Stop worrying about the 4% rule

[Clean Shaven]

There are an impressive number of commenters (including many ER-bloggers) who are "worrying about the 4% rule" and making various arguments for 3%, 2.5%, and even 0% (!)

See the comments here:  (not my blog, just one that I read)
https://ournextlife.com/2017/05/10/conservative-projections/

Weird.  Maybe they're all 20 years old and planning to retire at 22, so are trying to plan a 70-year retirement. 

[Retire-Canada]

Being afraid is popular. Especially when the result of being afraid is getting to keep doing the "safe" thing staying chained to a desk. I suspect the psychology of FIRE is far more daunting than we think.

[Tyson]

Being afraid is popular. Especially when the result of being afraid is getting to keep doing the "safe" thing staying chained to a desk. I suspect the psychology of FIRE is far more daunting than we think.

Well sure it is.  We spend all of our youth going to school preparing for a job.  Many of us that's 16 years invested in education alone.  Then you work a job for another 10 years and you finally start getting a high income in your 30's and 40's.  It's going to be really really hard for a lot of people to turn off that firehose of cash - they feel like they've worked their whole life for this and now it's finally paying off.  No wonder OMY is such a big thing.

[Classical_Liberal]

Being afraid is popular. Especially when the result of being afraid is getting to keep doing the "safe" thing staying chained to a desk. I suspect the psychology of FIRE is far more daunting than we think.

Well sure it is.  We spend all of our youth going to school preparing for a job.  Many of us that's 16 years invested in education alone.  Then you work a job for another 10 years and you finally start getting a high income in your 30's and 40's.  It's going to be really really hard for a lot of people to turn off that firehose of cash - they feel like they've worked their whole life for this and now it's finally paying off.  No wonder OMY is such a big thing.

Not to mention most of our daily social contacts, peers, and even family members are reinforcing this fear-based thought and the "normal lifestyle".  Don't underestimate the psychological power of peers and group-think.  This is why forums such as this & ERE are on my daily reading list, at least for a few minutes, to help counter these forces.

Frankly, I think people as whole vastly underestimate their own resourcefulness & resilience.  Yet another reason to practice some stoic deprivation from time-to-time; simply to give oneself a taste of how well evolution has built our bodies and minds. Live for a few months at poverty level spending, suddenly the thought of shaving a few percentage points off of a FIRE budget to weather a bad run for investments is no longer a fear at all.

[Eric]

Being afraid is popular. Especially when the result of being afraid is getting to keep doing the "safe" thing staying chained to a desk. I suspect the psychology of FIRE is far more daunting than we think.

Well sure it is.  We spend all of our youth going to school preparing for a job.  Many of us that's 16 years invested in education alone.  Then you work a job for another 10 years and you finally start getting a high income in your 30's and 40's.  It's going to be really really hard for a lot of people to turn off that firehose of cash - they feel like they've worked their whole life for this and now it's finally paying off.  No wonder OMY is such a big thing.

Not to mention most of our daily social contacts, peers, and even family members are reinforcing this fear-based thought and the "normal lifestyle".  Don't underestimate the psychological power of peers and group-think.  This is why forums such as this & ERE are on my daily reading list, at least for a few minutes, to help counter these forces.

Frankly, I think people as whole vastly underestimate their own resourcefulness & resilience.  Yet another reason to practice some stoic deprivation from time-to-time; simply to give oneself a taste of how well evolution has built our bodies and minds. Live for a few months at poverty level spending, suddenly the thought of shaving a few percentage points off of a FIRE budget to weather a bad run for investments is no longer a fear at all.

It could be much, much simpler than this.  Telling people how the 4% rule is doomed to fail gets clicks and page views.  Telling people that the status quo is just fine doesn't.  Just putting that out there...

[Retire-Canada]

It could be much, much simpler than this.  Telling people how the 4% rule is doomed to fail gets clicks and page views.  Telling people that the status quo is just fine doesn't.  Just putting that out there...

Agreed that's why blogger and talking heads post that stuff and FEAR is why it works on the readers.

[nereo]

Well sure it is.  We spend all of our youth going to school preparing for a job.  Many of us that's 16 years invested in education alone. 

Well I feel like a chump - I've been in school for no less than 26 years.  Kindergarden through my PhD.
Put another way, I"m in 25th grade!

There are an impressive number of commenters (including many ER-bloggers) who are "worrying about the 4% rule" and making various arguments for 3%, 2.5%, and even 0% (!)
...
Weird.  Maybe they're all 20 years old and planning to retire at 22, so are trying to plan a 70-year retirement. 

Anything less than 3.25% and you're banking that the future will be worse than any 30 year period we've experienced in the last 100+ years.  When you're talking about sub3% it doesn't matter if it's a 30 year term of a 70 year term.  In every historical simulation your portfolio increases with such a low WR.  So teh only following argument is that we're in for worse than the great depression.  At that point, why even worry about the future?  Preppers...

[maizefolk]

Yup. Controversial statements are a great way for blogs to get both clicks and links. This creates two issues.

The first what Eric mentioned, is one of incentives. People to try to come up with ways to claim the 4% rule doesn't work to drive traffic.

