How many people actually get to "use" the 4% rule?

[obstinate]

You can re-sort historical data and call it a Monte Carlo, but the more sophisticated way is to generate a brand new dataset with similar statistical characteristics as the historical data.

Nothing wrong with doing such an analysis but it's still downstream of historical data and makes assumptions that that data is somewhat generalizable to the future. Which is fine: as I said, there literally is no other option that has any meaningful chance of being a good model of reality.

[simonsez]

Whenever I talk about the 4% rule, I try to include this:

"All models are wrong, but some are useful"  -- George E P Box

The only 100% accurate model of the universe is...the universe.  But a lot of people do a lot of useful things with small fractions of that.

Likewise, I'm certain most if not all retirees from 2019 or before did not have a pandemic scenario modeled out.  Fortunately, those who didn't panic in March 2020 probably did OK, anyway.

If this was aimed at me, I wasn't meaning COVID necessarily.  There are plenty of simulators/calculators that already had the 1918 Spanish flu in there.

So if anyone prior to the most recent COVID pandemic had done any modeling with historical data going back a century and the ranges of outcomes that can happen, I'd argue they DID have a pandemic scenario accounted for.  It gets smoothed out by other years just like any other market disturbance both negative and positive.  There are other pandemic/epidemic examples in recent history baked into the modeling as well of varying national/global impacts, especially if the model/simulator being referenced starts in 1871.

But yes, if you're a buy-and-hold investor, you should... buy/keep buying and hold/keep holding.  If you're retired and drawing down, sure, selling when prices are lower stinks but that's why we have IPSs that work for us (selling bonds instead of stocks, any number of strategies) and allow us to sleep at night.

There will be more of all types of catastrophes in the future, pandemics included.

[wageslave23]

I don’t think it’s prudent to base a retirement on analyses of market returns from the past.

As for what's prudent - your definition is like a juror looking to remove ALL doubt when most of us are just looking for something beyond a reasonable doubt (since the future is unknowable).  I mean, do what works for you but when you start this particular thread and seem to be scoffing at how many approach personal finance and eventual retirement because of what is assumed by you to be a rule is actually a flexible guideline, it's puzzling.  Then again you say you're winging it - which doesn't sound prudent at all. 

I think this is what I have been struggling with in the discussion so far.  It's totally fine to decide that the 4% rule isn't sufficiently conservative, that you're happy enough working, and so you're going to continue working until you have enough put away to ensure your annual costs are well below 4% of your portfolio.  Hell, that's exactly where I am -- we could have quit several years ago, but we've decided to keep working because (i) we enjoy our jobs, and (ii) once we quit, it will be extremely hard to go back to making anything near what we currently make.  So for us, it's much better to work more now to further minimize the risk that we run out of money. 

But the argument here seems to suggest that winging it is better than looking at past performance to come up with some reasonable estimate of future returns.  And that's just counterintuitive to me.  It's certainly not better for someone who hates their job and would give anything to quit ASAP, and who can easily cover their future costs with part-time work if necessary. 

But my disagreement is more fundamental than that.  There is a huge amount of potentially-useful data out there.  None of it can accurately predict the future, and a lot of it is of varying quality and reliability, but much of it can give some kind of insight into how things might play out.  And IMO it's always wiser to do the analysis and then make your best guess than just to sort of pick a conservative number, close your eyes, and cross your fingers that you picked conservatively enough. 

I go back to "living on dividends and interest."  That feels pretty safe, because if you never have to touch the principal, you'll never run out, right?  But a long period of low interest rates can really tighten the screws on people relying on CDs and bonds -- just ask anyone who's tried that approach for the past, say, 20 years.  What do you do when inflation outpaces interest rates you can receive from safe investments?  I-bonds are the only way to ensure that your interest keeps up with inflation. 

Similarly, companies can and do cut dividends in a variety of circumstances.  So just sort of hoping that this approach will work effectively over 30-40 years, without doing the research into the kinds of circumstances where those approaches have historically failed, strikes me as not particularly prudent at all.  I mean, sure, it's better than assuming that your portfolio will return 12% annually forever; at least that conservative approach means you'll build up a bigger 'stache before pulling the plug, so even if you do need to dive into the capital at some point, you're starting from a much larger pile o'cash.  But it's certainly not better than following the same conservative approach after having researched potential failure scenarios and taken action to protect against them.

You're using logic and reason to try to refute an illogical argument.  No point in trying to make sense of a nonsensical statement.

[ChpBstrd]

I totally get the skepticism about using past investment results to predict future investment results. The world has changed a LOT since the distant past, and there is reason to believe it will change a LOT from today's status quo. At some point it is fair to ask what returns on U.S. railroad stocks in the 1800s have to do with where the Nasdaq will be in 2033. Things that have changed include technology, how currencies are managed, culture, the ease or difficulty of investing, the ease or difficulty of transferring funds, banking, competition, communication, availability of natural resources, human lifespans, political stability, liquidity, taxes, the legal environment, and a Federal Reserve with a mandate. Add to it some selection bias: People in most countries could not retire on a SWR of 4% because most countries have experienced dramatic instability over the past 150 years or so. We in the U.S. tend to be talking about U.S. historical data, when the U.S. has happened to be one of the most stable markets in the world. Recall that the U.S. had a coup attempt just a couple of years ago, and has sufficiently weak institutions that we could go the way of Turkyie' as soon as the next elections.

So using only forward-looking rationales, here are reasons to think recent patterns of returns will continue:

1) Inflation expands margins. Example at 5% inflation:
Year 1 cost of production: $1, revenue: $1.50, margin: $0.50, stock price @ PE=15: $7
Year 2 cost of production: $1.05, revenue $1.575, margin: $0.575, stock price @ PE=15: $8.625, a 23% increase.

So as inflation occurs, the nominal value of corporate earnings increases with inflation, which is then multiplied by the PE ratio. In the simple example above, the company faced a 5% increase in costs, raised their prices 5%, experienced a 5% increase in margin, and had a stock price increase of 23%.

2) New products expand economies. Think about all the economic growth that came from things you couldn't buy 40 years ago, like computers/smartphones, cars that last 250k miles, most pharmaceuticals and medical procedures, streaming services, internet services, software and SaaS, exchange traded funds, options, robots and drones, wrinkle-free clothes, induction ranges, GPS, audiobooks and podcasts, well-insulated housing, pet insurance, solar panels, etc. How much economic growth over the past 40 years came from the development of products no one could have imagined back then? Now think about the next 40 years and ask what we can't yet imagine.

3) Developing economies will continue to develop. The big story of the last 50 years was China and Eastern Europe transforming themselves from backward, impoverished places where children occasionally starved into vibrant economies with fast-rising standards of living. China's development boosted US corporate profits by offering retailers and transporters larger margins on cheap imported goods, by pushing down US inflation and enabling lower interest rates in the US, and by enabling the rapid release and production of new products. Now think about all the other formerly developing countries that are getting their shit together and emerging from poverty, like Chile, Brazil, Columbia, Mexico, Philippines, Indonesia, Thailand, Vietnam, India, Nigeria, and more. There's a definite pattern of development which could in coming decades slowly extend across Africa, more Latin American countries, more of Southeast Asia, the Middle East, and perhaps a future democratic Russia. As the worldwide economy gets bigger - much bigger - so will the opportunities to invest in new, fast-growing places.

4) Technology and globalization will continue to drive productivity upward. The big stories of the last 50 years were globalization and computers. Globalization allowed for the more efficient matching of human capital and financial capital, which both pulled hundreds of millions of people out of dire poverty AND increased everyone's financial capital. Computers meanwhile greatly simplified information processing (e.g. corporate accounting offices) and communication (email, mobile phones, video calls). The big story of the next 50 years might look like AI tools that design molecules to cure cancers and defeat viruses, design manufactured products to optimize their performance, invent new industrial processes or solutions to old problems, instruct robots to do work for us, enable mass production of customization, entertain us, or design the next AI tools. This will drive up productivity, as less human labor will be required to produce all sorts of services.

