Author Topic: Stop worrying about the 4% rule  (Read 465123 times)

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1600 on: October 19, 2018, 08:39:10 AM »
Except for the spectre of approaching death.

Let's face it people shooting for 2%WR or lower a secretly using the "if I die at my desk" strategy as a way to ensure they never have to worry about running out of money and perhaps even better "if I die at my desk I never have to face the scary possibility of actually having to stop working!" So I don't think death holds the same concern for them as it does for folks who are eager to retire and get off the hamster wheel. ;-)

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1601 on: October 19, 2018, 09:18:19 AM »
The other item people forget to think about is the spending aspect of a WR. Spending is not a constant over 50 years.

When talking about %WRs spending is assumed to be appropriately budgeted. If you are at 2%WR and don't have a budget you can live with or you are at 8%WR and have 300% luxury spending built in than there is no point trying to even compare the two.

Before you bother working out a withdrawal rate you need to determine how much annual budget you need for your retirement. If you fail at that step nothing you do further down the planning process is going to be reliable.

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1602 on: October 19, 2018, 09:32:04 AM »
This is an over generalization and not true for everyone.

Nothing is true for everyone. People are very creative and will come up with all manner of reasons to OMY.

Exflyboy

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Re: Stop worrying about the 4% rule
« Reply #1603 on: October 19, 2018, 09:36:11 AM »
Yeah the budgeting step is interesting. We went from $30k/year prior to RE to something more like $45k after RE. Why? Well we are not exactly sure yet (this is the first year of no real employment for either of us), nor are we sure of what our actual spend is yet.

I know we did a few things around the house, such as installed a new deck plus bought a fancy large fridge but that would only account for about half the extra spend.

Part of the issue is that 2% WR is about $60k for us so in some ways the extra spend really doesn't matter.. Good problem to have/hedonistic adaption perhaps?

PizzaSteve

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Re: Stop worrying about the 4% rule
« Reply #1604 on: October 19, 2018, 09:57:39 AM »
Agreed.  Thats why I get so annoyed about the mortgage debates.  It's really all about spending management, with investment returns really secondary.  Any decent investment strategy will do, ETFs, being debt free, individual stocks, rentals, even bonds or CDs are fine, assuming you live honestly and without that need to consume.

So much focus on x% withdraw rates misses the big picture. The models are just a tool/framework.  Lifestyle and savings are what matters, whether at a 2% or an 8% withdraw rate.  If you can manage yourself, track your status and be flexible, you will be fine.

Investment optimization threads are all fine, but secondary IMHO.

Well the underlying what you're invested in still matters a great deal. There are probably more unsuccessful investment to SWR mixes than successful ones.
Yes, but lets analyze what an 8% 'failure' looks like.

8% YOLO failure..
1) Focused young on doing your dreams.
2) Lived well, for maybe 30 years during your youth traveling, doing your thing.
3) In your senior years your stash looks something like the typical person at retirement (e.g. not much).
4) So you live frugally on social security or the local equivalent, cause you ran out of money.  Welcome to the world of most people.  However, you also have awsome life skills from your experience living off savings.  Likely you know how to make a thin income awsome.  You walk daily (because you have a healthy body from a lifetime of having time to exercise and with low stress).  Maybe some successful friends you made while retired help out with free vacations at their home, etc)

Meanwhile, 2% 'success' may mean...
1) Working much longer, perhaps another 10 years until traditional retirement age
2) Having more money than you need so you get some luxuries at old age (not to be under estimated)
3) Never pursued those thing you wanted to do while young enough to do it (e.g. mountain climbing, extreme sports, etc)

I am not advocating 8%, just saying it might be a good plan for someone really not materialistic, and with very specific goals like wanting time with kids during their youth, assuming they understand the consequences.  Often an 8% er inherits some cash when they run out, not that that is a good plan.  aive seen many very poor savers bailed out at 60 by a parents bequest.

