Author Topic: Stop worrying about the 4% rule  (Read 209316 times)

steveo

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Re: Stop worrying about the 4% rule
« Reply #1100 on: August 23, 2017, 03:44:00 AM »
It's interesting that he states it's a 4.5 % rule but typically a 7% rule should be good to go. He also states that equity valuations aren't really the issue.

Quote
Two things count: if you encounter a major bear market early in retirement, and/or if you experience high inflation during retirement.

So an early bear market might not even be an issue. The big concern is an early bear market and high inflation.

Basically he is stating "Stop worrying about the 4% rule".
« Last Edit: August 23, 2017, 03:51:53 AM by steveo »

Monkey Uncle

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Re: Stop worrying about the 4% rule
« Reply #1101 on: August 23, 2017, 04:42:13 AM »
I don't see how he is coming up with 4.5%.  I ran cFiresim with a 4.5% withdrawal for 30 years, using Bengen's inputs (50/50 allocation and starting in 1926), and I got a 73% success rate.  Using all data only gets me up to 77%.  Going back to the default 75/25 portfolio gets it to 84%.  I guess 73 - 84% success is good enough for some people, but he didn't say anything about accepting a lower historical success in exchange for that higher withdrawal rate.
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Re: Stop worrying about the 4% rule
« Reply #1102 on: August 23, 2017, 08:08:39 AM »
I don't see how he is coming up with 4.5%.  I ran cFiresim with a 4.5% withdrawal for 30 years, using Bengen's inputs (50/50 allocation and starting in 1926), and I got a 73% success rate.  Using all data only gets me up to 77%.  Going back to the default 75/25 portfolio gets it to 84%.  I guess 73 - 84% success is good enough for some people, but he didn't say anything about accepting a lower historical success in exchange for that higher withdrawal rate.

From his comments and this article, I think he is talking about a very specific allocation: "35% U.S. large-cap stocks, 18% U.S. small-cap stocks and 47% intermediate-term government bonds".
Perhaps there are more details and justification in his book.

At first glance, looks like major over weighting of small cap stocks, which historically would have given better returns than a normal equity allocation. So my guess is a similar trick seen with the The Larry Portfolio: get S&P 500 like returns with only a 30% equity allocation overall by massively over-weighting small cap value stocks. Historically has worked very well.
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brooklynguy

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Re: Stop worrying about the 4% rule
« Reply #1103 on: August 23, 2017, 08:17:10 AM »
I don't see how he is coming up with 4.5%.  I ran cFiresim with a 4.5% withdrawal for 30 years, using Bengen's inputs (50/50 allocation and starting in 1926), and I got a 73% success rate.  Using all data only gets me up to 77%.  Going back to the default 75/25 portfolio gets it to 84%.  I guess 73 - 84% success is good enough for some people, but he didn't say anything about accepting a lower historical success in exchange for that higher withdrawal rate.

There are clearly discrepancies in the inputs that lead to discrepancies in the outputs across the various sources for SWR information (or else there are outright mistakes, but that seems like a less likely explanation for presumably reliable sources like Bengen and cFIREsim).  The following thread had a good discussion about these types of discrepancies between cFIREsim and Kitces and, by extension, Bengen and other SWR information sources, and it attempted to pinpoint the reason(s) for the discrepancies:

"Kitces Article - Ratcheting SWR - Data Discrepancy?"

Based on the conclusions reached in that thread, it appears that at least part of the explanation is differences in bond asset class selections.

Edit:  I see CanuckExpat identified the specific asset allocation Bengen probably used above, which would explain why his results differ so drastically from cFIREsim's.
« Last Edit: August 23, 2017, 08:25:35 AM by brooklynguy »

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Re: Stop worrying about the 4% rule
« Reply #1104 on: August 23, 2017, 10:47:49 AM »
Chairman posted this link in one of the several stockmarket valuation panic threads that are happening at the moment. I thought it was worth a repost here in relation to the concerns about FIREing, 4%WR and using CAPE as a predictor of future stockmarket performance.

http://www.etf.com/sections/index-investor-corner/swedroe-wait-youll-likely-miss-out?nopaging=1

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Re: Stop worrying about the 4% rule
« Reply #1105 on: August 23, 2017, 01:17:10 PM »
Chairman posted this link in one of the several stockmarket valuation panic threads that are happening at the moment. I thought it was worth a repost here in relation to the concerns about FIREing, 4%WR and using CAPE as a predictor of future stockmarket performance.

http://www.etf.com/sections/index-investor-corner/swedroe-wait-youll-likely-miss-out?nopaging=1

I liked the part about the opportunity cost of not investing and the chances of a correction happening as well as the average benefit of waiting vs. investing right away.

quote:  "Looking back at 115 years of data, Elm asked: “During times when the market has been ‘expensive,’ what has been the average cost or benefit of waiting for a correction of 10% from the starting price level, rather than investing right away?” "

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Re: Stop worrying about the 4% rule
« Reply #1106 on: August 23, 2017, 07:16:51 PM »
I don't see how he is coming up with 4.5%.  I ran cFiresim with a 4.5% withdrawal for 30 years, using Bengen's inputs (50/50 allocation and starting in 1926), and I got a 73% success rate.  Using all data only gets me up to 77%.  Going back to the default 75/25 portfolio gets it to 84%.  I guess 73 - 84% success is good enough for some people, but he didn't say anything about accepting a lower historical success in exchange for that higher withdrawal rate.

