Author Topic: Does The 4% Rule Work In Today’s Markets?  (Read 31870 times)

REfinAnon

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #50 on: July 15, 2016, 10:23:42 AM »
MMM forums can be kind of funny sometimes. While I think its an awesome group of people - I also think they tend to be a little dogmatic when it comes to certain things and the defense of the 4% rule is one of them.

Interest rates drive EVERYTHING in capital markets. Anyone with a modicum of financial sophistication would be able to see that a lower interest rate environment also means a lower safe withdrawal rate. Is 4% still safe? Maybe, maybe not. I'll say one thing for sure: It's less safe than it used to be.

Some of the simplistic defenses essentially amount to "well it worked in the past so that's the best evidence we have! you'd be a fool to question it or think any deeper than that." I personally find these laughable. I don't think these people know very much about finance.

tooqk4u22

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #51 on: July 15, 2016, 10:44:53 AM »
MMM forums can be kind of funny sometimes. While I think its an awesome group of people - I also think they tend to be a little dogmatic when it comes to certain things and the defense of the 4% rule is one of them.

+1

Interest rates drive EVERYTHING in capital markets. Anyone with a modicum of financial sophistication would be able to see that a lower interest rate environment also means a lower safe withdrawal rate. Is 4% still safe? Maybe, maybe not. I'll say one thing for sure: It's less safe than it used to be.

While this is very accurate in the present context, historically this has not been the case as when economy is humming (which translates to earnings and rising stocks) rates are typically stable or rising to maintain or slow activity or when the economy is faltering (translates to lower earnings and values typically) rates are stable to declining to maintain/promote activity so historically stocks/bonds were not correlated.

Today they seem to be highly correlated and you have historically high values, historically low rates for an extended period, and now declining earnings (short term). Much of the it is due to the fed but a good chunk is also due to the fear trade where international investors are dumping money into US stocks and bonds as it is a better option on a relative basis - you know the saying "the best looking horse in the glue factory" ....that's the US right now.

Some of the simplistic defenses essentially amount to "well it worked in the past so that's the best evidence we have! you'd be a fool to question it or think any deeper than that." I personally find these laughable. I don't think these people know very much about finance.

+1 - they always like to ask "What, you thing the future is going to be worse than the worse times in the past like the depression?"

Economically I don't think so, but returns I do think will be worse, at least from this point - how can they not be.  From here you will get either

1.  a slow slog with some volatility along the way and everything will revert to the mean (maybe not fully) - but then you are only getting 3% but losing a bit to inflation based on 50/50 portfolio at current valuations/rates,
2. a big drop in stocks/bonds so your basis will be reset then market rates of return will act like historically (but net return will be similar to #1)
3.  deflation, stocks/earnings go down, cash is king, rates stay same or lower.

I don't like any of these outcomes.


ender

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #52 on: July 15, 2016, 10:54:28 AM »
MMM forums can be kind of funny sometimes. While I think its an awesome group of people - I also think they tend to be a little dogmatic when it comes to certain things and the defense of the 4% rule is one of them.

Interest rates drive EVERYTHING in capital markets. Anyone with a modicum of financial sophistication would be able to see that a lower interest rate environment also means a lower safe withdrawal rate. Is 4% still safe? Maybe, maybe not. I'll say one thing for sure: It's less safe than it used to be.

Some of the simplistic defenses essentially amount to "well it worked in the past so that's the best evidence we have! you'd be a fool to question it or think any deeper than that." I personally find these laughable. I don't think these people know very much about finance.

As one of those apparent simpletons, humor me - why.

  • Why do lower interest rates mean the market will drop over the extended period? What about that indicates it will?
  • Will the market drop in the near future?
  • If we experience 30 years of consistent 1% after inflation returns, does that mean that 4% is no longer a SWR?
  • How do you explain the 30% SP500 growth the last few years under similar conditions (record low interest rates)?

Keep in mind that even if the market returns 1% after inflation for the next 30 years, a 4% withdrawal is still safe. Frankly a really mediocre series of 30 years allows it to work, what kills it is a significant drop in the initial few years.

I don't care in the slightest if you reflect on current situations and question the conclusions of the Trinity study. But I do care when people pick a single factor difference between the past 100 years and now and choose that factor alone to base your entire skepticism off.

There are many differences between 2016 and the past 100 years. Interest rates are only a single difference.

LAGuy

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #53 on: July 15, 2016, 10:55:03 AM »
Interest rates go up and down. The Trinity Study is meant to give an indication of a safe withdrawal rate for a wide variety of circumstances. War. Famine. Disease. Depression. Commodity Shocks. Currency Crisis. My own gut feeling is that low interest rates and (maybe) slightly pricey stocks doesn't quite rise to the level of the aforementioned disasters, but then everybody has to find their own comfort level.

However, what is maddening is the claim that the 4% is optimistic. It's a statement grounded in zero reality. The Trinity Study is an excellent study grounded in facts. If you want to dismiss it and do your own analysis, that's fine! Pfau did that here, still got 4%. What's really silly, though, are those that are doing the equivalent of reading a study on bicycle safety and helmet usage and drawing the conclusion, "Hmm, this study says wearing a bicycle helmet reduces fatalities. I'm going to be smarter than that and wear two bicycle helmets."

forummm

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #54 on: July 15, 2016, 10:59:40 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.

Are interest rates important? Yes. But why are interest rates low? One reason is expectation of lower inflation for a very long time. Really high inflation rates are one of the things that can result in a portfolio failure (like retirement scenarios starting in '65-70). So if you have really low inflation expected, that could be a positive indication.

If you use the 4% rule, inflation is roughly 1%, the stock market is totally flat (no price appreciation at all) and dividends are roughly 2%, you can still last 28 years. It's a really conservative rule of thumb. And in that scenario, there would probably be price appreciation of stocks because earnings should rise along with inflation. So it's overly conservative even as stated.

