Bengen - Creator of the 4% rule - Changes the rule

[WSUCoug1994]

Interesting read.....nothing surprising to this crowd I imagine

https://www.marketwatch.com/story/the-inventor-of-the-4-rule-just-changed-it-11603380557

[maizefolk]

To post the punchline for those who don't want to read the whole article, this guy suggests using 5% rather than 4%.

I've always thought of the 4% rule as originating with Cooley, Hubbard, and Walz's 1998 paper (the Trinity Study). But perhaps this is like the boring debate about who can correctly claim to be the inventor of e-mail.

[JLee]

To post the punchline for those who don't want to read the whole article, this guy suggests using 5% rather than 4%.

I've always thought of the 4% rule as originating with Cooley, Hubbard, and Walz's 1998 paper (the Trinity Study). But perhaps this is like the boring debate about who can correctly claim to be the inventor of e-mail.

At 5% I'm likely only a couple months away from hitting my barebones minimum number, damn..

[PDXTabs]

And here I am fantasizing about a 2% withdrawal rate. I might have to change that to 2.5%.

EDITed to add: that would be to allow myself to relocate to a higher cost of living locale later on.

[LWYRUP]

Caution that this seems applied to people retiring at 65 and so I wouldn't rely on it to retire at 35. 

[PDXTabs]

Caution that this seems applied to people retiring at 65 and so I wouldn't rely on it to retire at 35.

But in some way retiring at 35 is less risky, right? Because you can always go back to work.

[sherr]

Caution that this seems applied to people retiring at 65 and so I wouldn't rely on it to retire at 35.

But in some way retiring at 35 is less risky, right? Because you can always go back to work.

No, it is quite definitely more risky. First of all even if you do try to go back to work after only a decade or two you may have a hard time getting hired at close to your old payrate, or even at all. Age discrimination is a thing, and you'd have a long employment gap and outdated skills.

But more importantly, it might not be obvious that you're going to run out of money until you're in your 60s or 70s. What then? No one is looking to entry-level hire someone who is already retirement age.

[bacchi]

Caution that this seems applied to people retiring at 65 and so I wouldn't rely on it to retire at 35.

But in some way retiring at 35 is less risky, right? Because you can always go back to work.

No, it is quite definitely more risky. First of all even if you do try to go back to work after only a decade or two you may have a hard time getting hired at close to your old payrate, or even at all. Age discrimination is a thing, and you'd have a long employment gap and outdated skills.

But more importantly, it might not be obvious that you're going to run out of money until you're in your 60s or 70s. What then? No one is looking to entry-level hire someone who is already retirement age.

There have been analyses -- and I believe our own @Mr Green created a table -- that help identify SOR risk.

[JLee]

Caution that this seems applied to people retiring at 65 and so I wouldn't rely on it to retire at 35.

But in some way retiring at 35 is less risky, right? Because you can always go back to work.

No, it is quite definitely more risky. First of all even if you do try to go back to work after only a decade or two you may have a hard time getting hired at close to your old payrate, or even at all. Age discrimination is a thing, and you'd have a long employment gap and outdated skills.

But more importantly, it might not be obvious that you're going to run out of money until you're in your 60s or 70s. What then? No one is looking to entry-level hire someone who is already retirement age.

My current income is based on aggressively saving for retirement - if my stache started to dip a bit, I wouldn't need to replace the income I have today in order to make up the difference.

As far as skills are concerned, I suspect a lot of us would spend that decade or two doing things that would improve our skills in some areas, even if not relevant to our previous careers.

[PDXTabs]

No, it is quite definitely more risky. First of all even if you do try to go back to work after only a decade or two you may have a hard time getting hired at close to your old payrate, or even at all. Age discrimination is a thing, and you'd have a long employment gap and outdated skills.

Sure, but if your 4% isn't cutting it how much money do you really need to make? I mean seriously, you need to make enough to cover rent and food and wait for your principle/capital to accumulate compound some more, complete with geoarbitrage opportunities. Unless you spent money for year after year knowing that you were burning through your principle and did nothing I really don't see the problem.

But more importantly, it might not be obvious that you're going to run out of money until you're in your 60s or 70s. What then? No one is looking to entry-level hire someone who is already retirement age.

I don't follow. If you can evaluate your principle/spend rate at 65 you can evaluate your principle/spend rate at 65. It doesn't matter if you have been retired for 30 days or 30 years.

EDITed to add: on average 4% will let you die wildly wealthy. IMHO retiring at 35 reduces, not increases, your SOR risk.

[reeshau]

I've always thought of the 4% rule as originating with Cooley, Hubbard, and Walz's 1998 paper (the Trinity Study). But perhaps this is like the boring debate about who can correctly claim to be the inventor of e-mail.

