Ditching the 4% rule

[4n6]

According to this CNBC article, some new research has come out that argues the 4% rule might not be the most ideal SWR because early losses in retirement, I would suspect it would be even worse in early retirement, could hamper economic plans. I know the 4% SWR has been debated here before, but I looked at Pfau's research (link in the article) and it is interesting...at the very least. Thoughts?

http://www.cnbc.com/2017/06/01/heres-how-to-handle-your-retirement-withdrawals.html

[PizzaSteve]

FUD (Fear, Uncertainty, & Doubt) tactic. 

Its too complicated for you to do it yourself...just (insert fee here).

So then they say....after much to do, perhaps a high fee fund or annuities and whole life are the answer.

Hogwash.

[GuitarStv]

If you have huge portfolio losses during the early years of your retirement, go back to work for a couple more years and/or withdraw less.  It's not rocket science.  As long as you're not a mindless automaton withdrawing 4% a year every year no matter what, it should be pretty hard to screw up.

[spokey doke]

I know the 4% SWR has been debated here before

This...

[Maenad]

We'll know we're back into Irrational Exuberance territory when a headline like "Ditching the 4% Rule" is for an article stating you can safely pull 5% or even 6%. I guess we're still climbing the wall of worry.

[UnleashHell]

any yet there it is - comment near the start from a financial planner who would build a new financial plan for you every year.

Of course you would! for  a damn fee - and that part of the reason a 4% rule would be in doubt.

The "journo" whose name is on this is a fool too. There's no journalism involved - just churning out a few roughly linked quotes.

fools and braggarts the lot of them.

Put the cnbc article in the trash where it belongs.

[runewell]

The article is probably right.  If you have losses early you will probably need to consider reducing your withdrawal rate.

[intellectsucks]

The concerns addressed in the article are certainly valid.  I’m pretty sure that JLCollins has an article in his stock series that says that in almost every case (90+%) a 4% SWR will result in having MORE money at the end than at the beginning.  The exceptions are when there are larger than average losses early in retirement (think of retiring in 2000 and seeing big losses three years in a row while drawing down).  If that happens, then you run the risk of outliving your money.
Yes, working is an option.  Yes, lowering your SWR is an option.  But neither of those may be ideal or even possible depending on the circumstances.  It is a good idea to have a reasonable backup plan in case you are unlucky enough to retire during one of those periods.  Pretending that this concern is nothing but fear mongering so that financial advisors can make more money

[Dicey]

Seriously, who cares? If you're a mustachian and your portfolio dumps in the first few years, you have mad skillz to cope. Your portfolio will have years to recover as long as you don't panic.

[intellectsucks]

Dicey, I only half agree with you.  Mustachians for the most part do seem to be much more flexible and resourceful than most.  Additionally, most mustachians seem to have either been through pretty significant market drops or are pretty mentally and emotionally prepared for one.  There do seem to be a large contingent of newer/less experienced mustachians who may not be aware of risks such as this.  Addressing this as a risk, and discussing different ways to mitigate it, is definitely a valuable discussion.

[BlueMR2]

Seriously, who cares? If you're a mustachian and your portfolio dumps in the first few years, you have mad skillz to cope. Your portfolio will have years to recover as long as you don't panic.

Well, the skillz may be there, but the fat may not be.  If you're RE based on numbers that work, and you got to that point by cutting things back already, there may not be any left to cut when things go wrong.

That's my OMY excuse...  I'm already cut back to the bone.  The numbers work, but I don't have a Plan B as there's really no more to be cut (or I would have already)!

[Mr. Green]

http://www.mrmoneymustache.com/2011/10/17/its-all-about-the-safety-margin/

'Nuff said.

[Dicey]

Dicey, I only half agree with you.  Mustachians for the most part do seem to be much more flexible and resourceful than most.  Additionally, most mustachians seem to have either been through pretty significant market drops or are pretty mentally and emotionally prepared for one.  There do seem to be a large contingent of newer/less experienced mustachians who may not be aware of risks such as this.  Addressing this as a risk, and discussing different ways to mitigate it, is definitely a valuable discussion.

Well, I guess my glass is half full then.

I think i do not disagree with you, but I think I do disagree with your approach. Ditching the 4% rule is extreme. Calling this a risk, without proof just doesn't make sense. It just is not a significant risk. If X happens, you do Y. If X+1 happens, you do Y+1, so to speak (this is fake math). The 4% rule is tested (using real math) across all market conditions between 1926 to 1976 in the US Stock & Bond Markets. It also applies to average people doing average things. Mustachians know how to live on less, earn money on the side, etc. We can roll with the punches, and be flex if we need to.

You seem to think that it only works in perfect conditions. Learning how to be a mustachian IS mitigating the risk. Telling "young mustachians" that the rule should be ditched is not doing anyone any favors, IMO.

From Investopedia: Bengen concluded that even during untenable markets, no historical case existed in which a 4% annual withdrawal exhausted a retirement portfolio in less than 33 years.

Read more: Four Percent Rule http://www.investopedia.com/terms/f/four-percent-rule.asp#ixzz4itIxwpp0
Follow us: Investopedia on Facebook

Now, if you plan to live in retirement for more than 33 years, to assure success, you can do a number of things, including saving more, spending less in down markets, keeping a higher % in stocks than bonds, etc. What you shouldn't do is say the 4% rule should be "ditched".