AdrianC

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #55 on: July 15, 2016, 11:12:36 AM »
Tyler, IIRC, weren't you targeting something like 3%?
Yep.  But that requires a bit of context.
...
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.

Thanks for the explanation, Tyler. Makes sense. And sage advice at the end there.


waltworks

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #56 on: July 15, 2016, 11:15:25 AM »
Here's the thing - we're always in uncharted territory. And you can always, always stick some variable into the 130ish years of data we have and find some correlations.

But the thing is, people have been trying to predict even the general direction of the stock market and the economy for all of the history of capitalism. And they have all failed.

It might be that the data we're using is worthless. C'est la vie. Modifying your expectations or predicting the future based on speculation, even if it's expert speculation, has a terrible track record.

-W

AdrianC

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #57 on: July 15, 2016, 11:25:16 AM »
Here’s a bit of fun:

Assume the next 15 years are exactly the same as the last 15:
* S&P500 nominal CAGR 5%, real CAGR 2.8%
* Sequence of returns and inflation is the same each 15 year cycle
* FIRE Jan 1, 2001 (note: this ignores the 12% drop in 2000)
* $1M in S&P500
* 0.1% costs
* zero taxes

How would we do?
4% WR fails in year 26
3.5% fails in year 31
3% fails in year 40 (10 years into the third 15 year cycle)

Nothing proven, just an illustration. Could it happen something like this? Probably not. Maybe.

If anything, this illustrates the sequence of returns problem. A smooth 5% CAGR lasts till year 38 with a 4% WR.

ender

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #58 on: July 15, 2016, 11:32:17 AM »
Just an interesting counter observation, how many people would consider it a "fail" if their ER went as your example and they made it 26 years before they ran out of money?

Sure you'd not have millions in your 80s. You might need SS for income. But is your goal to not need SS and die with millions? Or to stop working as soon as possible?

For us, based on our expected FIRE age, blindly following a 4% withdrawal through your period and "lasting" 25 years -- without making any adjustments or additional income -- would put us solidly into SS range and complete ER success.

forummm

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #59 on: July 15, 2016, 12:12:35 PM »
Here’s a bit of fun:

Assume the next 15 years are exactly the same as the last 15:
* S&P500 nominal CAGR 5%, real CAGR 2.8%
* Sequence of returns and inflation is the same each 15 year cycle
* FIRE Jan 1, 2001 (note: this ignores the 12% drop in 2000)
* $1M in S&P500
* 0.1% costs
* zero taxes

How would we do?
4% WR fails in year 26
3.5% fails in year 31
3% fails in year 40 (10 years into the third 15 year cycle)

Nothing proven, just an illustration. Could it happen something like this? Probably not. Maybe.

If anything, this illustrates the sequence of returns problem. A smooth 5% CAGR lasts till year 38 with a 4% WR.


Note that the 4% rule assumes a significant bond holding as well (I think 60/40). I think the 4% rule would last longer than 26 years during that set of data.

tooqk4u22

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #60 on: July 15, 2016, 12:33:04 PM »
Interest rates go up and down. The Trinity Study is meant to give an indication of a safe withdrawal rate for a wide variety of circumstances. War. Famine. Disease. Depression. Commodity Shocks. Currency Crisis. My own gut feeling is that low interest rates and (maybe) slightly pricey stocks doesn't quite rise to the level of the aforementioned disasters, but then everybody has to find their own comfort level.

It is a bit of an exaggeration to say that it survived all of those things -
- Disease, not really as there was no major (as in caused economic calamity) - there was spanish flu in 1918 but that pre-dated the trinity study.
- famine, one time during the great depression (so if they happened at the same time was the root of problem - the depression or the famine)
- War, actually never because all of the wars for the trinity study were fought on foreign soil which is actually economically beneficial.
- Commodities, energy crisis in 70's - ok but may have contributed to the failure years of the 60's
- currency crisis, major one was Russia in 1998 so for the 4% trinity still falls under TBD but my guess is that it will be ok given the last 20 years.

However, what is maddening is the claim that the 4% is optimistic. It's a statement grounded in zero reality. The Trinity Study is an excellent study grounded in facts. If you want to dismiss it and do your own analysis, that's fine! Pfau did that here, still got 4%. What's really silly, though, are those that are doing the equivalent of reading a study on bicycle safety and helmet usage and drawing the conclusion, "Hmm, this study says wearing a bicycle helmet reduces fatalities. I'm going to be smarter than that and wear two bicycle helmets."

It is not the same as trying to wear two helmets for safety, it is more like having good reason to believe, but not know for sure, that you are taking the bike from the pavement to a rugged trail so you decide to wear a better helmet and maybe some other safety gear.

Also, I suppose you meant to link to Pfau article, but didn't so here:

1.7% SWR for a 60/40 portfolio based on high values/low rates - so who knows - he suggests that the higher fees translate to 50-60bps so it would be a 2.2-2.3% for those of us with vanguard.
Pfau 2015 White Paper


Concluded that under current conditions 4% SWR would be 69% chance of success vs. 94% - would likely be a bit higher with reduction of the fees.
Pfau July 2016 Article

tooqk4u22

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Re: Does The 4% Rule Work In Today’s Markets?
« Reply #61 on: July 15, 2016, 12:48:12 PM »
    As one of those apparent simpletons, humor me - why.

