2.7% rule if you take into account not just US and longer withdrawal periods

[beee]

Just wanted to share a new video from Ben Felix. Really enjoyed it.
https://youtu.be/1FwgCRIS0Wg

What do you think?

I personally don't have a % goal. I have an age goal of 40.
Looks like a good age to start a new chapter in life but, of course, things can change.

[mistymoney]

thanks beee, I found it interesting, but didn't think it was a compelling argument regarding the dataset they compiled.

so the premise is tht the US stock market models that the 4% rule was derived from was just "too good", "too lucky" so has an inflated SWR recommendation, so they mixed in every developed market across the globe they could access data for and modelled from the 1890's and came up with 2.7%.

Seems to me that either the US mainttains its 'luck' and we go with 4% - or the luck cracks and we're going to be at 1% or something super low - not an average  or number inbetween our luck and other markets nonluck.

[beee]

Seems to me that either the US mainttains its 'luck' and we go with 4% - or the luck cracks and we're going to be at 1% or something super low - not an average  or number inbetween our luck and other markets nonluck.

Why do you think in extremes?
There're a whole lot of possibilities between the 4% of "as lucky as US before" and 1% of "nonluck".

I liked the framing of 4% not just as a "worst case scenario" but as a "worst case scenario in the luckiest stock market in history" with the most available historical data.

[mistymoney]

Seems to me that either the US mainttains its 'luck' and we go with 4% - or the luck cracks and we're going to be at 1% or something super low - not an average  or number inbetween our luck and other markets nonluck.

Why do you think in extremes?
There're a whole lot of possibilities between the 4% of "as lucky as US before" and 1% of "nonluck".

I liked the framing of 4% not just as a "worst case scenario" but as a "worst case scenario in the luckiest stock market in history" with the most available historical data.

I'm not thinking in extremes, I'm thinking of the data they used. And there was no information on how they combined it, so who knows? Could be any which way. But if the US alone is 4%, and the US mixed with everything else is 2.7%, then everything else without the US is well below 2.7%. So either the luck is good at 4% or the luck is not and then you are well sub of 2.7%, and I just picked 1. Maybe it is 2? Was the data weighted by population size of the market? IDK!

[JAYSLOL]

2.7% seems very conservative, they think the market won’t even beat inflation over the next what 30-50 years?  I doubt it.  I haven’t actually clicked the link, but my take is the problem with this is they are using a strict % WR and not using one where someone has a reasonable year or so cash cushion on top as well as selling bonds first in a down stock market rather than selling the fixed %.  If you have your portfolio set to a bit too much “risk” and have no cash cushion or frugality-related advantages, and you have to pick a 100% foolproof number, then sure maybe you need 2.7% to offset the sequence of returns risk of that portfolio for 100% of cases, but the reality for the ER crowd, not so much.  4% is fine

[maizefolk]

The thing to remember is that what makes the USA's economic time series data over the last century and a half exceptional is that we didn't have either world war fought on our soil, destroying our infrastructure, overthrowing our governments, in many cases making our currency inflate away into worthlessness, and killing a sizable percentage of an entire generation of young people.

If you look at the few other "developed" economies with a century plus of economic data (places like Canada, Australia, South Africa, and even the UK (bombed but never invaded)) which didn't have world wars, or the spanish civil war, fought on their soil and in their cities and they have safe withdrawal rates roughly comparable to the USA. 

We may or may not remain lucky in the sense of not having a major war fought on US soil during our lifetimes. But if we turn out to be unlucky, we're going to be in for major problems and dislocations regardless of whether we are still working or have FIREd on a 4% withdrawal rate.

[wageslave23]

Seems to me that either the US mainttains its 'luck' and we go with 4% - or the luck cracks and we're going to be at 1% or something super low - not an average  or number inbetween our luck and other markets nonluck.

Why do you think in extremes?
There're a whole lot of possibilities between the 4% of "as lucky as US before" and 1% of "nonluck".

I liked the framing of 4% not just as a "worst case scenario" but as a "worst case scenario in the luckiest stock market in history" with the most available historical data.

I like that quote "worst case scenario in the luckiest stock market in history". I think that sums up the 4% rule quite nicely.  4% is good rule of thumb but you better have back up plans.

[mistymoney]

The thing to remember is that what makes the USA's economic time series data over the last century and a half exceptional is that we didn't have either world war fought on our soil, destroying our infrastructure, overthrowing our governments, in many cases making our currency inflate away into worthlessness, and killing a sizable percentage of an entire generation of young people.

If you look at the few other "developed" economies with a century plus of economic data (places like Canada, Australia, South Africa, and even the UK (bombed but never invaded)) which didn't have world wars, or the spanish civil war, fought on their soil and in their cities and they have safe withdrawal rates roughly comparable to the USA. 

