Author Topic: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?  (Read 32423 times)

Guitarguy

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Alright, we've all heard about the 4% SWR rule, and I'm not knocking on it for someone that's already retired today, or close to retiring.

But my question is, for those of us in our 20's who will likely live until the year 2065-2070...do we really think we'll continue to see average annual returns of 7%? I just can't see how a mature economy can sustain that kind of growth for another 50 years.

This is a hot topic of debate among my wife and I. We've thrown the idea around to people we know that work in finance and they're saying 5% annual growth over the next 50 years is much more realistic than 7%.

But that might theoretically lower the 4% rule down to 2.9%. That's a huge difference. (Yuge.)

Another point we're considering is that from 1990 to 2010, the average life expectancy for a USA male increased from 75 to 78 years. If this trend holds, we're looking at the average 2065 life expectancy to be 7.5 years longer than today.

That means the average age a male dies in the USA in 2065 will be 85 years old, vs. 78 today. Right now the average retirement age is 63. So that means we'll go from an average retirement length of 15 years for males to an average retirement length of 22 years. That's a 46% increase in length of the average retirement.

Anyone else that's 25-30 years old want to weigh-in? I'm curious to hear how similarly-aged mustachians are thinking about this.
« Last Edit: December 10, 2016, 08:46:47 AM by Guitarguy »

2Birds1Stone

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #1 on: December 10, 2016, 08:53:49 AM »
The 4% rule is more than realistic, it's pretty much foolproof if you can do the following.

Earn just a tiny bit of side income.
Have the flexibility to drop that spending down to 3.5-3.75% in a really bad market year.
Get even a tiny percentage of your expenses in some sort of old age social aid (SS currently)
Get a part time job doing something you enjoy even for a little while.

There is a whole sticky thread on this topic.
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Retire-Canada

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #2 on: December 10, 2016, 08:56:46 AM »
The enemy of the 4% rule is a bad initial sequence of returns. If you are young you are even better placed to identify this and address it. On the other hand if you make it through the first 10-15yrs with solid returns your portfolio is going to be so big it will provide a huge safety buffer for your long FIRE.

I would also note if you look at cases of people who FIRE'd young it seems almost impossible to avoid making some money over the span of decades, which will pad your 'stash.
« Last Edit: December 10, 2016, 09:09:35 AM by Retire-Canada »

Indexer

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #3 on: December 10, 2016, 09:36:04 AM »
The 4% rule came from studies looking at historical returns and asking at what SWR(safe withdrawal rate) can you pull money and have a high likelihood of your money lasting forever. In most cases 4% works.

It isn't perfect though. The 4% rule survives most market scenarios, but not all. Depending on the monte carlo simulator you use it normally gives an 85-90% likelihood of never running out of money, which is really good. 95-99% is normally achieved around 3.5% SWR(28.6 X expenses). 100%(or 99.9999) is normally achieved when you get to 3% or less, which would be 33.33X expenses. That is overdoing it IMO.

There have been studies into whether your initial SWR should change based on market conditions. It will get a lot of disagreement here... but I tend to agree with those studies. If you had 20X expenses(5% SWR) in 2009 the market was so depressed who cares, you could retire. If you had 25X expenses(4%SWR) in the average year, you can retire. If the market valuations are well above their historical averages(think 1999) that normally implies lower returns in the next 5-10 years, which means you might want to target 28.6X expenses(3.5%SWR). Of course, if the market has been killing it for several years then it should be easier to hit 28.6, BUT if those great markets just barely got you to 25 then you might be at a higher risk than you think.

This is not encouraging market timing. That is just silly. I'm just saying high valuations today can imply lower expected returns in the future. An idea that is supported by Bogle and Vanguard. 

Quote
We've thrown the idea around to people we know that work in finance and they're saying 5% annual growth over the next 50 years is much more realistic than 7%.

Even Vanguard is saying that(well at least for 10 years, I don't know about 50...). Check page 28 of their 2017 outlook. Note those are real(after inflation) returns.

https://personal.vanguard.com/pdf/ISGVEMO.pdf

Quote
But that might theoretically lower the 4% rule down to 2.9%. That's a huge difference. (Yuge.)

No, because the 4% rule was already trying to figure out whether a portfolio could survive 'most market' scenarios, including the bad ones. 4% works even if you are earning less. If the market was earning 7% real returns consistently you could have a higher SWR. Again, just getting to 3.5% SWR if you want to be extra safe will give you a very high likelihood of never running out of money even if future returns are lower.

Quote
That's a 46% increase in length of the average retirement.

Doesn't matter. In most cases a portfolio will grow faster than the 4% withdrawal rate. If the portfolio is growing even as you take money off of it then it will last forever. Again, the 4% SWR is expected to protect you in most below average markets. Just average markets will make the portfolio grow. This is why the first 5 years after retirement are the most vulnerable. If your portfolio grows for awhile before the next crash you normally have a big enough cushion that it doesn't matter.
« Last Edit: December 10, 2016, 09:38:00 AM by Indexer »

Papa bear

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The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #4 on: December 10, 2016, 10:05:15 AM »
2 days ago there were a bunch of articles about life expectancy declining over the past 2 years.  Not sure life expectancy growth as in the past is realistic.

Nothing to add to 4% rule.


