Weekend reading: William Bengen’s new five percent rule

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• 1 Gary Cooper February 13, 2021, 10:43 am

  While US morningstar gave us The Good News About Retirement Income the UK version stunned last week with ‘£1 Million? Nice But Not Enough’ https://www.morningstar.co.uk/uk/news/209401/%c2%a31-million-nice-but-not-enough.aspx
• 2 Tharho February 13, 2021, 10:52 am

  As a long time reader, first time poster, firstly a BIG thank you to the Monevator team for all you do. Saturday breakfasts are all the more enjoyable when reading through the Weekend Reading article, links and comments. And I have been tracking excess reportable income on my accumulation funds for years thanks to your helpful articles – no unwitting tax evasion here!

  I recently inherited some money which I plan to drip feed into the market over the next 1-2 years (I know, “time in” the market is more important than “timing” the market, but it does feel frothy and I’m only human). In the meantime, with high (hah!) interest savings accounts earning a miserly 0.5%, I was keen to tap the collective wisdom on the attractiveness of holding the non-invested portion in short duration bonds.

  For example, the iShares £ Corp Bond 0-5yr ETF (ticker IS15) offers a more respectable c.1.8% yield. But it brings a risk of loss of principal if interest rates rise. Hence my focus on short duration bonds which will be less impacted. While my personal view is that UK interest rates are likely to stay low for some time, I’m not so sure about inflation.

  Q: What happens to short term bond prices if inflation increases but the BoE is motivated to keep interest rates low?
• 3 G February 13, 2021, 11:25 am

  On persuading retirees to spend their cash. I used to think that from your 70s, you spend very little so might as well spend a little more up front and have some fun while you still can.

  But I now I wonder if the prudent thing is to keep a bit back for health/care reasons. We’re likely to see an explosion in health/care interventions over the next couple of decades – not least because older people tend to be richer and some may not want to go quietly or quite as quickly into the long dark night – creating a massive new market. If you fall into the “rage, rage, rage against the dying of the light” category, it would be a damn shame to miss out on a medical intervention that might give you a few more years of quality of life.
• 4 EcoMiser February 13, 2021, 11:29 am

  I say I could safely draw (available wealth)/(100-age), and assume that the returns will cover inflation. I’ll revise that if either figure gets small, but I could survive on just my pensions. I keep saying I should spend more, but there aren’t may opportunities at the moment.
• 5 Gentleman's+Family+Finances February 13, 2021, 11:38 am

  5% rule???
  Over what time span and what other factors are present?

  I take all my advice from a financial guru called Charlie and he swears by the 2.1% rule.
  https://www.independent.co.uk/news/uk/home-news/prince-charles-wales-private-estate-duchy-cornwall-1bn-a8974836.html

  On a more serious note:my own view is that earning more money in retirement would require serious effort and if you are waiting to get to 5/4/3/2.5/2.1% of a SWR then you are letting something imaginary get in he way of living your real life.
  Take a risk and live for now!
• 6 xxd09 February 13, 2021, 12:21 pm

  Just some personal info
  My wife and I are nearly 75 and done a lot of world travelling-probably enough
  Travel abroad would appear to not be available for the foreseeable and we might then be too old
  So what is retirement income now to be spent on
  Two items figure -dentistry-often has to be private due to lack of NHS provision plus cost of so called non essential items like crowns, bridges and implants and the possible coming cost of a care home -£50000 pa
  No doubt others will have different priorities
  xxd09
• 7 Snowman February 13, 2021, 12:31 pm

  HM Treasury have issued a consultation on increasing the minimum age at which a pension can be accessed from age 55 to age 57 on or around April 2028. Apologies if it’s already been mentioned.

  Remember it’s a consultation, but it does give some clues on the direction of travel. Anybody potentially affected (which pretty much means anybody born after 5th April 1971) who was thinking that this would be applied in the harshest way possible, are likely to be pleasantly surprised.

  https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/960034/NMPA_consultation_2021.02.10.pdf

  Lot’s of interesting issues.

