Is Betterment trying to scare us into not believing the 4% rule?

[FIKris]

Has anyone else read this article? https://www.betterment.com/resources/retirement/investment-income-retirement/why-the-4-percent-rule-is-broken/  What do you think of their simulation that "shows" that a retiree will deplete their savings in they rely on the 4% rule? I don't like the fact that they are attempting to simulate the future...it seems like they're trying to scare us into thinking we need their retirement advisory service. 

[arebelspy]

Some critical analysis here: http://forum.mrmoneymustache.com/investor-alley/betterment%27s-blog-post-about-the-4-rule/

Short answer: Yes, sort of. The fine print and article say different things.

[wtjbatman]

Betterment isn't the only one questioning the 4% SWR (if that's what they're doing). I would feel comfortable saying the majority of Bogleheads believe the "4% rule" shouldn't be blindly followed going forward.

Not that everyone on the Bogleheads forum is a model of restraint or frugality, lol.

[JCfire]

Betterment isn't the only one questioning the 4% SWR (if that's what they're doing). I would feel comfortable saying the majority of Bogleheads believe the "4% rule" shouldn't be blindly followed going forward.

Not that everyone on the Bogleheads forum is a model of restraint or frugality, lol.

I'm in finance for my day job, and want to add some perspective from outside the narrowly defined "retirmenet SWR" discussion.  There are many legitimate reasons to think that Global GDP will likely grow slower on trend in the next 50 years than in the prior 100.  By construction, GDP growth is equal to Number of Workers Growth + Hours/Worker Growth + Productivity growth.  Also, it is impossible for corporate earnings to grow faster than GDP forever on an exponential basis (otherwise they would eventually exceed global GDP which is obviously impossible). 

Fact number one, is that global population growth is declining, and will continue to do so for at least the next 20 years or so.  It's declining most rapidly in the most productive countries.  Fact number two, we've seen massive productivity growth in the most populous country in the world by modernizing its technology and investing in its capital stock at a rate that now must decline as it more closely resembles a modern economy.  We may do something similar in India to buy another 20 years, but at that point we're out of "world's largest countries" to modernize.  Global productivity growth will begin to resemble current developed market productivity growth, which is much slower.

Also, as standard of living increases, hours worked per worker tends to decrease, although that's less reliable.

So it's fairly likely that global corporate earnings growth will be slightly slower during our collective retirement than on the period that we're basing our SWR on.  This is obviously eventually an obstacle for total investment returns, since P/E ratios are unlikely to expand to infinity.  So an interesting question would be this: if global investment returns had been 1% lower every year in our background data, what would SWR be?  It wouldn't be 1% lower, it would be something less.  So I think you can have smart discussions around reducing SWR by maybe 50% as much as the slowdown in global GDP growth, and that might result in a 3% or 3.5% SWR depending on how much the slowdown in global growth is.

[arebelspy]

Betterment isn't the only one questioning the 4% SWR (if that's what they're doing). I would feel comfortable saying the majority of Bogleheads believe the "4% rule" shouldn't be blindly followed going forward.

Not that everyone on the Bogleheads forum is a model of restraint or frugality, lol.

Pretty much no one thinks it should be followed blindly.

Flexibility is key to a good FIRE financial plan.

That doesn't make bad data or fear mongering about it okay.

[wtjbatman]

Betterment isn't the only one questioning the 4% SWR (if that's what they're doing). I would feel comfortable saying the majority of Bogleheads believe the "4% rule" shouldn't be blindly followed going forward.

Not that everyone on the Bogleheads forum is a model of restraint or frugality, lol.

Pretty much no one thinks it should be followed blindly.

Flexibility is key to a good FIRE financial plan.

Good point!

[skyrefuge]

So an interesting question would be this: if global investment returns had been 1% lower every year in our background data, what would SWR be?

According to cFIREsim, for a 75/25 stock/bond portfolio with 0% fees, a 4% WR resulted in a 93.9% success rate.

If we add 1% fees (simulating 1% lower investment returns), we achieve the same 93.9% success rate with a 3.6% WR.

Of course for 3.6% to be the real SWR going forward, we would also have to hit the sustained high inflation of the 1970s along with those lowered investment returns. Because the SWR does not come from some average of historical periods, it comes from the worst historical periods, and inflation played a bigger role than investment returns in making that period the "worst".

