Author Topic: Challenging the 4% "Rule"  (Read 8750 times)

Threshkin

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Challenging the 4% "Rule"
« on: June 04, 2018, 11:09:22 AM »
At the risk of being deemed a heretic, the 4% withdrawal rate may be too aggressive, particularly for the younger FIRE cohort.

ERN does a very good job of analyzing safe withdrawal rates in much more detail than the Trinity study.  You can read his analysis starting here: 

https://earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro/

WARNING!  This is very math heavy, not for the faint of heart. 

The study is up to 25 blog posts so far.  He covers all the major assumptions, arguments and myths regarding withdrawal rates, risks and market conditions.  Wade through every post like I did or pick and choose what interests you.  He also includes some google docs spreadsheets for analyzing your own specific situation.

Thoughts?  Opinions?

edit: HT to an unknown member of this forum who first brought ERN to my attention.
« Last Edit: June 04, 2018, 11:17:34 AM by Threshkin »

ysette9

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Threshkin

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Re: Challenging the 4% "Rule"
« Reply #2 on: June 04, 2018, 11:50:33 AM »
https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/700/

Thanks for sharing this thread but at 29 pages I did not read it all.  From the pages I did read it looks like this thread embraces the idea that 4% is too low a withdrawal rate.  Several posters were advocating 5%, 6% or more.  I also saw references to some of the myths analyzed in ERN's study. 

Group think and easy to remember memes are useful in some ways but I prefer to question simplistic assumptions and challenge the status quo.

I suggest you read or at least skim ERN's blog.   I spent a couple of months checking his math and it looks pretty solid to me.

ysette9

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Re: Challenging the 4% "Rule"
« Reply #3 on: June 04, 2018, 12:00:02 PM »
You could spend the next year reading a lot of good research and debate by smart people on the risks of a 4% withdrawal rate. Michael Kitces has a really interesting interview on that subject in a podcast I heard the other month. (Was it the Mad Fientist podcast?)

I know the thread above is long, so I would draw your attention to the graphs on page 15. I found them very powerful for putting relative risks into perspective. It seems to me that while we debate endlessly on whether it should be 3.6% or 3.5% or 2% or whatever, we lose sight of the fact that our risk of dying and never being able to use up all that money is both greater than running out of money, and growing every day. Don’t lose sight of what is important in life.

ysette9

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Re: Challenging the 4% "Rule"
« Reply #4 on: June 04, 2018, 01:52:27 PM »
I don’t think we should or mean to be so dismissive as this might come across by our responses so far. Personally I feel if I am going to hang my hat on the 4% rule to quit my job then I need to really understand deeply how it works, what assumptions have been built in, what the margin of safety is, and how the modeling applies or not to my specific situation. That will allow me to rest well when the markets take a downturn, or know when I need to sit up and be concerned. Having this understanding comes from reading the different studies and arguments do and against, and then deciding what my own risk tolerance is. That is all complex and takes time to digest, and has been discussed quite a bit already. So I don’t mean to dismiss OP’s post but to point out that it is part of a rich discussion that has been taking place here for a while.

Bird In Hand

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Re: Challenging the 4% "Rule"
« Reply #5 on: June 04, 2018, 02:21:00 PM »
4% SWR just gives me a tangible goal to aim for.  With all the caveats about sequence of returns, past performance is no guarantee of future returns, etc., many (including me) are susceptible to OMY syndrome.  At least when I get to 25x I know I'm probably close.

I'm fully aware that quitting at exactly 25x expenses and mindlessly withdrawing 4% might work perfectly, or I might leave millions on the table (oh no, I worked too long!), or a bad sequence of returns might force me to withdraw less or go back to work.  Or I could inherit a lot from relatives, or my savings could be decimated with an expensive illness in the family, or I could die decades earlier than I expect, or...

It's just a rule of thumb.  Something to (hopefully) get you in the FI ballpark.  Be flexible, save a lot, have a frugal mindset, and the details aren't so important.

bacchi

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Re: Challenging the 4% "Rule"
« Reply #6 on: June 04, 2018, 02:53:58 PM »
Quote
People take the Trinity Study at face value and extrapolate the 30-year windows from Trinity to 50+ years for the early retirement crowd

Who are these "people"?

If I spend $700 for a Pro Pass at FinCon 2018, would he tell me who these people are?

secondcor521

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Re: Challenging the 4% "Rule"
« Reply #7 on: June 04, 2018, 02:57:35 PM »
I've read the series in the past when it was fewer than 25 blog posts.  A few thoughts:

1.  ERN seems to be mostly correct, with a couple of limitations worth mentioning:
     a.  His blog posts are a mixture of general analysis and analysis specific to his situation.  Sometimes it seems that he generalizes a little too much - that is, if it doesn't work for him and his family and his situation, it won't work for others.  True in the case of math, not so much true in terms of risk profiles, age at retirement, relative size of SS benefit to stash, etc.
     b.  He presents his data with limited opportunities for peer review.  There are a bunch of charts and graphs that we have no way of verifying that they are correct except some basic logical inferences.  There are some google spreadsheets that he provides that you could check, yes.  But how do we know that any of the charts and graphs that don't come from those spreadsheets are correct?  How do we know he doesn't have bugs in his computer program?  We don't.

2.  He seems to spend a lot of words arguing back and forth between 3% and 4% and fractions of a percent in between.  If one is saving a lot and spending a little, toward the end of one's career it is pretty easy to go from 4% to 3% in a year or three (which he mentions at one point as being an idea he endorses).  So all the words spilled over .5% one way or the other works out to retiring a year or two earlier or later.  Seems like he is making blog post mountains out of several-months-one-way-or-the-other retirement date molehills.

3.  At one point he wrote that most early retirees would be in their 30s or 40s.  Err, I really doubt that it is "most".  Even on the early retirement message boards, retiring before 40 seems really rare to me.

4.  To echo a point made by someone above (referring to maizeman's graphs), ERN doesn't really consider the fact that the probability of dying in the 60 years he is concerned about is (a) much larger than the probability of running out of money, and (b) provides a safety factor of its own, something I didn't see discussed in his blog.  For this latter point, see http://www.retireearlyhomepage.com/swrlife.html

reeshau

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Re: Challenging the 4% "Rule"
« Reply #8 on: June 04, 2018, 02:58:05 PM »
It's just a rule of thumb.  Something to (hopefully) get you in the FI ballpark.  Be flexible, save a lot, have a frugal mindset, and the details aren't so important.

+1

To add a quote that I always think of, with this or any other general advice:

"All models are wrong but some are useful" - George Box

If you want some more food for thought on the 4% rule, the Trinity Study, their limitations and usefulness, I suggest Wade Pfau's site https://retirementresearcher.com


steveo

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Re: Challenging the 4% "Rule"
« Reply #9 on: June 04, 2018, 04:08:36 PM »
I really like ERN's analysis. I actually think it is probably spot on. If you are looking to retire at a young age - say 30 or 40 - and you don't intend to ever rely on social security or inheritance or any part time work or anything like that I think it is really solid advice.

I'm nearly 45. I have 3 kids 16, 14 & 7. I will receive social security at 67. I own my house in a HCOL area which means I could downsize. My parents and in-laws are both filthy rich which means I should inherit at least some money. I basically don't think his analysis is correct for my situation.

So I now have a broad general target and my target is 5% through to 3%. Once I get to 5% I know that I am good especially if I work for another couple of years and don't drawdown on my portfolio. So my goal isn't a perfect step from being not -FI and working to being FI and not working. I intend to get to the 5% area and then make a decision.

I should add that my expenses appear to be going up because we are spending more on the kids and my 5% target does not include this extra spending. I believe my spending will go down when the kids start to move into adulthood.

I use all of this analysis as a guideline and I use it in reference to my current situation which includes a lot of things - how happy I am at work, how much I have to work, how much we are currently spending due to the kids and how long until I receive social security. I think we should all use the available analysis in relation to our specific situations and also accept that the available analysis is a guideline and not a perfect way to predict the future.

I also use ERN's analysis on rising equity glidepath's as well.

DreamFIRE

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Re: Challenging the 4% "Rule"
« Reply #10 on: June 04, 2018, 04:27:11 PM »

This isn't anything new.  The 4% thread covers some of the same stuff.  And this recent thread also referenced a lower SWR:

https://forum.mrmoneymustache.com/investor-alley/cape-and-safe-withdrawal-rates/

Dicey

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Re: Challenging the 4% "Rule"
« Reply #11 on: June 04, 2018, 04:38:08 PM »
Yawn. Next topic, please.

