Author Topic: Stop worrying about the 4% rule  (Read 179054 times)

matchewed

  • Magnum Stache
  • ******
  • Posts: 4043
  • Location: CT
Re: Stop worrying about the 4% rule
« Reply #1000 on: August 03, 2017, 11:45:45 AM »
4% rule says the future won't be worse than the worst times in the history of the stock market. 

This is indeed a weakness of the 4% rule, it is possible that worse 30-yr stock market outcomes might occur. 

A problem with the 4% rule is that it also says that the distribution of future 30-yr sequences will match the distribution of 30-yr sequences from the last 100-or-so years.  With no account for whether the market is priced low or high when the person retires.

Um isn't that accounted for? In the past a person retired when the market was low or high.

tyort1

  • Handlebar Stache
  • *****
  • Posts: 1507
  • Age: 45
  • Location: Denver, Colorado
Re: Stop worrying about the 4% rule
« Reply #1001 on: August 03, 2017, 11:58:49 AM »
I think that the ideal starting SWR could be anywhere between 3.25%-4.75% depending on a multitude of factors, many of which I can't know about until retirement is closer.

I said something along these lines several pages ago to you.  These are things you don't even have to begin to worry about until you are much closer to retirement. 

I also said, many, many times - if you're more comfortable with 3.5 (or 3.25) then go for it.  No one is stopping you. 
Frugalite in training.

sol

  • Walrus Stache
  • *******
  • Posts: 5283
  • Age: 40
  • Location: Pacific Northwest
Re: Stop worrying about the 4% rule
« Reply #1002 on: August 03, 2017, 12:02:31 PM »
I think that the ideal starting SWR could be anywhere between 3.25%-4.75%

Great, then please stop writing things like "you need a 2% SWR".  You're only confusing the good people who come here looking for advice, by providing bad advice without context.

And you just keep doing it over and over again.  Please stop, you look like a troll.

tyort1

  • Handlebar Stache
  • *****
  • Posts: 1507
  • Age: 45
  • Location: Denver, Colorado
Re: Stop worrying about the 4% rule
« Reply #1003 on: August 03, 2017, 12:11:04 PM »

I said something along these lines several pages ago to you.  These are things you don't even have to begin to worry about until you are much closer to retirement. 

I also said, many, many times - if you're more comfortable with 3.5 (or 3.25) then go for it.  No one is stopping you.

Good.  I have a spreadsheet at home that forecasts my investments.  It assumes a 6% return until I retire and a 4% SWR.  If I wait until 60, I will probably have $2M.
But, 6% is probably not likely in the next ten years.  The % of equity allocation graph I showed earlier predicts 4%, and the CAPE method predicts even less (although if we go with the fact that CAPE might be a bit exaggerated, it might get closer to 4%).

If I go on assuming 6% forever, that might be too optimistic.  I think things will be fine, and then returns sputter between 2017-2025 and now my retirement is delayed.  Maybe it's better to plug in 4% and assume a lesser, later retirement until market conditions tell me otherwise.

This isn't stuff that needs to be ignored until six months before retirement.

Historical return is over 9%, assuming you re-invest dividends.  If you assume a long term 6% return then that is already really, really low.  I think 6% is going to be very easy to hit going forward because it's already way below historical returns.
« Last Edit: August 03, 2017, 12:26:49 PM by tyort1 »
Frugalite in training.

MDM

  • Walrus Stache
  • *******
  • Posts: 6700
Re: Stop worrying about the 4% rule
« Reply #1004 on: August 03, 2017, 02:03:35 PM »
runewell,
I ask again, what would it take to change your mind on this topic? 
I don't understand why you want to change my mind.
Willingness to change one's own mind when presented with appropriate information is a good thing.  Refusal to consider changing one's own mind, regardless of information, is not a good thing - agreed?

Another way of stating this is "There is no point in  making hypotheses that are not  falsifiable, because such hypotheses do  not say anything."

What is your hypothesis, and what information would falsify it?

MDM

  • Walrus Stache
  • *******
  • Posts: 6700
Re: Stop worrying about the 4% rule
« Reply #1005 on: August 03, 2017, 03:00:26 PM »
Another way of stating this is "There is no point in  making hypotheses that are not  falsifiable, because such hypotheses do  not say anything."

What is your hypothesis, and what information would falsify it?

Maybe you guys could weigh in on my suggestions before eliminating them.  Up to this point nobody has made it clear that they even comprehend my point, which is probably why they are being ignored.  Everyone keeps on saying "The 4% rule accounts for it" but they don't even know what it is.
Not trying to eliminate your suggestions, just trying to understand them.

What is your hypothesis (or suggestions), and what information would falsify it (or them)?

matchewed

  • Magnum Stache
  • ******
  • Posts: 4043
  • Location: CT
Re: Stop worrying about the 4% rule
« Reply #1006 on: August 03, 2017, 03:01:31 PM »
So your premise is in fact that we are in overvalued territory therefore you may only compare potential success against other overvalued historical times.
Quote

Yes.  How overvalued we are now vs then is a tricky question.

Quote
Okay, how do you come to the conclusion that we are in overvalued territory? Is it using CAPE? Just other people's say so?

CAPE and normal P/E are one metric, P/B is another.  % of total equity allocation is another.  There are problem plenty others out there I haven't looked for yet. but go up a few posts where I enumerated some concerns and start there.

So you posted the Vanguard paper earlier as evidence that CAPE is predictive and therefore the 4% rule is questionable when the paper concludes that at best CAPE is only predictive of 40% of the variance and even utilizing such predictions Vanguard concluded that the future returns may well be in line with historical returns within a probablistic framework. Given this why do you deviate from that end conclusion? Why is this time different?

DavidAnnArbor

  • Handlebar Stache
  • *****
  • Posts: 1014
  • Age: 51
  • Location: Ann Arbor, Michigan
Re: Stop worrying about the 4% rule
« Reply #1007 on: August 03, 2017, 03:55:42 PM »
I feel like there's an effort to try to predict the future with the claim that CAPE or other metrics are high and therefore future stock returns are going to be lower.

I think predictions are just that, predictions.

Here's what some economists are predicting.

The weak dollar, the recovery in Europe, and really good corporate earnings is propelling the market right now.

But there is not a lot of confidence in the market right now. So it's possible we'll have a market correction that has nothing to do with corporate profits.

Jeremy Siegel predicts a 7% nominal rate of return of the stock market over the next several years (2% inflation built into that).

Robert Shiller agrees the market is highly valued right now.

http://www.wbur.org/onpoint/2017/08/03/where-the-booming-stock-market-goes-from-here

TomTX

  • Handlebar Stache
  • *****
  • Posts: 2495
  • Location: Texas
Re: Stop worrying about the 4% rule
« Reply #1008 on: August 03, 2017, 04:19:34 PM »
If you are able to find a government backed inflation linked bond with a 0% real return, a 4% WR gets you 25 years, by definition. As it happens, you can go out right now and buy US treasury 30-year TIPs which give a real return of 0.98% and that will let you have a withdrawal rate of 4% for 30 years in absolute safety. You don't need to worry about CAPE or stock market volatility or any of that. Not for me - but it shows how very conservative a 4% WR over 30 years actually is.
But how do you know you need exactly 30 years?  You don't.
If you live the MMM dream and retire at 40, your life expectancy is about 40 years.  That's just the mean, you could very well outlive that.  If the retirement period were a set amount of years I would agree with you and we wouldn't have a thread named Stop worrying about the 4% rule.  If your horizon is instead 40-50 years Now you need a 2.0%-2.5% SWR.  Or equities and volatility.

So, why exactly are you here?