  – The eventual increase may transpire in many cases to be a sudden increase on 6th April 2028 from age 55 to 57 (assuming individual schemes aren’t silly enough to voluntarily increase it earlier)
  – in some cases it may even transpire that existing pensions might still be accessible from age 55 after 6th April 2028, even in relation to contributions after 6th April 2028, provided the pension isn’t transferred on.
  – anybody born after 5th April 1971, thinking of transferring a pension after 11th February 2021 (i.e 3 days ago!), needs to think very carefully, about the risk of potentially losing the right to access their pension at age 55 before going ahead.
• 8 Jim McG February 13, 2021, 1:05 pm

  I admit I haven’t bought an actual Kindle but I do buy through your 99p book links (every little helps!) I often wonder if you have a link that keeps you updated on these offers? I’m building an excellent 99p library as I browse Amazon – love their emailed daily deals too – although I wish they’d play fair on tax. Thanks for the podcast link which I’ll listen to with interest. The comment that the hardest challenge with retirees is getting them to spend their pots rang a bell with me, and I like the idea of the 5% rule way more than the 3%. In reality though, I wonder if I’ll be a 1.5% ruler when it comes to the crunch.
• 9 xeny February 13, 2021, 1:38 pm

  @Jim McG – there’s also a rather lengthy monthly deals selection, typically about 1000 books over 70+ pages on the Amazon site.
• 10 HariSeldon February 13, 2021, 1:52 pm

  @Tharho

  Re IS15 iShares Short Duration sterling corporate bond, do not be misled by the yield…. look at the yield to maturity of the portfolio its 0.85%, before costs of .2%. The distribution yield is higher but its the yield to maturity that matters which takes account of the value of the bonds that mature.

  IE you buy a bond at £1.04 that matures in 3 years time at £1.00 that pays 2% … you are getting 2% interest right up until maturity but you then take a capital loss of £0.04 per bond. The yield to maturity calculation takes account of this and in this case the YTM is 0.65%

  ( Usual caveats, its based on 6 monthly interest payments and the exact figures depend on exactly when you buy in relationship to the interest payment dates but it shows the principle)
• 11 Andrew February 13, 2021, 2:58 pm

  I read the ARK PDF and the phosphorous piece and they are both mind-blowing. Thanks, TI!
• 12 The Investor February 13, 2021, 2:59 pm

  @Snowman — That’s very helpful, cheers for sharing. Potentially a few people will sleep easier with this news, though I’ve not deeply dug through it myself yet. Will try to flag it up in a post next week for discussion I think.
• 13 Snowman February 13, 2021, 4:08 pm

  @The Investor

  Definitely worth a post. The gov.uk page linking to the consultation is here

  https://www.gov.uk/government/consultations/increasing-the-normal-minimum-pension-age-consultation-on-implementation

  Summary

  A consultation reconfirming that the normal minimum pension age will increase from age 55 to 57 in 2028 and seeking views on the proposed protection regime.

  This consultation closes at
  11pm on 22 April 2021
  Consultation description

  The normal minimum pension age is the minimum age at which most pension savers can access their pensions without incurring an unauthorised payments tax charge (unless they are taking their pension due to ill-health). It is currently age 55. In this consultation, the government reconfirms its intention to legislate to increase the normal minimum pension age to age 57 on 6 April 2028. Increasing the normal minimum pension age reflects increases in longevity and changing expectations of how long we will remain in work and in retirement. Raising the normal minimum pension age to age 57 could encourage individuals to save longer for their retirement, and so help ensure that individuals will have financial security in later life. The increase to age 57 will not apply to those who are members of the firefighters, police and armed forces public service pension schemes. The consultation also seeks views on the proposed protection regime for members of other pension schemes.
• 14 driftglass February 13, 2021, 4:18 pm

  “Nobody ever buys a Kindle through my link.”