5) Stock markets automatically sort out successful ideas from the unsuccessful ideas. Companies that fail to produce value eventually fall out of the indices and become penny stocks, or never make it into the indices in the first place. The companies which do the best jobs of creating value for their investors come to dominate the indices. Thus, if you buy into an index fund or any value-weighted fund, you are buying the outcome of a selection process that has already occurred. As you hold your index funds, the indices adapt to changing circumstances and displace the poorest performers with the new best performers. Thus, while it might not be clear how any particular company is going to perform for the next 10-30 years, it is clear that in 10-30 years your shares of SPY or QQQ or VTI will reflect the best ideas in the modern economy at that time.

6) Pinker's "Better Angels" are leading to growth. Author Steven Pinker created a stir among pessimists with his 2011 book, which amassed a vast pile of data supporting the conclusion that humanity is on a centuries-long trajectory of becoming less violent, less criminal, and less warlike. In economic terms, it has become more lucrative in modern times for an ambitious executive to start a corporation rather than to become a warlord. This is a departure from millennia of human history in which the best way to get ahead was to steal wealth and land from other humans in a zero-sum game of violence. Pinker makes a strong case that people worldwide are becoming more civil, better educated, and more inclined to democracy. There are exceptions, but they are getting rarer in the long view. The inclusion of women in economies around the world is in itself reason to expect faster economic growth - like the US experienced when it included women in the economy during the 1970's and 1980's. So if you think of certain regions as hellholes of war and poverty, imagine that not being the case in a couple of decades, and imagine publicly traded corporations making trillions of dollars in such places.

[dandarc]

Might want to check your math on Item 1 there:

Year 1 cost of production per unit: $1, price: $1.50, margin: $0.50
Year 2 cost of production per unit: $1.05, price $1.575, margin: $0.575 $0.525

Which is 5% higher than year 1 - exactly the same as inflation. Of course your point still stands that inflation should expand corporate earnings (and anything that might reasonably be pegged to those earnings - like the share price). Just not faster than the inflation rate by itself.

[GilesMM]

Might want to check your math on Item 1 there:

Year 1 cost of production per unit: $1, price: $1.50, margin: $0.50
Year 2 cost of production per unit: $1.05, price $1.575, margin: $0.575 $0.525

Which is 5% higher than year 1 - exactly the same as inflation. Of course your point still stands that inflation should expand corporate earnings (and anything that might reasonably be pegged to those earnings - like the share price). Just not faster than the inflation rate by itself.

Not only that, prices tend to be sticky upward due to competition so typically margins fall during rising prices (and widen during falling prices).

[Ron Scott]

I totally get the skepticism about using past investment results to predict future investment results. The world has changed a LOT since the distant past, and there is reason to believe it will change a LOT from today's status quo. At some point it is fair to ask what returns on U.S. railroad stocks in the 1800s have to do with where the Nasdaq will be in 2033. Things that have changed include technology, how currencies are managed, culture, the ease or difficulty of investing, the ease or difficulty of transferring funds, banking, competition, communication, availability of natural resources, human lifespans, political stability, liquidity, taxes, the legal environment, and a Federal Reserve with a mandate. Add to it some selection bias: People in most countries could not retire on a SWR of 4% because most countries have experienced dramatic instability over the past 150 years or so. We in the U.S. tend to be talking about U.S. historical data, when the U.S. has happened to be one of the most stable markets in the world. Recall that the U.S. had a coup attempt just a couple of years ago, and has sufficiently weak institutions that we could go the way of Turkyie' as soon as the next elections.

So using only forward-looking rationales, here are reasons to think recent patterns of returns will continue:

1) Inflation expands margins. Example at 5% inflation:
Year 1 cost of production per unit: $1, price: $1.50, margin: $0.50
Year 2 cost of production per unit: $1.05, price $1.575, margin: $0.575
So as inflation occurs, the nominal value of corporate margins increases at a faster pace than the inflation. In the simple example above, the company faced a 5% increase in costs, raised their prices 5%, and experienced a 15% increase in margin.

2) New products expand economies. Think about all the economic growth that came from things you couldn't buy 40 years ago, like computers/smartphones, cars that last 250k miles, most pharmaceuticals and medical procedures, streaming services, internet services, software and SaaS, exchange traded funds, options, robots and drones, wrinkle-free clothes, induction ranges, GPS, audiobooks and podcasts, well-insulated housing, pet insurance, solar panels, etc. How much economic growth over the past 40 years came from the development of products no one could have imagined back then? Now think about the next 40 years and ask what we can't yet imagine.

3) Developing economies will continue to develop. The big story of the last 50 years was China and Eastern Europe transforming themselves from backward, impoverished places where children occasionally starved into vibrant economies with fast-rising standards of living. China's development boosted US corporate profits by offering retailers and transporters larger margins on cheap imported goods, by pushing down US inflation and enabling lower interest rates in the US, and by enabling the rapid release and production of new products. Now think about all the other formerly developing countries that are getting their shit together and emerging from poverty, like Chile, Brazil, Columbia, Mexico, Philippines, Indonesia, Thailand, Vietnam, India, Nigeria, and more. There's a definite pattern of development which could in coming decades slowly extend across Africa, more Latin American countries, more of Southeast Asia, the Middle East, and perhaps a future democratic Russia. As the worldwide economy gets bigger - much bigger - so will the opportunities to invest in new, fast-growing places.

4) Technology and globalization will continue to drive productivity upward. The big stories of the last 50 years were globalization and computers. Globalization allowed for the more efficient matching of human capital and financial capital, which both pulled hundreds of millions of people out of dire poverty AND increased everyone's financial capital. Computers meanwhile greatly simplified information processing (e.g. corporate accounting offices) and communication (email, mobile phones, video calls). The big story of the next 50 years might look like AI tools that design molecules to cure cancers and defeat viruses, design manufactured products to optimize their performance, invent new industrial processes or solutions to old problems, instruct robots to do work for us, enable mass production of customization, entertain us, or design the next AI tools. This will drive up productivity, as less human labor will be required to produce all sorts of services.

5) Stock markets automatically sort out successful ideas from the unsuccessful ideas. Companies that fail to produce value eventually fall out of the indices and become penny stocks, or never make it into the indices in the first place. The companies which do the best jobs of creating value for their investors come to dominate the indices. Thus, if you buy into an index fund or any value-weighted fund, you are buying the outcome of a selection process that has already occurred. As you hold your index funds, the indices adapt to changing circumstances and displace the poorest performers with the new best performers. Thus, while it might not be clear how any particular company is going to perform for the next 10-30 years, it is clear that in 10-30 years your shares of SPY or QQQ or VTI will reflect the best ideas in the modern economy at that time.

6) Pinker's "Better Angels" are leading to growth. Author Steven Pinker created a stir among pessimists with his 2011 book, which amassed a vast pile of data supporting the conclusion that humanity is on a centuries-long trajectory of becoming less violent, less criminal, and less warlike. In economic terms, it has become more lucrative in modern times for an ambitious executive to start a corporation rather than to become a warlord. This is a departure from millennia of human history in which the best way to get ahead was to steal wealth and land from other humans in a zero-sum game of violence. Pinker makes a strong case that people worldwide are becoming more civil, better educated, and more inclined to democracy. There are exceptions, but they are getting rarer in the long view. The inclusion of women in economies around the world is in itself reason to expect faster economic growth - like the US experienced when it included women in the economy during the 1970's and 1980's. So if you think of certain regions as hellholes of war and poverty, imagine that not being the case in a couple of decades, and imagine publicly traded corporations making trillions of dollars in such places.

I try to manage my life like an optimist and my money like a realist.

I love your points and am very hopeful but I will not bet my retirement on how they affect my investments.

