Author Topic: Stop worrying about the 4% rule  (Read 228786 times)

Ursus Major

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Re: Stop worrying about the 4% rule
« Reply #250 on: January 24, 2016, 03:24:59 PM »
You are absolutely right that in theory retaining dividends is neutral for investors

I think practice is virtually assured to comport with theory on this point, because, although the stock market is not perfectly efficient (as posited by stronger forms of the efficient market hypothesis), it is nonetheless highly efficient, and certainly efficient enough to correctly reflect so obvious a change (or lack of change) in the intrinsic value of a company's shares as the company's divestiture (or non-divestiture) of cash in the form of a dividend payment (or non-payment) to its shareholders.  In other words, dividend payments (or non-payments) are always correctly priced into the company's shares by the market to begin with, so any market fluctuations would have an equal impact on companies regardless of their dividend payout ratios.

Forum user skyrefuge (who has been inactive lately) was best at articulating this point, so I would recommend looking up some of his posts on the topic (and the discussion starting with this post is a really fun read, if you're interested in going down a rabbit hole on this issue).

Hi brooklynguy,

I've decided to "go down the rabbit hole" and start a new thread on this: http://forum.mrmoneymustache.com/investor-alley/dividends-vs-capital-gains-once-again/

My calculations show a different result and I'd be delighted to have this resolved for myself.

dude

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Re: Stop worrying about the 4% rule
« Reply #251 on: January 25, 2016, 11:26:52 AM »
I'm curious is the is reasonable, empirically researched data/studies that make a sincere or valid attempt at invalidating a 4% SWR.  In really dumb terms: the Sith to the Trinity Study's Jedi?

Sure.  By none other than Wade Pfau, the guy who made the 4% rule popular.

http://tinyurl.com/nrywjny

Pfau's recent work doubting the 4% rule have been based on some way or another handicapping expected returns.  I've seen two basic methods:

1) Sneak in a 1% management cost.  Pretty damn obvious. I and others called him on this one since most of us are with Vanguard and low cost.  So.... the next method:

2) Take historical returns. Cut them down 25-50%, then run the Monte Carlo. More subtle. Justified on current low bond yield. This is basically assuming we have times which will be considerably worse than the Great Depression, or 66-82 stagflation for investors. It's fine to play "What if?" - but this isn't really predictive.

How about sneaking in a 1.67% management fee?

http://www.retireearlyhomepage.com/wadepfau_2016.html

AdrianC

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Re: Stop worrying about the 4% rule
« Reply #252 on: January 25, 2016, 12:27:44 PM »

How about sneaking in a 1.67% management fee?

http://www.retireearlyhomepage.com/wadepfau_2016.html

Our research determines that a safe withdrawal rate for the retirement class of 2014, 2015 and perhaps 2016 and 2017 is abysmal. This generation has picked a poor time to retire, no doubt about it. Their safe retirement rate is 1.7%, assuming they retire on January 1, 2015. We used U.S. 10-year bond yields and stock valuations for the same date.

So, take the 1.7%, add back the 1.6% fee, subtract (say) 0.2% for low cost funds and we get 3.1%.

Seems reasonable going forward.

brooklynguy

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Re: Stop worrying about the 4% rule
« Reply #253 on: January 25, 2016, 12:44:12 PM »
So, take the 1.7%, add back the 1.6% fee, subtract (say) 0.2% for low cost funds and we get 3.1%.

You can't simply add back the investment fee to the WR to correct for its adverse effect; as Pfau himself pointed out back in 2012, there is not a one-to-one tradeoff between investment fees and withdrawal rates, because the nominal dollar amount of an investment fee fluctuates in tandem with the nominal value of the portfolio, in contrast with the nominal dollar amount of the withdrawals, which do not change based on fluctuations in the portfolio value (instead, they remain a constant inflation-adjusted dollar amount).

TomTX

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Re: Stop worrying about the 4% rule
« Reply #254 on: January 25, 2016, 07:38:05 PM »
So, take the 1.7%, add back the 1.6% fee, subtract (say) 0.2% for low cost funds and we get 3.1%.

You can't simply add back the investment fee to the WR to correct for its adverse effect; as Pfau himself pointed out back in 2012, there is not a one-to-one tradeoff between investment fees and withdrawal rates, because the nominal dollar amount of an investment fee fluctuates in tandem with the nominal value of the portfolio, in contrast with the nominal dollar amount of the withdrawals, which do not change based on fluctuations in the portfolio value (instead, they remain a constant inflation-adjusted dollar amount).

It's a reasonable first approximation. Yes, it overstates somewhat.
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AdrianC

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Re: Stop worrying about the 4% rule
« Reply #255 on: January 26, 2016, 06:24:08 AM »
So, take the 1.7%, add back the 1.6% fee, subtract (say) 0.2% for low cost funds and we get 3.1%.

You can't simply add back the investment fee to the WR to correct for its adverse effect; as Pfau himself pointed out back in 2012, there is not a one-to-one tradeoff between investment fees and withdrawal rates, because the nominal dollar amount of an investment fee fluctuates in tandem with the nominal value of the portfolio, in contrast with the nominal dollar amount of the withdrawals, which do not change based on fluctuations in the portfolio value (instead, they remain a constant inflation-adjusted dollar amount).

It's a reasonable first approximation. Yes, it overstates somewhat.

