Author Topic: Stop worrying about the 4% rule  (Read 239689 times)

matchewed

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Re: Stop worrying about the 4% rule
« Reply #1050 on: August 09, 2017, 08:28:48 AM »
Again what's the worst that can reasonably happen if one were to use the 4% SWR with some measures of conservative risk management?

Be fabulously wealthy and have taken time off of work to do whatever for a significant portion of your life?

So what if you can't predict the future? It doesn't mean you shouldn't determine what reasonably may happen and work towards it.

maizeman

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Re: Stop worrying about the 4% rule
« Reply #1051 on: August 09, 2017, 08:36:15 AM »
runewell, what is your suggestion and why?
No particular suggestion, just saying that if we can't predict the future, why do we have any reason to believe the 4% rule will work at all.

You are right. The future is unknowable, all we can do is make our best efforts to forecast which futures are more likely than others.

Your chance (or mine) of dying in an asteroid impact is somewhere between 1:75,000 and 1:700,000. More personally, sudden cardiac arrest is a threat we all live with every day of our lives. Basically every time you or I go to sleep, there is a chance we're never going to wake up for one reason or another. So we triage what we're going to worry about every day based both on (1) our estimates of how likely a particular issue is to occur, and (2) our ability to do anything to effectively avoid it or prepare for it. I may very well die from cancer, but there's not much I can do to mitigate that so I don't spend a lot of time worrying about it. I'm about equally likely to die from heart disease, but there I can reduce the risk somewhat through diet and exercise, so I spend a bit more time thinking about that one. I could also do things to reduce my risk of death by mountain lion (avoid their habitat, carry a weapon when hiking), but I've chosen not to because my estimate of the overall risk is so low to begin with.

Now if I die in a mountain lion attack, or FIRE on 4% of my stash and run out of money, I'll feel a bit foolish (though obviously not for very long in the case of the mountain lion). But that's the price of being alive. We spend our lives making the best choices we can with the data we have at the time and we don't really know if they were the right choices or not until our lives are over.
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sw1tch

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Re: Stop worrying about the 4% rule
« Reply #1052 on: August 09, 2017, 08:39:49 AM »
No particular suggestion, just saying that if we can't predict the future, why do we have any reason to believe the 4% rule will work at all.

Isn't this what we (humans) do?  We extrapolate the future based on our past experiences and the data that is available to us - what else do we have to go off of?  I don't know about you, but there aint no damn crystal ball; and if there is, it's always wrong.  I'd rather be optimistic about what can happen in the world of tomorrow.  No, I'm not a hippy singing kum ba yah around the campfire and expecting world peace and everyone holding hands, but seriously, what's the use of fretting bout something outside of my control?  Not to say that we don't prepare ourselves, but you already said: "we can't predict the future."

Quote from: runewell
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?

I personally have seen doomsday guessers even within my own life.  And, guess what?  Humans are still around.  Until the day that we all die off (if that even happens), we'll still be optimistic about the future.  I believe that optimism is what garners the creativity that has allowed our species to overcome obstacles in the past.

Let's do a quick exercise, shall we?  You, yourself, were around just 20 years ago (as was I at 12).  Would you have accurately been able to describe what the world of today would look like?  How about the folks around you?

The world in 1997 involved cheap gas, mostly VCR's, DVD's were a new thing, video rental stores on weekends.  Much more that I can't quite recall as I was in the 6th grade and my world involved sitting in a elementary school classroom and trying to fit in.  Now, think about the things that were prevalent in your life 20 years ago.

For further exercise, let's go back to the halfway point of your 150 years to 75 years ago.  The world of 1942 was WAYYY different than the world of 1867.  Just like the world of 2017 is WAYYY different than the world of 1942 or 1867.  You get my point.

I'm pretty certain people living during those eras would have said the EXACT same thing(s) that you said about how the world that they called "today" was sooooo different from the last 75, 80, 90, 100, 150, 2000, 40000, etc years.  And, I guarantee no one knew what exactly the future was going to look like; however, here we are.  On a forum, discussing how NO ONE knows the future (some things haven't changed that much have they).

To close, your own signature reads: "All models are wrong; but some are useful."  Why don't you just approach the 4% rule as a "useful" model?  Because, that's pretty much what it is.. NOT a magical crystal ball.
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MDM

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Re: Stop worrying about the 4% rule
« Reply #1053 on: August 09, 2017, 08:42:33 AM »
runewell, what is your suggestion and why?
No particular suggestion....
Ok, thanks, that makes things clearer.

dividendman

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Re: Stop worrying about the 4% rule
« Reply #1054 on: August 09, 2017, 08:48:52 AM »
This thread now:

1. runewell: the 4% rule SWR isn't as safe as it appears because PE ratios are high
2. others: yeah, PE ratios are high and future returns might be lower but the 4% rule takes that into account
3. runewell: so it IS overstating the it's safety!
4. others: not quite, even in the vast majority of the cases where historical PE ratios are high the 4% rule succeeds, also PE ratios are calculated differently now
5. runewell: well, it's not as safe as we think and it might fail - you never know about the future!
6. others: yes, it might fail, that's why we won't just blindly follow it but will monitor what's going on and take action if appropriate - 4% is a guide that based on historical observation looks to be pretty safe and people are willing to take the risk (5% or whatever failure rate) for the reward (doing what you want for many years of useful life)
7. GOTO 1.

Mr. Green

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Re: Stop worrying about the 4% rule
« Reply #1055 on: August 09, 2017, 08:52:59 AM »
No particular suggestion, just saying that if we can't predict the future, why do we have any reason to believe the 4% rule will work at all.
If you believe the present is so far different from the past that we can't use historical data as a guide then you have no data to use, which again leaves you with no recourse but to simply work until you die. If you have no data then we can make anything up. Since the future will be so different than the past, I claim a 2% withdrawal rate isn't good enough. All those ideas you had about your stash? Double them, and then add some for good measure because I made that number up so even it might not be good enough. If you're going to claim that no data is useful you're not really adding anything to the conversation.
« Last Edit: August 09, 2017, 09:12:48 AM by Mr. Green »
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brooklynguy

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Re: Stop worrying about the 4% rule
« Reply #1056 on: August 09, 2017, 09:38:08 AM »
My argument is that the 4% rule does not sufficiently take this account the likelihood that future returns will be lower.

Again, at its core, the 4% rule is nothing more and nothing less than a backwards-looking observation of how a specific spending plan under specific parameters would have fared historically.  It takes into account everything that is relevant, which does not include anything about the future or market conditions in existence today.  But, given that a 4% WR succeeded in ~95% of all historical cases, it will not fail over the next 30 years unless market returns over that period are worse than ~95% of all historical 30-year periods.

As matchewed and others keep reiterating, many of us feel comfortable using a 4%-rule-derived trigger for the self-declaration of financial independence in reliance on this historical performance coupled with our retirement plans' built-in levels of safety margin.  We do not need to, and do not, handicap the specific odds that robotic annual inflation-adjusted withdrawals equal to 4% of our portfolio commencing on our retirement date will deplete our portfolio over the course of the following three decades in order to use the 4% rule as a springboard for FIRE decision-making.