Some additional thoughts:

Inflation can expand margins, but it can also erode the purchasing power of retirees' savings. It is important to factor in inflation when making retirement planning decisions.

New products can expand economies, but they can also disrupt existing industries and vested interests.

Developing economies will continue to develop, but they may not do so at the same pace as they have in the past. It is important to carefully assess the risks and opportunities of investing in developing countries.

Technology and globalization may continue to drive productivity upward, but they may also lead to job displacement. It is important to consider the impact of technology and globalization on the workforce when making investment decisions. And globalization may die a political death sooner than later

Stock markets automatically sort out successful ideas from the unsuccessful ideas, but this process can take time. It is important to be patient when investing in the stock market.

Pinker's "Better Angels" are leading to growth, but this trend is not guaranteed to continue.

I am never surprised when capitalism hits homers and will always bet on it to beat the alternatives out there, but I can’t count on it for specific returns.

[simonsez]

I love your points and am very hopeful but I will not bet my retirement on how they affect my investments.

I am never surprised when capitalism hits homers and will always bet on it to beat the alternatives out there, but I can’t count on it for specific returns.

Ok, but you're still invested in the market because you think that's better in the long-term to stuffing your mattress or other alternatives.  Or in other words, if you're not changing your current investing strategy moving forward, you're betting what has worked in the past will continue to work.  I don't think ChpBstrd was telling you to become an active investor to take advantage (or at least, it's not required) of how economies and technology will unfold the rest of this century - just rather that buying-and-holding should continue to be a very lucrative endeavor in spite of all the uncertainty the future has.  So that seems like you are, in fact, betting on your retirement that it will be in a better position if it continues to be exposed to more risk (relative to the mattress) in the long run.

What do mean by specific returns?  I can't tell you what 2024's specific return will be but I'm not sure why that would matter either.  It'll just be a blip, just like any other year when taking into account all of the neighboring years before and after.  I'm pretty damn confident markets will be higher 30 years from now compared to today, and thus, the long term trend of investing is up.  Or in other words, I'm counting on it for specific returns, namely positive ones when viewed over decades.  It's why I do it and it seems that's why you do it as well.

Now, if only some smart people had performed studies on 30 year periods and determined what has been historically safe to withdraw year-in year-out with inflation adjustments so that people accumulating today can have a ballpark range of outcomes and plan what retirement could look like...

My own personal SWR will likely be <2% when I retire and <1% with SS/pensions for reasons not directly tied to $$ but I still find it helpful, comforting, and illuminating to read the literature out there on various models, strategies, assumptions, plans, etc. and this includes the 4% rule/guideline.

[ChpBstrd]

Might want to check your math on Item 1 there:

Fixed.

I had a thought and then walked away from the post for several minutes at the point of the error. When I returned, I goofed. The point I originally meant to make is that an inflation-driven nominal gain in earnings results in much better outcomes for stockholders because the growth in earnings is multiplied by the PE ratio. So while earnings might go up 5%, the stock will go up more than that as long as the PE ratio remains greater than 1.

[Ron Scott]

I love your points and am very hopeful but I will not bet my retirement on how they affect my investments.

I am never surprised when capitalism hits homers and will always bet on it to beat the alternatives out there, but I can’t count on it for specific returns.

Ok, but you're still invested in the market because you think that's better in the long-term to stuffing your mattress or other alternatives.  Or in other words, if you're not changing your current investing strategy moving forward, you're betting what has worked in the past will continue to work.

No and I think I was clear on this point in the part of my post you quoted. I think my investment strategy, with stocks included, has the best chance to succeed at reasonable risk. But I do no count on any specific level of returns and I have no idea if “what has worked in the past will continue to work”.

I’m “hoping” things will work.

[obstinate]

But I do no count on any specific level of returns and I have no idea if “what has worked in the past will continue to work”.

I’m “hoping” things will work.

This is a distinction without a difference. It could have -100% returns. We're all "hoping" that doesn't happen, and whether you like it or not, you are indeed counting on a certain outcome just as much as anyone else, perhaps with wider error bars. "Hoping" is just a different word for the same expectation or prediction that we're all doing.

[dandarc]

Might want to check your math on Item 1 there:

Fixed.

I had a thought and then walked away from the post for several minutes at the point of the error. When I returned, I goofed. The point I originally meant to make is that an inflation-driven nominal gain in earnings results in much better outcomes for stockholders because the growth in earnings is multiplied by the PE ratio. So while earnings might go up 5%, the stock will go up more than that as long as the PE ratio remains greater than 1.

No it won't. Take a PE of 20 - a $1 earnings per share = $20 share price. Inflation 5% - EPS is now $1.05, still a PE of 20, so then we have a $21 share price. 5% higher - same as the inflation amount. Or is there some interaction that the PE would be expected to go up just due to inflation?

[bluecollarmusician]

There seems to be so much arguing around the edges of the “4% rule”… which data to include, which to exclude, the Trinity Study, Bergen’s study, all the study that has been done in the last 30 years.  What’s the rule? Is it a rule? Does anyone actually use it? etc.

Typically, the big picture is lost for all the arguing over .02 this way or that in determining the optimal “withdrawal” rate. Or whether there is a safe withdrawal rate.

I think mental models, Monte Carlo scenarios, and things like the Trinity Study and the 4% rule create a lot of discussion (helpful) but also drags people down a rabbit hole that is ultimately unhelpful- much like the shadows in the Allegory of the Cave. 

Trying to predict/plan for/imagine ANY future scenario (not just financial ) requires an acceptance of unknown unknowns.  Much like predicting the weather as we move further and further out it becomes more difficult to predict in fine grain specifics.  So what to do?  Argue about whether 3.5% or 4% or 4.5%?  Argue there is no safe amount and work forever?


There is also this tendency to ignore many of the non-financial variables- (I love the Rich, Broke, or Dead calc :-) ). Math is easy, it’s nice and tractable and we can keep modifying the numbers until they come out in a way that makes us feel better. But it doesn’t account for so many things that are harder to think about and plan for- so we just ignore it.  The McNamara Effect https://en.wikipedia.org/wiki/McNamara_fallacy

Your health, family life, social stability, community, etc. will likely have a far greater impact on the success of your life than whether you arbitrarily set your withdrawal rate at 3.6 or 5.5%. 

Past a certain point, the hyper focus on starting withdrawal rates (or the desire to drive them lower and lower ) does nothing to move us along towards our goal- it only gives us a place to start off.  The 4% rule is a starting off point: and it’s a LAZY starting off point.  For people who don’t want to think hard about it.  Sure, past performance doesn’t prove future outcome: but if you can determine a scenario that would have worked 95 out of 100 times in the last century that’s a good STARTING place. 

Because that’s the whole thing.   If you want a “retirement” (whatever that means) or a FIRE or any kind of life at all, you have to keep living.  And the overhead of that life is responding to the real world around you which is guaranteed to continue to unfold in often surprising and unpredictable ways.  And you will have to adapt, adjust and continue on.  There is NO formula, or investment or withdrawal rate that will guarantee anything.  There is a massive difference between predicting 1-2 years out, 5-10 years out, and 20-30 years out.  It is an impenetrable fog.  Pretending that you can use any metric to reliably predict what will happen in 30 years by calculating a withdrawal rate that you will strictly adhere from today to forever without considering any other circumstances in your life is laughable.  But you need to pick somewhere to start ;-)

[ender]

But I do no count on any specific level of returns and I have no idea if “what has worked in the past will continue to work”.

I’m “hoping” things will work.

This is a distinction without a difference. It could have -100% returns. We're all "hoping" that doesn't happen, and whether you like it or not, you are indeed counting on a certain outcome just as much as anyone else, perhaps with wider error bars. "Hoping" is just a different word for the same expectation or prediction that we're all doing.

I actually think that @Ron Scott didn't really FIRE by any traditional sense. I want to say he was in his 60s when he retired.

