Fox Business addresses the 4% rule

[talltexan]

http://www.foxbusiness.com/markets/2016/09/06/here-are-4-retirement-rules-major-flaws.html

[scottish]

i like this quote  (not):

Fortunately, you don't necessarily have to throw out the 4% rule altogether. You can address the stock market-volatility issue by being flexible. Withdraw less than 4% in bear markets and more than 4% in bull markets.

Aside from whether it would work or not, it assumes you can tell if you're in a bear market or a bull market!

[LivlongnProsper]

This hits on the low yield environment we are now in which necessitates a lower withdrawal rate than in the past. I recently looked at a report about this (attached) that had depressingly low withdrawal rates. One thing I took from it was the likelihood of rates staying low for the near and medium term. I was already planning on a 3% WR but now I may need to lower that to 2.5% and look at developing more skillsets that translate into more/more lucrative side gigs after FIRE.

[MrMoogle]

This hits on the low yield environment we are now in which necessitates a lower withdrawal rate than in the past. I recently looked at a report about this (attached) that had depressingly low withdrawal rates. One thing I took from it was the likelihood of rates staying low for the near and medium term. I was already planning on a 3% WR but now I may need to lower that to 2.5% and look at developing more skillsets that translate into more/more lucrative side gigs after FIRE.

I don't know that there is a correlation between low interest rates and lowering the SWR.  If you look at the SWR over time, does it correlate to the initial interest rate?

[Travis]

This hits on the low yield environment we are now in which necessitates a lower withdrawal rate than in the past. I recently looked at a report about this (attached) that had depressingly low withdrawal rates. One thing I took from it was the likelihood of rates staying low for the near and medium term. I was already planning on a 3% WR but now I may need to lower that to 2.5% and look at developing more skillsets that translate into more/more lucrative side gigs after FIRE.

I don't know that there is a correlation between low interest rates and lowering the SWR.  If you look at the SWR over time, does it correlate to the initial interest rate?

It should only affect the bond/treasury side of your portfolio as a direct consequence.  I don't know how interest rates influence the rest of the stock market.

[Bicycle_B]

Warren Buffett thinks stock prices relate to interest rates.  He says interest rates are "like gravity", invisible and powerful, in their effect; "the higher the rate, the greater their downward pull."  Bond prices respond quickly to interest rate changes but stock prices don't have to, though.

http://archive.fortune.com/magazines/fortune/fortune_archive/1999/11/22/269071/index.htm

Presumably if interest rates go back up, stock prices will eventually fall, at least compared to the price they would have achieved with rates that stayed low.

Fwiw, some economists (such as several of those at the Fed, including Janet Yellen) also think that low interest rates have another negative effect if they stay low for too long:  by making it too cheap to invest, they could "encourage risk taking and so undermine financial stability" (link below, "Where Do We Go From Here" section, 6th paragraph). 

http://www.federalreserve.gov/newsevents/speech/yellen20160826a.htm

I think it's perfectly possible to have lower returns than in past times even if the economy remains stable and strong for decades.  Perhaps the lower returns on investments today (as shown by interest rates) reflect not that times are bad, but that society is the most stable it's ever been.  Low risk, low reward!

[talltexan]

Bicycle_B, I think your low-rate hypothesis isn't correct. Rates always get lowered in response to new, bad news. If your hypothesis were correct, then they'd get raised when times are tough.

[TexasRunner]

Bicycle_B, I think your low-rate hypothesis isn't correct. Rates always get lowered in response to new, bad news. If your hypothesis were correct, then they'd get raised when times are tough.

I'm confused by your statement...  Are we talking fed rates or lender rates?  Because the feds have a arguably (substantially IMO) different approach and end goal in their rate-setting practices. 

[Classical_Liberal]

This hits on the low yield environment we are now in which necessitates a lower withdrawal rate than in the past. I recently looked at a report about this (attached) that had depressingly low withdrawal rates. One thing I took from it was the likelihood of rates staying low for the near and medium term. I was already planning on a 3% WR but now I may need to lower that to 2.5% and look at developing more skillsets that translate into more/more lucrative side gigs after FIRE.

You can fund a 30 year retirement 3%WR with a combo of CD ladder's and TIPS(even at today's yields). Yea you win!

[Bicycle_B]

Bicycle_B, I think your low-rate hypothesis isn't correct. Rates always get lowered in response to new, bad news. If your hypothesis were correct, then they'd get raised when times are tough.

If you mean my hypothesis that today's low rates reflect a society so stable that low rates can be maintained, you may be raising a very subtle issue.  I'm not claiming that the Fed consciously keeps rates low because they think everything is great.  Rather, I mean that the fact they can push rates so low and get away with it is because society is stable enough that we believe them.  The Fed itself, as you say, certainly cuts rates in response to bad news when they think that the bad news requires an economic boost.

Consider the alternative, where people don't trust the government's bonds.  When the government printed money (lowered rates), prices of goods and services might rise because people realize that the govt is just printing more of these worthless dollars.  We'd have inflation, as happened in the 1970s.  So I'm saying that the ability to have low rates reflects increased faith in the system. 

[talltexan]

I think you're conflating the Fed Funds rate with the market rate paid to the Treasury for new debt being issued.