The second is one of ascertainment bias. Because the stories that claim the 4% rule don't work get more discussion and more links, any given person is more likely to come across links to those stories than stories talking about how the 4% rule continues to work fine for most scenarios in most starting years. So a sample of what you, or I, or anyone else read is probably skewed relative to the underlying ratio of stories written presenting these two different results.

[Mr Mark]

Still, even us financial preppers (have to admit i am one of those...you know its true) know that universal life (or whatever they are calling it these days) is a bad deal with higher failure risk than indexed equities, well invested (look at all the financial firm failures). 

If you really are afraid the answer isnt fake 'guaranteed returns', its financial resilience by either saving more or spending less.  That simple.  Very few people need lifelong insurance.  Its like buying a contraft for a lifetime supply of coke because you want a beverage for lunch.  Buy what you need, when you need it (term)...build wealth via a good savings rate, low spending and the most efficient assets around (index funds).

Yeah, I get the impression the internet information explosion has started to really have a negative impact on all these financial advisors and the active fund manager con game "business". Vanguard is pulling in so much money it's got the financial industry running scared. With over $4 trillion AUM in Vanguard alone... in the good ol' days (when they could cream 2% in fees) that's 80 billion dollars a year they're losing in fee revenue.

Plus the competition from Vanguard has forced the for-profit firms like Fidelity et al to cut their passive fund fees to the bone as well.

So what to do to stop the leakage to Vanguard and other cheap index funds? Keep pumping out articles about how dangerous index funds are, how an active strategy can beat the market and index funds are dumb, cherry pick historical returns to show your strategy beating the index, etc. Make the market seem complex, and scary. Emphasise the big corrections and how terrible it would be to "loose" 50% of your savings  (even though that only happens if you happen to have bought the top, then panic, and sell the low.)

heck, some of them might even believe that crap. As the famous quote from Upton Sinclair goes — 'It is difficult to get a man to understand something, when his salary depends on his not understanding it.'

[PizzaSteve]

Yeah, I get the impression the internet information explosion has started to really have a negative impact on all these financial advisors and the active fund manager con game "business". Vanguard is pulling in so much money it's got the financial industry running scared. With over $4 trillion AUM in Vanguard alone... in the good ol' days (when they could cream 2% in fees) that's 80 billion dollars a year they're losing in fee revenue.

Plus the competition from Vanguard has forced the for-profit firms like Fidelity et al to cut their passive fund fees to the bone as well.

So what to do to stop the leakage to Vanguard and other cheap index funds? Keep pumping out articles about how dangerous index funds are, how an active strategy can beat the market and index funds are dumb, cherry pick historical returns to show your strategy beating the index, etc. Make the market seem complex, and scary. Emphasise the big corrections and how terrible it would be to "loose" 50% of your savings  (even though that only happens if you happen to have bought the top, then panic, and sell the low.)

heck, some of them might even believe that crap. As the famous quote from Upton Sinclair goes — 'It is difficult to get a man to understand something, when his salary depends on his not understanding it.'

To be fair, several for profit firms have also been on the same side as Vanguard, pushing for efficient investing.  Charles Schwab was among the first to undercut broker trading fees and promote the idea investors can do it themselves, and dont need advisors. Fidelity has pushed low cost passive funds right along the way.  I dont think Vanguard competition alone 'forced this strategy,' but understand the sentiment.  We should reward both VG and these for profit firms with our support, when appropriate.  Low cost, passive funds from companies like Charles Schwab are fine and us customers should constantly remind them what created their success (driving down investing costs) and that they risk losing their clients if they backslide towards shady practices.

[chasesfish]

Agree with PizzaSteve - ITOT purchased through Fidelity is the cheapest ETF out there for purchases under $20,000.  Commission free on the front end and 0.03% expense ratio.  They reserve the right to charge $0.01 to $0.03 per share at the sale, but I've never sold. 

[nereo]

...nothing can beat the government's rates on their funds.  Course you have to be military or similar to invest, but I think it's 0.02%...

[Mr Mark]

Yeah, I get the impression the internet information explosion has started to really have a negative impact on all these financial advisors and the active fund manager con game "business". Vanguard is pulling in so much money it's got the financial industry running scared. With over $4 trillion AUM in Vanguard alone... in the good ol' days (when they could cream 2% in fees) that's 80 billion dollars a year they're losing in fee revenue.

Plus the competition from Vanguard has forced the for-profit firms like Fidelity et al to cut their passive fund fees to the bone as well.

So what to do to stop the leakage to Vanguard and other cheap index funds? Keep pumping out articles about how dangerous index funds are, how an active strategy can beat the market and index funds are dumb, cherry pick historical returns to show your strategy beating the index, etc. Make the market seem complex, and scary. Emphasise the big corrections and how terrible it would be to "loose" 50% of your savings  (even though that only happens if you happen to have bought the top, then panic, and sell the low.)

heck, some of them might even believe that crap. As the famous quote from Upton Sinclair goes — 'It is difficult to get a man to understand something, when his salary depends on his not understanding it.'

To be fair, several for profit firms have also been on the same side as Vanguard, pushing for efficient investing.  Charles Schwab was amonb the first to undercut broker trading fees and promote the idea investors can do it themselves, and dont need advisors. Fidelity has pushed low cost passive funds right along the way.  I dont thing Vanguard competition 'forced this strategy.'  We should reward these for profit firms with our support, when appropriate.  Low cost, passive funds from companies like Charles Schwab are fine and us customers should constantly remind them what created their success (driving down investing costs) and that they risk losing their clients if they backslide towards shady practices.