Tyler

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Re: Challenging the 4% "Rule"
« Reply #12 on: June 04, 2018, 04:44:41 PM »
I prefer to question simplistic assumptions and challenge the status quo.

I very much admire the amount of work ERN has put into their SWR research.  But if you're into questioning simplistic assumptions, you might ask yourself whether limiting the research to the S&P500 and 10-year treasury bonds as your only two investing options is a reasonable assumption for modern investors.  Not all stocks and bonds are created equal.  Break that assumption and the calculated SWRs change quite a bit and many portfolios have done better (or worse) than 4%.

For a different perspective, you might read through a few of my own articles here: https://portfoliocharts.com/portfolio/retirement-income/

« Last Edit: June 04, 2018, 05:18:29 PM by Tyler »

Threshkin

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Re: Challenging the 4% "Rule"
« Reply #13 on: June 04, 2018, 05:08:02 PM »
I prefer to question simplistic assumptions and challenge the status quo.

I very much admire the amount of work ERN has put into their SWR research.  But if you're into questioning simplistic assumptions, you might ask yourself whether limiting the research to the S&P500 and 10-year treasury bonds as your only two investing options is a reasonable assumption for modern investors.  Not all stocks and bonds are created equal.  Break that assumption and the calculated SWRs change quite a bit and many portfolios have done quite a bit better than 4%.

For a different perspective, you might read through a few of my own articles here: https://portfoliocharts.com/portfolio/retirement-income/

Thanks Tyler.  I agree that ERN's investment assumptions are basic and also understand that attempting to model every possible permutation is effectively impossible.  He decided to go into detail in other areas. 

I have looked at your portfolio chars before and liked them.  I will take another look in relation to my own holdings.

My main intention was to keep people thinking about their own situation and FIRE targets.  We are getting a lot of new members who might drink the kool aid but not do the homework.

I think the last few bull market years can lead people into a false sense of security.  With this strong market many people are hitting their FIRE numbers (whatever their SWR assumption).  If a down turn happens in the next few years recent retirees may be in for an unpleasant surprise.

Personally I am more concerned about creeping longevity risk.  I do not want to discover in my 70s or 80s that I need to go back to work to supplement my portfolio!  An early hard crash can be dealt with....go back to work while still young.  An extended flat market is trickier because I might wait too long for the recovery and need to go back to work late.

Eric

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Re: Challenging the 4% "Rule"
« Reply #14 on: June 04, 2018, 05:27:46 PM »
I basically view that whole series as a conclusion in search of data.  He set out to prove that the 4% rule doesn't work and found data to support his argument.  (Plus, who's going to read 25 blog posts that state "4% WR still looks pretty good"?)

It's still a good thought exercise, and I think everyone should understand the underlying concepts.  But some/most of them are trying to be WAY too precise and the exact methodology is too rigid to be particularly useful.  I especially don't think that reading 10,000 words on whether your WR should be 3.47% or 3.56% is necessary, since as everyone in this Post-FIRE forum can tell you, not a single retiree withdraws or spends the exact same amount every year.  A handful of basis points in either direction is going to have basically zero effect on whether your retirement is successful or not.

maizeman

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Re: Challenging the 4% "Rule"
« Reply #15 on: June 04, 2018, 05:54:11 PM »
I basically view that whole series as a conclusion in search of data.  He set out to prove that the 4% rule doesn't work and found data to support his argument.  (Plus, who's going to read 25 blog posts that state "4% WR still looks pretty good"?)

It's still a good thought exercise, and I think everyone should understand the underlying concepts.  But some/most of them are trying to be WAY too precise and the exact methodology is too rigid to be particularly useful.  I especially don't think that reading 10,000 words on whether your WR should be 3.47% or 3.56% is necessary, since as everyone in this Post-FIRE forum can tell you, not a single retiree withdraws or spends the exact same amount every year.  A handful of basis points in either direction is going to have basically zero effect on whether your retirement is successful or not.

What Eric said. Even constraining ourselves to two asset classes* (equities and government bonds) we have so little real historical data. About 150 years worth. We must be cautious about drawing falsely precise conclusions from so few total data points.

We also have to be very careful to avoid overfitting such a small dataset. That's why red flags start to go up whenever anyone starts trying to predict future returns from current economic variables and insert that into projections of retirement success rates. Which is apparently what ERN is trying to do with CAPE. Which has been gone into on this forum quite enough already, but let me know if you're not familiar and I'd be happy to dig up the relevant threads.

And yes, I've felt much MUCH better about my odds of a successful FIRE since I realized I could include mortality curves right into my model of how likely I was to run out of money before I died, instead of just picking a random age I was hoping to live to.

*And as Tyler rightly points out there are lots of assets which are not either of these two things and for most of those we have only a handful of decades of historical data.

maizeman

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Re: Challenging the 4% "Rule"
« Reply #16 on: June 04, 2018, 07:16:45 PM »
Thereís a much much MUCH higher risk of staying too long at a job you donít enjoy, which is a much bigger risk for most people here than the perceived risk of people retiring too early without even understanding the risks or the math.
Again...thatís something I have never seen here. Not once.

Go back and read a lot of @Retire-Canada 's posts. @steveo is another reasonably good example. There may not be as many people talking about the major risks of working too long and missing out the chance to do things you want with your life (particularly while still healthy and active) as trying to argue the 4% rule is more accurately the 3.752% rule, but we do have a number of them on the forum.

DreamFIRE

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Re: Challenging the 4% "Rule"
« Reply #17 on: June 04, 2018, 08:18:16 PM »
I think Malkynn was referring to never seeing "people retiring too early without even understanding the risks or the math. "

Seadog

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Re: Challenging the 4% "Rule"
« Reply #18 on: June 05, 2018, 06:58:14 AM »
I basically view that whole series as a conclusion in search of data.  He set out to prove that the 4% rule doesn't work and found data to support his argument.  (Plus, who's going to read 25 blog posts that state "4% WR still looks pretty good"?)

It's still a good thought exercise, and I think everyone should understand the underlying concepts.  But some/most of them are trying to be WAY too precise and the exact methodology is too rigid to be particularly useful.  I especially don't think that reading 10,000 words on whether your WR should be 3.47% or 3.56% is necessary, since as everyone in this Post-FIRE forum can tell you, not a single retiree withdraws or spends the exact same amount every year.  A handful of basis points in either direction is going to have basically zero effect on whether your retirement is successful or not.

Jesus. We had people like that in engineering school. When comparing answers on assignments wanting to know what you got to the 6th decimal place. Forget that the huge assumptions on the way like whether you approximated a football as a sphere or a cylinder with throw even "correct" answers off by 50%.

A teacher then laid it out. In the real world, you run tests, you get data from sensors, you make best guess decisions and vast approximations, and you might have 1 significant figure confidently, and often only a certain order of magnitude. Data points will not line up in a nice curve and you can only make broad statements of correlation.

These models are not exact. Despite historically 3% never failing, the "true" failure rate is >0 because it's possible the future will be worse than the past. I'd go so far as to say that the true failure rate (even though it's unknown and hard to model) of 3% would be unacceptable if you were building a bridge.

Do you want financial certainty you can build a bridge on? Have 200x your annual spending divided amongst a few different asset classes. Maybe 50x in gold, 50x in T-Bills, 50x the market, 50x in RE. That way even if 2-3 entire financial classes shit the bed, and the last one offers 0% effective returns, you're still good for 50 years.

1.5-3% is what I'd call "almost certainly fine, but you never know" bracket. For this luxury you have to work 2-3x longer than someone in the 4-5.5% bracket with no better quality of life.

Similarly 3.5, 4.5, hell 5.5% are all in about the same ballpark. "You can expect to be fine, but keep on top of it and if you start to get much below your starting amount, maybe return to work"

Getting up higher to like 7-8%, "You're a gambler, give it a go, but probably won't work out for you but maybe?". 

It's sort of like measuring the weight/displacement of a 100,000 ton ship to the gram, and calculating the margin of safety as to whether it floats or not, also to the gram (or Milli-Newton). The point is, if you're safety margin in anything depends on a factor 1/1,000,000,000th one way or the other, it doesn't matter which side of the fence you're on, you're already fucked as day-to-day uncertainty will rapidly eclipse that. 

