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Book Review: Beyond The 4% Rule by Abraham Okusanya

Cover of the Abraham Okusanya book: Beyond the Four Percent Rule

The tactics you use to accumulate your retirement pot just won’t do when you throw the whole system into reverse and start spending those savings.

That’s a message that’s been slow to spread but is picking up speed now that the discipline of retirement research is moving out of academic journals and into Amazon books – placing more powerful retirement strategies into the hands of DIY investors like us.

The running has been made by US pioneers so far, but the good news is that we finally have our own Made In Britain take on retirement.

Abraham Okusanya is a UK-based retirement researcher and fintech entrepreneur and his book, Beyond The 4% Rule, should be required reading for any prospective UK retiree who won’t be relaxing in a hammock woven from secure Defined Benefit pension.

A great British retirement

When you need a strategy to last you the rest of your life, it’s a good idea to make sure that the American prescriptions travel well.

Beyond The 4% Rule marshals plenty of evidence to show that the US experience does translate but needs localisation. Okusanya shows the way – bounding as nimbly as a mountain goat across the deceptive slopes of retirement investing. He writes with a smile too, which is a welcome change from the dry-as-sticks tone that characterises most work in the field.

As the pages breeze by, you’ll find yourself covering:

  • The safety first alternative to nursing your portfolio through retirement uncertainty.
  • Why the 4% rule is a terrible rule of thumb.1
  • Longevity risk – your chance of drawing a golden ticket in the lottery of life.
  • The various ways you can pump up your SWR – including factor diversification, variable withdrawal strategies, choosing an acceptable failure rate(!), and declining consumption patterns in your dotage.

If all this is unfamiliar ground, you will find it relatively easy going with Okusanya as your guide. He makes light work of it – but that also means he takes some shortcuts.

The rocky patch

In my opinion, Beyond The 4% Rule stumbles in a couple of important areas where it would be better not to rush.

Okusanya replicates US withdrawal rate research by replacing historical US data with UK numbers. He doesn’t offer guidance as to how relevant historical UK returns are for contemporary retirees. We’d argue that in these days of globally diversified portfolios, UK data alone is not the best foundation for withdrawal rate assumptions.

This comes to a head when Okusanya pits a 50:50 global equity/global bond portfolio against a 50:50 UK equity/UK bond portfolio.

Okusanya’s numbers show that the UK portfolio has the higher SWR in the historical worst case. It also bests the global portfolio’s SWR 58% of the time between 1900 and 2016.

You’d be forgiven for thinking: “Well, it’s a UK-only portfolio for me, then – what a turn up!”

It is indeed a turn up. The renowned US retirement researcher, Wade Pfau, who has led the way on international withdrawal rates, came to a different conclusion. The global portfolio’s SWR beat the plucky UK 78% of the time between 1900 and 2012, according to Pfau. It also delivered a higher SWR than the UK portfolio in the worst case scenario.

I’m not saying Okusanya’s numbers are wrong. It takes only a different dataset or different assumptions to change the result. They could both be right! Precision is a myth in retirement investing.

But Okusanya errs, I believe, in presenting his research in a way that could lead investors to concentrate their portfolio in UK assets and ditch global diversification.

It’s not as if Okusanya is unaware of the Pfau findings. The key paper appears in the reference section of the book. His analysis could have been expanded to explain that the UK’s actual historical path was only one of many that might have been taken – as the fate of other developed countries shows. He might have explained that the historical returns are uncertain that far back, and that small input changes can create different results.

Okusanya does admit that the global portfolio’s worst case scenarios are largely caused by the catastrophic impact of World War One on the countries that bore the brunt. But he goes on to state that the evidence suggests the UK portfolio is better in extreme conditions.

This seems a bad case of projecting past performance into the future. We have no reason to believe that the UK could not be on the losing side in a major future conflict. Or it could be a ruined winner – as was Belgium after World War One.

Even US researchers such as Pfau think that US retirees should base future plans on the global dataset rather than expect their country’s 20th Century luck to hold.

To be fair, Okusanya doesn’t unequivocally back the UK portfolio. He makes a brief case for a global allocation based on volatility. But he’s vague and readers could use stronger guidance to interpret his evidence.

