Author Topic: Does The 4% Rule Work In Today’s Markets?  (Read 31863 times)

AdrianC

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Does The 4% Rule Work In Today’s Markets?
« on: July 12, 2016, 10:01:31 AM »
Wade Pfau says: not so well.

http://retirementresearcher.com/4-rule-work-todays-markets/?utm_campaign=Retirement+Researcher+Weekly+Email&utm_source=hs_email&utm_medium=email&utm_content=31552119&_hsenc=p2ANqtz-_24KgH66qKZC9BL6C3aBtYjZTrpQEjVwlkvO1DHzmS4ARdktoFRasQQDCqgfzJt3F0Mk0In5GxkeGbY45L67rrS5cDxA&_hsmi=31552119

This exhibit makes clear that the low interest rate environment creates additional stresses for the 4% rule that were not apparent in Monte Carlo simulations calibrated to historical data with higher bond-yield assumptions than are available today. For a 50/50 asset allocation to stocks and bonds, these simulations indicate that the 4% rule has a 69% chance of success instead of a 94% chance. The 4% rule may work for today’s retirees, but it is far from a sure bet or a “safe” spending strategy.


brooklynguy

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #1 on: July 12, 2016, 10:53:49 AM »
And in Pfau's follow-up article (published today),"What is the Sustainable Spending Rate for Retirees in 2016?", he concludes (using the conservative assumptions and methodology described in the next sentence, and based on a quite conservative 50/50 stock/bond allocation) that the best guess we can make today for the sustainable spending rate for a new retiree in 2016 is 4.16%.

But all of these pessimistic predictions that Pfau has been making (for years, at this point) suffer from the same potential "garbage in, garbage out" problem:  he uses Monte Carlo simulations that attempt to extrapolate predictions about future market performance from today's market conditions.  If you start with the assumption that future returns will be low, then of course you will conclude that future returns (and, consequently, SWRs) will be low.  Yet despite his conservative, perhaps overly-pessimistic assumptions, Pfau's latest best guess for the current SWR is 4.16%, higher than 4.00%, using a bond-heavy 50/50 portfolio allocation.  I find that pretty encouraging.

Telecaster

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #2 on: July 12, 2016, 01:24:37 PM »
Wade Pfau methodology assumes 0.84% fees.  If you go with a nice Fidelity of Vanguard index fund, your fees will be more like 0.05%.  In that case, 4% SWR works just fine

2Birds1Stone

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #3 on: July 12, 2016, 01:28:51 PM »
Yes it does.

Retire-Canada

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #4 on: July 12, 2016, 01:59:17 PM »
We should have a sticky at the top of the page that collects all the 4% SWR discussion so we don't have the same debate a 100 separate times. Hopefully people would stop worrying about the 4% SWR.

....oh wait we do. ;)

AdrianC

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #5 on: July 12, 2016, 02:11:48 PM »
We should have a sticky at the top of the page that collects all the 4% SWR discussion so we don't have the same debate a 100 separate times. Hopefully people would stop worrying about the 4% SWR.

....oh wait we do. ;)

The 4% sticky says "A collection of posts about why you should not worry about the 4% rule. "

This article isn't about "why you should not worry about the 4% rule" :-)

AdrianC

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #6 on: July 12, 2016, 02:22:21 PM »
I thought this idea was interesting enough to post the article:

"Let’s consider outcomes for sustainable spending rates using the Monte Carlo simulations with the low-interest-rate world of today as a starting point for the simulations"

EDIT:
So reading around I see Wade Pfau is not held in high esteem by the early-retirement communities :-)

The 4% rule is based on studies of all past markets, right?

So, does the 4% rule include all the previous times when stocks have been at a trailing PE of around 24 and bonds at about zero yield?
« Last Edit: July 13, 2016, 07:49:17 AM by AdrianC »

brooklynguy

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #7 on: July 13, 2016, 08:33:52 AM »
So, does the 4% rule include all the previous times when stocks have been at a trailing PE of around 24 and bonds at about zero yield?

Not sure if this question was intended to be rhetorical, but Pfau's exact argument is that the historical record lacks enough instances of such low interest rates for us to draw meaningful conclusions about the implications of starting retirement in a low rate environment, and there is no precedent whatsoever for such low interest rates coupled with such high stock market valuations.  That's why he tends to avoid (and warns against) using history as a basis for reasoning that the 4% rule is still safe for today's retirees and instead favors Monte Carlo based analysis -- but that method suffers from the potential "garbage in, garbage out" problem, and he also uses a host of (arguably over-)conservative assumptions (such as high investment fees, as Telecaster pointed out above), which largely explains the lack of love for Pfau in some corners of the early retirement community.

k9

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #8 on: July 13, 2016, 08:37:24 AM »
Pfau does not seem to be very fond of the very notion of SWR, AFAIK. He seems to advise other retirement strategies than those based on a fixed, inflation-adjusted amount of a financial portfolio each and every year. He seems to be fond of annuities, especially, at least as a part of one's portfolio.

But remember he's talking to "regular" retirees, not ER. The context is quite different. An ER cannot live from annuities (the rate would be too low for a 40 or 50 year annuity) but he can easily work part-time on a given year if needed. Plus, it's much easier to make sound financial decisions, and adapt your spending, when you're 45 than when you're 90 years old.

AdrianC

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #9 on: July 13, 2016, 11:44:02 AM »
So, does the 4% rule include all the previous times when stocks have been at a trailing PE of around 24 and bonds at about zero yield?

Not sure if this question was intended to be rhetorical, but Pfau's exact argument is that the historical record lacks enough instances of such low interest rates for us to draw meaningful conclusions about the implications of starting retirement in a low rate environment, and there is no precedent whatsoever for such low interest rates coupled with such high stock market valuations.

No, genuine question. So are the arguments valid:
1. That we are in an unprecedented situation, and
2. Therefore the previous "rules" are not applicable?

(And let's forget what Pfau says - he is discredited in my book).

Livewell

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #10 on: July 13, 2016, 11:58:50 AM »
Wade is conservative, and i think its good to review what he has to say.

But his analysis once again leads to near the 4% ballpark. 