People are worried about a fraction of a percent on their WR, which is literally like $50 a month. Something as trivial as buying a new BBQ, replacing a stolen bike, or hell big things like getting hit by a car in Thailand make calculations to that degree of precision worthless. 

For me the absolute best insurance policy is that I'm a thrifty, intelligent person who's navigated several 1-2 year breaks from work, and just started another which might be the last one. I'm probably fine, but I'll keep on top of it, and if not, I have lots of options.

Fire2025

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Re: Challenging the 4% "Rule"
« Reply #19 on: June 05, 2018, 07:48:33 AM »
I'm a big fan of ERN and appreciate his data to add to my understanding.  That said, I'm pretty risk tolerant and older so I'm still using 4% or 5%.  But knowing the risks, even at the margins, makes me more comfortable with my choices.

More people doing the math and giving people choices and information is better than less, IMHO.  For the very risk adverse, ERN gives them a number they, maybe, can feel comfortable with and, maybe, they wont let fear drive them to OMYing themselves to 65.
 

Jrr85

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Re: Challenging the 4% "Rule"
« Reply #20 on: June 05, 2018, 08:56:41 AM »

People are worried about a fraction of a percent on their WR, which is literally like $50 a month. Something as trivial as buying a new BBQ, replacing a stolen bike, or hell big things like getting hit by a car in Thailand make calculations to that degree of precision worthless. 

For me the absolute best insurance policy is that I'm a thrifty, intelligent person who's navigated several 1-2 year breaks from work, and just started another which might be the last one. I'm probably fine, but I'll keep on top of it, and if not, I have lots of options.

What fraction of a percent are you talking about?  If you're talking about the difference between 3.5% and 4% withdrawal rate, and counting on a $1M nest egg, that's more like $416 per month.  That's a pretty big swing.  That is for one of the worst case historical runs.  If you're talking about whether 4% or 3.7% is safe (which is a fairly representative difference in what would constitute safe or not in some of his historical runs), you're talking about more like $250 a month off a $1M portfolio.

I also think it's worth looking at his justifications for being so conservative.  He is assuming that the population of people able to consider early retirement in their 30's or 40's are generally going to be like him, high earners with a relatively low spend compared to their incomes (although not necessarily that low compared to average people).  So it won't take very much extra time to generate a lot of extra security.  Plus, for most people in that situation, their job is not going to be that unpleasant, and they won't be able to simply jump back in to their profession in five years and be able to make the same kind of money, so working a little extra now is not a big sacrifice to ensure they don't have to work much longer later and/or reduce their standard of living.  Plus, in the event you have a failure when you are too old to easily jump back into the work force, it is a catastrophic result, much worse than the result of spending an extra year couple of years in a relatively pleasant job.  And if the bad result is that you worked too long, you end up having more money to travel or to give or to leave to your heirs or whatever, which for the vast majority of people, is nowhere near as catastrophic as running out of money late in retirement.  Obviously for the people who cannot handle the stress of their job or are letting it affect their health, the calculation is a little different. 

   

diffusate

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Re: Challenging the 4% "Rule"
« Reply #21 on: June 05, 2018, 08:57:43 AM »
I thought the series was useful for two reasons.

First: rather than questioning the 4% rule, he sort of confirms it from every possible angle with a floor of 3.5% or so. Close enough. I'm very familiar with MMM's arguments and agree with them, but a round number is arbitrary so might as well be accurate.

Second: there is some really good thinking about asset allocation, particularly the rising equity glide path. Asset allocation does matter, and the results aren't intuitive and don't match conventional wisdom. As a couple planning to stop working next year at 29/38, getting asset allocation right is especially important.

ysette9

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Re: Challenging the 4% "Rule"
« Reply #22 on: June 05, 2018, 09:05:38 AM »
I do really like the bit about the reverse equity glidepath in this series, as well as the work that Michael Kitces has done on it. I printed out the ERN blog post on the equity glide path and have sections highlighted that are the basis of our conversation about what changes we should be making to our asset allocation now in preparation for FI. I do wish someone would do research though on the optimal time to start the equity reduction/bond tent. Those data aren’t out there though, so I have to just wing it.

I like the way the person above me put it about how his research shows a floor of around 3.5% to the safe withdrawal rates. That is pretty damn close to 4% for people with flexibility, SS, a touch of a pension, inheritance, a desire to work a bit part-time, etc. (i.e. probably a lot of us).

ender

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Re: Challenging the 4% "Rule"
« Reply #23 on: June 05, 2018, 09:31:37 AM »
At the end of the day, the 4% "rule" is not a program you follow where once you start, you cannot change anything, ever. It's a guideline.

There is an entire thread I've already argued on this subject over and over again and it's linked in the first reply here.

I've also written this:

Retiring will always have risk.

Even if your plan is a government pension, there is still risk.

We can debate 80% vs 95% but the fact is:
  • Someone blindly following a plan without adjusting ever will do worse than others
  • Being FIRE allows you the opportunity to reduce spending significantly given you can now trade time for DIY/savings/etc
  • Even a 4/5 chance of success is still quite good (which I suspect if you added lifestyle adjustments into would be higher)
  • Most ER plan failures could be very easily mitigated by part-time jobs, even making $10k/year has a huge effect
  • Many people who FIRE end up doing hobbies/etc which could be monetized if necessary
  • People who ER really early may have some inheritance later in their lives
  • Many people will run into pensions/Social Security supplemental income later in their lives

There's definitely no guarantee.

But acting as if once you ER with a 4% SWR you have to withdraw and spend exactly 4% every year blindly without ever reevaluating your plan or adjusting is a bit of a pointless thought exercise.

The bolded applies to nearly every one of these "oh man 4% rule is fail!" situations.

Eric

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Re: Challenging the 4% "Rule"
« Reply #24 on: June 05, 2018, 10:12:11 AM »
These models are not exact. Despite historically 3% never failing, the "true" failure rate is >0 because it's possible the future will be worse than the past. I'd go so far as to say that the true failure rate (even though it's unknown and hard to model) of 3% would be unacceptable if you were building a bridge.

There are lots of scenarios where 3% failed, just not in the US.  Check out the SWR for Germany or Japan.  It's less than .5%, because it turns out that losing a world war is not good when it comes to determining the worst case scenario WR.

Luckily in today's global environment, along with the internet, we have the ease of 1 click worldwide diversification.  Yet, none of the backtesting takes this into account, because it didn't exist for the vast majority of the periods tested.  So how do we handle that?  We simply make the best decision we can based on the data available.  Modern portfolio theory says that greater diversification is better than less, so we invest globally.  In theory, this should raise SWRs, because at least according to Vanguard, this should result in similar returns with lower volatility.  Will it work out that way?  Just like everything else, check back in 30-40 years.  :)

Mr. Green

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Re: Challenging the 4% "Rule"
« Reply #25 on: June 05, 2018, 10:30:43 AM »
Prospective early retirees could spend their time much more wisely by thoroughly understanding sequence of returns risk than trying to come up with a precise retirement percentage. I created an Excel spreadsheet of all 10-, 20-, and 30-year retirement periods back to 1871, including a look at individual 10-year periods within 20- and 30-year retirements so that I could see how the returns impacted the overall retirement scenario of any given year. This gives me a huge advantage in my own retirement because I can compare my specific case to historical data and see, with relative confidence, where I fall in the range of 30-year performance periods. I know for a fact that I'll see trouble coming years before my portfolio is approaching depletion, with a chance to remedy that, because I have this data. This is where I will spend my time instead of fussing over 3.5% vs. 4%.

boarder42

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Re: Challenging the 4% "Rule"
« Reply #26 on: June 05, 2018, 12:03:21 PM »
Mr. Green is correct.  understand SORR is 10x more important than understanding the 4% rule why it works and where its short comings are.  SORR that hits you early in FIRE will require you to be more flexible and possibly mean going back to work - the 4% rule is a conversation starter and a nice jumping off point - from there you should understand how you plan to be flexible in FIRE should the 5% of the cases where it fails occur in your first 5-10 years of FIRE.  using reverse equity glide path to counteract early SORR or variable withdrawal are 2 of the better strategies for assisting with your money last longer and likely allowing for higher spending than just inflation adjusted later in life. 

I like Tyler's anaylsis but it doesnt have a ton of weight in my mind b/c its data doesnt go back far enough.