    • Why do lower interest rates mean the market will drop over the extended period? What about that indicates it will?
      They don't
    • Will the market drop in the near future?
      Who knows
    • If we experience 30 years of consistent 1% after inflation returns, does that mean that 4% is no longer a SWR?
    With that assumption, the answer is yes because it 100% fails. I get your point, but if you make an argument it has to last 30 years so change it to 1.2% above inflation and then your statement works ;).
    • How do you explain the 30% SP500 growth the last few years under similar conditions (record low interest rates)?
      Because we were coming out of a major financial decline (that probably was an over shoot) and interest rates helped drive up the valuations.  Interest rates declining promotes higher stock values/interest rates rising promotes lower values - we now have both being at historic levels so where do you go from here - low/nowhere/down, with the exception being that if earnings do start to improve significantly.
    [/list]

    Keep in mind that even if the market returns 1% after inflation for the next 30 years, a 4% withdrawal is still safe. Frankly a really mediocre series of 30 years allows it to work, what kills it is a significant drop in the initial few years.

    No its not, it 100% fails, because you are taking out more than the portfolio is growing and it catches up and is fully depleted in the 30th year.

    I don't care in the slightest if you reflect on current situations and question the conclusions of the Trinity study. But I do care when people pick a single factor difference between the past 100 years and now and choose that factor alone to base your entire skepticism off.

    There are many differences between 2016 and the past 100 years. Interest rates are only a single difference.

    It's not just a singular difference - its historically low rates combined with historically high valuations that has not occurred.
    « Last Edit: July 15, 2016, 01:05:14 PM by tooqk4u22 »

    waltworks

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    Re: Does The 4% Rule Work In Today’s Markets?
    « Reply #62 on: July 15, 2016, 12:50:52 PM »
    It is not the same as trying to wear two helmets for safety, it is more like having good reason to believe, but not know for sure, that you are taking the bike from the pavement to a rugged trail so you decide to wear a better helmet and maybe some other safety gear.

    Pavement is much more dangerous, though. I think you want a different metaphor.

    If you want to live your life feeling "safe" then by all means pick a number that makes you feel safe.

    I'll be riding my bike (with just one helmet!) :)

    -Walt

    tooqk4u22

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    Re: Does The 4% Rule Work In Today’s Markets?
    « Reply #63 on: July 15, 2016, 12:55:28 PM »
    Just an interesting counter observation, how many people would consider it a "fail" if their ER went as your example and they made it 26 years before they ran out of money?

    I would consider it a fail and so would the trinity study.

    Sure you'd not have millions in your 80s. You might need SS for income. But is your goal to not need SS and die with millions? Or to stop working as soon as possible?

    For us, based on our expected FIRE age, blindly following a 4% withdrawal through your period and "lasting" 25 years -- without making any adjustments or additional income -- would put us solidly into SS range and complete ER success.

    This is different question from the OP, but valid as I suspect most here that have been disciplined/smart enough to get to the point of FIRE are equally as disciplined/smart enough to recognize when things are going off kilter in a material way and will course correct by tightening up spending, work, etc - the whole flexibility side of the coin.

    My other comments on this thread are about 4% rule in isolation.

    tooqk4u22

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    Re: Does The 4% Rule Work In Today’s Markets?
    « Reply #64 on: July 15, 2016, 01:03:24 PM »
    It is not the same as trying to wear two helmets for safety, it is more like having good reason to believe, but not know for sure, that you are taking the bike from the pavement to a rugged trail so you decide to wear a better helmet and maybe some other safety gear.

    Pavement is much more dangerous, though. I think you want a different metaphor.

    If you want to live your life feeling "safe" then by all means pick a number that makes you feel safe.

    I'll be riding my bike (with just one helmet!) :)

    -Walt

    Pavement is not more dangerous....the cars that may be on the pavement might be.  There are plenty of paved trails with no cars and they are certainly safer than rugged trails.

    And yes I do want to live safe.
    « Last Edit: July 15, 2016, 01:06:02 PM by tooqk4u22 »

    Bicycle_B

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    Re: Does The 4% Rule Work In Today’s Markets?
    « Reply #65 on: July 15, 2016, 01:16:14 PM »
    MMM forums can be kind of funny sometimes. While I think its an awesome group of people - I also think they tend to be a little dogmatic when it comes to certain things and the defense of the 4% rule is one of them.

    Interest rates drive EVERYTHING in capital markets. Anyone with a modicum of financial sophistication would be able to see that a lower interest rate environment also means a lower safe withdrawal rate. Is 4% still safe? Maybe, maybe not. I'll say one thing for sure: It's less safe than it used to be.

    Some of the simplistic defenses essentially amount to "well it worked in the past so that's the best evidence we have! you'd be a fool to question it or think any deeper than that." I personally find these laughable. I don't think these people know very much about finance.

    As one of those apparent simpletons, humor me - why.

    • Why do lower interest rates mean the market will drop over the extended period? What about that indicates it will?



    Interest rates don't cause changes in stock prices, changes in interest rates do.  Eventually.

    Because:
    1) The value of an existing bond assumes a certain rate of return.
    2) When interest rates go down, the return built into that bond looks more attractive, so the bond's price jumps. 
    3) Eventually, stock prices move in a similar direction to the bond price.  Like a bond, a share of stock entitles you to an income stream.  The value of that income stream varies depending on what rate you can get from competing investments - such as new bonds that use the new interest rate.

    It's highly variable whether stock prices will trend with bonds in the short term.  But Uncle Warren specifically described the long term effect as being similar to gravity in that it is very powerful:

    http://archive.fortune.com/magazines/fortune/fortune_archive/1999/11/22/269071/index.htm

    4) So if interest rates STAY low, you are correct, they will not cause any changes. 
    5) But if interest rates go back up to some normal rate, such as the federal funds rate being above inflation instead of below it, the rates will be rising.  It's not the fact that rates are low now that is so significant for future stock prices, it's the fact that rates would need to rise in order to return to normal.  The effect based on the math in steps 1-2-3 would be to reduce stock prices.