  No, but I certainly hoover up some of the cheap offerings >:)

  Also, https://www.spectator.co.uk/article/no-amsterdam-hasn-t-overtaken-the-city
• 15 The Investor February 13, 2021, 4:57 pm

  The consultation also seeks views on the proposed protection regime for members of other pension schemes.

  Thanks for thoughts @Snowman. I’ll probably look to do a heads-up, but really need my co-blogger to weigh in on this in the future as he’s been thinking about this stuff for a decade. (I don’t intend to retire as popularly understood at the moment, so am not so bothered by two years either way — I certainly haven’t modeled ISA bridges and whatnot like @TA).

  Talking of which The Accumulator will be able to answer this, but he’s offline at the moment… what does “protection” and “other pension schemes” here mean

  Would it mean potentially someone who has a SIPP when the rules come in will be able to retire at 55? Or does ‘schemes’ and the notion of ‘protection’ imply it would be other ‘professional’ type people with final salary schemes, such as teachers etc?
• 16 Tharho February 13, 2021, 5:23 pm

  @HariSeldon – Thank you. I agree that if I were to buy a single bond and hold it to maturity, the yield to maturity figure is the one to focus on.

  But should one take the same view when looking at an ETF holding a portfolio of bonds? E.g. where a bond in the portfolio is coming up to term, won’t the ETF provider sell it before it gets close to maturity and reinvest in a later dated bond in order to keep the overall maturity profile in line with target?

  If so, that would avoid the capital loss on a single bond at maturity. And so the distribution yield becomes more relevant than YTM. E.g. looking at the price of IS15 since 2013, apart from last March, it’s typically been c.£105 which suggests it’s not suffering from capital losses holding bonds to maturity.

  Perhaps I’ve got this wrong – if so, happy to be corrected!
• 17 ZXSpectrum48k February 13, 2021, 6:16 pm

  Tharho. In the absence of yield curve moves, the return will be the yield to maturity (YTM). High coupon bonds will “pull to par”. So say a 2-year bond with a coupon of 5% and yield of 1% will have a price of 107.88. A year later, if the yield is unchanged at 1%, it’s price will be 103.96. Add in the 5% coupon and you’re total value is 108.96. The return = 108.96/107.88 – 1 = 1%. The YTM.

  When that bond leaves the ETF, the proceeds are used to buy a new longer bond. That bond may also have a coupon of 5% and a yield of 1%. So the distribution yield can remain unchanged but nonetheless the return (emphasis: in an unchanged yield curve scenario) will be 1%, the YTM.
• 18 Kylie February 13, 2021, 6:22 pm

  I found the ARK stuff fascinating, but would be more convinced if it considered the risks as well as as the upsides. In particular it ignores climate change related risks, which will are particularly relevant to Bitcoin and hypersonic flight.

  It provides food for thought, but I would certainly be taking its predictions with a big pinch of salt.
• 19 Passive Pete February 13, 2021, 6:32 pm

  @TI – the ‘protection’ is a grandfathering clause illustrated by @Snowman’s final point about being careful transferring out of a current scheme. If you’re currently in a scheme that permits you to retire at 55 (or even 50 under previous rules) then that right will be protected and you will still be able to retire before the age of 57. Provided the pension scheme rules don’t change in the meantime, as @Snowman says!
• 20 Emily February 13, 2021, 7:08 pm

  That financial samurai piece on CNBC is hysterically funny. I loathe Corbyn and I’m hardly a pitchforks and torches type, but the idea that someone would write an article complaining about having paid off his mortgage in one of the highest cost cities in the US, because it had allowed him to go on extensive holidays with his wife before they had kids….I’m tempted to wonder if it’s a false flag operation by the Sanders crowd?
• 21 Tharho February 13, 2021, 7:41 pm

  @ZXSpectrum48k – Thanks. The pull to par concept makes sense. I suppose the fact that IS15 has held its value at c.£105 over the last 8 years is more a reflection of yield curve changes, else it would have trended down towards £100. Given its YTM is only 0.65% after fees (and with the risk of price fluctuations) vs 0.5% in a cash savings account, I think I’ll be staying in cash.
• 22 Faustus February 13, 2021, 9:07 pm

  The go-to argument for changing the pension age has always been rising life expectancy, which indeed was rising strongly in the UK until the first decade of this century.