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maizeman

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #5 on: December 10, 2016, 10:16:24 AM »
I completely agree with the other posters that the riskiest period for the 4% rule is the first 5-10 years so changes in life expectancy aren't a major thing to worry about but wanted to add a word about life expectancy anyway.

Age at death is left skewed, which is a fancy way of saying that if the average age at death is 80, you are much more likely to die at 50 than at 110. Also, most of the increase in life expectancy has come from a decrease in extremely early deaths rather than an increase in extremely late deaths.

Illustration of this:


This means

1) you cannot translate directly from life expectancy to calculate the average length of retirement, because life expectancy includes a non-trivial number of people who die before (normal) retirement age). In my data source which may be a few years out of date, at birth, a male child has a life expectancy of 76.1 years,* but the average 63 year old man (average age of retirement you found) can expect to live to be 82, which would translate to a 19 year retirement, not 13 as the overall life expectancy tables would indicate.

2) Even as life expectancy increases, the chances of living to 110 aren't appreciably increasing over time.

*We're probably using different original data sources, but this is for illustration only.
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Tyler

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #6 on: December 10, 2016, 10:38:55 AM »
This is a hot topic of debate among my wife and I. We've thrown the idea around to people we know that work in finance and they're saying 5% annual growth over the next 50 years is much more realistic than 7%.

But that might theoretically lower the 4% rule down to 2.9%. That's a huge difference. (Yuge.)

Safe withdrawal rates are based on the single worst-case historical sequence of returns.  For reference, the single worst 30-year retirement timeframe for most high-stock portfolios began in 1966.  The 30-year inflation-adjusted CAGR for the S&P500 from 1966-1995 was about 4.78%.  So yes, 5% real gets you a lot closer to the danger zone but it still technically does not fail.

Now the issue of whether a SWR calculated for somebody with a 30-year life expectancy is appropriate for someone in their 20's is another matter entirely.  I personally prefer perpetual withdrawal rates for very early retirees. 
« Last Edit: December 11, 2016, 04:42:40 PM by Tyler »
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RentSeeking

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #7 on: December 12, 2016, 08:06:36 PM »
Not to mention that all of those longer-living people out there have more time to buy things, further stimulating economic growth.

Telecaster

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #8 on: December 12, 2016, 08:33:29 PM »

This is a hot topic of debate among my wife and I. We've thrown the idea around to people we know that work in finance and they're saying 5% annual growth over the next 50 years is much more realistic than 7%.

People tend to assume that the current trend they are experiencing, whatever that trend is, will continue on forever.  If you were to ask people that same question back in the late 1990s, they would say 15 or 20% forever is plenty realistic.   The doubters saying 10% were viewed as hopeless wet blankets, and the 8%'ers were being fitted for straitjackets. 




Slow2FIRE

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #9 on: December 12, 2016, 09:41:02 PM »

This is a hot topic of debate among my wife and I. We've thrown the idea around to people we know that work in finance and they're saying 5% annual growth over the next 50 years is much more realistic than 7%.

People tend to assume that the current trend they are experiencing, whatever that trend is, will continue on forever.  If you were to ask people that same question back in the late 1990s, they would say 15 or 20% forever is plenty realistic.   The doubters saying 10% were viewed as hopeless wet blankets, and the 8%'ers were being fitted for straitjackets.

Several books I read recently published around 2009, 2010 and 2011 all claimed 5% going forward and suggested looking outside the stock markets for gains.  If anyone followed that advice, they sure screwed themselves out of some great market returns in the years that followed.

Retire-Canada

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #10 on: December 13, 2016, 07:53:47 AM »
The stockmarket is the worst place you grow your money passively except for every other alternative. Nobody knows what will happen for sure, but you have to pick something. Personally I'd rather FIRE with some reasonable assumptions and take the small risk that they fail me than either work many more years to [hopefully] secure a less risky future and very likely waste years of my life.

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #11 on: December 13, 2016, 08:00:53 AM »
Alright, we've all heard about the 4% SWR rule, and I'm not knocking on it for someone that's already retired today, or close to retiring.

But my question is, for those of us in our 20's who will likely live until the year 2065-2070...do we really think we'll continue to see average annual returns of 7%? I just can't see how a mature economy can sustain that kind of growth for another 50 years.

This is a hot topic of debate among my wife and I. We've thrown the idea around to people we know that work in finance and they're saying 5% annual growth over the next 50 years is much more realistic than 7%.

But that might theoretically lower the 4% rule down to 2.9%. That's a huge difference. (Yuge.)

Another point we're considering is that from 1990 to 2010, the average life expectancy for a USA male increased from 75 to 78 years. If this trend holds, we're looking at the average 2065 life expectancy to be 7.5 years longer than today.

That means the average age a male dies in the USA in 2065 will be 85 years old, vs. 78 today. Right now the average retirement age is 63. So that means we'll go from an average retirement length of 15 years for males to an average retirement length of 22 years. That's a 46% increase in length of the average retirement.

Anyone else that's 25-30 years old want to weigh-in? I'm curious to hear how similarly-aged mustachians are thinking about this.