Also, economic forecasting is pretty much impossible, so your rational-sounding prediction is likely to be laughed at and dismissed by reality anyhow.

[minority_finance_mo]

This isn't really a simulation problem, however. cFIREism is a simulation based on historical inputs that someone has compiled, so it wouldn't be able to account for future fundamental changes in market trends that do not follow the patterns of previous decades.

[skyrefuge]

This isn't really a simulation problem, however. cFIREism is a simulation based on historical inputs that someone has compiled, so it wouldn't be able to account for future fundamental changes in market trends that do not follow the patterns of previous decades.

The 4% SWR that is the basis of this thread came out of cFIREsim-style historical simulations, so it seems entirely appropriate to use the same mechanism to analyze objections to that 4% SWR. The only way that "future fundamental changes in market trends" were ever related to the 4% SWR was by the assumption that "the next 30 years are likely to be no worse than any of the ~100 30-year periods in the past." Because that research assumed (wisely, IMO) that looking to the past, while woefully imperfect, was still a better way to predict the future than economic forecasting.

Vanguard's Long-Term Treasury fund returned a ridiculous 25% last year, in about the 4th straight year that economists were sure interest rates would rise and kill bond prices. Whoops. If predicting one year ahead is that hard, it's silly to even try to predict 30 years ahead.

[FIKris]

Thanks Arebelspy for the link to the other thread related to this, and thanks everyone for your perspective! 

[aspiringnomad]

Betterment isn't the only one questioning the 4% SWR (if that's what they're doing). I would feel comfortable saying the majority of Bogleheads believe the "4% rule" shouldn't be blindly followed going forward.

Not that everyone on the Bogleheads forum is a model of restraint or frugality, lol.

I'm in finance for my day job, and want to add some perspective from outside the narrowly defined "retirmenet SWR" discussion.  There are many legitimate reasons to think that Global GDP will likely grow slower on trend in the next 50 years than in the prior 100.  By construction, GDP growth is equal to Number of Workers Growth + Hours/Worker Growth + Productivity growth.  Also, it is impossible for corporate earnings to grow faster than GDP forever on an exponential basis (otherwise they would eventually exceed global GDP which is obviously impossible). 

Fact number one, is that global population growth is declining, and will continue to do so for at least the next 20 years or so.  It's declining most rapidly in the most productive countries.  Fact number two, we've seen massive productivity growth in the most populous country in the world by modernizing its technology and investing in its capital stock at a rate that now must decline as it more closely resembles a modern economy.  We may do something similar in India to buy another 20 years, but at that point we're out of "world's largest countries" to modernize.  Global productivity growth will begin to resemble current developed market productivity growth, which is much slower.

Also, as standard of living increases, hours worked per worker tends to decrease, although that's less reliable.

So it's fairly likely that global corporate earnings growth will be slightly slower during our collective retirement than on the period that we're basing our SWR on.  This is obviously eventually an obstacle for total investment returns, since P/E ratios are unlikely to expand to infinity.  So an interesting question would be this: if global investment returns had been 1% lower every year in our background data, what would SWR be?  It wouldn't be 1% lower, it would be something less.  So I think you can have smart discussions around reducing SWR by maybe 50% as much as the slowdown in global GDP growth, and that might result in a 3% or 3.5% SWR depending on how much the slowdown in global growth is.

Also work in finance, but I am much more optimistic than you. In the short to medium term, the US is back on track and lucky for us potential early retirees (at least from the SWR perspective) Mustachianism isn't catching on like wildfire. Longer term, if the techies are to be believed, we're on the cusp of some interesting things in AI. That could mean exponential growth in technological productivity and higher corporate profits. Demand may shift substantially as job markets are disrupted, but a well-diversified portfolio of stock should capture the overall gains. Finally, not sure where you're getting your global growth projections, but while population is indeed declining in the advanced economies, overall it is still growing, and still quite rapidly in developing economies (i.e., those most primed to benefit from innovation).

[milesdividendmd]

Betterment isn't the only one questioning the 4% SWR (if that's what they're doing). I would feel comfortable saying the majority of Bogleheads believe the "4% rule" shouldn't be blindly followed going forward.