From his comments and this article, I think he is talking about a very specific allocation: "35% U.S. large-cap stocks, 18% U.S. small-cap stocks and 47% intermediate-term government bonds".
Perhaps there are more details and justification in his book.

At first glance, looks like major over weighting of small cap stocks, which historically would have given better returns than a normal equity allocation. So my guess is a similar trick seen with the The Larry Portfolio: get S&P 500 like returns with only a 30% equity allocation overall by massively over-weighting small cap value stocks. Historically has worked very well.

Ah, o.k.  Sounds like Mr. Bengen is engaging in some data mining.  In which case I would take his SWRs with a grain of salt.
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PizzaSteve

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Re: Stop worrying about the 4% rule
« Reply #1107 on: August 24, 2017, 08:52:41 AM »
Chairman posted this link in one of the several stockmarket valuation panic threads that are happening at the moment. I thought it was worth a repost here in relation to the concerns about FIREing, 4%WR and using CAPE as a predictor of future stockmarket performance.

http://www.etf.com/sections/index-investor-corner/swedroe-wait-youll-likely-miss-out?nopaging=1

I liked the part about the opportunity cost of not investing and the chances of a correction happening as well as the average benefit of waiting vs. investing right away.

quote:  "Looking back at 115 years of data, Elm asked: “During times when the market has been ‘expensive,’ what has been the average cost or benefit of waiting for a correction of 10% from the starting price level, rather than investing right away?” "
Thanks for the info.  The challenge is that the article quoting Shiller said that he believes his research suggests that CAPE (10 year average of historic earnings) is predictive, but only explained roughly 1/3 of future likely price movements, when backtested to historic data.

None of us know whether the market is highly valued or not.  We have a useful indicator, one that seems to `predict the weather.'  As i posted earlier, market values include both asset value and earnings in their valuations, so no earnings only metric will work.  Amazon's valuation is almost entirely balance sheet right now, resulting in rediculous CAPE, for its share of market.  We can argue what its true value should be, but the market still sets a price, currently high. Likewise, an oil company may sit on reserves and not sell as much oil for years (depressing earnings and inflating PE), but over 10 years they usually find a point in the business cycle that enourages them to `harvest profits'  to release assets from the balance sheet.

That is what was innovative about the CAPE model.  By looking at earnings, market wide over, a 10 year or more period, we capture a reasonably good look at at least several full business cycles.  Over that term, the sorts of asset hoarding strategies i mentioned above tend to average out.  Likewise, if investment rates are high (e.g. during the tech boom era), potentially valuable, efficiency/productivity creating assets are being created, but may not yet be allowed on the balance sheet or to be monitized (e.g. see lessons from Enron regarding mark to market accounting treatment of balance sheet assets valuation increases and attempts to recognize these as earnings...this is what sunk A. Anderson).  Hence CAPE is better than one years PE, but it is still a flawed, but useful tool to be used with awareness of its limitations. 

Believe me,  when mergers are priced, the buyers perform due diligence.  I have some good stories of 'free' acquisitions because the market misspriced a company by only looking at trailing earnings and not balance sheet assets.

Hence i tend to rely on the EMH, and assume markets are pricing assets with reasonable assumptions.  A 4% withdraw rate seems quite reasonably supported with the best data we have, and the case that global markets are severely overvalued across the board is somewhat weak.
« Last Edit: August 24, 2017, 01:18:10 PM by PizzaSteve »
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DavidAnnArbor

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Re: Stop worrying about the 4% rule
« Reply #1108 on: August 24, 2017, 12:53:28 PM »
Chairman posted this link in one of the several stockmarket valuation panic threads that are happening at the moment. I thought it was worth a repost here in relation to the concerns about FIREing, 4%WR and using CAPE as a predictor of future stockmarket performance.

http://www.etf.com/sections/index-investor-corner/swedroe-wait-youll-likely-miss-out?nopaging=1

Great article that really deconstructs the Schiller CAPE 10. I like the explanation of the impairment of intangible assets rule impacting CAPE comparisons from before when the rule was started (just after the dotcom collapse). My masters in accounting training including testing for impairment so it's nice to see how this applies to CAPE comparisons in the real world.

kenmoremmm

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Re: Stop worrying about the 4% rule
« Reply #1109 on: September 07, 2017, 12:32:44 PM »
i haven't had time to read this entire thread, so my apologies if it's been discussed before.

when you are projecting your spend levels to calculate your required withdrawal rate, what are people using for things like insurance, medical coverage, dental, food, etc? if you're 10 years out, are you taking today's dollar values and adjusting for inflation at 10 years? or do you apply a premium?

or, is the thought process more like: in today's dollars, i spend $15000/yr on all this stuff. therefore, my 4% target withdrawal amount should be $15000/yr?

