Author Topic: Stop worrying about the 4% rule  (Read 179055 times)

tyort1

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Re: Stop worrying about the 4% rule
« Reply #850 on: July 19, 2017, 02:38:45 PM »
even then, P/E ratios have “explained”only about 40% of the time variation in net-of-inflation returns.

You're making investing decisions on indicators that are only right about 40% of the time?  Holy crap!

First of all, that's not what it means.
Second of all, it's "40% more" information than you have.

OK, then explain what it means. 

Here's the chart I'm looking at:



To me it looks like high CAPE is correlated with high returns and low CAPE is correlated with low returns.  If this is true, you shouldn't get out when CAPE is increasing.  You should ride it as long as possible because that's where your gains are. 

On the other hand, when should one get off and move $$ elsewhere?  That's impossible to predict.  We might tap out at CAPE 30, or we might to to CAPE 44, or even higher.  That's what it means when we say the future is not really predictable.  Which is why you invest in VTSAX and don't ever sell.  If you are in the accumulation phase, keep buying, even during dips.  Make sure you have some bonds, they act like dry powder during stock dips.  Diversify with international stocks (I do).  These 2 things are hedges against 100% VTSAX and I think they are smart given volatility is inevitable with stocks. 

If you are retiring in the next 3 to 5 years, then maybe CAPE has more value.  I'm not, so I'll keep buying, every month, regardless.  I'm also saving up 30x expenses and will have a paid off home before pulling the plug.  My yearly budget will also have at least $10 to $20k that I could easily cut without any issues.  Again, more hedges.  But then again, I'm really very conservative when it comes to this stuff.
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maizeman

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Re: Stop worrying about the 4% rule
« Reply #851 on: July 19, 2017, 02:45:27 PM »

2) The dangers of overfitting models. The overall historical record for the stock market just isn't that long as statistical datasets go. It wouldn't take putting too many factors into a model to predict historical data perfectly but aren't useful at all to predict future returns. Without doing cross validation it's very easy to end up very confident and very wrong at the same time.

3) In your posts so far you've kind of waved aside the expertise already present on the forum regarding CAPE ratios and the (very legitimate I think) issues those folks brought up with the changes in how earnings must legally be reported and how this means a CAPE of 20 today doesn't reflect the same underlying ratio of business productivity to stock price as it would have in 1965.

Fair enough.  A portion of my time at work is trying to fit new variables to insurance pricing models so I am very interested in all of this.

That makes sense. The great thing about insurance datasets (health, auto, life, or other) is that you likely have access to 100k's of largely independent datapoints to test the correlation between a given potential explanatory variable or combination of variables and outcomes (car crashes, premature deaths, what have you). That gives plenty of data to subdivide, use a portion of your data to develop a model and another portion to validate the model.

The thing you've got to remember with historical stock market data we have only ~150 years of data and the data is autocorrelated (bad years are more likely like come before or after each other expected than by chance alone, and good years also tend to cluster). This is why monte carlo stock market simulations tend to produce more optimistic outcomes than historical backtesting. It also means that it's much much easier to develop overfit models than the types of data you're used to working with.
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runewell

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Re: Stop worrying about the 4% rule
« Reply #852 on: July 19, 2017, 02:48:01 PM »

If all that is correct so far, even if the CAPE data predicts it, I'm having a little bit of trouble understanding the proposed mechanism by which a recession in 2007-2009 predicts lower than average earnings in 2017-2037.  In other words, my suspicion is that it is data-fitting rather than an economic theory - the same as the price of butter in Bangladesh or skirt lengths or who wins the Super Bowl.

I'd really appreciate your (or anyone else's) thoughts or clarifications.

Hi there! 
Have a look at this graph.
http://www.multpl.com/shiller-pe/
Because the CAPE was above 30 from 1997-2002, the formula predicts that the average annual return for the next 10-15 years would be 0.5% (or at least below average).  So let's look at the ETF SPY and see how 15-yr returns fared during that time:

15 Years staring / Begin Price / End Price / Return / Annualized
Jan1998 / 98.31 / 149.70 / 52.3% / 2.8%
Jan1999 / 127.66 / 178.18 / 39.6% / 2.2%
Jan2000 / 139.56 / 199.45 / 42.9% / 2.4%
Jan2001 / 137.02 / 193.72 / 41.4% / 2.3%
Jan2002 / 113.18 / 227.53 / 101.0% / 4.8%

During this 5-yr period of 30+ CAPE ratios the 15-yr investment return was pathetic.  I remember the dot-com boom and bust, for a while stocks went up and up, but at ridiculous valuations and eventually everything came crashing down again.  Money kept going into the 401k, but the 401k didn't seem to go up for awhile.

Personally I don't think our CAPE 30 situation today is nearly as dangerous.  But the historical returns for 30+ CAPE investments are so bad that I am ready to tilt my portfolio to more international.  The UK only has a CAPE ratio of 15.  China is 15, Australia is 17.  That's where my money is going.

I know you had more to say (why the ginormous gap between CAPE and forward P/E?)  That I do not know right now, not sure I will even find out.  It is possible to download a spreadsheet with Robert Shiller's calculations, I did that once.  That might be a good place to start.  He doesn't do other countries though like this Star Research site.
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maizeman

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Re: Stop worrying about the 4% rule
« Reply #853 on: July 19, 2017, 02:51:19 PM »
If the CAPE has been rising recently but the current PE's have been historically average, the only reason I can imagine that to be the case is that the rolling 10-year window of CAPE is having some lower-than-average PE ratios drop out of the data set.

Another thing that can cause this is rapid growth in the absolute value of corporate earnings.

If corporate earnings are growing quickly (as they have since 2009) and the PE ratio stays the same, that means the overall valuation of the stock market also increases rapidly.

However, because the PE10/CAPE looks back at earnings over the last decade the 10 year average earnings lag behind current year earnings, so the P10/CAPE can increase at the same time.
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runewell

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Re: Stop worrying about the 4% rule
« Reply #854 on: July 19, 2017, 02:53:16 PM »

The thing you've got to remember with historical stock market data we have only ~150 years of data and the data is autocorrelated (bad years are more likely like come before or after each other expected than by chance alone, and good years also tend to cluster). This is why monte carlo stock market simulations tend to produce more optimistic outcomes than historical backtesting. It also means that it's much much easier to develop overfit models than the types of data you're used to working with.

Yes I understand this.  But I don't think Monte Carlo simulations are involved in the research presented here, so.... 
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sol

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Re: Stop worrying about the 4% rule
« Reply #855 on: July 19, 2017, 03:01:52 PM »
No, the 4% test failed for 20+ years during a 1929 start. 

I think this statement proves that you do not understand this topic very well.  Perhaps you expressed your true intentions poorly, but as written that sentence is clearly false.

runewell

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Re: Stop worrying about the 4% rule
« Reply #856 on: July 19, 2017, 03:03:40 PM »

To me it looks like high CAPE is correlated with high returns and low CAPE is correlated with low returns.  If this is true, you shouldn't get out when CAPE is increasing.  You should ride it as long as possible because that's where your gains are. 

On the other hand, when should one get off and move $$ elsewhere?  That's impossible to predict.  We might tap out at CAPE 30, or we might to to CAPE 44, or even higher.  That's what it means when we say the future is not really predictable.  Which is why you invest in VTSAX and don't ever sell.  If you are in the accumulation phase, keep buying, even during dips.  Make sure you have some bonds, they act like dry powder during stock dips.  Diversify with international stocks (I do).  These 2 things are hedges against 100% VTSAX and I think they are smart given volatility is inevitable with stocks. 