A lack of rigour also undermines the section on asset allocation between UK equities and bonds. Okusanya shows that a 100% UK equity portfolio delivered the best SWR across the board for a 30-year retirement. Yet Pfau has shown that optimal asset allocations are all over the map for different developed countries.

Drawing firm conclusions from a single dataset is a risk for retirees. Michael McClung was careful to use out-of-sample data to test his findings in his retirement investing book Living Off Your Money. Okusanya skips the nuance.

No easy answers

There’s an entertainingly self-aware comment from Monevator reader Mr Optimistic on another retirement book thread:

Thanks for the tip on Beyond the 4% Rule. Just bought it: hopes it helps in my quixotic quest for an easy answer!

Beyond The 4% Rule does not provide our easy answer. But in truth that’s because there are no easy answers for DIY retirees.

Despite its flaws I unequivocally recommend Beyond The 4% Rule. If you don’t know much about deaccumulation it’s a great introduction. There’s plenty of gold here for the more knowledgeable, too.

Okusanya brilliantly re-frames retirement failure not as the threat of running out of money but as the chance that you’ll need to lower your spending at some point. Combine that with his probability section showing that the odds of your nightmare scenario materialising and you living long enough to see it are pretty low, and suddenly the case for a bombproof SWR comes apart. If this convinces you to lower your demands from 100% historical success to 90%, then you can treat yourself to a nice SWR uptick.

There’s also a handy section at the end that shows how you can tweak your SWR in tune with various ‘Beyond the 4% rule’ factors you can bake into your plan. You add SWR points for positives like variable withdrawal strategies and subtract points for negatives like fees.

Again though, Okusanya’s version is infuriatingly incomplete and light on caveats, compared to similar work by the likes of Michael Kitces. FIRE devotees will also be disappointed by the book’s omission of time horizons beyond the standard 30 year, retire-at-65 game plan.

All of which serves to illustrate that while you could put a plan together from Beyond The 4% Rule, you probably shouldn’t. It’s better to use it as a gateway to more knowledge. The Kindle version enables you to click through immediately to the fantastic body of research – including UK sources – that Okusanya references. You can then follow up your reading with Michael McClung’s Living Off Your Money and Wade Pfau’s How Much Can I Spend In Retirement?

You can also check out the free chapter of Beyond The 4% Rule and read Okusanya’s blog.

Like the 4% rule itself, Okusanya’s book is an excellent contribution to our understanding of retirement investing.

But it’s not the easy answer. There isn’t one.

Take it steady,

The Accumulator

  1. The original research behind the 4% rule was a massive breakthrough, but Chinese Whispers have turned it into a retirement-maiming meme. []

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{ 74 comments… add one }
  • 51 YoungFiGuy April 19, 2018, 5:46 pm

    @TA – I’ve got some thoughts scribbled on paper, just need to convert them into some coherent (at the moment I’m worried about it coming across as too “Debbie Downer”). Thanks for the HT on Living Off Your Money, I’ve downloaded the first chapters and will try to give them a read.

  • 52 The Accumulator April 19, 2018, 9:21 pm

    @ James20 – That low Japanese SWR dates from 1937. WW2 did the damage. Not the recent Lost Decades. France, Italy, Germany and Austria all have a SWR of 1% or less depending on the study. Again, the major lesson is, don’t retire on the eve of a World War.

    Re: “5% isnt risky at all if you don’t take inflation every year, inflation should also be calculated as 3% on your cost of living NOT 3% adjusted for inflation on your total investment pot.”

    This is a fixed withdrawal strategy. Abraham Okusanya calculated the SWR on such a strategy as 4.5%:
    https://finalytiq.co.uk/fixed-withdrawal-sustainable-withdrawal-rate-twist/
    By not adjusting for inflation, he calculated that you’d have suffered a 40% decline in real income by year 15 of your retirement if your path is in the 50th percentile of outcomes. If you’re in the bottom 10% then your real income goes down 73%. Inflation matters over time. You could follow the Guyton & Klinger rules which only require you to skip adjusting for inflation in down years, but again the SWR is far short of 5%. Ultimately, there’s no free lunch. If you start out aggressively then you’ll need to cut back later if the sequence of returns doesn’t go your way. If fortune smiles on you, then you’re laughing, but don’t count on it.