I think the foundation holds true, use 4% as a target but know flexibility is key and no one can predict the unpredictable.  Small changes in assumptions lead to huge over saving or under investment.  Just pick a mix you can live with and stay flexible, this isn't about a magic number it's about risk management, which is an ongoing process.

The more I think about it, the more the risk of losing time is the most important part of the equation.  It's allowed me to be more aggressive on my FI target.  Check out the latest post by GoCurryCracker, he really captures it well

http://www.gocurrycracker.com/retirement-has-already-cost-us-at-least-5-million/

Telecaster

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #11 on: July 13, 2016, 12:19:00 PM »

No, genuine question. So are the arguments valid:
1. That we are in an unprecedented situation, and
2. Therefore the previous "rules" are not applicable?

(And let's forget what Pfau says - he is discredited in my book).

The central assumption around the 4% rule is that the future will be no worse than past.  Could the future be worse than the past?  You bet!   

Variations of your question come up all the time.  But since we don't know the future, there is no way to really answer the question.  If you think the future will be worse than the past, then the solution is to use a lower withdrawal rate. 

Humans tend to view events as if they continue on the same path forever.  I saw a projection today about the Italian economy.  They think the slow growth will continue for many more years.  But not one was saying this in 2008, when things looked rosey.   Point is, things don't look great today, but they will look much different five or ten years from now. 


TheAnonOne

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #12 on: July 13, 2016, 12:31:35 PM »
So, does the 4% rule include all the previous times when stocks have been at a trailing PE of around 24 and bonds at about zero yield?

Not sure if this question was intended to be rhetorical, but Pfau's exact argument is that the historical record lacks enough instances of such low interest rates for us to draw meaningful conclusions about the implications of starting retirement in a low rate environment, and there is no precedent whatsoever for such low interest rates coupled with such high stock market valuations.

No, genuine question. So are the arguments valid:
1. That we are in an unprecedented situation, and
2. Therefore the previous "rules" are not applicable?

(And let's forget what Pfau says - he is discredited in my book).

Doesn't this literally apply to every second in history? It will never be exactly the same as the past, but what we do know is that the appetites for success and improvement in the human race are always strong. It is in our nature.

caracarn

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #13 on: July 13, 2016, 12:40:12 PM »

No, genuine question. So are the arguments valid:
1. That we are in an unprecedented situation, and
2. Therefore the previous "rules" are not applicable?

(And let's forget what Pfau says - he is discredited in my book).

The central assumption around the 4% rule is that the future will be no worse than past.  Could the future be worse than the past?  You bet!   

Variations of your question come up all the time.  But since we don't know the future, there is no way to really answer the question.  If you think the future will be worse than the past, then the solution is to use a lower withdrawal rate. 

Humans tend to view events as if they continue on the same path forever.  I saw a projection today about the Italian economy.  They think the slow growth will continue for many more years.  But not one was saying this in 2008, when things looked rosey.   Point is, things don't look great today, but they will look much different five or ten years from now.

I believe the central tenet of the 4% rule is based on life expectancy. 

With longer lives after retirement and lower returns this creates the questions in my mind. 

Telecaster

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #14 on: July 13, 2016, 01:29:23 PM »

I believe the central tenet of the 4% rule is based on life expectancy. 

With longer lives after retirement and lower returns this creates the questions in my mind.

There's no life expectancy component to the 4% rule. 

caracarn

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #15 on: July 13, 2016, 01:33:03 PM »

I believe the central tenet of the 4% rule is based on life expectancy. 

With longer lives after retirement and lower returns this creates the questions in my mind.

There's no life expectancy component to the 4% rule.

Its basis (that 4% is safe) started with the assumption that you needed your money to last 25-30 years.

Telecaster

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #16 on: July 13, 2016, 01:50:34 PM »

Its basis (that 4% is safe) started with the assumption that you needed your money to last 25-30 years.

You can calculate the SWR for any period you like (within reason).   Bengen did his original study on a 30 year period, and that's kind of become the standard for comparison, but you don't have to use 30 years. 

Intercst (John Greeney) took Bengen's work and expanded it back to the 1871 using Schiller's data.  Here he shows the SWRs for 10, 20, 30, 40, 50, and 60 years.

http://www.retireearlyhomepage.com/restud1.html

Obviously, the longer the withdraw period, the lower the SWR is.   I like 30 years for a few reasons. One, that's the number most people use and there are fewer data sets as the periods get longer.  Plus it seems that the world will be far different in 30 years, so it will likely be time to re-evaluate things.  Also, other things seem to fall into 30 year intervals.  Typical home mortgages, etc. 




Bicycle_B

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #17 on: July 13, 2016, 02:12:42 PM »
I guess this is where I get to post my contrarian opinion:  namely, that 4% is a little optimistic.

My "logic":
 
As Warren Buffett says, interest rates act on stock prices like gravity, except that low rates cause high stock prices.  Since we have record low interest rates, presumably today's stock prices are unprecedentedly high.  If interest rates ever rise to "normal" levels, we will presumably experience lower returns on stock investments than past historical eras. 

To guess at a number, suppose that inflation stays at 2% - the Fed's target rate - and the prime interest rate rises over 30 years to a more historically normal 2% above inflation.  (Waves hands while pondering how much this will drop stock pricing, based on Buffett's 2 articles on the subject in Fortune magazine.) If this drops US equity values from 140% of GDP to 80-90%, a typical historical number, wouldn't the outcome be a loss of roughly one third of stock valuations - maybe a little over over 1% drop compared to previous experience, compounded annually? Value of current bonds heads in the same direction.  Maybe a 3% return is more reasonable for the next two or three decades. 

Yes, I get that 4% isn't an average, it's a low water mark.  But if we now have the lowest interest rates in history, shouldn't we at least consider the likely impact of this difference compared to the historical 4% benchmark?

There is still a personal choice as to whether you seek near certainty of never needing to work (One More Year! 3% Safe Withdrawal Rate!) or just reasonable estimate of safety (fine, I go back to work a few years if there is a serious crash.  Got it covered).  I lean towards the former emotionally and the latter in practice; just wanted to offer a path of reasoning for the consideration of the crowd.

