A good summary of the 4% "rule"

[ToTheMoon]

Hi all,

I just read this article by a fee for service financial planner.  It  seems to be a decent summary of the 4% rule, and how to best use it.

https://edrempel.com/reliably-maximize-retirement-income-4-rule-safe/

Is there anything you would add?  Caution about?

(*This is not an ad for his site - we used to work with him a few years back and I still get his emails.)

[ToTheMoon]

Ah yes,

Those points are critical and are not mentioned in this particular article.  Thank you :)

[Rosy]

J.L. Collins has a new book out - I'm about to order it from my library, which apparently has an in-depth chapter on the 4% rule that everyone, (well, here on MMM:), commented on as being outstanding, bringing up points they either hadn't considered or didn't know about.

[rockstache]

J.L. Collins has a new book out - I'm about to order it from my library, which apparently has an in-depth chapter on the 4% rule that everyone, (well, here on MMM:), commented on as being outstanding, bringing up points they either hadn't considered or didn't know about.

He wrote another one??!

[respond2u]

Hi all,

I just read this article by a fee for service financial planner.  It  seems to be a decent summary of the 4% rule, and how to best use it.

https://edrempel.com/reliably-maximize-retirement-income-4-rule-safe/

Is there anything you would add?  Caution about?

(*This is not an ad for his site - we used to work with him a few years back and I still get his emails.)

I would add: read Bengen's original paper so you can really understand the assumptions behind the numbers of the 4% guideline: http://www.retailinvestor.org/pdf/Bengen1.pdf . It's not terribly long and is a good read.

The backtesting results are from here:  www.cfiresim.com . It's easy to use and supports social security, pensions, etc. I recommend plotting in your own situation instead of guessing off one result in a paper.

Further, earlyretirementnow.com has a long and good series on withdrawal rates. He also has studied "cash cushions". And that site also has yet another portfolio backetester that also includes the ability to change the expected results for lower future results than history has.

[MDM]

The chart below shows the minimum real Compound annual growth rate (CAGR) your portfolio must generate to stay solvent for the given number of years.  It assumes that return happens each year.

Note that the "4% rule" requires only a 1.26% CAGR under these assumptions.

For a 25 year retirement, the answer is...0%.

[MustacheAndaHalf]

Especially on MMM  forums, the following 4% withdrawal assumption bears repeating:
"different withdrawal rates plus inflation for 30 years."

If you plan to retire early, you'll be retiring more than 30 years, and the 4% withdrawal rule isn't being tested for that.  You'll need to use another tool to explore it, and most likely find you need to a lower withdrawal rate for a 40-50 year retirement.

[respond2u]

The chart below shows the minimum real Compound annual growth rate (CAGR) your portfolio must generate to stay solvent for the given number of years.  It assumes that return happens each year.

Note that the "4% rule" requires only a 1.26% CAGR under these assumptions.

For a 25 year retirement, the answer is...0%.

If it doesn't take sequence of return risk into consideration, it's useless.

Backtesting may be useless as well, but at least it was useful for over a hundred years.

And one that backtesting taught us is that CAGR is not the most important factor. Bengen's paper (linked earlier) shows it, and here's an analysis 25 years afterwards: https://earlyretirementnow.com/2017/05/17/the-ultimate-guide-to-safe-withdrawal-rates-part-14-sequence-of-return-risk/

[MDM]

If it doesn't take sequence of return risk into consideration, it's useless.
Backtesting may be useless as well, but at least it was useful for over a hundred years.

As the saying goes, "All models are wrong but some are useful".  The usefulness, or lack thereof, depends in part on the intended use.

There were a few reasons behind posting the chart.  One was to illustrate how the minimum CAGR does increase as the retirement length increases.  This runs counter to the quote in The 4% Rule: The Easy Answer to “How Much Do I Need for Retirement?” - "there is very little difference between a 30-year period, and an infinite year period, when determining how long your money will last."

Another was to catch the eye of those, usually new to things financial but not always, who think the "4% rule" assumes a 4% real return.  Reading the Bengen and Trinity studies is usually a good step toward correcting that misconception.

[davisgang90]

Good read, thanks for the link.  I was hoping he would address the impact of his fees on a retirement over the 30 years.  ; )

[respond2u]

Good read, thanks for the link.  I was hoping he would address the impact of his fees on a retirement over the 30 years.  ; )

I think that's answered in the title of _Where Are The Customers' Yachts?_ (https://www.goodreads.com/book/show/288897.Where_Are_the_Customers_Yachts_ ;)

The serious answer (for those who didn't read Bengen's paper) is that the 20 year horizon for a 4% initial withdrawal (changed thereafter by inflation/deflation, not portfolio value) is based on 0% drag from fees, etc. You can use www.cfiresim.com to calculate with whatever fees you want. I don't think www.firecalc.com can do that (but the UI is so confusing to me, I wouldn't swear to it).