    UK SWR studies. They’re all over the map:

    http://www3.grips.ac.jp/~pinc/data/10-12.pdf
    3.43%, 1926 – 1979, Pfau, 50:50 UK portfolio, 30 year time horizon, historical worst case

    http://advisorperspectives.com/newsletters14/pdfs/Does_International_Diversification_Improve_Safe_Withdrawal_Rates.pdf
    3.05%, 1900 – 1912, Pfau, 50:50 UK portfolio, 30 year time horizon, historical worst case

    http://media.morningstar.com/uk%5CMEDIA%5CResearch_paper%5CUK_Safe_Withdrawal_Rates_ForRetirees.pdf
    2.1%, Monte Carlo return projection, Morningstar, 60:40 UK portfolio, 30 year time horizon, 99% estimated success rate, SWR is net 1% fees (deduct approx 0.5% from the SWR of other studies to account for fees)

    https://finalytiq.co.uk/lower-equity-allocation-retirement-reducing-risk-shooting-foot/
    3.1%, 1900 – 1916, Finalytiq, 50:50 UK portfolio, 30 year time horizon, historical worst case

    Using McClung’s Living Off Your Money methods, I can just about scrape over a 4% initial SWR on a global portfolio, after deductions for fees and an assumed 40-year time horizon, while accepting bonus points for variable income strategies, factor diversification and a few other techniques covered in the book.

  • 53 The Accumulator April 19, 2018, 9:51 pm

    Just to clarify:

    “5% isnt risky at all if you don’t take inflation every year”
    This bit is a fixed withdrawal strategy – i.e. you take x% from your portfolio every year.

    “inflation should also be calculated as 3% on your cost of living NOT 3% adjusted for inflation on your total investment pot.”
    This is how any withdrawal rate strategy is meant to work. If you’re adjusting for inflation then you adjust the amount of income you drawdown from your portfolio, by the previous year’s inflation rate. James, you’re right that this is often misunderstood.

    The traditional 4% rule is a constant inflation-adjusted withdrawal strategy. You take 4% from your portfolio as your initial income. Then you’d adjust year 2 income by inflation rate. Repeat for every year of your retirement.
    e.g. 20,000 year 1 income taken from £500,000 portfolio @ initial SWR of 4%.
    year 2 inflation = 3%.
    year 2 income = £20,000 x 1.03 = £20,600.
    Using this strategy, the 4% SWR is only applied in year 1. After that, your income is multiplied by inflation every year to maintain real spending.
    PS – your initial SWR should be downgraded to account for the effect of investment fees.

  • 54 Jamese20 April 19, 2018, 10:44 pm

    Sorry but assuming 1% fees is frankly stupid when you are an index Investor

    The FTSE 250 has returned 350% in price alone since 1996 and it currently has 3.6 dividend yield

    The FTSE all share has returned over 80% in similar time frame and is currently yielding almost 4% in dividends alone and it still isn’t even considered overvalued.

    Why use these time frames ? Well for one it has the second worse crash in the last century included and another strong crash just before it.

    I fail to see much risk in the 4% rule and going for things like 2.5% when you can get more than that in dividends alone even in the UK alone makes me think people are insane to go so low.

    Do i recommend going 4% blindly ? No..I think flexibility is key but I don’t believe the past has been some golden dream for business in fact quite the opposite…

    Going lower than 4% is going for over 100% safety which is the definition of insanity..if we did this in our everyday life we would be sitting on the floor and not moving in fear of something killing you…even then there is a % chance of death doing that!

    I honestly don’t follow this line of reasoning and as is said before… unfortunately we Brits are on the negative side of the spectrum

  • 55 Jamese20 April 19, 2018, 11:31 pm

    Hi accumulator

    I think of it as a blended mix between the 2, so I would recommend only increasing for inflation when you start to feel the pinch of inflation…and realistically I don’t see that being each year.

    A global fund tends to provide almost a 2% yield alone…to obtain an average of 2% premium on top I don’t think takes much doing in most business friendly environments.

    50/50 splits also are not the most efficient way of maintaining your pots either looking into it…even following the 4% rule the median of 1m 100% equity gets you to 17m! With UK suffering abit more in history maybe it is perhaps 14m..still I don’t think many will be complaining about that.

