Challenging the 4% Rule

[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.

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.

But would not asset prices be revalued higher in reflection of less being needed, yield support for a lower SWR because less spending was on-average needed. Equalisation and the £ declines (devalues) relatively more than the US$, higher UK inflation than in the US and where inflation might be considered as being just another form of taxation.

In net real terms, 4% common gross SWR, but where US individuals paid 20% average taxation whereas in the UK the broader average was closer to 40% (long term and US average/basic rate taxpayers have paid 38% taxation).

[1nvest]

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.

With a paradigm shift potentially occurring over the next 30 years, how reasonable (or not) is it for average-Joe to shift a brokerage 'offshore'? Maybe something like a Jersey based brokerage and local 'business' ... outside of UK reporting. I appreciate that increasingly we've seen measures to block such paths, as I see it when the state knows where all your wealth is then its no longer your wealth but the states, available to be called-in at any time. Promoted as capturing those looking to dodge taxes, but where at any time taxation levels could in effect amount to being 100% (historically and Labour in 1968 applied retrospective taxation that amounted to 130% for those at the highest band of taxation, and the Beatles were moaning about 90% Labour taxation rates ('Taxman' ... 19 for you, 1 for me coz I'm the taxman lyrics), and even Joe-Average was paying near 40% taxation).

[scrumpyjack]

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.

With a paradigm shift potentially occurring over the next 30 years, how reasonable (or not) is it for average-Joe to shift a brokerage 'offshore'? Maybe something like a Jersey based brokerage and local 'business' ... outside of UK reporting. I appreciate that increasingly we've seen measures to block such paths, as I see it when the state knows where all your wealth is then its no longer your wealth but the states, available to be called-in at any time. Promoted as capturing those looking to dodge taxes, but where at any time taxation levels could in effect amount to being 100% (historically and Labour in 1968 applied retrospective taxation that amounted to 130% for those at the highest band of taxation, and the Beatles were moaning about 90% Labour taxation rates ('Taxman' ... 19 for you, 1 for me coz I'm the taxman lyrics), and even Joe-Average was paying near 40% taxation).

At present the state does not require you to tell them what your shareholdings are. All you need to report is the total of dividends and also capital gains if over the limit. I'm not sure what they require in the way of taxpayer information from brokers like Hargreaves Lansdown. One used to have to report share purchases but that requirement ceased many years ago.

Unless you are proposing to break the law, which I think breaches the rules of TLF , you would need to physically remove yourself from the country to escape HMG's claws, eventually!

[1nvest]

Not proposing breaking laws at all. Rather just concerned of the direction towards where the state knows enough about your whereabouts/activities/wealth etc. whereby they can auto-complete your tax return ready for you to just sign. Nice in some respects, but open to targeted state 'confiscations' at any time, in effect you're no longer a individual but a fully owned/controlled state asset where more often that state is appointed by less than 20% of the population actually having voted for it.

[vand]

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.

1nvest is correct, the SWR needs to be lowered if you are considering it from a UK stocks/bonds/inflation data. 3.5% is typically accepted as the WR you would have required for to survive the worst. This is mainly due to the 1972-74 bear market that wiped out 80% of the value of the market in real terms.

SWR calculations don't make any adjustments for other income streams arriving at a latter date. Yes, the UK may have more safety nets than the US and other places, but portfolio depletion is still portfolio depletion.

[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.

1nvest is correct, the SWR needs to be lowered if you are considering it from a UK stocks/bonds/inflation data. 3.5% is typically accepted as the WR you would have required for to survive the worst. This is mainly due to the 1972-74 bear market that wiped out 80% of the value of the market in real terms.

SWR calculations don't make any adjustments for other income streams arriving at a latter date. Yes, the UK may have more safety nets than the US and other places, but portfolio depletion is still portfolio depletion.

But this wasn't a question about (historic) financial events, but about prospective lifestyle events such as having to pay for healthcare, or avoiding litigation and potential bankruptcies. The costs of these being such you require additional "caution" in the US relative to the UK.