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Re: Challenging the 4% "Rule"
« Reply #27 on: June 05, 2018, 03:26:35 PM »

People are worried about a fraction of a percent on their WR, which is literally like $50 a month. Something as trivial as buying a new BBQ, replacing a stolen bike, or hell big things like getting hit by a car in Thailand make calculations to that degree of precision worthless. 

For me the absolute best insurance policy is that I'm a thrifty, intelligent person who's navigated several 1-2 year breaks from work, and just started another which might be the last one. I'm probably fine, but I'll keep on top of it, and if not, I have lots of options.

What fraction of a percent are you talking about?  If you're talking about the difference between 3.5% and 4% withdrawal rate, and counting on a $1M nest egg, that's more like $416 per month.  That's a pretty big swing.  That is for one of the worst case historical runs.  If you're talking about whether 4% or 3.7% is safe (which is a fairly representative difference in what would constitute safe or not in some of his historical runs), you're talking about more like $250 a month off a $1M portfolio.

I also think it's worth looking at his justifications for being so conservative.  He is assuming that the population of people able to consider early retirement in their 30's or 40's are generally going to be like him, high earners with a relatively low spend compared to their incomes (although not necessarily that low compared to average people).  So it won't take very much extra time to generate a lot of extra security.  Plus, for most people in that situation, their job is not going to be that unpleasant, and they won't be able to simply jump back in to their profession in five years and be able to make the same kind of money, so working a little extra now is not a big sacrifice to ensure they don't have to work much longer later and/or reduce their standard of living.  Plus, in the event you have a failure when you are too old to easily jump back into the work force, it is a catastrophic result, much worse than the result of spending an extra year couple of years in a relatively pleasant job.  And if the bad result is that you worked too long, you end up having more money to travel or to give or to leave to your heirs or whatever, which for the vast majority of people, is nowhere near as catastrophic as running out of money late in retirement.  Obviously for the people who cannot handle the stress of their job or are letting it affect their health, the calculation is a little different.   
Thank you Jrr85.  This is what I was trying to say.  I am just not as articulate.

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Re: Challenging the 4% "Rule"
« Reply #28 on: June 05, 2018, 10:31:48 PM »
Prospective early retirees could spend their time much more wisely by thoroughly understanding sequence of returns risk than trying to come up with a precise retirement percentage. I created an Excel spreadsheet of all 10-, 20-, and 30-year retirement periods back to 1871, including a look at individual 10-year periods within 20- and 30-year retirements so that I could see how the returns impacted the overall retirement scenario of any given year. This gives me a huge advantage in my own retirement because I can compare my specific case to historical data and see, with relative confidence, where I fall in the range of 30-year performance periods. I know for a fact that I'll see trouble coming years before my portfolio is approaching depletion, with a chance to remedy that, because I have this data. This is where I will spend my time instead of fussing over 3.5% vs. 4%.

The only problem with this is that getting to 3.5% is a really good risk mitigation for sequence of returns risk. If you use that in tandem with variable withdrawals and a rising equity glide path I think that is about the best that you can do.

I'm not stating get to 3.5% or wherever. I do think it's good though to understand the whole financial picture that you are facing when looking to RE. I think you need to know enough about portfolio theory including stock valuations when retiring in relation to sequence of returns risk (the real issue) as well as considering your withdrawal rate.

So if you like 100% stocks which I also like I think you need to understand the problem of having a 50% drop right after you retire and how you will manage that. Do you have 100% stocks with a 5% WR (which is probably pretty good in most situations but could fail when SORR occur) or do you have 100% stocks with a 3% WR. Do you have a 50/50 portfolio with a 5% WR but you might have social security available in 20 years time.

I think that discussing this though also needs to take into context how much you like or dislike work and what you intend to do in retirement. Do you intend to travel full-time or do you have kids and will remain in your HCOL area for another 5-10 years.
« Last Edit: June 05, 2018, 10:34:16 PM by steveo »

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Re: Challenging the 4% "Rule"
« Reply #29 on: June 06, 2018, 07:43:07 AM »
Prospective early retirees could spend their time much more wisely by thoroughly understanding sequence of returns risk than trying to come up with a precise retirement percentage. I created an Excel spreadsheet of all 10-, 20-, and 30-year retirement periods back to 1871, including a look at individual 10-year periods within 20- and 30-year retirements so that I could see how the returns impacted the overall retirement scenario of any given year. This gives me a huge advantage in my own retirement because I can compare my specific case to historical data and see, with relative confidence, where I fall in the range of 30-year performance periods. I know for a fact that I'll see trouble coming years before my portfolio is approaching depletion, with a chance to remedy that, because I have this data. This is where I will spend my time instead of fussing over 3.5% vs. 4%.

The only problem with this is that getting to 3.5% is a really good risk mitigation for sequence of returns risk. If you use that in tandem with variable withdrawals and a rising equity glide path I think that is about the best that you can do.

I'm not stating get to 3.5% or wherever. I do think it's good though to understand the whole financial picture that you are facing when looking to RE. I think you need to know enough about portfolio theory including stock valuations when retiring in relation to sequence of returns risk (the real issue) as well as considering your withdrawal rate.

So if you like 100% stocks which I also like I think you need to understand the problem of having a 50% drop right after you retire and how you will manage that. Do you have 100% stocks with a 5% WR (which is probably pretty good in most situations but could fail when SORR occur) or do you have 100% stocks with a 3% WR. Do you have a 50/50 portfolio with a 5% WR but you might have social security available in 20 years time.

I think that discussing this though also needs to take into context how much you like or dislike work and what you intend to do in retirement. Do you intend to travel full-time or do you have kids and will remain in your HCOL area for another 5-10 years.
To me, much of what you talk about there is the basics. By all means we should understand that. It seems though like I see a lot of folks hung up on small differences in asset allocation or withdrawal rate, almost like they have to pick something at the beginning and can never change it. Given that sequence of returns risk is a much larger variable than those things, people should be experts at that.

For instance, while getting to a 3.5% WR creates less risk of portfolio failure, paying attention to the sequence of returns could allow you to stop at 5% and be prefectly fine if you were willing to go back to work within the first 7 years due to a poor sequence. Of course there may be those who can't go back, or hate their job or whatever. But just like someone can use variable withdrawal rates to protect against bad sequences, we can also use higher withdrawal rates to retire earlier if we understand what sequences are problematic and how our own sequence compares to history. The wonderful thing about sequences is that history is an exact predictor of the future because we're just looking at the math of returns, so we know that a personal 10-year sequence that looks just like a 10-year sequence from the past puts us in the exact same position, and we can then use the knowledge of how those previous periods turned out to know whether we're in trouble or not.

The person willing to quit at a 5% WR rate probably knocks a couple or more years off of his career comapred to 3.5% WR, and if he can easily go back to work maybe it's worth it. But I wouldn't dream of doing this without a firm grasp on sequence of returns risk and how it works on my portfolio.

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Re: Challenging the 4% "Rule"
« Reply #30 on: June 06, 2018, 07:55:12 AM »
Prospective early retirees could spend their time much more wisely by thoroughly understanding sequence of returns risk than trying to come up with a precise retirement percentage. I created an Excel spreadsheet of all 10-, 20-, and 30-year retirement periods back to 1871, including a look at individual 10-year periods within 20- and 30-year retirements so that I could see how the returns impacted the overall retirement scenario of any given year. This gives me a huge advantage in my own retirement because I can compare my specific case to historical data and see, with relative confidence, where I fall in the range of 30-year performance periods. I know for a fact that I'll see trouble coming years before my portfolio is approaching depletion, with a chance to remedy that, because I have this data. This is where I will spend my time instead of fussing over 3.5% vs. 4%.

The only problem with this is that getting to 3.5% is a really good risk mitigation for sequence of returns risk. If you use that in tandem with variable withdrawals and a rising equity glide path I think that is about the best that you can do.

I'm not stating get to 3.5% or wherever. I do think it's good though to understand the whole financial picture that you are facing when looking to RE. I think you need to know enough about portfolio theory including stock valuations when retiring in relation to sequence of returns risk (the real issue) as well as considering your withdrawal rate.

So if you like 100% stocks which I also like I think you need to understand the problem of having a 50% drop right after you retire and how you will manage that. Do you have 100% stocks with a 5% WR (which is probably pretty good in most situations but could fail when SORR occur) or do you have 100% stocks with a 3% WR. Do you have a 50/50 portfolio with a 5% WR but you might have social security available in 20 years time.