No debate to it--Bengen preceded them by 4 years.  You can read copies of both studies, which are linked as references in their Wikipedia articles.  Bengen was a single man with a spreadsheet--he calculated a single asset allocation, for a 30 year period, and communited The minimum of the historical series. The Trinity Study is cited because it is much broader, with multiple scenarios, and statistical likelihood below 100%

https://en.m.wikipedia.org/wiki/William_Bengen
https://en.m.wikipedia.org/wiki/Trinity_study

Also, as the article states, he he already raised it to 4.5% before.

[sherr]

No, it is quite definitely more risky. First of all even if you do try to go back to work after only a decade or two you may have a hard time getting hired at close to your old payrate, or even at all. Age discrimination is a thing, and you'd have a long employment gap and outdated skills.

Sure, but if your 4% isn't cutting it how much money do you really need to make? I mean seriously, you need to make enough to cover rent and food and wait for your principle/capital to accumulate compound some more, complete with geoarbitrage opportunities. Unless you spent money for year after year knowing that you were burning through your principle and did nothing I really don't see the problem.

Fine, but having to work 2X years at a lower pay rate instead of X years at a higher one is a risk too. Not as bad as "going broke" risk, but still a risk.

But more importantly, it might not be obvious that you're going to run out of money until you're in your 60s or 70s. What then? No one is looking to entry-level hire someone who is already retirement age.

I don't follow. If you can evaluate your principle/spend rate at 65 you can evaluate your principle/spend rate at 65. It doesn't matter if you have been retired for 30 days or 30 years.

EDITed to add: on average 4% will let you die wildly wealthy. IMHO retiring at 35 reduces, not increases, your SOR risk.

Let's say we're in one of the situations where we're neither obviously on the path to fabulous wealth, nor obviously heading towards the poor house, just kind of skating along. Things are going "fine". You stash is paying out your 4%, but not really increasing relative to inflation.

You might think that all is well and good and not go back to work. And *then* when you're 60 some major years-long economic downturn hits, and tips you definitely down into the "heading towards the poor house" bucket. What then?

The simple math involved says that a 60-year retirement is more risky than a 30-year one. For one simply because there's more time for something to go wrong, but also because the 4% rule is based on having at least $1 left after a 30-year retirement. There are many paths one could have taken where things are trending down but haven't quite run out of money yet that would have counted as 30-year successes, but result in 60-year failures.

Now if you want to argue that *most* of those paths you'd be able to foresee after the first decade or so, and could go back to work for 5 years or so until things start looking better, then fine, I won't disagree. But things are rarely so simple. It's also true that you're more likely to have a stroke or something as you get older, and you'll be less able to do manual labor in general, etc.

I just think it's unwise to assume that a 60-year retirement is less risky than a 30-year one starting from the same withdrawal rate just because "you can go back to work if you need to". A) maybe you can't, B) maybe you don't know in advance you needed to, and C) maybe that's not really that desirable of a fall-back plan anyway. Longer retirements are definitely more risky, and it makes sense to plan for them as such.

[PDXTabs]

Let's say we're in one of the situations where we're neither obviously on the path to fabulous wealth, nor obviously heading towards the poor house, just kind of skating along. Things are going "fine". You stash is paying out your 4%, but not really increasing relative to inflation.

You might think that all is well and good and not go back to work. And *then* when you're 60 some major years-long economic downturn hits, and tips you definitely down into the "heading towards the poor house" bucket. What then?

Can you point to one 25 year period of time since WWII where any reasonable portfolio would have actually lead to this outcome?

[PDXTabs]

Longer retirements are definitely more risky, and it makes sense to plan for them as such.

Strictly speaking this may be true, but having enough money to retire when you are 35 seems radically less risky then needing to work until you are 65 since you don't know when your health will give out. For example, my 44 year old white collar friend had a recent brain injury and their performance isn't what it used to be. If they already had enough money saved to retire they would be in a better place.

EDITed to add: the earliest that I could possibly retire would be 46, and I want to get enough saved so that if I'm in a similar place I can lean FIRE and live indoors and eat food.

[sherr]

Longer retirements are definitely more risky, and it makes sense to plan for them as such.

Strictly speaking this may be true, but having enough money to retire when you are 35 seems radically less risky then needing to work until you are 65 since you don't know when your health will give out. For example, my 44 year old white collar friend had a recent brain injury and their performance isn't what it used to be. If they already had enough money saved to retire they would be in a better place.

Right but we are not comparing two situations where Mustachian A achieves $1MM at 35 or has to work until 65 to get it, and deciding which is less risky. Obviously having more money earlier is better.