It's a more-or-less reasonable first approximation if you're not spending down the portfolio. In Pfau's examples the portfolio is being spent down.

Pfau says a 1% fee takes 0.5-0.6% off the SWR for a 30 year retirement. Taking the 1.7%, add an estimated 0.8% to compensate for the fee difference (1.6% vs 0.2%) and we get 2.5% for Pfau's 40 year 60/40 retirement using low cost funds. Coincidentally, 2.5% is what Betterment advises for a "likely chance" of my portfolio outlasting me.

It would be interesting to see what Pfau would get if he used low cost funds, but I guess he doesn't do that because he's marketing to financial advisors with their 1% fees.

Telecaster

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Re: Stop worrying about the 4% rule
« Reply #256 on: January 26, 2016, 02:26:56 PM »
Wade Pfau sure gets a lot of press for offering such marginal advice.   There are two basic solutions to the "future will be worse than the past" problem, one is downgrade your lifestyle by taking a lower WR.  The other is to use low-cost funds.   He of course recommends down grading your lifestyle.   

arebelspy

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Re: Stop worrying about the 4% rule
« Reply #257 on: January 26, 2016, 02:44:55 PM »
Wade Pfau sure gets a lot of press for offering such marginal advice.   

His analysis is pretty good.

His target audience is.. not us.  So the advice is marginal, for us.  But that doesn't mean we can't glean wisdom from the research.  :)
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dude

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Re: Stop worrying about the 4% rule
« Reply #258 on: February 03, 2016, 11:17:09 AM »
Regarding this recent discussion, Scott Burns has an excellent piece today:

https://assetbuilder.com/knowledge-center/articles/how-we-live-and-how-long-our-money-lasts

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #259 on: February 03, 2016, 01:02:09 PM »

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #260 on: February 03, 2016, 01:06:18 PM »
Regarding this recent discussion, Scott Burns has an excellent piece today:

https://assetbuilder.com/knowledge-center/articles/how-we-live-and-how-long-our-money-lasts

I share ^^^ this perspective. Flexibility in many different ways is the key to my FIRE plans.

steveo

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Re: Stop worrying about the 4% rule
« Reply #261 on: February 03, 2016, 02:06:02 PM »
That article is good but it also reflects something interesting in that we can't in my opinion resort back to math as the only factor within determining our withdrawal rates within retirement. I'm sure you can come up with some complex rule that produces an increased WR however I think the key is to simply be flexible and use some common sense because those rules only worked in the past.

So the 4% WR is in my opinion pretty safe so long as you use some common sense. I honestly think a 5% WR can be safe as well especially if you are prepared to work a little as well.

arebelspy

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Re: Stop worrying about the 4% rule
« Reply #262 on: February 03, 2016, 10:10:01 PM »
So the 4% WR is in my opinion pretty safe so long as you use some common sense. I honestly think a 5% WR can be safe as well especially if you are prepared to work a little as well.

I agree. And 5% may be safe a good chunk of the time even if you DON'T work again.  If you're flexible AND willing to earn some? 

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steveo

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Re: Stop worrying about the 4% rule
« Reply #263 on: February 03, 2016, 11:18:34 PM »
So the 4% WR is in my opinion pretty safe so long as you use some common sense. I honestly think a 5% WR can be safe as well especially if you are prepared to work a little as well.

I agree. And 5% may be safe a good chunk of the time even if you DON'T work again.  If you're flexible AND willing to earn some? 



5% and some part time work and that is 100% correct. 4-5% with some flexibility in spending and you are probably also completely fine.

I'm trying to get my wife to see our FI target as a range now because I figure 4% on base level expenses and then 5% on the cream on top is pretty freaken safe. Once you reach base level expenses you can really FIRE. I figure some buffer for excessive items is fine but there is no need for buffer on those excessive items. For instance just stop going to restaurants or go once a month when you FIRE if the markets aren't performing.

I don't reckon that you can pre-plan for this even though I'm sure you can backtest some system but why bother.

I'm honestly more worried now about FIRE'ing with too much money and hence too little time doing whatever I want to do.

AZryan

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Re: Stop worrying about the 4% rule
« Reply #264 on: February 04, 2016, 05:07:03 PM »
Quote from: steveo
5% and some part time work and that is 100% correct.
Are you sure you're getting those percentages right??

Your investments don't know, or care, if you've got a part time job or not, so how are you factoring that in to your 5% being a success?

If you're pulling $50K offa' a Million invested, that's 5% and a higher risk of failure than 4%. If you also did some part time work to make an extra say ~$10K a year, that sounds nice... but it doesn't actually count towards anything unless you explain what you're counting it towards?

Are you saying you're really only pulling ~4% from investments, but can get an easy extra 1% from part time work, for a total of 5%? 'Cuz that's not saying anything more than that you think 'the 4% rule won't fail'. The extra job/money don't matter to that point.
Very unclear what you're getting at.

matchewed

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Re: Stop worrying about the 4% rule
« Reply #265 on: February 04, 2016, 06:15:54 PM »
Because people who believe in inflexibility in their particular SWR number fail to see that you don't have to actually pull that 5% plus inflation every year. Things go shitty you can cut back or earn more.

The investments may not care but cash flow does. Which if you draw down less during bad years you extend your portfolio's viability.

sol

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Re: Stop worrying about the 4% rule
« Reply #266 on: February 04, 2016, 08:52:11 PM »
If you're pulling $50K offa' a Million invested, that's 5% and a higher risk of failure than 4%.