    « Last Edit: July 15, 2016, 01:44:50 PM by Bicycle_B »

    waltworks

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    Re: Does The 4% Rule Work In Today’s Markets?
    « Reply #66 on: July 15, 2016, 01:18:43 PM »


    Pavement is not more dangerous....the cars that may be on the pavement might be.  There are plenty of paved trails with no cars and they are certainly safer than rugged trails.

    And yes I do want to live safe.

    You are talking to a long-time professional cyclist, just FYI. Pavement is MUCH, MUCH more dangerous, even without cars, simply due to higher speeds. A "fast" mountain bike ride will average 8-10mph with some brief periods at 20. You can at least double that for pavement. Road crashes mean hospital time. Mountain bike crashes usually just mean an extra beer before bed.

    -Walt


    Bicycle_B

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    Re: Does The 4% Rule Work In Today’s Markets?
    « Reply #67 on: July 15, 2016, 01:26:03 PM »
    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.

    Tyler,

    Excellent post. 

    I visited the site, visited all of the portfolios, experimented with calculators.  Very illuminating! 

    I will use these as an exploration tool and a reference for a long time, and pass the word to others.  Really good contribution.

    AdrianC

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    Re: Does The 4% Rule Work In Today’s Markets?
    « Reply #68 on: July 15, 2016, 02:14:02 PM »
    Just an interesting counter observation, how many people would consider it a "fail" if their ER went as your example and they made it 26 years before they ran out of money?

    I would. I want my portfolio to last 50 years!

    waltworks

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    Re: Does The 4% Rule Work In Today’s Markets?
    « Reply #69 on: July 15, 2016, 02:20:05 PM »
    Just an interesting counter observation, how many people would consider it a "fail" if their ER went as your example and they made it 26 years before they ran out of money?

    I would. I want my portfolio to last 50 years!

    Ok, how certain do you want to be? And how much of your life do you want to trade for that certainty?

    I'll take mediocre odds of this kind of "failure" in exchange for freedom. But everyone is different.

    -Walt

    AdrianC

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    Re: Does The 4% Rule Work In Today’s Markets?
    « Reply #70 on: July 15, 2016, 02:25:16 PM »
    Note that the 4% rule assumes a significant bond holding as well (I think 60/40). I think the 4% rule would last longer than 26 years during that set of data.

    It would if bonds returned the same as they did 2001-2015. But it's very likely that over the next 15 years they will not. So, going forward I don't know.

    I did a variation of it using 90% S&P500 and 10% cash, and only taking withdrawals when the market was up (this is Buffett's instructions for his wife). It was actually a bit worse than 100% S&P500 for this sequence of returns. 2001, 2002 and 2008 really mess things up, especially when they repeat every 15 years!

    As Tyler has been saying, if we can smooth out the returns we can support a better WR. This example illustrated that fact nicely.

    AdrianC

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    Re: Does The 4% Rule Work In Today’s Markets?
    « Reply #71 on: July 15, 2016, 02:50:35 PM »
    Ok, how certain do you want to be? And how much of your life do you want to trade for that certainty?

    I'll take mediocre odds of this kind of "failure" in exchange for freedom. But everyone is different.

    -Walt

    I understand what you're saying. Life isn't secure.

    This has been a good discussion for me and I thank you all for it.

    Going off topic, it is possible to structure our work to give us certain "freedoms". I haven't had a "job" for 75% of my career. I work from home, though I do travel to client sites every few weeks. Haven't had a regular commute for 9 years. I couldn't punch a clock or sit in a cube every day. It would drive me nuts and I'd be FIRE-ing as soon as I could, too. As it is, I have enjoyed my work and over-accumulated in the process, and now, or very soon, it will be time to do something else. As soon as I learn how to say no often enough. I am getting better - the phone ain't ringing much lately.

    tonysemail

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    Re: Does The 4% Rule Work In Today’s Markets?
    « Reply #72 on: July 15, 2016, 03:06:21 PM »
    Ok, how certain do you want to be? And how much of your life do you want to trade for that certainty?

    I'll take mediocre odds of this kind of "failure" in exchange for freedom. But everyone is different.

    I agree completely that there's no wrong answer here.
    Everyone has their own choice to make.

    I read this poll as saying mustachians are split 60/40 on this question.
    60% believe in 4% or higher.
    http://forum.mrmoneymustache.com/post-fire/what's-your-actualplanned-swr

    Hypothetically, I would choose 3.5% and I would trade 1 year for that certainty.

    Here's a small table I made with theoretical numbers:
    YearWithdrawal Ratecfiresim success rate
    20154.6%85%
    20164%96.5%
    20173.6%100%
    « Last Edit: July 15, 2016, 05:15:47 PM by tonysemail »

    Mr. Green

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    Re: Does The 4% Rule Work In Today’s Markets?
    « Reply #73 on: July 15, 2016, 04:46:51 PM »
    One of the things I think people lose sight of is the bigger picture WRT the odds on how their life will play out physically. Did you know a 40 year old man has a 1 in 4 chance of dying by age 70? A 55 year old has a 30% chance of being dead by 75. And that doesn't even consider those who become disabled in some capacity. When I read stuff like that and think about trying to push my odds of success from 95% to 98% by saving more money and lowering my withdrawal rate 0.5-1.0% it makes me question my priorities. I could work longer to pad that stash, only to become disabled later in life where my now larger stash still isn't enough to provide the right type of care I need. All of life is a risk. I simply believe that if you've reached the point where you've established some kind of SWR, you have much better odds of something else killing you first, before your stash turned out to not be enough. And if your stash did turn out to not be enough, it assumes you blindly withdrew your percentage to failure and made no adjustments or earned another dollar.