I'm late twenties. Withdrawing much higher rates than 4% over the past couple of years. My portfolio has only grown in value. Another five years of this and I'll be past the ten year RE mark, and hopefully through the worst of sequence of return risk.  No issues or worries from my end, though my expenses vary year-to-year and I don't follow a strict 4% rule.
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trollwithamustache

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #12 on: December 13, 2016, 08:41:32 AM »
Depending how early you FIRE, there may be more risk in changes in life decisions  that the 4% withdrawal rule.  If you retired with a plan of no kids and then that changed to say two kids the old budget just won't work. Or you want to go from city life to homesteading and that has some start up capital associated with it.  Heck, who knows what craziness you could get into with all that time on your hands :)

Major unplanned expenses like that could put you back to working for a bit. This doesn't seem so bad since you'd only make the big change if it was really worth it to you.


mskyle

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #13 on: December 13, 2016, 09:03:44 AM »
Depending how early you FIRE, there may be more risk in changes in life decisions  that the 4% withdrawal rule.  If you retired with a plan of no kids and then that changed to say two kids the old budget just won't work. Or you want to go from city life to homesteading and that has some start up capital associated with it.  Heck, who knows what craziness you could get into with all that time on your hands :)

Major unplanned expenses like that could put you back to working for a bit. This doesn't seem so bad since you'd only make the big change if it was really worth it to you.

Yeah, I think this is the biggest thing, especially if you're planning on retiring on a shoestring budget - the lifestyle that you want at age 25 may end up being quite different from the lifestyle you want at age 50. And if even if you already have kids, the lifestyle your kids are happy with at age 1 and 3 might be different from the lifestyle they are cool with at 15 or 17. If your "retire at 25" budget has some fat in it, it's less concerning.

That said, I'm 38 and my spending now is actually lower (if I adjust for inflation) than my spending when I was in my early 20s. Pretty crazy considering my salary was 30-35% of what I'm making now and my rent was 20-60% of what I pay now. I wasn't an outrageous spender back then but I wasn't particularly frugal either.

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #14 on: December 13, 2016, 09:06:36 AM »
Just remember that in most cases, you'd have even more money at 50 than you did at 25. Often huge amounts more. So that would leave plenty of room to grow your spending if you made different life choices.
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mskyle

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #15 on: December 13, 2016, 09:13:46 AM »
Just remember that in most cases, you'd have even more money at 50 than you did at 25. Often huge amounts more. So that would leave plenty of room to grow your spending if you made different life choices.

Definitely. But if you're on a really tight budget (like, let's say you're planning on sharing a room in a cooperative house with your SO, eating mostly lentils and rice, and only using human-powered travel), it's not hard to double your expenses with a few apparently modest lifestyle changes.

trollwithamustache

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #16 on: December 13, 2016, 09:19:17 AM »

[/quote]


That said, I'm 38 and my spending now is actually lower (if I adjust for inflation) than my spending when I was in my early 20s. Pretty crazy considering my salary was 30-35% of what I'm making now and my rent was 20-60% of what I pay now. I wasn't an outrageous spender back then but I wasn't particularly frugal either.
[/quote]

Day to day the cost decrease is true for me too. I'm a more efficient cook and better at fixing things. (and already own enough tools that projects don't require new toys, er tools) But some of the big stuff like health insurance doesn't seem like it has a path to costing less.



Papa bear

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #17 on: December 13, 2016, 09:20:52 AM »
I hate to be Debby downer here, but I'll give some real world examples here about people going back to work if needed. Note, this is anecdotal, but we rarely hear of FIRE fails.

When I was working as a manager of a large staffing firm,  back in 2009-2014, there were a handful of times that I had interviewed people who had been early retirees. 

These people had come back looking for work after the real estate and market crash and they hadn't yet recovered.  These people were former accountants or finance managers and been out of the workforce for 5+ years.  Previously, they would have been controllers or had experience in public accounting.  Well, in the shitty work environment at the time, and the length of time people were off work, the best offers, if there were any, were to do data entry at 10-12$ / hour.  In fact, in 2009 and early 2010, it was a general sales practice to "sell" former controllers at bill rates under 20/hour.

This sucked.  Absolutely sucked.   Who knows if these people had saved enough or what their situation was.  But if going back to work is one of your options, be aware that getting a job will be hard, and it will be for way less than a previous salary.  This will be especially true that the point in time when our portfolio fails, it's when the economy is crashing, and everyone will be out looking for work.

Ok, back to regular programming.


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Interest Compound

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #18 on: December 13, 2016, 09:29:26 AM »
I hate to be Debby downer here, but I'll give some real world examples here about people going back to work if needed. Note, this is anecdotal, but we rarely hear of FIRE fails.

When I was working as a manager of a large staffing firm,  back in 2009-2014, there were a handful of times that I had interviewed people who had been early retirees. 

These people had come back looking for work after the real estate and market crash and they hadn't yet recovered.  These people were former accountants or finance managers and been out of the workforce for 5+ years.  Previously, they would have been controllers or had experience in public accounting.  Well, in the shitty work environment at the time, and the length of time people were off work, the best offers, if there were any, were to do data entry at 10-12$ / hour.  In fact, in 2009 and early 2010, it was a general sales practice to "sell" former controllers at bill rates under 20/hour.

This sucked.  Absolutely sucked.   Who knows if these people had saved enough or what their situation was.  But if going back to work is one of your options, be aware that getting a job will be hard, and it will be for way less than a previous salary.  This will be especially true that the point in time when our portfolio fails, it's when the economy is crashing, and everyone will be out looking for work.