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Re: Stop worrying about the 4% rule
« Reply #1110 on: September 07, 2017, 12:43:05 PM »
i haven't had time to read this entire thread, so my apologies if it's been discussed before.

when you are projecting your spend levels to calculate your required withdrawal rate, what are people using for things like insurance, medical coverage, dental, food, etc? if you're 10 years out, are you taking today's dollar values and adjusting for inflation at 10 years? or do you apply a premium?

or, is the thought process more like: in today's dollars, i spend $15000/yr on all this stuff. therefore, my 4% target withdrawal amount should be $15000/yr?

I think it's the latter, but keep in mind that in today's dollars you'd likely have more medical care/dental care issues if you were 64 years old.

tyort1

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Re: Stop worrying about the 4% rule
« Reply #1111 on: September 07, 2017, 12:43:41 PM »
i haven't had time to read this entire thread, so my apologies if it's been discussed before.

when you are projecting your spend levels to calculate your required withdrawal rate, what are people using for things like insurance, medical coverage, dental, food, etc? if you're 10 years out, are you taking today's dollar values and adjusting for inflation at 10 years? or do you apply a premium?

or, is the thought process more like: in today's dollars, i spend $15000/yr on all this stuff. therefore, my 4% target withdrawal amount should be $15000/yr?

Yes, the 4% rule factors in inflation, so you are covered when things increase in price over time due to inflation.

This is why you don't keep everything in cash - cash doesn't grow and inflation will eat away at it. 

Put another way - historically the stock market grows at just over 9% (with dividends re-invested).  Inflation is between 2 and 3 percent.  If you do the math:

9-3= 6%

Theoretically you could withdraw 6% on average and be fine, but you only take out 4% to give yourself a buffer for things like market fluctuations, etc....

Most of the time you end up with more money when you die than you had when you retired, because inflation has already been accounted for. 
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Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1112 on: September 07, 2017, 12:47:52 PM »
The 4% Rule factors in inflation once you FIRE, but if you are 10yrs out like Kenmoremmm mentions it does not account for inflation from your current spending to the date of your FIRE. That's the question he was asking.

tyort1

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Re: Stop worrying about the 4% rule
« Reply #1113 on: September 07, 2017, 12:50:57 PM »
The 4% Rule factors in inflation once you FIRE, but if you are 10yrs out like Kenmoremmm mentions it does not account for inflation from your current spending to the date of your FIRE. That's the question he was asking.

Oh yes, quite right.  Sorry, my mistake - I should red more carefully.
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Re: Stop worrying about the 4% rule
« Reply #1114 on: September 07, 2017, 01:00:03 PM »
The 4% Rule factors in inflation once you FIRE, but if you are 10yrs out like Kenmoremmm mentions it does not account for inflation from your current spending to the date of your FIRE. That's the question he was asking.

Oh yes, quite right.  Sorry, my mistake - I should red more carefully.
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Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1115 on: September 07, 2017, 03:38:16 PM »
when you are projecting your spend levels to calculate your required withdrawal rate, what are people using for things like insurance, medical coverage, dental, food, etc? if you're 10 years out, are you taking today's dollar values and adjusting for inflation at 10 years? or do you apply a premium?

I started with drafting a FIRE budget based on my current spending, but adjusted using the assumptions I have regarding FIRE. For example the amount of gas I plan to spend while traveling to do things I love, campground fees, etc... This has some of my guesses around inflated costs baked in, but not in a rigorous way. Two other considerations are that I am still optimizing my spending and my FIRE budget includes a healthy dose of luxuries. The continued optimization process reduces my costs and fights inflation while the luxury portion of my budget is a shock absorber against sudden cost spikes that I might need time to mitigate.

As I get closer to FIRE I revisit my budget. I just noticed that my truck insurance this year is higher than listed in my budget so I updated that number.

If you are 10yrs out just take the best stab at a FIRE budget as you can. This will let you set a savings/investment target and you have a while to adjust as you go. Whether you implicitly calculate inflation in, guess or just leave a decent chunk of contingency in your budget doesn't really matter as far as I am concerned as love as you continue to monitor and refine your numbers as you go.

Classical_Liberal

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Re: Stop worrying about the 4% rule
« Reply #1116 on: September 07, 2017, 04:11:06 PM »
when you are projecting your spend levels to calculate your required withdrawal rate, what are people using for things like insurance, medical coverage, dental, food, etc? if you're 10 years out, are you taking today's dollar values and adjusting for inflation at 10 years? or do you apply a premium?

Trying to project life and it's expenses ten years into the future isn't going to be accurate.  Ten years ago i was in sales and couldn't put on a bandaid, today I'm an acute care RN.  I would have never predicted that. 