I also agree with Pizza Steve's point that a lot of this scare tactic shit is spewed by the financial industry. They scare you so you will buy their expensive products. Real mustachians don't fall for that crap.

[intellectsucks]

Dicey, I only half agree with you.  Mustachians for the most part do seem to be much more flexible and resourceful than most.  Additionally, most mustachians seem to have either been through pretty significant market drops or are pretty mentally and emotionally prepared for one.  There do seem to be a large contingent of newer/less experienced mustachians who may not be aware of risks such as this.  Addressing this as a risk, and discussing different ways to mitigate it, is definitely a valuable discussion.

Well, I guess my glass is half full then.

I think i do not disagree with you, but I think I do disagree with your approach. Ditching the 4% rule is extreme. Calling this a risk, without proof just doesn't make sense. It just is not a significant risk. If X happens, you do Y. If X+1 happens, you do Y+1, so to speak (this is fake math). The 4% rule is tested (using real math) across all market conditions between 1926 to 1976 in the US Stock & Bond Markets. It also applies to average people doing average things. Mustachians know how to live on less, earn money on the side, etc. We can roll with the punches, and be flex if we need to.

You seem to think that it only works in perfect conditions. Learning how to be a mustachian IS mitigating the risk. Telling "young mustachians" that the rule should be ditched is not doing anyone any favors, IMO.

From Investopedia: Bengen concluded that even during untenable markets, no historical case existed in which a 4% annual withdrawal exhausted a retirement portfolio in less than 33 years.

Read more: Four Percent Rule http://www.investopedia.com/terms/f/four-percent-rule.asp#ixzz4itIxwpp0
Follow us: Investopedia on Facebook

Now, if you plan to live in retirement for more than 33 years, to assure success, you can do a number of things, including saving more, spending less in down markets, keeping a higher % in stocks than bonds, etc. What you shouldn't do is say the 4% rule should be "ditched".

I also agree with Pizza Steve's point that a lot of this scare tactic shit is spewed by the financial industry. They scare you so you will buy their expensive products. Real mustachians don't fall for that crap.

I guess I was overly vague as well.  I don't think the 4% rule should be "ditched" either, however, before actually retiring, I do think that everyone should look realistically at their options if they happen to retire during one of those very rare periods where early market losses screw with their planned income.  If you're living on $20-30k/year, reducing expenses even further may not be possible.  Also, depending on your skillset, getting full time work that can make up the difference may be difficult if you've been "unemployed" for a year or more.

I didn't even read the article that the OP linked, so it may well be full of BS fearmongering trying to sell advisory and insurance services, but the discussion of what to do during the rare times when the 4% rule doesn't cut it is a good one.

[matchewed]

Seriously, who cares? If you're a mustachian and your portfolio dumps in the first few years, you have mad skillz to cope. Your portfolio will have years to recover as long as you don't panic.

Well, the skillz may be there, but the fat may not be.  If you're RE based on numbers that work, and you got to that point by cutting things back already, there may not be any left to cut when things go wrong.

That's my OMY excuse...  I'm already cut back to the bone.  The numbers work, but I don't have a Plan B as there's really no more to be cut (or I would have already)!

That's just poor planning. No one should try for a FIRE on a bones budget.

[Dicey]

Seriously, who cares? If you're a mustachian and your portfolio dumps in the first few years, you have mad skillz to cope. Your portfolio will have years to recover as long as you don't panic.

Well, the skillz may be there, but the fat may not be.  If you're RE based on numbers that work, and you got to that point by cutting things back already, there may not be any left to cut when things go wrong.

That's my OMY excuse...  I'm already cut back to the bone.  The numbers work, but I don't have a Plan B as there's really no more to be cut (or I would have already)!

That's just poor planning. No one should try for a FIRE on a [bare] bones budget.

^^This^^

[PizzaSteve]

My general all purpose advice is to save enough via (OMY) until the numbers work with approximately 5% returns and maintain an 80/20 portfolio, with annual rebalancing proving some volatility reduction.  Dont count home equity in your FIRE calculations, only financial assets.

4% should work fine then.

[GuitarStv]

Seriously, who cares? If you're a mustachian and your portfolio dumps in the first few years, you have mad skillz to cope. Your portfolio will have years to recover as long as you don't panic.

Well, the skillz may be there, but the fat may not be.  If you're RE based on numbers that work, and you got to that point by cutting things back already, there may not be any left to cut when things go wrong.

That's my OMY excuse...  I'm already cut back to the bone.  The numbers work, but I don't have a Plan B as there's really no more to be cut (or I would have already)!

That's just poor planning. No one should try for a FIRE on a [bare] bones budget.

^^This^^

Again, there is the assumption that retiring early somehow prevents a person from ever working again.  That's just silly.  If things start to go catastrophically south in your first couple years of retirement, you will start working again, preserve your investments and then retire again in a couple years when things turn around again.

Flexibility is the key to security.  You can FIRE on a bare bones budget . . . if you accept the risk that you might need to work another couple years in a worst case scenario.

[spokey doke]

In other words (as has been rehearsed here ad nauseum)

"That's too conservative!"

"But that's too risky!"

"No, that's too conservative!"

"No, that is too risky!"

Are we plowing any new ground?  Nope.