Author Topic: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?  (Read 29924 times)

Eric

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #200 on: January 13, 2017, 02:17:13 PM »
The fact your portfolio drops 40% doesn't mean you withdrawals need to drop by 40%. In most cases you wouldn't need to change anything due to a significant market crash. You also would not shoot for the lowest paying PT job as a goal. There would be no pressure to jump on something crappy ASAP.

Great points.

As has been pointed out, if your stash drops 40% (or X% from its inflation adjusted starting value) and one is living off of 4% withdrawls, they only need to drop their withdrawls 12.5% to ensure they will never run out of money. At $40K, this puts it in the neighborhood of $5K, or even less than a minimum wage job. If spending is double that, two adults with jobs would fill that gap easily until the portfolio amount returns to the inflation-adjusted value.

Like Out of the Blue above, I'd also like to know what the basis of this claim is.  It doesn't make sense to me as is.  Why would reducing your withdrawals by 1/8 ensure that you'd never run out of money?  Certainly you're already started down a path that's staring at failure if your portfolio shrinks by 40% shortly after retirement.  Just because that last large drop recovered extremely quickly doesn't mean the next one will.

if you're using a variable withdrawal method you can play with the z value to see what works for you but historically with a .5 z value and a floor at ~.5% less than your spending level you will never run out of money.  the basis lies somewhere in that math.

Hmmm, that could be, but I still have problems with it if that's the case.  Because basically, the suggestion is to change boats mid-stream, by switching from inflation adjusted withdrawals (4% rule) to variable withdrawals.  So you'd 1) have to commit to staying with variable withdrawals going forward and 2) (the big one), you're essentially starting over with your withdrawal method so you should probably start as if this was year 0.  That could make the variable withdrawal a lot lower than 12.5% of the original amount of the inflation adjusted withdrawal.

I need to play around with the variable withdrawal results some more.  I actually just yesterday figured out what that Z score stood for and how it affected withdrawal amounts and therefore account balances.  EDIT -- Answer here for those interested:  http://cfiresim.com/phpBB3/viewtopic.php?f=11&t=163
« Last Edit: January 13, 2017, 02:18:54 PM by Eric »
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Classical_Liberal

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #201 on: January 13, 2017, 03:50:13 PM »
Perhaps I'm being Mr obvious here, but using a low Z value (like the 0.5 default) means one is slowly reacting to market conditions.  Quicker reaction means less failures.  If one is withdrawing a year's worth of spending at a time, "quickly" reacting means reacting sometime in the next year, which seems like a ton of time. Setting Z at 1 or selecting % of portfolio with appropriate floors and ceilings makes a huge difference in success.  This would be a better way to look at variable withdrawals for folks with large discretionary spending or who have a personality preferring to "bite the bullet" with income generation or spending cuts quickly, then get back on track.  Colorful metaphor... If you unexpectedly lose a finger would you rather cauterize it with brief intense pain, or throw on a bandaid and hope you don't slowly bleed out.

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #202 on: January 13, 2017, 04:35:14 PM »
So I did some quick excel work on the Z score recording differences in the standard 40k $1,000,000 portfolio.

Firecalc still adjusts all numbers for inflation.

Some thoughts:

1. The Z score represents a percentage that your withdraw changes with your portfolio. So a Z of 0 is the standard 4% WR, 1 means that you adjust your spending at the same rate as your portfolio changes, and a .2 means that you'd adjust at a rate of 20%. So a 10% change in your portfolio would mean you change your adjust your spending by 2%.

2. This is cumulative. So saying that you only need to adjust your spending by 12.5% is misleading. If your portfolio goes down two years in a row, the reduction in your spending level would increase on top of each other.

3. That said a Z of somewhere between .1 and .2 is 100% effective. The lowest withdraw for .1 is about -11% from starting portfolio and .2 is about -19%. This means that the worst withdraw in a 30 year period would at worst require covering 20% of your spending. So if you're spending $40k (inflation adjusted), you'll in the worst year need to cover about $8k.

My opinion is that overall, awesome knowledge to have, and for anyone that will be earning 15-30% of their salary year-to-year has absolutely no fear of ever running out of money.
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Retire-Canada

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #203 on: January 13, 2017, 06:44:44 PM »
Some thoughts:

1. The Z score represents a percentage that your withdraw changes with your portfolio. So a Z of 0 is the standard 4% WR, 1 means that you adjust your spending at the same rate as your portfolio changes, and a .2 means that you'd adjust at a rate of 20%. So a 10% change in your portfolio would mean you change your adjust your spending by 2%.