Ok, back to regular programming.


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They either weren't using the 4% rule, or they weren't using index funds, or both.
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Retire-Canada

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #19 on: December 13, 2016, 09:40:19 AM »
If you are a mustachian with a low COL you can avert portfolio disaster earning a fraction of a professional salary. I can earn $10K/yr without killing myself, selling a kidney or slaving in the coal mines. That's 25% of my full FIRE budget, 33% of my no luxury items FIRE budget or 50% of my just keep the lights on FIRE budget - all including a mortgage.

If you are not totally obvious you don't need to rebuild your 'stash from scratch all you have to do is reduce your withdrawals during particularly bad years - "if" you feel your FIRE success is at stake. A slight bit of flexibility in your 4% SWR increases your odds of success dramatically. That can be reducing expenses, side income or both.

And just to address the concern life would be awful. I did just this. I went from $100K+ a year contract work to working in a camping store for $15/hr for 6 months to deal with an issue I was facing. You know what it was not awful. If you can earn a professional salary you will out compete anyone who typically does a "Joe" job. I would much rather make $50/hr or $100/hr than $15/hr, but my personal self-worth or sense of satisfaction is around taking care of my life not a job title. Plus it was really nice to do a job with no supervision and no difficult responsibilities for a while. I just worked enough to cover my expenses and not dip into my savings. It was easy.
« Last Edit: December 13, 2016, 09:44:09 AM by Retire-Canada »

Papa bear

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #20 on: December 13, 2016, 09:44:04 AM »
I hate to be Debby downer here, but I'll give some real world examples here about people going back to work if needed. Note, this is anecdotal, but we rarely hear of FIRE fails.

When I was working as a manager of a large staffing firm,  back in 2009-2014, there were a handful of times that I had interviewed people who had been early retirees. 

These people had come back looking for work after the real estate and market crash and they hadn't yet recovered.  These people were former accountants or finance managers and been out of the workforce for 5+ years.  Previously, they would have been controllers or had experience in public accounting.  Well, in the shitty work environment at the time, and the length of time people were off work, the best offers, if there were any, were to do data entry at 10-12$ / hour.  In fact, in 2009 and early 2010, it was a general sales practice to "sell" former controllers at bill rates under 20/hour.

This sucked.  Absolutely sucked.   Who knows if these people had saved enough or what their situation was.  But if going back to work is one of your options, be aware that getting a job will be hard, and it will be for way less than a previous salary.  This will be especially true that the point in time when our portfolio fails, it's when the economy is crashing, and everyone will be out looking for work.

Ok, back to regular programming.


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They either weren't using the 4% rule, or they weren't using index funds, or both.

I don't disagree with you.  Just saying if going back to work is one of the plans if you are too aggressive, be weary that it won't be what you think. 


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robartsd

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #21 on: December 13, 2016, 11:08:22 AM »
Alright, we've all heard about the 4% SWR rule, and I'm not knocking on it for someone that's already retired today, or close to retiring.

But my question is, for those of us in our 20's who will likely live until the year 2065-2070...do we really think we'll continue to see average annual returns of 7%? I just can't see how a mature economy can sustain that kind of growth for another 50 years.

This is a hot topic of debate among my wife and I. We've thrown the idea around to people we know that work in finance and they're saying 5% annual growth over the next 50 years is much more realistic than 7%.

While I can accept that average real growth in the 21st century might be closer to 5% than 7%, to me this does not sound like a problem for the 4% SWR rule (average growth still exceeds withdraws, so on average wealth is still growing). What it does mean however is that accumulation might take longer because savings compound slower. Go ahead and use 5% growth as you project your accumulation phase; you'll avoid the disappointment of lower than expected returns adding a couple of years to your working life. However, as long as you maintain flexibility for the first few years of retirement in case you have low initial returns, planning on a 4% SWR is fine. My personal plan is to begin retirement monitoring expenses and ensuring that I never withdraw more than 1% of current investment value in a quarter. I imagine that the investments will grow enough as I get further into retirement that I will gradually decrease the effort I spend monitoring money.

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #22 on: December 13, 2016, 12:58:03 PM »
I hate to be Debby downer here, but I'll give some real world examples here about people going back to work if needed. Note, this is anecdotal, but we rarely hear of FIRE fails.

When I was working as a manager of a large staffing firm,  back in 2009-2014, there were a handful of times that I had interviewed people who had been early retirees. 

These people had come back looking for work after the real estate and market crash and they hadn't yet recovered.  These people were former accountants or finance managers and been out of the workforce for 5+ years.  Previously, they would have been controllers or had experience in public accounting.  Well, in the shitty work environment at the time, and the length of time people were off work, the best offers, if there were any, were to do data entry at 10-12$ / hour.  In fact, in 2009 and early 2010, it was a general sales practice to "sell" former controllers at bill rates under 20/hour.

This sucked.  Absolutely sucked.   Who knows if these people had saved enough or what their situation was.  But if going back to work is one of your options, be aware that getting a job will be hard, and it will be for way less than a previous salary.  This will be especially true that the point in time when our portfolio fails, it's when the economy is crashing, and everyone will be out looking for work.
Why the hell were they so honest about their situation, they could have told any old story like for example, "That they used to run their own company" or "That they worked as a capital manager" or whatever and they would have been as attractive as ever on the market.
« Last Edit: December 13, 2016, 01:12:34 PM by lordmetroid »

Papa bear

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #23 on: December 13, 2016, 06:27:32 PM »
I hate to be Debby downer here, but I'll give some real world examples here about people going back to work if needed. Note, this is anecdotal, but we rarely hear of FIRE fails.

