### Author Topic: 4% Rule is Rubbish - Forbes  (Read 2568 times)

#### Check2400

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##### 4% Rule is Rubbish - Forbes
« on: June 26, 2018, 01:30:55 PM »
https://www.forbes.com/sites/kotlikoff/2018/06/25/the-4-retirement-asset-spend-down-rule-is-rubbish/2/#322f74d621d8

Agree or disagree on the 4% rule, at least apply it correctly.

Here is the nonsense from the article:
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My pretend couple is age 66, married, has \$500,000 in regular assets and \$1 million each in retirement accounts. Their house is paid off, but their annual property, insurance and maintenance costs total \$14,000. Each spouse just filed to collect a \$2,500 monthly Social Security retirement benefit and each spouse just initiated annual smooth retirement account withdrawals. The couple earns 1% real on their regular assets and 2.5% real on their retirement accounts.

Let's call this couple the Saunders. What's the Saunders' proper spending rule? Is it 4% of their age-66 assets? No, it's 6.2%. If they have \$2 million in regular assets it's 5.3%. If they have zero regular assets and \$275,000 each in retirement accounts, their spending rule is 10.5%.

Aside from the article being a transparent pitch for his MaxFI planner, here are the problems I see with this:
1) He clearly defines the 4% rule as about spending, but then applies it as a product of assets.  The math isn't supported by how he reached his varying percentages, so I'm not sure where these percentages come from.   He conveniently omits the \$30,000 or \$60,000 in SS benefits they are obtaining as well (the 'each spouse just filed' reads as if independently, but even if the total benefits is 30K, so what?)
2) The 4% rule takes into account inflation, so using the 'real' percentages is disingenuous.  It should either be the return in total, or the 4% rule should be the 2% rule.  If you add back in the missing ~2% that the 4% rule already takes into account on just their assets then they have a return rate of 4.2% on the 2.5 million. Which means if they withdraw only that amount for the rest of their lives to live off of, they will never lose money.
3) The only spend he includes is the \$14,000 in fixed costs, as if that alone is relevant.  What does one fixed cost have to do with annual spending?  It is as if he is assuming humans are incapable of budgeting or knowing their annual spends.

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The rule is focused on steady annual spending as a share of initial retirement assets.

This I think is the problem.  The rule is not based on spending as a share of initial retirement assets, it is that spending should be 4% of initial retirement assets.  The spending dictates the needed retirement balance, not figuring out what spending can be done from a static retirement balance.  Sure, if you have 2.5 million and 60 grand a year in SS, you can spend much more than you probably have in the past, but that doesn't change the fact that you 'won' when your spend hit 4% of your assets.

Am I missing something?

#### patchyfacialhair

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##### Re: 4% Rule is Rubbish - Forbes
« Reply #1 on: June 26, 2018, 03:15:00 PM »
Am I missing something?

Yeah, you should sign up for the author's financial planning resources using the link at the end of the article...only then will you see the light...that only his company can provide...

#### DreamFIRE

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##### Re: 4% Rule is Rubbish - Forbes
« Reply #2 on: June 26, 2018, 03:19:24 PM »
He doesn't seem to understand the point of the 4% rule.  He's doing other calculations to come up with other percentages as if that somehow invalidates the 4% rule.  Having more than enough money so that you can withdraw even more than 4% doesn't delegitimize the 4% rule.

The 4% rule assumes you will adjust your withdrawals each year to inflation, and real returns are more meaningful, so I don't see a problem with that, but real returns for the 4% rule doesn't mean you need a yearly 4% return plus additional 2% return or whatever inflation is combined each year in total yearly return.  In fact, if you had a non-volatile real return of 1.3% per year, the 4% rule using a 4% WR, would be good for a 30 year retirement.

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If you add back in the missing ~2% that the 4% rule already takes into account on just their assets then they have a return rate of 4.2% on the 2.5 million. Which means if they withdraw only that amount for the rest of their lives to live off of, they will never lose money.