I run my variable WR simulations in cFIREsim and I set floor and ceiling values [Say $35K floor and $60K ceiling] to control the range of change I am willing to live with. I leave the score at 0.5 which is the default value.

Another way to look at the change in spending is to move non-essential costs around. So say an international trip gets deferred or a you hold off 2yrs on a full roof replacement, etc... Unless you have to spend $40K each year you can move some costs back to make up the difference and spend more than $40K in the good years so your average spending is at least $40K. That would mean not having to do any extra work at all.

human

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #204 on: January 13, 2017, 07:51:56 PM »
So what number are you shooting for Canada. You said it helps your fire faster. Are you firing at 4.5% swr

I haven't decided yet. I'm going to stop FT work at the end of this year and let the 'stash do its thing. That way I get lots more free time now while earning enough to cover costs.

Here are a couple options...

Constant WR

- FIRE target $1.1M
- take out $40K + $6K taxes each year [less CPP + OAS]
- cFIREsim = 96% success
-  avg/median WR/yr = $46K

Variable WR

- FIRE target $850K
- take out $35K to $60K each year [less CPP + OAS]
- cFIREsim = 100%
- median WR/yr = ~$45K

I'm at $675K today. So I'll add what I can in 2017 and then coast until I'm happy with the value of the portfolio. At the moment I'd like $46K/yr income in Canada bucks. That's like $35K USD/yr. I'm going to continue to optimize spending so perhaps I'll get that lower. $850K seems like a reasonable compromise and that's 5.4%WR [-1.4%/+1.7%] @ $46K/yr. I can collect modest Gov't benefits in 2029 and more in 2034.

I think this just demonstrates that one's swr can't really be compared to others. To me 1.1 million is a huge nest egg and I wouldn't bat an eye at 4-4.5% wr as I could easily change things and reduce expenses whenever I wanted.

However for myself with expenses of 25k I'd rather have a nest egg of 750k rather than 625k. That's an extra 125k to put away for 5k a year in breathing room, or 3.3% wr. I think it would take me about an extra 2 years of work to get to that and never have to worry period. Of course others over at ere would scoff at 750k and might put away 300-400k.

As usual it's expenses that matter more than anything else.

oldtoyota

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #205 on: January 13, 2017, 09:01:56 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....

This. I have never yet heard someone raise this issue, yet so many say they'll just get a job if RE doesn't work out. They also never mention ageism.


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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #206 on: January 13, 2017, 09:20:42 PM »
This. I have never yet heard someone raise this issue, yet so many say they'll just get a job if RE doesn't work out. They also never mention ageism.

As others have already pointed out, a "horrible" $10-12/hour part-time job would be plenty to save your RE plans. You don't need to go back to your high-powered former career.

I think being a lifeguard or working retail at REI or whatever would actually be pretty fun, but that's just me.

-W

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #207 on: January 13, 2017, 09:37:42 PM »

2. This is cumulative. So saying that you only need to adjust your spending by 12.5% is misleading. If your portfolio goes down two years in a row, the reduction in your spending level would increase on top of each other.

3. That said a Z of somewhere between .1 and .2 is 100% effective. The lowest withdraw for .1 is about -11% from starting portfolio and .2 is about -19%. This means that the worst withdraw in a 30 year period would at worst require covering 20% of your spending. So if you're spending $40k (inflation adjusted), you'll in the worst year need to cover about $8k.

My opinion is that overall, awesome knowledge to have, and for anyone that will be earning 15-30% of their salary year-to-year has absolutely no fear of ever running out of money.

So possibly misleading, if actionably accurate. If a 3.5% withdrawal rate has never failed, one should only need to reproduce the difference between their current withdrawal and 3.5% - if one were withdrawing 4% that would .5% - you're not trying to rebuild your 'stache, just withdraw from it at a lower rate.
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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #208 on: January 13, 2017, 11:25:17 PM »
I think this just demonstrates that one's swr can't really be compared to others. To me 1.1 million is a huge nest egg and I wouldn't bat an eye at 4-4.5% wr as I could easily change things and reduce expenses whenever I wanted.

However for myself with expenses of 25k I'd rather have a nest egg of 750k rather than 625k. That's an extra 125k to put away for 5k a year in breathing room, or 3.3% wr. I think it would take me about an extra 2 years of work to get to that and never have to worry period. Of course others over at ere would scoff at 750k and might put away 300-400k.

As usual it's expenses that matter more than anything else.

Not sure if you are in Canada or not, but $1.1M CAD = ~$839K USD and pretty much everything costs a lot more here compared to the US.