« Last Edit: July 13, 2016, 02:15:52 PM by Bicycle_B »

Lucas

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #18 on: July 13, 2016, 02:32:36 PM »
30 years is not much different then 100 years in terms of safe withdraw rate mathematically.  I am using 4% because i assume i won't be sitting on my but doing nothing, but will be making some small amount of money at least (or at least bartering time for reduced expenses). 

LAGuy

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #19 on: July 13, 2016, 02:43:02 PM »
I guess this is where I get to post my contrarian opinion:  namely, that 4% is a little optimistic.

The 4% rule isn't a little optimistic. It's massively pessimistic. It's a number meant to see you through great depressions, world wars, and any other calamity you can imagine.

If you think you need an even more conservative number based on the current economic environment then by all means, do so. But realize what you're saying: that the current economic environment is worse than some of the worst we've seen in the past 100+ years. Personally, I don't see it but to each their own.

waltworks

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #20 on: July 13, 2016, 02:51:32 PM »
We have a frickin' sticky about this at the top of the page. Everyone here is rehashing stuff that has been discussed a billion times already.

Your life is very valuable. Money is just money. The 4% rule is very, very conservative. So if you value being 100% sure you'll never run out of money over enjoying your life, go ahead and use the 3% or 2% rule, or just work forever. But STFU about the 4% rule because you clearly don't get it at all.

-W

Bicycle_B

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #21 on: July 13, 2016, 03:43:08 PM »
I guess this is where I get to post my contrarian opinion:  namely, that 4% is a little optimistic.

The 4% rule isn't a little optimistic. It's massively pessimistic. It's a number meant to see you through great depressions, world wars, and any other calamity you can imagine.

If you think you need an even more conservative number based on the current economic environment then by all means, do so. But realize what you're saying: that the current economic environment is worse than some of the worst we've seen in the past 100+ years. Personally, I don't see it but to each their own.

Actually, I'm not saying that the current economic environment is worse.  I'm saying that if the Fed's predictions - low inflation, growing economy, rising interest rates - come to pass, we could have the unique situation where everybody makes money at a nice healthy historically normal pace except equity investors and holders of current bonds. 

Stock prices in real terms could be nearly flat for a couple of decades while companies grow, employment stays healthy, technology improves, lifespans extend, governance holds even or gradually improves.  All that is needed is for stock prices and bond prices to respond to rising interest rates while the rest of the world goes on happily improving bit by bit.  I actually think everything except the stock price part is likely. 

Re Waltworks - as I said, yes the 4% is a nice safe low rate.  I understand that it represents 95% of cases in the past having enough money to withdraw after 30 years, based on data from 1920s or before until today in the USA.  But the start years that didn't work (early 1960s IIRC) were the years followed by rising interest rates.  Since rising interest rates are expected, in a combination with low inflation and a strong economy that's more or less never happened before in the periods studied, it is reasonable to think the accurate safe rate is a bit lower than historical experience.

Has the "use the 4% rate but modify it based on the effect of rates" analysis been done elsewhere on this forum?
« Last Edit: July 13, 2016, 03:51:42 PM by Bicycle_B »

k9

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #22 on: July 13, 2016, 03:43:44 PM »
I'm a little playing devil's advocate here : the international situation regarding interest rates, inflation and equities valuation looks a lot like Japan's last 30 years. And Japan's last 30 years didn't allow for even a 3% SWR. So you can imagine a situation where a 4% SWR doesn't work without being a doomer.

But don't worry too much about it :
- That's only true for an almost-100% stock allocation. Even a 60/40 allocation to japanese stocks & bonds allowed for a 4% SWR on the 40 last years. Yes, even with 60% of Japanese stocks, during their more-than-2 lost decades, you could withdraw 4% of your initial portfolio value every year.
- Japanese stocks were very highly valued in 1989 and still are somewhat today; US or international stocks, on average, are much less expensive, although they are far from being cheap.

waltworks

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #23 on: July 13, 2016, 04:34:18 PM »
Again, without a crystal ball, there is no point in worrying about it. You could certainly do some sort of garbage-in-garbage-out "analysis" of what you think will happen with rising interest rates. If you think you can actually accurately predict anything, you're delusional.

The past is the best data we have. C'est la vie. Could something crazy or unusual happen and make that past data useless for predicting the future? Of course. But if you live your life that way, financially or otherwise, you'll never feel "safe" regardless of withdrawal rate. Hence not worth worrying about.

-W

LAGuy

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #24 on: July 13, 2016, 04:58:13 PM »
You guys advocating for a lower withdrawl rate are completely missing the forest for the trees. You seem to be imagining this world where the 4%er's are eating cat food while you sit smugly on your 3% withdrawl rate. In reality, any world where the 4% rule fails is going to be gut check time for the 3% folks as well. And you'll be reacting the exact same way: cutting back. There is no 100% safe withdrawl rate. The whole point of the 4% rule is, "this is as safe as it gets." If you want to work longer, go right ahead. You'll be able to sustain a higher income that way. Then, well, that's what you'd expect if you worked longer and saved more money. But make no mistake. There is no increased margin of safety with a 3% withdrawl rate.

Telecaster

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #25 on: July 13, 2016, 08:34:53 PM »

Has the "use the 4% rate but modify it based on the effect of rates" analysis been done elsewhere on this forum?

No, because that's impossible.  You also have to include stock prices to determine SWR, and since you don't know what those will be, there's no sense in fiddling with predicted interest rates--which are only a prediction anyway.   Things like interest rates and even P/E are only weakly correlated to stock prices.  There is no way to predict what they are going to do in relation to each other with any accuracy. 

You're making this far too hard. If you think the future will be worse than the past, use a number smaller than 4%.  Easy peasy.   


waltworks

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #26 on: July 13, 2016, 09:30:59 PM »
Put this another way, assume:
-You have a limited lifespan, and you don't know when you'll die.
-You want to maximize the enjoyment of that lifespan.
-Running out of money will decrease your enjoyment.
-Working will decrease your enjoyment.
-You don't care about leaving money to descendants or charity/dying with the most toys.