    Feel free to do some math for your own age group if you want a sobering view of your life expectancy.
    https://www.ssa.gov/oact/STATS/table4c6.html
    « Last Edit: July 15, 2016, 04:57:36 PM by Mr. Green »

    k9

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    Re: Does The 4% Rule Work In Today’s Markets?
    « Reply #74 on: July 15, 2016, 04:51:27 PM »
    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.
    I'm pretty sure interest rates were very low in the 1940s, and it was a hard time (I've heard about a world war in those days). Guess what: the 4% "rule" worked very well for those starting in the 40s.
    Interest rates are very low in Japan since the 1990s and their stock market is a mess since then, but guess what : the 4% "rule" is currently working, for a retiree who retired in 1990. And that's just the plain, mechanical, stocks-and-bonds-only, no-adjustment, stupid rule. No spending reduction, no part-time work, no diversification with real assets, no nothing.

    You can think the future will be worse than the last world war (and, yes, it sucked for investors in many parts of the world in this time) or than the (still running) 25-years-long bear market in Japan, but that's setting the bar pretty low, IMO.

    But, beware the "this time is different" state of mind is an investor's worst enemy.

    Mr. Green

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    Re: Does The 4% Rule Work In Today’s Markets?
    « Reply #75 on: July 15, 2016, 05:19:29 PM »
    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.
    I'm pretty sure interest rates were very low in the 1940s, and it was a hard time (I've heard about a world war in those days). Guess what: the 4% "rule" worked very well for those starting in the 40s.
    Interest rates are very low in Japan since the 1990s and their stock market is a mess since then, but guess what : the 4% "rule" is currently working, for a retiree who retired in 1990. And that's just the plain, mechanical, stocks-and-bonds-only, no-adjustment, stupid rule. No spending reduction, no part-time work, no diversification with real assets, no nothing.

    You can think the future will be worse than the last world war (and, yes, it sucked for investors in many parts of the world in this time) or than the (still running) 25-years-long bear market in Japan, but that's setting the bar pretty low, IMO.

    But, beware the "this time is different" state of mind is an investor's worst enemy.
    The 40's provided all the best starting years for a 30 year retirement period in history. Check it out on cfiresim.

    AdrianC

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    Re: Does The 4% Rule Work In Today’s Markets?
    « Reply #76 on: July 15, 2016, 05:25:34 PM »
    Interest rates are very low in Japan since the 1990s and their stock market is a mess since then, but guess what : the 4% "rule" is currently working, for a retiree who retired in 1990. And that's just the plain, mechanical, stocks-and-bonds-only, no-adjustment, stupid rule. No spending reduction, no part-time work, no diversification with real assets, no nothing.

    What asset allocation are you using for the Japan case? I'd read somewhere (Bogleheads?) that a 60/40 domestic only investor in Japan starting 4% WR in 1990 is broke by now.

    AdrianC

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    Re: Does The 4% Rule Work In Today’s Markets?
    « Reply #77 on: July 15, 2016, 05:29:40 PM »
    I agree completely that there's no wrong answer here.
    Everyone has their own choice to make.

    I read this poll as saying mustachians are split 60/40 on this question.
    60% believe in 4% or higher.
    http://forum.mrmoneymustache.com/post-fire/what's-your-actualplanned-swr

    Hypothetically, I would choose 3.5% and I would trade 1 year for that certainty.

    Wow! I hadn't seen that poll before. One could be excused for guessing it would be more like a 95/5 split.

    forummm

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    Re: Does The 4% Rule Work In Today’s Markets?
    « Reply #78 on: July 15, 2016, 06:19:01 PM »
    Just an interesting counter observation, how many people would consider it a "fail" if their ER went as your example and they made it 26 years before they ran out of money?

    I would. I want my portfolio to last 50 years!

    No Social Security and Medicare?

    forummm

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    Re: Does The 4% Rule Work In Today’s Markets?
    « Reply #79 on: July 15, 2016, 06:23:59 PM »
    I agree completely that there's no wrong answer here.
    Everyone has their own choice to make.

    I read this poll as saying mustachians are split 60/40 on this question.
    60% believe in 4% or higher.
    http://forum.mrmoneymustache.com/post-fire/what's-your-actualplanned-swr

    Hypothetically, I would choose 3.5% and I would trade 1 year for that certainty.

    Wow! I hadn't seen that poll before. One could be excused for guessing it would be more like a 95/5 split.


    I voted/commented there. I had a much more conservative plan at that time. But scaling back the portfolio goal will save me years of my life. It took me time to become more comfortable with being flexible and the possibility of needing to get a little income in the future if I happen to hit a bad sequence of returns scenario.

    forummm

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    Re: Does The 4% Rule Work In Today’s Markets?
    « Reply #80 on: July 15, 2016, 06:35:08 PM »
    One of the things I think people lose sight of is the bigger picture WRT the odds on how their life will play out physically. Did you know a 40 year old man has a 1 in 4 chance of dying by age 70? A 55 year old has a 30% chance of being dead by 75. And that doesn't even consider those who become disabled in some capacity. When I read stuff like that and think about trying to push my odds of success from 95% to 98% by saving more money and lowering my withdrawal rate 0.5-1.0% it makes me question my priorities. I could work longer to pad that stash, only to become disabled later in life where my now larger stash still isn't enough to provide the right type of care I need. All of life is a risk. I simply believe that if you've reached the point where you've established some kind of SWR, you have much better odds of something else killing you first, before your stash turned out to not be enough. And if your stash did turn out to not be enough, it assumes you blindly withdrew your percentage to failure and made no adjustments or earned another dollar.

    Feel free to do some math for your own age group if you want a sobering view of your life expectancy.
    https://www.ssa.gov/oact/STATS/table4c6.html

    Wow. I'm approximately middle aged. I probably have a higher life expectancy than the average person my age (highly educated, financially stable, in good health, decently long lives in grandparents, etc). But still--a bit of an odd realization to have.

