Author Topic: Stop worrying about the 4% rule  (Read 388264 times)

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1350 on: January 28, 2018, 10:07:20 PM »
A great and always relevant comic, see panel six, "Most people never let themselves die"

Totally on point CE.

privatefarmer

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Re: Stop worrying about the 4% rule
« Reply #1351 on: February 23, 2018, 07:47:09 AM »
Not sure if this has been discussed, but if you use a variable-withdrawal strategy you can actually take out upwards of 6-7%/year, depending on how much equities you're comfortable with. This requires you to take less out during bear markets, however, so would not be feasible for someone who must have 4% each year to live off of. For someone who is flexible, who can go a few years w/ very low withdrawals, a variable-withdrawal strategy should allow you to ultimately take out far more $$$ over the course of decades while never exhausting your portfolio. Paul Merriman goes into great detail about it and on his website shows how taking out 6% variable w/d each year using a 100% global equity portfolio would've done (spoiler alert : from 1970-present your portfolio would've kept its original value, inflation adjusted).

privatefarmer

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Re: Stop worrying about the 4% rule
« Reply #1352 on: February 23, 2018, 07:55:42 AM »
I agree just bc the cape is high doesn't mean a 4% won't work. But it's historically been a good indicator. But keeping 30% bonds on hand is worse at making your money last. Anything less than 80/20 starts to get detrimental fast.

what people need to remember is that CAPE is high bc inflation is LOW. thus, your w/d's will not be increasing that much year-to-year. As inflation increases, bond yields should increase, earnings should increase, P/Es should decrease, CAPE should decrease... It's all relative. Stocks only seem "expensive" if you're not comparing them to any other investable asset (ie bonds or real estate). When you realize that bonds and real estate are also "expensive", it makes more sense. Ultimately, the risk premium of equities should be there and if treasury bills return roughly the rate of inflation equities should maintain their real return.

rxmurphy

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Re: Stop worrying about the 4% rule
« Reply #1353 on: February 24, 2018, 06:36:50 AM »
A simple question that may have been addressed already in these 20-some odd pages, so apologies up front. For a person (like me) who really has a 30 year retirement expectation, based on my age, to start in about 2 years, is the 4% SWR a safe assumption? Safer than an early retiree with a 40 or 50 year retirement plan? I see lots of folks questioning the Trinity Study in that the SWR should be lower based on a longer retirement, but not a lot of discussion about a 30 year plan.  Thanks in advance!

boarder42

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Re: Stop worrying about the 4% rule
« Reply #1354 on: February 24, 2018, 06:48:03 AM »
A simple question that may have been addressed already in these 20-some odd pages, so apologies up front. For a person (like me) who really has a 30 year retirement expectation, based on my age, to start in about 2 years, is the 4% SWR a safe assumption? Safer than an early retiree with a 40 or 50 year retirement plan? I see lots of folks questioning the Trinity Study in that the SWR should be lower based on a longer retirement, but not a lot of discussion about a 30 year plan.  Thanks in advance!

It's as safe as you are flexible
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maizeman

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Re: Stop worrying about the 4% rule
« Reply #1355 on: February 24, 2018, 08:26:09 AM »
A simple question that may have been addressed already in these 20-some odd pages, so apologies up front. For a person (like me) who really has a 30 year retirement expectation, based on my age, to start in about 2 years, is the 4% SWR a safe assumption?

You have 25 years of expenses saved up and only need to get them to last 30 years. So 5 years worth of investment earnings over three decades. A constant 1.3% return after inflation would be more than enough.

Quote
Safer than an early retiree with a 40 or 50 year retirement plan?

A little bit, but not strikingly so. Take a look at the green line in this graph. (The blue line is to illustrate how just using conventional trinity style calculations with longer and longer retirement windows isn't a good way to estimate this because eventually bad start years -- 1970s and great depression -- drop out of the model so it doesn't actually produce more conservative estimates.)



Detailed methods and assumptions from this post earlier in this same thread.

EscapeVelocity2020

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Re: Stop worrying about the 4% rule
« Reply #1356 on: February 24, 2018, 08:18:33 PM »
A simple question that may have been addressed already in these 20-some odd pages, so apologies up front. For a person (like me) who really has a 30 year retirement expectation, based on my age, to start in about 2 years, is the 4% SWR a safe assumption?

You have 25 years of expenses saved up and only need to get them to last 30 years. So 5 years worth of investment earnings over three decades. A constant 1.3% return after inflation would be more than enough.

Quote
Safer than an early retiree with a 40 or 50 year retirement plan?

A little bit, but not strikingly so. Take a look at the green line in this graph. (The blue line is to illustrate how just using conventional trinity style calculations with longer and longer retirement windows isn't a good way to estimate this because eventually bad start years -- 1970s and great depression -- drop out of the model so it doesn't actually produce more conservative estimates.)
Detailed methods and assumptions from this post earlier in this same thread.

A few significant omissions and observations from your response -  first, inflation is obviously significant to success, and most of us have no idea what 'real' 1970-style inflation looks like.  We should probably plan for higher than 2-3% inflation, especially with all the historically inflationary inputs like higher wages, low tax rates, and low borrowing rates.

Second, you left out how important expenses are to the 4% rule.  You can expect success of 40k expenses on 1MM portfolio if expenses are fixed or at inflation.  What about health care?  What about college for my kids?  These 'luxuries' are certainly rising faster than inflation. 

The final thing I'd like to put out there is that 95% success does not mean that you are guaranteed to make it to 75+ years old and then have to tighten your belt if your were unlucky.  It means that if you are any one of the people that retired at a peak and experience an adverse sequence of returns; that you are going to struggle from that point forward.  It could be especially terrible this time around with good ACA healthcare plans melting quicker than the polar ice caps...