    4% is meant to handle the worse crashes in history inflation adjusted.. that’s over 80% success rate also

    Honestly I think 2.5% withdrawal strategy is as silly as going for a 10% one…. Each at the end of their various spectrums.

    Who will spend every penny of that 4% a year also ? If you are smart enough to build a pot of money so large so early in your life I put money on those very people not just spending all that 4% each year.

    Not trying to be argumentive at all I just don’t want other readers to be worried that a sensible withdrawal plan won’t work when actually nothing has changed and the 4% guideline is a good one..yes for ukers also.

  • 56 The Accumulator April 20, 2018, 7:15 am

    James, the reason I’m at pains to continue this debate is because while a 4% SWR may work, you’ll be much safer if you don’t blindly apply the popular presentation of the 4% rule. You are correct that flexibility is key – by definition that means being prepared to take less income at times than the rule would otherwise allow for. It is not set and forget.

    Fees – the important thing is that you remember to reduce your SWR to account for the fees that you pay. Even index investors could well be paying around 0.5% by the time you account for a total world market portfolio, platform fees, some tracking difference.

    UK experience since 1996: too narrow a dataset. I’ve linked to plenty of counter material on this above. The worst case US scenario, for example, began in 1967-68. Relatively recent history and not even a wartime scenario.

    Optimal asset allocation – it varies depending on a country’s historical returns:
    https://ideas.repec.org/p/ngi/dpaper/10-12.html

    Yep, lowering your potential success rate allows you to increase your initial SWR. Important to know that may have consequences later, though. It’s not the definition of insanity to decide that you wouldn’t want to do that and to aim for a lower initial SWR.

    Who will spend every penny? Someone who retired with ‘just enough’. Jim Otar has a traffic light system: green retirement pots – someone who’s built up a large enough pot that they are effectively immune to all but the very worst outcomes. Red retirement pots – someone who leaves the workforce underfunded. Their options are all bad. Amber retirement pot – the ‘on-the-edge’ brigade. They’ll be fine in standard scenarios, but are likely to need to cut back if they suffer a bad sequence of returns.

    The 4% rule has not worked as advertised for most countries:
    http://advisorperspectives.com/newsletters14/pdfs/Does_International_Diversification_Improve_Safe_Withdrawal_Rates.pdf

    A withdrawal plan based blindly on the common conception of the 4% rule can get you into trouble. Better to know its weaknesses and the levers you can pull to fix them.

  • 57 zxspectrum48k April 20, 2018, 2:17 pm

    TA. Morningstar updated their numbers in Oct 17. http://media.morningstar.com/uk/MEDIA/Comprehensive_update_on_the_Safe_Withdrawal_Rate.pdf. Using 1% fees, a 30-year horizon and 60:40 equity/bond portfolio, they see the withdrawal rate at 2.4%/2.1%/1.6% at the 90%/95%/99% levels. For a 40-year retirement, that drops to 1.9%/1.6%/1.2%.

    Regarding the book above, I bought it and was disappointed. It’s positives are that it’s focussed on the UK and offers some ideas to the novice. However, it suffers from the same issues that Kitces and to a lesser extent Pfau in that the whole approach lacks rigour. The idea that you can use the historic data of the “winning countries” over those that “lost” is arguable. Surely these might converge in a world of globalized capital flows. The author needs to do more heavy lifting on constructing data sets for the various asset classes. Better data is available but he might need to pay for it. Even at a micro level, it’s not clear the most basic normalization is being done on the data set. You can’t take gilts returns over a 100+ year period and not control for duration changes. The gilt market 100 years ago didn’t have a duration of 12! Any 1st year fixed income analyst at a bank knows to do this when doing a historical asset allocation analysis. Finally, surely the real issue is not to come up with an SWR number but to identify what factors might drive the SWR. A simple PCA factor analysis on the data tensor would show relevant correlations with variables like bond yields, CAPE ratios, global CB balance sheets, debt levels etc.

    I also agree with W Neil that the blogger ERN is already ahead of the professionals in terms of his approach. https://www.earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro

  • 58 Jamese20 April 20, 2018, 2:29 pm

    Blind 4% would work over 80% of the time though…there is more chance of dying in your car on the way back from work than the 4% rule failing you.