The deciding factor may just be how much one likes their income generating life phase.  We oversaved more because we had good jobs we enjoyed and a good lifestyle while earning, than because we feared a lack of money after early retirement.  So it worked for us.

@Exflyboy We struggle a bit with giving ourselves permission to spend, having also saved to 2%ish.  A life of frugal habits is good, but can get in the way.  Nothing is wrong with the occasional deck or fancy fridge, well deserved. Better to get it when you will enjoy it for decades than hoard money.
« Last Edit: October 19, 2018, 10:09:55 AM by PizzaSteve »

steveo

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Re: Stop worrying about the 4% rule
« Reply #1605 on: October 19, 2018, 05:31:52 PM »
Before you bother working out a withdrawal rate you need to determine how much annual budget you need for your retirement. If you fail at that step nothing you do further down the planning process is going to be reliable.

This is the most important point and it gets missed in these maths type debates. Unless you get your estimated spending right it's going to be shot in the dark. That in all reality is probably a variable spending idea. You need to have an idea though of what you can live off but it's probably going to be I'd like to live on x but I can live off y for a period of time if things go bad so that I can quit earlier.

pecunia

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Re: Stop worrying about the 4% rule
« Reply #1606 on: November 03, 2018, 11:01:16 AM »

-snip-

Part of the issue is that 2% WR is about $60k for us so in some ways the extra spend really doesn't matter.. Good problem to have/hedonistic adaption perhaps?

2 % is a 50 X multiplier.

$60,000 X 50 = $3,000,000

It would take 30 years to spend that down at 100 K a year without any return.  You are definitely in a position where you do not have to worry about the 4 per cent rule.

Is health care a valid reason for OMY?  It seems rather unpredictable.  The 4 percent is fine other than that.

dude

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Re: Stop worrying about the 4% rule
« Reply #1607 on: December 04, 2018, 09:48:49 AM »
 This may have been posted here before (hell, I might have posted it previously!), but it gives me great comfort every time I read it:

https://www.kitces.com/blog/consumption-gap-in-retirement-why-most-retirees-will-never-spend-down-their-portfolio/

pecunia

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Re: Stop worrying about the 4% rule
« Reply #1608 on: December 23, 2018, 12:13:27 PM »
Yes - I'm a worrier.  I was brought up to be a worrier.

With the recent blip in the stock market, my worries arise anew.  I try to figure things out.  Sometimes, me and this financial stuff just do not agree. 

Just take a quick look at this overview of the S&P 500 for the past 90 years.  Observe the pattern.

https://www.macrotrends.net/2324/sp-500-historical-chart-data

Look at say 1965.  See the pattern.  It's a nice climb to a peak about 772 in 1968.  Nice, huh?  Maybe your grandfather made money on this market.  The overall curve of the stock market is going up.  If you draw a line through it the 4 percent rule ought to do just fine.

When did it hit 772 again?  It was about 1993.  This was about 25 years later.

Explain to me.  If you let your money sit in the stock market, did it take 25 years to get this value back?

I saw a very similar pattern looking at the Dow Jones curves.

There is a similar pattern after 1929 to 1958 or so.

Now look at 2010 to now.  The slope and general pattern look like the rise from 1950 to the mid 1960s.  Now it is starting to fall at the end of 2018.  Hey! I could easily be dead in 25 years if we have a repeat of the same pattern.  That delta under the curve which represents the toil and sweat of my lifetime could have gone into some Wall Street fat cats pocket.

Is my worry invalid or is it, "You pay yoo money yoo taka yoo chances" 

Educate me and let me sleep easy at night.



Roadrunner53

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Re: Stop worrying about the 4% rule
« Reply #1609 on: December 23, 2018, 12:40:02 PM »
I am worried too! I need to make a substantial withdrawal 3.5-4% in January.