That all depends on how you define "failure" doesn't it?  A 4% SWR lasts, on average, forever.  By which I mean that in more than 50% of the historical periods of all lengths, the portfolio survives without being depleted or requiring any spending reductions.  A 5% SWR, by contrast, only lasts an average of 49 years.  If your life expectancy is less than 49 years, then shooting for 4% actually means you have worked too long.  That's also a failure, isn't it?

The only way to "fail" retirement is to be forced into working more than you want to, and there are two ways to do that.  1) work too little, and then have to go back to work, or 2) work too much in the first place.  We can't know in advance what our financially optimal retirement date is because we don't know what future market returns will be.  If you retire before that date, then you'll need to work more in the future.  If you retire after that date then you have worked more than needed in the past.  Using a 4% SWR virtually guarantees (95% chance) that you fail the second way, and decide to work too long. 

The closest way I can figure to finding that financially optimal retirement date is to look at the 50% success probabilities for each SWR in the past.  That analysis suggests that someone like me, who is only planning to fund 23 years of retirement, should use a SWR of around 7% per year, and that someone planning a 30 year retirement should use about 6%.  Those are the statistically correct SWRs to use, if you believe that the future market will look like the past market, recessions and all. 

If the future turns out to be as good or better than the past, you will have picked right.  If it turns out to be worse than the past, you'll have to go back to work or reduce your inflation-adjusted spending limits.  I don't think either of those options are so bad that they're worth deliberately failing by working too long up front.

steveo

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Re: Stop worrying about the 4% rule
« Reply #267 on: February 04, 2016, 11:48:38 PM »
Quote from: steveo
5% and some part time work and that is 100% correct.
Are you sure you're getting those percentages right??

That wasn't meant to be a statistical or mathematical figure. I was just agreeing with arebelspy.

My take is pretty simple. If you have a 4% WR you are probably safe. If you have a 5% WR with some buffer or ability to spend less and be a little flexible you are probably safe. If you have a 5% WR but are prepared to work part time in certain situations you are more than likely completely safe.

I don't believe that you can model this to the nitty gritty detail because the future will be different to the past and so any rules like the ones already listed within the linked article above are probably providing a false sense of security.

I'm assuming that you have a simple asset allocation say 70/30 in index funds.

steveo

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Re: Stop worrying about the 4% rule
« Reply #268 on: February 04, 2016, 11:52:38 PM »
The only way to "fail" retirement is to be forced into working more than you want to, and there are two ways to do that.  1) work too little, and then have to go back to work, or 2) work too much in the first place.  We can't know in advance what our financially optimal retirement date is because we don't know what future market returns will be.  If you retire before that date, then you'll need to work more in the future.  If you retire after that date then you have worked more than needed in the past.  Using a 4% SWR virtually guarantees (95% chance) that you fail the second way, and decide to work too long. 

Yep. Its not so simple is it. Like I just posted at this point I'm more concerned with working too long.

arebelspy

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Re: Stop worrying about the 4% rule
« Reply #269 on: February 05, 2016, 12:01:44 AM »
Quote from: steveo
5% and some part time work and that is 100% correct.
Are you sure you're getting those percentages right??

Your investments don't know, or care, if you've got a part time job or not, so how are you factoring that in to your 5% being a success?

Because that part time work can lower the SWR when necessary.

I.e. say you need 50k/yr on your 1MM stache--5% WR.

Some years you pick up some side work and make 20k.  Your WR that year is only 3%.  Effectively the part time work lowers your average WR, but you're planning on a "5% WR and some part time work."  Some times you feel like a work, sometimes you don't.  5% is close to okay without it, and should be pretty good with it, especially with some spending flexibility (say, market is down, you earn 20k side gig and drop spending from 50k to 40k that year, due to spending more time at that job, and less on traveling, say).  Now you're only withdrawing 20k from the stache that year, a 2% WR.  That's where the spending and income flexibility come in.  Many years you spend 5%.  Other years your effective spending after spending flexibility and income is 2%.

That's what I meant by "5% may be safe a good chunk of the time even if you DON'T work again.  If you're flexible AND willing to earn some?"
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MoonShadow

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Re: Stop worrying about the 4% rule
« Reply #270 on: February 05, 2016, 12:09:14 PM »
Quote from: steveo
5% and some part time work and that is 100% correct.
Are you sure you're getting those percentages right??

Your investments don't know, or care, if you've got a part time job or not, so how are you factoring that in to your 5% being a success?

Because that part time work can lower the SWR when necessary.

I.e. say you need 50k/yr on your 1MM stache--5% WR.

Some years you pick up some side work and make 20k.  Your WR that year is only 3%.  Effectively the part time work lowers your average WR, but you're planning on a "5% WR and some part time work."  Some times you feel like a work, sometimes you don't.  5% is close to okay without it, and should be pretty good with it, especially with some spending flexibility (say, market is down, you earn 20k side gig and drop spending from 50k to 40k that year, due to spending more time at that job, and less on traveling, say).  Now you're only withdrawing 20k from the stache that year, a 2% WR.  That's where the spending and income flexibility come in.  Many years you spend 5%.  Other years your effective spending after spending flexibility and income is 2%.