    There is nothing wrong the aiming for 4% but there is everything wrong about people claiming you require way less withdrawal strategies

    So far I haven’t seen any credible evidence to suggest we should worry about the 4% rule
    ..those who do seem to add in silly 1% fees and predict that the future will be alot worse than our far from perfect less well off past?

    The UK can get fees for less than 0.3%! So even a 0.5% fee seems high for most funds.

    Show me some actual credible scenarios where we should fear the 4% rule and I will consider looking… ..and by credible I don’t mean the rare 10% times that it has failed or the fantasy land – the future will be worse

    It’s a guide and is a good very qualified guide…but folks suggesting 2.5% quite frankly is stupid and based on negative outlooks and insanely going after 100% certainty

  • 59 RichardF April 20, 2018, 3:29 pm

    Jamese20: I think we all understand what you are getting at but I feel uncomfortable with the word “stupid”. For my delicate sensitive self that doesn’t feel the right sort of language for this blog. Maybe I’m in the minority with that but I thought I’d share.

    You suggest that people can absorb inflation in their fixed income for certain periods and that is certainly the case. I have done the same thing in employment several time – particularly in recent years but the classic 4% and other similar SWR rules factor in inflation each year so your 4% isn’t the same as Bengen’s 4%. Same number different strategies.

    Maybe your approach could be bundled a strategy that says you pay yourself x% for 3 years (or so) then uplift by inflation; pay that amount for 3 years (uplift again for inflation) etc. That way you are stepping your way through deaccumulation with flexibility as you could decide along the way whether to religiously apply inflation or again push it on for another yer. One could even call it the “Jamese20 Variable Withdrawal Strategy”

  • 60 The Accumulator April 20, 2018, 3:50 pm

    @ zxspectrum48k – thank you for the updated Morningstar study. Much obliged!

    The convergence of winners vs losers washes out in the global portfolio SWR, for example:
    http://advisorperspectives.com/newsletters14/pdfs/Does_International_Diversification_Improve_Safe_Withdrawal_Rates.pdf

    I can’t agree that Pfau or Kitces lack rigour. I think where I share your frustrations, is that the pro retirement researchers don’t bring their many contributions together as an executable plan. I guess that’s not surprising as they work on the wealth management side – execution is their business.

    That’s where ERN (Early Retirement Now) and Living Off Your Money are a godsend for DIY investors. They’re coming at the problem from the same angle as we are: hence they have developed a coherent plan and we’re all free to use or adapt it.

    You’re spot on with the long bond problem for historic UK gilt returns. However, Pfau has published a UK SWR using an equities/bills portfolio which pushes up his result by a few notches (i.e. tenths of a percent) in ‘How Much Can I Live On In Retirement’. That suggests to me that the volatility / inflation vulnerability of long UK bonds is a contributing factor to the lower-ball SWR figures.

    (Quick jargon-buster for anyone wondering what I’m going on about re: Bills = very short-dated gov bonds, used as a proxy for cash.)

  • 61 The Rhino April 21, 2018, 11:57 am

    Inflation is super tricky to deal with.

    The disparity between national figures and personal inflation is significant.

    But it’s pretty much impossible to pull out personal inflation from your expenses.

    So what do you factor in into any SWR calc?

    It’s a really rough part of the calculations.

    There’s a huge amount of detailed research out there on SWRs but for all that, the pragmatist in me says just go 4%, but with caveat you’ve got to stay on your toes, keep your eye on the ball, don’t fall asleep at the wheel (I can’t think of any more metaphors)

  • 62 The Accumulator April 21, 2018, 12:15 pm

    Hi Rhino, if you keep a spreadsheet, divided into spending categories, wouldn’t you have a pretty good gauge on how much more you spent on food this year vs last, heating, fuel, boozing etc?

  • 63 John B April 21, 2018, 6:18 pm

    Spending categories always seem to miss big ticket items: new roof, marriage, cars moving house which with hindsight are the expensive parts of any year. Any long term plan should allow for a spending U, high to start with all those exotic holidays, dropping as you become a homebody, and a sharp uptick in a home. Very had to map to that by extrapolating your working middle-aged lifestyle.