Sorry to rain on the 'stop worrying about the 4% rule' parade again, it has turned out to be a good parade for the 2009 retiree, but if you are just hitting 4% now and have a 30+ year retirement, maybe hang in there for 3% (unless you're in a sane country that provides basic healthcare to their population regardless of being employed).
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maizeman

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Re: Stop worrying about the 4% rule
« Reply #1357 on: February 24, 2018, 09:47:07 PM »
Second, you left out how important expenses are to the 4% rule.  You can expect success of 40k expenses on 1MM portfolio if expenses are fixed or at inflation.  What about health care?  What about college for my kids?  These 'luxuries' are certainly rising faster than inflation. 

I don't know if it's a question of tone over the internet, but using words like "omissions" sounds like you're accusing me of misrepresenting something. Is that a correct interpretation?

Anyway, I don't disagree with you that if a person ends up needing to spend more than 4% of their starting portfolio, that simulations which assume that they will spend 4% of their starting portfolio aren't going to be particularly informative.

secondcor521

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Re: Stop worrying about the 4% rule
« Reply #1358 on: February 24, 2018, 10:05:17 PM »
https://xkcd.com/386/

A few significant omissions and observations from your response -  first, inflation is obviously significant to success, and most of us have no idea what 'real' 1970-style inflation looks like.  We should probably plan for higher than 2-3% inflation, especially with all the historically inflationary inputs like higher wages, low tax rates, and low borrowing rates.

Inflation, including 1970s-style inflation, is accounted for in the studies that lead to the 4% rule.

Higher wages are only inflationary to the extent that they exceed productivity growth.  Higher wages exceeding productivity growth are a very recent phenomenon, like in the last few months, aren't they?

If low tax rates and low borrowing rates lead to high inflation, where were the low tax rates and low borrowing rates that lead to the 1970s-style inflation?

Second, you left out how important expenses are to the 4% rule.  You can expect success of 40k expenses on 1MM portfolio if expenses are fixed or at inflation.  What about health care?  What about college for my kids?  These 'luxuries' are certainly rising faster than inflation. 

Agreed.  Personally I inflate college expenses separately at 6%.  For health care I currently use an ACA plan with subsidies, where my OOP is tied to increases in the federal poverty level levels, not health care inflation rates.

The final thing I'd like to put out there is that 95% success does not mean that you are guaranteed to make it to 75+ years old and then have to tighten your belt if your were unlucky.

I would say it does mean that.  Assuming the future is no worse than the past, it means that you have a 1-in-20 chance of CPI-adjusted expenses over 30 years at 4%.  Of course, most people don't really suggest spending blindly until the end of one's retirement and then realizing that they're in trouble in the unlucky scenario.  Most people will adjust as they go along (which actually makes the 4% rule even safer).

It means that if you are any one of the people that retired at a peak and experience an adverse sequence of returns; that you are going to struggle from that point forward.  It could be especially terrible this time around with good ACA healthcare plans melting quicker than the polar ice caps...

Adverse sequence of returns are already accounted for in the studies that lead to the 4% rule.  I don't know why people think this is a new thing.

It will be interesting to see what happens with the ACA.

Sorry to rain on the 'stop worrying about the 4% rule' parade again, it has turned out to be a good parade for the 2009 retiree, but if you are just hitting 4% now and have a 30+ year retirement, maybe hang in there for 3% (unless you're in a sane country that provides basic healthcare to their population regardless of being employed).

No worries.

I have no idea where you got 3% from except that it is less than 4%.  It sounds like a number you pulled out of your ear without any data or analysis.  (Unlike the 4% rule, by the way.)  Certainly lower is safer in general in terms of not running out of money in retirement, but as has been stated by others elsewhere on this board, you may have to work more of your healthiest years to gain that additional margin of safety which may not ultimately be needed.
« Last Edit: February 24, 2018, 10:07:26 PM by secondcor521 »
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EscapeVelocity2020

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Re: Stop worrying about the 4% rule
« Reply #1359 on: February 24, 2018, 10:43:10 PM »
@maizeman certainly not intending 'misrepresentation', much more the idea of oversimplification.  When people stop thinking for themselves, especially when equities are riding high and politicians are handing out candy, maybe it's not the best time to expect to be on the good side of P50.

@2ndCor - hey, I like your positivism.  I think I heard you on ER.org and Bogleheads, so you know what you are talkin' about.  No worries there and I appreciate your well structured comment.  Inevitably, we are all subject to both the 'system' which is human engineered (and effects our interest rate (which ultimately affects inflation, but we will see), taxation, and future returns on equities and fixed income) and natural (which is almost wholly unpredictable). 

Sadly, if you are a true businessman like Gates or Buffet, you crush the successful unknowns.  You buy them out for more than their emergent business could imagine in one lifetime.  Buffet and Gates have more money than several lifetimes could imagine spending.  In other words, I think the fantastic distributed growth we have enjoyed up until recent times may be gone forever.  The rise of Gates, Bezos, and Musk, is like a perfect echo to Vanderbilt, Carnegie, Rockefeller, and Morgan.
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secondcor521

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Re: Stop worrying about the 4% rule
« Reply #1360 on: February 24, 2018, 10:52:45 PM »
In other words, I think the fantastic distributed growth we have enjoyed up until recent times may be gone forever.  The rise of Gates, Bezos, and Musk, is like a perfect echo to Vanderbilt, Carnegie, Rockefeller, and Morgan.

You might enjoy reading the book "The Rational Optimist" for a well-reasoned counterpoint to the above.

Although I've been reading about and studying FIRE for about 25 years, at the end of the day I'm just SGOTI.
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cerat0n1a

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Re: Stop worrying about the 4% rule
« Reply #1361 on: February 25, 2018, 02:28:50 AM »
You might enjoy reading the book "The Rational Optimist" for a well-reasoned counterpoint to the above.