    AdrianC

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    Re: Does The 4% Rule Work In Today’s Markets?
    « Reply #81 on: July 16, 2016, 05:29:37 AM »
    Just an interesting counter observation, how many people would consider it a "fail" if their ER went as your example and they made it 26 years before they ran out of money?

    I would. I want my portfolio to last 50 years!

    No Social Security and Medicare?

    Yes. I'd still consider it a FIRE-fail if we ended up living only on SS. Not eating cat food fail, of course. We'd still be OK. Just more reliant on others than I'd want to be.

    AdrianC

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    Re: Does The 4% Rule Work In Today’s Markets?
    « Reply #82 on: July 16, 2016, 06:11:44 AM »
    [Wow! I hadn't seen that poll before. One could be excused for guessing it would be more like a 95/5 split.


    I voted/commented there. I had a much more conservative plan at that time. But scaling back the portfolio goal will save me years of my life. It took me time to become more comfortable with being flexible and the possibility of needing to get a little income in the future if I happen to hit a bad sequence of returns scenario.

    These discussions help, right? I understand some folks getting frustrated:

    https://www.flickr.com/photos/22984501@N06/2961175776

    But that could be applied to about every other thread on here. In rehashing the old stuff we sometimes achieve new insights.

    AdrianC

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    Re: Does The 4% Rule Work In Today’s Markets?
    « Reply #83 on: July 16, 2016, 06:16:19 AM »
    One of the things I think people lose sight of is the bigger picture WRT the odds on how their life will play out physically. Did you know a 40 year old man has a 1 in 4 chance of dying by age 70? A 55 year old has a 30% chance of being dead by 75. And that doesn't even consider those who become disabled in some capacity. When I read stuff like that and think about trying to push my odds of success from 95% to 98% by saving more money and lowering my withdrawal rate 0.5-1.0% it makes me question my priorities. I could work longer to pad that stash, only to become disabled later in life where my now larger stash still isn't enough to provide the right type of care I need. All of life is a risk. I simply believe that if you've reached the point where you've established some kind of SWR, you have much better odds of something else killing you first, before your stash turned out to not be enough. And if your stash did turn out to not be enough, it assumes you blindly withdrew your percentage to failure and made no adjustments or earned another dollar.

    Feel free to do some math for your own age group if you want a sobering view of your life expectancy.
    https://www.ssa.gov/oact/STATS/table4c6.html

    That's a great post.

    I've little doubt that our stash will see me out. We desire our money to fund us for 50+ years because the women in my wife's family have impressive longevity. Not the case for me, my dad, at 75, is the oldest member of my family, and he's alive thanks to the wonderful services provided by the UK NHS.

    k9

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    Re: Does The 4% Rule Work In Today’s Markets?
    « Reply #84 on: July 16, 2016, 07:45:58 AM »
    Interest rates are very low in Japan since the 1990s and their stock market is a mess since then, but guess what : the 4% "rule" is currently working, for a retiree who retired in 1990. And that's just the plain, mechanical, stocks-and-bonds-only, no-adjustment, stupid rule. No spending reduction, no part-time work, no diversification with real assets, no nothing.

    What asset allocation are you using for the Japan case? I'd read somewhere (Bogleheads?) that a 60/40 domestic only investor in Japan starting 4% WR in 1990 is broke by now.
    I used 50/50. But my numbers are maybe a little old (I had checked in something like 2013). Maybe now our Japanese investor is actually broke, because even if he wasn't back then, he was not in very good shape. Also note I didn't start from the very top in 1989 but from the start of the year in 1990, and the annual expenses for 1990 were taken out of the portfolio at the start of the year (I'm not sure the Trinity study works that way, but that makes sense). The decline from top in 1989 to end of 1990 was very steep, so that probably has an influence on the results.

    Well, anyway, depending on the japanese stock market from 1990 sucked, no matter what your exact retirement date and spending plan was. But, clearly, small adjustments to the dumb rule could have saved the japanese mustachian's life. And, obviously, true diversification would have helped, too.

    forummm

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    Re: Does The 4% Rule Work In Today’s Markets?
    « Reply #85 on: July 16, 2016, 01:22:18 PM »
    [Wow! I hadn't seen that poll before. One could be excused for guessing it would be more like a 95/5 split.


    I voted/commented there. I had a much more conservative plan at that time. But scaling back the portfolio goal will save me years of my life. It took me time to become more comfortable with being flexible and the possibility of needing to get a little income in the future if I happen to hit a bad sequence of returns scenario.

    These discussions help, right? I understand some folks getting frustrated:

    https://www.flickr.com/photos/22984501@N06/2961175776

    But that could be applied to about every other thread on here. In rehashing the old stuff we sometimes achieve new insights.


    Yes, I find the discussions to be useful overall (take the example of my post here about saving years of working). Sometimes I do a little eyeroll when there are 3 new threads about the 4% rule at the same time, and we are rehashing all the same things. But the newer people haven't read through the old threads, so it's new to them.

    Just an interesting counter observation, how many people would consider it a "fail" if their ER went as your example and they made it 26 years before they ran out of money?

    I would. I want my portfolio to last 50 years!

    No Social Security and Medicare?

    Yes. I'd still consider it a FIRE-fail if we ended up living only on SS. Not eating cat food fail, of course. We'd still be OK. Just more reliant on others than I'd want to be.

    You could partition your funds. Have a 4% WR fund and a 2nd fund that is to supplement SS. As little as $60k invested in 100% stocks for 30ish years (or however long you have until full SS) would provide something like a $15k/yr supplement to SS. Sequence of returns for fund #2 doesn't matter so much because you aren't drawing on it for such a long time.

    AdrianC

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    Re: Does The 4% Rule Work In Today’s Markets?
    « Reply #86 on: July 18, 2016, 06:52:05 AM »
    You could partition your funds. Have a 4% WR fund and a 2nd fund that is to supplement SS. As little as $60k invested in 100% stocks for 30ish years (or however long you have until full SS) would provide something like a $15k/yr supplement to SS. Sequence of returns for fund #2 doesn't matter so much because you aren't drawing on it for such a long time.