I do agree that spending is a key way to change your FIRE success/schedule. While I have made great strides in lowering my costs I know that I'm not done. As I shift to PT I'll have more time to optimize costs particularly food.  As I reach lower spending levels I'll adjust my FIRE targets appropriately.

That said you have to work with your current reality. Hence I plan for what I spend now and keep an open mind to changing plans.
« Last Edit: January 14, 2017, 09:49:09 AM by Retire-Canada »

Eric

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #209 on: January 14, 2017, 01:24:29 PM »

2. This is cumulative. So saying that you only need to adjust your spending by 12.5% is misleading. If your portfolio goes down two years in a row, the reduction in your spending level would increase on top of each other.

3. That said a Z of somewhere between .1 and .2 is 100% effective. The lowest withdraw for .1 is about -11% from starting portfolio and .2 is about -19%. This means that the worst withdraw in a 30 year period would at worst require covering 20% of your spending. So if you're spending $40k (inflation adjusted), you'll in the worst year need to cover about $8k.

My opinion is that overall, awesome knowledge to have, and for anyone that will be earning 15-30% of their salary year-to-year has absolutely no fear of ever running out of money.

So possibly misleading, if actionably accurate. If a 3.5% withdrawal rate has never failed, one should only need to reproduce the difference between their current withdrawal and 3.5% - if one were withdrawing 4% that would .5% - you're not trying to rebuild your 'stache, just withdraw from it at a lower rate.

Ahhh, but if a 3.5% WR has never failed, then the action would be to start withdrawing 3.5% of the current balance.  Otherwise, you're comparing apples to oranges.
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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #210 on: January 14, 2017, 02:18:55 PM »

2. This is cumulative. So saying that you only need to adjust your spending by 12.5% is misleading. If your portfolio goes down two years in a row, the reduction in your spending level would increase on top of each other.

3. That said a Z of somewhere between .1 and .2 is 100% effective. The lowest withdraw for .1 is about -11% from starting portfolio and .2 is about -19%. This means that the worst withdraw in a 30 year period would at worst require covering 20% of your spending. So if you're spending $40k (inflation adjusted), you'll in the worst year need to cover about $8k.

My opinion is that overall, awesome knowledge to have, and for anyone that will be earning 15-30% of their salary year-to-year has absolutely no fear of ever running out of money.

So possibly misleading, if actionably accurate. If a 3.5% withdrawal rate has never failed, one should only need to reproduce the difference between their current withdrawal and 3.5% - if one were withdrawing 4% that would .5% - you're not trying to rebuild your 'stache, just withdraw from it at a lower rate.

Ahhh, but if a 3.5% WR has never failed, then the action would be to start withdrawing 3.5% of the current balance.  Otherwise, you're comparing apples to oranges.

Just go run the tool if you allow yourself to drop to 3.5% even with no cap I never run out of money and more often than not you end up being able to spend a lot more
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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #211 on: January 14, 2017, 07:44:47 PM »
Ahhh, but if a 3.5% WR has never failed, then the action would be to start withdrawing 3.5% of the current balance.  Otherwise, you're comparing apples to oranges.

This makes no sense. If one's portfolio dropped 50% overnight, why would one withdraw 3.5% of the 'current' stache? The 4% rule isn't "Withdraw 4% of the current level of the stache"; why would the 3.5% rule do that?
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Eric

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #212 on: January 14, 2017, 09:49:36 PM »
Ahhh, but if a 3.5% WR has never failed, then the action would be to start withdrawing 3.5% of the current balance.  Otherwise, you're comparing apples to oranges.

This makes no sense. If one's portfolio dropped 50% overnight, why would one withdraw 3.5% of the 'current' stache? The 4% rule isn't "Withdraw 4% of the current level of the stache"; why would the 3.5% rule do that?

Why do you think that adjusting withdrawal rates in the middle of a period grants the same success rates as using the lower withdrawal rate from the start of the period?  That is what makes no sense. Simply adjusting to a lower WR at anytime, regardless of any circumstances, absolutely does not "ensure [you] will never run out of money."
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Eric

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #213 on: January 14, 2017, 09:52:57 PM »

2. This is cumulative. So saying that you only need to adjust your spending by 12.5% is misleading. If your portfolio goes down two years in a row, the reduction in your spending level would increase on top of each other.

3. That said a Z of somewhere between .1 and .2 is 100% effective. The lowest withdraw for .1 is about -11% from starting portfolio and .2 is about -19%. This means that the worst withdraw in a 30 year period would at worst require covering 20% of your spending. So if you're spending $40k (inflation adjusted), you'll in the worst year need to cover about $8k.

