Is the 4% rule still a thing?

[ChrisH72]

I keep reading about the 4% rule and trying to apply it to my own retirement plans. But it doesn't seem to add up and I'm not sure if I'm missing something or if it's just an outdated concept?

So an index tracker like s&p500 has returned on average 10% a year since 1957. Adjusted for inflation that's still 6-7%. If you keep your pot invested then surely drawing 4% won't even touch the capital? Even bog standard savings accounts beat 4% these days.

Then there's the 30 year thing. I'm 54 now with no plans to retire for at least another decade. But in 30 years I'll be 84. Nobody in my family has lived beyond that age. If I start drawing from my pot at 67 I'd be very surprised if I were to live to 97.

Does anyone still follow this principal?

[Castrol for a knave]

James Shak did a good piece on the 4% rule recently.

[trickywoo]

It’s a very prudent figure. If you want 40 years out of your pot it probably still makes sense but most people agree that 5% is more realistic.

[pteron]

Bill Bengen (who originally suggested the 4% rule) has some interesting info on his web site about how it is in fact a bit pessimistic and he's shocked that it became such a rule.

[Courser]

I’m drawing good bit more than that , because , I’m not going to live forever and I’d rather enjoy my money while I’m young enough to enjoy it.
I’m hardly going to be doing half the stuff I do at 80 , if I live that long.

The 4% is a bit outdated but that aside , using minimal amounts of money to build up the capital to leave it to your kids is likely to be punished by the tax man.

[pteron]

Courser said:

I m drawing good bit more than that , because , I m not going to live forever and I d rather enjoy my money while I m young enough to enjoy it.
I m hardly going to be doing half the stuff I do at 80 , if I live that long.

The 4% is a bit outdated but that aside , using minimal amounts of money to build up the capital to leave it to your kids is likely to be punished by the tax man.

That's my plan too - the book "Die With Zero" advocates targeting the spend - more during the early stages of retirement when you are still capable of actually doing stuff. People in their 80's don't spend as much as they are less active. (Generally).

[Sheepshanks]

ChrisH72 said:

So an index tracker like s&p500 has returned on average 10% a year since 1957. Adjusted for inflation that's still 6-7%. I

I know you used S&P 500 as an example but bear in mind there’s also exchange rates to deal with.

Also, that’s a 70 year time period so a lot of time to average over. Say you retired in the year 2000 - S&P 500 was lower in 2010 than it was in 2000, and all through that decade you pulled 4% out of it. Your pot wouldn’t have had much left to recover with when things picked up again.

[butchstewie]

The original 4% rule was very (entirely) US focused I believe.

If you look at it globally across different countries and different markets 4% hasn't always worked out historically - I think it was the James Shack video above that gave some examples.

[alscar]

Without getting too clever about it all 4% is usually based on starting taking drawdown and then living for a further 25 years.
It also assumes no pot growth , no inflationary factors ,no market crashes ( but equally no recovery potential ) etc.
If you know roughly what your income needs to be in say at least the first 10 years of this 25 years then you can do the sums anyway.
The one curve ball in any budget is knowing how much you might need /want to keep hold of for long term care.

[trickywoo]

alscar said:

Without getting too clever about it all 4% is usually based on starting taking drawdown and then living for a further 25 years.
It also assumes no pot growth , no inflationary factors ,no market crashes ( but equally no recovery potential ) etc.

All of that is implicit in the 4% and is supported by it not being far off even with the additional market data since and improved modelling.

[Sheepshanks]

I remember one of the charts my IFA produced had me running out of money worst case and being worth £20M at 99 best case.

Annoying that we have to rely on guess work.

[trickywoo]

Sheepshanks said:

Annoying that we have to rely on guess work.

That is what annuity products are for. If you don't want to guess let someone else do it, for a price.

[Sheepshanks]

trickywoo said:

That is what annuity products are for. If you don't want to guess let someone else do it, for a price.

Buying an annuity feels like I’d be jinxing myself!

[Phooey]

4% is unlikely to get you into deep trouble but when starting any "percentage" drawdown it is wise to consider other things like current equity valuations, inflation, interest rates etc. If I was starting a 4% drawdown today I would have a healthy slug of bonds whereas just only 5 years ago bonds wouldn't of contributed much to the party... When going DIY you have to keep one eye on what is happening.

[_Rodders_]

trickywoo said:

It s a very prudent figure. If you want 40 years out of your pot it probably still makes sense but most people agree that 5% is more realistic.

40 years seems excessive to me. Even if you retired at 50.

[_Rodders_]

pteron said:

Bill Bengen (who originally suggested the 4% rule) has some interesting info on his web site about how it is in fact a bit pessimistic and he's shocked that it became such a rule.

Sounds a bit like the Japanese guy who came up with the 10000 steps thing.

[trickywoo]

_Rodders_ said:

trickywoo said:

It s a very prudent figure. If you want 40 years out of your pot it probably still makes sense but most people agree that 5% is more realistic.

40 years seems excessive to me. Even if you retired at 50.

Exactly. That's why I said very prudent. The idea is that you never run out of money. Its no different to a trust fund that a kid might come into at 21 and never need to worry about another source of income.

[alscar]

trickywoo said:

alscar said:

Without getting too clever about it all 4% is usually based on starting taking drawdown and then living for a further 25 years.
It also assumes no pot growth , no inflationary factors ,no market crashes ( but equally no recovery potential ) etc.

All of that is implicit in the 4% and is supported by it not being far off even with the additional market data since and improved modelling.

I phrased it poorly - the 4% usage is simply what people take as deciding whether doable or not.
I guess it also depends on where and how the Pot is invested.
Even the likes of Voyant software appears to have its graph lines concur that the realistically going forward 4% is fine but all things being equal there will still be a surplus 25 years later.
I realise its only 4 years data but the pot from which I am drawing down has had all of the TFLS removed ( as early inheritances ) and adding to this the drawdown which of the original pot size was a max of 2.5% , and the remainder is still +50% of its original.

[_Rodders_]

My mum just cut short a Motorhome trip on health grounds, they managed 1 week out of a planned 4 and she's 69.

My gut feeling is her best laid plans won't survive first contact.

Seems mad to me to plan into your 80's. Post 70 seems ambitious for millions of people these days.

[Sheepshanks]

_Rodders_ said:

My mum just cut short a Motorhome trip on health grounds, they managed 1 week out of a planned 4 and she's 69.

My gut feeling is her best laid plans won't survive first contact.

Seems mad to me to plan into your 80's. Post 70 seems ambitious for millions of people these days.

Scarily, “healthy” life expectancy in the UK is only about 60.