Author Topic: cFIREsim versus 4% rule  (Read 2332 times)

ysette9

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cFIREsim versus 4% rule
« on: September 18, 2016, 12:29:47 PM »
I imagine this has been covered somewhere already, but the search engine is down for me right now. Besides, I can just imaging trying to narrow down a topic with keywords "cFIREsim" and "4% rule" on these forums. :)

I have been running and re-running lots of FIRE calculations on my multiple spreadsheets, as well as playing around with various tweaks of my scenarios in the cFIREsim calculator. (BTW, I love that tool.) The observation I consistently make is that the 4% rule seems to be more conservative than running real simulations. For all of the hand-wringing that can happen here about how "this time is different" and "I need a fuzzy security blanket to sleep at night" and therefore only 3.5% or 3% will do, I am finding myself thinking that I would be comfortable pulling the plug when cFIREsim gives me an ~80% success rate, which is a smaller stash than the 4% rule would indicate. Has anyone else observed that and what are your thoughts?

MDM

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Re: cFIREsim versus 4% rule
« Reply #1 on: September 18, 2016, 02:18:25 PM »
...I would be comfortable pulling the plug when cFIREsim gives me an ~80% success rate, which is a smaller stash than the 4% rule would indicate. Has anyone else observed that and what are your thoughts?
The 4% "rule" was developed using a requirement of ~95%-100% success rate.  If one changes the requirement, it's not surprising that the conclusion changes.

See 192.tif - Bengen1.pdf, 199802retire - retirement-savings-choosing-a-withdrawal-rate-that-is-sustainable.pdf, etc.

ysette9

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Re: cFIREsim versus 4% rule
« Reply #2 on: September 18, 2016, 04:00:30 PM »
Thanks for pointing that out. It seems so simple but I think that may be a subtle point that is missed in the discussion about the 4% rule. I know if I get 95% chance of success then I will likely think I have over-saved.

JLee

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Re: cFIREsim versus 4% rule
« Reply #3 on: September 18, 2016, 04:24:17 PM »
Thanks for pointing that out. It seems so simple but I think that may be a subtle point that is missed in the discussion about the 4% rule. I know if I get 95% chance of success then I will likely think I have over-saved.

That would be why, when you see people posting about how they only feel comfortable with a 2-3% WR, they get flooded with reminders that 4% is already pretty darn safe!

SwordGuy

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Re: cFIREsim versus 4% rule
« Reply #4 on: September 18, 2016, 05:41:49 PM »
I think it really depends on one's personal situation.

80% success rate:

Perfect for a pair of able-bodied folks, in their 30's or 40's, with low enough expenses that part time work would fill the gaps to avoid a sequence of returns risk.

95% success rate:

Pair of older folks, less able to do low-wage work due to health issues, with a higher level of expenses, and careers that would not allow for an easy re-entry.


csprof

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Re: cFIREsim versus 4% rule
« Reply #5 on: September 18, 2016, 06:29:30 PM »
I think it really depends on one's personal situation.

80% success rate:

Perfect for a pair of able-bodied folks, in their 30's or 40's, with low enough expenses that part time work would fill the gaps to avoid a sequence of returns risk.

95% success rate:

Pair of older folks, less able to do low-wage work due to health issues, with a higher level of expenses, and careers that would not allow for an easy re-entry.

And perfect if your expenses have some flexibility.  If 4.x% includes an annual vacation to the Bahamas that you can forego in a down year, you're probably in good shape.

This is discussed at some length, with references to more papers & analysis, in the "Investor Alley" sticky:

http://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/

boarder42

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Re: cFIREsim versus 4% rule
« Reply #6 on: September 19, 2016, 06:01:18 AM »
so cFIREsim just compares it to retiring in any given year in history and how the market performed after that.  sequence of returns matters the most and it matters the most in the first 5-10 years post FIRE.  so looking at indicators for why it failed in various years is key.  retiring in 1999 b/c you hit the 4% rule would have been bad, why b/c the market was over valued by alot.  personally while cFIREsim is great to test different withdrawal strategies.  i tend to look to the shiller PE ratio to determine what a reasonable SWR will be.  Mad Fientist examined it ... as an application to FIRE of Kitces work.  its all quite interesting how the inverse of the shiller PE is very accurate at predicting your SWR for retirement.

http://www.madfientist.com/safe-withdrawal-rate/

https://www.kitces.com/blog/understanding-sequence-of-return-risk-safe-withdrawal-rates-bear-market-crashes-and-bad-decades/

so even better than just saying it was successful x% of the time you can now you past historical data and the shiller PE to determine what SWR will be successful for your personal retirement date.

is it fool proof NO.  but is it better than just blindly using a 4% rule yes.  personally our plan is a 3.8% rate for a bit of buffer... but really it will come down to what the shiller PE ratio is.  if we hit 3.8% SWR and its showing 2% we'll likely wait a few years and keep our jobs.  if its showing 4.5% and we have hit 4% we'll probably quit.