assuming 0% real makes that easy, if you require 25 years of inflation adjusted £20K/year then it costs £500K of present day money to cover that. In some later years that might be further discounted, such as a £10K state pension being available after 5 years perhaps, so £20K/year for 5 years and £10K/year thereafter for 20 years, present day cost of £300K. For a 60 year old that is due to receive a £10K occupational pension at age 65, and another £10K/year state pension from age 67, who has £20K/year spending, they only need £140K of present day money in order to retire. Or a 60 year old with a immediate £10K/year occupational pension along with a £10K/year state pension from age 67, only needs £60K.

The errors as I see it are that instead of promoting security/safety, consecutive governments have induced greater risks/uncertainties, elected by the many to serve the few (businesses that 'bribe' MP's). Inflation linked occupational pension schemes killed off leaves more profits for companies to distribute to shareholders or to further line the pockets of those with more than enough wealth already, at the expense of greater risk upon individuals. Along with increases in state pension age and/or state pension reductions. By not uplifting the state pension by inflation both existing and all future individuals lose out - individually have to have more in order to plug that hole. The American way, where individuals risks are increased for the benefit of the few at the cost to many. Accordingly Capitalism and the likes of Fiat currencies are being pushed towards extinction with the rise of the many opting for 'change'.

I see a rising probability of a more extremist Labour government being voted into government, one where the likes of private ownership of homes will be replaced by broader collective insurance against health, housing and spending. A significant and relatively rapid swing away from the Capitalist/Fiat pendulum swing. I was relieved that didn't occur at the last General Election, but as the next approaches so that fear is being rekindled. I don't consider myself to be 'rich', rather 'comfortable', but above 'average' i.e. we own our own home and have some savings/investments. The rich will simply flight the country under such government to leave the 'average' as being the rich to pay the bill. Therein lays the 4% SWR risk IMO.

[1nvest]

And yet a 4% SWR is typically considered adequate in the US. One could argue that the safe SWR for the UK should be higher because of the lower risk of financial trauma due to life events.

Should that not be 'LOWER'? (SWR required to cover lower individual self financing).

Greater US citizen self funding spending cover required that is otherwise collectively paid for in the UK = lower SWR required in the UK than in the US.

IIRC the UK has had a lower historic SWR average than the US.

[dealtn]

And yet a 4% SWR is typically considered adequate in the US. One could argue that the safe SWR for the UK should be higher because of the lower risk of financial trauma due to life events.

Should that not be 'LOWER'? (SWR required to cover lower individual self financing).

Greater US citizen self funding spending cover required that is otherwise collectively paid for in the UK = lower SWR required in the UK than in the US.

IIRC the UK has had a lower historic SWR average than the US.

No. The SWR (for consumption) can afford to be higher since there are fewer other financial calls on your financial resources than in the US where you might need to fund such as healthcare, that in the UK are covered by the state via the NHS or the welfare/benefits system.