[obstinate]

Even if you're in your 60s when you retire you're still depending on the market to not go to zero and social security to not end. And what besides past performance could you rely on for either expectation?

[2sk22]

Michael H McClung in his book "Living off your money" writes in chapter 2 "Understanding risk during retirement":

Known and Speculative Risk

As mentioned earlier, all retirement risk can be subdivided into two facets: known risk and speculative risk. Known retirement risk encapsulates everything we know from the historical market data. Conversely, speculative retirement risk is outside the boundaries of what has been seen in market history and thus can only be discussed in speculative terms.

From another perspective, speculative risk can be said to pick up where known risk leaves off. Consider this case: in the US market the known risk of failure for a 3% withdrawal rate is 0% - there is no instance of failure anywhere in the US data for such a low withdrawal rate. Does this mean it's impossible to run out of money withdrawing 3% annually? Yes, if based on known risk within the US, but not based on speculative risk, where the possibility of a failure always exists. Speculative risk extends indefinitely beyond what has been experienced in the past, although we can say the more extreme the case, the lower the risk (i.e., speculative risk for a 1% withdrawal rate has to be lower than for a 2% withdrawal rate, even though neither is measurable). The logical existence of this speculative risk is very clear: virtually anything can happen in the future, but always keep in mind it's truly speculative without a clear foundation for estimating or planning.

There are important but subtle reasons for distinguishing known risk from speculative risk. The line separating what we know about markets (known risk) from what we don't know (speculative risk) is too often blurred in discussions. This blurring can cause risk to be treated as if it has no distinct characteristics, leading some to conclude there is very little market behavior we can plan on, with the extreme opinion being markets are too risky for retirement.

With well over 100 years of global market data, speculative risk becomes an anomaly that should not obscure what known about the markets. Speculative risk is indeedspeculative and should be classified as such. Quite distincily. iskenovrik can be methodically measured, based on our substantial historical record. Planning can be based on it. Economist Frank Knight in his 1921 book "Risk, Uncertainty, and Profit" writes:

Uncertainty must be taken in a sense radically distinct from the familiar notion of Risk, from which it has never been properly separated. [...] The essential fact is that 'risk' means in some cases a quantity susceptible of measurement, while at other times it's something distinctly not of this character. [...] It will appear that a measurable uncertainty, or risk' proper, as we shall use the term, is so far different from an unmeasurable one that it's not in effect an uncertainty at all.
Similar to Knight's thoughts above, known risk is the measurable uncertainty or "risk" proper in retirement.

Compared to speculative risk, known risk provides a level of understanding that is not uncertain at all, with clear boundaries drawn by historical markets. Known risk forms the basis for most of the retirement planning in this book. In contrast, speculative risk is the unmeasurable uncertainly in retirement, and as such is difficult to plan for except generally. Speculative risk is also the source of most disagreements surrounding retirement risk, and as such is better separated - we can only speculate on its future magnitude and frequency.

Nevertheless, speculative risk as defined must be small - the risk's existence starts beyond the market events of the last 100 years, spanning depressions, recessions, world wars, market bubbles, and high inflation. Known risk is bad enough and big enough to encompass all but the most extreme cases the future can throw at our retirements.
Still, speculative risk is real and will periodically be given separate attention, distinct from the methodical focus best applied to known risk.

Risk going forward generally refers to the known risk of systemic withdrawals.

[bluecollarmusician]

@2sk22

Interesting thanks for sharing- will have to look into this.

Agree the arguments seem to focus on fuzziness delineating between known risk and speculative risk.

I would posit that this solidifies that there is a "4% rule" although not necessarily a literal 4%, but a withdrawal rate that sits below your personal acceptable tolerance for known failure rates.  Below that (as McClung acknowledges) there is probably lower failure risk for a lower withdrawal rates, but the reality of this type of scenario is that once you are below the known failure rate improvement in success rates will (likely) be non-linear.  Less bang for your buck.

It would seem sensible to me to recognize that once you are at this inflection point (edge of known risk probably somewhere between a 3-4% withdrawal rate) it would make sense to turn preparation plans to general planning for speculative risk would increase likelihood of success at this point, or at least mitigate catastrophic failure. 

I think the difficulties and lack of certainty in planning for speculative risk send people into a sort of streetlight fallacy, but as they say "what got you here, won't get you there..." 

[Villanelle]

How much of this debate would be solved if we just called it a "4% guideline"?  IIRC, technically it was initially a 4% savings/safe withdraw rate, and the term "rule" came later. 

"Guideline" seems to be how nearly everyone uses it.  (Of the people who use it.)  If the semantics of that are better for the critics and the cynics, they seem at least as accurate, if not more so. 

[2sk22]

I would posit that this solidifies that there is a "4% rule" although not necessarily a literal 4%, but a withdrawal rate that sits below your personal acceptable tolerance for known failure rates.  Below that (as McClung acknowledges) there is probably lower failure risk for a lower withdrawal rates, but the reality of this type of scenario is that once you are below the known failure rate improvement in success rates will (likely) be non-linear.  Less bang for your buck.

Glad you found this excerpt useful. I OCRed it so it got a bit garbled but the main message is pretty clear. The book is definitely worth reading.

I like your characterization of ones personal safe withdrawal rate as being "below your personal acceptable tolerance for known failure rates" - this is much the way I think about it too.

[bluecollarmusician]

Ah, that explains it; I couldn't decipher "Quite distincily. iskenovrik can be methodically measured, ".... :-p I presumed it meant "Quite distinctly, known risk can be methodically measured..."  but I had to read it twice :-)

[2sk22]

Ah, that explains it; I couldn't decipher "Quite distincily. iskenovrik can be methodically measured, ".... :-p I presumed it meant "Quite distinctly, known risk can be methodically measured..."  but I had to read it twice :-)

Yes exactly, the book says: "Quite distinctly, known risk can be methodically measured, based on our substantial historical record. Planning can be based on it."

[Ron Scott]

Michael H McClung in his book "Living off your money" writes in chapter 2 "Understanding risk during retirement":

Known and Speculative Risk

As mentioned earlier, all retirement risk can be subdivided into two facets: known risk and speculative risk. Known retirement risk encapsulates everything we know from the historical market data. Conversely, speculative retirement risk is outside the boundaries of what has been seen in market history and thus can only be discussed in speculative terms.

From another perspective, speculative risk can be said to pick up where known risk leaves off. Consider this case: in the US market the known risk of failure for a 3% withdrawal rate is 0% - there is no instance of failure anywhere in the US data for such a low withdrawal rate. Does this mean it's impossible to run out of money withdrawing 3% annually? Yes, if based on known risk within the US, but not based on speculative risk, where the possibility of a failure always exists. Speculative risk extends indefinitely beyond what has been experienced in the past, although we can say the more extreme the case, the lower the risk (i.e., speculative risk for a 1% withdrawal rate has to be lower than for a 2% withdrawal rate, even though neither is measurable). The logical existence of this speculative risk is very clear: virtually anything can happen in the future, but always keep in mind it's truly speculative without a clear foundation for estimating or planning.

There are important but subtle reasons for distinguishing known risk from speculative risk. The line separating what we know about markets (known risk) from what we don't know (speculative risk) is too often blurred in discussions. This blurring can cause risk to be treated as if it has no distinct characteristics, leading some to conclude there is very little market behavior we can plan on, with the extreme opinion being markets are too risky for retirement.

With well over 100 years of global market data, speculative risk becomes an anomaly that should not obscure what known about the markets. Speculative risk is indeedspeculative and should be classified as such. Quite distincily. iskenovrik can be methodically measured, based on our substantial historical record. Planning can be based on it. Economist Frank Knight in his 1921 book "Risk, Uncertainty, and Profit" writes:

Uncertainty must be taken in a sense radically distinct from the familiar notion of Risk, from which it has never been properly separated. [...] The essential fact is that 'risk' means in some cases a quantity susceptible of measurement, while at other times it's something distinctly not of this character. [...] It will appear that a measurable uncertainty, or risk' proper, as we shall use the term, is so far different from an unmeasurable one that it's not in effect an uncertainty at all.
Similar to Knight's thoughts above, known risk is the measurable uncertainty or "risk" proper in retirement.