Pizzasteve

Sure, fair enough, Schwab et al started cutting fees too especially for brokerage services, but I think competition from Vanguard (and passive index funds in general) were a big driver. However, I'd say their objective is not to get you and I to invest 100% into a cheap low cost index fund, but to up-sell people into more actively managed funds and products where the fees are much higher. The index funds are almost being operated as 'loss leaders'.

Meanwhile the shadier end of the investment services spectrum (Jones, Deveer, et al) are actively pushing this sort of high fee/high selling bonus Universal life shit, or high churn rebalancing strategies. There's a reason the industry lobbied hard to get the new administration to drop the feduciary rule requirement for financial advisors. They simply do not want to have to act in the true financial interest of their clients. They want to earn as much as they can in bonuses for themselves and fees and profits for their shareholders. Those fees and costs  - by definition  - will come at the expense of lower compounded returns in investors' portfolios.

[arebelspy]

This is personal fiance, and because of this everyone is viewing the 4% SWR through there own biases. Some people are high corporate earners with no plans of producing any income after they FIRE. They are decide to shoot for a 3% SWR because it provides additional safety and will only take year to reach once they have hit a 4% SWR.

Others are entrepreneurial and plan to generate a little bit of income in FIRE so they are comfortable with a SWR of 5%. Others hate there job so much they are willing to take the additional risk of a SWR of 5% to get out of it.

Some people have extra "room" in there monthly budget. Some people on the forums have a family to support. Others have a pension or social security right around the corner. The older folks may be more risk averse after seeing recessions and other world problems first hand.

Given all this variation what is one to do? Summarize! I have rarely if ever seen anyone advocate a SWR of 2% or 6% on the forums with good reason. The 2% is overly conservative while the 6% is extremely aggressive, so we will through these out. We have a remaining range of 3% to 5%. I have seen people on these forums recommend and use a SWR in this range and the math shows, historically, a SWR in this range has a reasonable chance of success.

My advice to you is to plug 4% in your spreadsheet. When you get close to FIRE and know what your life looks like you can pick a SWR date based on something between 3% and 5%.

This is a great post.

We do have some outliers on the 2% and less side (those who can't seem to let go of their jobs), and a few who go 6%+ (though usually with a semi-ER plan to earn more, very rarely have I seen a straight 6%+ plan to withdraw and see how it goes w/o a plan to earn more), but the vast majority, as you say, is between 3 and 5%.  So pick something in there, and when you get close, go with what makes you happy. Feel the pull to quit and travel? Do it once you're in that range.  Feel scared and need to OMY, and are willing to sell another year of your life for more warm fuzzies? Okay, stay and lower your ER a bit more towards the low end of that range.  Anything in there, and you should be fine.

[EscapeVelocity2020]

We do have some outliers on the 2% and less side (those who can't seem to let go of their jobs).

Feel the pull to quit and travel? Do it once you're in that range.  Feel scared and need to OMY, and are willing to sell another year of your life for more warm fuzzies? Okay, stay and lower your ER a bit more towards the low end of that range.  Anything in there, and you should be fine.

Also a really good summary of the extremes.  Obviously USE has been in a generous market return phase, so I encourage those at 4% SWR, who are courageous, to quit and travel too!  And blog and YouTube (although it is not very lucrative anymore, you might meet interesting people which may enrich your life).  If you stick with it, you might find a new income source or learn to live well on less.  But those that quit and travel should not think they now have the answer to where USE goes next, nor that 4% SWR is 100% success for the future.  OMY could be more valuable going forward than most had given it credit for (one less year of retirement, one more year of retirement savings in a stagnant or declining market), but I could be wrong :) 

[deborah]

What is USE?

[arebelspy]

What is USE?

From context I'd guess US Equities.

[Tyson]

We do have some outliers on the 2% and less side (those who can't seem to let go of their jobs).

Feel the pull to quit and travel? Do it once you're in that range.  Feel scared and need to OMY, and are willing to sell another year of your life for more warm fuzzies? Okay, stay and lower your ER a bit more towards the low end of that range.  Anything in there, and you should be fine.

Also a really good summary of the extremes.  Obviously USE has been in a generous market return phase, so I encourage those at 4% SWR, who are courageous, to quit and travel too!  And blog and YouTube (although it is not very lucrative anymore, you might meet interesting people which may enrich your life).  If you stick with it, you might find a new income source or learn to live well on less.  But those that quit and travel should not think they now have the answer to where USE goes next, nor that 4% SWR is 100% success for the future.  OMY could be more valuable going forward than most had given it credit for (one less year of retirement, one more year of retirement savings in a stagnant or declining market), but I could be wrong :)

That's pretty much the same statement that could be made at every point throughout the history of the market.  It might go up, might go down, might stagnate, for a while.  But eventually it always goes up.  Just have enough cushion to weather a few bad years early on and you'll be fine. 

[Exflyboy]

I like my cushion..:)

[Mr Mark]

Yeah, I get the impression the internet information explosion has started to really have a negative impact on all these financial advisors and the active fund manager con game "business". Vanguard is pulling in so much money it's got the financial industry running scared. With over $4 trillion AUM in Vanguard alone... in the good ol' days (when they could cream 2% in fees) that's 80 billion dollars a year they're losing in fee revenue.