We may or may not remain lucky in the sense of not having a major war fought on US soil during our lifetimes. But if we turn out to be unlucky, we're going to be in for major problems and dislocations regardless of whether we are still working or have FIREd on a 4% withdrawal rate.

the mention this, and call that part of the "luck"

[GilesMM]

2.7% would be a robust SWR but one would need to be prepared to increase spending later in life to address potential large surpluses.

[reeshau]

"The good news is that withdrawal rates are not that useful, anyway.  We don't use them in financial planning.  The constant withdrawals used in safe withdrawal rate analysis are inferior to variable withdrawals for sustainable spending."  (8:47)


Whenever a topic like this comes up, I think many people in the conversation aren't familiar with Bill Bengan's actual study, and how humble it is.  It was never meant to be a generalized pronouncement of a financial law--it is explicit about the historical context of its conclusion.  And the variability is also overt, too.  Bengen called 4% SAFEMAX, which then became the safe withdrawal rate.  But within his dataset, a retiree in a particular year could have withdrawn as much as 10%.  The 4% rule is therefore incredibly conservative, or--viewed from the other way---incredibly risky, with the risk being having a huge net worth at death, and not using that money to maximize your happiness in your life.

In this way, it is what it is--a simple model, developed by a single professional practitioner, for his own purposes as a financial planner, using a spreadsheet on his own 1990's PC.  It was the beginning of answering the questions, not the be-all-and-end-all.  Bengen never proposed it was that.

[bacchi]

TIPS yields are now positive. You could buy 30 TIPS and get higher than 2.7% for 30 years.

[vand]

TIPS yields are now positive. You could buy 30 TIPS and get higher than 2.7% for 30 years.

Except that doesn't mean they can't fall in price in between now and then, forcing you to become a forced seller at low prices and running into SORR problems. That's the whole crux of the problem for retirees - good returns AND favourable order of those returns.

[bacchi]

TIPS yields are now positive. You could buy 30 TIPS and get higher than 2.7% for 30 years.

Except that doesn't mean they can't fall in price in between now and then, forcing you to become a forced seller at low prices and running into SORR problems. That's the whole crux of the problem for retirees - good returns AND favourable order of those returns.

Why sell? Just buy TIPS expiring in 1 yr, 2 yrs, 3-30 yrs, etc. The secondary market for TIPS is huge.

The only disadvantage is if you need a large emergency withdrawal. Saving an additional year or two would help with that and there'd still be a yield of >2.7% (1/31) even if there was some par slippage.

[ChpBstrd]

The thing to remember is that what makes the USA's economic time series data over the last century and a half exceptional is that we didn't have either world war fought on our soil, destroying our infrastructure, overthrowing our governments, in many cases making our currency inflate away into worthlessness, and killing a sizable percentage of an entire generation of young people.

If you look at the few other "developed" economies with a century plus of economic data (places like Canada, Australia, South Africa, and even the UK (bombed but never invaded)) which didn't have world wars, or the spanish civil war, fought on their soil and in their cities and they have safe withdrawal rates roughly comparable to the USA. 

We may or may not remain lucky in the sense of not having a major war fought on US soil during our lifetimes. But if we turn out to be unlucky, we're going to be in for major problems and dislocations regardless of whether we are still working or have FIREd on a 4% withdrawal rate.

A lot of people will ask "what does this have to do with the NEXT 50 years." I think the answer for them is that the contemporary United States is the most consumeristic, pro-business nation to ever have existed. People in the U.S. work long hours with little vacation, and then they go and blow their earnings on things like dog sweaters, leaf blowers, fast food, $20 car washes, ringtones, luxury cars made to resemble off-road vehicles, and "smart" toasters. The lack of an effective social support net, unions, or single-payer healthcare system is designed to force people who might have otherwise worked part time or retired early to contribute more productivity before they die. This way, more GDP is extracted from every body before it dies.

There's nowhere else in the world as obsessed with earning status by making money and blowing it on luxury items like leather-clad SUVs and jacuzzi tubs. To some extent, American culture is turning this place into a giant work camp, devoted to the production and consumption of wealth above all other priorities, and enforcing consequences against those who don't contribute an above-average amount. Consider the choices Americans make to put their work above other priorities like family, health, the pursuit of knowledge, or any other life goal. Also consider the consequences of not being a workaholic in a HCOL area: homelessness, a lack of access to medical care, hunger, and death from freezing or crime are all on the table.

So if the US system is designed to maximize shareholder value, that's where I want to own shares. Let the Spanish have their siestas. Let the Dutch take a month per year of vacation. Let the Italians go on strike. I want to put my investment dollars in a place where people die at their desks, and where poor people under the influence of their cell phones vigorously defend the right of corporations and billionaires to pay no taxes.