Author Topic: For those who follow the 4% rule  (Read 8689 times)

nara

  • 5 O'Clock Shadow
  • *
  • Posts: 48
For those who follow the 4% rule
« on: February 05, 2017, 07:46:10 PM »
Do you incorporate inflation into your 4% estimate?

This article was a discouraging read. I would like to hear some thoughts. https://www.moneyunder30.com/how-realistic-is-financial-independence-in-your-30s

maizeman

  • Pencil Stache
  • ****
  • Posts: 709
  • Location: The World of Tomorrow
Re: For those who follow the 4% rule
« Reply #1 on: February 05, 2017, 07:50:30 PM »
Yes, that's part of all the studies that backtest the 4% rule. 4% of your initial portfolio, adjusted for inflation each year.

Edit:

That article is stupid. They assume a 4% rate of return with 3% inflation. The CGAR of the stock market is actually 9.1%. After adjusting for inflation that drops to 6.8%. So almost 7x higher than the numbers that author uses (1% after inflation).
« Last Edit: February 05, 2017, 07:57:06 PM by maizeman »
"Itís a selective retirement," Richard explained, "a retirement from boring s**t."

My Journal

BTDretire

  • Pencil Stache
  • ****
  • Posts: 977
Re: For those who follow the 4% rule
« Reply #2 on: February 05, 2017, 07:53:36 PM »
Do you incorporate inflation into your 4% estimate?

This article was a discouraging read. I would like to hear some thoughts. https://www.moneyunder30.com/how-realistic-is-financial-independence-in-your-30s

 The only  thing I see, here we assume 7% annual return and live on 4%.
The article has a total annual return of 4%. Huuuge difference.

2Birds1Stone

  • Magnum Stache
  • ******
  • Posts: 2636
  • Age: 29
  • Location: New York
  • CFO
Re: For those who follow the 4% rule
« Reply #3 on: February 05, 2017, 09:17:50 PM »
Yes, the 4% rule is based on inflation.....
"A small house can hold as much happiness as a big one." - Fortune Cookie

58 Months Till FIRE Journal - Stop by, or stay a while.....
http://forum.mrmoneymustache.com/journals/fit-finance-when-two-seemingly-unrelated-worlds-colide/

letired

  • Bristles
  • ***
  • Posts: 403
  • Location: Texas
    • Needs More Glitter
Re: For those who follow the 4% rule
« Reply #4 on: February 05, 2017, 10:49:18 PM »
That website looks like a really bad resource. The author is not doing a good job reading up on FIRE if he doesn't realize that the 4% rule already accounts for inflation, and his answer in the comments to a question about reinvesting dividends is not exactly wrong, but kind of dumb.

respond2u

  • 5 O'Clock Shadow
  • *
  • Posts: 21
Re: For those who follow the 4% rule
« Reply #5 on: February 06, 2017, 12:18:59 AM »
Include inflation, yes.

The 4% rule originated with Bengen in this paper: http://www.retailinvestor.org/pdf/Bengen1.pdf
It was backed up by the Trinity Study: https://incomeclub.co/wp-content/uploads/2015/04/retirement-savings-choosing-a-withdrawal-rate-that-is-sustainable.pdf

Both say to increase/decrease the withdrawal based on inflation/deflation.

You can replicate these studies for your own particular case using www.cfiresim.com or www.firecalc.com .


====
Also, moneyunder30 doesn't seem to have a clue. I'm pretty sure the author never read those 2 papers, and I'm pretty sure that he never took MMM frugality to heart. 50K/year? Good lord! Root of Good is living off $40K raising 3 kids!
« Last Edit: February 06, 2017, 12:26:50 AM by respond2u »

Telecaster

  • Pencil Stache
  • ****
  • Posts: 783
Re: For those who follow the 4% rule
« Reply #6 on: February 06, 2017, 01:39:19 AM »
The author of the original article, sorry to put it this way, is an idiot.  Maybe not an idiot (but probably), but to be charitable is at best a lazy maroon. 

Lots and lots of people have looked into this very question and come up with answers that are vastly less stupid than this guy.  My advice:  Seek out the smart people and ignore the dumb people.

In a nutshell (caveats and conditions noted!) a 4% inflation adjusted withdrawal rate would have worked in the past.  Could the future be worse than the past?  You bet!  But the safe withdrawal rate is inflation adjusted based on historical rates of inflation.

This guy read "four percent" and then stopped reading.  Because he is lazy and dumb, he assumed there should be an inflation correction because he was too dumb/lazy to know there already was one.

There is so much stupidity to unpack in that article it is hard to pin it down on one thing.  Part of the problem is his disjointed thought process.  But here is the money shot:

On the surface, this might seem like an easy calculation. Letís say youíre 30 years old, you expect to live to 90, and youíre content living on $50,000 a year. You need 60 years of income. Sixty times $50,000 is $3 million.

Right? Well, not exactly, because weíre forgetting inflation.


A 4% SWR says you need 25 times expenses, or $1.25 million.  That gives a $50K inflation adjusted withdrawal rate.  That allows you to retire with the same lifestyle with less than half the savings.  Because, math. 

Again my advice:  Seek out the smart people and ignore the dumb people. This guy is dumb. 


Libertea

  • Bristles
  • ***
  • Posts: 358
  • Age: 41
  • Location: USA
Re: For those who follow the 4% rule
« Reply #7 on: February 06, 2017, 07:29:59 AM »
Do you incorporate inflation into your 4% estimate?

This article was a discouraging read. I would like to hear some thoughts. https://www.moneyunder30.com/how-realistic-is-financial-independence-in-your-30s
It may be a bit harsh to say the author is an idiot, but he's definitely misguided and does not correctly understand the 4% rule. 

First, the 4% rule is NOT based upon living only off one's dividends/interest.  If you have any assets yourself, you already have realized that a diversified equities fund will average closer to paying approximately 2% dividends, and even a high-interest savings account will pay more like 1% interest.  Therefore, if you are going to use the 4% rule, you almost certainly will in part be selling some of your assets each year.  The only way to avoid this is to save 50x your yearly expenses so that you have a 2% withdrawal rate instead of a 4% withdrawal rate.

Second, as already mentioned, the 4% rule is ALREADY INFLATION-ADJUSTED.  In fact, since a well-diversified retirement portfolio will average more like 6-7% return per year, it is likely that over time, your account will grow faster than inflation, and you will end up dying with substantially more money than what you had at the time of retirement. 

Third, none of these authors who are skeptical of FIRE seems to EVER take into account that people are not automatons with no ability to adjust their COL and/or their income.  If I'm living on $50k (which is actually double my current expenditure rate for my own expenses, but whatever), and the market suddenly drops so that my portfolio is now 50% of what it was, am I seriously going to just keep merrily spending $50k as if nothing had happened until I run out of money?  Of course not.  I am going to notice, hmm, the market dropped, and I can't afford to spend $50k any more.  In response, I would delay certain purchases, cut back discretionary spending on things like eating out and travel, and otherwise take steps to prevent depleting my account.  On the income side, I might even consider going back to work PT to help offset my expenses and decrease the drain on my portfolio.

So what are the valid critiques of living on 4% for the FIRE crowd?  To my mind, there are basically two. 

First, the 4% rule is based upon a series of 30 year study periods.  Since most early retirees can expect to have a RLE (retirement life expectancy) well beyond 30 years, it is reasonable to question whether the 4% rule holds for people like us versus people who retire in their mid to late 60s.  Unfortunately, there is no way to definitively answer this question, and you will have to make some assumptions about the future based upon your own personal risk tolerance and expectations for what will happen. 

Similarly, the criticism that past market performance does not guarantee future market performance is well-taken and cannot be summarily dismissed.  That being said, the Trinity Study that generated the 4% rule covers some of the worst economic times in modern history (including The Great Depression), and while it's not impossible that future depressions/recessions could be even worse, it may not be realistic to assume that such a possibility is likely.

respond2u

  • 5 O'Clock Shadow
  • *
  • Posts: 21
Re: For those who follow the 4% rule
« Reply #8 on: February 06, 2017, 11:42:01 PM »

First, the 4% rule is based upon a series of 30 year study periods.  Since most early retirees can expect to have a RLE (retirement life expectancy) well beyond 30 years, it is reasonable to question whether the 4% rule holds for people like us versus people who retire in their mid to late 60s.  Unfortunately, there is no way to definitively answer this question, and you will have to make some assumptions about the future based upon your own personal risk tolerance and expectations for what will happen. 