As forum denizen skyrefuge once wryly observed, paraphrasing Churchill, "The 4% SWR is the worst form of retirement-readiness predictor, except for all the rest."

brooklynguy

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Re: Stop worrying about the 4% rule
« Reply #1057 on: August 09, 2017, 03:36:02 PM »
Do you really want to advocate for the 4% rule so strongly even though the reason you rely on it is "because we don't have anything better."

Yes.  As a general rule, when trying to choose from among a set of available options, I like to pick the one that is best.

steveo

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Re: Stop worrying about the 4% rule
« Reply #1058 on: August 09, 2017, 05:29:08 PM »
A vacuous statement.  Do you really want to advocate for the 4% rule so strongly even though the reason you rely on it is "because we don't have anything better."

Yes I definitely do and I think a lot of people feel the same way as me. We also understand the 4% rule in some depth. There are so many assumptions underlying the 4% rule that don't make sense in reality that gives you heaps of options when it comes to utilising this rule.

I know that I won't always withdraw 4%. I may withdraw less and sometimes more but I'll do that in context of where I am at in relation to my retirement, how the markets have performed and my personal feelings regarding spending. Sometimes for instance I may simply not want to spend money because sometimes I just don't like spending money. At other times I may choose to go on a fancy holiday.

I will also be eligible for social security. I'll also be able to downsize my house and collect money. I'll also likely inherit millions. I may also get a part time job. I may also go back to work if I'm bored. It's really unlikely I'll go back to work but it is an option.

Do all of these adjustments make the 4% rule safer or less safe.

MMM actually has an article on this. I think it's someone like first retire and then get rich. I honestly don't care about getting rich but the point is that I'm more likely to end up with more money than less over the course of a retirement assuming that I utilise a reasonable target to retire on.

maizeman

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Re: Stop worrying about the 4% rule
« Reply #1059 on: August 09, 2017, 07:19:00 PM »
There is a value calculated by the government quarterly that has a 91% correlation with the ensuing 10-yr returns from 1952-2003. ... That value is 42.05% and corresponds to a future 10-yr return of about 4%.

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 (Edit: predictions based on the CAPE ratio, equity allocations, etc) will work at all?

Runewell, it appears to me that you're actively arguing with yourself at this point.

The only common thread through it all is that you really REALLY don't like the 4% rule and don't seem to separate the decades of research and discussion of this general principle from the original paper that kicked things off: "I don't see how you can love the Trinity study from the dark ages..." "If you go on clinging to the Trinity study..."

I've known a lot of people who have taken personal hatreds to a lot of ideas, but I really am stumped about how a rule of thumb for how much money retirees can spend could end up provoking such antipathy in a human being. I am just trying to point out that at this point it is really harming your ability to argue effectively because you're trying to attack the idea from both sides "I can predict things better than the 4% rule" and "the future is different from the past so we cannot predict it at all."
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Monkey Uncle

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Re: Stop worrying about the 4% rule
« Reply #1060 on: August 09, 2017, 07:23:00 PM »
In an attempt to find something that doesn't have the perceived drawbacks of CAPE, what do you all make of this article:

http://www.philosophicaleconomics.com/2013/12/the-single-greatest-predictor-of-future-stock-market-returns/

It's a long article, but the graph at the top sums it up.  There is a value calculated by the government quarterly that has a 91% correlation with the ensuing 10-yr returns from 1952-2003.



You can go here to see the current value: https://fred.stlouisfed.org/graph/?g=qis

That value is 42.05% and corresponds to a future 10-yr return of about 4%.

This looks rather predictive.  If you go on clinging to the Trinity study without adjusting for this, then (from EarlyRetirementNow)

Quote
Looking at long-term average equity returns to compute safe withdrawal rates might overstate the success probabilities considering that today’s equity valuations are much less attractive than the average during the 1926-current period (Trinity Study) and/or the period going back to 1871 that we use in our SWR study.

Following the Trinity Study too religiously and ignoring equity valuations is a little bit like traveling to Minneapolis, MN and dressing for the average annual temperature.  That may work out just fine in April and October when the average temperature is indeed pretty close to that annual average. But if we already know that we’ll visit in January and wear only long sleeves and a light jacket we should be prepared to freeze our butt off.  Likewise, be prepared to work with lower withdrawal rates considering that we’re now 7+ years into the post GFC-recovery with pretty lofty equity valuations.

Yep, there's a pretty good correlation between the red line and the blue line.  Now, if you can just recognize when the red line is at a peak, before it starts to go down, you've got it made!
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GenXbiker

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Re: Stop worrying about the 4% rule
« Reply #1061 on: August 09, 2017, 07:50:16 PM »
That value is 42.05% and corresponds to a future 10-yr return of about 4%.

That looks like nominal return, NOT real return - important distinction.
« Last Edit: August 09, 2017, 07:56:22 PM by GenXbiker »

steveo

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Re: Stop worrying about the 4% rule
« Reply #1062 on: August 09, 2017, 11:09:24 PM »
Yep, there's a pretty good correlation between the red line and the blue line.  Now, if you can just recognize when the red line is at a peak, before it starts to go down, you've got it made!

You don't have to do that even!  All you have to do is observe that the expected return for the next 10 years should be much lower than the historical average, putting retirements at risk.  It's so easy.

I honestly don't think it's as easy as what you state. Maybe a better way to look at this is how often do people correctly predict significant market inflection points - i.e. when the market turns. This is so so so rare.

There are also holes in your argument. I'll try and explain this,

1. You state that the market is high now. The problem is that we don't know when the market will drop. That is basically a factual comment. You may be different but these different people are extremely rare. I think they don't exist. So you can't trade off this indicator now as it's not good enough to be used for short term predictions.
2. If you look at the medium term it's also really really hard to pick. What if the market goes on a tear for the next 5 years and then drops significantly. What if the market drops tomorrow and then goes on a 10 year bull market. We can't pick this as well.
3. The long term returns tend to be about 5%. It might be 5% per year for the next 30 years but there will probably be ups and downs.

None of these factors invalidate the 4% rule. It's a guideline.

You may be right and people retiring in the next 10 years may if they follow the assumptions underlying the Trinity study to the letter may all fail in relation to their 30 retirements but I think the odds are really against you being right here.

Maybe a better way to phrase your feelings on this discussion is to state that you believe that you can pick when the 4% fail rule will fail today. So you have the ability to predict the next 30 years returns based on CAPE or PE or whatever indicator you choose to use. I really doubt that this is the case and I'll be betting against you.

My take is to use the 4% rule (in my case 5%) as a guideline to the amount of money I need to retire. I then manage that money within an asset allocation that I am comfortable with. I then will adjust my spending or withdrawals based upon market and personal conditions. The buffers that I have are enough for me.
« Last Edit: August 10, 2017, 12:26:15 AM by steveo »

cerat0n1a

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Re: Stop worrying about the 4% rule
« Reply #1063 on: August 10, 2017, 01:54:46 AM »
I may very well die from cancer, but there's not much I can do to mitigate that so I don't spend a lot of time worrying about it.