We are evaluating whether it makes sense to take advice tailored to a 30-year retirement and blindly apply it to a 60-year retirement. And no, it doesn't, you should do it only with a pinch of salt and with both eyes wide open. Having to go back to work is in-and-of-itself a failure case of "retirement", so obviously it is not a catch-all backup to things not working out.

And no I'm not interested in trying to find historical periods where any particular things happened. We all know that past results do not guarantee future returns.

[reeshau]

Let's say we're in one of the situations where we're neither obviously on the path to fabulous wealth, nor obviously heading towards the poor house, just kind of skating along. Things are going "fine". You stash is paying out your 4%, but not really increasing relative to inflation.

You might think that all is well and good and not go back to work. And *then* when you're 60 some major years-long economic downturn hits, and tips you definitely down into the "heading towards the poor house" bucket. What then?

Can you point to one 25 year period of time since WWII where any reasonable portfolio would have actually lead to this outcome?

Said a little different way, this is why having a substantial portion of your portfolio in risk assets is important.  25/75 stock/bond portfolios have very high failure rates, just for this reason--they never outgrow sequence of return risks.  Having a 50/50 portfolio (as Bengen modeled) or higher stock percentage means that, if you get through your first years you *probably* have money coming out of your ears.

Below is Bengen's chart, with "SAFEMAX" being the 4% mark--the minimum.  Notice how much more frequently the withdrawal rate could have been 6% or 7%.  But the whole point of the 4% rule is that you only know this in hindsight, at the end of the period--so be conservative.  That's fine for a mathematical model, but people living their lives can tell after 10, 15, or 20 years that their accounts are growing or not.

[maizefolk]

Let's say we're in one of the situations where we're neither obviously on the path to fabulous wealth, nor obviously heading towards the poor house, just kind of skating along. Things are going "fine". You stash is paying out your 4%, but not really increasing relative to inflation.

You might think that all is well and good and not go back to work. And *then* when you're 60 some major years-long economic downturn hits, and tips you definitely down into the "heading towards the poor house" bucket. What then?

Can you point to one 25 year period of time since WWII where any reasonable portfolio would have actually lead to this outcome?

To the best of my knowledge no, this isn't an outcome that happens. Withdrawing at 4% you either get hit by a poor sequence of returns outcome early (in the first decade or so) and you're in for a nail-biter ride, or your investment compounds rapidly to the point where you become wealthy enough that your withdrawals represent < 3% of your portfolio and nothing short a major war fought on your country's soil is going to put you at risk of running out of money.* And if a major war is fought on the ground in the USA we'll all have more and bigger problems to worry about that our long term spending rates.

Edit: actually as I was writing this resshau pointed out an important caveat that this is true so long as the majority of assets are in stocks which is what most people use for FIRE. High bond allocations that are designed to spend down the principal over 30 years and end close to zero are quite vulnerable to changes in market conditions 20+ years in and are also quite vulnerable to "longevity risk."

And no I'm not interested in trying to find historical periods where any particular things happened. We all know that past results do not guarantee future returns.

Then why engage in a debate about withdrawal rates in the first place? These concepts are entirely based on the use historical data to guess the possible range of outcomes in the future.

[sherr]

And no I'm not interested in trying to find historical periods where any particular things happened. We all know that past results do not guarantee future returns.

Then why engage in a debate about withdrawal rates in the first place? These concepts are entirely based on the use historical data to guess the possible range of outcomes in the future.

It's not the same thing. We model with historic data because that's the only data we have; the best guesses we can make. There have only been 1.25 unique (non-overlapping) 60-year retirement periods since WWII, has every possible sequence of returns already happened? It is not safe to assume that just because a 20-or-30-year period of moderate returns hasn't happened yet that it never will. There already have been 15-year periods where the S&P500 averages at about 4%.

But okay, I'm clearly outvoted. Let me re-formulate my position. I personally would find it undesirable to go back to work for a several years if my retirement failed. And it's more likely to fail if you retire earlier, yes? So I personally would rather work an extra year or so now to avoid that outcome, not increase my withdrawal rate to 5% just because it might work out.

[JLee]

And no I'm not interested in trying to find historical periods where any particular things happened. We all know that past results do not guarantee future returns.

Then why engage in a debate about withdrawal rates in the first place? These concepts are entirely based on the use historical data to guess the possible range of outcomes in the future.

It's not the same thing. We model with historic data because that's the only data we have; the best guesses we can make. There have only been 1.25 unique (non-overlapping) 60-year retirement periods since WWII, has every possible sequence of returns already happened? It is not safe to assume that just because a 20-or-30-year period of moderate returns hasn't happened yet that it never will. There already have been 15-year periods where the S&P500 averages at about 4%.

But okay, I'm clearly outvoted. Let me re-formulate my position. I personally would find it undesirable to go back to work for a several years if my retirement failed. And it's more likely to fail if you retire earlier, yes? So I personally would rather work an extra year or so now to avoid that outcome, not increase my withdrawal rate to 5% just because it might work out.

