Author Topic: Stop worrying about the 4% rule  (Read 442671 times)

Classical_Liberal

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Re: Stop worrying about the 4% rule
« Reply #1300 on: January 12, 2018, 04:46:01 PM »
For example, if the market crash is accompanied by rapid inflation - trying to live on $30k in bonds per year with no inflation adjustment is going to start really being untenable after a few years. The buying power of those bonds would be eroded away (even assuming I-Bonds that aren't devalued by rising interest rates)

This is what caused the mid/late-1960's failures of 4% rule.  If one is worried about this environment, add a small percentage of an asset class to AA which has historically done well; both in market downturns and in high inflationary periods.

TomTX

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Re: Stop worrying about the 4% rule
« Reply #1301 on: January 12, 2018, 05:16:31 PM »
I think most people on here just look at portfolio success rate and don't even consider a different income generating strategy when they are drawing down on their portfolio.

I think you are entirely wrong. It is considered. However, having income (even a relatively small one) makes portfolio survival in a downturn effectively trivial. There's nothing to discuss, because additional income in a downturn makes it almost impossible to generate a portfolio failure when starting with a reasonable SWR.

I suggest you go and read McClung's book on this and to compare that to the analysis that people are doing. Is anyone here really thinking about a withdrawal strategy with any sort of smarts at all. They aren't. It's completely about maintaining the same portfolio pre and post retirement. That is how we are getting all these comments about having high stock percentages despite analysis stating a lower stock percentage may result in more rather than less successes within retirement.

You actually didn't grasp my point either. An income generating strategy is from your portfolio not from going back to work. I'm talking about living off your portfolio.

In stating all of that I think having the ability to return to work even if it's part time packing shelves and earning a trivial income will make your chances of success really high.

No, you missed my point.

Most people here are willing to make a little cash on the side during retirement via a side gig or part time job if the market crashes.  Heck, many won't be able to help themselves from earning money and gaining the wrath of the IRP.

Mustachians are resilient. They take control of their money. They're not going to sit passively by for a decade watching their portfolio melt away and do nothing.

Even $5k a year during down years solves almost all the (tiny, rare) issues with a 4% SWR.

Last year we made over $5k (net) in credit card and bank account signups. The library walking distance from my house always has part-time job openings - either shelving books or working the circulation desk. Did both in High School. NBD.  I can do handyman stuff via Craigslist or whatever. I can write - better than some of this drek I see sold as Amazon e-books.

There are so many opportunities, that a Badass Mustachian will be fine even in the stagflation era with a 4% SWR.

steveo

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Re: Stop worrying about the 4% rule
« Reply #1302 on: January 12, 2018, 07:19:05 PM »
For example, if the market crash is accompanied by rapid inflation - trying to live on $30k in bonds per year with no inflation adjustment is going to start really being untenable after a few years. The buying power of those bonds would be eroded away (even assuming I-Bonds that aren't devalued by rising interest rates)

This is what caused the mid/late-1960's failures of 4% rule.  If one is worried about this environment, add a small percentage of an asset class to AA which has historically done well; both in market downturns and in high inflationary periods.

I believe that this is simply not factually correct. I think it details exactly my point in that people on here don't understand how to withdraw money from their portfolio in retirement. There is a difference between drawing down from a portfolio and maintaining the same portfolio over the course of your drawdown phase to using a smarter drawdown process which gives you the best chance to maintain a higher income or have a higher success rate within the drawdown phase.

Adding to your stock portfolio is factually the incorrect way to manage the drawdown phase if you want to increase your success rate.

A better way is to use an increased bond percentage and attempt to never sell your stocks. I'm pretty sure that is exactly what McClung investigated and the data supports this approach.

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1303 on: January 12, 2018, 07:22:21 PM »
A better way is to use an increased bond percentage and attempt to never sell your stocks. I'm pretty sure that is exactly what McClung investigated and the data supports this approach.

So start with say 30% bonds and withdraw only from bonds until they are exhausted or only use the bonds if there is crash early in FIRE?

Can you provide a Coles Notes [yes I am that old] summary of your WR plan?
« Last Edit: January 12, 2018, 07:25:18 PM by Retire-Canada »

ysette9

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Re: Stop worrying about the 4% rule
« Reply #1304 on: January 12, 2018, 08:45:50 PM »
Was it @Retire-Canada who said upthread that he/she would pull the plug at 5% WR? I just calculated that we have reached 5% WR right now. Pulling the plug now would scare the bejesus out of me, even though we would have a decent chance of making it work. I understand the OMY syndrome a little better all of a sudden.

steveo

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Re: Stop worrying about the 4% rule
« Reply #1305 on: January 12, 2018, 08:49:13 PM »
Was it @Retire-Canada who said upthread that he/she would pull the plug at 5% WR? I just calculated that we have reached 5% WR right now. Pulling the plug now would scare the bejesus out of me, even though we would have a decent chance of making it work. I understand the OMY syndrome a little better all of a sudden.

I said it and I completely understand what you are stating. I am getting closer to that figure and I am still not sure what to do. I've also hit or pretty close to hit our FI number if we sell the house and relocate. My wife is also now okay with moving however she wants to live where we are for 10 years prior to moving and that means I probably have to get to that 5% figure without selling the house.

ysette9

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Re: Stop worrying about the 4% rule
« Reply #1306 on: January 12, 2018, 08:51:18 PM »
Sorry for mis-remembering (and being too lazy to go back and read, hah). I’ll be curious how you act when you do get to 5% and how the risk profile looks from there.

CanuckExpat

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Re: Stop worrying about the 4% rule
« Reply #1307 on: January 12, 2018, 08:58:49 PM »
For example, if the market crash is accompanied by rapid inflation - trying to live on $30k in bonds per year with no inflation adjustment is going to start really being untenable after a few years. The buying power of those bonds would be eroded away (even assuming I-Bonds that aren't devalued by rising interest rates)

This is what caused the mid/late-1960's failures of 4% rule.  If one is worried about this environment, add a small percentage of an asset class to AA which has historically done well; both in market downturns and in high inflationary periods.

If you are worried about unexpected inflation and want to hold bonds, you can do that with inflation protected bonds (TIPS etc in the USA).