  • 64 The Accumulator April 22, 2018, 11:31 am

    If the plan is to accommodate a personal rate of inflation then we’re better positioned than any official inflation rate to estimate how frequent big ticket events are likely to be in our lives. It’s entirely possible to estimate the rough impact of those events and to amortise them over time. It’s about accuracy over precision as they say!

    Beyond The 4% Rule has an interesting section on the spending U. It quotes a fair bit of research that suggests the U is a myth for most people. Most people don’t end up in a home according to the research. And if they do, it’s not for very long…

  • 65 Vanguardfan April 22, 2018, 12:27 pm

    I agree that you can wildly overestimate care costs. Neither of my parents needed residential or nursing care. One needed substantial home care input for several years, but that was easily covered by pension income as the rest of the outgoings were so minimal.
    We really need some kind of collective social insurance for this though, as it’s hopelessly inefficient leaving it to individuals to self insure something so unpredictable.

  • 66 John B April 22, 2018, 1:11 pm

    The problem is that people dismiss care costs as an unlikely outcome, but worry about a repeat of the Wall Street Crash. If you are going to Monte Carlo model stock market portfolios, you also need to model health and life expectancy outcomes too. The problem is the life assurance industry has been attacked for offering such poor returns on annuities which hedge the former, and have had no traction with policies to cover the latter, again presumably because the premiums sound so high.

  • 67 The Rhino April 22, 2018, 3:28 pm

    @TA – do you keep categorised expense accounts? Have you tried to pull a personal inflation figure out of that data?

    Here’s my personal inflation figures for the past 7 years:

    -3.25%
    21.61%
    -13.08%
    10.52%
    9.74%
    41.38%
    -4.27%

    As you can see, its nonsense.

    I’ve thought about it quite a bit, but can’t see how you can pull apart expense variance and expense inflation. You’re possibly right that some categories like maybe gas and electric lend themselves to computing an inflation rate, but overall, I think you’ve got no chance.

    Dominant items, say like groceries, are impenetrable. How do you distinguish between butter rising from 60p to 140p and you consuming 2 packets rather than 1 packet? But then next year only consuming 1/2 a packet? Inflation, consumption it all gets conflated and its hugely variable.

    If the plan is to accommodate a personal rate of inflation then we’re better positioned than any official inflation rate to estimate how frequent big ticket events are likely to be in our lives. It’s entirely possible to estimate the rough impact of those events and to amortise them over time. It’s about accuracy over precision as they say!

    I would respectfully disagree here – My life experience suggests the exact opposite, i.e. its almost impossible to predict the impact of big-ticket items that may or may not occur in the future – and they have a huge impact on how much money you need to spend.

    My conclusion is erring towards excessive investigation into sensible SWR no.s is unecessary. Market returns exhibit great variability but you also have very little idea of what you will need to spend. Couple those two together and debating over whether a SWR is 2.7%, 3.2% or 4.0% starts to suggest we’ve lost sight of the size of the error bars.

    I’m starting to think rather than being over-cautious and revising SWRs ever downwards or being blase, picking too high an SWR and potentially suffering badly way down the line, what is necessary is simply to remain agile and retain the ability to adapt for as long as you possibly can. People talk about diversity amongst their portfolio but I don’t think you can stop there. You need to think broader, diversity in retaining social capital, human capital (ability to generate income) etc.

    To think along the lines of I need generate x pounds income per year and then I’m sorted is to misunderstand the nature of the beast. You’ve got to treat your financial position as a continuous feedack loop that you can’t afford to take your eye off, ever vigilant, ever tweaking and understanding the importance of keeping your options open. To calcify around the concept of ‘I’ve got y pounds in the bank and I’m never working again’ is probably not the smartest strategy. It might well not even be the most fun?

  • 68 YoungFiGuy April 22, 2018, 3:49 pm

    @TA – thanks for the recommendation on McClung – I read the first three chapters and have bought the book. I’m very impressed so far.