White Knighting us poor deluded believers in the 4% rule? While refusing to actually read the background material on the site?
Credit card signup bonuses:

$150 bonus on $500 spend for Chase Freedom:
https://www.referyourchasecard.com/2/MU4TDQ1N3K

$50 bonus (no min spend, just use it once) plus double all cash back at the end of 1 year for Discover, including the initial $50:
https://refer.discover.com/s/37e3u

$500 bonus on $4,000 spend for Chase Sapphire Preferred:
https://www.referyourchasecard.com/6/Z8JIP66H7G

TomTX

  • Handlebar Stache
  • *****
  • Posts: 2495
  • Location: Texas
Re: Stop worrying about the 4% rule
« Reply #1009 on: August 03, 2017, 04:22:15 PM »
4% rule says the future won't be worse than the worst times in the history of the stock market. 

This is indeed a weakness of the 4% rule, it is possible that worse 30-yr stock market outcomes might occur. 

A problem with the 4% rule is that it also says that the distribution of future 30-yr sequences will match the distribution of 30-yr sequences from the last 100-or-so years.  With no account for whether the market is priced low or high when the person retires.

Why do you keep mis-stating the 4% rule?

Is it because your own position is so weak that it basically doesn't really exist?
Credit card signup bonuses:

$150 bonus on $500 spend for Chase Freedom:
https://www.referyourchasecard.com/2/MU4TDQ1N3K

$50 bonus (no min spend, just use it once) plus double all cash back at the end of 1 year for Discover, including the initial $50:
https://refer.discover.com/s/37e3u

$500 bonus on $4,000 spend for Chase Sapphire Preferred:
https://www.referyourchasecard.com/6/Z8JIP66H7G

TomTX

  • Handlebar Stache
  • *****
  • Posts: 2495
  • Location: Texas
Re: Stop worrying about the 4% rule
« Reply #1010 on: August 03, 2017, 04:24:37 PM »
runewell,
I ask again, what would it take to change your mind on this topic? 

I don't understand why you want to change my mind.


I just want you to stop regurgitating your own crap that was already disproven.
Credit card signup bonuses:

$150 bonus on $500 spend for Chase Freedom:
https://www.referyourchasecard.com/2/MU4TDQ1N3K

$50 bonus (no min spend, just use it once) plus double all cash back at the end of 1 year for Discover, including the initial $50:
https://refer.discover.com/s/37e3u

$500 bonus on $4,000 spend for Chase Sapphire Preferred:
https://www.referyourchasecard.com/6/Z8JIP66H7G

AdrianC

  • Pencil Stache
  • ****
  • Posts: 737
Re: Stop worrying about the 4% rule
« Reply #1011 on: August 03, 2017, 06:10:32 PM »
The concern of Runewell seems to be that with the US stock market at a high valuation, and it is, sequence of returns or simply low long-term investment returns make FIREing now riskier than in the past. OK.

Itís hard to make the case that long term returns on stocks will be less than about 4% real. Bonds, yes. Bond returns will be low for many years, no doubt. For those who can accept the volatility of a mainly stock portfolio, 4% should be OK. Add in social security and a bit of part-time work and we are golden.

There is another risk, though, one that I think could cause many FIRE-failures in the USA. Itís expense inflation due to healthcare costs. Health care costs for the early retiree not covered by group insurance and without government subsidy will continue to rise faster than CPI inflation. It is a given. As we age health care costs increase faster than CPI. I think this expense inflation has to be built into our FIRE plan.

maizeman

  • Handlebar Stache
  • *****
  • Posts: 1154
  • Location: The World of Tomorrow
Re: Stop worrying about the 4% rule
« Reply #1012 on: August 03, 2017, 07:47:36 PM »
People can do whatever they want.  But to advocate the 4% rule to the public that isn't likely to think through its assumptions, weaknesses, and strengths, is to potentially provide inaccurate retirement advice to everyone on this board.  ... But I think people should admit that the market is more expensive and that the rosy 95% success rate from the Trinity study could very well be lower once we factor in these other findings.   

Ah so we are finally getting at your motivations and goals. I will point out that many people on this thread have indeed agreed with you that markets are more expensive than average at the moment, just not as expensive as you were trying to argue with your CAPE number. So you have already achieved 1/2 of your stated objective.

runewell,
I ask again, what would it take to change your mind on this topic? 

I don't understand why you want to change my mind.

Given that you just said that you want to change other people's minds,* why is it hard to understand why other people might also want to change yours?

*Okay, technically you said you wanted to change what other people say, but let's assume you also want them to believe what they're saying.

I guess I'll have to create a post that outlines all the problems with the 4% rule and post it over and over again unless someone can address my ideas intelligently.

This does not seem like an effective way to achieve your stated goal, does it?

Maybe you guys could weigh in on my suggestions before eliminating them.  Up to this point nobody has made it clear that they even comprehend my point, which is probably why they are being ignored.  Everyone keeps on saying "The 4% rule accounts for it" but they don't even know what it is.

Given that by my count approx. a dozen people (myself included) have been trying to talk to you and understand and address any evidence you might have, if you don't think anyone understands what your point is, perhaps you should try to come up with some different strategies for communicating your point? Obviously just repeating the same idea in the same way over and over again is not proving to be effective.

Alternatively you can continue as you are now. You can complain about how people don't understand you. Other people will complain you're not making any sense. Ultimately either you or everyone else will get tired and stop posting. If everyone else were to get tired before you were, maybe you'd get to have the last word. But that approach won't get you any closer to having people say that they agree with you. *shrug*

ďArguing with anonymous strangers on the Internet is a sucker's game because they almost always turn out to beóor to be indistinguishable fromóself-righteous sixteen-year-olds possessing infinite amounts of free time.Ē
"Itís a selective retirement," Richard explained, "a retirement from boring s**t."

My source code & my journal

matchewed

  • Magnum Stache
  • ******
  • Posts: 4043
  • Location: CT
Re: Stop worrying about the 4% rule
« Reply #1013 on: August 04, 2017, 07:10:57 AM »
I think that you may be trying to sound an alarm that many people here actually acknowledge and understand and have mitigated or have plans to mitigate in some shape or form.

If I hit my number tomorrow even with CAPE and the possibility of low returns for the next 10-15 years I'd still pull the trigger on my plan because I've intentionally designed it to be robust enough and to contain enough contingencies to deal with failure modes. Some of it is the 4% rule, some of it is knowing how to cut expenses, some of it is knowing how to generate income if I need to...etc.

That is why people say don't worry about the 4% rule, not because they blindly follow it, but because they understand the risks and mitigate.

tooqk4u22

  • Handlebar Stache
  • *****
  • Posts: 2021
Re: Stop worrying about the 4% rule
« Reply #1014 on: August 04, 2017, 08:27:10 AM »
No we have that data, the 4% rule takes it into account. The historical events when the market was overvalued occurred and the 4% rule prevailed. So again, what is different today?

The 4% rule failed 5% of the time across all time periods for a particular set of criteria. 
Now remove the time periods where the market started out undervalued or fairly valued.  Same number of failures, less years, higher failure rate.

I think I understand what you are suggesting, which is that highly or overly valued market conditions is the main factor of the  5% of the time that the 4% rule doesn't work.  It sounds like a logical conclusion however you are simply stating it without actually providing any analysis or back testing.  In fact, I think the more predominant contributor to failure was high inflation. 

So if you want to support your point you need to isolate those 5% of the times scenarios and analyze them for thematic variables (cape, inflation, PE, PB, interest rates, gdp, and on and on and on) otherwise you are just pissing in the wind so to speak.

Read this from Kitces which may have been posted already. Some key tidbits.   
https://www.kitces.com/blog/how-has-the-4-rule-held-up-since-the-tech-bubble-and-the-2008-financial-crisis/

1. Only 10% of the time would a retiree ended with LESS than their starting principal (which in real terms over 30 years and 3% inflation is about 40% value - still only 10% the time you end up having less 40% real terms of your original portfolio after not working and drawing down for 30 years - not bad.

2.  Failure only occurred in 4 years:
                    CAPE             PE           10 Yr Rate         
1929             27                 18             3.6%
1937             21                 17             2.68%
1965             23                 19             4.19%
1966.            24                 18             4.61%

Following excludes last thirty years (ie 1987 and older) to reflect that for sooner periods can't yet be tested for 4% rule.
CAPE - 10% of history was higher than 21
PE - 25% of history was 17 or higher
10yr - 15% of history is lower than 2.68%

The above rudimentary look suggests there may be correlation (not necessarily causation) with higher cape, lower rates but there are also periods with these metrics or higher/lower that 4% was safe.