IMO the best you can do is take a roiling 12 mo average of expenses, add in savings for anything you are glaringly missing, like expected intermittent expenses (replace car, roof on house, ect).  Subtract any work related costs multiply by 25... BAM, "your number".  If this calculation changes over time due inflation or lifestyle inflation adjust accordingly.  Don't waste time on the minutia, spend time learning to invest or cutting consumption instead. Then you wont have to wait a decade to FIRE.

Exflyboy

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Re: Stop worrying about the 4% rule
« Reply #1117 on: September 07, 2017, 04:36:13 PM »

[/quote]

Trying to project life and it's expenses ten years into the future isn't going to be accurate.  Ten years ago i was in sales and couldn't put on a bandaid, today I'm an acute care RN.  I would have never predicted that. 

[/quote]

Awesome..:)

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Re: Stop worrying about the 4% rule
« Reply #1118 on: September 07, 2017, 04:48:33 PM »
The 4% Rule factors in inflation once you FIRE, but if you are 10yrs out like Kenmoremmm mentions it does not account for inflation from your current spending to the date of your FIRE. That's the question he was asking.

Oh yes, quite right.  Sorry, my mistake - I should red more carefully.
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CanuckExpat

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Re: Stop worrying about the 4% rule
« Reply #1119 on: September 07, 2017, 06:31:45 PM »
If anyone likes very early reminders:

Wade Pfau, author of many Trinity Study Updates will be doing an "Ask Me Anything" Tuesday, 10/31/2017, at noon EDT 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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Le Barbu

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Re: Stop worrying about the 4% rule
« Reply #1120 on: October 07, 2017, 06:06:49 AM »
1 month since the last post here...

Where is Runewell? His profile disapeared and many of his post to...
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Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1121 on: October 07, 2017, 06:40:16 AM »
1 month since the last post here...

Where is Runewell? His profile disapeared and many of his post to...

Banned and his posts cleaned up a mod.

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Re: Stop worrying about the 4% rule
« Reply #1122 on: October 08, 2017, 10:38:23 PM »
1 month since the last post here...

Where is Runewell? His profile disapeared and many of his post to...

Banned and his posts cleaned up a mod.
Yes, and his mysterious twin, Mr. "Steed" has disappeared too.
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Re: Stop worrying about the 4% rule
« Reply #1123 on: October 13, 2017, 05:42:09 PM »
The 4% Rule factors in inflation once you FIRE, but if you are 10yrs out like Kenmoremmm mentions it does not account for inflation from your current spending to the date of your FIRE. That's the question he was asking.

Oh yes, quite right.  Sorry, my mistake - I should red more carefully.
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Re: Stop worrying about the 4% rule
« Reply #1124 on: October 13, 2017, 09:39:31 PM »
The 4% Rule factors in inflation once you FIRE, but if you are 10yrs out like Kenmoremmm mentions it does not account for inflation from your current spending to the date of your FIRE. That's the question he was asking.

Oh yes, quite right.  Sorry, my mistake - I should red more carefully.
don't feel blue, it happens to everyone once in a while...

I'm green with envy over your cleverness.

I think you are all dealing in shades of grey to be honest

I think there is an article on the Frugal Cyan-tist about that.
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Re: Stop worrying about the 4% rule
« Reply #1125 on: October 14, 2017, 04:50:04 PM »
Question..

You have two early retirees.. its 2014 and one person retires with $1M and intends to spend $40K + inflation for the rest of his/her natural life.

Now you retiree #2 who says.. Naah I want a bit more and I don't have $1m yet (say he has $750k).

Fast forward to 2017 and they both have exactly $2M after the huge bull run we have just had and Retiree #2 says.. OK I'm done.

R1 is still locked into $40k per year (the 4% rule) , where as R2 can spend $80k per year because he retired with $2M.

Clearly this is nonsense.

Explain..:)

sol

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Re: Stop worrying about the 4% rule
« Reply #1126 on: October 14, 2017, 05:12:04 PM »
Question..

You have two early retirees.. its 2014 and one person retires with $1M and intends to spend $40K + inflation for the rest of his/her natural life.

Now you retiree #2 who says.. Naah I want a bit more and I don't have $1m yet (say he has $750k).

Fast forward to 2017 and they both have exactly $2M after the huge bull run we have just had and Retiree #2 says.. OK I'm done.

R1 is still locked into $40k per year (the 4% rule) , where as R2 can spend $80k per year because he retired with $2M.

Clearly this is nonsense.

Explain..:)

You should probably go back and read this thread, where this effect has been discussed at some length multiple times.

But to summarize,

1)  they do not have equivalent time horizons anymore, and

2)  retiree #1 isn't locked into anything, and

3)  a success rate of 95% and a success rate of 30% are both "successful" if they both happen to last your particular time duration, and

4)  you've totally misunderstood the 4% rule if this is still confusing to you.  It's a historical look back at sequence of return risk, not a predictive tool for how to withdraw your savings.

Just go back to page 1 of this thread and start reading, and all of your questions will be answered.  Follow the links for extra credit.