I think that discussing this though also needs to take into context how much you like or dislike work and what you intend to do in retirement. Do you intend to travel full-time or do you have kids and will remain in your HCOL area for another 5-10 years.
To me, much of what you talk about there is the basics. By all means we should understand that. It seems though like I see a lot of folks hung up on small differences in asset allocation or withdrawal rate, almost like they have to pick something at the beginning and can never change it. Given that sequence of returns risk is a much larger variable than those things, people should be experts at that.

For instance, while getting to a 3.5% WR creates less risk of portfolio failure, paying attention to the sequence of returns could allow you to stop at 5% and be prefectly fine if you were willing to go back to work within the first 7 years due to a poor sequence. Of course there may be those who can't go back, or hate their job or whatever. But just like someone can use variable withdrawal rates to protect against bad sequences, we can also use higher withdrawal rates to retire earlier if we understand what sequences are problematic and how our own sequence compares to history. The wonderful thing about sequences is that history is an exact predictor of the future because we're just looking at the math of returns, so we know that a personal 10-year sequence that looks just like a 10-year sequence from the past puts us in the exact same position, and we can then use the knowledge of how those previous periods turned out to know whether we're in trouble or not.

The person willing to quit at a 5% WR rate probably knocks a couple or more years off of his career comapred to 3.5% WR, and if he can easily go back to work maybe it's worth it. But I wouldn't dream of doing this without a firm grasp on sequence of returns risk and how it works on my portfolio.

this is the way i look at it.  sure getting down to something that has never failed historically is safer but it doesnt mean you can say fuck it and not pay attention. 

But doing 3.5% plus reverse equity glide - plus variable withdrawal is putting a bandaid on a bandaid on a bandaid.  and is extreme overkill IMO.  pick one of those and you're likely fine.  variable withdraw starting at 5% probably allows for the most flexiblity and earliest date of retirement.

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Re: Challenging the 4% "Rule"
« Reply #31 on: June 06, 2018, 08:14:59 AM »
I started reading ERN's series, but it struck me as fatally flawed in that it's trying to nail down mathematical certainty on something that can never be certain. I'm an engineer - I love data. Data is awesome. However, you never have your full population, you're never really over 95% confident, you just do the best you can with the incomplete data you have.

29 blog posts to argue 3.5% rather than 4% seems to be a lot of effort to find certainty in an uncertain world. At some point you have to let go of your analysis paralysis, take a deep breath, and jump.

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Re: Challenging the 4% "Rule"
« Reply #32 on: June 06, 2018, 08:33:13 AM »
I've always thought 4% too conservative because of a different math....the extreme degree of weight given to the pain of 'running out of money if you stick to the withdrawal plan' versus 'working longer than you may need to'.  Not taking an inflation raise in a bad year, or having a 20% chance you may have to go back to work some at some point in your 40s to reinforce accounts hit by a bad market, never really seemed like some terrible thing, and certainly not terrible enough that it makes you work till 50 instead of 40, etc., as at some point your greatest risk of not experiencing a long happy retirement is because you keep working so you are certain you can have a long happy retirement.

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Re: Challenging the 4% "Rule"
« Reply #33 on: June 06, 2018, 09:58:25 AM »
To me, much of what you talk about there is the basics. By all means we should understand that. It seems though like I see a lot of folks hung up on small differences in asset allocation or withdrawal rate, almost like they have to pick something at the beginning and can never change it. Given that sequence of returns risk is a much larger variable than those things, people should be experts at that.

For instance, while getting to a 3.5% WR creates less risk of portfolio failure, paying attention to the sequence of returns could allow you to stop at 5% and be prefectly fine if you were willing to go back to work within the first 7 years due to a poor sequence. Of course there may be those who can't go back, or hate their job or whatever. But just like someone can use variable withdrawal rates to protect against bad sequences, we can also use higher withdrawal rates to retire earlier if we understand what sequences are problematic and how our own sequence compares to history. The wonderful thing about sequences is that history is an exact predictor of the future because we're just looking at the math of returns, so we know that a personal 10-year sequence that looks just like a 10-year sequence from the past puts us in the exact same position, and we can then use the knowledge of how those previous periods turned out to know whether we're in trouble or not.

The person willing to quit at a 5% WR rate probably knocks a couple or more years off of his career comapred to 3.5% WR, and if he can easily go back to work maybe it's worth it. But I wouldn't dream of doing this without a firm grasp on sequence of returns risk and how it works on my portfolio.

I don't think it works that way.  Nothing about history is an exact predictor.  The math of returns can change, because the future is not the past.  Obviously it's encouraging if you're matching a previously successful period, but that doesn't mean that you've 100% avoided trouble.

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Re: Challenging the 4% "Rule"
« Reply #34 on: June 06, 2018, 10:05:46 AM »
I started reading ERN's series, but it struck me as fatally flawed in that it's trying to nail down mathematical certainty on something that can never be certain. I'm an engineer - I love data. Data is awesome. However, you never have your full population, you're never really over 95% confident, you just do the best you can with the incomplete data you have.

29 blog posts to argue 3.5% rather than 4% seems to be a lot of effort to find certainty in an uncertain world. At some point you have to let go of your analysis paralysis, take a deep breath, and jump.

Thank you, this put it so much more succinctly. There simply are no guarantees, and people seem to forget that models only approximate reality and have inherently large error bands.

Here's an simple experiment. Roll a ball down a driveway, and get a bunch of people to calculate how long it will take. You will likely get a bunch of different, but similar answers, and probably close to the result. But, roll it down again, and you will likely get a different result. Maybe there was a gust of wind or something. It seems there are people here eager to measure the temperature of the air to the 4th decimal place since that can be done easily with a precise electronic thermometer to correct for air density and drag, but ignoring the fact that unpredictability of some kid with a stop watch will completely obliterate that accuracy.  Ultimately, for this incredibly simple model, it will be impossible to predict closer than 5% within the actual time recorded.

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Re: Challenging the 4% "Rule"
« Reply #35 on: June 06, 2018, 10:27:50 AM »
The other important point to remember is that there are things which have happened in the past and may happen in the future which are simply out of scope.

If the USA goes through the experience of Japan or Germany during and after world war II, those of us who live here are going to have a really bad time, regardless of whether we're spending 4%/year or 3.5% or still working and trying to build a stash big enough to support a 1.5% withdrawal rate.

If a nuclear weapon destroys your house, even if you happen to be out of the house and survive, you're not going to be worrying about the fact your home insurance specifically excludes acts of nuclear war and (if you don't live in a non-recourse state), your bank could theoretically come after you for the remaining balance on your mortgage.

So I try to confine myself to only worrying about scenarios which are bad enough they'd present a challenge to someone living off of their investments, but which would be survivable without dramatic changes in lifestyle by someone who still held a full time job. If it's less severe than that, there's by definition nothing to worry about from a FIRE context. If it's more severe than that, it's not a problem with FIRE, it's just a result of all of our futures being inherently unpredictable and risky: from fatal car crashes and unexpected cancer diagnoses  to nuclear war and asteroid impacts.

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Re: Challenging the 4% "Rule"
« Reply #36 on: June 06, 2018, 12:20:06 PM »
To me, much of what you talk about there is the basics. By all means we should understand that. It seems though like I see a lot of folks hung up on small differences in asset allocation or withdrawal rate, almost like they have to pick something at the beginning and can never change it. Given that sequence of returns risk is a much larger variable than those things, people should be experts at that.

For instance, while getting to a 3.5% WR creates less risk of portfolio failure, paying attention to the sequence of returns could allow you to stop at 5% and be prefectly fine if you were willing to go back to work within the first 7 years due to a poor sequence. Of course there may be those who can't go back, or hate their job or whatever. But just like someone can use variable withdrawal rates to protect against bad sequences, we can also use higher withdrawal rates to retire earlier if we understand what sequences are problematic and how our own sequence compares to history. The wonderful thing about sequences is that history is an exact predictor of the future because we're just looking at the math of returns, so we know that a personal 10-year sequence that looks just like a 10-year sequence from the past puts us in the exact same position, and we can then use the knowledge of how those previous periods turned out to know whether we're in trouble or not.