When I was working as a manager of a large staffing firm,  back in 2009-2014, there were a handful of times that I had interviewed people who had been early retirees. 

These people had come back looking for work after the real estate and market crash and they hadn't yet recovered.  These people were former accountants or finance managers and been out of the workforce for 5+ years.  Previously, they would have been controllers or had experience in public accounting.  Well, in the shitty work environment at the time, and the length of time people were off work, the best offers, if there were any, were to do data entry at 10-12$ / hour.  In fact, in 2009 and early 2010, it was a general sales practice to "sell" former controllers at bill rates under 20/hour.

This sucked.  Absolutely sucked.   Who knows if these people had saved enough or what their situation was.  But if going back to work is one of your options, be aware that getting a job will be hard, and it will be for way less than a previous salary.  This will be especially true that the point in time when our portfolio fails, it's when the economy is crashing, and everyone will be out looking for work.
Why the hell were they so honest about their situation, they could have told any old story like for example, "That they used to run their own company" or "That they worked as a capital manager" or whatever and they would have been as attractive as ever on the market.

References would be difficult to obtain for a fake job.  And employers tend to frown on lying on your resume.

But in general, people tend to tell the truth about things.  Like I said, it was a handful of times this came up that there was an early retiree coming back to work.  Most of the retirees coming back to work were of normal retirement age and were either bored or wanted to get away from their spouses!


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ender

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #24 on: December 13, 2016, 06:47:01 PM »
I hate to be Debby downer here, but I'll give some real world examples here about people going back to work if needed. Note, this is anecdotal, but we rarely hear of FIRE fails.

When I was working as a manager of a large staffing firm,  back in 2009-2014, there were a handful of times that I had interviewed people who had been early retirees. 

These people had come back looking for work after the real estate and market crash and they hadn't yet recovered.  These people were former accountants or finance managers and been out of the workforce for 5+ years.  Previously, they would have been controllers or had experience in public accounting.  Well, in the shitty work environment at the time, and the length of time people were off work, the best offers, if there were any, were to do data entry at 10-12$ / hour.  In fact, in 2009 and early 2010, it was a general sales practice to "sell" former controllers at bill rates under 20/hour.

This sucked.  Absolutely sucked.   Who knows if these people had saved enough or what their situation was.  But if going back to work is one of your options, be aware that getting a job will be hard, and it will be for way less than a previous salary.  This will be especially true that the point in time when our portfolio fails, it's when the economy is crashing, and everyone will be out looking for work.

This probably wasn't supposed to reassure me but it did.

If I retire and have to come back to work, I LOVE the idea that you can make nearly $13.50 (adjusted to 2016 dollars) after having retired and doing data entry types of jobs.

My biggest concern about retiring early and having to go back to work isn't about getting back into my chosen field. It's about not being able to find any job. Working 30 hours a week 45 weeks a year is 1350 hours a year. $13/hr puts your yearly salary at $17,550 -- that's a TON of money for a MMM minded person! Our budgeted expenses this year for a couple are going to run around $30k which means I can be nearly guaranteed to drop a 4% SWR in half even if the economy explodes?

Heck yeah! That's unbelievably reassuring.

(or did I completely miss the point of your post? :-)

waltworks

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #25 on: December 13, 2016, 07:24:41 PM »
I think there's a much higher chance that post-scarcity economics means everyone is FI at birth than the 4% rule fails someone in their mid-20s.

Or that we all die because the earth gets too damn hot, but that's not a 4% SWR problem.

So don't worry about it.

-W

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #26 on: December 13, 2016, 07:42:22 PM »
I hate to be Debby downer here, but I'll give some real world examples here about people going back to work if needed. Note, this is anecdotal, but we rarely hear of FIRE fails.

When I was working as a manager of a large staffing firm,  back in 2009-2014, there were a handful of times that I had interviewed people who had been early retirees. 

These people had come back looking for work after the real estate and market crash and they hadn't yet recovered.  These people were former accountants or finance managers and been out of the workforce for 5+ years.  Previously, they would have been controllers or had experience in public accounting.  Well, in the shitty work environment at the time, and the length of time people were off work, the best offers, if there were any, were to do data entry at 10-12$ / hour.  In fact, in 2009 and early 2010, it was a general sales practice to "sell" former controllers at bill rates under 20/hour.

This sucked.  Absolutely sucked.   Who knows if these people had saved enough or what their situation was.  But if going back to work is one of your options, be aware that getting a job will be hard, and it will be for way less than a previous salary.  This will be especially true that the point in time when our portfolio fails, it's when the economy is crashing, and everyone will be out looking for work.

This probably wasn't supposed to reassure me but it did.

If I retire and have to come back to work, I LOVE the idea that you can make nearly $13.50 (adjusted to 2016 dollars) after having retired and doing data entry types of jobs.

