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Learning, Sharing, and Teaching => Investor Alley => Topic started by: forummm on June 19, 2015, 05:50:26 PM

Title: Stop worrying about the 4% rule
Post by: forummm on June 19, 2015, 05:50:26 PM
A collection of posts about why you should not worry about the 4% rule. Please add others that you find useful.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on June 19, 2015, 05:51:06 PM
From Nords:  http://forum.mrmoneymustache.com/post-fire/what-has-workednot-worked-for-you-guys-who-have-been-fire-for-10-yrs/msg700740/#msg700740
(worth reading more in the thread)


Nords - great web site! The Real Life Retire Investment Returns was most interesting to me. The only points which I wasn't clear on in the various portfolios... 1) were all portfolios rebalanced once a yr or just those noted? 2) Was the 4% harvested equally amongst the individual portfolio mixes or was there some sort of order (I.e. Interest, dividends, cash, bonds, last stock sales)?
Thanks! 

I don't think that those differences are significant.  If they were relevant then Greaney would've taken the time to highlight them.

Those questions might not be relevant for any retirees, especially if the advice isn't suited for the retiree.  For example, some are firm believers in rebalancing every 1 January while others just do it when their asset allocation gets too far out of whack (I'm in the latter camp).  Some research says annual rebalancing is better, other research says every 2-3 years.  You have to pick the system with which you're most likely to stick.

You'll harvest your 4% with cash first, then the annual cap gains & dividends & interest, and then you'll sell off the assets that are farthest out of whack from your asset allocation.  So it doesn't matter what the study did-- your real-life practice is pretty close to the study, so minor differences won't be significant.

As a 4 yrs from FIRE guy, here is my takeaway so far for someone who is planning for 40+ yrs RE...
- Understand your risk temperment and don't kid yourself if your a 60/40 guy and going with a 100% stock portfolio
Absolutely.  It's the investor behavioral psychology aspect of investing, where you have to be able to sleep comfortably at night.

- After taking into account any other income sources, 3 - 3.5% may be a safer withdrawal rate
Um, no.  By that logic 0.0% would be even safer.

Consider the assumptions in the 4% SWR studies: 
no annuitized income (not even Social Security),
1% account expense ratios,
constant withdrawals (adjusted for inflation),
no extra cash beyond one year of expenses (just stocks/bonds).

Those are all simplifying assumptions for the benefit of the computer programming.  Nobody lives like that! 

Imagine that some of your income was annuitized (even if it was "just" Social Security).  If you encounter one of the failure scenarios where you blithely spend all of your assets at a 4% SWR, then you'll still have your annuity income.  In other words, your failure rate is actually zero because you have longevity insurance.  Yet the SWR studies never include this reality.

You're going to pay much less in fund expenses.  If you get your expense ratios down to 0.5% instead of 1% then the real SWR becomes 4.5%.  If you're thinking that you'll maintain a 3%-3.5% SWR then just cut your expense ratios and add the savings.  Now you're at 3.5%-4%.

But wait, there's more:  variable spending.  You'll spend more when the markets are up ("wealth effect") and cut back your spending during recessions ("loss aversion").  Some years you'll have a big fantasy vacation or a roof replacement, other years you'll hang out at home most of the year.  During the first five years of ER you'll be particularly sensitive to a recession and you'll probably cut your spending way back when it happens.  Even just using Bob Clyatt's variable spending scheme of 4%/95% in "Work Less, Live More" raises the 4% SWR to about 4.5%.  So variable spending is probably worth another 0.5% added to your more conservative version of the SWR.

Now if you keep two years of expenses in a money market or CD (instead of just one) then your asset allocation is more like 60/36/4.  Yet starting the year with two years' expenses in cash means that you can outlast almost any recession by just spending down your cash (which you're trying to conserve anyway) and letting your stocks recover.

Just by addressing some of those simplifying assumptions, we've taken your 3%-3.5% SWR right back up over 4%.

If you retire on a 4% SWR then you'll have a success ratio of 80%-100%, depending on your personal willingness to work longer to boost it past 80%.  (Anything over 80% is meaningless precision, but it'll help you sleep better at night.)  Your annuitized income (for a bare-bones budget) will guarantee that you'll avoid the failure rates of 0%-20%, so already your actual success ratio is at 100%.  In other words then you'll have more money than you need.

If you cut your spending to 3%-3.5% then you won't be any happier, although you might sleep better at night.  But eventually you'll realize that you have more money than you have health & mobility to enjoy it.  Your great-grandchildren will be happy with your legacy, but you'll have missed a lot of life-enhancing opportunities because you were too conservative with your spending.

Here's another way to look at it:  reducing your SWR from 4% to 3-3.5% is the same effect as cutting your current spending by 12%-25%.  Try that test now.  Cut your spending by that much for the next couple of years, while you're still working, and see how you feel about it.

I think you're good with a 4% SWR and behavioral psychology.  Don't over-think it.

- Using common sense and making sure you have flexibility to lower your annual expenses when needed (market tanks)
- 1 - 2 yr cash/CD/short term bond acct not a bad way to cushion a heavier stock portfolio mix
Yep, as mentioned in my previous paragraphs.

- Be sensitive to stock valuations when you launch and adjust your SWR accordingly if needed
Whatever the heck "valuation" means.  Trailing earnings?  Projected earnings?  EBIDTA?  Free cash flow?  One of the Internet's most notorious personal-finance trolls claims that he's been in cash since 1996 because valuations are still "too high".  Even 2009 wasn't good enough for him because future earnings were projected to be zero, and when a zero is in the denominator of P/E then valuations will always be too high.

A more concrete approach would be to start your ER at your personal conservative asset allocation, say at 60%/40% equities/bonds.  (I would not be more conservative than that.)  If a recession occurs during the first few years of ER then you'll cut your spending.  You'll spend your cash.  You'll spend some of your bonds.  Just by your spending, even though it's reduced, your AA will begin to drift up to 65%/35% or even 70/30.  At the end of the recession you'll resume your 4% SWR, your portfolio will have survived a recession and assumed a more aggressive AA, and it'll recover its value more quickly because you held on to your equities.  You'll have also endured the dreaded "sequence of returns" risk which is critical to portfolio survival during the first 5-10 years of ER.  Once you've survived that then your portfolio is nearly bulletproof.

- Maybe give consideration to a more aggressive SWR in yrs prior to age say 75 with a reduced SWR there after (This is basically my own research/observations as the theory is while you are younger/healthier, you will want to do more that may cost more $$ and as you get in your golden yrs you may be a little less active. Yes, exceptions everywhere, but I see this/hear this from people in my life)
One of the earliest mentions of this was a 1990s book by Michael Stein "The Prosperous Retirement." The anecdotal evidence is strong, but the research is mixed.  Are people spending less because they have to (running out of assets), or because they can't spend it?  (Poor health, limited mobility.)  What about medical expenses or end-of-life care?  In any case, I'm going to agree with the anecdotal data because it closely matches my personal experience.

I think your instincts are correct.  You could start your ER at a 4% SWR, and as you get into your 70s you might find out that your new 30-year SWR is really 5% or even 6%. 

I'm 54 years old, so it'll be interesting to see whether the actuarial analysis reaches a firm conclusion over the next decade.  However I'll still spend a little more now out of concern that I won't be able to spend it later.

Title: Re: Stop worrying about the 4% rule
Post by: forummm on June 19, 2015, 05:51:59 PM
From Sol: http://forum.mrmoneymustache.com/investor-alley/bogle-projects-'nominal-to-zero'-real-returns-over-the-next-decade/msg702331/#msg702331
(worth reading more in the thread)

this is why I'm not a fan of FIRE = 25x annual expenses. As

Keep in mind that the 25x rule and 4% rule already account for 95 percent of scenarios, so you would only have a one in 20 chance of needing to ever reduce your expenses.

To extend your hotel analogy, the correct plan would be to take the average expectation, which in this case is a 6% withdrawal rate (has a 50/50 chance of success over 30 years) and then add a 10% safety buffer (another 0.6%) and still plan on a withdrawal rate over 5 percent.  Your plan of going with 40x expenses is like planning for every party that makes a reservation to need the entire hotel, just to be safe, even though that has never happened before in all of history.

Yes, it is safer.  No, it's not a very efficient way to make plans.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on June 19, 2015, 05:52:40 PM
From Eric:

Jumping in here, this is why I'm not a fan of FIRE = 25x annual expenses. As brooklynguy stated a few posts back, none of us really know what the future will hold for the market. Instead of skirting by on 25x expenses, I think it's more prudent to go for 30 or 40x expenses. Because if your adaptation alternative is going back to work, you aren't FIRE anymore.

That's totally cool if that's your comfort level, but realize the trade off.  You're talking many extra years of guaranteed work, probably 5-10 years to get to 40x, versus a possible but unlikely part time work here and there if your 25x takes a big hit initially (and you choose to do that instead of implement other safety margins).  So if you go back to work "you aren't FIRE anymore", that still sounds better to a lot of us than never being FIRE to begin with until many years after 25x.

Sol touched on it above, but that 4% is already a pretty worse case scenario.  To add some numbers, the average portfolio balance at the end of 30 years using the 4% rule is over twice of what you started with (in real terms, not nominal).
Title: Re: Stop worrying about the 4% rule
Post by: forummm on June 19, 2015, 05:53:28 PM
From Brooklynguy:

To second (third?) Sol's and Eric's point, take a look at this excellent recent post by Nords (http://forum.mrmoneymustache.com/post-fire/what-has-workednot-worked-for-you-guys-who-have-been-fire-for-10-yrs/msg700740/#msg700740) highlighting the ridiculous amount of safety built into the 4% rule (in that, besides having an excessively high historical success rate to begin with, it deliberately ignores various external levels of safety margin which, in reality, will inure to the benefit of most retirees) -- and he's one of our more conservative early retirement planners!
Title: Re: Stop worrying about the 4% rule
Post by: forummm on June 19, 2015, 05:55:39 PM
From Skyrefuge:

If you need to maximize your 25x based on 4%, in the case of any growth oriented portfolio over 60% stock, there needs to be a draw down strategy that plays the law of averages the best.

If you believe in a 4% SWR, then you're totally overthinking all of this.

The research that created the 4% SWR assumed the same withdrawal strategy that forummm is describing: simply withdraw your 4%, and rebalance to your original AA (or withdraw your 4% in a manner that maintains the original AA; that's a mathematically identical way of saying the same thing).

A "down market" doesn't require any different approach. The existence of "down markets" and the simple withdrawal method are baked into the 4% SWR number, and any attempts at fancy withdrawal gymnastics are more likely to hurt your portfolio survival than help.
Title: Re: Stop worrying about the 4% rule
Post by: a1smith on June 19, 2015, 06:14:40 PM
Well, let's not make this a totally one-sided discussion.  Here is a post from clifp; I'll also add an old post of mine that discusses a similar concern I have:  While the 4% SWR seems fine for someone that is close to a 30-35 year retirement period it seems to be non-conservative for someone that is trying to retire early in their 30's, for example, and have up to a 60-65 year retirement.

To second (third?) Sol's and Eric's point, take a look at this excellent recent post by Nords (http://forum.mrmoneymustache.com/post-fire/what-has-workednot-worked-for-you-guys-who-have-been-fire-for-10-yrs/msg700740/#msg700740) highlighting the ridiculous amount of safety built into the 4% rule (in that, besides having an excessively high historical success rate to begin with, it deliberately ignores various external levels of safety margin which, in reality, will inure to the benefit of most retirees) -- and he's one of our more conservative early retirement planners!

I too agree with the sentiment provide your willing to be flexible as noted above and in Nords post.  If not then a lower SWR may be more prudent given the current valuations, lower interest rates, slow growth prospects.

I complete agree about not worrying about the 4% rule if we were talking about people retiring in their 60s.  But according to this calculator http://gosset.wharton.upenn.edu/mortality/perl/CalcForm.html (http://gosset.wharton.upenn.edu/mortality/perl/CalcForm.html), I as a 55 year old, have a 25% change of living another 34 years (same age as my mom) and if I was a woman a 50% chance.  So anybody planning on retiring before 50 should be looking at 40 year retirement (especially a couple) .  At 40 years a 4% WR only gives 81% success rate according to CFiresim.   Plus life expectancy is increasing at >1.2 year/decade in the US so a 25 year old today is likely to have a life expectancy at age 50 that is 3 years longer than a 50 year old today.   In order to get to a 95% success rate you need to dial the withdrawal rate down to 3.5%.

For somebody looking to retire in their early 40s or before, who has already slashed their lifestyle expenditures  to Mustachian levels, I don't think you are being too conservative to move the SWR rate to 3.0%.  Social security for a 40 year old is 22 years away and conceivably that age maybe raised by a couple of year.
Title: Re: Stop worrying about the 4% rule
Post by: a1smith on June 19, 2015, 06:29:41 PM
Here is my old post where I did cFIREsim simulations for longer retirement periods.  In The 4% Rule: The Easy Answer to “How Much Do I Need for Retirement?” (http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/), MMM says that "In other words, above 30 years, the length of your retirement barely affects the safe withdrawal rate calculations." (his emphasis, not mine.)  Looking at the cFIREsim calculations you can see that is not the case.  Upthread there is some discussion about 1% fee being high and that you can increase your SWR if you have lower fees -- note that the % success calculations below are for 0% fees.

So, to look at one data point, let's say someone retires at 30 and plans on living till 95.  With 50/50 AA cFIREsim predicts 55.0% chance of success and 80.0% chance of success at 70/30 AA.  So, at the very least, you have to adjust your AA to make sure you have an AA that guarantees a reasonable chance of success but is still an AA you are comfortable with given no income to invest.

Based on the trinity study and cfiresim you should be very safe at 4%. Saying that it only has a 52% success rate shows something is wrong. Also at some point having 50 years or 250 years should have a minimal change to the SWR. I will stick to cfiresim until a better model comes out.

Some food for thought - in MMM's post http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/ (http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/) he shows the 4.04% SAFEMAX value in Figure 2.1.  Actually, that figure is derived from William Bengen's work in 1994 (the author, Wade Pfau, extended the results to 1981 using data up to 2010), not the Trinity study.  The Trinity study occurred four years after Bengen's seminal work.  The only difference between their work is the bond indices they chose.  With Bengen, he showed 100% success at 4.15% WR; the Trinity study showed a 95% success rate at 4% WR (not 100%!!!).

If you go to the webpage MMM got that figure from, it redirects to http://retirementresearcher.com/the-trinity-study-and-portfolio-success-rates/ (http://retirementresearcher.com/the-trinity-study-and-portfolio-success-rates/).  Looking at Table 2.1, you can see that at 4% withdrawal rates you have 100% success at 30 years, but only 96% at 35 years and 85% at 40 years.

I tried a really simple experiment in cFIREsim and obtained comparable results.  I started with 2015-2045 for a 30 year retirement, with $100 portfolio, $4 spending (4%) with inflation adjust , 50/50 stocks/bonds, no fees, and everything else set to zero. That matches the study parameters. I then ran simulations for 30, 35, 40, ...., 70, and 75 year retirements. I stopped at 75 years for two reasons: most people won't be retired that long and also the data starts to be statistically insignificant because at 75 years only 70 cycles are ran, 80 years gives 65 cycles, etc.

Well, the results were so bad for 50/50 stock/bond allocation I also ran 70/30.  The results are shown in the table below.  As you can see the success rate keeps dropping and it is not clear to me that there is an asymptotic limit.  I'm not sure where the assumption that if the money lasts 30 years it will last forever came from but I consider it suspect.  If someone can post some hard calculations or a research paper that shows this I would appreciate it.

Years Retired50/50 Success70/30 Success
3090.4%93.9%
3582.7%90.9%
4067.6%84.8%
4565.0%80.0%
5063.2%81.1%
5560.0%82.2%
6060.0%82.4%
6555.0%80.0%
7053.3%78.7%
7550.0%77.1%

Also, I ran the MMM values in cFIREsim that I used in the spreadsheet.  90/10 allocation, 4% spend, 0.1% fees, inflation adjust, 46 year retirement. I got an 83.84% success rate with cFIREsim.  Higher than the simple spreadsheet but still not 100%.

So, the safety factors MMM mentions in article listed above are not safety factors; they are an absolute requirement.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on June 19, 2015, 06:31:32 PM
Good. All viewpoints welcome. This is intended to be a repository of information on the subject. Thanks for contributing!
Title: Re: Stop worrying about the 4% rule
Post by: MDM on June 19, 2015, 09:22:53 PM
A related thread is http://forum.mrmoneymustache.com/welcome-to-the-forum/50-60-year-retirement-timeframes-anyone-have-the-numbers/.

There is a comment in the MMM blog post referenced by a1smith: "It’s much like a 30-year mortgage, where almost all of your payment is interest. Drop your payment by just $199 per month, and suddenly you’ve got a thousand-year mortgage that will literally take you 1000 years to pay off."  Unfortunately that is not a generic truth - as the interest rate changes, so does the principal required.  E.g.,
Code: [Select]
Rate/yr Principal
0% $73,900
1% $83,500
2% $98,100
3% $116,000
4% $138,100
5% $165,600
10% $449,800

Much as MMM likely had a specific set of assumptions in mind for the "$199 rule", there are specific assumptions that lead to the "4% Safe Withdrawal Rate rule".  In either case, when different assumptions apply, different conclusions become valid.



ETA:If one wants to skip ~1000 posts, the one below provides a good summary of what is discussed in them:
Here is the live thread: I'm Bill Bengen, and I first proposed the 4% safe withdrawal rate in 1994. Ask me anything! (https://www.reddit.com/r/financialindependence/comments/6vazih/im_bill_bengen_and_i_first_proposed_the_4_safe/)

Highly recommend reading the thread.

His opening remarks and a few intersting points are reposted below.  I hope this is acceptable.

Reposting without comment, as it is of general interest to forum participants:

/financialindependence

I'm Bill Bengen, and I first proposed the 4% safe withdrawal rate in 1994. Ask me anything!

Thanks to ER10years_throwaway for this invite. I was a financial advisor for 25 years, now retired, but still expanding my research into safe withdrawals from retirement portfolios. I am eager to share my thoughts with you, so please bring on the questions. Caveat: I can't answer questions specific to a particular person's financial situation, as I am no longer a practicing financial planner or investment advisor. Hope to hear from you. I'll start answering questions at noon eastern on Tuesday, 8/21.

Q:  Since these questions get asked all the time here:   Is the 4% rule still relevant in today's economy? What safe withdrawal rate would you recommend for someone planning for longer than 30 years of retirement?

A: billbengen • Thanks for your question. Before I answer it specifically, why don't we dispense with some preliminaries, so we are all on the same page?

The "4% rule" is actually the "4.5% rule"- I modified it some years ago on the basis of new research. The 4.5% is the percentage you could "safely" withdraw from a tax-advantaged portfolio (like an IRA, Roth IRA, or 401(k)) the first year of retirement, with the expectation you would live for 30 years in retirement. After the first year, you "throw away" the 4.5% rule and just increase the dollar amount of your withdrawals each year by the prior year's inflation rate. Example: $100,000 in an IRA at retirement. First year withdrawal $4,500. Inflation first year is 10%, so second-year withdrawal would be $4,950. Now, on to your specific question. I find that the state of the "economy" had little bearing on safe withdrawal rates. Two things count: if you encounter a major bear market early in retirement, and/or if you experience high inflation during retirement. Both factors drive the safe withdrawal rate down. My research is based on data about investments and inflation going back to 1926. I test the withdrawal rates for retirement dates beginning on the first day of each quarter, beginning with January 1, 1926. The average safe withdrawal rate for all those 200+ retirees is, believe it or not, 7%! However, if you experience a major bear market early in retirement, as in 1937 or 2000, that drops to 5.25%. Add in heavy inflation, as occurred in the 1970's, and it takes you down to 4.5%. So far, I have not seen any indication that the 4.5% rule will be violated. Both the 2000 and 2007 retirees, who experienced big bear markets early in retirement, appear to be doing OK with 4.5%. However, if we were to encounter a decade or more of high inflation, that might change things. In my opinion, inflation is the retiree's worst enemy. As your "time horizon" increases beyond 30 years, as you might expect, the safe withdrawal rate decreases. For example for 35 years, I calculated 4.3%; for 40 years, 4.2%; and for 45 years, 4.1%. I have a chart listing all these in a book I wrote in 2006, but I know Reddit frowns on self-promotion, so that is the last I will have to say about that. If you plan to live forever, 4% should do it.


Q:   Because your assumption is not correct. The S&P500 is not 'offering' ANY future return. You are likely referring to past returns. Expected future returns are at issue here.

A: billbengen • Expected returns for the S&P 500 over the next decade are, according to a number of sources, very low, possibly zero or less. I recall that between 1966 and 1982, the S&P 500 did return zero. Michael Kitces, a brilliant financial advisor, created a chart matching stock market valuations with subsequent 30-year safe withdrawal rates. The negative correlation is virtually perfect; when stock valuations are high, the safe withdrawal rate was low, and vice versa. His advice, with which I concur, is that when stock market valuations are at very high levels, as they are today, it is best to stick with the appropriate safe withdrawal rate, and not try for something higher.


Q:   Obviously market conditions have changed a lot since 1994. Given that we've been in a bull bond market for so long, and given we're currently looking at corporate bond yields of maybe 4%, does it still make sense to have a bond component in your portfolio?

Also: did you ever foresee the development of a financial independence / early retirement movement like we have today?

A: billbengen • Yes, I still believe bonds should play a significant role in most retirement portfolios. During a stock bear market, interest rates often decline, which causes an increase in the price of bonds. This can offset some of the losses from the stocks. Overall, I believe a 50% equities/50% bonds mixture at the start of retirement is close to ideal. Years ago, I talked to Harry Markowitz, the founder of Modern Portfolio Theory, about this. He used that 50/50 ratio in his personal portfolio, which speaks volumes! Some recent research advocates increasing the fraction of stocks in the portfolio as the retiree ages. I haven't had an opportunity to verify this, but I plan to look into it in the next year. No shortage of intriguing ideas in this field! I think the financial independence movement is great, in part because it means people must educate themselves more in this field so they make good decisions. I have "retired' three times, and am now in my fourth career, as a writer/researcher. But many friends and acquaintances of my generation are still working, even into their late 70's, so I wonder how "early retirement" is succeeding in this environment. Like everything else, if you plan and execute early and well, you will most likely achieve what you want.


Q:  Related to the question on low bond returns, are you bothered at all by the number of people in the FI/RE community who are retiring with 100% stock portfolios?

A: billbengen • It doesn't "bother" me, as when the big stock market decline comes (and it will, eventually), I will not be the one with big losses! All kidding aside, my research indicates that using a 100% stock allocation sharply reduces your SWR. These folks might have to make some major adjustments in lifestyle during a major bear market. But if they are prepared to do so, they might get by.


A few interesting perspectives worth discussing.

Rule revised in Bengen (2006) to 4.5% if tax-free and 4.1% for taxable, underlying assumption, asset allocation of roughly 50/50 equities and debt, with at least 50-55% low cost index funds. The rest in quality bonds and cash (recommends 10% cash).

Q: Inflation assumptions sensitivity

A: billbengen •  It all depends on your view of future inflation. I like to remind people that the 4.5% rule is not a law of nature, like Newton's laws of motion, which will probably never change. Markets can change, and it is possible that in the future the 4.5% rule, which has held up for 50 years, might be violated. But I haven't seen those circumstances yet.

Q:  For a traditional retirement, 4% safe withdrawal rate is a pretty standard assumption for a 30 year period. What is your perspective for using the 4% SWR for a longer period of time, say 60 years? A lot of people pursuing financial independence aim for lower than 4%- it is pretty common to hear SWR's around 3.25%- 3.75% to be more conservative for a longer retirement horizon.

A: billbengen • As your "time horizon" lengthens, my research indicates that you should reduce your withdrawal rate concomitantly. For a 60-year time horizon, the indicated safe withdrawal rate is reduced from 4.5% to 4.0%.

billbengen • It is an interesting fact that in the past, 96% of retirees, at the end of 30 years, have a portfolio still worth at least as much as they started with, in nominal terms. Of course, when inflation is factored in, the real value of those investments has diminished considerably. It should also be noted that the SWR assumes that at the end of 30 years, the retiree will run out of money with his or her dying breath. If you wish to specify a minimum balance at the end of 30 years, that will result in lower initial withdrawal rates.
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on June 19, 2015, 09:55:41 PM
I'd just like to point out that the 4% SWR also assumes:
-That you live for 30+ years. You might not.
-That no cataclysmic natural disaster befalls the earth in that time. One might.
-That no social upheaval/revolution/political change makes your earnings and savings valueless.

So, when you say you want a 2% withdrawal rate because it's safer, you're ignoring the fact that it's arguably impossible to be "safer" than, say, 85-90% with any long term plan, because the world may have other plans for you and running out of money in a future that looks just like the present isn't the biggest concern anymore.

-W
Title: Re: Stop worrying about the 4% rule
Post by: deborah on June 19, 2015, 10:50:28 PM
The 4% SWR also assumes you live in the USA      and    the USA continues to be similar to what it was in the past.

Other places have much lower SWRs - Australia is about 3.6%, Japan is (from memory) 0.6%. In fact, of all the SWRs I have seen, the one for the USA is the highest. Obviously the hyperinflation of Germany in the 30s (which has a similarly low SWR) and the economic problems that Japan has experienced more recently mean that these countries have much worse SWRs than just about every other country, but we just don't know what is around the corner for our own economies (and as a result for their SWRs) - especially as we are considering the next 50 years.

Throughout the majority of the 20th Century the USA was the largest world economy, so it could be argued that other economies "jerked" twice as much - with their own problems as well as when the global economy (the USA) "jerked". This possibly gave the USA SWR its advantage. However, the Chinese economy (in global terms, not per person) is now, or just about, larger. Over the next 50 years (for the SWR we are postulating), we should consider that other economies (perhaps also India) will probably play leading roles globally, and that the USA economy may become a much smaller component of the global economy. Maybe people should be looking at the SWR of the UK rather than the USA when they are doing their calculations. (The UK "ruled the waves" at the beginning of the 20th century, but gradually decreased over the timeframe used to calculate SWRs).
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on June 19, 2015, 10:52:54 PM

The 4% SWR also assumes you live in the USA      and    the USA continues to be similar to what it was in the past.

Other places have much lower SWRs - Australia is about 3.6%, Japan is (from memory) 0.6%.

No, it doesn't assume it will be similar to the past--it assumes it will be no worse than the past. And those other countries worst case scenarios are worse than ours have been, yes, but I'm curious what their average scenarios were. That would be a lot more interesting to me, but I'm not aware of that data existing.
Title: Re: Stop worrying about the 4% rule
Post by: Kwill on June 19, 2015, 11:29:55 PM
I am disappointed. I thought I was going to learn that I could do a 50% withdrawal rate and be OK. Then I could actually retire soon. Too bad. ;)
Title: Re: Stop worrying about the 4% rule
Post by: Jeremy on June 20, 2015, 12:46:04 AM

The 4% SWR also assumes you live in the USA      and    the USA continues to be similar to what it was in the past.

Other places have much lower SWRs - Australia is about 3.6%, Japan is (from memory) 0.6%.

No, it doesn't assume it will be similar to the past--it assumes it will be no worse than the past. And those other countries worst case scenarios are worse than ours have been, yes, but I'm curious what their average scenarios were. That would be a lot more interesting to me, but I'm not aware of that data existing.

Even better

It assumes that it won't be worse than the WORST period in the history of the US

As a refresher, that period included an Oil Embargo, the closing of the gold window, discredited economic policies (Laffer Curve anyone?), price fixing, runaway inflation, gasoline shortages, etc...  just about the perfect storm of horrible economic conditions

And yet the 4% rule worked, by definition



Title: Re: Stop worrying about the 4% rule
Post by: clifp on June 20, 2015, 01:28:21 AM


Well, the results were so bad for 50/50 stock/bond allocation I also ran 70/30.  The results are shown in the table below.  As you can see the success rate keeps dropping and it is not clear to me that there is an asymptotic limit.  I'm not sure where the assumption that if the money lasts 30 years it will last forever came from but I consider it suspect.  If someone can post some hard calculations or a research paper that shows this I would appreciate it.

Years Retired50/50 Success70/30 Success
3090.4%93.9%
3582.7%90.9%
4067.6%84.8%
4565.0%80.0%
5063.2%81.1%
5560.0%82.2%
6060.0%82.4%
6555.0%80.0%
7053.3%78.7%
7550.0%77.1%

Also, I ran the MMM values in cFIREsim that I used in the spreadsheet.  90/10 allocation, 4% spend, 0.1% fees, inflation adjust, 46 year retirement. I got an 83.84% success rate with cFIREsim.  Higher than the simple spreadsheet but still not 100%.

So, the safety factors MMM mentions in article listed above are not safety factors; they are an absolute requirement.


I think this table illustrates the limitation of historical calculators.  As you may notice 45 years appears the worse case such that a 60 year retirement is better than a 45.  Both Firecalc and cFIREsim give similar result although the AA matters.

Now if we step back and think about this logically, going forward is is mathematically impossible for a longer retirement to be a safer than a shorter one with the same AA and withdrawal.  A 40 year old who retired in 2000 with a 4% SWR, like I did  is in far worse shape financially than a 65 year. The 65 year now 80 probably only has 10-15 years left to live. The 55 year like myself has 25-35 left. 

Now while it true in a solid majority cases after 30 years you end up with a more and often a lot more money than you start, in a roughly a 1/3 of the cases you end up dipping into your principal, so it is pretty important to understand the limitation of this calculators for early retirements.

I also noticed while playing around with longevity calculators that being retired is probably added a couple of years to my life, much lower stress, more exercise, more sleep.
Title: Re: Stop worrying about the 4% rule
Post by: deborah on June 20, 2015, 04:01:33 AM

The 4% SWR also assumes you live in the USA      and    the USA continues to be similar to what it was in the past.

Other places have much lower SWRs - Australia is about 3.6%, Japan is (from memory) 0.6%.

No, it doesn't assume it will be similar to the past--it assumes it will be no worse than the past. And those other countries worst case scenarios are worse than ours have been, yes, but I'm curious what their average scenarios were. That would be a lot more interesting to me, but I'm not aware of that data existing.

Even better

It assumes that it won't be worse than the WORST period in the history of the US

As a refresher, that period included an Oil Embargo, the closing of the gold window, discredited economic policies (Laffer Curve anyone?), price fixing, runaway inflation, gasoline shortages, etc...  just about the perfect storm of horrible economic conditions

And yet the 4% rule worked, by definition
But all these things happened to other economies as well. It is interesting that when those things happened in other countries (for example when run away inflation hit Germany), they DID cause their SWRs to go lower, and the study that talks about why each economy had its worst outcomes (which then feed into the lower SWRs) really shows (to me) that ANY country could have had some of these things happen (perhaps not the things that caused the very low SWRs of Germany and Japan).
Title: Re: Stop worrying about the 4% rule
Post by: zataks on June 20, 2015, 09:21:38 AM
Something I started thinking about yesterday and haven't seen anywhere (although "anywhere" means here or reddit) is legitimate arguments against 4% as a SWR.

For almost all theories and beliefs there are valid and legitimate counter beliefs, studies, science.  And I'm just not seeing it regarding this topic.  Is this because I hang out in places where this is essentially the mantra? or is it because nothing has come up to prove otherwise? Or is it because this is relatively simple so the science/maths behind what is going on is not up for debate?
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on June 20, 2015, 09:23:04 AM
Right, so now we're assuming that the future will be worse than anything we've ever had and as bad or worse than any other country has ever had in the last 200 years as well?

Seems pretty paranoid.

If the 4% rule (or 3% for another country, whatever) was based on the average withdrawal allowed to have success (i.e. 50% success rate), I'd share your skepticism, and say the future might be worse than the past (by average).  But to say that the future will be worse than the worst period in our past and all the other countries, too, so one should go sub-3%, or sub-1%, or whatever number you want to argue, seems just way too pessimistic.

I can buy that we'll be worse than average.  But the worst ever?  Seems unlikely. And even if it happened, there's lots you can do in that case.  Seems as good of a reason as any to not worry about the 4% rule.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on June 20, 2015, 09:23:40 AM
Something I started thinking about yesterday and haven't seen anywhere (although "anywhere" means here or reddit) is legitimate arguments against 4% as a SWR.

For almost all theories and beliefs there are valid and legitimate counter beliefs, studies, science.  And I'm just not seeing it regarding this topic.  Is this because I hang out in places where this is essentially the mantra? or is it because nothing has come up to prove otherwise? Or is it because this is relatively simple so the science/maths behind what is going on is not up for debate?

Huh? There's these arguments all the time.  That's why this thread was started, to compile together the posts arguing why you don't need to worry about it.
Title: Re: Stop worrying about the 4% rule
Post by: a1smith on June 20, 2015, 09:57:33 AM
I think this table illustrates the limitation of historical calculators.  As you may notice 45 years appears the worse case such that a 60 year retirement is better than a 45.  Both Firecalc and cFIREsim give similar result although the AA matters.

I just found another nice thread started by sol discussing firecalc and cFIREsim.

firecalc and cFIREsim both lie? (http://forum.mrmoneymustache.com/ask-a-mustachian/firecalc-and-cfiresim-both-lie/)

I think it is pertinent to this thread since many people are using those tools to pick a SWR, probably starting with 4%.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on June 20, 2015, 10:03:42 AM
I think this table illustrates the limitation of historical calculators.  As you may notice 45 years appears the worse case such that a 60 year retirement is better than a 45.  Both Firecalc and cFIREsim give similar result although the AA matters.

I just found another nice thread started by sol discussing firecalc and cFIREsim.

firecalc and cFIREsim both lie? (http://forum.mrmoneymustache.com/ask-a-mustachian/firecalc-and-cfiresim-both-lie/)

I think it is pertinent to this thread since many people are using those tools to pick a SWR, probably starting with 4%.

Yeah, that was another good one. That's where I learned about the difference in the tools. Thanks for adding.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on June 20, 2015, 10:06:57 AM
Something I started thinking about yesterday and haven't seen anywhere (although "anywhere" means here or reddit) is legitimate arguments against 4% as a SWR.

For almost all theories and beliefs there are valid and legitimate counter beliefs, studies, science.  And I'm just not seeing it regarding this topic.  Is this because I hang out in places where this is essentially the mantra? or is it because nothing has come up to prove otherwise? Or is it because this is relatively simple so the science/maths behind what is going on is not up for debate?

Some of those arguments are already popping up in this thread. The most common I see is "the SWR is XX% for country YYY". But if you just have a globally diversified portfolio, then it doesn't matter so much if Japan's equity returns sucked for 20+ years, because your eggs aren't all in one country's basket.
Title: Re: Stop worrying about the 4% rule
Post by: Tyler on June 20, 2015, 10:51:22 AM
Some of those arguments are already popping up in this thread. The most common I see is "the SWR is XX% for country YYY". But if you just have a globally diversified portfolio, then it doesn't matter so much if Japan's equity returns sucked for 20+ years, because your eggs aren't all in one country's basket.

The 4% rule was not arrived at using a globally diversified portfolio, so this may be a false assumption.

One other thing to remember is that the studies the 4% rule were based on did not settle on stocks and bonds in the US as the best investment options after evaluating everything else.  They studied them at the exclusion of everything else.  Portfolios that use things like international stocks, REITs, TIPS, and other assets may in fact perform better (or may not!), but most retirement calculators do not even offer them as options.  Retirement investing is more diverse and complex than the simple 4% rule of thumb may indicate. 
Title: Re: Stop worrying about the 4% rule
Post by: zataks on June 20, 2015, 11:54:46 AM
I guess I should have emphasize legitimate arguments against it? 

So many I see are "4% won't work because of downturns in the economy!" or "4% is not feasible because we can't predict the future!"

I'm curious is the is reasonable, empirically researched data/studies that make a sincere or valid attempt at invalidating a 4% SWR.  In really dumb terms: the Sith to the Trinity Study's Jedi?
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on June 20, 2015, 11:57:47 AM
I guess I should have emphasize legitimate arguments against it? 

So many I see are "4% won't work because of downturns in the economy!" or "4% is not feasible because we can't predict the future!"

I'm curious is the is reasonable, empirically researched data/studies that make a sincere or valid attempt at invalidating a 4% SWR.  In really dumb terms: the Sith to the Trinity Study's Jedi?

I don't understand what you're looking for.  What sort of data would disprove it?  It's a narrow study based on certain premises.  The data supports the conclusion because the conclusion was drawn from the data.

Some attack the premises, or say they should be different, but given the same assumptions, you should draw the same conclusions.  You just may not buy the premises.
Title: Re: Stop worrying about the 4% rule
Post by: Tyler on June 20, 2015, 12:02:07 PM
I'm curious is the is reasonable, empirically researched data/studies that make a sincere or valid attempt at invalidating a 4% SWR.  In really dumb terms: the Sith to the Trinity Study's Jedi?

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

http://tinyurl.com/nrywjny
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on June 20, 2015, 12:05:06 PM
By none other than Wade Pfau, the guy who made the 4% rule popular.

Not sure how Pfau made it popular?

And most of his current ideas on why the 4% rule may not work is based on future projected yields.  I don't buy the premise that we can predict future yields, so I don't buy his arguments about why he doesn't trust it going forward.

Pfau writes some awesome retirement stuff, but he's too pessimistic for me.
Title: Re: Stop worrying about the 4% rule
Post by: Tyler on June 20, 2015, 12:25:31 PM
I'm happy to walk back the "made it popular" comment.  But there's no denying he's very influential on the topic.

Pfau is probably the most widely quoted guy regarding SWR research, mostly because he continuously updates the original research with new data.  His opinion is definitely more pessimistic lately.  Here's a catalog of his research.  https://ideas.repec.org/e/ppf6.html

I make no judgments on his methodology.  But he's put out some fine research worth noting and is willing to change his views with new information, and with a PhD from Princeton he's no internet hack.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on June 20, 2015, 12:31:43 PM
No, it doesn't assume it will be similar to the past--it assumes it will be no worse than the past. And those other countries worst case scenarios are worse than ours have been, yes, but I'm curious what their average scenarios were. That would be a lot more interesting to me, but I'm not aware of that data existing.

Pfau's study from 2010 (http://retirementresearcher.com/an-international-perspective-on-safe-withdrawal-rates-from-retirement-savings-the-demise-of-the-4-percent-rule/) on SWR's in international markets has some limited data on "average" scenarios.  In particular, Table 3 gives a bunch of data beyond the safemax WR's in various foreign markets, including the failure rates for a 5% WR (which was closer to being an "averagely successful" WR in some of the countries) and it also gives the WR that gave a 90% success rate in each of the countries (at least I think that's what the "10th percentile" column is showing).
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on June 20, 2015, 12:55:54 PM
I'm happy to walk back the "made it popular" comment.  But there's no denying he's very influential on the topic.

Pfau is probably the most widely quoted guy regarding SWR research, mostly because he continuously updates the original research with new data.  His opinion is definitely more pessimistic lately.  Here's a catalog of his research.  https://ideas.repec.org/e/ppf6.html

I make no judgments on his methodology.  But he's put out some fine research worth noting and is willing to change his views with new information, and with a PhD from Princeton he's no internet hack.

I've been reading Pfau's blog for years; you don't have to convince me of his credentials.  I'm not sure what part of what I said translated to "who is this guy?"  :)
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on June 20, 2015, 12:59:26 PM
No, it doesn't assume it will be similar to the past--it assumes it will be no worse than the past. And those other countries worst case scenarios are worse than ours have been, yes, but I'm curious what their average scenarios were. That would be a lot more interesting to me, but I'm not aware of that data existing.

Pfau's study from 2010 (http://retirementresearcher.com/an-international-perspective-on-safe-withdrawal-rates-from-retirement-savings-the-demise-of-the-4-percent-rule/) on SWR's in international markets has some limited data on "average" scenarios.  In particular, Table 3 gives a bunch of data beyond the safemax WR's in various foreign markets, including the failure rates for a 5% WR (which was closer to being an "averagely successful" WR in some of the countries) and it also gives the WR that gave a 90% success rate in each of the countries (at least I think that's what the "10th percentile" column is showing).

You're right, this sort of has that for the ones that have around a 50% success rate of 5% after 30 years:
https://1.bp.blogspot.com/_7pcnNDkYOFE/TJLpRdCn9uI/AAAAAAAAAOI/e4WRVdW-D4U/s1600/Capture2.JPG

So that indicates to me that maybe a 4.5-5% success rate worked about half the time, even in other countries.  So 4% and flexibility should be fine, even assuming the US is worse than it's worst period, and is more like some of the other countries worse (but not worst) times.
Title: Re: Stop worrying about the 4% rule
Post by: Tyler on June 20, 2015, 01:01:53 PM
I'm not sure what part of what I said translated to "who is this guy?"  :)

Ha.  Nothing at all!  You're clearly well-versed in his background.  The longer explanation was more for the larger group who may not necessarily recognize the name.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on June 20, 2015, 01:04:46 PM
I'm not sure what part of what I said translated to "who is this guy?"  :)

Ha.  Nothing at all!  You're clearly well-versed in his background.  The longer explanation was more for the larger group who may not necessarily recognize the name.

Gotcha.  :)
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on June 21, 2015, 06:22:29 AM
I'm curious is the is reasonable, empirically researched data/studies that make a sincere or valid attempt at invalidating a 4% SWR.  In really dumb terms: the Sith to the Trinity Study's Jedi?

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

http://tinyurl.com/nrywjny

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

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

2) Take historical returns. Cut them down 25-50%, then run the Monte Carlo. More subtle. Justified on current low bond yield. This is basically assuming we have times which will be considerably worse than the Great Depression, or 66-82 stagflation for investors. It's fine to play "What if?" - but this isn't really predictive.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on June 21, 2015, 06:48:36 AM
From Brooklynguy:

Quote
ignoring the fact that it's arguably impossible to be "safer" than, say, 85-90%"
Let's be clear that isn't a fact, it's someone opinion (probably William Bernstein, a man who I respect).  Yes you can argue there is 10% or so chance you die before you hit 30 years,and 10% chance the economy changes and that works out to be 80 odd percent. But minimizing your chances of running out of money for that 80% of the time things go as expected isn't being overly conservative.

I agree with this and have noted before the irony in how Bernstein's 80% concept of false precision has itself become an example of false precision.

If this thread's purpose is to serve as a compilation of arguments about the 4% Rule and SWRs, we might as well add a link to the full thread where I made that observation, which had some good discussion on these matters in general:

http://forum.mrmoneymustache.com/welcome-to-the-forum/cfiresim-success-rate/

EDIT: Oops, just realized this is not the "Stop worrying about the 4% Rule thread."  But, for posterity's sake, clifp, maybe you want to respond to walt's identical post in that thread with the same response, and I'll do likewise to yours? :)
Title: Re: Stop worrying about the 4% rule
Post by: forummm on June 21, 2015, 06:52:33 AM
I'm curious is the is reasonable, empirically researched data/studies that make a sincere or valid attempt at invalidating a 4% SWR.  In really dumb terms: the Sith to the Trinity Study's Jedi?

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

http://tinyurl.com/nrywjny

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

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

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

I too have found these methods by Pfau to be suspect. You could argue that he's aiming these studies at financial advisors, so the 1% is actually going to the advisor's pockets. But the Monte Carlo analysis has never been reflective of what has actually happened before. Sequence of returns get all crazy with that. In the real world, things don't behave that way.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on June 21, 2015, 07:52:41 AM
I'm curious is the is reasonable, empirically researched data/studies that make a sincere or valid attempt at invalidating a 4% SWR.  In really dumb terms: the Sith to the Trinity Study's Jedi?

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

http://tinyurl.com/nrywjny

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

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

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

I too have found these methods by Pfau to be suspect. You could argue that he's aiming these studies at financial advisors, so the 1% is actually going to the advisor's pockets. But the Monte Carlo analysis has never been reflective of what has actually happened before. Sequence of returns get all crazy with that. In the real world, things don't behave that way.

They're certainly getting him headlines in the financial press (End of the 4% Rule!!!!!!) who use the titles as clickbait -  and this also feeds the frenzy over at Bogleheads with their "race to the lowest SWR."   Ignore Social Security. Ignore pensions. You cannot ever earn or recieve any other money (such as an inheritance. Or hobby income. Or churning credit cards for travel points. Or just Craigslisting your junk) You cannot vary your spending due to market conditions. Start with 3% as your SWR and you get a bunch of people arguing that it's too risky. You need 2.5%. No, you need 2%. No, I'm targeting 1.7%!

4% actually still seems pretty damn safe. Most of the risk is starting your retirement with a few bad years ("sequence of returns risk") - which can be planned for or solved pretty readily by a variety of methods:

1) I personally plan to have some "fun money" in the budget - primarily money for extended traveling.  The traveling can be postponed for a year or two in a market crash, or just made very cheap (ie National Park Camping Tour instead of European River Cruise)

2) In the first few years of retirement, you should be pretty darn employable or otherwise make some money. If the market crashes, work some for a year! (Yes, it's harder to get a job in a recession. Noted.)

3) I've got a lot of stuff around that I want to sell off. Don't have the time at the moment to do more than stay steady with selling off infant junk while acquiring toddler junk.

4) I'm gonna plan on Social Security. I plan to push it out to Age 70 (at the moment) - but if the market crashes hard, I can pull that in by 8 years. Frankly, being married there are a lot of middle ground options. Too complex for this post.

5) Personally, I have a pension.

6) I can have a HELOC in place shortly before I retire that I can draw on if need arises.

7) I am likely to inherit mid 6-figures within 15 years of retirement. (Perhaps morbid, but I am realistic here. The 15 years presumes one parent lives to 5 years older than any ancestor)
Title: Re: Stop worrying about the 4% rule
Post by: Jeremy on June 21, 2015, 08:07:24 AM
I'll give some props to Mr Pfau for highlighting one important (albeit somewhat obvious) point

The chart for Maximum Sustainable Withdrawal Rate shows a wide range.  4% was worst case.  But if you were lucky with your timing, it could be 12%

(http://3a05ty2ohkvc1zboze4eczal.wpengine.netdna-cdn.com/wp-content/uploads/2011/04/trinity11-1200x839.jpg)

When we retired, were we on the 4% path or the 12% path?  No idea.  But we can get a pretty strong indicator early on

From Pfau, bullet point 3c, http://retirementresearcher.com/trinity-study-updates/
"Retirement success is more dependent on what happens early in retirement than late in retirement. In fact, the wealth remaining 10 years after retirement combined with the cumulative inflation during those 10 years can explain 80 percent of the variation in a retiree’s maximum sustainable withdrawal rate after 30 years."

If the sequence of returns in your first 10 years is favorable, and inflation hasn't gone crazy, then you are sitting pretty.  If returns aren't favorable, then you need to keep the portfolio large enough to benefit from the next bull market. 

How many people would retire with a planned 4% withdrawal rate, watch the market lay waste to their portfolio or their country plunge into a massive inflationary recession, and say, "No worries, the Trinity Study said 4% was perfectly safe, keep the champagne flowing!"  Probably not many

Small amounts of flexibility in spending (or earning) in the early years is probably worth a percentage point on withdrawal rate (+/-)


Title: Re: Stop worrying about the 4% rule
Post by: a1smith on June 21, 2015, 08:09:01 AM
Pfau's recent work doubting the 4% rule have been based on some way or another handicapping expected returns.  I've seen two basic methods:

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

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

For some people the 1% fee is going to be valid (or low).  We just set up my wife's 401k for her part time job a few months ago and I just saw a 1% fee which appears to be taken out by the 401k administrator.  So, that is in addition to the ER's of the funds we have chosen.  The administrator just changed so hopefully those admin fees will be reduced and/or eliminated.  There's not much we can do about this fee; luckily my 401k has no admin fees and very low ER funds.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on June 21, 2015, 08:29:54 AM
Pfau's recent work doubting the 4% rule have been based on some way or another handicapping expected returns.  I've seen two basic methods:

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

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

For some people the 1% fee is going to be valid (or low).  We just set up my wife's 401k for her part time job a few months ago and I just saw a 1% fee which appears to be taken out by the 401k administrator.  So, that is in addition to the ER's of the funds we have chosen.  The administrator just changed so hopefully those admin fees will be reduced and/or eliminated.  There's not much we can do about this fee; luckily my 401k has no admin fees and very low ER funds.

Your 401k fee is not relevant for the SWR calculation. It does reduce your NW as long as you keep the money there. But once you've RE, you obviously won't be working anymore, so there's no reason to keep the money in that high-fee 401k. Roll it over to a Vanguard IRA at 0.05% and increase your SWR back to 4%.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on June 21, 2015, 08:41:37 AM
I too have found these methods by Pfau to be suspect. You could argue that he's aiming these studies at financial advisors, so the 1% is actually going to the advisor's pockets.

A more charitable view is that Pfau (and financial planners in general), like the 4% rule itself, are simply overcautious by nature -- they err on the side of caution because the consequences of being proven wrong are worse if their predictions are too aggressive than if they are too conservative.
Title: Re: Stop worrying about the 4% rule
Post by: a1smith on June 21, 2015, 09:29:09 AM
I too have found these methods by Pfau to be suspect. You could argue that he's aiming these studies at financial advisors, so the 1% is actually going to the advisor's pockets.

A more charitable view is that Pfau (and financial planners in general), like the 4% rule itself, are simply overcautious by nature -- they err on the side of caution because the consequences of being proven wrong are worse if their predictions are too aggressive than if they are too conservative.

I agree.  Most people absolutely, positively don't want to run out of money but don't mind having more left over to pass on to heirs, charities, etc.  Hence, the skewing towards conservatism.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on June 21, 2015, 09:50:24 AM
I too have found these methods by Pfau to be suspect. You could argue that he's aiming these studies at financial advisors, so the 1% is actually going to the advisor's pockets.

A more charitable view is that Pfau (and financial planners in general), like the 4% rule itself, are simply overcautious by nature -- they err on the side of caution because the consequences of being proven wrong are worse if their predictions are too aggressive than if they are too conservative.

I agree.  Most people absolutely, positively don't want to run out of money but don't mind having more left over to pass on to heirs, charities, etc.  Hence, the skewing towards conservatism.

Funny, I actually I thought I was being charitable. Providing a reasonable justification why 1% fees could be baked into his analysis, when no DIY investor should have anything close to that. I assume that Pfau's target audience is financial planners, and they do tend to charge 1%--rightly or wrongly. For those advisor's clients, the SWR would be appropriately substantially lowered. For people like most of us here, we can happily increase our SWR by 25% since we aren't burning that money on fees.

I agree there's a skew towards conservatism in general. But a more informed approach would be to say the SWR is X% minus whatever fees your portfolio management has. That way if the advisor is actually charging 1% plus putting them in funds also charging 1%, the correct amount to let the clients live off of is only 2%. In this example, Pfau is actually not being conservative enough.
Title: Re: Stop worrying about the 4% rule
Post by: Nords on June 21, 2015, 02:06:42 PM
This reminds me of the saying "Everybody has a plan until they get punched in the face."

I think that people talk a pretty brave game about reducing their SWR below 4%... until they realize how long they'd actually have to work, or how much they'd actually have to save, or how much less they'd actually have to spend to live within their excessively-conservative artificial constraints.

The defense against failure is not reducing the SWR to 0.0%, and it's not determining the one true SWR out to six significant figures.  The answer is not abusing cFIRESim or FIRECalc until their success rate is 100.0000%.  The defense against failure is annuitizing a part of your portfolio so that you have a bare-bones income for longevity insurance or a zombie apocalypse.  Maybe that annuity is Social Security, maybe it's an SPIA, maybe it's a TSP inflation-adjusted annuity at age 70, maybe it's a military pension, or "all of the above".  But annuities are how you handle the questions about failure.  Hope you find a good insurance company to sell it to you!

Once you meet the boundary condition "assets = 25x annual expenses" then you're ready to figure out annuities and other asset-allocation questions.  You're ready to assess variable-spending schemes or throttling back to part-time work or side-hustle income.  You should not immediately revert to "assets = 33x annual expenses" or kick it up a notch to "assets = 40x annual expenses".  Unless, of course, you're willing to work that long for that amount of assets.

Funny, I actually I thought I was being charitable. Providing a reasonable justification why 1% fees could be baked into his analysis, when no DIY investor should have anything close to that. I assume that Pfau's target audience is financial planners, and they do tend to charge 1%--rightly or wrongly. For those advisor's clients, the SWR would be appropriately substantially lowered. For people like most of us here, we can happily increase our SWR by 25% since we aren't burning that money on fees.

I agree there's a skew towards conservatism in general. But a more informed approach would be to say the SWR is X% minus whatever fees your portfolio management has. That way if the advisor is actually charging 1% plus putting them in funds also charging 1%, the correct amount to let the clients live off of is only 2%. In this example, Pfau is actually not being conservative enough.
Wade and I had a Twitter exchange on that a couple weeks ago:
‏@TheMilitaryGuid  Jun 9
The 4% rule is "good enough", but study of variable spending:  http://buff.ly/1Ggvc67  H/T @WadePfau  Investors can beat an expense ratio of 0.5%!

‏@WadePfau
@TheMilitaryGuid I know, I know. But I'm trying to be representative for the general public, and that fee is still well below average.
Title: Re: Stop worrying about the 4% rule
Post by: a1smith on June 21, 2015, 04:07:30 PM
The defense against failure is not reducing the SWR to 0.0%, and it's not determining the one true SWR out to six significant figures.  The answer is not abusing cFIRESim or FIRECalc until their success rate is 100.0000%.  The defense against failure is annuitizing a part of your portfolio so that you have a bare-bones income for longevity insurance or a zombie apocalypse.  Maybe that annuity is Social Security, maybe it's an SPIA, maybe it's a TSP inflation-adjusted annuity at age 70, maybe it's a military pension, or "all of the above".  But annuities are how you handle the questions about failure.  Hope you find a good insurance company to sell it to you!

Once you meet the boundary condition "assets = 25x annual expenses" then you're ready to figure out annuities and other asset-allocation questions.  You're ready to assess variable-spending schemes or throttling back to part-time work or side-hustle income.  You should not immediately revert to "assets = 33x annual expenses" or kick it up a notch to "assets = 40x annual expenses".  Unless, of course, you're willing to work that long for that amount of assets.

Nice enumeration of options.

I had a similar, but less detailed, comment about people with long retirements (start at 30, 65 year retirement)

So, the safety factors MMM mentions in article listed above are not safety factors; they are an absolute requirement.

My main motivation in posting the cFIREsim data above was to show that the safety factors MMM mentioned are required, especially for long retirements, and not necessarily to reduce SWR.

For my own plan, I have pension and SS as annuitized income and potentially some inheritance funds.  Unfortunately, my pension won't have COLA like yours does.  I've used Fidelity's Retirement Income Planner to help set up my plan and it is variable SWR.  Some years I have >>4% SWR and some years I have <4% SWR due to timing of when pension, SS start.  This plan lets me retire sooner than having <=4% SWR at all times.

PS - It seems that we arrived at Pearl Harbor around the same time, I got there around the end of '81.  I was on USS NYC (SSN-696) till 12/83.  We're fellow nukes!  :-)  I really enjoyed the scuba diving when I was out there; unfortunately, most of my diving was on the sub.

EDIT - I meant to say I arrived at Pearl Harbor around the same time you started in the Navy, but you got the idea.

PPS - I am building into my plan a 75% reduction in SS benefits starting in 2033 as mentioned in Status Of The Social Security And Medicare Programs - A SUMMARY OF THE 2014 ANNUAL REPORTS (http://www.ssa.gov/oact/trsum/)
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on June 21, 2015, 05:04:05 PM
Wade and I had a Twitter exchange on that a couple weeks ago:
‏@TheMilitaryGuid  Jun 9
The 4% rule is "good enough", but study of variable spending:  http://buff.ly/1Ggvc67  H/T @WadePfau  Investors can beat an expense ratio of 0.5%!

‏@WadePfau
@TheMilitaryGuid I know, I know. But I'm trying to be representative for the general public, and that fee is still well below average.

There is a MUCH better way.

"Fund expenses, management fees, advisor fees, etc count as part of your withdrawal"


Might get more of the general public to wake up that their advisors are taking perhaps 50% of their spendable money every year.

Yep. Skimming off half for usually doing worse than the indexes.
Title: Re: Stop worrying about the 4% rule
Post by: Nords on June 21, 2015, 05:24:13 PM
I've used Fidelity's Retirement Income Planner to help set up my plan and it is variable SWR.  Some years I have >>4% SWR and some years I have <4% SWR due to timing of when pension, SS start.  This plan lets me retire sooner than having <=4% SWR at all times.
I think that someday the research (and computer simulations) will catch up with reality to verify that the 4% SWR with a variable withdrawal plan has been the right answer all along.

PPS - I am building into my plan a 75% reduction in SS benefits starting in 2033 as mentioned in Status Of The Social Security And Medicare Programs - A SUMMARY OF THE 2014 ANNUAL REPORTS (http://www.ssa.gov/oact/trsum/)
If the system performs better than the GAAP estimates, or if the payroll contribution cap is removed, then everyone will breathe a lot easier.

PS - It seems that we arrived at Pearl Harbor around the same time, I got there around the end of '81.  I was on USS NYC (SSN-696) till 12/83.  We're fellow nukes!  :-)  I really enjoyed the scuba diving when I was out there; unfortunately, most of my diving was on the sub.
Wow-- not only that but we're shipmates.  I was NYC's Weps from Dec '89 to Jul '92.  (I spent '82 through '86 in the Atlantic, and '87-'89 at Monterey.)  I got the Weps job because the incumbent had resigned his billet for psychiatric reasons, and the crew (let alone the CO) was a little skittish about me coming onboard as his replacement.  NYC's Engineering dept graciously allowed me to stand my proficiency watches (and give the young O-3s their share of OOD time) but of course I was still occasionally regarded as a brain-damaged nuke stepchild-- just as if the nukes were treated if they'd wandered into sonar or the torpedo room.  It was definitely not an easy tour but in retrospect I did what I needed to do, helped a lot of people out, and got what I needed to get.

I did my diving in ballast tanks and occasionally sanitary tanks.  In retrospect I wish I'd started my career in Pearl Harbor and on SSNs, but coming to that community after Holy Loch and SSBNs made me appreciate Hawaii Navy ever so much more.
Title: Re: Stop worrying about the 4% rule
Post by: ender on June 21, 2015, 05:30:13 PM
The defense against failure is not reducing the SWR to 0.0%, and it's not determining the one true SWR out to six significant figures.  The answer is not abusing cFIRESim or FIRECalc until their success rate is 100.0000%.  The defense against failure is annuitizing a part of your portfolio so that you have a bare-bones income for longevity insurance or a zombie apocalypse.  Maybe that annuity is Social Security, maybe it's an SPIA, maybe it's a TSP inflation-adjusted annuity at age 70, maybe it's a military pension, or "all of the above".  But annuities are how you handle the questions about failure.  Hope you find a good insurance company to sell it to you!

This is one reason I would like to have some rental property income by the time we RE.

It's not as "guaranteed" as a pension/annuity but it would be nice to have a portion of FIRE income coming from rental properties instead of portfolio withdrawals.

I will have a small (slowly growing...) pension as well as, so we'll have some combination of SS, private pension, tax advantaged, and hopefully real estate. It'd be nice to have real estate investments covering 50% of our expenses - though I'm young enough I have no idea what life will bring for our FIRE timeframe.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on June 21, 2015, 07:11:12 PM
The defense against failure is not reducing the SWR to 0.0%, and it's not determining the one true SWR out to six significant figures.  The answer is not abusing cFIRESim or FIRECalc until their success rate is 100.0000%.  The defense against failure is annuitizing a part of your portfolio so that you have a bare-bones income for longevity insurance or a zombie apocalypse.  Maybe that annuity is Social Security, maybe it's an SPIA, maybe it's a TSP inflation-adjusted annuity at age 70, maybe it's a military pension, or "all of the above".  But annuities are how you handle the questions about failure.  Hope you find a good insurance company to sell it to you!

This is one reason I would like to have some rental property income by the time we RE.

It's not as "guaranteed" as a pension/annuity but it would be nice to have a portion of FIRE income coming from rental properties instead of portfolio withdrawals.

I will have a small (slowly growing...) pension as well as, so we'll have some combination of SS, private pension, tax advantaged, and hopefully real estate. It'd be nice to have real estate investments covering 50% of our expenses - though I'm young enough I have no idea what life will bring for our FIRE timeframe.

There's no difference between selling appreciated stock and spending the dividends. Real estate is imperfectly correlated to stocks, so it's one way to decrease volatility. But so are bonds. REITs are another way to own real estate with a diversified portfolio, no liability, be highly liquid, etc.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on June 22, 2015, 01:26:49 PM
To add to the link collection, here's a thread from a couple of months ago that generated some good discussion on this topic:

http://forum.mrmoneymustache.com/investor-alley/are-safe-withdrawal-rates-really-safe/
Title: Re: Stop worrying about the 4% rule
Post by: Livewell on June 26, 2015, 12:54:51 PM
Great thread, thanks for starting.   

Regarding the worse case scenario, GCC had a good article on this not too long ago - what would happen if you had retired in 1965?  http://www.gocurrycracker.com/the-worst-retirement-ever/

Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on July 02, 2015, 11:38:36 PM

The 4% SWR also assumes you live in the USA      and    the USA continues to be similar to what it was in the past.

Other places have much lower SWRs - Australia is about 3.6%, Japan is (from memory) 0.6%.

No, it doesn't assume it will be similar to the past--it assumes it will be no worse than the past. And those other countries worst case scenarios are worse than ours have been, yes, but I'm curious what their average scenarios were. That would be a lot more interesting to me, but I'm not aware of that data existing.

Even better

It assumes that it won't be worse than the WORST period in the history of the US

As a refresher, that period included an Oil Embargo, the closing of the gold window, discredited economic policies (Laffer Curve anyone?), price fixing, runaway inflation, gasoline shortages, etc...  just about the perfect storm of horrible economic conditions

And yet the 4% rule worked, by definition

I agree with the meat of this post, but I can't just let this go. The Laffer Curve has never been discredited.  For that matter, it is mathmatically provable, so it cannot be discredited.  The unknown variable of the Laffer Curve is where the "peak" is.  Said another way, the 'ideal' tax rate is an unknown number, and one that is likely variable across economic conditions.  If you don't agree, it's only because you didn't understand what the Laffer Curve actually was.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on July 03, 2015, 05:35:13 AM

The 4% SWR also assumes you live in the USA      and    the USA continues to be similar to what it was in the past.

Other places have much lower SWRs - Australia is about 3.6%, Japan is (from memory) 0.6%.

No, it doesn't assume it will be similar to the past--it assumes it will be no worse than the past. And those other countries worst case scenarios are worse than ours have been, yes, but I'm curious what their average scenarios were. That would be a lot more interesting to me, but I'm not aware of that data existing.