If you sit down and figure out when you'll probably die, and how much money you want to live on during the intervening time, you can make some educated guesses about what the future holds based on history. Then you can decide what your life is worth to you - do you want to work longer to be even more sure you don't run out of money, or not? The 4% SWR scenario is UNBELIEVABLY CONSERVATIVE for this purpose - you are virtually guaranteeing you'll die with plenty of money (in fact, in a majority of cases more than you started with!) in the bank unspent - meaning that you worked more than you needed to.

Asking if the 4% SWR "works" is silly - it's the best available way to estimate the probabilities that we have.

Can you come up with various reasons to think the future is going to suck? Yes, of course. People have made their careers doing that. Thus far, though, they've been consistently wrong for thousands of years as humanity has mostly improved it's lot in every way (with a few awful detours, of course).

k9

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #27 on: July 14, 2016, 03:10:11 AM »
One more thing about that "rule". If you are feeling bad about the 4% rule, try the "% of portfolio" in cfiresim's "spending plan" options. Then, with an initial portfolio of $1 million, choose 4% as the percentage, with a minimum spending of 30 000 and a maximum spending of 40 000. The 4% here is not 4% of the initial value, but 4% of the current value, each and every year, meaning you'll mathematically never deplete your portfolio. The maximum and minimum spending add thresholds to these percentages ("if 4% of the portfolio is lower than 30 000, spend 30 000 anyway; if it is higher than 40 000, only spend 40 000"), meaning you *can* actually deplete it, but looking at the simulations, this is very unlikely. Much, much more unlikely than with a 4% SWR. Look at the average and median spendings indicated by cfiresim, and the average and median remaining portfolios.

Of course, that means you have to be ready to reduce your expenses on some years, or work part-time these years, if needed.

AdrianC

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #28 on: July 14, 2016, 06:09:24 AM »
Interesting discussion. I appreciate it. Some diversity of opinion here, and that's a good thing.

To paraphrase my favorite first century poet: Now we see through a glass, darkly.

I think 4% is a little optimistic going forward, given stock prices, profit margins, bond yields, debt levels, etc, etc.

And it's OK to be optimistic. It seems to me most of y'all aren't so much planning on "retiring" as much as living an alternative lifestyle that may include some work for pay as needed. With that in mind, 4% is a good goal, i.e. savings of 25x conservatively calculated real expenses = FIRE time.

I'm happy with 3-4% and I'm already there.

Retire-Canada

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #29 on: July 14, 2016, 08:11:39 AM »
It seems to me most of y'all aren't so much planning on "retiring" as much as living an alternative lifestyle that may include some work for pay as needed.

If I had 4% saved and invested I'd stop working and not plan to work again.

The only reason I'm planning an "alternative lifestyle" is that from where I am working FT to hit 25x annual spending would mean working through the prime of my life and that's a poor trade off in my opinion. So I'll work PT and let the 'stach grow on its own for while.

At some point I'll hit 25x annual spending and I won't be planning to work after that.

I don't see myself withdrawing 4% each year like a metronome so I won't strictly be following the 4%WR plan. It will be more like 3% to 5%+ depending on what maintenance my house needs, when I need to replace a vehicle and what my travel plans are. For sure if markets have crashed 30% I won't be spending money on stuff that isn't essential [ie. big trip to Europe] and if my 'stash is double what I started with inflation adjusted dollars I'm likely to spend more than 4% of the original value in inflation adjusted dollars.

Looking at the historical periods covered by the data behind the 4% SWR I can't wrap my head around folks that say it's optimistic. To me the 4% SWR is a really pessimistic view of the future, but as you note different people see things differently.

tooqk4u22

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #30 on: July 14, 2016, 10:49:47 AM »
So, does the 4% rule include all the previous times when stocks have been at a trailing PE of around 24 and bonds at about zero yield?

Not sure if this question was intended to be rhetorical, but Pfau's exact argument is that the historical record lacks enough instances of such low interest rates for us to draw meaningful conclusions about the implications of starting retirement in a low rate environment, and there is no precedent whatsoever for such low interest rates coupled with such high stock market valuations.

No, genuine question. So are the arguments valid:
1. That we are in an unprecedented situation, and
2. Therefore the previous "rules" are not applicable?

(And let's forget what Pfau says - he is discredited in my book).

I think Brooklynguy's comment is the crux of the discussion and is the reason why there are some people that think current conditions may warrant a more conservative WR if no other reason to simply be more comfortably assured with FIRE - I am one of those people.  IF there is no other time in history that has high valuations (PE or CAPE and low rates caused by massive intervention so not a real market) then it could very well mean this time is different - that doesn't meant the 4% rule doesn't still work but it is rational to think that it might not be as safe as it once was.  In a 2015 article Pfau 2015 concluded that the SWR was much much less than 4% - 1.7% for a 60/40 portfolio based on high values/low rates - so who knows - suggest that the higher fees translate to 50-60bps so it would be a 2.2-2.3% for those of us with vanguard.

A far more simply/crudely approach I have thought about is using some basic assumptions - starting with $1mil, $40k spending, 50/50 stock/bond portfolio, and ignore inflation (generally stocks and dividends will increase at or greater than inflation overtime anyway).  Using Vanguard total stock and total bond today would give you a blended 2.1% dividend/interest.

#1 Case - Base Case
Principal Balance:                     1,000,000
Spending                         4%      40,000
Dividends/Interest   -2.10%     (21,000)
Principal Drawdown                 19,000
Years to Depletion                   52.6

#2 Case - Portfolio Declines 25%, Income Remains Same
Principal Balance:                       750,000
Spending                                     40,000
Dividends/Interest   -2.10%    (21,000)
Principal Drawdown                      19,000
Years to Depletion                           39.5

#3 Case - Portfolio and Income declines 25%
Principal Balance:                        750,000
Spending:                                     40,000
Dividends/Interest                        (15,750)
Principal Drawdown                        24,250
Years to Depletion                             30.9


Even in the dire situation the 4% rule under this crude analysis would be true - remember that 4% rule only needs to get you past 30 years to be considered not failing.  Keep in mind that for a 25% decline in a 50/50 portfolio basically is 50% decline in stocks with no change in bonds, which has happened and can but is still pretty severe and doesn't count for the likely higher growth following the decline and the years remaining are after the decline and basically a 5.3% WR on #3. 