Not that everyone on the Bogleheads forum is a model of restraint or frugality, lol.

I'm in finance for my day job, and want to add some perspective from outside the narrowly defined "retirmenet SWR" discussion.  There are many legitimate reasons to think that Global GDP will likely grow slower on trend in the next 50 years than in the prior 100.  By construction, GDP growth is equal to Number of Workers Growth + Hours/Worker Growth + Productivity growth.  Also, it is impossible for corporate earnings to grow faster than GDP forever on an exponential basis (otherwise they would eventually exceed global GDP which is obviously impossible). 

Fact number one, is that global population growth is declining, and will continue to do so for at least the next 20 years or so.  It's declining most rapidly in the most productive countries.  Fact number two, we've seen massive productivity growth in the most populous country in the world by modernizing its technology and investing in its capital stock at a rate that now must decline as it more closely resembles a modern economy.  We may do something similar in India to buy another 20 years, but at that point we're out of "world's largest countries" to modernize.  Global productivity growth will begin to resemble current developed market productivity growth, which is much slower.

Also, as standard of living increases, hours worked per worker tends to decrease, although that's less reliable.

So it's fairly likely that global corporate earnings growth will be slightly slower during our collective retirement than on the period that we're basing our SWR on.  This is obviously eventually an obstacle for total investment returns, since P/E ratios are unlikely to expand to infinity.  So an interesting question would be this: if global investment returns had been 1% lower every year in our background data, what would SWR be?  It wouldn't be 1% lower, it would be something less.  So I think you can have smart discussions around reducing SWR by maybe 50% as much as the slowdown in global GDP growth, and that might result in a 3% or 3.5% SWR depending on how much the slowdown in global growth is.

This analysis assumes that GDP growth and stock market returns are correlated.  That is both intuitive, and (suprisingly) unsupported by the data. 

http://gallery.mailchimp.com/6750faf5c6091bc898da154ff/files/global_investment_returns_yearbook_2014.pdf  (read the section on "the growth puzzle.")
OF course earnings growth can't outpace GDP growth forever, but earnings growth certainly can continue to to be uncorrelated to GDP growth.

(This is neither an argument for or against the wisdom of a 4% SWR.)

[JCfire]

So an interesting question would be this: if global investment returns had been 1% lower every year in our background data, what would SWR be?

According to cFIREsim, for a 75/25 stock/bond portfolio with 0% fees, a 4% WR resulted in a 93.9% success rate.

If we add 1% fees (simulating 1% lower investment returns), we achieve the same 93.9% success rate with a 3.6% WR.

Of course for 3.6% to be the real SWR going forward, we would also have to hit the sustained high inflation of the 1970s along with those lowered investment returns. Because the SWR does not come from some average of historical periods, it comes from the worst historical periods, and inflation played a bigger role than investment returns in making that period the "worst".

Also, economic forecasting is pretty much impossible, so your rational-sounding prediction is likely to be laughed at and dismissed by reality anyhow.

Economic forecasting is in fact not "pretty much impossible".  It depends on your objectives.  If you want to forecast next year's GDP to within 0.01% accuracy, sure its impossible.  If you want to guess whether growth will be faster/slower over the next 50 years on average, much more attainable.  Helll, half of GDP growth is just population growth, SURELY you believe that to be forecastable on trend, right?

Also to milesdividend's point -- GDP/return correllations don't hold up over short periods (like annual), but they are mathematically certain to hold up over sufficiently long periods.  No matter how small earnings are as a fraction of global GDP, if they grow 1% faster than global GDP indefinitely, they would eventually have to exceed global GDP, which is plainly impossible.

