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Learning, Sharing, and Teaching => Investor Alley => Topic started by: AdrianC on July 12, 2016, 10:01:31 AM

Title: Does The 4% Rule Work In Today’s Markets?
Post by: AdrianC 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.

Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: brooklynguy 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?" (http://www.forbes.com/sites/wadepfau/2016/07/12/what-is-the-sustainable-spending-rate-for-retirees-in-2016/2/#55078a2b32f7), 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Telecaster 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
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: 2Birds1Stone on July 12, 2016, 01:28:51 PM
Yes it does.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Retire-Canada 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. ;)
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: AdrianC 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" :-)
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: AdrianC 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?
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: brooklynguy 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: k9 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: AdrianC 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).
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Livewell 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/
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Telecaster 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. 

Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: TheAnonOne 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: caracarn 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. 
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Telecaster 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. 
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: caracarn 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Telecaster 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. 



Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Bicycle_B 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.

Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Lucas 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). 
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: LAGuy 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: waltworks 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
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Bicycle_B 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?
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: k9 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: waltworks 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
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: LAGuy 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Telecaster 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.   

Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: waltworks 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).
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: k9 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: AdrianC 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Retire-Canada 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: tooqk4u22 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 (http://www.fa-mag.com/userfiles/stories/whitepapers/2015/WealthVest_Sept_2015_Whitepaper/12040-Pfau-Sustainable-Withdrawal-Rates-Whitepaper-.pdf) 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. 

Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Tyler 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!
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: AdrianC 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: ender 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?" (http://www.forbes.com/sites/wadepfau/2016/07/12/what-is-the-sustainable-spending-rate-for-retirees-in-2016/2/#55078a2b32f7), 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.

Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: tooqk4u22 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Mr. Green 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).
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: LAGuy 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."
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Mr. Green 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?
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: LAGuy 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: ender 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 (https://en.wikipedia.org/wiki/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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: AdrianC 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%?
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: AdrianC 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?
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Mr. Green 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: markbike528CBX 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Bicycle_B 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. 



Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: LAGuy 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Bicycle_B 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: ender 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Tyler 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 (https://portfoliocharts.com/).  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. 
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: tooqk4u22 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. 
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: REfinAnon 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: tooqk4u22 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.

Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: ender 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.


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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: LAGuy 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."
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: forummm 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: AdrianC 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.

Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: waltworks 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
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: AdrianC 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: ender 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: forummm 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: tooqk4u22 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 (http://www.fa-mag.com/userfiles/stories/whitepapers/2015/WealthVest_Sept_2015_Whitepaper/12040-Pfau-Sustainable-Withdrawal-Rates-Whitepaper-.pdf)


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 (http://retirementresearcher.com/4-rule-work-todays-markets/)
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: tooqk4u22 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: waltworks 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
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: tooqk4u22 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: tooqk4u22 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Bicycle_B 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.

Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: waltworks 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

Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Bicycle_B 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 (https://portfoliocharts.com/).  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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: AdrianC 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!
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: waltworks 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
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: AdrianC 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: AdrianC 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: tonysemail 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%
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Mr. Green 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
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: k9 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Mr. Green 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: AdrianC 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: AdrianC 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: forummm 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?
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: forummm 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: forummm 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: AdrianC 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: AdrianC 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: AdrianC 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: k9 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: forummm 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: AdrianC 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: forummm 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: caracarn 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?
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: ender 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).
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: AdrianC 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: forummm 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?
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: steveo 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: arebelspy 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!
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: AdrianC 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.

Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Rubic 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.



Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: mathjak107 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/
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: AdrianC 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.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Mr. Green 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/

Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: mathjak107 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%


Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: k9 on July 21, 2016, 07:21:05 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 .

That's the reason why people like Wade Pfau talk about a rising glide path of equities. In other words, you start retirement with a given amount of bonds (say, 50/50) to protect yourself from an ugly 15-year initial period. Then, you live only on your bonds at the beginning of your retirement, leaving the stocks to grow. If the market went down during the 15 years and then recovered, you're good : you didn't sell stocks when they were cheap. If it went up, cool: you now have more money and less years to live on your portfolio.

That leads you, contrary to the usual recommendations, to have a bigger and bigger stock allocation as you get older. So the overall idea would be to gradually increase your bond allocation as you get closer to retirement, then gradually decrease it once you're retired. Bonds are here mainly to protect your during the critical time when you switch from growing your stash to spending it.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: mathjak107 on July 21, 2016, 07:31:52 AM
that is what we did and i was pretty glad we did it that way having retired back last july .

we cut equity's way down and until we have a substantial up cycle equity levels are lower then i typically would tolerate
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: forummm on July 23, 2016, 10:37:27 AM
that is what we did and i was pretty glad we did it that way having retired back last july .

we cut equity's way down and until we have a substantial up cycle equity levels are lower then i typically would tolerate

This statement is a little ambiguous. I hope you aren't saying that after the market goes up a lot you will switch more into stocks.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: mathjak107 on July 23, 2016, 10:55:40 AM
a rising glide path is  a bit  different then that  . it cuts the odds down upon entering retirement of  having extended periods of loss such as if we had  not just a v shape  recovery like we had . a rising glide path calls for increasing equity's by about 2%  over a 15 year period up to your desired allocation .

it is a controlled rise in allocation that has no bearing on market performance in the shorter term .

early losses can be quite harmful to a portfolio before it has a good run up .even a prolonged modest drop that is extended can effect your outcome  .

so far last year we spent only principal since we were up about 1% . this year we are up about 4.50% so we have still burned excessive principal to date .

a rising glide path holds down early losses, and increases your gain potential  down the road  . remember for many ,  retirement is not as much about growing richer as it is about not growing poorer .

i had the pedal to the metal for decades growing money . now i  invest to meet goal .
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: forummm on July 23, 2016, 05:47:25 PM
it is a controlled rise in allocation that has no bearing on market performance in the shorter term .