Way off-topic, but seeing as runewell has already wrecked the thread... There's plenty you can do to mitigate cancer risks. Stop smoking, moderate alcohol intake, exercise, eating plenty of vegetables, avoiding too much UV, having a good social life, being richer than those around you, avoiding too much stress - all have well established correlations with lower cancer rates.

I wonder whether it would be possible for the moderators to 'unsticky' this thread, rename it to "arguments about SWR" and create a new sticky thread which contains all the useful, earlier stuff. The content (certain posts, links, maizeman's graphs) has literally changed my life and it would be a shame if future readers couldn't find it as easily.

Monkey Uncle

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Re: Stop worrying about the 4% rule
« Reply #1064 on: August 10, 2017, 04:59:34 AM »
Yep, there's a pretty good correlation between the red line and the blue line.  Now, if you can just recognize when the red line is at a peak, before it starts to go down, you've got it made!

You don't have to do that even!  All you have to do is observe that the expected return for the next 10 years should be much lower than the historical average, putting retirements at risk.  It's so easy.

Sorry, at first glance I failed to notice that the right Y-axis is inverted.  So yes, for the time period pictured, there appears to be a pretty strong predictive relationship between % equity allocation and subsequent 10-yr return.  But what to do with that in a SWR context?  The only 4% rule failure years (so far) included within that data set are 1965 through 1969 (using cfiresim defaults).  Those years had subsequent 10 year returns in the 4 - 6% range.  Not great, but not the worst years on the chart, either.  The worst years for 10-yr return were 1999 - 2001, when returns were in the -3 to 3% range.  Of course we don't know how those 30-yr retirements will turn out yet, but so far they are doing demonstrably better than the late '60s years were doing this far in.
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maizeman

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Re: Stop worrying about the 4% rule
« Reply #1065 on: August 10, 2017, 06:31:54 AM »

Quote
Runewell, it appears to me that you're actively arguing with yourself at this point.

I'm talking out of both sides of my mouth.  Although the reality is between those two statements, people seem to be singularly focused on the second one.  I believe there is SOME predictive value in CAPE and this other number, but not enough to accurately time the market, but enough to take a cautionary view.

The statements about not being able to predict the future at all is what other people on this thread keep saying, so I have to consider that possibility too for their sake, even though I don't agree with it.

Quote
The only common thread through it all is that you really REALLY don't like the 4% rule and don't seem to separate the decades of research and discussion of this general principle from the original paper that kicked things off: "I don't see how you can love the Trinity study from the dark ages..." "If you go on clinging to the Trinity study..."

I actually like the Trinity Study as a starting point in this conversation but I think new research needs to be taken into account.  Many people here strongly resist this.

There is lots of better research which has come since the trinity study, which people have linked to. However, just because research is more recent than the trinity study doesn't make it better. The onus is always on new ideas to convince people that they represent an improvement on the current state of the art. Sometimes new ideas succeed and the entire field moves forward. Sometimes new ideas fail and, like Thomas Edison, the field can still move forward by adding one more approach to the long list of ideas that DON'T work. 

But talking out of both sides of your mouth (as you put it) is an actively counterproductive tactic if your goal is to convince people to change their minds, or even just trying convince people you're arguing in good faith and not just for the sake of arguing.


Yes I definitely do and I think a lot of people feel the same way as me. We also understand the 4% rule in some depth. There are so many assumptions underlying the 4% rule that don't make sense in reality that gives you heaps of options when it comes to utilising this rule.

I know that I won't always withdraw 4%. I may withdraw less and sometimes more

Hmmm.  I don't think you guys don't actually believe in the 4% rule, but you have created something entirely different that you like to call the 4% rule.

Now we're getting into arguing about the definition of the words used to argue, again, something I got enough of freshman year to last a lifetime. I remember one girl who had decided to read through the bible and quran, and then went around telling anyone who would listen how christians weren't real christians and muslims weren't really muslims because their actions and beliefs didn't match her interpretation of their holy texts. Needless to say this didn't go over well at all and certainly didn't change any hearts or minds.

Runewell, if you feel like everyone else's definition of what the 4% rule is doesn't match with your own, why don't you come up with a new word for the idea that you are arguing against? Otherwise you're going to have to try to first convince everyone to stop using the phrase "the 4% rule" to describe what they've been using it to describe for years, and then convince them that the new definition you've convinced them to adopt is wrong. Alternatively if you come up with a new phrase to describe the concept you're arguing against it may be a lot easier for you to convince people that this new concept is a false one, because people will be able to focus only on the concept as you've defined it (with whatever inherent flaws you'd like to put into the concept). You may well counter "why should I change? I think they should change?" The answer to that question depends on whether your goal is first to convince people of your idea, or to prolong your argument as long as possible.
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maizeman

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Re: Stop worrying about the 4% rule
« Reply #1066 on: August 10, 2017, 06:54:34 AM »
I may very well die from cancer, but there's not much I can do to mitigate that so I don't spend a lot of time worrying about it.

Way off-topic, but seeing as runewell has already wrecked the thread... There's plenty you can do to mitigate cancer risks. Stop smoking, moderate alcohol intake, exercise, eating plenty of vegetables, avoiding too much UV, having a good social life, being richer than those around you, avoiding too much stress - all have well established correlations with lower cancer rates.

I wonder whether it would be possible for the moderators to 'unsticky' this thread, rename it to "arguments about SWR" and create a new sticky thread which contains all the useful, earlier stuff. The content (certain posts, links, maizeman's graphs) has literally changed my life and it would be a shame if future readers couldn't find it as easily.

Hmmm, it seems you're right. I certainly knew about avoiding taking up smoking, excessive alcohol, excessive UV (a bit of a hazard in my field, but I at least apply broad spectrum sunblocks religiously during the field season), but assumed those represented a relatively small fraction of total lifetime cancer risk. Your comment lead me down a bit of a google rabbit hole that suggested 40-90% of cancers can be linked to changeable lifestyle factors. So I guess I have to start worrying about cancer after all. Thanks though! (And at least FIRE should help with the too much stress and relative wealth issues pretty much automatically.)

I think we're going to have to wait for this argument to ultimately burn itself out before doing anything. When people start completely switching their positions in order to continue to argue it is usually a sign the discussion is moving into its end stages. Once it comes to an end, we can repost a lot of the good stuff, or create a new index to this thread for newbies to find those important posts, or get the mods to swap out this thread for new pinned one (although that'd be my last choice just because this thread contains a lot of important contributions from awesome forum members who are no longer active).
"It’s a selective retirement," Richard explained, "a retirement from boring s**t."

My source code & my journal

MDM

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Re: Stop worrying about the 4% rule
« Reply #1067 on: August 10, 2017, 06:59:28 AM »
Runewell, if you feel like everyone else's definition of what the 4% rule is doesn't match with your own, why don't you come up with a new word for the idea that you are arguing against?
...
Alternatively if you come up with a new phrase to describe the concept you're arguing against it may be a lot easier for you to convince people that this new concept is a false one, because people will be able to focus only on the concept as you've defined it (with whatever inherent flaws you'd like to put into the concept). You may well counter "why should I change? I think they should change?" The answer to that question depends on whether your goal is first to convince people of your idea, or to prolong your argument as long as possible.
Runewell has studiously avoided positive statements of his/her own, preferring instead to tell others "you're wrong."  Let's wait for runewell to make a concrete proposal....