Even better

It assumes that it won't be worse than the WORST period in the history of the US

As a refresher, that period included an Oil Embargo, the closing of the gold window, discredited economic policies (Laffer Curve anyone?), price fixing, runaway inflation, gasoline shortages, etc...  just about the perfect storm of horrible economic conditions

And yet the 4% rule worked, by definition

I agree with the meat of this post, but I can't just let this go. The Laffer Curve has never been discredited.  For that matter, it is mathmatically provable, so it cannot be discredited.  The unknown variable of the Laffer Curve is where the "peak" is.  Said another way, the 'ideal' tax rate is an unknown number, and one that is likely variable across economic conditions.  If you don't agree, it's only because you didn't understand what the Laffer Curve actually was.

This is off topic. And the Laffer Curve is not relevant to modern day taxation in the US. The US economy did great in the 50s when the top marginal rate was 90%. It's nowhere near that now.
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on July 06, 2015, 03:25:09 PM
2) Take historical returns. Cut them down 25-50%, then run the Monte Carlo. More subtle. Justified on current low bond yield. This is basically assuming we have times which will be considerably worse than the Great Depression, or 66-82 stagflation for investors. It's fine to play "What if?" - but this isn't really predictive.

Nothing about the Trinity Study is predictive....its just many many iterations of potential outcomes using randomized historical data sets.  There is no final say on this topic simply because it is not predicitive and in my opinion questioning the status quo with additional research and updated information and methodologies is not a fool's errand. 

Here is another thread to add to the list:

http://forum.mrmoneymustache.com/investor-alley/what-warren-buffett-said-in-1999/msg720887/#msg720887 (http://forum.mrmoneymustache.com/investor-alley/what-warren-buffett-said-in-1999/msg720887/#msg720887)
Title: Re: Stop worrying about the 4% rule
Post by: Nords on July 06, 2015, 03:34:30 PM
Nothing about the Trinity Study is predictive....its just many many iterations of potential outcomes using randomized historical data sets.  There is no final say on this topic simply because it is not predicitive and in my opinion questioning the status quo with additional research and updated information and methodologies is not a fool's errand. 
When you link to a predictive study, I'll use it to determine tomorrow's stock market close.
Title: Re: Stop worrying about the 4% rule
Post by: MDM on July 06, 2015, 03:46:33 PM
Nothing about the Trinity Study is predictive....its just many many iterations of potential outcomes using randomized historical data sets.

One can delete the word "randomized" from the quote above.  The Trinity Study (see http://www.aaii.com/journal/article/retirement-savings-choosing-a-withdrawal-rate-that-is-sustainable for the original paper) simply used historical data sets to backtest portfolio withdrawal success rates.
Title: Re: Stop worrying about the 4% rule
Post by: johnny847 on July 06, 2015, 04:25:32 PM
I didn't read all the posts in this thread in detail, but I think variable spending rates have not been discussed before.

Strictly speaking, a variable spending rate does not follow the 4% rule. But I think it's pretty dumb to stick your head in the ground and always withdraw an inflation adjusted 4% from your portfolio, no matter how the market is doing.
Furthermore, this isn't the way people spend money. At least, I don't think. I don't think people plan on spending the same amount of money every year.
Finally, the 4% rule was never tested on retirements longer than 30 years. It does not logically follow that the 4% rule to work for 50 year retirements just because it works for 30 year retirements.

So here's a portion of the post I wrote earlier: http://forum.mrmoneymustache.com/investor-alley/'your-age-in-bonds'-a-bad-choice-for-early-retirement/msg719856/#msg719856 (http://forum.mrmoneymustache.com/investor-alley/'your-age-in-bonds'-a-bad-choice-for-early-retirement/msg719856/#msg719856)

But what about a 50 year retirement? Somebody FIREing in their 30s and living until their 80s? (or whatever start age you prefer, really)
With a constant 4% inflation adjusted withdrawal rate, here are the success rates:
50/50: 56.8%
60/40: 70.5%
70/30: 76.8%
80/20: 80%
90/10: 85.3%
100/0: 85.3%

And then with a variable spending rate of 3.5% to 4.5% of the initial portfolio, inflation adjusted every year:
50/50: 75.8%
60/40: 87.4%
70/30: 93.7%
80/20: 95.8%
90/10: 96.8%
100/0: 95.8%

Let's tone it down a bit. What about 40 year retirements?
Here's the constant 4% inflation adjusted withdrawal rate success rates:
50/50: 65.7%
60/40: 75.2%
70/30: 81%
80/20: 82.9%
90/10: 86.7%
100/0: 87.6%

And here's the numbers when you have a variable spending scheme of 3.5% to 4.5% of the original portfolio, inflation adjusted every year.
50/50: 87.6%
60/40:93.3%
70/30: 94.3%
80/20: 94.3%
90/10: 96.2%
100/0: 95.2%

Notice the nice increases in success rate by adopting a variable spending rate. For 40 year retirements, only 70/30 allocations and above survived 80%+ of the time with the rigid 4% withdrawals, but after applying a variable spending rate, all allocations 50/50 and higher survived 87.6%+ of the time (I consider anything above about 85% to be all the same, but w/e).
For 50 year retirements, only 80/20 allocations and above survived 80% of the time with the rigid 4% rule, but after adopting a variable spending rate, all allocations 60/40 and higher survived 87.4%+ of the time.

And as Jeremy at Go Curry Cracker (http://www.gocurrycracker.com) points out,
Quote from: GCC
Quote from: Wade Pfau
…the wealth remaining 10 years after retirement, combined with the cumulative inflation during those 10 years, can explain 80 percent of the variation in a retiree’s maximum sustainable withdrawal rate after 30 years
In other words, if you can make it through the first 10 years without severely depleting your portfolio or inflation going out of control, your portfolio is likely to enter Too Big to Fail territory.  I’ve never heard better news, because I’ve always wanted to be a Bank
So another approach to strengthen the 4% rule is to lower your spending for the first ten years.


Again, the strategies talked about above are not actually following the 4% rule. But I think that's okay - the point is that the 4% rule gives us a rough guideline, and we can make it even better.
Title: Re: Stop worrying about the 4% rule
Post by: a1smith on July 06, 2015, 10:45:08 PM
And as Jeremy at Go Curry Cracker (http://www.gocurrycracker.com) points out,
Quote from: GCC
Quote from: Wade Pfau
…the wealth remaining 10 years after retirement, combined with the cumulative inflation during those 10 years, can explain 80 percent of the variation in a retiree’s maximum sustainable withdrawal rate after 30 years
In other words, if you can make it through the first 10 years without severely depleting your portfolio or inflation going out of control, your portfolio is likely to enter Too Big to Fail territory.  I’ve never heard better news, because I’ve always wanted to be a Bank
So another approach to strengthen the 4% rule is to lower your spending for the first ten years.

I've thought about the 10 year "rule" for sequence of returns risk and I think it is better to express it as a percentage of your retirement period since Wade Pfau was referring to a 30 year retirement when he mentioned 10 years.  For someone retiring in their 50's-60's I think a 10 year period is probably accurate but I don't think you are home free from sequence of returns risk after 10 years if your retire at 30 and potentially have a 60 year retirement period.  So, maybe something in the 30-35% range?  Or is the sequence of returns risk present until the final 20 years of your retirement?  Thoughts, anyone?
Title: Re: Stop worrying about the 4% rule
Post by: johnny847 on July 06, 2015, 11:09:41 PM
And as Jeremy at Go Curry Cracker (http://www.gocurrycracker.com) points out,
Quote from: GCC
Quote from: Wade Pfau
…the wealth remaining 10 years after retirement, combined with the cumulative inflation during those 10 years, can explain 80 percent of the variation in a retiree’s maximum sustainable withdrawal rate after 30 years
In other words, if you can make it through the first 10 years without severely depleting your portfolio or inflation going out of control, your portfolio is likely to enter Too Big to Fail territory.  I’ve never heard better news, because I’ve always wanted to be a Bank
So another approach to strengthen the 4% rule is to lower your spending for the first ten years.

I've thought about the 10 year "rule" for sequence of returns risk and I think it is better to express it as a percentage of your retirement period since Wade Pfau was referring to a 30 year retirement when he mentioned 10 years.  For someone retiring in their 50's-60's I think a 10 year period is probably accurate but I don't think you are home free from sequence of returns risk after 10 years if your retire at 30 and potentially have a 60 year retirement period.  So, maybe something in the 30-35% range?  Or is the sequence of returns risk present until the final 20 years of your retirement?  Thoughts, anyone?

Ah true I should have thought about that more. I don't think you can simply say 10/30 = 33% for the interval after which you are home free with respect to sequence of returns risk though. We get compounding returns from our investments. This nonlinearity would imply that you can't just do a linear projection of taking the "10 year rule" to a 1/3 of your retirement period rule.

What is the analogous rule for longer retirements? That is something I need to think about.

Does anybody know if it is possible to get a CSV of all the terminal portfolio values in a simulation run?
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on July 07, 2015, 05:28:32 AM
2) Take historical returns. Cut them down 25-50%, then run the Monte Carlo. More subtle. Justified on current low bond yield. This is basically assuming we have times which will be considerably worse than the Great Depression, or 66-82 stagflation for investors. It's fine to play "What if?" - but this isn't really predictive.

Nothing about the Trinity Study is predictive....its just many many iterations of potential outcomes using randomized historical data sets.  There is no final say on this topic simply because it is not predicitive and in my opinion questioning the status quo with additional research and updated information and methodologies is not a fool's errand. 

I phrased that poorly. Let me try again:

With the handicapping he is using, Pfau is indulging in trying to predict the market based on current conditions. It translates to "The market seems kinda expensive, returns are likely to be poor"

It's the same as the newbie investor saying "the market is near an all-time high, I need to wait in cash until it crashes."

The newbie investor is likely to miss out on gains while waiting. Those taking Pfau's paper's to heart are likely to miss out on years of retirement while waiting.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on July 07, 2015, 09:23:39 AM
2) Take historical returns. Cut them down 25-50%, then run the Monte Carlo. More subtle. Justified on current low bond yield. This is basically assuming we have times which will be considerably worse than the Great Depression, or 66-82 stagflation for investors. It's fine to play "What if?" - but this isn't really predictive.

Nothing about the Trinity Study is predictive....its just many many iterations of potential outcomes using randomized historical data sets.  There is no final say on this topic simply because it is not predicitive and in my opinion questioning the status quo with additional research and updated information and methodologies is not a fool's errand. 

I phrased that poorly. Let me try again:

With the handicapping he is using, Pfau is indulging in trying to predict the market based on current conditions. It translates to "The market seems kinda expensive, returns are likely to be poor"

It's the same as the newbie investor saying "the market is near an all-time high, I need to wait in cash until it crashes."

The newbie investor is likely to miss out on gains while waiting. Those taking Pfau's paper's to heart are likely to miss out on years of retirement while waiting.

Hear, hear.

Ideally one would run the numbers without pessimistic inputs, and let readers decide for themselves what their ER is, expected future market valuations, etc.

Of course, one might feel justified treating their readers like idiots, if they're worried about the reader taking results from a study using a 0.1% ER, and saying that is their SWR, when they have a 1.5% ER.

You can see the dilemma one is in.  I'd rather run it without the assumptions, and add the caveats, but if you know most people won't read them, the financial headlines will just have the bottom line number, etc., it's a tough spot.
Title: Re: Stop worrying about the 4% rule
Post by: sol on July 07, 2015, 10:15:49 AM
Using the default 75/25 stock/bond split in firecalc, the historical record suggests that you are more likely to succeed in a 30 year retirement with a withdrawal rate of 9.25% than you are to fail in a 30 year retirement with a 4% withdrawal rate.  I'm calling it the "unsafe withdrawal rate" by analogy.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on July 07, 2015, 11:16:26 AM
Using the default 75/25 stock/bond split in firecalc, the historical record suggests that you are more likely to succeed in a 30 year retirement with a withdrawal rate of 9.25% than you are to fail in a 30 year retirement with a 4% withdrawal rate.  I'm calling it the "unsafe withdrawal rate" by analogy.

It's shocking to me the percent is that high (5-10?) of a success rate for 30 years with a 9.25% rate.  Must have had quite a stock market run at the beginning of those successes.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on July 07, 2015, 12:21:56 PM
Using the default 75/25 stock/bond split in firecalc, the historical record suggests that you are more likely to succeed in a 30 year retirement with a withdrawal rate of 9.25% than you are to fail in a 30 year retirement with a 4% withdrawal rate.  I'm calling it the "unsafe withdrawal rate" by analogy.

It's shocking to me the percent is that high (5-10?) of a success rate for 30 years with a 9.25% rate.  Must have had quite a stock market run at the beginning of those successes.

The successes are 1874, 1877, 1878, 1922, 1936, and 1982. If you change to 100% equities, the success rate for 9.25% goes up to 17%.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on July 07, 2015, 12:59:16 PM

The successes are 1874, 1877, 1878, 1922, 1936, and 1982. If you change to 100% equities, the success rate for 9.25% goes up to 17%.


Should we really count successes in the 19th century and early 20th century?  How did people even trade stocks and bonds back then?  So along this line of reasoning, I'd say 9.25% is unrealistic.  I would also say a retiree staying in 100% equities indefinitely is only realistic if you retire at the beginning of a bull market or have an alternate income source (blog revenue, rents, etc.), but unrealistic if you retire early and experience a bear market correction within 10 years.  Retired people with 20+ years to go generally cannot withstand a 20% loss without converting some equity to cash or bonds at what are typically in hindsight 'poorly market timed moves', this is just human nature.  I'd have more faith in the 75/25 allocation results, as there is a higher probability that people can maintain this allocation, or spend down the bonds during a bear market.

Quote
Before the Securities Act (then known as the Rayburn-Fletcher Securities Bill, May 27, 1933), most stock issues and sales were governed by state laws, which were based on principles of merit. The merit-based state laws had been largely ineffective in preventing securities fraud, as enforcement, prosecution, and oversight were all generally ineffective because of weak provisions, inadequate funding, or deliberate efforts by state governments to look the other way. The act superseded state laws through the Interstate Commerce Clause, which applied to so many possible stock sale methods (telephones, mailings, and electronic transfers are all considered aspects of interstate commerce) that it effectively took over all regulation of large stock issues. This was particularly important in light of the vastly increased breadth of stock ownership preceding the Great Depression -- the number of stockholders increased more than fourfold from 1900 to 1928, to 18 million people, or roughly 10% of the population.

With that said, I do agree that flexibility in SWR means that you will have years slightly above 4% and most likely will have years below, either by choice or circumstance, without triggering imminent failure.  The 4% rule is a planning tool, that's all, and relying on spending above 4% exposes you to needing to adjust spending down further and/or earlier than if you start at 4%...
Title: Re: Stop worrying about the 4% rule
Post by: forummm on July 07, 2015, 01:16:31 PM
I don't think anyone is advocating a 9.25% SWR. I agree that older data is less useful. The stock market was basically railroads for a lot of that time.
Title: Re: Stop worrying about the 4% rule
Post by: sol on July 07, 2015, 04:09:06 PM
So along this line of reasoning, I'd say 9.25% is unrealistic.

Of course it's unrealistic.  It's just as guaranteed to fail as a 4% SWR is guaranteed to succeed, which is to say it's almost certain but not quite.  Hence the label "unsafe withdrawal rate", chosen to remind you that anything between 4 and 9.25% is neither safe nor unsafe.

I merely mention it to highlight that if you're using 4% to plan for the extreme tail of the probability curve, it might be good to keep in mind the perspective provided by the tail at the other end, too.

The average SWR for 30 year periods in the current historical record is just over 6%, not 4%.  We use 4% to conservatively plan for worst case scenarios, fully cognizant of the fact that doing so means we are all but certain to work too long and save too much.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on July 07, 2015, 09:05:26 PM
Of course it's unrealistic.  It's just as guaranteed to fail as a 4% SWR is guaranteed to succeed, which is to say it's almost certain but not quite.  Hence the label "unsafe withdrawal rate", chosen to remind you that anything between 4 and 9.25% is neither safe nor unsafe.

I merely mention it to highlight that if you're using 4% to plan for the extreme tail of the probability curve, it might be good to keep in mind the perspective provided by the tail at the other end, too.

The average SWR for 30 year periods in the current historical record is just over 6%, not 4%.  We use 4% to conservatively plan for worst case scenarios, fully cognizant of the fact that doing so means we are all but certain to work too long and save too much.
On one hand, that is a brilliant framing observation, but on the other hand it makes planning a total crap-shoot.  How far toward 4% do you go before you pull the plug?  You seem to argue that 9.25% and 4% are the extremes, but it's certainly not as easy as splitting the difference, although you could also make that argument if you really wanted to, since none of this examination of historical record can convince anyone of what the next 30 years has in store for us.  That's why I like the 4% rule, people consider it to be a pretty dependable predictor of success for a 30 year period.  That pretty much means you won't suddenly find out that you screwed up (which gives you the wherewithal to adjust), and within 30 years some form of social security is probably within view to help supplement what you have left.

I know this is the 'stop worrying about the 4% rule' thread, so I will at least contribute by saying that you should certainly not continue to work a soul-sucking, family-destroying, unhealthy job just to get to 4%.  There are intangible benefits that offset the satisfaction of 100% bulletproof success, and there are also alternatives such as getting to 6% and then being willing to hustle a little, or go back to work when you get nervous.  There are also things happening now (facilitated by the internet) that are disruptively making retirement more enjoyable, engaging, and inexpensive - helping to bring down costs closer to 4%. 

It's a unique moment in human history, so who am I to say that you need a 4% SWR when people are paid for doing things that they would do anyways if they were retired (posting their game-play videos to YouTube, having a 'paleo/health/special interest blog', publishing eBooks, participating in pot where it is legalized, or craft brewing, and of course the sex industry (we are talking about the internet and human beings here) - the 'long tail' of ways to make at least a bit of income is becoming endless...). 
Title: Re: Stop worrying about the 4% rule
Post by: johnny847 on July 07, 2015, 09:32:31 PM
Of course it's unrealistic.  It's just as guaranteed to fail as a 4% SWR is guaranteed to succeed, which is to say it's almost certain but not quite.  Hence the label "unsafe withdrawal rate", chosen to remind you that anything between 4 and 9.25% is neither safe nor unsafe.

I merely mention it to highlight that if you're using 4% to plan for the extreme tail of the probability curve, it might be good to keep in mind the perspective provided by the tail at the other end, too.

The average SWR for 30 year periods in the current historical record is just over 6%, not 4%.  We use 4% to conservatively plan for worst case scenarios, fully cognizant of the fact that doing so means we are all but certain to work too long and save too much.
...

I know this is the 'stop worrying about the 4% rule' thread, so I will at least contribute by saying that you should certainly not continue to work a soul-sucking, family-destroying, unhealthy job just to get to 4%.  There are intangible benefits that offset the satisfaction of 100% bulletproof success, and there are also alternatives such as getting to 6% and then being willing to hustle a little, or go back to work when you get nervous.  There are also things happening now (facilitated by the internet) that are disruptively making retirement more enjoyable, engaging, and inexpensive - helping to bring down costs closer to 4%. 

...

Sounds like you missed sol's point entirely. There is no 100% bulletproof success.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on July 07, 2015, 09:44:36 PM
Sounds like you missed sol's point entirely. There is no 100% bulletproof success.
And you have apparently missed my point also, which is does not contribute to a constructive discussion.  Not meaning to go negative, but I think I've heard quite a bit of Sol's repertoire, so 'missing his point entirely' gets a little under my skin.  I don't (and didn't) disagree with him.
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on July 07, 2015, 10:06:19 PM
Someone's a Bayesian.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on July 07, 2015, 10:20:08 PM
Someone's a Bayesian.
I didn't know it had such a general defenitiion (https://en.wikipedia.org/wiki/Bayesian_probability).  Bayesian Economics is a bit more derogatory, which is why I don't post much around here...  so I hope you meant the former and not the latter. (http://econlog.econlib.org/archives/2009/11/why_arent_acade.html)
Title: Re: Stop worrying about the 4% rule
Post by: johnny847 on July 07, 2015, 10:21:16 PM
Sounds like you missed sol's point entirely. There is no 100% bulletproof success.
And you have apparently missed my point also, which is does not contribute to a constructive discussion.  Not meaning to go negative, but I think I've heard quite a bit of Sol's repertoire, so 'missing his point entirely' gets a little under my skin.  I don't (and didn't) disagree with him.

Does or does not your statement "There are intangible benefits that offset the satisfaction of 100% bulletproof success" contradict sol's statement "It's just as guaranteed to fail as a 4% SWR is guaranteed to succeed, which is to say it's almost certain but not quite."
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on July 07, 2015, 10:32:58 PM
Someone's a Bayesian.
I didn't know it had such a general defenitiion (https://en.wikipedia.org/wiki/Bayesian_probability).  Bayesian Economics is a bit more derogatory, which is why I don't post much around here...  so I hope you meant the former and not the latter. (http://econlog.econlib.org/archives/2009/11/why_arent_acade.html)

No, no, I just meant you aren't (as far as I can tell) into the "future will look like the past" sort of assumptions of traditional statistics that underly the usual 4% SWR sort of stuff.

It was not intended to be an insult at all. I just thought it was funny that nobody had mentioned it yet, since this sort of basic debate is common in statistics in all sorts of disparate fields.

-W
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on July 07, 2015, 10:59:20 PM
Sounds like you missed sol's point entirely. There is no 100% bulletproof success.
And you have apparently missed my point also, which is does not contribute to a constructive discussion.  Not meaning to go negative, but I think I've heard quite a bit of Sol's repertoire, so 'missing his point entirely' gets a little under my skin.  I don't (and didn't) disagree with him.

Does or does not your statement "There are intangible benefits that offset the satisfaction of 100% bulletproof success" contradict sol's statement "It's just as guaranteed to fail as a 4% SWR is guaranteed to succeed, which is to say it's almost certain but not quite."
Feel free to attack me pedantically (I was not meaning to pick on you, but you can pick on me all you want,  I REALLY don't care, and I kinda' appreciate it).  I said exactly what I meant - having a SWR of 4% is pretty much bulletproof if you are willing to actualize a little modification along the way.  Or maybe that was what I meant to say and didn't articulate it perfectly.

In the past, I tried to modify my intention and eliminate mis-interpretation, but ARS responded to my raw posts right away and made me feel bad for editing posts. 

Any anyways, who cares who wins online?  I've never been sent a check saying - congratulations for outsmarting XYZ by telling people that they were mostly right but a little wrong, so you deserve this cut of the proceeds...

Why not just respect the intent of people's posts and internalize their intent, instead of nit-picking?  We should be more concerned about creating (in this case, a bulletproof retirement) - so if you think 4% isn't bulletproof, then start putting up what is. 
Title: Re: Stop worrying about the 4% rule
Post by: johnny847 on July 07, 2015, 11:22:29 PM
Sounds like you missed sol's point entirely. There is no 100% bulletproof success.
And you have apparently missed my point also, which is does not contribute to a constructive discussion.  Not meaning to go negative, but I think I've heard quite a bit of Sol's repertoire, so 'missing his point entirely' gets a little under my skin.  I don't (and didn't) disagree with him.

Does or does not your statement "There are intangible benefits that offset the satisfaction of 100% bulletproof success" contradict sol's statement "It's just as guaranteed to fail as a 4% SWR is guaranteed to succeed, which is to say it's almost certain but not quite."
Feel free to attack me pedantically (I was not meaning to pick on you, but you can pick on me all you want,  I REALLY don't care, and I kinda' appreciate it).  I said exactly what I meant - having a SWR of 4% is pretty much bulletproof if you are willing to actualize a little modification along the way.  Or maybe that was what I meant to say and didn't articulate it perfectly.

In the past, I tried to modify my intention and eliminate mis-interpretation, but ARS responded to my raw posts right away and made me feel bad for editing posts. 

Any anyways, who cares who wins online?  I've never been sent a check saying - congratulations for outsmarting XYZ by telling people that they were mostly right but a little wrong, so you deserve this cut of the proceeds...

Why not just respect the intent of people's posts and internalize their intent, instead of nit-picking?  We should be more concerned about creating (in this case, a bulletproof retirement) - so if you think 4% isn't bulletproof, then start putting up what is.

You did not say "pretty much bulletproof" before. You said "100% bulletproof success." Not just "bulletproof," but you purposely qualified it to say "100% bulletproof." Maybe if you had just said "bulletproof" I could have given you the benefit of the doubt and said sure, he actually meant "pretty much bulletproof." But to qualify bulletproof with "100%"? Nope.

I don't think ANY withdrawal rate is bulletproof (and by bulletproof I mean 100% guaranteed) (aside from zero - because you've actually got a job or other income stream not from your investments that's sustaining your expenses). Even if you adapt. Nothing is guaranteed. Is a 1% withdrawal rate massively likely to succeed? Yea. That's still not a guarantee.

The whole notion of a safe withdrawal rate is that with high probability, your portfolio will not be depleted before you die. We do our best to establish this probability with past performance, but as we all know, past performance does not indicate future returns.

So what's conclusion if I don't have a bulletproof withdrawal rate? The 4% rule is good enough almost all the time. Use it as a benchmark for when you can retire. Use it as a guideline for how much you can withdraw from your portfolio each year. But as you say, be ready to adapt if the winds change. Particularly in the first approximately one third (I left this ambiguous earlier in this thread - it's 10 years for a 30 year retirement, but you can't just simply extrapolate that to say 1/3 of any retirement) where the sequences of returns risk can hit you hard.
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on July 07, 2015, 11:23:46 PM

Why not just respect the intent of people's posts and internalize their intent, instead of nit-picking? 

Are you new to this whole 'anonymous on the Internet' thing?
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on July 07, 2015, 11:34:32 PM
Thanks MoonShadow, for reminding me of an awesome song (https://www.youtube.com/watch?v=hr0rDW5j1KU).  I'll happily internalize the idea of 'if I ever lose my teeth, north and south'.  As many times in the past, and even more now, I sorta' regret not being born earlier, when people could just share ideas and  have a corresponding reciprocation in the form of 'fun'.
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on July 08, 2015, 01:59:12 PM
Thanks MoonShadow, for reminding me of an awesome song (https://www.youtube.com/watch?v=hr0rDW5j1KU).  I'll happily internalize the idea of 'if I ever lose my teeth, north and south'.  As many times in the past, and even more now, I sorta' regret not being born earlier, when people could just share ideas and  have a corresponding reciprocation in the form of 'fun'.

I never cared for that song, myself, and that is not where my handle comes from.  I'm MoonShadow on a lot of forums, and the name doesn't really have a good story behind it.  Basicly, my grandfather was part Cherokee by his mother, and once or twice called me that as a child.  I think because I was a quiet and sneaky kid, but it was never explained well.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on July 08, 2015, 02:12:20 PM
Thanks MoonShadow, for reminding me of an awesome song (https://www.youtube.com/watch?v=hr0rDW5j1KU).  I'll happily internalize the idea of 'if I ever lose my teeth, north and south'.  As many times in the past, and even more now, I sorta' regret not being born earlier, when people could just share ideas and  have a corresponding reciprocation in the form of 'fun'.

I never cared for that song, myself, and that is not where my handle comes from.  I'm MoonShadow on a lot of forums, and the name doesn't really have a good story behind it.  Basicly, my grandfather was part Cherokee by his mother, and once or twice called me that as a child.  I think because I was a quiet and sneaky kid, but it was never explained well.
Whoa, thanks for sharing, but I guess we are going off piste.
Title: Re: Stop worrying about the 4% rule
Post by: ender on July 08, 2015, 09:02:04 PM
So along this line of reasoning, I'd say 9.25% is unrealistic.

Of course it's unrealistic.  It's just as guaranteed to fail as a 4% SWR is guaranteed to succeed, which is to say it's almost certain but not quite.  Hence the label "unsafe withdrawal rate", chosen to remind you that anything between 4 and 9.25% is neither safe nor unsafe.

I merely mention it to highlight that if you're using 4% to plan for the extreme tail of the probability curve, it might be good to keep in mind the perspective provided by the tail at the other end, too.

The average SWR for 30 year periods in the current historical record is just over 6%, not 4%.  We use 4% to conservatively plan for worst case scenarios, fully cognizant of the fact that doing so means we are all but certain to work too long and save too much.

The thing about this is that to me is most compelling is that it is far easier to account for the "problems" in a 6% SWR (working part-time, lowering expenses, going back to work, starting side businesses, etc) than it is to account for the problems with working too long (you can't "undo" working years).


The more I think about this the more I find a higher than 4% withdrawal rate compelling.


I don't like belaboring this point and I know sol discusses this often but it's so important! Using the study for a 4% withdrawal, which is what everyone uses when picking their withdrawal percentage, you end up overworking in nearly all cases. So either you use 4%, understanding that the same logic to pick 4% means you will have a ton more after 30 years in most cases, or you pick a higher, and decide to adjust your lifestyle appropriately.

Nearly no-Mustachians here plan on doing nothing after FIRE so nearly all of us will have some income potential after that point. Perhaps not the same income as working, but definitely some earning potential (and pension/ss future income).
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on July 08, 2015, 09:17:03 PM
So along this line of reasoning, I'd say 9.25% is unrealistic.

Of course it's unrealistic.  It's just as guaranteed to fail as a 4% SWR is guaranteed to succeed, which is to say it's almost certain but not quite.  Hence the label "unsafe withdrawal rate", chosen to remind you that anything between 4 and 9.25% is neither safe nor unsafe.

I merely mention it to highlight that if you're using 4% to plan for the extreme tail of the probability curve, it might be good to keep in mind the perspective provided by the tail at the other end, too.

The average SWR for 30 year periods in the current historical record is just over 6%, not 4%.  We use 4% to conservatively plan for worst case scenarios, fully cognizant of the fact that doing so means we are all but certain to work too long and save too much.

The thing about this is that to me is most compelling is that it is far easier to account for the "problems" in a 6% SWR (working part-time, lowering expenses, going back to work, starting side businesses, etc) than it is to account for the problems with working too long (you can't "undo" working years).


The more I think about this the more I find a higher than 4% withdrawal rate compelling.


I don't like belaboring this point and I know sol discusses this often but it's so important! Using the study for a 4% withdrawal, which is what everyone uses when picking their withdrawal percentage, you end up overworking in nearly all cases. So either you use 4%, understanding that the same logic to pick 4% means you will have a ton more after 30 years in most cases, or you pick a higher, and decide to adjust your lifestyle appropriately.

Nearly no-Mustachians here plan on doing nothing after FIRE so nearly all of us will have some income potential after that point. Perhaps not the same income as working, but definitely some earning potential (and pension/ss future income).

Well said. A more eloquent explanation of Diane's catchphrase.
Title: Re: Stop worrying about the 4% rule
Post by: Nords on July 09, 2015, 10:56:24 AM
The thing about this is that to me is most compelling is that it is far easier to account for the "problems" in a 6% SWR (working part-time, lowering expenses, going back to work, starting side businesses, etc) than it is to account for the problems with working too long (you can't "undo" working years).

The more I think about this the more I find a higher than 4% withdrawal rate compelling.

I don't like belaboring this point and I know sol discusses this often but it's so important! Using the study for a 4% withdrawal, which is what everyone uses when picking their withdrawal percentage, you end up overworking in nearly all cases. So either you use 4%, understanding that the same logic to pick 4% means you will have a ton more after 30 years in most cases, or you pick a higher, and decide to adjust your lifestyle appropriately.

Nearly no-Mustachians here plan on doing nothing after FIRE so nearly all of us will have some income potential after that point. Perhaps not the same income as working, but definitely some earning potential (and pension/ss future income).
Whether your SWR is 4% or 6% or 5.03899875%, you're still going to have to insure against portfolio failure and longevity.  "Wal-Mart greeter" is not insurance, and even at age 54 my body is starting to grumble about physical labor.  Going without some sort of FI insurance (an annuity) is like going without medical insurance.

When I was working, I didn't appreciate the significance of a military pension.  Now that I'm retired, every year I'm more appreciative of its value as insurance against portfolio failure.

If you're confident that a 6% SWR is an acceptable risk of portfolio failure, then I'd still annuitize a bare-bones income as part of your asset allocation.  Maybe you'll depend on Social Security (yeah, I understand that plan has potential flaws) or maybe you'll buy a single-premium insured annuity.  (Yeah, I understand those flaws too.)  You'd also have to devote some thought to long-term care, because the SWR analyses do not account for end-of-life medical expenses.  (More flaws.  Right.  Let's get back to the main point.)  All of these concepts have drawbacks, but the drawbacks are less catastrophic than the prospect of running out of money in your late 70s.

If you're reluctant to annuitize a portion of your investments, then perhaps it's better to "self insure" by working an extra year or two in your 40s than to go back to work for five years in your 70s.

As for "lowering expenses", you should pick a number now and then try surviving on it for a few months.  I'm talking a Jacob Lund Fisker class of low expenses, not just cutting back on the entertainment spending.  It's better to have the extreme frugality experience now (when it's "optional") rather than later (when it's mandatory). 

My parents-in-law are just starting their 80s.  Their investments are 100% CDs & Treasuries (don't get me started on their logic) and they're receiving Social Security.  However inflation has ravaged their portfolio to the point where they're cutting back on utilities and even groceries, not just entertainment and transportation.  They've gone way past their Depression-era frugality and they're deep into deprivation, but the options of "part-time work" and "side businesses" are off the table.  By the way, all four of their parents were Ashkenazi centenarians so my PILs may be living like this for another two decades... with or without their cognition.

Yes, many retirees are surviving on their Social Security income today.  (That's their portfolio & longevity insurance.)  Yes, there may be other types of assistance-- we have supported some of my PIL's expenses.  My brother-in-law is a tax CPA (who just FIREd) and he's doing a great job of keeping an eye on their finances, but we expect "the call" for more support any year now.  Don't get me started on that issue either. 

However it's worth considering whether your portfolio failure might transfer your living expenses to your family or relatives.  Would you rather work an extra year in your 40s to avoid this potential imposition in your 70s?

I'm not against a 6% SWR.  I'm just suggesting that it's better to test-drive these blithely-stated failure contingencies right now, while you're still earning a paycheck, and appreciating the implications.  After the test drive you may decide that it's better to work a little longer for the insurance (or the extra margin of assets) after all.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on July 09, 2015, 11:12:42 AM
I think a good example relating to Nords' cautions is Sol. Sol has talked before about how he is thinking about a SWR higher than 4%. But he and his spouse have small pensions that kick in as early as <20 years from RE, and then SS later. And he has a lot of fat in his budget that he could cut out if things went south. It's important to have levels of safety, and more important if you are doing something more risky (like taking a 50% chance your portfolio runs out).
Title: Re: Stop worrying about the 4% rule
Post by: sol on July 09, 2015, 11:21:36 AM
I'm not against a 6% SWR.  I'm just suggesting that it's better to test-drive these blithely-stated failure contingencies right now, while you're still earning a paycheck, and appreciating the implications. 

Nords playing the part of voice of reason, as always.

A 6% withdrawal rate fails over a 30 year period half of the time.  Just because it is the statistically correct SWR for society as a whole doesn't make it the correct SWR for you or me or anyone else.

I also think it's important to recognize that very few folks here are looking at 30 year retirement funding periods.  Almost none of us.  I expect mine to be more like 21 years, and a 35 year old early retiree with good genes might reasonably expect to need 60 years out of her portfolio.  Don't believe that mmm line about how 30 years is the same as forever, it totally makes a difference.  You really do have to do your own math.

On the bright side, I think people underestimate how awesome social security is.  Someday soon I'll do a whole post about the ss benefits formula for early retirees, but the upshot is that it typically replaces half or more of a typical mustachians budget at age 67.  It's way more than the chump change most people here seem to assume it is.
Title: Re: Stop worrying about the 4% rule
Post by: ender on July 09, 2015, 11:30:09 AM
Whether your SWR is 4% or 6% or 5.03899875%, you're still going to have to insure against portfolio failure and longevity.  "Wal-Mart greeter" is not insurance, and even at age 54 my body is starting to grumble about physical labor.  Going without some sort of FI insurance (an annuity) is like going without medical insurance.

An important consideration in all this, too, is that if you look at the scenarios where a SWR fails, it's often initial years (first five or so) where the market crashes.

This is fortunately the best time to react. It is far easier to adjust in the years immediately after FIRE because as you say, the older you get, the harder it is. You can more easily get back into the job market or even start a second career if you have to.

Another thing which is good to think about along these lines is to ensure that after you FIRE you are still finding ways to grow your skills. This might be hobbies or DIY repairing of things, etc. If you like doing things like this that can be monetized then it's helpful "insurance" to continue to learn/enjoy those skills as in a pinch you can monetize them, too.

On the bright side, I think people underestimate how awesome social security is.  Someday soon I'll do a whole post about the ss benefits formula for early retirees, but the upshot is that it typically replaces half or more of a typical mustachians budget at age 67.  It's way more than the chump change most people here seem to assume it is.

+1
Title: Re: Stop worrying about the 4% rule
Post by: Nords on July 09, 2015, 11:53:57 AM
An important consideration in all this, too, is that if you look at the scenarios where a SWR fails, it's often initial years (first five or so) where the market crashes.

This is fortunately the best time to react. It is far easier to adjust in the years immediately after FIRE because as you say, the older you get, the harder it is. You can more easily get back into the job market or even start a second career if you have to.
I agree on that danger zone of the first 5-10 years for 30-year periods.  I sure hope it's true for longer periods, but I doubt there's research to confirm it.  I guess it also means that you start a new 30-year period every year until you're in your 60s or even 70s.

Another thing which is good to think about along these lines is to ensure that after you FIRE you are still finding ways to grow your skills. This might be hobbies or DIY repairing of things, etc. If you like doing things like this that can be monetized then it's helpful "insurance" to continue to learn/enjoy those skills as in a pinch you can monetize them, too.
I'd like to think that the financial skills which get someone to FI will also help them figure out how to earn while they're FI.  That's certainly been the case for me.

However we forum members might also be surrounded by high-performance overachievers who are simply turning their FI periods into extended bridge careers.  I'd really like to see some academic research on how much retirees earn after FI during their 50s, 60s, and 70s.  The good news is that while $10K of earnings won't help a portfolio very much, it's still a significant chunk of annual spending that can help preserve a portfolio.

But I'd still like to know whether the earnings reality of FI matches the fantasy.  For example my brother-in-law the FI tax CPA is really enjoying his retirement (he started last month).  He's finding plenty of things to do all day and I'm pretty sure he'll stay responsible for his own entertainment for the rest of his life.

However on his way out the door of his firm, he agreed to return this December to "help out" during tax season.  You tax workers know that a CPA's tax season runs through April and can easily suck up 60-70 hours per week.  He's expecting to work a fraction of that time, but he's already looking ahead to his winter plans (and the winter driving) and beginning to chafe at the potential commitment.  I feel the same way about earning money during FI... I don't mind an hour or two a day but when the surf is up I want to be free of commitments for at least 96 hours.

Again, if turning skills growth into money is part of the FI plan, then it's probably best to put that plan into action while you're still working for a paycheck.
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on July 09, 2015, 01:53:21 PM

On the bright side, I think people underestimate how awesome social security is.  Someday soon I'll do a whole post about the ss benefits formula for early retirees, but the upshot is that it typically replaces half or more of a typical mustachians budget at age 67.  It's way more than the chump change most people here seem to assume it is.

Don't get your hopes high that SS will still look like it does now by the time you are 67.  That's already mathmaticly impossible, so it will change in some fashion.  Also, there is a 10 year (40 non-consecutive quarters, each with a full-time at minimum wage minimum for score) minimum work requirement to receive SS benefits.  While this is unlikely to be an issue for most of us, the most hardcore FIRE's end up getting a high paying job out of college, with really low life expenses, and manage FIRE before they can get those 40 credit quarters.  This is more likely for highly skilled women, who quit mid-20's to be a stay-at-home-mother for a term, without ever quite making the 40 quarters first.  This has happened to my own wife, and now we are considering a job for her, in part, to round out her 10 year minimum requirement.

Granted, this is still a good problem to have.
Title: Re: Stop worrying about the 4% rule
Post by: Cheddar Stacker on July 09, 2015, 02:20:04 PM

On the bright side, I think people underestimate how awesome social security is.  Someday soon I'll do a whole post about the ss benefits formula for early retirees, but the upshot is that it typically replaces half or more of a typical mustachians budget at age 67.  It's way more than the chump change most people here seem to assume it is.

Don't get your hopes high that SS will still look like it does now by the time you are 67.  That's already mathmaticly impossible, so it will change in some fashion.  Also, there is a 10 year (40 non-consecutive quarters, each with a full-time at minimum wage minimum for score) minimum work requirement to receive SS benefits.  While this is unlikely to be an issue for most of us, the most hardcore FIRE's end up getting a high paying job out of college, with really low life expenses, and manage FIRE before they can get those 40 credit quarters.  This is more likely for highly skilled women, who quit mid-20's to be a stay-at-home-mother for a term, without ever quite making the 40 quarters first.  This has happened to my own wife, and now we are considering a job for her, in part, to round out her 10 year minimum requirement.

Granted, this is still a good problem to have.

This was a worthy read, and given all the annuity and SS discussion, viola:
http://www.gocurrycracker.com/social-security-and-early-retirement/
Title: Re: Stop worrying about the 4% rule
Post by: clifp on July 09, 2015, 02:56:22 PM
Whether your SWR is 4% or 6% or 5.03899875%, you're still going to have to insure against portfolio failure and longevity.  "Wal-Mart greeter" is not insurance, and even at age 54 my body is starting to grumble about physical labor.  Going without some sort of FI insurance (an annuity) is like going without medical insurance.

An important consideration in all this, too, is that if you look at the scenarios where a SWR fails, it's often initial years (first five or so) where the market crashes.

This is fortunately the best time to react. It is far easier to adjust in the years immediately after FIRE because as you say, the older you get, the harder it is. You can more easily get back into the job market or even start a second career if you have to.

Another thing which is good to think about along these lines is to ensure that after you FIRE you are still finding ways to grow your skills. This might be hobbies or DIY repairing of things, etc. If you like doing things like this that can be monetized then it's helpful "insurance" to continue to learn/enjoy those skills as in a pinch you can monetize them, too.

On the bright side, I think people underestimate how awesome social security is.  Someday soon I'll do a whole post about the ss benefits formula for early retirees, but the upshot is that it typically replaces half or more of a typical mustachians budget at age 67.  It's way more than the chump change most people here seem to assume it is.

+1

+2 on Social Security.  When I first retired I didn't really think about 15 years.  I am realizing that it is my longevity insurance since I plan to take it at 70

In hindsight yes you can spot the bad retirement in five years. When you are actually living the dream not so easy.
It seems very likely that a Y2K retiree is going to be one of the 5% that fail after 30 years.  Raddr long running post show this http://www.raddr-pages.com/forums/viewtopic.php?f=2&t=1208&sid=613efc43b73aa1960cf59252b172407e&start=390 (http://www.raddr-pages.com/forums/viewtopic.php?f=2&t=1208&sid=613efc43b73aa1960cf59252b172407e&start=390).  The post will make more sense in looking at this link.   Now I retired in 99/2000 with more money and more fat to cut from my budget than most, but also without the benefit of lots research on SWRs.


I fully expect a big market correction in 2000, and was prepared for it. I wasn't shocked when it continued in 2001, but 2002 was a shock. 2003 was good rally, but it was short lived. After 5 years the Y2K was $729K (now it real terms its 639K) but people don't actually do a good job mental adjust for inflation when it is modest.  (Back in the 70s and early 80 inflation was top of mind so you factored it in).  So after 5 years your portfolio has drop 1/4 and you are 5 years older. You really going to start looking for a job now. Retirement is nice man.   Maybe you cut back a bit instead. 2005 was another bad but not awful year. (My net worth increased 5% in 2005). So maybe you continue tightening the belt a bit. 2006 was a good year you nudge up spending. 2007 an ok year.

And than the great recession hits. In Raddr spreadsheet the portfolio ends 2008 at $502 and than bounce back in 2009. In reality the 1st quarter of 2009 was really ugly. I distinctly remember Feb 17, 2009. Cause that was the day my portfolio dropped below 2 million (I know still a lot of money) but it now officially under 1/2 what I retired with after less than 10 years. I said "you fucking idiot, unless things turn around really soon you have blown a million dollar lottery ticket (aka stock options)  and are going to have to find a job in the middle of recession.". Now if had only started with 1 million and hadn't cut back spending, the real retirement failure would have come in 2009, 9 year into your retirement.
Title: Re: Stop worrying about the 4% rule
Post by: Nords on July 09, 2015, 05:02:54 PM
... but it now officially under 1/2 what I retired with after less than 10 years. I said "you fucking idiot, unless things turn around really soon you have blown a million dollar lottery ticket (aka stock options)  and are going to have to find a job in the middle of recession."
Heh.  I seem to recall having a similar conversation on that date with my spouse!  17 September 2001 and October 2002 were also gloomy times for stock-market assessments.

I think our Great Recession actual peak-to-trough drop was 56%.  It was from a ludicrously high peak to a ridiculously undervalued trough, from five standard deviations on the right side of the bell curve to six standard deviations on the left side, but the emotional impact was not mitigated by logical analysis.
Title: Re: Stop worrying about the 4% rule
Post by: a1smith on July 09, 2015, 08:39:56 PM
And as Jeremy at Go Curry Cracker (http://www.gocurrycracker.com) points out,
Quote from: GCC
Quote from: Wade Pfau
…the wealth remaining 10 years after retirement, combined with the cumulative inflation during those 10 years, can explain 80 percent of the variation in a retiree’s maximum sustainable withdrawal rate after 30 years
In other words, if you can make it through the first 10 years without severely depleting your portfolio or inflation going out of control, your portfolio is likely to enter Too Big to Fail territory.  I’ve never heard better news, because I’ve always wanted to be a Bank
So another approach to strengthen the 4% rule is to lower your spending for the first ten years.

I've thought about the 10 year "rule" for sequence of returns risk and I think it is better to express it as a percentage of your retirement period since Wade Pfau was referring to a 30 year retirement when he mentioned 10 years.  For someone retiring in their 50's-60's I think a 10 year period is probably accurate but I don't think you are home free from sequence of returns risk after 10 years if your retire at 30 and potentially have a 60 year retirement period.  So, maybe something in the 30-35% range?  Or is the sequence of returns risk present until the final 20 years of your retirement?  Thoughts, anyone?

Ah true I should have thought about that more. I don't think you can simply say 10/30 = 33% for the interval after which you are home free with respect to sequence of returns risk though. We get compounding returns from our investments. This nonlinearity would imply that you can't just do a linear projection of taking the "10 year rule" to a 1/3 of your retirement period rule.

What is the analogous rule for longer retirements? That is something I need to think about.

Does anybody know if it is possible to get a CSV of all the terminal portfolio values in a simulation run?

I looked at cFIREsim and there is a checkbox for Create CSV file with output stats in the right column.  Then, once you get the results plot there is a Download Simulation Data link at the bottom of the page.  However, the CSV file was weird.  I did the default simulation for 2015-2045 retirement and the CSV file only has rows for 1956-1985.  The CSV file does have ending portfolio value with and w/o inflation adjust.  So, it seems to have a bug in the CSV file generator.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on July 10, 2015, 06:45:30 AM
Does anybody know if it is possible to get a CSV of all the terminal portfolio values in a simulation run?

I looked at cFIREsim and there is a checkbox for Create CSV file with output stats in the right column.  Then, once you get the results plot there is a Download Simulation Data link at the bottom of the page.  However, the CSV file was weird.  I did the default simulation for 2015-2045 retirement and the CSV file only has rows for 1956-1985.  The CSV file does have ending portfolio value with and w/o inflation adjust.  So, it seems to have a bug in the CSV file generator.

It picks a retirement year for you (in this case 1956). I haven't been able to figure out how to get it to run a specific year you are interested in.
Title: Re: Stop worrying about the 4% rule
Post by: johnny847 on July 10, 2015, 06:48:28 AM
Does anybody know if it is possible to get a CSV of all the terminal portfolio values in a simulation run?

I looked at cFIREsim and there is a checkbox for Create CSV file with output stats in the right column.  Then, once you get the results plot there is a Download Simulation Data link at the bottom of the page.  However, the CSV file was weird.  I did the default simulation for 2015-2045 retirement and the CSV file only has rows for 1956-1985.  The CSV file does have ending portfolio value with and w/o inflation adjust.  So, it seems to have a bug in the CSV file generator.

It picks a retirement year for you (in this case 1956). I haven't been able to figure out how to get it to run a specific year you are interested in.

This is my problem. I want all the output data, not just a subset.

Yes, I know, cFIREsim is a great resource that's provided for free, and I should be happy that I even have access to such a tool in the first place.
Title: Re: Stop worrying about the 4% rule
Post by: Nords on July 10, 2015, 03:22:39 PM
Here's Wade Pfau's overview of the 4% SWR and other withdrawal plans:
"Making Sense Out of Variable Spending Strategies for Retirees"
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2579123
(This link gets you to SSRN's abstract page, and then you can pick your preferred PDF.)

18 pages (large text, big margins) of review & analysis boils down to this 10-item table:

Decision Rule Methods:
[1] & [2] Bengen's Constant Inflation-Adjusted Spending (1994) (the 4% SWR)
[3] Bengen's Fixed-Percentage Withdrawals (2001)
[4] Bengen's Floor-and-Ceiling Withdrawals (2001)
[5] Guyton and Klinger's Decision Rules (2006)
[6] David Zolt's Target Percentage Adjustment (2013)

Actuarial Methods:
[7] & [8] RMD Spending Rules
[9] PMT Formula (ex. Waring and Siegel (2015); Steiner (2014); Bogleheads)
Monte-Carlo PMT Formulas: Frank, Mitchell, and Blanchett Age-Based 3D
Model (2011, 2012a, 2012b); Blanchett, Maciej, and Chen Mortality-Updating
Constant Probability of Failure (2012); David Blanchett's Simple Formula (2013)
[10] Annuitize the Floor & Invest for Discretionary

He concludes:
"Choosing a retirement income strategy is complicated by the fact that there is no single number which can summarize all of the characteristics of the strategy. The failure rate is not sufficient. The tables in this article provide 13 numbers to summarize the performance of a strategy, and all 13 numbers are important. These numbers include the initial spending rate, the evolution of real spending over 30 years at different points in the distribution of outcomes, and the distribution of remaining real wealth after 30 years.

How should a client choose a spending method and parameterize the initial spending rate?  This article provides a framework to think about the important issues, such as spending flexibility, feelings about upside spending growth vs. downside spending risks and a minimum spending threshold to be protected, desired direction of spending (for instance, whether to decrease spending over time), the appropriate planning horizon, and any legacy goals.

With decisions made about these issues, clients can decide on an appropriate XYZ formula and then compare the distributions of spending and wealth created by variable spending rules."
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on July 11, 2015, 04:58:37 AM
However on his way out the door of his firm, he agreed to return this December to "help out" during tax season.  You tax workers know that a CPA's tax season runs through April and can easily suck up 60-70 hours per week.  He's expecting to work a fraction of that time, but he's already looking ahead to his winter plans (and the winter driving) and beginning to chafe at the potential commitment.  I feel the same way about earning money during FI... I don't mind an hour or two a day but when the surf is up I want to be free of commitments for at least 96 hours.

Yeah, I'm starting to get a little skeptical of the frequently tossed-around statements about how easy it is to make up the slack with part-time employment or monetizing a hobby.  I've run some preliminary numbers on starting part-time businesses based around a couple of my hobbies (free-lance BBQ pitmaster and nature tour guide).  Even using wildly optimistic assumptions about how much business I'd get, and assuming that I would work 30+ hrs/week during the 5-6 month warm season (the time of year when I'd really like to be pursuing my own recreational interests), I'd be lucky to clear more than $10k after income and self-employment taxes.  Now, $10k is nothing to sneeze at in the context of $45k/yr total spending, but it doesn't seem like enough to make up for a major portfolio failure.

Taking a menial part-time job would be even worse.  I'd have to work 30 hrs/week, 50 weeks/yr at $9/hr to clear around $11k.

To make a serious dent in your annual $ requirements, it seems like you'd have to do something similar to what Nords' BIL is doing.  Working 60-70 hrs a week at my old career job for half the year is not my idea of retirement.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on July 11, 2015, 06:01:03 AM
However on his way out the door of his firm, he agreed to return this December to "help out" during tax season.  You tax workers know that a CPA's tax season runs through April and can easily suck up 60-70 hours per week.  He's expecting to work a fraction of that time, but he's already looking ahead to his winter plans (and the winter driving) and beginning to chafe at the potential commitment.  I feel the same way about earning money during FI... I don't mind an hour or two a day but when the surf is up I want to be free of commitments for at least 96 hours.

Yeah, I'm starting to get a little skeptical of the frequently tossed-around statements about how easy it is to make up the slack with part-time employment or monetizing a hobby.  I've run some preliminary numbers on starting part-time businesses based around a couple of my hobbies (free-lance BBQ pitmaster and nature tour guide).  Even using wildly optimistic assumptions about how much business I'd get, and assuming that I would work 30+ hrs/week during the 5-6 month warm season (the time of year when I'd really like to be pursuing my own recreational interests), I'd be lucky to clear more than $10k after income and self-employment taxes.  Now, $10k is nothing to sneeze at in the context of $45k/yr total spending, but it doesn't seem like enough to make up for a major portfolio failure.

Taking a menial part-time job would be even worse.  I'd have to work 30 hrs/week, 50 weeks/yr at $9/hr to clear around $11k.

To make a serious dent in your annual $ requirements, it seems like you'd have to do something similar to what Nords' BIL is doing.  Working 60-70 hrs a week at my old career job for half the year is not my idea of retirement.

This is my take on it as well. It's *much* easier to put in OMY when we have worked so hard to have everything setup to be saving so much money (and the jobs are not terrible, just not what we're really interested in) and accruing a little bump in eventual SS payout, than it is to work for, say, 6 years at a lower income because we pulled the cord a year too early. And with valuations so high right now, we're much more likely to be on the failure side of things for a 6%WR than if PEs were 15 and the 10 year Treasuries were 5%.

Now, if you're thinking about pulling the cord a year early, and you know that there's some chance you'll be OK, and some chance you'll need to go back and do your old job for 2-3 years to make up the ground you lost (you may need to discount from your old salary, you've burned through a lot of cash that would have been working for you, etc), then you'll have to figure out your own risk tolerance.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on July 11, 2015, 08:32:50 AM
I used think that as well.

Now I side with Nord's idea that the skills that got you there will probably take you pretty far in earning money when necessary.

Now, $10k is nothing to sneeze at in the context of $45k/yr total spending, but it doesn't seem like enough to make up for a major portfolio failure.

You might be surprised--run some calculations in cFIREsim.

And your estimates seem really low to me in terms of time necessary to make 10-20k.

Like I said, I used to think he same way, now it seems to me that that there's so many ways to make money, it really isn't a problem.
Title: Re: Stop worrying about the 4% rule
Post by: ender on July 11, 2015, 10:27:19 AM
Also keep in mind that depending on where your you might want to earn at least $1 of earned income if you want to ridiculously game take advantage of things like the EITC or savers credits.

http://www.irs.gov/Credits-&-Deductions/Individuals/Earned-Income-Tax-Credit/EITC-Income-Limits-Maximum-Credit-Amounts
http://www.irs.gov/Credits-&-Deductions/Individuals/Earned-Income-Tax-Credit/Do-I-Qualify-for-Earned-Income-Tax-Credit-EITC

Those hours working might translate to some big tax credits, depending on how much of your income is coming from Roth sources and/or how much in Roth conversions you are doing :)

For example, let's assume you spend $30k a year and have $100k in Roth IRA principle. You have 5 years you can withdraw $20k of principle and then need to make $10k/year. If you earn $10k/year, using the IRS EITC estimator with 1 child, you are eligible for an EITC of $3,305. If you bump your taxable income to $30k (maybe Roth conversions) you still have an EITC of $2,224. More kids increases this obviously and it may increase it to the point it's worthwhile to have your earned income at the ideal point you get a full EITC.

Since we're talking about gaming err using tax incentives, you might as well put $2k into a Roth IRA and get 50% of that back on AGI up to $36k from the savers credit. So in our hypothetical example, let's say you make $10k, spend $30k (remainder is from Roth IRA withdrawals). You put $2k "back" into a Roth IRA, so when you file taxes you get back $4,305 (EITC of $3305 + $1000 savers credit).

While these numbers are small it should show that a modest income ($10k) can result in a very large percentage of your yearly spending ($14.3k in this case). So your withdrawal from your portfolio is not $30k but just about $15k. This could dramatically change your withdrawal percentage in initial years.

For me personally, where this is important is considering whether to scale down your work before going completely FIRE. It may not be ideal for someone who wants to go 100% working to 0% working and never change that percentage. But for me, if I end up working say 50% or 20% for some years then options for taking advantage of the tax code become numerous. Maybe I am able to scale back to 50% and make say $40k a year gross. I could put a bunch of that into a 401k to lower AGI/MAGI and then basically take advantage of all of the above, too. Perhaps living 50% retired is not what most here want but it is an option that makes the 4% perspective different to consider other scenarios.

Regardless, our tax system is not at all designed for people like mustachians who can save/live under their means on minimal income.. it provides a lot of opportunities for someone able to skillfully control their income to really maximize tax incentives.

Also note that with Roth conversions you can basically pick your taxable income to a dollar every year - have some unused unrefundable credits (such as savers)? Just convert the right amount of pretax to Roth!
Title: Re: Stop worrying about the 4% rule
Post by: johnny847 on July 11, 2015, 10:54:56 AM
Also keep in mind that depending on where your you might want to earn at least $1 of earned income if you want to ridiculously game take advantage of things like the EITC or savers credits.

http://www.irs.gov/Credits-&-Deductions/Individuals/Earned-Income-Tax-Credit/EITC-Income-Limits-Maximum-Credit-Amounts
http://www.irs.gov/Credits-&-Deductions/Individuals/Earned-Income-Tax-Credit/Do-I-Qualify-for-Earned-Income-Tax-Credit-EITC

Those hours working might translate to some big tax credits, depending on how much of your income is coming from Roth sources and/or how much in Roth conversions you are doing :)

For example, let's assume you spend $30k a year and have $100k in Roth IRA principle. You have 5 years you can withdraw $20k of principle and then need to make $10k/year. If you earn $10k/year, using the IRS EITC estimator with 1 child, you are eligible for an EITC of $3,305. If you bump your taxable income to $30k (maybe Roth conversions) you still have an EITC of $2,224. More kids increases this obviously and it may increase it to the point it's worthwhile to have your earned income at the ideal point you get a full EITC.

Since we're talking about gaming err using tax incentives, you might as well put $2k into a Roth IRA and get 50% of that back on AGI up to $36k from the savers credit. So in our hypothetical example, let's say you make $10k, spend $30k (remainder is from Roth IRA withdrawals). You put $2k "back" into a Roth IRA, so when you file taxes you get back $4,305 (EITC of $3305 + $1000 savers credit).

While these numbers are small it should show that a modest income ($10k) can result in a very large percentage of your yearly spending ($14.3k in this case). So your withdrawal from your portfolio is not $30k but just about $15k. This could dramatically change your withdrawal percentage in initial years.

For me personally, where this is important is considering whether to scale down your work before going completely FIRE. It may not be ideal for someone who wants to go 100% working to 0% working and never change that percentage. But for me, if I end up working say 50% or 20% for some years then options for taking advantage of the tax code become numerous. Maybe I am able to scale back to 50% and make say $40k a year gross. I could put a bunch of that into a 401k to lower AGI/MAGI and then basically take advantage of all of the above, too. Perhaps living 50% retired is not what most here want but it is an option that makes the 4% perspective different to consider other scenarios.

Regardless, our tax system is not at all designed for people like mustachians who can save/live under their means on minimal income.. it provides a lot of opportunities for someone able to skillfully control their income to really maximize tax incentives.

Also note that with Roth conversions you can basically pick your taxable income to a dollar every year - have some unused unrefundable credits (such as savers)? Just convert the right amount of pretax to Roth!

Nice write up ender.

For the bolded part, you can even do this after the fact when you file taxes if there's any uncertainty in your income.   Convert more than necessary during the year and retroactively recharacterize the correct amount during tax season. You can even rechar by October 15.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on July 11, 2015, 02:34:52 PM
I agree on that danger zone of the first 5-10 years for 30-year periods.  I sure hope it's true for longer periods, but I doubt there's research to confirm it.

Jeremy @ Go Curry Cracker has a blog post in the works on how to determine if/when your portfolio has gotten "too big to fail" (which, given Jeremy's thoroughness, will, I'm sure, include a survey of any existing research) and I have high hopes that it will become the early retirement community's definitive resource on the topic (and I keep mentioning it periodically in part to keep the pressure on him to finish it up so the rest of us can freeload off of his efforts).

Quote
I guess it also means that you start a new 30-year period every year until you're in your 60s or even 70s.

It's tempting to think about the chances of portfolio success for super-long periods this way, but I don't think it's really accurate, because a 30+X year retirement period is not a rolling series of 30 year retirement periods, but a single 30+X year retirement period (and perhaps this line of thinking is what caused MMM to spread his bit of misinformation that having enough to last for 30 years is essentially equivalent to having enough to last forever).

Now I side with Nord's idea that the skills that got you there will probably take you pretty far in earning money when necessary.

I got the opposite takeaway from "Voice of Reason" Nords' latest posts in this thread -- that is, reliance on the often-invoked level of safety margin that "I can always return to work" may be misplaced, because (i) running out of money in old age is a catastrophic enough scenario to necessitate insuring against in one form or another and (ii) the reality of earning income during retirement could, to some extent, end up defeating the purpose of retiring (as in the tale of Nords' brother-in-law).
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on July 11, 2015, 02:46:26 PM
I used think that as well.

Now I side with Nord's idea that the skills that got you there will probably take you pretty far in earning money when necessary.

Now, $10k is nothing to sneeze at in the context of $45k/yr total spending, but it doesn't seem like enough to make up for a major portfolio failure.

You might be surprised--run some calculations in cFIREsim.

And your estimates seem really low to me in terms of time necessary to make 10-20k.

Like I said, I used to think he same way, now it seems to me that that there's so many ways to make money, it really isn't a problem.

I'm pretty confident about my estimates of the amount of money I would take in on the business ventures, as I was pretty thorough in constructing those (actually, I was probably too optimistic).  But I probably hi-balled the amount of taxes I would pay.  I forgot about all the EITC and Saver's Credit business, as it's been quite a while since I was able to qualify for those.  Ender's post is great, but I'm not sure how I would feel about claiming credits that are intended for the working poor, especially knowing that the money is coming straight out of the pockets of the still-working middle class.

Anyway, the whole point is that I don't really want to work nearly full time for half the year (or the whole year, in the case of the menial job) after I'm supposedly FIRE.
Title: Re: Stop worrying about the 4% rule
Post by: ender on July 11, 2015, 03:26:42 PM
Anyway, the whole point is that I don't really want to work nearly full time for half the year (or the whole year, in the case of the menial job) after I'm supposedly FIRE.

That's fine, but if the comparison is working FT 100% for 3 years or only doing 60% (maybe Mon-Wed) for 5 years it gets less straightforward.

One of the reasons I want to be able to scale back work is to spend time with kids in their earlier years once we have them. Having a reduced work schedule, while working more years but similar total hours, better allows this. It also provides more security if I want to "scale up" for whatever reason (market plummeting, unanticipated higher expenses, whatever) since I'm still doing work.