Plus the competition from Vanguard has forced the for-profit firms like Fidelity et al to cut their passive fund fees to the bone as well.

So what to do to stop the leakage to Vanguard and other cheap index funds? Keep pumping out articles about how dangerous index funds are, how an active strategy can beat the market and index funds are dumb, cherry pick historical returns to show your strategy beating the index, etc. Make the market seem complex, and scary. Emphasise the big corrections and how terrible it would be to "loose" 50% of your savings  (even though that only happens if you happen to have bought the top, then panic, and sell the low.)

heck, some of them might even believe that crap. As the famous quote from Upton Sinclair goes — 'It is difficult to get a man to understand something, when his salary depends on his not understanding it.'

To be fair, several for profit firms have also been on the same side as Vanguard, pushing for efficient investing.  Charles Schwab was amonb the first to undercut broker trading fees and promote the idea investors can do it themselves, and dont need advisors. Fidelity has pushed low cost passive funds right along the way.  I dont thing Vanguard competition 'forced this strategy.'  We should reward these for profit firms with our support, when appropriate.  Low cost, passive funds from companies like Charles Schwab are fine and us customers should constantly remind them what created their success (driving down investing costs) and that they risk losing their clients if they backslide towards shady practices.

Pizzasteve

Sure, fair enough, Schwab et al started cutting fees too especially for brokerage services, but I think competition from Vanguard (and passive index funds in general) were a big driver. However, I'd say their objective is not to get you and I to invest 100% into a cheap low cost index fund, but to up-sell people into more actively managed funds and products where the fees are much higher. The index funds are almost being operated as 'loss leaders'.

Meanwhile the shadier end of the investment services spectrum (Jones, Deveer, et al) are actively pushing this sort of high fee/high selling bonus Universal life shit, or high churn rebalancing strategies. There's a reason the industry lobbied hard to get the new administration to drop the feduciary rule requirement for financial advisors. They simply do not want to have to act in the true financial interest of their clients. They want to earn as much as they can in bonuses for themselves and fees and profits for their shareholders. Those fees and costs  - by definition  - will come at the expense of lower compounded returns in investors' portfolios.

Well, no one firm is perfect, including Vanguard, who have their own internal governance challenges.  I think the temptations of the money game are always there, so lets keep a healthy competition going, and read those annual reports.  😉

If only Vanguard had an afilliate deal I'd set up as a financial advisor tomorrow and put them in a VTSAX plus bond %

[chasesfish]

Vanguard has done a great job of getting investors focused on costs.   

At the institution I work for, their side of active money management has gone to a much smaller wrap fee and utilizing Vanguard/iShares ETFs.  The feedback I get is all of the clients are focused on costs.

[Mr Mark]

Amazing quote from this week's Financial Times mag (pg 42)

"The average all-in fee charged by the UK's wealth managers is approximately 2.24 per cent..."

Nice work if you can get it eh?

"Wealth managers are feeling downward pressure on their fee margins from the raise of lower-cost passive investment... "

Oh how sad.

[chasesfish]

2.24%, amazing!!

Was looking at making some more conservative moves, Vangaurd proved two nice active options with the Wellington and Wellesly Fund, 0.15% and 0.16% expense ratios on the admiral shares

[crimwell]

This is personal fiance, and because of this everyone is viewing the 4% SWR through there own biases. Some people are high corporate earners with no plans of producing any income after they FIRE. They are decide to shoot for a 3% SWR because it provides additional safety and will only take year to reach once they have hit a 4% SWR.

Others are entrepreneurial and plan to generate a little bit of income in FIRE so they are comfortable with a SWR of 5%. Others hate there job so much they are willing to take the additional risk of a SWR of 5% to get out of it.

Some people have extra "room" in there monthly budget. Some people on the forums have a family to support. Others have a pension or social security right around the corner. The older folks may be more risk averse after seeing recessions and other world problems first hand.

Given all this variation what is one to do? Summarize! I have rarely if ever seen anyone advocate a SWR of 2% or 6% on the forums with good reason. The 2% is overly conservative while the 6% is extremely aggressive, so we will through these out. We have a remaining range of 3% to 5%. I have seen people on these forums recommend and use a SWR in this range and the math shows, historically, a SWR in this range has a reasonable chance of success.

My advice to you is to plug 4% in your spreadsheet. When you get close to FIRE and know what your life looks like you can pick a SWR date based on something between 3% and 5%.

This is a great post.

We do have some outliers on the 2% and less side (those who can't seem to let go of their jobs), and a few who go 6%+ (though usually with a semi-ER plan to earn more, very rarely have I seen a straight 6%+ plan to withdraw and see how it goes w/o a plan to earn more), but the vast majority, as you say, is between 3 and 5%.  So pick something in there, and when you get close, go with what makes you happy. Feel the pull to quit and travel? Do it once you're in that range.  Feel scared and need to OMY, and are willing to sell another year of your life for more warm fuzzies? Okay, stay and lower your ER a bit more towards the low end of that range.  Anything in there, and you should be fine.