The real return is what matters.  If you had a nominal 4% return and withdrew that exact return every year, your stash and withdrawals wouldn't lose money in absolute dollars, that is correct, but inflation would erode the value of those dollars, which is why you need to adjust your withdrawals each year by inflation and why real returns are what is most relevant.
« Last Edit: June 26, 2018, 04:23:44 PM by DreamFIRE »

#### Check2400

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##### Re: 4% Rule is Rubbish - Forbes
« Reply #3 on: June 27, 2018, 01:09:20 PM »
The real return is what matters.  If you had a nominal 4% return and withdrew that exact return every year, your stash and withdrawals wouldn't lose money in absolute dollars, that is correct, but inflation would erode the value of those dollars, which is why you need to adjust your withdrawals each year by inflation and why real returns are what is most relevant.

I 100% agree that real returns are what is relevant.  I guess the point I was trying to make is that that specific example seems to be counting inflation twice by taking an inflation adjusted formula and then applying inflation adjusted returns in order to manufacture an almost nonexistent return.  When you only count it once as would be proper, you get a 4.2% return, and will never run out of money, which is the entire point of the rule.

Whether or not 4.2% is actually sufficient or not has more to do with the fact that this hypothetical couple is only getting a 4.2% return on their investments.  Which is a whole other problem with the article.  The 4% rule is based on actual historical returns, but this article purposefully selects dramatically underperforming returns presented as a perpetual certainty to undercut the rule.

#### Threshkin

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##### Re: 4% Rule is Rubbish - Forbes
« Reply #4 on: June 27, 2018, 03:48:08 PM »
Having more assets does not change the 4% rule.  If you withdraw more than 4% you have a greater risk of running out than if you withdraw less.  Now if you have more assets you may not need to withdraw more but that does not affect the 4% rule, it just affects the withdrawal %.

#### DreamFIRE

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##### Re: 4% Rule is Rubbish - Forbes
« Reply #5 on: June 27, 2018, 08:07:12 PM »
When you only count it once as would be proper, you get a 4.2% return, and will never run out of money, which is the entire point of the rule.

But as I explained, even though you would have the same number of dollars and the same withdrawal amounts every year, they would be devalued due to inflation, so you need to adjust your yearly withdrawals by inflation to have the same spending power.  And the return required for the 4% rule isn't 4% real or 4% nominal either one, because the actual return needed is going to vary based on volatility, and if inflation is high, you need a higher nominal return than you would with lower inflation, everything else being equal.  As mentioned, a non-volatile continuous "real" return of 1.3% over 30 years would sustain a 4% WR adjusted yearly for inflation.

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but this article purposefully selects dramatically underperforming returns presented as a perpetual certainty to undercut the rule.

2.5% isn't bad for fixed "real" returns.  I am not going to go back and read it again, but I think there was a lack of info about the investments as to be pretty meaningless, but I assume those older folks with a big stash would be quite conservative in their investments.

But true, the author didn't seem to understand the concept of the 4% rule.
« Last Edit: June 27, 2018, 08:11:51 PM by DreamFIRE »

#### talltexan

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##### Re: 4% Rule is Rubbish - Forbes
« Reply #6 on: July 02, 2018, 09:36:50 AM »
When you're age 66, your remaining life expectancy is only about 25 years. So a 4% withdrawal rate seems...cautious.

The 4% rule is mean for youngsters like us, who can expect to live fifty years or longer.

#### DreamFIRE

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##### Re: 4% Rule is Rubbish - Forbes
« Reply #7 on: July 02, 2018, 06:13:36 PM »
When you're age 66, your remaining life expectancy is only about 25 years. So a 4% withdrawal rate seems...cautious.

The 4% rule is mean for youngsters like us, who can expect to live fifty years or longer.

The 4% rule wasn't based on 50+ year retirements.