Plus, there are situations where pensions/benefits better accrue with more years service. My current pension gives me a year credit I think for something like 500 hours in a service year, so working 25% would not only provide the benefits I discussed above but it would provide me more years credit towards a pension.

For what it's worth in situations like this you may benefit from paying off a house earlier too as you reduce your risk in retirement - because you have lower spending to "cover" and volatility affects you more. I might do some musing on this to see how paying off a house early affects situations where you continue to work to meet some/all of your expenses at a higher SWR than if you still had a mortgage payment. If a decent percentage of your expenses is a mortgage then paying it off frees some cashflow.
Title: Re: Stop worrying about the 4% rule
Post by: johnny847 on July 11, 2015, 03:28:04 PM


I used think that as well.

Now I side with Nord's idea that the skills that got you there will probably take you pretty far in earning money when necessary.

Now, $10k is nothing to sneeze at in the context of $45k/yr total spending, but it doesn't seem like enough to make up for a major portfolio failure.

You might be surprised--run some calculations in cFIREsim.

And your estimates seem really low to me in terms of time necessary to make 10-20k.

Like I said, I used to think he same way, now it seems to me that that there's so many ways to make money, it really isn't a problem.

I'm pretty confident about my estimates of the amount of money I would take in on the business ventures, as I was pretty thorough in constructing those (actually, I was probably too optimistic).  But I probably hi-balled the amount of taxes I would pay.  I forgot about all the EITC and Saver's Credit business, as it's been quite a while since I was able to qualify for those.  Ender's post is great, but I'm not sure how I would feel about claiming credits that are intended for the working poor, especially knowing that the money is coming straight out of the pockets of the still-working middle class.

Anyway, the whole point is that I don't really want to work nearly full time for half the year (or the whole year, in the case of the menial job) after I'm supposedly FIRE.

If the moral aspects of claiming those credits when you don't need it bother you... then just don't claim them.
This isn't a real problem.
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on July 12, 2015, 04:59:58 AM
Anyway, the whole point is that I don't really want to work nearly full time for half the year (or the whole year, in the case of the menial job) after I'm supposedly FIRE.

That's fine, but if the comparison is working FT 100% for 3 years or only doing 60% (maybe Mon-Wed) for 5 years it gets less straightforward.

One of the reasons I want to be able to scale back work is to spend time with kids in their earlier years once we have them. Having a reduced work schedule, while working more years but similar total hours, better allows this. It also provides more security if I want to "scale up" for whatever reason (market plummeting, unanticipated higher expenses, whatever) since I'm still doing work.

Plus, there are situations where pensions/benefits better accrue with more years service. My current pension gives me a year credit I think for something like 500 hours in a service year, so working 25% would not only provide the benefits I discussed above but it would provide me more years credit towards a pension.

For what it's worth in situations like this you may benefit from paying off a house earlier too as you reduce your risk in retirement - because you have lower spending to "cover" and volatility affects you more. I might do some musing on this to see how paying off a house early affects situations where you continue to work to meet some/all of your expenses at a higher SWR than if you still had a mortgage payment. If a decent percentage of your expenses is a mortgage then paying it off frees some cashflow.

I get where you're coming from.  But I think it's highly situation-dependent.  I'm making close to 90k now, so in my situation it would not be as close as your 3 yrs full time vs. 5 years at 60%.  And my kid is grown, so that ship has sailed.  My job does not provide a part-time option that would still contribute to my pension (but continuing full-time increases my pension by 1% of hi-3 salary for each additional year, plus my hi-3 goes up as I continue to get COL and step increases).  The house thing could apply, though.  I probably wouldn't straight-up pay it off, as I have a 3 1/8% interest rate.  But DW and I are talking about downsizing, which has the potential to reduce our housing expenditure.  If we stick with the current house, it will be paid off in 12 years, and our annual expenses will drop by about $10k.  I project that I'm 3-4 years from FIRE, so if I were to do PT work, I'm probably looking at 8-9 years to get to where expenses drop to the point that I don't really need the extra money (unless we downsize the house).  We'll see how the numbers look when I get there, but if it's a choice between OMY (or TMY) and 8 or 9 years of PT work, I'd probably pick the former.  I'm hoping the numbers look good enough that I don't have to choose either of those options.  How good is that?  If I can manage a 90-95% success rate in cFiresim/FireCalc and an 80-85% success rate in a Monte Carlo simulator, I'd probably feel good enough to pull the plug completely.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on July 12, 2015, 07:05:03 AM
Anyway, the whole point is that I don't really want to work nearly full time for half the year (or the whole year, in the case of the menial job) after I'm supposedly FIRE.

That's fine, but if the comparison is working FT 100% for 3 years or only doing 60% (maybe Mon-Wed) for 5 years it gets less straightforward.

One of the reasons I want to be able to scale back work is to spend time with kids in their earlier years once we have them. Having a reduced work schedule, while working more years but similar total hours, better allows this. It also provides more security if I want to "scale up" for whatever reason (market plummeting, unanticipated higher expenses, whatever) since I'm still doing work.

Plus, there are situations where pensions/benefits better accrue with more years service. My current pension gives me a year credit I think for something like 500 hours in a service year, so working 25% would not only provide the benefits I discussed above but it would provide me more years credit towards a pension.

For what it's worth in situations like this you may benefit from paying off a house earlier too as you reduce your risk in retirement - because you have lower spending to "cover" and volatility affects you more. I might do some musing on this to see how paying off a house early affects situations where you continue to work to meet some/all of your expenses at a higher SWR than if you still had a mortgage payment. If a decent percentage of your expenses is a mortgage then paying it off frees some cashflow.

I get where you're coming from.  But I think it's highly situation-dependent.  I'm making close to 90k now, so in my situation it would not be as close as your 3 yrs full time vs. 5 years at 60%.  And my kid is grown, so that ship has sailed.  My job does not provide a part-time option that would still contribute to my pension (but continuing full-time increases my pension by 1% of hi-3 salary for each additional year, plus my hi-3 goes up as I continue to get COL and step increases).  The house thing could apply, though.  I probably wouldn't straight-up pay it off, as I have a 3 1/8% interest rate.  But DW and I are talking about downsizing, which has the potential to reduce our housing expenditure.  If we stick with the current house, it will be paid off in 12 years, and our annual expenses will drop by about $10k.  I project that I'm 3-4 years from FIRE, so if I were to do PT work, I'm probably looking at 8-9 years to get to where expenses drop to the point that I don't really need the extra money (unless we downsize the house).  We'll see how the numbers look when I get there, but if it's a choice between OMY (or TMY) and 8 or 9 years of PT work, I'd probably pick the former.  I'm hoping the numbers look good enough that I don't have to choose either of those options.  How good is that?  If I can manage a 90-95% success rate in cFiresim/FireCalc and an 80-85% success rate in a Monte Carlo simulator, I'd probably feel good enough to pull the plug completely.

Similarly, we have a good situation setup where we're saving a lot of money mostly due to VLCOL. But I would prefer to take a different job that pays less, maybe requires DW to get paid less/be unemployed for awhile to find something, and has a VHCOL. So we would probably not save anything, or very little. Figuring out the timing of how long to keep the status quo (which is fine, but not interesting to me beyond money) vs FIRE vs job more in line with my passion (but still a job I might not like) vs a job which would pay me a lot more but is still something I'm not interested in (status quo but with more money and more stress). The last one is the only one I've ruled out. I'm stuck with the status quo for at least 8 months (half of it on leave) due to impending parenthood.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on July 12, 2015, 08:00:31 AM
For what it's worth in situations like this you may benefit from paying off a house earlier too as you reduce your risk in retirement - because you have lower spending to "cover" and volatility affects you more. I might do some musing on this to see how paying off a house early affects situations where you continue to work to meet some/all of your expenses at a higher SWR than if you still had a mortgage payment. If a decent percentage of your expenses is a mortgage then paying it off frees some cashflow.

This is starting to get a bit off topic, but this isn't really accurate.  If you choose to retain a mortgage in retirement instead of paying it off, then the pile of investments that you have in lieu of paying off the mortgage (which can be mentally accounted for as the portion of your portfolio that is "earmarked" for servicing the mortgage) will "cover" the monthly mortgage expense and the decision to retain the mortgage therefore has no effect on your overall cashflow (putting aside tax considerations, transaction costs, and impact on eligibility for means-based financial incentives, if any (but, generally speaking, if the math favors keeping a mortgage before consideration of these factors, it will continue to do so even after consideration of these factors)).  It is true that retaining a mortgage can increase your "risk," but if the mortgage rate is low enough and the remaining life to maturity is high enough to justify the strategy of retaining it instead of paying it off, then that risk is probably lower than the equivalent risk of early retiring on a SWR-based retirement strategy in the first place (plus, retaining the mortgage can actually decrease certain risks in retirement, such as the risk of inflation eating away at your portfolio).  There's lots more discussion and detail on all of this in the various "to prepay or not to prepay" mortgage threads.
Title: Re: Stop worrying about the 4% rule
Post by: sol on July 15, 2015, 11:13:17 PM
I did a little FIREcalc meta-analysis to get a better feel for Safe Withdrawal Rates.

For each specified time period, I just recorded the success probabilities for each SWR.  I used the default 75/25 stock-bond split and a million dollar portfolio with 30k/year for 3%, 40k/yr for 4%, etc. 

The data are a little lumpy because I only did integer SWRs and the results are based on historic records, where random chance plays some role in distorting these lines from nice smooth curves.

Title: Re: Stop worrying about the 4% rule
Post by: sol on July 15, 2015, 11:14:01 PM
Some things to note on this graph:

1.  3% is 100% safe for all periods.  There are no periods in the historical record where a 3% SWR has ever failed, regardless of timing or duration. 

2.  Periods longer than 40 years are basically statistically identical.  Lasting 40 and 60 are a basically equally likely.  This may just be a result of there being so few 50 to 60 year periods in the historical record that they are largely identical.  Most of the 60 year periods are going to contain most of the same years as all of the 50 year periods, so these lines are mostly the same.

3.  The biggest increases in SWR come from shortening your time period.  This suggests to me that annuities like social security are hugely valuable, probably worth significantly depleting your nest egg.  For example, if you can buy a social security supplemental annuity at age 52 to cover all of your expenses after age 62, and by so doing lower your expected period of retirement drawdown from 30 years to 10 years, you can effectively increase your withdrawal rate on the remaining nest egg from 4% to 8.5% (from green's 95% to blue's 95% line) without negatively impacting your success probability.  That means it would be worth spending over half of your nest egg to get that annuity.  Short planned drawdown periods seem to make retirement super easy.

4.  The 50% success rate line on the vertical line gives you the average expected value for any time period.  For example, for a 30 year period the average safe withdrawal rate that has historically been about right is about 6%.  For periods longer than 40 years it's been closer to 5%.

5.  For periods 30 years or longer, this line gets steeper as you lower your SWR up to 4%.  This means you continue to see increasing large benefits from your continued savings up until you reach about 4%, but working to lower your SWR below 4% suddenly gets much harder.   The odds just don't move very much for your efforts beyond that.

6.  One way to look at this graph is to randomly sample it by printing it out and and throwing darts at it.  The first dart that lands anywhere between the red and orange lines is your retirement lifespan lasting between 20 and 60 years.  In order for a 4% SWR to fail you, your dart would have to land between the red and orange lines in the top left corner of the graph, to the left of the 4% line, AND you'd still have to live at least 20 more years to deplete it.
Title: Re: Stop worrying about the 4% rule
Post by: MDM on July 15, 2015, 11:22:22 PM
I did a little FIREcalc meta-analysis to get a better feel for Safe Withdrawal Rates....

Nicely done!
Title: Re: Stop worrying about the 4% rule
Post by: sol on July 15, 2015, 11:41:15 PM
Another way to look at this same information is to ask how long, on average, a given SWR should last.  I did this by iteratively seeking the number of years that FIREcalc needed to give me a 50% success rate for each specified SWR.

So by comparison with the above graph, the statistically "correct" average SWR for a 30 year period is about 6%, which is where the green line (for 30 years) is at 50% on the above graph.  This new graph below flips that relationship around to find the average time for each specified SWR, rather than the average SWR for each specified time, but it gives the same value: a 6% SWR should last about 30 years before being depleted to zero.

This plot reports an infinity value for 4% SWR or less, because these low SWRs never fall to 50% success rates over any time period.  On average, SWRs below 5% will last forever.  Most of you already know this, because you already know that the average ending portfolio value for a 4% SWR plan is roughly twice the starting value.

I find this graph more interesting than the first one, in some respects.  Once you've managed to save up 10x your expenses, your nest egg should last you an average of 15 years.  Saving anothe ~10% to get down to 9% SWR only gets you to 20 years.  But once you cross below that 6% SWR level (roughly 17x expenses) the time periods really start to take off.  Each tiny additional bit of savings is then buying you a huge number of additional years of retirement.
Title: Re: Stop worrying about the 4% rule
Post by: PowerMustache on July 16, 2015, 01:42:05 AM
Sol, I really like that last graph. In addition to illustrating the safety of 4% from yet another angle, it also provides an encouraging metric to show the big impact of those dollars saved in the final years leading up to FI (for those of us who think 4% is a good SWR). Before seeing this chart, I was thinking those years building up the net worth to achieve 4% rather than 6% WR might become a bit boring from a tracking perspective -- it's not as exciting to watch the portfolio grow that last 30% as it is to watch it grow the first 30%. Now, I plan to visualize this chart for inspiration during that final 30% of net worth growth before FI.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on July 16, 2015, 08:10:52 AM
I did a little FIREcalc meta-analysis to get a better feel for Safe Withdrawal Rates....

Nicely done!

I agree, great work!  But I'm curious why you used FIREcalc instead of cFIREsim, given the known flaw in [EDIT] cFIREsim's FIREcalc's bond data (http://forum.mrmoneymustache.com/investor-alley/rick-ferri-3070-portfolio-for-retirees/msg555914/#msg555914)?  However, I just ran a few comparison simulations to spot check the differences in the outputs between the two alternatives, and, with the default allocation of only 25% bonds, the discrepancy in the bond return calculation method does not appear to have a material impact on the outputs for purposes of your analysis.

In addition, I have a quibble with this portion of your analysis:

3.  The biggest increases in SWR come from shortening your time period.  This suggests to me that annuities like social security are hugely valuable, probably worth significantly depleting your nest egg.  For example, if you can buy a social security supplemental annuity at age 52 to cover all of your expenses after age 62, and by so doing lower your expected period of retirement drawdown from 30 years to 10 years, you can effectively increase your withdrawal rate on the remaining nest egg from 4% to 8.5% (from green's 95% to blue's 95% line) without negatively impacting your success probability.  That means it would be worth spending over half of your nest egg to get that annuity.  Short planned drawdown periods seem to make retirement super easy.

This analysis assigns no value to having a positive terminal portfolio value at the end of the retirement period (which may be a valid assumption for some people, but, all else being equal, I think most people would prefer to have something instead of nothing at retirement end (i.e., death) in order to pass on to their heirs, give to charity, throw themselves a Great Gatsby level party of a funeral, or whatever).

In your example, spending half of your portfolio to purchase the supplemental annuity (which would have no impact on your success probability and almost no impact on your withdrawals in absolute dollars) would cost you a historically median amount of $258K in terminal portfolio value for every $100K of your portfolio that was spent on the annuity.  That is, if your portfolio was $1 million at age 52, and you spent half of it ($500k) on an annuity, then, at the projected end of the retirement period (age 82, in your example), you would be left with a portfolio of $0 (but, of course, you would still have the entitlement to continue collecting the annuity payments if you continue to live beyond that point), whereas, had you not purchased the annuity, you would at that point have had a terminal portfolio having a historical median amount of $1,290,000.  Given that all else is practically equal between the two scenarios, I'd rather have a $1,290,000 portfolio when I turn 82 than have zero dollars and the right to collect $40K per year for the remainder of my life.
Title: Re: Stop worrying about the 4% rule
Post by: Cheddar Stacker on July 16, 2015, 08:18:35 AM
Sol, You are awesome. Thank you.
Title: Re: Stop worrying about the 4% rule
Post by: SuperSecretName on July 16, 2015, 08:35:24 AM
Regardless, our tax system is not at all designed for people like mustachians who can save/live under their means on minimal income.. it provides a lot of opportunities for someone able to skillfully control their income to really maximize tax incentives.

Great write-up, and I agree on the tax code.  It is not meant for people like us.  Given how badly big business cheats optimizes their taxes, I don't feel bad about doing the same with mine.
Title: Re: Stop worrying about the 4% rule
Post by: Clean Shaven on July 16, 2015, 08:43:09 AM
Sol, You are awesome. Thank you.
X2. Thanks!
Title: Re: Stop worrying about the 4% rule
Post by: forummm on July 16, 2015, 10:55:28 AM
(http://www.freedomtwentyfive.com/wp-content/uploads/2012/02/slowclap.jpg)

Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on July 16, 2015, 11:09:57 AM
In recognition of sol's extraordinary efforts towards examining SWRs from new angles, I propose that we rename this thread "Dr. Sol or:  How I Learned to Stop Worrying and Love the 4% Rule."
Title: Re: Stop worrying about the 4% rule
Post by: Cheddar Stacker on July 16, 2015, 02:35:05 PM
This article is nothing new for anyone around here:
http://www.marketwatch.com/story/how-traditional-retirement-formulas-fall-short-2015-07-15?dist=afterbell

I linked to it here because I think it highlights just one more reason to stop worrying about the 4% rule even though that's not really his conclusion.

It sort of reminded me of this GCC post: http://www.gocurrycracker.com/the-worst-retirement-ever/ because he cherry picked an awful year to retire (1970) and still showed ways to succeed.

The article in summary: if you retire in a very bad year for sequence of return risk, and you draw 5%/year adjusted for inflation, and you invest conservatively in a 50/50 stock bond portfolio, you will run out of money in year 38. By adjusting to 60/40 and still drawing 5% you would still have 180% of your original starting value after 43 years.

My conclusion: So draw 4%, or invest more aggressively than 50/50. Or don't be so rigid with spending exactly 4/5% plus inflation. Pretty simple.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on July 16, 2015, 03:19:51 PM
The article in summary: if you retire in a very bad year for sequence of return risk, and you draw 5%/year adjusted for inflation, and you invest conservatively in a 50/50 stock bond portfolio, you will run out of money in year 38. By adjusting to 60/40 and still drawing 5% you would still have 180% of your original starting value after 43 years.

Something seems grossly amiss with this data (but first of all, note that the tables appear to be using nominal figures, so, on an inflation-adjusted basis, you wouldn't have "180% of your original starting value after 43 years" even assuming that the tables' data is accurate -- but that's just a footnote, because the data in the tables seems to be wildly inaccurate).

As you summarized, the table shows that a 50/50 portfolio with a 5% WR would not run out of money until year 38.  But cFIREsim says a 50/50 portfolio with a 5% WR starting in 1970 would have run out of money in less than 20 years.  Similarly, as you said, with a 60/40 portfolio, the table shows a positive balance of more than 180% of the original balance (in nominal terms) after 43 years, but cFIREsim shows total portfolio depletion in less than 20 years for this scenario as well.

What gives?  Obviously there are some discrepancies between the underlying data used by cFIREsim and this article's tables (for example, cFIREsim uses a total equity index while the article uses the S&P 500) and probably also in other assumptions (investment fees, timing of withdrawals, etc.), but none of this should be sufficient to explain such outrageously different results.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on July 16, 2015, 03:41:58 PM
The article in summary: if you retire in a very bad year for sequence of return risk, and you draw 5%/year adjusted for inflation, and you invest conservatively in a 50/50 stock bond portfolio, you will run out of money in year 38. By adjusting to 60/40 and still drawing 5% you would still have 180% of your original starting value after 43 years.

Something seems grossly amiss with this data (but first of all, note that the tables appear to be using nominal figures, so, on an inflation-adjusted basis, you wouldn't have "180% of your original starting value after 43 years" even assuming that the tables' data is accurate -- but that's just a footnote, because the data in the tables seems to be wildly inaccurate).

As you summarized, the table shows that a 50/50 portfolio with a 5% WR would not run out of money until year 38.  But cFIREsim says a 50/50 portfolio with a 5% WR starting in 1970 would have run out of money in less than 20 years.  Similarly, as you said, with a 60/40 portfolio, the table shows a positive balance of more than 180% of the original balance (in nominal terms) after 43 years, but cFIREsim shows total portfolio depletion in less than 20 years for this scenario as well.

What gives?  Obviously there are some discrepancies between the underlying data used by cFIREsim and this article's tables (for example, cFIREsim uses a total equity index while the article uses the S&P 500) and probably also in other assumptions (investment fees, timing of withdrawals, etc.), but none of this should be sufficient to explain such outrageously different results.

This isn't a very useful study. It's a backtested portfolio that conveniently uses the asset classes that went crazy during that time period. "100% Stocks" means 20% LC, 20% LCV, 20% SC, 20% SCV, and 20% REIT.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on July 16, 2015, 03:48:44 PM
This isn't a very useful study. It's a backtested portfolio that conveniently uses the asset classes that went crazy during that time period. "100% Stocks" means 20% LC, 20% LCV, 20% SC, 20% SCV, and 20% REIT.

Where does it say that?  Doesn't the article say the "100% stock" portfolio is the S&P 500?

EDIT:  Oh I see now - I misread the reference to the "column at the right" to mean the "100% stock" column and didn't notice the separate S&P 500 column.
Title: Re: Stop worrying about the 4% rule
Post by: Cheddar Stacker on July 16, 2015, 05:34:56 PM
Ok then. I didn't verify anything. Disregard.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on July 18, 2015, 08:10:03 AM
I'll be interested to see that analysis, Ender. I assume you'll also include the differences that result from longer or shorter remaining mortgage terms, and higher and lower interest rates. With only 5 years left on the term, perhaps the WR can be really high since you'll have the huge drop in spending in 5 years. With the typical 6% interest rates historically, paying off your mortgage seems like a no-brainer. It's with the historically low 3% rates now that make us wonder.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on July 18, 2015, 08:17:42 AM
Ender, your analysis in the above post is flawed for the same reason I described in post # 107 above.  I'm reluctant to go into too much detail because it seems off topic for this thread and has already been extensively discussed in several of the "to pay off or not to pay off" mortgage threads (like this one (http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/)), but in my view the proper way to think about it once you have a sufficient portfolio balance to pay off the mortgage in full is to mentally divide your portfolio into two buckets:  one devoted to servicing the mortgage principal + interest, and another devoted to servicing all of your non-mortgage related expenses.  So, if your mortgage rate is low enough and remaining life to maturity high enough to justify retaining the mortgage, then paying it off does not result in increased chances of history-based portfolio success (instead, it can result in decreased chances of history-based portfolio success, in addition to leaving you with a lower historical terminal portfolio value).  When you run your cFIREsim/FIREcalc analyses, don't forget to set the principal + interest payments to "not inflation adjusted" (while all the non-mortgage related expenses, including property taxes and insurance, should be adjusted for inflation).

EDIT:  For the sanity of anyone reading this in posterity, this post was made in response to a post by ender that was apparently subsequently deleted (as was the post that post # 107 was responsive to, but in that one I had quoted the portion I was responding to so that one should be easier for future readers to make sense out of).
Title: Re: Stop worrying about the 4% rule
Post by: a1smith on July 18, 2015, 09:15:05 AM
^^  I agree.  My mortgage is 2.97% and there is no way I'm paying it off early.  Easy math problem.
Title: Re: Stop worrying about the 4% rule
Post by: makincaid on July 18, 2015, 11:04:12 AM
Awesome graph Sol!

I would love to see it for 80% survival as well.
Title: Re: Stop worrying about the 4% rule
Post by: a1smith on July 18, 2015, 12:41:35 PM
. . . . .

I find this graph more interesting than the first one, in some respects.  Once you've managed to save up 10x your expenses, your nest egg should last you an average of 15 years.  Saving anothe ~10% to get down to 9% SWR only gets you to 20 years.  But once you cross below that 6% SWR level (roughly 17x expenses) the time periods really start to take off.  Each tiny additional bit of savings is then buying you a huge number of additional years of retirement.

Your graph is also a great way to illustrate that reducing your expenses even a little (for SWR < 6%) has a huge impact on how long your money will last due to the high sensitivity (slope) in that region of the graph.
Title: Re: Stop worrying about the 4% rule
Post by: MDM on July 18, 2015, 01:14:47 PM
Your graph is also a great way to illustrate that reducing your expenses even a little (for SWR < 6%) has a huge impact on how long your money will last due to the high sensitivity (slope) in that region of the graph.
Good point.  See linearized sensitivities below for various variables in the simplified "time to FI" calculation, given the first five numbers as inputs.

Quick calculation of "Time to FI"
Planned Withdrawal RateWR4%
Annual Savings InvestedS50000$/yr
Annual Retirement ExpensesE40000$/yr
Current Assets InvestedA100000$
Investment returnr_6%
Time to FIt11.6yr
Sensitivity of Time to FI for each input
E/WR, stash neededG1000000$
dt/dr_-0.6yr/%
dt/dS-0.2yr/$K
dt/dG0.9yr/$100K
dt/dA-1.8yr/$100K
dt/dE2.3yr/$10K
dt/dWR-2.3yr/%
Calculate Savings needed based on time
Desired time to FIt10.00yr
Annual Savings NeededS62281$/yr
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on July 20, 2015, 07:40:15 AM
Sensitivity of Time to FI for each input
E/WR, stash neededG1000000$
dt/dr_-0.6yr/%
dt/dS-0.2yr/$K
dt/dG0.9yr/$100K
dt/dA-1.8yr/$100K
dt/dE2.3yr/$10K
dt/dWR-2.3yr/%

Interesting summary, but why compare dt/dS in yr/$k vs. dt/dE in yr/$10k?  For most Mustachians, I would think it is just as likely to be able to save an extra 10k/yr for the earnings years as it would be to permanently lower annual expense from 40k to 30k.  This would then make both sensitivities about equal, I think...
Title: Re: Stop worrying about the 4% rule
Post by: MDM on July 20, 2015, 07:54:18 AM
Interesting summary, but why compare dt/dS in yr/$k vs. dt/dE in yr/$10k?
Don't remember why.  Do remember not thinking about it all that much.  Probably started down the list with unit ratios, increased the ones in the middle, then picked an in-between number for dE.

Quote
For most Mustachians, I would think it is just as likely to be able to save an extra 10k/yr for the earnings years as it would be to permanently lower annual expense from 40k to 30k.  This would then make both sensitivities about equal, I think...
The sensitivities do have the same order of magnitude.  In this case, looking at two significant digits, dt/dS=-1.5$/10K.  The calc'ns are on the 'Misc. calcs' tab of the case study spreadsheet (http://forum.mrmoneymustache.com/ask-a-mustachian/how-to-write-a-%27case-study%27-topic/msg274228/#msg274228) if anyone would like to explore more.
Title: Re: Stop worrying about the 4% rule
Post by: ysette9 on July 24, 2015, 07:59:19 PM

... dt/dS in yr/$k vs. dt/dE in yr/$10k? ...

Ah, be still, my heart. I love it when you talk nerd to me! :)
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on July 24, 2015, 08:05:55 PM

... dt/dS in yr/$k vs. dt/dE in yr/$10k? ...

Ah, be still, my heart. I love it when you talk nerd to me! :)

https://www.youtube.com/watch?v=BdB0P9fx7Es

See what you made me do!
Title: Re: Stop worrying about the 4% rule
Post by: a1smith on July 24, 2015, 09:17:27 PM
Your graph is also a great way to illustrate that reducing your expenses even a little (for SWR < 6%) has a huge impact on how long your money will last due to the high sensitivity (slope) in that region of the graph.
Good point.  See linearized sensitivities below for various variables in the simplified "time to FI" calculation, given the first five numbers as inputs.
 . . . . . .

About what operating point are the equations linearized at?  Is it the values listed under Quick calculation of "Time to FI" heading?
Title: Re: Stop worrying about the 4% rule
Post by: MDM on July 24, 2015, 09:49:59 PM
Your graph is also a great way to illustrate that reducing your expenses even a little (for SWR < 6%) has a huge impact on how long your money will last due to the high sensitivity (slope) in that region of the graph.
Good point.  See linearized sensitivities below for various variables in the simplified "time to FI" calculation, given the first five numbers as inputs.
 . . . . . .

About what operating point are the equations linearized at?  Is it the values listed under Quick calculation of "Time to FI" heading?
Yes, those are the "first five numbers" in question.  The equations are in the linked spreadsheet mentioned a few posts back.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on July 29, 2015, 01:48:54 PM
https://www.kitces.com/blog/how-has-the-4-rule-held-up-since-the-tech-bubble-and-the-2008-financial-crisis/

Quote
The 4% rule has been much maligned lately, as recent market woes of the past 15 years – from the tech crash of 2000 to the global financial crisis of 2008 – have pressured both market returns and the portfolios of retirees.

Yet a deeper look reveals that if a 2008 or even a 2000 retiree had been following the 4% rule since retirement, their portfolios would be no worse off than any of the other "terrible" historical market scenarios that created the 4% rule from retirement years like 1929, 1937, and 1966. To some extent, the portfolio of the modern retiree is buoyed by the (only) modest inflation that has been occurring in recent years, yet even after adjusting for inflation, today’s retirees are not doing any materially worse than other historical bad-market scenarios where the 4% rule worked.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on July 29, 2015, 01:54:27 PM
I just came here to post the Kitces article and I see forummm beat me to it.  I thought the article was terrific, but note that, as usual for Kitces, his numbers (based on a 60/40 stock/bond portfolio) are a bit more optimistic than what cFIREsim reports for the same allocation (but otherwise using its default settings) (as discussed in this thread (http://forum.mrmoneymustache.com/investor-alley/kitces-article-ratcheting-swr-data-discrepancy/)).

Also, I wish he would have included an equivalent chart to the first "historical worst year comparison" chart using real instead of nominal data (and it seems odd that he didn't).
Title: Re: Stop worrying about the 4% rule
Post by: Nords on July 29, 2015, 02:14:25 PM
I just came here to post the Kitces article and I see forummm beat me to it.  I thought the article was terrific, but note that, as usual for Kitces, his numbers (based on a 60/40 stock/bond portfolio) are a bit more optimistic than what cFIREsim reports for the same allocation (but otherwise using its default settings) (as discussed in this thread (http://forum.mrmoneymustache.com/investor-alley/kitces-article-ratcheting-swr-data-discrepancy/)).
You guys both beat me.  Now I'm going to have to tweet about it instead.

Raddr's been tracking this on his forum for over a decade.  Here's the initial setup:  http://raddr-pages.com/forums/viewtopic.php?f=2&t=1208
"I've finally gotten around to calculating the 2004 year end balance of the portfolio of a hypothetical investor who retired at the end of 1999 with a 75:25 mix of S&P500 stocks and 6 mo. commercial paper."
Here's the 2014 update, at a withdrawal rate of over 10%:  http://raddr-pages.com/forums/viewtopic.php?f=2&t=1208&start=390#p52998

Here's a more in-depth discussion of various asset allocations:
http://www.early-retirement.org/forums/f28/firecalc-and-the-hapless-y2k-retiree-69942.html

Yet the Hapless Y2K Retiree still might make it.  And if his portfolio can survive this mindless spending, then I think every human starting with a 4% SWR can make it to at least Social Security.
Title: Re: Stop worrying about the 4% rule
Post by: k9 on August 04, 2015, 04:15:17 PM
Right, so now we're assuming that the future will be worse than anything we've ever had and as bad or worse than any other country has ever had in the last 200 years as well?

Seems pretty paranoid.

Not sure about what you mean here. According to the data from your other post (https://1.bp.blogspot.com/_7pcnNDkYOFE/TJLpRdCn9uI/AAAAAAAAAOI/e4WRVdW-D4U/s1600/Capture2.JPG), the worldwide SWR is about 0.25%. 400 years of income. That's pretty scary.

As a French investor, I should target a 0.95% SWR. A 4% WR for 30 years would have failed most of the time. It kinda sucks.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on August 04, 2015, 04:36:24 PM
You cut off the rest of my post, taking that out of context.  Read the rest of it.

If you want to argue for a sub-1% SWR (or .25%, or whatever number you pick), like I said, you're essentially saying that the future will be worse than anything we've ever had and as bad or worse than any other country has ever had in the last 200 years as well.

That seems pretty pessimistic.

In other words, yes, your post of needing a sub-0.25% SWR is saying the future will be much worse than ever, anywhere, in the last several hundred years.

I just don't see it, and if that is the case, I don't think any SWR will help, even if it's 0.01% as we'll be in total economic collapse.
Title: Re: Stop worrying about the 4% rule
Post by: k9 on August 04, 2015, 05:15:00 PM
Oh, anyway, I'm not really scared about that SWR stuff. As mentioned a lot of times even in this topic, there are many options beside SWR. As a French citizen, I have a substantial pension waiting for me starting from my 60s, and I can work more if needed until that. I will probably inherit from my parents before I am not able to work anymore. Health insurance is quite cheap here. And I could well be dead before I retire, anyway, so...

I'm just questioning the geographical bias of US investors. Your country has had an amazing century and you seem to take that for granted. No war. No hyperinflation. No sovereign default. No communist or fascist dictatorship. No multidecades bear market. This is exceptionally good.

4% is the worst case scenario for the best case scenario. I think it is a reasonable overall tradeoff (and I'm aiming for that), but it cannot just be considered an outlier.
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on August 04, 2015, 05:36:25 PM
I'm just questioning the geographical bias of US investors. Your country has had an amazing century and you seem to take that for granted. No war. No hyperinflation. No sovereign default. No communist or fascist dictatorship. No multidecades bear market. This is exceptionally good.

There are a great many of us here that would argue that was not simply luck, and many others that would argue that we've had quite a few close calls on all of that.
Title: Re: Stop worrying about the 4% rule
Post by: Nords on August 04, 2015, 11:30:51 PM
I'm just questioning the geographical bias of US investors. Your country has had an amazing century and you seem to take that for granted. No war. No hyperinflation. No sovereign default. No communist or fascist dictatorship. No multidecades bear market. This is exceptionally good.
So you're essentially saying that past history is no indication of future performance?

The point of this thread is that the 4% SWR is a reasonable estimate of success.  If you're trying to insure against failure then you'd use annuities and enough savings that you'd never have to touch the principal.  But for people who are wondering "How much is enough?" the 4% SWR is a starting point.

No war.
Speaking as a military veteran, I find this statement incomprehensible as written.  Feel free to elaborate.
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on August 04, 2015, 11:38:20 PM

No war.
Speaking as a military veteran, I find this statement incomprehensible as written.  Feel free to elaborate.

No warfare within our national borders.  On our soil.

You have to remember, he is speaking from the perspective of a French citizen.  When you are born French, war comes to you.
Title: Re: Stop worrying about the 4% rule
Post by: k9 on August 05, 2015, 04:10:45 AM
I'm just questioning the geographical bias of US investors. Your country has had an amazing century and you seem to take that for granted. No war. No hyperinflation. No sovereign default. No communist or fascist dictatorship. No multidecades bear market. This is exceptionally good.
So you're essentially saying that past history is no indication of future performance?

The point of this thread is that the 4% SWR is a reasonable estimate of success.  If you're trying to insure against failure then you'd use annuities and enough savings that you'd never have to touch the principal.  But for people who are wondering "How much is enough?" the 4% SWR is a starting point.

Yeah, I agree with that. But the point was raised at some point that the 4% SWR was a worse case scenario, and that at no point in history the situation could have been worse. This is somewhat biased.

Quote
No war.
Speaking as a military veteran, I find this statement incomprehensible as written.  Feel free to elaborate.

Yeah, sorry. MoonShadow explained. No war *on your soil*. Your country has never been invaded, your cities being destroyed, your country being ruled by a foreign army, etc. Except for military men like you, this makes a huge difference. Even if you end up winning the war, you have a whole country to build back. This has a huge impact on the economy, obviously. Your REITS portfolio kinda suffers, for instance ;)
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on August 05, 2015, 08:33:47 AM
Not sure about what you mean here. According to the data from your other post (https://1.bp.blogspot.com/_7pcnNDkYOFE/TJLpRdCn9uI/AAAAAAAAAOI/e4WRVdW-D4U/s1600/Capture2.JPG), the worldwide SWR is about 0.25%. 400 years of income. That's pretty scary.

Just to clarify (and to elaborate on what Rebs said), the linked table shows that the "worldwide" (where the 17 countries listed in the table constitute the entire universe of countries in the "world") SWR was 0.24% (for Japan) using a 50/50 stock/bond allocation if you define SWR to mean the WR that historically resulted in success 100% of the time (commonly referred to as the "safemax" in the SWR literature).  Even in the US, the historical safemax is below 4% under the parameters most often used (in this table, it is 3.66%).  Most early-retirement-planners in this forum use a more reasonable (but still extremely conservative) threshold for what constitutes a "safe" WR, like a 95% success rate.  The table does also show the SWRs for the various countries using a 90%-success-rate threshold, and Japan is the single extreme outlier with a SWR (using that definition) below 1% -- but more importantly, even in Japan, a 4% WR succeeded most of the time (61.1% of the time).

Quote
As a French investor, I should target a 0.95% SWR.

Again, this is only true if you want to be extremely conservative and use the absolute historical worst case as your hurdle to clear (a hurdle that was set, keep in mind, based on a pretty conservative asset allocation -- as the other tables in the Pfau article make clear, stock-heavier portfolios in France had considerably higher SWRs)).

Quote
A 4% WR for 30 years would have failed most of the time. It kinda sucks.

This is not true.  The table says that a 4% WR in France worked most of the time (55.6% of the time).
Title: Re: Stop worrying about the 4% rule
Post by: forummm on August 05, 2015, 09:06:00 AM
Not sure about what you mean here. According to the data from your other post (https://1.bp.blogspot.com/_7pcnNDkYOFE/TJLpRdCn9uI/AAAAAAAAAOI/e4WRVdW-D4U/s1600/Capture2.JPG), the worldwide SWR is about 0.25%. 400 years of income. That's pretty scary.

Just to clarify (and to elaborate on what Rebs said), the linked table shows that the "worldwide" (where the 17 countries listed in the table constitute the entire universe of countries in the "world") SWR was 0.24% (for Japan) using a 50/50 stock/bond allocation if you define SWR to mean the WR that historically resulted in success 100% of the time (commonly referred to as the "safemax" in the SWR literature).  Even in the US, the historical safemax is below 4% under the parameters most often used (in this table, it is 3.66%).  Most early-retirement-planners in this forum use a more reasonable (but still extremely conservative) threshold for what constitutes a "safe" WR, like a 95% success rate.  The table does also show the SWRs for the various countries using a 90%-success-rate threshold, and Japan is the single extreme outlier with a SWR (using that definition) below 1% -- but more importantly, even in Japan, a 4% WR succeeded most of the time (61.1% of the time).

Quote
As a French investor, I should target a 0.95% SWR.

Again, this is only true if you want to be extremely conservative and use the absolute historical worst case as your hurdle to clear (a hurdle that was set, keep in mind, based on a pretty conservative asset allocation -- as the other tables in the Pfau article make clear, stock-heavier portfolios in France had considerably higher SWRs)).

Quote
A 4% WR for 30 years would have failed most of the time. It kinda sucks.

This is not true.  The table says that a 4% WR in France worked most of the time (55.6% of the time).

Just buy the whole world. Why increase your risk by concentrating in one country? Even US investors shouldn't do that.
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on August 06, 2015, 04:29:00 AM
Just buy the whole world. Why increase your risk by concentrating in one country? Even US investors shouldn't do that.

Yep: http://www.schwab.com/public/schwab/nn/articles/Global-Perspective-the-Right-International-Stock-Allocation-May-Be-More-Than-You-Think?cmp=em-QYB
 (http://www.schwab.com/public/schwab/nn/articles/Global-Perspective-the-Right-International-Stock-Allocation-May-Be-More-Than-You-Think?cmp=em-QYB)
See the graph in item number 3.  All the upside of the U.S. market with less downside.
Title: Re: Stop worrying about the 4% rule
Post by: acorn on August 06, 2015, 07:27:26 PM
Just buy the whole world. Why increase your risk by concentrating in one country? Even US investors shouldn't do that.

Yep: http://www.schwab.com/public/schwab/nn/articles/Global-Perspective-the-Right-International-Stock-Allocation-May-Be-More-Than-You-Think?cmp=em-QYB
 (http://www.schwab.com/public/schwab/nn/articles/Global-Perspective-the-Right-International-Stock-Allocation-May-Be-More-Than-You-Think?cmp=em-QYB)
See the graph in item number 3.  All the upside of the U.S. market with less downside.

Also Fig 1 from https://personal.vanguard.com/pdf/icrrhb.pdf
Title: Re: Stop worrying about the 4% rule
Post by: k9 on August 07, 2015, 06:16:51 AM
Quote
As a French investor, I should target a 0.95% SWR.

Again, this is only true if you want to be extremely conservative and use the absolute historical worst case as your hurdle to clear (a hurdle that was set, keep in mind, based on a pretty conservative asset allocation -- as the other tables in the Pfau article make clear, stock-heavier portfolios in France had considerably higher SWRs)).
I know, I know. I was being rhetorical, just to underline the fact that 4% is not the worst that ever happened. I think 4% is good no matter what. If one really doesn't feel it, he should aim for 3%, no less. I mean, even if you did just as well as inflation (a 0% real return), 3% lasts 33 years and 4 months. And you don't need a very agressive allocation to do better than inflation on the long run.

And what about black swan events ? Yes, they happen (and that is what Pfau's chart shows). But you can hardly do anything about that. And that's, btw, why I agree it's silly to aim for 100% success in backtestings & simulations. 100% doesn't exist.

Oh, for the record, just to show why I think it's kinda wrong anyway to worry about that 0.95% SWR. That outlier happened because of WWII. But a French citizen retiring just after WWII was actually in a very good situation. They were the very first ones to access social security pensions (they are more substantial than in the US), and didn't have to pay for that. So, whatever got crushed during the war was somewhat given back afterwards. Pretty cool for an all-time worst.

TLDR : don't suppose 4% is ultra-safe. Don't worry about it either. Nothing is ultra-safe.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on August 24, 2015, 09:31:56 AM
I agree on that danger zone of the first 5-10 years for 30-year periods.  I sure hope it's true for longer periods, but I doubt there's research to confirm it.

Jeremy @ Go Curry Cracker has a blog post in the works on how to determine if/when your portfolio has gotten "too big to fail" (which, given Jeremy's thoroughness, will, I'm sure, include a survey of any existing research) and I have high hopes that it will become the early retirement community's definitive resource on the topic (and I keep mentioning it periodically in part to keep the pressure on him to finish it up so the rest of us can freeload off of his efforts).

Quote
I guess it also means that you start a new 30-year period every year until you're in your 60s or even 70s.

It's tempting to think about the chances of portfolio success for super-long periods this way, but I don't think it's really accurate, because a 30+X year retirement period is not a rolling series of 30 year retirement periods, but a single 30+X year retirement period (and perhaps this line of thinking is what caused MMM to spread his bit of misinformation that having enough to last for 30 years is essentially equivalent to having enough to last forever).

Further to the above, Go Curry Cracker posted a great article today (part 1 of 3, it seems) on portfolio survivability.  He introduced the concept of "withdrawal rate in perpetuity", or the withdrawal rate that leaves a portfolio's inflation-adjusted value unchanged from its initial value at the 30-year mark.  He found that a 4% WR met this standard in roughly 65% of the 30-year periods commencing between 1926 and 1985 using a 75/25 stock/bond split (higher equity allocations produced even higher historical rates of achieving the "withdrawal in perpetuity" standard).

http://www.gocurrycracker.com/the-go-curry-cracker-endowment-fund/
Title: Re: Stop worrying about the 4% rule
Post by: HankERJourney on August 24, 2015, 10:46:34 AM
Been trying to read it all here, especially because I am about to start Retirement at age of 49. To me, this 4% rule should all be read with some common-sense. First of all, it is just a guide, not a fixed rule, and it only focus on a certain asset class, so you should look at the big picture of your Retirement-funding. In reality you would for instance:
(1) Diversify in asset classes, for instance, my early retirement income will be partially based on Rental income (this forms a basis and not directly correlated with stock market)
(2) Vary the SWR depending on how the Market performs. I keep a variation between 2 and 4% in mind. In combination with Rental income, you should plan for variation in Retirement-spending because of this. This automatically means, you should have a buffer built into your funding of your lifestyle, and if Market turns out to be bad for 5-10 years, you should be happy with a lower funding (and still enjoy life). For me this means, I will travel less around the world if the Market is really bad, and I am happy with that. I see travel as a luxury that is not necessarily needed all the time.
(3) On top of this, I keep an emergency buffer of 3 years in Cash assets. If somehow a major crash happens, i would be willing to put some of this Cash into play of Stock market

I guess, for everyone this works out differently. My main comment is : use common sense, the 4% rule is just a guide :-)
Title: Re: Stop worrying about the 4% rule
Post by: fattest_foot on August 24, 2015, 03:35:25 PM
And what about black swan events ? Yes, they happen (and that is what Pfau's chart shows). But you can hardly do anything about that. And that's, btw, why I agree it's silly to aim for 100% success in backtestings & simulations. 100% doesn't exist.

You shouldn't worry about black swan events.

In a hypothetical where something like WWII breaks out again, a cushy office job is probably going to disappear anyway. You'll be no worse off being unemployed when the war kicks off versus having your portfolio collapse. Really, the only difference being that you'll have had hopefully a decent amount of time to enjoy your life before humanity ruined it.

In a situation where the country is invaded, or anything a Doomsday prepper prepares for, it's similar in that everyone's money will be worthless anyway. So I doubt many people should be factoring that into a SWR.
Title: Re: Stop worrying about the 4% rule
Post by: Dawg Fan on August 27, 2015, 04:59:01 PM
Been trying to read it all here, especially because I am about to start Retirement at age of 49. To me, this 4% rule should all be read with some common-sense. First of all, it is just a guide, not a fixed rule, and it only focus on a certain asset class, so you should look at the big picture of your Retirement-funding. In reality you would for instance:
(1) Diversify in asset classes, for instance, my early retirement income will be partially based on Rental income (this forms a basis and not directly correlated with stock market)
(2) Vary the SWR depending on how the Market performs. I keep a variation between 2 and 4% in mind. In combination with Rental income, you should plan for variation in Retirement-spending because of this. This automatically means, you should have a buffer built into your funding of your lifestyle, and if Market turns out to be bad for 5-10 years, you should be happy with a lower funding (and still enjoy life). For me this means, I will travel less around the world if the Market is really bad, and I am happy with that. I see travel as a luxury that is not necessarily needed all the time.
(3) On top of this, I keep an emergency buffer of 3 years in Cash assets. If somehow a major crash happens, i would be willing to put some of this Cash into play of Stock market

I guess, for everyone this works out differently. My main comment is : use common sense, the 4% rule is just a guide :-)
Well, I finally had a chance to follow the chain and I think my brain is about to explode. I am in Hankers camp... It seems like the 4% rule has been vetted out as well as it can be and is probably as good of a guide as anyone can hope for in planning their ER. What I have not heard discussed which I would suggest is that there could be a strong argument for an adjustable SWR, particularly anyone doing ER under the age of 60. I would argue that while you are "younger" and in better physical health, you will naturally be able to do more certain things on your bucket list that you might not be able to do after a certain age. Many of these to dos may cost more in the early years and you stand the chance to to miss them if you stick to a ridged SWR. I think the statistics show after a certain age typically expenses start to diminish (i.e. Entertainment, travel) and while the risk of major medical costs exists, odds are you will want to spend more $$ when your 50 then when your 80. Always exceptions, but I would almost argue error on the side of taking that extra trip when your 50 even if it pushes your SWR to 5% one year. If I am 85 and need round the clock medical attention, then chances are my days are numbered and my quality of life sucks so I am not worried about my 4%, but just making sure I am not a financial burden to my kids. As stated, there is no 100% guarantee of anything here, but using common sense with a plan is the best we all have. My only point is part of the attraction to ER is to do your bucket list and if you stay to strict to your SWR, you might miss some of the good stuff.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on August 27, 2015, 06:04:50 PM
Been trying to read it all here, especially because I am about to start Retirement at age of 49. To me, this 4% rule should all be read with some common-sense. First of all, it is just a guide, not a fixed rule, and it only focus on a certain asset class, so you should look at the big picture of your Retirement-funding. In reality you would for instance:
(1) Diversify in asset classes, for instance, my early retirement income will be partially based on Rental income (this forms a basis and not directly correlated with stock market)
(2) Vary the SWR depending on how the Market performs. I keep a variation between 2 and 4% in mind. In combination with Rental income, you should plan for variation in Retirement-spending because of this. This automatically means, you should have a buffer built into your funding of your lifestyle, and if Market turns out to be bad for 5-10 years, you should be happy with a lower funding (and still enjoy life). For me this means, I will travel less around the world if the Market is really bad, and I am happy with that. I see travel as a luxury that is not necessarily needed all the time.
(3) On top of this, I keep an emergency buffer of 3 years in Cash assets. If somehow a major crash happens, i would be willing to put some of this Cash into play of Stock market

I guess, for everyone this works out differently. My main comment is : use common sense, the 4% rule is just a guide :-)
Well, I finally had a chance to follow the chain and I think my brain is about to explode. I am in Hankers camp... It seems like the 4% rule has been vetted out as well as it can be and is probably as good of a guide as anyone can hope for in planning their ER. What I have not heard discussed which I would suggest is that there could be a strong argument for an adjustable SWR, particularly anyone doing ER under the age of 60. I would argue that while you are "younger" and in better physical health, you will naturally be able to do more certain things on your bucket list that you might not be able to do after a certain age. Many of these to dos may cost more in the early years and you stand the chance to to miss them if you stick to a ridged SWR. I think the statistics show after a certain age typically expenses start to diminish (i.e. Entertainment, travel) and while the risk of major medical costs exists, odds are you will want to spend more $$ when your 50 then when your 80. Always exceptions, but I would almost argue error on the side of taking that extra trip when your 50 even if it pushes your SWR to 5% one year. If I am 85 and need round the clock medical attention, then chances are my days are numbered and my quality of life sucks so I am not worried about my 4%, but just making sure I am not a financial burden to my kids. As stated, there is no 100% guarantee of anything here, but using common sense with a plan is the best we all have. My only point is part of the attraction to ER is to do your bucket list and if you stay to strict to your SWR, you might miss some of the good stuff.

The point of the thread is that you shouldn't worry much about a 4% SWR failing. But the reality is that you can probably spend more than that, especially if you're 5 or 10 years into RE and you can tell from the past market returns that you have avoided one of those disastrous retirement dates. So you could certainly spend more at times and be OK. Personally, I have multiple funds that I'm working with. I have a base 4% WR fund that will take care of basic minimum expenses. Then I have another fund for fun stuff that I don't need to last forever. And then another fund for paying off the house, some college expense, etc. So do whatever works for you and your spending interests.
Title: Re: Stop worrying about the 4% rule
Post by: 2lazy2retire on September 03, 2015, 10:43:07 AM
I too have found these methods by Pfau to be suspect. You could argue that he's aiming these studies at financial advisors, so the 1% is actually going to the advisor's pockets.

A more charitable view is that Pfau (and financial planners in general), like the 4% rule itself, are simply overcautious by nature -- they err on the side of caution because the consequences of being proven wrong are worse if their predictions are too aggressive than if they are too conservative.

I agree.  Most people absolutely, positively don't want to run out of money but don't mind having more left over to pass on to heirs, charities, etc.  Hence, the skewing towards conservatism.

Funny, I actually I thought I was being charitable. Providing a reasonable justification why 1% fees could be baked into his analysis, when no DIY investor should have anything close to that. I assume that Pfau's target audience is financial planners, and they do tend to charge 1%--rightly or wrongly. For those advisor's clients, the SWR would be appropriately substantially lowered. For people like most of us here, we can happily increase our SWR by 25% since we aren't burning that money on fees.

I agree there's a skew towards conservatism in general. But a more informed approach would be to say the SWR is X% minus whatever fees your portfolio management has. That way if the advisor is actually charging 1% plus putting them in funds also charging 1%, the correct amount to let the clients live off of is only 2%. In this example, Pfau is actually not being conservative enough.

+1 , no better way to show how much the "advisors" are creaming than to illustrate it with withdrawal rate, how many clients who would not notice that 1% fee during accumulation but when shown the effect on SWR would go WTF - I have 1 million saved so I can pull down 40k and give 10K to the friendly advisor, suddenly 1% comes 25% and shit gets real.
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on September 03, 2015, 12:21:28 PM
I too have found these methods by Pfau to be suspect. You could argue that he's aiming these studies at financial advisors, so the 1% is actually going to the advisor's pockets.

A more charitable view is that Pfau (and financial planners in general), like the 4% rule itself, are simply overcautious by nature -- they err on the side of caution because the consequences of being proven wrong are worse if their predictions are too aggressive than if they are too conservative.

I agree.  Most people absolutely, positively don't want to run out of money but don't mind having more left over to pass on to heirs, charities, etc.  Hence, the skewing towards conservatism.

Funny, I actually I thought I was being charitable. Providing a reasonable justification why 1% fees could be baked into his analysis, when no DIY investor should have anything close to that. I assume that Pfau's target audience is financial planners, and they do tend to charge 1%--rightly or wrongly. For those advisor's clients, the SWR would be appropriately substantially lowered. For people like most of us here, we can happily increase our SWR by 25% since we aren't burning that money on fees.

I agree there's a skew towards conservatism in general. But a more informed approach would be to say the SWR is X% minus whatever fees your portfolio management has. That way if the advisor is actually charging 1% plus putting them in funds also charging 1%, the correct amount to let the clients live off of is only 2%. In this example, Pfau is actually not being conservative enough.

+1 , no better way to show how much the "advisors" are creaming than to illustrate it with withdrawal rate, how many clients who would not notice that 1% fee during accumulation but when shown the effect on SWR would go WTF - I have 1 million saved so I can pull down 40k and give 10K to the friendly advisor, suddenly 1% comes 25% and shit gets real.

A contrarian view would be that if markets are efficient then the 1% that is NOT flowing to the advisors (or ultimately shifts to low cost funds) would be invested and therefore bring the returns forward, thereby reducing future returns by similar amount - therefore 4% doesn't work or more likely the 1% being taken out doesn't matter.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on September 11, 2015, 06:04:59 AM
I too have found these methods by Pfau to be suspect. You could argue that he's aiming these studies at financial advisors, so the 1% is actually going to the advisor's pockets.

A more charitable view is that Pfau (and financial planners in general), like the 4% rule itself, are simply overcautious by nature -- they err on the side of caution because the consequences of being proven wrong are worse if their predictions are too aggressive than if they are too conservative.

I agree.  Most people absolutely, positively don't want to run out of money but don't mind having more left over to pass on to heirs, charities, etc.  Hence, the skewing towards conservatism.

Funny, I actually I thought I was being charitable. Providing a reasonable justification why 1% fees could be baked into his analysis, when no DIY investor should have anything close to that. I assume that Pfau's target audience is financial planners, and they do tend to charge 1%--rightly or wrongly. For those advisor's clients, the SWR would be appropriately substantially lowered. For people like most of us here, we can happily increase our SWR by 25% since we aren't burning that money on fees.

I agree there's a skew towards conservatism in general. But a more informed approach would be to say the SWR is X% minus whatever fees your portfolio management has. That way if the advisor is actually charging 1% plus putting them in funds also charging 1%, the correct amount to let the clients live off of is only 2%. In this example, Pfau is actually not being conservative enough.

+1 , no better way to show how much the "advisors" are creaming than to illustrate it with withdrawal rate, how many clients who would not notice that 1% fee during accumulation but when shown the effect on SWR would go WTF - I have 1 million saved so I can pull down 40k and give 10K to the friendly advisor, suddenly 1% comes 25% and shit gets real.

A contrarian view would be that if markets are efficient then the 1% that is NOT flowing to the advisors (or ultimately shifts to low cost funds) would be invested and therefore bring the returns forward, thereby reducing future returns by similar amount - therefore 4% doesn't work or more likely the 1% being taken out doesn't matter.

No. That 1% is being drawn. It either goes to the investor for living expenses, or it goes to the parasite advisor almost certainly for living expenses/business expenses. Gotta pay rent on that EJ storefront every month ya know.

With the $1MM portfolio, the choice* is draw $40k to live on, or draw $30k to live on while handing over $10k for the advisor to live on.

Handing over 25% of my spending money every year certainly does matter.

*For the topic at hand: a 4% WR.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on September 11, 2015, 07:48:25 AM
A bit of a new thought, for those that are open to such things, what is most interesting about a young person living on '4%' of their net worth is how poor they are relative to their earning potential.  Even more interesting, the earlier you retire, the more income you forego.  MMM pulled this off nicely in the 'fat times' of the internet because he has plenty of income.  Notice how he never talks about living off market or dividend returns, and even mentioned going back to work (at one point).

Anyway, what I'm getting at is, in order to save up that portfolio at an early age, you were making much more than the 4% SWR (in order to have a 50% or greater saving rate).  And that is the conundrum for most people, even the amazing savers, that to be truly 'free', you must leave behind income (that you had some control over) and depend on your investments (that you have no influence on).

So, 'stop worrying about 4%' might actually just mean 'find work that you enjoy that provides the 4%'.  I think that is where most PF bloggers are, whether they admit it or not.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on September 11, 2015, 08:08:21 AM
And that is the conundrum for most people, even the amazing savers, that to be truly 'free', you must leave behind income (that you had some control over) and depend on your investments (that you have no influence on).

It's only a conundrum if that income provides some value, and the entire point behind this site is that any amount beyond "enough" does not.  The trick is how to know what constitutes "enough," and we have no bright lines to guide us, but as long as one does have enough there is no reason to regret what more one could have had.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on September 11, 2015, 08:50:54 AM
And that is the conundrum for most people, even the amazing savers, that to be truly 'free', you must leave behind income (that you had some control over) and depend on your investments (that you have no influence on).

It's only a conundrum if that income provides some value, and the entire point behind this site is that any amount beyond "enough" does not.  The trick is how to know what constitutes "enough," and we have no bright lines to guide us, but as long as one does have enough there is no reason to regret what more one could have had.

In this case, I think you missed the point I tried to make, which was having control (e.g. the accumulation phase) vs. 'depending on returns' (withdrawal), which is what 'worrying about the 4% rule' entails. 

The whole 'enough' idea is very gray (grey?), which will always come up, and will keep coming up now that the market might go down YoY for the first time in a looooong time.  For example, is 'enough' just when you hit 4% on your 100% NASDAQ fund at 3940 at the end of 1999.  Doing a simple simulation of 4% non-inflation adjusted withdrawals (1M went to zero in 2013) vs. savers (20k/yr savers had 1.3M in 2014) might shock you as to how different accumulators have it from those in the withdrawal phase.

 
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on September 11, 2015, 08:59:11 AM
But, to make my point clearer in my 'simple simulation', the NASDAQ withdrawal guy would currently be fine if he started with 2 million (e.g. a 2% SWR, ending 2014 at about 1.1M).  But who would've known that 1 million was 'not enough' in 1999 and 2 million was (and maybe these are similarly heady times as to today)? 

Who knows if 1 million is 'enough' for a 30 year 4% SWR going forward (yeah, the simulators all tell us it was fine in the past, blah, blah, blah), that's all I'm trying to point out...
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on September 11, 2015, 09:12:06 AM
In this case, I think you missed the point I tried to make, which was having control (e.g. the accumulation phase) vs. 'depending on returns' (withdrawal), which is what 'worrying about the 4% rule' entails. 

Yes, I must have missed the point, and I still don't quite see it.  This thread is a repository of all the reasons we have to believe in the safety of relying on the 4% rule (including the all the various external levels of safety it intentionally ignores, over some of which you do have control).

If your point is that reliance on a sinking fund investment portfolio to cover your living expenses is inherently less safe than reliance on an investment portfolio plus an accumulator's income stream, then of course that point is correct, but the goal in examining the safety of the 4% rule is to determine whether it is sufficiently safe to allow one to rely on it without an accumulator's income stream.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on September 11, 2015, 09:29:59 AM
Well, what I was actually trying to say, not quite as simplified as what you reduced it down to, is that 4% is a far cry from where you were when you had income and built a portfolio that provided the passive 4%. 

So maybe a better simplification of what I intended to say is that a better strategy to 'stop worrying about 4%', instead of running simulations, is if you put that effort toward how to turn some of your 100+% SWR into some of that 4% SWR...  Sounds pretty ridiculous when I say it like that, but that is why Mustachianism is niche.  For example, MMM easily made 6x his SWR (150k avg. family salary, 25k spending), so of course he retired after working 10 years.  But then he went on to make money on his blog (probably more than he intended), which was the 'belt and suspenders' approach to feeling truly FI.  An 'easier' path would've been to establish stable income while working, and both shorten his career AND have more SWR safety factor.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on September 15, 2015, 03:59:33 PM
I might be making this topic a little tougher however if a 4% WR is considered safe at what level is a WR still considered safe.

At this point I am intending to retire on a 5% WR. Is this too risky ?
Title: Re: Stop worrying about the 4% rule
Post by: sol on September 15, 2015, 04:10:26 PM
I might be making this topic a little tougher however if a 4% WR is considered safe at what level is a WR still considered safe.

At this point I am intending to retire on a 5% WR. Is this too risky ?

If you re-read this thread, you'll see some charts I posted showing success percentages for other withdrawal rates and other time periods.

5% has historically been totally safe (100% success) for periods less than 17 years.  At 19 years it's about as safe as 4% is at 30 years.  On average (50% success) it should last 50 years.
Title: Re: Stop worrying about the 4% rule
Post by: MDM on September 15, 2015, 04:14:23 PM
I might be making this topic a little tougher however if a 4% WR is considered safe at what level is a WR still considered safe.

At this point I am intending to retire on a 5% WR. Is this too risky ?
The value of that two-sided coin, Safety and Risk, is in the eye of the beholder.  See https://www.kitces.com/blog/what-returns-are-safe-withdrawal-rates-really-based-upon/ for more background.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on September 16, 2015, 02:56:41 AM
I might be making this topic a little tougher however if a 4% WR is considered safe at what level is a WR still considered safe.

At this point I am intending to retire on a 5% WR. Is this too risky ?

If you re-read this thread, you'll see some charts I posted showing success percentages for other withdrawal rates and other time periods.

5% has historically been totally safe (100% success) for periods less than 17 years.  At 19 years it's about as safe as 4% is at 30 years.  On average (50% success) it should last 50 years.

This is interesting. I probably read that within this thread but forgot it. If on average it can last 50 years then what if you can tighten your budget a bit at the start or not withdraw for say 5 years and work part time. I'm just throwing some options out there but I figure you could increase the odds of success over and above how a WR is modelled.

That isn't including any form of inheritance or social security or downsizing your house.

Basically this makes me feel that a 5% WR should be fine for me.

Title: Re: Stop worrying about the 4% rule
Post by: steveo on September 16, 2015, 03:03:48 AM
I might be making this topic a little tougher however if a 4% WR is considered safe at what level is a WR still considered safe.