Although it pays to remember that its author was the chairman of the first UK bank to have a run on it in 150+ years, with over 1 billion withdrawn a single day and police called to branches to restore order. It then had to be taken into public ownership and bailed out by the government, adding approx 100 billion to the UK national debt - taking it from 38% of GDP at the time to 45% of GDP. A little less optimism and a little more attention to his bank's ridiculous business model...

boarder42

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Re: Stop worrying about the 4% rule
« Reply #1362 on: February 25, 2018, 04:31:50 AM »
Every day extra you work passed 4% swr guarantees just 1 thing. You will have worked an extra day. The older you are the more likely you are to die first than run out of money I'd prefer to not work extra and be flexible in retirement. And I'll be walking away from a 250k job with private stock making me over 100k a year in returns when I leave.
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TomTX

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Re: Stop worrying about the 4% rule
« Reply #1363 on: February 25, 2018, 07:32:01 AM »
Every day extra you work passed 4% swr guarantees just 1 thing. You will have worked an extra day. The older you are the more likely you are to die first than run out of money I'd prefer to not work extra and be flexible in retirement. And I'll be walking away from a 250k job with private stock making me over 100k a year in returns when I leave.

Yep. Maizeman, care to bring out your graphs again?

Always great when we get people here who obviously haven't actually read the thread before attacking the 4% rule. Not.
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matchewed

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Re: Stop worrying about the 4% rule
« Reply #1364 on: February 25, 2018, 08:17:40 AM »
So this is yet another if we throw away or break the assumptions the math no longer works questions eh?

maizeman

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Re: Stop worrying about the 4% rule
« Reply #1365 on: February 25, 2018, 08:29:50 AM »
Yep. Maizeman, care to bring out your graphs again?

Always great when we get people here who obviously haven't actually read the thread before attacking the 4% rule. Not.

Well I know EV has read at least a good chunk of the thread and seen those same graphs before because I remember making a special "more serious research article style" formatted version for him or her back on page 15.

For anyone just joining the conversation at this point, this is a reference to a style of graph I put together last year that displays the risk of death and the risk of going bankrupt at the same time, which some people have found very helpful for putting concerns about running out of money in their old age into perspective.

Here is an example using the life expectancy for an american male who pushed the big red button and FIRED at 45 with 25x his (actual) annual spending in stocks.

Exflyboy

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Re: Stop worrying about the 4% rule
« Reply #1366 on: February 25, 2018, 12:50:16 PM »
Looks like the probability of being dead between the ages of 70 and 100 is unacceptably high...:)

Exflyboy

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Re: Stop worrying about the 4% rule
« Reply #1367 on: February 25, 2018, 05:15:12 PM »
In support of EV I will point out that the "full freight" cost of our shitty HC plan is currently $1100/month.. I don't know what that was say 5 years ago but its currently the cost for a mid to late 50"s couple on a Bronze plan is $13k per year in premiums alone, add to that the OOP costs ($13k if you both had pre-existing conditions, or developed something).

So thats up to $26k/year today. How will costs increase and will the ACA subsidies be there for much longer?

So while I agree 4% works, that 4% could be over half a million bucks more than the days when your employer paid almost all your HC costs. And thats assuming you don't have kids.

I am thankful for 1) the ACA subsidies and 2) we are both in excellent health so far.

As to college costs, while I have sympathy, funding your kids college is at least a choice whereas realistically HC is not.

desk_jockey

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Re: Stop worrying about the 4% rule
« Reply #1368 on: February 25, 2018, 09:37:13 PM »
Looks like the probability of being dead between the ages of 70 and 100 is unacceptably high...:)
 
Looking for suggestions to mitigate the risk. 

cerat0n1a

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Re: Stop worrying about the 4% rule
« Reply #1369 on: February 26, 2018, 01:18:20 AM »
Looks like the probability of being dead between the ages of 70 and 100 is unacceptably high...:)
 
Looking for suggestions to mitigate the risk.
You won't be surprised to hear that there's communities on the internet talking about life extension and using themselves as guinea pigs by taking various supplements that have been shown to work on rats etc.

boarder42

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Re: Stop worrying about the 4% rule
« Reply #1370 on: February 26, 2018, 06:06:02 AM »
Looks like the probability of being dead between the ages of 70 and 100 is unacceptably high...:)
 
Looking for suggestions to mitigate the risk.
You won't be surprised to hear that there's communities on the internet talking about life extension and using themselves as guinea pigs by taking various supplements that have been shown to work on rats etc.

google's futurist predicts the millenial generation will be the first to have to decide to die, we will reach a point where we can fix most mental failures and physical failures that people can continue good quality of life more or less indefinitely.  So either the govt or individuals will have to set life limits on human life.
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DavidAnnArbor

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Re: Stop worrying about the 4% rule
« Reply #1371 on: February 26, 2018, 06:35:54 AM »
"more pot pies!"

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nereo

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Re: Stop worrying about the 4% rule
« Reply #1372 on: February 26, 2018, 08:09:18 AM »
Looks like the probability of being dead between the ages of 70 and 100 is unacceptably high...:)
 
Looking for suggestions to mitigate the risk.
You won't be surprised to hear that there's communities on the internet talking about life extension and using themselves as guinea pigs by taking various supplements that have been shown to work on rats etc.

google's futurist predicts the millenial generation will be the first to have to decide to die, we will reach a point where we can fix most mental failures and physical failures that people can continue good quality of life more or less indefinitely.  So either the govt or individuals will have to set life limits on human life.
...well there's always the SciFi idea of the 'Singularity' - uploading our consciousness into a computer to live in perpetuity...
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sol

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Re: Stop worrying about the 4% rule
« Reply #1373 on: February 26, 2018, 08:34:36 AM »
...well there's always the SciFi idea of the 'Singularity' - uploading our consciousness into a computer to live in perpetuity...

Yea, nobody wants me around forever.  Society stops evolving the moment individuals stop dying.  I loved my grandfather, but he was a born and raised a racist and the world is better off with his generation moved on.  I'm sure future generations will say something similar about me.