DavidAnnArbor

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Re: Stop worrying about the 4% rule
« Reply #1068 on: August 10, 2017, 07:35:41 AM »
I think the 4% rule is as studied as it can be.  The 4% rule is likely to survive the 2000 crash while the % equity graph seems to suggest it might not, and it is this contradiction that makes me question the usefulness of the predictability of the % equity asset allocation graph.

How you're feeling psychologically when the market tanks is a bigger hurdle to the 4% rule.

Who here is going to keep up the good fight when we have a correction ?  Who will crack ? When the world seems like it is coming to an end or capitalism seems like it is failing ? When Donald Trump starts a war with North Korea, or the Congress refuses to raise the debt ceiling in October ?

Then Maizeman's amazing graphs that show death is a bigger issue to deal with than failure of the 4% rule should be a wake up call.


Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1069 on: August 10, 2017, 08:31:40 AM »
I don't know anyone who would robotically WR 4%/yr + inflation during retirement partially due to the fact that expenses are not smooth year to year [ie. you don't replace a car or a roof annually] and partially because in the teeth of a crash it's hard not to reduce optional spending [ie. travel] and if your portfolio value doubles it will be easier to treat yourself to a luxury [ie. international travel].

If I run a cFIREsim simulation with default values except [0.1% drag and 90/10 stock bonds] I get:

- $40K/yr = 96.6% success
- $38K-$50K/yr = 99.1% success
- if I add in some likely gov't retirement benefits I am at 100%

It doesn't take much flexibility [either through spending reduction or easy PT work] to push your historical success rates close to 100%.

Beyond that I would worry far more about stuff like your mental/physical health and your relationships than thinking about money. I can imagine many futures where more money won't be the key to success so having a plan that balances money against non-financial success factors is key in my mind.

I'm also solidly in the camp that thinks the future will not be worse than the past and I worry about having worked too long not about having saved too little.
« Last Edit: August 10, 2017, 08:48:48 AM by Retire-Canada »

brooklynguy

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Re: Stop worrying about the 4% rule
« Reply #1070 on: August 10, 2017, 08:51:26 AM »
This looks rather predictive.  If you go on clinging to the Trinity study without adjusting for this, then (from EarlyRetirementNow)

Quote
Looking at long-term average equity returns to compute safe withdrawal rates might overstate the success probabilities considering that today’s equity valuations are much less attractive than the average during the 1926-current period (Trinity Study) and/or the period going back to 1871 that we use in our SWR study.

Following the Trinity Study too religiously and ignoring equity valuations is a little bit like traveling to Minneapolis, MN and dressing for the average annual temperature.  That may work out just fine in April and October when the average temperature is indeed pretty close to that annual average. But if we already know that we’ll visit in January and wear only long sleeves and a light jacket we should be prepared to freeze our butt off.  Likewise, be prepared to work with lower withdrawal rates considering that we’re now 7+ years into the post GFC-recovery with pretty lofty equity valuations.

Retiring on the basis of the 4% rule in the manner described in this thread is more akin to dressing for the top 95th percentile of low temperatures in Minneapolis' historical record in addition to making back-up arrangements to obtain even more extreme cold-weather clothing should that prove necessary after you arrive.  If you follow that approach, it would be rational to follow the advice contained in this thread's title and "stop worrying" about it, though, in reality, given that we possess the ability to make near-term weather forecasts with a reasonable degree of accuracy, that backwards-looking approach is not necessarily the best one to use for making travel-related sartorial decisions.  Our ability to predict future market returns, on the other hand, is (at least arguably) decidedly less accurate than our ability to predict tomorrow's weather, so the "build your plan on the basis of historical performance and make it flexible enough to adapt as necessary" approach is (at least arguably) the best one to use for retirement planning.

Once [the current argument] comes to an end, we can repost a lot of the good stuff, or create a new index to this thread for newbies to find those important posts, or get the mods to swap out this thread for new pinned one (although that'd be my last choice just because this thread contains a lot of important contributions from awesome forum members who are no longer active).

All the good stuff in this thread is still there, located where newcomers are most likely to come across it first, because (runewell:  take note) the logical place to start reading a new-to-you thread (especially if you intend to actively participate in the discussion) is the beginning.

PizzaSteve

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Re: Stop worrying about the 4% rule
« Reply #1071 on: August 10, 2017, 10:59:16 AM »
What i get as a summary of this thread.

1) Historical data supports a conclusion that a 4% withdraw rate would be X% successful in the past, under various assumptions.  This data is helpful for planning.

2) Since historical data has limits, in terms of its reliability for predicting the future, the X% success rate should not be treated as a `true probability' (such as in a dice roll).   Rather it is an estimate based on many assumptions, the most important one being the assumption that the future will behave similarly to the past.

3) Since various other factors come into play for overall retirement `success', each person should make their own plan based on their own comfort level with assumptions and safety margins, based on what the data seems to suggest and what it means for them personally.
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steveo

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Re: Stop worrying about the 4% rule
« Reply #1072 on: August 10, 2017, 03:44:31 PM »
I don't know anyone who would robotically WR 4%/yr + inflation during retirement partially due to the fact that expenses are not smooth year to year [ie. you don't replace a car or a roof annually] and partially because in the teeth of a crash it's hard not to reduce optional spending [ie. travel] and if your portfolio value doubles it will be easier to treat yourself to a luxury [ie. international travel].

If I run a cFIREsim simulation with default values except [0.1% drag and 90/10 stock bonds] I get:

- $40K/yr = 96.6% success
- $38K-$50K/yr = 99.1% success
- if I add in some likely gov't retirement benefits I am at 100%

It doesn't take much flexibility [either through spending reduction or easy PT work] to push your historical success rates close to 100%.

Beyond that I would worry far more about stuff like your mental/physical health and your relationships than thinking about money. I can imagine many futures where more money won't be the key to success so having a plan that balances money against non-financial success factors is key in my mind.

I'm also solidly in the camp that thinks the future will not be worse than the past and I worry about having worked too long not about having saved too little.

100% correct.

GenXbiker

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Re: Stop worrying about the 4% rule
« Reply #1073 on: August 10, 2017, 08:44:10 PM »
Your views on not timing the market but being cautionary when the market appears to be high line up with Warren Buffet, Vanguard, Howard Marks (from Oaktree), and Jacob Fisker (From ERE), not bad company to be in.

And Jack Bogle and Robert Shiller to name a couple others.

I just spent a few hours reading the last month's worth of posts in this thread.  I thought Runewell started off with some legitimate concerns, including some that I share, such as market valuations and dynamic asset allocation.  At first (way back in July), I actually thought he was interested in having a conversation about them.  So naive.  So, so naive.

Although I do want to point out the irony of having Sol dismiss some of Runewell's concerns about the likelihood of increased failure due to higher valuations, considering that FIRECalc and cFIREsim both lie.

