Author Topic: Financial Samurai says 4% rule is outdated  (Read 2362 times)

MikePolo4

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Financial Samurai says 4% rule is outdated
« on: August 18, 2020, 08:36:04 AM »
See this post: https://www.financialsamurai.com/proper-safe-withdrawal-rate/

I feel this article is a bit extreme, for sure. Though, is there a bit of truth? I've been shooting for a 3% withdrawal plan for an extra 1% peace of mind. Is even 3% risky given 10 year bond yields as he explains?

What are people's thoughts? I trust MMM more, but believe there is some data in this argument that should be assessed.

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2Birds1Stone

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Re: Financial Samurai says 4% rule is outdated
« Reply #1 on: August 18, 2020, 08:54:04 AM »
You fell for the clickbait, if you stop sharing his articles, maybe he will go away.

TheHardenedInvestor

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Financial Samurai says 4% rule is outdated
« Reply #2 on: August 18, 2020, 09:00:42 AM »
Iím a fan of FS and have been a long time subscriber. I like him because he pushes boundaries and doesnít sugar coat things. With that being said, I donít see how a 0.5% withdraw rate is reality. Mine as well just withdraw 0% at that point and work for life. Anyway, he bases that largely on the 10-year yield but your portfolio wonít be (shouldnít be) 100% in bonds. Even the original study and 4% rule paper suggested 50/50 split with a lean towards really a 75/50 split. I donít expect a 50/50 split portfolio retuning 0.5% over the next decade. So I guess itís based on what you think your return will be. I donít follow any ď% ruleĒ blindly. Just adapt every year and be very conservative. I think the point is to be very conservative. 4% is probably too high, but also has a high chance of being successful.
« Last Edit: August 18, 2020, 09:09:53 AM by TheHardenedInvestor »

Padonak

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Re: Financial Samurai says 4% rule is outdated
« Reply #3 on: August 18, 2020, 09:03:54 AM »
I dont disagree that 4% may be a little too high but im not going to read anything this prick wrote. He's a well known troll so fuck him.

2Birds1Stone

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Re: Financial Samurai says 4% rule is outdated
« Reply #4 on: August 18, 2020, 09:08:39 AM »
Iím a fan of FS and have been a long time subscriber.

The guy is an idiot/troll.

If you want really good information on SWR's from someone who is not primarily motivated by sensationalist titles and clickbait, check out Karsten (PHD in Economics/CFA) over at https://earlyretirementnow.com/safe-withdrawal-rate-series/

tl;dr, 4% will NOT hold up for retirements longer than 30 years, and valuations matter when choosing a SWR.

@TheHardenedInvestor makes a good point about not following any "rule" blindly, but at the same time, you have to have an IPS with a system in place to prevent too much tinkering and not sticking to a strategy because of whatever headlines/media is pushing.

The SWR series I linked is 30+ parts, and an EXCELLENT read.
« Last Edit: August 18, 2020, 09:23:14 AM by 2Birds1Stone »

erutio

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Re: Financial Samurai says 4% rule is outdated
« Reply #5 on: August 18, 2020, 09:09:39 AM »
sorry OP but had to report your post.  It's the second one on the exact same link.

terran

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Re: Financial Samurai says 4% rule is outdated
« Reply #6 on: August 18, 2020, 09:15:47 AM »
I've got to agree, "Financial Samurai says" is just about all you need to read to know that "some kind of complete BS" is the only thing that might finish the statement. He had some quality content way back when, but now he's just trolling the financial independence community for clicks/revenue.

Boll weevil

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Re: Financial Samurai says 4% rule is outdated
« Reply #7 on: August 18, 2020, 09:37:13 AM »
It depends on what your assumptions are.

The big variables I usually consider are how long it has to last, average annual returns, inflation, taxes, and health care.

I did a quick spreadsheet and found if you assume 60 year duration, 0 average annual returns, 3% increase to cover inflation, and no other increases to withdrawals (I.e. for health care or increased taxes), your initial withdrawal is 0.6%, which lines up with what he said. Drop it to 40 year duration, and your initial withdrawal can be 1.3%.

Assume positive annual returns and the initial percentage will go up. Assume increasing withdrawals towards the end of the duration due to health care and/or taxes, and the initial percentage goes down.

The 4% safe withdrawal rate is only a rule of thumb, and you really should be doing the calculations specifically for your situation and forecasts.


bacchi

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Re: Financial Samurai says 4% rule is outdated
« Reply #8 on: August 18, 2020, 09:42:48 AM »
I did a quick spreadsheet and found if you assume 60 year duration, 0 average annual returns, 3% increase to cover inflation, and no other increases to withdrawals (I.e. for health care or increased taxes), your initial withdrawal is 0.6%, which lines up with what he said. Drop it to 40 year duration, and your initial withdrawal can be 1.3%.