The person willing to quit at a 5% WR rate probably knocks a couple or more years off of his career comapred to 3.5% WR, and if he can easily go back to work maybe it's worth it. But I wouldn't dream of doing this without a firm grasp on sequence of returns risk and how it works on my portfolio.

I don't think it works that way.  Nothing about history is an exact predictor.  The math of returns can change, because the future is not the past.  Obviously it's encouraging if you're matching a previously successful period, but that doesn't mean that you've 100% avoided trouble.
I think it does work this way, as a guide, if we're assuming the future won't be worst than the past, which we do or cfiresim and all that would be much less useful. For instance, I know what my average return has to be by my 8th year of retirement in order for me to not go back to work. I can't guarantee that I'll never have to go back to work in the future, but I do know the return I need to stay retired at that moment in time.

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Re: Challenging the 4% "Rule"
« Reply #37 on: June 06, 2018, 12:29:11 PM »
I think it does work this way, as a guide, if we're assuming the future won't be worst than the past, which we do or cfiresim and all that would be much less useful. For instance, I know what my average return has to be by my 8th year of retirement in order for me to not go back to work. I can't guarantee that I'll never have to go back to work in the future, but I do know the return I need to stay retired at that moment in time.

Can you share how you calculated this?

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Re: Challenging the 4% "Rule"
« Reply #38 on: June 06, 2018, 12:48:04 PM »
I think it does work this way, as a guide, if we're assuming the future won't be worst than the past, which we do or cfiresim and all that would be much less useful. For instance, I know what my average return has to be by my 8th year of retirement in order for me to not go back to work. I can't guarantee that I'll never have to go back to work in the future, but I do know the return I need to stay retired at that moment in time.

Can you share how you calculated this?

ditto and the data.

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Re: Challenging the 4% "Rule"
« Reply #39 on: June 06, 2018, 03:04:44 PM »
I think it does work this way, as a guide, if we're assuming the future won't be worst than the past, which we do or cfiresim and all that would be much less useful. For instance, I know what my average return has to be by my 8th year of retirement in order for me to not go back to work. I can't guarantee that I'll never have to go back to work in the future, but I do know the return I need to stay retired at that moment in time.

Can you share how you calculated this?

ditto and the data.
https://investedlife.wordpress.com/2016/04/25/understanding-sequence-of-returns-risk/

....and the actual spreadsheet is attached, updated with the most recent returns data. I even started to project some returns into the future to see how things might look. Using this data, I know that a 2009 retiree has already won the game. There is no historical scenario where that first 10-year period runs out of money or even gets close to it after 30 years.

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Re: Challenging the 4% "Rule"
« Reply #40 on: June 07, 2018, 04:17:17 AM »
Prospective early retirees could spend their time much more wisely by thoroughly understanding sequence of returns risk than trying to come up with a precise retirement percentage. I created an Excel spreadsheet of all 10-, 20-, and 30-year retirement periods back to 1871, including a look at individual 10-year periods within 20- and 30-year retirements so that I could see how the returns impacted the overall retirement scenario of any given year. This gives me a huge advantage in my own retirement because I can compare my specific case to historical data and see, with relative confidence, where I fall in the range of 30-year performance periods. I know for a fact that I'll see trouble coming years before my portfolio is approaching depletion, with a chance to remedy that, because I have this data. This is where I will spend my time instead of fussing over 3.5% vs. 4%.

The only problem with this is that getting to 3.5% is a really good risk mitigation for sequence of returns risk. If you use that in tandem with variable withdrawals and a rising equity glide path I think that is about the best that you can do.

I'm not stating get to 3.5% or wherever. I do think it's good though to understand the whole financial picture that you are facing when looking to RE. I think you need to know enough about portfolio theory including stock valuations when retiring in relation to sequence of returns risk (the real issue) as well as considering your withdrawal rate.

So if you like 100% stocks which I also like I think you need to understand the problem of having a 50% drop right after you retire and how you will manage that. Do you have 100% stocks with a 5% WR (which is probably pretty good in most situations but could fail when SORR occur) or do you have 100% stocks with a 3% WR. Do you have a 50/50 portfolio with a 5% WR but you might have social security available in 20 years time.

I think that discussing this though also needs to take into context how much you like or dislike work and what you intend to do in retirement. Do you intend to travel full-time or do you have kids and will remain in your HCOL area for another 5-10 years.
To me, much of what you talk about there is the basics. By all means we should understand that. It seems though like I see a lot of folks hung up on small differences in asset allocation or withdrawal rate, almost like they have to pick something at the beginning and can never change it. Given that sequence of returns risk is a much larger variable than those things, people should be experts at that.

For instance, while getting to a 3.5% WR creates less risk of portfolio failure, paying attention to the sequence of returns could allow you to stop at 5% and be prefectly fine if you were willing to go back to work within the first 7 years due to a poor sequence. Of course there may be those who can't go back, or hate their job or whatever. But just like someone can use variable withdrawal rates to protect against bad sequences, we can also use higher withdrawal rates to retire earlier if we understand what sequences are problematic and how our own sequence compares to history. The wonderful thing about sequences is that history is an exact predictor of the future because we're just looking at the math of returns, so we know that a personal 10-year sequence that looks just like a 10-year sequence from the past puts us in the exact same position, and we can then use the knowledge of how those previous periods turned out to know whether we're in trouble or not.

The person willing to quit at a 5% WR rate probably knocks a couple or more years off of his career comapred to 3.5% WR, and if he can easily go back to work maybe it's worth it. But I wouldn't dream of doing this without a firm grasp on sequence of returns risk and how it works on my portfolio.

I don't consider this stuff the basics at all. I think it's the stuff that everyone should know but I bet most people don't. I doubt everyone on here has gone and investigated portfolio theory and WR's in relation to SORR. To be fair there is also no perfect mathematical model out there. I also think if the default way to handle SORR is to go back to work then you haven't really solved the problem at all. That to me is a portfolio failure.

In stating all of that doing everything in my opinion correctly - namely variable withdrawals and using a rising equity glide path doesn't change the reality that it's only going to give you a small advantage in relation to how low you need to get your WR. We are dealing with probabilities into the future and we don't know what will happen. We have to accept some risk.

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Re: Challenging the 4% "Rule"
« Reply #41 on: June 07, 2018, 04:23:51 AM »
I started reading ERN's series, but it struck me as fatally flawed in that it's trying to nail down mathematical certainty on something that can never be certain. I'm an engineer - I love data. Data is awesome. However, you never have your full population, you're never really over 95% confident, you just do the best you can with the incomplete data you have.

29 blog posts to argue 3.5% rather than 4% seems to be a lot of effort to find certainty in an uncertain world. At some point you have to let go of your analysis paralysis, take a deep breath, and jump.

I disagree with this. I think ERN has nailed the SWR's issue really well. The question is how risk averse are you. It's always going to be a subjective call based on a lot of factors. ERN has an opinion on the data. I think it's cool to disagree with him. His opinion isn't necessarily valid but that doesn't change my opinion that his analysis is really good.
« Last Edit: June 07, 2018, 04:28:29 AM by steveo »

steveo

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Re: Challenging the 4% "Rule"
« Reply #42 on: June 07, 2018, 04:26:21 AM »
To me, much of what you talk about there is the basics. By all means we should understand that. It seems though like I see a lot of folks hung up on small differences in asset allocation or withdrawal rate, almost like they have to pick something at the beginning and can never change it. Given that sequence of returns risk is a much larger variable than those things, people should be experts at that.

For instance, while getting to a 3.5% WR creates less risk of portfolio failure, paying attention to the sequence of returns could allow you to stop at 5% and be prefectly fine if you were willing to go back to work within the first 7 years due to a poor sequence. Of course there may be those who can't go back, or hate their job or whatever. But just like someone can use variable withdrawal rates to protect against bad sequences, we can also use higher withdrawal rates to retire earlier if we understand what sequences are problematic and how our own sequence compares to history. The wonderful thing about sequences is that history is an exact predictor of the future because we're just looking at the math of returns, so we know that a personal 10-year sequence that looks just like a 10-year sequence from the past puts us in the exact same position, and we can then use the knowledge of how those previous periods turned out to know whether we're in trouble or not.

The person willing to quit at a 5% WR rate probably knocks a couple or more years off of his career comapred to 3.5% WR, and if he can easily go back to work maybe it's worth it. But I wouldn't dream of doing this without a firm grasp on sequence of returns risk and how it works on my portfolio.