My opinion is that overall, awesome knowledge to have, and for anyone that will be earning 15-30% of their salary year-to-year has absolutely no fear of ever running out of money.

So possibly misleading, if actionably accurate. If a 3.5% withdrawal rate has never failed, one should only need to reproduce the difference between their current withdrawal and 3.5% - if one were withdrawing 4% that would .5% - you're not trying to rebuild your 'stache, just withdraw from it at a lower rate.

Ahhh, but if a 3.5% WR has never failed, then the action would be to start withdrawing 3.5% of the current balance.  Otherwise, you're comparing apples to oranges.

Just go run the tool if you allow yourself to drop to 3.5% even with no cap I never run out of money and more often than not you end up being able to spend a lot more

Which tool would you use to start with a 4% WR and then once your portfoliio drops 40% switch to a 3.5% WR an option?
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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #214 on: January 14, 2017, 10:40:53 PM »
I think you can get pretty close by running the "Variable" withdraw in cfiresim with:

Z value of : .3 (40% drop to cause 12.5% change in spending 12.5/40 = .3125)
Spending ceiling set at 4% (defined value of 40k with set defaults)
Spending floor set at 3.5% (35k)

Shows a good success rate of ~99%.

Not the exact requested scenario, but I assume pretty close.
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Eric

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #215 on: January 14, 2017, 10:51:07 PM »
I think you can get pretty close by running the "Variable" withdraw in cfiresim with:

Z value of : .3 (40% drop to cause 12.5% change in spending 12.5/40 = .3125)
Spending ceiling set at 4% (defined value of 40k with set defaults)
Spending floor set at 3.5% (35k)

Shows a good success rate of ~99%.

Not the exact requested scenario, but I assume pretty close.

That's not the context of this scenario though.  The claim is that using a 4% inflation adjusted WR, after a 40% drop in portfolio value, switching to a 3.5% inflation adjusted WR (of the initial balance) then guarantees success.  Things just don't work like that.  Starting with a variable withdrawal rate, as you're suggesting, is a whole different ball of wax.
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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #216 on: January 14, 2017, 11:35:34 PM »
That's not the context of this scenario though.  The claim is that using a 4% inflation adjusted WR, after a 40% drop in portfolio value, switching to a 3.5% inflation adjusted WR (of the initial balance) then guarantees success.  Things just don't work like that.  Starting with a variable withdrawal rate, as you're suggesting, is a whole different ball of wax.

That was not the scenario posted. This is probably why you're confused - the scenario you described does indeed make little sense!
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Eric

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #217 on: January 15, 2017, 11:55:42 AM »
That's not the context of this scenario though.  The claim is that using a 4% inflation adjusted WR, after a 40% drop in portfolio value, switching to a 3.5% inflation adjusted WR (of the initial balance) then guarantees success.  Things just don't work like that.  Starting with a variable withdrawal rate, as you're suggesting, is a whole different ball of wax.

That was not the scenario posted. This is probably why you're confused - the scenario you described does indeed make little sense!

I'm glad to hear that, but you may want to edit previous posts because it sounds like you're saying the exact scenario I described above.

The fact your portfolio drops 40% doesn't mean you withdrawals need to drop by 40%. In most cases you wouldn't need to change anything due to a significant market crash. You also would not shoot for the lowest paying PT job as a goal. There would be no pressure to jump on something crappy ASAP.

Great points.

As has been pointed out, if your stash drops 40% (or X% from its inflation adjusted starting value) and one is living off of 4% withdrawls, they only need to drop their withdrawls 12.5% to ensure they will never run out of money.  At $40K, this puts it in the neighborhood of $5K, or even less than a minimum wage job. If spending is double that, two adults with jobs would fill that gap easily until the portfolio amount returns to the inflation-adjusted value.
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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #218 on: January 15, 2017, 10:45:09 PM »
No. You may have missed the part that the 3.5% withdrawal would be from the inflation adjusted value, not the 'starting balance'.
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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #219 on: January 16, 2017, 08:05:27 AM »
It doesn't matter how technically complex one's simulations are. They are still extrapolations of past data into the future. They still operate under the fundamental assumption that the future will resemble the past.

50,000 Monte Carlo simulations yielding a probability distribution of future values along with various statistics is still a fancy way of tracing a trendline with a ruler.

You cannot statistically account for the probability of events like the multi-decade low-growth funk Japan has endured, much less the collapses of democracy Turkey, Russia, and Thailand have experienced, or the 30% currency devaluation the Brits experienced last year.