Exflyboy

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Re: Stop worrying about the 4% rule
« Reply #1127 on: October 14, 2017, 07:09:22 PM »
Question..

You have two early retirees.. its 2014 and one person retires with $1M and intends to spend $40K + inflation for the rest of his/her natural life.

Now you retiree #2 who says.. Naah I want a bit more and I don't have $1m yet (say he has $750k).

Fast forward to 2017 and they both have exactly $2M after the huge bull run we have just had and Retiree #2 says.. OK I'm done.

R1 is still locked into $40k per year (the 4% rule) , where as R2 can spend $80k per year because he retired with $2M.

Clearly this is nonsense.

Explain..:)

You should probably go back and read this thread, where this effect has been discussed at some length multiple times.

But to summarize,

1)  they do not have equivalent time horizons anymore, and

2)  retiree #1 isn't locked into anything, and

3)  a success rate of 95% and a success rate of 30% are both "successful" if they both happen to last your particular time duration, and

4)  you've totally misunderstood the 4% rule if this is still confusing to you.  It's a historical look back at sequence of return risk, not a predictive tool for how to withdraw your savings.

Just go back to page 1 of this thread and start reading, and all of your questions will be answered.  Follow the links for extra credit.

Actually I'm not confused but #4 is the real answer.

In fact the curiosity of the 4% rule is such that 4% historically gets you to a 30 year horizon to 95% (or whatever that actual probability is). If however you happened to retire at the beginning of a major stock market run up you can in fact reset your dollar withdrawal number to a higher value based upon on 4% (or whatever you decide is your "safe" number) and get the same level of risk.

In my case my chosen WR is 3% and that can ride up with the market with the same level of future risk..


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Re: Stop worrying about the 4% rule
« Reply #1128 on: October 14, 2017, 08:53:51 PM »

In my case my chosen WR is 3% and that can ride up with the market with the same level of future risk..

That's true, but instead of retiring with 25x expenses, you need 33x expenses.  That means a number of extra years working, with no extra safety.

Exflyboy

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Re: Stop worrying about the 4% rule
« Reply #1129 on: October 14, 2017, 10:02:46 PM »

In my case my chosen WR is 3% and that can ride up with the market with the same level of future risk..

That's true, but instead of retiring with 25x expenses, you need 33x expenses.  That means a number of extra years working, with no extra safety.

Indeed, in my case though it sort of happened by accident as I was already FI before I started reading MMM.

Then I RE'd in 2014 and now have roughly 3.2 to 3.9 times what we need based on 4%.. Depends on if we stay in the rental business or not.

I guess this is a good problem to have and we intend to spend more in retirement.

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Re: Stop worrying about the 4% rule
« Reply #1130 on: October 14, 2017, 11:09:12 PM »

In my case my chosen WR is 3% and that can ride up with the market with the same level of future risk..

That's true, but instead of retiring with 25x expenses, you need 33x expenses.  That means a number of extra years working, with no extra safety.
i wanted to point out that this makes no sense.  more money = no extra safety?  that literally makes no logical sense.  more money means more cushion, literally by definition of what is a safety margin. How can you say 33x isnt more secure than 25x with a straight face?

(EDIT: Looks like what I was replying to was deleted. Leaving this response, because I think PS's question was a valid one that multiple people will have. /END EDIT.)

At some point, more money is not more safety, because your worry is no longer running out of money, but dying, or the country collapsing, or whatever, and a 3% WR won't be any different than 4% WR in those scenarios.

I would argue that there is extra safety in a 3% vs 4% (after all, 4% was only 95% safe historically--admittedly with robotic withdrawals/spending and no extra income), but there isn't really much extra safety in terms of mitigating sequence of returns risk in going from a 1% WR to a 0.5% WR.

Where the actual line is where you stop gaining extra safety from money is a sorites paradox, but I think you're probably right that there is extra safety going from a 4% to 3%, for most people, and that TC is right that at some point, extra money as a buffer doesn't add safety because the risks at that point aren't ones you can handle with money.

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Re: Stop worrying about the 4% rule
« Reply #1131 on: October 14, 2017, 11:31:32 PM »

In my case my chosen WR is 3% and that can ride up with the market with the same level of future risk..

That's true, but instead of retiring with 25x expenses, you need 33x expenses.  That means a number of extra years working, with no extra safety.
i wanted to point out that this makes no sense.  more money = no extra safety?  that literally makes no logical sense.  more money means more cushion, literally by definition of what is a safety margin. How can you say 33x isnt more secure than 25x with a straight face?

(EDIT: Looks like what I was replying to was deleted. Leaving this response, because I think PS's question was a valid one that multiple people will have. /END EDIT.)

At some point, more money is not more safety, because your worry is no longer running out of money, but dying, or the country collapsing, or whatever, and a 3% WR won't be any different than 4% WR in those scenarios.

I would argue that there is extra safety in a 3% vs 4% (after all, 4% was only 95% safe historically--admittedly with robotic withdrawals/spending and no extra income), but there isn't really much extra safety in terms of mitigating sequence of returns risk in going from a 1% WR to a 0.5% WR.