Where do you draw that line?  What if the market crashes harder and you still have to go back to work, despite that one more year?  Why not make it two more years to be safe? Or three? Or work til you're 65 to be absolutely sure?

[PDXTabs]

I personally would find it undesirable to go back to work for a several years if my retirement failed. And it's more likely to fail if you retire earlier, yes? So I personally would rather work an extra year or so now to avoid that outcome, not increase my withdrawal rate to 5% just because it might work out.

I'm actually 100% okay with this position. In fact I might do something similar where I use very aggressive geoarbitrage at the beginning as an insurance policy that I won't have to later.

[maizefolk]

But okay, I'm clearly outvoted. Let me re-formulate my position. I personally would find it undesirable to go back to work for a several years if my retirement failed. And it's more likely to fail if you retire earlier, yes? So I personally would rather work an extra year or so now to avoid that outcome, not increase my withdrawal rate to 5% just because it might work out.

A perfectly reasonable position to take. I'm in a field where once I leave my job it would very extremely difficult if not impossible to get a similar one, and like you I wouldn't be comfortable pushing the big red button with a 5% withdrawal rate either.

I also don't plan to keep working to get down to a 3% or 2.5% withdrawal rate either, although I have run into other posters on the forum who feel that the extra years of work necessary to add all that extra safety margin are necessary for them to sleep well at night. Everyone is going to have their own point where the certainty of spending more years of their finite lives working finally outweighs the risk of running out of money prior to death.

[sherr]

Where do you draw that line?  What if the market crashes harder and you still have to go back to work, despite that one more year?

Then, "Oh well, it is what it is, I did my best". I expect everyone to be able to decide for themselves where that line is. Unless you're arguing that we all have to retire the instant we hit a 5% withdrawal rate?

[JLee]

Where do you draw that line?  What if the market crashes harder and you still have to go back to work, despite that one more year?

Then, "Oh well, it is what it is, I did my best". I expect everyone to be able to decide for themselves where that line is. Unless you're arguing that we all have to retire the instant we hit a 5% withdrawal rate?

I reread my posts and I still don't see how you invented that one.

[sherr]

Where do you draw that line?  What if the market crashes harder and you still have to go back to work, despite that one more year?

Then, "Oh well, it is what it is, I did my best". I expect everyone to be able to decide for themselves where that line is. Unless you're arguing that we all have to retire the instant we hit a 5% withdrawal rate?

I reread my posts and I still don't see how you invented that one.

Because you were mocking me / satirically asking "why not work till you're 65" for not wanting to retire on a 5% WR.

[PDXTabs]

Everyone is going to have their own point where the certainty of spending more years of their finite lives working finally outweighs the risk of running out of money prior to death.

Yup. My dad worked until the day he died, so did my grandfather in law. I would prefer not to go that way.

[ender]

Let's say we're in one of the situations where we're neither obviously on the path to fabulous wealth, nor obviously heading towards the poor house, just kind of skating along. Things are going "fine". You stash is paying out your 4%, but not really increasing relative to inflation.

You might think that all is well and good and not go back to work. And *then* when you're 60 some major years-long economic downturn hits, and tips you definitely down into the "heading towards the poor house" bucket. What then?[/url]

I mean, this is pretty much not possible in the USA unless you did as lean of FIRE as possible and had so few working years your social security is trivial (or, of course, the whole system collapses).

[JLee]

Where do you draw that line?  What if the market crashes harder and you still have to go back to work, despite that one more year?

Then, "Oh well, it is what it is, I did my best". I expect everyone to be able to decide for themselves where that line is. Unless you're arguing that we all have to retire the instant we hit a 5% withdrawal rate?

I reread my posts and I still don't see how you invented that one.

Because you were mocking me / satirically asking "why not work till you're 65" for not wanting to retire on a 5% WR.

Maybe you make a lot more money than me, in which case just a year might be enough to bump you from 5% to 4%.  With a $50k retirement income target, the difference between 5% and 4% is $250k in investments.

Now...if I could gather up a quarter million a year while working, I'd be hard pressed to not work a few more years and double the stache just for kicks :)

[maizefolk]

The phenomenon of working just one more year for extra safety, and then another just one more year for safety, and then a third just one more year for safety is a very real one, and a very easy trap to fall into. That's why you see people talking about OMY syndrome here on the forums.

The problem is that there is no amount of money where it strops being true that working one more year reduces your risk of running out of money before death.

[AO1FireTo]

Wow 5%, I can FIRE now then.  Better tell the DW.

[TomTX]

Caution that this seems applied to people retiring at 65 and so I wouldn't rely on it to retire at 35.