This analysis suggest low interest rates might be the risk, not CAPE.
http://www.retirementestateplan.com/wp-content/uploads/2015/07/the-four-percentage-rule-may-not-work.pdf

There - I have gotten you started on the path to actually doing some analysis to support you point beyond the all powerful and winning view of your opinion. Who knows, maybe with some work you will prove it out and make the FIRE world safer for all.

tooqk4u22

  • Handlebar Stache
  • *****
  • Posts: 2021
Re: Stop worrying about the 4% rule
« Reply #1015 on: August 04, 2017, 08:28:20 AM »
The concern of Runewell seems to be that with the US stock market at a high valuation, and it is, sequence of returns or simply low long-term investment returns make FIREing now riskier than in the past. OK.

Itís hard to make the case that long term returns on stocks will be less than about 4% real. Bonds, yes. Bond returns will be low for many years, no doubt. For those who can accept the volatility of a mainly stock portfolio, 4% should be OK. Add in social security and a bit of part-time work and we are golden.

There is another risk, though, one that I think could cause many FIRE-failures in the USA. Itís expense inflation due to healthcare costs. Health care costs for the early retiree not covered by group insurance and without government subsidy will continue to rise faster than CPI inflation. It is a given. As we age health care costs increase faster than CPI. I think this expense inflation has to be built into our FIRE plan.

I think this (and any other expense inflation) is a more real risk to FIRE - but it doesn't affect the 4% rule.

matchewed

  • Magnum Stache
  • ******
  • Posts: 4043
  • Location: CT
Re: Stop worrying about the 4% rule
« Reply #1016 on: August 04, 2017, 08:41:41 AM »
That is why people say don't worry about the 4% rule, not because they blindly follow it, but because they understand the risks and mitigate.

Maybe the people in this thread understand the risks and mitigate - maybe.  But I think that's giving people in general a bit more credit than they deserve.   

It's also a bit of a cop-out answer if I'm honest, but I'm not trying to give you crap here. 

This line of thought basically says that I have decided I am going to take 4% and will assume the risk of failure with reduced expenses and golden age employment.  When the market is expensive, theoretically this risk goes up, but it is a challenge to quantify it. 

Let's say the risk of failure at 4% SWR is 5%.  Once you adjust the 4% experiment for the pricey-market-lower-return hypothesis, the failure rate should go up.  Theoretically the SWR should back off to 3.75% or 3.9% or some number to get back to a 5% failure rate.  Without quantifying the risk of failure I really don't think this line of thinking deserves to be attached the 4% rule since the Trinity study which never said anything about going back to work.  In fact that study recognizes the risk of inflation and advises people to back off the SWR to add a margin of safety.

I think that you may be trying to sound an alarm that many people here actually acknowledge and understand and have mitigated or have plans to mitigate in some shape or form.

If I hit my number tomorrow even with CAPE and the possibility of low returns for the next 10-15 years I'd still pull the trigger on my plan because I've intentionally designed it to be robust enough and to contain enough contingencies to deal with failure modes. Some of it is the 4% rule, some of it is knowing how to cut expenses, some of it is knowing how to generate income if I need to...etc.

That is why people say don't worry about the 4% rule, not because they blindly follow it, but because they understand the risks and mitigate.

Cutting those expenses inherently is a reduction of your withdrawal rate. It's not a cop out. For many of us here it is a well considered subject. Most of the individuals you've been interacting with have given this subject a great deal of thought and aren't walking into the statements or the attempt to FIRE blindly.

Why don't those individuals deserve that credit? If you've read this thread (a common refrain I'm sure you've heard) you'll find all sorts of people talking about how to mitigate the inherent risks associated with the 4% rule. Which is why it is called stop worrying about the 4% rule. It's not about blindly following it, it is about mitigating and accepting that unless we're in unprecedented US economic catastrophe right around the corner we're all going to be probably ok.

MDM

  • Walrus Stache
  • *******
  • Posts: 6700
Re: Stop worrying about the 4% rule
« Reply #1017 on: August 04, 2017, 11:34:25 AM »
Actually the paper for the 4% rule says that if inflation is a concern, you should reduce your SWR to provide a margin of safety, so it is very much related to the 4% rule. 
Yes, indeed it is.

The reduction in SWR discussed in that paper (199802retire - 6794_retirement-savings-choosing-a-withdrawal-rate-that-is-sustainable.pdf) comes from a much higher percentage (see tables 1 & 2).  The ~4% comes from the "Inflation-Adjusted Portfolio Success Rate" in table 3.


Back to the general question: What is your hypothesis (or suggestions), and what information would falsify it (or them)?

DavidAnnArbor

  • Handlebar Stache
  • *****
  • Posts: 1014
  • Age: 51
  • Location: Ann Arbor, Michigan
Re: Stop worrying about the 4% rule
« Reply #1018 on: August 04, 2017, 12:26:34 PM »
Future healthcare cost issues definitely has to be factored in, in advance. Good point.
Obamacare/ACA was a step in the right direction toward helping to reign those costs in for early retiree.

AdrianC

  • Pencil Stache
  • ****
  • Posts: 737
Re: Stop worrying about the 4% rule
« Reply #1019 on: August 04, 2017, 08:10:40 PM »
There is another risk, though, one that I think could cause many FIRE-failures in the USA. It’s expense inflation due to healthcare costs.

I think this (and any other expense inflation) is a more real risk to FIRE - but it doesn't affect the 4% rule.

Actually the paper for the 4% rule says that if inflation is a concern, you should reduce your SWR to provide a margin of safety, so it is very much related to the 4% rule. 

Alternatively if you think that healthcare costs start out $5,000 but will go up twice as fast as other expenses, it might be necesasry to estimate the average present value of all future healthcare costs.  You might have to budget for $8,000 or $10,000 in the first year even though it's too much to provide for the later years when it's not enough.  This is going to increase your expenses and with a 25x multiplier it's going to impact your target amount.

The 4% rule takes general inflation into account, not specific inflation such as health care or lifestyle inflation.  One's individual inflation can vary dramatically +/- to general inflation.  Health care is a biggie and yes if you expect HC to be 25% of your costs and that is going to grow 5% faster then inflation then you would have to lower your WR % to account for this.

Right.

I just spent some time in cFIREsim, which allows additional expenses to be inflated at a set rate.
- Assume no subsidies for health insurance premiums (currently $14K/year).
- Premiums increase at 13% per year to age 66 (this is the rate they have increased over the last 6 years), then end.
- Max out of pocket each year (currently $14.25K).
- Max out of pocket increases at 13% per year to age 66, then end.
- Qualify for Medicare at age 67.
- Assume social security is enough to cover healthcare expenses from age 67 onwards (i.e. I didn't bother putting SS into cFIREsim).

30 years, 95% success, Initial Withdrawal Rate 3.5%
40 years, 95% success, Initial Withdrawal Rate 3.3%

That's fine for me. YMMV.

Edit:
Another way of looking at it, say I thought we could live on $40K/year, and also say I'm optimistic we won't have much in the way of out of pocket health costs, so I include the insurance premium of $14K and just $1K more for health costs. I inflate that at 13%.

Our initial spending = $40K + $14K + $1K = $55K. Using 4% rule we need 25x55= $1.375M

Now run it through cFIREsim (using my age inputs, YMMV) with $15K as extra spending inflated at 13%.

30 years, 95% success, Maximum initial spending $29,774. That's $10K less than I needed.
« Last Edit: August 05, 2017, 08:16:21 AM by AdrianC »

Mr. Green

  • Handlebar Stache
  • *****
  • Posts: 1320
  • Age: 33
Re: Stop worrying about the 4% rule
« Reply #1020 on: August 05, 2017, 06:00:38 PM »
I must say the last several pages of this thread have baffled me. The general argument has seemed to be over the very general statement that the 4% withdrawal rate is safe, taken completely at face value. A deeper analysis of the 4% withdrawal rate requires a look at sequence of returns risk, which is a sub-component of the 4% argument. It's a bit obvious that a high CAPE and a prolonged bull market means that, statistically, lower returns in the next few years are more likely but we won't know that until it happens. Since we know things about sequence of returns risk, and how strongly the first 10-year return in retirement affects the trajectory of a retirement portfolio we can make some educated observations about the near future and keep an eye out for additional red flags.