Similarly, the criticism that past market performance does not guarantee future market performance is well-taken and cannot be summarily dismissed.  That being said, the Trinity Study that generated the 4% rule covers some of the worst economic times in modern history (including The Great Depression), and while it's not impossible that future depressions/recessions could be even worse, it may not be realistic to assume that such a possibility is likely.

The duration is a definite problem unless you're a money machine blogger like MMM or have some other good side hustle. cfiresim.com shows that 4% withdrawal only succeeds 75% of the time, assuming no Social Security. I played around a bit with different asset allocations and it didn't improve much. And the second concern "past results don't indicate future results" just gets more worrisome with more time.

BTW, I believe it was Bengen, not Trinity, that lit the fire under the 4% rule (see the links I posted above). "Therefore, I counsel my clients to with-draw at no more than a four-percent rate during the early years of retirement."

Metric Mouse

  • Walrus Stache
  • *******
  • Posts: 5313
  • FU @ 22. F.I.R.E before 23
Re: For those who follow the 4% rule
« Reply #9 on: February 07, 2017, 01:59:29 AM »
Do you incorporate inflation into your 4% estimate?

This article was a discouraging read. I would like to hear some thoughts. https://www.moneyunder30.com/how-realistic-is-financial-independence-in-your-30s
No wonder you were discouraged. This article is completely wrong.
Give me one fine day of plain sailing weather and I can mess up anything.

MustacheMathTM

soccerluvof4

  • Handlebar Stache
  • *****
  • Posts: 2460
  • Location: Artic Midwest
  • Retired at 50
Re: For those who follow the 4% rule
« Reply #10 on: February 12, 2017, 09:53:36 AM »
^+1 ....Yes.
" In life you don't get what you deserve you get what you negotiate"

Ursus Major

  • Stubble
  • **
  • Posts: 140
  • Location: Silicon Valley, CA
Re: For those who follow the 4% rule
« Reply #11 on: February 12, 2017, 01:31:54 PM »
Third, none of these authors who are skeptical of FIRE seems to EVER take into account that people are not automatons with no ability to adjust their COL and/or their income.  If I'm living on $50k (which is actually double my current expenditure rate for my own expenses, but whatever), and the market suddenly drops so that my portfolio is now 50% of what it was, am I seriously going to just keep merrily spending $50k as if nothing had happened until I run out of money?  Of course not.  I am going to notice, hmm, the market dropped, and I can't afford to spend $50k any more.  In response, I would delay certain purchases, cut back discretionary spending on things like eating out and travel, and otherwise take steps to prevent depleting my account.  On the income side, I might even consider going back to work PT to help offset my expenses and decrease the drain on my portfolio.

I found this article on earlyretirementnow.com on Guyton-Klinger withdrawal rules very enlightening. It seems that the necessary curb in spending would be significant.

Quote
So what are the valid critiques of living on 4% for the FIRE crowd?  To my mind, there are basically two. 

First, the 4% rule is based upon a series of 30 year study periods.  Since most early retirees can expect to have a RLE (retirement life expectancy) well beyond 30 years, it is reasonable to question whether the 4% rule holds for people like us versus people who retire in their mid to late 60s.  Unfortunately, there is no way to definitively answer this question, and you will have to make some assumptions about the future based upon your own personal risk tolerance and expectations for what will happen. 

Similarly, the criticism that past market performance does not guarantee future market performance is well-taken and cannot be summarily dismissed.  That being said, the Trinity Study that generated the 4% rule covers some of the worst economic times in modern history (including The Great Depression), and while it's not impossible that future depressions/recessions could be even worse, it may not be realistic to assume that such a possibility is likely.

I would add a third one (once again picked up from earlyretirementnow.com):

3. The 4% rule is also based on running your portfolio to zero at the end. So if you in the final years of your life see you portfolio dwindling and you luckily(?) die before it hits zero, that counts as a success. Well, it wouldn't in my book.

Plus, if we want to extrapolate this rule to time frames of more than 30 years, a portfolio of zero is not a good start. And if I use a stricter criteria (minimum portfolio after 30 years should be 75% of starting portfolio in real dollars, then the probabilities go down: According to cfiresim a $1M portfolio of 80% stocks and 20% bonds has only a 74.5% probability to be more than $750k (in real dollars) after 30 years. For a 60%/40% stock/bond split the probability is ca. 57%.

steveo

  • Handlebar Stache
  • *****
  • Posts: 1345
Re: For those who follow the 4% rule
« Reply #12 on: February 12, 2017, 02:11:00 PM »
Plus, if we want to extrapolate this rule to time frames of more than 30 years, a portfolio of zero is not a good start. And if I use a stricter criteria (minimum portfolio after 30 years should be 75% of starting portfolio in real dollars, then the probabilities go down: According to cfiresim a $1M portfolio of 80% stocks and 20% bonds has only a 74.5% probability to be more than $750k (in real dollars) after 30 years. For a 60%/40% stock/bond split the probability is ca. 57%.

Personally this sounds pretty safe to me. Just to clarify that this isn't including any form or reduced spending or additional income at all. It's a blind rule that I think turns out pretty good in the long run.

Ursus Major

  • Stubble
  • **
  • Posts: 140
  • Location: Silicon Valley, CA
Re: For those who follow the 4% rule
« Reply #13 on: February 12, 2017, 07:14:44 PM »
Plus, if we want to extrapolate this rule to time frames of more than 30 years, a portfolio of zero is not a good start. And if I use a stricter criteria (minimum portfolio after 30 years should be 75% of starting portfolio in real dollars, then the probabilities go down: According to cfiresim a $1M portfolio of 80% stocks and 20% bonds has only a 74.5% probability to be more than $750k (in real dollars) after 30 years. For a 60%/40% stock/bond split the probability is ca. 57%.

Personally this sounds pretty safe to me. Just to clarify that this isn't including any form or reduced spending or additional income at all. It's a blind rule that I think turns out pretty good in the long run.

You find a success rate of 74.5% acceptable? How much reduction in spending and how many extra years of work in retirement are you willing to undergo?

Metric Mouse

  • Walrus Stache
  • *******
  • Posts: 5313
  • FU @ 22. F.I.R.E before 23
Re: For those who follow the 4% rule
« Reply #14 on: February 12, 2017, 09:30:23 PM »
Plus, if we want to extrapolate this rule to time frames of more than 30 years, a portfolio of zero is not a good start. And if I use a stricter criteria (minimum portfolio after 30 years should be 75% of starting portfolio in real dollars, then the probabilities go down: According to cfiresim a $1M portfolio of 80% stocks and 20% bonds has only a 74.5% probability to be more than $750k (in real dollars) after 30 years. For a 60%/40% stock/bond split the probability is ca. 57%.

Personally this sounds pretty safe to me. Just to clarify that this isn't including any form or reduced spending or additional income at all. It's a blind rule that I think turns out pretty good in the long run.

You find a success rate of 74.5% acceptable? How much reduction in spending and how many extra years of work in retirement are you willing to undergo?
I would take a 75% chance of never having to lower my spending or ever work again over a 100% chance of working more years. Since a 3% withdrawl rate has NEVER failed, one would have to reduce their spending at most 25% (It's actually much lower than that, but for argument's sake). And since this is not a permanent reduction, but only for a year or two of really bad years, I see zero reason to worry in the proposed scenario.
Give me one fine day of plain sailing weather and I can mess up anything.

MustacheMathTM

sol

  • Magnum Stache
  • ******
  • Posts: 4833
  • Age: 40
  • Location: Pacific Northwest
Re: For those who follow the 4% rule
« Reply #15 on: February 12, 2017, 09:36:46 PM »
I'm so tired of dealing with this sort of BS misinformation that I've about decided not to bother. 

Here's my new strategy:  You're right!  You can never retire.  You need to stay in your 9-5 job for as long as you can possibly stand it.  Please purchase a new vehicle every three years, remodel your kitchen every seven years, and be sure to keep all of your credit cards maxed out.  There are poor unfortunate souls who actually WANT those used cars, old appliances, and your credit rating to be terrible, and the economy needs industrious patriotic American consumers like you to keep the hamster wheel spinning in overdrive at all times.  You can safely disregard the hundreds of early retirees on this forum, they're all deluded dreamers who are only pretending to be happy.  The reality is that only people with soul-sucking office jobs and shiny new SUVs are truly happy inside. 

Telecaster

  • Pencil Stache
  • ****
  • Posts: 783
Re: For those who follow the 4% rule
« Reply #16 on: February 12, 2017, 09:48:53 PM »

3. The 4% rule is also based on running your portfolio to zero at the end. So if you in the final years of your life see you portfolio dwindling and you luckily(?) die before it hits zero, that counts as a success. Well, it wouldn't in my book.