At this point I am intending to retire on a 5% WR. Is this too risky ?
The value of that two-sided coin, Safety and Risk, is in the eye of the beholder.  See https://www.kitces.com/blog/what-returns-are-safe-withdrawal-rates-really-based-upon/ for more background.

That is a good article which is in my opinion pretty optimistic. I'm also optimistic that a 5% WR would be fine.
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on September 16, 2015, 04:27:44 AM
I might be making this topic a little tougher however if a 4% WR is considered safe at what level is a WR still considered safe.

At this point I am intending to retire on a 5% WR. Is this too risky ?
The value of that two-sided coin, Safety and Risk, is in the eye of the beholder.  See https://www.kitces.com/blog/what-returns-are-safe-withdrawal-rates-really-based-upon/ for more background.

One obvious point that the article failed to address: if average returns going forward are expected to be below historical levels, wouldn't one also expect the worst case scenario to be worse than historical worst case scenarios?
Title: Re: Stop worrying about the 4% rule
Post by: forummm on September 16, 2015, 06:35:15 AM
I might be making this topic a little tougher however if a 4% WR is considered safe at what level is a WR still considered safe.

At this point I am intending to retire on a 5% WR. Is this too risky ?
The value of that two-sided coin, Safety and Risk, is in the eye of the beholder.  See https://www.kitces.com/blog/what-returns-are-safe-withdrawal-rates-really-based-upon/ for more background.

That is a good article which is in my opinion pretty optimistic. I'm also optimistic that a 5% WR would be fine.
There have been discussions on this forum about how Kitces' results do not match up with cFIREsim or FIREcalc's simulations. Forum members have been unable to get Kitces to explain the difference in outcomes. cFIREsim is created using public data. Kitces normally seems to know what he's taking about, so who knows what's going on here. Maybe someone can get him to share his data and methods?
Title: Re: Stop worrying about the 4% rule
Post by: MDM on September 16, 2015, 08:10:41 AM
One obvious point that the article failed to address: if average returns going forward are expected to be below historical levels, wouldn't one also expect the worst case scenario to be worse than historical worst case scenarios?
Not necessarily.  It depends on the specific sequence of returns.  E.g., an average real return of ~1.2-1.3% is sufficient to make a 4% WR work for 30 years - if that return is constant.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on September 16, 2015, 09:04:41 AM
One obvious point that the article failed to address: if average returns going forward are expected to be below historical levels, wouldn't one also expect the worst case scenario to be worse than historical worst case scenarios?

It's not really that the article failed to address that point, but that the assumption that the future will be no worse than the worst of the past (among other assumptions) implicitly underlies any SWR-based attempt to use historical success rates to predict the likelihood of future success.

In other words, the "obvious point" that you said the article failed to address is actually another way of stating its conclusion.  The comfort to be had from historical SWR analysis is precisely the fact that the future would need to be worse than the worst of the past in order for a historically-100%-successful withdrawal rate to fail.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on September 16, 2015, 02:57:27 PM
The comfort to be had from historical SWR analysis is precisely the fact that the future would need to be worse than the worst of the past in order for a historically-100%-successful withdrawal rate to fail.

There a couple of points that gives me some comfort that a 5% WR should be okay in my situation:-

1. The point quoted here is pretty critical. Its probably unlikely that when I retire the results will be worse than they have ever been.
2. I intend to retire but not draw down for a couple of years and then draw down less than the amount I will at a later point in time.
3. I do not include my house value in my FIRE assets. I can downsize my house.
4. I have 3 kids and the costs associated with them should continually decrease.
5. I am not including any inheritance or social security in my calculations.
6. I can live off less than 5% and intend to in the first say 5-10 years. I could always continue living off less.
7. My wife may continue to work part time. I could as well although I don't want too.

If I live for 50 years post retirement I still think I should have my money last that long although I think its unlikely I will live 50 years post retirement.
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on September 16, 2015, 03:29:51 PM
A contrarian view would be that if markets are efficient then the 1% that is NOT flowing to the advisors (or ultimately shifts to low cost funds) would be invested and therefore bring the returns forward, thereby reducing future returns by similar amount - therefore 4% doesn't work or more likely the 1% being taken out doesn't matter.

No. That 1% is being drawn. It either goes to the investor for living expenses, or it goes to the parasite advisor almost certainly for living expenses/business expenses. Gotta pay rent on that EJ storefront every month ya know.

With the $1MM portfolio, the choice* is draw $40k to live on, or draw $30k to live on while handing over $10k for the advisor to live on.

Handing over 25% of my spending money every year certainly does matter.

*For the topic at hand: a 4% WR.

I disagree, because in a world without advisor fees (assume 1%) all that money would be invested thereby increasing the markets by 1% right away and then going forward you would be able to take advantage of the advisor arbitrage and therefore the real SWR is only 4% SWR (this is based purely on the premise that the trinity study assumes a 1% fee).  So the more people that move to vanguard or other low cost funds/ETF/etc the less arbitrage there is to take advantage of and in that case it would be 4%-1% = 3% SWR. 

Good news is that low cost funds still only account for a about a third of the investment world - so may be more like a 3.65% SWR now.



Title: Re: Stop worrying about the 4% rule
Post by: sol on September 16, 2015, 03:38:50 PM
this is based purely on the premise that the trinity study assumes a 1% fee

That assumption is incorrect; the Trinity study assumed 0% fees. 

Subsequent research by people like Pfau typically includes a 1% fee, which is why their recommendations are typically about 1% lower.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on September 16, 2015, 03:47:04 PM
The comfort to be had from historical SWR analysis is precisely the fact that the future would need to be worse than the worst of the past in order for a historically-100%-successful withdrawal rate to fail.

There a couple of points that gives me some comfort that a 5% WR should be okay in my situation:-

1. The point quoted here is pretty critical. Its probably unlikely that when I retire the results will be worse than they have ever been.
2. I intend to retire but not draw down for a couple of years and then draw down less than the amount I will at a later point in time.
3. I do not include my house value in my FIRE assets. I can downsize my house.
4. I have 3 kids and the costs associated with them should continually decrease.
5. I am not including any inheritance or social security in my calculations.
6. I can live off less than 5% and intend to in the first say 5-10 years. I could always continue living off less.
7. My wife may continue to work part time. I could as well although I don't want too.

If I live for 50 years post retirement I still think I should have my money last that long although I think its unlikely I will live 50 years post retirement.

With all those caveats you aren't really talking about a 5% WR any more. cFIREsim has quite a few variable spending options that you can use to model your scenario with and see what happens vs. historical data.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on September 16, 2015, 03:54:21 PM
The comfort to be had from historical SWR analysis is precisely the fact that the future would need to be worse than the worst of the past in order for a historically-100%-successful withdrawal rate to fail.

There a couple of points that gives me some comfort that a 5% WR should be okay in my situation:-

1. The point quoted here is pretty critical. Its probably unlikely that when I retire the results will be worse than they have ever been.
2. I intend to retire but not draw down for a couple of years and then draw down less than the amount I will at a later point in time.
3. I do not include my house value in my FIRE assets. I can downsize my house.
4. I have 3 kids and the costs associated with them should continually decrease.
5. I am not including any inheritance or social security in my calculations.
6. I can live off less than 5% and intend to in the first say 5-10 years. I could always continue living off less.
7. My wife may continue to work part time. I could as well although I don't want too.

If I live for 50 years post retirement I still think I should have my money last that long although I think its unlikely I will live 50 years post retirement.

With all those caveats you aren't really talking about a 5% WR any more. cFIREsim has quite a few variable spending options that you can use to model your scenario with and see what happens vs. historical data.

Agreed. The point is though that my target becomes 5% rather than 4%. Its an easier target to hit.
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on September 16, 2015, 04:04:03 PM
this is based purely on the premise that the trinity study assumes a 1% fee

That assumption is incorrect; the Trinity study assumed 0% fees. 

Subsequent research by people like Pfau typically includes a 1% fee, which is why their recommendations are typically about 1% lower.

Slip on my part as the comment was about Pfau stuff.
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on September 17, 2015, 04:29:53 AM
One obvious point that the article failed to address: if average returns going forward are expected to be below historical levels, wouldn't one also expect the worst case scenario to be worse than historical worst case scenarios?

It's not really that the article failed to address that point, but that the assumption that the future will be no worse than the worst of the past (among other assumptions) implicitly underlies any SWR-based attempt to use historical success rates to predict the likelihood of future success.

In other words, the "obvious point" that you said the article failed to address is actually another way of stating its conclusion.  The comfort to be had from historical SWR analysis is precisely the fact that the future would need to be worse than the worst of the past in order for a historically-100%-successful withdrawal rate to fail.

I totally get that SWRs assume that the future will be no worse than the worst of the past.  But if we are going to make the assumption that the best of the good times going forward will not be as good as the best times in the past, what justification do we have for maintaining the assumption that the worst will still be no worse than the worst times of the past?  An average is composed of a range of data points.  If one is going to assume that the range of data points will contract on the high end, one needs to provide some justification for assuming that the range will not expand on the low end.  In other words, why do we think that dispersion about the mean is going to contract, and only on one end of the distribution?
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on September 17, 2015, 06:27:10 AM
The other 'worst' assumption that isn't discussed is that we are talking finances, not social events.  Economists have argued that WWII was 'good' for the economy and brought about the end to the Great Depression, so I actually don't worry financially about social events.  On the other hand, we are in uncharted territory with what the Fed and globalization have left us.  Both first world countries and emerging markets have benefited from globalization and the US has benefited from the Fed keeping rates at zero and implementing QE.  These tail winds, IMHO, are closer to the end than the beginning.  Even gains in productivity now seem to come with a tradeoff to unemployment or underemployment. 

So with a long stretch of social calm and an inability to 'jump start' the global economy in the future, it is conceivable to me that the next 30 years may contain some of the worst times to rely on 4% SWR. 
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on September 17, 2015, 07:26:08 AM
But if we are going to make the assumption that the best of the good times going forward will not be as good as the best times in the past...

Who makes that assumption?  The 4% rule certainly doesn't.

So with a long stretch of social calm and an inability to 'jump start' the global economy in the future, it is conceivable to me that the next 30 years may contain some of the worst times to rely on 4% SWR.

I'm not sure why you think this isn't discussed.  It's discussed so much by so many that this thread was created with the express purpose of reminding people why, in spite of that, there are still reasons to believe in the safety of retiring in reliance on the 4% rule.  Many (maybe most?) financial prognosticators argue that we are potentially poised for some of the worst market returns ever.  Even so, to cause the failure of a withdrawal plan strictly adhering to the 4% rule, market performance would have to be worse than history's 5th percentile.  To cause the failure of most any actual retiree's actual retirement (which will never robotically adhere to the rigid parameters of the 4% rule, and which will benefit from at least some of the copious layers of external safety margin deliberately ignored by the 4% rule), market performance would have to be catastrophically worse than history's 0th percentile.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on September 17, 2015, 07:37:24 AM
Who makes that assumption?  The 4% rule certainly doesn't.

Agreed.  The nice thing now is that we have free tools that we can use to test our specific RE situations against historical data or whatever monte carlo simulation parameters we feel best model the worst case scenarios that concern us.

Nobody knows what is going to happen, but if you want to simulate some bad stuff you can and see how your investment/spending plan handles it.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on September 17, 2015, 08:22:23 AM
I'm not sure why you think this isn't discussed. 

I get the impression folks conflate social events with market performance, I haven't seen comments about how the current economic landscape compares with history.  But that is a much more difficult evaluation to make, very few people are still around that could raise awareness of the economic backdrop (ignoring the social events) of the past vs. present.  All I know is, the Fed has never expanded its balance sheet, kept near zero fund rates, all while having at the same time no increase in inflation.  And the correlation between market performance and the economy is stronger than market performance and social events.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on September 17, 2015, 08:35:33 AM
All I know is, the Fed has never expanded its balance sheet, kept near zero fund rates, all while having at the same time no increase in inflation.

It's explicitly for this reason (the historically unprecedented combination of economic conditions in which we currently find ourselves) that Pfau argues we shouldn't rely on actual historical market performance and why some of his latest research uses Monte Carlo simulations with built-in capital market expectations instead of actual historical data.
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on September 18, 2015, 04:40:39 AM
But if we are going to make the assumption that the best of the good times going forward will not be as good as the best times in the past...

Who makes that assumption?  The 4% rule certainly doesn't.


Those nameless "retirees and planners" who are "adjusting to the new normal."  And the article in question appears to buy into that assumption:

Quote
As retirees and their planners adjust to the 'new normal' - a world of lower-than-average returns for the foreseeable future, many have questioned whether the historical safe withdrawal rate research is still valid. After all, if returns will be below average in the coming years, doesn't that imply safe withdrawal rates must be below average as well? In point of fact, though, safe withdrawal rates do not depend on average returns in the first place; the worst safe withdrawal rates in history that we rely upon are actually associated with 15-year real returns of less than 1%/year from a balanced portfolio! Accordingly, given current bond yields, dividend yields, and inflation, if the current environment for today's retirees will result in a "new record low" safe withdrawal rate, the S&P 500 would still have to be no higher in 2027 than it was in 2007 or even 2000! On the other hand, merely projecting equities to recover to new highs by the end of the decade or generating a mid-single-digits return would actually represent an upside surprise, allowing for higher retirement spending than 4.5% safe withdrawal rates!

The author grants that average returns will be below average for the foreseeable future, and then suggests that the downside will be no worse than the worst in history.  So, by default, he has assumed that the potential upside in the future will be reduced relative to history.

I think the big fallacy in all of this is the presumption that mid-single digit returns for long periods of time are unprecedented.  They're not (see: the 1970s).  So if what we're really looking at is a repeat of the worst decade in history, the 4% rule should be fine.  Such conditions are already baked into it. 

Yes, I realize I'm agreeing with you, brooklynguy.  I don't really buy into the anxiety about the adequacy of the 4% rule; I was just trying to point out a logical problem in the argument that is being offered in support of the rule.  A better defense would be refusing to grant the assumption of a "new normal" in the first place.

Of course, no one knows what the real future will hold.  Personally, I have a bit of anxiety about assuming that US market returns from 1871 to 1960 have any predictive value for the future, given the tremendous changes in demographics and the economy since then.  Perhaps we would be better served by basing our modeling on post-war western Europe, which probably resembles the current state of the US more closely than the US history that was used to build the 4% rule.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on September 18, 2015, 05:14:09 AM
The author grants that average returns will be below average for the foreseeable future, and then suggests that the downside will be no worse than the worst in history.  So, by default, he has assumed that the potential upside in the future will be reduced relative to history.

I don't think that's a fair interpretation of what Kitces said.  What he said is simply that even if you believe the "new normal" in which we currently find ourselves will return below-average returns, it would have to do so by historically unprecedented levels (that is, be worse than the worst of the past) in order for the 4% rule to fail you.  There is no logical fallacy there.  (But keep in mind that, as forummm noted above, whatever parameters are built into Kitces' version of the 4% rule differ from other versions and produce more optimistic results; using a nominally equivalent asset allocation in cFIREsim and its default setting for all other variables, the historical success rate of a 4% WR is closer to 95% than 100%).
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on September 19, 2015, 04:42:57 AM
The author grants that average returns will be below average for the foreseeable future, and then suggests that the downside will be no worse than the worst in history.  So, by default, he has assumed that the potential upside in the future will be reduced relative to history.

I don't think that's a fair interpretation of what Kitces said.  What he said is simply that even if you believe the "new normal" in which we currently find ourselves will return below-average returns, it would have to do so by historically unprecedented levels (that is, be worse than the worst of the past) in order for the 4% rule to fail you.  There is no logical fallacy there.  (But keep in mind that, as forummm noted above, whatever parameters are built into Kitces' version of the 4% rule differ from other versions and produce more optimistic results; using a nominally equivalent asset allocation in cFIREsim and its default setting for all other variables, the historical success rate of a 4% WR is closer to 95% than 100%).

I think we're getting close to tomato/tomaahto-land.  What got me was that the author appeared to buy into the "this is unprecedented" tone of the new normal argument.  If he had simply stated from the outset that long-term single digit returns are not unprecedented and are already accounted for by the 4% rule, his argument would have been much clearer.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on September 20, 2015, 03:42:20 PM
All I know is, the Fed has never expanded its balance sheet, kept near zero fund rates, all while having at the same time no increase in inflation.

It's explicitly for this reason (the historically unprecedented combination of economic conditions in which we currently find ourselves) that Pfau argues we shouldn't rely on actual historical market performance and why some of his latest research uses Monte Carlo simulations with built-in capital market expectations instead of actual historical data.

Which results in sub-4% SWR's...

http://time.com/money/2795168/forget-the-4-withdrawal-rule/?iid=EL

Quote
(Feb. 2014)  “The probability that a 4% withdrawal rate will work in the future is much lower,” he says. His new safe starting point: a 3% drawdown. That means that if you’ve saved $1 million, you’re living on $30,000 a year before Social Security and any other sources of income you might have, not $40,000. Ouch.

You may be relieved to hear that Pfau’s idea is controversial. Michael Kitces, partner and director of research, Pinnacle Advisory, who has worked with Pfau on other research (more on that later), is one of many experts who think that the long historical record is still a decent guide to the future.

Yet William Bengen, the planner who in 1994 came up with the 4% rule, says some rethinking may be in order. “I think Pfau has done a great job of looking at the issues,” he says. “Market valuations are important, and he may be right.”
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on September 21, 2015, 07:18:00 AM
Which results in sub-4% SWR's...

http://time.com/money/2795168/forget-the-4-withdrawal-rule/?iid=EL

Yes, here's another example from just three weeks ago where he reached the same pessimistic conclusion:

http://www.fa-mag.com/news/why-4--could-fail-22881.html

Of course, this is just another way of saying tomaahto.  If you assume the future will be worse than the past, then you will be forced to conclude the future will be worse than the past.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on September 21, 2015, 09:18:02 AM
Of course, this is just another way of saying tomaahto.  If you assume the future will be worse than the past, then you will be forced to conclude the future will be worse than the past.

Personally, I think you're oversimplifying this and brushing it under the rug.  It's not that Pfau is just assuming the future will be worse than the past, he (and his colleagues) are looking at the past vs. the present and coming to the conclusion that the future will, more likely than not, look different.

I'm not trying to be argumentative here, but a lot of folks are buying in to 4% SWR as a natural law which does not need to be examined.  Folks are running simulators without any regard for the assumptions behind the model, and feel confident that an 90% chance of success is 'the answer' (or hopefully at least close).  But the smart people that came up with the 4% 'rule' are telling us that we are most likely headed toward a period of low or no stock market growth, lower than historic bond yield, stagflation, an inability for the Fed to raise rates; basically any number of things that are now worrying them about trusting a 30-year 4% SWR going forward.

The worry for people that RE isn't to suddenly find their portfolio flashing warning signs a year or two in (although that would suck), but it is to be retired for a decade or two and then find yourself facing a declining or uncomfortably low standard of living and pathetic job prospects.  But then again, most 'true Mustachians' can live well on Social Security alone, so I'll end by saying that I'm probably just projecting my own fears when I say that I don't want to have to depend solely on SS 24 years from now. 

My strategy, with these fears in mind, was to take my FU money (not 4% SWR), find a job I like, and extend my accumulation phase.  It's remarkably similar to what many of these bloggers have done, except I am not bashful about calling what I do for income to be a job.     
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on September 21, 2015, 09:56:57 AM
Personally, I think you're oversimplifying this and brushing it under the rug.  It's not that Pfau is just assuming the future will be worse than the past, he (and his colleagues) are looking at the past vs. the present and coming to the conclusion that the future will, more likely than not, look different.

I don't mean to brush this concern under the rug.  I share this concern myself.  I don't profess to be able to accurately predict the future, but I personally believe there are very good reasons to think we are poised to encounter below-average returns over the next several decades.  Maybe the thirty-year period starting today will resemble one of history's bottom fifth percentile cases.  Maybe it will be worse than any we've seen before.

I'm just trying to point out the flaws in the reasoning of using predictions about the future to attack the validity of the 4% rule, which is merely an observation about the past.  Anyone who treats the 4% rule as a natural law has not been paying enough attention.  It is an observation about what worked in the past--no more, no less.  When we extrapolate and use it as a guide for what will work in the future, we are necessarily making assumptions about the range of possibilities the future will bring.  If you assume that history contains the entire universe of possible outcomes, then past safe withdrawal rates tell you future chances of success.  If you build pessimistic capital market expectations into your assumptions about the future (as Pfau has been doing with his Monte Carlo simulations), then your conclusions about the future will necessarily be pessimistic.  The results of any forecasting exercise are only as good as the assumptions used in the model.  Garbage in, garbage out.

In addition, as you alluded to, whenever one examines the litany of real-world exogenous risk factors surrounding reliance on the 4% rule (high current market valuations, strong likelihood of your retirement period outlasting 30 years, etc.), one should not forget to stack against it the litany of real-world exogenous levels of safety margin (flexibility to lower spending or seek supplemental income, possibility of receiving social security or inheritances, etc.).  And, to your point, vice versa.

As always, given the unknowability of the future, it boils down to a trade-off between your retirement's length and your retirement's likelihood of unmitigated success.
Title: Re: Stop worrying about the 4% rule
Post by: sol on September 21, 2015, 09:58:15 AM
It's not that Pfau is just assuming the future will be worse than the past, he (and his colleagues) are looking at the past vs. the present and coming to the conclusion that the future will, more likely than not, look different.

That's all well and good, but it's economic forecasting and has nothing to do with historical SWRs. 

If you see a global economic catastrophe coming and lay odds on the collapse of civilization, don't pretend you're still talking about analyzing historic stock market returns.  You're suggesting you can predict the future based on something other than the past, which may be true but it doesn't tell you anything useful about future market returns or supportable withdrawal rates.

Your SWR will be zero if an asteroid hits the earth.  Not 4%, or 3.2%, or 1.8%.  The key is that the odds of that happening have nothing to do with past market performance.  You're trying to predict fuel economy based on the assumption of crashing the car.

Assuming you don't crash, your mpg is pretty predictable and based on your past mpg.  If you do crash, it won't really matter anymore so why are you worrying about false security?
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on September 21, 2015, 11:11:58 AM
What I'd like to hear, instead of catastrophic scenarios which I don't tend to spend much time worrying about, is what gives you encouragement that the past IS going to repeat in the future, and especially what 30 year period you think we are headed for?  1965-1995 doesn't look all that bad in the history books, but it was a terrible time to be a retiree.  But I'd even go so far as to say that the economic landscape in 1965 looked better than what we currently face (high equity valuations, low bond yields, etc.). 

Per GoCurryCracker (http://www.gocurrycracker.com/the-worst-retirement-ever):

Quote
Pure 4% withdrawals for a retirement starting in 1965 were a disaster, with the portfolio dropping to $0 in about 25 years.  This occurred regardless of asset allocation.  A portfolio of 50% stock / 50% bonds failed just as surely as a portfolio of 100% stock.

I'm just putting this out there to provoke thought and discussion.  I thought Jeremy's article was a fantastic thought experiment, but didn't go far enough in discussing remedies, or how painful the remedies could be.  He mentions 'flexibility' (which sounds suspiciously like, "if things go pear shaped, I'll just pop on a tie and go back to work until things get better") and using a 3% SWR (which requires 33% more years of work!), both of which are easy to say when you have all the data.  It's also easy to say when you already have a 3% or lower SWR, which I suspect is the case based on his latest blog post...

Anyway, I'm getting tired of thinking pessimistically, so I'll let it go at that.
Title: Re: Stop worrying about the 4% rule
Post by: MDM on September 21, 2015, 11:45:16 AM
Per GoCurryCracker (http://www.gocurrycracker.com/the-worst-retirement-ever):
Quote
Pure 4% withdrawals for a retirement starting in 1965 were a disaster, with the portfolio dropping to $0 in about 25 years.  This occurred regardless of asset allocation.  A portfolio of 50% stock / 50% bonds failed just as surely as a portfolio of 100% stock.

May be déjà vu here, but how does the above "4% would have failed in 1965" compare with the chart (as seen in http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/ and http://retirementresearcher.com/the-trinity-study-and-portfolio-success-rates/) below showing "4% would have succeeded in 1965"?

(http://www.mrmoneymustache.com/wp-content/uploads/2012/05/SWR-by-year.jpg)
Title: Stop worrying about the 4% rule
Post by: Seppia on September 21, 2015, 12:01:51 PM
Yes, here's another example from just three weeks ago where he reached the same pessimistic conclusion:

http://www.fa-mag.com/news/why-4--could-fail-22881.html

Of course, this is just another way of saying tomaahto.  If you assume the future will be worse than the past, then you will be forced to conclude the future will be worse than the past.

Yeah, plus I'm not super sure I would trust 100% someone who isn't even able to depict the German flag correctly :)
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on September 21, 2015, 12:44:53 PM

May be déjà vu here, but how does the above "4% would have failed in 1965" compare with the chart (as seen in http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/ and http://retirementresearcher.com/the-trinity-study-and-portfolio-success-rates/) below showing "4% would have succeeded in 1965"?


I'm not sure why there would be differences, but Pfau's himself states that 4% failed in 1965 (http://retirementresearcher.com/trinity-study-retirement-withdrawal-rates-and-the-chance-for-success-updated-through-2009/)

Quote
The Trinity Study had data from 1926 to 1995.  To consider retirements lasting 30 years, this means they could only consider retirement dates from 1926 to 1966.  For anyone retiring after 1966, they couldn’t calculate the withdrawal rate sustainable over 30 years because they didn’t have the data.  1926 to 1966 represents 41 beginning retirement dates.  Of those 41 dates, the 4% inflation-adjusted withdrawal rate failed 2 times, in 1965 and 1966.  Thus, it’s success rate was 39/41 = 95.12%, or 95% when rounded down.
Title: Re: Stop worrying about the 4% rule
Post by: MDM on September 21, 2015, 01:02:36 PM

May be déjà vu here, but how does the above "4% would have failed in 1965" compare with the chart (as seen in http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/ and http://retirementresearcher.com/the-trinity-study-and-portfolio-success-rates/) below showing "4% would have succeeded in 1965"?
I'm not sure why there would be differences, but Pfau's himself states that 4% failed in 1965 (http://retirementresearcher.com/trinity-study-retirement-withdrawal-rates-and-the-chance-for-success-updated-through-2009/)
Quote
The Trinity Study had data from 1926 to 1995.  To consider retirements lasting 30 years, this means they could only consider retirement dates from 1926 to 1966.  For anyone retiring after 1966, they couldn’t calculate the withdrawal rate sustainable over 30 years because they didn’t have the data.  1926 to 1966 represents 41 beginning retirement dates.  Of those 41 dates, the 4% inflation-adjusted withdrawal rate failed 2 times, in 1965 and 1966.  Thus, it’s success rate was 39/41 = 95.12%, or 95% when rounded down.

Ok, now I remember - and if I'd reread better the Pfau article I linked...:
Quote
The only difference in assumptions between William Bengen’s work and the Trinity study regards the choice of bond indices. While Mr. Bengen’s original research combined the S&P 500 index with 5-year intermediate term government bond returns, the Trinity Study used long-term high-grade corporate bond returns instead. The different choice for bonds explains why the worst-case scenario for Mr. Bengen (his SAFEMAX) was a withdrawal rate of 4.15%, but why the original Trinity Study found that a 4% withdrawal rate only had a 95% success rate (with more volatile corporate bonds, the sustainable withdrawal rate dipped below 4% in 1965 and 1966).
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on September 21, 2015, 01:57:30 PM
Ok, now I remember - and if I'd reread better the Pfau article I linked...

We had discussed this particular discrepancy in the thread about the variations between Kitces' SWR conclusions and those of most other studies (which expanded into a discussion about discrepancies across the various SWR backtest studies in general, and which was alluded to, but not specifically cross-referenced, upthread, so here's the link for anyone interested:  SWR data discrepancies (primarily re: Kitces studies) (http://forum.mrmoneymustache.com/investor-alley/kitces-article-ratcheting-swr-data-discrepancy/)).

But all this hashing over the details of the various backtests' inputs and outputs just reinforces the larger point that SWR analysis is, by its nature, backward (and not forward) looking.

What I'd like to hear, instead of catastrophic scenarios which I don't tend to spend much time worrying about, is what gives you encouragement that the past IS going to repeat in the future, and especially what 30 year period you think we are headed for?

I have little faith in anyone's ability to predict what the next 30 year period will look like (at least without some massive error bands around their prediction).  But I do have lots of confidence that my "4%-rule-plus-safety-margin"-based early retirement's chances of success will be more than high enough to justify my decision to avoid bolstering those odds even further by deferring my early retirement even longer.  If you'd like to hear what gives me that confidence, scroll up and reread this thread ;)
Title: Re: Stop worrying about the 4% rule
Post by: sol on September 21, 2015, 03:57:39 PM
If you'd like to hear what gives me that confidence, scroll up and reread this thread ;)

But, but, but, what if there's a world war? An oil crisis?  A major nuclear meltdown?  A great depression?  Super restrictive economic policy changes?  Super aggressive economic policy changes? Stagflation?  A missile crisis that takes us to the edge of nuclear annihilation?  Another terrorist attack?

Oh wait, the 4% SWR has already survived all of that, and assumes all of those things will totally happen again, and yet it's still 95-100% safe. 

Does anyone here think the future is really going to look worse than the past the 4% rule is based on?  I'm not saying it's impossible, just that it's a pretty grim view of the future.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on September 21, 2015, 05:06:30 PM
But I do have lots of confidence that my "4%-rule-plus-safety-margin"-based early retirement's chances of success will be more than high enough to justify my decision to avoid bolstering those odds even further by deferring my early retirement even longer.

This is where I have an issue. If I worry so much about 4% not being safe (I am honestly at this point going to go for 5%) then I have to keep working longer and longer. I don't want to do that. I may have to think about jobs that can pay me a small income with little effort because that is all that I need to live happily on and it would delay my drawdown phase.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on September 21, 2015, 05:11:39 PM
Does anyone here think the future is really going to look worse than the past the 4% rule is based on?  I'm not saying it's impossible, just that it's a pretty grim view of the future.

I don't think so. I think the most pessimistic view of the future for early retirees with a close to break even portfolio (say 4%) is that people stop spending and the economy therefore goes through a slow down period ala Japan for 30-50 years. I just can't see that happening. Consumerism is ingrained in people.
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on September 21, 2015, 09:47:14 PM
Does anyone here think the future is really going to look worse than the past the 4% rule is based on?  I'm not saying it's impossible, just that it's a pretty grim view of the future.

I don't think so. I think the most pessimistic view of the future for early retirees with a close to break even portfolio (say 4%) is that people stop spending and the economy therefore goes through a slow down period ala Japan for 30-50 years. I just can't see that happening. Consumerism is ingrained in people.

I have a suggestion for some reading, in this case.  The Demographic Cliff by Harry Dent.  The very simply summary is the book is about what happens to the economy (and by proxy, the stock market) when you cross the data about average spending as people age (Ty Bernicke's Reality Retirement Planning) with the two distinct birth peaks that resulted in the Boomers and the Millienials, with the X-gen stuck in the low between.  The result is that he predicts a Japan-like 'lost decade' for the United States (and most of Europe as well) roughly between 2014 and 2022.  Considering he was one of not very many predicting Japan's lost decade in the late 1980's, and for similar demographic reasons, his perspective should not be dismissed lightly.  So, if he is correct, the next several years should be a great time to be accumulating.

Even still, the 4% rule should be fine.  One decade or so of flatlined stock values isn't the worst we have seen.
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on September 22, 2015, 08:56:56 AM
Does anyone here think the future is really going to look worse than the past the 4% rule is based on?  I'm not saying it's impossible, just that it's a pretty grim view of the future.

I don't think so. I think the most pessimistic view of the future for early retirees with a close to break even portfolio (say 4%) is that people stop spending and the economy therefore goes through a slow down period ala Japan for 30-50 years. I just can't see that happening. Consumerism is ingrained in people.

I have a suggestion for some reading, in this case.  The Demographic Cliff by Harry Dent.  The very simply summary is the book is about what happens to the economy (and by proxy, the stock market) when you cross the data about average spending as people age (Ty Bernicke's Reality Retirement Planning) with the two distinct birth peaks that resulted in the Boomers and the Millienials, with the X-gen stuck in the low between.  The result is that he predicts a Japan-like 'lost decade' for the United States (and most of Europe as well) roughly between 2014 and 2022.  Considering he was one of not very many predicting Japan's lost decade in the late 1980's, and for similar demographic reasons, his perspective should not be dismissed lightly.  So, if he is correct, the next several years should be a great time to be accumulating.

Even still, the 4% rule should be fine.  One decade or so of flatlined stock values isn't the worst we have seen.

A Japan like scenario for the US is probably a more likely one of the possible bad scenarios as there are a lot of similarities - high debt levels, aging population, focused on consumerism, etc. 

However, the Japan had a true demographic cliff whereas ours starts at the after the Millenials which have yet to really play a role in the economy - once this demographic gets going in their careers and household formation (assuming it stops being all about me me me and YOLO mentality) they will drive the economy and backfill the aging/retiring boomers.  GenX gets stuck again but as they say timing is everything.

Additionally, the US still has relatively friendly immigration policies that has and will continue to offset our decling birthrates. 

So full blown Japan scenario shouldn't occur.
Title: Re: Stop worrying about the 4% rule
Post by: P4J on September 28, 2015, 11:42:38 AM
Looking back at the historical data (with a nod to the idea that things could always be different going forward):

There is a good historical correlation between the valuation of the market (Shiller PE ratio) at any given time and the SWR applicable to that point in time. I haven't seen anyone run the analysis before, so I did it. See http://plottingforjailbreak.com/safe-withdrawal-rates-for-all-markets/ (http://plottingforjailbreak.com/safe-withdrawal-rates-for-all-markets/).

The 4% SWR is, as you recall, the "worst case" SWR found in the historical data for 30-year retirements. As it turns out, the Shiller PE in that year was 25, the same as it is today. For all PEs lower than 25, the SWR was higher, with roughly power-law dependence. See Figure 3 in the post linked above. It is pretty amazing how well the data follows the curve.

Historically speaking, 4% is the correct SWR for the market valuations we are seeing today. If the curve fits are to be believed when extrapolated (grain of salt required), a 3% SWR isn't needed until the PE hits 35—which it has only ever done leading up to the peak in the dot-com bubble.

(And, on a side note, I’m not a big fan of the Shiller PE right now, because the 10-year average earnings include the anomalous year or two of crashed earnings during the 2008 bust…so I think the current 25 number is actually artificially high.)

Bottom line—history says that 4% is where you should want to be today. One more reason not to worry about it and work on your flexibility instead.
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on September 28, 2015, 01:10:16 PM
(And, on a side note, I’m not a big fan of the Shiller PE right now, because the 10-year average earnings include the anomalous year or two of crashed earnings during the 2008 bust…so I think the current 25 number is actually artificially high.)

Yeah but it also includes the inflated earnings leading up to the crash and the earnings recovery right after the crash so it balances out....that is the logic behind the the rolling 10 year period

Bottom line—history says that 4% is where you should want to be today. One more reason not to worry about it and work on your flexibility instead.

Makes sense that if the Shiller PE is 4% (1/25) and interest rates are 4% (about what they were then) that a 4% SWR would work....but it is not clear to me from you or the link that this is coincedence or not.  It does look like today from a PE and Shiller PE, but interest rates are lower today (both nominal and real) and dividend yields are lower today.....divi yield being lower matters because it is not cash in your pocket, sure it stays with the company to reinvest or buyback stock so it should be neutral on a total return basis but history has demonstrated that companies having excess capital to play with generally results in inferior returns.
Title: Re: Stop worrying about the 4% rule
Post by: seattlecyclone on October 01, 2015, 10:50:36 AM
There is a good historical correlation between the valuation of the market (Shiller PE ratio) at any given time and the SWR applicable to that point in time. I haven't seen anyone run the analysis before, so I did it. See http://plottingforjailbreak.com/safe-withdrawal-rates-for-all-markets/ (http://plottingforjailbreak.com/safe-withdrawal-rates-for-all-markets/).

That is an amazing correlation. Thanks for plotting it!
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on October 01, 2015, 11:41:15 AM
Nice work, P4J. 

I haven't seen anyone run the analysis before, so I did it.

FYI, Kitces actually did a similar analysis (see: Kitces on Shiller CAPE for Retirement Planning (https://www.kitces.com/blog/shiller-cape-market-valuation-terrible-for-market-timing-but-valuable-for-long-term-retirement-planning/)).  Citing research he conducted in 2008, he found an "astonishingly strong -0.74 correlation" between CAPE and SWRs.

That is an amazing correlation. Thanks for plotting it!

Note, however, that CAPE seems to have lost much of its predictive power with respect to SWRs in periods subsequent to 1985, for which we don't yet have fully-elapsed 30-year periods but for which we do have long enough periods to suggest that the relationship between starting-year CAPE and SWR has broken down (unless the future brings some truly catastrophic market performance over the unelapsed portions of those 30-year periods) (see the discussions in these threads: (i) Using market valuations to affect SWR? (http://forum.mrmoneymustache.com/investor-alley/using-market-valuation-measurements-to-affect-swr/) and (ii) SWR discussion (http://forum.mrmoneymustache.com/post-fire/if-(swrinflation-lt-4-of-stash-reset-to-4-spend-swrinflation)/50/) (the portion of the discussion starting at post # 84 in particular).
Title: Re: Stop worrying about the 4% rule
Post by: k9 on October 01, 2015, 01:16:08 PM
The more I read about stock allocations that have a SWR of 5% or more, the less I worry about the 4% rule. Oh, well, the stock-heavy crowd will have to live with 4%, I guess, but I'm happy to go for 20 years of expenses rather than 25.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on October 01, 2015, 05:00:07 PM
The more I read about stock allocations that have a SWR of 5% or more, the less I worry about the 4% rule. Oh, well, the stock-heavy crowd will have to live with 4%, I guess, but I'm happy to go for 20 years of expenses rather than 25.

Stocks have tended to perform better over longer time periods and should therefore provide the highest possible SWR's. The problem is that the valuation of stocks over the past 100+years may not occur again and therefore the 4% rule might be more likely to be required.

Personally I want to go for a 5% WR but I'd like to see stocks decrease a lot in value for me to be comfortable with that WR.
Title: Re: Stop worrying about the 4% rule
Post by: Tyler on October 01, 2015, 05:30:28 PM
Stocks have tended to perform better over longer time periods and should therefore provide the highest possible SWR's.

This may seem instinctively true but mathematically it's more complicated than that.  Safe Withdrawal Rates are highly influenced not only by average returns but also by annual volatility.  All things being equal, higher volatility lowers the SWR.  So two portfolios with equal average returns may have drastically different withdrawal rates based on the underlying volatility.  And sometimes portfolios with lower average returns but lower volatility can still beat stocks.  That's how you get interesting results like this:

(https://portfoliocharts.files.wordpress.com/2015/09/swr-vs-cagr.jpg)

This plots the returns and calculated SWRs of a variety of different popular lazy portfolios.  Note that the Total Stock Market has one of the highest returns but the lowest SWR!  Also note than none of the top-3 SWR portfolios have more than 40% stocks.  For a more detailed walkthrough, I'd recommend reading this (http://portfoliocharts.com/2015/09/08/why-your-safe-withdrawal-rate-is-probably-wrong/).  And to see an example of a portfolio with only 40% stocks that matches the long-term returns of the stock market with much lower volatility and a much higher SWR, try this (http://portfoliocharts.com/2015/09/22/catching-a-golden-butterfly/).
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on October 01, 2015, 07:27:16 PM
And to see an example of a portfolio with only 40% stocks that matches the long-term returns of the stock market with much lower volatility and a much higher SWR, try this (http://portfoliocharts.com/2015/09/22/catching-a-golden-butterfly/).

Thank you for this.  I might just consider altering my portfolio based upon this information.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on October 01, 2015, 07:44:45 PM
The more I read about stock allocations that have a SWR of 5% or more, the less I worry about the 4% rule. Oh, well, the stock-heavy crowd will have to live with 4%, I guess, but I'm happy to go for 20 years of expenses rather than 25.

Stocks have tended to perform better over longer time periods and should therefore provide the highest possible SWR's. The problem is that the valuation of stocks over the past 100+years may not occur again and therefore the 4% rule might be more likely to be required.

Personally I want to go for a 5% WR but I'd like to see stocks decrease a lot in value for me to be comfortable with that WR.

I don't have a whole lot of confidence in this analysis. I'm reading a bunch of William Bernstein's books now and I think he nails a lot of really good points that I think are not encompassed within that analysis.

Some factors such as:-

1. Hidden costs. Just taking into account indexes does not cater for index fees, buying and selling costs and capital gains costs (tax). This is especially true with small cap value and emerging market indexes. Small cap and emerging markets sound great in theory but the costs may eat up all of the supposed increased returns.
2. Gold doesn't perform well in most situations. Gold performs well in times of deflation however deflation is not a high probability event.
3. Past returns do not equal future returns. Its easy to put together an optimised portfolio based on historical data however that does not mean that this will continue into the future.

I do agree that portfolio theory is a really important component of managing your investments but I think taking into account the various assets available to the investor and the returns that you can expect from those assets over time is probably more important that optimising a portfolio. I also think you will never get a perfect portfolio.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on October 01, 2015, 08:17:09 PM
The most simple and convincing case I have for stocks being over valued is that their main (risk adjusted) competitor, long term bonds, are at all time historic lows.  People who need total return have been forced to buy equities (or other 'riskier' instruments).  If the Fed successfully raises interest rates to a more normalized 2% or positive real return of 4% nominal, equities become less attractive (on a risk adjusted basis).  And this is all assuming that inflation remains constant ~2%.  If we experience deflation or an increase in inflation, all bets are off with earnings staying high as consumers tend to move to the sidelines.
(http://www.valueexplorer.com/fileadmin/_migrated/RTE/RTEmagicC_Shiller_PE_Jan_13.png.png)
Title: Re: Stop worrying about the 4% rule
Post by: steveo on October 01, 2015, 08:42:11 PM
^^^^
This is the type of analysis that I think is important when trying to judge a portfolio including WR's. I think the best portfolio would be pretty simple in theory - put 90%-100% into stocks when they are at all time lows. The problem is that its not going to happen.
Title: Re: Stop worrying about the 4% rule
Post by: Tyler on October 01, 2015, 08:47:05 PM
@Steveo --

IMHO, the point is not to try to back test the perfect portfolio.  The important takeaway is simply that different portfolios never considered by the Trinity study may have different SWRs.  I definitely don't think there's a single portfolio that works best for everyone, so you need to do your own due diligence and account for things like taxes and what you're comfortable investing in.

BTW, if you like William Bernstein you might be interested in the SWR for one of his portfolios mentioned in the Intelligent Asset Allocator.  Scroll to the bottom. http://portfoliocharts.com/portfolio/bernstein-portfolio/  Regardless of your outlook for the future, the portfolios you are more personally comfortable with might also surprise you!
Title: Re: Stop worrying about the 4% rule
Post by: steveo on October 02, 2015, 02:50:36 AM
@Steveo --

IMHO, the point is not to try to back test the perfect portfolio.  The important takeaway is simply that different portfolios never considered by the Trinity study may have different SWRs.  I definitely don't think there's a single portfolio that works best for everyone, so you need to do your own due diligence and account for things like taxes and what you're comfortable investing in.

BTW, if you like William Bernstein you might be interested in the SWR for one of his portfolios mentioned in the Intelligent Asset Allocator.  Scroll to the bottom. http://portfoliocharts.com/portfolio/bernstein-portfolio/  Regardless of your outlook for the future, the portfolios you are more personally comfortable with might also surprise you!

I agree with your comments regarding different portfolios not being considered by the Trinity study. I am working through what is the best option to take for me personally with regards to my portfolio however I get the impression it will never be perfect.

That Bernstein portfolio is interesting. I think Bernstein is very risk averse and yet that portfolio over 40 years had a 5% SWR. I'm not sure exactly what option I will take however I also want to keep it relatively simple.
Title: Re: Stop worrying about the 4% rule
Post by: Seppia on October 03, 2015, 07:31:54 AM
This thread is simply amazing, sorry for the pretty pointless post but I just wanted to thank all contributors
Title: Re: Stop worrying about the 4% rule
Post by: k9 on October 05, 2015, 05:21:17 AM
Stocks have tended to perform better over longer time periods and should therefore provide the highest possible SWR's.

This may seem instinctively true but mathematically it's more complicated than that.  Safe Withdrawal Rates are highly influenced not only by average returns but also by annual volatility.
This. Reducing volatility is not only about reducing down years (and, therefore, sleeping better) at the expense of CAGR. It is also about improving SWR. The fun thing is, rebalancing two (or, better, more than two) very volatile but uncorrelated assets can produce a low-volatility portfolio with excellent CAGR, because then volatility is not your enemy, eating in your stache, but your friend, letting you make huge rebalancing gains. This is the mechanism that makes those great portfolios mentioned by Tyler shine, even when compared to 100% stocks.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on October 25, 2015, 10:39:01 AM
2. Gold doesn't perform well in most situations. Gold performs well in times of deflation however deflation is not a high probability event.

Gold's done really poorly the lat few years and we are certainly not in inflation.
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on October 25, 2015, 10:22:46 PM
Gold performs well during periods of high uncertainty, but that is not the only influencing factor.  Other things do well under similar conditions, but are not universally effective or available.  There is no perfect hedge investment, but gold (and silver) is a well established hedge investment.  And one with a huge history.  Don't just automatically discount it because it doesn't earn a return, there will be times that preservation of wealth already accumulated is more important for your portfolio than growth.
Title: Re: Stop worrying about the 4% rule
Post by: Tyler on October 25, 2015, 11:56:54 PM
2. Gold doesn't perform well in most situations. Gold performs well in times of deflation however deflation is not a high probability event.

Gold's done really poorly the lat few years and we are certainly not in inflation.

Gold is traditionally considered an inflation hedge, not the other way around.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on October 26, 2015, 05:00:31 AM
2. Gold doesn't perform well in most situations. Gold performs well in times of deflation however deflation is not a high probability event.

Gold's done really poorly the lat few years and we are certainly not in inflation.

Gold is traditionally considered an inflation hedge, not the other way around.

I did some more poking around, and PortfolioCharts only uses data starting in 1972. Basically, a falling interest rate environment and exactly starting when gold was no longer price controlled.

That data set is too limited for me to trust the siren call of higher WRs. It's certainly interesting, but we're missing the traditionally worst starting years for portfolios in the 1960s... 

...and OF COURSE gold does well. No shit. The price had been kept artificially low by the government and it was unlocked. Gold was fixed at $35 before it was unlocked.

The argument is that not all the data sets go back that far - but the effect is to cherry pick your start dates.
Title: Re: Stop worrying about the 4% rule
Post by: Tyler on October 26, 2015, 09:25:23 AM
FYI - The starting date for the data, its effect on calculated SWRs, and the reason why more data doesn't necessarily help unless it reflects how you actually invest are addressed at length here:  http://forum.mrmoneymustache.com/investor-alley/asset-allocation-and-safe-withdrawal-rates/
Title: Re: Stop worrying about the 4% rule
Post by: dabears847 on November 30, 2015, 09:05:39 AM


The point of the thread is that you shouldn't worry much about a 4% SWR failing. But the reality is that you can probably spend more than that, especially if you're 5 or 10 years into RE and you can tell from the past market returns that you have avoided one of those disastrous retirement dates. So you could certainly spend more at times and be OK. Personally, I have multiple funds that I'm working with. I have a base 4% WR fund that will take care of basic minimum expenses. Then I have another fund for fun stuff that I don't need to last forever. And then another fund for paying off the house, some college expense, etc. So do whatever works for you and your spending interests.
[/quote]
So much to read, multiple days getting through this post... I posted another thread a few weeks ago looking for some of this information. There would be huge value to me and others alike if you made the "Playbook of the 4% plan, best ideas from the group, with portfolio mix, rentals, swr, flexibility, triggers, taxes, 72t, 401k conversion, low cost funds, college costs, kids, re-balancing portfolio, etc. Similar to the communication thread.
Title: Re: Stop worrying about the 4% rule
Post by: thinkinahead on December 09, 2015, 10:17:47 AM
I may have missed it but what about all the economist talk about secular stagnation? It looks like real interest rates have been declining for some time, which I assume could make the 4% rule a less safe benchmark. Are there any examples of 4% rule holding despite real interest rates <1-2% for an extended period of time?
Title: Re: Stop worrying about the 4% rule
Post by: Telecaster on December 09, 2015, 10:30:01 AM
I may have missed it but what about all the economist talk about secular stagnation? It looks like real interest rates have been declining for some time, which I assume could make the 4% rule a less safe benchmark. Are there any examples of 4% rule holding despite real interest rates <1-2% for an extended period of time?

The 4% number came from looking at all of the available historical data.  The original Trinity study went back to 1926 or something, and others have extended it back to the 1880s.   

The underlying assumption of the 4% rule is that the future will be no worse than the past, economically speaking.   It is possible the future will be worse than the past?  Sure!  If you want extra safety, take 3%.    My view is that I'm willing to forgo that extra bit of safety in order to retire sooner/higher lifestyle.  If the stash doesn't look like it will last, then I will reduce my lifestyle. 
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on December 13, 2015, 07:23:17 AM
I may have missed it but what about all the economist talk about secular stagnation? It looks like real interest rates have been declining for some time, which I assume could make the 4% rule a less safe benchmark. Are there any examples of 4% rule holding despite real interest rates <1-2% for an extended period of time?

The 4% number came from looking at all of the available historical data.  The original Trinity study went back to 1926 or something, and others have extended it back to the 1880s.   

The underlying assumption of the 4% rule is that the future will be no worse than the past, economically speaking.   It is possible the future will be worse than the past?  Sure!  If you want extra safety, take 3%.    My view is that I'm willing to forgo that extra bit of safety in order to retire sooner/higher lifestyle.  If the stash doesn't look like it will last, then I will reduce my lifestyle.

Here's how I'm going to handle it: in 11.5 years, I qualify for a (partial) pension. With a paid off house, the pension will cover all base living expenses. The plan is to use 2% of the stash for travel/extras, with the ability to tap up to 5% for unusual expenses (HVAC blew up, whatever) on an occasional basis with no worries.

My pension isn't COLA adjusted, so its value will decline over time (or looked at another way, my property taxes, insurance, etc will continue to climb!! - we'll slowly ramp up the draw from the stash until we hit Social Security. Conveniently, the dividend yield on VTSAX is around 2%, so we'll just stop dividend reinvestment and figure that cash is "fun money".

Frankly, I'm probably being too conservative with the spending plans. However, I have to plan for "what if I die" and leave my wife - the pension is significantly reduced if it lasts until the last of us dies instead of until I die. There is only a tiny hit for a guaranteed 10 year payout, so we'll probably do that option. Plus, social security will be reduced notably when one of us dies.
Title: Re: Stop worrying about the 4% rule
Post by: dividendman on January 04, 2016, 12:14:19 AM

But, but, but, what if there's a world war? An oil crisis?  A major nuclear meltdown?  A great depression?  Super restrictive economic policy changes?  Super aggressive economic policy changes? Stagflation?  A missile crisis that takes us to the edge of nuclear annihilation?  Another terrorist attack?

Oh wait, the 4% SWR has already survived all of that, and assumes all of those things will totally happen again, and yet it's still 95-100% safe. 

Does anyone here think the future is really going to look worse than the past the 4% rule is based on?   I'm not saying it's impossible, just that it's a pretty grim view of the future.

Not only is it a grim view of the future it goes against the all global trends. The fact is that globally all indicators on lifestyle are increasing. Life expectancy,  real income/purchasing power, worker productivity, crime is decreasing, people killed/impacted by global warfare/strife is decreasing, etc. All of these are trends that have been occurring for centuries (it would have been for thousands of years but the dark ages set us back). Not only that, but they have been accelerating in the positive direction.

Now we can argue whether or not our invested assets will grow at the same rate as a result of the overwhelmingly postive trends but the world being "better" is pretty much a lock (unless we really fucked up bad with global warming - but then your portfolio won't save you anyway).

I like the 5 or 4% rule for the simple reason that the pace of change is accelerating so rapidly it's  silly to think about the world more than 20-25 years out. Hey, we might all get a basic income from the government by then due to magnificent productivity gains of technology and then all of this worrying will have been for naught and we would have all overworked!
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on January 14, 2016, 06:50:44 PM

But, but, but, what if there's a world war? An oil crisis?  A major nuclear meltdown?  A great depression?  Super restrictive economic policy changes?  Super aggressive economic policy changes? Stagflation?  A missile crisis that takes us to the edge of nuclear annihilation?  Another terrorist attack?

Oh wait, the 4% SWR has already survived all of that, and assumes all of those things will totally happen again, and yet it's still 95-100% safe. 

Does anyone here think the future is really going to look worse than the past the 4% rule is based on?   I'm not saying it's impossible, just that it's a pretty grim view of the future.

Not only is it a grim view of the future it goes against the all global trends.

To be fair, not all of them.  I'm far from a doomsayer, but one trend that might eventually require a re-visit of the 4% rule is the trendline of dividends.  While the US stock markets have trended up by about 6% or 7%, on average, for it's entire existence; the ratio of dividends to capital has been declining.  This is the inverse of the price to earnings ratio, so the PE has been trending up.  I presume that this is a side effect of maturing industrial societies; as in, as the infrastructure & industry of a society improves, the relative number of discoverable improvements in those categories (and thus the relative number of profitable investing opportunities) declines.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on January 15, 2016, 07:37:09 AM
To be fair, not all of them.  I'm far from a doomsayer, but one trend that might eventually require a re-visit of the 4% rule is the trendline of dividends.  While the US stock markets have trended up by about 6% or 7%, on average, for it's entire existence; the ratio of dividends to capital has been declining.  This is the inverse of the price to earnings ratio, so the PE has been trending up.  I presume that this is a side effect of maturing industrial societies; as in, as the infrastructure & industry of a society improves, the relative number of discoverable improvements in those categories (and thus the relative number of profitable investing opportunities) declines.

I don't follow your logic.  If anything, a lower dividend payout ratio indicates higher (not lower) growth prospects, because it suggests that management believes reinvesting funds in the business is a better allocation of capital then returning it to shareholders in the form of dividends (which explains why companies traditionally increase their dividend payout ratios as they progress in their lifecycles from young, growing businesses with many reinvestment opportunities to mature, stable businesses with fewer reinvestment opportunities).

The increase in PE ratios that is directly attributable to the decrease in dividend payout ratios causes PE-based valuation metrics to overstate the expensiveness of the current market as compared to historical periods (because those PE-based valuation metrics do not correct for the effects of the downward trend in dividend payout ratios), suggesting that expected future returns are higher (not lower) than they otherwise would be using those PE-based valuation metrics in the absence of a secular change in dividend payout ratios.  (In reality, the downward trend in dividend payout ratios is largely due to a shift in management preferences towards favoring returning capital to shareholders via share buybacks in lieu of dividend payments, in large part precisely because of a lower dividend payout ratio's "artificial" boost to performance metrics.)
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on January 15, 2016, 02:29:48 PM
To be fair, not all of them.  I'm far from a doomsayer, but one trend that might eventually require a re-visit of the 4% rule is the trendline of dividends.  While the US stock markets have trended up by about 6% or 7%, on average, for it's entire existence; the ratio of dividends to capital has been declining.  This is the inverse of the price to earnings ratio, so the PE has been trending up.  I presume that this is a side effect of maturing industrial societies; as in, as the infrastructure & industry of a society improves, the relative number of discoverable improvements in those categories (and thus the relative number of profitable investing opportunities) declines.

I don't follow your logic.  If anything, a lower dividend payout ratio indicates higher (not lower) growth prospects, because it suggests that management believes reinvesting funds in the business is a better allocation of capital then returning it to shareholders in the form of dividends (which explains why companies traditionally increase their dividend payout ratios as they progress in their lifecycles from young, growing businesses with many reinvestment opportunities to mature, stable businesses with fewer reinvestment opportunities).

The increase in PE ratios that is directly attributable to the decrease in dividend payout ratios causes PE-based valuation metrics to overstate the expensiveness of the current market as compared to historical periods (because those PE-based valuation metrics do not correct for the effects of the downward trend in dividend payout ratios), suggesting that expected future returns are higher (not lower) than they otherwise would be using those PE-based valuation metrics in the absence of a secular change in dividend payout ratios.  (In reality, the downward trend in dividend payout ratios is largely due to a shift in management preferences towards favoring returning capital to shareholders via share buybacks in lieu of dividend payments, in large part precisely because of a lower dividend payout ratio's "artificial" boost to performance metrics.)

You seem to be thinking about how a p/e ratio might rise or fall within a single company.  I'm talking about the general trend of the entire market over it's lifetime.  Take a look at it...

http://www.multpl.com/

Granted, there is a lot of volatility in there, and I don't have the tools to show a precise trend line, but if you look at it you can see that the overall trend of the S&P500 P/E ratio is gradually upwards.  I suspect, but cannot know, that is because the 'lower hanging fruit' of private infrastructure (and thus many investment) opprotunities have already been picked, for an industrial economy as mature as the United States; and therefore, the newer investments are both of a more incremental improvement & of a longer ROI.  Of course, I'm speaking of the entire market in the US today as compared to the past, and not speaking of particular companies, regions or industries; which could move counter to that slow trend over any time period.  So, in our own lifetimes it may not matter, since the 4% rule is very conservative anyway; but it might matter eventually.  It would also imply that 'emerging market' type investments should be part of a 4% withdrawal portfolio.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on January 15, 2016, 02:43:32 PM
You seem to be thinking about how a p/e ratio might rise or fall within a single company.  I'm talking about the general trend of the entire market over it's lifetime.  Take a look at it...

http://www.multpl.com/

Granted, there is a lot of volatility in there, and I don't have the tools to show a precise trend line, but if you look at it you can see that the overall trend of the S&P500 P/E ratio is gradually upwards.  I suspect, but cannot know, that is because the 'lower hanging fruit' of private infrastructure (and thus many investment) opprotunities have already been picked, for an industrial economy as mature as the United States; and therefore, the newer investments are both of a more incremental improvement & of a longer ROI.  Of course, I'm speaking of the entire market in the US today as compared to the past, and not speaking of particular companies, regions or industries; which could move counter to that slow trend over any time period.  So, in our own lifetimes it may not matter, since the 4% rule is very conservative anyway; but it might matter eventually.  It would also imply that 'emerging market' type investments should be part of a 4% withdrawal portfolio.

Yes, I realized you were talking about the entire market, but the "entire market" is just a collection of individual companies, whose P/E ratio consists of the aggregate P/E ratios of those individual companies (and, for the reasons I stated, I still don't follow your logic -- higher P/E ratios imply that investors are expecting more growth, not less).
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on January 15, 2016, 03:02:22 PM
You seem to be thinking about how a p/e ratio might rise or fall within a single company.  I'm talking about the general trend of the entire market over it's lifetime.  Take a look at it...

http://www.multpl.com/

Granted, there is a lot of volatility in there, and I don't have the tools to show a precise trend line, but if you look at it you can see that the overall trend of the S&P500 P/E ratio is gradually upwards.  I suspect, but cannot know, that is because the 'lower hanging fruit' of private infrastructure (and thus many investment) opprotunities have already been picked, for an industrial economy as mature as the United States; and therefore, the newer investments are both of a more incremental improvement & of a longer ROI.  Of course, I'm speaking of the entire market in the US today as compared to the past, and not speaking of particular companies, regions or industries; which could move counter to that slow trend over any time period.  So, in our own lifetimes it may not matter, since the 4% rule is very conservative anyway; but it might matter eventually.  It would also imply that 'emerging market' type investments should be part of a 4% withdrawal portfolio.

Yes, I realized you were talking about the entire market, but the "entire market" is just a collection of individual companies, whose P/E ratio consists of the aggregate P/E ratios of those individual companies (and, for the reasons I stated, I still don't follow your logic -- higher P/E ratios imply that investors are expecting more growth, not less).

Sometimes, but sometimes investors are simply seeking the best yield on capital that they can find.  In fact, I'd say that that's what happens most of the time.  While they may expect that one company is going to grow more than another, they are still two boats riding the same tide.  So while P/E does make sense in your context, trying to decide between multiple specific investments, the overall trend in P/E is still higher.  The demographics of investments (for lack of a better term) implies that capital is increasing & competing for fewer (sound) investments overall, which would be what we would expect to see in a maturing industry.  What I'm saying is, that it looks like the entire investing marketplace, all industries included, are maturing on a multi-generational timeframe; and thus we can expect that yield on capital (dividends in this context) will trend lower, but very slowly.
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on January 15, 2016, 08:56:26 PM
Stocks have tended to perform better over longer time periods and should therefore provide the highest possible SWR's.

This may seem instinctively true but mathematically it's more complicated than that.  Safe Withdrawal Rates are highly influenced not only by average returns but also by annual volatility.  All things being equal, higher volatility lowers the SWR.  So two portfolios with equal average returns may have drastically different withdrawal rates based on the underlying volatility.  And sometimes portfolios with lower average returns but lower volatility can still beat stocks.  That's how you get interesting results like this:

(https://portfoliocharts.files.wordpress.com/2015/09/swr-vs-cagr.jpg)

This plots the returns and calculated SWRs of a variety of different popular lazy portfolios.  Note that the Total Stock Market has one of the highest returns but the lowest SWR!  Also note than none of the top-3 SWR portfolios have more than 40% stocks.  For a more detailed walkthrough, I'd recommend reading this (http://portfoliocharts.com/2015/09/08/why-your-safe-withdrawal-rate-is-probably-wrong/).  And to see an example of a portfolio with only 40% stocks that matches the long-term returns of the stock market with much lower volatility and a much higher SWR, try this (http://portfoliocharts.com/2015/09/22/catching-a-golden-butterfly/).

This is very interesting. I've been a stocks + cash guy during accumulation. No bonds. No gold. Now I'm thinking of going RE I wonder about the volatility of a stocks plus cash portfolio. However, I'm also concerned that bonds and gold are not going to do what they did in these SWR studies.

Example: The Permanent Portfolio:
•25% Long Term Treasuries
•25% Short Term Treasuries
•25% Gold
•25% Total Stock Market

For a portfolio to last 40 years at a 4% SWR it needs investment returns of about 2.5% per year after inflation. Then it's all gone.

•25% Long Term Treasuries - Vanguard Long-Term Treasury Fund Admiral Shares (VUSUX) current yield 2.68%
•25% Short Term Treasuries - Vanguard Short-Term Treasury Fund Admiral Shares (VFIRX) current yield 0.99%
•25% Gold - over the long term will likely keep up with inflation, real return of 0%
•25% Total Stock Market - who knows? But valuation is demonstrably high, which correlates well with sub-par returns.