I don't think it works that way.  Nothing about history is an exact predictor.  The math of returns can change, because the future is not the past.  Obviously it's encouraging if you're matching a previously successful period, but that doesn't mean that you've 100% avoided trouble.

Yep. I don't see that as working out at all or maybe better put there are much simpler ways and probably accurate ways to work through that issue. I'd suggest you would know if you were in trouble fairly early. I also think the idea of returning to work while valid is really just a portfolio failure. I'm cool with that but it's not something for everyone.

boarder42

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Re: Challenging the 4% "Rule"
« Reply #43 on: June 07, 2018, 06:35:06 AM »
To me, much of what you talk about there is the basics. By all means we should understand that. It seems though like I see a lot of folks hung up on small differences in asset allocation or withdrawal rate, almost like they have to pick something at the beginning and can never change it. Given that sequence of returns risk is a much larger variable than those things, people should be experts at that.

For instance, while getting to a 3.5% WR creates less risk of portfolio failure, paying attention to the sequence of returns could allow you to stop at 5% and be prefectly fine if you were willing to go back to work within the first 7 years due to a poor sequence. Of course there may be those who can't go back, or hate their job or whatever. But just like someone can use variable withdrawal rates to protect against bad sequences, we can also use higher withdrawal rates to retire earlier if we understand what sequences are problematic and how our own sequence compares to history. The wonderful thing about sequences is that history is an exact predictor of the future because we're just looking at the math of returns, so we know that a personal 10-year sequence that looks just like a 10-year sequence from the past puts us in the exact same position, and we can then use the knowledge of how those previous periods turned out to know whether we're in trouble or not.

The person willing to quit at a 5% WR rate probably knocks a couple or more years off of his career comapred to 3.5% WR, and if he can easily go back to work maybe it's worth it. But I wouldn't dream of doing this without a firm grasp on sequence of returns risk and how it works on my portfolio.

I don't think it works that way.  Nothing about history is an exact predictor.  The math of returns can change, because the future is not the past.  Obviously it's encouraging if you're matching a previously successful period, but that doesn't mean that you've 100% avoided trouble.

Yep. I don't see that as working out at all or maybe better put there are much simpler ways and probably accurate ways to work through that issue. I'd suggest you would know if you were in trouble fairly early. I also think the idea of returning to work while valid is really just a portfolio failure. I'm cool with that but it's not something for everyone.

so i'm not reading 29 pages of debate on 3.5% vs 4% but i assume ERN used historical data to come to his conclusions.  All Mr. Green is doing is looking at that data from a different view point.  basically if after 5, 10, 20 etc. years of FIRE if your returns have been X historically did you survive or did you fail and what percent of the time did you fail.  Its no different than using data from the past to come up with a 3.5 or 4% SWR.  This analysis is much more valuable at predicting if you're going to be ok than just writing 29 blog posts to come up with what worked in the past an historically didnt fail - that takes 4 minutes on cFIREsim to determine a historical withdrawal rate that never failed.  Mr. Green's inventive way of looking at the data to give you an idea of if you may have failed in the past when you're paritally into the withdrawal phase adds an early indicator is much more inventive than coming to a conclusion that takes minutes with a few other calculators already online and availab.e

FIRE 20/20

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Re: Challenging the 4% "Rule"
« Reply #44 on: June 07, 2018, 08:14:16 AM »
I have yet to see a single post from a single person stating that they have saved exactly 25X their annual spend, that they are quitting immediately to never ever work again and have absolutely no plan or intention of ever having any back up source of employment/income if needed, and that they will spend exactly 4% per year no matter what, with zero willingness/ability to cut back, and with total disregard for any possible influences on their savings.

When I do, Iíll be sure to point them towards ERNís fancy calculations. Until then, Iíll keep pointing people towards Peteís admission that he could have quit a lot sooner.

This should have ended the thread, in my opinion.  Wonderful post @Malkynn.

I love the work that Big ERN did.  I've read the whole series front to back 2-3 times and refer back to certain sections often.  I think he provided something very valuable to the community.
However, as good as it is I still disagree with his conclusions.  The reason is that he states numerous times that success rates of ~80% are unacceptable.  That might sound reasonable to someone who isn't familiar with what the 4% rule is really saying, but I think most people who are interested in FIRE and are approaching 25x anticipated spending are familiar with it.  Here's how I read the "80% is unacceptable" line:

I am willing to accept a 100% guaranteed bad outcome (working the youngest, healthiest, best remaining ~1-2 years of my life) in order to avoid a 20% chance of having to make a series of modest changes.

For "~1-2 years" enter whatever amount of working time it will take you to get from 4% down to whatever Big ERN suggests has a 100% success rate. 

Look, there is always some risk with FIRE.  What we're usually arguing about with the 4% rule is whether retiring earlier (say at a 4% or higher withdrawal rate) is worth it because you get a guarantee of not working that best remaining time in your life for a relatively small chance of needing to spend less or earn more later, or if it's better to keep working that best remaining time to come close to eliminating any chance of ever needing to make any adjustments.  People are different and in different circumstances so they answer that question differently.  If you are flexible, have a lot of skills, can cut spending if needed, and highly value that next year of your life then go ahead and retire when you have 20x of planned expenses.  I'm sure a 5% withdrawal rate would be more than sufficient for that person because they'll adjust if needed.  If you see FIRE as never ever working again and never ever earning any more money ever for any reason then definitely save up more than 30x planned expenses.  Honestly, I suspect between those two strawmen I would bet on the 20x person having a higher real-life success in FIRE because flexibility is more powerful than money.
« Last Edit: June 07, 2018, 08:40:52 AM by FIRE 20/20 »

Jrr85

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Re: Challenging the 4% "Rule"
« Reply #45 on: June 07, 2018, 10:15:03 AM »
I have yet to see a single post from a single person stating that they have saved exactly 25X their annual spend, that they are quitting immediately to never ever work again and have absolutely no plan or intention of ever having any back up source of employment/income if needed, and that they will spend exactly 4% per year no matter what, with zero willingness/ability to cut back, and with total disregard for any possible influences on their savings.

When I do, Iíll be sure to point them towards ERNís fancy calculations. Until then, Iíll keep pointing people towards Peteís admission that he could have quit a lot sooner.

This should have ended the thread, in my opinion.  Wonderful post @Malkynn.

I love the work that Big ERN did.  I've read the whole series front to back 2-3 times and refer back to certain sections often.  I think he provided something very valuable to the community.
However, as good as it is I still disagree with his conclusions.  The reason is that he states numerous times that success rates of ~80% are unacceptable.  That might sound reasonable to someone who isn't familiar with what the 4% rule is really saying, but I think most people who are interested in FIRE and are approaching 25x anticipated spending are familiar with it.  Here's how I read the "80% is unacceptable" line:

I am willing to accept a 100% guaranteed bad outcome (working the youngest, healthiest, best remaining ~1-2 years of my life) in order to avoid a 20% chance of having to make a series of modest changes.

For "~1-2 years" enter whatever amount of working time it will take you to get from 4% down to whatever Big ERN suggests has a 100% success rate. 

Look, there is always some risk with FIRE.  What we're usually arguing about with the 4% rule is whether retiring earlier (say at a 4% or higher withdrawal rate) is worth it because you get a guarantee of not working that best remaining time in your life for a relatively small chance of needing to spend less or earn more later, or if it's better to keep working that best remaining time to come close to eliminating any chance of ever needing to make any adjustments.  People are different and in different circumstances so they answer that question differently.  If you are flexible, have a lot of skills, can cut spending if needed, and highly value that next year of your life then go ahead and retire when you have 20x of planned expenses.  I'm sure a 5% withdrawal rate would be more than sufficient for that person because they'll adjust if needed.  If you see FIRE as never ever working again and never ever earning any more money ever for any reason then definitely save up more than 30x planned expenses.  Honestly, I suspect between those two strawmen I would bet on the 20x person having a higher real-life success in FIRE because flexibility is more powerful than money.

I can't help but think a lot of people haven't actually read Big ERN's posts.  The entire point of his posts is there is nothing "modest" about the flexibility (whether going back to work or cutting back on spending) required to avoid portfolio failures and portfolio failure (or the flexibility required to avoid it) is a much, much, much worse result for many people than simply working until they have a lower initial withdrawal rate.