That's what I meant by "5% may be safe a good chunk of the time even if you DON'T work again.  If you're flexible AND willing to earn some?"

While I agree with this, as it's been explained, I'm not sure if it matches the idea of the safe withdrawal rate concept; since most of the time it refers to a initial year withdrawal rate than then rises with inflation.  If one were to add extra rules, such as, "in a down market year, I get a job and earn $20K and then quit", your SWR (with inflation increases) can be a lot higher; but are we really still talking about the same thing?  If your decisions about how much to withdraw from your savings are based upon as-you-go rules, that's great, but that seems like it would be something different than (initial) safe withdrawal rates (plus inflation).  For example, If $50K per year is more than what I projected my annual expenses would be, I could FIRE with $500K and a rule such as, "97% of the previous year's capital gains, up to a maximum of 10% of total capital at the start of last year" and "if that withdrawal amount is less than $30K, get a job and earn $15K" and "if total capital drops below $440K at any point, freeze withdrawals and get a job."  Rules like those, that change each year or so based upon recent conditions, are great rules to FIRE by; but still seem different to me than what we are talking about in this thread.

AZryan

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Re: Stop worrying about the 4% rule
« Reply #271 on: February 05, 2016, 12:51:22 PM »
MoonShadow pretty much just wrote what I was getting at.

Basically, it's not the "4% (or 5%) rule" at all if you're tacking on hugely random notions of going back to work to make up a large portion of your spending and/or dropping your spending drastically.

I think everyone agrees those tactics are totally smart and super useful, but it's wrong to word it like you're following the 4 (or 5) % rule, and that you believe it's safe so that's why you're following it, etc., when you're not at all.

Like I think MoonShadow was also getting at... the point of this thread is about whether the 4% rule is still safe to follow, or if it's a simplistic, outdated starting point and instead, we should be focused on these highly flexible/random tactics to keep failure away.

brooklynguy

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Re: Stop worrying about the 4% rule
« Reply #272 on: February 05, 2016, 01:07:58 PM »
The point is simply that flexibility to supplement income and/or reduce spending are both part of the multiple external layers of safety margin that are deliberately ignored by the 4% rule but usually exist in the real world.  So, to reiterate the overarching theme of this thread, strict adherence to the 4% rule is highly safe, and flexible adherence to the 4% rule is exceedingly safe.

steveo

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Re: Stop worrying about the 4% rule
« Reply #273 on: February 05, 2016, 02:22:34 PM »
The point is simply that flexibility to supplement income and/or reduce spending are both part of the multiple external layers of safety margin that are deliberately ignored by the 4% rule but usually exist in the real world.  So, to reiterate the overarching theme of this thread, strict adherence to the 4% rule is highly safe, and flexible adherence to the 4% rule is exceedingly safe.

This is the point. The 4% rule as stated is a rigid rule defined as withdrawing 4% the first year and increasing that by inflation each year thereafter. Personally I can't see myself spending like that and I will have a range to spend within. I'm flexible with my spending and I may also choose to work part time for some time after becoming FI. All of these points make the 4% or 5% rule pretty safe for me.

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Re: Stop worrying about the 4% rule
« Reply #274 on: February 05, 2016, 02:34:13 PM »
But if you put caveats and asterisks on how to define your retirement number, then how do you know when to retire?  Are you saying that 4% SWR is way too conservative and are putting in votes for 5% or higher?  There has been a lot of good discussion in this thread (like Sol's definition of 'retirement failure' and why he thinks 6 or 7% are better SWRs), but it's getting buried. 

I still think 4% is the best starting point for defining FI.  All of the extra fluff (how to react to good/bad series of returns in the first 5-10 years) is a totally different, endless discussion and speculation.  Just my 2 cents, but we really do seem to be going in circles as opposed to introducing new ideas.
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arebelspy

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Re: Stop worrying about the 4% rule
« Reply #275 on: February 05, 2016, 02:57:55 PM »

MoonShadow pretty much just wrote what I was getting at.

Basically, it's not the "4% (or 5%) rule" at all if you're tacking on hugely random notions of going back to work to make up a large portion of your spending and/or dropping your spending drastically.

I think everyone agrees those tactics are totally smart and super useful, but it's wrong to word it like you're following the 4 (or 5) % rule, and that you believe it's safe so that's why you're following it, etc., when you're not at all.

Literally no one ever picks an initial WR, increases it exactly by inflation, and always spends to the penny that exact amount, regardless of market conditions, external factors, etc.

It doesn't happen.

So you can talk about a 4% WR, but it's a rough guideline for how it will go.

It's safe to do on it's own, and it's even safer to be flexible. And that may allow you to go even higher, to 5-6%.

But for the people worried about 4%, having flexibility is just another level of safety margin, because your effective WR will be lower if you're willing to decrease spending or earn money.  It's not necessary, but it may provide some peace of mind for the worriers.
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MoonShadow

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Re: Stop worrying about the 4% rule
« Reply #276 on: February 05, 2016, 03:01:46 PM »

If the future turns out to be as good or better than the past, you will have picked right.  If it turns out to be worse than the past, you'll have to go back to work or reduce your inflation-adjusted spending limits. I don't think either of those options are so bad that they're worth deliberately failing by working too long up front.