That's not looking good. It's not looking promising for 2.5% over inflation. And it's certainly not looking like 4-5% over inflation, which is, I expect, what most of us really want (and need).
Title: Re: Stop worrying about the 4% rule
Post by: Tyler on January 16, 2016, 11:17:52 AM
The math behind SWRs is more complicated than just adding up the long-term real return for each individual asset.  For example, gold does generally average a 0% real return in the long run but it is quite volatile year to year.  Rebalancing a diverse portfolio each year allows you to benefit from those short-term movements by selling high and buying low.  Also, volatility of the overall portfolio is a lot more important than most people realize (see How Safe Withdrawal Rates Work (http://portfoliocharts.com/2015/11/17/how-safe-withdrawal-rates-work/)).  So you have to look beyond yield and average returns to get the full story. 

In any case, all portfolios are uncertain looking forward.  IMHO, the key for an early retiree is not to fear or ignore uncertainty but to embrace and plan for it.  Portfolio diversification is just one way to do that, but I think it's a good one.
Title: Re: Stop worrying about the 4% rule
Post by: Eucalyptus on January 18, 2016, 06:04:20 AM
Maybe getting off topic, but with a diversified portfolio Tyler, what would be a simple rule based mechanism for the pre and post retirement stages? My thoughts were:

PRE.
1. Choose your fund allocations as %es.
2. Set regular date (eg 1st Monday each month) to invest savings (invest whatever you get to. Have your own personal rules for this but NOT based on the market if possible...eg rules could be to maintain a certain slush fund for emergencies, day to day, etc).
3. On that 1st Monday, look at your funds, determine which has lost the most (% wise) since last look (previous month).
4. Invest in that to get you back up to your pre determined fund allocation scenario.
5. Invest in next worse performing fund (if still have savings left).
6. Etc

(or could just dispense of 5, 6 and keep it simple by sticking it all in the worst fund each time. Maybe more likely to get out of whack. Maybe not. This might save brokerage fees depending on your situation (Eg for Aussies, everyone pays fees at the moment as far as I can tell).
Rarely (eg once per year, depending on your countries and your personal tax situation)...sell some of highest performing over the previous period (year if choosing year), to rebalance other funds, if required (assuming savings input during year wasn't enough to maintain balance).

POST (keeping it simple, I'm avoiding the issues of pensions, super, social security, etc).
1. Choose your SWR (however you want. Putting that debate aside for the moment).
2. Determine your frequency of withdrawal (eg month, eg six months-put cash aside).
3. Look at % performance change of portfolio since last withdrawal. Choose worst(s) performing ETFs.
4. Withdraw progressively from worst ETF until withdrawn required funds.

Rarely, perform fund rebalancing same as for PRE retirement.

Does that make sense?

I've also simplified by ignoring dividends particularly in the POST environment...different tax and other implications depending on country.
Title: Re: Stop worrying about the 4% rule
Post by: Tyler on January 18, 2016, 01:26:24 PM
Your pre-fire plan is exactly what I did. 

For post-fire, here's what I've done (YMMV).

1) Calculate your budget for the year based on your initial SWR and inflation.
2) Withdraw expenses once a year, coinciding with your annual rebalance.
3) Set dividends and interest to go to cash rather than automatically reinvest.  Use these for expenses first.
4) Sell the assets above your target AA (winners) to make up the difference.  That will also accomplish a partial rebalance.
5) After that, reevaluate what's left and rebalance as needed.  Always be smart about taxes.

It's a good topic.  If you have any more questions, perhaps we can start a new thread. 

Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on January 19, 2016, 06:42:15 PM
The math behind SWRs is more complicated than just adding up the long-term real return for each individual asset.  For example, gold does generally average a 0% real return in the long run but it is quite volatile year to year.  Rebalancing a diverse portfolio each year allows you to benefit from those short-term movements by selling high and buying low.  Also, volatility of the overall portfolio is a lot more important than most people realize (see How Safe Withdrawal Rates Work (http://portfoliocharts.com/2015/11/17/how-safe-withdrawal-rates-work/)).  So you have to look beyond yield and average returns to get the full story. 

Sure. All good. However, we can look at current valuations and yields, and make informed guesses about future returns for each asset class. The total portfolio return will not be the simple average of the various asset classes, but will it be *that* far away from it? Depends on volatility, rebalance timing and other factors. No way to know. To my mind it's better to reduce assets that are all but guaranteed to return a lot less than what is required to sustain our required withdrawal rate. So long term treasuries are out, for a start. Short term treasuries (cash) is needed, of course.

Quote
In any case, all portfolios are uncertain looking forward.  IMHO, the key for an early retiree is not to fear or ignore uncertainty but to embrace and plan for it.  Portfolio diversification is just one way to do that, but I think it's a good one.

Absolutely. Withdrawal rate flexibility is key. A 4% rate may be doable on average, but the early retiree needs to be able to ride through periods of lower withdrawals. Aiming for 3% isn't a bad idea.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on January 22, 2016, 08:12:39 AM
You seem to be thinking about how a p/e ratio might rise or fall within a single company.  I'm talking about the general trend of the entire market over it's lifetime.  Take a look at it...

http://www.multpl.com/

Granted, there is a lot of volatility in there, and I don't have the tools to show a precise trend line, but if you look at it you can see that the overall trend of the S&P500 P/E ratio is gradually upwards.  I suspect, but cannot know, that is because the 'lower hanging fruit' of private infrastructure (and thus many investment) opprotunities have already been picked, for an industrial economy as mature as the United States; and therefore, the newer investments are both of a more incremental improvement & of a longer ROI.  Of course, I'm speaking of the entire market in the US today as compared to the past, and not speaking of particular companies, regions or industries; which could move counter to that slow trend over any time period.  So, in our own lifetimes it may not matter, since the 4% rule is very conservative anyway; but it might matter eventually.  It would also imply that 'emerging market' type investments should be part of a 4% withdrawal portfolio.

Yes, I realized you were talking about the entire market, but the "entire market" is just a collection of individual companies, whose P/E ratio consists of the aggregate P/E ratios of those individual companies (and, for the reasons I stated, I still don't follow your logic -- higher P/E ratios imply that investors are expecting more growth, not less).

Sometimes, but sometimes investors are simply seeking the best yield on capital that they can find.  In fact, I'd say that that's what happens most of the time.  While they may expect that one company is going to grow more than another, they are still two boats riding the same tide.  So while P/E does make sense in your context, trying to decide between multiple specific investments, the overall trend in P/E is still higher.  The demographics of investments (for lack of a better term) implies that capital is increasing & competing for fewer (sound) investments overall, which would be what we would expect to see in a maturing industry.  What I'm saying is, that it looks like the entire investing marketplace, all industries included, are maturing on a multi-generational timeframe; and thus we can expect that yield on capital (dividends in this context) will trend lower, but very slowly.

Ah, I see what you are saying.  But your argument is really based on the overall decrease in the earnings yield (the inverse of the P/E ratio), not the dividend yield (the ratio of dividends to share price).  The downward trend in dividend yields is not just a function of higher P/E ratios, but also the downward trend in dividend payout ratios (the ratio of dividends to earnings, which is what I had been referring to).  That is, we have lower dividend yields today than historically not only because share prices are higher relative to earnings (which, accordingly to your theory, may reflect increased investor competition for fewer investment opportunities in a mature market), but also, in large part, because companies simply choose to retain a higher percentage of their earnings instead of paying them out to shareholders in the form of dividends.
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on January 22, 2016, 11:00:41 PM
You seem to be thinking about how a p/e ratio might rise or fall within a single company.  I'm talking about the general trend of the entire market over it's lifetime.  Take a look at it...

http://www.multpl.com/

Granted, there is a lot of volatility in there, and I don't have the tools to show a precise trend line, but if you look at it you can see that the overall trend of the S&P500 P/E ratio is gradually upwards.  I suspect, but cannot know, that is because the 'lower hanging fruit' of private infrastructure (and thus many investment) opprotunities have already been picked, for an industrial economy as mature as the United States; and therefore, the newer investments are both of a more incremental improvement & of a longer ROI.  Of course, I'm speaking of the entire market in the US today as compared to the past, and not speaking of particular companies, regions or industries; which could move counter to that slow trend over any time period.  So, in our own lifetimes it may not matter, since the 4% rule is very conservative anyway; but it might matter eventually.  It would also imply that 'emerging market' type investments should be part of a 4% withdrawal portfolio.

Yes, I realized you were talking about the entire market, but the "entire market" is just a collection of individual companies, whose P/E ratio consists of the aggregate P/E ratios of those individual companies (and, for the reasons I stated, I still don't follow your logic -- higher P/E ratios imply that investors are expecting more growth, not less).

Sometimes, but sometimes investors are simply seeking the best yield on capital that they can find.  In fact, I'd say that that's what happens most of the time.  While they may expect that one company is going to grow more than another, they are still two boats riding the same tide.  So while P/E does make sense in your context, trying to decide between multiple specific investments, the overall trend in P/E is still higher.  The demographics of investments (for lack of a better term) implies that capital is increasing & competing for fewer (sound) investments overall, which would be what we would expect to see in a maturing industry.  What I'm saying is, that it looks like the entire investing marketplace, all industries included, are maturing on a multi-generational timeframe; and thus we can expect that yield on capital (dividends in this context) will trend lower, but very slowly.

Ah, I see what you are saying.  But your argument is really based on the overall decrease in the earnings yield (the inverse of the P/E ratio), not the dividend yield (the ratio of dividends to share price).  The downward trend in dividend yields is not just a function of higher P/E ratios, but also the downward trend in dividend payout ratios (the ratio of dividends to earnings, which is what I had been referring to).  That is, we have lower dividend yields today than historically not only because share prices are higher relative to earnings (which, accordingly to your theory, may reflect increased investor competition for fewer investment opportunities in a mature market), but also, in large part, because companies simply choose to retain a higher percentage of their earnings instead of paying them out to shareholders in the form of dividends.

I can accept that observation, however the decisions of boardmembers regarding dividends retention or payout tend to reverse themselves over the long run, and don't reflect upon the P/E ratio over generations.  Therefore, the primary (perhaps not the only) long term effect of a generational decrease of earnings yield would be to suppress dividends anyway.  So I don't know how the fact that some companies choose to retain more earnings during one decade over another affects my argument.  In the long run, the dividend yield must still go down proportional to the decrease in the earnings yield; because earnings beget dividends.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on January 23, 2016, 06:28:05 AM
I can accept that observation, however the decisions of boardmembers regarding dividends retention or payout tend to reverse themselves over the long run

Do they?  Dividend payout ratios have been declining since at least 1980 (see here (http://www.advisorperspectives.com/newsletters08/Jeremy_Siegel_on_why_Equities_are_Dirt_Cheap.html)), and I think for much longer (but I'm on my phone so I'm having trouble looking up data).

Quote
In the long run, the dividend yield must still go down proportional to the decrease in the earnings yield; because earnings beget dividends.

Not necessarily; that's exactly my point.  For the past 35 years (at least) there has been a disproportionately high decrease in the dividend yield owing to the decrease in the dividend payout ratio.  Consider what would happen if every company suddenly decided to follow Berkshire Hathaway's lead and stop paying dividends altogether; the overall dividend yield would suddenly shrink to zero, but that wouldn't indicate anything about underlying market fundamentals.
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on January 23, 2016, 08:10:18 AM
I can accept that observation, however the decisions of boardmembers regarding dividends retention or payout tend to reverse themselves over the long run

Do they?  Dividend payout ratios have been declining since at least 1980 (see here (http://www.advisorperspectives.com/newsletters08/Jeremy_Siegel_on_why_Equities_are_Dirt_Cheap.html)), and I think for much longer (but I'm on my phone so I'm having trouble looking up data).

Quote
In the long run, the dividend yield must still go down proportional to the decrease in the earnings yield; because earnings beget dividends.

Not necessarily; that's exactly my point.  For the past 35 years (at least) there has been a disproportionately high decrease in the dividend yield owing to the decrease in the dividend payout ratio.  Consider what would happen if every company suddenly decided to follow Berkshire Hathaway's lead and stop paying dividends altogether; the overall dividend yield would suddenly shrink to zero, but that wouldn't indicate anything about underlying market fundamentals.

Perhaps, but I think even Berkshire Hathaway will eventually pay out dividends. Warren Buffet won't live forever.  Still, that won't change the trend;if earnings are not paid out as dividends, that typically adds to the stock value anyway, so a generationally rising P/E is going to impact the 4% rule whether by dividends or by capital gains.  But at the trendline rate, it's unlikely that any of us will have to be too concerned.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on January 23, 2016, 08:53:01 AM
Still, that won't change the trend;if earnings are not paid out as dividends, that typically adds to the stock value anyway, so a generationally rising P/E is going to impact the 4% rule whether by dividends or by capital gains. 

No, to the extent the increase in P/E is attributable to a decrease in the dividend payout ratio, it would have zero impact on the 4% rule (ignoring tax consequences, if any); all it would mean is that an investor relying on the 4% rule would need to sell more shares (which, as you said, would reflect the higher value of the retained earnings) to make up the shortfall in the dividend payouts, with no net overall impact.
Title: Re: Stop worrying about the 4% rule
Post by: ender on January 23, 2016, 09:36:52 AM
It might be interesting to include in this thread a comprehensive list of "things that could go wrong" and "things you could do to improve chances of FIRE" on the same SWR?

I wrote this post (http://forum.mrmoneymustache.com/welcome-to-the-forum/removing-success-bias-from-safe-withdrawal-rate/msg949380/#msg949380) and it occurred to me it might be interesting to have a large list of reasons why FIRE could be easier or harder than expected.

Title: Re: Stop worrying about the 4% rule
Post by: Ursus Major on January 23, 2016, 10:08:00 AM
Still, that won't change the trend;if earnings are not paid out as dividends, that typically adds to the stock value anyway, so a generationally rising P/E is going to impact the 4% rule whether by dividends or by capital gains. 

No, to the extent the increase in P/E is attributable to a decrease in the dividend payout ratio, it would have zero impact on the 4% rule (ignoring tax consequences, if any); all it would mean is that an investor relying on the 4% rule would need to sell more shares (which, as you said, would reflect the higher value of the retained earnings) to make up the shortfall in the dividend payouts, with no net overall impact.

You are absolutely right that in theory retaining dividends is neutral for investors, but there is one aspect where it would make a difference, whether a company pays dividends or retains them and that is volatility. I believe that on average dividend payouts are much less volatile than stock prices, so downward volatility is going to be much more problematic, if an investor relies on stock sales (and thus stock prices) for most or all of their income generation compared to an investor who gets a decent percentage of their returns as dividend. To the extent that companies now pay less in dividends, this means you have to sell comparatively more of them at low prices during an adverse market event.

This might very well lower the SWR compared to the past.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on January 23, 2016, 01:44:12 PM
You are absolutely right that in theory retaining dividends is neutral for investors

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

Forum user skyrefuge (who has been inactive lately) was best at articulating this point, so I would recommend looking up some of his posts on the topic (and the discussion starting with this post (http://forum.mrmoneymustache.com/investor-alley/blending-dividend-investing-and-index-investing/msg654766/#msg654766) is a really fun read, if you're interested in going down a rabbit hole on this issue).
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on January 23, 2016, 05:33:34 PM
Stocks have tended to perform better over longer time periods and should therefore provide the highest possible SWR's.

This may seem instinctively true but mathematically it's more complicated than that.  Safe Withdrawal Rates are highly influenced not only by average returns but also by annual volatility.  All things being equal, higher volatility lowers the SWR.  So two portfolios with equal average returns may have drastically different withdrawal rates based on the underlying volatility.  And sometimes portfolios with lower average returns but lower volatility can still beat stocks.  That's how you get interesting results like this:

(https://portfoliocharts.files.wordpress.com/2015/09/swr-vs-cagr.jpg)

This plots the returns and calculated SWRs of a variety of different popular lazy portfolios.  Note that the Total Stock Market has one of the highest returns but the lowest SWR!  Also note than none of the top-3 SWR portfolios have more than 40% stocks.  For a more detailed walkthrough, I'd recommend reading this (http://portfoliocharts.com/2015/09/08/why-your-safe-withdrawal-rate-is-probably-wrong/).  And to see an example of a portfolio with only 40% stocks that matches the long-term returns of the stock market with much lower volatility and a much higher SWR, try this (http://portfoliocharts.com/2015/09/22/catching-a-golden-butterfly/).

This is very interesting. I've been a stocks + cash guy during accumulation. No bonds. No gold. Now I'm thinking of going RE I wonder about the volatility of a stocks plus cash portfolio. However, I'm also concerned that bonds and gold are not going to do what they did in these SWR studies.

Example: The Permanent Portfolio:
•25% Long Term Treasuries
•25% Short Term Treasuries
•25% Gold
•25% Total Stock Market

For a portfolio to last 40 years at a 4% SWR it needs investment returns of about 2.5% per year after inflation. Then it's all gone.

•25% Long Term Treasuries - Vanguard Long-Term Treasury Fund Admiral Shares (VUSUX) current yield 2.68%
•25% Short Term Treasuries - Vanguard Short-Term Treasury Fund Admiral Shares (VFIRX) current yield 0.99%
•25% Gold - over the long term will likely keep up with inflation, real return of 0%
•25% Total Stock Market - who knows? But valuation is demonstrably high, which correlates well with sub-par returns.

That's not looking good. It's not looking promising for 2.5% over inflation. And it's certainly not looking like 4-5% over inflation, which is, I expect, what most of us really want (and need).

As I have said before, the backtesting used here is bullshit. Not only is it too short - It's since 1972. That's when we went off the gold standard, and gold had a huge runup. Bonds were paying unusually well, rates got higher for a bit - then anyone holding long bonds from 1980 forward made an absolute killing due to the long decline in interest rates (interest rates fall, value of your bonds goes up.) 1972 was also a pretty poor year to start in stocks.

With today's rates, you simply cannot get that to happen. 30 year treasuries are below 3% (!)
Title: Re: Stop worrying about the 4% rule
Post by: Tyler on January 23, 2016, 08:54:35 PM
The fact that portfolios using assets not included in the Trinity study had different withdrawal rates than the very specific portfolios used in the Trinity study really shouldn't be too surprising.  When you deviate from the assumptions, you change the conclusions.  All we can do is look at the best data available and come to our own conclusions about where to invest our life savings.   

One is free to dislike particular assets for whatever reason they choose and still find value in the interesting results for other portfolios with assets that make them more comfortable.  They can also choose to distrust those results and only invest in things where they have many more decades of data, or they can choose to distrust all SWR studies and take a completely different path to retirement (rentals, income investing, saving more, etc).  All of those methods are perfectly fine, and reasonable people may disagree on the preferable approach.

IMHO, the only unreasonable approach is to blindly follow a SWR calculated for a specific set of assets you do not yourself own. 
Title: Re: Stop worrying about the 4% rule
Post by: Ursus Major on January 24, 2016, 03:24:59 PM
You are absolutely right that in theory retaining dividends is neutral for investors

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

Forum user skyrefuge (who has been inactive lately) was best at articulating this point, so I would recommend looking up some of his posts on the topic (and the discussion starting with this post (http://forum.mrmoneymustache.com/investor-alley/blending-dividend-investing-and-index-investing/msg654766/#msg654766) is a really fun read, if you're interested in going down a rabbit hole on this issue).

Hi brooklynguy,

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

My calculations show a different result and I'd be delighted to have this resolved for myself.
Title: Re: Stop worrying about the 4% rule
Post by: dude on January 25, 2016, 11:26:52 AM
I'm curious is the is reasonable, empirically researched data/studies that make a sincere or valid attempt at invalidating a 4% SWR.  In really dumb terms: the Sith to the Trinity Study's Jedi?

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

http://tinyurl.com/nrywjny

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

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

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

How about sneaking in a 1.67% management fee?

http://www.retireearlyhomepage.com/wadepfau_2016.html
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on January 25, 2016, 12:27:44 PM

How about sneaking in a 1.67% management fee?

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

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

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

Seems reasonable going forward.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on January 25, 2016, 12:44:12 PM
So, take the 1.7%, add back the 1.6% fee, subtract (say) 0.2% for low cost funds and we get 3.1%.

You can't simply add back the investment fee to the WR to correct for its adverse effect; as Pfau himself pointed out back in 2012 (http://retirementresearcher.com/retirement-income-and-the-tyranny-of-compounding-fees/), there is not a one-to-one tradeoff between investment fees and withdrawal rates, because the nominal dollar amount of an investment fee fluctuates in tandem with the nominal value of the portfolio, in contrast with the nominal dollar amount of the withdrawals, which do not change based on fluctuations in the portfolio value (instead, they remain a constant inflation-adjusted dollar amount).
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on January 25, 2016, 07:38:05 PM
So, take the 1.7%, add back the 1.6% fee, subtract (say) 0.2% for low cost funds and we get 3.1%.

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

It's a reasonable first approximation. Yes, it overstates somewhat.
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on January 26, 2016, 06:24:08 AM
So, take the 1.7%, add back the 1.6% fee, subtract (say) 0.2% for low cost funds and we get 3.1%.

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

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

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

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

It would be interesting to see what Pfau would get if he used low cost funds, but I guess he doesn't do that because he's marketing to financial advisors with their 1% fees.
Title: Re: Stop worrying about the 4% rule
Post by: Telecaster on January 26, 2016, 02:26:56 PM
Wade Pfau sure gets a lot of press for offering such marginal advice.   There are two basic solutions to the "future will be worse than the past" problem, one is downgrade your lifestyle by taking a lower WR.  The other is to use low-cost funds.   He of course recommends down grading your lifestyle.   
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on January 26, 2016, 02:44:55 PM
Wade Pfau sure gets a lot of press for offering such marginal advice.   

His analysis is pretty good.

His target audience is.. not us.  So the advice is marginal, for us.  But that doesn't mean we can't glean wisdom from the research.  :)
Title: Re: Stop worrying about the 4% rule
Post by: dude on February 03, 2016, 11:17:09 AM
Regarding this recent discussion, Scott Burns has an excellent piece today:

https://assetbuilder.com/knowledge-center/articles/how-we-live…-and-how-long-our-money-lasts
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on February 03, 2016, 01:02:09 PM
Regarding this recent discussion, Scott Burns has an excellent piece today:

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

This link works.

https://assetbuilder.com/knowledge-center/articles/how-we-live%E2%80%A6-and-how-long-our-money-lasts
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on February 03, 2016, 01:06:18 PM
Regarding this recent discussion, Scott Burns has an excellent piece today:

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

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

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

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

(http://www.businessintelligence.com.s3.amazonaws.com/wp-content/uploads/2013/10/sticker375x360.png)
Title: Re: Stop worrying about the 4% rule
Post by: steveo on February 03, 2016, 11:18:34 PM
So the 4% WR is in my opinion pretty safe so long as you use some common sense. I honestly think a 5% WR can be safe as well especially if you are prepared to work a little as well.

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

(http://www.businessintelligence.com.s3.amazonaws.com/wp-content/uploads/2013/10/sticker375x360.png)

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

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

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

I'm honestly more worried now about FIRE'ing with too much money and hence too little time doing whatever I want to do.
Title: Re: Stop worrying about the 4% rule
Post by: AZryan on February 04, 2016, 05:07:03 PM
Quote from: steveo
5% and some part time work and that is 100% correct.
Are you sure you're getting those percentages right??

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

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

Are you saying you're really only pulling ~4% from investments, but can get an easy extra 1% from part time work, for a total of 5%? 'Cuz that's not saying anything more than that you think 'the 4% rule won't fail'. The extra job/money don't matter to that point.
Very unclear what you're getting at.
Title: Re: Stop worrying about the 4% rule
Post by: matchewed on February 04, 2016, 06:15:54 PM
Because people who believe in inflexibility in their particular SWR number fail to see that you don't have to actually pull that 5% plus inflation every year. Things go shitty you can cut back or earn more.

The investments may not care but cash flow does. Which if you draw down less during bad years you extend your portfolio's viability.
Title: Re: Stop worrying about the 4% rule
Post by: sol on February 04, 2016, 08:52:11 PM
If you're pulling $50K offa' a Million invested, that's 5% and a higher risk of failure than 4%.

That all depends on how you define "failure" doesn't it?  A 4% SWR lasts, on average, forever.  By which I mean that in more than 50% of the historical periods of all lengths, the portfolio survives without being depleted or requiring any spending reductions.  A 5% SWR, by contrast, only lasts an average of 49 years (http://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/msg732843/#msg732843).  If your life expectancy is less than 49 years, then shooting for 4% actually means you have worked too long.  That's also a failure, isn't it?

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

The closest way I can figure to finding that financially optimal retirement date is to look at the 50% success probabilities for each SWR (http://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/msg732843/#msg732843) in the past.  That analysis suggests that someone like me, who is only planning to fund 23 years of retirement, should use a SWR of around 7% per year, and that someone planning a 30 year retirement should use about 6%.  Those are the statistically correct SWRs to use, if you believe that the future market will look like the past market, recessions and all. 

If the future turns out to be as good or better than the past, you will have picked right.  If it turns out to be worse than the past, you'll have to go back to work or reduce your inflation-adjusted spending limits.  I don't think either of those options are so bad that they're worth deliberately failing by working too long up front.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on February 04, 2016, 11:48:38 PM
Quote from: steveo
5% and some part time work and that is 100% correct.
Are you sure you're getting those percentages right??

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

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

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

I'm assuming that you have a simple asset allocation say 70/30 in index funds.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on February 04, 2016, 11:52:38 PM
The only way to "fail" retirement is to be forced into working more than you want to, and there are two ways to do that.  1) work too little, and then have to go back to work, or 2) work too much in the first place.  We can't know in advance what our financially optimal retirement date is because we don't know what future market returns will be.  If you retire before that date, then you'll need to work more in the future.  If you retire after that date then you have worked more than needed in the past.  Using a 4% SWR virtually guarantees (95% chance) that you fail the second way, and decide to work too long. 

Yep. Its not so simple is it. Like I just posted at this point I'm more concerned with working too long.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on February 05, 2016, 12:01:44 AM
Quote from: steveo
5% and some part time work and that is 100% correct.
Are you sure you're getting those percentages right??

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

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

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

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

That's what I meant by "5% may be safe a good chunk of the time even if you DON'T work again.  If you're flexible AND willing to earn some?"
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on February 05, 2016, 12:09:14 PM
Quote from: steveo
5% and some part time work and that is 100% correct.
Are you sure you're getting those percentages right??

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

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

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

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

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

While I agree with this, as it's been explained, I'm not sure if it matches the idea of the safe withdrawal rate concept; since most of the time it refers to a initial year withdrawal rate than then rises with inflation.  If one were to add extra rules, such as, "in a down market year, I get a job and earn $20K and then quit", your SWR (with inflation increases) can be a lot higher; but are we really still talking about the same thing?  If your decisions about how much to withdraw from your savings are based upon as-you-go rules, that's great, but that seems like it would be something different than (initial) safe withdrawal rates (plus inflation).  For example, If $50K per year is more than what I projected my annual expenses would be, I could FIRE with $500K and a rule such as, "97% of the previous year's capital gains, up to a maximum of 10% of total capital at the start of last year" and "if that withdrawal amount is less than $30K, get a job and earn $15K" and "if total capital drops below $440K at any point, freeze withdrawals and get a job."  Rules like those, that change each year or so based upon recent conditions, are great rules to FIRE by; but still seem different to me than what we are talking about in this thread.
Title: Re: Stop worrying about the 4% rule
Post by: AZryan on February 05, 2016, 12:51:22 PM
MoonShadow pretty much just wrote what I was getting at.

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

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

Like I think MoonShadow was also getting at... the point of this thread is about whether the 4% rule is still safe to follow, or if it's a simplistic, outdated starting point and instead, we should be focused on these highly flexible/random tactics to keep failure away.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on February 05, 2016, 01:07:58 PM
The point is simply that flexibility to supplement income and/or reduce spending are both part of the multiple external layers of safety margin that are deliberately ignored by the 4% rule but usually exist in the real world.  So, to reiterate the overarching theme of this thread, strict adherence to the 4% rule is highly safe, and flexible adherence to the 4% rule is exceedingly safe.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on February 05, 2016, 02:22:34 PM
The point is simply that flexibility to supplement income and/or reduce spending are both part of the multiple external layers of safety margin that are deliberately ignored by the 4% rule but usually exist in the real world.  So, to reiterate the overarching theme of this thread, strict adherence to the 4% rule is highly safe, and flexible adherence to the 4% rule is exceedingly safe.

This is the point. The 4% rule as stated is a rigid rule defined as withdrawing 4% the first year and increasing that by inflation each year thereafter. Personally I can't see myself spending like that and I will have a range to spend within. I'm flexible with my spending and I may also choose to work part time for some time after becoming FI. All of these points make the 4% or 5% rule pretty safe for me.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on February 05, 2016, 02:34:13 PM
But if you put caveats and asterisks on how to define your retirement number, then how do you know when to retire?  Are you saying that 4% SWR is way too conservative and are putting in votes for 5% or higher?  There has been a lot of good discussion in this thread (like Sol's definition of 'retirement failure' and why he thinks 6 or 7% are better SWRs), but it's getting buried. 

I still think 4% is the best starting point for defining FI.  All of the extra fluff (how to react to good/bad series of returns in the first 5-10 years) is a totally different, endless discussion and speculation.  Just my 2 cents, but we really do seem to be going in circles as opposed to introducing new ideas.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on February 05, 2016, 02:57:55 PM

MoonShadow pretty much just wrote what I was getting at.

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

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

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

It doesn't happen.

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

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

But for the people worried about 4%, having flexibility is just another level of safety margin, because your effective WR will be lower if you're willing to decrease spending or earn money.  It's not necessary, but it may provide some peace of mind for the worriers.
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on February 05, 2016, 03:01:46 PM

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

True, but there is also the consideration about ability to return to work.  Those of use who retire early, and not for medical reasons, can expect to be able to fall back on returning to work for a period of time.  However, it may not be wise for us to assume that we can continue to do this after a certain age.  I think it's reasonable to assume that just about any of us could return to work, at pretty much anything, and expect to make at least $20K in a year until 55 or 60 years old.  I wonder if there is a way to run that scenario through a monte carlo simulator and find out how many times our expenses we would need, at minimum to FIRE, if we could tell it that to reduce the absolute withdrawal rate by $20K (plus inflation) following any year with a year-over-year decline in the stock market; up to age 60 or so.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on February 05, 2016, 03:10:37 PM
But if you put caveats and asterisks on how to define your retirement number, then how do you know when to retire? 

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

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

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

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

The later issues lead to the OMY syndrome more than the $$ do in my opinion.
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on February 05, 2016, 03:14:26 PM

MoonShadow pretty much just wrote what I was getting at.

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

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

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

It doesn't happen.

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

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

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

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

Notably, we here on this forum are not looking for certainty, but what we are also looking at retirement time periods much longer than the average, so we still need to favor conservatively.  What I am looking for, and I think what most of us are looking for, is what Sol was talking about; that special multiple of our expenses, that we can set as our target, where we cross from unlikely to succeed to likely to succeed historically, without falling back upon earning income in some other way.  Because while we know we can do so for many years, and that odds are high that we will be earning income external to our savings gains anyway, we want to know what that "May the odds be ever in your favor" point should be.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on February 05, 2016, 04:09:07 PM
What I am looking for, and I think what most of us are looking for, is what Sol was talking about; that special multiple of our expenses, that we can set as our target, where we cross from unlikely to succeed to likely to succeed historically, without falling back upon earning income in some other way.

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

The 4% rule, as a worst case or near-worst case protection strategy, was deliberately designed to have a total or near-total historical success rate in order to compensate for our inability to pre-identify (with any reasonable degree of certainty) those retirement commencement dates that are destined to result in failure.  But people tend to forget that, and start building layers of safety upon layers of safety to the point of absurdity, at the cost of years of lost retirement upfront.
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on February 05, 2016, 05:00:56 PM
the answer is a portfolio valued at slightly under 17x expenses, the inverse of a withdrawal rate slightly over 5.88%)--but that's not at all what most folks around here are actually looking for. It's a rare individual indeed who has the cojones to pull the retirement ripcord as soon as chances of success pass the "more likely than not" threshold

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

EDIT:  If I can double that number before 55, I'm FIRE'd that very day.
Title: Re: Stop worrying about the 4% rule
Post by: sol on February 05, 2016, 05:05:37 PM
It's a rare individual indeed who has the cojones to pull the retirement ripcord as soon as chances of success pass the "more likely than not" threshold

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

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

So I plan my expenses with some nice safety buffer that could be cut, and stop worrying about ever working again.  If you are the rare type to retire on a true bare bones budget (under $10k/yr maybe?) then cutting expenses might not work for you.  But I live in a big fancy house and drive a big fancy car and eat abundant big fancy meals, and all of those things could take a 50% reduction without really impacting my overall life happiness level.  More likely, a 5% SWR means I'll have to find some way to spend even more money on those things, but in the off chance I have to spend less because the US economy has collapsed, that's easy too.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on February 05, 2016, 05:13:44 PM
You retire when you feel your FIRE tool kit is ready. That includes:

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

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

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

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

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

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

MoonShadow - I have 3 kids and I intend to be retired well before they all finish school. My oldest is 14 and I can't see myself retiring prior to her finishing school but my youngest is 5 and I expect to be retired before he starts high school.
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on February 05, 2016, 07:02:24 PM

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

I have 5 kids, and my youngest is 3.  I have 55 as my target age because; she will turn 18 a month after I turn 55, all my older children will either be through college, or paid for by the state, and the "55 and out" ER rule with a 401k.  However, as I said above, that is just my target at present; because I really do love my job.  If conditions here suddenly change, and I start hating my work or they start hating me, I can see FIREing before 55; or taking a sabbatical before finding new work.  But if I succeed at significantly reducing my expenses, or significantly increasing my income; so that my relative savings rate shoots up & I can double my 'bare minimum' FIRE target (let's say it's 17x) before 55, I'm out.  That would be 34x my expenses, or a SWR of about 3%, so it truly would be a stupid waste of lifespan for me to continue working, no matter how much I love my job. This is really doable once I turn 55, because I believe that I can reduce my expenses significantly once all my kids are out of the house, by downsizing to a small condo or just selling the house & moving into an RV or a small yacht.  (The costs of living on a sailboat tend to increase at an exponential rate relative to the length of the boat, so it's possible to live well & cheap living on a boat, but only if it's small & you are able to do your own maintenance, which I am).  My wife & I are pretty frugal, but kids are simply expensive; and the state busybodies tend to get nosy if your kid's address at their school is a marina slip number.  (And even the marina slip rental would kill the fiscal advantages of living aboard a boat)  We do homeschool our older two, who are highschool aged now, and are likely to do so for our youngest (we might not for our two middle boys, who do not respond well to my wife's educational style) but to register a child in Kentucky as a homeschooler, a GPS location somewhere on the Ohio River doesn't fly, and neither does a PO box number.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on February 05, 2016, 09:35:57 PM
My wife & I are pretty frugal, but kids are simply expensive

I get this. Kids just cost money. You can minimise this but I can't just cut this to bare bones level. If the kid needs swimming lessons for instance we pay for it.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on February 06, 2016, 07:42:56 AM
The 4% rule, as a worst case or near-worst case protection strategy, was deliberately designed to have a total or near-total historical success rate in order to compensate for our inability to pre-identify (with any reasonable degree of certainty) those retirement commencement dates that are destined to result in failure.  But people tend to forget that, and start building layers of safety upon layers of safety to the point of absurdity, at the cost of years of lost retirement upfront.

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

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

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

I have no kids so I really have no use for accumulating a fortune.
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on February 06, 2016, 11:53:06 AM
My wife & I are pretty frugal, but kids are simply expensive

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

Indeed.

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

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

Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on February 06, 2016, 12:29:40 PM
My wife & I are pretty frugal, but kids are simply expensive

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

Indeed.

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

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

I'd say you need to accurately estimate your expenses, including known unknowns.  But that doesn't require any extra safety margins, as it's already plenty safe, as long as that has been done correctly.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on February 06, 2016, 12:54:52 PM
In my mind, 50% success rate of the 6% SWR means I am just as likely to have to increase my spending as reduce my spending, later in retirement. 

But isn't it kind of arbitrary to use the historical 50% success rate as your trigger point?  As we've discussed before, a given WR's historical success rate can only serve as a proxy for your own probability of success if you assume (among other assumptions) that every retirement commencement date has an equal likelihood of success regardless of then-existing market conditions, which we know to be false.  I suppose it's no different than the sense of false precision inherent in any historical SWR-based strategy, though.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on February 06, 2016, 03:46:50 PM
My wife & I are pretty frugal, but kids are simply expensive

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

Indeed.

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

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

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

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

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

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

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

Expenses can increase significantly and unpredictably.

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

http://www.gocurrycracker.com/obamacare-optimization-early-retirement/
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on February 08, 2016, 08:36:34 PM
As long as we have the ACA

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

Point being, some expenses are hard to predict, so a margin of safety is needed when estimating expenses (or when deciding on a withdrawal rate - amounts to the same thing).
Title: Re: Stop worrying about the 4% rule
Post by: Eric on February 09, 2016, 10:45:19 AM
As I mentioned, it's the subsidies that keep the premiums stable.  So if you don't qualify for those, then your premiums wouldn't be stable.  Best to cut some of that excess spending, considering that 400% of the FPL is pretty damn spendy.
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on February 10, 2016, 08:05:07 AM
As I mentioned, it's the subsidies that keep the premiums stable.  So if you don't qualify for those, then your premiums wouldn't be stable.  Best to cut some of that excess spending, considering that 400% of the FPL is pretty damn spendy.

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

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

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

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

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

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


Unfortunately, none still alive.  And in my school district, they actually investigate such claims.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on February 13, 2016, 04:34:11 PM
(The costs of living on a sailboat tend to increase at an exponential rate relative to the length of the boat, so it's possible to live well & cheap living on a boat, but only if it's small & you are able to do your own maintenance, which I am).  My wife & I are pretty frugal, but kids are simply expensive; and the state busybodies tend to get nosy if your kid's address at their school is a marina slip number.  (And even the marina slip rental would kill the fiscal advantages of living aboard a boat)  We do homeschool our older two, who are highschool aged now, and are likely to do so for our youngest (we might not for our two middle boys, who do not respond well to my wife's educational style) but to register a child in Kentucky as a homeschooler, a GPS location somewhere on the Ohio River doesn't fly, and neither does a PO box number.

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


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

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

Make some friends.
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on February 13, 2016, 11:14:41 PM

Make some friends.

But, Dude, they keep dying.

Hey, Tom; would you be my friend.  It's probably all just coincidence.
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on February 13, 2016, 11:17:46 PM

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


By investigate, I mean that they actually do that.  As in, knock on the front door as ask to see the child's bedroom, kind of investigate.  Seriously, I live in one of the most desired public school districts in the state, and it's a criminal misdemeanor to claim a child lives in the home, when they do not.  It's really asking too much of anyone.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on February 14, 2016, 07:12:55 AM

Make some friends.

But, Dude, they keep dying.

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

Well, stop picking friends based on how quickly they get to the front of the line at the ER!
Title: Re: Stop worrying about the 4% rule
Post by: bo_knows on February 17, 2016, 01:38:48 PM
Does anybody know if it is possible to get a CSV of all the terminal portfolio values in a simulation run?

I looked at cFIREsim and there is a checkbox for Create CSV file with output stats in the right column.  Then, once you get the results plot there is a Download Simulation Data link at the bottom of the page.  However, the CSV file was weird.  I did the default simulation for 2015-2045 retirement and the CSV file only has rows for 1956-1985.  The CSV file does have ending portfolio value with and w/o inflation adjust.  So, it seems to have a bug in the CSV file generator.

It picks a retirement year for you (in this case 1956). I haven't been able to figure out how to get it to run a specific year you are interested in.

This is my problem. I want all the output data, not just a subset.

Yes, I know, cFIREsim is a great resource that's provided for free, and I should be happy that I even have access to such a tool in the first place.

I'll look into this.  It SHOULD be giving ALL of the data.

I admittedly have not been paying attention to cFIREsim as of late.  I made a big push at the end of last year to get a new job, and the last month I've been ramping up to learn more at this new job.

I'll report back when I can.
Title: Re: Stop worrying about the 4% rule
Post by: 2lazy2retire on March 09, 2016, 10:01:18 AM

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


By investigate, I mean that they actually do that.  As in, knock on the front door as ask to see the child's bedroom, kind of investigate.  Seriously, I live in one of the most desired public school districts in the state, and it's a criminal misdemeanor to claim a child lives in the home, when they do not.  It's really asking too much of anyone.

 "I live in one of the most desired public school districts in the state" << everyone thinks this LOL. Anyway I doubt the local school reps have authority to inspect anyone's bedroom?
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on March 09, 2016, 11:33:49 AM

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


By investigate, I mean that they actually do that.  As in, knock on the front door as ask to see the child's bedroom, kind of investigate.  Seriously, I live in one of the most desired public school districts in the state, and it's a criminal misdemeanor to claim a child lives in the home, when they do not.  It's really asking too much of anyone.

 "I live in one of the most desired public school districts in the state" << everyone thinks this LOL. Anyway I doubt the local school reps have authority to inspect anyone's bedroom?

That's was hyperbole, but they do have the authority to go to some rather great lengths to make certain that the child actually does live in the district.  It is a very good school district, and there have been cases of some people claiming that their grandchildren live in their home, while the parents live in another district.  They pretty much accept this on faith; but if they are never riding the bus, but always dropped off at the school by their parents instead of the grandparents, they will grow suspicious.  More than one family has been caught doing this kind of nonsense.  The practical consequences are low, however, as they usually just end up with a court order to transfer their kid at the end of the school year.  I'm not sure if some kind of fine has ever been imposed.
Title: Re: Stop worrying about the 4% rule
Post by: retiringearly on March 09, 2016, 11:36:40 AM
in
Title: Re: Stop worrying about the 4% rule
Post by: AZryan on March 09, 2016, 11:42:21 PM
Quote from: MoonShadow
-I live in one of the most desired public school districts in the state-

There are 'desired school districts' in KY?

Wow... I did not know that.

heh... I kid
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on March 10, 2016, 01:01:11 PM
Quote from: MoonShadow
-I live in one of the most desired public school districts in the state-

There are 'desired school districts' in KY?

Wow... I did not know that.

heh... I kid

http://www.zillow.com/ky/districts/oldham-county-school-district-441396/#/ky/districts/oldham-county-school-district-441396/level=elem%2Cmid%2Chigh&type=public

This is the school district ranking page on Zillow.  The overall average ranking (1 to 10) is a 9, I don't know why the box on the upper right displays a 1.  All of the surrounding districts, except Anchorage, are lower.  Most are much lower.  I think that it would be pretty cool to find out what Zillow thinks of other member's school districts around the country.  If you lived in nearby Jefferson County (where the city of Louisville is identical to the county in size & borders; so this averages both the inner city & suburban schools) is a 5, you can see why there is some motivation to fake an Oldham county residence.
Title: Re: Stop worrying about the 4% rule
Post by: 2lazy2retire on March 11, 2016, 07:21:02 AM
Quote from: MoonShadow
-I live in one of the most desired public school districts in the state-

There are 'desired school districts' in KY?

Wow... I did not know that.

heh... I kid

Best school district in KY,  I guess everything is relative ;)
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on March 11, 2016, 11:43:55 AM
Quote from: MoonShadow
-I live in one of the most desired public school districts in the state-

There are 'desired school districts' in KY?

Wow... I did not know that.

heh... I kid

Best school district in KY,  I guess everything is relative ;)

A pox upon all your houses.  Next you uppity yankees are going to insist that a education requires shoes.
Title: Re: Stop worrying about the 4% rule
Post by: 2lazy2retire on March 14, 2016, 11:57:01 AM
Quote from: MoonShadow
-I live in one of the most desired public school districts in the state-

There are 'desired school districts' in KY?

Wow... I did not know that.

heh... I kid

Best school district in KY,  I guess everything is relative ;)

A pox upon all your houses.  Next you uppity yankees are going to insist that a education requires shoes.

:) :)
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on June 01, 2016, 04:20:32 PM
Is 4.5% WR still safe?

For the 2000 and 2008 retiree Bengen says yes.

http://www.fa-mag.com/news/is-4-5---still-safe-27153.html?section=47

Title: Re: Stop worrying about the 4% rule
Post by: Livewell on June 05, 2016, 11:16:35 AM
Is 4.5% WR still safe?

For the 2000 and 2008 retiree Bengen says yes.

http://www.fa-mag.com/news/is-4-5---still-safe-27153.html?section=47

Thanks for posting! 

I think the answer remains aim for 4% and keep yourself flexible (especially in the first 10 years) and everything will work out.  It's good to read this type of data to back up that hypothesis!
Title: Re: Stop worrying about the 4% rule
Post by: thinkinahead on June 16, 2016, 01:35:56 PM
How does 4% withdrawal rule hold up with someone who retire in Japan around 1990ish?
Title: Re: Stop worrying about the 4% rule
Post by: DrF on June 16, 2016, 01:50:07 PM
depends on if they were invested in Japanese stocks or US stocks (or other). I wonder what landlording has looked like in Japan over the last ~25-30 years. My guess is on an island, probably not too bad.
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on June 16, 2016, 01:54:21 PM
depends on if they were invested in Japanese stocks or US stocks (or other). I wonder what landlording has looked like in Japan over the last ~25-30 years. My guess is on an island, probably not too bad.

Don't assume that.  Japan is the the only country on Earth that has a 3 generation mortgage period. (100 years)  If such a term is required, then the odds are high that rent wouldn't cover a 30 year note payment.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on June 16, 2016, 03:08:45 PM
How does 4% withdrawal rule hold up with someone who retire in Japan around 1990ish?

If they were (foolishly IMO) 100% Japanese stocks, then probably not great. But you can google for that. But if they were cap-weight globally diversified, they probably did OK.
Title: Re: Stop worrying about the 4% rule
Post by: k9 on June 24, 2016, 04:04:47 AM
How does 4% withdrawal rule hold up with someone who retire in Japan around 1990ish?

If they were (foolishly IMO) 100% Japanese stocks, then probably not great. But you can google for that. But if they were cap-weight globally diversified, they probably did OK.

forummm, do you think US investors that are almost-100% stocks are foolish, too? If not, what makes them different? (hint: in the 80s, there were Japanese stocks investors that believed stocks always go up on the long run, as it always did historically, so don't panic, stay the course and you'll be fine).

Anyway, according to portfoliocharts.com, a 50% pacific / 50% total bond investor (remember those studies are made on a 50/50 portfolio) has a... 4.4% SWR, which is better than 100% US stocks (4.2%). But a 100% pacific investor (sic) has a 2.3% SWR.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on June 24, 2016, 10:42:37 AM
How does 4% withdrawal rule hold up with someone who retire in Japan around 1990ish?

If they were (foolishly IMO) 100% Japanese stocks, then probably not great. But you can google for that. But if they were cap-weight globally diversified, they probably did OK.

forummm, do you think US investors that are almost-100% stocks are foolish, too? If not, what makes them different? (hint: in the 80s, there were Japanese stocks investors that believed stocks always go up on the long run, as it always did historically, so don't panic, stay the course and you'll be fine).

Anyway, according to portfoliocharts.com, a 50% pacific / 50% total bond investor (remember those studies are made on a 50/50 portfolio) has a... 4.4% SWR, which is better than 100% US stocks (4.2%). But a 100% pacific investor (sic) has a 2.3% SWR.

Do you mean 100% US stocks? Yes, I think that's foolish if you have a decent NW (if you are just starting out, it's totally fine). The US is the only market where that's more forgivable because we are pretty interlinked with much of the rest of the world. But I wouldn't be too reliant on long term performance of any one country. If you live in the US you will already have so much of your life reliant on the economy here anyway (SS, MC, availability of jobs, cost of goods, cost of healthcare, inflation, growth, etc). Why throw 100% of your savings into that mix as well? I'm ~50/50 US/Intl (like the market cap).
Title: Re: Stop worrying about the 4% rule
Post by: k9 on June 24, 2016, 10:58:22 AM
So we pretty much agree. Thanks for your answer.
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on June 28, 2016, 07:47:43 AM
Reading Bill Bernstein's "The Investor's Manifesto" - great book BTW - page 45:

"When all is said and done, I still know of no better risk analysis tool for retirees under the age of 70 than this simple arithmetic: At a 2% withdrawal rate, your nest egg will survive all but catastrophic institutional and military collapse; at 3%, you are probably safe; at 4%, you are taking real chances; and at 5% and beyond, you should consider annuitizing most, if not all, of your nest egg".

Bernstein is on the pessimistic side of future return forecasting:
https://www.bogleheads.org/wiki/Historical_and_expected_returns#William_Bernstein

U.S. Large-Cap Stocks 2% real
Treasury Bills, Notes, and Bonds -1% real
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on June 28, 2016, 08:00:27 AM
Mad Fientist on the 4% SWR:
http://www.madfientist.com/safe-withdrawal-rate/

"As you can see, there is actually a strong correlation between the two so you can use the Shiller P/E 10 (a.k.a. Shiller CAPE) to predict safe withdrawal rates!

This exciting realization prompted me to use my programming skills to create a new Safe Withdrawal Rate indicator for the FI Laboratory. Now, you can log in at any time and see an up-to-date safe withdrawal rate estimate based on the most-recent Shiller CAPE value!"

Current SWR estimate: 3.8 - 3.9%

"Calculated using the 05/01/2016 Shiller CAPE Ratio of 25.49"

Title: Re: Stop worrying about the 4% rule
Post by: Systems101 on June 29, 2016, 08:38:14 PM
An interesting perspective ("The “Feel Free” Retirement Spending Strategy"):
http://www.investmentnews.com/assets/docs/CI105854622.PDF

It simple, but I would like to see a lot more math behind it and how the extra buffer addresses the one time events/tail risk (which is basically what is addressed by going below 4%)
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on June 29, 2016, 09:04:32 PM
An interesting perspective ("The “Feel Free” Retirement Spending Strategy"):
http://www.investmentnews.com/assets/docs/CI105854622.PDF

It simple, but I would like to see a lot more math behind it and how the extra buffer addresses the one time events/tail risk (which is basically what is addressed by going below 4%)

Making up numbers is fun, but pretty pointless.

His range is take your age, divide by 10-20, and that's your range of spending, in percent.  So a 70 year old can spend between 70/20 = 3.5% and 70/10 = 7%.

A 40 year old?  Between 2 and 4%. 

And he really harps on the "feel free" part of it (see, for example, the conclusion).  Having a 40 year old spend 2%, a 60 year-old spend 3%, and a 70 year old 3.5% is quite low. This method leaves one to over-save, and work longer than necessary, IMO.  It's overly simplistic, which makes it mostly useless.

If you want more precise than a broad rule you try to apply to everyone, regardless of age, circumstance, etc., run cFIREsim calcs with variable spending and floors/ceilings.

This whole thread gives reasons why you can stop worrying about the 4% rule, and go with it.  Taking this more conservative "divide by 20" idea is the opposite of what this thread is advocating.  :)
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on June 30, 2016, 08:45:54 AM
These 'retirement age' comments remind me of an article I read the other day - https://assetbuilder.com/knowledge-center/articles/to-live-well-you-need-lots-of-money

Basically, you can retire whenever you want and live very well with no possiblity of running out of money (living on today's ~2% dividend and bond yield) if you have 4 - 5 MM.  You can use a 4% SWR to bring that requirement down to $2MM (if you believe high CAPE + low yield environment will not influence the 4% rule eligibility going forward).  And finally, as you get closer to SS eligibilty, savings required come down dramatically due to having a new source of supplemental COLA'ed lifetime income.

For Mustachians, you can also live on less than the 'life of Riley' top 25th percentile income ($77,824) which reduces all of the figures proportionately. Even if you don't agree with the numbers per se, the anaylsis is interesting and can be tailored to fit your own scenario if you play with the table at the end of the article.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on June 30, 2016, 05:08:30 PM
That article basically confirms our numbers.

His premise is to live what he calls the Life of Riley, you need ~$77,824/yr.  IMO, a Mustachian can easily live just as well as most people spending that much, but while spending half that, simply due to optimization and efficiency.

His article notes:
Quote
Suppose you take a regular safe withdrawal rate of 4 percent from your portfolio? You’d need ... $1,945,600

Now cut that in half, and you're just under 1MM.  Seems like what many here are shooting for.  Perfect.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on June 30, 2016, 07:55:47 PM
Which is exactly how I'd expect you to comment ARS.  I re-wrote my initial post about 10x so that it wasn't too easily dismissed as having flawed assumptions, so I'm glad you made it sound acceptable.  Glad to have the real IRP back commenting on everything :) 
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on June 30, 2016, 08:47:49 PM
I read that twice, and have no idea what you're talking about. :)

Sent from my Nexus 5X using Tapatalk

Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on June 30, 2016, 09:15:31 PM
https://www.youtube.com/watch?v=u7Mi6N5ZoN0 :)
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on June 30, 2016, 11:53:33 PM
Admittedly, I skipped around after about 20 seconds, but that didn't clarify anything. :)
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on July 01, 2016, 09:10:14 PM
Mad Fientist on the 4% SWR:
http://www.madfientist.com/safe-withdrawal-rate/

"As you can see, there is actually a strong correlation between the two so you can use the Shiller P/E 10 (a.k.a. Shiller CAPE) to predict safe withdrawal rates!

This exciting realization prompted me to use my programming skills to create a new Safe Withdrawal Rate indicator for the FI Laboratory. Now, you can log in at any time and see an up-to-date safe withdrawal rate estimate based on the most-recent Shiller CAPE value!"

Current SWR estimate: 3.8 - 3.9%

"Calculated using the 05/01/2016 Shiller CAPE Ratio of 25.49"

The problem is that the calculation of  "earnings" shifted quite significantly with Sarbanes Oxley, likely in a pessimistic direction.  This makes Shiller CAPE likely too pessimistic as well.
Title: Re: Stop worrying about the 4% rule
Post by: k9 on July 08, 2016, 07:24:45 AM
Hey, I read a very interesting (and very old) post on Bogleheads yesterday, and wanted to share it with you, but I can't find it anymore :(, so apologies to author but I can't link to it. However, here's the general idea.

We have 2 mustachians (let's call them M1 and M2) on their path to FIRE. They have the very same age (they can even be twins, if you like). M1 had a huge downfall, and suddenly owns $ 1 million. Cool, that's even more than he needs, so he retires, and SWR states he can spend $ 40 000 (4%) per year. $ 30 000 (3%) would be quite conservative, and $ 50 000 (5%) would be quite risky. M1 is conservative, and he didn't expect having so much money in the first place, so he goes for 3%.

Five years later, the market fell and M1's portfolio is now worth $ 700k, but that's okay, the rule states he can still spend inflation-adjusted $ 30 000 (let's say 35 000 in today's dollars) and it was a conservative choice in the first place, so let's keep on tracks. Well, it happens M2 saved agressively these last 5 years, and now owns 700k, too, which allows him to FIRE. The 4% SWR rule states he can spend $ 28 000 per year, with $21k (3%) being very conservative and $35k (5%) being quite risky. M2 loves risk (after all, he has a lot of safety margins), so he goes for 5%.

No, here's the question. M1 and M2 both have the very same life expectancy, both have the very same net worth, the very same asset allocation and both spend $35k per year. How on earth can a spending pattern be very conservative and very aggressive at the same time ???

Sounds like a riddle of the Sphinx. Enjoy.
Title: Re: Stop worrying about the 4% rule
Post by: MDM on July 08, 2016, 07:46:11 AM
M1 and M2 both have the very same life expectancy, both have the very same net worth, the very same asset allocation and both spend $35k per year. How on earth can a spending pattern be very conservative and very aggressive at the same time ???
For one thing, the SWR calculation is built on a 30 year assumption.  M1 has used 5, so has only 25 to go, while M2 has to last the full 30.
Title: Re: Stop worrying about the 4% rule
Post by: 2Birds1Stone on July 08, 2016, 08:00:12 AM
M1 and M2 both have the very same life expectancy, both have the very same net worth, the very same asset allocation and both spend $35k per year. How on earth can a spending pattern be very conservative and very aggressive at the same time ???
For one thing, the SWR calculation is built on a 30 year assumption.  M1 has used 5, so has only 25 to go, while M2 has to last the full 30.

Great answer MDM

Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on July 08, 2016, 08:00:57 AM
M1 and M2 both have the very same life expectancy, both have the very same net worth, the very same asset allocation and both spend $35k per year. How on earth can a spending pattern be very conservative and very aggressive at the same time ???
For one thing, the SWR calculation is built on a 30 year assumption.  M1 has used 5, so has only 25 to go, while M2 has to last the full 30.

That has no bearing on this as both have a current portfolio of $700k.  The answer is in the sequence of returns risk/benefit.   While there is no way to predict what the markets will do with any certainty it is fairly easy and reasonable to assume that after a 30% drop in the market from $1mil to $700k (or much much more if it was a balanced portfolio) you can be more aggressive.  The opposite (Risk) is also true, after a long/large run up that there is more risk of the portfolio declining than climbing at least in the near to intermediate term.

If I had enough to FIRE in 2009 then 4% or higher WR would make sense, but in 2006 or even now I don't think so and am more in the 3-3.5% WR view. 
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on July 08, 2016, 08:02:55 AM
M1 and M2 both have the very same life expectancy, both have the very same net worth, the very same asset allocation and both spend $35k per year. How on earth can a spending pattern be very conservative and very aggressive at the same time ???

Sounds like a riddle of the Sphinx. Enjoy.

The two identical spending plans (inflation-adjusted $35k per year for the next X years using a $700k portfolio commencing on the same date) obviously have identical risk profiles.  In characterizing one as conservative and the other as aggressive, you're just ignoring all of the context that serves as a frame of reference.

Here's a similar story:  M1 lives on a remote, isolated island where the average height of the population is 5 feet, and the tallest individual on the island is 5 feet 8 inches.  M1 is 5 feet 6 inches tall, and consequently considers himself quite tall.  M2 lives on a different remote, isolated island where the average height of the population is 6 feet, and the shortest individual on the island is 5 feet 4 inches.  M2 is 5 feet 6 inches tall, and consequently considers himself quite short.

Now, here's the question.  M1 and M2 are both exactly the same height.   How on earth can a given height be quite short and quite tall at the same time???

The approach of using historical SWRs to forecast the likelihood of future portfolio success deliberately ignores all current context, implicitly assuming that every retirement start date has an equal likelihood of success regardless of then-existing market conditions.  In the real world, we all know this assumption is not true.  In your example, an X% spending plan using a $700k portfolio is necessarily more likely to succeed starting on M2's retirement start date (after the market dropped) than on M1's start date (before the market dropped).
Title: Re: Stop worrying about the 4% rule
Post by: MDM on July 08, 2016, 08:34:08 AM
For one thing, the SWR calculation is built on a 30 year assumption.  M1 has used 5, so has only 25 to go, while M2 has to last the full 30.
That has no bearing on this as both have a current portfolio of $700k.  The answer is in the sequence of returns risk/benefit.

The 30 year assumption is one thing, and the sequence of returns is yet another.  No need to argue - both have a bearing.
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on July 08, 2016, 08:52:10 AM
For one thing, the SWR calculation is built on a 30 year assumption.  M1 has used 5, so has only 25 to go, while M2 has to last the full 30.
That has no bearing on this as both have a current portfolio of $700k.  The answer is in the sequence of returns risk/benefit.

The 30 year assumption is one thing, and the sequence of returns is yet another.  No need to argue - both have a bearing.

Sure when you start out in the context of the 4% rule, but in the context of the actual question the timeframe doesn't matter.  As Brooklynguy said:

The two identical spending plans (inflation-adjusted $35k per year for the next X years using a $700k portfolio commencing on the same date) obviously have identical risk profiles.   
Title: Re: Stop worrying about the 4% rule
Post by: k9 on July 08, 2016, 08:54:20 AM
For one thing, the SWR calculation is built on a 30 year assumption.  M1 has used 5, so has only 25 to go, while M2 has to last the full 30.
Sure, but it keeps being used in FIRE communities where retirements are supposed to last much longer than 30 years.

That has no bearing on this as both have a current portfolio of $700k.  The answer is in the sequence of returns risk/benefit.
Yes, precisely. M1 and M2 will face the same sequence of returns from that point, and SWR theory just ignores that.

The approach of using historical SWRs to forecast the likelihood of future portfolio success deliberately ignores all current context, implicitly assuming that every retirement start date has an equal likelihood of success regardless of then-existing market conditions.  In the real world, we all know this assumption is not true.
My point exactly. I think that SWR thing is overrated. I agree 25 x annual expenses (which is just SWR-1) is a good approximate target for people hoping to FIRE (or just to retire at "regular" age), but that's about it.

Anyway, I'm pretty sure nobody on earth ever used this rule unmodified from the day they retired until their death. So, stop worrying about the 4% rule: it's not even a rule, it's just a raw indication of how much net worth you should target before you can retire.
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on July 08, 2016, 09:33:39 AM
If I had enough to FIRE in 2009 then 4% or higher WR would make sense, but in 2006 or even now I don't think so and am more in the 3-3.5% WR view.

Be careful. With that kind of rational thought you'll get labeled as a doomer-gloomer.
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on July 08, 2016, 09:43:16 AM
If I had enough to FIRE in 2009 then 4% or higher WR would make sense, but in 2006 or even now I don't think so and am more in the 3-3.5% WR view.

Be careful. With that kind of rational thought you'll get labeled as a doomer-gloomer.

Reason, logic, risk calibration are terrible things....much better to be a lemming and follow the masses blindly. 
Title: Re: Stop worrying about the 4% rule
Post by: fattest_foot on July 08, 2016, 09:49:02 AM
Or do what a rational early retiree would do, and adjust spending when the market has tanked. Market is down 30%? Maybe stop blindly following the 4% rule and pare back a bit. When it comes back up, maybe you start to draw 4% again, or go crazy and draw 5% or more?
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on July 08, 2016, 09:49:51 AM
M1 and M2 will face the same sequence of returns from that point, and SWR theory just ignores that.

But "SWR theory" deliberately ignores that, and compensates for its blindness to then-existing market conditions by setting the clearance hurdle at history's worst case or near-worst case scenarios (or whatever specific alternative threshold you opt for that makes you comfortable).  It always remains true that at any given time, if you're using a SWR with an X% historical success rate, the future would have to be as bad as or worse than the worst 100-X% of cases in history [edited to add:] for your spending plan to fail.
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on July 08, 2016, 10:14:10 AM
Or do what a rational early retiree would do, and adjust spending when the market has tanked. Market is down 30%? Maybe stop blindly following the 4% rule and pare back a bit. When it comes back up, maybe you start to draw 4% again, or go crazy and draw 5% or more?

That would work as well but you need to have the flex to spend less, and most people assume more than bare bones spending for FIRE by including travel, good food, etc so therefore have that flex. 
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on July 08, 2016, 10:18:07 AM
M1 and M2 will face the same sequence of returns from that point, and SWR theory just ignores that.

But "SWR theory" deliberately ignores that, and compensates for its blindness to then-existing market conditions by setting the clearance hurdle at history's worst case or near-worst case scenarios (or whatever specific alternative threshold you opt for that makes you comfortable).  It always remains true that at any given time, if you're using a SWR with an X% historical success rate, the future would have to be as bad as or worse than the worst 100-X% of cases in history [edited to add:] for your spending plan to fail.