  However, this is no longer true with longevity in the UK today very little changed from 2011 (even before the nefarious effects of Covid have been recorded). Much has been written about the reasons for stalling life expectancy in Britain (the King’s Fund has some good articles) but this major trend change is consistently ignored by the Government and Treasury.

  Given that many of the current plans to raise private and state pension ages stem from George Osborne in the period after the financial crisis, when life expectancy trends seemed to be on a different course, this fundamental issue needs to be hammered home in any consultation.
• 23 Snowman February 13, 2021, 9:35 pm

  @the Investor

  To follow on from what Passive Pete said

  PROTECTION

  This relates to 2.2 of the consultation.

  Some members of company pensions (those set up under trust) retained the right to take their pensions from that specific arrangement at age 50.

  This would mainly relate to company pension schemes (and section 32 policies – a type of pension into which some transfers from mainly final salary pension transfers were made) where there was an existing right under the scheme rules to take their pension at age 50, when the increase in pension age from 50 to 55 was announced prior to the change in 2006.

  In addition some professions (e.g. professional footballers) with personal pensions and retirement annuity contracts have historically been able to take their pensions at an early age and they were able to protect their minimum pension age at age 50 when the increase to 55 took place.

  These exceptions are relatively rare and most people with pensions can’t access them before age 55, and anybody who has an arrangement with protected age 50 should know about it, and should be wary about transferring such an arrangement and losing their protected pension age.

  OTHER PENSIONS

  Hard to know what they mean, because it’s a bit vague.

  But basically there are a lot of different types of pensions, so I think it is a cover all statement. So you have contractual pension such as personal pensions and SIPPs which are essentially the same thing legislatively, the company pension schemes set up under trust (defined benefit including final salary and career average, defined contribution, hybrid etc). And you’ve got section 32 policies, retirement annuity contracts, SSASs, executive pensions and so on.

  The consultation seems to relate to all pensions although it doesn’t explicitly say that.

  The consultation proposes in 2.5 that someone who has a SIPP now (but not if they take out a SIPP tomorrow) might be able to retire at age 55 after 6th April 2028, in relation to contributions made both before and after April 2028 (2.7), provided they don’t transfer their SIPP between now and when they access it (2.18). However this requires that there is an existing right within their SIPP rules to take pension benefits at age 55 (2.12), and the answer on whether the SIPP can be accessed at age 55 after April 2028, may hang on whether this is explicitly stated in most SIPP scheme rules or is there some vague wording about being able to take at the minimum age set out by legislation.
• 24 Jonathan B February 13, 2021, 10:05 pm

  @Emily, I had to re-read that article to see where there was a reference to Corbyn – and there isn’t one.

  The guy’s problem seems to be valuing his spreadsheet value over the benefit of enjoying his wealth. Those trips with friends to the Far East and Yosemite will be benefits that remain in his memory for a long time.

  One’s relationship to mortgage payments probably differs through life. For most people it is the cheapest way to borrow money, so well worth accepting as a benefit given you would otherwise need to pay rent. After 2008 we found that overpaying it slightly (we just kept our monthly payments the same as before) was effectively earning more interest than we could get in any cash account, though we did happen to have a mortgage account where you could take any overpayment balance out again. And it meant that by the time I retired I could pay off the balance with the lump sum portion of my pension. Which was an important part of the retirement plan, reducing outgoings meant we needed less income.
• 25 ZXSpectrum48k February 13, 2021, 11:39 pm

  Re: “Brexit: Amsterdam ousts London as Europe’s top share trading hub. ”

