Author Topic: 4% of 12 month average asset?  (Read 1021 times)

vagavince

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4% of 12 month average asset?
« on: November 16, 2019, 02:07:14 AM »
Would it be more accurate to calculate my withdrawal as 4% base on a rolling average of asset value instead of latest asset value? Market has fluctuate a lot and my net worth right now is much higher than a year ago. So 4% on a sudden run-up may be risky assumption?
« Last Edit: November 16, 2019, 11:19:42 PM by vagavince »

Rob_bob

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Re: 4% of 12 month average asset?
« Reply #1 on: November 16, 2019, 05:36:12 PM »
4% as in calculating a SWR?  Being more conservative isn't a bad way to go IMO.

reeshau

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Re: 4% of 12 month average asset?
« Reply #2 on: November 17, 2019, 05:25:50 AM »
The 4% of assets in the 4% rule is only considered in the first year of withdrawals.  From there, it is adjusted by inflation, not any change in your wealth.  If you see your wealth increasing, then that is buffer against the time in the not-to-distant future when the markets go down.

The 4% rule is not a precise instrument; the measurement is at a point in time because it is a spreadsheet exercise, and that is the nature of a spreadsheet.  If you are actually taking withdrawals, you would be better served to be spending toward a budget.  You can adjust that budget as you want / need to but do it because of that, not because you have manipulated a guideline to "tell" you to do so.  If your doctored rule goes awry in the future, it will not apologize to you.

norajean

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Re: 4% of 12 month average asset?
« Reply #3 on: November 17, 2019, 06:40:33 AM »
Only time will tell if a different SWR estimate will be close to what you choose to withdraw on the day.  If you retired at a market high and the market fell and you chose to withdraw less as a result, then something less than 4% would be, as you say, a more accurate forecast.  There is obviously more risk in retiring at a market high than low.  But the market hits new highs all the time.  And historically even retiring the day before a massive crash, 4% SWR still worked for 30 years.

terran

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Re: 4% of 12 month average asset?
« Reply #4 on: November 18, 2019, 06:53:33 AM »
You could also take a look at the idea of setting your SWR based on the current CAPE, which similarly reduces your withdrawal rate when valuations are high from a historical perspective: https://earlyretirementnow.com/2017/08/30/the-ultimate-guide-to-safe-withdrawal-rates-part-18-flexibility-CAPE-Based-Rules/

FIRE 20/20

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Re: 4% of 12 month average asset?
« Reply #5 on: November 18, 2019, 03:41:17 PM »
Would it be more accurate to calculate my withdrawal as 4% base on a rolling average of asset value instead of latest asset value? Market has fluctuate a lot and my net worth right now is much higher than a year ago. So 4% on a sudden run-up may be risky assumption?

If I understand correctly, you're asking if - due to recent run-ups in stock market levels - you could reduce your risk by using a rolling average of your asset values and using that as your 4% withdrawals.  If that's correct then yes, you would be reducing your risk a bit, but it seems to me to be a roundabout way of doing so.  Let's use some hypothetical numbers to see.  If we assume your predicted post-FIRE spending is $40k, then you'll need $1M if you follow the 4% rule.  Let's say you're at $1.1M today and your rolling 12 month average just cleared $1.0M.  Essentially what you're doing is using a 3.64% withdrawal rate of your current assets or a 4% rate of your 12-month rolling average.  If you do that, then you can look at historical success rates for 3.64% (like using BigERN's numbers that @terran linked to), or you could use CFIRESim or FIRECalc.  I don't think there are any resources that quantify how much you're reducing your risk using a rolling average but there are resources that help if you use a lower initial withdrawal rate.  As a result, I don't see much benefit to thinking of it as a rolling average. 
The larger picture in my mind is what your risk mitigation strategies are.  Depending on your situation, 4% may be overly conservative or overly aggressive.  There's nothing magic about 4%.  If, for instance, you are in a field (like medicine, to name one) that has a very high barrier to entry if you're out of work for many years and if you have dependents who depend on you (e.g. special needs children) and you have a very lean budget with nothing to cut, and on top of all that you don't qualify for any pension or Social Security income, then 4% is probably too aggressive.  If you have a fat budget that has easy cuts available, no dependents, and plenty of hobbies that could generate income, then 4% is probably overly conservative.  Saving more money (and that's what the rolling average does in practice) is just one of a number of risk mitigation strategies for FIRE.