CanuckExpat

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Re: Stop worrying about the 4% rule
« Reply #1308 on: January 12, 2018, 09:03:09 PM »
A better way is to use an increased bond percentage and attempt to never sell your stocks. I'm pretty sure that is exactly what McClung investigated and the data supports this approach.

So start with say 30% bonds and withdraw only from bonds until they are exhausted or only use the bonds if there is crash early in FIRE?

Can you provide a Coles Notes [yes I am that old] summary of your WR plan?

Is it this approach:
"
Basic McClung Prime Harvesting Rules
- This rule was proposed by Michael McClung in his book Living Off Your Money.
- Pick an initial asset allocation, e.g., 60% Stocks, 40% Bonds.
- There is an upper ďguardrailĒ for the stock portfolio. You never withdraw from the stock portfolio until you reach that upper guardrail of equity holdings (and the guardrail is adjusted for CPI inflation). Normally that guardrail is set to 1.2 times the original equity holdings.
- If stocks are at or above 1.2-times their initial level (adjusted for inflation) then sell 20% of stocks and shift into bonds.
- Sell from bonds to fund upcoming withdrawal. If no more bonds are available then sell stocks.
- Thatís it. Itís really that easy!
"

?

steveo

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Re: Stop worrying about the 4% rule
« Reply #1309 on: January 12, 2018, 09:05:36 PM »
A better way is to use an increased bond percentage and attempt to never sell your stocks. I'm pretty sure that is exactly what McClung investigated and the data supports this approach.

So start with say 30% bonds and withdraw only from bonds until they are exhausted or only use the bonds if there is crash early in FIRE?

Can you provide a Coles Notes [yes I am that old] summary of your WR plan?

These are McClung's rules which he validated as increasing your chances of retirement success if we define success as your portfolio sustaining a withdrawal rate for 30 years (or more):-

1. Calculate your withdrawal rate and withdraw that amount. This is a complex figure but has a default starting rate of 5%. It is calculated by a band around the 5% mark so you don't go too high if the portfolio goes nuts but also decreases your withdrawals early in retirement. It also takes into account your mortality rate so it increases your WR as you age. Truthfully I haven't gone into this in too much detail.
2. Withdraw from your portfolio enough cash to sustain you for 1 year. This comes from your bonds if you have them.
3. Sell your stocks by 20% (I think) if your stocks go to 120% including inflation of their initial value. Don't sell your stocks at any other time.

=> This actually increases your chances of portfolio success much more than retaining your existing portfolio allocation. I think all the comments on 100% stocks do not take this into account as McClung proved increasing your stock allocation decreases your chance of portfolio success. I think for 30 years McClung stated a 50/50 bond/stock allocation was the best bet.

My plan is different to McClung's and I'm still working through it. Assuming I get to 5% then I intend to work till the end of the financial year to hopefully get my full bonus and then possibly go part time until I get to 4% or I just can't be stuffed.

1. If I'm working part time I won't need to withdraw so I won't.
2. Assuming I'm not working I intend to withdraw probably 5%.
3. I'll draw down my bonds at whatever rate is required taking into account dividends/interest payments that won't be reinvested throughout the year.
4. If I have a run-up of 20% of stock valuation I will probably sell 10% of my stocks and put that into cash or bonds.
5. If all my bonds/cash run out I'll sell stocks or sell the house. This is my big buffer. I honestly think I am aiming for 800k but selling the house could net about 500k. The only issue is moving location.

This also shows how stupid a 4% rate is and how conservative I am really being because I will also collect social security to bail me out of a disaster situation. I also expect I will inherit a lot of money.

Everytime I work through the figures or discuss this for me personally going below a 5% WR is overkill.
« Last Edit: January 12, 2018, 09:10:36 PM by steveo »

steveo

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Re: Stop worrying about the 4% rule
« Reply #1310 on: January 12, 2018, 09:07:51 PM »
Sorry for mis-remembering (and being too lazy to go back and read, hah). Iíll be curious how you act when you do get to 5% and how the risk profile looks from there.

This is the interesting point because rationally I think I'm good to go and I have problems understanding the internet argument to get below 4%. In stating that I'm not doing this in reality. It's the psychological part that is tougher. I also 3 kids one of who is 7 but that is still an excuse and me being soft.

steveo

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Re: Stop worrying about the 4% rule
« Reply #1311 on: January 12, 2018, 09:08:52 PM »
A better way is to use an increased bond percentage and attempt to never sell your stocks. I'm pretty sure that is exactly what McClung investigated and the data supports this approach.

So start with say 30% bonds and withdraw only from bonds until they are exhausted or only use the bonds if there is crash early in FIRE?

Can you provide a Coles Notes [yes I am that old] summary of your WR plan?

Is it this approach:
"
Basic McClung Prime Harvesting Rules
- This rule was proposed by Michael McClung in his book Living Off Your Money.
- Pick an initial asset allocation, e.g., 60% Stocks, 40% Bonds.
- There is an upper ďguardrailĒ for the stock portfolio. You never withdraw from the stock portfolio until you reach that upper guardrail of equity holdings (and the guardrail is adjusted for CPI inflation). Normally that guardrail is set to 1.2 times the original equity holdings.
- If stocks are at or above 1.2-times their initial level (adjusted for inflation) then sell 20% of stocks and shift into bonds.
- Sell from bonds to fund upcoming withdrawal. If no more bonds are available then sell stocks.
- Thatís it. Itís really that easy!
"

?

That is it.

ysette9

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Re: Stop worrying about the 4% rule
« Reply #1312 on: January 12, 2018, 09:11:16 PM »
It is like seeing other people jump off the high diving board and egging them on, versus being up there yourself and seeing how very far down the pool is.
We could easily earn money part-time, we could cut our spending quite a bit, and chances are we will get some sizable inheritances one day between my parents and my childless Aunt and Uncle, both sets of whom are comfortable. But still, not willing to jump off the diving board. Heck, I’m sure the careful nature that allows us to get to the point of FIRE is half the problem in being able to pull the plug

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1313 on: January 12, 2018, 09:45:51 PM »
Was it @Retire-Canada who said upthread that he/she would pull the plug at 5% WR? I just calculated that we have reached 5% WR right now. Pulling the plug now would scare the bejesus out of me, even though we would have a decent chance of making it work. I understand the OMY syndrome a little better all of a sudden.

No. My plan is to get to 5%WR and then start the process of FIREing.