The historical 30-year periods that have been analyzed represent a sliding scale. The low end is the riskiest time to retire and the high end is the safest time based on immediate returns after retirement. However, we have enough 30-year periods to analyze that we know a bad first couple years doesn't necessarily spell disaster. It's just another metric that allows us to continue looking for additional red flags. It doesn't, however, give us the ability to declare the 4% rule isn't safe simply because it might appear like returns over the next decade could be lower than the norm.

Look at 1970 as an example. The first 10 years after that yielded an average return of -1.45%. People here are saying returns might only be 2-4% on average so we should all run for the hills right? Well the second 10-year interval averaged 11.97%, and the third interval averaged 14.94%, and after 30 years the portfolio ended with 10% more money in it than what it started with. That's just one example in history, but for that specific case we would say the 4% rule was successful. Looking at that, I don't understand how someone can look at some experts claiming lower returns in the next decade are likely and immediately jump to the conclusion that the 4% rule isn't safe anymore.

Up thread there was mention of it being too early to tell for the years 1997-2001. Again, sequence of returns allows us to forward project and we can indeed confidently answer how those years will fare. For 1997 the game has already been won. No historical scenario has put up first and second 10-year periods like it has and failed. Essentially, a collapse of the US economy would be required for that portfolio to fail. As you move toward 2001 the outcomes are much grimmer. Those years have put up numbers that make it much riskier that their portfolios will go the distance.

The whole thing is a sliding scale and requires the use of brain power to make good decisions. All of the examples mentioned above fall within that sliding scale. If you retire and see negative returns for the next 5 years you might want to consider going back to work, but as I've clearly shown above that doesn't mean the original plan might not still work. You just wouldn't want to wait that many years to find out you're safe.

A statistician would tell you that lower returns over the next decade increase the purely statistical chances that the 4% rule may fail simply because we're lower on that sliding scale, but people continue to use the blanket statement that it's safe because of all the historical data that shows success. By all means, use the threat of lower future returns to keep a watchful eye on your portfolio if you're planning to retire imminently but it by no means extends to saying the 4% rule is more worrisome now than in the past. To claim that would require one to know the future.

Also, if you analyze sequence of returns risk you'd understand better just how low the returns can be and still yield success at a 4% WR. The historical average of a 6-7% return, after inflation, leaves you with disgusting amounts of money after 30 years. Returns can be points lower and still go the distance.

Edit: typos
« Last Edit: August 06, 2017, 09:41:46 AM by Mr. Green »
FIRE, Take Two.

DavidAnnArbor

  • Handlebar Stache
  • *****
  • Posts: 1014
  • Age: 51
  • Location: Ann Arbor, Michigan
Re: Stop worrying about the 4% rule
« Reply #1021 on: August 05, 2017, 08:54:07 PM »
Really well said Mr. Green !

Classical_Liberal

  • Pencil Stache
  • ****
  • Posts: 713
  • Age: 41
Re: Stop worrying about the 4% rule
« Reply #1022 on: August 06, 2017, 03:49:19 AM »
So if the CAPE today is 21+ and history tells us we should expect a 5.4%/yr return for the next ten years, we might severely understate the failure rate when we use a simulator that uses all historical return sequences and thereby gives the portfolio a 10.1%/yr average return for the next ten years. 

Since it is impossible to know what will happen over the next 10 years, it becomes difficult to come to conclusions about 30-yr periods.  I think it would be better to simulate underperformance for the next ten years followed by a 20 years of historical returns.

According to this logic if one retires in a year with CAPE<21, you should only use those data sets, in all of which the 4% rule worked, hence 100%/guaranteed success rate?  This is cherry picking data with a single metric to validate your hypothesis. 

Correlation does not equal causation.  Elevated CAPE does not cause lower returns, which does not in itself cause a 4% rule failure.  They are single metrics with some correlation to each other. I think the disconnect here is you are an actuarial expert and have an anchoring personal bias, coupled with very limited economic/market knowledge. Statistics, market metrics, historical trends, ect only provide some insight into market behavior, they are not causative factors. 

Please don't insult me with by saying I do not understand what you mean... I get it.  You are concerned about this correlation and think success rates for a 4% WR retirement are lower in 2017 than the statistical average.  If you are correct, this only applies to someone beginning drawdown in an elevated PE10 environment (ie retiring now), not in accumulation(everyone not retiring today can relax).

The thing is, I don't think you are right.  There's too much complexity to market forces to trust a single metric as predictive, particularly with limited data sets and even more so if you cherry pick those data sets.  As argued in this thread and others before, CAPE mean may have been altered by these complex forces.

If you personally would like to cherry pick data to look at risk of >21 CAPE only, use this calculator, under the investigate tab you can run simulations on individual years (ie you could pick the years only with CAPE >21).  If it makes you feel better, feel free to pick only the years of known 4% rule failure.  Prove to yourself that with cherry picked data the 4% rule always fails and come back to tell us about your study.


TomTX

  • Handlebar Stache
  • *****
  • Posts: 2495
  • Location: Texas
Re: Stop worrying about the 4% rule
« Reply #1023 on: August 06, 2017, 06:18:22 AM »

So if the CAPE today is 21+ and history tells us we should expect a 5.4%/yr return for the next ten years, we might severely understate the failure rate when we use a simulator that uses all historical return sequences and thereby gives the portfolio a 10.1%/yr average return for the next ten years. 

Stop right there.

We've been over this, ad nauseum. You are using something with a variable definition as your standard. CAPE today is overstated compared to CAPE in any of the failure years.
Credit card signup bonuses:

$150 bonus on $500 spend for Chase Freedom:
https://www.referyourchasecard.com/2/MU4TDQ1N3K

$50 bonus (no min spend, just use it once) plus double all cash back at the end of 1 year for Discover, including the initial $50:
https://refer.discover.com/s/37e3u

$500 bonus on $4,000 spend for Chase Sapphire Preferred:
https://www.referyourchasecard.com/6/Z8JIP66H7G

Retire-Canada

  • Magnum Stache
  • ******
  • Posts: 4285
Re: Stop worrying about the 4% rule
« Reply #1024 on: August 06, 2017, 07:36:23 AM »
Stop right there.

We've been over this, ad nauseum. You are using something with a variable definition as your standard. CAPE today is overstated compared to CAPE in any of the failure years.

Yes. It's like switching from C to F in how you report temperatures and complaining that it's far hotter since the change. ;)
 
http://www.philosophicaleconomics.com/2013/12/shiller/

maizeman

  • Handlebar Stache
  • *****
  • Posts: 1154
  • Location: The World of Tomorrow
Re: Stop worrying about the 4% rule
« Reply #1025 on: August 06, 2017, 08:47:49 AM »
Yes. It's like switching from C to F in how you report temperatures and complaining that it's far hotter since the change. ;)

That's a great way of putting it. If you don't mind I might borrow that, as these CAPE discussions seem doomed to continue to come up.

Looking before and after 1997, the modal CAPE value has gone from ~18 to ~25.



Including dividends, I make out the average S&P return to be about 10.1%/yr historically. 
The four failure years had a CAPE of 21+.
Historically years with CAPEs under 21 would experience an average return of 11.1%/yr for the following ten years.
But for years with CAPEs over 21 the average return would only be 5.4%/yr for the following ten years.


It'll make a lot simpler for all of us if we use CAGR instead of average returns. Ideally also inflation adjusted, but if you'd rather correct for that separately it can be made to work. "Average" returns are incredibly misleading.* The long term inflation adjusted CAGR of the stock market is about 6.9% (or 9.1% without inflation).