And besides, the singularity isn't exactly a FIRE utopia either.  Just think of all of the problems around maintaining a SWR in a virtual world.  Who's going to pay all of the maintenance workers who keep the servers running?  Where does the electricity come from, and who maintains that infrastructure?  How does asset ownership in the physical world translate into income streams in the virtual world?

Personally I think the whole idea is a hoax.  By the time we have generalist AI capable of indistinguishably reproducing my forum personality, that AI will also be capable of simultaneously reproducing every other forum member's personality too, and all of those digital representations of long-dead individuals will exist together in a hive mind.  In that situation, I think it would be pretty clear that fencing off one little personality (mine, yours, MMM's) as distinct from the others is sort of inefficiently redundant.  Why keep sol alive as a forum bot?  Just to amuse the other forum bots?  Can bots even be amused?  The hive mind would surely have to recognize that sol is kind of a dumb ass, on 99% of the possible topics of discussion, so why devote resources to letting him continue to be stupid when there are other parts of the hive mind that can do better? 

The singularity proponents want to live forever, but I'm pretty sure that digital superintelligence will have better things to do than play Renaissance Faire all day with the personalities of stupid racist dead people who are only holding the world back. 
« Last Edit: February 26, 2018, 10:58:20 AM by sol »

MasterStache

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Re: Stop worrying about the 4% rule
« Reply #1374 on: February 26, 2018, 09:05:27 AM »
Looks like the probability of being dead between the ages of 70 and 100 is unacceptably high...:)
 
Looking for suggestions to mitigate the risk.

Retire and enjoy life!

Exflyboy

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Re: Stop worrying about the 4% rule
« Reply #1375 on: February 26, 2018, 09:36:35 AM »
We could all be brains in a jar in any case... The brain only knows about its surroundings (i.e outside the skull) because of electrical impulses provided by sensors.

If a computer is providing all that stimulation it would be indistinguishable from the "real" world.

So maybe we already are immortal...:)

tyort1

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Re: Stop worrying about the 4% rule
« Reply #1376 on: February 26, 2018, 09:48:34 AM »
...well there's always the SciFi idea of the 'Singularity' - uploading our consciousness into a computer to live in perpetuity...

Yea, nobody wants me around forever.  Society stops evolving the moment individuals stop dying.  I loved my grandfather, but he was a born and raised a racist and the world is better off with his generation moved on.  I'm sure future generations will say something similar about me.

And besides, the singularity isn't exactly a FIRE utopia either.  Just think of all of the problems around maintaining a SWR in a virtual world.  Who's going to pay all of the maintenance workers who keep the servers running?  Where does the electricity come from, and who maintains that infrastructure?  How does asset ownership in the physical world translate into income streams in the virtual world?

Personally I think the whole idea is a hoax.  By the time we have generalist AI capable of indistinguishably reproducing my forum personality, that AI will also be capable of simultaneously reproducing every other forum member's personality too, and all of those digital representations of long-dead individuals will exist together in a hive mind.  In that situation, I think it would be pretty clear that fencing off one little personality (mine, yours, MMM's) as distinct from the others is sort of inefficiently redundant.  Why keep sol alive as forum bot?  Just to amuse the other forum bots?  Can bots even be amused?  The hive mind would surely have to recognize that sol is kind of a dumb ass, on 99% of the possible topics of discussion, so why devote resources to letting him continue to be stupid when there are other parts of the hive mind that can do better? 

The singularity proponents want to live forever, but I'm pretty sure that digital superintelligence will have better things to do than play Renaissance Faire all day with the personalities of stupid racist dead people who are only holding the world back.

Maybe the computer super AI only allows the top 4% of humanity to upload to singularity status.  Then we'll have a whole 'nother 4% rule to worry about! 
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AdrianC

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Re: Stop worrying about the 4% rule
« Reply #1377 on: February 26, 2018, 10:34:39 AM »
In support of EV I will point out that the "full freight" cost of our shitty HC plan is currently $1100/month.. I don't know what that was say 5 years ago but its currently the cost for a mid to late 50"s couple on a Bronze plan is $13k per year in premiums alone, add to that the OOP costs ($13k if you both had pre-existing conditions, or developed something).

So thats up to $26k/year today. How will costs increase and will the ACA subsidies be there for much longer?

So while I agree 4% works, that 4% could be over half a million bucks more than the days when your employer paid almost all your HC costs. And thats assuming you don't have kids.

4% works only if your $26K health cost increases at regular inflation rates. If we think health care costs will rise faster than normal inflation (I do) then we have to account for that in our expenses estimate. The same methodology that gave us the 4% rule still works, but because of the extra rising costs we end up with a somewhat lower SWR.

I used $28K for healthcare inflated at 13% till we reach medicare age. For a 95% success rate in cFIREsim I get a 3.5% initial WR. Everyone's answer will be different, of course.


nereo

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Re: Stop worrying about the 4% rule
« Reply #1378 on: February 26, 2018, 10:47:30 AM »
In support of EV I will point out that the "full freight" cost of our shitty HC plan is currently $1100/month.. I don't know what that was say 5 years ago but its currently the cost for a mid to late 50"s couple on a Bronze plan is $13k per year in premiums alone, add to that the OOP costs ($13k if you both had pre-existing conditions, or developed something).

So thats up to $26k/year today. How will costs increase and will the ACA subsidies be there for much longer?

So while I agree 4% works, that 4% could be over half a million bucks more than the days when your employer paid almost all your HC costs. And thats assuming you don't have kids.

4% works only if your $26K health cost increases at regular inflation rates. If we think health care costs will rise faster than normal inflation (I do) then we have to account for that in our expenses estimate. The same methodology that gave us the 4% rule still works, but because of the extra rising costs we end up with a somewhat lower SWR.