1. I'm 100% stocks currently
2. start buying bonds
3. I do contract work so talk to my clients and figure out a transition plan with them
4. during the time I'm working out how to end my current work obligations I'm guessing I'll get closer to 4.5%WR
5. pull the plug somewhere between 4% - 4.5%WR

Note that I am currently only working 24hrs over 3 days a week so I've already begun winding down towards FIRE. My GF/SO has to work FT another 8-9yrs at this point before she can FIRE so while I don't want work a ton extra - no OMYing! I'm also not trying to stop working at my absolute upper max.....which is probably 5%WR.

By downshifting to PT work I've taken a lot of pressure/stress of working off.

I haven't figured out my WR plan yet, but I am thinking about it. I don't like the idea of holding a fixed % of bonds. I'd prefer to say be 100% stocks + $200K bonds. The bonds would be used to deal with an early sequence of returns risk and if that doesn't materialize they can just be out run by stocks and become a smaller and smaller part of my portfolio. I don't need a constant inflation adjusted income from my portfolio so I can incorporate some sort of variable WR mechanism. I need to work out the details further.

The recent acceleration in my portfolio has made me put this issue on the front burner as I may hit 5%WR faster than I thought and I need to determine how/when I'll start buying bonds and how I will WR my money.

Coming back to this thread's topic I would consider it a personal FIRE failure if I was working a significant amount [more than 25% FT] once I hit 4%WR. I see OMYing as one of the more insidious risks of FIRE because decades of societal programming make it very to justify one of many fears to keep us at our desks. There is always a reason you can give for not quitting. I'm excited to FIRE and start the decompression/healing process.

Classical_Liberal

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Re: Stop worrying about the 4% rule
« Reply #1314 on: January 13, 2018, 07:56:05 AM »
For example, if the market crash is accompanied by rapid inflation - trying to live on $30k in bonds per year with no inflation adjustment is going to start really being untenable after a few years. The buying power of those bonds would be eroded away (even assuming I-Bonds that aren't devalued by rising interest rates)

This is what caused the mid/late-1960's failures of 4% rule.  If one is worried about this environment, add a small percentage of an asset class to AA which has historically done well; both in market downturns and in high inflationary periods.

I believe that this is simply not factually correct. I think it details exactly my point in that people on here don't understand how to withdraw money from their portfolio in retirement. There is a difference between drawing down from a portfolio and maintaining the same portfolio over the course of your drawdown phase to using a smarter drawdown process which gives you the best chance to maintain a higher income or have a higher success rate within the drawdown phase.

Adding to your stock portfolio is factually the incorrect way to manage the drawdown phase if you want to increase your success rate.

A better way is to use an increased bond percentage and attempt to never sell your stocks. I'm pretty sure that is exactly what McClung investigated and the data supports this approach.

Yes I've read it.  It's interesting, and Prime harvesting will back test well considering the types of secular bears we've seen in the past.  I'm a firm believer of NOT having a static portfolio and have preached that ideology on multiple threads in this forum for awhile now.   I think phase of life (ie personal goals, where you are at in FIRE process, etc) and macro economic conditions should cause one to modify portfolios over time.

Prime harvesting takes both of these factors into consideration, so I like the idea, but he also limits assets classes to a standard stock/bond; which I do not like.  I wasn't referring to stocks in my previous statement.

Eric

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Re: Stop worrying about the 4% rule
« Reply #1315 on: January 15, 2018, 04:02:16 PM »
Has anyone done the math based on monthly withdrawals? Suppose I retire and withdraw tomorrow. I don't need to draw out 4% right away, I only need to draw out a months worth, or 1/12 of 4% or 0.33%. That would mean that the other 3.67% would be earning for me for another 1-11 months.

For the record, the Trinity Study used monthly withdrawals.  I'm pretty surprised that of all of the people responding to you, no one mentioned that.  Doesn't anyone read things that they are basing their retirement on?  Scary thought.  Merry Christmas, btw.

Quote from: Trinity Study Authors
Data and Methodology

The principal objective of our analysis is to calculate retirement portfolio success rates for various monthly withdrawal rate assumptions and various portfolio asset allocations from 1926 to 2009, and show how an adviser can use the findings to manage portfolio withdrawal rates adaptively.
 ....

The monthly data on financial market returns are provided in the 2010 Ibbotson SBBI Classic Yearbook by Morningstar. The stock returns in the analysis are monthly total returns to the Standard & Poorís 500 Index. Corporate bond returns are monthly total returns calculated from the Salomon Brothers Long-Term High-Grade Corporate Bond Index and Standard & Poorís monthly high-grade corporate composite yield data. Monthly portfolio returns, month-end values, and month-end values after withdrawals are calculated for overlapping 15-, 20-, 25-, and 30-year periods from January 1926 to December 2009.


Eric

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Re: Stop worrying about the 4% rule
« Reply #1316 on: January 15, 2018, 04:03:53 PM »
It is like seeing other people jump off the high diving board and egging them on, versus being up there yourself and seeing how very far down the pool is.

Excellent analogy!  I feel like the diving board continues to rise with PE too.

DavidAnnArbor

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Re: Stop worrying about the 4% rule
« Reply #1317 on: January 15, 2018, 04:33:49 PM »
It is like seeing other people jump off the high diving board and egging them on, versus being up there yourself and seeing how very far down the pool is.

Excellent analogy!  I feel like the diving board continues to rise with PE too.

Yes me too.

EscapeVelocity2020

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Re: Stop worrying about the 4% rule
« Reply #1318 on: January 15, 2018, 10:24:35 PM »
For the record, the Trinity Study used monthly withdrawals.  I'm pretty surprised that of all of the people responding to you, no one mentioned that.  Doesn't anyone read things that they are basing their retirement on?  Scary thought. 

It's also surprising that people don't highlight the fact that 4% rule advocates 50 - 75% equities, not 100% - which has a far greater impact on outcome than re-balance bands, frequency of withdrawals, frequency of inflation adjustment, etc.  There are infinite levers to tweak on the margins, but let's not lose the forest for the trees.  In this low rate / high PE environment, AA has a large influence on outcome and it is hardly ever discussed.