[vand]

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.

1nvest is correct, the SWR needs to be lowered if you are considering it from a UK stocks/bonds/inflation data. 3.5% is typically accepted as the WR you would have required for to survive the worst. This is mainly due to the 1972-74 bear market that wiped out 80% of the value of the market in real terms.

SWR calculations don't make any adjustments for other income streams arriving at a latter date. Yes, the UK may have more safety nets than the US and other places, but portfolio depletion is still portfolio depletion.

But this wasn't a question about (historic) financial events, but about prospective lifestyle events such as having to pay for healthcare, or avoiding litigation and potential bankruptcies. The costs of these being such you require additional "caution" in the US relative to the UK.

Well the criteria for fulfilling a SWR is not running out of money while keeping your spending the same each year in real terms.. obviously if we are going to widen the discussion to larger expenses then we are extending the conversation beyond just SWRs. In the real world none of us know for certain when our time is up, what the state of our health will be or what other financial obstacles we will have.. nor can we certain of free healthcare or the state of public pensions in the future. However, it's still sensible to have a core plan based around how much of your accumulated wealth you can afford to spend a year to maintain the sort of lifestyle you want.

[hiriskpaul]

With all the talk on SWRs below 4% it is easy to lose sight of the fact that you have to be very unlucky with your retirement date to run out of money with a 4% SWR, as the graph on earlyretirementnow.com shows:

https://earlyretirementnow.com/2016/12/ ... t-1-intro/

The median SWR looks like it was around 6%. So be lucky

[1nvest]

With all the talk on SWRs below 4% it is easy to lose sight of the fact that you have to be very unlucky with your retirement date to run out of money with a 4% SWR, as the graph on earlyretirementnow.com shows:

https://earlyretirementnow.com/2016/12/ ... t-1-intro/

The median SWR looks like it was around 6%. So be lucky

For the bad case runs, had some gold been included the results were considerably improved. In other cases including gold acted as a drag factor, however reducing great down to good outcome was still a success.

Starting with a third each in stocks/bonds/gold and NOT rebalancing more often saw % gold weighting decline as stocks/bonds did well. But in some cases saw % gold rise to being a high percentage. So with a caveat that you might rebalance, or even entirely sell gold to buy more stock/bonds if/when % gold rose to substantial amounts ... overall that worked out well.

In effect if stock/bonds do well then that's more inclined to support a 6% SWR, so even completely writing off the third initial allocation to gold = 4% SWR. If stocks/bonds do poorly then gold 'floated' the portfolio such that a 4% SWR was still supported.

In this US example for 1972 to 1980, 4% SWR resulted in twice as much of the original start date portfolio value in inflation adjusted terms at the end of 1980 and where gold had risen to being 80% of the portfolio weight (click the Allocation Drift tab). Similarly some gold helped for a 2000 start date. Starting from 1980 and as Dow/Gold was down at 1.0 levels then including gold was a drag factor, instead of great gains had gold been excluded you still saw good results and where by the early/mid 1990's % gold weighting was down to negligible levels. Had in effect served its early years sequence of returns risk insurance/hedge and was no longer required (after good gains SORR is much less of a risk as more often you might just be giving back some of gains (other peoples money) rather than eating into ones own capital).

More broadly, a initial diverse thirds non-rebalanced stock/bonds/gold allocation will tend to see % stock rise over time, becomes stock heavy that tends to result in good/great longer term outcomes, but where the early years sequence of returns risk is considerably reduced in having initially weighted a third each of stock/bonds/gold. If you start with thirds each, and end at perhaps 90/10 stock/bonds, then up to that point you averaged around 60/20/20 stock/bond/gold, and beyond that the averages will see increasingly higher average % stock and lower average % gold. Could be considered a form of having averaged into stock over time rather than having lumped into stock at perhaps the worst possible time.

Less dependent upon luck.