This will be my first time withdrawing this type of percentage. I had to dip into regular savings for the last few years due to Obamacare and not to increase my income level to lose the subsidy. I am off Obamacare and starting January I need to take from retirement money and cringe since the stock market is going nuts every day!

secondcor521

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Re: Stop worrying about the 4% rule
« Reply #1610 on: December 23, 2018, 12:40:32 PM »
1929 and 1966 were probably the absolute worst times to retire and use the 4% rule (even though it hadn't been described at those points in history).  Note that a 4% withdrawal rate historically succeeded over a 30 year retirement in both of those absolute worst years.(*)

This also assumes that the hapless retiree doesn't notice the problem for 30 years and refuses to go back to work or tighten their belt and continues to adjust upward for inflation.  A reasonable retiree would (a) probably notice sooner, and (b) probably do something about it.

Your chart also includes price changes but likely does not account for dividends.  The dividend yield in the 1960's was probably (guessing) 3%, so after 25 years of waiting you'd have all of your money back (less inflation) plus 75% of your money in dividends.

Finally, you seem to imply that the person saved up cash for a lifetime, then bought 100% stocks in 1966 (or 1929).  Nearly everyone works for 20 years at a career and buys in with each paycheck over that long period of time.  At least that's what I did.  So a typical investor trying to retire in 1966 would have started buying in 1946 or so and benefited from the 1946 to 1966 market performance.

2010 as a starting year could be worse than ever before, in which case the 4% rule could fail.  2019-2020 could rhyme with 1973-1974 (albeit probably with lower inflation), or it could rhyme with 2010-2011.  Nobody knows, so in this case of trying to predict the future, yes, you do pays your money and takes your chances.

Personally I think we've learned some things about economics since 1929 and 1966, and I think that the world economy is overall trending positively, not negatively.  I admit I may be wrong, but I'm pretty much a relentless optimist.

As the market drops - and it may drop further; I believe bear markets average about 9 months in length - you will find me likely rebalancing my portfolio from bonds to stocks.  As it bottoms out, I will probably be nervous.  If it isn't different this time and the recovery follows, I will be at 95% stocks, riding the next wave up, and probably buying a first class plane ticket to my favorite Caribbean island.  I fully and completely expect this.

If it is different this time, I'll be grubby from not having showered to minimize my water bill, and riding my ten-speed bicycle to my greeter job at Walmart, if my resume printed on the back side of a recycled piece of paper manages to catch the eye of HR over the thousands of my fellow unemployed citizens.  But for a few pretty enjoyable years between 2016 and then, I will have not had to work.

(*) More or less, depending on what you were invested in.  1966 and 1967 might have been failure years, but they were still close.
« Last Edit: December 23, 2018, 12:59:04 PM by secondcor521 »

SwordGuy

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mjr

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Re: Stop worrying about the 4% rule
« Reply #1612 on: December 23, 2018, 01:02:26 PM »
It's not adjusted for inflation, but it does include dividends.  You can't just ignore dividends, they're a big part of the total return.

This is just for the time period you mentioned.

« Last Edit: December 23, 2018, 01:04:10 PM by mjr »

pecunia

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Re: Stop worrying about the 4% rule
« Reply #1613 on: December 23, 2018, 10:06:17 PM »
It's not adjusted for inflation, but it does include dividends.  You can't just ignore dividends, they're a big part of the total return.

This is just for the time period you mentioned.



Certainly is a much prettier picture.  I didn't think J L Collins was lying to me.

I couldn't understand it.  The late 1960s was a good time for the United States.  There were good paying union jobs, we were still on a science kick going to the moon and we had enough money too support LBJs war on poverty.  The Vietnam War probably dragged the economy down a bit, but this was the time when all of those shuttered factories in the rust belt were still going strong.  Like, we sold stuff to the world.

Ok - So they issued dividends and shared the wealth.  That's cool.

So, unless I hear about them continuing to do layoffs like GM, I would think American Industry will keep this stock thing going.  I'll hang in there.  Once they get this government thing solved, get a good trade deal with the Chinese and possibly revalue over-valued stocks, we should get back to a slow rise in maybe a year. 

mjr

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Re: Stop worrying about the 4% rule
« Reply #1614 on: December 23, 2018, 11:29:49 PM »
The inflation adjusted chart lets you compare apples and apples better.