Compared to speculative risk, known risk provides a level of understanding that is not uncertain at all, with clear boundaries drawn by historical markets. Known risk forms the basis for most of the retirement planning in this book. In contrast, speculative risk is the unmeasurable uncertainly in retirement, and as such is difficult to plan for except generally. Speculative risk is also the source of most disagreements surrounding retirement risk, and as such is better separated - we can only speculate on its future magnitude and frequency.

Nevertheless, speculative risk as defined must be small - the risk's existence starts beyond the market events of the last 100 years, spanning depressions, recessions, world wars, market bubbles, and high inflation. Known risk is bad enough and big enough to encompass all but the most extreme cases the future can throw at our retirements.
Still, speculative risk is real and will periodically be given separate attention, distinct from the methodical focus best applied to known risk.

Risk going forward generally refers to the known risk of systemic withdrawals.

LOL, this guy has absolutely twisted himself into a pretzel trying to make the case for relying on historical data.

But even if you adopt his worldview, that every type of risk can be lumped into “known” and “speculative”, all you need to assume is that a speculative risk occurs that would render known risk less important during your own personal retirement period to blow up the theory of relying on known risk behavior.

Next?

[bluecollarmusician]

LOL, this guy has absolutely twisted himself into a pretzel trying to make the case for relying on historical data.

But even if you adopt his worldview, that every type of risk can be lumped into “known” and “speculative”, all you need to assume is that a speculative risk occurs that would render known risk less important during your own personal retirement period to blow up the theory of relying on known risk behavior.

Next?

Hi, @Ron Scott I think this excerpt is just explaining how to divide types of risk for developing strategies for managing them.  It is only an excerpt that does not discuss best approaches for dealing with speculative risk.  (As he says :"Still, speculative risk is real and will periodically be given separate attention, distinct from the methodical focus best applied to known risk.") So, I think there is time dedicated to speculative risk not included in the excerpt- maybe some required reading for us both. ;-)

I don't think there is any argument that there are no unknown or speculative risks in "retirement"- there is a disagreement on how to plan for them.  If I understand you correctly, the mitigation strategy is to drive down WR lower and lower.  It's a "more is always better" approach to money, with an underlying assumption that more dollars will be more helpful.  It is also an appealing strategy, because you get to "keep doing what you know" i.e. work/save/invest, etc.  However past a point (5% WR maybe?) the marginal utility of additional dollars begins decreasing rapidly when acting as a hedge against historical failure risk (i.e. "known risk.")

I understand you saying you don't use any historical outcomes for devising your own strategy, but I do think it is worth considering that at that point of rapidly diminishing returns in WR%, an outlier event that would cause failure in historically safe rates would likely be a problem that money alone is not going to solve.  It is developing other forms of capital that will likely be helpful in a scenario that would mean a total break down of capital markets.  I.e. below a 3% WR more money probably won't help you.

Of course, maybe you just want to spend more money- and that's fine too.

[ender]

It's far more of a leap of faith to assume the future will be completely unlike history to the point history is worthless than it is to assume history can be insightful towards what will happen in the future.

[bluecollarmusician]

@ender

I agree with that sentiment.  But I understand Ron's point that there is no guarantee of anything, and I think to a degree we are all nibbling around the edges of it: i.e. there is a lot of unacknowledged agreement- we are all pretty much in the agreement of how to get 95+ of the way there (work hard, save more than you spend, invest in the best income generation vehicles you can find), it's just a difference in how we "feel" about the unknown that determines comfort level in those last few speculative %.

I acknowledge that the subjective risk is hard to think about and plan for: for some it might mean growing a garden, having close extended family/friends, owning gold, building a bunker, for others it might mean trying to achieve 1% savings rate.  Any of those may have some relative merit in planning for the unknown.  It's all distraction from death anyway :-)

I actually think the drive to push down withdrawal rates has more to do with the fear that "I might want to spend a lot more money in the future."    This can be seen in the ERE Wheaton scale; (can't remember if it was in this thread I posted it recently?) Another breakdown is the transition in mentality from 4% "because internet" and a more traditional annuity style retirement mindset, to thinking of a capital for life strategy as well as recognizing different forms of capital and yields and flows.

[Ron Scott]

LOL, this guy has absolutely twisted himself into a pretzel trying to make the case for relying on historical data.

But even if you adopt his worldview, that every type of risk can be lumped into “known” and “speculative”, all you need to assume is that a speculative risk occurs that would render known risk less important during your own personal retirement period to blow up the theory of relying on known risk behavior.

Next?

Hi, @Ron Scott I think this excerpt is just explaining how to divide types of risk for developing strategies for managing them.  It is only an excerpt that does not discuss best approaches for dealing with speculative risk.  (As he says :"Still, speculative risk is real and will periodically be given separate attention, distinct from the methodical focus best applied to known risk.") So, I think there is time dedicated to speculative risk not included in the excerpt- maybe some required reading for us both. ;-)

I don't think there is any argument that there are no unknown or speculative risks in "retirement"- there is a disagreement on how to plan for them.  If I understand you correctly, the mitigation strategy is to drive down WR lower and lower.  It's a "more is always better" approach to money, with an underlying assumption that more dollars will be more helpful.  It is also an appealing strategy, because you get to "keep doing what you know" i.e. work/save/invest, etc.  However past a point (5% WR maybe?) the marginal utility of additional dollars begins decreasing rapidly when acting as a hedge against historical failure risk (i.e. "known risk.")

I understand you saying you don't use any historical outcomes for devising your own strategy, but I do think it is worth considering that at that point of rapidly diminishing returns in WR%, an outlier event that would cause failure in historically safe rates would likely be a problem that money alone is not going to solve.  It is developing other forms of capital that will likely be helpful in a scenario that would mean a total break down of capital markets.  I.e. below a 3% WR more money probably won't help you.

Of course, maybe you just want to spend more money- and that's fine too.

Well, there’s also the matter that you have a life to live and can’t let your uncertainties dictate how to live it. There’s a balance to find, it isn’t in the extremes, and it’s each family’s decision where to find it.

I just don’t think real FI is best determined in terms of minimums based on historical data, like 25X = 30 years. To me, FI is a more robust state, giving you flexibility and options for changing your worldview in the future. Acting as if past results are indicative of future performance doesn’t makes sense to me.

A ender implies above, its not helpful to “assume the future will be completely unlike history to the point history is worthless”. History is just not worth as much as the 4% Rule would have us believe.

[secondcor521]

History is just not worth as much as the 4% Rule would have us believe.

Understood.

So do you plan to retire?  If so, what is your plan, and how do you evaluate your plan's risk?

It can be fun to throw rocks and peanuts.  But unless you've got some useable alternative, I don't see how you're helping yourself out.  Or anyone else.

[Ron Scott]

History is just not worth as much as the 4% Rule would have us believe.

Understood.

So do you plan to retire?  If so, what is your plan, and how do you evaluate your plan's risk?

It can be fun to throw rocks and peanuts.  But unless you've got some useable alternative, I don't see how you're helping yourself out.  Or anyone else.

Easy mon…

I am retired. So far so good!

I went over my plan earlier in this thread.

[Much Fishing to Do]

Most don't use the 4% rule, and most people don't have to.  The average person retires at like 64/65, dies at like 80/81.  In my experience our family
 members die somewhere in the 69-78 range.  Even if you only grew your money at the pace of inflation, and no more, a 6-7% withdrawal would last thru that period.  Only because I had always planned to retire at 50 did I like the 4% rule as a good guideline for myself.

[bluecollarmusician]

I don't mean to speak for him @secondcor521, but I don't think we are all that far apart.