The same logic applies to the rejoinder of "if it's so hard to forecast one year, longer periods must be even harder".  Let me give an analogy.  If I play one hand of poker against Phil Ivey, the best player in the world, I have no idea who would win.  If I play 10,000 hands of poker against Phil Ivey, I'm certain he will win.  Similarly, for a year or two GDP may be 5% higher or lower than I expect, whether it's some fancy AI research or biotech breakthrough or a bubble bursting or whatever.  But trend productivity growth is very resistant to change, as are trends in fertility rates, mortality rates, average retirement age, average labor force participation, and average hours worked.  Over the course of the multiple economic cycles that make up our retirements, it's not one timely technological breakthrough that defines GDP -- even the computer revolution left US productivity growth very similar to 100 year averages over the course of the last two decades.  With the rate of hours-worked growth, globally, unambiguously certain to de-accelerate between now and when I die, likely by more than a full percentage point, unless productivity growth doubles it is certain that GDP growth will on average be slower than the CFIREsim period.  Productivity growth in large emerging markets shows diminishing marginal benefits from capital investments, which means that the easy 10% growth years of the world's largest country are behind us.  The productivity growth rate of the worlds other 4 largest economies have been incredibly stable on trend for a very long time.  I think it's a pretty simple argument once you understand the identity of GDP growth = working population growth * productivity growth, but I don't expect to convince everybody with an internet post.

Thanks for the 3.6% result from cFIREsim, that's a big help! 

[aspiringnomad]

Right. Not trying to be argumentative but anyone who has taken econ 102 understands GDP construction. Productivity does not necessarily make up half of it. It is a factor that drives some variable portion of the whole. Plus, as I said, population is still projected to grow rapidly in those countries that derive higher marginal gains from productivity growth. Now, if I held a portfoilo of all European or Japanese equities with little exposure to other markets, I would be seriously concerned about my SWR. They'll probably underperform on the productivity side and definitely underperform on the demographic side. But I don't, so I'm not.

Edited to fix typos

[TreeTired]

With global interest rates extremely low and possibly heading lower,  it seems reasonable to me that a "four percent rule" that worked historically when interest rates were higher may not work in the future. 

[Eric]

With global interest rates extremely low and possibly heading lower,  it seems reasonable to me that a "four percent rule" that worked historically when interest rates were higher may not work in the future.

There's nothing particularly unique about today's interest rates.

[Zummbot]

"The four most dangerous words in investing are: 'this time it's different.'" Sir John Templeton

[JCfire]

Right. Not trying to be argumentative but anyone who has taken econ 102 understands GDP construction. Productivity does not necessarily make up half of it. It is a factor that drives some variable portion of the whole. Plus, as I said, population is still projected to grow rapidly in those countries that derive higher marginal gains from productivity growth. Now, if I held a portfoilo of all European or Japanese equities with little exposure to other markets, I would be seriously concerned about my SWR. They'll probably underperform on the productivity side and definitely underperform on the demographic side. But I don't, so I'm not.

Edited to fix typos

"Still rapidly", but I reiterate still slower than the last 50 years, in each of the 20 or 30 largest economies in the world.  Productivity growth does not "necessarily" make up half of global GDP growth, but in actual fact it has (in round numbers). 

It is simply fact that population growth will be slower for the next 50 years than the past 50, and that productivity growth in industrialized countries has never really changed much on trend, and that unless one of those two things changes GDP growth will be somewhat slower on trend.  Maybe we'll have a "productivity miracle" like the late 1990s that somehow persists for the rest of my life, but I won't be counting on it.  And I know a precise maximum number of people who could possibly be turning 18 years old 17 years from now, so workforce growth for at least a couple of decades is really pretty easy to make broad directional forecasts about.  But if the religion in these parts is that "forecasts are bad", I'll stop bashing my head against the wall.

[Bob W]

Believing in a 4% SWR is just that "believing."   Nothing more nothing less.  Anyone who says they can predict the future 50 years out is itching for a fight.  Especially when their predictions are based on the past.   Let's please remind ourselves that "past performance is no guarantee of future performance."    Please, please quit using the long term historic data points as if they somehow indicate future data points.   

One could be reasonably certain that if they retire very early they would enjoy 4 or 5 very nice years of FI as a young person.   That in my opinion trumps the hope that working until 65 and still having 4 or 5 nice years.   

So don't "believe" in SWR but do believe that a very early out will lead to some nice times as a young person.  Then reevaluate your plan every 4-5 years. 

[arebelspy]

Believing in a 4% SWR is just that "believing."   Nothing more nothing less.

In the same way that believing when I get in the car for a five mile ride I will not die in an accident along the way is just "believing," yes.

In both cases though, the catastrophic outcome has a low probability, can be lessened with preparation, and the outcome can be mitigated with planning.