[TheOldestYoungMan]

Bicycle_B, I think your low-rate hypothesis isn't correct. Rates always get lowered in response to new, bad news. If your hypothesis were correct, then they'd get raised when times are tough.

Claim based on facts not in evidence.  If the news is bad enough, rates might very well get raised.  It depends entirely on the type of bad news and the extent of the impact.

[talltexan]

You have to go back more than 35 years to find the last time the Fed raised rates during a recession.

[arebelspy]

Wow, that was a really bad article.

Let's debunk every one of their issues.

Let's start with the fact that the rule was created more than 20 years ago, when interest rates were higher. In such an environment, the bond portion of a portfolio would have been generating more income. We've been in a low-interest rate environment for a long time now, rendering our bonds less able to replenish funds withdrawn each year.

100% irrelevant.  The 4% rule wasn't based on the market conditions of the time, but the history of the market over decades.  It encompassed wars, depressions, recessions, etc.  It has nothing to do with what interest rates were in the 90s.

Then there's the rule's assumption that your portfolio will be split 60-40 between stocks and bonds. You might not have or want that allocation. If your portfolio is split 50-50, or you have 75% of it in stocks, then the 4% rule won't work as advertised.

Mostly irrelevant.  Yes, AA is important.  Minor tweaks like they mention won't shift the 4% rule much at all.  Anything between about 30/70 and 70/30 have very similar outcomes.

Meanwhile, many people are living longer. Datafrom a 2015 Centers for Disease Control and Prevention report shows that those born in 2014 can be expected to live, on average, to age 78.8, up from 75.8 in 1995 and 70.8 in 1970. And those are just averages -- many people live much longer (and some much shorter) lives. The 4% rule aims to make your money last for 30 years, but if you retire at 62 and live to 96, you might be quite pinched in your last years.

This is the only semi-valid one, but you can, you know, plan for this (and especially see, after a few years, the direction your portfolio is trending--if it grows, and thus your WR based on current portfolio size shrinks, you're very likely to be able to have it last 40, 50, 60 years or even indefinitely).

Finally, remember that every set of 20 or 30 or however many years in the stock market will be at least somewhat different -- some with higher-than-average gains and some with lower-than-average gains. If you plan to follow the rule and withdraw 4% of your nest egg in your first year of retirement, what if the stock market and your portfolio tank by 30% in the year leading up to your retirement? Such things can happen -- the S&P 500 plunged 37% in 2008. If that happens early in your retirement, you'll either be withdrawing far less than you'd planned on or you'll be depleting your nest egg faster.

100% irrelevant.  If the market drops the year before you ER, you haven't hit your number, and don't ER.  If it drops the year you ER, well, that's accounted for in the 4% rule.

Their criticisms are bad, and they should feel bad.

There's legitimate reasons to be (a little, not much) concerned about the 4% rule.  Longevity is MAYBE one.  The rest?  Total bunk.

[TheOldestYoungMan]

You have to go back more than 35 years to find the last time the Fed raised rates during a recession.

What's that, you say they haven't always gone down?

[larmando]

According to CAPM the expected return of a risky endeavor depends on the risk-free rate (i.e. of government bonds) as well as on the "market premium" and the level of risk (which is one for the "whole market" approach most mustachians take).

Now most put the market premium at 7% or 5%, so above the 4%, though closer enough that sequence of returns risk might be more problematic. That doesn't mean the rule is wrong but of course to guarantee a longer-than-30-years retirement one should pay a bit of attention, be flexible, be prepared to add some gig or to cut on something, etc, especially if after a year or two of retirement they see themselves withdrawing far more than 4% (e.g. due to a crash).

[zephyr911]

I would so much rather work a few hours PT or S/E than worry about walking a razor's edge with my WR. I realize this isn't everyone's thing, but if most of your needs are met and you just need a little more, you can pick work you like, be picky about hours, and so on, and get past most of the stuff most of us hate about having a job.

[TomTX]

This hits on the low yield environment we are now in which necessitates a lower withdrawal rate than in the past. I recently looked at a report about this (attached) that had depressingly low withdrawal rates. One thing I took from it was the likelihood of rates staying low for the near and medium term. I was already planning on a 3% WR but now I may need to lower that to 2.5% and look at developing more skillsets that translate into more/more lucrative side gigs after FIRE.

More of Pfau's crap. He hides huge amounts of drag on his portfolio calculations. Like 1% manager fees. Or taking the historical record and handicapping everything by 25% Yes, Pfau projects the future will be 25% worse than the Great Depression, Stagflation, etc.

His early work was good. His recent stuff is crap.

[arebelspy]

This hits on the low yield environment we are now in which necessitates a lower withdrawal rate than in the past. I recently looked at a report about this (attached) that had depressingly low withdrawal rates. One thing I took from it was the likelihood of rates staying low for the near and medium term. I was already planning on a 3% WR but now I may need to lower that to 2.5% and look at developing more skillsets that translate into more/more lucrative side gigs after FIRE.

More of Pfau's crap. He hides huge amounts of drag on his portfolio calculations. Like 1% manager fees. Or taking the historical record and handicapping everything by 25% Yes, Pfau projects the future will be 25% worse than the Great Depression, Stagflation, etc.

His early work was good. His recent stuff is crap.

Blunter than I'd word it, but... yeah.