True, but there is also the consideration about ability to return to work.  Those of use who retire early, and not for medical reasons, can expect to be able to fall back on returning to work for a period of time.  However, it may not be wise for us to assume that we can continue to do this after a certain age.  I think it's reasonable to assume that just about any of us could return to work, at pretty much anything, and expect to make at least $20K in a year until 55 or 60 years old.  I wonder if there is a way to run that scenario through a monte carlo simulator and find out how many times our expenses we would need, at minimum to FIRE, if we could tell it that to reduce the absolute withdrawal rate by $20K (plus inflation) following any year with a year-over-year decline in the stock market; up to age 60 or so.

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Re: Stop worrying about the 4% rule
« Reply #277 on: February 05, 2016, 03:10:37 PM »
But if you put caveats and asterisks on how to define your retirement number, then how do you know when to retire? 

You retire when you feel your FIRE tool kit is ready. That includes:

- $$ in investments
- PT work plans if any
- risk management plan
- FIRE plan AKA what the fuck do I do with all this time off plan

and the market isn't tanking. Probably nobody has the stomach to FIRE in the middle of a 20-30% crash.

That does not provide an exact answer, but focusing on 4% is no better - either in terms of $$ or frankly the more important issues like how you are going to adjust to FIRE mentally/emotionally.

The later issues lead to the OMY syndrome more than the $$ do in my opinion.

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Re: Stop worrying about the 4% rule
« Reply #278 on: February 05, 2016, 03:14:26 PM »

MoonShadow pretty much just wrote what I was getting at.

Basically, it's not the "4% (or 5%) rule" at all if you're tacking on hugely random notions of going back to work to make up a large portion of your spending and/or dropping your spending drastically.

I think everyone agrees those tactics are totally smart and super useful, but it's wrong to word it like you're following the 4 (or 5) % rule, and that you believe it's safe so that's why you're following it, etc., when you're not at all.

Literally no one ever picks an initial WR, increases it exactly by inflation, and always spends to the penny that exact amount, regardless of market conditions, external factors, etc.

It doesn't happen.

So you can talk about a 4% WR, but it's a rough guideline for how it will go.

It's safe to do on it's own, and it's even safer to be flexible. And that may allow you to go even higher, to 5-6%.

But for the people worried about 4%, having flexibility is just another level of safety margin, because your effective WR will be lower if you're willing to decrease spending or earn money.  It's not necessary, but it may provide some peace of mind for the worriers.

I agree with this, but the real reason people want to know the SWR that considers inflation, is they are looking for the inverse number; how many times over their expenses do they need to retire.  That is why it's a rigid rule, because we are really trying to predict the amount of money required to retire.  For just about anyone who retires at 60+, the 4% rule is going to be very conservative, but that is what most people are looking for; near certainty.

Notably, we here on this forum are not looking for certainty, but what we are also looking at retirement time periods much longer than the average, so we still need to favor conservatively.  What I am looking for, and I think what most of us are looking for, is what Sol was talking about; that special multiple of our expenses, that we can set as our target, where we cross from unlikely to succeed to likely to succeed historically, without falling back upon earning income in some other way.  Because while we know we can do so for many years, and that odds are high that we will be earning income external to our savings gains anyway, we want to know what that "May the odds be ever in your favor" point should be.

brooklynguy

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Re: Stop worrying about the 4% rule
« Reply #279 on: February 05, 2016, 04:09:07 PM »
What I am looking for, and I think what most of us are looking for, is what Sol was talking about; that special multiple of our expenses, that we can set as our target, where we cross from unlikely to succeed to likely to succeed historically, without falling back upon earning income in some other way.

That answer is easy to find--just plug your desired inputs into cFIREsim and ask it to tell you what size stash generates a 50% historical success rate (using cFIREsim's default input settings, the answer is a portfolio valued at slightly under 17x expenses, the inverse of a withdrawal rate slightly over 5.88%)--but that's not at all what most folks around here are actually looking for.  It's a rare individual indeed who has the cojones to pull the retirement ripcord as soon as chances of success pass the "more likely than not" threshold (as evidenced by the pervasive worrying that occurs even over plans with historical safety records in excess of 95%, which is what led to the creation of this thread in the first place).

The 4% rule, as a worst case or near-worst case protection strategy, was deliberately designed to have a total or near-total historical success rate in order to compensate for our inability to pre-identify (with any reasonable degree of certainty) those retirement commencement dates that are destined to result in failure.  But people tend to forget that, and start building layers of safety upon layers of safety to the point of absurdity, at the cost of years of lost retirement upfront.

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Re: Stop worrying about the 4% rule
« Reply #280 on: February 05, 2016, 05:00:56 PM »
the answer is a portfolio valued at slightly under 17x expenses, the inverse of a withdrawal rate slightly over 5.88%)--but that's not at all what most folks around here are actually looking for. It's a rare individual indeed who has the cojones to pull the retirement ripcord as soon as chances of success pass the "more likely than not" threshold

Well, I would except that I have two additional conditions; that my home is paid for (or I can pay for the remainder of the mortgage without dropping below the above number) and that my youngest child is 18 and a high school graduate.  For me, this means May or June of 2030, just after my 55th birthday; which also works well for taking 401k withdrawals.  I would reasonably expect to have quite a bit more than 17x my expenses in savings by the time I'm 55, but I'm looking at the above target number as a minimum trigger condition, but not the only necessary condition.  For myself, the above 17x expenses number would be right around $600K, based upon my guesstimate about how much my expenses will drop once all my kids are ready to fly the nest.  But it's also a 'just enough' kind of estimate, so anything that I can stash away above that number till my 55th would be welcome; but if I can't make that number for whatever reason, I can't reasonably retire at 55.