  It annoys me when the media and general public seem to think the LSE and share trading is somehow at the heart of London’s financial services. It’s never been about the LSE. It’s much more about LCH (London Clearing House) and the products related to that. London is about interest rate swaps, FRAs, fx swaps etc. It’s never been about bonds or shares. Of course I’m biased being a swap trader but let’s be clear: LSE volumes are just a few billion a day; LCH volumes are a few trillion per day! Do the math.
• 26 Al Cam February 14, 2021, 12:40 am

  @Jonathan B (#24):
  Sounds like you are familiar with big ERN’s take on this: https://earlyretirementnow.com/2017/10/11/the-ultimate-guide-to-safe-withdrawal-rates-part-21-mortgage-in-retirement/
• 27 Seeking Fire February 14, 2021, 11:35 am

  The Bengen podcast is, as Monevator says, very interesting. Many commentators who have been at best questioning the validity of the 4% rule g/f perhaps haven’t really factored in the possible counterbalance of a low inflation environment reducing annual cost of living increases (note standard of living increases also excluded per the article comment). The real risk, which in fairness, he does highlight, is that it seems unduly cavalier to think that the low inflation environment continues for the foreseeable future. Not that I have any particular insight. It’s also worth reminding oneself that this is a narrow dataset and concentrates only on the US. I imagine there are very few readers here only with the S&P 500 in their equity portion – myself I am global equities. But the 4% has not worked with a global portfolio historically as he acknowledges (Germany / Japan / Italy / Russia anyone?). It’s also interesting that he advocates a lower bond portfolio given current YTM. Although that is implicitly suggesting your portfolio is going to have increased volatility, which will increase stress for the average retiree. I never blinked in the last 12 months but doubt my ability to deal with this as well if I am not earning and human capital is exhausted. And yet downing tools in ones 40’s / 50’s likely necessitates a high level of equities to hedge out the tail risk that you or your partner live to 100. The small cap bias intuitively makes sense but seems like hindsight bias. You also have to live with greater volatility still. The major risk in today’s environment to a traditional equity / bond portfolio seems a low interest / low inflation environment, which suddenly changes to a high interest / high inflation environment that would realise sequence of return risk dramatically. Again I have no insights beyond recognising this as a possibility.
• 28 MrOptimistic February 14, 2021, 11:49 am

  Two things dominate my thinking about drawing down pension monies. By far the greatest is inheritance, this has come to the fore with recent tax changes for iht and pensions. Second is care home fees, but again this could be interpreted as an inheritance issue by way of avoiding impact on the eventual estate. Other than that I just assume one of us may live for 30 years so 3% is the starting point and since I am a product of my time inflation is the big bogeyman. No impulse to take on any more risk than necessary as I reckon I have enough so FOMO would be synonomous with greed.
  A relative died recently. While he was in the nursing section of the care home weekly fee was £1400 paid out of net income. Gulp.
• 29 Al Cam February 14, 2021, 12:09 pm

  @Seeking Fire:
  For info:
  https://retirementresearcher.com/4-rule-work-around-world/
• 30 Bill G February 14, 2021, 12:59 pm

  Thank you for posting your lived experience as a retiree, xxd09. I am somewhat short of examples of actual retired people (my family does not make old bones) so it helps me consider the reality of growing old.
  Most of my few retired associates are from the cycling club and are disproportionately former teachers and managerial grade staff from the previously nationalised industries. While good company they do not necessarily reflect UK retirees.
• 31 Getting Minted February 14, 2021, 1:00 pm

  5% “safe withdrawal rate”?
  I prefer to use natural income yield and have kept that above the 4% plus inflation “safe withdrawal rate” for the last four years. Expenditure that has been less than the 4% plus inflation “safe withdrawal rate” for the last seven years been helpful too.
• 32 Jonathan B February 14, 2021, 1:12 pm

  @Al Cam (#26) – ERN’s analyses are way more sophisticated than ours!