I would add that the initial weightings might be adjusted according to valuations at the time. 1980 with Dow/Gold down at 1.0 levels and perhaps not bother with starting with any gold. 1999 when Dow/Gold was up at 40 levels and stock PE based valuations looked very high, perhaps lightening up on stock and initially holding more bonds/gold. At recent valuations lightening up on bonds ...etc. Such a combination of hedging earlier year SORR along with applying some relative valuation at the time of transitioning from accumulation into retirement is more inclined IMO to result in a successful outcome.

[BullDog]

Overall, with gold not paying any income, that means the remaining portfolio assets have to sweat harder to produce the income. A higher yield often means higher risk and lower capital growth. So, as a consequence, I can easily imagine that in many portfolios where only natural yield is being withdrawn, holding gold is going to be a significant drag on SWR?

[Spet0789]

Overall, with gold not paying any income, that means the remaining portfolio assets have to sweat harder to produce the income. A higher yield often means higher risk and lower capital growth. So, as a consequence, I can easily imagine that in many portfolios where only natural yield is being withdrawn, holding gold is going to be a significant drag on SWR?

If only natural yield is being withdrawn, then holding gold (a non-income paying asset) in a portfolio is identical to burning the money!

But if the portfolio is rebalanced regularly and viewed on a total return basis then including gold exposure does seem to have allowed materially higher SWRs historically.

[BullDog]

Overall, with gold not paying any income, that means the remaining portfolio assets have to sweat harder to produce the income. A higher yield often means higher risk and lower capital growth. So, as a consequence, I can easily imagine that in many portfolios where only natural yield is being withdrawn, holding gold is going to be a significant drag on SWR?

If only natural yield is being withdrawn, then holding gold (a non-income paying asset) in a portfolio is identical to burning the money!

But if the portfolio is rebalanced regularly and viewed on a total return basis then including gold exposure does seem to have allowed materially higher SWRs historically.

Agreed. Though I am not sure how many of your typical DC pension beneficiaries are sophisticated enough to pull that off? I have been investing since 1974 and I wouldn't try it. Neither would I hold bonds. I remain fully invested in shares/funds and take a modest natural yield drawdown from a total return portfolio. I guess I am lucky enough that my DB pension is enough for me to live on. The drawdown is spending money.

[hiriskpaul]

Overall, with gold not paying any income, that means the remaining portfolio assets have to sweat harder to produce the income. A higher yield often means higher risk and lower capital growth. So, as a consequence, I can easily imagine that in many portfolios where only natural yield is being withdrawn, holding gold is going to be a significant drag on SWR?

If you are taking the natural yield then you are not taking the SWR. If you hold gold and are taking natural yield only then the income you take is bound to be reduced. The more gold you hold, the lower your income. The problem here is not the gold, it is the "I am only going to take the natural yield" part.

[BullDog]

Overall, with gold not paying any income, that means the remaining portfolio assets have to sweat harder to produce the income. A higher yield often means higher risk and lower capital growth. So, as a consequence, I can easily imagine that in many portfolios where only natural yield is being withdrawn, holding gold is going to be a significant drag on SWR?

If you are taking the natural yield then you are not taking the SWR. If you hold gold and are taking natural yield only then the income you take is bound to be reduced. The more gold you hold, the lower your income. The problem here is not the gold, it is the "I am only going to take the natural yield" part.

There isn't a "problem". What the term SWR is is likely open to individual definition anyway. For me, I am quite happy that SWR = natural yield. Perhaps if I didn't have a more than big enough pot of money, my definition would be different.

[hiriskpaul]

Overall, with gold not paying any income, that means the remaining portfolio assets have to sweat harder to produce the income. A higher yield often means higher risk and lower capital growth. So, as a consequence, I can easily imagine that in many portfolios where only natural yield is being withdrawn, holding gold is going to be a significant drag on SWR?

If you are taking the natural yield then you are not taking the SWR. If you hold gold and are taking natural yield only then the income you take is bound to be reduced. The more gold you hold, the lower your income. The problem here is not the gold, it is the "I am only going to take the natural yield" part.