@Ron Scott seems to object to the moniker "4% rule", but in reality he is using it's essential elements.  He just demands a higher tolerance from the known failure rates. This is his way of achieving a margin of safety for speculative unknowns.

[Ron Scott]

I don't mean to speak for him @secondcor521, but I don't think we are all that far apart.

@Ron Scott seems to object to the moniker "4% rule", but in reality he is using it's essential elements.  He just demands a higher tolerance from the known failure rates. This is his way of achieving a margin of safety for speculative unknowns.

I’m not why people want me to appear I use a technique I do not use. I just don’t go there.  It’s not a big deal…I’m only one guy.

I do have a gut feeling that there would be significant political pressure internally if real rates stayed at or below 0 for too long, so that’s a consolation at least. And FWIW keeping pace with inflation translates to 3.3% WR for a 30 year retirement. So 4% @ 30 years isn’t CRAZY, it’s just making a 20% leap of faith. (For half-a-life-long retirements however 4% is definitely like Church.)

I’m also a bit surprised that so many people trust old financial data. It’s almost surreal. But here we are.

[ender]

@ender

I agree with that sentiment.  But I understand Ron's point that there is no guarantee of anything, and I think to a degree we are all nibbling around the edges of it: i.e. there is a lot of unacknowledged agreement- we are all pretty much in the agreement of how to get 95+ of the way there (work hard, save more than you spend, invest in the best income generation vehicles you can find), it's just a difference in how we "feel" about the unknown that determines comfort level in those last few speculative %.

I acknowledge that the subjective risk is hard to think about and plan for: for some it might mean growing a garden, having close extended family/friends, owning gold, building a bunker, for others it might mean trying to achieve 1% savings rate.  Any of those may have some relative merit in planning for the unknown.  It's all distraction from death anyway :-)

I actually think the drive to push down withdrawal rates has more to do with the fear that "I might want to spend a lot more money in the future."    This can be seen in the ERE Wheaton scale; (can't remember if it was in this thread I posted it recently?) Another breakdown is the transition in mentality from 4% "because internet" and a more traditional annuity style retirement mindset, to thinking of a capital for life strategy as well as recognizing different forms of capital and yields and flows.

The weird thing to me is when I think of governmental actions in the USA in the last decade vs the prior 100 years, I feel like it makes the 4% approach far safer - the government has proactively intervened in ways that are in many ways not historically represented.

So instead of this making me feel like we need to be even more cautious than history, it seems to me like it's likely historical market returns are going to be far more consistent than in the past.

Keep in mind that 4% every year after inflation returns results in a portfolio that never depletes the initial value with a withdrawal strategy based on the 4% rule.

Return rate generally isn't what has killed retirements based on historical data, it's sequence of returns.

It certainly feels like the federal government is far far far FAR more invested in being a stabilizing influence now than at any point historically.

Which to me means historical return periods are worse than likely going forward. Even if growth is somewhat lessened, the stabilizing influence the gov seems to be providing more than accounts for that imo.

So do you plan to retire?  If so, what is your plan, and how do you evaluate your plan's risk?

It can be fun to throw rocks and peanuts.  But unless you've got some useable alternative, I don't see how you're helping yourself out.  Or anyone else.

His plan was waiting till his 60s to do a Bogleheads style retirement.

[nereo]

I don't mean to speak for him @secondcor521, but I don't think we are all that far apart.

@Ron Scott seems to object to the moniker "4% rule", but in reality he is using it's essential elements.  He just demands a higher tolerance from the known failure rates. This is his way of achieving a margin of safety for speculative unknowns.

I’m not why people want me to appear I use a technique I do not use. I just don’t go there.  It’s not a big deal…I’m only one guy.

I do have a gut feeling that there would be significant political pressure internally if real rates stayed at or below 0 for too long, so that’s a consolation at least. And FWIW keeping pace with inflation translates to 3.3% WR for a 30 year retirement. So 4% @ 30 years isn’t CRAZY, it’s just making a 20% leap of faith. (For half-a-life-long retirements however 4% is definitely like Church.)

I’m also a bit surprised that so many people trust old financial data. It’s almost surreal. But here we are.

Reading over all of your posts here, it just seems like you are putting a lot of energy to appear contrarian when your approach towards retirement is very much what’s advocated for around here. You’re aware of what historical trends have been, you’ve played around with FireSim, you’ve guesstimated your future spend rates and know what multiple of savings that is - and then you make a decision on what WR to use based on your own circumstances, risk tolerance, age, etc.   As you’ve pointed out, at your age a 3.x WR is likely all you need if the markets do nothing more than keep roughly level with inflation.

You’re more conservative than the median but no where near the extreme outliers. It’s a bit ironic that your ultimate WR is much higher than many even though you’ve settled on just keeping pace with inflation

As for not trusting old financial data - that statement makes little sense. I common sentiment here is that the next century likely won’t provide the returns in the US market as the previous century - something you seem to share. But the default isn’t “keeping up with inflation”.  Note you aren’t assuming the real value of your investments won’t be cut by 50% over the next decade either.

[Chris Pascale]

I've included it in the articles I've written for the sake of providing a template, but I've also said in articles that I'm not frugal and don't keep a budget (if it applies).

4%? Hey, I'd love to if that's how it works out, but I could honestly just see myself initially taking 100% of my Roth IRA and having a kickass time when I retire from teaching (my next career) and I could also just see myself leaving it there if other things I'm working on come through.

Planning has its value, but plans are not really going to get used.

[secondcor521]

History is just not worth as much as the 4% Rule would have us believe.

Understood.

So do you plan to retire?  If so, what is your plan, and how do you evaluate your plan's risk?

It can be fun to throw rocks and peanuts.  But unless you've got some useable alternative, I don't see how you're helping yourself out.  Or anyone else.

Easy mon…

I am retired. So far so good!

I went over my plan earlier in this thread.

I am taking it easy, thanks.  I was curious and didn't understand your point of view, so I was seeking clarification via direct questions.

I re-read all of your posts in this thread.  Based on "simple division" then "ignore" and "see how it goes" (reply #37), "I wing it" (reply #42), and "I'm hoping things will work" (reply #60), it sounds to me like your plan isn't what I would really call a plan.

That's cool with me if that's what you want to do.  No shade from me on your approach or your life decisions - everyone gets to make their bets and take their chances.  I also understand and appreciate your point of view about being conservative wanting to ensure staying FIREd and the statistical limitations of historical studies.

Because my approach is quite different, I mistakenly assumed that if you didn't use the 4% rule to plan that you were using something else similarly analytical -- such as liability matching or only spending dividends, or a cash flow approach.  My bad.

(FWIW, I'm 54, retired 7 years, and currently running about a 1% net WR.)

[rosarugosa]

How much of this debate would be solved if we just called it a "4% guideline"?  IIRC, technically it was initially a 4% savings/safe withdraw rate, and the term "rule" came later. 

"Guideline" seems to be how nearly everyone uses it.  (Of the people who use it.)  If the semantics of that are better for the critics and the cynics, they seem at least as accurate, if not more so.

Good point.

[Ron Scott]

History is just not worth as much as the 4% Rule would have us believe.

Understood.

So do you plan to retire?  If so, what is your plan, and how do you evaluate your plan's risk?

It can be fun to throw rocks and peanuts.  But unless you've got some useable alternative, I don't see how you're helping yourself out.  Or anyone else.

Easy mon…

I am retired. So far so good!

I went over my plan earlier in this thread.

I am taking it easy, thanks.  I was curious and didn't understand your point of view, so I was seeking clarification via direct questions.

I re-read all of your posts in this thread.  Based on "simple division" then "ignore" and "see how it goes" (reply #37), "I wing it" (reply #42), and "I'm hoping things will work" (reply #60), it sounds to me like your plan isn't what I would really call a plan.