Assume you mean the inverse (the market performance as no bearing on the rise in allocation)--i.e. no market timing. If so, great!
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: mathjak107 on July 23, 2016, 06:32:15 PM
correct , no market timing
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: wotan on July 25, 2016, 08:54:51 AM
http://arichlife.passionsaving.com/
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Classical_Liberal on July 25, 2016, 10:30:14 AM
http://arichlife.passionsaving.com/

This is the same recycled market timing/disaster is looming stuff people try to put forth all of the time.  No one denies that shiller PE does have a correlation to 10 year returns & his contribution to long term investing is invaluable.  The problem is no one can predict how or when reversion to mean will happen.  In fact, there is some legitimate debate as to whether or not some underlying fundamentals have changed over the past 140 years which have permanently altered the mean PE10.

PE 10 is helpful to extrapolate expected future returns, but is basically useless in determining asset allocation for the present.  For example, mean PE10 of S& P 500 is 16.7 http://www.multpl.com/shiller-pe/.  Following this logic the market was VERY frothy back in 1993 with a PE10 of 20.3, more than 20 percent above mean.  An investor who acted on that data would have missed out on annualized returns of 9.10 (CAGR) http://www.moneychimp.com/features/market_cagr.htm from 1993 to 2015, the PE 10 only dropped below this level very temporarily during the financial crisis.  So the index was "overvalued" for a 22 year period, all the while producing excellent returns!

Shiller may be right and the market may not always be 100 percent efficient. It probably does have psychological/emotional undercurrents affecting valuation.  The problem is those undercurrents can last for half of an investor's lifetime, or an entire early retirement.  I'll buy and hold, thank you very much.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Telecaster on July 25, 2016, 01:24:34 PM
http://arichlife.passionsaving.com/

Good Lord.  Rob Bennett is completely fucking nuts.   If you've ever read another popular early retirement board, Bogleheads, M*, TMF, etc.  chances are pretty good Rob has been kicked off of it.   

Classical_Liberal had it right.  Some of the time stock markets returns will be below average--by definition of the word average.    It is okay to be below average some of the time, because, again by definition, you will be below average some of the time.   Bennett keeps saying times of high valuation predict a crash.  Oh no they don't!  Higher than average valuations predict lower than average returns.  What can you do about it?  Nothing, accept that sometimes your returns will be below average. 

Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: steveo on July 25, 2016, 04:26:47 PM
It is okay to be below average some of the time, because, again by definition, you will be below average some of the time.   Bennett keeps saying times of high valuation predict a crash.  Oh no they don't!  Higher than average valuations predict lower than average returns.  What can you do about it?  Nothing, accept that sometimes your returns will be below average.

I like this. I think it's 100% correct as well. You should always think of what your action should be. Typically the action is stick to the plan - i.e. buy if you can and don't sell.

Sure there may be exceptions at times but this is so rare it's not funny. I'm thinking the 2000 tech bubble.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: arebelspy on July 25, 2016, 06:19:28 PM
http://arichlife.passionsaving.com/

Good Lord.  Rob Bennett is completely fucking nuts.   If you've ever read another popular early retirement board, Bogleheads, M*, TMF, etc.  chances are pretty good Rob has been kicked off of it.   

(https://dl.dropboxusercontent.com/u/9743562/icon_lol.gif)

The hocomania is real!
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: lordmetroid on September 24, 2016, 03:06:55 AM
4% is too conservative in my opinion. The Trinity study assumes you will make a full time retirement and not earn a single penny. A person committed to FIRE is bound to earn some money from their hobbies in some way or another. Maybe a 6-8% withdrawal rate is more appropriate to avoid sitting on a huge amount of cash at the end of your life.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: mathjak107 on September 24, 2016, 03:42:36 AM
the stress testing on a portfolio is always after subracting out additional income ,whether social security , pension ,rental or a job . it is only based on the draw you need from the portfolio portion -period .

the trinity is only telling you what the portfolio portion can safely generate itself . what you get in total is another issue and has nothing to do with whether what you need from the portfolio portion lives or dies  before you do . .

so in my case i subtract off our needs all the other income . what is left is what i need my portfolio to produce . i would then go to firecalc or a good planner and see how drawing that amount from what i have would have stood up to the worst of the past .

the results have zero to do with any other income . that comes off before you stress test things .

no one ever said the 4% draw is a practical fixed amount for life . a good plan has that amount adjusted as time goes on .

many folks use the rule of thumb that if  you are up more than 50% from where you started year one you can increase spending by 10% plus any inflation adjusting you normally do .

every 3 years  repeat the process if you are still 50% above that starting number  . dying with two much money left on the table that could have been enjoyed  would be a shame unless legacy money is your goal .

Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Retire-Canada on September 24, 2016, 07:13:11 AM
. dying with two much money left on the table that could have been enjoyed  would be a shame unless legacy money is your goal .

Spending money just to spend it would be a shame as well. More spending doesn't lead to more enjoyment. I've tried that during the earlier part of my life and within the confines of some pretty modest incomes compared to a lot of folks on this forum hit a point where I was just spending money with limited happiness gains. The converse has been true as well as I reigned in my spending and redirected it towards savings.

I do agree that the typical MMM 4% SWR retiree should have a plan to deal with all the potential excess wealth they end up with. You'd want to get through the first part of your FIRE both to allow for sequence of return risk to play out and for compounding to grow your 'stach to the point of needing to decide what to do with it. I figure that's something to worry about once I have a ton of free time in FIRE.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: mathjak107 on September 24, 2016, 07:27:22 AM
more money may not buy happiness or enjoyment but as i learned in my lifetime it sure buys choices in life . the 4% swr was never ever meant to be a lifetime spending plan . it is only for ball parking day 1 .

there are to many other factors acting on it such as life expectancy and human spending patterns for it to be a real time plan .
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: TomTX on September 24, 2016, 08:27:45 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.