High returns occur with high CAPE because prices get bid up too high or earnings finally collapse.  After the CAPE maxes out the stock goes through a sideways period until valuations get reasonable again, then the returns can go up.

The CAPE is high enough that I think we will see a lot more sideways return in the future 10-15 years. 

Now you told me VTSAX but you're showing me a chart of the S&P.  Mainly because you can't easily get CAPE graphs.  You're content to own the whole universe of stocks: US & non-US.  The point is, if you had a graph of Europe up there the CAPE ratios would look much more attractive.  So why worry about how many months/years the S&P has left in it when you can just allocate more $$ to non-US funds where the stocks have a lot more potential to rise.

Any don't get me started about dollar-cost averaging (otherwise known as market timing).  And I don't want bonds (those hurt your long-term portfolio survival and the yields are way too low to get me interested)
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sol

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Re: Stop worrying about the 4% rule
« Reply #857 on: July 19, 2017, 03:06:04 PM »
don't get me started about dollar-cost averaging (otherwise known as market timing).  And I don't want bonds (those hurt your long-term portfolio survival

I think this statement proves that you do not understand this topic very well.  Perhaps you expressed your true intentions poorly, but as written that sentence is clearly false.

CanuckExpat

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Re: Stop worrying about the 4% rule
« Reply #858 on: July 19, 2017, 03:48:16 PM »
If you're concerned about US equity CAPE then make sure to diversify into international.

A Japanese investor would have seen his investments improved if he diversified out of his country's equity markets that were devastated in the early 1990's and have never fully recovered.

Diversify your CAPE by diversifying equity exposure.

I agree with diversifying internationally, I am 50% US, 50% non-US. This is a good time to point out though, that most of the idea that 4% is rock solid is based on historical US data, with only few developed countries being safer. If US or global market returns going forward look more "international" and less "US" like, the safety of a 4% withdrawal rate can be called into question:

From An International Perspective on Safe Withdrawal Rates from Retirement Savings

Note, many of the worst years for advance economies correspond to retirement starting in or around either WW1 or WW2. We forgot too easily how the US and North America was relatively spared the worst of the last century. (Or don't retire at the period that essentially marked the end of a global Empire,  UK retirees in the 1900, looking at you).

This dataset is more pessimistic than I choose to be, but it's helpful to remember the international experience.

And I don't want bonds (those hurt your long-term portfolio survival and the yields are way too low to get me interested)

A small to moderate bond allocation, approximately 20%, has historically reduced volatility much more than it has decreased overall returns. Check efficient frontier. Once more, limited to historical data, and based on geography of your choosing.
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steveo

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Re: Stop worrying about the 4% rule
« Reply #859 on: July 19, 2017, 05:16:11 PM »
Finally with regards to using historical data to test the success of investment strategies you say: "However, they don't account for the possibility that the market starts out very expensive and that subsequent years could perform poorly." Is it your position that there are no historical time points where the stock market started out extremely overvalued and performed poorly for years?

No, my position is that if retirement begins with stocks overvalued, it is faulty to assume that future 15-30 yr investment returns will follow historical experience.  This position to supported not only by the CAPE link but also in Ben Stein's interesting book "Yes You Can Time the Market". 

I think the insight you're missing from the Trinity study (and successors) is that over the past 100 years the market has been overvalued before, and has experienced periods of slow to negative growth before. Even given the worst market returns in recorded history, 4% was a low enough withdrawal rate to make it through. In average to good times, 4% was excessively conservative and someone following that plan would die filthy rich.

If you wish to cast doubt on the validity of a 4% SWR, it's not sufficient to claim that stocks are overvalued and that you expect returns to be lower than their historical averages. All that has happened before, and 4% was just fine during those times. Instead you need to show that the next 30 years will be historically bad, the worst ever. That's certainly possible! That said, I don't think that a high CAPE ratio is sufficient evidence that this is likely to be the case.

Exactly. The stock market is too high is not a valid argument. This has happened in the past and it will happen again. You can also utilise different portfolios although there is no free lunch in this regard.

You are also not even really looking at the assumptions within the 4% rule. The 4% states you never receive another cent outside of your portfolio. This is bordering on ridiculous.

In stating all of that if you are risk averse or you want to get rich (some people may actually like to have a large bank balance) then maybe you should keep working until you get to 3% or less or just keep working forever.

None of these arguments though are rational statements against saving up to 25 times your expenses (assuming you judge your expenses accurately), investing in a sensible portfolio and being able to retire if you want too at that point. Personally I think 20 times your expenses will typically be fine depending on how old you are.

tyort1

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Re: Stop worrying about the 4% rule
« Reply #860 on: July 19, 2017, 05:22:00 PM »
The CAPE is high enough that I think we will see a lot more sideways return in the future 10-15 years. 

Right, you're making a prediction about the future.  That's market timing.  You might think "but wait, I'm smarter than all those other people out there that are also trying to time the market, and I have better data and better insight, so I'll succeed where they all failed".  I can assure you, this is not the case.
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steveo

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Re: Stop worrying about the 4% rule
« Reply #861 on: July 19, 2017, 05:44:06 PM »
The CAPE is high enough that I think we will see a lot more sideways return in the future 10-15 years. 

Right, you're making a prediction about the future.  That's market timing.  You might think "but wait, I'm smarter than all those other people out there that are also trying to time the market, and I have better data and better insight, so I'll succeed where they all failed".  I can assure you, this is not the case.

I think people that get it wrong try and do too much analysis on micro level details and miss the big picture. The trick to doing well is to figure out a decent asset allocation/investment approach and stick to that consistently.

All the micro data analysis misses the big picture and that big picture is that a diversified portfolio utilising the lowest possible fees in tandem with saving somewhere from 20-30 times your expenses should enable you to retire from a financial perspective and be relatively safe. You can't time the market and you can't develop better models than the trinity study based on some special factor that only you or other special people know.

This whole field is about accepting that you aren't a special snowflake. You don't have special inside information. You are simply smart enough or humble enough to recognise that you will put the odds in your favour and accept the inherent risks within your approach because this is the best that anyone can do.
« Last Edit: July 19, 2017, 05:45:51 PM by steveo »

Virtus

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Re: Stop worrying about the 4% rule
« Reply #862 on: July 19, 2017, 10:48:19 PM »
If you're concerned about US equity CAPE then make sure to diversify into international.

A Japanese investor would have seen his investments improved if he diversified out of his country's equity markets that were devastated in the early 1990's and have never fully recovered.

Diversify your CAPE by diversifying equity exposure.

I agree with diversifying internationally, I am 50% US, 50% non-US. This is a good time to point out though, that most of the idea that 4% is rock solid is based on historical US data, with only few developed countries being safer. If US or global market returns going forward look more "international" and less "US" like, the safety of a 4% withdrawal rate can be called into question:

From An International Perspective on Safe Withdrawal Rates from Retirement Savings

Note, many of the worst years for advance economies correspond to retirement starting in or around either WW1 or WW2. We forgot too easily how the US and North America was relatively spared the worst of the last century. (Or don't retire at the period that essentially marked the end of a global Empire,  UK retirees in the 1900, looking at you).

This dataset is more pessimistic than I choose to be, but it's helpful to remember the international experience.