But in some way retiring at 35 is less risky, right? Because you can always go back to work.

No, it is quite definitely more risky. First of all even if you do try to go back to work after only a decade or two you may have a hard time getting hired at close to your old payrate, or even at all. Age discrimination is a thing, and you'd have a long employment gap and outdated skills.

If your portfolio is going to fail, it should be pretty obvious in the first 5 years when it is easiest to remedy by going back to work, or otherwise generating cash to limit drawdown of depressed stocks/whatever investments.

[TomTX]

Fine, but having to work 2X years at a lower pay rate instead of X years at a higher one is a risk too. Not as bad as "going broke" risk, but still a risk.

Hm. A 5-10% risk of having to work 2X years versus a 100% chance of working X years.

So, an average "cost" of 0.1X to 0.2X versus 1X.

Still sounds like RE wins.

I've decided to neglect undermining your assumption that 2X years would be required.

[TomTX]

Wow 5%, I can FIRE now then.  Better tell the DW.

If you're willing to reduce or replace up to 1.5% when the portfolio is below inflation-adjusted starting value, sure!

[Milizard]

If you're in the US, the big risk is the cost of healthcare and getting sick.  That can blow your spend and the possibility of returning to work right out of the water.  If you have not had a front row experience with elder care, it is ugly.

[secondcor521]

The problem is that there is no amount of money where it strops being true that working one more year reduces your risk of running out of money before death.

Which is, as people point out periodically, a retirement failure of a different kind.  And quite real.

[mathlete]

If I were an American, I would think long and hard about exposing myself to the whims of congressional healthcare decisions for potentially decades while drawing 5% on my assets unless I had a significant amount of margin built into my lifestyle.

If you're planning on a $70K with healthy and cutable margins, maybe go for it. But if you're trying to get by on $20K-$30K, you're a bad health event and a few years of hitting your OOPM away from your plans going up in flames. And depending upon what happens to the ACA, you may potentially find yourself uninsurable for multiple years until you qualify for Medicare too.

And then there's always this. The cheap and spartan lifestyle you enjoy when you're 25 or 35 may eventually become miserable monotany by the time you're in your 50s.

[frugalor]

Caution that this seems applied to people retiring at 65 and so I wouldn't rely on it to retire at 35.

Are they talking about people need 5% on top of their social security income?  Either the principal is too small or they are spending too much, right?

I would imagine once I collect SS, the withdrawal rate will be cut significantly.

[BTDretire]

  I'm one that has always argued to people that they should work longer to save more, I also argue against the lean FIRE. I just can't see taking the risk when a few more years can provide a safer retirement. But there are a few things that need to be thrown in the mix. Do you really hate your job? Is there some health scare that could shorten your life? Dr. Fauci is a great example of someone that obviously gets a big plus from working, he's 2 months before his 80th birthday and still having a big input.
 We were not a high income family so, took us longer to get our 4%, but we continued 7 more years. We lived at the right time and the market gave us a double.
The 7 years also got us much closer to SS.

tl;dr Put in a little more time, unless you have extenuating circumstances

[norajean]

If you are happy to return to work, then something like an 6-7% SWR will work for you. In about 20% of historical scenarios (some examples are in the early 1920s) you would never need to return to work over a 50 year period.  If you get unlucky, as you say, just resume work.

[secondcor521]

If you are happy to return to work, then something like an 6-7% SWR will work for you. In about 20% of historical scenarios (some examples are in the early 1920s) you would never need to return to work over a 50 year period.  If you get unlucky, as you say, just resume work.

IIRC, 6.5% over 30 years is about a 50/50 proposition.  So you'd get "unlucky" about half the time.  It's a strategy for sure, but make sure you evaluate the odds based on the data.

[maizefolk]

The long term CAGR of the stock market after adjusting for inflation is only what 6.8/6.9? Once you get up into the 6-7% range for annual withdrawals, the pattern of just really needing survive the first decade without a major sequence of returns problem in order to compound to the point of being completely safe goes away.

Instead more start dates begin to to look more like what sheer was describing where a bad recession/crash at any stage of retirement prior to death could get you in to trouble.

That could definitely still be the right fit for some people, but I really prefer having what risk there is of a failure with the 4% rule front loaded instead of knowing it could well kick in when I'm in my 60s or 70s.

[LWYRUP]

The simple math involved says that a 60-year retirement is more risky than a 30-year one. For one simply because there's more time for something to go wrong, but also because the 4% rule is based on having at least $1 left after a 30-year retirement. There are many paths one could have taken where things are trending down but haven't quite run out of money yet that would have counted as 30-year successes, but result in 60-year failures.

