Author Topic: Interesting Morningstar Article on the 4% rule and Australian retirees  (Read 3831 times)

Luckyvik

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This article suggests that the 4% rule is not conservative enough for all and particularly for Australians and non-USA retirees, it suggests that due to various factors including longer lifespans 2-3% is a better rule. Mmm might have to rethink my plans. What do others think?


http://corporate.morningstar.com/au/documents/WhitePapers/Safe_Withdrawal_Rates_Australian_Retirees.pdf


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Retire-Canada

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it suggests that due to various factors including longer lifespans 2-3% is a better rule. Mmm might have to rethink my plans. What do others think?

The real benefit of working many extra years during the prime of your life to accumulate the massive stash that is required for a 2% WR [or heck why not get really safe and go for 1%???] is that you'll have so many fewer years of retirement to fund!

What do I think?

I think working and saving for a 3%, 2% or 1% WR is a poor use of the limited time you have on this planet, but ultimately it's your time to spend how you wish.

FWIW - I am not US based.

Hopefully you've taken the time to read this sticky at the top of the forum placed there because this topic was coming up so frequently and people were having to re-hash the same info over and over and over again.

http://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/
« Last Edit: June 14, 2016, 09:13:50 AM by Retire-Canada »

bacchi

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Quote
the portfolio is invested domestically in 50% shares and 50% bonds, and
the annual portfolio fee is 1.0% of assets.

You can reclaim some of that missing 1-2% with lower fees.

You can reclaim some more with more aggressive investments.

maizeman

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We discussed a similar morningstar article about international SWR a few months ago here: http://forum.mrmoneymustache.com/investor-alley/safe-withdrawal-rate-for-australians/

1% expense ratios are brutal. That has nothing to do with australian stock markets being fundamentally different from other country and are really going to hurt the SWR of any portfolio. 50% bonds 50% stocks is probably too conservative an investment mix for a 30+ year time frame.

In addition, keep in mind that the countries with the lowest SWR in "Exhibit 3" are those where world war II was actively fought on their soil (Austria, Belgium, Finland, France, Germany, Italy, Japan). There is probably no amount of money you can save that will allow you to continue to your life uninterrupted if Australia (or whatever country you happen to live in) is being bombed and invaded.

itchyfeet

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I don't understand any SWR below 3%.

You can get a 3% dividend yield, meaning you never touch the initial investment.

You can get a residential gross rental yield above 5% that will net above 3%. Again you will never have to touch capital. You can get higher rent yields on commercial property.

Any capital appreciation or depreciation is fairly irrelevant if the assets are owned for income, rather than growth.

If you shoot purely for capital growth you might fall short of 3% SWR due to a bad sequence of returns, but if you take a reasonable portion of income focussed assets, removing some risk of selling in a market slump, I think you can design something that will allow for 3.5% SWR+.

hodor

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VAS is yielding 4.5% net, crossed up with franking (for Aussies only) that's well over 5%. Yield has been 4% of higher in aus in the same periods the study is based

So maybe the withdrawal rate is lower, there are reasons why, such as our higher payout ratio.

marty998

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You can get a residential gross rental yield above 5% that will net above 3%.


You've never been a landlord have you.

Repairs, maintenance, carpets, dishwashers, air conditioners, vacancies, property manager fees, council rates, water, strata, land tax.

If I ever get 3% net yield on my property I will eat my shirt.

k9

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I don't understand any SWR below 3%.

You can get a 3% dividend yield, meaning you never touch the initial investment.

You can get a residential gross rental yield above 5% that will net above 3%. Again you will never have to touch capital. You can get higher rent yields on commercial property.

Any capital appreciation or depreciation is fairly irrelevant if the assets are owned for income, rather than growth.

If you shoot purely for capital growth you might fall short of 3% SWR due to a bad sequence of returns, but if you take a reasonable portion of income focussed assets, removing some risk of selling in a market slump, I think you can design something that will allow for 3.5% SWR+.
Well, 3% of dividends is not guaranteed. Efficient market hypothesis  says that if it was, nobody would ever invest in bonds, since their yield is lower. Actually, I'm pretty sure s&p 500's yield is lower than that currently.