It's not all gravy - it doesn't make it back to 1965 levels until 1983.  Better than 1992 but still a bloody long time.

Don't forget that the downturn in the market in 1966 is what defines the 4% rule for the US market.  4% withdrawals kept the 1965 retiree out of trouble, barely.

pecunia

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Re: Stop worrying about the 4% rule
« Reply #1615 on: December 24, 2018, 06:52:04 AM »
The inflation adjusted chart lets you compare apples and apples better.

It's not all gravy - it doesn't make it back to 1965 levels until 1983.  Better than 1992 but still a bloody long time.

Don't forget that the downturn in the market in 1966 is what defines the 4% rule for the US market.  4% withdrawals kept the 1965 retiree out of trouble, barely.

That's right.  It was a time of high inflation, stagflation.  Not such a pretty picture with the inflation.  That all makes it make sense.  High inflation can drag you down.  OPEC was king back then.  Having a monopoly was very good for the monopoly.  It kind of gives one an appreciation for the new oil production technologies that get oil from tar sands and shale.  It is starting to make sense why the curve was kept from growth. 

From the web:

September 2018

"The United States likely surpassed Russia and Saudi Arabia to become the world's largest crude oil producer earlier this year, based on preliminary estimates in EIA's Short-Term Energy Outlook (STEO). In February, U.S. crude oil production exceeded that of Saudi Arabia for the first time in more than two decades."

If the money stays in North America, it should help recovery from the upcoming bear market.

I'm starting to feel better.  I've not known J. L. Collins to lie about this stuff.

DreamFIRE

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Re: Stop worrying about the 4% rule
« Reply #1616 on: December 25, 2018, 10:00:50 AM »
Here's a much more recent timeline of 13 years with negative real returns with dividend reinvestment and adjusted for inflation.

That's April 1999 to June 2012 with a real annualized return of -0.699%.

http://i65.tinypic.com/e02y3c.jpg


There have been longer time periods as well:

https://forum.mrmoneymustache.com/investor-alley/10-years-of-negative-returns/msg2100467/#msg2100467
« Last Edit: December 25, 2018, 10:07:14 AM by DreamFIRE »

EscapeVelocity2020

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Re: Stop worrying about the 4% rule
« Reply #1617 on: December 25, 2018, 10:40:56 AM »
Here's a pretty good summary of what it's been like being in the drawdown phase from 2000 - 2017 for several asset allocations, example is scaled using $100,000 starting NW and $4,000 inflation adjusted withdrawals -

https://youtu.be/opNohVglLX0?t=183

Classical_Liberal

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Re: Stop worrying about the 4% rule
« Reply #1618 on: December 25, 2018, 07:01:39 PM »
@EscapeVelocity2020

Nice presentation in the link.  Although a high inflationary environment (1965-1982 for example) would make the higher bond allocation look pretty risky. 

In general, this is why I have always thought that circumstances should dictate AA.  It doesn't make you a market timer to adjust AA based on your needs.  The idea of bond tent or reverse glidepath has become rather popular, but I prefer a "buckets" approach with noncorrelating asset classes.  IOW one bucket is for longer term were I will not draw down, the other for nearer term that will be drawn down.

To stick with the thread topic; further perfecting personal AA increases the resiliency of the 4% rule.  Making it more robust than the original trinity study predicts
« Last Edit: December 25, 2018, 07:03:32 PM by Classical_Liberal »

tooqk4u22

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Re: Stop worrying about the 4% rule
« Reply #1619 on: December 26, 2018, 07:46:52 AM »
I certainly have not enjoyed this December, but I really am thankful for my assessment of my risk tolerance and managing to a 3.0-3.25% SWR and a conservative AA.  My year end rebalancing will get things back in order.