3 Serious Problems with the 4% Rule

[DreamFIRE]

Another mainstream media (CNN) article about the 4% rule that was posted earlier today.

"3 serious problems with the 4% retirement rule"

http://money.cnn.com/2018/02/16/retirement/4-percent-retirement-rule/index.html

[SugarMountain]

The "Serious problems" headline is a bit click-baity compared to the actual article.  Here's the tl;dr version:
1) Really only applies to 60/40 split of stocks/bonds.  (Not really a "serious problem".)
2) Based on old data (was done in the 90s when bond interest was higher).  The author obviously doesn't understand where the "4% rule" came from or that it was updated with another study in 2009.
3) 4% might be too conservative and you'll die with money in the bank, particularly if you're retiring late, i.e. 70s where living for 30 more years is unlikely.

[Much Fishing to Do]

It looks like the 4% rule doesn't apply to every possible investment mix, might not be conservative enough in some time periods, probably will be too conservative in most time periods, and really should be viewed as a very helpful time tested guideline/goal versus a comprehensive investment draw-down plan.

I guess the "serious problems" must be with respect to the number of people hearing 4% but not knowing these obvious and oft repeated characteristics of the rule

[scottish]

There's a book that covers this in intricate detail.

https://www.amazon.com/Living-Off-Your-Money-Retirement/dp/0997403403

I'm studying it to prepare for RE in the next couple of years.   Highly recommended.

[daverobev]

There's a book that covers this in intricate detail.

https://www.amazon.com/Living-Off-Your-Money-Retirement/dp/0997403403

I'm studying it to prepare for RE in the next couple of years.   Highly recommended.

Can you give a tl;dr?

[scottish]

They cover a number of topics.   Results are all back-tested and presented for the reader to look at in detail.

1.  Income harvesting strategies.   The best ones convert equities to fixed income assets when total equity value has crossed a threshold (20% above starting value).   McClung calls this 'prime harvesting'.   Simple rebalancing works ok, but you can do better.

2.  Variable withdrawal strategies.  They consider several different withdrawal strategies.   The best one to use depends on your retirement parameters (primarily life expectancy).

This takes you up to chapter 4.   I haven't studied the other 7 chapters yet.   The book considers global diversification and asset mix in detail.

The really really TLDR is that the 4% SWR isn't a problem.

[scottish]

The author is talking about the equity part of the portfolio in the aggregate, not applying the rule to individual stocks.    Back-testing supports his claims.

I wonder if we should start a thread in investor alley to dissect the book in detail...

[daverobev]

They cover a number of topics.   Results are all back-tested and presented for the reader to look at in detail.

1.  Income harvesting strategies.   The best ones convert equities to fixed income assets when total equity value has crossed a threshold (20% above starting value).   McClung calls this 'prime harvesting'.   Simple rebalancing works ok, but you can do better.

2.  Variable withdrawal strategies.  They consider several different withdrawal strategies.   The best one to use depends on your retirement parameters (primarily life expectancy).

This takes you up to chapter 4.   I haven't studied the other 7 chapters yet.   The book considers global diversification and asset mix in detail.

The really really TLDR is that the 4% SWR isn't a problem.

1 - So say you have $100k in XAW.TO or whatever, it grows (stripping inflation) to $120k, then you sell $20k and put that $20k into bonds?

I was thinking of that myself a while back - as in, if you have a portfolio which is above the amount you need for 4% SWR, do you take a different risk profile with the amount above the 4%?

So really after this crazy run up over the last little while, you should sell (high, no less).

[rab-bit]

I wonder if we should start a thread in investor alley to dissect the book in detail...

I believe there are one or two threads on Bogleheads that do this.

[robtown]

There's a book that covers this in intricate detail.

https://www.amazon.com/Living-Off-Your-Money-Retirement/dp/0997403403

I'm studying it to prepare for RE in the next couple of years.   Highly recommended.

Thank you,  I just put in a request for my county library to purchase a copy.

[matchewed]

Oh so yet another article that comes to the same conclusion at the end as https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/1350/

[scottish]

Here's the Bogleheads thread:

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=192105