Try using -10% yoy and you'll never be able to retire.

</s>

KungfuRabbit

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Re: Financial Samurai says 4% rule is outdated
« Reply #9 on: August 18, 2020, 12:55:17 PM »
Bonds are so boring.  People that invest in 0.5% interest CDs or bonds with any large portion of their income are WAY too risk adverse.  You may indeed not lose net money, but you are guaranteed to have less spending power over time AND guaranteed not to gain money....why live like that...?

The simplest "safe enough" cash earners are dividend focused ETFs (average ~3-4% dividend yield, investing in large staple companies that tend to not have extreme price swings).  In that scenario your $1,000,000 investment could crank out $30,000 / year in dividends, and on top of that the lump sump will also grow over time.  Over the past 10 years Vanguards VYM tripled in value while paying out a 3% dividend, so if you retired in 2010 with $1,000,000 in there you would have started with a $30,000 dividend, and today you'd have $3,000,000 invested in there and be getting a $90,000 dividend - so after 10 years of retirement your Stache tripled and you bumped up your lifestyle into Spendypants territory guilt free!  And yes, the past decade has been extreme for capital growth, but the past 100 years that dividend payout would still have worked. 

Another income generator would be a series of CEFs (something I don't really see often on the MMM pages).  These pay out a "dividend" in the range of 6-8%, but the asset price doesn't change as much over time so it won't grow with inflation really (unless of course you only keep 3-4% of the payout, and re-invest the rest!).  In this scenario your $1,000,000 would generate ~$70,000 / year in cash flow.

And then there is another root MMM quality - ADAPT!  If you FIRE on a tight budget and the market crashes, tighten your belt further and / or find a temporary job - not the end of the world. 

Personally I'm somewhere between a SWAMI and a "one more year" and a "too chicken to ever likely pull the trigger" and "don't hate my job and would get bored with 40 more hours of time", so I'll likely FIRE needing like a 2% SWR, or maybe even less - who knows.  My plan is something like 50% in dividend ETFs and CEFs to hit my cash flow, 25% in broad market ETFs to be boring, 15-20% in individual stocks because YOLO, and 5-10% in cash that I may or may not put in CDs because is 0.5% interest really worth the hassle / not being able to take it out if you need it? 

Anyhow.  I think the 4% rule is fine, as long as you accept the fact you need to invest in stocks and not bonds, and there is a non-zero chance that you'll need to go back to work at least temporarily. 

Padonak

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Re: Financial Samurai says 4% rule is outdated
« Reply #10 on: August 18, 2020, 01:04:40 PM »
Bonds are so boring.  People that invest in 0.5% interest CDs or bonds with any large portion of their income are WAY too risk adverse.  You may indeed not lose net money, but you are guaranteed to have less spending power over time AND guaranteed not to gain money....why live like that...?

The simplest "safe enough" cash earners are dividend focused ETFs (average ~3-4% dividend yield, investing in large staple companies that tend to not have extreme price swings).  In that scenario your $1,000,000 investment could crank out $30,000 / year in dividends, and on top of that the lump sump will also grow over time.  Over the past 10 years Vanguards VYM tripled in value while paying out a 3% dividend, so if you retired in 2010 with $1,000,000 in there you would have started with a $30,000 dividend, and today you'd have $3,000,000 invested in there and be getting a $90,000 dividend - so after 10 years of retirement your Stache tripled and you bumped up your lifestyle into Spendypants territory guilt free!  And yes, the past decade has been extreme for capital growth, but the past 100 years that dividend payout would still have worked. 

Another income generator would be a series of CEFs (something I don't really see often on the MMM pages).  These pay out a "dividend" in the range of 6-8%, but the asset price doesn't change as much over time so it won't grow with inflation really (unless of course you only keep 3-4% of the payout, and re-invest the rest!).  In this scenario your $1,000,000 would generate ~$70,000 / year in cash flow.

And then there is another root MMM quality - ADAPT!  If you FIRE on a tight budget and the market crashes, tighten your belt further and / or find a temporary job - not the end of the world. 

Personally I'm somewhere between a SWAMI and a "one more year" and a "too chicken to ever likely pull the trigger" and "don't hate my job and would get bored with 40 more hours of time", so I'll likely FIRE needing like a 2% SWR, or maybe even less - who knows.  My plan is something like 50% in dividend ETFs and CEFs to hit my cash flow, 25% in broad market ETFs to be boring, 15-20% in individual stocks because YOLO, and 5-10% in cash that I may or may not put in CDs because is 0.5% interest really worth the hassle / not being able to take it out if you need it? 