*Year 1: -50%, year 2: 100%. Average return 25%/year, actual return over two years 0%.

Quote
So if the CAPE today is 21+ and history tells us we should expect a 5.4%/yr return for the next ten years, we might severely understate the failure rate when we use a simulator that uses all historical return sequences and thereby gives the portfolio a 10.1%/yr average return for the next ten years. 

Since it is impossible to know what will happen over the next 10 years, it becomes difficult to come to conclusions about 30-yr periods.  I think it would be better to simulate underperformance for the next ten years followed by a 20 years of historical returns.

I think this might be one of the fundamental points that you're misunderstanding about historical backtesting and withdrawal rate strategies generally: volatility and sequence of return risk is the major driver of portfolio failures, not lower overall returns. This may also be why you're essentially talking past a lot of folks on the board.

I'm going to illustrate this, but I want to preface this with the disclaimer that what I am about to do is NOT a good way to go about calculating the risk of retirement strategies and I'm only doing it to illustrate some properties of the math involved in these calculations.

Let's consider two scenarios: 1) regular historical backtesting, starting with a $1.2M portfolio invested entirely in stocks, and taking out $4k every month (equivalent to a 4% withdrawal rate). 2) same as above, but investments earn a flat (and low) rate of return for the first 10 years, then switch over to historical data.



So you'll notice a couple of things. First of all failures are still associated with the same two historical time frames (although the actual FIRE dates that fail are 10 years earlier than they were under normal historical scenarios). Second, a decade of low returns reduces the best case outcomes by tens of millions of dollars. Finally, I played with what the fixed low rate was going to be in the second scenario. The first scenario with monthly data gave a failure rate of 2.2%. To get close to the same failure rate (2.0%) in the second scenario, I set the fixed return rate of investment return of the first decade at 2.8%/year.

Taking this to its logical extreme, as I believe someone else already pointed out above, if we keep a fixed low rate of return for 30 years, you only need 1.3% per year to avoid running out of cash.

Also, because this also comes up a lot when people start thinking about this: No, it also doesn't work to just subtract a fixed percentage of annual return from each year for the first ten years. If you'd like to discuss why that is we can, but this post is already quite long.

TL;DR: Hard coding low fixed returns early in retirement actually skew predictions of FIRE successes to be more optimistic than the real historical return data suggests. This produces misleadingly optimistic forecasts, which is why anyone reading this thread for its intended purpose and not as part of the current mess should should skip over this whole post.
"Itís a selective retirement," Richard explained, "a retirement from boring s**t."

My source code & my journal

Retire-Canada

  • Magnum Stache
  • ******
  • Posts: 4285
Re: Stop worrying about the 4% rule
« Reply #1026 on: August 06, 2017, 09:05:25 AM »
If your concern is a poor sequence of returns risk the efficient solution to my mind is to choose an asset allocation/FIRE withdrawal plan that mitigates this risk as opposed to just shooting for a lower WR, which translates to more money and more time chained to a desk.

https://www.kitces.com/blog/should-equity-exposure-decrease-in-retirement-or-is-a-rising-equity-glidepath-actually-better/

I'm going to FIRE with a WR rate between 4% & 5%, but I'll use a fixed $ value of bonds equal to a few years minimal cost of living and a bit of spending flexibility to mitigate a poor sequence of returns and then as my equities outrun my bonds I'll be set to deal with the risk of high inflation as my FIRE duration increases.

Retire-Canada

  • Magnum Stache
  • ******
  • Posts: 4285
Re: Stop worrying about the 4% rule
« Reply #1027 on: August 06, 2017, 04:05:11 PM »
We do know that a good target to get to is 25 times your spending. I also think that if you want to reach a higher target because you are risk averse then that is a personal decision and it's all good.

I just want to point out that mitigating potential risks to the 4%WR rule does not automatically mean saving more money. I don't disagree with your point overall, but we should acknowledge that more money isn't the only or even a good solution to the risks facing an aspiring FIREer.


Al1961

  • Stubble
  • **
  • Posts: 221
  • Age: 56
  • Location: Alberta - B.C.
  • Dad of a husky Husky
Re: Stop worrying about the 4% rule
« Reply #1028 on: August 06, 2017, 04:10:04 PM »

--snip--

We just simply don't know if now is a bad time to retire or not on the 4% rule. We do know that a good target to get to is 25 times your spending. I also think that if you want to reach a higher target because you are risk averse then that is a personal decision and it's all good. There is no need though to try and state that this is one of the years where the 4% rule will fail. You can't know that.

^^Yes. This.

If worried, work longer. Many do, and don't resent the extra time.

Time to unpin and close this train wreck.
FIREd July 2014

steveo

  • Handlebar Stache
  • *****
  • Posts: 1447
Re: Stop worrying about the 4% rule
« Reply #1029 on: August 07, 2017, 01:53:01 AM »
We do know that a good target to get to is 25 times your spending. I also think that if you want to reach a higher target because you are risk averse then that is a personal decision and it's all good.

I just want to point out that mitigating potential risks to the 4%WR rule does not automatically mean saving more money. I don't disagree with your point overall, but we should acknowledge that more money isn't the only or even a good solution to the risks facing an aspiring FIREer.

I agree. There are so many ways to mitigate the risk if that is required. The point is that some people though for whatever reason don't trust the 4% level. Those people can just save up more money until they are happy. Their decisions don't invalidate the 4% rule.

I can see people working forever because the 1% rule just isn't safe. It's a psychological issue rather than a cape or whatever else issue.

marty998

  • Magnum Stache
  • ******
  • Posts: 4578
  • Location: Sydney, Oz
Re: Stop worrying about the 4% rule
« Reply #1030 on: August 08, 2017, 05:10:46 AM »

I get it. Things could be worse in future. So what. If you don't take corrective action to save your own ass over the THIRTY YEARS that you can see the slow moving train wreck heading towards you then you deserve to run out of money and starve.

Whilst this argument rages on, I believe the market has simply kept marching upwards.

CanuckExpat

  • Handlebar Stache
  • *****
  • Posts: 2173
  • Age: 34
  • Location: Buffalo for the Summer
    • Freedom35
Re: Stop worrying about the 4% rule
« Reply #1031 on: August 08, 2017, 09:46:51 AM »
"I refuse to read this thread, and I revel in the attention I get by making people repeat answers already contained here because it makes me feel special to get a personal response instead of learning from the content already available to me if I wasn't too stubborn to go back and read it?"

I'll go with "Hey, I'm gonna be an asshole and refuse to actually read the whole thread or really do anything except repeating my pet theory ad nauseum"

For everyone, there is a block user feature if people drive you to frustration. Normally I'd say let it run, but this is a stickied thread that should be useful and it's now several pages full of bickering.
Was targetting Freedom35 but ended up retiring a couple years early. Currently Based in Buffalo for the summer.

secondcor521

  • Handlebar Stache
  • *****
  • Posts: 1009
  • Age: 48
  • Location: Boise, Idaho
  • Big cattle, no hat.
    • Age of Eon - Overwatch player videos
Re: Stop worrying about the 4% rule
« Reply #1032 on: August 08, 2017, 09:59:38 AM »
For everyone, there is a block user feature if people drive you to frustration. Normally I'd say let it run, but this is a stickied thread that should be useful and it's now several pages full of bickering.

I'd like to do that, but I can't find the option on this forum.  Are you maybe thinking of another forum (which I hesitate to name to help ensure that it does not similarly become afflicted)?
Like Overwatch?  Check out this YouTube channel:  http://bit.ly/AgeOfEon

secondcor521

  • Handlebar Stache
  • *****
  • Posts: 1009
  • Age: 48
  • Location: Boise, Idaho
  • Big cattle, no hat.
    • Age of Eon - Overwatch player videos
Re: Stop worrying about the 4% rule
« Reply #1033 on: August 08, 2017, 10:26:16 AM »
When you consider the length of time most folks would have to work longer to go from 95% to 100%, for the gain of changing one or two historical 30-year periods from a failure to a success, it gets ugly. The opportunity cost is enormous.

