Author Topic: The End of the 4% Withdrawal?  (Read 4125 times)

bahnbo

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The End of the 4% Withdrawal?
« on: March 07, 2013, 02:08:51 PM »
Hello fellow Mustachians,

I know MMM and many others on here subscribe to the 4% withdrawal rate as a pretty foolproof way of reaching and sustaining ER. I was wondering if people on here had a chance to read the Yahoo! article from today about this topic and what your thoughts were on it. Would love to hear others' opinions. Thanks!

http://finance.yahoo.com/news/why-4-rule-no-longer-185708236.html

matt_g

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arebelspy

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Re: The End of the 4% Withdrawal?
« Reply #2 on: March 07, 2013, 07:27:13 PM »
Yadda yadda the future won't be like the past yadda yadda it's different this time yadda yadda.

Bottom line: be flexible in your spending, be willing to earn a little bit of income if necessary, everything will turn out fine.  See: millions of other discussions on the 4% SWR here and elsewhere as well as the hundreds (thousands? more?) of people doing it successfully already (one bastion of them being over at early-retirement.org).
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ebast

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Re: The End of the 4% Withdrawal?
« Reply #3 on: March 07, 2013, 09:22:45 PM »
A lot of this has been hashed over in the discussion about the (probably more detailed) yahoo finance article mentioned in:
  https://forum.mrmoneymustache.com/investor-alley/rethinking-the-4-percent-rule/
(which was ultimately based on a Credit Suisse analysis)

I think in the article you linked they are using a Morningstar analysis.  It is interesting that multiple sources are coming to the same conclusion. The Morningstar paper I believe is:
  http://corporate.morningstar.com/ib/documents/MethodologyDocuments/ResearchPapers/LowBondYieldsWithdrawalRates.pdf

The big scary claims from that paper being
 - you have only a 50% chance of success withdrawing now at 4%
 - If you want a 90% success probability, you have to begin withdrawing at 2.8% or less
all assuming a 40-60% stock-bond split and according to their assumptions about current and potential market conditions.

I put that last part in italics because it means they're wrong.  Just kidding, I don't know they're wrong.  (but I hope they are, right?)

They  make an interesting case that:

1. if you have no margin of safety-- you start withdrawing exactly at 4%, you need to be getting good investment returns then to be sucessful long-termor else it'll fail. Ok, that makes sense.  You're raiding the 'stache before it's had a chance to grow.

Also, they find that

2. bond yields are pretty highly correlated, meaning if they are low this year, they will be low next year, and in fact the decade to come.

It's a pretty nifty (but concerning) argument because people will say, well sure, things are low now but they will return to average -- well, these guys are saying, that's great, but too late!!  This time may not be different long-term, but it is different now.  If you have a lot of underperformance at the beginning and are withdrawing at 4%, it can really hurt your chances long-term.

but like people said in the MMM thread I linked at the beginning, it's probably not reliable to be that close to 4% anyway on the one hand, and on the other, you can always supplement by <yeep!> working part-time to fill the gap.

Matt K

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Re: The End of the 4% Withdrawal?
« Reply #4 on: March 08, 2013, 06:29:54 AM »
I'm reading The Intelligent Asset Allocator right now. Great book btw. Anyways, it was written in 1998 during the tech bubble. My version has no mention of the 2003 crash, the housing bubble, the 2007 crash, etc. But it talks a lot about the crashes and bear markets of 1990, 1987, 1973-74, 1929, etc. The author really points out to the whole problem of recency - ie we belive that what has happened in the last ten years is how it will always be. After every big bear market "things will never be the same", and if you are only comparing to the average of the last 20 year, you're right. But if you look at the mean over the past 70 years, yea, things tend to go back to the way they were (or close enough).

In the mid 80s bonds paid more than stocks (thanks to very high interest rates) and stocks would never return good again, watch out for run away inflation, it'll never be the same again!

If someone tells you they know the future, they're full of BS. If someone tells you "things will never be the same again", they simply aren't looking far enough ahead. your job, as your own money manager is to plan for decades, not quarters, and just as A Rebel Spy said, be flexible as you ride the rollercoaster of investing.

StarswirlTheMustached

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Re: The End of the 4% Withdrawal?
« Reply #5 on: March 08, 2013, 09:48:06 AM »
Is it just me, or does everyone seem to focus only on the 20th century for their models of market downturns?
Personally, I think we're in a more 19th century boom-and-bust cycle (within my experience: the dot-com bubble, followed by the housing bubble, followed by what I suspect is a resource bubble, especially in shale gas, along with a possible bubble in education finance) -- I'd like to see how well the usual strategies would fare in that kind of environment. Say, go from the 1850s and see how you'd fare in the Panics of 1857, 73, 85, and 1907. (FIREcalc only starts in 1871, IIRC).

skyrefuge

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Re: The End of the 4% Withdrawal?
« Reply #6 on: March 08, 2013, 10:04:55 AM »
The author really points out to the whole problem of recency

I got whiplashed listening to the radio this morning. In the news report, they're talking about the DJIA hitting another record high, US unemployment dropping to a 4-year low, and then an ad comes on: "In this terrible economy..." I don't even remember what it was for, but it just highlighted that not only is there too much dwelling on negative recent events, there's also a delay in recognizing positive even-more-recent events. All this recent "4% is a lie!" doom-and-gloom seems weird because it already feels of out-of-date.

If someone had retired 2 years ago, withdrawing this doomed-to-fail 4% ($20k) from their $500k in the S&P500, today that $500k would be somewhere near $600k and they'd be withdrawing only 3.5%. Hey, look, problem solved! Sure, the same trick might not work over the next 2 years for someone retiring today, but on the other hand, it might!

And of course the delay in recognition occurs in the opposite direction too; eventually the doom-and-gloomers will finally notice that we've been on a steady upslope for years, and then turn into optimistic bubble-inflators. And that's probably right when the curve will start turning downward again, outside of their notice.

Vanguard just had an interesting article noting that the 10-year average return (often seen in fund comparisons) for stocks made a huge leap this year from 3.87% to 7.96%. It's really just a result of a quirk in the arbitrary 10-year selection window, because we finally lost the last negative year (-20.96%) of the dotcom collapse. But I wonder (fear) how much that change will make people think that stocks suddenly changed from "meh, kinda shitty" to "pretty damn good", even though nothing really changed. Even worse, next year, the 5-year average will drop 2008 from the books, and spring up from 2.27% to 13-14%. I have a feeling that silly math like that will affect peoples' sentiment a lot more than it should. Maybe next year we'll be hearing all about 4% being too conservative.