Wade Pfau always says that. He always does something to significantly handicap the projections. Stupidly high fees. Presume that the future will be 25% worse than history, so take all the historical data and reduce returns by 25% before running the Monte Carlo. Et cetera.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Retire-Canada on September 24, 2016, 10:02:00 AM
more money may not buy happiness or enjoyment but as i learned in my lifetime it sure buys choices in life . the 4% swr was never ever meant to be a lifetime spending plan . it is only for ball parking day 1 .

there are to many other factors acting on it such as life expectancy and human spending patterns for it to be a real time plan .

It definitely buys choices. Our society is all about giving us choices in how to burn through our money and be miserable.

For sure I don't see anyone robotically spending 4% [inflation adjusted] each year until they die. My own thought is to spend 3-5% averaging out to 4%.

For the FIREr with a $1M starting portfolio and a plan to take ~$40K/yr if they end up with a $3M portfolio they'll need to figure out what to do with the extra money that has some meaning to them. Spending $120K/yr+ just to burn through it so they don't leave money on the table doesn't make a lot of sense.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: TomTX on September 24, 2016, 11:26:21 AM
more money may not buy happiness or enjoyment but as i learned in my lifetime it sure buys choices in life . the 4% swr was never ever meant to be a lifetime spending plan . it is only for ball parking day 1 .

there are to many other factors acting on it such as life expectancy and human spending patterns for it to be a real time plan .

It definitely buys choices. Our society is all about giving us choices in how to burn through our money and be miserable.

For sure I don't see anyone robotically spending 4% [inflation adjusted] each year until they die. My own thought is to spend 3-5% averaging out to 4%.

For the FIREr with a $1M starting portfolio and a plan to take ~$40K/yr if they end up with a $3M portfolio they'll need to figure out what to do with the extra money that has some meaning to them. Spending $120K/yr+ just to burn through it so they don't leave money on the table doesn't make a lot of sense.

That would cover the buy-in for the very ritzy retirement place my aunt and uncle moved to.  We stayed a couple of nights (in one of the separate apartments that residents can reserve for guests!) - OMG great restaurants, pools, gyms, rubberized running/walking paths to almost everywhere, huge pond with wildlife, bocce ball, tennis, library, golf cart shuttle service on-call, fountains, art, concerts, etc etc.

Covers the full gamut of care from independent living to full nursing to hospice.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: mathjak107 on September 24, 2016, 12:47:57 PM
more money may not buy happiness or enjoyment but as i learned in my lifetime it sure buys choices in life . the 4% swr was never ever meant to be a lifetime spending plan . it is only for ball parking day 1 .

there are to many other factors acting on it such as life expectancy and human spending patterns for it to be a real time plan .

It definitely buys choices. Our society is all about giving us choices in how to burn through our money and be miserable.

For sure I don't see anyone robotically spending 4% [inflation adjusted] each year until they die. My own thought is to spend 3-5% averaging out to 4%.

For the FIREr with a $1M starting portfolio and a plan to take ~$40K/yr if they end up with a $3M portfolio they'll need to figure out what to do with the extra money that has some meaning to them. Spending $120K/yr+ just to burn through it so they don't leave money on the table doesn't make a lot of sense.

no one ever spends robotically nor should they . the swr stress testing was never meant to be some sort of retirement plan .
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: lordmetroid on September 24, 2016, 02:06:40 PM
more money may not buy happiness or enjoyment but as i learned in my lifetime it sure buys choices in life . the 4% swr was never ever meant to be a lifetime spending plan . it is only for ball parking day 1 .

there are to many other factors acting on it such as life expectancy and human spending patterns for it to be a real time plan .

It definitely buys choices. Our society is all about giving us choices in how to burn through our money and be miserable.

For sure I don't see anyone robotically spending 4% [inflation adjusted] each year until they die. My own thought is to spend 3-5% averaging out to 4%.

For the FIREr with a $1M starting portfolio and a plan to take ~$40K/yr if they end up with a $3M portfolio they'll need to figure out what to do with the extra money that has some meaning to them. Spending $120K/yr+ just to burn through it so they don't leave money on the table doesn't make a lot of sense.
Exactly, doesn't make much sense for a Mustachian. So rather than postponing your FIRE for 25x your yearly expenditure. Perhaps your number should be something like 15x to 20x. Withdrawing money from your stache to cover all expenses exceeding any income from your hobbies.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Retire-Canada on September 24, 2016, 02:52:21 PM
Exactly, doesn't make much sense for a Mustachian. So rather than postponing your FIRE for 25x your yearly expenditure. Perhaps your number should be something like 15x to 20x. Withdrawing money from your stache to cover all expenses exceeding any income from your hobbies.

I hope to have ~17x my the low end of my annual expenses by the end of 2017. At that point I'm going to downshift to PT work  and let the 'stach grow on its own while I have a ton more free time to do the things I love. Working 50% FT will cover my expenses and may even allow me to add a small amount to the 'stash each year. The opportunity cost of working FT until I hit 25x is too high in my opinion.

My FIRE is constrained a bit by my GF's need to work FT 10 more years to get her pension. So PT work gives me about all the free time I can use if I'm not able to hit the road without needing to maintain a relationship.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: arebelspy on September 24, 2016, 06:03:59 PM
For sure I don't see anyone robotically spending 4% [inflation adjusted] each year until they die. My own thought is to spend 3-5% averaging out to 4%.