Quote
Early studies which helped develop the 4% rule did recommend asset allocations for retirees that were on the aggressive side. In the conclusion of William Bengenís original 1994 article that started research in this area, he wrote, ďDespite advice you may have heard to the contrary, the historical record supports an allocation of between 50-percent and 75-percent stocks as the best starting allocation for a client. For most clients, it can be maintained throughout retirement, or until their investing goals change. Stock allocations below 50 percent and above 75 percent are counterproductive.

boarder42

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Re: Stop worrying about the 4% rule
« Reply #1319 on: January 16, 2018, 04:51:19 AM »
For the record, the Trinity Study used monthly withdrawals.  I'm pretty surprised that of all of the people responding to you, no one mentioned that.  Doesn't anyone read things that they are basing their retirement on?  Scary thought. 

It's also surprising that people don't highlight the fact that 4% rule advocates 50 - 75% equities, not 100% - which has a far greater impact on outcome than re-balance bands, frequency of withdrawals, frequency of inflation adjustment, etc.  There are infinite levers to tweak on the margins, but let's not lose the forest for the trees.  In this low rate / high PE environment, AA has a large influence on outcome and it is hardly ever discussed.

Quote
Early studies which helped develop the 4% rule did recommend asset allocations for retirees that were on the aggressive side. In the conclusion of William Bengenís original 1994 article that started research in this area, he wrote, ďDespite advice you may have heard to the contrary, the historical record supports an allocation of between 50-percent and 75-percent stocks as the best starting allocation for a client. For most clients, it can be maintained throughout retirement, or until their investing goals change. Stock allocations below 50 percent and above 75 percent are counterproductive.

The Trinity study was based on a 30 year retirement. And was the absolute worst case withdrawal. It doesn't really matter if you've read that study and understand what's in it bc with cfiresim you can historically back test multiple AAs and different withdrawal strategies to your hearts content.  It was a good basis for the jumping off point for all the FIRE forums. But the tools to test plans have since been made better and the discussion around here means you don't need to go read a study that was never intended to do what we're trying to do.

Eric

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Re: Stop worrying about the 4% rule
« Reply #1320 on: January 16, 2018, 12:30:03 PM »
For the record, the Trinity Study used monthly withdrawals.  I'm pretty surprised that of all of the people responding to you, no one mentioned that.  Doesn't anyone read things that they are basing their retirement on?  Scary thought. 

It's also surprising that people don't highlight the fact that 4% rule advocates 50 - 75% equities, not 100% - which has a far greater impact on outcome than re-balance bands, frequency of withdrawals, frequency of inflation adjustment, etc.  There are infinite levers to tweak on the margins, but let's not lose the forest for the trees.  In this low rate / high PE environment, AA has a large influence on outcome and it is hardly ever discussed.

Quote
Early studies which helped develop the 4% rule did recommend asset allocations for retirees that were on the aggressive side. In the conclusion of William Bengenís original 1994 article that started research in this area, he wrote, ďDespite advice you may have heard to the contrary, the historical record supports an allocation of between 50-percent and 75-percent stocks as the best starting allocation for a client. For most clients, it can be maintained throughout retirement, or until their investing goals change. Stock allocations below 50 percent and above 75 percent are counterproductive.

The Trinity study was based on a 30 year retirement. And was the absolute worst case withdrawal. It doesn't really matter if you've read that study and understand what's in it bc with cfiresim you can historically back test multiple AAs and different withdrawal strategies to your hearts content.  It was a good basis for the jumping off point for all the FIRE forums. But the tools to test plans have since been made better and the discussion around here means you don't need to go read a study that was never intended to do what we're trying to do.

I'm not sure I'd recommend anyone retire using any withdrawal rule that they personally haven't read and understood.  That seems like particularly bad advice, no matter the calculators that exist.  If you don't understand the input, the output is useless.

boarder42

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Re: Stop worrying about the 4% rule
« Reply #1321 on: January 16, 2018, 01:28:15 PM »
For the record, the Trinity Study used monthly withdrawals.  I'm pretty surprised that of all of the people responding to you, no one mentioned that.  Doesn't anyone read things that they are basing their retirement on?  Scary thought. 

It's also surprising that people don't highlight the fact that 4% rule advocates 50 - 75% equities, not 100% - which has a far greater impact on outcome than re-balance bands, frequency of withdrawals, frequency of inflation adjustment, etc.  There are infinite levers to tweak on the margins, but let's not lose the forest for the trees.  In this low rate / high PE environment, AA has a large influence on outcome and it is hardly ever discussed.

Quote
Early studies which helped develop the 4% rule did recommend asset allocations for retirees that were on the aggressive side. In the conclusion of William Bengenís original 1994 article that started research in this area, he wrote, ďDespite advice you may have heard to the contrary, the historical record supports an allocation of between 50-percent and 75-percent stocks as the best starting allocation for a client. For most clients, it can be maintained throughout retirement, or until their investing goals change. Stock allocations below 50 percent and above 75 percent are counterproductive.

The Trinity study was based on a 30 year retirement. And was the absolute worst case withdrawal. It doesn't really matter if you've read that study and understand what's in it bc with cfiresim you can historically back test multiple AAs and different withdrawal strategies to your hearts content.  It was a good basis for the jumping off point for all the FIRE forums. But the tools to test plans have since been made better and the discussion around here means you don't need to go read a study that was never intended to do what we're trying to do.

I'm not sure I'd recommend anyone retire using any withdrawal rule that they personally haven't read and understood.  That seems like particularly bad advice, no matter the calculators that exist.  If you don't understand the input, the output is useless.

you dont have to read the trinity study to understand what the trinity study was based on - but all they did was back test data and find the highest posslbe SWR that was safe for 30 years - this is no different than just using cFIREsim to run your own thing.

Eric

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Re: Stop worrying about the 4% rule
« Reply #1322 on: January 16, 2018, 03:37:03 PM »
The Trinity study was based on a 30 year retirement. And was the absolute worst case withdrawal. It doesn't really matter if you've read that study and understand what's in it bc with cfiresim you can historically back test multiple AAs and different withdrawal strategies to your hearts content.  It was a good basis for the jumping off point for all the FIRE forums. But the tools to test plans have since been made better and the discussion around here means you don't need to go read a study that was never intended to do what we're trying to do.

I'm not sure I'd recommend anyone retire using any withdrawal rule that they personally haven't read and understood.  That seems like particularly bad advice, no matter the calculators that exist.  If you don't understand the input, the output is useless.

you dont have to read the trinity study to understand what the trinity study was based on - but all they did was back test data and find the highest posslbe SWR that was safe for 30 years - this is no different than just using cFIREsim to run your own thing.