This is especially true if one has a low savings rate.  I had a high savings rate and kept my job for a while after hitting FI just because of my own situation.

While I went ahead and waited for 100% cfiresim and then some before retiring, after I retired I started looking at the cases that were close to failure and doing some sensitivity analysis.  After a while, I noticed what everyone else does who tries this:  the late 1960s are the worst-case scenarios, and if you assume that the future is going to be better than the past at least to the degree that that period of stagflation won't happen again, you can spend quite a bit more money.

I don't spend that extra money right now, but it was nice to have done the exercise.
Like Overwatch?  Check out this YouTube channel:  http://bit.ly/AgeOfEon

maizeman

  • Handlebar Stache
  • *****
  • Posts: 1154
  • Location: The World of Tomorrow
Re: Stop worrying about the 4% rule
« Reply #1034 on: August 08, 2017, 10:55:31 AM »
For everyone, there is a block user feature if people drive you to frustration. Normally I'd say let it run, but this is a stickied thread that should be useful and it's now several pages full of bickering.

I'd like to do that, but I can't find the option on this forum.  Are you maybe thinking of another forum (which I hesitate to name to help ensure that it does not similarly become afflicted)?

Click on your profile, then hover over the "modify profile" button, then move down to the last option "buddies/ignore list." I finally had to do this with one user and my experience on the forums improved significantly.
"Itís a selective retirement," Richard explained, "a retirement from boring s**t."

My source code & my journal

secondcor521

  • Handlebar Stache
  • *****
  • Posts: 1009
  • Age: 48
  • Location: Boise, Idaho
  • Big cattle, no hat.
    • Age of Eon - Overwatch player videos
Re: Stop worrying about the 4% rule
« Reply #1035 on: August 08, 2017, 11:54:06 AM »
For everyone, there is a block user feature if people drive you to frustration. Normally I'd say let it run, but this is a stickied thread that should be useful and it's now several pages full of bickering.

I'd like to do that, but I can't find the option on this forum.  Are you maybe thinking of another forum (which I hesitate to name to help ensure that it does not similarly become afflicted)?

Click on your profile, then hover over the "modify profile" button, then move down to the last option "buddies/ignore list." I finally had to do this with one user and my experience on the forums improved significantly.

Thanks!!
Like Overwatch?  Check out this YouTube channel:  http://bit.ly/AgeOfEon

Virtus

  • Stubble
  • **
  • Posts: 206
Re: Stop worrying about the 4% rule
« Reply #1036 on: August 08, 2017, 11:59:10 AM »
If you're looking for a 99.5% success rate, very early retirement simply isn't for you. You're essentially looking for a guarantee. You've said yourself that we might yet experience a 30 year return in the future that is worse than any in our past. Since we don't know the future, we have no way of knowing how bad that return might be. So really you just have to keep working until you die because even a 2% withdrawal rate might not survive this worst case, future 30 year return. That is the only safe option there is if you require 99.5% certainty.

I didn't say I was looking for a 99.5% success rate; I was just pointing out that there is nothing magical about 95%.  Even 99.5% isn't safe - just safer.
That being said, there's no reason someone can't aim for a 99.5% success rate and early retirement if they have the wherewithal.
I said a while back that the ideal withdrawal rate [for me] is probably no worse than 3.25% so I don't know why you're advocating 2%.
I'm not advocating anything other than the fact that if you want to be certain you simply have to work until you die. When you consider the length of time most folks would have to work longer to go from 95% to 100%, for the gain of changing a couple historical 30-year periods from a failure to a success, it gets ugly. The opportunity cost is enormous.

Lets not jump from the thought that if someone wants more safety than a WR of 4%, they want certainty. Every 0.1 percentage point decrease in WR increases the likelihood it will succeed. So maybe instead of 4.0% they FIRE at 3.9% or 3.6%. Who am I to tell someone else that a little more safety or a little more risk is right or wrong?

I think the table (Based on 100% stock allocation over 30 years) below is helpful:

WR    Historical Success          Probability of future success (Due to high valuations)*
3.5%           100%                       <or=99.9%
4.0%            95%                              <95%
4.5%            89%                              <89%
5.0%            78%                              <78%
6.0%            64%                              <64%
7.0%            46%                              <46%

Its important to remember, even a WR of 6% on average succeeds. So at what point below 6% does a WR become a SWR? Its hard to say, but one would be a fool to not realize that a WR selected by an investor should consider, retirement duration, other income, pensions, social security, market conditions, expense flexibility along with a host of other variables.

One other point, the longer a bull market and the higher valuations rise over intrinsic value, the more likely a decline in stock prices. I am NOT PREDICTING when and what will happen and not suggesting others due, rather that they realize that the risk of a decline can be high or low depending on current conditions. In the words of Warren Buffet "when others are greedy be fearful (use a low WR) and when others are fearful be greedy (use a higher WR).

*https://en.wikipedia.org/wiki/Cyclically_adjusted_price-to-earnings_ratio
http://hussmanfunds.com/wmc/wmc170807.htm
https://jeroenbloklandblog.com/2017/07/31/calm-before-the-storm/
https://imx.tdameritrade.com/imx/p/imx-pub
« Last Edit: August 08, 2017, 12:13:07 PM by Virtus »

steveo

  • Handlebar Stache
  • *****
  • Posts: 1447
Re: Stop worrying about the 4% rule
« Reply #1037 on: August 08, 2017, 12:14:55 PM »
Its important to remember, even a WR of 6% on average succeeds. So at what point below 6% does a WR become a SWR? Its hard to say, but one would be a fool to not realize that a WR selected by an investor should consider, retirement duration, other income, pensions, social security, market conditions, expense flexibility along with a host of other variable.

I don't think that it's easy to consider market conditions. No one does this well. I agree though that a 6% WR typically succeeds over 30 years. I also agree that all those other factors you mention provide buffers to your retirement but so does inheritance, downsizing etc. The success rates that you have stated do not include any flexibility in retirement. To me that is the biggest flaw in the 4% WR being listed as a SWR. It's probably too high a WR. People don't seem to consider the other side of the equation though.

CanuckExpat

  • Handlebar Stache
  • *****
  • Posts: 2173
  • Age: 34
  • Location: Buffalo for the Summer
    • Freedom35
Re: Stop worrying about the 4% rule
« Reply #1038 on: August 08, 2017, 12:20:25 PM »
For everyone, there is a block user feature if people drive you to frustration. Normally I'd say let it run, but this is a stickied thread that should be useful and it's now several pages full of bickering.

I'd like to do that, but I can't find the option on this forum.  Are you maybe thinking of another forum (which I hesitate to name to help ensure that it does not similarly become afflicted)?

Click on your profile, then hover over the "modify profile" button, then move down to the last option "buddies/ignore list." I finally had to do this with one user and my experience on the forums improved significantly.

Thanks!!

Thanks maizeman.
I created a thread in Forum FAQ section with your instructions and added screenshots. The placement seems counter intuitive https://forum.mrmoneymustache.com/forum-information-faqs/how-to-ignore-specific-users/
Was targetting Freedom35 but ended up retiring a couple years early. Currently Based in Buffalo for the summer.

Virtus

  • Stubble
  • **
  • Posts: 206
Re: Stop worrying about the 4% rule
« Reply #1039 on: August 08, 2017, 12:53:33 PM »
Its important to remember, even a WR of 6% on average succeeds. So at what point below 6% does a WR become a SWR? Its hard to say, but one would be a fool to not realize that a WR selected by an investor should consider, retirement duration, other income, pensions, social security, market conditions, expense flexibility along with a host of other variable.

I don't think that it's easy to consider market conditions. No one does this well. I agree though that a 6% WR typically succeeds over 30 years. I also agree that all those other factors you mention provide buffers to your retirement but so does inheritance, downsizing etc. The success rates that you have stated do not include any flexibility in retirement. To me that is the biggest flaw in the 4% WR being listed as a SWR. It's probably too high a WR. People don't seem to consider the other side of the equation though.