Sounds quite reasonable (perhaps even overly conservative).

cFIREsim says 4% initial withdrawal with variable spending of 3% floor, 5% ceiling (default other options--75/25, .18% fees) has a 100% success rate historically, with a median ending portfolio almost 50% higher in real dollars than what you started with.  :)
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: steveo on September 24, 2016, 06:42:19 PM
4% is too conservative in my opinion. The Trinity study assumes you will make a full time retirement and not earn a single penny. A person committed to FIRE is bound to earn some money from their hobbies in some way or another. Maybe a 6-8% withdrawal rate is more appropriate to avoid sitting on a huge amount of cash at the end of your life.

I like this idea but I think you need to have some buffers built in. So too much house and you can downsize or social security or a part time job. I don't though care if I end up with too much money. Spending more money to me doesn't equate to more happiness. If I end up with too much the kids can get it. Having too little is a potential problem but so is working too much.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: lordmetroid on September 25, 2016, 04:11:12 AM
I love this article on the subject and the illustrative graphs:

http://www.forbes.com/sites/greggfisher/2012/12/05/what-portfolio-withdrawal-rate-can-you-live-with/#4302ff006a6d
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: TomTX on September 25, 2016, 04:51:15 AM
4% is too conservative in my opinion. The Trinity study assumes you will make a full time retirement and not earn a single penny. A person committed to FIRE is bound to earn some money from their hobbies in some way or another. Maybe a 6-8% withdrawal rate is more appropriate to avoid sitting on a huge amount of cash at the end of your life.

I like this idea but I think you need to have some buffers built in. So too much house and you can downsize or social security or a part time job. I don't though care if I end up with too much money. Spending more money to me doesn't equate to more happiness. If I end up with too much the kids can get it. Having too little is a potential problem but so is working too much.

Storing value in "too much house" is stupid. Selling/buying houses and moving your living space is very inefficient.  1-2% front-end load, 6-10% back-end load, plus hundreds of hours of your time wasted.

Just set up a HELOC on your reasonable-sized house before retiring. If the market takes a shit in the first 5 years and you can't get a little part-time job or hobby income, tap home equity to live on for a bit until markets recover.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: mathjak107 on September 25, 2016, 05:01:11 AM
the problem is anything increasing your draw rate like loans increases sequence risk at the worst possible times .

drawing out more to pay loans over an extended downturn can be quite harmful .especially if it happens early on before you develop a cushion from a good up cycle in retirement . counting on paying a loan to support you is never a good idea when you have no job .

sequence risk makes all the difference when spending down and increasing draws at a bad time ..
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Retire-Canada on September 25, 2016, 06:45:26 AM
the problem is anything increasing your draw rate like loans increases sequence risk at the worst possible times .

drawing out more to pay loans over an extended downturn can be quite harmful .especially if it happens early on before you develop a cushion from a good up cycle in retirement . counting on paying a loan to support you is never a good idea when you have no job .

sequence risk makes all the difference when spending down and increasing draws at a bad time ..

He's suggesting using the HELOC instead of taking money out of his investments to mitigate the early sequence of returns risk. If you need $X to live on, but instead can take $X from your HELOC and take only a small amount from your investments say $X x 10% to pay the maintenance costs on the HELOC that is going to let your investments weather a crash more easily and you can pay the HELOC back when your investments have recovered.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Retire-Canada on September 25, 2016, 06:59:15 AM
Sounds quite reasonable (perhaps even overly conservative).

cFIREsim says 4% initial withdrawal with variable spending of 3% floor, 5% ceiling (default other options--75/25, .18% fees) has a 100% success rate historically, with a median ending portfolio almost 50% higher in real dollars than what you started with.  :)

I'm currently at 13.5x annual COL in my investment accounts and hope to hit ~15x when I stop working FT. So unlike the simulation you ran ^^^ I'll probably be starting at 5% WR on the variable rate scale and need $$ for ~45yrs as I am likely to want to FIRE before I get to 25x my full annual COL.

Just to keep things simple if I plug a starting WR of $50K/yr into the old cFIREsim [the new version doesn't have the same options] leaving the rest of the inputs at default and with a lower WR of $30K and upper of $50K for 45yr retirement I get 59% success. I haven't added in my Gov't retirement benefits which are not as generous as many of the SS calcs I see on this forum, but will nevertheless improve my success rate.

I do hear you on the issue of being too conservative. It's something that's on my mind a lot and a big part of the reason why I won't work FT past the end of 2017. I suspect if I can get down to a PT situation that's ~50% FT I won't mind working a few more years as the 'stach grows. It also possible there is some level of PT work that I actually prefer to never working again. Hard to say when you've worked fairly solidly for 30yrs. I do know that I am not willing to work FT much longer.

Once I'm PT I'll decompress and start thinking about the next stage in more detail.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: mathjak107 on September 25, 2016, 07:01:15 AM
the question remaining is if he takes the heloc because he needs money where is the money coming from to pay the heloc ?

if you have the cash to pay the heloc you wouldn't need the heloc .  if you have no cash and take the heloc then you have to sell the investments to pay the heloc .

something is not really making a whole lot of sense . it likely sounds better  than it would actually play out . increasing debt to live on   at a bad time is never really a good idea when you have no job .

two years cash and 100% equity's has been the best combo so far . whether you have the pucker factor for it is another story .

historically spending down directly from 100% equity's has always had a very high rate of success even in bad times .the fact that 100% equity's develops a larger cushion in up years cushions the spending down from it in poor years .
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Retire-Canada on September 25, 2016, 07:09:41 AM
the question remaining is if he takes the heloc because he needs money where is the money coming from to pay the heloc ?

For simplicity I'll use round numbers:

- you need $50K/yr to live on
- you have a $300K HELOC with no balance
- market crashes for 2yrs
- you take $50K/yr from your HELOC to live on and pay just the minimum maintenance amount

That minimum maintenance amount say 10% of the balance can come from your investments or it can come from the HELOC. Let's say it comes from your investments - taking out $5K in year #1 and $10K in year 2 to maintain the HELOC is far less than the $50K you would have taken out each year if you didn't have the HELOC and instead had to take your living expenses out of your investments.