That's cool with me if that's what you want to do.  No shade from me on your approach or your life decisions - everyone gets to make their bets and take their chances.  I also understand and appreciate your point of view about being conservative wanting to ensure staying FIREd and the statistical limitations of historical studies.

Because my approach is quite different, I mistakenly assumed that if you didn't use the 4% rule to plan that you were using something else similarly analytical -- such as liability matching or only spending dividends, or a cash flow approach.  My bad.

(FWIW, I'm 54, retired 7 years, and currently running about a 1% net WR.)

I loosely spend interest and dividends (or less). It’s not what I’d call a strategy though LOL.

May I ask how you settled on a 1% WR vs. more? Also, by “net WR” do you mean net of taxes or do you simply treat taxes as an expense that the 1% has to cover?

[secondcor521]

May I ask how you settled on a 1% WR vs. more? Also, by “net WR” do you mean net of taxes or do you simply treat taxes as an expense that the 1% has to cover?

Roughly speaking, I hit 4% a few years before retiring.  Job was OK so I kept working and saving.  Retired in 2016 and kept 90%+ of my investments in S&P500 equivalents, which have more or less doubled since then.

When making my plan, I only looked at my FIRE stash balance and assumed zero outside income.  As it turned out, I found a side gig and receive various gifts and rebates and things which generate spendable cash not from the FIRE stash.  So I call it non-portfolio income.

Roughly speaking, I spend 1.5% of my FIRE stash each year, but my non-portfolio income equals about 0.5% of my FIRE stash each year, so I consider my net WR to be 1%.

As far as taxes go, I consider them an expense and include them in my WR.  But with low spending and kids in college (AOTC), I hardly pay any at the moment.  I would try to pay more, but the incentive structure of the ACA means I hit a high marginal rate at a low income so I stop Roth converting at a relatively low AGI.

[ChpBstrd]

May I ask how you settled on a 1% WR vs. more? Also, by “net WR” do you mean net of taxes or do you simply treat taxes as an expense that the 1% has to cover?

Roughly speaking, I hit 4% a few years before retiring.  Job was OK so I kept working and saving.  Retired in 2016 and kept 90%+ of my investments in S&P500 equivalents, which have more or less doubled since then.

When making my plan, I only looked at my FIRE stash balance and assumed zero outside income.  As it turned out, I found a side gig and receive various gifts and rebates and things which generate spendable cash not from the FIRE stash.  So I call it non-portfolio income.

Roughly speaking, I spend 1.5% of my FIRE stash each year, but my non-portfolio income equals about 0.5% of my FIRE stash each year, so I consider my net WR to be 1%.

As far as taxes go, I consider them an expense and include them in my WR.  But with low spending and kids in college (AOTC), I hardly pay any at the moment.  I would try to pay more, but the incentive structure of the ACA means I hit a high marginal rate at a low income so I stop Roth converting at a relatively low AGI.

I like this trajectory. Have you ever analyzed where you'd be today if you had quit once you reached 25x instead of working a few more years and doing the side gig? I suspect you would have been fine if invested in 90% S&P500 equivalents, but I wonder where your WR would be today.

[Ron Scott]

May I ask how you settled on a 1% WR vs. more? Also, by “net WR” do you mean net of taxes or do you simply treat taxes as an expense that the 1% has to cover?

Roughly speaking, I hit 4% a few years before retiring.  Job was OK so I kept working and saving.  Retired in 2016 and kept 90%+ of my investments in S&P500 equivalents, which have more or less doubled since then.

When making my plan, I only looked at my FIRE stash balance and assumed zero outside income.  As it turned out, I found a side gig and receive various gifts and rebates and things which generate spendable cash not from the FIRE stash.  So I call it non-portfolio income.

Roughly speaking, I spend 1.5% of my FIRE stash each year, but my non-portfolio income equals about 0.5% of my FIRE stash each year, so I consider my net WR to be 1%.

As far as taxes go, I consider them an expense and include them in my WR.  But with low spending and kids in college (AOTC), I hardly pay any at the moment.  I would try to pay more, but the incentive structure of the ACA means I hit a high marginal rate at a low income so I stop Roth converting at a relatively low AGI.

This is a great scenario, thanks for sharing. Nice AA: For those of us retiring in recent years the market certainly cooperated. Tommorow? Fingers crossed…

I am averse now to taking on the responsibility of a paycheck, but I somehow managed to hold onto frozen pension (!) which I call my “side hustle”. So I too have the convenience of enjoying a couple dollars outside the stash and beyond the boundaries of the WR.

[secondcor521]

I like this trajectory. Have you ever analyzed where you'd be today if you had quit once you reached 25x instead of working a few more years and doing the side gig? I suspect you would have been fine if invested in 90% S&P500 equivalents, but I wonder where your WR would be today.

Not really.  I typically don't engage in alternative histories because I don't find them actionable.

But if I had retired when I hit what I considered FI on 6/20/2015 (it was actually later than I thought - sorry), the S&P on that date was 2121 or so, which is almost exactly half what it is today.

Without the side gig income, I probably would be spending all the dividends plus an additional 2% of the principle each year.  Over 8 years (2015 - 2023), that 2% of principle would be 16%.  (I'm ignoring the loss of compounding - the 2% of principle spent in 2015 would have grown between then and now.  I'm ignoring that for simplicity and laziness.)

But I also received some life insurance in 2016 when my Mom passed away, which would have occurred regardless of when I retired and regardless of side gigs.  That amount was about 4% of my FIRE stash.

So the math means I was at 25x in 2015, which would be 50x today because of investment growth, minus about (16% - 4% = 12%) of that, or 88% of that, or 88% of 50x, or 44x.  Which is about a 2.3% WR.

...

As an aside, there are downsides to my trajectory.  Knowing one can spend more but not being able to (mostly emotionally) is actually a problem I deal with.  Can't really discuss that issue with very many people, obviously - most regular folk and even many FIRE folk can't relate.  Still something I spend time and effort working on.

[BeanCounter]

As an aside, there are downsides to my trajectory.  Knowing one can spend more but not being able to (mostly emotionally) is actually a problem I deal with.  Can't really discuss that issue with very many people, obviously - most regular folk and even many FIRE folk can't relate.  Still something I spend time and effort working on.

I think there are lots and lots of people in the FIRE community who can relate to this.

[Ron Scott]

As an aside, there are downsides to my trajectory.  Knowing one can spend more but not being able to (mostly emotionally) is actually a problem I deal with.  Can't really discuss that issue with very many people, obviously - most regular folk and even many FIRE folk can't relate.  Still something I spend time and effort working on.

I think there are lots and lots of people in the FIRE community who can relate to this.

Unless it is coupled with severe FOMO, is extreme and interfering with maintaining a reasonable standard of living, or is causing disruption in the family I don’t see this as a problem.

Better this than being house poor or hitting the credit cards too hard.

FWIW, I have found working on the estate plan helps to put things in perspective.

[jim555]

I'm in the sub 4% club.  Once you are frugal it is hard to become less frugal and start spending.

[baludon]

As an aside, there are downsides to my trajectory.  Knowing one can spend more but not being able to (mostly emotionally) is actually a problem I deal with.  Can't really discuss that issue with very many people, obviously - most regular folk and even many FIRE folk can't relate.  Still something I spend time and effort working on.

I think there are lots and lots of people in the FIRE community who can relate to this.

Yeah, I could spend more but my mind thinks that if I wait 10 more years I may be able to spend 4x more. But there isn’t really anything now I want to spend 4x money on.  Maybe, I could afford to move to Hawai’i then and eat more than rice and beans.

[secondcor521]

As an aside, there are downsides to my trajectory.  Knowing one can spend more but not being able to (mostly emotionally) is actually a problem I deal with.  Can't really discuss that issue with very many people, obviously - most regular folk and even many FIRE folk can't relate.  Still something I spend time and effort working on.

I think there are lots and lots of people in the FIRE community who can relate to this.