  We simply compared our likely expenditure needs/wishes (imprecision there) with our potential incomes running into the future, and worked out how to manage the latter most effectively. It was immediately obvious that the main risks in income came in the early years of retirement for us (DB pension income plus state pension would provide a reliable base eventually) and losing a non-discretionary outgoing would reduce risk considerably as long as we would still hold a reasonable emergency cash fund. It was then a matter of working out how to do that in the time left for additional pension contributions and mortgage overpayment.
• 33 Al Cam February 14, 2021, 1:37 pm

  @Jonathan (#32)
  ERN is fab at putting numbers/charts/etc together to present a compelling narrative – but it is the key insights that really matter!
• 34 ZXSpectrum48k February 14, 2021, 1:58 pm

  @SeekingFire. The Bengen article is driving using the rear-view mirror.

  First, his low inflation narrative is just flawed. He’s basically assuming that nominal returns are constant and that lower inflation means higher real returns (via the Fisher equation). Except that isn’t supported by evidence. Lower inflation eventually results in lower nominal returns. Of course, in the adjustment period where you move from a higher to lower inflation environment, you will get higher returns from capital appreciation. A period of structural disinflation, leading to lower rates, is a massive tailwind for returns. Bond yields tell you all you need to know about asset valuations here. Either the inflationary environment mean reverts, bad for capital values, or we stagnate, bad for carry.

  Let’s also add in demographics, the iceberg of macro fundamentals. 90% of the impact doesn’t get seen until it’s too late. Wage inflation is the biggest driver of inflation and demographics/technology has been forcing that down. The demographic component turns within the 5-10 years. Wage inflation could make a comeback.

  Second, it’s always ridiculous to use the US historical returns for SWR. Using a country that won the 20th century is clear hindsight bias. The period started with protectionist economies and ended with globalization. Great tailwind for returns. Going forward, however, that lack of capital controls will tend to result in more homogenized real returns and higher correlations (or we go back to protectionism with lower returns all around).

  Third, we’ve spent the last decade focussing on money creation operators. At some point, that will turn and the annihilation operator will dominate. Probably via taxation. My net worth increase last year alone would have put me in the 1%. There is precisely bugger all chance that somebody isn’t coming for that. It’s just a question of when.

  Last: To those that are happy to inflate their SWR by CPI-U for the next 50 years: I think you’re mad. Living the 2021 standard of living in 2071 doesn’t appeal to me.
• 35 FitandFunemployed February 14, 2021, 5:00 pm

  @TI – if you can find me a referral link for a new Kobo, I’ll consider it 😉 . So much nicer than Kindles!
• 36 Seeking Fire February 14, 2021, 9:22 pm

  Al Cam. Thanks for the useful link that I had read along time ago, helpful reminder. It suggests you knock off around 50 bps for a global portfolio based on historic data. To my mind that’s the price you are paying for hedging yourself to a global portfolio as opposed to anchoring yourself solely to the US that may not perform as well going forward. I am reminded of the British upper class in 1910 who felt their position was unassailable.

  ZX – Hard to disagree with any of what you say and it is particularly problematic for ‘fat fire types’ given the likely inability to re-enter a similar paying role once you’ve pulled the plug if thing started going pear shaped or use say the state pension as a buffer. At least for me anyway. Equally given the future is un-knowable things may turn out materially better than expected acknowledging hope is not a strategy. Political risk for fat firees is quite problematic, equally capital is more mobile than historically and to be honest if you are globally orientated, one could pull the plug if needed and just come and visit regularly to the UK. much easier said than done though, I acknowledge particularly as you head to your 50’s. FWIW I am tending towards the natural yield of a global equities portfolio albeit even that is now lower than what I had in my head.