Maybe I should have just posted the thread I started in here instead: https://forum.mrmoneymustache.com/investor-alley/nobel-winner-william-sharpe-(sharpe-ratio)-tackling-retirement-planning/

Basic thesis: 4% rule may be best we have but clearly model misses a lot of important info. I agree the problem is obvious, based on people's endless discussions about whether or not to really use 3.5%, 3%, how to time it, etc.

https://www.bloomberg.com/view/articles/2017-06-05/tackling-the-nastiest-hardest-problem-in-finance

[EscapeVelocity2020]

This is personal fiance, and because of this everyone is viewing the 4% SWR through there own biases.
...

This is a great post.

We do have some outliers on the 2% and less side (those who can't seem to let go of their jobs), and a few who go 6%+ (though usually with a semi-ER plan to earn more, very rarely have I seen a straight 6%+ plan to withdraw and see how it goes w/o a plan to earn more), but the vast majority, as you say, is between 3 and 5%.  So pick something in there, and when you get close, go with what makes you happy. Feel the pull to quit and travel? Do it once you're in that range.  Feel scared and need to OMY, and are willing to sell another year of your life for more warm fuzzies? Okay, stay and lower your ER a bit more towards the low end of that range.  Anything in there, and you should be fine.

Maybe I should have just posted the thread I started in here instead: https://forum.mrmoneymustache.com/investor-alley/nobel-winner-william-sharpe-(sharpe-ratio)-tackling-retirement-planning/

Basic thesis: 4% rule may be best we have but clearly model misses a lot of important info. I agree the problem is obvious, based on people's endless discussions about whether or not to really use 3.5%, 3%, how to time it, etc.

https://www.bloomberg.com/view/articles/2017-06-05/tackling-the-nastiest-hardest-problem-in-finance

Good contributions, but I think all of this is trending toward 4% being less than a foolproof number for ER.  In fact, I predict that we will start to hear from ER failures within the next 4 years.  Some of it may be quite ugly, depending on how long the passive income drought lasts.   And those survivors will be much more instructive than all of this "I ER'ed at 30 into a bull market and now make great passive income blogging about it" stuff.  That, obviously, is not sustainable, or else the stock  market will go up faster and faster forever, and we know that never happens.   

[maizefolk]

Good contributions, but I think all of this is trending toward 4% being less than a foolproof number for ER.  In fact, I predict that we will start to hear from ER failures within the next 4 years.  Some of it may be quite ugly, depending on how long the passive income drought lasts.   And those survivors will be much more instructive than all of this "I ER'ed at 30 into a bull market and now make great passive income blogging about it" stuff.  That, obviously, is not sustainable, or else the stock  market will go up faster and faster forever, and we know that never happens.   

Do you mean folks getting scared by market declines and jumping back into the labor force? Or literal "I ER'ed and then ran out of money" stories? Assuming folks have been retiring on 4% (25 years expenses), and most folks are either break even or way ahead since they FIREd given the recent run up in the market, I'm not sure 4 years would be enough to start generating failures.

If the market crashes 80% tomorrow and stays flat for the next four years, someone who started with 25 years worth of expenses wouldn't be (quite) broke yet after 4 years, though it'd be clear they weren't going to recover.

[Exflyboy]

Well the way the 4% is written is that you decide which day you are FIRED on then take 4% of your stash. Then next year 4% + the rate of inflation.

Wait a minute.. What if the market tanks 50% the day after you retire? The 4% as rule as I understand it has you blindly spending 4% of the market top peak stash.

I doubt if anyone would really do this.. In fact it would make much more sense to only take 4% (max) of the stash at the time of withdrawal. Mustacians are masters of belt tightening after all.

Now if you add to that the fact you retired knowing what your spend needs to be, one would assume that if the market goes on a runaway tear one is likely to spend less than 4% by definition.

I wonder if this effect will be enough to save the 4% "rule"?

[EscapeVelocity2020]

Hey guys, the great Oz has spoken, alright :) 

But yeah, I'd hope people go back to work in a 2008-type scenario.  Being ER and hoping the market comes back is ridiculous.  I mean, it came back eventually, but the trajectory of portfolio recovery is breathtaking if you look at retired and waiting vs. actively investing through the downturn.  I'll have to look for a reference paper or do a quick follow-up comparison, but it was night and day.  When you are spending, even a reduced amount, of depressed assets vs. consistently buying...
[Edit to add - I did a quick run using S&P total returns and the "wait for recovery 2008 4% SWR ER" was underwater until 2013.  "Invest during the downturn" folks were back to even by 2010 due to 2009 ultimately being a 26% gain, and are way ahead by 2013...] 

Anyways, I made my prediction and we all know predictions turn out to be wrong.  Except when you beat the house, win the lottery, and all the other cool stuff :)  Maybe 2008/9 was my only win.  I'd be cool with that.

[Monkey Uncle]

Hey guys, the great Oz has spoken, alright :) 

But yeah, I'd hope people go back to work in a 2008-type scenario.  Being ER and hoping the market comes back is ridiculous.  I mean, it came back eventually, but the trajectory of portfolio recovery is breathtaking if you look at retired and waiting vs. actively investing through the downturn.  I'll have to look for a reference paper or do a quick follow-up comparison, but it was night and day.  When you are spending, even a reduced amount, of depressed assets vs. consistently buying...