    @Rhino – I agree with your comment. Watch out for my thoughts coming through early next week (I’ve written the post, now I just need to make sure readable…)

  • 69 RichardF April 22, 2018, 4:13 pm

    @Rhino
    I’m not quite retired but I’m hoping it will be similar in earnings terms as when I was employed (not the amount but the approach). I will earn £x a year/month; if I’m lucky that money may increase on average each year to cope with inflation (note that this hasn’t happened as an employed person over the last 10 years but I will be paying myself in retirement and I hope I’m a kinder boss). If my personal inflation goes up or down my current boss doesn’t care. I get my pay and I live off it. The same will happen in retirement.

    I currently hope to adopt a McClung Prime Harvesting Strategy or similar and attempt some form of Variable Withdrawal rate that considers both minimum needs and also how well the portfolio is doing. I’m not interested in squeezing the very last drop of potential growth out of my savings because that adds formulistic complexity when I may be of diminished mental ability in the future. If I’m lucky enough to have a growing portfolio It’s will either be a hedge against potentially expensive long-term care or my children will benefit.

    So, in retirement as in employment I must continue to sensibly balance my outgoings and income. Nothing will change in that regard. If my personal inflation needs to increase for something I will have to save for it or do without. If I cannot, then I hope the Variable Withdrawal rate strategy will help.

    I suspect the vast majority of people that read this site will be in a similar position but with different income generating strategies.

  • 70 The Accumulator April 23, 2018, 1:36 pm

    @ Rhino – yes, I track expenses. Mine don’t bounce around quite as violently as yours. It seems doable to me, especially if I focus on representative essentials rather than the headline figure. But, in practice I think RichardF is right – I’d cut my cloth according to the circumstances.

    I very much agree with your idea of building a wider base of capital. It’s hard for any spreadsheet to capture a full life. Where we seem to differ is how we approach our framework. It surely is impossible to predict with precision what the big tickets will cost and how frequently they arrive. But by trying to model them and coming up with a number, I’m in a much better place than if I hadn’t bothered. Both from a psychological p-o-v and a financial perspective. I don’t curse my luck when things happen, I’m prepared for things to crop up. And the plan is more robust because it’s tried to price them in to some degree. Also, the financial difference between a 3% SWR and a 4% SWR is massive. Choosing one or the other will impact my financial flexibility in the future. Still, the greater value in following the research is I’ve got a much clearer idea of how to respond if things do go wrong.

  • 71 The Rhino April 23, 2018, 3:57 pm

    @TA – that is interesting about the expense volatility. I’d assumed what I’d measured might be normal but maybe that isn’t the case. For sure, the less volatile the expenses, the more it makes sense to refine the SWR.

    I guess its the extent of the modelling that you do that is maybe the key here. Understanding the limits of its accuracy and letting that dictate how much effort you put into it – how many decimal places you use.

    You’re right about the difference between 3 and 4 percent SWR being massive.

    Its all moot really as has been mentioned before, no-one in reality would ever run their finances in such a way that they wouldn’t react and do something long before things went really bad.

    But I suppose if you took that on-board prior to even getting started with the saving/investing you could potentially save a lot of time?

  • 72 The Rhino April 23, 2018, 5:37 pm

    Just to elaborate on the 3 to 4 percent SWR being massive.

    It is if you’re looking from the required capital perspective

    It is not if you’re looking from the required income perspective

    Say you want 20k a year to live off.

    at a 3% SWR you will need 666k of assets
    at a 4% SWR you will need 500k of assets

    Thats a massive extra chunk of change to work for – how many years to be able to save 166k?

    But say you’d modelled 4% SWR, but then reactively decided to trim back to using 15k of assets and 5k of income (some form of work) – well you’ve managed to bridge the gap between that massive difference of settling on a 3 or a 4 percent safe withdrawal by earning just under 100 pounds per week.

    With any form of human capital left in the kitty that is eminently doable – and a healthy social capital is what will provide the opportunities to allow that to happen.

  • 73 The Rhino April 24, 2018, 7:24 am

    Nice piece on SWR s over at Young FI Fuy

  • 74 Mr Optimistic April 30, 2018, 8:18 pm

    I enjoyed reading this book and although I think it cut some corners it probably meets the needs of the audience he targeted and at least hammers home some basic points. Given the frequency with which seeking a financial advisor is promoted, the book would be a good primer for understanding such a conversation, providing you got a competent advisor of course. Thanks for the review.

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