  Getting Minted. Interesting comment but I feel it necessary to point out this is no panacea imho. The natural yield of a global portfolio is circa / sub 2%. Therefore anyone achieving 4% through a natural yield is making an active choice to focus on a small subset of the market (e.g. UK, Spain, Oil & Gas, Property etc etc). One will largely exclude the US given its low yield however companies in the US have made a conscious decision to reduce dividends and buy back stock instead – the returns to investors have not changed though. Over the last decade this has been a (very) sub-investment decision given the absent of technology companies and US in the portfolio as you will be aware. It is also arithmetically the same if an investment trust borrows to maintain a dividend to borrowing yourself to maintain income – so again no panacea. In addition SWR research has no read-across at all to the strategy of reaching for a 4% yield – it may or may not work (I have no view)- there’s just no data to support it. That’s not to say that (a) investing in these sub-sectors won’t prove very profitable relatively over the next decade if value outperforms (I have no idea) and (b) I wouldn’t recommend investment trusts to someone in retirement – the psychological benefits can be very helpful but you are likely paying for that either in fees or sector concentration and should reduce your SWR accordingly to account for this.
• 37 Al Cam February 15, 2021, 1:15 am

  @Jonathan B:
  For another take on carrying a mortgage into/through retirement, see:
  http://howmuchcaniaffordtospendinretirement.blogspot.com/2021/02/borrowing-and-investing-proceeds-in-low.html
• 38 Limette February 15, 2021, 10:38 am

  Reading this on a Monday because I bought myself a long weekend I’m particularly enjoying the ‘environmental factors’ section. And I’ll be sure to put ‘knuffelcontact’ in my bio on *that* app. 😉
• 39 Jonathan B February 15, 2021, 11:04 am

  Thanks @Al Cam. That article seems to me to be really about leverage, even if it may be a retirement context. At the moment, having made our retirement plan, our interest is primarily in succeeding in living a comfortable life in our terms not taking risks to get rich quick.

  However the website has links to other things which I have started exploring, and will continue. It will be interesting to see whether their downloadable spreadsheets are useful (I just have a totally unsophisticated one purely so there is a record of assets in one place, to update as needed and share with my wife).
• 40 Al Cam February 15, 2021, 1:14 pm

  @Jonathan B:
  That site uses a [somewhat pared back] actuarial approach, with discount rates, etc attuned to a US environment and essentially assumes a Floor and Upside approach.
• 41 Dazzle February 16, 2021, 11:10 am

  I couldn’t see any info on how a change from 55 to 57 would be phased in. Has anyone else seen anything on this.
  Particularly interested as I was born Feb 1972 so 55 in 2027 but not 57 until 2029. I could be completely unaffected by it or entirely affected.
  I would hope that they wouldn’t phase from 55 to 57 so that the transition was completed by April 2028 but can’t rule it out. I was hoping to be FI (if not RE) by the end of this year but moving the pension access age back would scupper that. It is a very short window of notice for such a change (less so if you consider they 1st raised the issue 5+ years back but then it was just a thought) Was there not something about giving 10 years notice of rule changes such as this?
• 42 The Investor February 16, 2021, 12:16 pm

  @Dazzle — I agree with you it’s opaque. I was toying with writing an article on this, partly leaning on @Snowman’s useful commentary above (thanks!) but I decided I didn’t have much value to add.

  Instead I’m going to keep this on my radar and if there’s anything concrete pops up in the media/comment-o-sphere, I’ll try and flag that up. Maybe this Friday with any luck.

  If anybody finds a great resource/take (deep dive by a super wonky pension consultant or similar) please do pop the link in here. 🙂
• 43 Getting Minted February 16, 2021, 3:32 pm

  @Seeking Fire. I agree that in following my own approach I have had to be able to ignore the capital growth underperformance when compared to global indices with heavy US tech exposure in recent years. I think considering the history of the investment trust dividend heroes in increasing their dividends over twenty or more years is a useful alternative to considering the SWR research.
• 44 Naeclue February 16, 2021, 6:00 pm

  The Bengen interview was interesting and it would be great if it turned out to be true. I would like to see more detail on his research, but have to say I am sceptical about it. It is not at all clear to me that there is enough historical data to reach any definitive conclusion about a link between inflation and SWRs. What he has observed may be just a fluke uncovered as a result of his data mining. Testing his original 4% rule out of sample to other countries showed that it was not really valid and that the US was an outlier.

