Author Topic: More thoughts on The 4% Rule  (Read 877 times)

Ron Scott

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More thoughts on The 4% Rule
« on: November 30, 2021, 09:10:56 PM »
I’m personally not a fan of this thing because its’ predictor variables are dated and limited—mostly US 20th century, during the US heyday. But it’s the big dog in town for retirement planning and I think about it a good bit.

Some thoughts:

1.   It gives people a good target for retirement savings…25X—30X, etc.
2.   It’s not like blind faith: People who claim to believe in it often report behaving much more conservatively during retirement, i.e., variable rate withdrawals based on recent returns, no automatic increases for inflation, etc.
3.   FIRE adherents sometimes seem to compound their longevity risk by assuming more equity risk…75/25 vs. 60/40 for example. This can lead to death spiraling (selling stocks at lows and related sequence of returns problems). When success rates drop below 90% the likelihood of catastrophic failure also increase (for example, running out of money 20-30 years from the retirement date).         
4.   It probably encourages more planning and thinking about FI and asset allocation than any other financial concept. But it seems to miss a great opportunity for focusing on investment fees and asset location.
5.   It doesn’t seem robust with respect to long periods of low returns on bonds.
6.   The name it’s known by now—the 4% “Rule”—is unfortunate. It would have been much better to phrase it in terms we used to describe risk tolerance for asset allocation…so people would be encouraged to think in terms of a range, like 3% to 4%, the way they do when they weigh decisions like 80-20 vs. 50-50.

lutorm

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Re: More thoughts on The 4% Rule
« Reply #1 on: November 30, 2021, 10:01:15 PM »
Have you read the 2000 posts in the 4% thread? ;-)