My biggest concern about retiring early and having to go back to work isn't about getting back into my chosen field. It's about not being able to find any job. Working 30 hours a week 45 weeks a year is 1350 hours a year. $13/hr puts your yearly salary at $17,550 -- that's a TON of money for a MMM minded person! Our budgeted expenses this year for a couple are going to run around $30k which means I can be nearly guaranteed to drop a 4% SWR in half even if the economy explodes?

Heck yeah! That's unbelievably reassuring.

(or did I completely miss the point of your post? :-)

Nah if it's reassuring then all the better.  I tend to think people are too conservative. Staffing agencies can be a great resource if looking for short term work or something in a pinch. And if you can be flexible with compensation, some temp job will pop up.

You just never get to hear about any fails, since there is typically confirmation bias. And for a lot of people, taking a major hit to find a job can really hurt your ego. 


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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #27 on: December 13, 2016, 07:43:20 PM »
I hate to be Debby downer here, but I'll give some real world examples here about people going back to work if needed. Note, this is anecdotal, but we rarely hear of FIRE fails.

...

This probably wasn't supposed to reassure me but it did.

If I retire and have to come back to work, I LOVE the idea that you can make nearly $13.50 (adjusted to 2016 dollars) after having retired and doing data entry types of jobs.

My biggest concern about retiring early and having to go back to work isn't about getting back into my chosen field. It's about not being able to find any job. Working 30 hours a week 45 weeks a year is 1350 hours a year. $13/hr puts your yearly salary at $17,550 -- that's a TON of money for a MMM minded person! Our budgeted expenses this year for a couple are going to run around $30k which means I can be nearly guaranteed to drop a 4% SWR in half even if the economy explodes?

Heck yeah! That's unbelievably reassuring.

(or did I completely miss the point of your post? :-)

You completely understood that post!  :)

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #28 on: December 13, 2016, 07:58:01 PM »
We decided not to put all our eggs in the stock market basket.

We have some in farmland that we inherited, but we also have some in rental property.   

Including SS, that's 3 completely different sources of income.   

I expect we'll either flip some houses or fix some up for renting out just for the fun of it. 

We've targeted a median family income with zero debt, which is pretty good money.   And there's lots of room for cutting back if we need to for a few years.

And, of course, we could always find a way to earn $5,000 to $10,000 in a year if we had to.  The USA is chock full of opportunities.


Or pay folks to walk their dogs?  $5 a day for 5 days a week for 40 weeks a year is $1,000.  And all for talking a walk around the neighborhood that you would have done anyway.

Or mow their yards?   Why pay for a gym membership when people will pay you to work out? :)  $30 for a yard once a week for 33 weeks is $990.

Those two "jobs" would take up about 6 hours a week of your time and bring in $2,000 just for doing some exercise you would have wanted to do anyway.

Two more yards a week and we're up to an 8 hour work week for about another $2,000.

And that's not even trying.

Did you know that people charge over $1,000 to put up other people's Christmas lights and then take them back down?
Is this a great country or what? 

Just read an article in a NC business magazine about a guy who started his own business pressure washing houses.   From there he started painting them.   Within a few months he was finding enough work that he had hired 2 people to do the work for him.   He's at around $10,000,000 in annual sales now.

And the only reason he went into business is he got his first credit card while living at his parents, spent $5,000 on computer gaming gear, and needed a job to pay that debt off.   




Mighty-Dollar

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #29 on: December 13, 2016, 08:05:56 PM »
The 4% rule assumes a 30 year time horizon (until death).
For 40 years or more it's the 3.3% rule.
For a 20 year time horizon it's 5.1% - 5.5%.

waltworks

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #30 on: December 13, 2016, 08:10:56 PM »
The 4% rule assumes a 30 year time horizon (until death).
For 40 years or more it's the 3.3% rule.
For a 20 year time horizon it's 5.1% - 5.5%.

It also assumes ZERO income of ANY kind including pensions, Social Security, side gigs, Xmas presents from mom and dad, etc.

Feel free to keep working longer, though. It's your life.

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BuffaloStache

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #31 on: December 13, 2016, 08:30:20 PM »
This is a great thread and really makes me think. I too worry that the 4% rule may be coming to an end. However, I also agree with the other readers that life expectancy shouldn't matter (and if it does, here is a source to an article that claims it isn't an ever-increasing value). Additionally,

And just to address the concern life would be awful. I did just this. I went from $100K+ a year contract work to working in a camping store for $15/hr for 6 months to deal with an issue I was facing. You know what it was not awful. If you can earn a professional salary you will out compete anyone who typically does a "Joe" job. I would much rather make $50/hr or $100/hr than $15/hr, but my personal self-worth or sense of satisfaction is around taking care of my life not a job title. Plus it was really nice to do a job with no supervision and no difficult responsibilities for a while. I just worked enough to cover my expenses and not dip into my savings. It was easy.

This is my plan exactly: build up my 'stache till I'm right around 4% withdrawal, then switch to a lower paid job for ~1 year. I actually keep a list of potential low-wage, low-stress, part-time jobs that I was thinking I'd use to create a gradual slide into RE. Something with added perks (working for an airline, at a movie theater, camping store- to get a discount, Costco- because I love the company and their stores, etc.) could be an added bonus.
« Last Edit: December 13, 2016, 08:33:37 PM by BuffaloStache »
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BattlaP

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #32 on: December 13, 2016, 08:48:47 PM »
There are many possibilities that could completely negate the 4% rule for everyone - sizeable asteroid impact, global war, runaway rapid climate change, some sort of severe epidemic.. As well as this, there are many ways in which the 'endless growth', western-style 'prosperity for all' model of society are completely unsustainable and the expected future productivity of the human race could potentially collapse within our lifetimes.