  Last year I flipped from 60/40 equity/bonds to 90/10 equities/cash, with a drawdown rate of 1.8%. At the start of this year the drawdown rate had dropped below 1.5%, mostly due to the market rise since I started the new strategy. This breached a limit I had set which meant I could give away some cash and so limit the drawdown rate to 1.5%. Under the current plan, my dawdown rate will never drop below 1.5%, but if/when the stock market halves it would rise to about 2.8%, which seems a reasonably prudent risk to take.

  In January I calculated what would have happened had I retired at the end of 2012 (which is something I had considered) and drew down my 60/40 fund at a SWR of 3%, adjusted upward by CPI. At the start of 2021, the drawdown rate would have been about 2.1%. If I had chosen an SWR of 4%, the drawdown rate would now be about 3.0%. Does this mean that the person retiring in 2012 can now safely increase their SWR by 33% to get it back to 4%? Maybe, or it seems more likely to me that an SWR of 4% now just carries a lot of risk and Bengen’s 5+% seems dangerously fanciful. Again though, it would be great if it turns out to be true.
• 45 Seeking Fire February 17, 2021, 12:18 pm

  Naeclue – there is a lot to like about your strategy from a safety perspective mostly that your w/r is 1.5%! As you say if markets halved and then halved again they’d have fallen by 75% and yet your w/r would still only be 6%, which is 50% higher than the fabled 4% but by that point valuations would be so low you could likely comfortably keep withdrawing. And even if not your cash buffer lasts six years. I assume you are either in US or Global Equities passively as opposed to active funds. Not that active is definitely worse, it’s just harder to read across the SWR research given it is index based. The challenge you have I would say would be in managing volatility – you need a strong constitution to manage a decade of negative returns or a 40% market suck out (no idea if it’s coming or not).

  Getting Minted – Picture another world – it’s 2021 and instead of US equities been on a tear over the last decade, they’ve done nothing and in fact are now down. Investors keep hunting around for value. In that construct, your portfolio has done very well relatively speaking, your trusts kept paying the dividends and blogs like yours are all the rage and are full of articles about hunting reliable dividend payers, value is king etc etc as opposed to catching on the tails of the S&P 500 tech constituents. It just never turned out that way this time around but it may do the next decade (aka 2001 – 2009, which was painful for most people in equities). It’s too difficult for me to try and figure out which way the world will go so I just don’t bother as quite often I get it wrong but that’s easy to say when the market just goes up. The real test for passive investors will be if we have a decade of negative returns. Investment Trusts can be a good option for investors particularly retirees I feel for the psychological benefits as the cosy warmth you get from regular quarterly dividends is very comforting particularly if you don’t compare your TSR to the market. Just be aware that you are often making a very active choice (value type stocks) (which over the last ten years has been costly) and because of that and greater fees your SWR may need to reduce accordingly.
• 46 Naeclue February 17, 2021, 4:30 pm

  @Seekingfire, yes we are mostly in global trackers, split by geographical region, but approximating the weighting of a global tracker. Our drawdown rate would be about 4.8% if the markets dropped by 75%. We currently have 60 years worth in equities, 6 in cash. That would reduce to 15 years + 6, so 21 years total, about 4.8% drawdown rate. With the new strategy we would not rebalance into equities, just out of them into cash, so we would not be buying into a falling market. We skim dividends off the equities rather than reinvest, so the cash would last more than 6 years before we became forced sellers.

  No doubt a fall of 75% would be alarming, but we have a plan B which would add some comfort. We have a holiday home we would let or sell. Plan C would be to either Airbnb a spare room, or downsize. Once Covid restrictions get lifted we are intending to give Airbnb a try to see how we feel about it.

  There is scope for belt tightening as well, which would likely be our first reaction following a 75% fall.