You then pay down the HELOC once your investments have recovered from the crash.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: mathjak107 on September 25, 2016, 07:12:05 AM
2 years cash and 100% equity's would be the best way . to date that has had the highest success rates through thick and thin over the longest periods of time
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Retire-Canada on September 25, 2016, 07:14:32 AM
2 years cash and 100% equity's would be the best way

Define best? Holding all that cash means that you lose out on the potential returns if a crash does not happen vs. the person who is fully invested and then uses a HELOC as a buffer. It won't take long for them to gain enough advantage over your plan before they are way ahead.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: mathjak107 on September 25, 2016, 07:16:39 AM
the 100% equity's has made up for that  while most bear markets last about 2 years  . in simulations run that had the highest success rate over longer periods of time over the typical 30 year time frames . it is the best balance of trade offs ,except volatility ,which will be very high .

our planeuses 2 years cash held at all times but we don't need to go more than 40-50% equity's to meet our goals . we have less than a 30 year time frame at this point too .
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: arebelspy on September 25, 2016, 07:19:07 AM
2 years cash and 100% equity's would be the best way

Let's be clear on what you're advocating.  Are you saying 25x in equities PLUS two years cash, for 27x savings?  Cause now we're no longer in 4% rule range, that's a 3.7% WR, and one has to work longer to get there.

Or are you saying still 25x (4% rule), but 23x expenses in 100% equities and 2x expenses in cash?

Because obviously the first one will have a better success rate than straight 4%, because you're not comparing apples to apples, you're starting with more money than a 4% rule.  And the second, I'm skeptical is better.

So which of the two are you saying?

EDIT: Running it on cFIREsim as 23x expenses @ 100% equities and 2x expenses in cash (92/8 equities/cash) gives success rate of 93.1% versus the default 75/25 (equities/bonds) giving 95.69%.  So no, doesn't appear to be better, when comparing apples to apples.  Straight 100% equities gives 94.83%.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: mathjak107 on September 25, 2016, 07:20:40 AM
i am just saying from an allocation stand point 100% equity with 2 years spending cash in reserve has given the highest success rates out to 40 years .
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Retire-Canada on September 25, 2016, 07:21:19 AM
the 100% equity's has made up for that  while most bear markets last about 2 years  . in simulations run that had the highest success rate over longer periods of time over the typical 30 year time frames . it is the best balance of trade offs ,except volatility ,which will be very high

So hold no cash and 100% equities and a HELOC. You'll get better returns than this ^^^ and everything else will look the same. That sounds more best-er. ;)
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: mathjak107 on September 25, 2016, 07:22:13 AM
maybe not , depends how long you have to keep paying the heloc plus interest vs how long the down turn lasts .

Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: arebelspy on September 25, 2016, 07:24:31 AM
i am just saying from an allocation stand point 100% equity with 2 years spending cash in reserve has given the highest success rates out to 40 years .

No, it doesn't.  See my edit, above.

Though I only ran it for 30 years.

But show your work, please, rather than just stating this as a fact.  What assumptions and inputs are you using for this outcome?
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Retire-Canada on September 25, 2016, 07:25:24 AM
maybe not , depends how long you have to keep paying the heloc plus interest vs how long the down turn lasts .

Cash is too much of a drag on your portfolio. You can construct some scenarios where you'll come out ahead, but in most cases not holding cash will make you far more successful. The beauty of the HELOC is it costs you nothing unless you actually needed. That large cash positions costs you every single day for your 45yr FIRE.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: TomTX on September 25, 2016, 07:26:20 AM
the 100% equity's has made up for that  while most bear markets last about 2 years  . in simulations run that had the highest success rate over longer periods of time over the typical 30 year time frames . it is the best balance of trade offs ,except volatility ,which will be very high .

our planeuses 2 years cash held at all times but we don't need to go more than 40-50% equity's to meet our goals . we have less than a 30 year time frame at this point too .

What's the point of holding 2 years cash at all times?

To get any use out of a cash strategy, you have to spend down the cash when your investments crash.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: arebelspy on September 25, 2016, 07:27:47 AM
Cash is too much of a drag on your portfolio.

This is the conclusion of every retirement study I'm aware of says as well (e.g. "buckets" and such).  Cash helps you feel good, and helps you ride out down markets psychologically, but if you didn't sell (other than when you had to, which sucks but is fine), you come out ahead without sticking a chunk of your portfolio in cash.

Do you have a study, citation anything, mathjak?
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: mathjak107 on September 25, 2016, 07:29:47 AM
mentally i find it comforting in my case .

in the case of 100% equity's it tested better than not holding any cash and 100% equity's . get hit up front with the down turn and holding the cash did better than  selling directly from equity's .

i retired 2 years ago , we set a side two years cash  going in to retirement  and so far have spent principal since markets last year and this year so far have not exceeded in returns what we spent . so far i have all our investments intact .

no cash and 100% equity's works well providing you do not get hit before the first up cycle . then it is akin to a trader having a string of losing trades .
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: TomTX on September 25, 2016, 07:32:17 AM
the problem is anything increasing your draw rate like loans increases sequence risk at the worst possible times .

drawing out more to pay loans over an extended downturn can be quite harmful .especially if it happens early on before you develop a cushion from a good up cycle in retirement . counting on paying a loan to support you is never a good idea when you have no job .

sequence risk makes all the difference when spending down and increasing draws at a bad time ..

The whole point of the HEL strategy is to mitigate sequence of returns risk.

Instead of spending down my (stock/bond) investments while their price has temporarily crashed, I am borrowing cash at a low rate, which I can pay back from my investments when they recover.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: arebelspy on September 25, 2016, 07:33:15 AM
in the case of 100% equity's it tested better than not holding any cash and 100% equity's . get hit up front with the down turn and holding the cash did better than  selling directly from equity's .