    I wish I had 30 years till full SS :-)

    Interesting idea though.

    forummm

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    Re: Does The 4% Rule Work In Today’s Markets?
    « Reply #87 on: July 18, 2016, 08:55:41 AM »
    You could partition your funds. Have a 4% WR fund and a 2nd fund that is to supplement SS. As little as $60k invested in 100% stocks for 30ish years (or however long you have until full SS) would provide something like a $15k/yr supplement to SS. Sequence of returns for fund #2 doesn't matter so much because you aren't drawing on it for such a long time.

    I wish I had 30 years till full SS :-)

    Interesting idea though.

    If you have less than 30 years to 67, then the 4% gets even more conservative for you. Try out some cFIREsim simulations with your info. You might be surprised. If you are far away from FIRE, you might not be as far away as you think.

    caracarn

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    Re: Does The 4% Rule Work In Today’s Markets?
    « Reply #88 on: July 18, 2016, 10:16:23 AM »
    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.


    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.


    I think the difference here to consider is that the rate of rising interest rates in the 60s and into the 70s is very, very unlikely to re-occur.  I do not foresee mortgage rates at 24% anytime soon.  So the question then is if those models had some portion of stock impact, if we experience a much smaller interest rate increase, does it not stand to reason that the stock impact will also me much smaller?  If that's not true, then are the two item correlated and causal at all?

    ender

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    Re: Does The 4% Rule Work In Today’s Markets?
    « Reply #89 on: July 18, 2016, 06:12:03 PM »
    You could partition your funds. Have a 4% WR fund and a 2nd fund that is to supplement SS. As little as $60k invested in 100% stocks for 30ish years (or however long you have until full SS) would provide something like a $15k/yr supplement to SS. Sequence of returns for fund #2 doesn't matter so much because you aren't drawing on it for such a long time.

    I wish I had 30 years till full SS :-)

    Interesting idea though.

    If you have less than 30 years to 67, then the 4% gets even more conservative for you. Try out some cFIREsim simulations with your info. You might be surprised. If you are far away from FIRE, you might not be as far away as you think.

    Playing with SS guesstimates really, really makes 4% pretty safe.

    I think we're at about a $30k/year ($20k me, wife would be 1/2 that or $10k) if I work till 40 and take full SS.

    Pretty crazy how quickly your SS credits build into a very sizable income in ER (well, at that point more like R).

    AdrianC

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    Re: Does The 4% Rule Work In Today’s Markets?
    « Reply #90 on: July 18, 2016, 07:25:13 PM »
    If you have less than 30 years to 67, then the 4% gets even more conservative for you. Try out some cFIREsim simulations with your info. You might be surprised. If you are far away from FIRE, you might not be as far away as you think.

    I'm good to go. I get 100% success rate in cFIREsim.

    forummm

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    Re: Does The 4% Rule Work In Today’s Markets?
    « Reply #91 on: July 18, 2016, 07:40:57 PM »
    If you have less than 30 years to 67, then the 4% gets even more conservative for you. Try out some cFIREsim simulations with your info. You might be surprised. If you are far away from FIRE, you might not be as far away as you think.

    I'm good to go. I get 100% success rate in cFIREsim.

    Congrats! Is this the first time you realized that?

    steveo

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    Re: Does The 4% Rule Work In Today’s Markets?
    « Reply #92 on: July 18, 2016, 08:41:07 PM »
    You could partition your funds. Have a 4% WR fund and a 2nd fund that is to supplement SS. As little as $60k invested in 100% stocks for 30ish years (or however long you have until full SS) would provide something like a $15k/yr supplement to SS. Sequence of returns for fund #2 doesn't matter so much because you aren't drawing on it for such a long time.

    I wish I had 30 years till full SS :-)

    Interesting idea though.

    If you have less than 30 years to 67, then the 4% gets even more conservative for you. Try out some cFIREsim simulations with your info. You might be surprised. If you are far away from FIRE, you might not be as far away as you think.

    This is a good point. I just did this for myself. I'm 43 now. I'm Australian and I assume I can receive social security at 70. I'll work for another 4 years and assume I have 700k saved up. At that point cFIREsim gives me a 90% chance of success based on spending 30-50k. My WR at that point will be over 5% assuming a spending rate of 40k.

    All of those projections are fairly conservative.

    The more I do the figures the more I think I'm more at risk of working too long rather than having too little money.

    I also don't really see the problem with today's markets. Of course the returns mightn't be great but I figure it's still pretty safe especially because I bet that I save more money or downsize my house or work part time or something similar.

    arebelspy

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    Re: Does The 4% Rule Work In Today’s Markets?
    « Reply #93 on: July 19, 2016, 02:30:55 AM »
    Yes, I find the discussions to be useful overall

    +1.  Stuff gets worded in a different way, and it helps to solidify things or have another way of thinking about it.

    The biggest aha for me in this one was the answer "why are you starting at 4% and working down, rather than the historical average" when projecting that right now's environment (low interest rates, high valuations) will lead to a lower WR.  That's a great point--and probably if you take the historical average, take into account the high valuations and low interest rate environment, and work downward, you end up with somewhere around 4% (or Pfau's 4.16% from the first reply in the thread).

    4% is quite conservative, and one should be conservative because of the environment.  Were we in other times, 5% or 6% might be more appropriate.

    Read through this whole thread and enjoyed it.  Thanks to those who contributed!
    We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
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    Re: Does The 4% Rule Work In Today’s Markets?
    « Reply #94 on: July 19, 2016, 08:02:51 AM »
    I'm good to go. I get 100% success rate in cFIREsim.

    Congrats! Is this the first time you realized that?