On the other hand, the 4% rule is pretty much the best option you've got, apart from building a lifestyle in which you can basically drop your required income to zero if need be (property owned outright, solar+batteries, sustainable food sources).

Even if it turns out you'll need to use 3% or 2%, does it really change what you need to be doing at this point? Just save as much as you can and hope for the best, plan as well as you can for the worst (the 'worst' perhaps, in this case, being the longest expected lifespan - funny way to look at it).

Also as someone else said it could go the totally opposite way and a basic income + robot servants + digital existence could mean you'll never need all that money anyway. But again that doesn't change what the best way forward is at this point in time.

dividendman

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #33 on: December 13, 2016, 09:42:58 PM »
I think there's a much higher chance that post-scarcity economics means everyone is FI at birth than the 4% rule fails someone in their mid-20s.


I agree, the chances of a UBI being established in the next 30-40 years is much higher than the 4% rule failing in my view. It's quite likely that many of us have saved too much (unless you want an extravagant lifestyle).

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #34 on: December 14, 2016, 04:46:58 AM »
The 4% rule assumes a 30 year time horizon (until death).

And 1% expense ratios, and a conservative AA ratio... and many other things...
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AdrianC

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #35 on: December 14, 2016, 09:36:10 AM »
The 4% rule assumes a 30 year time horizon (until death).

And 1% expense ratios, and a conservative AA ratio... and many other things...

Not "1% expense ratios". IIRC ERs were not taken into account in the academic studies that lead to the 4% rule.

AdrianC

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #36 on: December 14, 2016, 09:38:05 AM »
The 4% rule assumes a 30 year time horizon (until death).
For 40 years or more it's the 3.3% rule.
For a 20 year time horizon it's 5.1% - 5.5%.

No one wants to hear about the 3.3% rule.

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #37 on: December 14, 2016, 10:11:00 AM »
The 4% rule assumes a 30 year time horizon (until death).
For 40 years or more it's the 3.3% rule.
For a 20 year time horizon it's 5.1% - 5.5%.

No.  There's no 3.3% rule for 40 year retirements - that would be even MORE conservative than using 4% for 30 years.  And where did you pull 5.1 to 5.5% from?  If you're trying to match the 'success rate' (i.e. the % of portfolios which did not hit $0 over a given time frame) than you'd use a 5.0% for a 20 year term to get the same success rate as 4% for a 30 year term.  But they're still not equal - at 5% roughly half of all portfolios will be worth less after 20 years, compared with about 1/3 at 4%.
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Retire-Canada

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #38 on: December 14, 2016, 10:11:50 AM »
No one wants to hear about the 3.3% rule.

Indeed. It makes us sad to hear about people who want to FIRE wasting extra years at a job to get a low WR for irrational reasons.

If people are truly concerned about FIRE failures I would suggest that there are a myriad of ways to fail at FIRE that are more likely than the 4% SWR failing, but nobody wants to talk about that because it's not a number with a % or $ attached. Working extra years at most jobs would be one of those risks to your FIRE I'd definitely lump in that pool of non-monetary risks.

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #39 on: December 14, 2016, 10:50:32 AM »
This is a hot topic of debate among my wife and I. We've thrown the idea around to people we know that work in finance and they're saying 5% annual growth over the next 50 years is much more realistic than 7%.

But that might theoretically lower the 4% rule down to 2.9%. That's a huge difference. (Yuge.)

Safe withdrawal rates are based on the single worst-case historical sequence of returns.  For reference, the single worst 30-year retirement timeframe for most high-stock portfolios began in 1966.  The 30-year inflation-adjusted CAGR for the S&P500 from 1966-1995 was about 4.78%.  So yes, 5% real gets you a lot closer to the danger zone but it still technically does not fail.

Now the issue of whether a SWR calculated for somebody with a 30-year life expectancy is appropriate for someone in their 20's is another matter entirely.  I personally prefer perpetual withdrawal rates for very early retirees.

I'm digging your withdrawal rate calculator. Do you plan to add any other fixed income categories (such as corporate bonds?)

Tyler

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #40 on: December 14, 2016, 11:44:35 AM »
I'm digging your withdrawal rate calculator. Do you plan to add any other fixed income categories (such as corporate bonds?)

I'd love to.  It's just a matter of data availability.  I'm currently working on it and hope to have a few new bond options in January. 
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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #41 on: December 14, 2016, 11:59:04 AM »
I'm digging your withdrawal rate calculator. Do you plan to add any other fixed income categories (such as corporate bonds?)

I'd love to.  It's just a matter of data availability.  I'm currently working on it and hope to have a few new bond options in January.
+1.  Also, I love your "heat map" of all different combinations of starting year and time periods.  It does a good job of showing in one graphic what many try to describe in countless paragraphs (myself included).
Keep up the good work.
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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #42 on: December 14, 2016, 09:12:13 PM »
I'm undecided. The bad news is I have plenty of time to decide. (FIRE gallows humor)

Long term stock returns will be based on demographics, politics, educational attainment by the population, productivity growth, etc. This is all incredibly hard to predict long-range. People once thought Japan would dominate the world economy.