Sure, if the US committed to sticking with the same economic configuration we had for most of the post-WW2 era, we could predict similar outputs. But now we've entered an era of financial deregulation, ballooning national debt, economic isolationism, and one-party government that doesn't resemble the past we are extrapolating.

So the odds of portfolio failure could be a factor of "normal" variability in returns PLUS variability caused by "unusual events". This sum is greater than sims based on past data can calculate.

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #220 on: January 17, 2017, 02:38:03 PM »
This. I have never yet heard someone raise this issue, yet so many say they'll just get a job if RE doesn't work out. They also never mention ageism.

As others have already pointed out, a "horrible" $10-12/hour part-time job would be plenty to save your RE plans. You don't need to go back to your high-powered former career.

I think being a lifeguard or working retail at REI or whatever would actually be pretty fun, but that's just me.

-W

I'm with you on this Walt. And remember, that part time job (which may come with added social, fitness, or other perks) would easily push most FIREe's down to below a 3% withdrawal rate, protecting you from all but the worst of market conditions
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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #221 on: January 18, 2017, 10:48:14 AM »
I think for us that has say 1-7years left until FIRE we have one thing in common, we will have to get past the next stock market crash before we can settle. What i mean is that if i had two years left, and the market just continued to rise until then, and i reached my goal ( 25x ) THEN the crash came, i would be bad off, but the same applies to the ones that have lets say 5 years left. Why i say this is that i think the next crash would be as big as the last one at least (there is much more debt around now than in 2008) and there is imminent that we are not very many years from it coming from a long bull market. I could be 2017, it could be 2018, but we all need to get past it before we safely can surf away :-). It would not be great to get the 70% down in your face after a year or two into your FIRE. So it would not help me very much to say i am two years away from FIRE in contradiction to say i am 4 years from it. I would say for those of us that are not fire today, you would have to wait until after the next big one :-). Might be awfully wrong of course but it goes along with the importance of the 5 first years after you quit work thing. The behavior of the market the period before you FIRE kind of predict if you need to go 3,5% or can go 5% etc.

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #222 on: January 18, 2017, 10:57:11 AM »
There is no telling when the next crash will come, how big it will be or how fast the recovery will be. You need a FIRE plan that can deal with all the typical risks, which include a market crash early on. Any plan that doesn't account for these risks is incomplete.

I'm into the short strokes for FIRE. If the market keep climbing like this year I'm done in 3-4yrs. Assuming we get that far down the road without a crash I'm not going to keep working until there is a crash or until I have some wacky low WR that can weather a nuclear war. I'll pull the trigger and have some contingency plans for an early crash. If the crash comes I'll execute those contingency plans and if it doesn't I'll get on with FIRE.

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #223 on: January 18, 2017, 11:14:45 AM »
It doesn't take a crash to get back into the realm of normal growth a simple 0% gain year would put us back in the ballpark. The valuation is not astronomically high right now

I don't get why everyone assumes crash
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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #224 on: January 18, 2017, 11:26:11 AM »
It doesn't take a crash to get back into the realm of normal growth a simple 0% gain year would put us back in the ballpark. The valuation is not astronomically high right now

I don't get why everyone assumes crash

You are correct. I don't assume anything. The best thing I've learned from MMM & JL Collins is that I have no fucking clue what's going to happen next year or few years and that's okay I can still be a successful investor.

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #225 on: January 18, 2017, 11:38:03 AM »
It doesn't take a crash to get back into the realm of normal growth a simple 0% gain year would put us back in the ballpark. The valuation is not astronomically high right now

I don't get why everyone assumes crash

You are correct. I don't assume anything. The best thing I've learned from MMM & JL Collins is that I have no fucking clue what's going to happen next year or few years and that's okay I can still be a successful investor.

Agreed.

People tend to point to 07 valuations and we're higher now. But we don't have stupid lending going on in the housing markets that spurred that. We have it in cars but that's not near the same. We have an education bubble I can see too. But most of these will not be like the 08 housing bubble. 

But we have no clue. Just dump in every dollar you have as fast as you can and watch it grow. BC it will over time.
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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #226 on: January 19, 2017, 06:33:01 PM »
It doesn't take a crash to get back into the realm of normal growth a simple 0% gain year would put us back in the ballpark. The valuation is not astronomically high right now

I don't get why everyone assumes crash

You are correct. I don't assume anything. The best thing I've learned from MMM & JL Collins is that I have no fucking clue what's going to happen next year or few years and that's okay I can still be a successful investor.