Anyways, I made my prediction and we all know predictions turn out to be wrong.  Except when you beat the house, win the lottery, and all the other cool stuff :)  Maybe 2008/9 was my only win.  I'd be cool with that.

MMM retired in 2005, just two years or so before the market top.  Plus he made some stupid mistakes on a spec house, IIRC.  He didn't start blogging until 2011.  Did his side income from the construction business carry him through the Great Recession?

[EscapeVelocity2020]

MMM retired in 2005, just two years or so before the market top.  Plus he made some stupid mistakes on a spec house, IIRC.  He didn't start blogging until 2011.  Did his side income from the construction business carry him through the Great Recession?

Well maybe, I think the construction business was a flop, but from what I understand, his wife was working and they rented out a house they couldn't sell.  He wrote about 2008/9 from hindsight, which is entirely different than writing during the crisis.  I quoted a bit of the article and added in some commentary in (paranthesis).

Things didn’t always go smoothly.  The Great Financial crisis hit in 2008, and caused the worst recession since the Great Depression. The value of my retirement savings in stocks was sliced in half. I was also stuck with an extra house I couldn’t sell. We had been blindsided by something we never could have predicted a few years earlier.

Were our early retirement dreams shattered?

Amazingly enough, they barely took a hit! (because it was 2012 when he wrote this, just a minute ago he was talking about losing half his savings).  Most US companies continued to make their dividend payments at a barely-reduced level throughout 2008 and 2009 (he earlier stated a 21% decline).  The rental market remained strong enough to keep properties from sitting vacant (although the home was underwater).  Sure, the stock prices were down, but who cares about stock prices when you’re not selling them? (never selling stocks if prices decline is not the 4% rule, especially if yields are low, more like a 2.5% rule).

We dialed back our spending for a year or two, continued to rent out the un-sellable house, and I even made a point of doing some extra work so I could afford to buy some of the stocks that had been beaten down to bargain levels. (which is a 'retirement fail' scenario, needing to work for income, in this case to buy stock).

So in hindsight, everything worked out peachy and he continues to write from this perspective today.  He probably didn't need to work and dial back savings those couple years, knowing what we know now, but I'd hardly say he was relaxed and confident.  His actions speak louder than his words, at least to me.

[Retire-Canada]

His actions speak louder than his words, at least to me.

Yup. Don't work extra years at the prime of your life just in case. Just get to a reasonable point [like 4%WR] and then get on with your life.

[EscapeVelocity2020]

His actions speak louder than his words, at least to me.

Yup. Don't work extra years at the prime of your life just in case. Just get to a reasonable point [like 4%WR] and then get on with your life.

Kinda, except I'd phrase it more as 'Don't work at something you dislike any longer than you absolutely must.  Work, in and of itself, is fine.' (paraphrasing many MMM posts).  He construed his working during 2008/9 as being involuntary (that he enjoyed getting back to focus on raising his son in 2010), which is why I characterized that period as an ER fail - that he ER'ed in 2005 then worked a couple years when things got bad. 

[Classical_Liberal]

It seems people go through phases regarding the 4% rule. 

Phase One: Just learned of the possibility of FIRE and are "on board". Did some compounding interest math & Cfiresim, 4% rule seems legit. Plus all these internet people are saying its cool, so how can it be wrong? Unknown, Unknowns.

Phase Two:  Middle to late accumulation and has been more exposed to the details of investing/cashflow, ect.  Now sees the risk in a straight 4% rule, but not too concerned.  Draw-down is down the road, plus even part time work seems better than what she's doing now. Known, Unknowns, but not immediately concerning.

Phase Three:  End accumulation/beginning draw-down.  Small chances of 4% rule failure are exaggerated.  Whatever the financial markets look like, the future is  obviously going to be worse than historical. After years of planning the idea of failure is scary.  The idea of working again for less $ at some unknown point also sucks. These are the folks most concerned about the 4% rule. Known, Unknowns with potential immediate consequences

Phase Four:  FIRE'd for multiple years.  Returns have been good and FIRE'ee accidentally made a few unplanned thousand dollars each year due to serendipitous opportunities which arise from freedom of time and location.  WR is now well below 4%, so no concerns.  OR Horrible recession, stache dips to levels that are scary.  FIRE'ee decides to take some part time work to avoid long term failure, even though the numbers are still on her side; "better safe than sorry".  FIRE'ee manufactures some employment around life, whereas before life revolved around employment.  Soon recession is over, WR back to under 4% and FIRE'ee thinks "wow, that wasn't so bad, I can't believe I wasted so much time worrying about the worse cases of the 4% rule"(this is where MMM writes that article).  Either way it's now Known, Knowns.

I'm sitting squarely in the phase two camp, trying to learn from the phase four folks so I can partially avoid phase three.
 

[TomTX]

Good contributions, but I think all of this is trending toward 4% being less than a foolproof number for ER.  In fact, I predict that we will start to hear from ER failures within the next 4 years.  Some of it may be quite ugly, depending on how long the passive income drought lasts.   And those survivors will be much more instructive than all of this "I ER'ed at 30 into a bull market and now make great passive income blogging about it" stuff.  That, obviously, is not sustainable, or else the stock  market will go up faster and faster forever, and we know that never happens.