And I don't want bonds (those hurt your long-term portfolio survival and the yields are way too low to get me interested)

A small to moderate bond allocation, approximately 20%, has historically reduced volatility much more than it has decreased overall returns. Check efficient frontier. Once more, limited to historical data, and based on geography of your choosing.

This graphic is actually very encouraging. Look at all the countries where a 4% SWR worked over 95% of the time. An to your point about WWI and WWII if you country is at war and conquered by a foreign nation, I think there is very good chance your early retirement will come to an end for other reasons than portfolio failure.
« Last Edit: July 20, 2017, 04:08:47 PM by Virtus »

runewell

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Re: Stop worrying about the 4% rule
« Reply #863 on: July 19, 2017, 10:49:52 PM »
No, the 4% test failed for 20+ years during a 1929 start. 

I think this statement proves that you do not understand this topic very well.  Perhaps you expressed your true intentions poorly, but as written that sentence is clearly false.

hahaha that was pretty terrible on my part.  Definitely need to rephrase that one, sorry:

For the 1929 year, the 4% test failed for the 20-yr, 25-yr, and 30-yr time horizons.  NOT 20 different sets of failures :)
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Virtus

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Re: Stop worrying about the 4% rule
« Reply #864 on: July 19, 2017, 10:54:03 PM »

To me it looks like high CAPE is correlated with high returns and low CAPE is correlated with low returns.  If this is true, you shouldn't get out when CAPE is increasing.  You should ride it as long as possible because that's where your gains are. 

On the other hand, when should one get off and move $$ elsewhere?  That's impossible to predict.  We might tap out at CAPE 30, or we might to to CAPE 44, or even higher.  That's what it means when we say the future is not really predictable.  Which is why you invest in VTSAX and don't ever sell.  If you are in the accumulation phase, keep buying, even during dips.  Make sure you have some bonds, they act like dry powder during stock dips.  Diversify with international stocks (I do).  These 2 things are hedges against 100% VTSAX and I think they are smart given volatility is inevitable with stocks. 

High returns occur with high CAPE because prices get bid up too high or earnings finally collapse.  After the CAPE maxes out the stock goes through a sideways period until valuations get reasonable again, then the returns can go up.

Define "too high".

I am surprised no one has mentioned interest rates. If the expected returns for stocks is the risk free rate plus a risk premium then the the conclusion follows that CAPE is high because future returns are expected to be lower than historical levels because interest rates (the risk free rate) are low. However, as long as interest rates stay low the stock market will not crash, it will continue at its current CAPE ratio. 

The FED has significant influence over interest rates and does not seem eager to increase them at a rapid pace.

runewell

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Re: Stop worrying about the 4% rule
« Reply #865 on: July 19, 2017, 11:11:23 PM »
Quote

If you wish to cast doubt on the validity of a 4% SWR, it's not sufficient to claim that stocks are overvalued and that you expect returns to be lower than their historical averages. All that has happened before, and 4% was just fine during those times. Instead you need to show that the next 30 years will be historically bad, the worst ever. That's certainly possible! That said, I don't think that a high CAPE ratio is sufficient evidence that this is likely to be the case.

Disgree.  I'm not just talking about overvalued stocks, I am specifically noting that the CAPE ratio has only been over 30 three times in history: the great depression, and the rise and fall of the dot-com period.  The rise of the dot-com period happened after the original 4% study and was too recent to be included in the 2009 update.  As for the great depression, it was the single year where the 4% rule FAILED.  Other than the great depression, the 4% withdrawal rate study has not experienced stocks at these valuation metrics, so I don't think it's safe to assume "business as usual"
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sol

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Re: Stop worrying about the 4% rule
« Reply #866 on: July 19, 2017, 11:11:59 PM »
For the 1929 year, the 4% test failed for the 20-yr, 25-yr, and 30-yr time horizons.  NOT 20 different sets of failures :)

How do you figure?  Cfiresim seems to disagree with you.  The 75/25 portfolio starting in 1929 and withdrawing 4% per year adjusted for inflation never depletes to zero.  It is cut in half by 1933 but then starts growing again.  Feel free to check my math, or provide a different data source.  The 30 year CAGR starting in 1929 was over 11%.  The 20 year CAGR was much worse, but still about 3.7%. 

Maybe you're confusing "portfolio failure" with "earns less than 4%"?  Remember that your retirement account balances can always go down in any year, but as long as they don't go down to zero then your retirement hasn't failed because you can continue to draw your 4% inflation adjusted expenses every year.

Quote from: cfiresim

Year   CumulativeInflation   portfolio.start   portfolio.infAdjStart   spending   infAdjSpending   PortfolioAdjustments   Equities   Bonds   Gold   Cash   equities.growth   dividends   bonds.growth   gold.growth   cash.growth   fees   portfolio.end   portfolio.infAdjEnd
1929   1   1000000   1000000   0   0   0   750000   250000   0   0   -95032.18   25945.29   14953.45   0   0   0   945866.56   945866
1930   1   905866.56   945866.56   40000   40000   0   679399.92   226466.64   0   0   -179316.51   30380.54   6582.92   0   0   0   763513.51   763513
1931   0.929824561   726320.53   821137.17   37192.98   40000   0   544740.3975   181580.1325   0   0   -261802.64   32953.73   1406.73   0   0   0   498878.35   536529
1932   0.83625731   465428.06   596560.82   33450.29   40000   0   349071.045   116357.015   0   0   -50888.67   33363.62   7586.08   0   0   0   455489.09   544675
1933   0.754385965   425313.65   603787.86   30175.44   40000   0   318985.2375   106328.4125   0   0   155218.49   22270.48   5083.69   0   0   0   607886.31   805802
1934   0.771929825   577009.12   787489.08   30877.19   40000   0   432756.84   144252.28   0   0   -52554.91   18098.6   8243.68   0   0   0   550796.49   713531
1935   0.795321637   518983.62   692545.59   31812.87   40000   0   389237.715   129745.905   0   0   189154.4   18915.44   5057.58   0   0   0   732111.03   920521
1936   0.807017544   699830.33   907181.06   32280.7   40000   0   524872.7475   174957.5825   0   0   146094.67   18309.51   4221.54   0   0   0   868456.05   1076130
1937   0.824561404   835473.59   1053233.93   32982.46   40000   0   626605.1925   208868.3975   0   0   -223711.23   26004.65   7589.86   0   0   0   645356.87   782666
1938   0.830409357   612140.5   777155.1   33216.37   40000   0   459105.375   153035.125   0   0   48305.52   32203.67   6373.54   0   0   0   699023.24   841781
1939   0.81871345   666274.7   853806.96   32748.54   40000   0   499706.025   166568.675   0   0   -7995.3   20521.25   5950.09   0   0   0   684750.73   836374
1940   0.812865497   652236.11   842391.19   32514.62   40000   0   489177.0825   163059.0275   0   0   -69598.36   24790.26   7072.29   0   0   0   614500.3   755967
1941   0.824561404   581517.84   745245.04   32982.46   40000   0   436138.38   145379.46   0   0   -66971.01   27835.67   -3086.15   0   0   0   539296.35   654040
1942   0.918128655   502571.2   587386.47   36725.15   40000   0   376928.4   125642.8   0   0   48962.71   29687.14   2990.52   0   0   0   584211.57   636306
1943   0.988304094   544679.41   591125.32   39532.16   40000   0   408509.5575   136169.8525   0   0   71256.38   23887.08   3254.75   0   0   0   643077.62   650688
1944   1.01754386   602375.87   631990.07   40701.75   40000   0   451781.9025   150593.9675   0   0   62525.09   23383.35   5063.27   0   0   0   693347.58   681393
1945   1.040935673   651710.15   666081.1   41637.43   40000   0   488782.6125   162927.5375   0   0   164135.3   23309.86   6233.56   0   0   0   845388.87   812143
1946   1.064327485   802815.77   794293.94   42573.1   40000   0   602111.8275   200703.9425   0   0   -93892.02   22275.7   3424.12   0   0   0   734623.57   690223
1947   1.257309942   684331.17   584282   50292.4   40000   0   513248.3775   171082.7925   0   0   -12822.77   24070.81   1251.03   0   0   0   696830.24   554223
1948   1.385964912   641391.64   502776.25   55438.6   40000   0   481043.73   160347.91   0   0   17191.72   27355.36   5589.03   0   0   0   691527.75   498950
1949   1.403508772   635387.4   492713.52   56140.35   40000   0   476540.55   158846.85   0   0   47157.66   29370.13   3541.67   0   0   0   715456.86   509763
1950   1.374269006   660486.1   520609.03   54970.76   40000   0   495364.575   165121.525   0   0   127069.23   33748.18   551.25   0   0   0   821854.75   598030