Can we wait 1 more year of normal returns? Then I calculate I'll be through the sequence of returns risk and won't even notice the next crash.
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steveo

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #227 on: January 19, 2017, 06:55:57 PM »
There is no telling when the next crash will come, how big it will be or how fast the recovery will be. You need a FIRE plan that can deal with all the typical risks, which include a market crash early on. Any plan that doesn't account for these risks is incomplete.

I'm into the short strokes for FIRE. If the market keep climbing like this year I'm done in 3-4yrs. Assuming we get that far down the road without a crash I'm not going to keep working until there is a crash or until I have some wacky low WR that can weather a nuclear war. I'll pull the trigger and have some contingency plans for an early crash. If the crash comes I'll execute those contingency plans and if it doesn't I'll get on with FIRE.

I'm in this position as well. I haven't really thought through a contingency plan. I'm interested in what your contingency plans are.

Just off the top of my head here are mine:-

1. I should be able to not withdraw from the stash for 2-3 years based on accrued leave. I don't have that much leave at all but I don't spend anywhere near that amount of money that I earn ala anyone who is intending to FIRE.
2. I can go back to work at my current job within say 3 years. I intend to ask for a career break which means I can go back to work.
3. Use my bonds post the 3 year point. This is a tough one because if markets crash 50% I'd like to sell my bonds and buy more stocks.
4. Work in a part-time job that pays crap but I don't really need much anyway.
5. Just be really frugal and spend less.
6. Do nothing. I can always sell my house and downsize. There would be no rush to do this. It's just that my stash would be depleted.

Mighty-Dollar

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #228 on: January 20, 2017, 10:12:07 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%.

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%.
If you want to make your money last for 40 years then you have to lower to 3.3%. This is according to researchers.  When you have a 20 year time horizon there's one study that concluded 5.1% and another that concluded 5.5%.

waltworks

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #229 on: January 20, 2017, 10:36:32 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%.

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%.
If you want to make your money last for 40 years then you have to lower to 3.3%. This is according to researchers.  When you have a 20 year time horizon there's one study that concluded 5.1% and another that concluded 5.5%.

Citations, plz.

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maizeman

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #230 on: January 20, 2017, 10:39:44 PM »
....
If you want to make your money last for 40 years then you have to lower to 3.3%. This is according to researchers.  When you have a 20 year time horizon there's one study that concluded 5.1% and another that concluded 5.5%.

Ummm. what? Who are these researchers and what crazy assumptions did they make?
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boarder42

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #231 on: January 21, 2017, 06:02:32 AM »
Yeah 3.3% is wrong. 3.5% has never historically failed with greater than 75% stocks.

Those studies were all based on larger amounts of bonds.
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Retire-Canada

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #232 on: January 21, 2017, 06:49:20 AM »
Ummm. what? Who are these researchers and what crazy assumptions did they make?

....that you'd never fact check their crazy assumptions?

waltworks

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #233 on: January 21, 2017, 09:12:09 AM »
I'd like to point out that with a 20 year horizon, these amazing "researchers" are very, very close!

One can, with a 100% cash allocation, withdraw 5% per year for 20 years. The 5.1% figure is optimistic, says my math, but great effort by the "researchers". This is how science progresses!

I'm publishing these findings today, then waiting to hear from the Nobel committee!

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Tyler

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #234 on: January 21, 2017, 10:15:25 AM »
If you want to make your money last for 40 years then you have to lower to 3.3%. This is according to researchers.  When you have a 20 year time horizon there's one study that concluded 5.1% and another that concluded 5.5%.

Citations, plz.

-W

The specific numbers vary by portfolio, and one would be wise to make sure that their own investments match the assumptions of whatever retirement study they are referencing before arguing over basis points (not all stocks and bonds are created equal), but the idea that withdrawal rates vary by retirement length is absolutely true.

« Last Edit: January 21, 2017, 10:32:07 AM by Tyler »
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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #235 on: January 21, 2017, 02:32:18 PM »
I'd like to point out that with a 20 year horizon, these amazing "researchers" are very, very close!

One can, with a 100% cash allocation, withdraw 5% per year for 20 years. The 5.1% figure is optimistic, says my math, but great effort by the "researchers". This is how science progresses!

I'm publishing these findings today, then waiting to hear from the Nobel committee!

-W

Ha. I didn't catch that at first.
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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #236 on: January 21, 2017, 05:36:41 PM »
Simple answer:

4% rule followed exactly may have tough times.

4% rule bent with some mustachian ways (spend less, start a side hussle, go back to work, etc.) you'll be okay.

