A podcast from the Mad Fientist about a Safe Withdrawal Rate got me thinking this week. Not so much about the maths behind it, or whether it is likely to work or not for me over the next thirty years, but thinking more about me over those thirty years instead.
You can’t take it with you, and as I head toward turning fifty four this year I increasingly wonder about how I will fare over the next thirty years? Because, in all probability, that’s about what I have left on this mortal coil.
We don’t do death very well in the Western world, so it’s quite difficult to focus on your own demise. Actually, I’ve read that it’s virtually impossible to imagine your own death in any meaningful way. Your mind can’t grasp it, and in a way the “4% rule” is a good example of this. If I read it right, and to make the maths simple, let’s say you have a million quid in a pension pot. If I withdraw £40k a year from that pot then, thirty years down the line, that million quid (allowing for inflation) will still be sitting there, pretty much untouched. It might even have grown. It might have dwindled slightly. Who knows for sure? But what I do know is that I doubt I’d have much need of a million quid at that age!
My feelings about this intensified at the end of the podcast where the interviewee, Michael Kitces, talks about “Lifestyle Creep” and lifestyle in general. He argues quite forcefully that you shouldn’t sweat the small stuff and, if you have your financial priorities right, then you’ve no need to worry about buying that Starbucks Mucho Latte or Big Mac (Large) for lunch, if that’s what you want. That sort of purchase just doesn’t matter in comparison to maxing out your mortgage with the first property you buy and then servicing the debt from your twenties onward. If you do that then you might not be able to afford a McDonalds for lunch in future.
Meanwhile, once you start living in a bigger house, buying a new car every three years, taking two or more holidays, hiring help for the gardening or cleaning and so on, it becomes very, very difficult to subsequently give those things up.
I can affirm the reality of this. Dispassionately I know I should downsize my property at some point for a multitude of good and financially advantageous reasons but, you know, I like the house I have, with spare rooms for guests or just to lounge around in. I like the garden, the spacious garage, the shed, the location and so on. Could I easily give them up? (Emphasis on the “easily”.)
The same could be said for cars. In my career, I’ve always had company cars that changed every two or three years. I’d really like to continue on with that, but does that really make sense? Financially, buying a new car every three years is jaw-droppingly dumb, but emotionally?
None of this internal debate matters if you’re loaded and are swimming in money through retirement, but it’s not hazarding a guess to think that most people will not be in that situation. If you ask me, it’s the middle classes that will be in for potentially the biggest shock. Talking to friends who work as pension advisors a 30k a year income is a desirable retirement income for many couples. This sits, however, very uneasily with the most popular middle class goal of retiring at 55. If I am calculating it correctly, and not allowing for any nifty tax manipulation, you’d need a £750k pot for that income on the 4% rule.
The Safe Withdrawal Rate is therefore quite a hard task master, especially if the point of it is to protect your capital and income generation. But surely you have to ask yourself, as you head into your dotage, how much do you need?
For me, looking at retirement, this is one of the biggest puzzles I have – how much am I going to need to service my definition of “a comfortable retirement”? When I had my year out, I was quite amazed by how little I spent on a week to week basis versus what I used to spend when I was working. I feel that would almost certainly continue as I head into my sixties and beyond. I’m just not going to need as much money in my sixties as I did in my fifties, and I think that same rule will apply even more to my seventies and eighties (if I get there!) As each year goes by, the chances are that my annual budget will be shrinking.
(There’s a potentially big caveat here when it comes to health, because who knows how much you want to spend on that as you grow older?)
Assuming I stay relatively healthy though, the 4% rule seems either to assume that you’re going to live forever or that one of your goals in life is actually a goal for death, through leaving an inheritance. I can see the sense in it for early retirement, but traditional retirement at 65? Not so much