Inheritances and downsizing would be items that should be included when considering a WR.

Its funny, I don't think its that hard to get a feel for if the market is irrationally exuberant or irrationally pessimistic. I do have to remember though that I have multiple degrees and certifications along with many years of experience in finance, so I probably take it for granted sometimes that market sentiment can be discerned. 

Do you mean you think that 4% is too low for a SWR? That would be the logical conclusion from your argument.

Mr. Green

  • Handlebar Stache
  • *****
  • Posts: 1320
  • Age: 33
Re: Stop worrying about the 4% rule
« Reply #1040 on: August 08, 2017, 01:28:56 PM »
My questions whether the 4% withdrawal rate is truly 95% safe as people assume. 
It very well could be, especially starting out with a market that is average or below-average price, I would guess that it is.
Those two sentences don't logically make sense together. You're asking if something truly succeeds 95% of the time when one thinks he might be looking at a scenario that falls within the 5% where it fails. The percentage is market agnostic, and doesn't care what the CAPE or any other metric is. 95% is 95%.

It sounds like what you really mean to ask is "Might we be looking at a period in the near future where we fall within that 5% failure rate?" To answer that question you have to go beyond the simply withdrawal rate and look at sequence of returns, etc. This question doesn't change the fact that the 4% withdrawal rate is successful 95% of the time over historical 30-year periods.
FIRE, Take Two.

matchewed

  • Magnum Stache
  • ******
  • Posts: 4043
  • Location: CT
Re: Stop worrying about the 4% rule
« Reply #1041 on: August 08, 2017, 01:34:39 PM »
Exactly my previous point. In order for someone to state that the 95% rule is no longer valid they have to be assuming that the future will be worse than the past. Where that assumption comes from? It seems to be from CAPE which is not 100% predictive. So even if there is other evidence or crystal ball utilization going on here that we're unaware of, the 4% SWR still stands at 95% regardless of where the current market stands as it is a backwards looking conclusion.

If you're not comfortable with it then feel free to sacrifice your time to shore up your certainty. I see a rather brighter future regardless of immediate data points that don't fully predict future events and may or may not point in a positive direction.

Virtus

  • Stubble
  • **
  • Posts: 206
Re: Stop worrying about the 4% rule
« Reply #1042 on: August 08, 2017, 02:07:50 PM »
Exactly my previous point. In order for someone to state that the 95% rule is no longer valid they have to be assuming that the future will be worse than the past. Where that assumption comes from? It seems to be from CAPE which is not 100% predictive. So even if there is other evidence or crystal ball utilization going on here that we're unaware of, the 4% SWR still stands at 95% regardless of where the current market stands as it is a backwards looking conclusion.

If you're not comfortable with it then feel free to sacrifice your time to shore up your certainty. I see a rather brighter future regardless of immediate data points that don't fully predict future events and may or may not point in a positive direction.

I don't think you understand the 4% rule and the analysis surrounding it. If we forecast that the next 10 years will have average returns compared to the last 146 years, than we have a 95% chance of success with a WR of 4%. If we predict they will below average (not below any historical time period) then you have less than a 95% chance of success. In the extreme, if you knew the great depression would start in the next year you would have a 0% chance of success using the 4% rule.

You don't have to predict worse than historical results to have the 4% rule fail because it failed in 5% of historical time periods.

Now the common response would be that no one knows the future, which is correct. But we all make forecasts of the future in our plans. Do you think you have a 95% chance of success using a 4% WR starting today? That would assume that the next 10 years or so have the same returns as the average of the last 146 years. Do you have a crystal ball? Why will the returns over the next 10 years not be the average of the last 30 years, average of the last 200 years, better than the average of the last 146 years, or etc?

Example: If you look at 1926 to present, the 4% rule failed 8% of the time, 3 percentage points higher than the typically stated 5%. (There actually is a very good argument for excluding data before 1926 because it is incomplete)

We all make forecasts about the future in our planning for FIRE, however, some people on this forum realize they are making them, that they are uncertain, and act accordingly.

« Last Edit: August 08, 2017, 02:13:57 PM by Virtus »

matchewed

  • Magnum Stache
  • ******
  • Posts: 4043
  • Location: CT
Re: Stop worrying about the 4% rule
« Reply #1043 on: August 08, 2017, 02:20:59 PM »
Exactly my previous point. In order for someone to state that the 95% rule is no longer valid they have to be assuming that the future will be worse than the past. Where that assumption comes from? It seems to be from CAPE which is not 100% predictive. So even if there is other evidence or crystal ball utilization going on here that we're unaware of, the 4% SWR still stands at 95% regardless of where the current market stands as it is a backwards looking conclusion.

If you're not comfortable with it then feel free to sacrifice your time to shore up your certainty. I see a rather brighter future regardless of immediate data points that don't fully predict future events and may or may not point in a positive direction.

I don't think you understand the 4% rule and the analysis surrounding it. If we forecast that the next 10 years will have average returns compared to the last 146 years, than we have a 95% chance of success with a WR of 4%. If we predict they will below average (not below any historical time period) then you have less than a 95% chance of success. In the extreme, if you knew the great depression would start in the next year you would have a 0% chance of success using the 4% rule.

You don't have to predict worse than historical results to have the 4% rule fail because it failed in 5% of historical time periods.

Now the common response would be that no one knows the future, which is correct. But we all make forecasts of the future in our plans. Do you think you have a 95% chance of success using a 4% WR starting today? That would assume that the next 10 years or so have the same returns as the average of the last 146 years. Do you have a crystal ball? Why will the returns over the next 10 years not be the average of the last 30 years, average of the last 200 years, better than the average of the last 146 years, or etc?

We all make forecasts about the future in our planning for FIRE, however, some people on this forum realize they are making them, that they are uncertain, and act accordingly.

No I understand it just fine. You're just twisting it to make a future statement. I'm stating that I will use it to make a rough assumption about the future and will proceed to shore up risks where I see them and using different methods to do so. That is not saying the 4% SWR is going to be successful in the future, again this is all about building resiliency in FIRE not about assuming a historical analysis for future returns. View it more as a springboard and less as something you have to solve or disprove. There is nothing to solve or disprove with the 4% SWR. It is factually correct today and will be tomorrow. We'll see about what it is in 10-15 years but won't know until that happens.

Yes I do think I have a 95% chance of success using 4% today, solely because I think the next 50 years may actually be better than the last 100. Just in case though I keep a few contingency plans and a few mitigating factors to increase those odds. Some people are looking for guarantees where there are none. I'm going to FIRE on probably a greater than 4% solely because of that.

steveo

  • Handlebar Stache
  • *****
  • Posts: 1447
Re: Stop worrying about the 4% rule
« Reply #1044 on: August 08, 2017, 03:41:45 PM »
Exactly my previous point. In order for someone to state that the 95% rule is no longer valid they have to be assuming that the future will be worse than the past. Where that assumption comes from? It seems to be from CAPE which is not 100% predictive. So even if there is other evidence or crystal ball utilization going on here that we're unaware of, the 4% SWR still stands at 95% regardless of where the current market stands as it is a backwards looking conclusion.

If you're not comfortable with it then feel free to sacrifice your time to shore up your certainty. I see a rather brighter future regardless of immediate data points that don't fully predict future events and may or may not point in a positive direction.

I don't think you understand the 4% rule and the analysis surrounding it. If we forecast that the next 10 years will have average returns compared to the last 146 years, than we have a 95% chance of success with a WR of 4%. If we predict they will below average (not below any historical time period) then you have less than a 95% chance of success. In the extreme, if you knew the great depression would start in the next year you would have a 0% chance of success using the 4% rule.

You don't have to predict worse than historical results to have the 4% rule fail because it failed in 5% of historical time periods.

Now the common response would be that no one knows the future, which is correct. But we all make forecasts of the future in our plans. Do you think you have a 95% chance of success using a 4% WR starting today? That would assume that the next 10 years or so have the same returns as the average of the last 146 years. Do you have a crystal ball? Why will the returns over the next 10 years not be the average of the last 30 years, average of the last 200 years, better than the average of the last 146 years, or etc?