Great read if you want to explore more: http://www.madfientist.com/safe-withdrawal-rate/
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Retire-Canada

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #237 on: January 21, 2017, 05:55:33 PM »
Simple answer:

4% rule followed exactly may have tough times. is very very conservative and will work under most conceivable scenarios.

4% rule bent with some mustachian ways (spend less, start a side hussle, go back to work, etc.) you'll be okay - takes stupid safe and adds a belt and suspenders to it.

Great read if you want to explore more: http://www.madfientist.com/safe-withdrawal-rate/

Sorry I had to correct that post a little bit as it doesn't summarize the discussion so far well.
« Last Edit: January 22, 2017, 06:06:18 PM by Retire-Canada »

Classical_Liberal

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #238 on: January 22, 2017, 10:39:31 AM »
Per usual, Tyler makes great points about AA.  If someone is so very concerned about the 4% rule (I am not), there are ways to mitigate this risk through portfolio management.  Changing passive AA during different times in drawdown is not market timing, itís like hedging your bets or buying insurance.

Think of it this way:  You purchase a house in a flood plain.  History tells us that in the last 150 years your neighborhood has flooded 5 times.  Rightfully, you are concerned and get a quote for flood insurance at a rate of $100 a month.  However, detailed investigation shows that every time your neighborhood has flooded it has happened in March and April, your insurer is willing to offer you a policy that only covers March and April for $400 annually (letís forget about climate change here as that is a known variable, pretend all things are equal).  Which insurance is the best buy?

There are only two historical scenarios that have cause a failure of 4% rule in the US:
  • Significant drop is asset value soon after drawdown initiation which lasts multiple years (sequence risk)
  • Long term low growth coupled with high inflation (stagflation)
 
Why not insure against these two risks?  For example, a portfolio 100% VTI is a high risk portfolio for scenario #1 (If you call single digit percents high).  In the first decade or so of drawdown, a simple modification to 25 to 40 percent treasuries significantly reduces this risk.  If a bad sequence never materializes (most scenarios) and the retiree sees average or above average gains, this risk disappears.  Yes, being less invested in equities means a smaller stash after the decade of average returns, BUT (big but) itís meaningless!  A 60% equity allocation would have been more than enough to reduce withdrawal rate to a point in which historically, the retirement never fails.  100% equities would have reduced WR more, but for what purpose?  After the sequence risk has been eliminated (historically speaking, since thatís all weíve got), then reallocate to defend against the next issue, inflation.  Obviously having a percentage of liquid assets tax deferred allows for easier (quicker) AA changes, but over periods of time it can be adjusted in taxable accounts rather efficiently as well (or one could glidepath).


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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #239 on: January 22, 2017, 10:47:48 AM »
Have people gamed out the "initially 60/40 split, moving to 100% stocks over time" scenario?

My gut says it feels like a free lunch, and is suspicious that if you chop so much possible growth off your portfolio in the early years by going 40% bonds, you're actually extending the number of years where your portfolio is small enough it'd be subject to sequence of returns risk. But my gut has been wrong before, which is why it is good I can overrule it with hard numbers once available.
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Classical_Liberal

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #240 on: January 22, 2017, 11:00:33 AM »
I think your "gut" is absolutely correct!  "Insurance" has it's costs, if the worst case does not play out, you are probably at risk for worst cases for a bit longer thanks to lower expected returns. However, the worst case is exactly what you are insuring against, risk remains mitigated.  This is why glidepath has gained some popularity. 

The biggest "cost" is not having more money than has ever historically been needed (ie all the scenarios where 4% ends with more inflation adjusted stache than initial are significantly reduced).  If legacy or inheritance is more important than mitigating risk, this is a lousy suggestion.

Edit: This is the advantage of knowing how much is "enough" vs always trying to accumulate at a maximum rate.
« Last Edit: January 22, 2017, 11:04:00 AM by Classical_Liberal »

Metric Mouse

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #241 on: January 24, 2017, 12:21:26 AM »
Have people gamed out the "initially 60/40 split, moving to 100% stocks over time" scenario?

My gut says it feels like a free lunch, and is suspicious that if you chop so much possible growth off your portfolio in the early years by going 40% bonds, you're actually extending the number of years where your portfolio is small enough it'd be subject to sequence of returns risk. But my gut has been wrong before, which is why it is good I can overrule it with hard numbers once available.