« Last Edit: July 19, 2017, 11:15:22 PM by sol »

sol

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Re: Stop worrying about the 4% rule
« Reply #867 on: July 19, 2017, 11:13:42 PM »
As for the great depression, it was the single year where the 4% rule FAILED. 

Well that's not true either.  It didn't fail in 1929, and most of the actual 4% SWR failures in the historic record are in the 60s, due to stagflation in the 70s, while CAPE was very normal.  Are you sure you're comfortable with this topic?

runewell

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Re: Stop worrying about the 4% rule
« Reply #868 on: July 19, 2017, 11:15:10 PM »

A small to moderate bond allocation, approximately 20%, has historically reduced volatility much more than it has decreased overall returns. Check efficient frontier. Once more, limited to historical data, and based on geography of your choosing.

Yes I'm aware of this (I know my flagrant comment about bonds is under fire) although I believe the utility curves of some investors could prevent them from having any bonds in their portfolio at all.  This is an asset allocation question.  I do have a tiny amount of bonds in my portfolio.
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runewell

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Re: Stop worrying about the 4% rule
« Reply #869 on: July 19, 2017, 11:19:12 PM »
As for the great depression, it was the single year where the 4% rule FAILED. 

Well that's not true either.  It didn't fail in 1929, and most of the actual 4% SWR failures in the historic record are in the 60s, due to stagflation in the 70s, while CAPE was very normal.  Are you sure you're comfortable with this topic?

Sorry I looked back at the article and realized I also needed to specify the 100% equity selection is where things failed.  Things held together for a bond allocation of 25% or more.
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runewell

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Re: Stop worrying about the 4% rule
« Reply #870 on: July 19, 2017, 11:24:50 PM »
Some good news from the study; from 1946-1995 (when the CAPE never exceeded 25) it showed a 100% success rate for a 6% withdrawal rate for scenarios with at least a 25% equity allocation.  That sort of blows my mind.  A 6% withdrawal rate suggests that only 17x expenses might be needed for a 30-yr time frame, although to be fair I would have to have a lower CAPE before I started off on that journey.
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EscapeVelocity2020

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Re: Stop worrying about the 4% rule
« Reply #871 on: July 19, 2017, 11:51:41 PM »
I'll readily admit, I need to catch up a bit on the 'runewell debates' above, however, I struggle with how the 4% rule fixes expenses at a level which might be artificially low.  One thing I don't hear discussed much from ER's is how reliable that is if you ER at 30 or 40 that expenses don't increase.  I can imagine, for the intended 55 or 65 yo demographic, there will be little or discretionary expense increase, but 30 yo ERs? 

If you ER at 30 - don't you expect that (especially if inflation kicks in) you'll have to spend more at 40 and 50, even if you live the same quality of life?  There's health, sending the kids to college, buying a car, or whatever.  Of course, it is always discretionary up to a point - kids don't need to drive, or go to college...  but healthcare is obviously concerning...
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tyort1

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Re: Stop worrying about the 4% rule
« Reply #872 on: July 20, 2017, 01:01:24 AM »
I'll readily admit, I need to catch up a bit on the 'runewell debates' above, however, I struggle with how the 4% rule fixes expenses at a level which might be artificially low.  One thing I don't hear discussed much from ER's is how reliable that is if you ER at 30 or 40 that expenses don't increase.  I can imagine, for the intended 55 or 65 yo demographic, there will be little or discretionary expense increase, but 30 yo ERs? 

If you ER at 30 - don't you expect that (especially if inflation kicks in) you'll have to spend more at 40 and 50, even if you live the same quality of life?  There's health, sending the kids to college, buying a car, or whatever.  Of course, it is always discretionary up to a point - kids don't need to drive, or go to college...  but healthcare is obviously concerning...

Inflation is accounted for in the 4% rule.  If you have kids, and want to help them with college or a car or whatever, you should factor that in to your savings amount.  And I agree, healthcare is concerning. 
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steveo

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Re: Stop worrying about the 4% rule
« Reply #873 on: July 20, 2017, 01:07:29 AM »
I'll readily admit, I need to catch up a bit on the 'runewell debates' above, however, I struggle with how the 4% rule fixes expenses at a level which might be artificially low.  One thing I don't hear discussed much from ER's is how reliable that is if you ER at 30 or 40 that expenses don't increase.  I can imagine, for the intended 55 or 65 yo demographic, there will be little or discretionary expense increase, but 30 yo ERs? 

If you ER at 30 - don't you expect that (especially if inflation kicks in) you'll have to spend more at 40 and 50, even if you live the same quality of life?  There's health, sending the kids to college, buying a car, or whatever.  Of course, it is always discretionary up to a point - kids don't need to drive, or go to college...  but healthcare is obviously concerning...

This is where we can agree. The best analysis that we can utilise is the 4% rule when it comes to estimating how much you need to retire. The biggest risk area is if you have inaccurately estimated your expenses. Estimating expenses is something that is also really hard because it's an individual thing. Do you use current expenses ? What if you intend to spend more via travelling if you RE ? What if you get bored and want to do a lot of stuff ?

We use our current expenses but we have 3 kids with the 2 oldest finishing school soon (college/university will be free as we live in Australia) and we expect costs to go down over time. We won't travel unless we work or our portfolio allows us to travel. We also own our house in a HCOL area and we could easily downsize. Our buffers also include inheritance and social security. If you have 3 kids who are young and you intend to pay for them to go to an expensive college than your situation may be different. You may be single and retire but get married and have kids post retirement.

This though doesn't invalidate the 4% rule. It just focuses on the area of highest risk.
« Last Edit: July 20, 2017, 01:12:46 AM by steveo »

Exflyboy

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Re: Stop worrying about the 4% rule
« Reply #874 on: July 20, 2017, 01:23:29 AM »
Dw and I are fortunate (financially speaking) to not have kids.

We currently make $20k/year in rent from properties co-located with our house. While I love living in the USA, should healthcare costs start eating up all of our $20k in rent I think we will simply sell the house and move to a lower cost country.