Therefore, the 4% rule doesn't apply to you, and you should use some other number.

Also, congratulations!  You are the five billionth person to point out that if you change the base assumptions that resulted in the 4% rule, then you come up a some number that isn't 4%.



*I realize you are not literally the five billionth person to point this out.  It just feels like it. 

Ursus Major

  • Stubble
  • **
  • Posts: 140
  • Location: Silicon Valley, CA
Re: For those who follow the 4% rule
« Reply #17 on: February 12, 2017, 10:18:02 PM »

3. The 4% rule is also based on running your portfolio to zero at the end. So if you in the final years of your life see you portfolio dwindling and you luckily(?) die before it hits zero, that counts as a success. Well, it wouldn't in my book.


Therefore, the 4% rule doesn't apply to you, and you should use some other number.

Also, congratulations!  You are the five billionth person to point out that if you change the base assumptions that resulted in the 4% rule, then you come up a some number that isn't 4%.



*I realize you are not literally the five billionth person to point this out.  It just feels like it.

What exactly is your problem with my post? I added one more point to Libertea's list of two valid critiques of the 4% rule. I didn't see you taking those two points to task, only my added point.

Of course the 4% rule only works in the framework of its assumptions. But the questions are: how relevant are these assumptions in practice, particularly for early retirees (what this forum is about).

sol

  • Magnum Stache
  • ******
  • Posts: 4833
  • Age: 40
  • Location: Pacific Northwest
Re: For those who follow the 4% rule
« Reply #18 on: February 12, 2017, 11:48:34 PM »
Of course the 4% rule only works in the framework of its assumptions. But the questions are: how relevant are these assumptions in practice, particularly for early retirees (what this forum is about).

I'm assuming you've read the sticky thread about the 4% rule, which discusses all of these questions and many more in excruciating detail.

The short answer is that SWRs below 4% were (historically) just as likely to last 100 years as they were to last 40 years.  The 30 year time frame is a rough approximation of "forever" when talking about the stock market, because it's longer than the typical market cycles so if survives that long it typically survives indefinitely.  The only failure cases for periods of 30 years or 50 years or 100 years are all determined inside of the first ten years.

relevant graph from page 3 of the thread referenced above: 

Metric Mouse

  • Walrus Stache
  • *******
  • Posts: 5313
  • FU @ 22. F.I.R.E before 23
Re: For those who follow the 4% rule
« Reply #19 on: February 13, 2017, 12:28:06 AM »
What exactly is your problem with my post? I added one more point to Libertea's list of two valid critiques of the 4% rule. I didn't see you taking those two points to task, only my added point.

Of course the 4% rule only works in the framework of its assumptions. But the questions are: how relevant are these assumptions in practice, particularly for early retirees (what this forum is about).
You should therefore be arguing against the assumptions, not against the rule. Changing the assumptions and then claiming the rule doesn't work with added assumptions isn't very helpful.
Give me one fine day of plain sailing weather and I can mess up anything.

MustacheMathTM

Ursus Major

  • Stubble
  • **
  • Posts: 140
  • Location: Silicon Valley, CA
Re: For those who follow the 4% rule
« Reply #20 on: February 13, 2017, 10:38:02 AM »
Of course the 4% rule only works in the framework of its assumptions. But the questions are: how relevant are these assumptions in practice, particularly for early retirees (what this forum is about).

I'm assuming you've read the sticky thread about the 4% rule, which discusses all of these questions and many more in excruciating detail.

The short answer is that SWRs below 4% were (historically) just as likely to last 100 years as they were to last 40 years.  The 30 year time frame is a rough approximation of "forever" when talking about the stock market, because it's longer than the typical market cycles so if survives that long it typically survives indefinitely.  The only failure cases for periods of 30 years or 50 years or 100 years are all determined inside of the first ten years.

relevant graph from page 3 of the thread referenced above: 


sol,

Thank you for actually confirming my point with your post and the graph. Eyeballing the graph: For a 4% WR the success rate is significantly (>=10%) lower for a 40 year retirement than for a 30 year retirement. The success rates converge at the 3.0% WR, which presumably then marks the SWR for a perpetual retirement (if they were such a thing). So an early retiree might adopt 3.0%, 3.25% or perhaps even 3.5% as a WR, but 4% looks iffy in my book.

I agree with you that the success rate is determined in the first 10 to 15 years. But that doesn't change the fact that the SWR is lower for a 40-year retirement than for a 30-year retirement. And my point is that this is because a portfolio that is close to zero after 30 years (and thus still counted as a success there) will not survive 40 years. So the trouble for that portfolio still starts in the first 10 to 15 years, but doesn't kill it until after 30 years.

That's why I believe that using a portfolio final value of zero is a weakness of this approach. Using longer time periods can mitigate this to a point, but then you run into different problems (e.g. for a 50-year simulation you are just now including the year 1966 as retirement start date, for a 60 year simulation you have to wait several more years).

So in what way was my post BS and misinformation? It seems to me that you interpreted an intention into it that simply wasn't there.

sol

  • Magnum Stache
  • ******
  • Posts: 4833
  • Age: 40
  • Location: Pacific Northwest
Re: For those who follow the 4% rule
« Reply #21 on: February 13, 2017, 10:50:14 AM »
So in what way was my post BS and misinformation? It seems to me that you interpreted an intention into it that simply wasn't there.

You're right!  You can never retire.  Better to keep that office job as long as possible, just to be safe.

Just because a 3% SWR has never failed, for any length of retirement at any time in history, doesn't mean it will work if you start it today.  The world economy could collapse tomorrow.  The future is uncertain.  Please work as long as you can possibly stand it and then maybe add a few more years after that just to be certain nothing bad happens.

Ursus Major

  • Stubble
  • **
  • Posts: 140
  • Location: Silicon Valley, CA
Re: For those who follow the 4% rule
« Reply #22 on: February 13, 2017, 10:51:32 AM »
What exactly is your problem with my post? I added one more point to Libertea's list of two valid critiques of the 4% rule. I didn't see you taking those two points to task, only my added point.

Of course the 4% rule only works in the framework of its assumptions. But the questions are: how relevant are these assumptions in practice, particularly for early retirees (what this forum is about).
You should therefore be arguing against the assumptions, not against the rule. Changing the assumptions and then claiming the rule doesn't work with added assumptions isn't very helpful.

But isn't it always about the assumptions? I mean we're not debating here whether a mathematical theorem is correct in and of itself. I'm sure that all the calculations behind the 4% rule are correct. But those calculations are just a mathematical exercise, unless we can apply this rule to our situation. And for that it's all about evaluating the assumptions.

Retire-Canada

  • Magnum Stache
  • ******
  • Posts: 3360
Re: For those who follow the 4% rule
« Reply #23 on: February 13, 2017, 11:50:19 AM »
Thank you for actually confirming my point with your post and the graph. Eyeballing the graph: For a 4% WR the success rate is significantly (>=10%) lower for a 40 year retirement than for a 30 year retirement. The success rates converge at the 3.0% WR, which presumably then marks the SWR for a perpetual retirement (if they were such a thing). So an early retiree might adopt 3.0%, 3.25% or perhaps even 3.5% as a WR, but 4% looks iffy in my book.

You pay a very high price to chase after a 100% success rate using historical data especially if you have zero spending flexibility. It costs you the most precious resource you have - time at the prime of your life and fails to account for all the ways you can fail at retirement that are not captured by $$/% and tabulated in a spreadsheet. Many of these non-financial types of failures are [in my opinion] exacerbated by working extra years.

By all means shoot for 3%WR or maybe 2%WR because as you rightly point out simulating longer FIRE periods using historical data is problematic as there are fewer full cycles of data to utilize. I can think of ways a 3%WR is not going to survive 50yrs. 2%WR may even be too risky for some people.

Personally I think being afraid is one of the primary risks with FIRE and is exemplified by people working too long chasing after an abstract of security while failing to appreciate the opportunity costs associated with that pursuit. The irony is they may well fail despite their massive investment accounts. At least they can distract themselves from their failure watching the numbers grow to absurd levels.
« Last Edit: February 13, 2017, 12:21:53 PM by Retire-Canada »

steveo

  • Handlebar Stache
  • *****
  • Posts: 1345
Re: For those who follow the 4% rule
« Reply #24 on: February 13, 2017, 02:00:12 PM »
Plus, if we want to extrapolate this rule to time frames of more than 30 years, a portfolio of zero is not a good start. And if I use a stricter criteria (minimum portfolio after 30 years should be 75% of starting portfolio in real dollars, then the probabilities go down: According to cfiresim a $1M portfolio of 80% stocks and 20% bonds has only a 74.5% probability to be more than $750k (in real dollars) after 30 years. For a 60%/40% stock/bond split the probability is ca. 57%.