EDIT:  If I can double that number before 55, I'm FIRE'd that very day.
« Last Edit: February 05, 2016, 05:03:10 PM by MoonShadow »

sol

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Re: Stop worrying about the 4% rule
« Reply #281 on: February 05, 2016, 05:05:37 PM »
It's a rare individual indeed who has the cojones to pull the retirement ripcord as soon as chances of success pass the "more likely than not" threshold

That's my plan, and I assure you that my cojones are very normal sized.

In my mind, 50% success rate of the 6% SWR means I am just as likely to have to increase my spending as reduce my spending, later in retirement.  Going back to work isn't really in the picture, except as a last resort in case of true catastrophe. 

So I plan my expenses with some nice safety buffer that could be cut, and stop worrying about ever working again.  If you are the rare type to retire on a true bare bones budget (under $10k/yr maybe?) then cutting expenses might not work for you.  But I live in a big fancy house and drive a big fancy car and eat abundant big fancy meals, and all of those things could take a 50% reduction without really impacting my overall life happiness level.  More likely, a 5% SWR means I'll have to find some way to spend even more money on those things, but in the off chance I have to spend less because the US economy has collapsed, that's easy too.

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Re: Stop worrying about the 4% rule
« Reply #282 on: February 05, 2016, 05:13:44 PM »
You retire when you feel your FIRE tool kit is ready. That includes:

- $$ in investments
- PT work plans if any
- risk management plan
- FIRE plan AKA what the fuck do I do with all this time off plan

and the market isn't tanking. Probably nobody has the stomach to FIRE in the middle of a 20-30% crash.

That does not provide an exact answer, but focusing on 4% is no better - either in terms of $$ or frankly the more important issues like how you are going to adjust to FIRE mentally/emotionally.

The later issues lead to the OMY syndrome more than the $$ do in my opinion.

I feel that this is a better way to look at the situation. The 4% guideline is basically across the top 3 points that you make. Do I have some buffer ? Am I going to work part time for a couple of years ? What happens if the market drops ?

I have a 5% target to hit and then its about moving towards the RE part. That will probably include working part time to possibly buy some extra stuff (for instance money to get the house painted or a fancy new e-bike) or save for some holidays or something or just to add some years of not actually withdrawing. Once I hit the 5% target though if I feel like quitting work I will.

MoonShadow - I have 3 kids and I intend to be retired well before they all finish school. My oldest is 14 and I can't see myself retiring prior to her finishing school but my youngest is 5 and I expect to be retired before he starts high school.

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Re: Stop worrying about the 4% rule
« Reply #283 on: February 05, 2016, 07:02:24 PM »

MoonShadow - I have 3 kids and I intend to be retired well before they all finish school. My oldest is 14 and I can't see myself retiring prior to her finishing school but my youngest is 5 and I expect to be retired before he starts high school.

I have 5 kids, and my youngest is 3.  I have 55 as my target age because; she will turn 18 a month after I turn 55, all my older children will either be through college, or paid for by the state, and the "55 and out" ER rule with a 401k.  However, as I said above, that is just my target at present; because I really do love my job.  If conditions here suddenly change, and I start hating my work or they start hating me, I can see FIREing before 55; or taking a sabbatical before finding new work.  But if I succeed at significantly reducing my expenses, or significantly increasing my income; so that my relative savings rate shoots up & I can double my 'bare minimum' FIRE target (let's say it's 17x) before 55, I'm out.  That would be 34x my expenses, or a SWR of about 3%, so it truly would be a stupid waste of lifespan for me to continue working, no matter how much I love my job. This is really doable once I turn 55, because I believe that I can reduce my expenses significantly once all my kids are out of the house, by downsizing to a small condo or just selling the house & moving into an RV or a small yacht.  (The costs of living on a sailboat tend to increase at an exponential rate relative to the length of the boat, so it's possible to live well & cheap living on a boat, but only if it's small & you are able to do your own maintenance, which I am).  My wife & I are pretty frugal, but kids are simply expensive; and the state busybodies tend to get nosy if your kid's address at their school is a marina slip number.  (And even the marina slip rental would kill the fiscal advantages of living aboard a boat)  We do homeschool our older two, who are highschool aged now, and are likely to do so for our youngest (we might not for our two middle boys, who do not respond well to my wife's educational style) but to register a child in Kentucky as a homeschooler, a GPS location somewhere on the Ohio River doesn't fly, and neither does a PO box number.

steveo

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Re: Stop worrying about the 4% rule
« Reply #284 on: February 05, 2016, 09:35:57 PM »
My wife & I are pretty frugal, but kids are simply expensive

I get this. Kids just cost money. You can minimise this but I can't just cut this to bare bones level. If the kid needs swimming lessons for instance we pay for it.

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #285 on: February 06, 2016, 07:42:56 AM »
The 4% rule, as a worst case or near-worst case protection strategy, was deliberately designed to have a total or near-total historical success rate in order to compensate for our inability to pre-identify (with any reasonable degree of certainty) those retirement commencement dates that are destined to result in failure.  But people tend to forget that, and start building layers of safety upon layers of safety to the point of absurdity, at the cost of years of lost retirement upfront.