Lets face it, there are LOTs of choices in that regard (like all of them!).

Of course the US will tax us on worldwide income so we are not completely off the hook, but tax treaties mean we can avoid double taxation fairly easily and we can keep all our Vanguard accounts in place to draw our chosen 3%.

After moving here from the UK 20 years ago its sad to me to even feel the need to think this way...:(

EscapeVelocity2020

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Re: Stop worrying about the 4% rule
« Reply #875 on: July 20, 2017, 10:35:04 AM »
I'll readily admit, I need to catch up a bit on the 'runewell debates' above, however, I struggle with how the 4% rule fixes expenses at a level which might be artificially low.  One thing I don't hear discussed much from ER's is how reliable that is if you ER at 30 or 40 that expenses don't increase.  I can imagine, for the intended 55 or 65 yo demographic, there will be little or discretionary expense increase, but 30 yo ERs? 

If you ER at 30 - don't you expect that (especially if inflation kicks in) you'll have to spend more at 40 and 50, even if you live the same quality of life?  There's health, sending the kids to college, buying a car, or whatever.  Of course, it is always discretionary up to a point - kids don't need to drive, or go to college...  but healthcare is obviously concerning...

Inflation is accounted for in the 4% rule.  If you have kids, and want to help them with college or a car or whatever, you should factor that in to your savings amount.  And I agree, healthcare is concerning.

But even "inflation" can be considered a misleading indicator.  I agree that technically CPI is included in the 4% rule, and if you aren't buying new iPhones and a Tesla, maybe that is a good enough benchmark, but it is a broad basket of goods and also makes value judgements for you about tangible cost discounted by added features.  So I'd argue that a 30 and 40 y.o. experiences higher inflation (compounded if you are raising kids) than what the CPI reports.  Of course, with the reported figure being so low for so long, Americans have been able to ignore this, but go to other countries where their prices in their local currency are 'outrageous'...  We are very fortunate to enjoy a strong dollar and the benefits of importing cheap goods. 

While you're employed, your income generally rises with inflation and when you are collecting Social Security, that adjusts for COL, but ER'd folks are SOL :).
« Last Edit: July 20, 2017, 11:13:28 AM by EscapeVelocity2020 »
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maizeman

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Re: Stop worrying about the 4% rule
« Reply #876 on: July 20, 2017, 11:31:52 AM »
But even "inflation" can be considered a misleading indicator.  I agree that technically CPI is included in the 4% rule, and if you aren't buying new iPhones and a Tesla, maybe that is a good enough benchmark, but it is a broad basket of goods and also makes value judgements for you about tangible cost discounted by added features.  So I'd argue that a 30 and 40 y.o. experiences higher inflation (compounded if you are raising kids) than what the CPI reports.  Of course, with the reported figure being so low for so long, Americans have been able to ignore this, but go to other countries where their prices in their local currency are 'outrageous'...  We are very fortunate to enjoy a strong dollar and the benefits of importing cheap goods. 

While you're employed, your income generally rises with inflation and when you are collecting Social Security, that adjusts for COL, but ER'd folks are SOL :).

I definitely agree with you that different folks personal inflation rates aren't always going to line up well with the CPI. In addition to the assumptions it makes that you brought up above, it also makes assumptions about how much of your spending is in different subcategories, each of which are experiencing dramatically different rates of inflation (for example education and healthcare prices are going up much faster than overall CPI inflation, while apparel and recreation prices are going much more slowly than the overall CPI).

However, one issue that I think is often overlooked is that for folks who don't rent, whether they own a house outright or carry a mortgage in FIRE -- and please let us not reopen that obnoxious can of worms -- a very big component of their cost of living is experiencing no inflation at all. (Although property taxes, maintenance, and home insurance will still increase with inflation over time). This tends to drag personal inflation rates down below the overall CPI, and may, to some extent, balance out the biases dragging personal inflation higher than CPI that you identify above.
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brooklynguy

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Re: Stop worrying about the 4% rule
« Reply #877 on: July 20, 2017, 12:04:41 PM »
However, one issue that I think is often overlooked is that for folks who don't rent, whether they own a house outright or carry a mortgage in FIRE -- and please let us not reopen that obnoxious can of worms -- a very big component of their cost of living is experiencing no inflation at all. (Although property taxes, maintenance, and home insurance will still increase with inflation over time). This tends to drag personal inflation rates down below the overall CPI, and may, to some extent, balance out the biases dragging personal inflation higher than CPI that you identify above.

But only to the extent you include these inflation-shielded housing costs as part of your "cost of living" in the first place, which virtually no one who owns their home free and clear would do (most people would simply treat the elimination of rental expense from their cost of living as exactly that, unless they're using some kind of funky imputed rent accounting), and which most informed mortgage-loan-carriers would not do without accounting for the inflation-protected nature of that cash flow item in their financial planning (for example, in my own accounting for my personal retirement planning, I deduct my outstanding mortgage loan balance from my investment portfolio to determine my stash size, and ignore the principal + interest payments when determining my expenses).

I point this out only because your post feels like a step in the direction of the argument, commonly made in early retirement circles, that frugal mustachians are better-protected from inflation simply by virtue of their low expenses, which doesn't really hold water -- those low expenses (which presumably serve as the basis for determining the required stash size to support them in retirement) are just as subject to inflation as any others.

tooqk4u22

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Re: Stop worrying about the 4% rule
« Reply #878 on: July 20, 2017, 12:06:41 PM »
If you're concerned about US equity CAPE then make sure to diversify into international.

A Japanese investor would have seen his investments improved if he diversified out of his country's equity markets that were devastated in the early 1990's and have never fully recovered.

Diversify your CAPE by diversifying equity exposure.

Thanks that is exactly what I plan to do!  I am about 75% US, 20% International and I am going to drop that to about 55/40 in the coming week.

Yes, I guess you are right, we don't really talk enough about diversification.  I'm 80-20 Stocks/Bonds, but within stocks I'm about 65/35 US/International.  Those are smart things to do, IMHO.

I believe in international exposure in the AA as well, but by doing so you/we/me are moving away from the 4% rule analysis as no international was included so it becomes more apples and oranges. And in many developed countries SWR are well below the US 4%.


tooqk4u22

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Re: Stop worrying about the 4% rule
« Reply #879 on: July 20, 2017, 12:09:39 PM »
My understanding from the Nightly Business Report is that the current PE, which I'm assuming is price/TTM, is just somewhat higher than the historical average.  I think the average is 16.something, and we're at 18, more or less.  And this has been the case for about the last six months to a year.


Except that it is not at 18, it is at 26.  The 18 is most likely a forward looking PE - ie expected earnings for the next 12 months / current price.


tyort1

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Re: Stop worrying about the 4% rule
« Reply #880 on: July 20, 2017, 12:15:22 PM »
If you're concerned about US equity CAPE then make sure to diversify into international.

A Japanese investor would have seen his investments improved if he diversified out of his country's equity markets that were devastated in the early 1990's and have never fully recovered.

Diversify your CAPE by diversifying equity exposure.

Thanks that is exactly what I plan to do!  I am about 75% US, 20% International and I am going to drop that to about 55/40 in the coming week.

Yes, I guess you are right, we don't really talk enough about diversification.  I'm 80-20 Stocks/Bonds, but within stocks I'm about 65/35 US/International.  Those are smart things to do, IMHO.