Yes, some posters on this forum have posted the same concerns.  Runewell made an appearance in this thread as well:
https://forum.mrmoneymustache.com/welcome-to-the-forum/cfiresim-severely-overestimates-success-rates-for-mustachians/
« Last Edit: August 10, 2017, 08:48:27 PM by GenXbiker »

sol

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Re: Stop worrying about the 4% rule
« Reply #1074 on: August 10, 2017, 11:32:19 PM »
Although I do want to point out the irony of having Sol dismiss some of Runewell's concerns about the likelihood of increased failure due to higher valuations, considering that FIRECalc and cFIREsim both lie.

I don't think it's ironic at all, it's exactly the point I was trying to make.  This was well trodden ground around here, and if he had just bothered to read this thread or any of the links contained herein (and I think you picked a good one) where we answered all of his questions, he would have realized how dumb he sounded asking the same trite questions that we've answered over and over again, and then re-raising the same trite arguments we've already covered and resolved.  Thinking his naive observations are somehow novel, and not just a clear demonstration of how little he understands, while he struts around making bold pronouncements about his own intellectual superiority.  I know the type, I may have been the same way when I was 19.

Basically, Runewell is one of those people who just revels in the attention.  He can't learn anything without personalized hand-holding, and demands that his questions be personally answered again, as he thinks of them, and thinks everyone else will somehow benefit from his input.  He doesn't realize he's had a net negative impact on this thread and this community. 

Please, mods, unsticky this thread.  It's just misleading garbage now, and we do the community of future knowledge seekers a disservice by keeping it pegged at the top of the subforum with a sticky icon.
« Last Edit: August 10, 2017, 11:35:36 PM by sol »

Dicey

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Re: Stop worrying about the 4% rule
« Reply #1075 on: August 11, 2017, 01:53:12 AM »
Sincere question:

Runewell is a well educated TROLL, but he is still a troll.  Why are you all feeding the troll?
Why do you think this person is well educated? Because they are an actuary? Seriously, lots of well-educated people get things wrong from time to time. Nobody is an expert on everything. There's a difference between education and intelligence. And a troll is a troll is a troll, "educated" or otherwise.
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Re: Stop worrying about the 4% rule
« Reply #1076 on: August 11, 2017, 10:31:35 AM »
Yep, there's a pretty good correlation between the red line and the blue line.  Now, if you can just recognize when the red line is at a peak, before it starts to go down, you've got it made!

You don't have to do that even!  All you have to do is observe that the expected return for the next 10 years should be much lower than the historical average, putting retirements at risk.  It's so easy.

That is the very definition of "Sequence of Returns" risk... and why, although most plan to use the 4% rule model, also build in a "WTH" backup plan if the near term performance is poor.  Also why the 4% rule uses such a long historical trend.   The peaks / valleys smooth out when you take the long view.
--------------
I do love that the answer to "the future can't be predicted by a 4% rule / CAPE, historical performance, etc" is to provide an article with a  graph showing correlations on 10 year cycles from the (recent) the past.   Those types of correlations work great -- until they don't, and often change after about 3 cycles...   At least the 4% rule takes the long view as a starting point.



-----------
Boy, am I now glad that my DD who will be starting a Fine Arts major, of all things, has chosen to take a course in logic from the Philosophy department.  May I recommend the same to runewell?   Specifically...

Introduction to Formal Logic

Students will study the basic techniques of formal deductive logic. They will learn the semantics and syntax of two artificial languages-sentential logic ( SL ) and predicate logic ( PL )-with emphasis given to the former. With the aid of the formal techniques learned in this course, students will gain insight into the nature of rational argument and sound reasoning.

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Re: Stop worrying about the 4% rule
« Reply #1077 on: August 11, 2017, 10:57:37 AM »
I think the thread should stay stickied.  Knowledge that is true is resilient.  It can stand challenges.  Which is what we see here.  Far from undermining the 4% rule, runewell has merely helped to re-enforce it's validity. 
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Re: Stop worrying about the 4% rule
« Reply #1078 on: August 11, 2017, 12:02:22 PM »
Although I do want to point out the irony of having Sol dismiss some of Runewell's concerns about the likelihood of increased failure due to higher valuations, considering that FIRECalc and cFIREsim both lie.

I don't think it's ironic at all, it's exactly the point I was trying to make.  This was well trodden ground around here, and if he had just bothered to read this thread or any of the links contained herein (and I think you picked a good one) where we answered all of his questions, he would have realized how dumb he sounded asking the same trite questions that we've answered over and over again, and then re-raising the same trite arguments we've already covered and resolved. 

I don't think that's really fair.  Now, I'm not defending him specifically, especially because he went from asking good questions to the most annoying poster on the planet very quickly, but this is a discussion board, so claiming that all questions have already been answered doesn't really fit the format.

When this thread was started over 2 years ago, I was not worried about the 4% rule.  I'm sure I have many posts in the first handful of pages defending it from the naysayers.  However, at current valuations, I actually am worried about it.  I think comparing where we are now with where we were 2 years ago has made some of the answers from 2 years ago less relevant.

Valuations matter, despite some of the flippant dismissals made by posters in the last ~7 pages or so.  Those that claim CAPE is not a future predictor of returns are burying their heads in the sand IMO.  Obviously sequence of returns matters too, but there is definite reason for concern for people looking to retire today.
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steveo

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Re: Stop worrying about the 4% rule
« Reply #1079 on: August 11, 2017, 05:37:54 PM »
Those that claim CAPE is not a future predictor of returns are burying their heads in the sand IMO.  Obviously sequence of returns matters too, but there is definite reason for concern for people looking to retire today.

I disagree with this assessment completely and there are plenty of reasons to disagree with it. It presumes that a high CAPE can be used to predict 30 years of returns accurately. I don't believe that it can. CAPE might now be a terrible indicator. Predicting market returns is inherently difficult and you are more likely to lose money than gain money by doing it.

People today really shouldn't be worried and if they are they can work longer or use more bonds or be prepared to work part time or spend less or heaps of other alternatives other than just stating well the 4% rule now isn't valid. No one can state the 4% rule now isn't valid because you can't predict the future. It might not be or it might be. It's the best guideline that we have and a high cape definitely doesn't invalidate that. We have no idea if today or tomorrow or whenever is the day that results in a failure of a 30 year retirement which is funded by 25 years of expenses in a typical stock/bond portfolio. We can though bet with a fair degree of confidence that if we save up 25 years of expenses (assuming we get the expenses part correct) and invest with a degree of rationality that we should be able to last 30 years or more without working especially if we have some flexibility within our approach.

I do agree though that discussing the 4% rule is cool.

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Re: Stop worrying about the 4% rule
« Reply #1080 on: August 11, 2017, 06:37:59 PM »
Those that claim CAPE is not a future predictor of returns are burying their heads in the sand IMO.  Obviously sequence of returns matters too, but there is definite reason for concern for people looking to retire today.

I disagree with this assessment completely and there are plenty of reasons to disagree with it. It presumes that a high CAPE can be used to predict 30 years of returns accurately. I don't believe that it can. CAPE might now be a terrible indicator.