    I've known that the math works out for some time.

    Realizing that I really, really do not need to work for money...that's still sinking in. My wife still doesn't believe it.

    That extreme protestant work ethic we were both raised with is still messing with our heads.


    Rubic

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    Re: Does The 4% Rule Work In Today’s Markets?
    « Reply #95 on: July 19, 2016, 09:10:47 AM »
    I'm good to go. I get 100% success rate in cFIREsim.

    Congrats! Is this the first time you realized that?

    I've known that the math works out for some time.

    Realizing that I really, really do not need to work for money...that's still sinking in. My wife still doesn't believe it.

    That extreme protestant work ethic we were both raised with is still messing with our heads.

    I'm in a similar situation.  FI for some time now, but not yet RE.  Up until a short while ago I hadn't really considered hanging up my spurs, but last year I had to cancel a bicycle trip in France due to work-related duties.  At that point I realized I was sacrificing life goals for excess money.  I hope to wind down my affairs soon and join the FIRE party in 2017.  I've already put my condo up for sale so I'll be free for international travel.

    In the process of winding down my affairs (not OMY syndrome, btw), my current 3.3% SWR (100% success) is dropping toward 3.0%.  This hasn't been a goal, just an unexpected outcome of my particular circumstances.




    mathjak107

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    Re: Does The 4% Rule Work In Today’s Markets?
    « Reply #96 on: July 21, 2016, 04:44:06 AM »
    until you break the numbers down like michael  kitces did  you don't realize just how bad things have to be for the 4% swr to fail .

    in fact if it was not for the 5 worst time frames a swr would have been 6.50% . so that is a whopper of an income drop to clear those worst time frames , 1907, 1929, 1937 , 1965/1966 .

    in 90% of every rolling time frame . in practice a 4% swr left you 30 years later with more then you even started with and 2/3's of the time 2x or more what you started with .

    https://www.kitces.com/blog/what-returns-are-safe-withdrawal-rates-really-based-upon/

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    Re: Does The 4% Rule Work In Today’s Markets?
    « Reply #97 on: July 21, 2016, 05:44:30 AM »
    I'm in a similar situation.  FI for some time now, but not yet RE.  Up until a short while ago I hadn't really considered hanging up my spurs, but last year I had to cancel a bicycle trip in France due to work-related duties.  At that point I realized I was sacrificing life goals for excess money. 

    Yes, that will do it. I've taken most of this summer off with the kids. I do have a few work related things I need to do and earmarked last week (kids were at camp) and this week to do them before we head off to Europe for three weeks. Man, it has been difficult getting back into work mode these two weeks. Yes, I think I'm mentally ready for FIRE.

    Mr. Green

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    Re: Does The 4% Rule Work In Today’s Markets?
    « Reply #98 on: July 21, 2016, 06:14:10 AM »
    until you break the numbers down like michael  kitces did  you don't realize just how bad things have to be for the 4% swr to fail .

    in fact if it was not for the 5 worst time frames a swr would have been 6.50% . so that is a whopper of an income drop to clear those worst time frames , 1907, 1929, 1937 , 1965/1966 .

    in 90% of every rolling time frame . in practice a 4% swr left you 30 years later with more then you even started with and 2/3's of the time 2x or more what you started with .

    https://www.kitces.com/blog/what-returns-are-safe-withdrawal-rates-really-based-upon/
    I made a blog post a couple months back about this where I illustrated rolling 10-, 20-, and 30-year return periods starting with the same year and color coded the cells according to how that period performed (according to cfiresim). I was amazed at how terrible your returns had to be for virtually the entire 30-year period in order for a portfolio to reach zero. Here is the chart. Only the years shaded in red actually experienced complete portfolio failure. Check out the post if you want the full explanation for all the color shading of the return columns. https://investedlife.wordpress.com/2016/04/25/understanding-sequence-of-returns-risk/


    mathjak107

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    Re: Does The 4% Rule Work In Today’s Markets?
    « Reply #99 on: July 21, 2016, 06:23:37 AM »
    kitces work showed that the 30 year returns were not the problem , in every case it was the first 15 years that ruined the entire 30 year time frame .

    in fact the 30 year time frames in the most horrible  scenario's were really not bad . but it was the 15 year start that was pathetic .

    no matter how good things recovered after the 15 years it was to little to late as to much was spent down .

    want to know what the actual results were over the worst 30 year periods ever ?

    suppose you were so unlucky to retire in one of those worst time framess ,what would your 30 year results look like :

    1907 stocks returned 7.77% -- bonds 4.250-- rebalanced portfolio 7.02- - inflation 1.64--

    1929 stocks 8.19% - - bonds 1.74%-- rebalanced portfolio 6.28-- inflation 1.69--

    1937 stocks 10.12 - - bonds 2.13 - rebalanced portfolio -- 7.24 inflation-- 2.82

    1966 stocks 10.23 - -bonds 7.85 -- rebalanced portfolio 9.56- - inflation 5.38

    for comparison the 140 year average's were:

    stocks 8.39--bonds 2.85%--rebalanced portfolio 6.17% inflation 2.23%

    so what made those time frames the worst ? what made them the worst is the fact in every single retirement time frame the outcome of that 30 year period was determined not by what happened over the 30 years but the entire outcome was decided in the first 15 years.

    so lets look at the first 15 years in those time frames determined to be the worst we ever had.

    1907--- stocks minus 1.47%---- bonds minus .39%-- rebalanced minus .70% ---inflation 1.64%

    1929---stocks 1.07%---bonds 1.79%---rebalanced 2.29%--inflation 1.69%

    1937---stocks -- 3.45%---bonds minus 3.07%-- rebalanced 1.23%--inflation 2.82%

    1966-stocks minus .13%--bonds 1.08%--rebalanced .64%-- inflation 5.38%