But anyway, I agree that anything below 3% is probably too conservative, especially since these studies are aiming people retiring at ages like 65, and hope to consume their portfolios in 30 years. I mean, come on, just keeping your stash from being eaten by inflation/fees/taxes is not that hard. I'm not talking about growing it, just fighting inflation et al. And, well, just that, just a 0% real return lets you eat 3.33% of your portfolio every year for 30 years. And what's the point in investing 50% in stocks if you can't even enjoy a bigger SWR than with, say, 100% TIPS?

itchyfeet

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You can get a residential gross rental yield above 5% that will net above 3%.


You've never been a landlord have you.

Repairs, maintenance, carpets, dishwashers, air conditioners, vacancies, property manager fees, council rates, water, strata, land tax.


Marty,

I am a landlord on a couple of properties. The one is Sydney sadly does not net 3% by a long shot. Gross is less than 4%. We won't keep this one long term.

But I also bought a house in Brissy for 530k that I rented out immediately for $550 a week. That's a gross yield of 5.4%. To achieve a net return of 3% I have to keep maintenance, taxes, vacancy rate and commissions below $13K per year. I am cettainly achieving that now. Maybe $2000 in REA commission, $2500 for land and water rates, and I have about $8000 a year allowance for maintenance on the place.



If I ever get 3% net yield on my property I will eat my shirt.

marty998

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Did you pay cash?

Not trying to troll, but you can't just ignore interest costs in a net yield calc.

________________

This 3% for Australia thing is a bit funny. Because if you really fuck it up there is always the age pension to fall back on.

There was an old fogie on Q and A on Monday who asked a question about what is being done to give more assistance to pensioners because they can't survive on $650 a week.

I wanted to murder her. We already have a situation in this country where people who save $500,000 in order to be self sufficient in retirement are worse off than people who blow all the money they ever earned in their lifetime and go on the Old Age Pension.

There is no incentive anymore for the majority to save when the pension safety net is InMyHumblestofhumbleOpinions so generous.

Luckyvik

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it suggests that due to various factors including longer lifespans 2-3% is a better rule. Mmm might have to rethink my plans. What do others think?

The real benefit of working many extra years during the prime of your life to accumulate the massive stash that is required for a 2% WR [or heck why not get really safe and go for 1%???] is that you'll have so many fewer years of retirement to fund!

What do I think?

I think working and saving for a 3%, 2% or 1% WR is a poor use of the limited time you have on this planet, but ultimately it's your time to spend how you wish.

FWIW - I am not US based.

Hopefully you've taken the time to read this sticky at the top of the forum placed there because this topic was coming up so frequently and people were having to re-hash the same info over and over and over again.

http://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/
Thank you I had not seen the stickie as I mostly use Tapatalk to browse the forum and it doesn't show the stickies. I have read the stickie and I agree that 4% is reasonable, like you said working extra years is a poor use of our limited time.


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Luckyvik

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There was an old fogie on Q and A on Monday who asked a question about what is being done to give more assistance to pensioners because they can't survive on $650 a week.

I wanted to murder her. We already have a situation in this country where people who save $500,000 in order to be self sufficient in retirement are worse off than people who blow all the money they ever earned in their lifetime and go on the Old Age Pension.

There is no incentive anymore for the majority to save when the pension safety net is InMyHumblestofhumbleOpinions so generous.
Wow $650 a week is the equivalent of $845k nestegg at 4% withdrawal rate.


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samustache

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There was an old fogie on Q and A on Monday who asked a question about what is being done to give more assistance to pensioners because they can't survive on $650 a week.

I wanted to murder her. We already have a situation in this country where people who save $500,000 in order to be self sufficient in retirement are worse off than people who blow all the money they ever earned in their lifetime and go on the Old Age Pension.

There is no incentive anymore for the majority to save when the pension safety net is InMyHumblestofhumbleOpinions so generous.
Wow $650 a week is the equivalent of $845k nestegg at 4% withdrawal rate.


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This is why I always argue against a means testing provision in social security.

HappierAtHome

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You may want to double check that pension figure before getting quite so indignant about it: https://www.humanservices.gov.au/customer/services/centrelink/age-pension

Best case scenario is $873.90 a FORTNIGHT. Not $650 a week.