I don't think it can predict 30 years of returns either.  However, that doesn't really matter, because any portfolio that's going to fail would do so because of sequence of returns risk that happens at the beginning.  In fact, portfolio success/failure has the highest correlation to 10 year real returns.  When you hear Bogle and all the other investing icons out there talk about expecting lower returns going forward, they're basically talking about the next decade.  And luckily for us, CAPE has a fairly strong correlation to 10 year returns.


Predicting market returns is inherently difficult and you are more likely to lose money than gain money by doing it.

I'm simply talking about the likelihood receiving lower than average market returns.  You don't have to have an exact prediction to understand that high valuations now are likely to lead to lower returns in the near future.  Expansion cycles don't last forever.  It's just part of the business cycle.  In fact, we're currently in one of the longest expansions in history.  Could it continue for 10 more years?  Sure.  Is it likely?  No.

Now even with lower that average returns, 4% could be fine.  It depends on the actual sequence of those returns.  A long period of low returns without any major crashes would likely be fine, whereas a large major crash early with years without recovery likely would not be.  At the same time, if you're expecting lower than average returns, it's adds more risk.

People today really shouldn't be worried and if they are they can work longer or use more bonds or be prepared to work part time or spend less or heaps of other alternatives other than just stating well the 4% rule now isn't valid. No one can state the 4% rule now isn't valid because you can't predict the future. It might not be or it might be. It's the best guideline that we have and a high cape definitely doesn't invalidate that. We have no idea if today or tomorrow or whenever is the day that results in a failure of a 30 year retirement which is funded by 25 years of expenses in a typical stock/bond portfolio. We can though bet with a fair degree of confidence that if we save up 25 years of expenses (assuming we get the expenses part correct) and invest with a degree of rationality that we should be able to last 30 years or more without working especially if we have some flexibility within our approach.

I never said anything was invalidated.  Only that I was worried.  Of the times that the 4% rule has failed in the past, all of them had a CAPE between 18-25. We're at (or fast approaching) 30.  Now of course there were times with high valuations that ended up just fine.  But looking at all the data, it's pretty easy to conclude that it might not be as safe to retire right now as it would been 2 years ago or could be 2 years from now using 4%.
"Compound interest is the most powerful force in the universe."  -- Einstein

PizzaSteve

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Re: Stop worrying about the 4% rule
« Reply #1081 on: August 11, 2017, 07:21:20 PM »
...

I never said anything was invalidated.  Only that I was worried.  Of the times that the 4% rule has failed in the past, all of them had a CAPE between 18-25. We're at (or fast approaching) 30.  Now of course there were times with high valuations that ended up just fine.  But looking at all the data, it's pretty easy to conclude that it might not be as safe to retire right now as it would been 2 years ago or could be 2 years from now using 4%.

I would qualify this by narrowing my caution to the longer-term retirements based on optimistic assumptions, like a 30 year old who ' drunk on 12% returns,' thinks they can really push the envelope of lean living and still must withdraw the full 4% ( or more) with limited skill based safety nets. 

Those of us who have followed disciplined savings plans for the last 20 years or so should have an extra safety margin built in from our smazing returns of the last 10 years.  We should be comfortably over funded and grateful the SS Trust funds has remained solvant.  We should be well positioned to be able to absorb some losses or have bonds/RE to sell if needed.

That said, my personal opinion is that structural changes to our economy and productivity gains with respect to capital goods production (less resources needed) are reasons for optimism that even an aggressive young FIREee could very well succeed, even at 5-7% withdraw rates (as long as the bull keeps charging and they are growing wealth in real terms).  If they want to take that gamble and go for it, i would only advise them to keep their eyes open for adjustment opportunities, should we hit a bear market.
« Last Edit: August 12, 2017, 08:42:45 AM by PizzaSteve »
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Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1082 on: August 11, 2017, 07:40:26 PM »
My take on the issue is that regardless of CAPE or whatever indicator you prognosticate with any serious aspirant FIREr should have a plan to deal with the threat of a poor sequence of returns. There are a number of ways to address this risk that have been beaten to death in this thread and others so I won't enumerate them, but assuming you have a plan for that potentiality you should feel fine about FIREing whether the indicators point one way or the other.

I would also add that the less your plan relies on you predicting future outcomes the better.
« Last Edit: August 11, 2017, 07:42:27 PM by Retire-Canada »

steveo

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Re: Stop worrying about the 4% rule
« Reply #1083 on: August 11, 2017, 10:08:55 PM »
My take on the issue is that regardless of CAPE or whatever indicator you prognosticate with any serious aspirant FIREr should have a plan to deal with the threat of a poor sequence of returns. There are a number of ways to address this risk that have been beaten to death in this thread and others so I won't enumerate them, but assuming you have a plan for that potentiality you should feel fine about FIREing whether the indicators point one way or the other.

I would also add that the less your plan relies on you predicting future outcomes the better.

Exactly.

I'll add that I'm not sure that equities are so overbought at the moment. This is an opinion no matter who states it and what indicators are being used but I don't feel that the markets are exceptionally high at this point.

deborah

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Re: Stop worrying about the 4% rule
« Reply #1084 on: August 11, 2017, 10:26:06 PM »
My take on the issue is that regardless of CAPE or whatever indicator you prognosticate with any serious aspirant FIREr should have a plan to deal with the threat of a poor sequence of returns. There are a number of ways to address this risk that have been beaten to death in this thread and others so I won't enumerate them, but assuming you have a plan for that potentiality you should feel fine about FIREing whether the indicators point one way or the other.

I would also add that the less your plan relies on you predicting future outcomes the better.

Exactly.

I'll add that I'm not sure that equities are so overbought at the moment. This is an opinion no matter who states it and what indicators are being used but I don't feel that the markets are exceptionally high at this point.
The trouble is that where we are, the markets aren't - they haven't even reached their pre 2008 peak, whereas in the US it is completely different.

retiringearly

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Re: Stop worrying about the 4% rule
« Reply #1085 on: August 12, 2017, 01:57:13 PM »
Sincere question:

Runewell is a well educated TROLL, but he is still a troll.  Why are you all feeding the troll?
Why do you think this person is well educated? Because they are an actuary? Seriously, lots of well-educated people get things wrong from time to time. Nobody is an expert on everything. There's a difference between education and intelligence. And a troll is a troll is a troll, "educated" or otherwise.

Honest, answer, I thin he is well educated because he is able to keep an argument up.  Wrong as it might be.

GenXbiker

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Re: Stop worrying about the 4% rule
« Reply #1086 on: August 12, 2017, 02:41:24 PM »
Those that claim CAPE is not a future predictor of returns are burying their heads in the sand IMO.  Obviously sequence of returns matters too, but there is definite reason for concern for people looking to retire today.

I disagree with this assessment completely and there are plenty of reasons to disagree with it. It presumes that a high CAPE can be used to predict 30 years of returns accurately. I don't believe that it can. CAPE might now be a terrible indicator.

I don't think it can predict 30 years of returns either.  However, that doesn't really matter, because any portfolio that's going to fail would do so because of sequence of returns risk that happens at the beginning.  In fact, portfolio success/failure has the highest correlation to 10 year real returns.  When you hear Bogle and all the other investing icons out there talk about expecting lower returns going forward, they're basically talking about the next decade.  And luckily for us, CAPE has a fairly strong correlation to 10 year returns.