And that's why we have a person asking about how it would look if they did monthly withdrawals, and multiple people replying without even realizing that the Trinity Study is already monthly.  Because everyone is planning their retirement around it, but no one reads it.  That alone is fucking insane. 

So while yes, cFIREsim does the same thing, if you don't understand what that thing is, then it's not helpful.  You'll notice there's no explanation of the withdrawal methods on cFIREsim.  You have to look up that information separately.  Might as well actually read about why that withdrawal method exists on cFIREsim.

dougules

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Re: Stop worrying about the 4% rule
« Reply #1323 on: January 19, 2018, 10:54:11 AM »
It is like seeing other people jump off the high diving board and egging them on, versus being up there yourself and seeing how very far down the pool is.
We could easily earn money part-time, we could cut our spending quite a bit, and chances are we will get some sizable inheritances one day between my parents and my childless Aunt and Uncle, both sets of whom are comfortable. But still, not willing to jump off the diving board. Heck, Iím sure the careful nature that allows us to get to the point of FIRE is half the problem in being able to pull the plug

Interesting idea.  That almost deserves its own thread.

AdrianC

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Re: Stop worrying about the 4% rule
« Reply #1324 on: January 19, 2018, 06:08:06 PM »
It is like seeing other people jump off the high diving board and egging them on, versus being up there yourself and seeing how very far down the pool is.
We could easily earn money part-time, we could cut our spending quite a bit, and chances are we will get some sizable inheritances one day between my parents and my childless Aunt and Uncle, both sets of whom are comfortable. But still, not willing to jump off the diving board. Heck, Iím sure the careful nature that allows us to get to the point of FIRE is half the problem in being able to pull the plug

The diving board analogy is good...but it does seem like you're worrying about the 4% rule.

The 4% rule is good, as long as:
1. You are invested largely in productive assets.
2. You can be flexible if need be.
3. Your expense estimate is good.

1 and 2 are easy to get right. I personally find 3 to be the tricky one. Such a large part of our expenses is somewhat out of our control. For example:

http://www.mrmoneymustache.com/2017/11/05/when-your-shitty-health-insurance-doubles-in-price/

The Trinity study had expenses rising by inflation. I know that my own expenses have risen substantially more than inflation over the last ten years. I believe I must include for that same rate of increase in my plan, at least up to Medicare/Social Security age. I modeled my more-than-inflation expense increase in cFIREsim using a 95% success rate, the same success rate as the Trinity study. This gives me my number, which is now a bit more than 25 times current expenses. Am I still following the 4% rule? Donít care. This exercise gave me the confidence I needed to pull the plug. And I did.

Padonak

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Re: Stop worrying about the 4% rule
« Reply #1325 on: January 19, 2018, 07:14:38 PM »
I had a thought today and would like to share it. Nothing scientific, just a thought about the 4% rule.

You can make a retirement plan based on the 4% rule more reliable by adding multiple "safety nets" which could save you even if if the plan failed. In fact, I am sure that many of us already have a number of safety nets in place, we just don't realize it.

Examples of safety nets:

Bonds and other fixed income assets in your portfolio. By definition, you start with 25X your annual expenses if you use the 4% rule. If you have 20% in Bonds + CDs + Cash, you can just keep spending that part of your portfolio if tomorrow the stock market crashes 50% or more. E.g. your fixed income part becomes 40% in this case, keep spending it until it goes back to 20%. By that time chances are the stocks will have recovered from the crash. This assumes that bond and stock prices don't fall at the same time which is unlikely over longer time periods.

Cutting discretionary expenses. For example, 1/4 of your planned expenses include travel, luxuries and other discretionary expenses. If the market drops significantly, you just cut back that 1/4 for as long as you have to and boom, your are spending at 3% of the initial retirement amount. The 3% rule is pretty much bullet proof. OK, you won't be flying to Ibiza popping bottles or whatever, just hike for free locally and go to Planet Fitness instead, it's better for your health anyway.

Being able to go back to work or do temporary jobs or start a little business, e.g teach English online for $20 per hour. This option has been discussed a lot on the forum. The main point here is that you don't actually need that much money to beef up your savings and get back on track. Therefore, it doesn't have to be a high paying job or even a full time job. It's not that hard to find either.

Healthcare costs safety nets: there's Obamacare, Medicaid etc. at least for now. There is Medicare for those over 65. There are more liberal states which are likely to offer free or affordable health care options to lower income people regardless of federal rules. There are countries with free or cheaper health care where you may qualify for citizenship by ancestry, or your spouse may be from one of those countries. Nobody is 100% safe when it comes to health care and its costs, but my point is it's not as scary as it seems if you are willing to explore different options.

Your pensions, social security etc. While I wouldn't include social security or small pensions in retirement calculations, especially for younger retirees who may have their benefits reduced by the time they are old enough to use them, It's something that will likely provide some extra safety when you are older.

Worst case scenarios and additional safety nets

Let's say your portfolio fails and all those previous safety nets somehow fail as well which is very, very unlikely. Two additional options which may be somewhat unethical for those who have money, but if you are broke they are sill available for you.
-Government benefits. It sucks having to rely on them, but they are available and a lot of people use them. It's not like people starve to death out there, at least not in the US. Google videos and blog posts about cooking at home on food stamps budget, for example.
-Credit cards and other loans. What's your total credit limit? If you, like many Mustachians, have been opening cards to get sign up bonuses, it's probably in the high 5 - low 6 figures. That's your last safety net, my friend. Of course, it's unethical to borrow money you can't pay back, but if you are broke there is that option. You'll pay them back if you get back on your feet.

I would never use the last options unless I really had to. I think it would be unethical to do so. The point I am trying to make is that even if you somehow completely screw up your retirement, you are not going to die on the street. There are always options.



« Last Edit: January 19, 2018, 07:23:12 PM by Padonak »

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1326 on: January 19, 2018, 07:20:28 PM »
I had a thought today and would like to share it. Nothing scientific, just a thought about the 4% rule.

You can make a retirement plan based on the 4% rule more reliable by adding multiple "safety nets" which could save you even if if the plan failed. In fact, I am sure that many of us already have a number of safety nets in place, we just don't realize it.