Personally this sounds pretty safe to me. Just to clarify that this isn't including any form or reduced spending or additional income at all. It's a blind rule that I think turns out pretty good in the long run.

You find a success rate of 74.5% acceptable? How much reduction in spending and how many extra years of work in retirement are you willing to undergo?

I find it more than acceptable. I'm willing to work at any point if I have too but I'm failing to see why I would need too. I can always spend a little less. I can always downsize my house. I can always get a little social security. I can always expect some inheritance. I also have 3 kids and expect my spending to fall.

My point is that you are focussed on the negatives of a 4% WR whereas I can see a lot of reasons why a 6% WR for me should be pretty safe.
« Last Edit: February 13, 2017, 02:10:05 PM by steveo »

steveo

  • Handlebar Stache
  • *****
  • Posts: 1345
Re: For those who follow the 4% rule
« Reply #25 on: February 13, 2017, 02:07:27 PM »
Of course the 4% rule only works in the framework of its assumptions. But the questions are: how relevant are these assumptions in practice, particularly for early retirees (what this forum is about).

I'm assuming you've read the sticky thread about the 4% rule, which discusses all of these questions and many more in excruciating detail.

The short answer is that SWRs below 4% were (historically) just as likely to last 100 years as they were to last 40 years.  The 30 year time frame is a rough approximation of "forever" when talking about the stock market, because it's longer than the typical market cycles so if survives that long it typically survives indefinitely.  The only failure cases for periods of 30 years or 50 years or 100 years are all determined inside of the first ten years.

relevant graph from page 3 of the thread referenced above: 


I just want to state that I love this chart.

Ursus Major

  • Stubble
  • **
  • Posts: 140
  • Location: Silicon Valley, CA
Re: For those who follow the 4% rule
« Reply #26 on: February 13, 2017, 04:43:26 PM »
Thank you for actually confirming my point with your post and the graph. Eyeballing the graph: For a 4% WR the success rate is significantly (>=10%) lower for a 40 year retirement than for a 30 year retirement. The success rates converge at the 3.0% WR, which presumably then marks the SWR for a perpetual retirement (if they were such a thing). So an early retiree might adopt 3.0%, 3.25% or perhaps even 3.5% as a WR, but 4% looks iffy in my book.

You pay a very high price to chase after a 100% success rate using historical data especially if you have zero spending flexibility.

I'm assuming that you mean "lots of spending flexibility", because if you have zero spending flexibility, then one line of defense against an adverse scenario, the reduction of spending, has evaporated, thus the less spending flexibility (or alternatively income generating flexibility) you have, the higher should be the success rate that you're shooting for.

Quote
It costs you the most precious resource you have - time at the prime of your life and fails to account for all the ways you can fail at retirement that are not captured by $$/% and tabulated in a spreadsheet. Many of these non-financial types of failures are [in my opinion] exacerbated by working extra years.

Sure, it does, but then so what? Everything has a price, that is a truism. But I find it more honest to say, that I am taking conservative assumptions, have a success rate <95% for my calculation for a WR of 4%, but retire anyway on that WR, because the non-financial cost of not doing so is too high, than to pretend (by using inappropriate assumptions) that 4% is a WR that will give me success probabilities in the 95% range (or whatever range you choose).

Quote
By all means shoot for 3%WR or maybe 2%WR because as you rightly point out simulating longer FIRE periods using historical data is problematic as there are fewer full cycles of data to utilize. I can think of ways a 3%WR is not going to survive 50yrs. 2%WR may even be too risky for some people.

Personally I think being afraid is one of the primary risks with FIRE and is exemplified by people working too long chasing after an abstract of security while failing to appreciate the opportunity costs associated with that pursuit. The irony is they may well fail despite their massive investment accounts. At least they can distract themselves from their failure watching the numbers grow to absurd levels.

I don't know why there is this hostility and pejorative accusations against people who consider a lower WR than 4% as the baseline. I find this completely unnecessary and it does the concept of FIRE a disservice. I'm guessing that there is a lot (too much in my book) anchoring on that 4% number for historical reasons.

A thought experiment: If the Trinity Study would have found that 5% is the SWR of a 60/40 portfolio with a success rate of 95% in a 20 year retirement (just to pull a fictitious scenario of out the hat), would all those who would now dare to suggest that for longer retirements such as 30 years, perhaps 4% is a more appropriate number, face the same line of counter-arguments (you're just afraid, you don't consider the cost of working longer, etc.).

Again just a thought...


steveo

  • Handlebar Stache
  • *****
  • Posts: 1345
Re: For those who follow the 4% rule
« Reply #27 on: February 14, 2017, 02:03:04 PM »
Ursus Major - I think that you are missing a couple of key points:-

1. The 4% SWR is pretty safe as is. It is 95% safe over 30 years and typically you end up with money left over.
2. The assumptions of the 4% SWR are pretty extreme - no additional income or reduced spending at all.

I accept that if you have a really tight budget with no leeway to adjust and you utilise a 4% WR and you have a bad sequence of returns in the first 10 years you could be in some trouble.

If you take a step back here what do you believe the real chances are of falling on the wrong side of the pros and cons of the 4% SWR. I think it's much more likely to fall on the right side - i.e. you end up better off than the theoretical 4% rule. When you consider that rule is 95% okay can you see why a bunch of us believe that this rule isn't something worth worrying about at all.

I am comfortable with a 5% to 6% WR based on the adjustments that I can make.

Exflyboy

  • Magnum Stache
  • ******
  • Posts: 3733
  • Age: 55
  • Location: Oregon
Re: For those who follow the 4% rule
« Reply #28 on: February 14, 2017, 02:59:51 PM »
So the 4% rule was based on the absolute worst 30 year period since the late 1800's from memory.

Assuming that 30 years = 60years (using the reverse mortgage interest thought process) for a moment.

Then as long as economic conditions are no worse than the absolute worse they have ever been since 100+ years ago, 4% will work.

In fact if you look at the average of the SWR's that would have worked it looks like 5.5% is a better answer.. Just be sure you can drop to 4% if you have to.

Ursus Major

  • Stubble
  • **
  • Posts: 140
  • Location: Silicon Valley, CA
Re: For those who follow the 4% rule
« Reply #29 on: February 14, 2017, 06:24:51 PM »
Ursus Major - I think that you are missing a couple of key points:-

1. The 4% SWR is pretty safe as is. It is 95% safe over 30 years and typically you end up with money left over.

The statement is correct, but not particularly helpful, because
a) Our retirement time frame as (aspiring) early retirees is longer than 30 years, potentially 60 years or more for some members of this forum. And if you look at the graph earlier in this thread you'll see that the success rate goes down for longer periods, e.g. <85% for 60 years. One of the reasons this is the case, is because the model allows the depletion of the portfolio after the time frame. That might be fine in real life, but isn't good for simply extrapolating the 30 year results to longer time frames.

b) The fact that you typically end up with money left over is irrelevant, because we are not optimizing for the median (or average) case, we are trying to protect against the downside. Imagine a weapon with a 20 gun ammo magazine, 19 are blanks and one is live and the position of the live bullet in the magazine is random. If you play one round of Russian Roulette with that, then you typically end up alive (95% probability). Still probably not a good idea, if you consider the downside.

Quote
2. The assumptions of the 4% SWR are pretty extreme - no additional income or reduced spending at all.

I accept that if you have a really tight budget with no leeway to adjust and you utilise a 4% WR and you have a bad sequence of returns in the first 10 years you could be in some trouble.

Well, that's what failure is all about, a bad sequence of return at the start, isn't it? If you don't believe you'll have that, you should be fine to ramp up your WR even more. And I don't know, how much you are able to tighten your budget. You may need to tighten a lot. Here's a post on earlyretirementnow.com re. applying the Guyton-Klinger rules (as one way to reduce spending in an adverse scenario): https://earlyretirementnow.com/2017/02/08/the-ultimate-guide-to-safe-withdrawal-rates-part-9-guyton-klinger/

The relevant graph is this one:



That's a lot of reduction in spending. Now you may be able to cut less, if you cut at the first sign of trouble and cut a lot. But even then you'll probably need to cut at least 25%, possible more.

