The safe drawdown rate refers to the maximum rate at which an investor can withdraw money from their investment portfolio without running out of money. The 4% rule, which states that an investor can withdraw 4% of their initial investment balance each year, adjusted for inflation, has been widely accepted and supported by evidence and studies.
For example, a study by Trinity University in 1998 found that a portfolio invested in a mix of stocks and bonds following the 4% rule had a success rate of over 96% in sustaining withdrawals for 30 years. Another study by William Bengen in 1994 also supported the 4% rule, based on historical data on investment returns and inflation from 1926 to 1992.
However, it’s essential to consider the impact of charges on the safe drawdown rate. Investment charges such as management fees, transaction costs, and taxes can reduce the overall investment return and impact the safe drawdown rate. It’s important to consider these charges when calculating the safe drawdown rate and adjusting it accordingly to ensure the sustainability of the investment portfolio over time.
Additionally, it’s also important to note that the safe drawdown rate is not a guarantee and can vary based on an individual’s specific financial situation and investment portfolio.
Provider charges on investments can vary widely, ranging from a fraction of a per cent to several per cent of the investment amount. The specific charges range will depend on the type of investment, the provider, and the level of service offered. Some of the most common types of provider charges include:
- Management fees: These are fees charged by investment managers for overseeing and managing investment portfolios. Management fees can range from 0.25% to 2% or more of the total investment amount, with lower-cost index funds typically having lower management fees than actively managed funds.
- Transaction costs are fees associated with buying and selling investments, such as brokerage fees and bid-offer spreads. Transaction costs can range from pennies to several per cent of the transaction amount.
- Advisory fees: These are fees charged by financial advisers for providing personalized investment advice and portfolio management services. Advisory fees can range from 0.5% to 1% or more of the investment amount.
- Performance fees: These are fees charged by some investment managers based on the investment portfolio’s performance. Performance fees can range from 10% to 20% or more of the investment gains.
It’s important to note that the specific range of charges for a particular investment will depend on several factors, including the type of investment, the provider, and the level of service offered. Additionally, it’s recommended to carefully review the fees and charges associated with any investment before making a decision, as these fees can significantly impact the overall returns of the investment over time.
Consider the impact total provider charges ranging from 0.5% to 2.5% per annum can have on your safe drawdown rate.
For a £1,000,000 portfolio, the safe drawdown rate is £40,000.
A. With the lowest charging provider, the client receives £35,000 and the provider £5,000.
B. With the highest charging provider, the client receives £15,000 and the provider £25,000.
Which one do you choose, A or B?
Research has shown that provider charges can have a significant impact on the overall returns of an investment. In fact, a study by Morningstar found that low-cost funds consistently outperformed their higher-cost counterparts over time, even after considering differences in asset class and strategy.
While the level of service a wealth manager provides, such as the quality of their advisers or reputation, may be important factors in choosing a provider, it’s crucial to understand that these factors alone don’t guarantee investment success. On the other hand, a lower-cost provider may offer comparable returns to a more expensive provider after charges are taken into consideration.
Therefore, it’s recommended to consider the impact of charges on the returns of a potential investment, in addition to other factors such as reputation and level of service, when choosing a wealth manager.