Inflation is a factor but not as much as you may think - here is the Years to Depletion assuming stocks and dividends (50% of portfolio) grow by inflation (3%) and bonds stay flat (ie 1.5% growth on total principal and income) but withdrawals grow at 3%, then would last:

#1 - 33 years
#2 - 27 years
#3 - 23 years

2% Returns Above Inflation would yield
#1 - 38 years
#2 - 30 years
#3 - 26 years

All seems pretty conservative and still seems to support the 4% rule on an back of the envelope/end around approach.  I might need to rethink my conservatism. 


Tyler

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #31 on: July 14, 2016, 12:08:39 PM »
I personally believe that all the handwringing about "this time is different" may perhaps be true but is only one piece to the retirement puzzle.  Spending so much energy debating whether the old fashioned 50-50 asset allocation option still works while ignoring other options seems kinda shortsighted to me.  Not every portfolio follows the 4% rule to begin with!

AdrianC

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #32 on: July 14, 2016, 12:14:35 PM »
All seems pretty conservative and still seems to support the 4% rule on an back of the envelope/end around approach.  I might need to rethink my conservatism.

I don't think you're including the reduction in investment income each year due to lower principal.

ender

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #33 on: July 14, 2016, 12:38:23 PM »
And in Pfau's follow-up article (published today),"What is the Sustainable Spending Rate for Retirees in 2016?", he concludes (using the conservative assumptions and methodology described in the next sentence, and based on a quite conservative 50/50 stock/bond allocation) that the best guess we can make today for the sustainable spending rate for a new retiree in 2016 is 4.16%.

But all of these pessimistic predictions that Pfau has been making (for years, at this point) suffer from the same potential "garbage in, garbage out" problem:  he uses Monte Carlo simulations that attempt to extrapolate predictions about future market performance from today's market conditions.  If you start with the assumption that future returns will be low, then of course you will conclude that future returns (and, consequently, SWRs) will be low.  Yet despite his conservative, perhaps overly-pessimistic assumptions, Pfau's latest best guess for the current SWR is 4.16%, higher than 4.00%, using a bond-heavy 50/50 portfolio allocation.  I find that pretty encouraging.

I think the biggest thing that people don't realize is that the results that give 4% as a "safe withdrawal rate" have ridiculous built in safety margins, where something like 90% of scenarios result in you fairly wealthy at the end of 30 years.

An overwhelming percentage of those 30 year periods in 100% stocks result in you having an obscene amount of money at the end of them. Relatively few end up failing and nearly just as few end up with "little" money after 30 or 40 years.  And none of these include any "logical" reactions to a falling market in early years of retirement.


tooqk4u22

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #34 on: July 14, 2016, 02:13:11 PM »
All seems pretty conservative and still seems to support the 4% rule on an back of the envelope/end around approach.  I might need to rethink my conservatism.

I don't think you're including the reduction in investment income each year due to lower principal.

Your right, darn it all to hell when you do things too quickly.

#1 - 27
#2 - 22
#3 - 20

Ok so not quite ridiculousness of my flawed calculation - but still some pretty harsh assumptions - but not quite enough for me to love the 4% rule......back to the bit more conservative side.

Mr. Green

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #35 on: July 14, 2016, 03:49:41 PM »
When I see all the repetitive posts about people questioning SWRs over and over again, all I can think of is "that guy must be an over-analytical engineer!" because I am and it's how I think. I still jumped though because I value my life more than my money. I'm really surprised that so many people here weight their life so lightly and their money so heavily. It almost implies people have this belief that their stashes will go from "4%-SWR-I'm-okay" to "$0-I'm-fucked" overnight. If people enjoy working and want to keep doing it, awesome, but the amount of people that seem to want to pull the trigger and can't is kind of shocking (to me).

LAGuy

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #36 on: July 14, 2016, 04:15:22 PM »
When I see all the repetitive posts about people questioning SWRs over and over again, all I can think of is "that guy must be an over-analytical engineer!" because I am and it's how I think. I still jumped though because I value my life more than my money. I'm really surprised that so many people here weight their life so lightly and their money so heavily. It almost implies people have this belief that their stashes will go from "4%-SWR-I'm-okay" to "$0-I'm-fucked" overnight. If people enjoy working and want to keep doing it, awesome, but the amount of people that seem to want to pull the trigger and can't is kind of shocking (to me).

I think it's probably too much paying attention in engineering classes and not enough in statistic classes.  From an engineering stand point, 95% success is simply not acceptable. But life can't be lived to 6-Sigma and retirement is not a jet engine. The 4% rule is saying, "to the best of our knowledge, this is the limit of safe." You can't improve on that...97.5% chance of retirement success compared to 95% is completely meaningless. Save more if you like. You'll certainly have more money. But you won't get any utility value or safety from it.

But I get it. Everybody has their own tolerance for what success in retirement looks like. In my field, healthcare, I can jump in and out on a contract basis once I give up full time work for good. Looks like that's more the way the world is heading anyways in its method of working (see: Uber, gig economy, digital nomads, geographic arbitrage etc). So, I can risk a higher withdrawl rate. I can see where somebody who considers working another day in retirement to be an abject failure, have a lot of family obligations, and want to stay put would want to be very conservative. As for me, I kind of like the idea of walking back into the lab 15 years from now, like Robert Redford in The Natural, picking up a pipette, and saying, "Yeah, I still got it."

Mr. Green

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #37 on: July 14, 2016, 07:58:38 PM »
When I see all the repetitive posts about people questioning SWRs over and over again, all I can think of is "that guy must be an over-analytical engineer!" because I am and it's how I think. I still jumped though because I value my life more than my money. I'm really surprised that so many people here weight their life so lightly and their money so heavily. It almost implies people have this belief that their stashes will go from "4%-SWR-I'm-okay" to "$0-I'm-fucked" overnight. If people enjoy working and want to keep doing it, awesome, but the amount of people that seem to want to pull the trigger and can't is kind of shocking (to me).