Predicting market returns is inherently difficult and you are more likely to lose money than gain money by doing it.

I'm simply talking about the likelihood receiving lower than average market returns.  You don't have to have an exact prediction to understand that high valuations now are likely to lead to lower returns in the near future.  Expansion cycles don't last forever.  It's just part of the business cycle.  In fact, we're currently in one of the longest expansions in history.  Could it continue for 10 more years?  Sure.  Is it likely?  No.

Now even with lower that average returns, 4% could be fine.  It depends on the actual sequence of those returns.  A long period of low returns without any major crashes would likely be fine, whereas a large major crash early with years without recovery likely would not be.  At the same time, if you're expecting lower than average returns, it's adds more risk.

People today really shouldn't be worried and if they are they can work longer or use more bonds or be prepared to work part time or spend less or heaps of other alternatives other than just stating well the 4% rule now isn't valid. No one can state the 4% rule now isn't valid because you can't predict the future. It might not be or it might be. It's the best guideline that we have and a high cape definitely doesn't invalidate that. We have no idea if today or tomorrow or whenever is the day that results in a failure of a 30 year retirement which is funded by 25 years of expenses in a typical stock/bond portfolio. We can though bet with a fair degree of confidence that if we save up 25 years of expenses (assuming we get the expenses part correct) and invest with a degree of rationality that we should be able to last 30 years or more without working especially if we have some flexibility within our approach.

I never said anything was invalidated.  Only that I was worried.  Of the times that the 4% rule has failed in the past, all of them had a CAPE between 18-25. We're at (or fast approaching) 30.  Now of course there were times with high valuations that ended up just fine.  But looking at all the data, it's pretty easy to conclude that it might not be as safe to retire right now as it would been 2 years ago or could be 2 years from now using 4%.

Well said, and as noted earlier, you, Runewell, and some others here are in good company.

Your views on not timing the market but being cautionary when the market appears to be high line up with Warren Buffet, Vanguard, Howard Marks (from Oaktree), and Jacob Fisker (From ERE), not bad company to be in.

And Jack Bogle and Robert Shiller to name a couple others.

I just spent a few hours reading the last month's worth of posts in this thread.  I thought Runewell started off with some legitimate concerns, including some that I share, such as market valuations and dynamic asset allocation.  At first (way back in July), I actually thought he was interested in having a conversation about them.  So naive.  So, so naive.

Although I do want to point out the irony of having Sol dismiss some of Runewell's concerns about the likelihood of increased failure due to higher valuations, considering that FIRECalc and cFIREsim both lie.

Yes, some posters on this forum have posted the same concerns.  Runewell made an appearance in this thread as well:
https://forum.mrmoneymustache.com/welcome-to-the-forum/cfiresim-severely-overestimates-success-rates-for-mustachians/

Dicey

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Re: Stop worrying about the 4% rule
« Reply #1087 on: August 13, 2017, 04:30:47 AM »
Well said, and as noted earlier, you, Runewell, and some others here are in good company.
They may be in good company, but it's entirely possible that they're making their arguments on the wrong thread. This one was started for the purpose of thoroughly exploring the opposing viewpoint, but somebody doesn't like that it doesn't have a sticky.

https://forum.mrmoneymustache.com/investor-alley/start-worrying-about-the-4-rule/
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FrugalToque

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Re: Stop worrying about the 4% rule
« Reply #1088 on: August 14, 2017, 05:34:26 PM »

MOD NOTE:

I just waded through 6 pages of people patiently and impatiently answering questions that had already been asked and answered pages before.

6 pages of nonsense, bullshit and bickering.

I do not want to do it again.

This thread is valuable as a resource on the 4% rule.  The other mods and I agree on this.  The rule's frailties are known and clearly stated.  There is no need to restate them as if some magical conspiracy is being revealed.

Keep this thread on topic.

Thank you,
Toque.

P.S.  I tried to keep the best of the posts around, even over these last few pages, but I apologize if, in the cleansing sweep through all the pointlessness, I deleted something clever you may have said.
« Last Edit: August 15, 2017, 05:34:49 PM by FrugalToque »

FrugalToque

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Re: Stop worrying about the 4% rule
« Reply #1089 on: August 15, 2017, 05:35:20 PM »
The thread is unlocked.

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1090 on: August 15, 2017, 07:44:35 PM »
I just waded through 6 pages of people patiently and impatiently answering questions that had already been asked and answered pages before.

Thank you.

Mr Mark

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Re: Stop worrying about the 4% rule
« Reply #1091 on: August 16, 2017, 12:05:02 AM »
I just waded through 6 pages of people patiently and impatiently answering questions that had already been asked and answered pages before.

Thank you.
+1
Mr. Mark

FrugalToque

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Re: Stop worrying about the 4% rule
« Reply #1092 on: August 16, 2017, 08:35:12 PM »
I just waded through 6 pages of people patiently and impatiently answering questions that had already been asked and answered pages before.

Thank you.
+1

I do what I can.

Cheers.

CanuckExpat

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Re: Stop worrying about the 4% rule
« Reply #1093 on: August 21, 2017, 02:53:06 PM »
Might be of interest to people on this thread:

William Bengen, author of the 1994 paper "Determining Withdrawal Rates Using Historical Data" will be doing an "Ask Me Anything" tomorrow Tuesday, August 22 at 12:00 noon eastern daylight time on the Financial Independence Subreddit if you want to ask him any questions directly. Here is a link to the reminder with more information
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CanuckExpat

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PizzaSteve

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Re: Stop worrying about the 4% rule
« Reply #1095 on: August 22, 2017, 12:22:16 PM »
Here is the live thread: I'm Bill Bengen, and I first proposed the 4% safe withdrawal rate in 1994. Ask me anything!

Highly recommend reading the thread.

His opening remarks and a few intersting points are reposted below.  I hope this is acceptable.

Reposting without comment, as it is of general interest to forum participants:

/financialindependence

I'm Bill Bengen, and I first proposed the 4% safe withdrawal rate in 1994. Ask me anything!

Thanks to ER10years_throwaway for this invite. I was a financial advisor for 25 years, now retired, but still expanding my research into safe withdrawals from retirement portfolios. I am eager to share my thoughts with you, so please bring on the questions. Caveat: I can't answer questions specific to a particular person's financial situation, as I am no longer a practicing financial planner or investment advisor. Hope to hear from you. I'll start answering questions at noon eastern on Tuesday, 8/21.

Q:  Since these questions get asked all the time here:   Is the 4% rule still relevant in today's economy? What safe withdrawal rate would you recommend for someone planning for longer than 30 years of retirement?

A: billbengen • Thanks for your question. Before I answer it specifically, why don't we dispense with some preliminaries, so we are all on the same page?