That is why it is good to evaluate if when you FIRE you are in a period that resembles one of those 100-x% times - its not about focusing on things being worse than they ever have, its about the periods that failed - x%.   
Title: Re: Stop worrying about the 4% rule
Post by: MDM on July 08, 2016, 01:36:15 PM
For one thing, the SWR calculation is built on a 30 year assumption.  M1 has used 5, so has only 25 to go, while M2 has to last the full 30.
That has no bearing on this as both have a current portfolio of $700k.  The answer is in the sequence of returns risk/benefit.
The 30 year assumption is one thing, and the sequence of returns is yet another.  No need to argue - both have a bearing.
Sure when you start out in the context of the 4% rule, but in the context of the actual question the timeframe doesn't matter.

The actual question (http://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/msg1145680/#msg1145680) included
Quote
SWR states he can spend...4% per year...3% would be quite conservative, and...5% would be quite risky.
...
The 4% SWR rule states he can spend $ 28 000 per year, with ...3% being very conservative and ...5% being quite risky.
...
How on earth can a spending pattern be very conservative and very aggressive at the same time ???

One is free to interpret whether the question (let alone the thread) is in the context of the "4% rule" - but that's how I interpreted it.
Title: Re: Stop worrying about the 4% rule
Post by: k9 on July 08, 2016, 03:20:14 PM
But "SWR theory" deliberately ignores that, and compensates for its blindness to then-existing market conditions by setting the clearance hurdle at history's worst case or near-worst case scenarios (or whatever specific alternative threshold you opt for that makes you comfortable).  It always remains true that at any given time, if you're using a SWR with an X% historical success rate, the future would have to be as bad as or worse than the worst 100-X% of cases in history [edited to add:] for your spending plan to fail.
Yep, but you have to see the other side of the coin, too. Since SWR is so paranoïd (worst-case focused), more often than not, you end up with an absurd amount of wealth at your death. Sure, that's good news for your heirs, but that also means either you end up having worked too much in your life, or you have restreined yourself too much regarding spending. You're a 1961 mustachian, you're FI since 1933 and you're starting to get old (about 65-70). Your net worth is now an incredible 8 million bucks, while you started at 1 million. Couldn't you afford that wonderful trip around the world you delayed for so long ? Could you go to that very expensive but *amazing* restaurant you've heard about in France ? Just once in your lifetime ? Nope, 'coz SWR says you should only spend 40 000 (inflation adjusted) this year, again and again.

Practical consequence, for instance : maybe FIREing earlier, at 20 years of expenses (5% SWR) *and* being ready to work part-time unless the markets are friendly in the first years of your retirement is a viable strategy, I dunno, but that would mean that, on average, you can work even less that advised. Don't try this at home though, I'm just thinking out loud.
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on July 09, 2016, 04:18:58 AM
But "SWR theory" deliberately ignores that, and compensates for its blindness to then-existing market conditions by setting the clearance hurdle at history's worst case or near-worst case scenarios (or whatever specific alternative threshold you opt for that makes you comfortable).  It always remains true that at any given time, if you're using a SWR with an X% historical success rate, the future would have to be as bad as or worse than the worst 100-X% of cases in history [edited to add:] for your spending plan to fail.
Yep, but you have to see the other side of the coin, too. Since SWR is so paranoïd (worst-case focused), more often than not, you end up with an absurd amount of wealth at your death. Sure, that's good news for your heirs, but that also means either you end up having worked too much in your life, or you have restreined yourself too much regarding spending. You're a 1961 mustachian, you're FI since 1933 and you're starting to get old (about 65-70). Your net worth is now an incredible 8 million bucks, while you started at 1 million. Couldn't you afford that wonderful trip around the world you delayed for so long ? Could you go to that very expensive but *amazing* restaurant you've heard about in France ? Just once in your lifetime ? Nope, 'coz SWR says you should only spend 40 000 (inflation adjusted) this year, again and again.

Practical consequence, for instance : maybe FIREing earlier, at 20 years of expenses (5% SWR) *and* being ready to work part-time unless the markets are friendly in the first years of your retirement is a viable strategy, I dunno, but that would mean that, on average, you can work even less that advised. Don't try this at home though, I'm just thinking out loud.

As someone else said above, SWR theory just produces a reasonable estimate of the stash size you need to pull the plug.  When you reach that number, retire.  Run cFiresim every year on January 1 to determine how much you get to spend that year.  If your stash keeps growing, your spending number will go up.  If your stash is shrinking, your spending number may go down or stay the same, depending on how much your stash has shrunk relative to the time you have left.  That way you get to take advantage of good market returns without taking on the risk of spending too much when you start out.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on July 09, 2016, 06:30:53 AM
Sure, that's good news for your heirs, but that also means either you end up having worked too much in your life, or you have restreined yourself too much regarding spending.

This ^^^ is the part that bothers me about the 4% freak out as I'll call it. Going to a 3% WR is a huge difference in time at the prime of your life spent working. That opportunity cost rarely gets mentioned because it's not a dollar figure.

Practical example:

- I have $550K saved invested
- I would like to FIRE with $40K/yr
- I can save $40K/yr
- over the short-term my returns are 5% after inflation
- to hit 4% WR [$1M] takes me ~6yrs
- to hit 3% WR [$1.33M] takes me ~9.5yrs

I could spend that extra 3.5yrs working FT saving/investing or I could stop working that much earlier and enjoy my freedom while I was younger.

Add in the fact nobody knows how long they'll live and it seems to me 3.5yrs at prime health is pretty valuable. Therefore the cost of working the additional time because you think the next 30yrs will be worse than the years covered by the Trinity study is not insignificant.

In reality I wouldn't even work the 6yrs FT to hit 4% WR. I'd downshift to PT by $600K after ~1yr and take a bunch of freedom now while I am healthy and let my 'stach grow on its own to the desired size.

I'm with the posters above who note that flexibility is a powerful tool in the FIRE toolbox to deal with risks. A tool that is much better in my opinion than simply working more for a huge 'stach. It's not like we are loading up a spaceship and heading to colonize Mars with no shot at resupply.
Title: Re: Stop worrying about the 4% rule
Post by: Telecaster on July 09, 2016, 08:58:29 AM
But "SWR theory" deliberately ignores that, and compensates for its blindness to then-existing market conditions by setting the clearance hurdle at history's worst case or near-worst case scenarios (or whatever specific alternative threshold you opt for that makes you comfortable).  It always remains true that at any given time, if you're using a SWR with an X% historical success rate, the future would have to be as bad as or worse than the worst 100-X% of cases in history [edited to add:] for your spending plan to fail.
Yep, but you have to see the other side of the coin, too. Since SWR is so paranoïd (worst-case focused), more often than not, you end up with an absurd amount of wealth at your death. Sure, that's good news for your heirs, but that also means either you end up having worked too much in your life, or you have restreined yourself too much regarding spending. You're a 1961 mustachian, you're FI since 1933 and you're starting to get old (about 65-70). Your net worth is now an incredible 8 million bucks, while you started at 1 million. Couldn't you afford that wonderful trip around the world you delayed for so long ? Could you go to that very expensive but *amazing* restaurant you've heard about in France ? Just once in your lifetime ? Nope, 'coz SWR says you should only spend 40 000 (inflation adjusted) this year, again and again.

Practical consequence, for instance : maybe FIREing earlier, at 20 years of expenses (5% SWR) *and* being ready to work part-time unless the markets are friendly in the first years of your retirement is a viable strategy, I dunno, but that would mean that, on average, you can work even less that advised. Don't try this at home though, I'm just thinking out loud.

Interesting article from Kitces this week (emphasis original:).


Quote from: Kitces
As the chart reveals, the decision to follow a 4% initial withdrawal rate makes it exceptionally rare that the retiree finishes with less than what they started with, at the end of the 30-year time horizon; only a small number of wealth paths finish below the starting principal threshold. In fact, overall, the retiree finishes with more-than-double their starting wealth in a whopping 2/3rds of the scenarios, and is more likely to finish with quintuple their starting wealth than to finish with less than their starting principal!


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


Title: Re: Stop worrying about the 4% rule
Post by: Telecaster on July 09, 2016, 11:27:07 AM
As someone else said above, SWR theory just produces a reasonable estimate of the stash size you need to pull the plug.  When you reach that number, retire.  Run cFiresim every year on January 1 to determine how much you get to spend that year.  If your stash keeps growing, your spending number will go up.  If your stash is shrinking, your spending number may go down or stay the same, depending on how much your stash has shrunk relative to the time you have left.  That way you get to take advantage of good market returns without taking on the risk of spending too much when you start out.

You can do that, but the place were the 4% rule really gives you protection is if you get a bad set of years early on in the sequence.  Let's say the market goes up for the first three years of your retirement and you dutifully increase your spending, then down or sideways for the next ten.  Now you are in the situation where your standard of living is decreasing for maybe 10 years in a row.  That's a lot of belt tightening.  Or you can just trust the 4% rule and everything will be fine.   




Title: Re: Stop worrying about the 4% rule
Post by: Clean Shaven on July 09, 2016, 11:47:06 AM
As someone else said above, SWR theory just produces a reasonable estimate of the stash size you need to pull the plug.  When you reach that number, retire.  Run cFiresim every year on January 1 to determine how much you get to spend that year.  If your stash keeps growing, your spending number will go up.  If your stash is shrinking, your spending number may go down or stay the same, depending on how much your stash has shrunk relative to the time you have left.  That way you get to take advantage of good market returns without taking on the risk of spending too much when you start out.

You can do that, but the place were the 4% rule really gives you protection is if you get a bad set of years early on in the sequence.  Let's say the market goes up for the first three years of your retirement and you dutifully increase your spending, then down or sideways for the next ten.  Now you are in the situation where your standard of living is decreasing for maybe 10 years in a row.  That's a lot of belt tightening.  Or you can just trust the 4% rule and everything will be fine.
All true, but at some point in retirement under the 4% rule, I would think that you'd reassess your spending - be flexible in increasing (or decreasing if needed).  I'd like to be in the position of someone like k9 described (ie large market returns)  and have that flexibility to increase spending to splurge.

The question is when and how to reevaluate spending as the retirement stash grows.  It's a good "problem" to have.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on July 09, 2016, 05:12:06 PM
Good article Telecaster.

more likely to finish with quintuple their starting wealth than to finish with less than their starting principal!

And yet the hand-wringing over the 4% rule (including the fact that people will adjust) continues.  :D
Title: Re: Stop worrying about the 4% rule
Post by: k9 on July 10, 2016, 05:24:50 AM
the 4% rule (including the fact that people will adjust)
... meaning it's not really a rule ;)
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on July 10, 2016, 05:41:40 AM
the 4% rule (including the fact that people will adjust)
... meaning it's not really a rule ;)

The rule is one thing.  The fact that no one would actually abide by it in a real world situation is another.  :)

It's a spherical withdrawal rate, in a vacuum.
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on July 10, 2016, 02:20:52 PM
The goal is to maximize your happiness/well being. Not to accumulate the maximum "safety" or the maximum amount of money. It's a means to an end. 4% rule is a good indication that *you won the money game, now quit*. It doesn't mean you have to quit forever, and it doesn't mean you're guaranteed a perfect life. But it does mean that continuing to work is stupid unless continuing to work is what makes you happiest.

-Walt
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on July 10, 2016, 02:35:15 PM
The goal is to maximize your happiness/well being. Not to accumulate the maximum "safety" or the maximum amount of money. It's a means to an end. 4% rule is a good indication that *you won the money game, now quit*. It doesn't mean you have to quit forever, and it doesn't mean you're guaranteed a perfect life. But it does mean that continuing to work is stupid unless continuing to work is what makes you happiest.

Well said.
Title: Re: Stop worrying about the 4% rule
Post by: dude on July 14, 2016, 11:43:15 AM
Another 4% rule article, sorta.

http://www.marketwatch.com/story/how-saving-too-much-can-make-your-retirement-less-satisfying-2016-07-13
Title: Re: Stop worrying about the 4% rule
Post by: dougules on July 14, 2016, 12:15:53 PM
Good article Telecaster.

more likely to finish with quintuple their starting wealth than to finish with less than their starting principal!

And yet the hand-wringing over the 4% rule (including the fact that people will adjust) continues.  :D

Is all the hand-wringing over the 4% rule really about the 4% rule?  Is it possible some of it is just a proxy for worrying about work stress or the fear involved in convincing yourself to trust the numbers that say you can fly if you jump off the cliff now?

I think I may be guilty of it at the very least.
Title: Re: Stop worrying about the 4% rule
Post by: ender on July 14, 2016, 12:27:50 PM
Is all the hand-wringing over the 4% rule really about the 4% rule?  Is it possible some of it is just a proxy for worrying about work stress or the fear involved in convincing yourself to trust the numbers that say you can fly if you jump off the cliff now?

I think I may be guilty of it at the very least.

Eh, it's because risk associated with running out of money is far more tangible than risks of overworking.

People are generally speaking, very risk adverse, and most people would prefer to work a few extra years 95% of the time than worry about a 5% chance of running out of money (ignoring the dozens of ways to increase likelihood of a given withdrawal rate working).
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on July 14, 2016, 02:14:55 PM
Is all the hand-wringing over the 4% rule really about the 4% rule?  Is it possible some of it is just a proxy for worrying about work stress or the fear involved in convincing yourself to trust the numbers that say you can fly if you jump off the cliff now?

I think I may be guilty of it at the very least.

Eh, it's because risk associated with running out of money is far more tangible than risks of overworking.

People are generally speaking, very risk adverse, and most people would prefer to work a few extra years 95% of the time than worry about a 5% chance of running out of money (ignoring the dozens of ways to increase likelihood of a given withdrawal rate working).

Yup....especially for those that are high earners with low spend and high savings rates, as the time value is much less.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on July 14, 2016, 02:16:08 PM
Is all the hand-wringing over the 4% rule really about the 4% rule?  Is it possible some of it is just a proxy for worrying about work stress or the fear involved in convincing yourself to trust the numbers that say you can fly if you jump off the cliff now?

I think I may be guilty of it at the very least.

Eh, it's because risk associated with running out of money is far more tangible than risks of overworking.

People are generally speaking, very risk adverse, and most people would prefer to work a few extra years 95% of the time than worry about a 5% chance of running out of money (ignoring the dozens of ways to increase likelihood of a given withdrawal rate working).

I wouldn't say "tangible". I'm definitely experiencing the risks of overworking very tangibly today. I'd say it's more the opposite (which is what you get at). Fear of the uncertain is frequently much more strongly weighed than the negatives of the known.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on July 14, 2016, 04:21:41 PM
Eh, it's because risk associated with running out of money is far more tangible than risks of overworking.

People are generally speaking, very risk adverse, and most people would prefer to work a few extra years 95% of the time than worry about a 5% chance of running out of money (ignoring the dozens of ways to increase likelihood of a given withdrawal rate working).

Well said.
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on July 20, 2016, 04:38:26 AM
the 4% rule (including the fact that people will adjust)
... meaning it's not really a rule ;)

The rule is one thing.  The fact that no one would actually abide by it in a real world situation is another.  :)

It's a spherical withdrawal rate, in a vacuum.

it is like miles per gallon in a laboratory .

it is a basis for comparison  which rules out human interaction and spending patterns since they are so variable . .

it rules out life expectancy too as part of the equation . it simply lets you  know what it what have taken to not run out of money before you ran out of time under the worst the past has thrown at us .

while i retired at a 100% success rate even 90% would have been acceptable once you thrown in the odds of even living in retirement for 30 years . so how old you are when you retire is a big factor . retiring at 65 may have very small odds of needing your money to last 30 years . retiring at 55 is another story .
in the real world we are delaying ss as long as we can . right now we are at about a 3.50% draw from our portfolio . at 70 the 70% larger checks will drop our draw forever down to about 2% .

that is a whole lot less dependency  on markets for decades .   that is our main reason for delaying .  we can actually spend more now early on  because the higher checks later on will refill us but ss has no sequence risk .

unlike our own investing which limits what we can spend because so much powder has to be kept dry for sequence risk , ss has zero sequence risk .

90% of every rolling 30 year period ended with more then you started with drawing 4% inflation adjusted . but to allow for the worst case scenario's that is about max so the end result is you usually die with to much money .

if we eliminated the 5 worst time frames , 1907 , 1929,1937 ,1965/1966 the safe withdrawal rate could have actually been 6.50% . but to allow for those dates it has to drop to about 4% .

the zero sequence risk of ss lets you spend that difference since sequence risk is off the table on that chunk of dough unlike if that difference had to come from our own investing .

that is a major point folks miss when looking at delaying ss and the 4% swr .  they get to wrapped up in what if i die , when the real issue is what if i live .

 .

Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on July 20, 2016, 06:12:18 AM
Eh, it's because risk associated with running out of money is far more tangible than risks of overworking.

People are generally speaking, very risk adverse, and most people would prefer to work a few extra years 95% of the time than worry about a 5% chance of running out of money (ignoring the dozens of ways to increase likelihood of a given withdrawal rate working).

I think there's also an element of "how badly do I want out?"

How much risk am I willing to take to get out of this barely tolerable situation?

Or, how much risk am I willing to take to do something different, when I enjoy my work for the most part and have been very successful at it?
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on July 20, 2016, 06:34:55 AM
Eh, it's because risk associated with running out of money is far more tangible than risks of overworking.

People are generally speaking, very risk adverse, and most people would prefer to work a few extra years 95% of the time than worry about a 5% chance of running out of money (ignoring the dozens of ways to increase likelihood of a given withdrawal rate working).

I agree with your point.

I'd also add that fear is pretty much unlimited so if you give people a reason to be worried they can generate a huge amount of angst around the topic. This gets compounded the less certainty there is in terms of the details of the situation. Peering into what will happen 2 decades into FIRE is pretty uncertain.

People have been trained by society to work, value work and value themselves because of their work. Having to stop that process and break through the decades of conditioning is tough. Give them a reason to fear the outcome [however slight the risk] and it's not surprising that so many people's solution to the "problem" of the 4% SWR is to work more.
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on July 21, 2016, 04:48:25 AM
As someone else said above, SWR theory just produces a reasonable estimate of the stash size you need to pull the plug.  When you reach that number, retire.  Run cFiresim every year on January 1 to determine how much you get to spend that year.  If your stash keeps growing, your spending number will go up.  If your stash is shrinking, your spending number may go down or stay the same, depending on how much your stash has shrunk relative to the time you have left.  That way you get to take advantage of good market returns without taking on the risk of spending too much when you start out.

You can do that, but the place were the 4% rule really gives you protection is if you get a bad set of years early on in the sequence.  Let's say the market goes up for the first three years of your retirement and you dutifully increase your spending, then down or sideways for the next ten.  Now you are in the situation where your standard of living is decreasing for maybe 10 years in a row.  That's a lot of belt tightening.  Or you can just trust the 4% rule and everything will be fine.
All true, but at some point in retirement under the 4% rule, I would think that you'd reassess your spending - be flexible in increasing (or decreasing if needed).  I'd like to be in the position of someone like k9 described (ie large market returns)  and have that flexibility to increase spending to splurge.

The question is when and how to reevaluate spending as the retirement stash grows.  It's a good "problem" to have.

In light of the last several posts, I still think an annual reassessment is probably the most reasonable way to reconcile the fear of spending too much with the probability that you're going to die with a buttload of unspent assets.  If I'm 10 years into FIRE and I have a stash of 1MM, how is the modeling from that point forward any different from the modeling for a person with 1MM who is planning to FIRE at that time?  Likely the only difference is that my time frame is shorter, thus I'm going to have a higher projected success rate.  The fact that I've been living off of my stash for 10 years up to that point has no bearing whatsoever on my probability of success going forward.  If my modeling tells me I'm not spending enough, I don't necessarily have to spend all the excess immediately.  I could earmark some or all of the excess for a charitable trust or an estate for my heirs.  If times get tough later on, I can raid the extra if I need to.  But I also wouldn't feel too bad about using $10k on a European vacation that I wouldn't otherwise have taken if I were blindly following a set withdrawal rate that was calculated based on a smaller stash a decade ago.

The point about too much belt tightening is valid, but I think most rational people would conclude that it's time for a PT job or other supplemental income source before they get too far down that road.  And again, that is just as likely to happen to our FIREee who just took the plunge.

The 4% rule is a good tool for determining when you're ready to take the plunge.  But that doesn't mean you quit keeping track of your situation after you take the plunge.
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on July 21, 2016, 05:12:02 AM
we use bob clyatts  dynamic method of setting our goal posts each year .

it does not mean we spend that much but we know what our limits are .

it is a very easy dynamic method that has never failed out to 40 years .

just take your balance each year on jan 1  and you can take 4% of that balance or if markets are down you take 5% less  or 4% which ever is higher .

that gives you more latitude for spending more when markets are up and mentally you will be able to do that and if down you take a 5% cut which really will not upset your lifestyle .

Title: Re: Stop worrying about the 4% rule
Post by: k9 on July 21, 2016, 06:38:21 AM
Mathjak, what if you experience a very good year, where, say, the market goes up 20% ? I mean, you could spend the 4% of this year, but that means spending 20% more than previous year and you don't necessarily want to do that (not for the whole sum, at least). What do you do then ? Keep them in the portfolio (which is equivalent to buying expensive stocks) or transform them into cash/ST bonds (which means "I don't spend you this year, but I might need/want you in the next 2/3 years") ?
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on July 21, 2016, 07:01:47 AM
because the system is dynamic and the inflation adjusting is built in spending more in up years is fine .   if you don't need it then leave it allocated as you see fit .  this july is our first year retired and we came in 20k under budget . so we leave it invested .  our portfolio allocations have nothing to do with whether we spend or leave the money .

a series of years that happen to the down side would each get a 5% cut . so taking more when up is not a big problem like a fixed draw would be .  reality is most folks are never on  a fixed system and  do not spend the same in up and down markets regardless
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on July 21, 2016, 08:44:38 AM
If I'm 10 years into FIRE and I have a stash of 1MM, how is the modeling from that point forward any different from the modeling for a person with 1MM who is planning to FIRE at that time?

Your right its not as long as you are still basing the analysis on 30 years and 4% of the portfolio at that time ($40k) - with that premise it is the exact same going forward as someone who FIREs now.

Likely the only difference is that my time frame is shorter, thus I'm going to have a higher projected success rate.  The fact that I've been living off of my stash for 10 years up to that point has no bearing whatsoever on my probability of success going forward. 

This is the difference - if you only are looking at the next 20 years (30-10) as there is less time needed for the portfolio to survive. Or if your initial $1mil and $40k spend has now inflated to $54k (assumes 3% inflation for 10 years) then your WR would now be 5.4% on the current $1mil portfolio, which might be fine for 20 years but what would the success factor be if applied back to 30 year period?
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on July 21, 2016, 08:54:16 AM
you beat me to it , time left is the difference . as well as odds are if  quite  a few years elapsed because of poor markets , odds are pretty good you are closer to a turn around

higher valuations at retirement lead to worse market returns as opposed to lower valuations at retirement .
Title: Re: Stop worrying about the 4% rule
Post by: CanuckExpat on August 03, 2016, 02:04:41 AM
Interesting article from Kitces this week (emphasis original:).
...
https://www.kitces.com/blog/consumption-gap-in-retirement-why-most-retirees-will-never-spend-down-their-portfolio/

Thanks, I always enjoy reading Kitces work. On a related note, does any one know of any articles where Kitces has talked about Safe Withdrawal Rates in the context of historical international data and not just US returns?

Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on August 03, 2016, 02:07:46 AM
Interesting article from Kitces this week (emphasis original:).
...
https://www.kitces.com/blog/consumption-gap-in-retirement-why-most-retirees-will-never-spend-down-their-portfolio/

Thanks, I always enjoy reading Kitces work. On a related note, does any one know of any articles where Kitces has talked about Safe Withdrawal Rates in the context of historical international data and not just US returns?

Are you sure that was Kitces?  Pfau has written about that...

https://ideas.repec.org/p/ngi/dpaper/10-12.html
http://www3.grips.ac.jp/~pinc/data/10-12.pdf
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on August 03, 2016, 02:16:21 AM
M1 and M2 will face the same sequence of returns from that point, and SWR theory just ignores that.

But "SWR theory" deliberately ignores that, and compensates for its blindness to then-existing market conditions by setting the clearance hurdle at history's worst case or near-worst case scenarios (or whatever specific alternative threshold you opt for that makes you comfortable).  It always remains true that at any given time, if you're using a SWR with an X% historical success rate, the future would have to be as bad as or worse than the worst 100-X% of cases in history [edited to add:] for your spending plan to fail.

That is why it is good to evaluate if when you FIRE you are in a period that resembles one of those 100-x% times - its not about focusing on things being worse than they ever have, its about the periods that failed - x%.

things only have to be close math wise not event wise .  mathematically a 2% real return is needed over the first 15 years of a 30 year retirement to  hold up to a 4% swr .

that is the common denominator to every one of the 4 worst case scenario's . the returns all fell below 1% real returns over the first 15 years  but that math is only true for a 30 year retirement .

monte carlo simulations attempt to find worst matches so not all outcomes have to have actually happened

Title: Re: Stop worrying about the 4% rule
Post by: CanuckExpat on August 03, 2016, 02:56:27 PM
Interesting article from Kitces this week (emphasis original:).
...
https://www.kitces.com/blog/consumption-gap-in-retirement-why-most-retirees-will-never-spend-down-their-portfolio/

Thanks, I always enjoy reading Kitces work. On a related note, does any one know of any articles where Kitces has talked about Safe Withdrawal Rates in the context of historical international data and not just US returns?

Are you sure that was Kitces?  Pfau has written about that...

https://ideas.repec.org/p/ngi/dpaper/10-12.html
http://www3.grips.ac.jp/~pinc/data/10-12.pdf

I wasn't sure if Kitces had or not, or if he always relied on US results. I did know about Pfau and his less optimistic take (which is perhaps reasonable based on the data he looked at). I wanted another perspective, and I like Kitces writing: thorough and accessible, was hoping someone knew of an article from him I had missed where looks at the international data.

If I had to quibble about 4% as a safe withdrawal rate, it would be that it starts to look less bullet-proof when you consider the international data. That won't make me worry or start jumping ship, we have much more flexibility built into our lives to decrease spending or make income.

However, it bothers me from an analysis point of view to ignore the international data :)
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on August 03, 2016, 03:53:15 PM
Interesting article from Kitces this week (emphasis original:).
...
https://www.kitces.com/blog/consumption-gap-in-retirement-why-most-retirees-will-never-spend-down-their-portfolio/

Thanks, I always enjoy reading Kitces work. On a related note, does any one know of any articles where Kitces has talked about Safe Withdrawal Rates in the context of historical international data and not just US returns?

i believe it was dr wade pfau who looked at that not kitces
Title: Re: Stop worrying about the 4% rule
Post by: Eucalyptus on August 03, 2016, 07:25:46 PM
M1 and M2 will face the same sequence of returns from that point, and SWR theory just ignores that.

But "SWR theory" deliberately ignores that, and compensates for its blindness to then-existing market conditions by setting the clearance hurdle at history's worst case or near-worst case scenarios (or whatever specific alternative threshold you opt for that makes you comfortable).  It always remains true that at any given time, if you're using a SWR with an X% historical success rate, the future would have to be as bad as or worse than the worst 100-X% of cases in history [edited to add:] for your spending plan to fail.

That is why it is good to evaluate if when you FIRE you are in a period that resembles one of those 100-x% times - its not about focusing on things being worse than they ever have, its about the periods that failed - x%.

things only have to be close math wise not event wise .  mathematically a 2% real return is needed over the first 15 years of a 30 year retirement to  hold up to a 4% swr .

that is the common denominator to every one of the 4 worst case scenario's . the returns all fell below 1% real returns over the first 15 years  but that math is only true for a 30 year retirement .


That's really interesting and one of the big questions I had! It would be great to be able to work out with some kind of calculator, what kind of indicators in Early FIRE that your portfolio might fail the 30yr test (or insert whatever time frame you require).

What happens in the first say, 5 years of those bad scenarios? The first few years of FIRE is perhaps the best period for a FIREd person to go back to work at some level or another (as they are younger and less out of touch of their former industry). What would be a good trigger?

Personally I'm thinking more and more I would be happy with a starting Portfolio at FIRE that has an ~80% chance of success. I'd FIRE at a much lower value, eg down to 50%, if I had a good handle on potential trigger conditions of a bad scenario in the first ~5 years and could thus more aggresively implement moustachian protections (eg spending a few months here and there on contract work to ride out a period).

I reckon if someone could come up with a Post FIRE Calculator to help people work this out, then a lot of people would be more comfortable with going FIRE with a higher initial WR.
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on August 04, 2016, 02:20:58 AM
the best look at this in my opinion is  when michael kitces actually broke it out for us .

https://www.kitces.com/blog/what-returns-are-safe-withdrawal-rates-really-based-upon/
Title: Re: Stop worrying about the 4% rule
Post by: Eucalyptus on August 07, 2016, 07:31:50 AM
Yeah thanks Mathjak

I actually read a bunch of Kitces' articles right after I wrote that post, he has some really useful analyses with regard to SWRs and early trigger conditions!

Another good one of his that I found useful (prob a follow up to yours) is this one:

https://www.kitces.com/blog/understanding-sequence-of-return-risk-safe-withdrawal-rates-bear-market-crashes-and-bad-decades/

Its worth reading through the whole article (don't stop after the first couple of graphs...there is more to the story).

But yeah, perhaps a careful look at that P/E Schiller ratio in the first few years of FIRE, and also, real returns in the first few years. If you look at this graph of his:
https://www.kitces.com/wp-content/uploads/2014/10/Chart_Correlation-Graph.png

You can see that the best correlations with real returns (ignore nominal returns as he explains prior to that graph) is around the 8-10 year mark. However, you probably don't want to wait until the 8 year mark to make changes, if you happen to be in one of those bad runs! Otherwise you would have missed 7 years of correctional opportunity and it might be too late to really do anything about it (or at least, harder)!

Clearly, first year of FIRE, there is little correlation, so its worth just ignoring a bad real returns year then. Though the correlation gets much stronger in the second and subsequent years.

Kitces talks in many places (inc on that article) about how a diversified portfolio (he mainly keeps it simple with bonds/shares) helps to get a portfolio through these bad periods, particularly the first couple of years. I'm betting that, as well as having a well diversified portfolio (with international sharemarket diversification in different ETFs), if you just threw in a year of no withdrawals somewhere in the first few years, you would significantly reduce the chance of portfolio failure, at any WR above 4%. A "no withdrawal" year doesn't mean going back to work full time, it could just mean some part time work combined with some other moustachian way of reducing spending (eg maybe its working for an aid agency somewhere for a year on low pay). Essentially, having a no withdrawal year, would be akin to adding another factor of diversification to your portfolio.

It would be interesting to see the effect on SWRs, if a "non withdrawal year" is added somewhere in the first ten-fifteen years of draw down. Or 1.5 years, or two years. Given the many, many moustachian ways of doing such a period, its not outside the realms of FIRE possibility for most people on MMM.

The main way I can think of analysing this is by going through a TON of simulations on cfiresim or Firecalc. But there is probably a smarter way to model it by using a script. If going the cfiresim/firecalc route, you would have to do runs for different lengths of fire (I would suggest 30, 40, 50 years...being thus realistic for early FIRErs), various withdrawal rates (eg 4, 4.5, 5, 5.5,.....9%), and then insert a year of zero spending (probably by adding a years income) in each year from 1 up to R where R = years of retirement. It could then all be repeated again with a second and third year of zero spending (but using all possible combos, eg, your zero spending could be consecutive ie FIRE years 3,4,5, or non, eg years 1,4,6)...and it could be repeated with some different portfolio allocations (to the limits of what those two tools provide...).

(As you can see that's a lot of simulations, really, would be easier with a script).

Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on August 07, 2016, 07:40:25 AM
in practice we tend to automatically kind of adjust when things are not going well . i think we all pretty much have a hard time doing any extra spending when markets are not doing well . i know the last two years have not been great  since i retired and even though the budget says we can , we did not do as many trips as  we planned .

we just naturally tend to cut back or spend more in real life based on how we feel mentally . we actually came in 20k less than what we allocated for  the year  , since aug 1 is an anniversary .




Title: Re: Stop worrying about the 4% rule
Post by: Eucalyptus on August 07, 2016, 07:50:56 PM
Yeah, I'm a long time pre FIRE but I could imagine myself cutting back whenever the market isn't doing so well...if I'm not prior armed with appropriate knowledge to allay my fears.

After I posted last night I did some quick playing around in cfiresim with what I expect will be roughly my target portfolio of 80% equities, 15% bonds, 5% Gold. Results are interesting. With including some years in the first ten that are no withdrawal.

Interestingly it seems that replacing the 5% gold with an extra 5% bonds is a bad idea in all those scenarios I tested, reduces success a few percent. That bit of extra diversification and inflation protection that a small bit of Gold provides is worth it in the historical worst case scenarios. Given that 5% gold is not massive (not like what's suggested in say the permanent portfolio) I think its worth it.

Interestingly, at least with my AA, having a no withdrawal year in the first year has less effect than ones in years 2-10 of FIRE. This goes along with what Kitces says. For me the difference was only slight (about 1% success), probably because as well as bonds I have gold in there. It would be more pronounced if you only had one equity ETF and one bonds ETF.

The data in cfiresim doesn't give you the options we have today of investing one's equities in a very diverse range of different markets that aren't highly correlated. Doing this might help increase SWR a little more.

I think I'll carefully run a load of scenarios in cfiresim like this and start recording the results to plot. I think this kind of way of looking at things is very useful for people on this forum who are quite Moustachian in outlook; so many on here either do or plan to do significant things in FIRE that would result in reducing their WR for various years (eg working as a low paid tour guide somewhere, working in an orphanage, spending a year overseas with the Red Cross, etc), thus potentially increasing their SWR dramatically.
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on August 08, 2016, 02:42:21 AM
be careful testing for a safe withdrawal rate with gold . by definition  a safe withdrawal rate means the portfolio was stress tested over very specific worst case  time frames .

they are 1907 in some cases , 1929,1937,1965/1966 .

gold was not freely traded here in the usa and not a main stream investment  until 1975 .  then it had certain once in a life time events have it soaring . we have no idea what gold would have done under those time frames or different conditions for itself .

so we can not accurately compare what if's to any of the time frames that the 4% safe withdrawal rate is based on .

any other time frames you pick to use may be bad but they are not the worst case scenario's the so called "rule" is based on .

but if you wanted to see just how gold did since 1975 , get this :

1oz of gold in 1975 was 175.00 bucks . if you put the same 175 bucks in to a  1 month t-bill and rolled it over up until today the t-bill beat it by a few dollars .

equity's and bonds beat it many times over .

it always came to pass that no matter what the situation we had in time that was supposedly good for gold , longer term everything else ended up doing better .
Title: Re: Stop worrying about the 4% rule
Post by: Telecaster on August 08, 2016, 12:22:54 PM
Preach it brother. 
Title: Re: Stop worrying about the 4% rule
Post by: tonysemail on August 08, 2016, 01:05:51 PM
this reply has a great illustration of why gold back-tests well.
http://forum.mrmoneymustache.com/investor-alley/portfolio-charts-the-golden-butterfly/msg1048589/#msg1048589
Title: Re: Stop worrying about the 4% rule
Post by: steveo on August 08, 2016, 03:59:03 PM
be careful testing for a safe withdrawal rate with gold . by definition  a safe withdrawal rate means the portfolio was stress tested over very specific worst case  time frames .

they are 1907 in some cases , 1929,1937,1965/1966 .

gold was not freely traded here in the usa and not a main stream investment  until 1975 .  then it had certain once in a life time events have it soaring . we have no idea what gold would have done under those time frames or different conditions for itself .

so we can not accurately compare what if's to any of the time frames that the 4% safe withdrawal rate is based on .

any other time frames you pick to use may be bad but they are not the worst case scenario's the so called "rule" is based on .

but if you wanted to see just how gold did since 1975 , get this :

1oz of gold in 1975 was 175.00 bucks . if you put the same 175 bucks in to a  1 month t-bill and rolled it over up until today the t-bill beat it by a few dollars .

equity's and bonds beat it many times over .

it always came to pass that no matter what the situation we had in time that was supposedly good for gold , longer term everything else ended up doing better .

I think the key point on Gold is that getting robust data isn't easy.
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on August 08, 2016, 04:13:09 PM
this reply has a great illustration of why gold back-tests well.
http://forum.mrmoneymustache.com/investor-alley/portfolio-charts-the-golden-butterfly/msg1048589/#msg1048589
tylers data on gold and assumptions are just that . assumptions  and what if's . we do not know what golds outcome would have been if it were freely traded here .

 there is no data on gold in the pre 1975 years since except for collectible coins gold was not legal to own .

it also had once  in a lifetime events applied to the price at the same time as it was taken off the standard . .

you cannot use the years the safe withdrawal rates are stressed tested against .

while index's and stocks change constantly  and nothing is as it was , the fact is gold here was not a viable asset class for the most part until after 1975 and to try to predict what might have been is silly .

you can't  even guess at it from what silver did . look at 2008 when gold went up while silver plunged . .


Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on August 09, 2016, 01:13:22 AM
Personally, I think that the next 'bubble' is a credit bubble.  I'd be interested to know what others are doing / would do for such a thing...
Title: Re: Stop worrying about the 4% rule
Post by: Eucalyptus on August 09, 2016, 04:44:15 AM
Personally, I think that the next 'bubble' is a credit bubble.  I'd be interested to know what others are doing / would do for such a thing...

Also interested in that scenario; what performs well in a credit bubble crash? What about a Real Estate bubble crash (obviously not REITs, haha). I guess the idea with gold is its a potential help in high inflation or negative real interest scenarios. If you don't ever experience one of those, then its a waste compared to most other things, of course.
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on August 09, 2016, 06:21:17 PM
1965/ 1966 as a starting point was not bad for stocks over that 30 year time frame  at all. in fact  they saw a 10.23% average return . , it was inflation that did them in . inflation soared in the first few years from 1% to double digits .

in every failure it was the first 15 years out of 30 that caused the failure .

in fact here are the results for the 1966 group

this is how you did over 30 years


1966 stocks 10.23 - -bonds 7.85 -- rebalanced portfolio 9.56- - inflation 5.38

this is the first 15 years .

1966-stocks minus .13%--bonds 1.08%--rebalanced .64%-- inflation 5.38%






Title: Re: Stop worrying about the 4% rule
Post by: Tyler on August 09, 2016, 06:28:07 PM
Many of the concerns around the years covered by the SWR calculators are discussed in the FAQ (https://portfoliocharts.com/withdrawal-rates-faq/). 
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on August 09, 2016, 06:34:06 PM
tyler , where is the post i replied to ?    deleted ?  my post is standing alone now,  lol
Title: Re: Stop worrying about the 4% rule
Post by: Tyler on August 09, 2016, 07:02:31 PM
My bad --  I deleted the original post in favor of the simple link (I chose to add a new topic to the FAQ instead) before I saw that you replied.  You're too quick.  ;)  I understand your concern with the coverage of the data and appreciate your preference for other studies.  It's why I pointed to the FAQ that covers these things in detail.   

BTW, I see that you're fond of Kitces' article on the importance of the first 15 years of real returns in retirement (as am I -- it's a good one).  Even if the SWR calculator isn't your favorite, perhaps you'll find this one interesting:  https://portfoliocharts.com/portfolio/rolling-returns/  It doesn't cover every 15-year period in history (I wish it could!), but it's a decent way to evaluate which portfolios have been most consistent over that length of time. 
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on August 09, 2016, 11:35:43 PM
Personally, I think that the next 'bubble' is a credit bubble.  I'd be interested to know what others are doing / would do for such a thing...
What do you mean by a "credit bubble"?
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on August 10, 2016, 02:13:40 AM
My bad --  I deleted the original post in favor of the simple link (I chose to add a new topic to the FAQ instead) before I saw that you replied.  You're too quick.  ;)  I understand your concern with the coverage of the data and appreciate your preference for other studies.  It's why I pointed to the FAQ that covers these things in detail.   

BTW, I see that you're fond of Kitces' article on the importance of the first 15 years of real returns in retirement (as am I -- it's a good one).  Even if the SWR calculator isn't your favorite, perhaps you'll find this one interesting:  https://portfoliocharts.com/portfolio/rolling-returns/  It doesn't cover every 15-year period in history (I wish it could!), but it's a decent way to evaluate which portfolios have been most consistent over that length of time.

yep , there has not been one single worst case scenario that didn't have the failure happen because of the first 15 years .
think about it , the 1965/1966 group were part of the 1982 greatest bull market in history . but even that could not help them . great gains on to little money is to little to late when things get spent down to far early on .

it isn't just about the money lasting x-amount of years as well , it is about the balance left at the end . portfolio's can show they passed fine but live 1 more year and you are broke .

if it wasn't for 1907,1929,1937 and 1965/1966 the safe withdrawal rate for a 60/40 mix would be 6.50% . so if stress testing without those years your results being compared would be quite different and not apples to apples . anytime gold is in the mix you really can not predict what those years would have been like had it actually traded here freely .

the once in lifetime event of coming off the gold standard would certainly skew things earlier as well ,  showing performance that likely was a pricing error like nasdaq at 5000 or real estate was getting before the plunge in many areas .

pricing errors that correct because they were temporary  errors do not make good benchmarks forever

so i am not keen on calling any portfolio with gold a safe withdrawal rate since that term really means it was stress tested against those dates above . 1907 being the only outcast since firecalc uses it but bengan and the trinity only go back to 1926
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on September 07, 2016, 06:16:59 AM
Early retirement blogger says: 25x Expenses Isn’t Enough for Early Retirement

http://retireby40.org/25x-expenses-isnt-enough-for-early-retirement/

Most of his points will be easily turned aside. He does talk about his own expense inflation, a very real risk for very early retirees on bare-bones budgets.
Title: Re: Stop worrying about the 4% rule
Post by: ender on September 07, 2016, 06:21:47 AM
Early retirement blogger says: 25x Expenses Isn’t Enough for Early Retirement

http://retireby40.org/25x-expenses-isnt-enough-for-early-retirement/

Most of his points will be easily turned aside. He does talk about his own expense inflation, a very real risk for very early retirees on bare-bones budgets.

That article is based on fairly rubbish assumptions.

No expense multiplier is going to be enough if you consistently increase your spending to keep up with the Jones's and buy everything new under the sun.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on September 07, 2016, 08:41:45 AM
No expense multiplier is going to be enough if you consistently increase your spending to keep up with the Jones's and buy everything new under the sun.

Yes. Insecurity, fear and retail therapy all add up to many years of extra work in your life. You really have to ask yourself "Is it worth it?"
Title: Re: Stop worrying about the 4% rule
Post by: chasesfish on September 08, 2016, 11:22:49 AM
Personally, I think that the next 'bubble' is a credit bubble.  I'd be interested to know what others are doing / would do for such a thing...

I'm buying small and mid cap stocks that have very little debt on their balance sheet.  I'm also only long on one (non employer) Bank stock.

I'm also not sure what "credit bubble" means and I'm in banking.  I'm assuming we're talking about how companies will see their interest expense double with small interest rate movements, thus shrinking earnings or causing defaults.
Title: Re: Stop worrying about the 4% rule
Post by: Telecaster on September 08, 2016, 11:46:20 PM
Early retirement blogger says: 25x Expenses Isn’t Enough for Early Retirement

http://retireby40.org/25x-expenses-isnt-enough-for-early-retirement/

Most of his points will be easily turned aside.

Yep.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on September 10, 2016, 08:57:19 AM
Early retirement blogger says: 25x Expenses Isn’t Enough for Early Retirement

http://retireby40.org/25x-expenses-isnt-enough-for-early-retirement/

Most of his points will be easily turned aside.

Yep.

"Using the 4% rule doesn't work if you refuse to follow the rule and instead spend more!"
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on September 10, 2016, 09:45:55 AM
Early retirement blogger says: 25x Expenses Isn’t Enough for Early Retirement

http://retireby40.org/25x-expenses-isnt-enough-for-early-retirement/

Most of his points will be easily turned aside.

Yep.

"Using the 4% rule doesn't work if you refuse to follow the rule and instead spend more!"

As a counter-point, if you are already living a frugal life, you have no fat to cut when you get older.  And getting older typically entails having to hire younger people to do things you physically can no longer do (or are increasingly risky to push your limits to do) as well as other obvious medical costs.  I, personally, didn't mind his blog post and thought it was well intentioned.

Also, Chasefish, thanks for your thoughts.  Credit bubble is intentionally vague since it could mean a number of things.  I live my life generally thinking the next decade may suck (hence the justification for indexing over, say, individual stocks which have been soaring lately) so I'm usually pleasantly surprised.  But I am getting more and more tempted to put in the effort to prep.  I have reallocated toward a few hedges in depressed, strong dividend stocks, munis, and foreign currency.  None of these hedges have impacted the current standard of living, but I hope they defray any volatility going forward....
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on September 10, 2016, 12:48:28 PM
Early retirement blogger says: 25x Expenses Isn’t Enough for Early Retirement

http://retireby40.org/25x-expenses-isnt-enough-for-early-retirement/

Most of his points will be easily turned aside.

Yep.

"Using the 4% rule doesn't work if you refuse to follow the rule and instead spend more!"

As a counter-point, if you are already living a frugal life, you have no fat to cut when you get older.  And getting older typically entails having to hire younger people to do things you physically can no longer do (or are increasingly risky to push your limits to do) as well as other obvious medical costs.  I, personally, didn't mind his blog post and thought it was well intentioned.

Also, Chasefish, thanks for your thoughts.  Credit bubble is intentionally vague since it could mean a number of things.  I live my life generally thinking the next decade may suck (hence the justification for indexing over, say, individual stocks which have been soaring lately) so I'm usually pleasantly surprised.  But I am getting more and more tempted to put in the effort to prep.  I have reallocated toward a few hedges in depressed, strong dividend stocks, munis, and foreign currency.  None of these hedges have impacted the current standard of living, but I hope they defray any volatility going forward....

By the time you get old enough to require hiring young people, your 4% withdrawal would generally be supplemented by Social Security.  Unless you get to the point of needing help to get to the bathroom, SS should be more than enough to cover a lawn guy, grocery delivery, uber rides and the occasional visit from a fixit guy around the house.
Title: Re: Stop worrying about the 4% rule
Post by: Telecaster on September 10, 2016, 01:13:57 PM

As a counter-point, if you are already living a frugal life, you have no fat to cut when you get older.  And getting older typically entails having to hire younger people to do things you physically can no longer do (or are increasingly risky to push your limits to do) as well as other obvious medical costs.  I, personally, didn't mind his blog post and thought it was well intentioned.

As a counter-counter-point, deciding you want to do more international travel is an example of adding fat. 

Here's the thing:  The headline "4% SWR Still Safe!" is boring.   The headline "I Found a Flaw with the 4% Rule!" is exciting and sexy!  It implies the author discovered new insights that no one else thought of.   "4% Rule Fails!" gets page clicks.   In this case, the author came up with the following bombshells:

1.  If you add discretionary spending to your budget, you need more money.

2.  If the future is worse than the past, the 4% rule fails.

Well, duh.  But worse, he also demonstrated a common noob misunderstanding of the 4% rule.  He's says (basically that based on higher than average P/E, it is a reasonable assumption that stock returns will be lower than average going forward.   No quibble from me on that point.  Based on that, he posits the 4% rule won't work in future.  But the 4% SWR isn't on average returns, it is the worst case scenario.   

So if the 4% rule fails--as he suggests could happen--it must be because we are now experiencing, or about to experience, worse market conditions than have ever existed in the past!   Yet he provided zero evidence this is the case, or even why it might be a likely scenario. 

TL;DR.  We can all stop worrying about the 4% rule. 



Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on September 10, 2016, 07:20:28 PM
As a counter-point, if you are already living a frugal life, you have no fat to cut when you get older. 

Having read a metric shit ton of retirement stories/plans only a handful have been really bare bones where no cuts were possible. Add to that all the data I've seen points to a reduction in spending as people get older not an increase.
Title: Re: Stop worrying about the 4% rule
Post by: deborah on September 10, 2016, 08:55:09 PM
In Australia, we have superannuation, which is broadly similar to a 401k. A study has recently been published about long term withdrawal rates from superannuation in retirement - http://www.finsia.com/docs/default-source/jassa-current-issue/JASSA-2016-issue-2/superannnuation-drawdown-behaviour.pdf?sfvrsn=0

There are several interesting outcomes from the study. Firstly, the withdrawal amount doesn't increase as people age, although you would expect otherwise.

Secondly, people are withdrawing less than expected. In Australia there are two standardised retirement expenditures - modest (the expected requirements of a couple who live a modest lifestyle in retirement) and comfortable (those who have a more inflated lifestyle) - that were worked out by a bank by looking at the costs of various things. Couples on a modest lifestyle are supposed to require $34,216AUD, and $34,598AUD when they reach 85. However, the longitudinal study finds that people are actually living an even more modest lifestyle in retirement (the median expenditure) - about 20% less.

Thirdly, from the standardised retirement expenditures, people (on average) need about the same whether they are 65 or 85 - with the study noting that the 65 year olds tend to be spending more.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on September 11, 2016, 12:57:31 PM
Early retirement blogger says: 25x Expenses Isn’t Enough for Early Retirement

http://retireby40.org/25x-expenses-isnt-enough-for-early-retirement/

Most of his points will be easily turned aside. He does talk about his own expense inflation, a very real risk for very early retirees on bare-bones budgets.

Well that was just.. bad.

He underestimated his ER expenses, and then complained that saving 25x (or 30, in his case) his underestimated expenses wasn't enough to pay for his new, higher expenses.

The problem there is not the 4% rule, it's in your poor ability to plan for the future.

His title "25x Expenses Isn’t Enough for Early Retirement" is totally wrong--it would be enough, if you actually had saved up 25x actual expenses, not a made up, lower number.  The poll on the bottom is ridiculous, too.  Almost half his respondents (43% as of this writing) say you need 40x or 50x expenses.  That's a 2% to 2.5% WR!  Crazy!  Of course, if you make up artificially low retirement budget numbers, and then save up 50x expenses, and then spend double in ER, guess what?  You're at a 4% real WR, and will do just fine, as long as that actually is your ER spending, and it doesn't keep rising and rising.  ;)
Title: Re: Stop worrying about the 4% rule
Post by: Radagast on September 11, 2016, 03:19:51 PM
I think retireby40 makes a good point that extreme early retirees may not have sufficient understanding of future expenses. There is still too much life ahead for a 29-year-old to know for certain about children, medical costs, divorces, modest increases in hedonism, etc. It is hard to extrapolate the next 60 years from the last 6 years with any accuracy,so an extra margin of safety is probably necessary.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on September 11, 2016, 05:22:00 PM
I think retireby40 makes a good point that extreme early retirees may not have sufficient understanding of future expenses. There is still too much life ahead for a 29-year-old to know for certain about children, medical costs, divorces, modest increases in hedonism, etc. It is hard to extrapolate the next 60 years from the last 6 years with any accuracy,so an extra margin of safety is probably necessary.

If that's your point, say that.

Say that "here's what to watch out for when setting future expenses, and thus determining your number."  But "4% rule doesn't work" bullshit is just clickbait, and misguided.  In his example, he is the problem (way underestimating FIRE expenses), not the 4% rule.

He could have written a beautiful article with the premise you provide that almost everyone here would have agreed with.  Instead, he put that up.  (https://dl.dropboxusercontent.com/u/9743562/icon_rolleyes.gif)
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on September 11, 2016, 07:45:03 PM
Well, duh.  But worse, he also demonstrated a common noob misunderstanding of the 4% rule.  He's says (basically that based on higher than average P/E, it is a reasonable assumption that stock returns will be lower than average going forward.   No quibble from me on that point.  Based on that, he posits the 4% rule won't work in future.  But the 4% SWR isn't on average returns, it is the worst case scenario.   

Quibble: 4% SWR isn't worst case scenario, is it?

Firecalc 30 years, 4%, 75/25
For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 6 cycles failed, for a success rate of 94.8%.
Zero failures at 3.6%.

Firecalc 40 years, 4%, 75/25
For our purposes, failure means the portfolio was depleted before the end of the 40 years. FIRECalc found that 15 cycles failed, for a success rate of 85.8%.
Zero failures at 3.3%.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on September 11, 2016, 08:01:20 PM
Well, duh.  But worse, he also demonstrated a common noob misunderstanding of the 4% rule.  He's says (basically that based on higher than average P/E, it is a reasonable assumption that stock returns will be lower than average going forward.   No quibble from me on that point.  Based on that, he posits the 4% rule won't work in future.  But the 4% SWR isn't on average returns, it is the worst case scenario.   

Quibble: 4% SWR isn't worst case scenario, is it?

Firecalc 30 years, 4%, 75/25
For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 6 cycles failed, for a success rate of 94.8%.
Zero failures at 3.6%.

Firecalc 40 years, 4%, 75/25
For our purposes, failure means the portfolio was depleted before the end of the 40 years. FIRECalc found that 15 cycles failed, for a success rate of 85.8%.
Zero failures at 3.3%.

Probably a typo--it's missing a single letter.  It's the worst case scenarios.

;)

Yes, 4% WR was designed to have 95% success rate (being defined as having money left) after 30 years, historically, when withdrawing an initial 4% and then adjusting it up for inflation yearly.
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on September 12, 2016, 03:57:07 AM
actually the grand pappy of the 4% safe withdrawal rate bill bengen  found his   SAFEMAX  was actually  4.15% for   a 50/50 allocation for stocks and bonds and was 100% succesful  based on 1966 as  the worst case scenario .

it was only later on when the trinity study  used longer term corporate bonds rather  than bill's 5 year gov't bonds that they got poorer results so 4% dropped to only a 95% success rate . it took a 3.60% draw rate  or so to get a full 100% success rate under the trinity parameters  . bill also took his withdrawals the end of each year vs others which took it at the beginning .

so at worst there is about a 12% difference in pay checks between the two .

note: none count any fees at all in the equation .
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on September 12, 2016, 07:26:48 AM
I don't see why we keep harping on about Bengen and the Trinity studies. Sure, they did ground-breaking work. Now we can all do our own studies using cFIREsim or FIREcalc.

Unless someone thinks that these tools are inferior?

http://www.firecalc.com/


Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on September 12, 2016, 07:32:01 AM
the math at the end of the day is what it is , at least for a 30 year time frame .  mathematically you need at least a 2% real return average over the  first 15 years of a 30 year retirement to support 4% inflation adjusted  .

going out longer i am not aware of anyone who actually broke out the math needed  so all you get is a statistic and nothing to really monitor going forward .

i know if 5 years in or so if i am not seeing at least a 2% real return i may want to cut back spending .  but if i had a 40 or 50 year retirement i don't know what the math is i would have to achieve  to have it hold . kitces only did the study on the math for a 30 year time frame .
Title: Re: Stop worrying about the 4% rule
Post by: ender on September 12, 2016, 08:52:26 AM
mathematically you need at least a 2% real return average over the  first 15 years of a 30 year retirement to support 4% inflation adjusted  .

Citation needed?

I can think of multiple scenarios where a 2% real return average for the first 15 years fails 30 year retirement. Or where a lower percentage succeeds.
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on September 12, 2016, 09:19:50 AM
here you go

https://www.kitces.com/blog/what-returns-are-safe-withdrawal-rates-really-based-upon/
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on September 12, 2016, 09:21:52 AM
mathematically you need at least a 2% real return average over the  first 15 years of a 30 year retirement to support 4% inflation adjusted  .

Citation needed?

I can think of multiple scenarios where a 2% real return average for the first 15 years fails 30 year retirement. Or where a lower percentage succeeds.

here are the actual numbers for the worst time frames we have had in history


suppose you were so unlucky to retire in one of those worst time framess ,what would your 30 year results look like :

1907 stocks returned 7.77% -- bonds 4.250-- rebalanced portfolio 7.02- - inflation 1.64--

1929 stocks 8.19% - - bonds 1.74%-- rebalanced portfolio 6.28-- inflation 1.69--

1937 stocks 10.12 - - bonds 2.13 - rebalanced portfolio -- 7.24 inflation-- 2.82

1966 stocks 10.23 - -bonds 7.85 -- rebalanced portfolio 9.56- - inflation 5.38

for comparison the 140 year average's were:

stocks 8.39--bonds 2.85%--rebalanced portfolio 6.17% inflation 2.23%

so what made those time frames the worst ? what made them the worst is the fact in every single retirement time frame the outcome of that 30 year period was determined not by what happened over the 30 years but the entire outcome was decided in the first 15 years.

so lets look at the first 15 years in those time frames determined to be the worst we ever had.

1907--- stocks minus 1.47%---- bonds minus .39%-- rebalanced minus .70% ---inflation 1.64%

1929---stocks 1.07%---bonds 1.79%---rebalanced 2.29%--inflation 1.69%

1937---stocks -- 3.45%---bonds minus 3.07%-- rebalanced 1.23%--inflation 2.82%

1966-stocks minus .13%--bonds 1.08%--rebalanced .64%-- inflation 5.38%

it is those 15 year horrible time frames that the 4% safe withdrawal rate was born out of since you had to reduce from what could have been 6.50% as a swr down to just 4% to get through those worst of times.


Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on September 12, 2016, 11:03:39 AM
1966-stocks minus .13%--bonds 1.08%--rebalanced .64%-- inflation 5.38%

it is those 15 year horrible time frames that the 4% safe withdrawal rate was born out of since you had to reduce from what could have been 6.50% as a swr down to just 4% to get through those worst of times.

Sure, excepting 1966, of course. 4% did not work from 1964 through 1969 (according to cFIREsim).
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on September 12, 2016, 11:48:38 AM
depends on the portfolio . bill bengan's model passed 1966 at 4.16%  . the trinity did not . the types of bonds held matter . but the 2% real return gives you extra leeway

Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on September 13, 2016, 02:59:50 AM
mathematically you need at least a 2% real return average over the  first 15 years of a 30 year retirement to support 4% inflation adjusted  .

Citation needed?

I can think of multiple scenarios where a 2% real return average for the first 15 years fails 30 year retirement. Or where a lower percentage succeeds.

as you see 2% real returns the first 15 years never failed . every worst case was less than 2% 
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on September 13, 2016, 06:34:27 AM
it is those 15 year horrible time frames that the 4% safe withdrawal rate was born out of since you had to reduce from what could have been 6.50% as a swr down to just 4% to get through those worst of times.

I tried 6.5% in FIREcalc just for fun:
50/50 FIRECalc found that 77 cycles failed, for a success rate of 33.6%.
75/25 FIRECalc found that 64 cycles failed, for a success rate of 44.8%.

6.1%:
75/25 FIRECalc found that 58 cycles failed, for a success rate of 50.0%.



Title: Re: Stop worrying about the 4% rule
Post by: k9 on September 14, 2016, 02:37:46 AM
The poll on the bottom is ridiculous, too.  Almost half his respondents (43% as of this writing) say you need 40x or 50x expenses.  That's a 2% to 2.5% WR!  Crazy!  Of course, if you make up artificially low retirement budget numbers, and then save up 50x expenses, and then spend double in ER, guess what?  You're at a 4% real WR, and will do just fine, as long as that actually is your ER spending, and it doesn't keep rising and rising.  ;)
Yeah. When your remaining life expectancy (typically, for a male who "retires by 40", a little less than 40 years) is lower than your multiple of expenses invested, you know there's a problem. Get a life annuity and you'll automatically improve your WR (which will be the safest you can come up with, by definition: 100% success rate). And, once again, that's without considering ability to work part-time if needed, or without considering SS.
Title: Re: Stop worrying about the 4% rule
Post by: ender on September 14, 2016, 06:29:42 AM
as you see 2% real returns the first 15 years never failed . every worst case was less than 2%

That is a very different statement than:

mathematically you need at least a 2% real return average over the  first 15 years of a 30 year retirement to support 4% inflation adjusted  .

Mathematically you barely need over 0% real return to support a 4% withdrawal rate. If your portfolio keeps up with inflation and otherwise does exactly 0% return, you will still last 25 years with a 4% withdrawal. Mathematically you need your overall return to be only slightly over 0% real every year to support 30 years (or more).
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on September 16, 2016, 03:18:04 AM
25 years is not long enough and sequences of returns makes it even worse once you try to get enough return not to have any money left at all.

That draw down figures not having a penny left for a longer life or unexpected spending beyond the budget.

2% real returns is about the min i would consider safe enough for  a 30 year or longer retirement not zero
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on September 16, 2016, 03:42:37 AM
2% real returns, huh?

So if you assume 4% withdrawals, 3% inflation, and 5.06% nominal return for 10 years (which gives us a real return of 2% (Formula for real return = (1+nominal rate)/(1+inflation rate)-1)), ending portfolio after 10 years would be 6.675% higher than initial amount.

E.g. starting at 1MM, spending 40k/yr, increasing with inflation at 3%/yr, earning 5.06%/yr (this is, of course, assuming steady returns, which totally skews things, and is the whole point of the trinity study, but I'm ignoring that for the moment), you'll end with 1,066,750 after 10 years.

At what point along the way do you monitor, and with what triggers?  Saying "2% real after a decade" is nice, but I'd probably be looking at it before then, and looking at portfolio value, not just return amount.
Title: Re: Stop worrying about the 4% rule
Post by: Frs1661 on September 16, 2016, 04:08:07 AM
2% real returns, huh?

So if you assume 4% withdrawals, 3% inflation, and 5.06% nominal return for 10 years (which gives us a real return of 2% (Formula for real return = (1+nominal rate)/(1+inflation rate)-1)), ending portfolio after 10 years would be 6.675% higher than initial amount.

E.g. starting at 1MM, spending 40k/yr, increasing with inflation at 3%/yr, earning 5.06%/yr (this is, of course, assuming steady returns, which totally skews things, and is the whole point of the trinity study, but I'm ignoring that for the moment), you'll end with 1,066,750 after 10 years.

At what point along the way do you monitor, and with what triggers?  Saying "2% real after a decade" is nice, but I'd probably be looking at it before then, and looking at portfolio value, not just return amount.
In real terms,  1MM after 10 years of inflation at 3% you would need 1.344MM to have the same buying power as your starting portfolio. So this investor is down by about 25% with 33%of their 30y retirement over... Seems OK. No reason to panic anyway.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on September 16, 2016, 05:24:33 AM
2% real returns, huh?

So if you assume 4% withdrawals, 3% inflation, and 5.06% nominal return for 10 years (which gives us a real return of 2% (Formula for real return = (1+nominal rate)/(1+inflation rate)-1)), ending portfolio after 10 years would be 6.675% higher than initial amount.

E.g. starting at 1MM, spending 40k/yr, increasing with inflation at 3%/yr, earning 5.06%/yr (this is, of course, assuming steady returns, which totally skews things, and is the whole point of the trinity study, but I'm ignoring that for the moment), you'll end with 1,066,750 after 10 years.

At what point along the way do you monitor, and with what triggers?  Saying "2% real after a decade" is nice, but I'd probably be looking at it before then, and looking at portfolio value, not just return amount.
In real terms,  1MM after 10 years of inflation at 3% you would need 1.344MM to have the same buying power as your starting portfolio. So this investor is down by about 25% with 33%of their 30y retirement over... Seems OK. No reason to panic anyway.