Quote
If you take a step back here what do you believe the real chances are of falling on the wrong side of the pros and cons of the 4% SWR. I think it's much more likely to fall on the right side - i.e. you end up better off than the theoretical 4% rule. When you consider that rule is 95% okay can you see why a bunch of us believe that this rule isn't something worth worrying about at all.

Well, it's not 95% okay, if your retirement is longer than 30 years.  So why are you using the 95% number? Are you planning for a 30 year retirement horizon? Well, then you're fine and nothing of this applies to you. But if it is longer, the fact that it is 95% safe for 30 years matters to you as much as the fact that it is 100% safe for 20 years...

Quote
I am comfortable with a 5% to 6% WR based on the adjustments that I can make.

Yes, you said earlier (IIRC) that you're comfortable with a 75% success rate. Good for you!


Ursus Major

  • Stubble
  • **
  • Posts: 140
  • Location: Silicon Valley, CA
Re: For those who follow the 4% rule
« Reply #30 on: February 14, 2017, 06:38:28 PM »
So the 4% rule was based on the absolute worst 30 year period since the late 1800's from memory.

Assuming that 30 years = 60years (using the reverse mortgage interest thought process) for a moment.

Sorry, I don't follow you on that. Could you please explain the "30 years = 60 years" logic for me.

Quote
Then as long as economic conditions are no worse than the absolute worse they have ever been since 100+ years ago, 4% will work.

In fact if you look at the average of the SWR's that would have worked it looks like 5.5% is a better answer.. Just be sure you can drop to 4% if you have to.

I my previous post in this thread I mentioned the Russian Roulette example to explain why I don't think that averages matter. And when you drop your WR from 5.5% to 4% (presumably of your original portfolio then CPI adjusted) in an adverse scenario, you could already be hosed, because your WR from your actual (reduced) portfolio is significantly higher. Which works of course to a degree, but only so far...

steveo

  • Handlebar Stache
  • *****
  • Posts: 1345
Re: For those who follow the 4% rule
« Reply #31 on: February 14, 2017, 10:59:04 PM »
a) Our retirement time frame as (aspiring) early retirees is longer than 30 years, potentially 60 years or more for some members of this forum. And if you look at the graph earlier in this thread you'll see that the success rate goes down for longer periods, e.g. <85% for 60 years. One of the reasons this is the case, is because the model allows the depletion of the portfolio after the time frame. That might be fine in real life, but isn't good for simply extrapolating the 30 year results to longer time frames.

I get this but stuff still happens that may help. For instance I'm 43 and I am looking to retire in 3-5 years time. I assume that I'll be retired by 50. Let's say I live another 50 years. I assume I'll inherit some money and if I don't that I will receive some social security payments. I also assume that my house can be downsized. These assumptions aren't exactly unlikely scenarios. They are pretty likely.

b) The fact that you typically end up with money left over is irrelevant, because we are not optimizing for the median (or average) case, we are trying to protect against the downside. Imagine a weapon with a 20 gun ammo magazine, 19 are blanks and one is live and the position of the live bullet in the magazine is random. If you play one round of Russian Roulette with that, then you typically end up alive (95% probability). Still probably not a good idea, if you consider the downside.

I don't see it like this. It's not like Russian Roulette at all. If you fail at russian roulette you die and it's impossible to see it coming. If ER looks like failing you have multiple options. You can spend less. You can go back and do a little work. For instance packing shelves and earning $10k per year might be a huge chunk of your ER spending.

I think that the fact that you are typically left with money is relevant because it means that the odds are on your side when it comes to FIRE. Typically people are saving too much without any adjustments.

Well, that's what failure is all about, a bad sequence of return at the start, isn't it? If you don't believe you'll have that, you should be fine to ramp up your WR even more. And I don't know, how much you are able to tighten your budget. You may need to tighten a lot
...
That's a lot of reduction in spending. Now you may be able to cut less, if you cut at the first sign of trouble and cut a lot. But even then you'll probably need to cut at least 25%, possible more.

I agree that most people here could probably ramp up the WR past 4%. My only proviso is that you aren't on a too tight budget. My only concern with an ERE type retirement is that your spending is really low. My spending is relatively low but it's not at a bare bones level. I have 3 kids right now. I've paid $5k over the last two years for my daughters braces. We've bought two macbook airs over the last 3 years for my kids schooling. We pay for swimming and soccer lessons. I think most people on this forum could cut their spending by a bit if it was required or go back to work and earn 25% of their budget. I can't talk for everyone else but I get the impression that most people err on the side of safety anyway. There are people on this forum who don't and they seem to be going okay as well.

Well, it's not 95% okay, if your retirement is longer than 30 years.  So why are you using the 95% number? Are you planning for a 30 year retirement horizon? Well, then you're fine and nothing of this applies to you. But if it is longer, the fact that it is 95% safe for 30 years matters to you as much as the fact that it is 100% safe for 20 years...

I use the 95% figure because I think budgeting for the next 30 years is a fairly long timeframe to reassess within that timeframe. 50% with adjustments is probably okay. 50% plus some buffers may be okay.

The 95% figure as per any figure is not 95% safe but nothing is. It's just a figure based on historical data. You can't really get 100% safety in reality.

steveo

  • Handlebar Stache
  • *****
  • Posts: 1345
Re: For those who follow the 4% rule
« Reply #32 on: February 14, 2017, 11:07:55 PM »
So the 4% rule was based on the absolute worst 30 year period since the late 1800's from memory.

Assuming that 30 years = 60years (using the reverse mortgage interest thought process) for a moment.

Sorry, I don't follow you on that. Could you please explain the "30 years = 60 years" logic for me.

I could be wrong but I assume ExFlyboy means that you could get a reverse mortgage. If this is the case I could get a reverse mortgage and get another 30 years living expenses. Personally I wouldn't do this but I would downsize. I could easily go from my 4 bedroom house in a massively expensive city to a 2 bedroom shack or retirement village somewhere a lot cheaper.

spartana

  • Magnum Stache
  • ******
  • Posts: 3603
Re: For those who follow the 4% rule
« Reply #33 on: February 15, 2017, 02:39:03 AM »
Ursa Major's chart above also assumes that reduction in spending and WR is because of declining market conditions when it may be simply that the ERee is just spending less at those time periods regardless of the market. I've been FIRE around 13 or so years now and my spending varies based not just on the market but on my life at that time. Right now I'm spending very little (probably 1 - 2% WR based on the size of my stash) even though the market is booming (and my stash is growing). Its just that right now I'm not spending as much as I did in the early years because of lifestyle choices not because I have to reduce expenses. This ebb and flow of WR spending seems to be a pretty common thing among ERees as things in their lives change and often expenses they had at the onset of ER no longer exist.
Retired at 42 to play!

Slate-WA

  • 5 O'Clock Shadow
  • *
  • Posts: 55
Re: For those who follow the 4% rule
« Reply #34 on: February 15, 2017, 11:05:34 AM »
Quick side question for you all...

Can you give me a quick demo of the process once I retire and want to take money?

Let's say $50k is my benchmark for living expenses.  (should the 50k be net of taxes or pre?)

I save $1,250,000 and quit. 

Year 1 I take $50k out.

Year 2 - do I take out 4% regardless of what the market did that year? 

I'm not trying to live on 50k forever right...I'm trying to live on 4% of my nest egg?

thanks.

Ursus Major

  • Stubble
  • **
  • Posts: 140
  • Location: Silicon Valley, CA
Re: For those who follow the 4% rule
« Reply #35 on: February 15, 2017, 11:12:31 AM »
a) Our retirement time frame as (aspiring) early retirees is longer than 30 years, potentially 60 years or more for some members of this forum. And if you look at the graph earlier in this thread you'll see that the success rate goes down for longer periods, e.g. <85% for 60 years. One of the reasons this is the case, is because the model allows the depletion of the portfolio after the time frame. That might be fine in real life, but isn't good for simply extrapolating the 30 year results to longer time frames.

I get this but stuff still happens that may help. For instance I'm 43 and I am looking to retire in 3-5 years time. I assume that I'll be retired by 50. Let's say I live another 50 years. I assume I'll inherit some money and if I don't that I will receive some social security payments. I also assume that my house can be downsized. These assumptions aren't exactly unlikely scenarios. They are pretty likely.

steveo,

you can model these events with an assumed probability into your calculations and come up with a SWR based on that. Have you ever done that? How did they do on the 1966 retirement year? Or are you assuming that nothing comparable will ever happen.

b) The fact that you typically end up with money left over is irrelevant, because we are not optimizing for the median (or average) case, we are trying to protect against the downside. Imagine a weapon with a 20 gun ammo magazine, 19 are blanks and one is live and the position of the live bullet in the magazine is random. If you play one round of Russian Roulette with that, then you typically end up alive (95% probability). Still probably not a good idea, if you consider the downside.