Again, not true.

Quote
Running it on cFIREsim as 23x expenses @ 100% equities and 2x expenses in cash (92/8 equities/cash) gives success rate of 93.1% ... Straight 100% equities gives 94.83%.

(This edited out the fact that 75/25 was higher than either at 95.69%.)

Small percentages that aren't statistically significant, but when you're claiming one thing, but the data I'm seeing shows something else.

So if you can back that up, great.  Otherwise just repeating it won't convince us.  :)

If you want (slightly) subpar returns for mental comfort, great.  Accept and own that.  But don't try and say that it's more mentally comforting and better results.  It isn't.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: mathjak107 on September 25, 2016, 07:33:46 AM
what cash are you making payments with if you have no cash ?
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Retire-Canada on September 25, 2016, 07:34:37 AM
what cash are you making payments with if you have no cash ?

I have explained that above.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Retire-Canada on September 25, 2016, 07:39:10 AM
mentally i find it comforting in my case .

That's a fair point. If you can't stomach FIREing without a 2yr cash buffer it's reasonable to have one. That doesn't make it better. It just makes it work for you.

no cash and 100% equity's works well providing you do not get hit before the first up cycle . then it is akin to a trader having a string of losing trades .

Holding 2yrs of cash will put you behind a 100% equities portfolio very quickly. If a crash happens right off the bat you might be better off for a short time compared to using a HELOC, but very quickly you fall behind and you'll get further and further behind as years go by.

Holding cash is very expensive.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: arebelspy on September 25, 2016, 07:40:39 AM
what cash are you making payments with if you have no cash ?

I have explained that above.

Here it was in case you missed it: http://forum.mrmoneymustache.com/investor-alley/does-the-4-rule-work-in-todays-markets/msg1241013/#msg1241013
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: mathjak107 on September 25, 2016, 07:43:37 AM
in the case of 100% equity's it tested better than not holding any cash and 100% equity's . get hit up front with the down turn and holding the cash did better than  selling directly from equity's .

Again, not true.

Quote
Running it on cFIREsim as 23x expenses @ 100% equities and 2x expenses in cash (92/8 equities/cash) gives success rate of 93.1% ... Straight 100% equities gives 94.83%.

(This edited out the fact that 75/25 was higher than either at 95.69%.)

Small percentages that aren't statistically significant, but when you're claiming one thing, but the data I'm seeing shows something else.

So if you can back that up, great.  Otherwise just repeating it won't convince us.  :)

If you want (slightly) subpar returns for mental comfort, great.  Accept and own that.  But don't try and say that it's more mentally comforting and better results.  It isn't.


 got to rerun the numbers in firecalc
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: arebelspy on September 25, 2016, 07:55:23 AM
firecalc shows 75/25 over 40 years 85.80% success rate at 4%
98% equity 2% cash 87.7% success
100% equity 87.6

I haven't used FIRECalc in years, since the superior cFIREsim came out, but I went ahead and went over there.  How do you even put in a cash allocation?

If I leave everything default, and just change equities to 100%, I get 93.1%, so I don't know where your 87.6 is coming from.

Can you please show your work?  What inputs are you using?  (And why FIRECalc over cFIREsim)?
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: mathjak107 on September 25, 2016, 07:59:37 AM
i screwed it up though . i have to re figure it .  the cash is a declining balance since by the end of year 1 it is gone and you are no longer holding 2 years . i have to see how to handle it . on fircalc commercial paper i think should be cash instruments but i have to confirm that
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: arebelspy on September 25, 2016, 08:09:54 AM
i screwed it up though . i have to re figure it .  the cash is a declining balance since by the end of year 1 it is gone and you are no longer holding 2 years . i have to see how to handle it . on fircalc commercial paper i think should be cash instruments but i have to confirm that

So you aren't saying always have 2 years in cash (i.e. a 92%/8% equities/cash)?  You're saying start with 2 years, spend it all regardless of market conditions, allow the equities (the other 23x/92% of your portfolio) to grow over those two years, then go 100% stocks?

Please confirm.  If not, please clarify exactly what withdrawal plan/AA you mean, because a few vague sentences aren't helping the communication here, trying to understand.  :)

EDIT: That doesn't quite make sense either, because you say "by the end of year 1 it is gone"--do you mean gone completely, or down to one year after a year, and then gone completely after 2 years?
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: pbkmaine on September 25, 2016, 08:37:08 AM
https://www.kitces.com/blog/are-cash-reserve-retirement-strategies-really-necessary/
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: arebelspy on September 25, 2016, 08:38:09 AM
the cash is a declining balance since by the end of year 1 it is gone and you are no longer holding 2 years .

So you aren't saying always have 2 years in cash (i.e. a 92%/8% equities/cash)?  You're saying start with 2 years, spend it all regardless of market conditions, allow the equities (the other 23x/92% of your portfolio) to grow over those two years, then go 100% stocks?

Okay, I went ahead and tested this scenario.

I ran a cFIREsim scenario of having saved 23x expenses in 100% equities, and 2x expenses in cash, by putting in that 23x expenses as the portfolio (920k on 40k spending in equities, 80k, or two years spending, in cash).  To model this I put in a portfolio of 920k, 100% equities, then I added a single income of 40k in years 1 and 2.  So that offsets the 40k spending those years, as that 80k cash is spent down, and the portfolio is left to grow the first two years.  All other stuff (fees, etc.) left default.

I also ran a default cFIREsim of 75/25 stocks/bonds, entire 1MM portfolio invested, no cash infusion, as well as a 100% stocks scenario.

I then downloaded the spreadsheets and found the median and average of the year two end portfolio for each scenario.