I used $28K for healthcare inflated at 13% till we reach medicare age. For a 95% success rate in cFIREsim I get a 3.5% initial WR. Everyone's answer will be different, of course.

I get what you are saying, but the SWR doesn't change - only your expenses do. On one hand that may seem like splitting grapes, but 4% doesn't stop working and lead to increased portfolio failures, rather more of your budget will go towards health insurance/care.  Ultimately this may require you have a larger portfolio to provide for bigger annual withdraws, but how you plug the numbers in matters when planning.
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Exflyboy

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Re: Stop worrying about the 4% rule
« Reply #1379 on: February 26, 2018, 11:19:04 AM »
In support of EV I will point out that the "full freight" cost of our shitty HC plan is currently $1100/month.. I don't know what that was say 5 years ago but its currently the cost for a mid to late 50"s couple on a Bronze plan is $13k per year in premiums alone, add to that the OOP costs ($13k if you both had pre-existing conditions, or developed something).

So thats up to $26k/year today. How will costs increase and will the ACA subsidies be there for much longer?

So while I agree 4% works, that 4% could be over half a million bucks more than the days when your employer paid almost all your HC costs. And thats assuming you don't have kids.

4% works only if your $26K health cost increases at regular inflation rates. If we think health care costs will rise faster than normal inflation (I do) then we have to account for that in our expenses estimate. The same methodology that gave us the 4% rule still works, but because of the extra rising costs we end up with a somewhat lower SWR.

I used $28K for healthcare inflated at 13% till we reach medicare age. For a 95% success rate in cFIREsim I get a 3.5% initial WR. Everyone's answer will be different, of course.

Sounds like a reasonable guesstimate. This would have HC costs doubling every 4 to 5 years.. So roughly $80k by the time I get to Medicare in 8 years time (assuming its $20k today).

Of course one would hope (hahaha) that as that rate of growth will make HC simply un-affordable for the majority of Americans, that those of kind of price increases will have to subside to something that at least half the population can afford.

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Re: Stop worrying about the 4% rule
« Reply #1380 on: February 26, 2018, 01:11:01 PM »
Yup. I don't see "you may be wrong about your estimated expenses" as an issue with the math about the 4% SWR. It's a separate question of "how accurate are the numbers you're plugging into the 4% SWR formula to figure out how much you need to save." Like nereo I realize this may sound like an academic distinction, but I think it reduces confusion for newbies reading the thread if we avoid confounding problems with the SWR rate math itself and problems with accurately estimating the variables an individual person plugs into that SWR math when they're deciding how much they need to save before they consider themselves FI.

With regards to the higher rate of healthcare inflation, remember that healthcare in already a component of the CPI and the higher inflation for healthcare also pulls the overall CPI number up so if you pull it out and look at a higher inflation rate for it specifically, it also means you should adjust your assumptions about overall inflation for the rest of your spending downwards.

It still may make sense to split them out, because the proportion of total spending which goes to healthcare for a FIREd individual may be substantially higher than the proportion in the overall population, but assuming healthcare will inflate at a higher rate and all your other expenses will inflate at a rate that includes the higher rate of healthcare is double counting pessimism.

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Re: Stop worrying about the 4% rule
« Reply #1381 on: February 26, 2018, 01:35:33 PM »
But @maizeman, I thought you were an anxious individual like me.. What is this "don't worry because its double counting pessimism" stuff..:)

I have saved to the point of ridiculousness, with a WR of about 0.4%.. Just to make sure I have some cushion you see!

You are right of course this does not invalidate the math of the 4% rule one bit.

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Re: Stop worrying about the 4% rule
« Reply #1382 on: February 26, 2018, 01:42:29 PM »
Oh absolutely do worry!

Just find one best home in your calculations for each terrible thing which could possibly go wrong. Then if you're tempted to worry about it somewhere else and correct for the same risk a second time, just remember: "Hey I've taken into account (radical healthcare inflation/the odds of living to 120/a big uptick in inflation/minor nuclear war/the odds I'll start a harem at 85 and having to send a dozen kids to college when I'm in my early 100s) in my math already."
« Last Edit: February 26, 2018, 01:47:34 PM by maizeman »

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Re: Stop worrying about the 4% rule
« Reply #1383 on: February 26, 2018, 11:51:21 PM »
I don't intend to post as a pessimist when I post my 'wait, but what about' posts;  hopefully I provide food for thought.

I'm very skeptical of headline inflation - even chained-CPI is very different from what a young 'individual' would expect.  To ignore inflation, or say that inflation is counted in the 4% SWR literature is to read one thing superficially and not start studying it as it pertains to your own situation.  My hope would be that folks continue to educate in this forum as to things like the good starting point and yet potential pitfalls of the 4% rule.

One last point, there was a comment against my statement that 95% success means you get to 75+ yo and then struggle.  I made my comment about those 55 - 65 y.o. ER's in 2007 that then hit 2008-2009 and lost 37% or more (sometimes painfully more) of their nest egg.  Most of them bailed out as they "played chicken" with Wall St. and pulled right.  They are doing OK today, but nothing like if they had either been more conservative before the crash or still been in the accumulation phase and benefiting from depressed stock price opportunity. 

But here we are.  As long as we are aware of the nuances of the basis of our decisions, then we should be ready for what comes in the foreseeable future.  Sadly, 30+ years includes many things that cannot possibly be foreseen.  But if you are willing to make it work and aware of what mistakes you might be making, then that shouldn't worry us.

Hopefully that clarifies my position on the somewhat outdated Trinity Study.

   
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Re: Stop worrying about the 4% rule
« Reply #1384 on: February 27, 2018, 12:36:43 AM »
Not at all..

In fact I am very skeptical of the "religion of 4%" or any other doctrine we hold to be true, especially as its all based on historical data which may or may not hold true going forwards.

Heck I did mention my 0.4% WR right?..:).. That mostly happened by happy accident.