It's a good thought. Even a slight temporary reduction in withdrawals in response poor market returns pushes you towards 100% historical success. Personally my FIRE plans start with 4%WR and then defend in depth through a number of safety mechanisms as you note. The key to my mind is that at some point [for me that's 4%WR] saving more money isn't as useful and diversifying your defense strategies.

People need to remember there are lots of FIRE failure modes that are not mitigated by more and more money. In fact a number of these failure modes are exacerbated by working more to hit a sub-4%WR, which ends up being self-defeating. You won't run out of money, but you'll die earlier than you expected or end up without a spouse or family to spend time with in FIRE.

dandarc

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Re: Stop worrying about the 4% rule
« Reply #1327 on: January 22, 2018, 06:23:09 AM »
For even more discussion on Margin of Safety - MMM himself:

http://www.mrmoneymustache.com/2011/10/17/its-all-about-the-safety-margin/

Classical_Liberal

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Re: Stop worrying about the 4% rule
« Reply #1328 on: January 22, 2018, 09:27:03 AM »

It's a good thought. Even a slight temporary reduction in withdrawals in response poor market returns pushes you towards 100% historical success. Personally my FIRE plans start with 4%WR and then defend in depth through a number of safety mechanisms as you note. The key to my mind is that at some point [for me that's 4%WR] saving more money isn't as useful and diversifying your defense strategies.

More money has diminishing returns, but would still make a FIRE plan more robust.  As per your second statement, are the costs of these diminished returns worth it?

A true anti-fragile plan would have income and/or spending reduction abilities coming  from a source unrelated to stash. Like hobby income, or housing for labor situations available, growing your own food as a hobby, ect. It's better because these other plans would be wholey or partially non-correlated to stash income AND you haven't hit a point of seriously diminishing returns on the other options.

Personally, I'd rather have a 5%WR, + 25% of spending covered with scalable hobby income + ability to cut spending 10% with a garden and chickens, + 25% of spending for taking on a tenant if  wanted, + ability to cut spending by 25% for a couple of years (ie luxuries or deffer replacement or large ticket items).  This is far superior to a 3.5% WR, IMO

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1329 on: January 28, 2018, 07:08:25 PM »
More money has diminishing returns, but would still make a FIRE plan more robust.  As per your second statement, are the costs of these diminished returns worth it?

The bolded portion of your post is the critical question we have to ask ourselves. I deleted the rest because it goes right back to, what I think is a misguided notion, that money beyond a reasonable point is the main risk of FIRE failure. Once you are down to optimizing a percent here or there with your money and historical success rates I would suggest it's time to admit that you've won as far as money is concerned so congrats, but to also realize that money is just a small portion of what a successful FIRE is built from. Your mental and physical health as well as the health of your personal relationships are key to that success and far more important to your FIRE than going from 96% cFIREsim success rate to 97%. Some folks will say they can work 40-60hrs a week and still prioritize their health and their personal relationships. I would say that's wishful thinking.

I do sympathize though. If you spend decades being programmed and groomed to work. You excel at it. You build a life and a personal identity around it. It's damn hard to stop and start from scratch in a post-FIRE life that doesn't involve work. It's also damn hard to acknowledge the toll those decades of work have had on your health and relationships. But, that's the challenge of FIRE. Not the saving and investing, but dealing with breaking the patterns of your work life and figuring out what's beyond it and what you'll do with the time you have left.
« Last Edit: January 28, 2018, 10:05:22 PM by Retire-Canada »

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Re: Stop worrying about the 4% rule
« Reply #1330 on: January 28, 2018, 08:11:47 PM »
I do sympathize though. If you spend decades being programmed and groomed to work. You excel at it. You build a life and a personal identity around it. It's damn hard to stop and start from scratch in a post-FIRE life that doesn't involve work.

A great and always relevant comic, see panel six, "Most people never let themselves die"

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1331 on: January 28, 2018, 10:07:20 PM »
A great and always relevant comic, see panel six, "Most people never let themselves die"

Totally on point CE.

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Re: Stop worrying about the 4% rule
« Reply #1332 on: February 23, 2018, 07:47:09 AM »
Not sure if this has been discussed, but if you use a variable-withdrawal strategy you can actually take out upwards of 6-7%/year, depending on how much equities you're comfortable with. This requires you to take less out during bear markets, however, so would not be feasible for someone who must have 4% each year to live off of. For someone who is flexible, who can go a few years w/ very low withdrawals, a variable-withdrawal strategy should allow you to ultimately take out far more $$$ over the course of decades while never exhausting your portfolio. Paul Merriman goes into great detail about it and on his website shows how taking out 6% variable w/d each year using a 100% global equity portfolio would've done (spoiler alert : from 1970-present your portfolio would've kept its original value, inflation adjusted).

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Re: Stop worrying about the 4% rule
« Reply #1333 on: February 23, 2018, 07:55:42 AM »
I agree just bc the cape is high doesn't mean a 4% won't work. But it's historically been a good indicator. But keeping 30% bonds on hand is worse at making your money last. Anything less than 80/20 starts to get detrimental fast.

what people need to remember is that CAPE is high bc inflation is LOW. thus, your w/d's will not be increasing that much year-to-year. As inflation increases, bond yields should increase, earnings should increase, P/Es should decrease, CAPE should decrease... It's all relative. Stocks only seem "expensive" if you're not comparing them to any other investable asset (ie bonds or real estate). When you realize that bonds and real estate are also "expensive", it makes more sense. Ultimately, the risk premium of equities should be there and if treasury bills return roughly the rate of inflation equities should maintain their real return.

rxmurphy

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Re: Stop worrying about the 4% rule
« Reply #1334 on: February 24, 2018, 06:36:50 AM »
A simple question that may have been addressed already in these 20-some odd pages, so apologies up front. For a person (like me) who really has a 30 year retirement expectation, based on my age, to start in about 2 years, is the 4% SWR a safe assumption? Safer than an early retiree with a 40 or 50 year retirement plan? I see lots of folks questioning the Trinity Study in that the SWR should be lower based on a longer retirement, but not a lot of discussion about a 30 year plan.  Thanks in advance!

boarder42

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Re: Stop worrying about the 4% rule
« Reply #1335 on: February 24, 2018, 06:48:03 AM »
A simple question that may have been addressed already in these 20-some odd pages, so apologies up front. For a person (like me) who really has a 30 year retirement expectation, based on my age, to start in about 2 years, is the 4% SWR a safe assumption? Safer than an early retiree with a 40 or 50 year retirement plan? I see lots of folks questioning the Trinity Study in that the SWR should be lower based on a longer retirement, but not a lot of discussion about a 30 year plan.  Thanks in advance!