Right.  And that was the minimum mathjak said he's looking for.  He's mentioned this in many, many threads.  I'm curious though what he's actually looking for.  I mean, unless you don't check until the 10 year mark, it's not a super helpful indicator.
Title: Re: Stop worrying about the 4% rule
Post by: dougules on September 16, 2016, 11:17:55 AM
2% real returns, huh?

So if you assume 4% withdrawals, 3% inflation, and 5.06% nominal return for 10 years (which gives us a real return of 2% (Formula for real return = (1+nominal rate)/(1+inflation rate)-1)), ending portfolio after 10 years would be 6.675% higher than initial amount.

E.g. starting at 1MM, spending 40k/yr, increasing with inflation at 3%/yr, earning 5.06%/yr (this is, of course, assuming steady returns, which totally skews things, and is the whole point of the trinity study, but I'm ignoring that for the moment), you'll end with 1,066,750 after 10 years.

At what point along the way do you monitor, and with what triggers?  Saying "2% real after a decade" is nice, but I'd probably be looking at it before then, and looking at portfolio value, not just return amount.
In real terms,  1MM after 10 years of inflation at 3% you would need 1.344MM to have the same buying power as your starting portfolio. So this investor is down by about 25% with 33%of their 30y retirement over... Seems OK. No reason to panic anyway.

Right.  And that was the minimum mathjak said he's looking for.  He's mentioned this in many, many threads.  I'm curious though what he's actually looking for.  I mean, unless you don't check until the 10 year mark, it's not a super helpful indicator.

I'm curious if any of these calculations are taking dividends into account.  A 2% WR would almost be covered by dividends alone at the moment, and dividend yields are really low compared to most of history. 
Title: Re: Stop worrying about the 4% rule
Post by: ender on September 16, 2016, 12:37:06 PM
I'm curious if any of these calculations are taking dividends into account.  A 2% WR would almost be covered by dividends alone at the moment, and dividend yields are really low compared to most of history.

Keep in mind if 2% dividends remain constant, it's 2% of market value.

So if you start with $1M, and 20k/year spend, but the market drops to $500k but still has 2% dividends, you are only getting $10k/year in dividends. Not a constant $20k.

This is a common mistake when considering dividend yield and SWRs.
Title: Re: Stop worrying about the 4% rule
Post by: dougules on September 16, 2016, 02:25:55 PM
I'm curious if any of these calculations are taking dividends into account.  A 2% WR would almost be covered by dividends alone at the moment, and dividend yields are really low compared to most of history.

Keep in mind if 2% dividends remain constant, it's 2% of market value.

So if you start with $1M, and 20k/year spend, but the market drops to $500k but still has 2% dividends, you are only getting $10k/year in dividends. Not a constant $20k.

This is a common mistake when considering dividend yield and SWRs.

The 2% was relative to the numbers as they stand now.  Dividends generally don't drop nearly as bad as prices when a crash happens, so if all your expenses are covered by dividends you should be golden.  Just a quick run through cfiresim shows that you might have a sequence of returns risk if there's 70s style inflation, but it wouldn't be that bad.  Anyway, my point is that a WR is pretty conservative if it is mostly covered by dividends when you start out. 

http://www.multpl.com/s-p-500-dividend-yield/

Notice the spikes that happened when the market went south. 
Title: Re: Stop worrying about the 4% rule
Post by: ender on September 16, 2016, 03:56:00 PM
Notice the spikes that happened when the market went south.

What spikes?

The only "spike" there was during the great depression. Everywhere else dividend yield stays fairly flat (2008/2009 is a good example, the market dropped much more than dividends increased).
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on September 16, 2016, 03:59:22 PM
I'm curious if any of these calculations are taking dividends into account.  A 2% WR would almost be covered by dividends alone at the moment, and dividend yields are really low compared to most of history.

Keep in mind if 2% dividends remain constant, it's 2% of market value.

So if you start with $1M, and 20k/year spend, but the market drops to $500k but still has 2% dividends, you are only getting $10k/year in dividends. Not a constant $20k.

This is a common mistake when considering dividend yield and SWRs.

The 2% was relative to the numbers as they stand now.  Dividends generally don't drop nearly as bad as prices when a crash happens, so if all your expenses are covered by dividends you should be golden.  Just a quick run through cfiresim shows that you might have a sequence of returns risk if there's 70s style inflation, but it wouldn't be that bad.  Anyway, my point is that a WR is pretty conservative if it is mostly covered by dividends when you start out. 

http://www.multpl.com/s-p-500-dividend-yield/

Notice the spikes that happened when the market went south.

Doesn't matter, at a 2%WR you are immune to everything with the exception of collapse of western civilization.  Unless someone is concerned about a legacy, with a WR that low, the vast majority of assets can invested conservatively so that sequence risk goes away.
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on September 17, 2016, 03:48:26 AM
I'm curious if any of these calculations are taking dividends into account.  A 2% WR would almost be covered by dividends alone at the moment, and dividend yields are really low compared to most of history.

Keep in mind if 2% dividends remain constant, it's 2% of market value.

So if you start with $1M, and 20k/year spend, but the market drops to $500k but still has 2% dividends, you are only getting $10k/year in dividends. Not a constant $20k.

This is a common mistake when considering dividend yield and SWRs.

unless dividends are cut or raised  the dividend is constant while the yield from share price changes with nav for new buyers only .

a dividend is declared as a dollar amount not a percentage of share price .

if i get a 1 dollar dividend it stays 1 dollar  regardless of share price . only those first buying in are getting a higher or lower yield percentage wise since they still get the same 1 dollar i do
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on September 17, 2016, 03:53:18 AM
I'm curious if any of these calculations are taking dividends into account.  A 2% WR would almost be covered by dividends alone at the moment, and dividend yields are really low compared to most of history.

Keep in mind if 2% dividends remain constant, it's 2% of market value.

So if you start with $1M, and 20k/year spend, but the market drops to $500k but still has 2% dividends, you are only getting $10k/year in dividends. Not a constant $20k.

This is a common mistake when considering dividend yield and SWRs.

The 2% was relative to the numbers as they stand now.  Dividends generally don't drop nearly as bad as prices when a crash happens, so if all your expenses are covered by dividends you should be golden.  Just a quick run through cfiresim shows that you might have a sequence of returns risk if there's 70s style inflation, but it wouldn't be that bad.  Anyway, my point is that a WR is pretty conservative if it is mostly covered by dividends when you start out. 

http://www.multpl.com/s-p-500-dividend-yield/

Notice the spikes that happened when the market went south.

sequence odf return risk can take those same average total returns and throw them off as much as a 15 year difference in how long that money lasts .

same exact total returns can see a huge difference
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on September 17, 2016, 04:21:46 AM
I'm curious if any of these calculations are taking dividends into account.  A 2% WR would almost be covered by dividends alone at the moment, and dividend yields are really low compared to most of history.

Keep in mind if 2% dividends remain constant, it's 2% of market value.

So if you start with $1M, and 20k/year spend, but the market drops to $500k but still has 2% dividends, you are only getting $10k/year in dividends. Not a constant $20k.

This is a common mistake when considering dividend yield and SWRs.

unless dividends are cut or raised  the dividend is constant while the yield from share price changes with nav for new buyers only .

a dividend is declared as a dollar amount not a percentage of share price .

if i get a 1 dollar dividend it stays 1 dollar  regardless of share price . only those first buying in are getting a higher or lower yield percentage wise since they still get the same 1 dollar i do

Right, he's saying they're often cut.  So if dividends remain 2% (which is a percentage), they'll be cut to match the new share price.  The graph shows they're much more aligned with market price than dividend chasers would have you believe.
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on September 17, 2016, 05:29:54 AM
got it , if that is the case .
Title: Re: Stop worrying about the 4% rule
Post by: dougules on September 19, 2016, 03:48:55 PM
I'm curious if any of these calculations are taking dividends into account.  A 2% WR would almost be covered by dividends alone at the moment, and dividend yields are really low compared to most of history.

Keep in mind if 2% dividends remain constant, it's 2% of market value.

So if you start with $1M, and 20k/year spend, but the market drops to $500k but still has 2% dividends, you are only getting $10k/year in dividends. Not a constant $20k.

This is a common mistake when considering dividend yield and SWRs.

unless dividends are cut or raised  the dividend is constant while the yield from share price changes with nav for new buyers only .

a dividend is declared as a dollar amount not a percentage of share price .

if i get a 1 dollar dividend it stays 1 dollar  regardless of share price . only those first buying in are getting a higher or lower yield percentage wise since they still get the same 1 dollar i do

Right, he's saying they're often cut.  So if dividends remain 2% (which is a percentage), they'll be cut to match the new share price.  The graph shows they're much more aligned with market price than dividend chasers would have you believe.

I'm not saying dividends don't go down in a recession.  They definitely do, but they're way less volatile than prices.  Spikes may not have been the best term for the graphic, but you'll notice that the dividend yield rose in most of the worst economic periods.  That illustrates that the dividends did a lot better than prices through the trouble. 

Anyway my point is that a WR that is purely dividends is very conservative.  Yes dividends can and do go down, but if they cover your expenses now it would take a pretty bad economy to make you dip into any principal.  Even then probably not much. 
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on September 19, 2016, 05:14:05 PM


[quote author=dougules link=topic=39064.msg1233781#msg1233781 date=1474321735. 
Anyway my point is that a WR that is purely dividends is very conservative.  Yes dividends can and do go down, but if they cover your expenses now it would take a pretty bad economy to make you dip into any principal.  Even then probably not much.
[/quote]

I agree with you, a dividend approach is much too conservative (and subpar for other reasons as well).

Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on September 20, 2016, 02:29:46 AM
The term total return means your complete roi regardless of how the roi is achieved .

I am retired . I reinvest all dividends right now . I own dividend paying funds , bond funds and non dividend paying funds .

I have a withdrawal rate of 3.50% . I take that from cash instruments right now while letting all investments still grow . My total portfolio yield income wise is about 3% with total return about 5% right now ytd on the portfolio.

Except for the fact that i draw my money for living from a cash buffer my outcome in down markets is identical to if i spent the dividends directly and held less cash .

There is no diifference in down markets as to how my income is constructed ,whether apreciation or dividends or both .

The outcome in down markets is the same whether you use cash buckets , stocks and bonds or whether you spend dividends and don't reinvest them or even spend equally from all parts of the portfolio in a systematic withdrawal that preserves your allocation as you spend .

To think you are any different spending down dividends that come off the share price vs a whole portfolio in a down market or up market is nonsense.

Just ask yourself if you reinvested the dividend and took the same money out of the overall portfolio or out of a non dividend payer with the same return would a down market effect you any less . Of course not is the answer .you are just fooling yourself if you think there is any difference except for some small tax differences. Funds have no fee to sell
Title: Re: Stop worrying about the 4% rule
Post by: dude on September 20, 2016, 07:16:36 AM
Interesting article, related to the SafeMax discussion.  Back-tests the Kitces/Pfau "rising equity glide paths" strategy against other fixed allocation and declining glide path (the norm in financial planning) strategies.  Was surprised to see the 60% fixed allocation a pretty clear winner here, all things considered (esp. when considering its simplicity). Was equally surprised to see a 60/40 stocks/bills allocation generally superior to 60/40 stocks/bonds (probably good news for TSP participants with the G Fund).  It's long and detailed, but worth the read, IMHO:

https://www.onefpa.org/journal/Pages/MAR15-Retirement-Risk,-Rising-Equity-Glide-Paths,-and-Valuation-Based-Asset.aspx
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on September 20, 2016, 09:42:48 AM
Interesting article, related to the SafeMax discussion.  Back-tests the Kitces/Pfau "rising equity glide paths" strategy against other fixed allocation and declining glide path (the norm in financial planning) strategies.  Was surprised to see the 60% fixed allocation a pretty clear winner here, all things considered (esp. when considering its simplicity). Was equally surprised to see a 60/40 stocks/bills allocation generally superior to 60/40 stocks/bonds (probably good news for TSP participants with the G Fund).  It's long and detailed, but worth the read, IMHO:

https://www.onefpa.org/journal/Pages/MAR15-Retirement-Risk,-Rising-Equity-Glide-Paths,-and-Valuation-Based-Asset.aspx

Thanks for the link, this is very interesting! 

Corporate issued bonds tend to have more correlation with stock prices. Both are driven by earnings.  In an earnings recession, the chance for default on corporate bonds increases which drives up rates and can hurt the face values of existing bonds.  Whereas the opposite is true for Tbills.  In a recessionary period treasury yields tend to decrease, both from the free market "safety" end and from a macroeconomic policy standpoint. This has the effect of increasing face values of previously owned treasuries.  The idea that Tbill allocation outperforms total bonds from a WR standpoint makes sense, theoretically anyway. 

If the point of a portfolio in the initial 10-15 years of drawdown is to minimize sequence risk, Tbills seem to be the best choice.  Decrease sequence risk= Minimized volatility = noncorrelated assets (even if total returns are lower).  The problem with this theory; Treasury yields are yet to recover from the last, rather extreme, economic cycle.  This back testing may not hold true for the near future.
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on September 20, 2016, 02:05:19 PM
the relationship between bonds and stock  is all over the place . above 3% they  correlate one way , under 3% they have correlated another and at the transition line flip a coin .

(https://photos.smugmug.com/photos/i-kQtSMJV/0/O/i-kQtSMJV.png)
Title: Re: Stop worrying about the 4% rule
Post by: index on September 20, 2016, 02:20:41 PM
The value of the dividend comes right out of the stock price. That is why "dividend capture" trading schemes don't work. There is nothing magical about receiving a dividend. It is a forced taxable event and can be achieved in the exact same manner by selling shares.   
Title: Re: Stop worrying about the 4% rule
Post by: Telecaster on September 20, 2016, 02:46:05 PM
The value of the dividend comes right out of the stock price. That is why "dividend capture" trading schemes don't work. There is nothing magical about receiving a dividend. It is a forced taxable event and can be achieved in the exact same manner by selling shares.

^^ Thank Odin someone understands this! 
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on September 20, 2016, 03:03:10 PM
that is the hardest concept for folks to get in to their heads . it is so misunderstood .
Title: Re: Stop worrying about the 4% rule
Post by: dougules on September 21, 2016, 11:32:30 AM
The term total return means your complete roi regardless of how the roi is achieved .

I am retired . I reinvest all dividends right now . I own dividend paying funds , bond funds and non dividend paying funds .

I have a withdrawal rate of 3.50% . I take that from cash instruments right now while letting all investments still grow . My total portfolio yield income wise is about 3% with total return about 5% right now ytd on the portfolio.

Except for the fact that i draw my money for living from a cash buffer my outcome in down markets is identical to if i spent the dividends directly and held less cash .

There is no diifference in down markets as to how my income is constructed ,whether apreciation or dividends or both .

The outcome in down markets is the same whether you use cash buckets , stocks and bonds or whether you spend dividends and don't reinvest them or even spend equally from all parts of the portfolio in a systematic withdrawal that preserves your allocation as you spend .

To think you are any different spending down dividends that come off the share price vs a whole portfolio in a down market or up market is nonsense.

Just ask yourself if you reinvested the dividend and took the same money out of the overall portfolio or out of a non dividend payer with the same return would a down market effect you any less . Of course not is the answer .you are just fooling yourself if you think there is any difference except for some small tax differences. Funds have no fee to sell

The value of the dividend comes right out of the stock price. That is why "dividend capture" trading schemes don't work. There is nothing magical about receiving a dividend. It is a forced taxable event and can be achieved in the exact same manner by selling shares.

^^ Thank Odin someone understands this!

I completely agree.  Earnings are earnings whether they're retained or distributed as dividends.  I was more just trying to make the point that a WR is really conservative when it's covered by dividends.  You're not even taking retained earnings into account at all except as a SHTF back-up. 


that is the hardest concept for folks to get in to their heads . it is so misunderstood .

Honestly it took me a while to wrap my head around this.  It does take some thought to understand the fact there is almost always some way to reinvest to earn more or cut costs. 
Title: Re: Stop worrying about the 4% rule
Post by: dougules on September 21, 2016, 03:03:24 PM
I am probably wasting my time writing this, but the incorrect statements keep coming.

RECEIVING A DIVIDEND IS NOT THE SAME AS SELLING A SHARE OF STOCK!

I agree as a practical note that an investor should focus on total return as apposed to dividends or capital appreciation at the exclusion of the other. However, dividends are different then capital appreciation. These are viewed differently by the IRS, SEC, and GAAP.

Dividends and capital appreciation affect the ownership of the company differently. If I own several shares of Target and sell several shares Target has the exact same market capitalization but I own a smaller piece of it as I sold some of my ownership to another investor (Transaction between another investor and me). If Target pays a dividend my ownership % stays the same but the value of what I own decreases(Transaction between Target and me).

There is a theory that when a dividend is received an investor will have the same net worth, ignoring taxes; but it is practically impossible to view this in the real world as the market price is affected by so many variables simultaneously. Further this theory leaves out the fact that the markets valuation of a company is based on many different factors such as future growth and not liquidation value of the companies assets. Why does this matter? I think an example will shed light on this.

LinkedIn has a  market cap of $26 billion and a cash balance of $546 million. If it issued a dividend totaling $540 million do you think the market cap would decrease to $25.46 billion after it was paid? It would likely decrease much more because they would be cash starved. Dividends affect the financial statements of entities and are an indicator of organizational health, investment opportunities, and the growth stage of the organization.

Well, yeah, dividends vs reinvested retained earnings do pan out differently in the real world.  I personally like it when companies retain earnings right now since I'm still working.  Dividends are going to get taxed at the high pre-FIRE rate for me instead of the nice post-FIRE capital gains rate for selling shares.  Plus reinvestment is the high risk, high reward option which is good when you're not relying on your stash.  I'm not going to get involved in the companies' business, so it's all the same to me owning fewer shares of a bigger company vs more shares of a smaller company (autoreinvest dividends). 

I think my least favorite is companies sitting on piles of cash.  It seems to be popular right now (like your LinkedIn example). 

At the end of the day, though, earnings are still earnings.  I'm trusting that the market is more efficient than me at valuing what companies do with them. 
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on September 21, 2016, 04:53:41 PM
stocks pay dividends even when they lose money . dividends are just an amount of money paid out decided by the board . right now there are quite a few major stocks that are paying out more than they even earned .
Title: Re: Stop worrying about the 4% rule
Post by: k9 on September 22, 2016, 03:56:53 AM
EDIT: read too fast.
Title: Re: Stop worrying about the 4% rule
Post by: markbike528CBX on September 25, 2016, 01:19:54 PM
  Dividends are going to get taxed at the high pre-FIRE rate for me instead of the nice post-FIRE capital gains rate for selling shares.

for 10 and 15% tax brackets, BOTH dividends and cap gains are taxed at 0%. 
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on September 25, 2016, 03:02:23 PM
the issue ,especially with funds is what is a qualified dividend .there are many years a lot of  our dividends are not qualified .

dividends are not based on a 1 year holding period . you have special holding requirements personally and then the fund has it's own set of requirements .

Holding periods

Although the holding period requirement is the same whether you received a dividend for shares you hold directly or in a mutual fund during the tax year, how you determine the holding period may vary, as outlined below.
Note: When counting the number of days the fund was held, include the day the fund was disposed of, but not the day it was acquired.

Mutual funds
All of the following requirements must be met:
The fund must have held the security unhedged for at least 61 days out of the 121-day period that began 60 days before the security’s ex-dividend date. (The ex-dividend date is the date after the dividend has been paid and processed and any new buyers would be eligible for future dividends.)
For certain preferred stock, the security must be held for 91 days out of the 181-day period, beginning 90 days before the ex-dividend date. The amount received by the fund from that dividend-generating security must have been subsequently distributed to you.
You must have held the applicable share of the fund for at least 61 days out of the 121-day period that began 60 days before the fund’s ex-dividend date.
Stock
You must have held those shares of stock unhedged for at least 61 days out of the 121-day period that began 60 days before the ex-dividend date.
For certain preferred stock, the security must be held for 91 days out of the 181-day period beginning 90 days before the ex-dividend date.
Title: Re: Stop worrying about the 4% rule
Post by: dougules on September 26, 2016, 10:18:46 AM
  Dividends are going to get taxed at the high pre-FIRE rate for me instead of the nice post-FIRE capital gains rate for selling shares.

for 10 and 15% tax brackets, BOTH dividends and cap gains are taxed at 0%.

Yep.  0% is pretty nice.  We're definitely not in that bracket at the moment. 
Title: Re: Stop worrying about the 4% rule
Post by: sol on September 26, 2016, 08:20:14 PM
Yep.  0% is pretty nice.  We're definitely not in that bracket at the moment.

More importantly for this community, most of us WILL be in that bracket in retirement, with low expenses and a significant amount of income coming from nontaxable sources like savings, capital return on stocks, and Roth IRAs.
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on September 27, 2016, 01:43:34 AM
no way could we see that zero % bracket . but heck i will take having  more income any day and pay the taxes . as long as i got the taxes as low as i can .
Title: Re: Stop worrying about the 4% rule
Post by: ender on September 27, 2016, 07:03:37 AM
no way could we see that zero % bracket . but heck i will take having  more income any day and pay the taxes . as long as i got the taxes as low as i can .

Honestly, you are not the target audience of this forum.

You retired way later than most people here plan on retiring here.
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on September 27, 2016, 07:29:42 AM
yes , that is true . our time frame is different , our needs from our resources are different  and our lifestyle goals and wants are likely very different . i was never one for living a frugal life style in retirement . we went the opposite route . we are living better in retirement with a bigger budget than we did working and having our time consumed .
Title: Re: Stop worrying about the 4% rule
Post by: dougules on September 27, 2016, 10:20:35 AM
yes , that is true . our time frame is different , our needs from our resources are different  and our lifestyle goals and wants are likely very different . i was never one for living a frugal life style in retirement . we went the opposite route . we are living better in retirement with a bigger budget than we did working and having our time consumed .

I think I would file the >0% tax bracket under "First World Problems."
Title: Re: Stop worrying about the 4% rule
Post by: ender on September 27, 2016, 07:10:37 PM
yes , that is true . our time frame is different , our needs from our resources are different  and our lifestyle goals and wants are likely very different . i was never one for living a frugal life style in retirement . we went the opposite route . we are living better in retirement with a bigger budget than we did working and having our time consumed .

It's important to remember that.

Good, generalized ER advice is often different than "planning on retiring at 65" advice.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on September 28, 2016, 06:53:14 AM
It's important to remember that.

Good, generalized ER advice is often different than "planning on retiring at 65" advice.

And also worth mentioning in threads as the casual reader may not have that backstory to add context to the advice/comments.
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on October 06, 2016, 06:24:48 PM
Withdrawal Rates During Retirement: Are We Being Too Conservative?
https://www.ifa.com/articles/withdrawal_rates_during_retirement_being_conservative/

The conclusion:
This analysis was simple but leaves a very powerful message for investors. While many prognosticators may be saying “death to the 4% rule” based on their prediction of future returns, most investors are going to be JUST FINE. We analyzed withdrawal rates looking at the worst rolling period returns that we have ever experienced and we are getting results that are right on track and even better with what has been recommended in the past. Remember, this leaves the investor with the same amount of principal they started with at retirement. If we were trying to liquidate all retirement assets, these withdrawal rates would be even higher. As a general rule, we have been advising our clients for years that a withdrawal rate of 5-6% is a safe bet throughout retirement and also allows for consistency in cash flows from year to year. This accommodates possible events or return scenarios that we have never experienced before (like 2008) as well as the multiple risk capacities that our investors have in retirement.

IFA use portfolios of index funds from Dimensional Fund Advisors, that are typically not available to retail investors. DFA funds tend to perform a little better than equivalent Vanguard funds, but to get them you have to go through an advisor. Not sure what IFA charge, perhaps 1%?
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on October 07, 2016, 03:09:06 AM
we all use a variable spending plan  in retirement . it eventually self adjusts . no  one spends and inflation adjusts like a robot
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on October 07, 2016, 10:30:59 AM
Withdrawal Rates During Retirement: Are We Being Too Conservative?
https://www.ifa.com/articles/withdrawal_rates_during_retirement_being_conservative/

The conclusion:
This analysis was simple but leaves a very powerful message for investors. While many prognosticators may be saying “death to the 4% rule” based on their prediction of future returns, most investors are going to be JUST FINE. We analyzed withdrawal rates looking at the worst rolling period returns that we have ever experienced and we are getting results that are right on track and even better with what has been recommended in the past. Remember, this leaves the investor with the same amount of principal they started with at retirement. If we were trying to liquidate all retirement assets, these withdrawal rates would be even higher. As a general rule, we have been advising our clients for years that a withdrawal rate of 5-6% is a safe bet throughout retirement and also allows for consistency in cash flows from year to year. This accommodates possible events or return scenarios that we have never experienced before (like 2008) as well as the multiple risk capacities that our investors have in retirement.

IFA use portfolios of index funds from Dimensional Fund Advisors, that are typically not available to retail investors. DFA funds tend to perform a little better than equivalent Vanguard funds, but to get them you have to go through an advisor. Not sure what IFA charge, perhaps 1%?

I like that they are downplaying the risk to 4%WR, however, the limited data they are working with really skews the WR upwards for the longer rolling periods (20 & 30yrs).  The worst 30 year rolling return year used was a start year of 1986.  The two biggest threats to a 4%WR are sequence of returns and low returns coupled with high inflation.  Their WORST case (a 1986 retiree) had neither of those, the 2000 & 2008 market downturns were meaningless after so many years of great returns and average inflation.  As a matter of fact, if I had a choice of when to retire in the past century for best financial outcome (using the power of hindsight) it would be anytime from 1981-1994.  This articles "worst" period is actually a historical "very good" period.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on October 07, 2016, 12:49:57 PM
One interesting take-away is that retiring near the 2008 downturn resulted in the worst 10-yr SWR's.  I'm betting that the 10-yr rolling periods continue to get worse as we move in to 2017 and 2018.  I wonder if they will update this study?  And I wonder how the 30 year SWR will look from 2007 - 2037?  Obviously we are limited to the data we have, but we still don't really know what the long term impact of the 2008/9 downturn and the subsequent ZIRP (if you allocate some retirement funds to bonds) has been on SWR since it is too recent.  And the worst 30 year rolling period started in 1986?  I'd rate this article 'meh' on being an improvement on the Trinity Study, more like a sales pitch for DFA (IFA).
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on October 07, 2016, 01:23:21 PM
actually retiring in 2008 was just an average retirement time frame  15 years in .  2008 was v-shaped and really had not much of an effect . a more modest drop that was extended out longer would have been far worse .

 in fact the 2008 retiree stands no different than where any other average time frame retiree stood 15 years in .

kices looked in to that very issue .

https://www.kitces.com/blog/how-has-the-4-rule-held-up-since-the-tech-bubble-and-the-2008-financial-crisis/#more-7856



Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on October 07, 2016, 01:31:25 PM
The 2000 retiree has seen two large, but relatively short lived, "V's" in the first ten years.  Likely not fairing as well.

Edit: note to self, read article cited before comment.  Apparently the 2000 retire is doing OK.
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on October 07, 2016, 01:40:24 PM
according to kices the 2000 retiree is doing worse than 2008 . the y2k retiree is on par with the 1929 retiree . on track to be a worst case scenario .
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on October 07, 2016, 02:28:05 PM
2000 is at a 6.2% WR, halfway through, similar to 1929 start which survived 4%WR.  1966 was over a 10% WR rate at 15 yrs, which did not.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on October 07, 2016, 02:38:18 PM

https://www.kitces.com/blog/how-has-the-4-rule-held-up-since-the-tech-bubble-and-the-2008-financial-crisis/#more-7856

I wonder why the Kitces and IFA papers disagree?  Kitces seems to imply that 2000 - 2010 is worse than IFA's worst 10-yr period cited, 2006 - 2016.  Kitces didn't explain his work (like if he used 50/50 allocation) and his 2008 drop seems to indicate -20% as opposed to the actual 37% S&P drop...
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on October 07, 2016, 02:53:40 PM
Kitces was using 60/40.  Not sure which exact stocks or bonds though.

The other article was examining max WR maintaining principal balance on different allocations via their particular "target date" type funds.  They dont specify what stocks & bonds are in those funds.   The worst rolling 10 year returns with more than 60 percent stocks was 1999 in that article (2000 retiree).
Title: Re: Stop worrying about the 4% rule
Post by: deborah on October 07, 2016, 11:51:51 PM
Withdrawal Rates During Retirement: Are We Being Too Conservative?
https://www.ifa.com/articles/withdrawal_rates_during_retirement_being_conservative/

The conclusion:
This analysis was simple but leaves a very powerful message for investors. While many prognosticators may be saying “death to the 4% rule” based on their prediction of future returns, most investors are going to be JUST FINE. We analyzed withdrawal rates looking at the worst rolling period returns that we have ever experienced and we are getting results that are right on track and even better with what has been recommended in the past. Remember, this leaves the investor with the same amount of principal they started with at retirement. If we were trying to liquidate all retirement assets, these withdrawal rates would be even higher. As a general rule, we have been advising our clients for years that a withdrawal rate of 5-6% is a safe bet throughout retirement and also allows for consistency in cash flows from year to year. This accommodates possible events or return scenarios that we have never experienced before (like 2008) as well as the multiple risk capacities that our investors have in retirement.

IFA use portfolios of index funds from Dimensional Fund Advisors, that are typically not available to retail investors. DFA funds tend to perform a little better than equivalent Vanguard funds, but to get them you have to go through an advisor. Not sure what IFA charge, perhaps 1%?

I like that they are downplaying the risk to 4%WR, however, the limited data they are working with really skews the WR upwards for the longer rolling periods (20 & 30yrs).  The worst 30 year rolling return year used was a start year of 1986.  The two biggest threats to a 4%WR are sequence of returns and low returns coupled with high inflation.  Their WORST case (a 1986 retiree) had neither of those, the 2000 & 2008 market downturns were meaningless after so many years of great returns and average inflation.  As a matter of fact, if I had a choice of when to retire in the past century for best financial outcome (using the power of hindsight) it would be anytime from 1981-1994.  This articles "worst" period is actually a historical "very good" period.
Actually, my parents retired in 1986 (they were early retirees), and they are having a lot of trouble with their financial situation. However, one of their issues is that the products we are relying on - such as indexes rather than buying individual shares, and retirement products - were not available to them then. They also have a fear of the new products available because of the problems people have had being cheated by financial advisors, so they are not taking advantage of these products. I keep looking at them and thinking that this could be me in 30 years. In 30 years will I trust new products? Will I select the best way to go?
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on October 08, 2016, 09:45:28 AM
Actually, my parents retired in 1986 (they were early retirees), and they are having a lot of trouble with their financial situation. However, one of their issues is that the products we are relying on - such as indexes rather than buying individual shares, and retirement products - were not available to them then. They also have a fear of the new products available because of the problems people have had being cheated by financial advisors, so they are not taking advantage of these products. I keep looking at them and thinking that this could be me in 30 years. In 30 years will I trust new products? Will I select the best way to go?

I'm very sorry to hear about your parents Deborah, I wish them the best of luck!  Obviously they raised a smart daughter and hopefully they can draw on that social capital to help!

I would sincerely argue though, the 4% rule didn't fail them as 1986 retirees.  Other things were obviously amiss from an investment choice standpoint and maybe a spending side as well.  A simple 50/50 split of S&P 500 and LTT (both of which were readily available in 1986) would have blown away the 4% rule over the past 30 years. 
Title: Re: Stop worrying about the 4% rule
Post by: tonysemail on October 11, 2016, 10:57:49 AM
Actually, my parents retired in 1986 (they were early retirees), and they are having a lot of trouble with their financial situation. However, one of their issues is that the products we are relying on - such as indexes rather than buying individual shares, and retirement products - were not available to them then. They also have a fear of the new products available because of the problems people have had being cheated by financial advisors, so they are not taking advantage of these products. I keep looking at them and thinking that this could be me in 30 years. In 30 years will I trust new products? Will I select the best way to go?

If you've already "won" the game, then why would you want to change strategies and adopt new products?
I agree with the philosophy of investing in what you can understand.
At least, that's how I rationalize NOT chasing higher returns through complicated products that already exist today..

But in general, I agree that a big vulnerability of FIRE is the assumption that we remain perfectly rational and flexible as we age 50+ years.
I only have to look at my parents and grandparents generation to know that things sometimes go sideways.
Unfortunately, I can't think of a way to insure against your own decision making.
Maybe an annuity or irrevocable trust would mitigate somewhat.
Title: Re: Stop worrying about the 4% rule
Post by: frugal_c on November 13, 2016, 09:44:59 AM
actually retiring in 2008 was just an average retirement time frame  15 years in .  2008 was v-shaped and really had not much of an effect . a more modest drop that was extended out longer would have been far worse .

 in fact the 2008 retiree stands no different than where any other average time frame retiree stood 15 years in .

kices looked in to that very issue .

https://www.kitces.com/blog/how-has-the-4-rule-held-up-since-the-tech-bubble-and-the-2008-financial-crisis/#more-7856





I disagree with this article.  I have run the math and I have a 2000 retiree in big trouble. It looks like they are pulling out over 10% WDR at this point assuming 100% stocks.   Definitely possible I made a mistake but yeah it looks like a fail at this point.

EDIT : Okay, it does say in the article that the numbers are based on 60/40 split.  Using that I get about a $670k inflation adjusted portfolio, or a 6% WDR going forward.  That is based on using cfiresim.

Given that most people are advocating for high stock allocations, I think the likely failure of the 99-00 timeframe is important.  We now have 3 fails, 1929, 1966-67 and 99-00.  There are also many near fails in between.   It appears that the 4% while likely to work is dangerous to hang your hat on.  I just don't see why you wouldn't save up just a few more years to greatly increase your likelihood of success.
Title: Re: Stop worrying about the 4% rule
Post by: MDM on November 13, 2016, 10:10:36 AM
I disagree with this article.  I have run the math and I have a 2000 retiree in big trouble. It looks like they are pulling out over 10% WDR at this point assuming 100% stocks.   Definitely possible I made a mistake but yeah it looks like a fail at this point.
A year by year comparison among your results and ones from, say, cfiresim and firecalc, might be instructive.  I have no idea what the results would be, but it seems a worthwhile way to get at the root cause of any differences.

If you want to disagree with the article's conclusions, you might also use the same assumptions (e.g., asset allocation of 60/40 not 100/0) as the article.  Otherwise it seems a disagreement about assumptions, not conclusions.
Title: Re: Stop worrying about the 4% rule
Post by: frugal_c on November 13, 2016, 10:42:59 AM
It's a good point MDM.  With 60/40 in cfiresim starting in 2000, you now have $690k (adjusted for inflation).    That indicates a 5.8% wdr going forward and very likely a fail.

If you use a 60/40 allocation and look at the late 60's almost every single year there fails with that ratio.

Overall, if you run cfiresim with 40 year time horizons and a 60/40 split your success rate is only 82%.   This is why I don't think it's a reasonable asset mix to consider for a 4% WDR.  You really have no choice but to go to higher stock allocations.
Title: Re: Stop worrying about the 4% rule
Post by: MDM on November 13, 2016, 10:57:06 AM
It's a good point MDM.  With 60/40 in cfiresim starting in 2000, you now have $690k (adjusted for inflation).    That indicates a 5.8% wdr going forward and very likely a fail.
Why "very likely a fail"?  Only has to last ~14 more years now, and with a current 5.8% WR that can happen with returns below inflation.
Title: Re: Stop worrying about the 4% rule
Post by: frugal_c on November 13, 2016, 11:21:17 AM
The point is that the article has the portfolio as just fine with similar to starting assets, I am not seeing that.

For the time horizon, I guess it's open to debate what to use.  For people retiring 40 and under I think you need to be running things with a much longer window.  I consider it a fail if at 30 years the assets are mostly gone.   I generally run things with a 40 year time horizon and even then I want the assets to mostly still be there.  It seems dangerous to allow your stash to just run out and be completely reliant on government benefits.  That just isn't what I consider FI, it sounds very stressful to me.  I could understand if you disagree on that assumption.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on November 13, 2016, 12:07:53 PM
It's a good point MDM.  With 60/40 in cfiresim starting in 2000, you now have $690k (adjusted for inflation).    That indicates a 5.8% wdr going forward and very likely a fail.

If you use a 60/40 allocation and look at the late 60's almost every single year there fails with that ratio.

Overall, if you run cfiresim with 40 year time horizons and a 60/40 split your success rate is only 82%.   This is why I don't think it's a reasonable asset mix to consider for a 4% WDR.  You really have no choice but to go to higher stock allocations.

So, an 18% chance that I would need to go back to work for a year. Or do some part time consulting. Or crank up the CC churning. Or get some other side-gig income.

Meh.
Title: Re: Stop worrying about the 4% rule
Post by: frugal_c on November 13, 2016, 12:30:45 PM
When you look at these scenarios you might have to work full time for 10+ years.   These scenarios are not even close.

I get what people are saying here regarding cutting back or getting a part time job but then why don't we just say that from the outset.  You can retire and pull out 4% a year as long as you are willing to go back to work for a decade or more if things go bad.  I can see why you would be willing to take that bet but let's just be up front about it.

If you really want to retire and not have to have worried historically you should be more in the 3-3.5% WDR.

Title: Re: Stop worrying about the 4% rule
Post by: TomTX on November 13, 2016, 12:49:27 PM
When you look at these scenarios you might have to work full time for 10+ years.   These scenarios are not even close.

I get what people are saying here regarding cutting back or getting a part time job but then why don't we just say that from the outset.  You can retire and pull out 4% a year as long as you are willing to go back to work for a decade or more if things go bad.  I can see why you would be willing to take that bet but let's just be up front about it.

If you really want to retire and not have to have worried historically you should be more in the 3-3.5% WDR.

Why would I go back to work for a decade? Are you thinking that I would just sit on my ass until my assets are depleted, then work? That would be stupid.

If the market crashes hard in the first 5 years, I work (or whatever for cash) for maybe a year to avoid selling the devalued assets. When the market recovers, I go back to being retired for 30-40 more years. If everything is great for 5 years, my assets are building and even if the market crashes my portfolio is big enough to take it.

You're trying to convince me that a 100% chance of working 2-3 extra years (adding padding) is a better choice than an 18% chance of needing to go back to work for 1-2 years after I take a sabbatical/ER until the market crashes...

That makes no sense.
Title: Re: Stop worrying about the 4% rule
Post by: MDM on November 13, 2016, 12:50:47 PM
The point is that the article has the portfolio as just fine with similar to starting assets, I am not seeing that.
That's a good point.

A quick check using some S&P 500 data (see http://forum.mrmoneymustache.com/welcome-to-the-forum/stock-market-gains-401k/msg1302928/#msg1302928) also indicates a large drop between 2000 and 2015.  Of course, that gets us back to 60/40 vs. 100/0.  Don't know if Kitces provides details that would allow one to reconstruct his year by year values for comparison with yours.

Until one understands the difference in these calculations (offhand, I don't), discussion of conclusions based on the differences seems not worthwhile.
Title: Re: Stop worrying about the 4% rule
Post by: frugal_c on November 13, 2016, 01:04:03 PM
The point is that the article has the portfolio as just fine with similar to starting assets, I am not seeing that.
That's a good point.

A quick check using some S&P 500 data (see http://forum.mrmoneymustache.com/welcome-to-the-forum/stock-market-gains-401k/msg1302928/#msg1302928) also indicates a large drop between 2000 and 2015.  Of course, that gets us back to 60/40 vs. 100/0.  Don't know if Kitces provides details that would allow one to reconstruct his year by year values for comparison with yours.

Until one understands the difference in these calculations (offhand, I don't), discussion of conclusions based on the differences seems not worthwhile.

I ran the numbers on cfiresim with a 60/40 split, same as in the article.  The article has things ending at around $1m, I have it ending at $690k.   In my mind cfiresim refutes the article.
Title: Re: Stop worrying about the 4% rule
Post by: MDM on November 13, 2016, 01:08:16 PM
I ran the numbers on cfiresim with a 60/40 split, same as in the article.  The article has things ending at around $1m, I have it ending at $690k.   In my mind cfiresim refutes the article.
Don't know that we have reached "refutes" yet, unless you know why the results are different.  Could be unrecognized differences in assumptions, a Kitces error, a cfiresim error, etc.
Title: Re: Stop worrying about the 4% rule
Post by: frugal_c on November 13, 2016, 01:10:40 PM
When you look at these scenarios you might have to work full time for 10+ years.   These scenarios are not even close.

I get what people are saying here regarding cutting back or getting a part time job but then why don't we just say that from the outset.  You can retire and pull out 4% a year as long as you are willing to go back to work for a decade or more if things go bad.  I can see why you would be willing to take that bet but let's just be up front about it.

If you really want to retire and not have to have worried historically you should be more in the 3-3.5% WDR.

Why would I go back to work for a decade? Are you thinking that I would just sit on my ass until my assets are depleted, then work? That would be stupid.

If the market crashes hard in the first 5 years, I work (or whatever for cash) for maybe a year to avoid selling the devalued assets. When the market recovers, I go back to being retired for 30-40 more years. If everything is great for 5 years, my assets are building and even if the market crashes my portfolio is big enough to take it.

You're trying to convince me that a 100% chance of working 2-3 extra years (adding padding) is a better choice than an 18% chance of needing to go back to work for 1-2 years after I take a sabbatical/ER until the market crashes...

That makes no sense.

It is worse than you make it out to be.   

I also think i misspoke saying you have to go back full-time, it is more like part-time.   

I just see where you would have to go back for 5-10 years or maybe longer without touching the principal.  The problem with the 30's and the 70's was it wasn't just a drop down and then a return 2 years later where everything was fine again.  Things just kept dragging on.  In the 70's inflation just kept going up and the stocks were going essentially nowhere.  So you might have gone back for part-time work in 74/75 and then I don't know when you would be comfortable retiring again.  It probably wouldn't have been until the mid 80's.
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on November 13, 2016, 01:25:24 PM

I ran the numbers on cfiresim with a 60/40 split, same as in the article.  The article has things ending at around $1m, I have it ending at $690k.   In my mind cfiresim refutes the article.

I read the article and the comments.  It does not appear to state which types of bonds were used in the articles calculations, this matters big-time. It also doesn't specify which stocks either, but I'm guessing it was S&P 500.  Secondly, the around $1million number you are taking from the article was nominal, not real.  The Cfiresim numbers are real(inflation adjusted) dollars.  The combination of these factors likely explains the difference in results you are seeing.
Title: Re: Stop worrying about the 4% rule
Post by: frugal_c on November 13, 2016, 01:47:20 PM

I ran the numbers on cfiresim with a 60/40 split, same as in the article.  The article has things ending at around $1m, I have it ending at $690k.   In my mind cfiresim refutes the article.

I read the article and the comments.  It does not appear to state which types of bonds were used in the articles calculations, this matters big-time. It also doesn't specify which stocks either, but I'm guessing it was S&P 500.  Secondly, the around $1million number you are taking from the article was nominal, not real.  The Cfiresim numbers are real(inflation adjusted) dollars.  The combination of these factors likely explains the difference in results you are seeing.

Thanks for clearing it up.   It is roughly the same withdrawal rate, so your explanation makes sense.  Either way, if I retired young I would not be comfortable right now.
Title: Re: Stop worrying about the 4% rule
Post by: dude on December 06, 2016, 01:34:26 PM
Relevant to the 4% discussion:

https://assetbuilder.com/knowledge-center/articles/how-to-spend-the-kids-inheritance
Title: Re: Stop worrying about the 4% rule
Post by: ImCheap on December 09, 2016, 11:59:13 AM
Relevant to the 4% discussion:

https://assetbuilder.com/knowledge-center/articles/how-to-spend-the-kids-inheritance

Quote
Have you seen the book, “How To Spend the Kids’ Inheritance”? If not, perhaps you've seen the British Airways ads offering “101 Ways to Spend the Kids’ Inheritance.” Both are in the spirit of the old Irish saying, “Only a fool would die solvent.”

I love the last part.
Title: Re: Stop worrying about the 4% rule
Post by: sol on December 09, 2016, 12:13:13 PM
That article basically says 4% is too low because in 95% of cases you can't spend it down before you die and in more than half of the cases you die with more money than you started with, which is exactly what we've been saying in this thread all along. 

They even propose the same solution: retire on 5-6% SWR and then be prepared to modify your spending up or down as necessary.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on December 09, 2016, 03:02:27 PM
That article basically says 4% is too low because in 95% of cases you can't spend it down before you die and in more than half of the cases you die with more money than you started with, which is exactly what we've been saying in this thread all along. 

They even propose the same solution: retire on 5-6% SWR and then be prepared to modify your spending up or down as necessary.

The only thing is that lots of people on here will have a retirement period greater than 30 years. Still personally I don't see the issue. We should all be able to adjust something if it is required.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on December 10, 2016, 08:24:03 AM
The only thing is that lots of people on here will have a retirement period greater than 30 years. Still personally I don't see the issue. We should all be able to adjust something if it is required.

Yes the main concern is an initial poor sequence of returns which will be early on and allow you to act as appropriate. If you make it through the first decade with good returns you are likely sitting on a massive stash and no worries even with a 50yr+ FIRE. Especially if you are doing like a lot of people I read on this forum and ignoring Gov't retirement benefits, which will kick in 30yrs or less for most of us.
Title: Re: Stop worrying about the 4% rule
Post by: Ursus Major on December 11, 2016, 08:56:43 AM
The only thing is that lots of people on here will have a retirement period greater than 30 years. Still personally I don't see the issue. We should all be able to adjust something if it is required.

Yes the main concern is an initial poor sequence of returns which will be early on and allow you to act as appropriate. If you make it through the first decade with good returns you are likely sitting on a massive stash and no worries even with a 50yr+ FIRE. Especially if you are doing like a lot of people I read on this forum and ignoring Gov't retirement benefits, which will kick in 30yrs or less for most of us.

So the effect of that initial period of good returns is to lower your actual (then current) withdrawal rate. If your portfolio value increases by 33.3%, a 3% withdrawal is the same amount as a 4% withdrawal from your original amount. So I'm using a lower initial withdrawal rate to be less dependent on a good first decade (even though a 33% increase in portfolio value is not a good return over a decade).
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on December 11, 2016, 09:10:53 AM
So I'm using a lower initial withdrawal rate to be less dependent on a good first decade (even though a 33% increase in portfolio value is not a good return over a decade).

Sure, you're just working longer to do so.

That's a trade off some of us were no longer willing to make.  :)
Title: Re: Stop worrying about the 4% rule
Post by: steveo on December 11, 2016, 01:47:26 PM
So I'm using a lower initial withdrawal rate to be less dependent on a good first decade (even though a 33% increase in portfolio value is not a good return over a decade).

Sure, you're just working longer to do so.

That's a trade off some of us were no longer willing to make.  :)

I'm not a fan of the lower WR for this reason. I prefer to look at my other options such as social security, downsizing the house, returning to work, working a different job and for me personally inheritance.
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on December 11, 2016, 02:01:56 PM
Yeah, sometimes it baffles me - people will choose to work another 10 years to get their portfolio failure rate down by 5% or something - but 5% of your remaining life is what, 2 or 3 years?

Crazy irrational, there. C'est la vie.

-W
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on December 11, 2016, 02:05:36 PM
I've started viewing a low WR as a guaranteed ER failure.

The failure is just up front, not down the line.

That is, if you have a higher WR because you pull the plug early, and you end up having to go back to work for a few years to bolster the stache at some point down the line, we'd call that ER failure.

By instead working those years up front, you've guaranteed that you have to work them. Still seems like an ER failure, to me.

Compare to someone else who pulls the plug a few years earlier than you, and then gets a part time job a few different years to supplement in a crash. Both of you work the same. Why is only one a failure?

Consider the person who ERs a few years earlier, and never has to go back, because early returns drop their WR low enough. They never worked the extra years. Why should your working them not be considered ER failure?

Maybe something to challenge your thinking today. ;)

(I understand and recognize all the caveats that the up front years are likely at a higher rate, you may not be able to find a job when the economy is bad, etc. I'm providing food for thought, ignore the nit picking, please.)
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on December 11, 2016, 02:09:35 PM
That is a great way of looking at it. Without trying to quantify total life satisfaction (IMO years not worked when younger are more valuable than years not worked when very old, but opinions could vary on that) it's just about total life vs total amount of work. If you spend a ton of time/effort making money to "guarantee" a successful RE, I would agree that what you've really done is decide to fail.

-W
Title: Re: Stop worrying about the 4% rule
Post by: sol on December 11, 2016, 02:11:08 PM
Yeah, sometimes it baffles me - people will choose to work another 10 years to get their portfolio failure rate down by 5% or something - but 5% of your remaining life is what, 2 or 3 years?

We've discussed this here before, but the short version is that sometimes working at your job IS your highest purpose in life.

If what you really want to do with your life is sleep late and watch tv, then by all means retire asap and get on with it.  But if your goals include being part of something, or working towards something, sometimes you are better served by staying employed and involved in that something. 

In those cases, we have to more carefully consider whether we would do the same work for free, which is effectively what you're doing if you continue to work after achieving a 4% SWR.  Sometimes the answer is yes.  Some people think that's crazy irrational.

Title: Re: Stop worrying about the 4% rule
Post by: waltworks on December 11, 2016, 02:16:30 PM
We've discussed this here before, but the short version is that sometimes working at your job IS your highest purpose in life.

If what you really want to do with your life is sleep late and watch tv, then by all means retire asap and get on with it.  But if your goals include being part of something, or working towards something, sometimes you are better served by staying employed and involved in that something. 

In those cases, we have to more carefully consider whether we would do the same work for free, which is effectively what you're doing if you continue to work after achieving a 4% SWR.  Sometimes the answer is yes.  Some people think that's crazy irrational.

Good point Sol. I should have been more clear - *for folks who wish to stop paid work ASAP*, extra working to lower SWR beyond 5% or so (I don't want to sit down and calculate it out, probably actually higher) is irrational.

I doubt I'll ever quit working, because I like doing useful stuff. I was trying to say something a little more subtle than what I ended up saying, my apologies.

-W
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on December 11, 2016, 02:19:45 PM
Yeah, sometimes it baffles me - people will choose to work another 10 years to get their portfolio failure rate down by 5% or something - but 5% of your remaining life is what, 2 or 3 years?

We've discussed this here before, but the short version is that sometimes working at your job IS your highest purpose in life.

If what you really want to do with your life is sleep late and watch tv, then by all means retire asap and get on with it.  But if your goals include being part of something, or working towards something, sometimes you are better served by staying employed and involved in that something. 

In those cases, we have to more carefully consider whether we would do the same work for free, which is effectively what you're doing if you continue to work after achieving a 4% SWR.  Sometimes the answer is yes.  Some people think that's crazy irrational.
Sure. If you've hit a 4% WR and acknowledge that you have enough, but want to keep working, that's great!  More power to you.

It seems like though the vast majority who are going for a 3% WR are doing it out of fear, and their plan is to pull the plug as soon as they can, as soon as they hit their number. They aren't working in their job for a sense of purpose, as you suggest in your post.
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on December 11, 2016, 02:57:15 PM

It seems like though the vast majority who are going for a 3% WR are doing it out of fear, and their plan is to pull the plug as soon as they can, as soon as they hit their number. They aren't working in their job for a sense of purpose, as you suggest in your post.

If anything, I think these folks are dissatisfied with their work MORE than the average forum member.  The irrational need to save way past a "safe" amount is a reflex to ensure never having to go back, like PTSD or something.  Those that Sol mentions, who work for the sake of greater good or enjoyment are rarely debating the math of WR's and AA's.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on December 11, 2016, 03:40:14 PM

It seems like though the vast majority who are going for a 3% WR are doing it out of fear, and their plan is to pull the plug as soon as they can, as soon as they hit their number. They aren't working in their job for a sense of purpose, as you suggest in your post.

If anything, I think these folks are dissatisfied with their work MORE than the average forum member.  The irrational need to save way past a "safe" amount is a reflex to ensure never having to go back, like PTSD or something.  Those that Sol mentions, who work for the sake of greater good or enjoyment are rarely debating the math of WR's and AA's.

I think it's a stretch to say that these folks are dissatisfied with their work MORE than the average forum member.  Given the run in the equities market and from what was shared about Mustachian household incomes (http://forum.mrmoneymustache.com/welcome-to-the-forum/this-is-the-average-us-household-income-how-do-you-compare-(usa-today-article)/msg1320217/#msg1320217) (almost 50% above 125k), it is almost inevitable that going a little further than 4% quickly (OMY maybe) becomes 3%.

Also, in my case, I got to a bare bones FI (5 - 6% WR) and was emboldened to get a better job.  I think several other FI bloggers and forum members have 'dream jobs' or working spouses that have them continuing to stash beyond the 4% WR number. 

I'd be interested to understand why you'd think FI folks at 4% or below are so unhappy with working or having an income.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on December 11, 2016, 03:47:04 PM
In those cases, we have to more carefully consider whether we would do the same work for free, which is effectively what you're doing if you continue to work after achieving a 4% SWR.  Sometimes the answer is yes.  Some people think that's crazy irrational.

The thing is you aren't working for free. So the additional caveat is that the additional work might mean that you can go on a fancy holiday or get a fancy bike or whatever it is that you consider a luxury type purchase.

My version of FI is I think a pretty great existence but it's definitely not excessive. My work also isn't bad even if I definitely wouldn't do it for free. I could though work a little longer to afford some luxury type spending.

I am though being theoretical here. At this point as soon as my chances look good enough to me I will RE. I see myself as now being past work and I want to embark on a different phase of my life. I don't have any grand plans either.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on December 11, 2016, 03:59:12 PM

It seems like though the vast majority who are going for a 3% WR are doing it out of fear, and their plan is to pull the plug as soon as they can, as soon as they hit their number. They aren't working in their job for a sense of purpose, as you suggest in your post.

If anything, I think these folks are dissatisfied with their work MORE than the average forum member.  The irrational need to save way past a "safe" amount is a reflex to ensure never having to go back, like PTSD or something.  Those that Sol mentions, who work for the sake of greater good or enjoyment are rarely debating the math of WR's and AA's.

I think it's a stretch to say that these folks are dissatisfied with their work MORE than the average forum member.  Given the run in the equities market and from what was shared about Mustachian household incomes (http://forum.mrmoneymustache.com/welcome-to-the-forum/this-is-the-average-us-household-income-how-do-you-compare-(usa-today-article)/msg1320217/#msg1320217) (almost 50% above 125k), it is almost inevitable that going a little further than 4% quickly (OMY maybe) becomes 3%.

Also, in my case, I got to a bare bones FI (5 - 6% WR) and was emboldened to get a better job.  I think several other FI bloggers and forum members have 'dream jobs' or working spouses that have them continuing to stash beyond the 4% WR number. 

I'd be interested to understand why you'd think FI folks at 4% or below are so unhappy with working or having an income.
Because we've done polls, and found that the majority don't like their jobs. That's the majority of the general population, and of Mustachians.

Your experience and ideas of a "dream job" seem normal to you, because it's your experience. But it seems not to be the case for the majority.

And as CL points out, if you are enjoying your dream job and past the FI point, you aren't on an early retirement forum handwringing about the success rate of 3% vs. 4%.

So the vast majority of people on here talking about how they want to pull the plug at 3% WR are very likely doing it out of fear.

If they were in their dream job, and wanted to work forever, they wouldn't be talking about pulling the plug as soon as they hit 3%, because they'd want to keep working, because they love their job.
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on December 11, 2016, 04:56:53 PM
I'd be interested to understand why you'd think FI folks at 4% or below are so unhappy with working or having an income.

I think Arebelspy answered that for me.
 
The thing is you aren't working for free. So the additional caveat is that the additional work might mean that you can go on a fancy holiday or get a fancy bike or whatever it is that you consider a luxury type purchase.

My version of FI is I think a pretty great existence but it's definitely not excessive. My work also isn't bad even if I definitely wouldn't do it for free. I could though work a little longer to afford some luxury type spending.

I understand the idea that one is concerned that they may want something more or different down the road.  The thing is, the 4% rule covers that.  Just go into Cfiresim and run the default scenario.  In most cases you end up with more money than you started with 20 or 30 years into retirement.  Most of the anecdotal evidence of those who have FIRE'd on this forum shows that spending usually does not go up AND many accidently make more money anyway. I think it's fear driven. 

Honestly, anyone who was smart and motivated enough to FIRE young and wants a luxury bike or vacation in 10 years he/she will figure out how to make it happen easily. If someone doesn't like their job and works past 4% because of PE/10's or whatever nightmare scenario they have in their head, it's virtually a guaranteed failure as Arebelspy points out so eloquently upthread.

Edit: To harp on the subject a little more, here are the SS actuarial numbers:
https://www.ssa.gov/oact/STATS/table4c6.html

If you retire at 30 with the 4 percent rule; which is more likely to have happened 30 years later, running out of money or death?  It just gets worse the older you get (as I am becoming more acutely aware).  Is working two more years for a 3.5% WR looking a bit more irrational yet?

Title: Re: Stop worrying about the 4% rule
Post by: steveo on December 11, 2016, 11:39:02 PM
Classical_Liberal - I intend to retire on a 5% WR probably on a best case scenario. I still agree with what you are stating. I can't see myself bothering to get to a 4% WR. I think for me it's much more likely to get to 5% and then work to save up some extra spending money.

We intend to do what you state though - i.e. see how our spending goes once we retire and save to splurge if we choose too.
Title: Re: Stop worrying about the 4% rule
Post by: Telecaster on December 11, 2016, 11:50:31 PM
By instead working those years up front, you've guaranteed that you have to work them. Still seems like an ER failure, to me.

I gotta say arebelspy, despite your tender age, you continually impress me with your wisdom. 
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on December 12, 2016, 01:06:09 AM
By instead working those years up front, you've guaranteed that you have to work them. Still seems like an ER failure, to me.

I gotta say arebelspy, despite your tender age, you continually impress me with your wisdom.
My tender age.  :D

And here I've been feeling so old lately.

Thanks for the double compliment!
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on December 12, 2016, 06:38:29 AM
By instead working those years up front, you've guaranteed that you have to work them. Still seems like an ER failure, to me.

I gotta say arebelspy, despite your tender age, you continually impress me with your wisdom.
My tender age.  :D

And here I've been feeling so old lately.

Thanks for the double compliment!

I would think you ER's would feel like children.  I ran 14 miles on Sunday and am here at the office before 7am.  I love how fast life is, still feel like I'm in my 20's!  Maybe ER makes you feel old ;)
Title: Re: Stop worrying about the 4% rule
Post by: ImCheap on December 12, 2016, 08:21:21 AM
One stat in the back of mind is:

http://firecalc.com/
Quote
Ty Bernicke's Reality Retirement Planning: A New Paradigm for an Old Science describes extensive research showing that most people see significant reductions in spending with age (not related to reduced assets or income). If selected, this option will reduce your inflation-adjusted yearly spending by 2-3% per year starting at age 56, and then stabilizing at age 76 to keep up with inflation. You should read his article for details if you plan to use this option.

After seeing first hand parents and In-Laws, most of who have passed on, one left out of 4. The above seems to be true with one exception, healthcare!  Those final years can be crazy expensive, think 3-4 years of assisted living plus some memory care.

Most of the time an SWR assumes a constant increase in spending, not so sure that is true from what I see, the one living parent I have left has a tough time spending a SS check, thank goodness for good health at 90 years young!
Title: Re: Stop worrying about the 4% rule
Post by: mizzourah2006 on December 14, 2016, 09:28:37 AM
I've started viewing a low WR as a guaranteed ER failure.

The failure is just up front, not down the line.

That is, if you have a higher WR because you pull the plug early, and you end up having to go back to work for a few years to bolster the stache at some point down the line, we'd call that ER failure.

By instead working those years up front, you've guaranteed that you have to work them. Still seems like an ER failure, to me.

Compare to someone else who pulls the plug a few years earlier than you, and then gets a part time job a few different years to supplement in a crash. Both of you work the same. Why is only one a failure?

Consider the person who ERs a few years earlier, and never has to go back, because early returns drop their WR low enough. They never worked the extra years. Why should your working them not be considered ER failure?

Maybe something to challenge your thinking today. ;)

(I understand and recognize all the caveats that the up front years are likely at a higher rate, you may not be able to find a job when the economy is bad, etc. I'm providing food for thought, ignore the nit picking, please.)

This automatically assumes you literally hate what you do. I could say that I see owning real estate as an automatic failure because I would literally hate dealing with it. It doesn't make it true, but it makes it true in my case. My issue with the 30 year studies vs. the 40 & 50 year simulations is as you start to get into larger and larger years for simulation purposes the number of unique combinations goes down. So we have no where near as much historical data on a 50 year withdrawal rate as compared to a 30 year withdrawal rate. It also assumes the US will continue to be a GDP super power or that you will know when to invest in any new emerging markets that become the new GDP grower that the US has been over the last century. Could a 4% withdrawal rate work over 50-60 years, sure, but I wouldn't rely on historical simulations of that considering most of the data used in the simulation is not even double the time period you are trying to simulate. We need to remember that the life expectancy of healthy adults continues to increase. I am in my early 30s, there's a strong chance that the average life expectancy for people my age as long as they are healthy at 60 is into the mid 90s. So if you retire planning on a 4% WD exactly and little no wiggle room at 40 you may need to plan on supporting yourself for 55 years and that is just assuming it is you that needs to be supported by that money. A married couple may have an average life expectancy between the two of over 100, which would mean you need to make sure that money lasts over 60 years.

Now you could say don't worry about it because you can always go back to work, but I'd rather do what I do and enjoy for a few more years than chance needing to go back to work in my 60s or 70s. To each their own, but  I definitely wouldn't say working a few years longer is automatically a failure especially if you don't dislike what you do in the first place. You need to keep in mind that not everyone in this forum is aiming for FIRE as fast as possible, some are aiming for FI and a relatively early RE.
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on December 14, 2016, 09:36:56 AM
Sure, that's not a useful response to Arebelspy, though. "Retirement" does not have to mean not working for money, or even not working full time if that's your thing. It's your life and you can do whatever you feel is most satisfying *without being concerned with money*.

The point of FIRE is not "sit on your ass", it's "you can do whatever you want to do most and not worry about the money".

So if you're still working and you NEVER WITHDRAW A DIME from any of your retirement accounts in your life, that's fine if it's what you want to do. If you are working because you are trying to lower your WR below 4% (or even lower) because it makes you feel safe, you are being irrational - you are doing something you hate and not getting a commensurate return in years of doing what you love.

Does that make more sense?

-W
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on December 14, 2016, 12:19:23 PM
This automatically assumes you literally hate what you do.

No, it merely assumes you have something else you'd rather do.

if you don't, you love your job and will keep doing it forever, then you're not worried about the 4% rule anyways.

But if you want to ER, then working down to 4%, or past it, is ER failure as much as someone FIREing at 5% WR and going back for a bit to bolster the stache.

Quote
I could say that I see owning real estate as an automatic failure because I would literally hate dealing with it.