I think there are many people in The FIRE community (and maybe @secondcor521 is one of them) who really have no desire to spend more even if they can because they are personally happy with what they have. However there is A LOT of pressure on people to spend more - including FIREees - because ...reasons. It will make us happier, more fulfilled, more satisfied with our life's. We will be viewed as more attractive, interesting, fun, sexy, charming, etc... So often we feel like we SHOULD want to spend more, or that something's wrong with us because we don't have that desire. It can easily get twisted into feeling like we should spend more and makes us feel like we have an emotional issue when really we don't. We're just happy with our stuff and lives as is. Getting your brain to accept that isn't an easy thing though.

Maybe there are lots who can relate, but it's not a topic I see brought up very often.  Perhaps all us 1%-ers consider it uncouth or intractable.

@spartana has it mostly right.  I'm pretty darn content at the 1% rate.  I also enjoy playing the "frugality game" even though I don't have to.  Through circumstance I've also been lucky enough to go mostly everywhere and do mostly everything I've wanted to.

I do sometimes feel the pressure that @spartana is referring to though.  For me, it's the fact that most people couldn't just decide to go on a Caribbean cruise next week and pay cash for it, and most people if given the opportunity would probably do so and have a fun time.  Or buy a new car and appreciate the upgrade.  Or heck, even go out to eat more often.

So the pressure is of two forms:  (1) to do it for the people as their lucky representative, kind of like we enjoy watching lottery winners buy new mansions, and/or (2) hey maybe I'm missing something if they all think a trip to Europe would be an exciting adventure and all I see is planning hassle and jet lag.

[RedmondStash]

Hi RedmondStash, thanks for sharing your experience, I have some follow-up questions.

Do you withdraw the annual amount for the entire year budget or instead every month for monthly budget? I will be close to FIRE in a few years and wondering how people actually do it.  You might be tempted to time the market, for example, if you withdraw annual amount January 2nd but if in December 27th the market increases by 10% then you might do it then? How do you deal with the mental aspect of when to get that money out? Do you have any particular rules you apply for this?

I think I like the annual approach instead to have to go through it every single month.

Thanks again!

Hi @bigote2032 , just saw this. Better late than really, really late, right?

In terms of drawing down, I try to keep a certain amount available in ready cash, roughly between 4% and 8%, mostly in MM accounts. I don't sell assets on a schedule, but when my cash supply dwindles too low. That works out to maybe 1-3 times a year, depending on whether unexpected expenses come up during the year. I often sell a chunk in January, and then, depending on how the market is doing (as you alluded to), possibly another chunk in October or November, if the coffers need replenishing.

For me, flexibility wins out over schedule. When I see a big expense coming in the next year or two, I line up the money for it. And I don't worry about whether I got the optimal price. You never get it just right.

How I deal with the mental aspect is by reminding myself that cautious is better than optimal. Better to lose out on a few dollars by trading early than to risk not having enough. I sell a chunk when I stop sleeping well at night (SWAN) because I worry I don't have enough cash, so it's a sort of internal barometer.

Plus I have tons of spreadsheets and strategies and plans, taking into account taxes, ACA subsidies, Roth conversions, time until Medicare eligibility, time until SS eligibility, etc. I overplan. Then when I actually sell a chunk, I'm content because I know that even if it wasn't perfect, it was good enough, and it fits with my long-term strategies. And I let it go.

[Ron Scott]

Knowing one can spend more but not being able to (mostly emotionally) is actually a problem I deal with.

I think there are lots and lots of people in the FIRE community who can relate to this.

However there is A LOT of pressure on people to spend more - including FIREees - because ...reasons.

So the pressure is of two forms:  (1) to do it for the people as their lucky representative, kind of like we enjoy watching lottery winners buy new mansions, and/or (2) hey maybe I'm missing something if they all think a trip to Europe would be an exciting adventure and all I see is planning hassle and jet lag.

Let me offer a respectful but blunt perspective: You’re overthinking it. Get over it.

The people with the lowest WRs in my experience are 0.5%ers and above. People in your circle know where you’re coming from and there’s nothing left to prove. Nobody is going to be impressed by your spending or lack of it.

So you’re left with the reality of money that the vast majority of the wealthy understand very well:

1. Wealth is not as big a deal as people think.
2. By the time you can afford to buy lots of stuff, you no longer get excited about it.
3. Most people you see with lots of bling, fancy cars, etc., have less money than you. Whatever.
4. Actually spending a lot more money than you want to because you think you SHOULD is the stupidest thing you can do and you know it. Refusing to do it is a sign of maturity.

Psychological, irrational thinking about how someone with money SHOULD behave is meaningless/silly self-talk. Get over “your feelings”, be satisfied you get it intellectually, and move on.

[JupiterGreen]

As an aside, there are downsides to my trajectory.  Knowing one can spend more but not being able to (mostly emotionally) is actually a problem I deal with.  Can't really discuss that issue with very many people, obviously - most regular folk and even many FIRE folk can't relate.  Still something I spend time and effort working on.

I think there are lots and lots of people in the FIRE community who can relate to this.

I think there are many people in The FIRE community (and maybe @secondcor521 is one of them) who really have no desire to spend more even if they can because they are personally happy with what they have. However there is A LOT of pressure on people to spend more - including FIREees - because ...reasons. It will make us happier, more fulfilled, more satisfied with our life's. We will be viewed as more attractive, interesting, fun, sexy, charming, etc... So often we feel like we SHOULD want to spend more, or that something's wrong with us because we don't have that desire. It can easily get twisted into feeling like we should spend more and makes us feel like we have an emotional issue when really we don't. We're just happy with our stuff and lives as is. Getting your brain to accept that isn't an easy thing though.

Maybe there are lots who can relate, but it's not a topic I see brought up very often.  Perhaps all us 1%-ers consider it uncouth or intractable.

@spartana has it mostly right.  I'm pretty darn content at the 1% rate.  I also enjoy playing the "frugality game" even though I don't have to.  Through circumstance I've also been lucky enough to go mostly everywhere and do mostly everything I've wanted to.

I do sometimes feel the pressure that @spartana is referring to though.  For me, it's the fact that most people couldn't just decide to go on a Caribbean cruise next week and pay cash for it, and most people if given the opportunity would probably do so and have a fun time.  Or buy a new car and appreciate the upgrade.  Or heck, even go out to eat more often.

So the pressure is of two forms:  (1) to do it for the people as their lucky representative, kind of like we enjoy watching lottery winners buy new mansions, and/or (2) hey maybe I'm missing something if they all think a trip to Europe would be an exciting adventure and all I see is planning hassle and jet lag.

I understand this to some extent. Especially the vacation part. I don't usually regret taking vacations (especially when I learn something about history or an unfamiliar culture), but I find the whole planning and traveling thing to be a hassle and I am not super motivated to do all that. Sometimes other people can inspire us to get past that discomfort and do something that is good for us. Having experiences is usually a good thing to spend money on (if you have the money to spare), stupid consumer stuff especially unnecessary gadgets and fashion usually aren't worth it. Though I have to admit, I went through an expensive taste phase and recently I sold a bunch of that stuff on Poshmark for what I bought it for so it ended up not being bad spending since I got to enjoy it and then made my money back. Wouldn't do it again, but it made my stupid past spendy-pants spending hurt less.  LOL

[Tempname23]

 After I found the 4% "guide" I found our portfolio was such that a 3.2% WDR would be enough for us.
I retired.
 Without the 4% "Guide" I would have been been flailing without any guidance and not known if I could retire.
The 4% Guide gave me confidence and it has worked out well, so far.
 However, my wife worked another two years and when she retired we were down to 2.75%.
5 years later, after yearly spending, our portfolio has still grown, (even though our portfolio peaked over 10% higher than it is now because of the market decline.) now our WDR is down to 2.55%. SS in 14 months will bring our WDR down to about 1%.
  Short answer, I used it to say we had enough, but we don't spend 4%.