2008 for me was a valuable learning experience.. I'd lost so much I figured I'd just keep buying. I mean what else did i have to lose?

Now in retirement I have enough bond funds to last roughly 10 years plus pensions to draw on if things got really bad.

So pessimism is not a bad thing to me, if I end up with a huge pile o money that I can't possibly spend before I die.. Well then I was over pessimistic.. so bite me..:)


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Re: Stop worrying about the 4% rule
« Reply #1385 on: February 27, 2018, 05:17:35 AM »
I don't intend to post as a pessimist when I post my 'wait, but what about' posts;  hopefully I provide food for thought.

I'm very skeptical of headline inflation - even chained-CPI is very different from what a young 'individual' would expect.  To ignore inflation, or say that inflation is counted in the 4% SWR literature is to read one thing superficially and not start studying it as it pertains to your own situation.  My hope would be that folks continue to educate in this forum as to things like the good starting point and yet potential pitfalls of the 4% rule.

One last point, there was a comment against my statement that 95% success means you get to 75+ yo and then struggle.  I made my comment about those 55 - 65 y.o. ER's in 2007 that then hit 2008-2009 and lost 37% or more (sometimes painfully more) of their nest egg.  Most of them bailed out as they "played chicken" with Wall St. and pulled right.  They are doing OK today, but nothing like if they had either been more conservative before the crash or still been in the accumulation phase and benefiting from depressed stock price opportunity. 

But here we are.  As long as we are aware of the nuances of the basis of our decisions, then we should be ready for what comes in the foreseeable future.  Sadly, 30+ years includes many things that cannot possibly be foreseen.  But if you are willing to make it work and aware of what mistakes you might be making, then that shouldn't worry us.

Hopefully that clarifies my position on the somewhat outdated Trinity Study.

Well the inflation discussion has been had before as well. Every individual's personal inflation will be different (regardless of youthfulness). I don't think anyone is "ignoring" inflation, just stating that you have to incorporate it into your spending plan. As others pointed the actions you take to mitigate particular inflationary risks depends on what is inflating. I haven't seen anyone say ignore inflation or to say that inflation is not a risk. Just that as it pertains to the 4% rule it is in fact incorporated into the model and that it is still just a model and you as an individual will have to adjust accordingly.

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Re: Stop worrying about the 4% rule
« Reply #1386 on: February 27, 2018, 05:46:31 AM »
Well the inflation discussion has been had before as well. Every individual's personal inflation will be different (regardless of youthfulness). I don't think anyone is "ignoring" inflation, just stating that you have to incorporate it into your spending plan. As others pointed the actions you take to mitigate particular inflationary risks depends on what is inflating. I haven't seen anyone say ignore inflation or to say that inflation is not a risk. Just that as it pertains to the 4% rule it is in fact incorporated into the model and that it is still just a model and you as an individual will have to adjust accordingly.

You speak very well for yourself, but do you represent everyone?  And I'm still not sure you get just how tough higher than expected  inflation might get on a fixed income.

Also, most ER bloggers have around 2M and 30k or more blog income (Root of Good, Rb40, MrTako, MMM, 1500days) so it's not unreasonable to say many folks that ER intentionally do so very conservatively.
« Last Edit: February 27, 2018, 05:58:55 AM by EscapeVelocity2020 »
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Re: Stop worrying about the 4% rule
« Reply #1387 on: February 27, 2018, 05:55:26 AM »
Well the inflation discussion has been had before as well. Every individual's personal inflation will be different (regardless of youthfulness). I don't think anyone is "ignoring" inflation, just stating that you have to incorporate it into your spending plan. As others pointed the actions you take to mitigate particular inflationary risks depends on what is inflating. I haven't seen anyone say ignore inflation or to say that inflation is not a risk. Just that as it pertains to the 4% rule it is in fact incorporated into the model and that it is still just a model and you as an individual will have to adjust accordingly.

You speak very well for yourself, but do you represent everyone?  And I'm still not sure you get just how tough higher than expected  inflation might get on a fixed income.

I don't think its just @matchewed - inflation and CPI has been discussed at length over this thread and others.  Bottom line - yes the CPI is factored into the 4% guideline, and yes an individual's inflationary risks may differ from that.  Each person needs to do their due diligence and determine where their risks lie.
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Re: Stop worrying about the 4% rule
« Reply #1388 on: February 27, 2018, 06:06:10 AM »
regardless of inflation of one service or another in ones life one can blindly follow the 4% rule with a larger equity stake and assuming the future is like the past - which no matter what your plan is if you're going to stop earning money and live off your assets you have to assume this to some level.  that person is very likely to live a long happy retirement and never worry about money - infact they are more likely to die with multiple millions more than they started with than to have to worry about running out of money. 

But around here there is mostly an understanding that flexiblity is key the larger the withdrawal rate becomes.  and thru cutting spending or earning some money hustling in FIRE a retiree can make themselves extremely safe. 

you can continue to try to put out random what ifs and site some data that its been increasing faster but to that end you should never FIRE b/c what if capitalism falls apart and all the markets tank or we're stuck in hyper inflation for 50 years.  We dont know what the future will bring but we can be optimistic it will be like the past and choose to not do the one guaranteed thing that working longer brings you - you're closer to dieing than you were the day before.
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AdrianC

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Re: Stop worrying about the 4% rule
« Reply #1389 on: February 27, 2018, 06:49:18 AM »
Yup. I don't see "you may be wrong about your estimated expenses" as an issue with the math about the 4% SWR. It's a separate question of "how accurate are the numbers you're plugging into the 4% SWR formula to figure out how much you need to save." Like nereo I realize this may sound like an academic distinction, but I think it reduces confusion for newbies reading the thread if we avoid confounding problems with the SWR rate math itself and problems with accurately estimating the variables an individual person plugs into that SWR math when they're deciding how much they need to save before they consider themselves FI.