Sure, I agree with that.  If you don't want to have real estate in ER, if you were forced to have some and deal with it for years of your retirement, I'd consider an ER failure.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on December 14, 2016, 01:02:52 PM

This automatically assumes you literally hate what you do. I could say that I see owning real estate as an automatic failure because I would literally hate dealing with it. It doesn't make it true, but it makes it true in my case. My issue with the 30 year studies vs. the 40 & 50 year simulations is as you start to get into larger and larger years for simulation purposes the number of unique combinations goes down. So we have no where near as much historical data on a 50 year withdrawal rate as compared to a 30 year withdrawal rate. It also assumes the US will continue to be a GDP super power or that you will know when to invest in any new emerging markets that become the new GDP grower that the US has been over the last century. Could a 4% withdrawal rate work over 50-60 years, sure, but I wouldn't rely on historical simulations of that considering most of the data used in the simulation is not even double the time period you are trying to simulate. We need to remember that the life expectancy of healthy adults continues to increase. I am in my early 30s, there's a strong chance that the average life expectancy for people my age as long as they are healthy at 60 is into the mid 90s. So if you retire planning on a 4% WD exactly and little no wiggle room at 40 you may need to plan on supporting yourself for 55 years and that is just assuming it is you that needs to be supported by that money. A married couple may have an average life expectancy between the two of over 100, which would mean you need to make sure that money lasts over 60 years.

Now you could say don't worry about it because you can always go back to work, but I'd rather do what I do and enjoy for a few more years than chance needing to go back to work in my 60s or 70s. To each their own, but  I definitely wouldn't say working a few years longer is automatically a failure especially if you don't dislike what you do in the first place. You need to keep in mind that not everyone in this forum is aiming for FIRE as fast as possible, some are aiming for FI and a relatively early RE.

There's a couple of things that jumped out at me with your post I'd like to respond to.

1) From a purely medical standpoint this notion about increasing lifespans is wildly misunderstood.  Ignoring for a moment the recent dip in life expectancies (mostly due to an increase in drug overdoses and suicides among otherwise young, healthy individuals), the increase in life expectancies is because fewer people are dying earlier. When fewer adults die in their 50s or 60s the median life expectancy increases.  Put another way, while the life expectancy of a healthy 60 year old has increased by roughly 3 years in the last two decades, the probability that they will reach 90 has barely budged.  As a species our average (median) life span has increased, but our maximum lifespan is essentially unchanged.
There is no evidence that the life expectancy (by definition a 50% probability of surviving) of someone in their 60s will be their 'mid 90s'.  Sorry, but the likelihood that either person in a marriage will live to see 100 is very small. Not today and not projected for our generation (you and I are about the same age).  Currently a healthy 60yo white male has a life expectancy of 81.5.  I'd love to think my wife and I will live to see 95, but the odds are heavily against it.

this doesn't mean that financially you shouldn't plan for your money to last as long as your maximum life span - you should. On that note...

2) While it is true that the available sample size (or 'number of unique combinations' as you call them) does decrease as you increase time periods, this doesn't mean that its not possible to test longer time periods.  The most common way to do this is with Monte Carlo simulations where you re-sample (sampling with replacement) different time periods, which allows you to have very large and equal sample sizes even when the time periods are very long.  Most people seem to use yearly time periods for MC simulations, but there's logic to sampling at 7 or 10 year time periods as well (cyclical markets and all...) An even simpler method is instead of viewing how many simulated portfolios 'failed' is to view what percentage ended with a higher real balance than they started with. There's a far greater probability that you will end your first 30 years of ER with substantially more then there is that you will have less money (in real terms) than when you first retired.

All of this assumes that the next few decades will be no worse than the worst time periods of the last 100+ years, which brings us to...

3) The idea that the lost of the US as the largest GDP somehow equates with the eminent failure of the 4% 'rule'. There's several different facets illustrating why this need not be the case.  For example, the ratio of US GDP to global GDP has been falling since its peak in 1952. There's the fact that only ~55% of profits from SP500 companies come domestically (a number that's also been steadily declining), and the idea that 'emerging markets' are better long term investments (historically they have not). Lower growth won't even limit the efficacy of a 4% WR per se. For that to happen we would need more periods that were as bad or worse than what we've seen over the last several decades.  Despite the 'great recession' and lots of articles published over the last 4 decades claiming 'the good times are over' there's little evidence showing that this is actually happening.
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on December 14, 2016, 01:04:06 PM
ARS, you know I respect you.  And I understand your POV and the math about working longer as a failed RE situation.  I also respect each individual person's decision to FIRE when and whether they see fit.

I would like to point out, though, that some folks - me included - attach a high negative value to the transition event of being forced to go back to work.  There is also the calculus of the tradeoff between a shorter time now at a relatively higher paying job vs. a longer time at some point in the future at a relatively lower paying job.  These two things mean there are some situations and value systems where paying what is effectively an insurance policy premium of working longer can make sense.

I guess it seems to me that, from your perspective, those extra X years are a guaranteed spend now versus maybe X+epsilon years later, and from that point of view you are absolutely accurate.  I'm just throwing out there that for others, the contiguity of the working years, the relative size of epsilon, the probability of "maybe", the likelihood of being able to get a job (ageism still happens despite the law), and similar factors may be weighted as heavily or even more so.

Cheers!
Title: Re: Stop worrying about the 4% rule
Post by: deborah on December 14, 2016, 01:06:36 PM
The point of FIRE is not "sit on your ass", it's "you can do whatever you want to do most and not worry about the money".
Why not sit on your ass, if that's what you want to do?
Title: Re: Stop worrying about the 4% rule
Post by: nereo on December 14, 2016, 01:15:40 PM
The point of FIRE is not "sit on your ass", it's "you can do whatever you want to do most and not worry about the money".
Why not sit on your ass, if that's what you want to do?
Well if we're being philisophical, it would be a waste of a life.
Just sayin'...
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on December 14, 2016, 01:30:29 PM
I guess it seems to me that, from your perspective, those extra X years are a guaranteed spend now versus maybe X+epsilon years later, and from that point of view you are absolutely accurate.  I'm just throwing out there that for others, the contiguity of the working years, the relative size of epsilon, the probability of "maybe", the likelihood of being able to get a job (ageism still happens despite the law), and similar factors may be weighted as heavily or even more so.

Young years are also MUCH more valuable than older years. Working extra years for perceived safety beyond the 4% SWR (already insanely conservative) is nuts. If doing some form of part-time paid work at some point in the future is your *worst case scenario*, then go at it, I guess.

Keep in mind, too - you could die tomorrow, or the day after you hit your 3.3% or whatever you're going for. The downside risks are kinda nuts on the work-longer side IMO.

-W
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on December 14, 2016, 01:35:06 PM
Young years are also MUCH more valuable than older years. Working extra years for perceived safety beyond the 4% SWR (already insanely conservative) is nuts. If doing some form of part-time paid work at some point in the future is your *worst case scenario*, then go at it, I guess.

Keep in mind, too - you could die tomorrow, or the day after you hit your 3.3% or whatever you're going for. The downside risks are kinda nuts on the work-longer side IMO.

-W

I fully expect there will be a point in my life where doing an easy PT job at a camping store, bike shop or surf shop will be very appealing even if I don't need the $$. Once I can no longer be super active staying in touch with those communities while having a reason to get out for a bicycle ride will be nice. But while I am still fit an extra year to camp, ride or surf is far more important.
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on December 14, 2016, 04:54:11 PM
I guess it seems to me that, from your perspective, those extra X years are a guaranteed spend now versus maybe X+epsilon years later, and from that point of view you are absolutely accurate.  I'm just throwing out there that for others, the contiguity of the working years, the relative size of epsilon, the probability of "maybe", the likelihood of being able to get a job (ageism still happens despite the law), and similar factors may be weighted as heavily or even more so.

Young years are also MUCH more valuable than older years. Working extra years for perceived safety beyond the 4% SWR (already insanely conservative) is nuts. If doing some form of part-time paid work at some point in the future is your *worst case scenario*, then go at it, I guess.

Keep in mind, too - you could die tomorrow, or the day after you hit your 3.3% or whatever you're going for. The downside risks are kinda nuts on the work-longer side IMO.

-W

In some ways, I'm an extraordinarily conservative person.  Belts and suspenders plus fashionable boxers behind a fence, if you don't mind a tortured analogy.

Overall, I think the WR discussion, while a great rule of thumb, is really just a first cut measurement.  Like knowing your BMI for health - it is a good number to know, it's just a first piece of data.  A safe WR depends on a person's disposition, risk tolerance, asset allocation, age, life expectancy, work history, backup plans, other sources of income, family size, children's ages, opinions about mortages and college costs, and probably half a dozen other factors.

For me personally, I declared myself FI when I reached a 4.08% pro forma WR about age 45.  My job wasn't bad at that point, so I kept with it and watched my WR drop while knowing I could quit any time.  About two years later, things got bad at work, and my Mom was sick, so I RE'd just before age 47 - I think I was at an estimated 2.5-3.0% WR then.

Nowadays I spend a little more freely and am at about 3.5%, which is where I personally feel comfortable.

As far as the perennial time versus money issue you allude to in your last sentence, yes, I keep that in mind.  I like what people have said elsewhere...you rolls your dice and you takes your chances.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on December 14, 2016, 09:17:34 PM
ARS, you know I respect you.  And I understand your POV and the math about working longer as a failed RE situation.  I also respect each individual person's decision to FIRE when and whether they see fit.

I would like to point out, though, that some folks - me included - attach a high negative value to the transition event of being forced to go back to work.  There is also the calculus of the tradeoff between a shorter time now at a relatively higher paying job vs. a longer time at some point in the future at a relatively lower paying job.  These two things mean there are some situations and value systems where paying what is effectively an insurance policy premium of working longer can make sense.

I guess it seems to me that, from your perspective, those extra X years are a guaranteed spend now versus maybe X+epsilon years later, and from that point of view you are absolutely accurate.  I'm just throwing out there that for others, the contiguity of the working years, the relative size of epsilon, the probability of "maybe", the likelihood of being able to get a job (ageism still happens despite the law), and similar factors may be weighted as heavily or even more so.

Cheers!

Definitely.

This becomes more true the higher the amount you make, and the lower the probability of being able to make anything close to it, later.

You're still trading off guaranteed years for unlikely future years, especially when you're trying to go from a 95% success rate to a 100% one.

That was my point. We don't count these traded off years as ER failure, because you haven't ER'd yet.  But I think there's a reasonable case to consider it an ER failure (if not imagination failure).  :)
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on December 14, 2016, 11:07:02 PM
Agreed.  I think the older one is too the more likely one is to not be willing to go back.  It didn't work for me, but even so a strategy of being young and flexible and RE'ing at 30 or 35 at a 5% SWR and being willing to take the bet makes sense to me.

The point about 95% vs. 100% is one I didn't realize until after the fact.  I just plugged in 100%, got 4.08% back out (older data from retireearlyhomepage.com) and worked to grow my assets to hit FI.  It wasn't until after FIRE that I looked and realized that if one is willing to take the bet that one is not starting in a period like the mid-1960's, one can raise one's WR quite a bit.  Personally I am of the opinion that the future will be better than the past, at least to be able to avoid the stagflation that affected those start years, so in retrospect I should have gone more with a 95% success rate (which is what you get for a 40-year planning period if you toss out or ignore four or five of those 1960's start dates).
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on December 15, 2016, 01:51:04 AM
what you get for a 40-year planning period if you toss out or ignore four or five of those 1960's start dates.

This is my preferred "safe" method. Then you're basically saying "It'll be worse than average.  Worse than almost every other year, in fact, but not literally the worst."  I think that's probably about as safe as you can get, barring a catastrophe, without just trading away MANY years chasing an illusive and uncatchable "guarantee."
Title: Re: Stop worrying about the 4% rule
Post by: ender on December 15, 2016, 06:25:23 AM
Agreed.  I think the older one is too the more likely one is to not be willing to go back.  It didn't work for me, but even so a strategy of being young and flexible and RE'ing at 30 or 35 at a 5% SWR and being willing to take the bet makes sense to me.

Keep in mind that all of us with even a remotely large stash are already taking the bet.

We're assuming:

[li]Guaranteeing working now vs a potential of working in the future[/li][/list]

The last one is one I see interesting in these discussions as it's often overlooked. You can't say, "there's a risk of having to go back to work, so I'll keep working for a few OMYs so I can negate the risk" without acknowledging that by doing so, you are guaranteeing that you work extra years.

It's entirely possible you could FIRE on 5%. Or higher. The risk is having to work again in the future. The benefit is not having to work for the immediate short term.

Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on December 15, 2016, 06:43:21 AM
You can't say, "there's a risk of having to go back to work, so I'll keep working for a few OMYs so I can negate the risk" without acknowledging that by doing so, you are guaranteeing that you work extra years.

(https://static.spiceworks.com/shared/post/0017/5294/quiteindeed.jpg)

I was trying to say something similar recently, but much more rambling, and much less eloquently.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on December 15, 2016, 07:07:33 AM
And if you have the flexibility to vary your annual spending WR say +/- 0.5% in response to market conditions you can get a nice bump in your success rate.

Using stock cFIREsim values and a 40yr FIRE

4%WR

- $40K/yr WR
- 90% success rate

3.5% - 4.5%WR

- $44K/yr median WR
- 96% success rate

3% - 5% WR

- $44K/yr median WR
- 100% success rate

For most FIRErs the variable rate options means you'll get more $$/yr and a higher probability of success.
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on December 15, 2016, 07:14:43 AM
Right, I get the argument.  I think it actually is discussed (vs. being overlooked) in many of the OMY posts that crop up on FIRE forums - does the person work longer for extra safety or quit now and start enjoying retirement.  Although I guess as an explicit strategy ("I'll stop at 5% knowing that I might have to but probably won't have to go back to work.") it isn't often discussed in that way.

To me, the even rarer discussion (and one that, incidentally, I was among the first to point out <- my extraordinarily minor contribution to FIRE research) is on the other end of lifespan - the 4% rule is even safer than we think because we discount the successes associated with dying early.  Most if not all of us breezily assume that we'll live to 85 or 100 or whatever and then look to make sure our money will last that long.  We ignore the fact that we might not last that long - I'm not sure what the numbers are exactly, but they're pretty grim; I plan for age 87 (47+40) but there's only a 50% chance or thereabouts that I'll be around.  Since living or dying and the stash surviving are mostly independent events, one can calculate P(failure)=P(me dying)*P(stash going to zero).  Doing the math that way leads to the 4% rule being very very safe.

Here's a page that intercst wrote on the subject (I believe after reading a post of mine from the old Motley Fool REHP forum).  He deserves credit for extending the math to account for year-by-year failure:

http://www.retireearlyhomepage.com/swrlife.html
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on December 15, 2016, 07:18:44 AM
And if you have the flexibility to vary your annual spending say +/- 0.5% in response to market conditions you can get a nice bump in your success rate

To clarify: That's varying your WR by 0.5%, not your annual spending--your spending would vary by 12.5%.

Could you temporarily take a 12.5% pay cut, basically? Or earn 12.5%. Or some combination of the two. Either of which would reduce your WR by 0.5%, and then your numbers illustrate what would have happened historically in that case.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on December 15, 2016, 07:20:47 AM
Wow 2ndCor, you've been in the ER community awhile.
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on December 15, 2016, 07:23:53 AM
And if you have the flexibility to vary your annual spending say +/- 0.5% in response to market conditions you can get a nice bump in your success rate.

Using stock cFIREsim values and a 40yr FIRE

4%WR

- $40K/yr WR
- 90% success rate

3.5% - 4.5%WR

- $44K/yr median WR
- 96% success rate

3% - 5% WR

- $44K/yr median WR
- 100% success rate

For most FIRErs the variable rate options means you'll get more $$/yr and a higher probability of success.

Very good. And in the 3-5% case your average spend is higher than a straight 4%.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on December 15, 2016, 07:37:50 AM

To me, the even rarer discussion (and one that, incidentally, I was among the first to point out <- my extraordinarily minor contribution to FIRE research) is on the other end of lifespan - the 4% rule is even safer than we think because we discount the successes associated with dying early.  Most if not all of us breezily assume that we'll live to 85 or 100 or whatever and then look to make sure our money will last that long.  [snip]

My opinion on the matter is that if one is considering a retirement of >>30 years, there's really no point in worrying about whether you will live to be 85 or 100, because difference in 'failures' is miniscule between these two options, and the most likely outcome for either is that you die with more money than you started.  Since all of the risk is tied to the initial sequence of returns your response would be the same (reduce spending or earn some income, or both).

For example - using numbers similar to your own lets assume you were planning for either a 37 year retirement (median life expectancy) or a 50 year retirement; "success" slides from 90 to 81%, but in both accounts troubled portfolios can be identified within the first 7 years. In both cases >50% of scenarios end with substantially more $ than they began with.  Tack on SS and the numbers get much closer.  Use a slightly reduced WR (e.g. 3.7) and the numbers essentially converge.

Following this logic I don't worry that my retirement could be 65 years if I wind up winning the life-expectancy lottery and living well past 100.  My plan doesn't change from an estimated 40 years of retirement.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on December 15, 2016, 08:30:55 AM
And if you have the flexibility to vary your annual spending say +/- 0.5% in response to market conditions you can get a nice bump in your success rate

To clarify: That's varying your WR by 0.5%, not your annual spending--your spending would vary by 12.5%.

Could you temporarily take a 12.5% pay cut, basically? Or earn 12.5%. Or some combination of the two. Either of which would reduce your WR by 0.5%, and then your numbers illustrate what would have happened historically in that case.

Good catch. I edited my post.

Personally I could take a 25% pay cut in any year or for a few years as long as it was likely I could increase my spending later. I have a number of expenses that are either nice to have or are for longer term issues that could be deferred a year or 3 if needed without any harm. Heck with an easy PT job I could drop my portfolio spending by 50%/yr for a while without feeling hard done by. That's the beauty of spending [relatively less] than is typical for your peer group.

What I don't want to do is spend extra years working FT because I am afraid of a small % risk of working PT for a few years. That makes no sense to me.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on December 15, 2016, 08:41:34 AM

What I don't want to do is spend extra years working FT because I am afraid of a small % risk of working PT for a few years. That makes no sense to me.

I agree with you on this, but the point where the risk is "small enough" is different among people.  Personally I'd be content anywhere north of 50%, knowing that we have every intention of adjusting spending and picking up random sources of income as they become available.  Others think this approach is crazy and would be terrified by it. 
So where does your comfort level lie regarding portfolio success rates?  80%?  95%?
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on December 15, 2016, 09:06:54 AM
So where does your comfort level lie regarding portfolio success rates?  80%?  95%?

I don't know for sure yet. I am behind the 8 ball in terms of time because I didn't start this process as early as I would have liked. I am also very active and my FIRE dreams are camping, mtn biking, surfing, fly fishing, etc... So that predisposes me to value my health and mobility.

My current FIRE numbers look roughly like this:

- spending ~$40K/yr so with taxes I need ~$47K/yr
- at 4%WR that's ~$1.2M
- I currently have ~$650K saved/invested
- I'm 47
- at my usual income/spending levels I can save $30K-$40K/yr

As you can see those number don't work out so great for an early FIRE...assuming you even think you can have an early FIRE once you are closing in on 50. So my plan is to save what I can in 2017. I'm luckily [sort off] working two contracts and earning more than typical so I may be able to sock away $80K next year. In 2018 I will shift to PT work with the goal to carve out months of free time and do the stuff I love while not drawing down the portfolio. That will allow it to continue to grow.

Now to your question. My expectation is that one of the things I will do with my additional free time in the downshift period is to see if I can reduce my FIRE budget comfortably and also to explore what variable WR rate plan I am comfortable with and what WR range I am comfortable with. Obviously by moving those variables around I can significantly reduce the $$ value I need to hit and shave years off my need to even do PT work. Also as obvious is that great or poor market performance will dramatically impact my motivation to optimize my FIRE plans.

I can say I am 100% comfortable with the standard 4%WR. And I think ~5yrs of PT work is something I feel good with. My simple simulations say that will give me ~$1M. I figure that I'll be able to make anything approaching that work. So that's the direction I am heading.

I will keep evaluating my situation and if I hate the PT work or my health changes or something else drastic occurs I'll be ready to stop working entirely on less than $1M. I'm also open to the notion that at some level/type of PT work I will actually prefer working to not working at all, which makes the shift to PT sooner than later sensible to me as with an income of $10K/yr my FIRE $ target shifts down significantly. I've spend 6 months+ doing outdoors store retail in my adult life and it was fun, but poorly paid.

Sorry that's not a concise answer. I really don't have one. I do know I am ready to be done working FT though and I do know that 6months/yr of free time now is worth more to me than 12 months/yr of free time in a decade.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on December 15, 2016, 11:00:11 AM
It's an interesting side alley, taking the unconventional view that working at all beyond a 4%SWR is an ER failure, but I don't see a good way to nudge the mainstream view.  To most folks, being unhappy in retirement is their only criteria for ER failure.  This current bull market nonwithstanding, you will have a negative return at some point before traditional retirement age if you retire in your 30's or 40's which most people feel uncomfortable about, even though the 4% literature still gives them some 95% success rate.  It's probably just human nature, but erring on the side of safety, especially when it's a 'bird in hand vs. two in the bush' decision just feels better.  I do hope that people don't work jobs they hate plugging through their OMY, or at least that they feel like a tremendous weight has been lifted by hitting FI (I have seen this light bulb go on, and it's a great feeling), but I don't think I could convince any FI'ed people I know that by working they are retirement failures.  They would look at me like I've lost my mind! 

TL;DR  I guess what I've noticed is that people really want to be FI, and ER is a distant second.  So if you tell them to ER but they think it might compromise their FI, the answer is going to be no.  It could be because of health insurance, or sequence of returns, or a zombie apocalypse, but FI 'trumps' ER.  (see what I did there :)
Title: Re: Stop worrying about the 4% rule
Post by: Telecaster on December 15, 2016, 03:37:26 PM
To me, the even rarer discussion (and one that, incidentally, I was among the first to point out <- my extraordinarily minor contribution to FIRE research) is on the other end of lifespan - the 4% rule is even safer than we think because we discount the successes associated with dying early.

Indeed.  But to be fair, it is hard to wrap your brain around the mindset that dying early is a success  :) 
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on December 15, 2016, 03:46:53 PM
To me, the even rarer discussion (and one that, incidentally, I was among the first to point out <- my extraordinarily minor contribution to FIRE research) is on the other end of lifespan - the 4% rule is even safer than we think because we discount the successes associated with dying early.

Indeed.  But to be fair, it is hard to wrap your brain around the mindset that dying early is a success  :)

True.  I come from an extremely blunt and practical lineage.  :-)
Title: Re: Stop worrying about the 4% rule
Post by: deborah on December 15, 2016, 03:54:59 PM
The trouble is that most people are part of a couple. In Australia, life expectancy is 80, but at least one of a couple is expected to live until 90-something. This is going to be similar elsewhere, so you actually need to think about how long your stash will need to last to cover both of you.
Title: Re: Stop worrying about the 4% rule
Post by: Mr. Green on December 15, 2016, 04:19:35 PM
The trouble is that most people are part of a couple. In Australia, life expectancy is 80, but at least one of a couple is expected to live until 90-something. This is going to be similar elsewhere, so you actually need to think about how long your stash will need to last to cover both of you.
It's extremely likely (I'd bet on it) that someone who is 90 has limited mobility and therefore spends little. By limited mobility I mean aches and pains become the norm and you become less and less likely to take trips. My grandmother on my mom's side just died at 87 and my grandfather (her husband) is still alive at 90. They were the healthiest elderly people I ever met. Indeed all their friends had died off before them. And they stopped travelling 10 years ago, with the exception of visiting family. And there was a healthy tapering in the decade before that. At that age they just couldn't string together enough good days to take week long vacations and such. Now that Grandma is gone (died last January), I'd say Grandpa barely spends anything. I can't say for sure that the same healthcare system will be in place when I'm that age but they used medicare and they paid for extra insurance that covered their 20% coinsurance beyond medicare. Those two costs covered everything so there were never any surprises. Of course they weren't taking heaps of pills either. I know prescriptions can be very costly.

There are communities popping up in the US where 3 types of housing are offered. Villas for independent living, apartments for the less mobile, and full on nursing care. You buy into the community and you have equity for 10 years. If you die before 10 years some equity is returned to the estate. If you live longer than 10 years there is an additional cost to stay there if you have the money to pay it but they can never kick you out. As a person or couple ages they can start in the independent living space and move to more assisted care as they need it, without having to leave the community. There's a communal space that allows people to get together and enjoy activities with other people of a similar age and new friendships can be formed if people are so inclined. It's a great way to limit the "long term care" cost that people seem to fear so much, provided a couple or individual has the means to buy into the community. The cost is no more expensive than buying a small home, and typically older people are able to pay for the transition by selling the home they lived in and no longer need. It's a cool concept, particularly since you do lose friends at that age and the community you live in can start to look like a bunch of strangers. My grandfather talks about this now. He's basically the last man standing of all their friends.

That being said, I still think overall costs for most people will go down from 60 to 80, assuming you live that long, unless your base spending is already incredibly low. Perhaps a mustachian, spending only 40k a year, would see spending essentially stay flat as travel decreases and increased medical expenses replace the travel budget.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on December 15, 2016, 04:21:06 PM
The trouble is that most people are part of a couple. In Australia, life expectancy is 80, but at least one of a couple is expected to live until 90-something. This is going to be similar elsewhere, so you actually need to think about how long your stash will need to last to cover both of you.

I've attached a spreadsheet that calculates the probability of one or both of you surviving to given ages (based on US data, but I bet Australia is quite similar, though perhaps slightly longer--within the margin of error though).

Put in your current age, and select your health level (from above average, average, or below average) and it'll calculate the probability that each of you makes it X number more years, and the probability that AT LEAST one of you makes it there.

Right now, at 31, wife is 30, our 50% chance of making it is: 54 more years (to 85) for me, 58 more years (to 88) for her.  Our joint 50% probability (i.e. 50/50 chance at least one of us will be left) is 62 years from now, when I'm 93 and she's 92.

We have a 10% chance of at least one of us lasting 70 more years, until I'm 101 and she's 100.  If you want the same odds as many want for cFIREsim runs, 95% chance of covering you, we look at the 5% chance one of us will be alive... 72 years, when I'll be 103, her 102.

I don't care about covering myself past 100 (though I think it'll happen naturally via the way net worth raises in FIRE), but some might.

Have fun playing with your own numbers, everyone!

:)
Title: Re: Stop worrying about the 4% rule
Post by: Cheddar Stacker on December 15, 2016, 06:23:49 PM

I've attached a spreadsheet that calculates the probability of one or both of you surviving to given ages...

I love that you are posting this, particularly given that from what I know about you none of this stuff matters. You FIREd based on real cash flow rather than 4% theory fluff. Thanks for continuing to provide resources for the rest of us.

As to the recent conversation, +1 to retire-canada. My current plan (hope) is to just get close to something reasonable, then slow down and pick up some random cash here and there to supplement. A 6-7% WR can be super "safe" if you keep picking up a few dollars, rely on SS, and remain flexible.
Title: Re: Stop worrying about the 4% rule
Post by: deborah on December 15, 2016, 06:58:53 PM
It's extremely likely (I'd bet on it) that someone who is 90 has limited mobility and therefore spends little. By limited mobility I mean aches and pains become the norm and you become less and less likely to take trips. My grandmother on my mom's side just died at 87 and my grandfather (her husband) is still alive at 90. They were the healthiest elderly people I ever met. Indeed all their friends had died off before them. And they stopped travelling 10 years ago, with the exception of visiting family. And there was a healthy tapering in the decade before that. At that age they just couldn't string together enough good days to take week long vacations and such. Now that Grandma is gone (died last January), I'd say Grandpa barely spends anything. I can't say for sure that the same healthcare system will be in place when I'm that age but they used medicare and they paid for extra insurance that covered their 20% coinsurance beyond medicare. Those two costs covered everything so there were never any surprises. Of course they weren't taking heaps of pills either. I know prescriptions can be very costly.

There are communities popping up in the US where 3 types of housing are offered. Villas for independent living, apartments for the less mobile, and full on nursing care. You buy into the community and you have equity for 10 years. If you die before 10 years some equity is returned to the estate. If you live longer than 10 years there is an additional cost to stay there if you have the money to pay it but they can never kick you out. As a person or couple ages they can start in the independent living space and move to more assisted care as they need it, without having to leave the community. There's a communal space that allows people to get together and enjoy activities with other people of a similar age and new friendships can be formed if people are so inclined. It's a great way to limit the "long term care" cost that people seem to fear so much, provided a couple or individual has the means to buy into the community. The cost is no more expensive than buying a small home, and typically older people are able to pay for the transition by selling the home they lived in and no longer need. It's a cool concept, particularly since you do lose friends at that age and the community you live in can start to look like a bunch of strangers. My grandfather talks about this now. He's basically the last man standing of all their friends.

That being said, I still think overall costs for most people will go down from 60 to 80, assuming you live that long, unless your base spending is already incredibly low. Perhaps a mustachian, spending only 40k a year, would see spending essentially stay flat as travel decreases and increased medical expenses replace the travel budget.
Ah dear! There are a few things here that I need to comment on.

My parents are quite elderly, as are some of their relatives, and I have been looking at multilevel accommodation in Australia (some of them are in multilevel accommodation). Obviously, we are a different country, with different laws BUT although many people go into multilevel accommodation because they think that if one of them gets worse, he will go into a higher level of care while she stays in the lower level accommodation, it just doesn't work that way here, and there is no guarantee that this can happen. These places are perennially full, so if they have the room, it can be done, but, generally, it can't.

Secondly, the last eight years of life tend to be the most expensive years of all (according to the Australian stats). People tend to take eight years going downhill before they die. They may have a fall and break a hip, and never walk again (this is very common). Or some other progressive problem occurs. My grandmother (who was just short of 100 when she died) was in nursing homes for the last eighteen years of her life with dementia - for years she was just a skeleton lying on a bed, with no speech, no ability to walk - and ll this takes an amazing amount of money to support. So I really disagree about being elderly costing less.

My parents loved travel. They traveled to many places, and gradually traveled more as they got older. Cruises replaced tours which had replaced independent travel as they got older. Their last cruise was from London to Sydney through the Panama Canal. So, as 60 became 70 became 80 became 85, their travel gradually increased in price. As they became less able to visit local towns or sites on the weekend, their overseas travel became longer and more often.

That said, it is normal here for expenses to go down slightly between 65 and 85 - see the comfortable standard of living developed by the banks https://www.superannuation.asn.au/resources/retirement-standard - but this is marginal. However, are mustachians more like my parents? There seem to be a lot of people in the forum who adore travel. The other thing is that the 85 year olds in Australia have MUCH cheaper pills and medical care than even our general populace - I have forgotten the exact cutoff, but if an elderly person spends more than (say) $5000 in a year on pharmaceuticals, they don't have to pay any more.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on December 15, 2016, 09:38:48 PM

I've attached a spreadsheet that calculates the probability of one or both of you surviving to given ages...

I love that you are posting this, particularly given that from what I know about you none of this stuff matters. You FIREd based on real cash flow rather than 4% theory fluff. Thanks for continuing to provide resources for the rest of us.

As to the recent conversation, +1 to retire-canada. My current plan (hope) is to just get close to something reasonable, then slow down and pick up some random cash here and there to supplement. A 6-7% WR can be super "safe" if you keep picking up a few dollars, rely on SS, and remain flexible.

It was one of the ER resources I accumulated at some point, so was no big deal to share.  :)

Our plan is definitely different, so it is much less relevant to me personally, but very interesting, still.

I love your plan; I think everyone should do something similar, IMO, and gain years of life, unless they love their job and aren't doing it for the money..
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on December 16, 2016, 06:20:18 AM

It seems like though the vast majority who are going for a 3% WR are doing it out of fear, and their plan is to pull the plug as soon as they can, as soon as they hit their number. They aren't working in their job for a sense of purpose, as you suggest in your post.

If anything, I think these folks are dissatisfied with their work MORE than the average forum member.  The irrational need to save way past a "safe" amount is a reflex to ensure never having to go back, like PTSD or something.  Those that Sol mentions, who work for the sake of greater good or enjoyment are rarely debating the math of WR's and AA's.

I think it's a stretch to say that these folks are dissatisfied with their work MORE than the average forum member.  Given the run in the equities market and from what was shared about Mustachian household incomes (http://forum.mrmoneymustache.com/welcome-to-the-forum/this-is-the-average-us-household-income-how-do-you-compare-(usa-today-article)/msg1320217/#msg1320217) (almost 50% above 125k), it is almost inevitable that going a little further than 4% quickly (OMY maybe) becomes 3%.

Also, in my case, I got to a bare bones FI (5 - 6% WR) and was emboldened to get a better job.  I think several other FI bloggers and forum members have 'dream jobs' or working spouses that have them continuing to stash beyond the 4% WR number. 

I'd be interested to understand why you'd think FI folks at 4% or below are so unhappy with working or having an income.
Because we've done polls, and found that the majority don't like their jobs. That's the majority of the general population, and of Mustachians.

Your experience and ideas of a "dream job" seem normal to you, because it's your experience. But it seems not to be the case for the majority.

And as CL points out, if you are enjoying your dream job and past the FI point, you aren't on an early retirement forum handwringing about the success rate of 3% vs. 4%.

So the vast majority of people on here talking about how they want to pull the plug at 3% WR are very likely doing it out of fear.

If they were in their dream job, and wanted to work forever, they wouldn't be talking about pulling the plug as soon as they hit 3%, because they'd want to keep working, because they love their job.

I actually would like my job if I didn't have to go in every day :D It's the day in, day out aspect of it (and the solo travel) that's most wearing.

Doing it an average of a week or two per month would be great.
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on December 16, 2016, 07:11:32 AM
I actually would like my job if I didn't have to go in every day :D It's the day in, day out aspect of it (and the solo travel) that's most wearing.

Doing it an average of a week or two per month would be great.

It seems to me that some here are taking serious risks of failure in their FIRE plans, then I remember what many of you actually do on a daily basis. I'd hate that. I'd take some serious risks to get out of that too. Though I guess I did when I quit a salaried job and became a self-employed consultant years ago.

If you can swing it, a self-employed consulting gig can be sweet. Work from home, no commute, travel to clients' sites is paid by the mile and minute, tax-deductions, no set schedule, high pay/hour...you get the idea. It worked for me.

I'm still working some. More than I want to. I considered myself semi-RE at the start of 2016, but still managed an average of 30h/week (in chunks). I gave one project inquiry this week to a competitor. I'm trying to do more of that. Then again, I just completed a project for an old client and it was immensely satisfying. I don't get that same satisfaction from riding my bike, hiking or messing with my cars. I need a new hobby.
Title: Re: Stop worrying about the 4% rule
Post by: Mr. Green on December 16, 2016, 09:07:49 AM
I've attached a spreadsheet that calculates the probability of one or both of you surviving to given ages (based on US data, but I bet Australia is quite similar, though perhaps slightly longer--within the margin of error though).

Put in your current age, and select your health level (from above average, average, or below average) and it'll calculate the probability that each of you makes it X number more years, and the probability that AT LEAST one of you makes it there.
I tried your spreadsheet and as a 33 year old male, with a 30 year old wife, both in average health, it says I have a 99% chance of living 13 more years. She has a 99% chance of living 24 more years. Together we have a 99% chance of living 40 more years. So by having a wife my 99% chance of being alive increases from 13 to 40 years? Something about that doesn't seem right to me. That's an insane jump.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on December 16, 2016, 09:13:14 AM
I've attached a spreadsheet that calculates the probability of one or both of you surviving to given ages (based on US data, but I bet Australia is quite similar, though perhaps slightly longer--within the margin of error though).

Put in your current age, and select your health level (from above average, average, or below average) and it'll calculate the probability that each of you makes it X number more years, and the probability that AT LEAST one of you makes it there.
I tried your spreadsheet and as a 33 year old male, with a 30 year old wife, both in average health, it says I have a 99% chance of living 13 more years. She has a 99% chance of living 24 more years. Together we have a 99% chance of living 40 more years. So by having a wife my 99% chance of being alive increases from 13 to 40 years? Something about that doesn't seem right to me. That's an insane jump.

You ALONE have a 99% chance of living 13 more years
Wife ALONE had a 99% chance of living 24 more years
Together, there is a 99% chance that ONE OF YOU is alive for 40 more years.
There is NOT a 99% chance that BOTH of you are alive for 40 more years.

Seems pretty reasonable to me.
Title: Re: Stop worrying about the 4% rule
Post by: dandarc on December 16, 2016, 09:17:17 AM
I've attached a spreadsheet that calculates the probability of one or both of you surviving to given ages (based on US data, but I bet Australia is quite similar, though perhaps slightly longer--within the margin of error though).

Put in your current age, and select your health level (from above average, average, or below average) and it'll calculate the probability that each of you makes it X number more years, and the probability that AT LEAST one of you makes it there.
I tried your spreadsheet and as a 33 year old male, with a 30 year old wife, both in average health, it says I have a 99% chance of living 13 more years. She has a 99% chance of living 24 more years. Together we have a 99% chance of living 40 more years. So by having a wife my 99% chance of being alive increases from 13 to 40 years? Something about that doesn't seem right to me. That's an insane jump.
The "Joint" time is that one of you makes it.  Turning it around - you're looking for a 1% chance of both being dead at that age : 10% * 10% = 1%.  So the 90% lines for individuals are what you'd look at to "validate" the 99% line for joint.  Roughly.
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on December 16, 2016, 09:52:09 AM
I've attached a spreadsheet that calculates the probability of one or both of you surviving to given ages (based on US data, but I bet Australia is quite similar, though perhaps slightly longer--within the margin of error though).

Put in your current age, and select your health level (from above average, average, or below average) and it'll calculate the probability that each of you makes it X number more years, and the probability that AT LEAST one of you makes it there.
I tried your spreadsheet and as a 33 year old male, with a 30 year old wife, both in average health, it says I have a 99% chance of living 13 more years. She has a 99% chance of living 24 more years. Together we have a 99% chance of living 40 more years. So by having a wife my 99% chance of being alive increases from 13 to 40 years? Something about that doesn't seem right to me. That's an insane jump.

These numbers do not seem to match up with the SS actuarial data I had posted up thread.  They are more optimistic. Another safety margin if you use them.

...Secondly, the last eight years of life tend to be the most expensive years of all (according to the Australian stats). People tend to take eight years going downhill before they die. They may have a fall and break a hip, and never walk again (this is very common). Or some other progressive problem occurs. My grandmother (who was just short of 100 when she died) was in nursing homes for the last eighteen years of her life with dementia - for years she was just a skeleton lying on a bed, with no speech, no ability to walk - and ll this takes an amazing amount of money to support. So I really disagree about being elderly costing less.

This is not supported from data in the US, even including rising medical expenses.
https://www.kitces.com/blog/do-your-clients-spend-more-or-less-in-their-later-retirement-years/
Title: Re: Stop worrying about the 4% rule
Post by: Mr. Green on December 16, 2016, 10:35:27 AM
I've attached a spreadsheet that calculates the probability of one or both of you surviving to given ages (based on US data, but I bet Australia is quite similar, though perhaps slightly longer--within the margin of error though).

Put in your current age, and select your health level (from above average, average, or below average) and it'll calculate the probability that each of you makes it X number more years, and the probability that AT LEAST one of you makes it there.
I tried your spreadsheet and as a 33 year old male, with a 30 year old wife, both in average health, it says I have a 99% chance of living 13 more years. She has a 99% chance of living 24 more years. Together we have a 99% chance of living 40 more years. So by having a wife my 99% chance of being alive increases from 13 to 40 years? Something about that doesn't seem right to me. That's an insane jump.

You ALONE have a 99% chance of living 13 more years
Wife ALONE had a 99% chance of living 24 more years
Together, there is a 99% chance that ONE OF YOU is alive for 40 more years.
There is NOT a 99% chance that BOTH of you are alive for 40 more years.

Seems pretty reasonable to me.
Ah! Totally makes more sense now. I knew I had to be missing something.
Title: Re: Stop worrying about the 4% rule
Post by: deborah on December 16, 2016, 04:09:12 PM
Actually, it is supported by data from the US - https://www.sciencedaily.com/releases/2016/06/160615163036.htm - however, I was unaware that your medical expenses were also capped.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on December 16, 2016, 06:24:47 PM
Canada is modernizing its assisted dying laws, which I applaud. Given the high cost of health care in the very last years  I'm confident that process will continue and I plan to put into place legal instructions to avoid spending a prolonged period in care when my situation is not worth [in my opinion] extending my life.

If my portfolio won't support it I am okay with using Government funded care if I can no longer live at home yet don't meet the requirements of my assisted dying protocol.

In any case it seems a poor trade off to work extra years now to try and head of some potential scenario that will be an issue in my old age. I think a far more effective way to mitigate such concerns is to stop working after hitting something like a 4%WR, being flexible and keep my mind and body strong. If you give me a choice between more money or better health I'll take better health every time. Despite having a [relatively] high level of movement and low stress for a desk job it's pretty clear to me more full time work is not as beneficial to my health as more free time to pursue my interests...most of which involve significant exercise and low stress levels.
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on December 16, 2016, 06:55:09 PM
Actually, it is supported by data from the US - https://www.sciencedaily.com/releases/2016/06/160615163036.htm - however, I was unaware that your medical expenses were also capped.

I absolutely agree with end of life care costs are very high as I work in the medical field and see anecdotal evidence of this daily.  This particular study is only over the last year of life. The kites article shows total spending is reduced later in life despite the increasing health care costs.  As people age other reduced costs offset the increases, albeit over a period longer than the last year.
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on January 20, 2017, 06:27:32 AM
Another article somewhat skeptical of the 4% rule:

https://earlyretirementnow.com/2017/01/18/the-ultimate-guide-to-safe-withdrawal-rates-part-6-a-2000-2016-case-study/

If you’ve been following our series on withdrawal rates (part 1 here) you have noticed that we’re quite skeptical about the 4% rule. That would be especially true for early retirees with a much longer horizon than the standard 30 years.


....

Summary

The 4% rule worked just fine during the Tech Bubble and Global Financial Crisis IF:
•You have a 30-year retirement horizon.
•You are comfortable depleting your money at the end of that horizon and/or significantly cutting your real withdrawal amounts.
•You had a relatively low equity portion (60% or less).
•You are not a passive investor but rather have the foresight to time long-term vs. short-term bonds. Specifically, you needed the ability (or dumb luck?) to implement the exact allocation that didn’t work in 1965/66 and avoid the allocation that did actually work quite beautifully in 1965/66.
•Did we miss any other qualifiers? Please let us know in the comments section!

Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on January 20, 2017, 06:31:44 AM
i trust michael kitce's studies and looks at things far more than 90% of these financial writer jerks out there .

as michael found:

The 4% rule has been much maligned lately, as recent market woes of the past 15 years – from the tech crash of 2000 to the global financial crisis of 2008 – have pressured both market returns and the portfolios of retirees.

Yet a deeper look reveals that if a 2008 or even a 2000 retiree had been following the 4% rule since retirement, their portfolios would be no worse off than any of the other “terrible” historical market scenarios that created the 4% rule from retirement years like 1929, 1937, and 1966. To some extent, the portfolio of the modern retiree is buoyed by the (only) modest inflation that has been occurring in recent years, yet even after adjusting for inflation, today’s retirees are not doing any materially worse than other historical bad-market scenarios where the 4% rule worked.


https://www.kitces.com/blog/how-has-the-4-rule-held-up-since-the-tech-bubble-and-the-2008-financial-crisis/
Title: Re: Stop worrying about the 4% rule
Post by: Gunny on January 20, 2017, 07:18:46 AM
Another article somewhat skeptical of the 4% rule:

https://earlyretirementnow.com/2017/01/18/the-ultimate-guide-to-safe-withdrawal-rates-part-6-a-2000-2016-case-study/

If you’ve been following our series on withdrawal rates (part 1 here) you have noticed that we’re quite skeptical about the 4% rule. That would be especially true for early retirees with a much longer horizon than the standard 30 years.


....

Summary

The 4% rule worked just fine during the Tech Bubble and Global Financial Crisis IF:
•You have a 30-year retirement horizon.
•You are comfortable depleting your money at the end of that horizon and/or significantly cutting your real withdrawal amounts.
•You had a relatively low equity portion (60% or less).
•You are not a passive investor but rather have the foresight to time long-term vs. short-term bonds. Specifically, you needed the ability (or dumb luck?) to implement the exact allocation that didn’t work in 1965/66 and avoid the allocation that did actually work quite beautifully in 1965/66.
•Did we miss any other qualifiers? Please let us know in the comments section!


I've been reading this series with much interest.  Overall, the author is not saying the 4% rule is no longer viable, he simply states that if you are looking at a much longer time horizon and wish to leave an inheritance, then lower withdrawal rates provide higher chances of success.  I particularly like the article on withdrawal rates based on current market valuations.  His research is in line with what I've read on MadFientist.  His research is of interest to me since my DW will loose my pension if I precede her in death and she will have only SS and our stash to live on.  A little smaller WR now to provide her a higher amount later on would let me fall asleep faster at night.  This is an academic exercise at this juncture as I have yet to start tapping the stash. 
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on January 20, 2017, 07:46:21 AM
i trust michael kitce's studies and looks at things far more than 90% of these financial writer jerks out there .

Any comment on the criticism of Kites in the article?

The article claims a 2000 retiree is doing very badly with 40% in short-term treasuries, OK with 10-year treasuries. The author accuses Kites of hindsight bias when he uses the 10-year in 2000-onwards studies.
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on January 20, 2017, 09:02:30 AM
we can all cherry pick assets that work or don't work , same with time frames  . i only  go by what i show and my mix . hypothetical means nothing . through 2000 i held intermediate term bonds and equity's and did okay .
Title: Re: Stop worrying about the 4% rule
Post by: Maschinist on January 31, 2017, 09:24:51 AM
Another article somewhat skeptical of the 4% rule:

https://earlyretirementnow.com/2017/01/18/the-ultimate-guide-to-safe-withdrawal-rates-part-6-a-2000-2016-case-study/

If you’ve been following our series on withdrawal rates (part 1 here) you have noticed that we’re quite skeptical about the 4% rule. That would be especially true for early retirees with a much longer horizon than the standard 30 years.


....

Summary

The 4% rule worked just fine during the Tech Bubble and Global Financial Crisis IF:
•You have a 30-year retirement horizon.
•You are comfortable depleting your money at the end of that horizon and/or significantly cutting your real withdrawal amounts.
•You had a relatively low equity portion (60% or less).
•You are not a passive investor but rather have the foresight to time long-term vs. short-term bonds. Specifically, you needed the ability (or dumb luck?) to implement the exact allocation that didn’t work in 1965/66 and avoid the allocation that did actually work quite beautifully in 1965/66.
•Did we miss any other qualifiers? Please let us know in the comments section!

This is by far the best and most detailed study about the 4% rule that is available until now. Everybody who is dismissing this should take a break and read it from front to end.

- The KITCES study does not account for any inflation on the portfolio level. (which after a decade of more makes all the difference in optical portfolio valuation and with that also withdrawal rate)
- The ERN study does and on top of that is also looking for longer retirement periods aka what everybody here should be interested in. This part is the most important in my opinion and should open the eyes of early retires in their 30's-40's
https://earlyretirementnow.com/2016/12/21/the-ultimate-guide-to-safe-withdrawal-rates-part-3-equity-valuation/

Going from 4% to 3% withdrawal rate makes all the difference in the world at current market valuations and guarantees 50+ years peace of mind.

Im not connected in any way to the author but when you read the article you know that its pure gold.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on January 31, 2017, 10:06:57 AM
The KITCES study does not account for any inflation.

This is not true.  The Kitces study in question (https://www.kitces.com/blog/how-has-the-4-rule-held-up-since-the-tech-bubble-and-the-2008-financial-crisis/) most certainly takes inflation into account.  The commentary in the Kitces article pertaining to the specific chart critiqued by the ERN article (which uses nominal figures) expressly discusses the fact that it is based on nominal (non-inflation-adjusted) dollars.  And it goes on to provide another chart displaying inflation-adjusted spending as a percentage of total portfolio value, which demonstrates that the year 2000 retiree (whose portfolio followed the parameters of Kitces' asset allocation and other assumptions) was faring better (in terms of inflation-adjusted withdrawal rate) at the 15-year mark than history's worst-case retiree (which the ERN article seems to have conveniently overlooked when it highlighted Kitces' use of a portfolio value chart based on nominal dollars).
Title: Re: Stop worrying about the 4% rule
Post by: Maschinist on January 31, 2017, 10:25:29 AM
The KITCES study does not account for any inflation.

This is not true.  The Kitces study in question (https://www.kitces.com/blog/how-has-the-4-rule-held-up-since-the-tech-bubble-and-the-2008-financial-crisis/) most certainly takes inflation into account.  The commentary in the Kitces article pertaining to the specific chart critiqued by the ERN article (which uses nominal figures) expressly discusses the fact that it is based on nominal (non-inflation-adjusted) dollars.  And it goes on to provide another chart displaying inflation-adjusted spending as a percentage of total portfolio value, which demonstrates that the year 2000 retiree (whose portfolio followed the parameters of Kitces' asset allocation and other assumptions) was faring better (in terms of inflation-adjusted withdrawal rate) at the 15-year mark than history's worst-case retiree (which the ERN article seems to have conveniently overlooked when it highlighted Kitces' use of a portfolio value chart based on nominal dollars).
KITCES inflation is only calculated for the withdrawal but not for the portfolio value.
You can check the results easily with cfiresim. (when you check the period from 1966 onwards this flaw becomes even more obvious because of high inflation rates).

Starting year 2000 with a 60/40 portfolio with 0.1% fees leaves you with ~$700k adjusted now. (and not a nearly $1M like in the kitces study, because account value is not inflation adjusted (only the yearly withdrawal).
Everybody with a higher stock mix would have fared worse.
Currently the 10year bond yield is at ~2.5% instead of ~6% @ year 2000. The damage limiting component of bond yields is just not there today.

The ERN study is covering all that.
Title: Re: Stop worrying about the 4% rule
Post by: dandarc on January 31, 2017, 10:29:12 AM
The KITCES study does not account for any inflation.

This is not true.  The Kitces study in question (https://www.kitces.com/blog/how-has-the-4-rule-held-up-since-the-tech-bubble-and-the-2008-financial-crisis/) most certainly takes inflation into account.  The commentary in the Kitces article pertaining to the specific chart critiqued by the ERN article (which uses nominal figures) expressly discusses the fact that it is based on nominal (non-inflation-adjusted) dollars.  And it goes on to provide another chart displaying inflation-adjusted spending as a percentage of total portfolio value, which demonstrates that the year 2000 retiree (whose portfolio followed the parameters of Kitces' asset allocation and other assumptions) was faring better (in terms of inflation-adjusted withdrawal rate) at the 15-year mark than history's worst-case retiree (which the ERN article seems to have conveniently overlooked when it highlighted Kitces' use of a portfolio value chart based on nominal dollars).
KITCES inflation is only calculated for the withdrawal but not for the portfolio value.
You can check the results easily with cfiresim. (when you check the period from 1966 onwards this flaw becomes even more obvious because of high inflation rates).
Starting year 2000 with a 60/40 portfolio with 0.1% fees leaves you with ~$700k adjusted now. (and not a nearly $1M like in the kitces study, because account value is not inflation adjusted (only the yearly withdrawal).
Everybody with a higher stock mix would have fared worse.
Currently the 10year bond yield is at ~2.5% instead of ~6% @ year 2000. The damage limiting component of bond yields is just not there today.

The ERN study is covering all that.
Why would you need to count inflation twice?
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on January 31, 2017, 10:35:06 AM
KITCES inflation is only calculated for the withdrawal but not for the portfolio value.

Yes, the Kitces article recognizes this, discusses it, and accounts for it in the analysis.

Quote
Starting year 2000 with a 60/40 portfolio with 0.1% fees leaves you with ~$700k adjusted now.

Run the same numbers for the comparable period starting in 1966 and the remaining inflation-adjusted portfolio value is even lower, which was Kitces' point.
Title: Re: Stop worrying about the 4% rule
Post by: Maschinist on January 31, 2017, 10:52:57 AM
The KITCES study does not account for any inflation.

This is not true.  The Kitces study in question (https://www.kitces.com/blog/how-has-the-4-rule-held-up-since-the-tech-bubble-and-the-2008-financial-crisis/) most certainly takes inflation into account.  The commentary in the Kitces article pertaining to the specific chart critiqued by the ERN article (which uses nominal figures) expressly discusses the fact that it is based on nominal (non-inflation-adjusted) dollars.  And it goes on to provide another chart displaying inflation-adjusted spending as a percentage of total portfolio value, which demonstrates that the year 2000 retiree (whose portfolio followed the parameters of Kitces' asset allocation and other assumptions) was faring better (in terms of inflation-adjusted withdrawal rate) at the 15-year mark than history's worst-case retiree (which the ERN article seems to have conveniently overlooked when it highlighted Kitces' use of a portfolio value chart based on nominal dollars).
KITCES inflation is only calculated for the withdrawal but not for the portfolio value.
You can check the results easily with cfiresim. (when you check the period from 1966 onwards this flaw becomes even more obvious because of high inflation rates).
Starting year 2000 with a 60/40 portfolio with 0.1% fees leaves you with ~$700k adjusted now. (and not a nearly $1M like in the kitces study, because account value is not inflation adjusted (only the yearly withdrawal).
Everybody with a higher stock mix would have fared worse.
Currently the 10year bond yield is at ~2.5% instead of ~6% @ year 2000. The damage limiting component of bond yields is just not there today.

The ERN study is covering all that.
Why would you need to count inflation twice?

Not counting twice but to ignore inflation on the portfolio size gives a complete wrong sense of safety for longer periods:
(https://www.kitces.com/wp-content/uploads/2015/08/Graphics_2.png)
For example the 1966 cohort from the KITCES chart where you see nearly $1M in 1981 with 4% withdrawal rate are in reality only around $225k inflation adjusted! 1981 $
That means you have to withdraw more than 15% per year from this portfolio after only 15 years of retirement. So its failing before it reaches even 30 years.
When you take all historical years with Shiller Cape ~25 or higher and also take into account the currently non existing bond yield after inflation what do you expect? Its pure and simple math.
This is what you can see in the ERN study.
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on January 31, 2017, 01:02:41 PM
the 1965/1966  group had really good 30 year stock returns . over 10% .  however inflation , stock returns and bond returns killed them in  the first 15 years . it was really inflation that put the nail in the coffin .
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on January 31, 2017, 01:20:09 PM
The KITCES study does not account for any inflation.

This is not true.  The Kitces study in question (https://www.kitces.com/blog/how-has-the-4-rule-held-up-since-the-tech-bubble-and-the-2008-financial-crisis/) most certainly takes inflation into account.  The commentary in the Kitces article pertaining to the specific chart critiqued by the ERN article (which uses nominal figures) expressly discusses the fact that it is based on nominal (non-inflation-adjusted) dollars.  And it goes on to provide another chart displaying inflation-adjusted spending as a percentage of total portfolio value, which demonstrates that the year 2000 retiree (whose portfolio followed the parameters of Kitces' asset allocation and other assumptions) was faring better (in terms of inflation-adjusted withdrawal rate) at the 15-year mark than history's worst-case retiree (which the ERN article seems to have conveniently overlooked when it highlighted Kitces' use of a portfolio value chart based on nominal dollars).
KITCES inflation is only calculated for the withdrawal but not for the portfolio value.
You can check the results easily with cfiresim. (when you check the period from 1966 onwards this flaw becomes even more obvious because of high inflation rates).
Starting year 2000 with a 60/40 portfolio with 0.1% fees leaves you with ~$700k adjusted now. (and not a nearly $1M like in the kitces study, because account value is not inflation adjusted (only the yearly withdrawal).
Everybody with a higher stock mix would have fared worse.
Currently the 10year bond yield is at ~2.5% instead of ~6% @ year 2000. The damage limiting component of bond yields is just not there today.

The ERN study is covering all that.
Why would you need to count inflation twice?

Not counting twice but to ignore inflation on the portfolio size gives a complete wrong sense of safety for longer periods:
(https://www.kitces.com/wp-content/uploads/2015/08/Graphics_2.png)
For example the 1966 cohort from the KITCES chart where you see nearly $1M in 1981 with 4% withdrawal rate are in reality only around $225k inflation adjusted! 1981 $
That means you have to withdraw more than 15% per year from this portfolio after only 15 years of retirement. So its failing before it reaches even 30 years.
When you take all historical years with Shiller Cape ~25 or higher and also take into account the currently non existing bond yield after inflation what do you expect? Its pure and simple math.
This is what you can see in the ERN study.

The very next graphic in the article shows the WR's after 15 years.  This is not at all deceiving. (https://www.kitces.com/wp-content/uploads/2015/08/Graphics_3.png)
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on January 31, 2017, 02:20:38 PM
here are the results of the 30 year time frames that failed .

they all had pretty good results  with a 60/40 mix

1907 stocks returned 7.77% -- bonds 4.250-- rebalanced portfolio 7.02- - inflation 1.64--

1929 stocks 8.19% - - bonds 1.74%-- rebalanced portfolio 6.28-- inflation 1.69--

1937 stocks 10.12 - - bonds 2.13 - rebalanced portfolio -- 7.24 inflation-- 2.82

1966 stocks 10.23 - -bonds 7.85 -- rebalanced portfolio 9.56- - inflation 5.38

for comparison the 140 year average's were:

stocks 8.39--bonds 2.85%--rebalanced portfolio 6.17% inflation 2.23%

so what made those time frames the worst ? what made them the worst is the fact in every single retirement time frame the outcome of that 30 year period was determined not by what happened over the 30 years but the entire outcome was decided in the first 15 years.

so lets look at the first 15 years in those time frames determined to be the worst we ever had.

1907--- stocks minus 1.47%---- bonds minus .39%-- rebalanced minus .70% ---inflation 1.64%

1929---stocks 1.07%---bonds 1.79%---rebalanced 2.29%--inflation 1.69%

1937---stocks -- 3.45%---bonds minus 3.07%-- rebalanced 1.23%--inflation 2.82%

1966-stocks minus .13%--bonds 1.08%--rebalanced .64%-- inflation 5.38%

Title: Re: Stop worrying about the 4% rule
Post by: Maschinist on January 31, 2017, 04:40:33 PM
...
so what made those time frames the worst ? what made them the worst is the fact in every single retirement time frame the outcome of that 30 year period was determined not by what happened over the 30 years but the entire outcome was decided in the first 15 years.
...
Yes that's correct. And on top they had in common, that in each case Shiller Cape was in the mid twenties (to low thirties in 1929).
That makes the ERN study so valuable. It separates cases with low and high Cape and makes probabilities for each group.

After reading, it gets obvious that the current statistical risk/failure rate, specially for early retires, is a good amount higher than Trinity study or others suggest.
Title: Re: Stop worrying about the 4% rule
Post by: Eric on January 31, 2017, 06:47:07 PM
...
so what made those time frames the worst ? what made them the worst is the fact in every single retirement time frame the outcome of that 30 year period was determined not by what happened over the 30 years but the entire outcome was decided in the first 15 years.
...
Yes that's correct. And on top they had in common, that in each case Shiller Cape was in the mid twenties (to low thirties in 1929).
That makes the ERN study so valuable. It separates cases with low and high Cape and makes probabilities for each group.

After reading, it gets obvious that the current statistical risk/failure rate, specially for early retires, is a good amount higher than Trinity study or others suggest.

CAPE is an okay comparison, but it's definitely not a be all end all number.  It fails to take into account changes in GAAP over time, changes in company attitudes towards dividends, and the underlying factors that drive investments (like interest rates).

I'm not completely dismissing it as a metric, but at the same time, expecting CAPE to simply revert back to its historical mean or assuming that a "high" CAPE is a signal of an impending crash is completely ignoring the context of the measure.

This writeup gets into these issues (deeply) if you want to better understand why CAPE is not a great comparison tool over time periods with different characteristics.

http://www.philosophicaleconomics.com/2013/12/shiller/
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on February 01, 2017, 06:42:20 AM
This writeup gets into these issues (deeply) if you want to better understand why CAPE is not a great comparison tool over time periods with different characteristics.

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

Thanks for posting. That was a good read.
Title: Re: Stop worrying about the 4% rule
Post by: dandarc on February 01, 2017, 09:39:29 AM
This writeup gets into these issues (deeply) if you want to better understand why CAPE is not a great comparison tool over time periods with different characteristics.

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

Thanks for posting. That was a good read.
+1 - I'd read about the accounting standards change's impact on CAPE, but it wasn't presented this clearly.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on February 01, 2017, 10:10:39 AM
This writeup gets into these issues (deeply) if you want to better understand why CAPE is not a great comparison tool over time periods with different characteristics.

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

Thanks for posting. That was a good read.
+1 - I'd read about the accounting standards change's impact on CAPE, but it wasn't presented this clearly.

Note that the Philosophical Economics author put out a few subsequent articles where he or she continued to refine his or her thinking on CAPE, including this one (in which he or she constructed a new-and-improved version of CAPE and ultimately concluded that future market returns are likely to be below the historical average):

http://www.philosophicaleconomics.com/2015/03/payout/
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on February 01, 2017, 10:47:24 AM
http://www.philosophicaleconomics.com/2015/03/payout/

Super interesting, thankyou! While the entire article should be read, some interesting conclusions.

Quote
"We conclude with the question that all of this exists to answer: Is the market expensive? Yes, and returns are likely to be below the historical average, pulled down by a number of different mechanisms.  Should the market be expensive?  “Should” is not an appropriate word to use in markets.  What matters is that there are secular, sustainable forces behind the market’s expensiveness–to name a few: low real interest rates, a lack of alternative investment opportunities (TINA), aggressive policymaker support, and improved market efficiency yielding a reduced equity risk premium (difference between equity returns and fixed income returns).  Unlike in prior eras of history, the secret of “stocks for the long run” is now well known–thoroughly studied by academics all over the world, and seared into the brain of every investor that sets foot on Wall Street.  For this reason, absent extreme levels of cyclically-induced fear, investors simply aren’t going to foolishly sell equities at bargain prices when there’s nowhere else to go–as they did, for example, in the 1940s and 1950s, when they had limited history and limited studied knowledge on which to rely.

As for the future, the interest-rate-related forces that are pushing up on valuations will get pulled out from under the market if and when inflationary pressures tie the Fed’s hands–i.e., force the Fed to impose a higher real interest rate on the economy.  For all we know, that may never happen.  Similarly, on a cyclically-adjusted basis, the equity risk premium may never again return to what it was in prior periods, as secrets cannot be taken back."

Yes, the market may be inflated due to policies and interests rates.  If these factors change, lower returns will likely result in the medium term.  Not great for very recent early retirees, if it happens.  OTOH, reduced long term expected returns via a loss of equity premium (ie knowledge of buy and hold) may not necessarily be a bad thing for early retirees.  Since we all know that sequence of returns is far more important than mean real returns; reduced mean equity returns from loss of equity premium will equate to decrease length and breadth of market downturns.  This could actually increase portfolio survivability over the long run.
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on February 12, 2017, 07:44:49 PM