Author Topic: Stop worrying about the 4% rule  (Read 241821 times)


  • Walrus Stache
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Re: Stop worrying about the 4% rule
« Reply #1250 on: November 07, 2017, 08:19:36 AM »
Similar to what ExFlyboy asked earlier (a page ago), but with a twist.  What if Retiree A and B have $1M.  Retiree A calls it quits in 2007 and withdraws his inflation adjusted $40k for 30 years.  Retiree B hangs in a little longer only to suffer the ~37% decline in 2008.   Retiree A has roughly 605k and Retiree B has roughly 630k. 

How much can Retiree B plan to spend for the next 30 years?

So is there a consensus on how much Retiree B can spend?  I've heard the strict interpretation of the 4% Rule = $25,200 (inflation adjusted) for the next 30 years and also heard 'something closer to $40,800, since that what Retiree A can spend'.  There is a pretty big difference between those answers, and a whole lot of handwaving around 'being flexible' doesn't really help Retiree B know what to do.

I think the answer in terms of the 4% rule is that *in the past* it has worked out 96% of the time if a person with that amount of stash spent 4% of the balance of that stash each year.   

The 4% rule isn't really a prediction, it is a statement about what has happened before.  Now if you want to use Person A's conditions to determine Person B's spending, the fact is that even Person A's plan isn't looking too great now.  Even though they followed the 4% rule properly, the fact is that even the historical model shows that it does fail sometimes (4% of the time during the historical period).  The new information that we now have - the large market drop one year into Person A's retirement) now means that we have more information to plug into that historical model to see how he *would have done* in the past.  You would have to look at the subset of periods in which a similar market drop occurred right after a person retired. He might still be fine, both in the past model and in the future reality.  It would now be the role of the thinking rational human being to look at all of the available information and re-evaluate. 

The 4% rule is kind of an anchor point that gives us a model of the best information we currently have about how market performance and withdrawal rates ultimately affect a retirement plan.  We can look at all of the historical circumstances such as the great depression, the tech bubble crash, the inflationary 70's, the crappy stock market returns of the late 60's - early 70's and use that knowledge to help us put a confidence level on our historical model. 

No matter what cFireSim tells you when you plug in your numbers, you might still run out of money.  Even if you use 2% instead of 4%, you might run out of money.  Because no one can predict the future. 

But it's a trade-off.  Running out of money is one kind of failure.  Dying one year into your retirement is another kind of failure.  Having a long retirement of worrying about money and not travelling to see your family or not enjoying your life but then leaving a million bucks in the bank when you kick off is another kind of failure. We all have to use our own judgment and our own priorities to determine where we feel comfortable.

in the given scenario if 100% of assets were invested in VTSAX both could have withdrawn 40k per year adjsuted up at 3% per year for much higher than inflation withdrawals and been left today sitting with 1.3MM and 1.4MM ... so with the added data that has been proposed from the future in this situation it is currently further proving the safety of the 4% swr regardless of the huge hit you took in year one.  when a normal human would likely cut some spending or earn some extra income.
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  • Magnum Stache
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Re: Stop worrying about the 4% rule
« Reply #1251 on: November 07, 2017, 10:52:43 AM »
It is interesting to me that as a group we tend to worry about the "running out of money" type of failure. I think we see this kind of thinking because to savers are are wired that way.

Now I have family members who are broke, will never retire and the thought of ROM failure doesn't even enter their heads.... "Oh retirement, that's what that Social Security thing is for right?". Of course they are head directly for a ROM type of failure BEFORE they FIRE. A path I don't want to be on.

The challenge to us worriers (and yes I am one) is to learn to be comfortable spending our allocation after a lifetime of saving. I am attempting to do this by being comfortable blowing 3%.. As in blowing it and not giving a second thought.

Sounds easy, but when it comes to paying for unsubsidised Health care I immediately "optimise" and go for the max subsidy, i.e spend way less.

Its a disease I tell ya..:)