Now if you want to argue that *most* of those paths you'd be able to foresee after the first decade or so, and could go back to work for 5 years or so until things start looking better, then fine, I won't disagree. But things are rarely so simple. It's also true that you're more likely to have a stroke or something as you get older, and you'll be less able to do manual labor in general, etc.

I just think it's unwise to assume that a 60-year retirement is less risky than a 30-year one starting from the same withdrawal rate just because "you can go back to work if you need to". A) maybe you can't, B) maybe you don't know in advance you needed to, and C) maybe that's not really that desirable of a fall-back plan anyway. Longer retirements are definitely more risky, and it makes sense to plan for them as such.

I agree with this.  Look, if you retire at 35 and are in good health, you may need that money for 60+ years, and most experts in that situation would tell you that means you need enough cushion so that 30 years from now your portfolio is at least where you started.  Yes, you can work temporarily to achieve this but:

1.  Many people will be leaving during peak earning years and not be able to get those jobs back.  My dollar per hour is based on concrete and relevant skills (and could be juiced if I needed to over time by changing employers, working more, etc.).  If I go out of the game, even for a few years, it may be a challenge for me to find a similarly paying job (that doesn't totally suck -- you can always juice earnings with a shitty QOL but who wants that).  Fifteen years?  Stick a fork in it.  Starting from the bottom.  Thirty years?  Barista time.  Not that there's anything wrong with that, but one year of transactional lawyer earnings is going to swamp five years of barista earnings.  Maybe ten or more years if I left my cushy job and really went back into the salt mines.  Same story is true for any engineer or similar white collar occupation where the stakes are high and the money is based on specific accumulated knowledge and value you can deliver immediately. 

2.  Broder uncertainty -- Health problems or poor job market may mean you can't get even that.  Also, assumption of stability is a US-centric view (and, uh, increasingly questionable), let's look back since 1920 and talk to people from virtually anywhere else on earth and they will tell you a story of the time it all went to shit.  Someone with an international or broader view of history will understand the need for a greater margin of safety. 

3.  The closer you are to 65, the more you can count on social security, and the longer you work the more you pay into it.  Another margin of safety.

4.  The longer your retirement, the more risk you have of the horrible inflationary period the author talks about.  Also, we all know about all those economists who are forecasting lower expected returns going forward because of historically high CAPE shiller ratios.

Anyways, I think the Bogleheads overdo this issue on the conservative side, but the MMM folks overdo it on the risk side.  For people who are making it rain now, I would think long and hard before trying to FIRE on 5% plus if your job is not miserable.  That extra year or two now at a high income could save you a decade of working at an admin as an insurance agency when you are 60 if you mess it up. 

[LWYRUP]

Caution that this seems applied to people retiring at 65 and so I wouldn't rely on it to retire at 35.

Are they talking about people need 5% on top of their social security income?  Either the principal is too small or they are spending too much, right?

I would imagine once I collect SS, the withdrawal rate will be cut significantly.

Yeah, this is a tricky subject, but basically the closer you get to SS the more you can count on it.  If you are actively drawing, you just need to use the following formula:

Expenses - Social Security = Gap that needs to be filled with stash.

If you are 30 years out like me, I'm just not factoring it into my model.  I'm going to retire without needing it, and then when I'm old assuming all has gone well I'll just give some more to charity or my kids or buy a nice bottle of wine, or maybe a bit of all three.  I'm just OK I guess not completely minimizing my time at the office and knowing I'll probably have a little cushion for mistakes or black swans or whatever the case may be. 

For people, say ten years out, I think they try to forecast cash flows so they can live without it for 10 years and then they factor it in.  Sometimes with an appropriate discount (Say 75% of expected value) to be safe. 

[maizefolk]

I agree with this.  Look, if you retire at 35 and are in good health, you may need that money for 60+ years, and most experts in that situation would tell you that means you need enough cushion so that 30 years from now your portfolio is at least where you started. 

One of the things I like about death and bankruptcy graphs is they give you a visual sense of how uncommon it is to go out 40+ years, and have significantly less than you started (without having gone broke entirely years earlier).



You can get a similar sense from just looking at the distribution of portfolio values in some of the FIRE calculation websites but it's harder to get a quantitative sense when adding up a bunch of different lines.

So your trade off is between the certainty of, say, working an extra year before FIRE, or a modest risk of working 2 years at lower wages within the first 10-15 years of FIRE. Neither is ideal and different people may value them differently, and they may work in fields where the degree of drop in earning potential after a few years out of work is different, making the ratio of certain years worked now to potential years worked in the future different. So different people will hit the point where it stops making sense to work now to ensure against the risk of having to work later. But in a high equity allocation portfolio, sequence of return risk is the primary driver of running out of money, not longevity risk. Even those scenarios where people have less money than they started out with 30+ years out are almost entirely driven by having bad early sequence of returns risk and never entirely recovering.