I don't see it like this. It's not like Russian Roulette at all. If you fail at russian roulette you die and it's impossible to see it coming. If ER looks like failing you have multiple options. You can spend less. You can go back and do a little work. For instance packing shelves and earning $10k per year might be a huge chunk of your ER spending.

You are overstretching the Russian Roulette analogy. All it was meant to do is to show that the average or likely outcome is irrelevant, if the focus is on downside protection.

I think that the fact that you are typically left with money is relevant because it means that the odds are on your side when it comes to FIRE. Typically people are saving too much without any adjustments.

The odds are on your side in the Russian Roulette example, too. That's not a particularly strong argument.

Well, that's what failure is all about, a bad sequence of return at the start, isn't it? If you don't believe you'll have that, you should be fine to ramp up your WR even more. And I don't know, how much you are able to tighten your budget. You may need to tighten a lot
...
That's a lot of reduction in spending. Now you may be able to cut less, if you cut at the first sign of trouble and cut a lot. But even then you'll probably need to cut at least 25%, possible more.

I agree that most people here could probably ramp up the WR past 4%. My only proviso is that you aren't on a too tight budget. My only concern with an ERE type retirement is that your spending is really low. My spending is relatively low but it's not at a bare bones level. I have 3 kids right now. I've paid $5k over the last two years for my daughters braces. We've bought two macbook airs over the last 3 years for my kids schooling. We pay for swimming and soccer lessons. I think most people on this forum could cut their spending by a bit if it was required or go back to work and earn 25% of their budget. I can't talk for everyone else but I get the impression that most people err on the side of safety anyway. There are people on this forum who don't and they seem to be going okay as well.

Thanks for raising that point. Yes, that's actually my big concern about ERE and the main reason why I'm so persistent about my point. You need a lot of slack in your budget to mitigate a bad sequence of return through budget cuts. Just cutting "a bit" won't do it. Do you have a preset rule on how you are going to cut your budget, when you hit a year or two of bad returns? Just curious, because if you don't cut quickly and deeply, your cuts may have to be much more severe than 25%. (See the graph re. Guyton-Klinger rules that I posted above and I also recommend reading the associated blog post, link is above the graph.

Well, it's not 95% okay, if your retirement is longer than 30 years.  So why are you using the 95% number? Are you planning for a 30 year retirement horizon? Well, then you're fine and nothing of this applies to you. But if it is longer, the fact that it is 95% safe for 30 years matters to you as much as the fact that it is 100% safe for 20 years...

I use the 95% figure because I think budgeting for the next 30 years is a fairly long timeframe to reassess within that timeframe. 50% with adjustments is probably okay. 50% plus some buffers may be okay.

The 95% figure as per any figure is not 95% safe but nothing is. It's just a figure based on historical data. You can't really get 100% safety in reality.

Of course it's only a figure based on historical data. But that part was never in dispute. Also I never claimed that I am aspiring 100% safety. The 20 year example was just to show that the numbers are meaningless, if they don't apply to your scenario. And it does indeed appear that the 95% figure doesn't apply to you (just as the fictitious 100% figure in the 20 year scenario doesn't), because your retirement horizon is longer and you don't want to exhaust your capital at the end of 30 years. Now you can do a lot of mental accounting to "explain" that fact away (I can reduce my spending, I can expect an inheritance, I can work part-time, etc.), but that's not helpful for a general discussion, mainly because it's too vague (without a clearly formulated example) to back-test against historical scenarios and to a lesser degree because it likely doesn't apply to everyone (particularly the inheritance expectation). And that has nothing to do with the 4% rule, because that rule is only about what your portfolio can do for you, not what an inheritance can do for you.

So to restate my original point: I still believe that one of the weaknesses of applying the 4% rule to a retirement horizon longer than 30 years is that the original rule allowed for capital depletion, meaning it counts any portfolio amount >=$0 at the end of the 30 years as a success.


dandarc

  • Magnum Stache
  • ******
  • Posts: 2504
Re: For those who follow the 4% rule
« Reply #36 on: February 15, 2017, 11:16:28 AM »
Slate-WA -

4% rule, as stated in the academic research on the issue is:

You take 4% of your portfolio in year one, then adjust for inflation each year.

So you start at $50K, then adjust up for inflation for year 2 - maybe $51-52K.  Then yet more in year 3.

If you were to just take 4% of whatever the portfolio is at every year, that would be a very, very robust plan.  But you'd have to be able to halve your spending potentially in a very bad year.

As spartana points out - most people, I wouldn't think actually follow the inflation adjustments verbatim.  You've decided to retire, so you pay for whatever expenses you have out of your portfolio.  It would be unusual for that amount to lock-step follow inflation year after year.
Link to my journal, so I can find it quickly - http://forum.mrmoneymustache.com/journals/dandarc's-journal/

Ursus Major

  • Stubble
  • **
  • Posts: 140
  • Location: Silicon Valley, CA
Re: For those who follow the 4% rule
« Reply #37 on: February 15, 2017, 11:31:03 AM »
Ursa Major's chart above also assumes that reduction in spending and WR is because of declining market conditions when it may be simply that the ERee is just spending less at those time periods regardless of the market. I've been FIRE around 13 or so years now and my spending varies based not just on the market but on my life at that time. Right now I'm spending very little (probably 1 - 2% WR based on the size of my stash) even though the market is booming (and my stash is growing). Its just that right now I'm not spending as much as I did in the early years because of lifestyle choices not because I have to reduce expenses. This ebb and flow of WR spending seems to be a pretty common thing among ERees as things in their lives change and often expenses they had at the onset of ER no longer exist.

Just to be clear and restate what I already said in the post where I included the graph: It's not my chart, is from a blog post at https://earlyretirementnow.com/2017/02/08/the-ultimate-guide-to-safe-withdrawal-rates-part-9-guyton-klinger/ which I highly recommend.

And that chart is all about a forced reduction in spending due to an adverse market scenario (from the blog post you can find out that it uses the January 1966 retirement date).

It's great for you, if your WR is so low, because with anything below 2% you probably have a 100% success rate even in worse than historical scenarios. But that is the expected outcome, if you retire in a year with reasonable equity valuations (assuming 2003 or 2004 in your case). You didn't specify what your initial WR was, but it probably was around 4%. And you were also lucky that the 2008/2009 crisis was severe, but short. So congratulations! You're in all likelihood set for life and those bad scenarios (e.g. 1966 retirement or 1999 retirement) don't apply to you.

Of course the fact that your spending went down due to lifestyle choices is great for you, but it isn't clear that this can be generally applied. If you would have been so unlucky to have an expensive medical condition, your spending might be significantly higher for all we know. Or perhaps most people wouldn't want to make the lifestyle choices that you do? Who knows...

So it is hard to extrapolate individual experiences into a general rule as the 4% rule, if we don't have any data on the general population. Also (to take up a point from a previous post that steveo makes and I think is very relevant):

My only concern with an ERE type retirement is that your spending is really low. My spending is relatively low but it's not at a bare bones level

And that is the crux: If folks retire immediately, as soon as their bare bones level budget is covered by the 4% rule, they don't have much or any slack to cut expenses. Sure, if the crisis hits after 10 years, they may have a bit more, but who knows, if it is enough...

Exflyboy

  • Magnum Stache
  • ******
  • Posts: 3733
  • Age: 55
  • Location: Oregon
Re: For those who follow the 4% rule
« Reply #38 on: February 15, 2017, 11:58:26 AM »
So the 4% rule was based on the absolute worst 30 year period since the late 1800's from memory.

Assuming that 30 years = 60years (using the reverse mortgage interest thought process) for a moment.

Sorry, I don't follow you on that. Could you please explain the "30 years = 60 years" logic for me.

I could be wrong but I assume ExFlyboy means that you could get a reverse mortgage. If this is the case I could get a reverse mortgage and get another 30 years living expenses. Personally I wouldn't do this but I would downsize. I could easily go from my 4 bedroom house in a massively expensive city to a 2 bedroom shack or retirement village somewhere a lot cheaper.

Actually what I was referring was MMM's post on the 4% WR where he points out that mathematically there is very little difference between a 30 year and a 60 year mortgage. i.e if you add say just $150/m to your 30 year mortgage, its paid off in 15 years. The argument being that a savings stash is the same thing in reverse. I.e make your WR say 3.9% and it will be the same risk over 60 years as it will 30.