Where the actual line is where you stop gaining extra safety from money is a sorites paradox, but I think you're probably right that there is extra safety going from a 4% to 3%, for most people, and that TC is right that at some point, extra money as a buffer doesn't add safety because the risks at that point aren't ones you can handle with money.
Think about it.  When we use statistics to suggest having more money is meaningless, we are crossing over a line of what a statistical model is meant to represent in terms of guidance value.
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Re: Stop worrying about the 4% rule
« Reply #1132 on: October 14, 2017, 11:40:01 PM »

In my case my chosen WR is 3% and that can ride up with the market with the same level of future risk..

That's true, but instead of retiring with 25x expenses, you need 33x expenses.  That means a number of extra years working, with no extra safety.
i wanted to point out that this makes no sense.  more money = no extra safety?  that literally makes no logical sense.  more money means more cushion, literally by definition of what is a safety margin. How can you say 33x isnt more secure than 25x with a straight face?

(EDIT: Looks like what I was replying to was deleted. Leaving this response, because I think PS's question was a valid one that multiple people will have. /END EDIT.)

At some point, more money is not more safety, because your worry is no longer running out of money, but dying, or the country collapsing, or whatever, and a 3% WR won't be any different than 4% WR in those scenarios.

I would argue that there is extra safety in a 3% vs 4% (after all, 4% was only 95% safe historically--admittedly with robotic withdrawals/spending and no extra income), but there isn't really much extra safety in terms of mitigating sequence of returns risk in going from a 1% WR to a 0.5% WR.

Where the actual line is where you stop gaining extra safety from money is a sorites paradox, but I think you're probably right that there is extra safety going from a 4% to 3%, for most people, and that TC is right that at some point, extra money as a buffer doesn't add safety because the risks at that point aren't ones you can handle with money.

A bit like Steve Jobs.. even his billions couldn't buy a ticket out of pancreatic cancer sadly..:(

And for me 3% is because I'm there already and, well, its gives me warm and fuzzy feelings all over..:)
« Last Edit: October 14, 2017, 11:45:19 PM by Exflyboy »

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Re: Stop worrying about the 4% rule
« Reply #1133 on: October 15, 2017, 12:10:43 AM »

In my case my chosen WR is 3% and that can ride up with the market with the same level of future risk..

That's true, but instead of retiring with 25x expenses, you need 33x expenses.  That means a number of extra years working, with no extra safety.
i wanted to point out that this makes no sense.  more money = no extra safety?  that literally makes no logical sense.  more money means more cushion, literally by definition of what is a safety margin. How can you say 33x isnt more secure than 25x with a straight face?

(EDIT: Looks like what I was replying to was deleted. Leaving this response, because I think PS's question was a valid one that multiple people will have. /END EDIT.)

At some point, more money is not more safety, because your worry is no longer running out of money, but dying, or the country collapsing, or whatever, and a 3% WR won't be any different than 4% WR in those scenarios.

I would argue that there is extra safety in a 3% vs 4% (after all, 4% was only 95% safe historically--admittedly with robotic withdrawals/spending and no extra income), but there isn't really much extra safety in terms of mitigating sequence of returns risk in going from a 1% WR to a 0.5% WR.

Where the actual line is where you stop gaining extra safety from money is a sorites paradox, but I think you're probably right that there is extra safety going from a 4% to 3%, for most people, and that TC is right that at some point, extra money as a buffer doesn't add safety because the risks at that point aren't ones you can handle with money.

In addition, the extra time you need to work to collect that 33x stache vs 25x is also a guaranteed shortening of your time in retirement by exactly the number of extra years you worked.

Lets say you are 40 yrs old, with a paid off mortgage, and have anticipated spending of $40k/yr. You are earning $100k/yr net. Your stache is $1 million, so 4% rule says you can FIRE away. But you decide to use a 3% SWR because you assume 'it's safer'. Thus you would need an equiv of a an extra $333,000 saved, so you work about an extra 3 years to get this (how long that will take depends on how quickly your $1million 'stache grows in the meantime). If your life expectancy is 90, you have chosen to lose 6% of your retirement time. If you actually end up dying at 70, you lost 10%. That's a pretty big decision IMHO.
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Exflyboy

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Re: Stop worrying about the 4% rule
« Reply #1134 on: October 15, 2017, 12:38:03 AM »
Each to their own of course but retiring at 43 instead of 40 but with 33% more money sounds like a good deal to me. I mean what will be different say 10 years from now.. Will we have doubled healthcare costs or will we have a well run single payer system for example?

I mean that extra $333k is about $13k/year.. That seems to be a very real cost of healthcare for families even today.. let alone 10 years from now.

But then if you die at 50.. Maybe not such a great deal..

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Re: Stop worrying about the 4% rule
« Reply #1135 on: October 15, 2017, 03:32:56 AM »
Each to their own of course but retiring at 43 instead of 40 but with 33% more money sounds like a good deal to me. I mean what will be different say 10 years from now.. Will we have doubled healthcare costs or will we have a well run single payer system for example?