Fair enough. 25 times 'X' is a fine rule of thumb.

Quote
With regards to the higher rate of healthcare inflation, remember that healthcare in already a component of the CPI and the higher inflation for healthcare also pulls the overall CPI number up so if you pull it out and look at a higher inflation rate for it specifically, it also means you should adjust your assumptions about overall inflation for the rest of your spending downwards.

It still may make sense to split them out, because the proportion of total spending which goes to healthcare for a FIREd individual may be substantially higher than the proportion in the overall population, but assuming healthcare will inflate at a higher rate and all your other expenses will inflate at a rate that includes the higher rate of healthcare is double counting pessimism.

Yes, I'm double counting, but that hardly makes a difference (13% vs about 2%). It's going to be more than CPI, simply because each year we're one year older. I used 13% and got an answer that was pleasing. It seems sufficiently conservative, some would say ridiculously over the top, but it works for me (the stash is big enough) so it's not an issue. YMMV.

I thought the CFIREsim extra expenses method was a good one. You could do a present value calculation, but whatever method you use, it's going to result in a higher starting 'X'. Unless you just ignore healthcare inflation.

maizeman

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Re: Stop worrying about the 4% rule
« Reply #1390 on: February 27, 2018, 07:30:15 AM »
Yes, I'm double counting, but that hardly makes a difference (13% vs about 2%).
It actually in many scenarios it will make a significant difference because the lower inflation number is applied to the majority (hopefully) of your spending so smaller changes in that number will have an outsized effect on overall spending growth.

Quote
It's going to be more than CPI, simply because each year we're one year older.

I've never though of this as part of inflation, but you're certainly right that every year you're statistically more likely to need more healthcare than the year before. I haven't tried to put a number on that before. I found this paper* which claims the average 20 year old will consume $1,448 in healthcare spending, while the average 85 year old will consume $17,071 dollars.** That works out to a CAGR in healthcare spending of 3.86% independent of (and on top of) overall healthcare cost inflation.

Now that's a bit pessimistic because it is looking at total medical expenditures, not out of pocket spending. The ACA has a lot of wealth transfers from healthy young people to less healthy older people built into it, which slow down the rate of out of pocket spending growth relative to total healthcare expenditure growth by raising your total spending when you're young, and lowering it when you're old. And of course after one ages out of ACA and into medicare, a big chunk of the total costs are picked up by the taxpayer (or by your own previous medicare tax payments if you prefer), but either way aren't being paid out of your stash.

Now regular healthcare cost inflation has been running 2-5% in recent years when regular inflation was 0.5-2%. So I think one could make a reasonably convincing case for inflating the cost of healthcare in your simulation by as much as 7% above base inflation (up to 3% inflation premium for healthcare above regular inflation, plus up to 4% annual healthcare spending growth from being a year older each year).

* https://www.ncbi.nlm.nih.gov/pmc/articles/PMC1361028/

** I should also mention these are inflation adjusted 2000 dollars, so the numbers would be higher today, but the ratio between the two is the same.

Quote
I used 13% and got an answer that was pleasing. It seems sufficiently conservative, some would say ridiculously over the top, but it works for me (the stash is big enough) so it's not an issue. YMMV.

I think this statement is a good example of the root cause of many disagreements about the 4% rule. You've got more than enough money given regular assumptions, so when you do the math you're trying to to figure out how crazy things can get and you'd still be okay. In your shoes I'd probably do the same thing, because it seems like it would help a person sleep better at night. Others who are still in the accumulation phase are often just trying to figure out what a good set of regular assumptions to use are.

The first task obviously calls for a much more pessimistic set of assumptions than the second one, yet people mix the two discussions together without usually specifying which task they're currently working on themselves (although in this case you did explicitly explain what was motivating your assumptions, which was quite helpful, thanks).

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Re: Stop worrying about the 4% rule
« Reply #1391 on: February 27, 2018, 08:07:29 AM »
Just to be clear on the inflation thing.....CPI is fundamentally BS.   It excludes food and energy, it makes up a figure for housing via imputed rent that is not based on any current information, it excludes government and employer funded health care, and on and on.  Some of these things will be very meaningful or less meaningful to a FIREe.

Adrian is right to be thinking about it though and the numbers seem about right without subsidies.

a lot of the items can be mitigated with substitutes, cutting back, moving, etc but health care is completely unknown, unpredictable, and CAN be a significant part of ones budget especially for the lower spending FIREe....I mean an extra $10k on a $40k budget would be crippling or massive deterioration in desired lifestyle.  So there are three FIRE issues for HC - (1) real inflation of it that typically exceeds CPI, (2) inflation due to aging/becoming less healthy, and (3) loss of subsidies.  HC is certainly one of my fears.   


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Re: Stop worrying about the 4% rule
« Reply #1392 on: February 27, 2018, 08:48:08 AM »
Just to be clear on the inflation thing.....CPI is fundamentally BS.   It excludes food and energy, it makes up a figure for housing via imputed rent that is not based on any current information, it excludes government and employer funded health care, and on and on.  Some of these things will be very meaningful or less meaningful to a FIREe.


No.
You can read about the CPI here:
https://www.bls.gov/cpi/#

Note that the data they collect is publicly available and broken down into individual categories and by region. As everyone's situation in retirement may be different, you can look at which categories and regions matter most to you and use that to adjust your WR and strategy.

The BLS calculates inflation both with and without food and energy prices, and there's good reason for doing so.  It also distinguishes between urban and rural consumers. There is no 'made up' information un-grounded in 'current information'.

here's a good article which goes into detail the misperceptions people have about the CPI.
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AdrianC

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Re: Stop worrying about the 4% rule
« Reply #1393 on: February 27, 2018, 09:56:19 AM »
The first task obviously calls for a much more pessimistic set of assumptions than the second one, yet people mix the two discussions together without usually specifying which task they're currently working on themselves (although in this case you did explicitly explain what was motivating your assumptions, which was quite helpful, thanks).