"Disproving" the 4% rule is clickbait - the purpose of these articles is to get people to click on them and generate ad revenue. It's more sensational to say "WAIT! YOUR PLANS ARE NOT AS SAFE AS YOU THINK! CLICK HERE TO FIND OUT MORE!!!!" than to say "Yep, 4% rule. Works 95% of the time with a reasonable asset allocation. Ho hum. You already knew this."

Which gets more clicks, and more ad revenue?

[Eric]

Phase Three:  End accumulation/beginning draw-down.  Small chances of 4% rule failure are exaggerated.  Whatever the financial markets look like, the future is  obviously going to be worse than historical. After years of planning the idea of failure is scary.  The idea of working again for less $ at some unknown point also sucks. These are the folks most concerned about the 4% rule. Known, Unknowns with potential immediate consequences

[snip]

I'm sitting squarely in the phase two camp, trying to learn from the phase four folks so I can partially avoid phase three.
 

Phase 3 isn't so bad, if you're using 4% for planning purposes instead of robotic withdrawal.  Anyone retiring within the next year or two should be concerned about market valuations and second guessing whether their current balances are sustainable. 

As a personal example, at the beginning of the this year, I determined that at my current saving level, I'd be FI in 2 years with 0% market returns.  Markets were (and are) at high valuations, so I decided to work for these 2 years that would make me FI with 0% returns, since at the time 0% seemed entirely reasonable. 

What happened?  A mere 6 months in, I've already hit my FI number.  I still have 18 months to go though, since I'm sticking to my plan.  Does this mean that I will have worked for too long?  That remains to be seen, but I think it's entirely rational to expect to lose some of these recent gains.  What will my withdrawal rate be?  Who knows.  I'm simply planning to spend at the level I've already committed to, no matter what my balance is in 18 months.  Do I no longer believe in the 4% rule?  Oh no, I still believe it's very robust and would work almost every time.  I just also believe that it's ludicrous to not factor current market conditions into my planning.  In fact, I could still end up drawing 4%, if markets go down over the next 18 months, and at that time, I would be perfectly fine retiring at a 4% spend rate.  However, assuming that I end up with more than my FI number, then that's simply a cushion to be able to weather the next crash.  It would be nice to be able to take a 20% hit without flinching.  Especially because I didn't have to do any extra work to get there.  All I have to do is stick to my plan.

[Classical_Liberal]

What will my withdrawal rate be?  Who knows.  I'm simply planning to spend at the level I've already committed to, no matter what my balance is in 18 months. 

By definition this is not the 4% rule.  It's your plan or "Eric percent rule" (maybe a book deal?).  Essentially it's your variation of OMY (or 18mos) because the US S&P 500 CAPE is sitting at 29.  I get it, I may do the same thing if I were you, so no judgement. However, its clearly phase three, or some plan other than 4%WR.

[Eric]

What will my withdrawal rate be?  Who knows.  I'm simply planning to spend at the level I've already committed to, no matter what my balance is in 18 months. 

By definition this is not the 4% rule.  It's your plan or "Eric percent rule" (maybe a book deal?).  Essentially it's your variation of OMY (or 18mos) because the US S&P 500 CAPE is sitting at 29.  I get it, I may do the same thing if I were you, so no judgement. However, its clearly phase three, or some plan other than 4%WR.

I know it's phase 3, but I'm saying it's not so bad.  At least not the way I've set it up, since I have clearly defined expectations.  I was just trying to explain the juxtaposition of believing in a 4% WR and deciding that maybe right at this exact moment is not the proper time to execute it without considering other factors.  After all, it is a planning tool, nothing more.

Also, I could still end up at a 4% WR.  All we need is a reasonable correction in the next handful of months.  Wouldn't that be something?!

[Monkey Uncle]

Despite my baiting of EscapeVelocity's pessimism, I'm also in Phase 3.  According to my cFiresim runs, I should have bailed a year ago.  But I wanted to have about a $5k/yr spending buffer to cover infrequent large expenses and account for the possibility that future sequence of return risk might be worse than anything that has occurred in the past.  Also, I'm including expected SS and pension benefits in my calculations, so I feel like that calls for a safety buffer since I would only be a little more than halfway to my number if I ignored those income sources.  And I'm sitting tight until the US health care mess gets sorted out one way or another.  Put all that together and I'm looking at a projected FIRE date at the end of 2017/beginning of 2018, with potentially a $12k/year spending buffer.  Yeah, phase 3.

[EscapeVelocity2020]

Hey, bait away guys, I don't mind challenging my preconceived perception that status quo in Phase 3 is pretty awesome.  And I think the 4% rule is the best starting point / ER planning tool available, just that maybe there is more to  it once you've ridden an 8 year bull market to your number and beyond... 

In phase 3, I get to be about as free as I can imagine.  I don't stress about taking sick days, half days for family matters, and long vacations, as long as I get my critical work done.  Most of my bosses are near traditional retirement, so they're around even less than I am.  As a bonus, my net worth goes up in one year what it used to take 5 -10 years of hard work and saving to accomplish when I started out.  Think of all the good I can do for others in the future!  So many possibilities.