Depends on your work/life situation, I'd say.  For many work is a deeply unpleasant experience that leaves them unable to do much else time-wise and very often saps their health (e.g. sitting immoble at a desk, high stress, long/poor hours).  One could flip that question around and ask: how much would 3 healthy years of your life be worth in your 40s?  what if those are among the last years you'll spend with your kids (on a day-to-day basis)?

It's a different choice for everyone of course. 
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TomTX

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Re: Stop worrying about the 4% rule
« Reply #1136 on: October 15, 2017, 08:16:17 AM »
Each to their own of course but retiring at 43 instead of 40 but with 33% more money sounds like a good deal to me. I mean what will be different say 10 years from now.. Will we have doubled healthcare costs or will we have a well run single payer system for example?


Depends on your work/life situation, I'd say.  For many work is a deeply unpleasant experience that leaves them unable to do much else time-wise and very often saps their health (e.g. sitting immoble at a desk, high stress, long/poor hours).  One could flip that question around and ask: how much would 3 healthy years of your life be worth in your 40s?  what if those are among the last years you'll spend with your kids (on a day-to-day basis)?

It's a different choice for everyone of course.

Yep. We don't know how much healthy, active time we're going to have.

My Dad's health issues really kicked in shortly before he hit age 70. His capability to actually go out and do stuff is severely diminished - and my Mom is spending most of her time in a caretaker role. Thankfully he retired semi-early at 56 and they got to do a fair amount of travel. Now, even some "easy" stuff like a cross-country train trip is canceled due to health issues.

Friend of mine at work - his brother has terminal brain cancer. Age 67.

Friend of mine in high school. Dead at 17. Car wreck.

These are just things that come to mind immediately.
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Re: Stop worrying about the 4% rule
« Reply #1137 on: October 15, 2017, 08:58:08 AM »
Each to their own of course but retiring at 43 instead of 40 but with 33% more money sounds like a good deal to me. I mean what will be different say 10 years from now.. Will we have doubled healthcare costs or will we have a well run single payer system for example?


Depends on your work/life situation, I'd say.  For many work is a deeply unpleasant experience that leaves them unable to do much else time-wise and very often saps their health (e.g. sitting immoble at a desk, high stress, long/poor hours).  One could flip that question around and ask: how much would 3 healthy years of your life be worth in your 40s?  what if those are among the last years you'll spend with your kids (on a day-to-day basis)?

It's a different choice for everyone of course.

Yes, you have to look at the overall picture and make the best decision you can.
If you work clearing landmines from a civilian area, love what you do and want to do it for another three years, do it.
If you work planting landmines in front of orphanages, hate your job, and don't want to work three more years, you should probably quit.

Most people's situations probably lie more in the middle
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Exflyboy

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Re: Stop worrying about the 4% rule
« Reply #1138 on: October 15, 2017, 10:10:21 AM »
One would hope most peoples choices lie somewhere in the middle..:)

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Re: Stop worrying about the 4% rule
« Reply #1139 on: October 15, 2017, 03:04:48 PM »
...what exactly did/do you do, CanuckExpat?
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Telecaster

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Re: Stop worrying about the 4% rule
« Reply #1140 on: October 15, 2017, 04:51:55 PM »
Think about it.  When we use statistics to suggest having more money is meaningless, we are crossing over a line of what a statistical model is meant to represent in terms of guidance value.

Let me be clear:  I'm definitely not saying there is zero utility in having more money.   I'm talking about the definition of "safe."  Specifically, when we talk about "safe" withdrawal rates, by "safe" we mean the portfolio won't run out of money.    The implied fear is that if we run out of money, we have to go back to work, thereby shortening our retirements.  So to avoid the possibility the future will be worse than the past, we work extra years before retiring--thereby shortening our retirements.    Either way, you have a shorter retirement, so there is no additional "safety."  In both cases all you are doing is reducing the withdrawal period.   

Obviously, if there is some big life crisis like a medical emergency that requires money, you are better off having more money.  But those events aren't included in the SWR studies.  The "safe" in SWR only knows about what happened in the past. 

But the 4% rule also implies a precision that doesn't exist in the data.  We don't have very much data, and the data aren't very good.  Let me explain what I mean by that.  First we only have three or so unique 30-year periods.  Next we are using past conditions to as a comparison for the future.   Let's look at the two worst starting dates, 1929 and 1966.  In 1929, there was a widespread nationwide banking failure followed by deflation and a long, deep, depression.  Economics wasn't as well understood back then, and it took years before the government started taking active measures to fix the economy.  In 2007, there was a major banking failure, which was contained fairly quickly.  Faltering banks were quickly shored up, there was almost no deflation, and the economy began recover quickly, in part bolstered by a robust safety net that didn't exist in 1929.   In short, I don't think we'll see a 1929 style crisis in the future.   