Cash scenario:
Average: 1,109,048.311
Median: 1,098,287.19

75/25 stocks/bonds scenario:
Average: 1,084,244.348
Median: 1,081,889.04

100% equities scenario:
Average: 1,113,412.208
Median: 1,099,959.26

Looks like straight equities > equities + cash > 75/25.

The interesting thing though is that 75/25 has a lower failure rate (i.e. higher success rate, as I posted earlier in the thread), so it's not just about the most money.

Either way though, if you want a lower failure rate, it doesn't seem like cash is the way to go, and if you want more money two years after ERing, ditto.

I'm not seeing a scenario where investing 23x your income and keeping 2x in cash to start out your ER, then spending down that two years in cash is beneficial.  Nor am I seeing one where keeping two years in cash forever is beneficial.

Other than, as we said, psychologically.

If it helps you sleep at night, great, more power to you.  But I don't see the math where it helps your success rate, or leaves you with more money.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: ender on September 25, 2016, 08:52:58 AM
A lot of this is interesting because of the psychological factors.

Relying on a HELOC to me seems very risky, particularly if you are carrying a meaningful mortgage - if the market drop is correlated with a housing price drop, you may not be able to get a HELOC. Of course whether to carry a mortgage into ER also is a psychological factor. Mathematically and historically for the same total net worth you are better off having a mortgage, due to similar reasons as the "cash drag." That does not mean it is necessarily a worse strategy for you, depending on how strong the psychological factors are.


Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Retire-Canada on September 25, 2016, 09:01:36 AM
Relying on a HELOC to me seems very risky, particularly if you are carrying a meaningful mortgage - if the market drop is correlated with a housing price drop, you may not be able to get a HELOC.

How much equity you have in your home vs. how much HELOC you want to use as a FIRE buffer is an important consideration. If you have a $500K home and a $300K HELOC you can safely plan to take out $50K/yr for 2 years without much risk that property value changes will affect you.

You are also never forced to use your HELOC it's just one tool amongst the many you have like cashing in investments, getting a PT job and/or lowering your spending. The beauty with a HELOC is it costs you nothing until and unless you decide to use it so I would say it's a great tool to have.

Personally I have a LOC not tied to my home equity that I could live off for for 1.5yrs of lowered spending living. A change to my home equity would have zero impact on this LOC.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: arebelspy on September 25, 2016, 09:06:17 AM
Relying on a HELOC to me seems very risky, particularly if you are carrying a meaningful mortgage - if the market drop is correlated with a housing price drop, you may not be able to get a HELOC.

How much equity you have in your home vs. how much HELOC you want to use as a FIRE buffer is an important consideration. If you have a $500K home and a $300K HELOC you can safely plan to take out $50K/yr for 2 years without much risk that property value changes will affect you.

Not necessarily; during 2008-9, many banks closed or cut back people's HELOCs.  It's a tool I'd put in place, and would use if it was available, but also wouldn't count on to be there when you need it.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Mmm_Donuts on September 25, 2016, 09:15:00 AM
The way cFiresim works, you're essentially holding one years expenses in cash at the start of each year by default. If you are holding two years cash, you need to adjust the cash allocation percentage down slightly because of this. And for those who would never withdraw that much cash in one go, it's a good thing to keep in mind as it may affect your results.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: TomTX on September 25, 2016, 09:26:32 AM
Relying on a HELOC to me seems very risky, particularly if you are carrying a meaningful mortgage - if the market drop is correlated with a housing price drop, you may not be able to get a HELOC.

How much equity you have in your home vs. how much HELOC you want to use as a FIRE buffer is an important consideration. If you have a $500K home and a $300K HELOC you can safely plan to take out $50K/yr for 2 years without much risk that property value changes will affect you.

Not necessarily; during 2008-9, many banks closed or cut back people's HELOCs.  It's a tool I'd put in place, and would use if it was available, but also wouldn't count on to be there when you need it.

I don't believe my CU did.

Here's how my house situation would be under this scenario:

House value $300,000
Mortages/laons: $0 (paid off house)
HELOC current amount $0
HELOC max amount $200,000 (because why not? CU doesn't care up to 80% LTV)
HELOC rate: Prime -0.5% (so, half a point under prime, currently 3.00%)
HELOC draw period: 10 years
HELOC payback period: 20 years

The cost to set it up is maybe a couple of hours, and there is no fee associated if my assumed value doesn't exceed the tax value.

This is just one of many possible contingencies. Get a part time job. Get hobby income. Ramp up a side gig Craigslisting stuff. Et cetera.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Retire-Canada on September 25, 2016, 09:30:46 AM
Not necessarily; during 2008-9, many banks closed or cut back people's HELOCs.  It's a tool I'd put in place, and would use if it was available, but also wouldn't count on to be there when you need it.

If your plan is to borrow a small % of the equity in your house via a HELOC you are at far less risk for this. In my example above that amount was 20% of the equity. That seems pretty safe.

You can also do what I do and have a LOC not tied to home equity at all.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: arebelspy on September 25, 2016, 09:31:28 AM
This is just one of many possible contingencies. Get a part time job. Get hobby income. Ramp up a side gig Craigslisting stuff. Et cetera.

Sure.  That's always true, and tangential to this discussion.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Classical_Liberal on September 25, 2016, 11:56:06 AM
The way cFiresim works, you're essentially holding one years expenses in cash at the start of each year by default. If you are holding two years cash, you need to adjust the cash allocation percentage down slightly because of this. And for those who would never withdraw that much cash in one go, it's a good thing to keep in mind as it may affect your results.

I did not realize that, thanks. 