The "4% rule" is actually the "4.5% rule"- I modified it some years ago on the basis of new research. The 4.5% is the percentage you could "safely" withdraw from a tax-advantaged portfolio (like an IRA, Roth IRA, or 401(k)) the first year of retirement, with the expectation you would live for 30 years in retirement. After the first year, you "throw away" the 4.5% rule and just increase the dollar amount of your withdrawals each year by the prior year's inflation rate. Example: $100,000 in an IRA at retirement. First year withdrawal $4,500. Inflation first year is 10%, so second-year withdrawal would be $4,950. Now, on to your specific question. I find that the state of the "economy" had little bearing on safe withdrawal rates. Two things count: if you encounter a major bear market early in retirement, and/or if you experience high inflation during retirement. Both factors drive the safe withdrawal rate down. My research is based on data about investments and inflation going back to 1926. I test the withdrawal rates for retirement dates beginning on the first day of each quarter, beginning with January 1, 1926. The average safe withdrawal rate for all those 200+ retirees is, believe it or not, 7%! However, if you experience a major bear market early in retirement, as in 1937 or 2000, that drops to 5.25%. Add in heavy inflation, as occurred in the 1970's, and it takes you down to 4.5%. So far, I have not seen any indication that the 4.5% rule will be violated. Both the 2000 and 2007 retirees, who experienced big bear markets early in retirement, appear to be doing OK with 4.5%. However, if we were to encounter a decade or more of high inflation, that might change things. In my opinion, inflation is the retiree's worst enemy. As your "time horizon" increases beyond 30 years, as you might expect, the safe withdrawal rate decreases. For example for 35 years, I calculated 4.3%; for 40 years, 4.2%; and for 45 years, 4.1%. I have a chart listing all these in a book I wrote in 2006, but I know Reddit frowns on self-promotion, so that is the last I will have to say about that. If you plan to live forever, 4% should do it.


Q:   Because your assumption is not correct. The S&P500 is not 'offering' ANY future return. You are likely referring to past returns. Expected future returns are at issue here.

A: billbengen • Expected returns for the S&P 500 over the next decade are, according to a number of sources, very low, possibly zero or less. I recall that between 1966 and 1982, the S&P 500 did return zero. Michael Kitces, a brilliant financial advisor, created a chart matching stock market valuations with subsequent 30-year safe withdrawal rates. The negative correlation is virtually perfect; when stock valuations are high, the safe withdrawal rate was low, and vice versa. His advice, with which I concur, is that when stock market valuations are at very high levels, as they are today, it is best to stick with the appropriate safe withdrawal rate, and not try for something higher.


Q:   Obviously market conditions have changed a lot since 1994. Given that we've been in a bull bond market for so long, and given we're currently looking at corporate bond yields of maybe 4%, does it still make sense to have a bond component in your portfolio?

Also: did you ever foresee the development of a financial independence / early retirement movement like we have today?

A: billbengen • Yes, I still believe bonds should play a significant role in most retirement portfolios. During a stock bear market, interest rates often decline, which causes an increase in the price of bonds. This can offset some of the losses from the stocks. Overall, I believe a 50% equities/50% bonds mixture at the start of retirement is close to ideal. Years ago, I talked to Harry Markowitz, the founder of Modern Portfolio Theory, about this. He used that 50/50 ratio in his personal portfolio, which speaks volumes! Some recent research advocates increasing the fraction of stocks in the portfolio as the retiree ages. I haven't had an opportunity to verify this, but I plan to look into it in the next year. No shortage of intriguing ideas in this field! I think the financial independence movement is great, in part because it means people must educate themselves more in this field so they make good decisions. I have "retired' three times, and am now in my fourth career, as a writer/researcher. But many friends and acquaintances of my generation are still working, even into their late 70's, so I wonder how "early retirement" is succeeding in this environment. Like everything else, if you plan and execute early and well, you will most likely achieve what you want.


Q:  Related to the question on low bond returns, are you bothered at all by the number of people in the FI/RE community who are retiring with 100% stock portfolios?

A: billbengen • It doesn't "bother" me, as when the big stock market decline comes (and it will, eventually), I will not be the one with big losses! All kidding aside, my research indicates that using a 100% stock allocation sharply reduces your SWR. These folks might have to make some major adjustments in lifestyle during a major bear market. But if they are prepared to do so, they might get by.


A few interesting perspectives worth discussing.

Rule revised in Bengen (2006) to 4.5% if tax-free and 4.1% for taxable, underlying assumption, asset allocation of roughly 50/50 equities and debt, with at least 50-55% low cost index funds. The rest in quality bonds and cash (recommends 10% cash).

Q: Inflation assumptions sensitivity

A: billbengen •  It all depends on your view of future inflation. I like to remind people that the 4.5% rule is not a law of nature, like Newton's laws of motion, which will probably never change. Markets can change, and it is possible that in the future the 4.5% rule, which has held up for 50 years, might be violated. But I haven't seen those circumstances yet.

Q:  For a traditional retirement, 4% safe withdrawal rate is a pretty standard assumption for a 30 year period. What is your perspective for using the 4% SWR for a longer period of time, say 60 years? A lot of people pursuing financial independence aim for lower than 4%- it is pretty common to hear SWR's around 3.25%- 3.75% to be more conservative for a longer retirement horizon.

A: billbengen • As your "time horizon" lengthens, my research indicates that you should reduce your withdrawal rate concomitantly. For a 60-year time horizon, the indicated safe withdrawal rate is reduced from 4.5% to 4.0%.

billbengen • It is an interesting fact that in the past, 96% of retirees, at the end of 30 years, have a portfolio still worth at least as much as they started with, in nominal terms. Of course, when inflation is factored in, the real value of those investments has diminished considerably. It should also be noted that the SWR assumes that at the end of 30 years, the retiree will run out of money with his or her dying breath. If you wish to specify a minimum balance at the end of 30 years, that will result in lower initial withdrawal rates.

« Last Edit: August 22, 2017, 05:56:16 PM by PizzaSteve »
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Pizzasteve prefers to avoid excessive critical debates.  In the event of a post, no need to reply or quote if you disagree. I am posting information meant to stand on its own and hope to avoid back and forth debating.

MDM

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Re: Stop worrying about the 4% rule
« Reply #1096 on: August 22, 2017, 04:43:41 PM »
Reposting without comment, as it is of general interest to forum participants:
PizzaSteve, thanks for posting this.

Hope you don't mind that I took advantage of having a post on the first page of this thread to copy it.  See https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/msg702893/#msg702893.

MDM

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Re: Stop worrying about the 4% rule
« Reply #1097 on: August 22, 2017, 06:08:24 PM »
I did a bit of further clean up and additions.  Feel free to repost.
Done.  Editing is easy. :)

DavidAnnArbor

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Re: Stop worrying about the 4% rule
« Reply #1098 on: August 22, 2017, 08:23:45 PM »
Wow thanks for posting all that info. I was struck by how he felt the 100% stock portfolio would require a lower SWR, I seemed to believe that cfiresim would suggest otherwise. 

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1099 on: August 22, 2017, 09:26:03 PM »
Wow thanks for posting all that info. I was struck by how he felt the 100% stock portfolio would require a lower SWR, I seemed to believe that cfiresim would suggest otherwise.

cFIREsim success rates with default values except for % stocks/bonds:

100/0 = 95%
90/10 = 97%
75/25 = 96%
60/40 = 95%
50/50 = 93%