1966 was a poor year to start because it was characterized by stagnant stock market returns followed by a period of usually high inflation which the Fed (led by the bumbling Arthur Burns) failed to keep in check.  The Fed now has an inflation target in the low single digits.  I find it unlikely we'll see inflation that high ever again.  So 1929 and 1966 aren't directly comparable to 2017.  The world is a much different place now.  Can we use those data to form opinions about the future?  We have to.  We don't have anything else. 

But if we do see 1977 style inflation, a good hedge is to simply have a mortgage.  That way your housing expenses are fixed (for the most part), with allows you to withdraw fewer inflation-adjusted dollars.  And there are lots of hedging strategies, which most people are probably already using or could easily use.  Owning rental real estate, having an income producing hobby, relying on Social Security for a supplemental income, reducing withdrawal rate, etc.   So if "safe" means "not running out money" there are lots of common sense mid-course corrections available to most people--without shortening your retirement years which is what "safe" means in this context. 

As arebelspy points out, (wildly paraphrasing) nobody ever got hit by the bus they saw coming.  We're not going to have a 1929 style meltdown, and we won't have 1970s style inflation.  The next thing will be something nobody anticipates, and if the 4% rule won't save us, then 3.3% rule probably won't either.  In that case, we'll all have to fall back on hedging strategies--which most of us are already planning on doing.  To put it another way, if the future really is worse than the past, no one can quantifiably say a 3.3 WR is "safer" than 4.0.  The data aren't good enough to make that fine a distinction. 

So, IMO, stop worrying about the 4% rule. 


tooqk4u22

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Re: Stop worrying about the 4% rule
« Reply #1141 on: October 17, 2017, 09:04:05 AM »

Yep. We don't know how much healthy, active time we're going to have.

My Dad's health issues really kicked in shortly before he hit age 70. His capability to actually go out and do stuff is severely diminished - and my Mom is spending most of her time in a caretaker role. Thankfully he retired semi-early at 56 and they got to do a fair amount of travel. Now, even some "easy" stuff like a cross-country train trip is canceled due to health issues.

Friend of mine at work - his brother has terminal brain cancer. Age 67.

Friend of mine in high school. Dead at 17. Car wreck.

These are just things that come to mind immediately.

This is the type of thinking that leads to YOLO approach to life.  The reality is these are smaller more isolated events than your statistical odds are - for one I suspect you have already lived past 17.  Death is certain, when is not - so for IMO you have to go with the statistical probabilities as your baseline, which by the way change as you age (ie. avg. life expectancy for those born in 2015 is 79 but if you were 65 in 2015 your life expectancy is 84). Lifestyle factors, sex, race also play a part.

Aside from that, I think about it too - I would hate waste more of my life to only having it be short.  Although I take comfort that my family would be fine.

tooqk4u22

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Re: Stop worrying about the 4% rule
« Reply #1142 on: October 17, 2017, 09:05:36 AM »
Each to their own of course but retiring at 43 instead of 40 but with 33% more money sounds like a good deal to me. I mean what will be different say 10 years from now.. Will we have doubled healthcare costs or will we have a well run single payer system for example?


Depends on your work/life situation, I'd say.  For many work is a deeply unpleasant experience that leaves them unable to do much else time-wise and very often saps their health (e.g. sitting immoble at a desk, high stress, long/poor hours).  One could flip that question around and ask: how much would 3 healthy years of your life be worth in your 40s?  what if those are among the last years you'll spend with your kids (on a day-to-day basis)?

It's a different choice for everyone of course.

Yes, you have to look at the overall picture and make the best decision you can.
If you work clearing landmines from a civilian area, love what you do and want to do it for another three years, do it.
If you work planting landmines in front of orphanages, hate your job, and don't want to work three more years, you should probably quit.

Most people's situations probably lie more in the middle

Be a demand creator.....plant the mines then get paid to clear them....sure fire way to FIRE (or getting blown up).

maizeman

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Re: Stop worrying about the 4% rule
« Reply #1143 on: October 17, 2017, 09:07:45 AM »
Better yet, pretend to the mines and still get paid to clean them up. Lower Cost of Goods, and reduced risk of getting blown up.
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cerat0n1a

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Re: Stop worrying about the 4% rule
« Reply #1144 on: October 17, 2017, 01:49:08 PM »
Better yet, pretend to the mines and still get paid to clean them up. Lower Cost of Goods, and reduced risk of getting blown up.

Just don't be this guy and sell pretend mine detectors.

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Classical_Liberal

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Re: Stop worrying about the 4% rule
« Reply #1145 on: October 17, 2017, 04:54:39 PM »
Be a demand creator.....plant the mines then get paid to clear them....sure fire way to FIRE (or getting blown up).

John Maynard Keynes predicted this exact activity.  Except he used digging holes and filling them again as the example, but adding the manufacturing jobs to produce mines that are never actually used only makes it better.

Better yet, pretend to the mines and still get paid to clean them up. Lower Cost of Goods, and reduced risk of getting blown up.
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