I think it's probably too much paying attention in engineering classes and not enough in statistic classes.  From an engineering stand point, 95% success is simply not acceptable. But life can't be lived to 6-Sigma and retirement is not a jet engine. The 4% rule is saying, "to the best of our knowledge, this is the limit of safe." You can't improve on that...97.5% chance of retirement success compared to 95% is completely meaningless. Save more if you like. You'll certainly have more money. But you won't get any utility value or safety from it.

But I get it. Everybody has their own tolerance for what success in retirement looks like. In my field, healthcare, I can jump in and out on a contract basis once I give up full time work for good. Looks like that's more the way the world is heading anyways in its method of working (see: Uber, gig economy, digital nomads, geographic arbitrage etc). So, I can risk a higher withdrawl rate. I can see where somebody who considers working another day in retirement to be an abject failure, have a lot of family obligations, and want to stay put would want to be very conservative. As for me, I kind of like the idea of walking back into the lab 15 years from now, like Robert Redford in The Natural, picking up a pipette, and saying, "Yeah, I still got it."
The weird thing to me is that a 4% SWR already is extremely conservative. I guess that's the part I don't get is people approaching it like it's not conservative. Maybe because it's tossed around so much people don't feel like it's conservative?

LAGuy

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #38 on: July 14, 2016, 08:25:04 PM »
When I see all the repetitive posts about people questioning SWRs over and over again, all I can think of is "that guy must be an over-analytical engineer!" because I am and it's how I think. I still jumped though because I value my life more than my money. I'm really surprised that so many people here weight their life so lightly and their money so heavily. It almost implies people have this belief that their stashes will go from "4%-SWR-I'm-okay" to "$0-I'm-fucked" overnight. If people enjoy working and want to keep doing it, awesome, but the amount of people that seem to want to pull the trigger and can't is kind of shocking (to me).

I think it's probably too much paying attention in engineering classes and not enough in statistic classes.  From an engineering stand point, 95% success is simply not acceptable. But life can't be lived to 6-Sigma and retirement is not a jet engine. The 4% rule is saying, "to the best of our knowledge, this is the limit of safe." You can't improve on that...97.5% chance of retirement success compared to 95% is completely meaningless. Save more if you like. You'll certainly have more money. But you won't get any utility value or safety from it.

But I get it. Everybody has their own tolerance for what success in retirement looks like. In my field, healthcare, I can jump in and out on a contract basis once I give up full time work for good. Looks like that's more the way the world is heading anyways in its method of working (see: Uber, gig economy, digital nomads, geographic arbitrage etc). So, I can risk a higher withdrawl rate. I can see where somebody who considers working another day in retirement to be an abject failure, have a lot of family obligations, and want to stay put would want to be very conservative. As for me, I kind of like the idea of walking back into the lab 15 years from now, like Robert Redford in The Natural, picking up a pipette, and saying, "Yeah, I still got it."
The weird thing to me is that a 4% SWR already is extremely conservative. I guess that's the part I don't get is people approaching it like it's not conservative. Maybe because it's tossed around so much people don't feel like it's conservative?

I think you're absolutely spot on. Because it's thrown around so much. A more rational approach, for those concerned about interest rates, P/E, CAPE ratios, or whatever the metric du jour is, would be to start at the historical average. And then make an argument about why going forward we may not see those average returns. That's an argument I could understand. But for whatever reason, they start with whatever the financial horror of the day is (there's always something) and work their way down from the historical worst case scenario without ever explaining why that's their START point in their analysis. And then, they come up with some magical number - 3.5%! 3.0%! Based on no data other than if 4% is good, 3% MUST be better.

In the meantime, the market is making new historical highs and we're basically one strong earnings session away from turning all those beloved ratios on their heads - doomsayers are always forgetting to look at the denominators in their precious ratios.

ender

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #39 on: July 14, 2016, 08:38:23 PM »
When I see all the repetitive posts about people questioning SWRs over and over again, all I can think of is "that guy must be an over-analytical engineer!" because I am and it's how I think. I still jumped though because I value my life more than my money. I'm really surprised that so many people here weight their life so lightly and their money so heavily. It almost implies people have this belief that their stashes will go from "4%-SWR-I'm-okay" to "$0-I'm-fucked" overnight. If people enjoy working and want to keep doing it, awesome, but the amount of people that seem to want to pull the trigger and can't is kind of shocking (to me).

I think it's probably too much paying attention in engineering classes and not enough in statistic classes.  From an engineering stand point, 95% success is simply not acceptable. But life can't be lived to 6-Sigma and retirement is not a jet engine. The 4% rule is saying, "to the best of our knowledge, this is the limit of safe." You can't improve on that...97.5% chance of retirement success compared to 95% is completely meaningless. Save more if you like. You'll certainly have more money. But you won't get any utility value or safety from it.

But I get it. Everybody has their own tolerance for what success in retirement looks like. In my field, healthcare, I can jump in and out on a contract basis once I give up full time work for good. Looks like that's more the way the world is heading anyways in its method of working (see: Uber, gig economy, digital nomads, geographic arbitrage etc). So, I can risk a higher withdrawl rate. I can see where somebody who considers working another day in retirement to be an abject failure, have a lot of family obligations, and want to stay put would want to be very conservative. As for me, I kind of like the idea of walking back into the lab 15 years from now, like Robert Redford in The Natural, picking up a pipette, and saying, "Yeah, I still got it."
The weird thing to me is that a 4% SWR already is extremely conservative. I guess that's the part I don't get is people approaching it like it's not conservative. Maybe because it's tossed around so much people don't feel like it's conservative?

It's how anchoring works.

Or in the case of 4% SWR, doesn't work because it's never done.

The reason it doesn't work is that it's not clear without some research just a "4% SWR" is ridiculously conservative. If it was presented as, perhaps, "To achieve a 95% success rate ending rich after 30 years of retirement based on previous data, including all the periods of depression, wars, and other political problems over the last 100 years (including Great Depression, World War 1/2, Vietnam, the 70s, 9/11, etc) you can spend up to 4% of your portfolio per year" -- you might anchor it as the conservative thing it is.

But... it takes a lot of research to really get the factors which go into the 4% number.