Intellectually I know this, but it's easy to forget or let it get buried under the FUD that gets thrown around on these forums. Thanks for reminding me! :)

I'm currently at ~7% WR and shooting for ~5.5% WR with a flexible WR plan. Shooting for $40K, but okay with $30K - $50K/yr.

I am trying to stay focused on all the reasons to be optimistic as I don't want to keep working full-time for extra years in the prime of my life while my portfolio goes from 5.5% to 4% WR.

I have no kids so I really have no use for accumulating a fortune.

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Re: Stop worrying about the 4% rule
« Reply #286 on: February 06, 2016, 11:53:06 AM »
My wife & I are pretty frugal, but kids are simply expensive

I get this. Kids just cost money. You can minimise this but I can't just cut this to bare bones level. If the kid needs swimming lessons for instance we pay for it.

Indeed.

We had enough saved at the end of 2007 that I could have retired at a 4% WR (it wasn't in my thoughts at the time). It would have seemed a particularly bad time to retire during the 2008/2009 crash, but by now our investments would be higher than at the start and that's with taking out 4% plus inflation a year. But we would have been starting to worry. Our expenses have increased over 30% since 2007. We had another child, the other two got older and into activities that cost a lot, and our medical costs have more than doubled.

Those of us with kids need to build in an extra safety margin, IMHO. Bare bones will not do it.


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Re: Stop worrying about the 4% rule
« Reply #287 on: February 06, 2016, 12:29:40 PM »
My wife & I are pretty frugal, but kids are simply expensive

I get this. Kids just cost money. You can minimise this but I can't just cut this to bare bones level. If the kid needs swimming lessons for instance we pay for it.

Indeed.

We had enough saved at the end of 2007 that I could have retired at a 4% WR (it wasn't in my thoughts at the time). It would have seemed a particularly bad time to retire during the 2008/2009 crash, but by now our investments would be higher than at the start and that's with taking out 4% plus inflation a year. But we would have been starting to worry. Our expenses have increased over 30% since 2007. We had another child, the other two got older and into activities that cost a lot, and our medical costs have more than doubled.

Those of us with kids need to build in an extra safety margin, IMHO. Bare bones will not do it.

I'd say you need to accurately estimate your expenses, including known unknowns.  But that doesn't require any extra safety margins, as it's already plenty safe, as long as that has been done correctly.
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brooklynguy

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Re: Stop worrying about the 4% rule
« Reply #288 on: February 06, 2016, 12:54:52 PM »
In my mind, 50% success rate of the 6% SWR means I am just as likely to have to increase my spending as reduce my spending, later in retirement. 

But isn't it kind of arbitrary to use the historical 50% success rate as your trigger point?  As we've discussed before, a given WR's historical success rate can only serve as a proxy for your own probability of success if you assume (among other assumptions) that every retirement commencement date has an equal likelihood of success regardless of then-existing market conditions, which we know to be false.  I suppose it's no different than the sense of false precision inherent in any historical SWR-based strategy, though.

steveo

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Re: Stop worrying about the 4% rule
« Reply #289 on: February 06, 2016, 03:46:50 PM »
My wife & I are pretty frugal, but kids are simply expensive

I get this. Kids just cost money. You can minimise this but I can't just cut this to bare bones level. If the kid needs swimming lessons for instance we pay for it.

Indeed.

We had enough saved at the end of 2007 that I could have retired at a 4% WR (it wasn't in my thoughts at the time). It would have seemed a particularly bad time to retire during the 2008/2009 crash, but by now our investments would be higher than at the start and that's with taking out 4% plus inflation a year. But we would have been starting to worry. Our expenses have increased over 30% since 2007. We had another child, the other two got older and into activities that cost a lot, and our medical costs have more than doubled.

Those of us with kids need to build in an extra safety margin, IMHO. Bare bones will not do it.

I'd say you need to accurately estimate your expenses, including known unknowns.  But that doesn't require any extra safety margins, as it's already plenty safe, as long as that has been done correctly.

You can't go with a bare bones retirement however if you know how much you spend you can use that as a go forward position. I don't expect  expenses to increase significantly but my kids are 14,12 and 5.

AdrianC

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Re: Stop worrying about the 4% rule
« Reply #290 on: February 07, 2016, 06:25:03 AM »
You can't go with a bare bones retirement however if you know how much you spend you can use that as a go forward position. I don't expect  expenses to increase significantly but my kids are 14,12 and 5.

An example: Our largest budget item after groceries is medical insurance. It has gone up by 211% from 2008 to 2016. Out of pocket costs have also gone up since each year we take higher deductibles to keep premiums down. The increase last year to this is 18%. We could assume it will increase the same in 2017. The year after is anyone's guess.

Expenses can increase significantly and unpredictably.

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Re: Stop worrying about the 4% rule
« Reply #291 on: February 08, 2016, 06:20:23 PM »
You can't go with a bare bones retirement however if you know how much you spend you can use that as a go forward position. I don't expect  expenses to increase significantly but my kids are 14,12 and 5.

An example: Our largest budget item after groceries is medical insurance. It has gone up by 211% from 2008 to 2016. Out of pocket costs have also gone up since each year we take higher deductibles to keep premiums down. The increase last year to this is 18%. We could assume it will increase the same in 2017. The year after is anyone's guess.