So I don't think there are plausible scenarios where a FIREee would be surprised by bad investment returns and have to reenter the workforce after 30 years not working, aside from scenarios that would equally disrupt their live if they were continuing to work (major medical event, economic collapse, etc). 

[LWYRUP]

Thanks for the thoughtful response. 

When I look at those graphs, I think that the gap between 3.5 and 4 is small and really a judgement call about whether someone is OK with taking a small amount of risk and making small adjustments along the way vs. taking virtually no risk.  (I think the Bogleheads that go to SWR of 3% and below are being excessive, and they just really like accumulating and should just admit that.)  I do think the gap between 4 and 5 is significant.  You can't do anything about death, so if you take that out and look at the risk of being 65 and looking up feeling either broke or at risk of it, it's not insignificant.  (Aside: Being broke isn't necessarily a death sentence, there are plenty of broke 65 year olds and none of them starve to death in the developed world, but it's not a pleasant place to be if you can plan to avoid it.) 

I'll also say that the graphs are based on models, and thus don't include things like someone getting sick and needing to spend a lot more of their stash that they intend to.  (I would also wonder whether they take into account a global view or are focused on just historical US investor returns).  Also, I don't necessarily consider all of the scenarios in the mass of dark blue equal.  If I FIRE and then returns are great, I'll happily spend money on unnecessary things (nice vacation, graduate school for kids, etc.) that I might not otherwise be able to do.  Starting with a lower SWR gives you the opportunity to choose to loosen the purse strings (or not) in the future. 

I hear you that everyone's situation is different, but I think the situation of someone spending a lot of time and money on training and then being in a spot where they can monetize that training now in a way they may never able to do again if they walk away is not uncommon.  Also, at the other end of the spectrum, the leaner someone's FIRE is, the less room for cutting if there are issues.

So, for all those reasons, I'm generally of the view that we should maintain the standard advice of "4%, adjusted upwards or downwards based on risk tolerance and personal circumstance."  It's good to hear that the author of the article is sanguine about a low interest rate environment, but that's not compelling enough to move the needle on the standard advice for me. 

[maizefolk]

Just a clarification as your reply makes me think I may have been misrepresenting my own position:

I don't favor using a 5% withdrawal rate either, personally. Risk of failure it too high for my tastes. It doesn't sound like any new math or analysis prompted this guy to declare that 4.5% and now 5% are the "new 4% rule" but just his own shifting views about risk tolerance people should be willing to accept, which may itself be the result of the fellow being 25 years older than he was when he published his own paper prior to the Trinity study, and the changes in worldview that age brings.

I hear you that everyone's situation is different, but I think the situation of someone spending a lot of time and money on training and then being in a spot where they can monetize that training now in a way they may never able to do again if they walk away is not uncommon.

Oh I completely agree that this situation is a common one, particularly on the board since we tend to enrich for high earners and high earning occupations in general are ones where skills go stale late in life.

My point is simply it is a continuum even when this is that case. Say you're making 4x right now what you would be able to make as an entry level person in your field coming back to work after a decade off doing other things. If there is a 50% chance of having to come back to work until you earn one year at your current salary (so 4 years of later in life work) if you FIRE now, and a 10% chance of the same thing if you work an extra year, clearly it makes sense to work an extra year. Certainly of 1 year of work saves 4 years of work * (.5-.1) = 1.6 expected years of work in the future.

But once we get to the point that an year of work pre-FIRE is saving you less than one year of expected work post fire, say going from 10% to 5% odds of having to coming back to work long enough to earn one year's current income, which would still take you four years (4 years of work * (0.1 - 0.05) = 0.2 expected years of work in the future) you are trading on average working more total years for a reduction in the uncertainty about the total number of years you will work.

Trading reduced expected value for reduced uncertainty is perfectly rational and something we do all the time. It's why people dollar cost average into the market with large windfalls (reduced expected value vs lump sum, but the worst case scenarios are less bad than lump sum). It's why we buy insurance even when not legally required to do so (insurance has to have a negative expected value for the customer or the insurance company will go bankrupt).

But the differentiator here isn't the ratio of how much money per year you or I make now vs what we'd make if we had to find work after being out of the workforce for 5 or 10 years. That ratio helps determines when the expected value of working another year before FIRE goes from decreasing expected total years worked to each additional year increasing expected in total years worked. But since so many people work well past that break even point for expected total years worked, I think it is the degree to which we value the absence of uncertainty which is the bigger determiner of how long people will work and how far down we'll push our withdrawal rates before pushing the big red button.

[LWYRUP]

Thanks, that is very well thought out and thinking of the decision to FIRE in terms of the tension between minimizing total expected working years vs. minimizing uncertainty is really helpful.

There's a huge psychological component associated with all this, on both sides.