AdrianC

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #40 on: July 15, 2016, 05:28:48 AM »
I personally believe that all the handwringing about "this time is different" may perhaps be true but is only one piece to the retirement puzzle.  Spending so much energy debating whether the old fashioned 50-50 asset allocation option still works while ignoring other options seems kinda shortsighted to me.  Not every portfolio follows the 4% rule to begin with!

Very true.

Tyler, IIRC, weren't you targeting something like 3%?

AdrianC

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #41 on: July 15, 2016, 06:04:19 AM »
If people enjoy working and want to keep doing it, awesome, but the amount of people that seem to want to pull the trigger and can't is kind of shocking (to me).

Are there folks here able to FIRE right now on 4% but waiting for some lower number?

Mr. Green

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #42 on: July 15, 2016, 06:22:57 AM »
If people enjoy working and want to keep doing it, awesome, but the amount of people that seem to want to pull the trigger and can't is kind of shocking (to me).

Are there folks here able to FIRE right now on 4% but waiting for some lower number?
Definitely.

markbike528CBX

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #43 on: July 15, 2016, 07:24:42 AM »

The reason it doesn't work is that it's not clear without some research just a "4% SWR" is ridiculously conservative. If it was presented as, perhaps, "To achieve a 95% success rate ending rich after 30 years of retirement based on previous data, including all the periods of depression, wars, and other political problems over the last 100 years (including Great Depression, World War 1/2, Vietnam, the 70s, 9/11, etc) you can spend up to 4% of your portfolio per year" -- you might anchor it as the conservative thing it is.

But... it takes a lot of research to really get the factors which go into the 4% number.

... you can spend up to 4% of your initial portfolio then index that amount for inflation per year...

added further definition points.

Bicycle_B

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #44 on: July 15, 2016, 07:42:15 AM »
If people enjoy working and want to keep doing it, awesome, but the amount of people that seem to want to pull the trigger and can't is kind of shocking (to me).

Are there folks here able to FIRE right now on 4% but waiting for some lower number?
Definitely.

As one person who gave a comment that maybe 4% is optimistic:

No, I'm not, and you don't speak for me on that. I am not at FI yet.  I am not likely to be until early or middle 2020s.  The variance is due more to uncertainty about earnings than any intention to ignore the 4% guideline.  I suspect that I wlll act on it despite my misgivings.  We won't know until until I get there.

Since many commenters don't appear to recognize yet what I'm saying:  I don't mean that everyone needs to work longer because the 4% rule is invalid.  Yes, I understand that 95% success means that even many of the 5% failure cases leave you with money, and a little bit of adjustment along the way will cure most of them just fine.  I understand that in most of the 95% success cases, you die with a huge pile of investments remaining, usually more than you started with at the moment of FIRE.  I get it, people!!

What I'm saying is that on an intellectual basis, I suspect that the "95% of future years will not run out of money at 4% SWR" is not quite accurate because:
1) The 4% rule summarizes all the experience we've been able to quantify.
2) One logical way to guess what will happen is assume the past repeats itself, unless there's a reason to believe otherwise.
3) We have one factor here (interest rates) that is both different from before and has somewhat predictable effects.
4) The effect of lower interest rates is to increase the price of currently existing bonds, and eventually to raise stock prices.
5) We have interest rates that are so low they were not included in the data that produced the 4% SWR.
6) So let's estimate the right number by taking 4% and modifying it by the projected effect of reverting interest rates closer to the mean.

Doing that appears to produce a slightly lower number.  Whether it is wise to change your FIRE date based on this is a personal matter.  I think that many people's FIRE dates shouldn't change and many others shouldn't change much. 

Fwiw, the 4% mark itself isn't a magic number where the month after you have it, you've worked way too long and the month before, you'd be screwed if you quit now.  It's a reasonable line to mark where the judgment of "Is 95% chance to not reduce withdrawal rate in gross dollars safe enough for me?" meets "Hell yes, I'm outta this workplace", knowing that you can make adjustments to spending in the event of weird events anyway, so yes it's pretty darn safe.  Moving the anchor of "this is officially the convenient mark we think is super safe" still would mean people should decide their individual case on their individual merits, and most will BE safe before they FEEL safe.  Yes, most people on the fence should seize the day and live a life of glorious freedom.  I don't expect to condemn the masses to eternal grinding labor. 



« Last Edit: July 15, 2016, 07:54:17 AM by Bicycle_B »

LAGuy

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #45 on: July 15, 2016, 07:47:53 AM »

6) So guess the right number by taking 4% and modifying it by the projected effect of reverting interest rates closer to the mean.


See, here is where your analysis breaks down. You don't explain why starting at 4% and working down makes sense. You should be starting at average historical returns and making your case from there.

Bicycle_B

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #46 on: July 15, 2016, 08:31:27 AM »

6) So guess the right number by taking 4% and modifying it by the projected effect of reverting interest rates closer to the mean.


See, here is where your analysis breaks down. You don't explain why starting at 4% and working down makes sense. You should be starting at average historical returns and making your case from there.

LAGuy,

Excellent point! 

One reason I don't advocate for too much change in behavior is that I'm not sure whether to work from the average (which appears closer to 6%) or the 4%.  There's certainly a reasonable counter-argument that sure, interest rates today are weird, but there's always something going on, and 4% survives all of the somethings; interest rates should be considered part of the package, not outside of it.   

In my own thoughts, I actually try to come at this by several different paths to see where they each fall.  (This is what I do sometimes for fun, not because it affects my plans much.)  I posted in the first place because the different approaches appear to me to bring the same conclusion, so I posted what I thought was the simplest path to the repeated conclusion. 

One reason to consider the rates separately is that the rates are literally lower than past experience.  To me it does seem that the most accurate way to predict would be to project based on the past, but modify by the known difference. 

Obviously, even if my proposal that the interest rate thing will affect returns is true, it only modifies the base case of all other factors, which previously produced the 6% or whatever the exact average portfolio return is in the various cFIRESIM runs.  But it presumably does also affect the 95% safety hurdle mark too; the previous base case produced both the higher average and the 4% safety mark for SWR.  I'm not projecting that 4% or less is the expected return of a portfolio going forwards.  I'm proposing that the 95% safety hurdle goes down a little just like the average does, if interest rates go to normal and all other factors remain within historical norms.