I think that you're looking at it backwards. At 4% it's already likely one's stache is growing way faster than needed. While a 60/40 (or whatever) split would remove some of the upside, it would also remove some of the downside, which is the real portfolio killer. While you may be right that it extends the time subject to sequence of returns risks, it is also making those risks lower on a per year basis. This is why reverse glide path has become more popular.
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maizeman

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #242 on: January 24, 2017, 07:25:46 AM »
Is there a good mathematically precise example of the reverse glide path? I'd like to actually run some simulations when I get the chance (right now my in house script doesn't think about bonds at all so it'll take a little work).
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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #243 on: January 24, 2017, 01:07:28 PM »
Is there a good mathematically precise example of the reverse glide path? I'd like to actually run some simulations when I get the chance (right now my in house script doesn't think about bonds at all so it'll take a little work).

Have you read the Kitces article?

https://www.kitces.com/blog/should-equity-exposure-decrease-in-retirement-or-is-a-rising-equity-glidepath-actually-better/
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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #244 on: January 24, 2017, 01:36:35 PM »
Also, more recent Kitces article on "V-shaped" equity glidepath (decreasing equity exposure in years immediately leading up to retirement, then ratcheting back up in years immediately following retirement):

https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/

And discussion (with some historical backtest results) here:

http://forum.mrmoneymustache.com/investor-alley/changing-asset-allocation-as-fire-approaches/

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #245 on: January 24, 2017, 01:47:27 PM »
I hadn't read the Kitces article, thanks!

So if I understand how he's using starting and ending allocations correctly, the model is you start at XX% bonds, spend only from the bonds bucket, and don't start rebalancing out of stocks until bonds until your percent bonds hits YY% (where YY is your target ending bond allocation?).

I wish he gave more detail on his monte carlo method (for example, does it assume no correlation -- positive or negative -- between stock and bond returns) and explained why he was using monte carlo data instead of historical data, but it already starts to give more solid info to work with.

...pause while I try to post and get notified of brooklynguy's post...

Okay, someone (msilenus) tested it with actual historical data. Very cool. My gut is officially silenced with hard numbers.

Quote
The intuition I'm developing is that you're going to give up median end portfolio with either glidepaths, or by increasing bond allocations.  Both of those strategies improve worst case performance, but the 70/30,10 glidepath seemed to be striking a better tradeoff than I could find via statically increasing bonds.  Ie: I could get better security at a higher median than I could with static allocations, but the median wasn't as good as with 100/0 static.

Thank you both.
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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #246 on: February 06, 2017, 10:20:27 PM »
+1 Thanks for the kitces article, I hadn't read it and it was very interesting.
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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #247 on: February 07, 2017, 04:40:59 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.

Haha, perfect.

Yeah, even the stock market is a bet, but you are forced to make some kind of bet to stop working. That said, nearly anyone industrious enough to make 30-40-year-old FIRE work is probably going to trip over a few grand a year in odd hobby jobs, community involvement, something. That is an insurance against the miniscule chance the 4% rule fails us that we all never calculate (usually on purpose!), but which is the reason I would never bother to worry about The Total Decline of Everythingô.

Retire-Canada

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #248 on: February 07, 2017, 06:32:43 AM »
Yeah, even the stock market is a bet, but you are forced to make some kind of bet to stop working. That said, nearly anyone industrious enough to make 30-40-year-old FIRE work is probably going to trip over a few grand a year in odd hobby jobs, community involvement, something. That is an insurance against the miniscule chance the 4% rule fails us that we all never calculate (usually on purpose!), but which is the reason I would never bother to worry about The Total Decline of Everythingô.


Agreed on the side income.

We also fail to fully appreciate how damaging it is to be chained to a desk for years. You can fail FIRE before you start if you force yourself to chase after a super low WR and arrive at the finish line physically and mentally broken. That doesn't fit neatly into a cFIREsim simulation or a spreadsheet projection though so we ignore it.

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Re: The 4% Rule For Those In Their Mid-20's... Completely Unrealistic?
« Reply #249 on: February 07, 2017, 03:48:36 PM »
Eh. You figure out allowances for yourself as long as you have a level head about how much teeth-grinding you do over obnoxious work. I determined my max at my current job was the 4 more years it would take to get my flurry of benefits locked in (which puts me FI if not RE after the stint at this job). I'll consider that a win, but woo, will I never miss the industry.

I don't recommend anyone keep a job that grinds them down and makes them go home tired if they can avoid it. Least of all if you have family. The only reason I would do it is to facilitate not having to do it anymore. Some can say "oh there are others" and just quit and try something else, but there's a comi-tragedy in the reporting bias on just how well that actually goes. That is, again, especially if you have family.