Granted, if you don't mind working part time and/or can do so at a high pay, then flexibility is fine.  But unless you can jump back in the job market at a high pay, it's not working part time for a couple of years.  It's working part time for potentially a decade or more, compared to sticking with a job (that in his case he likes) for another year or two.  Definitely not applicable to everybody, but I think he's right that many people just saying "I'll be flexible" are looking at it as "I'll work part time for a few years", not "I'll work part time for more than a decade of my 'retirement'" or alternatively they are thinking "I'll reduce my withdrawal rate by half a percentage point for a few years, no big deal", and not "I'll reduce my withdrawal rate by more than 12% for basically forever". 

 

Mr. Green

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Re: Challenging the 4% "Rule"
« Reply #46 on: June 07, 2018, 10:32:22 AM »
To me, much of what you talk about there is the basics. By all means we should understand that. It seems though like I see a lot of folks hung up on small differences in asset allocation or withdrawal rate, almost like they have to pick something at the beginning and can never change it. Given that sequence of returns risk is a much larger variable than those things, people should be experts at that.

For instance, while getting to a 3.5% WR creates less risk of portfolio failure, paying attention to the sequence of returns could allow you to stop at 5% and be prefectly fine if you were willing to go back to work within the first 7 years due to a poor sequence. Of course there may be those who can't go back, or hate their job or whatever. But just like someone can use variable withdrawal rates to protect against bad sequences, we can also use higher withdrawal rates to retire earlier if we understand what sequences are problematic and how our own sequence compares to history. The wonderful thing about sequences is that history is an exact predictor of the future because we're just looking at the math of returns, so we know that a personal 10-year sequence that looks just like a 10-year sequence from the past puts us in the exact same position, and we can then use the knowledge of how those previous periods turned out to know whether we're in trouble or not.

The person willing to quit at a 5% WR rate probably knocks a couple or more years off of his career comapred to 3.5% WR, and if he can easily go back to work maybe it's worth it. But I wouldn't dream of doing this without a firm grasp on sequence of returns risk and how it works on my portfolio.

I don't think it works that way.  Nothing about history is an exact predictor.  The math of returns can change, because the future is not the past.  Obviously it's encouraging if you're matching a previously successful period, but that doesn't mean that you've 100% avoided trouble.

Yep. I don't see that as working out at all or maybe better put there are much simpler ways and probably accurate ways to work through that issue. I'd suggest you would know if you were in trouble fairly early. I also think the idea of returning to work while valid is really just a portfolio failure. I'm cool with that but it's not something for everyone.
It's certainly not for everyone. I created it for myself because I wanted to see the data from a different angle. It helped me draw certain conclusions. If I had retired in 2009 I would know 21 years early that I already won. I also know that a 3% average return is my threshold for the first 10 years as to whether I have to go back to work. As I get further into retirement and my returns start to mimick previous returns I'll be able to draw further conclusions about what I'll consider safe to stay retired vs. not. With any luck my returns will be good enough I won't need to really pay attention to that but I like the fact that I can use the data to know for sure, rather than me simply looking at my portfolio balance and going by gut. Because none of us are waiting to zero to say, "Oh that sucks," right?

itchyfeet

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Re: Challenging the 4% "Rule"
« Reply #47 on: June 07, 2018, 12:32:33 PM »
I tried to resist posting but couldnít.

Everything has been said.

I can only say the same as been said dozens of times.

Big Ern is undoubtedly a clever and deep thinking fellow. His work is seriously impressive. But, and sorry for saying it one more time, he canít predict the future any better than anybody else here..

He has no idea. We have no idea.

Building more spreadsheets doesnít make anyone a clairvoyant. Spreadsheets have no magical powers. What was safe in the past in the US may not be safe in the future in the US, or for so many reasons, there could be less volatility in the future and a 5% WR will never fail ever again. Who the f&ck knows. Not BigErn. Not that he claims to know. He just wrote thousands of words to make himself sleep better at night. To each his own poison.

Big Ernís first (or thereabouts) investment sale post FIRE was his condo. He received an unexpectedly high sale price. Far higher than he forecast. BigErn couldnít predict the asset value accurately even a few weeks ahead of the sale. Good luck predicting 20 or 30 years in the future.

25x a rough estimate of what my average spend might be over the long run is a good enough guide for me. Iíll play my cards from there in the full knowledge that Iíll probably be able to spend significantly more than the current estimate, and there is a small chance I might have to spend less.

There was/ is a blog ďFreedom with BrunoĒ. Many of you will know the blog. The young couple FIRED with a million $. They bought a house that was more expensive than they had planned for. They spent yet more cash on some renovations. They also spent maybe a little more than they thought on other things and suddenly their stash was looking a bit small. Did their lives fall apart? No, of course not. They Airbnbíd a part of their house for a bit, and did some casual work and their stash started climbing again. They are now travelling through Europe. Flexibility will give the greatest chance of success in an uncertain world.

bacchi

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Re: Challenging the 4% "Rule"
« Reply #48 on: June 07, 2018, 02:55:24 PM »
I can't help but think a lot of people haven't actually read Big ERN's posts.  The entire point of his posts is there is nothing "modest" about the flexibility (whether going back to work or cutting back on spending) required to avoid portfolio failures and portfolio failure (or the flexibility required to avoid it) is a much, much, much worse result for many people than simply working until they have a lower initial withdrawal rate.

Granted, if you don't mind working part time and/or can do so at a high pay, then flexibility is fine.  But unless you can jump back in the job market at a high pay, it's not working part time for a couple of years.  It's working part time for potentially a decade or more, compared to sticking with a job (that in his case he likes) for another year or two.  Definitely not applicable to everybody, but I think he's right that many people just saying "I'll be flexible" are looking at it as "I'll work part time for a few years", not "I'll work part time for more than a decade of my 'retirement'" or alternatively they are thinking "I'll reduce my withdrawal rate by half a percentage point for a few years, no big deal", and not "I'll reduce my withdrawal rate by more than 12% for basically forever". 

 

The audience is different. If you're ERE and FIRE on $300k, having to pay $50k out of pocket for medical expenses is an "oh shit" moment.

If, however, you retire on $1 million, spending $50k is a reduction of $2000/year in withdrawals. With some flexibility in the budget, that's traveling internationally 1/3 years instead of 1/2 years. That's pretty modest.


Eta: I agree with the "working" flexibility. People are too blasť about it. When there's a real recession, it'll be tough to get a job, even a shitty part-time one.
« Last Edit: June 07, 2018, 03:04:52 PM by bacchi »

Jrr85

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Re: Challenging the 4% "Rule"
« Reply #49 on: June 07, 2018, 03:05:59 PM »
I can't help but think a lot of people haven't actually read Big ERN's posts.  The entire point of his posts is there is nothing "modest" about the flexibility (whether going back to work or cutting back on spending) required to avoid portfolio failures and portfolio failure (or the flexibility required to avoid it) is a much, much, much worse result for many people than simply working until they have a lower initial withdrawal rate.

Granted, if you don't mind working part time and/or can do so at a high pay, then flexibility is fine.  But unless you can jump back in the job market at a high pay, it's not working part time for a couple of years.  It's working part time for potentially a decade or more, compared to sticking with a job (that in his case he likes) for another year or two.  Definitely not applicable to everybody, but I think he's right that many people just saying "I'll be flexible" are looking at it as "I'll work part time for a few years", not "I'll work part time for more than a decade of my 'retirement'" or alternatively they are thinking "I'll reduce my withdrawal rate by half a percentage point for a few years, no big deal", and not "I'll reduce my withdrawal rate by more than 12% for basically forever". 

 

The audience is different. If you're ERE and FIRE on $300k, having to pay $50k out of pocket for medical expenses is an "oh shit" moment.

If, however, you retire on $1 million, spending $50k is a reduction of $2000/year in withdrawals. With some flexibility in the budget, that's traveling internationally 1/3 years instead of 1/2 years. That's pretty modest.

Mostly Big ERN isn't addressing unforeseen medical bills.  He's addressing situations where the 4% rule hasn't worked historically.  So it's not reducing your annual spending by 5% (which is what your scenario discusses).  It's more like 7.5% to 12% permanent reduction depending on what scenario you are looking at, and that assumes you have perfect foresight and know ahead of time to start with a lower safe withdrawal rate.  If you start off with 4% and have an awful sequence of returns, you can have to cut much deeper to compensate.