Thanks for the post, Maizeman. Very good.

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Re: Stop worrying about the 4% rule
« Reply #1394 on: February 27, 2018, 10:16:36 AM »
...the one guaranteed thing that working longer brings you - you're closer to dieing [sic] than you were the day before.

You (and Maizeman, and many other ER bloggers) bring this up frequently.  As a counterpoint, there is also plently of correlation between wealth and longevity.  Of course, if working is more stressful than poverty, then I agree that you're better of ER'ing.
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boarder42

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Re: Stop worrying about the 4% rule
« Reply #1395 on: February 27, 2018, 10:22:01 AM »
...the one guaranteed thing that working longer brings you - you're closer to dieing [sic] than you were the day before.

You (and Maizeman, and many other ER bloggers) bring this up frequently.  As a counterpoint, there is also plently of correlation between wealth and longevity.  Of course, if working is more stressful than poverty, then I agree that you're better of ER'ing.

having a pile of money you can live off of in the bank that allows you to FIRE i would say your situation linked describes exactly what a FIREe at 4% SWR would be on the wealthy not poor side of that equation.  the chance of ending up in poverty are greatly over blown in most of your statements and its not really mitigated too well by just accruing more assets.
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Re: Stop worrying about the 4% rule
« Reply #1396 on: February 27, 2018, 12:23:29 PM »
You (and Maizeman, and many other ER bloggers) bring this up frequently.  As a counterpoint, there is also plently of correlation between wealth and longevity.  Of course, if working is more stressful than poverty, then I agree that you're better of ER'ing.

I couldn't find the study in the Lancet that that article is talking about. Based on the effect sizes reported though it sounds like the conclusions were a lot like those from this JAMA paper* which found at "The gap in life expectancy between the richest 1% and poorest 1% of individuals [based on household income not net worth] was 14.6 years (95% CI, 14.4 to 14.8 years) for men and 10.1 years (95% CI, 9.9 to 10.3 years) for women." One thing you have to keep in mind though is that causality potentially runs in both directions. The JAMA study at least is looking at income and risk of death in the same year using anonymized tax return data. Generally very sick people who are the most likely to die in the next year are going to have extremely low incomes because they are sick and therefore cannot work.

In addition, being wealthy can be a double edged sword in the modern american healthcare system. Wealthy patents tends to correlate with receiving more medical procedures because people who experience more medical procedures report higher levels of patient satisfaction, and hospitals want to nurture potential donors (see "Red Blanket Patients"). But at the same time patients who receive more treatments, and hence are happier with their medical care, may actually have worse outcomes (ie die more often) than patients whose treatment decisions aren't influenced by trying to optimize patient satisfaction.**

Now that said, I don't doubt that being wealthy -- or at least not poor -- also does some good things for your lifespan by reducing stress and make sure you do have access to healthcare if and when you need it so my estimates of how fast people are likely to die, taken from the SSAs mortality tables, are likely to be a bit optimistic for the average FIREee who will have a lower stress lifestyle (if optimistic is the right word for thinking people will die faster and hence be less likely to live long enough to have to worry about having enough money). I remain on the look out for a data source on mortality/life expectancy that would be even more representative of the folks on this forum.

* Source: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4866586/

** Source: https://jamanetwork.com/journals/jamainternalmedicine/fullarticle/1108766

TempusFugit

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Re: Stop worrying about the 4% rule
« Reply #1397 on: February 27, 2018, 01:40:33 PM »
You (and Maizeman, and many other ER bloggers) bring this up frequently.  As a counterpoint, there is also plently of correlation between wealth and longevity.  Of course, if working is more stressful than poverty, then I agree that you're better of ER'ing.

...at the same time patients who receive more treatments, and hence are happier with their medical care, may actually have worse outcomes (ie die more often) than patients whose treatment decisions aren't influenced by trying to optimize patient satisfaction.**


I heard a story on Radiolab, I believe that referenced a study done that compared outcomes on patients who went to the emergency room for heart attacks / symptoms of, and the comparison was related to the seniority of the doctors at the hospital during those days.  I can't recall the details of why it was less experienced doctors, perhaps something about holidays or conference season when so many senior cardiologists are travelling.  In any regard, the conclusion was that you had a better chance of a good outcome if you had the rookie doctors rather than the senior doctors because the less experienced doctors were less likely to use more invasive treatments.  In other words, just as you say, oftentimes the best treatment is no treatment or very mild treatments such as meds rather than procedures.

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Re: Stop worrying about the 4% rule
« Reply #1398 on: February 27, 2018, 01:56:22 PM »
I bet the story you heard was based on was this study: "The Startling Benefit of Cardiology Meetings." A really clever approach to analyzing the data and a fascinating -- if rather worrying -- result.

Quote
Sixty percent of patients with cardiac arrest who were admitted to a teaching hospital during the days when cardiologists were at scientific meetings died within 30 days, compared to 70 percent of patients who were admitted on non-meeting days.

News article: https://hms.harvard.edu/news/startling-benefit-cardiology-meetings
Original article: https://jamanetwork.com/journals/jamainternalmedicine/fullarticle/2038979

TempusFugit

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Re: Stop worrying about the 4% rule
« Reply #1399 on: February 27, 2018, 02:14:48 PM »
I bet the story you heard was based on was this study: "The Startling Benefit of Cardiology Meetings." A really clever approach to analyzing the data and a fascinating -- if rather worrying -- result.

Quote
Sixty percent of patients with cardiac arrest who were admitted to a teaching hospital during the days when cardiologists were at scientific meetings died within 30 days, compared to 70 percent of patients who were admitted on non-meeting days.

News article: https://hms.harvard.edu/news/startling-benefit-cardiology-meetings
Original article: https://jamanetwork.com/journals/jamainternalmedicine/fullarticle/2038979

Yep, that's the one.