It's as safe as you are flexible

maizeman

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Re: Stop worrying about the 4% rule
« Reply #1336 on: February 24, 2018, 08:26:09 AM »
A simple question that may have been addressed already in these 20-some odd pages, so apologies up front. For a person (like me) who really has a 30 year retirement expectation, based on my age, to start in about 2 years, is the 4% SWR a safe assumption?

You have 25 years of expenses saved up and only need to get them to last 30 years. So 5 years worth of investment earnings over three decades. A constant 1.3% return after inflation would be more than enough.

Quote
Safer than an early retiree with a 40 or 50 year retirement plan?

A little bit, but not strikingly so. Take a look at the green line in this graph. (The blue line is to illustrate how just using conventional trinity style calculations with longer and longer retirement windows isn't a good way to estimate this because eventually bad start years -- 1970s and great depression -- drop out of the model so it doesn't actually produce more conservative estimates.)



Detailed methods and assumptions from this post earlier in this same thread.

EscapeVelocity2020

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Re: Stop worrying about the 4% rule
« Reply #1337 on: February 24, 2018, 08:18:33 PM »
A simple question that may have been addressed already in these 20-some odd pages, so apologies up front. For a person (like me) who really has a 30 year retirement expectation, based on my age, to start in about 2 years, is the 4% SWR a safe assumption?

You have 25 years of expenses saved up and only need to get them to last 30 years. So 5 years worth of investment earnings over three decades. A constant 1.3% return after inflation would be more than enough.

Quote
Safer than an early retiree with a 40 or 50 year retirement plan?

A little bit, but not strikingly so. Take a look at the green line in this graph. (The blue line is to illustrate how just using conventional trinity style calculations with longer and longer retirement windows isn't a good way to estimate this because eventually bad start years -- 1970s and great depression -- drop out of the model so it doesn't actually produce more conservative estimates.)
Detailed methods and assumptions from this post earlier in this same thread.

A few significant omissions and observations from your response -  first, inflation is obviously significant to success, and most of us have no idea what 'real' 1970-style inflation looks like.  We should probably plan for higher than 2-3% inflation, especially with all the historically inflationary inputs like higher wages, low tax rates, and low borrowing rates.

Second, you left out how important expenses are to the 4% rule.  You can expect success of 40k expenses on 1MM portfolio if expenses are fixed or at inflation.  What about health care?  What about college for my kids?  These 'luxuries' are certainly rising faster than inflation. 

The final thing I'd like to put out there is that 95% success does not mean that you are guaranteed to make it to 75+ years old and then have to tighten your belt if your were unlucky.  It means that if you are any one of the people that retired at a peak and experience an adverse sequence of returns; that you are going to struggle from that point forward.  It could be especially terrible this time around with good ACA healthcare plans melting quicker than the polar ice caps...

Sorry to rain on the 'stop worrying about the 4% rule' parade again, it has turned out to be a good parade for the 2009 retiree, but if you are just hitting 4% now and have a 30+ year retirement, maybe hang in there for 3% (unless you're in a sane country that provides basic healthcare to their population regardless of being employed).

maizeman

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Re: Stop worrying about the 4% rule
« Reply #1338 on: February 24, 2018, 09:47:07 PM »
Second, you left out how important expenses are to the 4% rule.  You can expect success of 40k expenses on 1MM portfolio if expenses are fixed or at inflation.  What about health care?  What about college for my kids?  These 'luxuries' are certainly rising faster than inflation. 

I don't know if it's a question of tone over the internet, but using words like "omissions" sounds like you're accusing me of misrepresenting something. Is that a correct interpretation?

Anyway, I don't disagree with you that if a person ends up needing to spend more than 4% of their starting portfolio, that simulations which assume that they will spend 4% of their starting portfolio aren't going to be particularly informative.

secondcor521

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Re: Stop worrying about the 4% rule
« Reply #1339 on: February 24, 2018, 10:05:17 PM »
https://xkcd.com/386/

A few significant omissions and observations from your response -  first, inflation is obviously significant to success, and most of us have no idea what 'real' 1970-style inflation looks like.  We should probably plan for higher than 2-3% inflation, especially with all the historically inflationary inputs like higher wages, low tax rates, and low borrowing rates.

Inflation, including 1970s-style inflation, is accounted for in the studies that lead to the 4% rule.

Higher wages are only inflationary to the extent that they exceed productivity growth.  Higher wages exceeding productivity growth are a very recent phenomenon, like in the last few months, aren't they?

If low tax rates and low borrowing rates lead to high inflation, where were the low tax rates and low borrowing rates that lead to the 1970s-style inflation?

Second, you left out how important expenses are to the 4% rule.  You can expect success of 40k expenses on 1MM portfolio if expenses are fixed or at inflation.  What about health care?  What about college for my kids?  These 'luxuries' are certainly rising faster than inflation. 

Agreed.  Personally I inflate college expenses separately at 6%.  For health care I currently use an ACA plan with subsidies, where my OOP is tied to increases in the federal poverty level levels, not health care inflation rates.

The final thing I'd like to put out there is that 95% success does not mean that you are guaranteed to make it to 75+ years old and then have to tighten your belt if your were unlucky.

I would say it does mean that.  Assuming the future is no worse than the past, it means that you have a 1-in-20 chance of CPI-adjusted expenses over 30 years at 4%.  Of course, most people don't really suggest spending blindly until the end of one's retirement and then realizing that they're in trouble in the unlucky scenario.  Most people will adjust as they go along (which actually makes the 4% rule even safer).

It means that if you are any one of the people that retired at a peak and experience an adverse sequence of returns; that you are going to struggle from that point forward.  It could be especially terrible this time around with good ACA healthcare plans melting quicker than the polar ice caps...

Adverse sequence of returns are already accounted for in the studies that lead to the 4% rule.  I don't know why people think this is a new thing.

It will be interesting to see what happens with the ACA.