On the one side, I do feel a lot of people focus on FIRE because they are unhappy with their job.  I know I did.  When I actually changed jobs (twice) and acclimated to a new environment, new commute, new colleagues, new mix of substantive work, I now am mostly happy with my job.  (Not that it's perfect, just mostly happy.)  So just coasting along and stacking up money doesn't sound so bad anymore, and I've also been slightly more relaxed about spending as a result.  Working and padding the stash is fine.  If I get laid off and need to move out of HCOL and FIRE that's fine too.  It's all fine, and it took me a long time to slowly reduce the stress that built up in my system from hating my job but really wanting to accumulate money to realizing that actually it's really just all fine, not far off in the future but actually fine right now!  So I can say just from experience that changing working conditions can solve an enormous amount of the underlying issues, which in turn make deciding to stay and just drive the SWR down to 3.5% (and maybe plus room to help the kids and take that cruise to boot) much more logical. 

On the other side, I see people on bogleheads worried about their 3% SWR and their mortgage in Silicon Valley but they don't like their jobs and are super stressed and juggling intense work deadlines and childcare time and costs and all the (financially) conservative rich retired dentists are telling them just to keep grinding it out because they are making so much money and you never know and look at the cost of getting those kids through medical school and what if the economy collapses and what will your colleagues say and all that, and I wonder if it's just fear of the unknown.  For some of these people the math obviously works, and so anything other than "hit reset, take time to think things through then do whatever brings you the most joy, whether that be making money or not" is so clearly the right answer that its only psychology and cultural expectations that prevent people from recognizing it. 

[TomTX]

Thanks for the thoughtful response. 

When I look at those graphs, I think that the gap between 3.5 and 4 is small and really a judgement call about whether someone is OK with taking a small amount of risk and making small adjustments along the way vs. taking virtually no risk.  (I think the Bogleheads that go to SWR of 3% and below are being excessive, and they just really like accumulating and should just admit that.)  I do think the gap between 4 and 5 is significant.  You can't do anything about death, so if you take that out and look at the risk of being 65 and looking up feeling either broke or at risk of it, it's not insignificant.  (Aside: Being broke isn't necessarily a death sentence, there are plenty of broke 65 year olds and none of them starve to death in the developed world, but it's not a pleasant place to be if you can plan to avoid it.)   

Which is why a flexible withdrawal rate (or "moderately Fat FIRE") is so powerful. You can draw 5% most of the time, but when your portfolio is below the (inflation adjusted) starting point, you cut back on spending. Instead of three months in Europe, you spend two months camping at Big Bend (or whatever cheap alternative appeals to you).

[maizefolk]

Thanks, that is very well thought out and thinking of the decision to FIRE in terms of the tension between minimizing total expected working years vs. minimizing uncertainty is really helpful.

There's a huge psychological component associated with all this, on both sides.

I've really enjoyed this discussion as well. Completely agree with your bolded sentence. Once of the counter-intuitive things I've found on this forum is doing a lot of math/working through logic can be the best way to help at least some people to focus on that all important psychological component.

Once we can divorce our gut feelings and emotions from what the numbers are saying it becomes easier to figure out what decisions make sense for us, taking into account that part of what makes a decision the right one for each of us is optimizing for our own individual psychologies and gut feelings.

[lutorm]

It seems like an reasonable way to evaluate how things are going is to compare that amount you're withdrawing every year (the inflation-adjusted X% of your initial portfolio, for whatever X you chose) with what you would be withdrawing if you retired today (X% of current portfolio). If at any point the former exceeds the latter, you're in a situation where, if you were still working, you would not choose to retire today. That would be the time to ask yourself whether you should reconsider your earlier decision.

For example, if you had retired with an x=5%, you would conclude that is not working and "re-retire" with an x=4%. You'd be in exactly the same boat as someone who retired at that point with a 4% withdrawal rate. (Assuming you can trim that off your budget, of course. If you can't, it seems you need to be a lot more conservative.)

[John Galt incarnate!]

Thanks, that is very well thought out and thinking of the decision to FIRE in terms of the tension between minimizing total expected working years vs. minimizing uncertainty is really helpful.

There's a huge psychological component associated with all this, on both sides.

I've really enjoyed this discussion as well. Completely agree with your bolded sentence. Once of the counter-intuitive things I've found on this forum is doing a lot of math/working through logic can be the best way to help at least some people to focus on that all important psychological component.

Once we can divorce our gut feelings and emotions from what the numbers are saying it becomes easier to figure out what decisions make sense for us, taking into account that part of what makes a decision the right one for each of us is optimizing for our own individual psychologies and gut feelings.

The psychic income of secure FIREtirement is of the utmost importance to me for it is the foundation of my ataraxia.