But we're probably looking at the wrong thing. In my spreadsheet simulations, the average assumed rate of inflation makes a bigger difference than ROI. If inflation runs 3% over my retirement, I'm fine with a lot less money than if it runs 3.5%. At 4% I would need a large fortune. At least with stocks, you are in theory buying the companies collecting those higher prices. To see what I mean, drop your current spending into a spreadsheet (cell A1) and in cell A2 write "=A1*1.03" and then drag it down 50 years. Yikes! Now put on a diaper and try it at 4%.

BuffaloStache

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #43 on: December 14, 2016, 09:43:06 PM »
I'm digging your withdrawal rate calculator. Do you plan to add any other fixed income categories (such as corporate bonds?)

I'd love to.  It's just a matter of data availability.  I'm currently working on it and hope to have a few new bond options in January.
+1.  Also, I love your "heat map" of all different combinations of starting year and time periods.  It does a good job of showing in one graphic what many try to describe in countless paragraphs (myself included).
Keep up the good work.

Make it +2. That was a great read!
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AdrianC

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #44 on: December 15, 2016, 07:43:40 AM »
No one wants to hear about the 3.3% rule.

Indeed. It makes us sad to hear about people who want to FIRE wasting extra years at a job to get a low WR for irrational reasons.

If people are truly concerned about FIRE failures I would suggest that there are a myriad of ways to fail at FIRE that are more likely than the 4% SWR failing, but nobody wants to talk about that because it's not a number with a % or $ attached. Working extra years at most jobs would be one of those risks to your FIRE I'd definitely lump in that pool of non-monetary risks.

I expect a good number of FIRE failures will be due to expense inflation, especially among the very early retirees. Kids cost money. Healthcare is an unknown. We could well be in for a bought of monetary inflation. Lots of things to worry about if you're so inclined.


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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #45 on: December 15, 2016, 07:57:50 AM »
No one wants to hear about the 3.3% rule.

Indeed. It makes us sad to hear about people who want to FIRE wasting extra years at a job to get a low WR for irrational reasons.

If people are truly concerned about FIRE failures I would suggest that there are a myriad of ways to fail at FIRE that are more likely than the 4% SWR failing, but nobody wants to talk about that because it's not a number with a % or $ attached. Working extra years at most jobs would be one of those risks to your FIRE I'd definitely lump in that pool of non-monetary risks.

I expect a good number of FIRE failures will be due to expense inflation, especially among the very early retirees. Kids cost money. Healthcare is an unknown. We could well be in for a bought of monetary inflation. Lots of things to worry about if you're so inclined.

Of course - there are always unknowns, including not knowing how much time you and your loved ones have left.
It's also worth noting that survey after survey show that people wind up spending less in retirement than they had anticipated.
Overall we tend to overestimate our retirement expenses, underestimate our willingness to adjust spending habits during down years, assume we will never make any money ever again and plan on living far longer than is statistically likely. Based on those assumptions we still shoot for "success rates" in the upper 90s.
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BuffaloStache

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #46 on: December 15, 2016, 08:37:10 PM »
As if Vangaurd had known I'd been reading this thread, I got this link in an email from them today about the 4% rule, and doubts given the recent lower returns: https://personal.vanguard.com/us/insights/article/retirement-spending-102016?EXCMPGN=EX:EM:RIG:eITV:121516:retail:XX:article:slot2

Essentially the article boiled down to a very mustachian principle- be flexible. If it was a bad year, maybe take out less than 4% (or even get that part time job). If it was a banner year, take out the full 4% and don't feel bad about it.
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Roothy

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #47 on: December 16, 2016, 08:13:15 AM »
Does anyone really think runaway inflation is a real risk in this country, though?  I mean, maybe if the political risk is high enough (ahem), but controlling inflation seems like the one thing we have really, really figured out. I can imagine lots of economics/financial threats over the next fifty years or so, but high inflation is very low on my list.

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #48 on: December 16, 2016, 08:42:39 AM »
Does anyone really think runaway inflation is a real risk in this country, though?  I mean, maybe if the political risk is high enough (ahem), but controlling inflation seems like the one thing we have really, really figured out. I can imagine lots of economics/financial threats over the next fifty years or so, but high inflation is very low on my list.

Well, there's runaway inflation, the sort that coutries like Iran and Zimbabwe have experienced, and then there's chronic high inflation, which has struck most large developed countries at some point or another, including the US. In the last 100 years we've had 5 periods where inflation in the US averaged above 10%.  26% of the the last 50 years have had inflation above 5%

After 15 years of below average inflation it's easy to forget how detrimental this can be to long-term savings. Maybe we've truly 'licked' high inflation forever, but I tend to doubt it.
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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #49 on: December 16, 2016, 08:56:56 AM »
The 4% rule won't ever "just not work"

You need to remember the success of the rule is based on the start year. Will 95% of the next 100 years be successful start years? Probably not, but that's hardly much to worry about. Fire is a long slow and heavy ship. Small changes early yeild massive improvements.

Someone with a 1.5m portfolio, spending 60k a year could litterally save themselves with a minimum wage job part time. This is why you don't need to worry. Is going to work part time occasionally in between years off really that bad?