Anyhow.  I think the 4% rule is fine, as long as you accept the fact you need to invest in stocks and not bonds, and there is a non-zero chance that you'll need to go back to work at least temporarily.

Could you please give some examples of good CEFs which can be bought using large brokerages such as Vanguard or Fidelity?

MrThatsDifferent

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Re: Financial Samurai says 4% rule is outdated
« Reply #11 on: August 18, 2020, 01:04:56 PM »
I wonder if the OP (with all of 10 posts) is the FS trying to get people to click so he keeps getting add money. Heís only saying controversial shit like this to keep that income stream. Please ignore him and that site.

rothwem

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Re: Financial Samurai says 4% rule is outdated
« Reply #12 on: August 18, 2020, 01:13:54 PM »
I wonder if the OP (with all of 10 posts) is the FS trying to get people to click so he keeps getting add money. Heís only saying controversial shit like this to keep that income stream. Please ignore him and that site.

Yeah, is the OP just a shill or bot to drive traffic to the blog?

Maybe I need that business plan. Iíll write a blog about controversial things and then make bots to post about it on forums to drive ad renvue.

Now letís brainstorm some good controversial topics, Iíll venmo $5 per good idea.

MikePolo4

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Re: Financial Samurai says 4% rule is outdated
« Reply #13 on: August 19, 2020, 07:44:01 AM »
Haha not a bot, but just more risk adverse. Hoping that this community could put me at ease. This did help.

I did fall for the clickbait. I have never read FS in the past but Google recommended the article given my interest if FI.

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terran

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Re: Financial Samurai says 4% rule is outdated
« Reply #14 on: August 19, 2020, 08:32:11 AM »
Here's a quality series that has a (slightly) more pessimistic/realistic (depending on your opinion) view of withdrawal rates than the 4% "rule" that should make you better informed and help put you at ease: https://earlyretirementnow.com/safe-withdrawal-rate-series/

2Birds1Stone

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Re: Financial Samurai says 4% rule is outdated
« Reply #15 on: August 19, 2020, 08:39:57 AM »
Here's a quality series that has a (slightly) more pessimistic/realistic (depending on your opinion) view of withdrawal rates than the 4% "rule" that should make you better informed and help put you at ease: https://earlyretirementnow.com/safe-withdrawal-rate-series/

This was already suggested upthread ;)

terran

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Re: Financial Samurai says 4% rule is outdated
« Reply #16 on: August 19, 2020, 01:14:29 PM »
Here's a quality series that has a (slightly) more pessimistic/realistic (depending on your opinion) view of withdrawal rates than the 4% "rule" that should make you better informed and help put you at ease: https://earlyretirementnow.com/safe-withdrawal-rate-series/

This was already suggested upthread ;)

So it was. Can't be suggested enough though ;)

MrThatsDifferent

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Re: Financial Samurai says 4% rule is outdated
« Reply #17 on: August 19, 2020, 02:12:36 PM »
Haha not a bot, but just more risk adverse. Hoping that this community could put me at ease. This did help.

I did fall for the clickbait. I have never read FS in the past but Google recommended the article given my interest if FI.

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If you want to learn, read all of MMMís articles, start with his most popular and work backwards. So much good stuff in there that isnít self serving like FS, who is loathsome to me.

ericbonabike

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Re: Financial Samurai says 4% rule is outdated
« Reply #18 on: August 20, 2020, 07:18:52 AM »
There's a ton of information out there.  Some of it says the 4% is a terrible idea because you will die broke.  Others say 4% is a terrible idea because you will die super wealthy (i.e., waste time working by acquiring too much money).

I read a very good book recently, which performed what I thought was an exhaustive analysis on the subject.  He looked at the 4% rule and he determined that in most cases, you die with way too much money, but in a few years, you die broke.  The issues associated with the 4% rule is namely the annual rebalancing which occurs regardless of market conditions.  In poor markets, you're spending your stocks.  And in good markets you're spending your bonds.  Which runs counter to what might be considered optimal.

If you're interested, here's a link. It's very technical, and it took me a good bit of reading to follow along.  I have some understanding of statistical terms (engineer) but I have zero formal financial training.   

https://www.amazon.com/Living-Off-Your-Money-Retirement/dp/0997403403/ref=sr_1_2?crid=2DFEITSPJO46U&dchild=1&keywords=living+off+your+money+by+michael+mcclung&qid=1597929046&sprefix=living+off+your%2Caps%2C235&sr=8-2


The last time I ran numbers through his spreadsheet, he recommended a SWR of ~4.4%.