I believe in international exposure in the AA as well, but by doing so you/we/me are moving away from the 4% rule analysis as no international was included so it becomes more apples and oranges. And in many developed countries SWR are well below the US 4%.

That's part of the reason I'm saving up 30x expenses, and will have a paid off house before retiring - I want to have some cushion and flexibility if returns are depressed for an extended period. 

Right now, during saving/accumulation, we live a fairly frugal life on about $30k per year (not counting mortgage).  I plan to save up enough to allow $60k per year during retirement.  That's a very nice life, and we have the ability to cut back significantly if we need to.  I like having that flexibility built in.
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maizeman

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Re: Stop worrying about the 4% rule
« Reply #881 on: July 20, 2017, 01:46:30 PM »
However, one issue that I think is often overlooked is that for folks who don't rent, whether they own a house outright or carry a mortgage in FIRE -- and please let us not reopen that obnoxious can of worms -- a very big component of their cost of living is experiencing no inflation at all. (Although property taxes, maintenance, and home insurance will still increase with inflation over time). This tends to drag personal inflation rates down below the overall CPI, and may, to some extent, balance out the biases dragging personal inflation higher than CPI that you identify above.

But only to the extent you include these inflation-shielded housing costs as part of your "cost of living" in the first place, which virtually no one who owns their home free and clear would do (most people would simply treat the elimination of rental expense from their cost of living as exactly that, unless they're using some kind of funky imputed rent accounting), and which most informed mortgage-loan-carriers would not do without accounting for the inflation-protected nature of that cash flow item in their financial planning (for example, in my own accounting for my personal retirement planning, I deduct my outstanding mortgage loan balance from my investment portfolio to determine my stash size, and ignore the principal + interest payments when determining my expenses).

I point this out only because your post feels like a step in the direction of the argument, commonly made in early retirement circles, that frugal mustachians are better-protected from inflation simply by virtue of their low expenses, which doesn't really hold water -- those low expenses (which presumably serve as the basis for determining the required stash size to support them in retirement) are just as subject to inflation as any others.

Brooklynguy, good point. And I agree with you about the perils of the argument described in your second paragraph. Generally it seems that "luxury" items (electronics, entertainment, etc) are the items which have small or negative levels of inflation, while items that are necessities even to FIRE folks (like healthcare) show higher rates of inflation. Since folks who RE with budgets at or below the median household income are going to see their spending biased towards the second category of expenses, I agree that -- putting aside whatever is spend on having a place to live -- the average mustachian's expenses are more likely to inflate at or above the overall CPI rather than below it.
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runewell

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Re: Stop worrying about the 4% rule
« Reply #882 on: July 20, 2017, 01:58:12 PM »
I believe in international exposure in the AA as well, but by doing so you/we/me are moving away from the 4% rule analysis as no international was included so it becomes more apples and oranges. And in many developed countries SWR are well below the US 4%.

Another reason why the 4% withdrawal rule seems dated.  I would think that causing 1/3 of your portfolio to be international stocks would improve diversification.  Some areas that had 100% success rates might change to 95% if the return is lower, but other instances of a 50% failure rate would probably go up significantly.  I think the upside would be more attractive than the downside.  But without a long history of international stock returns, it's going to be difficult finding an answer.
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runewell

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Re: Stop worrying about the 4% rule
« Reply #883 on: July 20, 2017, 02:22:50 PM »
There's no difference between selling appreciated stock and spending the dividends.

Except taxation.
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dividendman

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Re: Stop worrying about the 4% rule
« Reply #884 on: July 20, 2017, 02:26:43 PM »
There's no difference between selling appreciated stock and spending the dividends.

Except taxation.

With selling stock that's appreciated you have less of an ownership stake in the company, that's another difference.

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #885 on: July 20, 2017, 02:45:04 PM »
With selling stock that's appreciated you have less of an ownership stake in the company, that's another difference.

Unless your stash is pretty huge your % ownership stake will not change in a meaningful way since it will be tiny to begin with.

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Re: Stop worrying about the 4% rule
« Reply #886 on: July 20, 2017, 05:42:25 PM »
My understanding from the Nightly Business Report is that the current PE, which I'm assuming is price/TTM, is just somewhat higher than the historical average.  I think the average is 16.something, and we're at 18, more or less.  And this has been the case for about the last six months to a year.


Except that it is not at 18, it is at 26.  The 18 is most likely a forward looking PE - ie expected earnings for the next 12 months / current price.

Ah, thanks for the clarification.  The 26 number would help explain runewell's CAPE number of 30 better.  I don't pay all that much attention, obviously.
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steveo

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Re: Stop worrying about the 4% rule
« Reply #887 on: July 20, 2017, 05:55:32 PM »
If you're concerned about US equity CAPE then make sure to diversify into international.

A Japanese investor would have seen his investments improved if he diversified out of his country's equity markets that were devastated in the early 1990's and have never fully recovered.

Diversify your CAPE by diversifying equity exposure.

Thanks that is exactly what I plan to do!  I am about 75% US, 20% International and I am going to drop that to about 55/40 in the coming week.

Yes, I guess you are right, we don't really talk enough about diversification.  I'm 80-20 Stocks/Bonds, but within stocks I'm about 65/35 US/International.  Those are smart things to do, IMHO.

I believe in international exposure in the AA as well, but by doing so you/we/me are moving away from the 4% rule analysis as no international was included so it becomes more apples and oranges. And in many developed countries SWR are well below the US 4%.

This is exactly what I think people do wrong when discussing the 4% rule. It's micro analysis of the data and missing the key points. The trinity study is simply a study based upon historical data within the US market. It's a guideline not something that should be followed blindly.

The key points of the trinity study are that saving 20-30 times your annual expenses should result in your stash lasting 30 years.

When it comes to portfolio theory it should be as simple as stating that a diversified portfolio (across asset classes and within asset classes) is a good idea. It's also a good idea to utilise a stock heavy portfolio because the no 1 risk to portfolio failure tends to be inflation which stocks protect against.

Based on these points a portfolio of 50/50 through to 90/10 (international stocks/domestic bonds) that is 20-30 times your annual expenses means that you have placed yourself in a statistically likely position for your retirement to be a success from a financial perspective. That is the best that you are going to get. Trying to mimic the best past performance or protect yourself perfectly is not possible as we can't predict the future.

The past can only offer broad general principles to follow. It can't offer completely detailed mathematically exact criteria to follow.

runewell

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Re: Stop worrying about the 4% rule
« Reply #888 on: July 20, 2017, 10:43:21 PM »
The key points of the trinity study are that saving 20-30 times your annual expenses should result in your stash lasting 30 years.