There isn't a "problem". What the term SWR is is likely open to individual definition anyway. For me, I am quite happy that SWR = natural yield. Perhaps if I didn't have a more than big enough pot of money, my definition would be different.

If that is your definition of SWR then we are not talking the same language.

By the more conventional definition of SWR, gold in the portfolio is available to be sold in order to provide income. Its inclusion in a portfolio may increase or decrease the SWR, depending on its performance, sequence of returns and the approach to rebalancing.

[Lootman]

Overall, with gold not paying any income, that means the remaining portfolio assets have to sweat harder to produce the income.

Not necessarily. You can hold gold miners, which typically do pay dividends. You can use gold options and futures to generate income. And of course you can sell some gold each year, given that the SWR is not just about income but about having enough capital to draw down.

In fact I could be 100% in Berkshire Hathaway, which pays no income at all, and just sell 4% a year. Who needs income?

[hiriskpaul]

Overall, with gold not paying any income, that means the remaining portfolio assets have to sweat harder to produce the income.

Not necessarily. You can hold gold miners, which typically do pay dividends. You can use gold options and futures to generate income. And of course you can sell some gold each year, given that the SWR is not just about income but about having enough capital to draw down.

In fact I could be 100% in Berkshire Hathaway, which pays no income at all, and just sell 4% a year. Who needs income?

The thing about doing that is you get to decide how much income to take. The natural yielders get what they are given. It wouldn't suit me, but some people prefer the latter.

For the former with investments in funds inside ISAs/SIPPs, I think there is much to be said for holding accumulation versions of funds/ETFs. That way your money stays fully invested until you chose to take it out. With funds that pay dividends you end up having more cash hanging around than is optimal.

[1nvest]

Overall, with gold not paying any income, that means the remaining portfolio assets have to sweat harder to produce the income. A higher yield often means higher risk and lower capital growth. So, as a consequence, I can easily imagine that in many portfolios where only natural yield is being withdrawn, holding gold is going to be a significant drag on SWR?

If only natural yield is being withdrawn, then holding gold (a non-income paying asset) in a portfolio is identical to burning the money!

But if the portfolio is rebalanced regularly and viewed on a total return basis then including gold exposure does seem to have allowed materially higher SWRs historically.

Agreed. Though I am not sure how many of your typical DC pension beneficiaries are sophisticated enough to pull that off? I have been investing since 1974 and I wouldn't try it. Neither would I hold bonds. I remain fully invested in shares/funds and take a modest natural yield drawdown from a total return portfolio. I guess I am lucky enough that my DB pension is enough for me to live on. The drawdown is spending money.

Depends upon the era you live through. Groucho Marx having been burnt by stocks (lost around $12M or present day money in the 1920/1930's) opted for a retirement portfolio of purely treasury bonds. As did many retirees burnt by stocks in the 60's/70's opt for bonds. What is bad for retirees can be good for accumulators, average in over a time of poor stock performance accumulates above average amounts, which is pretty much what has occurred across the 1980's/1990's.

The first 15 years of retirement has a high correlation to SWR success/failure (as per highlighted by Kitces). If say you lose 2% real total return for those first 15 years along with drawing a 4% SWR you'd be down at 25% of the inflation adjusted portfolio value remaining at the end of the 15th year and be expecting a effective/equivalent 16% SWR to last 15 years. In cases when stock/bonds have yielded such low/poor outcomes gold has performed very well. In cases when stock/bond or stock/gold or bond/gold have performed poorly so the third asset has tended to perform well enough to float the SWR/portfolio. Viewed as one asset floats the SWR over the first 10 to 15 years I can't see that being bonds in forward time from present valuations, potentially accompanied by poor stock rewards from relatively high valuations such that gold might be 'the asset'. But predictions more often turn out wrong, so could see stock/bonds do well and gold poorly, nobody knows until after the event.