We all make forecasts about the future in our planning for FIRE, however, some people on this forum realize they are making them, that they are uncertain, and act accordingly.

No I understand it just fine. You're just twisting it to make a future statement. I'm stating that I will use it to make a rough assumption about the future and will proceed to shore up risks where I see them and using different methods to do so. That is not saying the 4% SWR is going to be successful in the future, again this is all about building resiliency in FIRE not about assuming a historical analysis for future returns. View it more as a springboard and less as something you have to solve or disprove. There is nothing to solve or disprove with the 4% SWR. It is factually correct today and will be tomorrow. We'll see about what it is in 10-15 years but won't know until that happens.

Yes I do think I have a 95% chance of success using 4% today, solely because I think the next 50 years may actually be better than the last 100. Just in case though I keep a few contingency plans and a few mitigating factors to increase those odds. Some people are looking for guarantees where there are none. I'm going to FIRE on probably a greater than 4% solely because of that.

Another good post.

Here is the issue. Some people don't actually appear to understand what the Trinity study is and how to utilise it. It's not about micromanaging all the potential scenarios where the 4% rule failed to try and make it more robust.

It's about using it as a guide and stating that we don't know exactly what the future will hold.

If you want > 95% historical success then save up more. That doesn't invalidate the 4% SWR.
« Last Edit: August 08, 2017, 03:43:50 PM by steveo »

Virtus

  • Stubble
  • **
  • Posts: 206
Re: Stop worrying about the 4% rule
« Reply #1045 on: August 08, 2017, 04:20:07 PM »
Exactly my previous point. In order for someone to state that the 95% rule is no longer valid they have to be assuming that the future will be worse than the past. Where that assumption comes from? It seems to be from CAPE which is not 100% predictive. So even if there is other evidence or crystal ball utilization going on here that we're unaware of, the 4% SWR still stands at 95% regardless of where the current market stands as it is a backwards looking conclusion.

If you're not comfortable with it then feel free to sacrifice your time to shore up your certainty. I see a rather brighter future regardless of immediate data points that don't fully predict future events and may or may not point in a positive direction.

I don't think you understand the 4% rule and the analysis surrounding it. If we forecast that the next 10 years will have average returns compared to the last 146 years, than we have a 95% chance of success with a WR of 4%. If we predict they will below average (not below any historical time period) then you have less than a 95% chance of success. In the extreme, if you knew the great depression would start in the next year you would have a 0% chance of success using the 4% rule.

You don't have to predict worse than historical results to have the 4% rule fail because it failed in 5% of historical time periods.

Now the common response would be that no one knows the future, which is correct. But we all make forecasts of the future in our plans. Do you think you have a 95% chance of success using a 4% WR starting today? That would assume that the next 10 years or so have the same returns as the average of the last 146 years. Do you have a crystal ball? Why will the returns over the next 10 years not be the average of the last 30 years, average of the last 200 years, better than the average of the last 146 years, or etc?

We all make forecasts about the future in our planning for FIRE, however, some people on this forum realize they are making them, that they are uncertain, and act accordingly.
Yes I do think I have a 95% chance of success using 4% today, solely because I think the next 50 years may actually be better than the last 100.

You do realize this is logically inconsistent. In the same breath you estimate your odds going forward assuming the next 10 years has an equally weighted chance as mimicking any 10 year period during the last 100 years but then say you think that the next 50 years will be better than the last 100.

For portfolio success, you should be focused on the first 10 years of draw down not the first 50.

PS: Over the last 100 years (30 cycles starting in 1917 and ending in 2016) the historical success rate was only 91.67% per cfiresim.

Virtus

  • Stubble
  • **
  • Posts: 206
Re: Stop worrying about the 4% rule
« Reply #1046 on: August 08, 2017, 04:22:19 PM »
Everything old is new again.

It's almost like we're back on page three again!

My chart my have been inspired by some other poster in this thread that is still posting.

matchewed

  • Magnum Stache
  • ******
  • Posts: 4043
  • Location: CT
Re: Stop worrying about the 4% rule
« Reply #1047 on: August 09, 2017, 06:37:16 AM »
Exactly my previous point. In order for someone to state that the 95% rule is no longer valid they have to be assuming that the future will be worse than the past. Where that assumption comes from? It seems to be from CAPE which is not 100% predictive. So even if there is other evidence or crystal ball utilization going on here that we're unaware of, the 4% SWR still stands at 95% regardless of where the current market stands as it is a backwards looking conclusion.

If you're not comfortable with it then feel free to sacrifice your time to shore up your certainty. I see a rather brighter future regardless of immediate data points that don't fully predict future events and may or may not point in a positive direction.

I don't think you understand the 4% rule and the analysis surrounding it. If we forecast that the next 10 years will have average returns compared to the last 146 years, than we have a 95% chance of success with a WR of 4%. If we predict they will below average (not below any historical time period) then you have less than a 95% chance of success. In the extreme, if you knew the great depression would start in the next year you would have a 0% chance of success using the 4% rule.

You don't have to predict worse than historical results to have the 4% rule fail because it failed in 5% of historical time periods.

Now the common response would be that no one knows the future, which is correct. But we all make forecasts of the future in our plans. Do you think you have a 95% chance of success using a 4% WR starting today? That would assume that the next 10 years or so have the same returns as the average of the last 146 years. Do you have a crystal ball? Why will the returns over the next 10 years not be the average of the last 30 years, average of the last 200 years, better than the average of the last 146 years, or etc?

We all make forecasts about the future in our planning for FIRE, however, some people on this forum realize they are making them, that they are uncertain, and act accordingly.
Yes I do think I have a 95% chance of success using 4% today, solely because I think the next 50 years may actually be better than the last 100.

You do realize this is logically inconsistent. In the same breath you estimate your odds going forward assuming the next 10 years has an equally weighted chance as mimicking any 10 year period during the last 100 years but then say you think that the next 50 years will be better than the last 100.

For portfolio success, you should be focused on the first 10 years of draw down not the first 50.

PS: Over the last 100 years (30 cycles starting in 1917 and ending in 2016) the historical success rate was only 91.67% per cfiresim.

Try using all of what I stated instead of only some. Then provide any discussion. Until then you're being dishonest in your portrayal of my position.

It is not logically inconsistent to state that the 4% SWR is a springboard, that I understand risks are there, that I plan to mitigate those risks, and to also state that I'm optimistic of the future. None of those are inherently conflicting.

MDM

  • Walrus Stache
  • *******
  • Posts: 6700
Re: Stop worrying about the 4% rule
« Reply #1048 on: August 09, 2017, 07:35:09 AM »
Here is the issue. Some people don't actually appear to understand what the Trinity study is and how to utilise it. It's not about micromanaging all the potential scenarios where the 4% rule failed to try and make it more robust.

It's about using it as a guide and stating that we don't know exactly what the future will hold.

Since we don't know what the future will hold and the conditions today are very different from the conditions for the last 150 years, why do we have any reason to think that the 4% rule will work at all?
runewell, what is your suggestion and why?

PizzaSteve

  • Pencil Stache
  • ****
  • Posts: 512
Re: Stop worrying about the 4% rule
« Reply #1049 on: August 09, 2017, 08:09:36 AM »
There are a lot of fundamental economics and business research topics and theories that suggest organized institutions can sustainably create value via products and services that society will reward with a profit margin.  These fundamental human behviors fuel equity valuations at a fundmental level and would need to fail or change for stock markets and return rates to shift in a dramatic way.

I guess i would answer the quuestion by saying governments and capital markets have been fairly stable for the last 100 years or so, relatively speaking, so the assumption that shareholder returns can sustain 4% (assuming a gradual withdraw of capital) is reasonable.
All posts are opinions of the author subject to independent verification by the reader.  No representations of fact are asserted regarding commercial products or services.

Pizzasteve is currently inactive and muted at his own request.  In the event of a rare post, no need to reply as i am not engaging in debates, just posting information or an opinion meant to stand on its own.