Actually that's just people's interpretation of the study conclusions.  Even though it seems like an appropriate corollary, the study never actually mentions anything about multiplying by the desired annual amount before inflation adjustments by the reciprocal of the withdrawal rate.  Why don't we have a look at the actual conclusions ending the study:

• Early retirees who anticipate long payout periods should plan on lower withdrawal rates.
• The presence of bonds in the portfolio increases the success rate for low to mid-level withdrawal rates. However, the presence of common stocks provides upside
potential and holds the promise of higher sustainable withdrawal rates. In other words, the addition of bonds helps increase certainty but at the expense of potentially
higher consumption. Most retirees would likely benefit from allocating at least 50% to common stocks.
• Retirees who demand CPI-adjusted withdrawals during their retirement years must accept a substantially reduced
withdrawal rate from the initial portfolio. For retirees with significant fixed costs and for those who
tend to spend less as they age, CPI-adjustments will likely cause a suboptimal exchange of present consumption
for future consumption.
• For stock-dominated portfolios, withdrawal rates of 3% and 4% represent exceedingly conservative behavior. At
these rates, retirees who wish to bequeath large estates to their heirs will likely be successful. Ironically, even
those retirees who adopt higher withdrawal rates and who have little or no desire to leave large estates may
end up doing so if they act reasonably prudent in protecting themselves from prematurely exhausting their
portfolio. Table 4 shows large expected terminal values of portfolios under numerous reasonably prudent scenarios
that include withdrawal rates greater than 4%.
• For short payout periods (15 years or less), withdrawal rates of 8% or 9% from stock-dominated portfolios appear
to be sustainable. Since the life expectancy of most retirees exceeds 15 years, however, these withdrawal
rates represent aggressive behavior in most cases. By definition, you have a 50% chance of living beyond your
actuarially determined life expectancy, so it is wise to be conservative and add a few years.

A multiplier of 20 would correspond to a withdrawal rate of 5% and under the inflation-adjustment scenario there are a lot of instances where that fails.
« Last Edit: July 20, 2017, 10:56:31 PM by runewell »
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runewell

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Re: Stop worrying about the 4% rule
« Reply #889 on: July 20, 2017, 10:50:00 PM »
How do you figure?  Cfiresim seems to disagree with you. 

You know, I looked up in the wrong table.  People say that the withdrawals are adjusted for inflation but that only occurred in the second half of the article, and uses table 3.  Having just realized this I wanted to clarify what the study shows in Table 4:

A 3% withdrawal rate was pretty darn safe.
At a 4% withdrawal rate, the 30-yr portfolio was never 100% successful at any allocation of bonds and stocks, but it was much higher when it was not 100% bonds.  (seems obvious)
At a 5% withdrawal rate, the 15-yr portfolios were 100% safe but longer time periods were never more than 90% safe, sometimes considerably less.

Also keep in mind that on the default settings Cfiresim's latest simulation period is approximately 1987-2016.  More recent instances of 30-yr scenarios starting at 25+ CAPE ratios aren't really possible simulate because the data doesn't exist yet, but we know they're coming. 
« Last Edit: July 20, 2017, 11:10:35 PM by runewell »
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deborah

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Re: Stop worrying about the 4% rule
« Reply #890 on: July 20, 2017, 11:12:04 PM »
Also remember that if Cfiresim is updated with new information, eventually the dot-com boom and the financial crisis are likely to add more examples of failure to the simulations. 
And success. One of the things I got from the trinity study was that even the worst market downturns tend to be only for a year or two, and really don't make much difference to you (if you have some bonds, a 3 year cash supply or any other means of support while markets rally). The examples of failure you mention fall well within these parameters, and I would be surprised if they made much of a blip on the simulations.



runewell

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Re: Stop worrying about the 4% rule
« Reply #891 on: July 20, 2017, 11:46:16 PM »
https://www.nytimes.com/2015/05/09/your-money/some-new-math-for-the-4-percent-retirement-rule.html

“Because interest rates are so low now, while stock markets are also very highly valued, we are in uncharted waters in terms of the conditions at the start of retirement and knowing whether the 4 percent rule can work in those cases,” said Wade Pfau [the guy who updated the Trinity study], a professor of retirement income at the American College of Financial Services and another researcher within the financial planning community.
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sol

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Re: Stop worrying about the 4% rule
« Reply #892 on: July 21, 2017, 12:17:20 AM »

said Wade Pfau [the guy who updated the Trinity study], a professor of retirement income at the American College of Financial Services and another researcher within the financial planning community.

lol, you must be new here.  We all know who Wade is.  He's even posted to the forum before.

You probably need to stop thinking of the forum as a bunch of know-nothing amateurs.  I would argue that there is more expertise on this topic here than anywhere else on the internet, including wade's site or bogleheads.  This is crowdsourcing at its best. 

steveo

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Re: Stop worrying about the 4% rule
« Reply #893 on: July 21, 2017, 01:42:41 AM »
The key points of the trinity study are that saving 20-30 times your annual expenses should result in your stash lasting 30 years.

Actually that's just people's interpretation of the study conclusions.  Even though it seems like an appropriate corollary, the study never actually mentions anything about multiplying by the desired annual amount before inflation adjustments by the reciprocal of the withdrawal rate.

The statement that I made is broad because that is the best way to draw conclusions from historical analysis. It's like coming up with a detailed trading plan that analyses micro point to the nth degree. Those nth degree details will more than likely not hold in the future. When you start drawing down to much into the detail unless you have the ability to recognise that the future will be different to the past you will probably miss the key points.


 Why don't we have a look at the actual conclusions ending the study:

• Early retirees who anticipate long payout periods should plan on lower withdrawal rates.
• The presence of bonds in the portfolio increases the success rate for low to mid-level withdrawal rates. However, the presence of common stocks provides upside
potential and holds the promise of higher sustainable withdrawal rates. In other words, the addition of bonds helps increase certainty but at the expense of potentially
higher consumption. Most retirees would likely benefit from allocating at least 50% to common stocks.
• Retirees who demand CPI-adjusted withdrawals during their retirement years must accept a substantially reduced
withdrawal rate from the initial portfolio. For retirees with significant fixed costs and for those who
tend to spend less as they age, CPI-adjustments will likely cause a suboptimal exchange of present consumption
for future consumption.
• For stock-dominated portfolios, withdrawal rates of 3% and 4% represent exceedingly conservative behavior. At
these rates, retirees who wish to bequeath large estates to their heirs will likely be successful. Ironically, even
those retirees who adopt higher withdrawal rates and who have little or no desire to leave large estates may
end up doing so if they act reasonably prudent in protecting themselves from prematurely exhausting their
portfolio. Table 4 shows large expected terminal values of portfolios under numerous reasonably prudent scenarios
that include withdrawal rates greater than 4%.
• For short payout periods (15 years or less), withdrawal rates of 8% or 9% from stock-dominated portfolios appear
to be sustainable. Since the life expectancy of most retirees exceeds 15 years, however, these withdrawal
rates represent aggressive behavior in most cases. By definition, you have a 50% chance of living beyond your
actuarially determined life expectancy, so it is wise to be conservative and add a few years.

A multiplier of 20 would correspond to a withdrawal rate of 5% and under the inflation-adjustment scenario there are a lot of instances where that fails.

I agree with the points that are made above excluding the comment related to 5% failure rates. This is another key point in the Trinity study that needs to be recognised and has already been mentioned on this thread multiple times. The assumptions within the Trinity study are basically ridiculous. When you start taking into account factors such as social security/inheritance/the ability to go back to work the picture changes significantly.

Monkey Uncle

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Re: Stop worrying about the 4% rule
« Reply #894 on: July 21, 2017, 04:45:03 AM »
How do you figure?  Cfiresim seems to disagree with you. 

You know, I looked up in the wrong table.  People say that the withdrawals are adjusted for inflation but that only occurred in the second half of the article, and uses table 3.  Having just realized this I wanted to clarify what the study shows in Table 4:

A 3% withdrawal rate was pretty darn safe.
At a 4% withdrawal rate, the 30-yr portfolio was never 100% successful at any allocation of bonds and stocks, but it was much higher when it was not 100% bonds.  (seems obvious)
At a 5% withdrawal rate, the 15-yr portfolios were 100% safe but longer time periods were never more than 90% safe, sometimes considerably less.