If you use Cfiresim and use a 60 year time frame this fact seems to be true, except of course there are not that many 60 year periods available to project results over.

For me I rationalise that if my stash has not grown significantly over 10 years I still have time to make spending adjustments.


spartana

  • Magnum Stache
  • ******
  • Posts: 3603
Re: For those who follow the 4% rule
« Reply #39 on: February 15, 2017, 12:27:33 PM »
Ursa Major's chart above also assumes that reduction in spending and WR is because of declining market conditions when it may be simply that the ERee is just spending less at those time periods regardless of the market. I've been FIRE around 13 or so years now and my spending varies based not just on the market but on my life at that time. Right now I'm spending very little (probably 1 - 2% WR based on the size of my stash) even though the market is booming (and my stash is growing). Its just that right now I'm not spending as much as I did in the early years because of lifestyle choices not because I have to reduce expenses. This ebb and flow of WR spending seems to be a pretty common thing among ERees as things in their lives change and often expenses they had at the onset of ER no longer exist.

Just to be clear and restate what I already said in the post where I included the graph: It's not my chart, is from a blog post at https://earlyretirementnow.com/2017/02/08/the-ultimate-guide-to-safe-withdrawal-rates-part-9-guyton-klinger/ which I highly recommend.

And that chart is all about a forced reduction in spending due to an adverse market scenario (from the blog post you can find out that it uses the January 1966 retirement date).

It's great for you, if your WR is so low, because with anything below 2% you probably have a 100% success rate even in worse than historical scenarios. But that is the expected outcome, if you retire in a year with reasonable equity valuations (assuming 2003 or 2004 in your case). You didn't specify what your initial WR was, but it probably was around 4%. And you were also lucky that the 2008/2009 crisis was severe, but short. So congratulations! You're in all likelihood set for life and those bad scenarios (e.g. 1966 retirement or 1999 retirement) don't apply to you.

Of course the fact that your spending went down due to lifestyle choices is great for you, but it isn't clear that this can be generally applied. If you would have been so unlucky to have an expensive medical condition, your spending might be significantly higher for all we know. Or perhaps most people wouldn't want to make the lifestyle choices that you do? Who knows...

So it is hard to extrapolate individual experiences into a general rule as the 4% rule, if we don't have any data on the general population. Also (to take up a point from a previous post that steveo makes and I think is very relevant):

My only concern with an ERE type retirement is that your spending is really low. My spending is relatively low but it's not at a bare bones level

And that is the crux: If folks retire immediately, as soon as their bare bones level budget is covered by the 4% rule, they don't have much or any slack to cut expenses. Sure, if the crisis hits after 10 years, they may have a bit more, but who knows, if it is enough...
I expect that at different points during most peoples ERs they'll have different expenses and increases, along with decreases, in their spending and thus WRs.. They'll still base it on the 4% rule overall, which I see as successful given most circumstances, but there will be years where just because one CAN have a SWR of 4% they'll choose to withdraw less due to lifestyle changes. That allows the stash to grow for a higher $$ withdrawals  in the future. Most people don't just retire on barebones FI but factor in some extra $$s  that they may not need or use every year. Just my personal ER experience. Also in my ER experience I have realized I could have (and should have) retired earlier.
« Last Edit: February 15, 2017, 12:31:53 PM by spartana »
Retired at 42 to play!

Ursus Major

  • Stubble
  • **
  • Posts: 140
  • Location: Silicon Valley, CA
Re: For those who follow the 4% rule
« Reply #40 on: February 15, 2017, 12:28:39 PM »
Actually what I was referring was MMM's post on the 4% WR where he points out that mathematically there is very little difference between a 30 year and a 60 year mortgage. i.e if you add say just $150/m to your 30 year mortgage, its paid off in 15 years. The argument being that a savings stash is the same thing in reverse. I.e make your WR say 3.9% and it will be the same risk over 60 years as it will 30.

If you use Cfiresim and use a 60 year time frame this fact seems to be true, except of course there are not that many 60 year periods available to project results over.

For me I rationalise that if my stash has not grown significantly over 10 years I still have time to make spending adjustments.

Exflyboy,

There is no need to speculate. The image posted earlier in this thread gives us the data:


So once again eyeballing that image the 95% threshold for 50 and 60 years is at WR of around 3.3% (give or take a bit).

So that's quite different from 4%. You can also see that for a WR of 3.9% your success rate for 60 years is around 83% (again give or take a bit). So unfortunately your assumptions are not backed up by the actual numbers. And to once again reiterate my point: The main reason for that divergence is the fact that depletion of capital is permitted under the 4% rule within the retirement horizon.

And your post is one more example why that is a problem. Folks just more-or-less blindly apply the 4% rule to longer timeframes and think that adjusting the numbers a bit will do it. Even you fell for it and assumed that the SWR for a 60-year portfolio was higher than the numbers show.

Now you can argue that you spend less or have extra income in retirement, but that is unrelated to the rule.

As a side note: The mortgage example is misleading, because it assumes a constant return stream. If you were 100% in bonds, it would be a more appropriate analogy, but for a primarily equity-based portfolio it is not. The curse of volatility...

And a 2nd side note: Yes, I share your reservation about using a 60 year timeframe on cfiresim. Today it wouldn't even include the 1966 retirement scenario. That's why I'm thinking that a 30 year scenario with a final portfolio value of x% (in real terms) of you starting portfolio is probably the better approach. Not sure what x% should be, but 100% is likely too high (because you portfolio could be in a temporary dip) and 50% sounds a bit low. Perhaps 75% or something around that.


Ursus Major

  • Stubble
  • **
  • Posts: 140
  • Location: Silicon Valley, CA
Re: For those who follow the 4% rule
« Reply #41 on: February 15, 2017, 01:03:06 PM »
I expect that at different points during most peoples ERs they'll have different expenses and increases, along with decreases, in their spending and thus WRs.. They'll still base it on the 4% rule overall, which I see as successful given most circumstances, but there will be years where just because one CAN have a SWR of 4% they'll choose to withdraw less due to lifestyle changes. That allows the stash to grow for a higher $$ withdrawals  in the future.

Yes, in some years they might withdraw less. And in other years they might withdraw more. And perhaps a certain percentage needs to withdraw more in the beginning, before they can start to withdraw less. Nobody knows, so we can't really base any calculation on it. So the x% WR adjusted for inflation is not the worst of assumptions to use as the consumption baseline.

Quote
Most people don't just retire on barebones FI but factor in some extra $$s  that they may not need or use every year. Just my personal ER experience.

It sounds to me like you're essentially saying: "It is true for me and the twenty people that I know, so it must be true for most people". This appears to be the fallacy of a biased sample. Even if it were true for 50% of the population (the median), it is still debatable, whether we should apply the median case to a calculation that is intended for downside protection.

I don't know what "most people" do and I don't know, if they realize how much slack they actually need in their budget to absorb an adverse scenario.

Quote
Also in my ER experience I have realized I could have (and should have) retired earlier.

As I told you, you picked a decent year to retire. And if all goes well, we can always determine with hindsight that we could have retired earlier. Unfortunately you have to make that decision without knowing the future, since that DeLorean time machine is unobtainable for most people.

So why didn't you retire a year or two or three or four earlier? You must have had some seemingly plausible reasons at the time.

Retire-Canada

  • Magnum Stache
  • ******
  • Posts: 3360
Re: For those who follow the 4% rule
« Reply #42 on: February 15, 2017, 03:27:48 PM »
I'm not trying to live on 50k forever right...I'm trying to live on 4% of my nest egg?

The 4% WR Rule is based on 4% of the initial portfolio value + inflation withdrawn each year. Are you concerned that the $50K/yr + inflation is too little or too much?

steveo

  • Handlebar Stache
  • *****
  • Posts: 1345
Re: For those who follow the 4% rule
« Reply #43 on: February 15, 2017, 04:42:18 PM »
steveo,

you can model these events with an assumed probability into your calculations and come up with a SWR based on that. Have you ever done that? How did they do on the 1966 retirement year? Or are you assuming that nothing comparable will ever happen.

I tell you how I figure out FI. I look at the historical data and then at the assumptions underlying the historical data. I don't try and micromanage this to somehow control my downside risk. All I do is state that there is a high probability of success if I get to a 5.5% WR with pretty unrealistic assumptions that are not in my favour.