Expenses can increase significantly and unpredictably.

As long as we have the ACA, and your income is within 400% of poverty level, then you can reliably predict your insurance expenses to stay the same.  The actual premiums increase with age, but so do the subsidies, leaving you paying the same rate every year.

http://www.gocurrycracker.com/obamacare-optimization-early-retirement/
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AdrianC

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Re: Stop worrying about the 4% rule
« Reply #292 on: February 08, 2016, 08:36:34 PM »
As long as we have the ACA

Maybe a 50/50 chance, probably less (Repugs will repeal, or it might death spiral). And even if it does stay, as I already said, our premiums went up 18% last year to this, under (because of) the ACA (we don't get any subsidies).

Point being, some expenses are hard to predict, so a margin of safety is needed when estimating expenses (or when deciding on a withdrawal rate - amounts to the same thing).

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Re: Stop worrying about the 4% rule
« Reply #293 on: February 09, 2016, 10:45:19 AM »
As I mentioned, it's the subsidies that keep the premiums stable.  So if you don't qualify for those, then your premiums wouldn't be stable.  Best to cut some of that excess spending, considering that 400% of the FPL is pretty damn spendy.
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AdrianC

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Re: Stop worrying about the 4% rule
« Reply #294 on: February 10, 2016, 08:05:07 AM »
As I mentioned, it's the subsidies that keep the premiums stable.  So if you don't qualify for those, then your premiums wouldn't be stable.  Best to cut some of that excess spending, considering that 400% of the FPL is pretty damn spendy.

Good info for when our income matches spending, thanks. Assuming the ACA survives, which is in serious doubt, of course.

We don't currently qualify for subsidies due to excess income, not excess spending (well, we do have excess spending, but that's another issue). I'm semi-RE. Winding down slowly.

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Re: Stop worrying about the 4% rule
« Reply #295 on: February 13, 2016, 11:46:11 AM »
(The costs of living on a sailboat tend to increase at an exponential rate relative to the length of the boat, so it's possible to live well & cheap living on a boat, but only if it's small & you are able to do your own maintenance, which I am).  My wife & I are pretty frugal, but kids are simply expensive; and the state busybodies tend to get nosy if your kid's address at their school is a marina slip number.  (And even the marina slip rental would kill the fiscal advantages of living aboard a boat)  We do homeschool our older two, who are highschool aged now, and are likely to do so for our youngest (we might not for our two middle boys, who do not respond well to my wife's educational style) but to register a child in Kentucky as a homeschooler, a GPS location somewhere on the Ohio River doesn't fly, and neither does a PO box number.

No offense, but don't you have any friends?

We have several sets of friends who would be happy to rent a room to us for a nominal amount so that we had a fixed address for the school district. Get your bills delivered there, and use that address for your driver's license. Presto.
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Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #296 on: February 13, 2016, 12:43:26 PM »
We have several sets of friends who would be happy to rent a room to us for a nominal amount so that we had a fixed address for the school district. Get your bills delivered there, and use that address for your driver's license. Presto.

You don't even need to rent a room. Just a friend who will receive your mail. Hopefully they like you enough not to charge you for that service. ;)

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Re: Stop worrying about the 4% rule
« Reply #297 on: February 13, 2016, 03:01:49 PM »
(The costs of living on a sailboat tend to increase at an exponential rate relative to the length of the boat, so it's possible to live well & cheap living on a boat, but only if it's small & you are able to do your own maintenance, which I am).  My wife & I are pretty frugal, but kids are simply expensive; and the state busybodies tend to get nosy if your kid's address at their school is a marina slip number.  (And even the marina slip rental would kill the fiscal advantages of living aboard a boat)  We do homeschool our older two, who are highschool aged now, and are likely to do so for our youngest (we might not for our two middle boys, who do not respond well to my wife's educational style) but to register a child in Kentucky as a homeschooler, a GPS location somewhere on the Ohio River doesn't fly, and neither does a PO box number.

No offense, but don't you have any friends?


Unfortunately, none still alive.  And in my school district, they actually investigate such claims.

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Re: Stop worrying about the 4% rule
« Reply #298 on: February 13, 2016, 04:34:11 PM »
(The costs of living on a sailboat tend to increase at an exponential rate relative to the length of the boat, so it's possible to live well & cheap living on a boat, but only if it's small & you are able to do your own maintenance, which I am).  My wife & I are pretty frugal, but kids are simply expensive; and the state busybodies tend to get nosy if your kid's address at their school is a marina slip number.  (And even the marina slip rental would kill the fiscal advantages of living aboard a boat)  We do homeschool our older two, who are highschool aged now, and are likely to do so for our youngest (we might not for our two middle boys, who do not respond well to my wife's educational style) but to register a child in Kentucky as a homeschooler, a GPS location somewhere on the Ohio River doesn't fly, and neither does a PO box number.

No offense, but don't you have any friends?


Unfortunately, none still alive.  And in my school district, they actually investigate such claims.

Which is why you have a (mobile) phone bill with that address on it and your name, and your driver's license has that address, etc.

Make some friends.
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MoonShadow

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Re: Stop worrying about the 4% rule
« Reply #299 on: February 13, 2016, 11:14:41 PM »

Make some friends.

But, Dude, they keep dying.

Hey, Tom; would you be my friend.  It's probably all just coincidence.