On the flip side, phase 4 sounds kinda boring to me.  I'm pretty cheap, so having to pay for my own travel and not having a paycheck to give me warm fuzzies about break even cash flow probably means I'll do less novel stuff.  Like scuba diving, I don't think  I'd be getting certified if money were on my mind but the opportunity came up with my son's Boy Scout troop, so why not?  I want to see as much of this beautiful planet as I can!

But I do think I'll ER at 45.  20 extra years of retirement sounds pretty good too.  Anyway, in phase 3 you've got pretty much all the options to pick from (as long as you don't let working be too confining).  I am OK with the work / life balance (my wife is a SAHP) but I understand others aren't.

[CanuckExpat]

FIRE'd for multiple years.  Returns have been good and FIRE'ee accidentally made a few unplanned thousand dollars each year due to serendipitous opportunities which arise from freedom of time and location.  WR is now well below 4%, so no concerns.  OR Horrible recession, stache dips to levels that are scary.  FIRE'ee decides to take some part time work to avoid long term failure, even though the numbers are still on her side; "better safe than sorry".  FIRE'ee manufactures some employment around life, whereas before life revolved around employment.  Soon recession is over, WR back to under 4% and FIRE'ee thinks "wow, that wasn't so bad, I can't believe I wasted so much time worrying about the worse cases of the 4% rule"(this is where MMM writes that article).  Either way it's now Known, Knowns.

Good contributions. Emphasis mine on some particularly salient points.

We retired (or was it sabbatical, or just quitting, terminology) with a lot of unknowns in our budgets. And I would say I still have reservations about a robotic application of a 4% withdrawal rule going forward, BUT over the first year at least, it appears we've made a bit of extra money, mainly from freedom of time and location (still no W2 income), spent a bit lesss than planned also from freedom of time and location, and our effective withdrawal rate over six months was 1.5%, and we've had a booming stock market to help a bit with psychological worries (this could change any time).

So in theory I have concerns, in practice nothing to worry about so far.
Future will tell how long all of that lasts

[deborah]

I retired with most of my money in superannuation - Australian - similar to 401k, but you can get control of it at somewhere between 55 and 60, AND you have to take out a certain percentage each year - initially 4%. So after the first years (before 55), I was living by the 4% rule. This has not been an issue. Of course the reason you have to take out a certain amount each year is that it is tax free - but it is still growing.

[Exflyboy]

Do you have to pay taxes on your Super when you take it out as income?

[deborah]

Do you have to pay taxes on your Super when you take it out as income?

No. They have recently changed things so that it's only the first $1.6million that can actually be in pension phase, and thus be tax free.

[Exflyboy]

Nice.. Thats the big difference to a 401k as its taxed when you take it out.

[Livewell]

In phase 3, I get to be about as free as I can imagine.  I don't stress about taking sick days, half days for family matters, and long vacations, as long as I get my critical work done.  Most of my bosses are near traditional retirement, so they're around even less than I am.  As a bonus, my net worth goes up in one year what it used to take 5 -10 years of hard work and saving to accomplish when I started out.  Think of all the good I can do for others in the future!  So many possibilities.
....

But I do think I'll ER at 45.  20 extra years of retirement sounds pretty good too.  Anyway, in phase 3 you've got pretty much all the options to pick from (as long as you don't let working be too confining).  I am OK with the work / life balance (my wife is a SAHP) but I understand others aren't.

I think this is where I'm headed and agree it's not a bad place to be.  Sometimes I think about no work, and other times I think one more year for a period, as long as work life balance is there, would be great.  Have your cake and eat it too.  What's missing is now I'm still working towards FI, and it means I'm still stressing about work, however well into FU money.  Call it phase 2.5.

[runewell]

It sounds like the 4% rule simulates success rates based on the distribution of historical returns.

However, research shows that high CAPE ratios are generally followed by periods of low returns. 

http://www.starcapital.de/research/CAPE_Stock_Market_Expectations

They are only expecting 3.1%-3.5% returns on US investments going forward.

[Tyson]

It sounds like the 4% rule simulates success rates based on the distribution of historical returns.

However, research shows that high CAPE ratios are generally followed by periods of low returns. 

http://www.starcapital.de/research/CAPE_Stock_Market_Expectations

They are only expecting 3.1%-3.5% returns on US investments going forward.

So then just save up 30x expenses instead of 25x expenses, if you are worried about that.

[Classical_Liberal]

They are only expecting 3.1%-3.5% returns on US investments going forward.

Even if that were the case (I do not concede that point, there are many reasons CAPE is high) , CAGR is not the only factor to consider when looking at the 4% rule.  Volatility is at least as important, particularly in early withdrawal.  If I got 3.5% above inflation, without any volatility, a 4% WR would last about 70 years.

[TomTX]

It sounds like the 4% rule simulates success rates based on the distribution of historical returns.

However, research shows that high CAPE ratios are generally followed by periods of low returns. 

http://www.starcapital.de/research/CAPE_Stock_Market_Expectations

They are only expecting 3.1%-3.5% returns on US investments going forward.

How much of that high CAPE is due to changes in GAAP accounting?

"Earnings" today are pretty different than "Earnings" 30 years ago.

[Retire-Canada]

How much of that high CAPE is due to changes in GAAP accounting?

"Earnings" today are pretty different than "Earnings" 30 years ago.

Good point....

http://www.philosophicaleconomics.com/2013/12/shiller/