You are overstretching the Russian Roulette analogy. All it was meant to do is to show that the average or likely outcome is irrelevant, if the focus is on downside protection.

I agree with this comment but I don't think it's the best way to live your life in general. If all you are worried about is downside protection in relation to FIRE for instance then you will have to work a long time to manage that downside risk. If you like your job that is fine. If not then I think it's the wrong approach. To me it's not as simple as only worrying about the downside risk. There are trade-offs and these should be recognised.

Thanks for raising that point. Yes, that's actually my big concern about ERE and the main reason why I'm so persistent about my point. You need a lot of slack in your budget to mitigate a bad sequence of return through budget cuts. Just cutting "a bit" won't do it. Do you have a preset rule on how you are going to cut your budget, when you hit a year or two of bad returns? Just curious, because if you don't cut quickly and deeply, your cuts may have to be much more severe than 25%. (See the graph re. Guyton-Klinger rules that I posted above and I also recommend reading the associated blog post, link is above the graph.

I don't have a set figure. I would probably go back to work. My budget is 40k living expenses. I intend to have some bonds, have 2-3 years living expenses in paid leave and probably some cash. On top of that I can always return to work in my current job within say 3 years or work at a menial job like retail. It would be pretty easy for myself and my wife to earn say $20k per year.

I think we could live off $30k without a problem because there is probably $10k in expenses that aren't essential.

Of course it's only a figure based on historical data. But that part was never in dispute. Also I never claimed that I am aspiring 100% safety. The 20 year example was just to show that the numbers are meaningless, if they don't apply to your scenario. And it does indeed appear that the 95% figure doesn't apply to you (just as the fictitious 100% figure in the 20 year scenario doesn't), because your retirement horizon is longer and you don't want to exhaust your capital at the end of 30 years. Now you can do a lot of mental accounting to "explain" that fact away (I can reduce my spending, I can expect an inheritance, I can work part-time, etc.), but that's not helpful for a general discussion, mainly because it's too vague (without a clearly formulated example) to back-test against historical scenarios and to a lesser degree because it likely doesn't apply to everyone (particularly the inheritance expectation). And that has nothing to do with the 4% rule, because that rule is only about what your portfolio can do for you, not what an inheritance can do for you.

So to restate my original point: I still believe that one of the weaknesses of applying the 4% rule to a retirement horizon longer than 30 years is that the original rule allowed for capital depletion, meaning it counts any portfolio amount >=$0 at the end of the 30 years as a success.

I understand what you are stating but my take is that I don't need to backtest anything because it's just a guide and that is all it will ever be. So I look at the situation and state I'm comfortable with that. I think you look at the situation and state that you aren't comfortable with it.

Retire-Canada

  • Magnum Stache
  • ******
  • Posts: 3360
Re: For those who follow the 4% rule
« Reply #44 on: February 15, 2017, 05:04:46 PM »
I'm assuming that you mean "lots of spending flexibility", because if you have zero spending flexibility, then one line of defense against an adverse scenario, the reduction of spending, has evaporated, thus the less spending flexibility (or alternatively income generating flexibility) you have, the higher should be the success rate that you're shooting for.

No I meant to say no spending flexibility. That's what drives the price up.

Sure, it does, but then so what? Everything has a price, that is a truism.

The so what is that the opportunity cost calculations inherent in working extra years at the prime of your life chasing after small likelihood risks make no sense to me. Particularly when there are ways to mitigate the same risks without working those extra years. Everything may have a price, but I would suggest that time is frequently undervalued.

I don't know why there is this hostility and pejorative accusations against people who consider a lower WR than 4% as the baseline. I find this completely unnecessary and it does the concept of FIRE a disservice. I'm guessing that there is a lot (too much in my book) anchoring on that 4% number for historical reasons.

Identifying a major risk to FIRE plans is a worthwhile thing. Particularly when fear is a far more serious risk than some of the low % risks being chased after. The criticism isn't about people it's about their assessment of risk and evaluation of opportunity cost.

It's a bit like someone who is so focused on not tripping on a crack in the pavement getting run over by a bus when they failed to look up crossing the street.

LAGuy

  • Stubble
  • **
  • Posts: 207
  • Age: 42
  • Location: Los Angeles
Re: For those who follow the 4% rule
« Reply #45 on: February 15, 2017, 06:11:14 PM »
So once again eyeballing that image the 95% threshold for 50 and 60 years is at WR of around 3.3% (give or take a bit).

So that's quite different from 4%. You can also see that for a WR of 3.9% your success rate for 60 years is around 83% (again give or take a bit).

There's no practical difference between a 83% success rate and a 95% success rate. At 4%, I think there's what like one fail year in all the cFIRE sim data? 83% maybe adds one more year. Basically, both indicate a very high likelihood of success. What those numbers are telling you, is that you have enough money to FIRE and should you find yourself in a fail year, it's your own ability to adapt and not how much you started with that's going to insure your ultimate success. That is to say, if you retired with an 83% chance to succeed, and you find yourself in a fail year, the guy that retired with a 95% chance to succeed isn't going to be laying back with his feet up smirking. You're both going to be sweating bullets and making changes. You're both going to be worried about failure.

steveo

  • Handlebar Stache
  • *****
  • Posts: 1345
Re: For those who follow the 4% rule
« Reply #46 on: February 15, 2017, 07:04:58 PM »
The criticism isn't about people it's about their assessment of risk and evaluation of opportunity cost.

This is exactly what we are talking about. Different people can have different assessments of risk and their evaluations of opportunity costs (in this case time). Personally I think the assumptions underlying the 4% SWR are pretty extreme on the side of safety.

Telecaster

  • Pencil Stache
  • ****
  • Posts: 783
Re: For those who follow the 4% rule
« Reply #47 on: February 15, 2017, 07:06:10 PM »
There's no practical difference between a 83% success rate and a 95% success rate. At 4%, I think there's what like one fail year in all the cFIRE sim data? 83% maybe adds one more year. Basically, both indicate a very high likelihood of success. What those numbers are telling you, is that you have enough money to FIRE and should you find yourself in a fail year, it's your own ability to adapt and not how much you started with that's going to insure your ultimate success. That is to say, if you retired with an 83% chance to succeed, and you find yourself in a fail year, the guy that retired with a 95% chance to succeed isn't going to be laying back with his feet up smirking. You're both going to be sweating bullets and making changes. You're both going to be worried about failure.

^ This is a great post.   There is no completely safe number.  We could still have a 30, 40, 60-year period that was worse than the past.  At some point you have to say "this is close enough" and pull the pin.  Then, at some point in the future you:

1) Die happy on a giant pile of money (very likely), or

2) Realize--probably later than you should have--that things aren't working out and you have to change something.  Like maybe cut expenses or become a greeter at Wal-mart.


steveo

  • Handlebar Stache
  • *****
  • Posts: 1345
Re: For those who follow the 4% rule
« Reply #48 on: February 15, 2017, 07:19:50 PM »
There's no practical difference between a 83% success rate and a 95% success rate. At 4%, I think there's what like one fail year in all the cFIRE sim data? 83% maybe adds one more year. Basically, both indicate a very high likelihood of success. What those numbers are telling you, is that you have enough money to FIRE and should you find yourself in a fail year, it's your own ability to adapt and not how much you started with that's going to insure your ultimate success. That is to say, if you retired with an 83% chance to succeed, and you find yourself in a fail year, the guy that retired with a 95% chance to succeed isn't going to be laying back with his feet up smirking. You're both going to be sweating bullets and making changes. You're both going to be worried about failure.

^ This is a great post.   There is no completely safe number.  We could still have a 30, 40, 60-year period that was worse than the past.  At some point you have to say "this is close enough" and pull the pin.  Then, at some point in the future you:

1) Die happy on a giant pile of money (very likely), or

2) Realize--probably later than you should have--that things aren't working out and you have to change something.  Like maybe cut expenses or become a greeter at Wal-mart.

I completely agree with this as well. You don't get a 100% safe number. It's just probabilities. Personally I think you just hit a reasonable number and then figure if you want to quit work.

Metric Mouse

  • Walrus Stache
  • *******
  • Posts: 5313
  • FU @ 22. F.I.R.E before 23
Re: For those who follow the 4% rule
« Reply #49 on: February 15, 2017, 07:50:35 PM »
Slate-WA -


If you were to just take 4% of whatever the portfolio is at every year, that would be a very, very robust plan.
This would be very robust. In fact, it couldn't fail! The new 100% success rate 4% plan.
Give me one fine day of plain sailing weather and I can mess up anything.

MustacheMathTM