Gold commodity currency unlike stock/bond fiat currency doesn't need to pay dividends/interest. When on the gold standard there was broad zero inflation (but in a volatile way). Since having ended that convertibility in the early 1930's fiat currency has broadly only been progressively deflated in most if not all currencies relative to gold. Fiat currencies have to pay interest/dividends to try and mitigate such loss of purchase power (inflation) and in having to 'invest' others take a slice out of those 'gains' ... taxman, market makers, brokers, fund fees ...etc.

Harry Browne's Permanent Portfolio that invests equally into cash/stock/bonds/gold came with the indication of expecting one asset to endure a Bear phase, lose 20, 30, 40 maybe even 50% in his words. Partnered with one of the asset having a Bull phase, rising 100, 200 or 300% or more. Cash is most unlikely to be those candidates so primarily its one of stocks/bonds/gold that is more likely to see one perhaps lose 50%, another gain 100% type movements. Similar to stocks, if you don't hold the good ones then the bad ones can drag you down. Viewed as a third in each of stocks/bonds/gold then if one loses half, 33 down to 16, another doubles from 33 to 66 and assuming the third remains flat at 33, you're up at 116 total levels, rather than perhaps 50/50 of just two of the assets seeing one halve, the other flat and being down at 75 levels. Deducting say 40 from those values in reflection of SWR withdrawals, 35 remaining versus 75 remaining type values.

It's only really applicable to those transitioning into retirement. Once 10 years or so into retirement more usually good gains have you relatively ahead, a buffer of 'other peoples money' having been built up such that you can more reasonably afford to take a 33%/whatever hit without it being critical (more a case of just giving back some/all of other peoples money rather than eating into your own capital).

[1nvest]

Overall, with gold not paying any income, that means the remaining portfolio assets have to sweat harder to produce the income.

Not necessarily. You can hold gold miners, which typically do pay dividends. You can use gold options and futures to generate income. And of course you can sell some gold each year, given that the SWR is not just about income but about having enough capital to draw down.

In fact I could be 100% in Berkshire Hathaway, which pays no income at all, and just sell 4% a year. Who needs income?

The thing about doing that is you get to decide how much income to take. The natural yielders get what they are given. It wouldn't suit me, but some people prefer the latter.

For the former with investments in funds inside ISAs/SIPPs, I think there is much to be said for holding accumulation versions of funds/ETFs. That way your money stays fully invested until you chose to take it out. With funds that pay dividends you end up having more cash hanging around than is optimal.

Some stocks are pretty slow at paying out dividends, might take a couple of months between when the stock went ex-div and the share price was marked down to when you actually receive the dividend (and maybe a further delay before that money is reinvested again and after brokers, stamp duty, market maker, FX agent, taxman ..etc. may also have taken a slice). For higher yielding portfolios that might be 4% of the portfolio value being idle and/or bearing costs for several months each year. Maybe not that dissimilar to investing only 99% and leaving 1% in hard cash. Such generosity of 'free money' gifted to others enables them to operate out of expensive buildings/locations and pay high wages. Personally I don't feel like being generous to such cases and would rather keep it for myself or gift it to where I opined there was a greater need.

[vand]

I like strategies like the Permanent Portfolio and All-weather portfolio, but sometimes they are a hard sell to people who are wedded on the traditional 60/40 or some other stock/bond mix.

A small allocation to gold has historically improved the survivability of all stock/bond portfolios. This is easy to understand in highsight, if you consider that the two major periods where paper assets have struggled (1968-1982, 1999-2009) gold was undergoing major bull market and would have acted as the lifebouy that kept your portfolio afloat during these difficult periods.

You can use cfiresim and choose any combination of stock/bonds, then knock 5% off each one, add a 10% gold allocation and rerun.

I'd challenge anyone to come up with a good argument why the standard retirement portfolio shouldn't be 60/30/10 stocks/bonds/gold (99.18% survival rate) rather than the usual 60/40 (95.08% survival rate). This is a very easy to implement modification that anyone can do.

60/40: https://www.cfiresim.com/d689c17b-84a3- ... 90bd1065a6
60/30/10: https://www.cfiresim.com/5cba3a75-5dde- ... 0188439608