Thanks for thinking about it seriously instead of just dismissing out of hand.
« Last Edit: July 15, 2016, 08:39:12 AM by Bicycle_B »

ender

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #47 on: July 15, 2016, 08:40:47 AM »
What I'm saying is that on an intellectual basis, I suspect that the "95% of future years will not run out of money at 4% SWR" is not quite accurate because:
1) The 4% rule summarizes all the experience we've been able to quantify.
2) One logical way to guess what will happen is assume the past repeats itself, unless there's a reason to believe otherwise.
3) We have one factor here (interest rates) that is both different from before and has somewhat predictable effects.
4) The effect of lower interest rates is to increase the price of currently existing bonds, and eventually to raise stock prices.
5) We have interest rates that are so low they were not included in the data that produced the 4% SWR.
6) So let's estimate the right number by taking 4% and modifying it by the projected effect of reverting interest rates closer to the mean.

This is somewhat intellectually dishonest. Why not remove much less relevant negative factors from the past 100 years too? Why adjust the results of a 4% being a SWR for retirement purely based on one factor?

You can't say in good faith, "the current times differ from the past 100 years by a single factor [interest rates] and so a 4% withdrawal rate is less reliable than during those periods" without attempting to isolate some of the many factors which were negatives on society that are also likely not going to be factors in the future.

Tyler

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #48 on: July 15, 2016, 09:46:28 AM »
Tyler, IIRC, weren't you targeting something like 3%?

Yep.  But that requires a bit of context.

I'm currently fully FI and pulled the trigger in late 2014.  Leading up to my big FIRE date, my understanding of SWRs was similar to many of the well-educated opinions in this thread.  I was a FIREcalc junkie, was knowledgeable on the Trinity and Bengen studies, and had a good working understanding of the 4% rule.  I was also aware that the number was calculated for 30-year retirements while I was planning to retire in my mid-30's.  And I knew enough about the base studies to understand that my Permanent Portfolio was never covered by the 4% research.  I ran enough excel models to be comfortable that the PP didn't break the 4% rule, but to plan conservatively for both portfolio and duration purposes I aimed for 3%.  It was a nice round number also popular at the time that conveniently coincided with the anticipated savings I'd have at the end of my work commitment. 

Once I retired and had all that free time, I was fascinated by those rough Permanent Portfolio calculations and spent some time refining my models for that portfolio and others.  The resulting spreadsheets became the basis for Portfolio Charts.  Once I finished the Withdrawal Rates calculator my eyes were fully opened to just how myopic the 4% rule was to begin with.  Asset allocation is about so much more than buying a single stock fund and bond fund, and different portfolios have historically supported very different withdrawal rates.

Another lesson I've learned after retirement is that predicting exactly how much you will spend every year is mostly impossible.  I tracked my spending up to retirement religiously, but once I pulled the trigger I learned how little I knew.  I recently checked Mint for the first time in a long while, and thought it was broken because my expenses were way lower than I expected.  It turns out that the only thing wrong was my understanding of how much spending is required for a happy retired life. 

So yes, I planned for a 3% SWR to be conservative.  I now know that my portfolio (evolved from my original PP) has supported up to 5% while sustaining principal (a much more conservative standard than the 4% rule is based on), and I'm spending maybe half that on a regular basis.  But I also understand that unexpected medical expenses or other big-ticket items could change that in the future, and I'm thankful for the buffer. 

If I had known about all of that before retirement, would I have fretted about saving down to 3% because I wasn't sure the 4% rule would be safe enough?  Probably not.  Stressing solely about the savings lever while ignoring the other levers at your disposal (asset allocation, part time work, etc) feels silly in retrospect. 

Would I recommend quitting the day you hit your withdrawal rate for your specific portfolio?  Also no.  I still think planning conservatively is a good idea.  Adding a little extra buffer so that you can truly let go and not stress when your natural spending fluctuations don't match the WR assumptions or when markets go through their inevitable valleys is a healthy thing. 
« Last Edit: July 15, 2016, 10:38:27 AM by Tyler »

tooqk4u22

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #49 on: July 15, 2016, 10:12:49 AM »
I think you're absolutely spot on. Because it's thrown around so much. A more rational approach, for those concerned about interest rates, P/E, CAPE ratios, or whatever the metric du jour is, would be to start at the historical average. And then make an argument about why going forward we may not see those average returns. That's an argument I could understand. But for whatever reason, they start with whatever the financial horror of the day is (there's always something) and work their way down from the historical worst case scenario without ever explaining why that's their START point in their analysis. And then, they come up with some magical number - 3.5%! 3.0%! Based on no data other than if 4% is good, 3% MUST be better.

Many people make such an argument but anytime anybody does people so anchored in the view of the 4% rule immediately poo-poo it as being irrational - fine but to each their own.  Many people here an otherwise, including Pfau, are concerned about current equity valuations being so high (relative to historical) and interest rates being historically low (combined with govt manipulation) happening at the same time has never occurred - everything is priced for perfection yet there really isn't a lot of perfection out there right now  (this is where similar people refute the premise of "this time is different"). 

You speak of averages but there are highs and lows along the way - maybe the 4% rule will hold right now but maybe it won't.  Valuations for stocks or bonds are not based on reality especially in light of declining earnings, also keep in mind that the last two down turns when PE or CAPEs were high as well the 10Year interest rate was around 5% not 2%+/- that it is and has been recently - so what you call making up a magical number some us view it as rational to have a bit more. 

On a relative basis (risk premium of equities to treasuries) the stock valuations are probably supported but that still means you are banking on lower returns - if rates ever increase that gets blown out and both your stock and bond portfolios go down, nowhere to hide. Will it happen, who knows so the only mitigant to it that I can come up with is to save more. I have other reasons for wanting to go with a WR lower than 4% but this is one factor.

In the meantime, the market is making new historical highs and we're basically one strong earnings session away from turning all those beloved ratios on their heads - doomsayers are always forgetting to look at the denominators in their precious ratios.

Well this is along the lines of the market can stay irrational longer than you can stay liquid - one strong earnings session way except we are five quarters going down but maybe it turns even though there is no reason there is a great economic story (its not bad, but its not great) to support a view that strong earnings session is coming.