Sorry to rain on the 'stop worrying about the 4% rule' parade again, it has turned out to be a good parade for the 2009 retiree, but if you are just hitting 4% now and have a 30+ year retirement, maybe hang in there for 3% (unless you're in a sane country that provides basic healthcare to their population regardless of being employed).

No worries.

I have no idea where you got 3% from except that it is less than 4%.  It sounds like a number you pulled out of your ear without any data or analysis.  (Unlike the 4% rule, by the way.)  Certainly lower is safer in general in terms of not running out of money in retirement, but as has been stated by others elsewhere on this board, you may have to work more of your healthiest years to gain that additional margin of safety which may not ultimately be needed.
« Last Edit: February 24, 2018, 10:07:26 PM by secondcor521 »

EscapeVelocity2020

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Re: Stop worrying about the 4% rule
« Reply #1340 on: February 24, 2018, 10:43:10 PM »
@maizeman certainly not intending 'misrepresentation', much more the idea of oversimplification.  When people stop thinking for themselves, especially when equities are riding high and politicians are handing out candy, maybe it's not the best time to expect to be on the good side of P50.

@2ndCor - hey, I like your positivism.  I think I heard you on ER.org and Bogleheads, so you know what you are talkin' about.  No worries there and I appreciate your well structured comment.  Inevitably, we are all subject to both the 'system' which is human engineered (and effects our interest rate (which ultimately affects inflation, but we will see), taxation, and future returns on equities and fixed income) and natural (which is almost wholly unpredictable). 

Sadly, if you are a true businessman like Gates or Buffet, you crush the successful unknowns.  You buy them out for more than their emergent business could imagine in one lifetime.  Buffet and Gates have more money than several lifetimes could imagine spending.  In other words, I think the fantastic distributed growth we have enjoyed up until recent times may be gone forever.  The rise of Gates, Bezos, and Musk, is like a perfect echo to Vanderbilt, Carnegie, Rockefeller, and Morgan.

secondcor521

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Re: Stop worrying about the 4% rule
« Reply #1341 on: February 24, 2018, 10:52:45 PM »
In other words, I think the fantastic distributed growth we have enjoyed up until recent times may be gone forever.  The rise of Gates, Bezos, and Musk, is like a perfect echo to Vanderbilt, Carnegie, Rockefeller, and Morgan.

You might enjoy reading the book "The Rational Optimist" for a well-reasoned counterpoint to the above.

Although I've been reading about and studying FIRE for about 25 years, at the end of the day I'm just SGOTI.

cerat0n1a

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Re: Stop worrying about the 4% rule
« Reply #1342 on: February 25, 2018, 02:28:50 AM »
You might enjoy reading the book "The Rational Optimist" for a well-reasoned counterpoint to the above.

Although it pays to remember that its author was the chairman of the first UK bank to have a run on it in 150+ years, with over £1 billion withdrawn a single day and police called to branches to restore order. It then had to be taken into public ownership and bailed out by the government, adding approx £100 billion to the UK national debt - taking it from 38% of GDP at the time to 45% of GDP. A little less optimism and a little more attention to his bank's ridiculous business model...

boarder42

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Re: Stop worrying about the 4% rule
« Reply #1343 on: February 25, 2018, 04:31:50 AM »
Every day extra you work passed 4% swr guarantees just 1 thing. You will have worked an extra day. The older you are the more likely you are to die first than run out of money I'd prefer to not work extra and be flexible in retirement. And I'll be walking away from a 250k job with private stock making me over 100k a year in returns when I leave.

TomTX

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Re: Stop worrying about the 4% rule
« Reply #1344 on: February 25, 2018, 07:32:01 AM »
Every day extra you work passed 4% swr guarantees just 1 thing. You will have worked an extra day. The older you are the more likely you are to die first than run out of money I'd prefer to not work extra and be flexible in retirement. And I'll be walking away from a 250k job with private stock making me over 100k a year in returns when I leave.

Yep. Maizeman, care to bring out your graphs again?

Always great when we get people here who obviously haven't actually read the thread before attacking the 4% rule. Not.

matchewed

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Re: Stop worrying about the 4% rule
« Reply #1345 on: February 25, 2018, 08:17:40 AM »
So this is yet another if we throw away or break the assumptions the math no longer works questions eh?

maizeman

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Re: Stop worrying about the 4% rule
« Reply #1346 on: February 25, 2018, 08:29:50 AM »
Yep. Maizeman, care to bring out your graphs again?

Always great when we get people here who obviously haven't actually read the thread before attacking the 4% rule. Not.

Well I know EV has read at least a good chunk of the thread and seen those same graphs before because I remember making a special "more serious research article style" formatted version for him or her back on page 15.

For anyone just joining the conversation at this point, this is a reference to a style of graph I put together last year that displays the risk of death and the risk of going bankrupt at the same time, which some people have found very helpful for putting concerns about running out of money in their old age into perspective.

Here is an example using the life expectancy for an american male who pushed the big red button and FIRED at 45 with 25x his (actual) annual spending in stocks.

Exflyboy

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Re: Stop worrying about the 4% rule
« Reply #1347 on: February 25, 2018, 12:50:16 PM »
Looks like the probability of being dead between the ages of 70 and 100 is unacceptably high...:)

Exflyboy

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Re: Stop worrying about the 4% rule
« Reply #1348 on: February 25, 2018, 05:15:12 PM »
In support of EV I will point out that the "full freight" cost of our shitty HC plan is currently $1100/month.. I don't know what that was say 5 years ago but its currently the cost for a mid to late 50"s couple on a Bronze plan is $13k per year in premiums alone, add to that the OOP costs ($13k if you both had pre-existing conditions, or developed something).

So thats up to $26k/year today. How will costs increase and will the ACA subsidies be there for much longer?

So while I agree 4% works, that 4% could be over half a million bucks more than the days when your employer paid almost all your HC costs. And thats assuming you don't have kids.

I am thankful for 1) the ACA subsidies and 2) we are both in excellent health so far.

As to college costs, while I have sympathy, funding your kids college is at least a choice whereas realistically HC is not.

desk_jockey

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Re: Stop worrying about the 4% rule
« Reply #1349 on: February 25, 2018, 09:37:13 PM »
Looks like the probability of being dead between the ages of 70 and 100 is unacceptably high...:)
 
Looking for suggestions to mitigate the risk.