Also keep in mind that on the default settings Cfiresim's latest simulation period is approximately 1987-2016.  More recent instances of 30-yr scenarios starting at 25+ CAPE ratios aren't really possible simulate because the data doesn't exist yet, but we know they're coming.

We can run a 20 year simulation at a 5% withdrawal rate starting in 1997 (the year after Greenspan's "irrational exuberance" comment).  Using $1MM starting portfolio, a $50k spend, and leaving everything else at the default values, the 1997 start year simulation ends with about $1.1MM.  Granted, US stocks still had three banner years ahead of them at the beginning of 1997, so I would expect a sim starting in 1999 to have very different results.  But the point is, while high valuations may indicate higher risk, they don't necessarily indicate impending failure.

What's interesting about this simulation is that we get "only" a 92% success rate, with almost all of the failure years starting in the late 1960s (1906 being the odd exception).  So once again, it appears that very high inflation/low growth environment seems to be the most toxic scenario.  1929 and 1937 came close to running out, but not quite.
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runewell

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Re: Stop worrying about the 4% rule
« Reply #895 on: July 21, 2017, 06:49:06 AM »
lol, you must be new here.  We all know who Wade is.  He's even posted to the forum before.

No, we don't all know who Wade is.  I didn't know who Wade was.  Other people new to the forum probably won't know who he is.

You probably need to stop thinking of the forum as a bunch of know-nothing amateurs.  I would argue that there is more expertise on this topic here than anywhere else on the internet, including wade's site or bogleheads.  This is crowdsourcing at its best.

The hostility and comments I have experienced so far don't give me a lot of confidence, although a few posters do seem to have some good contributions.  Just because I am new here doesn't mean you have to emit a condescending attitude.  Frankly I was hoping to get more constructive criticism on my "add caution to the 4% due to this CAPE article" and I got some feedback but it sounded like most people didn't want to hear anything that would challenge the established 4% motto. 
« Last Edit: July 21, 2017, 07:13:30 AM by runewell »
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runewell

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Re: Stop worrying about the 4% rule
« Reply #896 on: July 21, 2017, 07:09:05 AM »

I agree with the points that are made above excluding the comment related to 5% failure rates. This is another key point in the Trinity study that needs to be recognised and has already been mentioned on this thread multiple times. The assumptions within the Trinity study are basically ridiculous. When you start taking into account factors such as social security/inheritance/the ability to go back to work the picture changes significantly.

An inheritance or returning to work and probably not scenarios the majority of people want to rely on upon retirement.  If you plan on a work-free retirement and later find yourself working, you might as well consider the 4% rule a failure.  Social Security could probably be treated as a monthly certainly which could be subtracted from your monthly retirement needs.  It could be troublesome to factor in SS inflation or viability.

For 20+ years at a 5% withdrawal rate adjusted for inflation, the Trinity study recorded:
12-15% failure rates with 100% stocks,
10-17% failure rates with 75% stocks,
10-24% failure rates with 50% stocks,
18-73% failure rates with 25% stocks, and
53-83% failure rates with 0% stocks.
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maizeman

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Re: Stop worrying about the 4% rule
« Reply #897 on: July 21, 2017, 07:13:01 AM »
Also keep in mind that on the default settings Cfiresim's latest simulation period is approximately 1987-2016.  More recent instances of 30-yr scenarios starting at 25+ CAPE ratios aren't really possible simulate because the data doesn't exist yet, but we know they're coming.

This is correct, but we can certainly look at how more recent retirement scenarios are doing already, and compare them to the patterns of the existing worst 30 year intervals on record. A couple of years Kitces did just that for hypothetical retirees who pulled the trigger in 2000 and 2008, after the two more recent crashes and compared the performance of these portfolios so far to how things were looking for retirees in 1929, 1935, and 1966 (some of the worst years to retire in historically) after the same length of time.

This isn't ideal, but it does a good job of harvesting some information we do have about more recent retirements, rather than pretending we have absolutely no idea what the outcome for the 1987-2017 retiree will look like until January 1st 2018.

Quote
Ultimately, the key point here is simply to recognize that the 2000 retiree is merely ‘in line’ with the 1929 retiree, and doing better than the rest. And the 2008 retiree – even having started with the global financial crisis out of the gate – is already doing far better than any of these historical scenarios! In other words, while the tech crash and especially the global financial crisis were scary, they still haven’t been the kind of scenarios that spell outright doom for the 4% rule. ...

The bottom line, though, is simply to recognize that even market scenarios like the tech crash in 2000 or the financial crisis of 2008 are not ones that will likely breach the 4% safe withdrawal rate, but merely examples of bad market declines for which the 4% rule was created. In turn, this is an implicit acknowledgement of just how conservative the 4% rule actually is, and how horrible the historical market returns really were that created it. In the end, this doesn’t necessarily mean that the 4% rule is ‘sacred’ and that some future market disaster couldn’t be bad enough to undermine it ... But when the Great Depression and the stagflationary 1970s couldn’t break it, and the crash of 1987 and even the global financial crisis of 2008 were just speed bumps, it will take a lot to set a new safe withdrawal rate below 4%!

https://www.kitces.com/blog/how-has-the-4-rule-held-up-since-the-tech-bubble-and-the-2008-financial-crisis/

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maizeman

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Re: Stop worrying about the 4% rule
« Reply #898 on: July 21, 2017, 07:21:59 AM »
The hostility and comments I have experienced so far don't give me a lot of confidence, although a few posters do seem to have some good contributions.  Just because I am new here doesn't mean you have to emit a condescending attitude.  Frankly I was hoping to get more constructive criticism on my "add caution to the 4% due to this CAPE article" and I got some feedback but it sounded like most people didn't want to hear anything that would challenge the established 4% motto.

I've previously pointed out a number of reasons why you're getting a much less receptive response than other folks (with lower post counts than you) who have also discussed potential issues or oversights in the 4% rule, but who have received much more positive feedback from the forum generally and many of the same posters.

Similarly to how you're trying to get feedback without then seriously considering the flaws people are identifying with the CAPE analysis approach, you are also continuing to complain about receiving a hostile/condescending response despite having a clear explanation of why it is happening, and positive models for how to engage in discussion of the same topic without eliciting such a response.
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runewell

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Re: Stop worrying about the 4% rule
« Reply #899 on: July 21, 2017, 07:28:20 AM »
This is correct, but we can certainly look at how more recent retirement scenarios are doing already, and compare them to the patterns of the existing worst 30 year intervals on record. A couple of years Kitces did just that for hypothetical retirees who pulled the trigger in 2000 and 2008, after the two more recent crashes and compared the performance of these portfolios so far to how things were looking for retirees in 1929, 1935, and 1966 (some of the worst years to retire in historically) after the same length of time.

This isn't ideal, but it does a good job of harvesting some information we do have about more recent retirements, rather than pretending we have absolutely no idea what the outcome for the 1987-2017 retiree will look like until January 1st 2018.

Thanks for directing me to that.  I scanned it but shall have to revisit it again.  He concluded that today's high valuations are a concern and hopes that since under normal valuations a ton of scenarios leave zillions unspent, that this safety margin will prevent a lackluster return period from wreaking havoc.  My point all along is to recognize the high valuations and introduce other research that shows we would be wise to project gloomy investment returns going forward. 

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