Also, doesn't cFiresim maintain a constant asset allocation?  So if you allocate a certain amount of cash (80K on 1Mil) it will continue to maintain that allocation even in the historically poor performing equity years.  Correct me if I'm wrong, but what mathjak107 is suggesting is during a bear on equities, one would then change AA through drawdown by only spending the cash, allowing equities to recover (theoretically), before readjusting AA.  This is a very similar approach to drawing on a HELOC.  The difference being with a HELOC the cash is not sitting stagnate without returns, but no need to sell any equities to make minimum payments when stocks are down.

I remember reading a livingaFI blog post where he modeled the two years cash in several bear markets to see how it's work out.

Edit: heres that post https://livingafi.com/2014/05/28/drawdown-part-4-examples/
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: steveo on September 25, 2016, 03:52:19 PM
The interesting thing though is that 75/25 has a lower failure rate (i.e. higher success rate, as I posted earlier in the thread), so it's not just about the most money.

I think that this is the most important to me personally. I don't want the most money. I want to be able to remain retired without going back to work.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: mathjak107 on September 25, 2016, 04:47:01 PM
The way cFiresim works, you're essentially holding one years expenses in cash at the start of each year by default. If you are holding two years cash, you need to adjust the cash allocation percentage down slightly because of this. And for those who would never withdraw that much cash in one go, it's a good thing to keep in mind as it may affect your results.

I did not realize that, thanks. 

Also, doesn't cFiresim maintain a constant asset allocation?  So if you allocate a certain amount of cash (80K on 1Mil) it will continue to maintain that allocation even in the historically poor performing equity years.  Correct me if I'm wrong, but what mathjak107 is suggesting is during a bear on equities, one would then change AA through drawdown by only spending the cash, allowing equities to recover (theoretically), before readjusting AA.  This is a very similar approach to drawing on a HELOC.  The difference being with a HELOC the cash is not sitting stagnate without returns, but no need to sell any equities to make minimum payments when stocks are down.

I remember reading a livingaFI blog post where he modeled the two years cash in several bear markets to see how it's work out.

Edit: heres that post https://livingafi.com/2014/05/28/drawdown-part-4-examples/


the problem with helocs a side from interest and payments during a cash crunch  is banks can  cut helocs just when you need them most . if real estate falls helocs  can be  cut or suspended .  i would use a heloc only as emergency money at best . i would never use it as a proxy for my own cash being spent monthly in a downturn with an unlimited potential for an extended  time frame .

i rather pull 4% out of my investments once the cash is depleted  than the additional money to include principal and  interest in my payments  on a potentially increasing balance  when things are taking an extended beating
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Retire-Canada on September 25, 2016, 05:32:57 PM
Other than, as we said, psychologically.

If it helps you sleep at night, great, more power to you.  But I don't see the math where it helps your success rate, or leaves you with more money.

The whole cash buffer vs. HELOC/LOC vs. 100%-invested-just-ride-it-out debate sounds very much like the paying down your mortgage faster vs. paying the mortgage slower and investing debate. There is a heavily emotional component to one option that for some people out weighs the mathematical/statistical benefits of the other option.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: arebelspy on September 25, 2016, 05:44:54 PM
Other than, as we said, psychologically.

If it helps you sleep at night, great, more power to you.  But I don't see the math where it helps your success rate, or leaves you with more money.

The whole cash buffer vs. HELOC/LOC vs. 100%-invested-just-ride-it-out debate sounds very much like the paying down your mortgage faster vs. paying the mortgage slower and investing debate. There is a heavily emotional component to one option that for some people out weighs the mathematical/statistical benefits of the other option.

Yup, definitely.

It's absolutely worth it for some people to pay off the mortgage, keep a cash buffer, etc.

It's just disingenuous when they try to argue that's the better approach mathematically, because data has shown it isn't, historically, and there's no reason for that to be "different this time."

IMO, the best thing to do is explore the options, understand them thoroughly, and choose the best one for you, accepting its downsides (whether the downside is you'll have a portfolio crash harder and need more nerves of steel to ride it out, or the downside is you have to work longer, or whatever).  Trying to convince yourself of a certain approach having no downsides is dangerous.  Learn, accept where the flaws in your plan are, and then you can be prepared for them, and help compensate for them.
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: mathjak107 on September 25, 2016, 06:21:51 PM
the cash is a declining balance since by the end of year 1 it is gone and you are no longer holding 2 years .

So you aren't saying always have 2 years in cash (i.e. a 92%/8% equities/cash)?  You're saying start with 2 years, spend it all regardless of market conditions, allow the equities (the other 23x/92% of your portfolio) to grow over those two years, then go 100% stocks?

Okay, I went ahead and tested this scenario.

I ran a cFIREsim scenario of having saved 23x expenses in 100% equities, and 2x expenses in cash, by putting in that 23x expenses as the portfolio (920k on 40k spending in equities, 80k, or two years spending, in cash).  To model this I put in a portfolio of 920k, 100% equities, then I added a single income of 40k in years 1 and 2.  So that offsets the 40k spending those years, as that 80k cash is spent down, and the portfolio is left to grow the first two years.  All other stuff (fees, etc.) left default.

I also ran a default cFIREsim of 75/25 stocks/bonds, entire 1MM portfolio invested, no cash infusion, as well as a 100% stocks scenario.

I then downloaded the spreadsheets and found the median and average of the year two end portfolio for each scenario.

Cash scenario:
Average: 1,109,048.311
Median: 1,098,287.19

75/25 stocks/bonds scenario:
Average: 1,084,244.348
Median: 1,081,889.04

100% equities scenario:
Average: 1,113,412.208
Median: 1,099,959.26

Looks like straight equities > equities + cash > 75/25.

The interesting thing though is that 75/25 has a lower failure rate (i.e. higher success rate, as I posted earlier in the thread), so it's not just about the most money.

Either way though, if you want a lower failure rate, it doesn't seem like cash is the way to go, and if you want more money two years after ERing, ditto.

I'm not seeing a scenario where investing 23x your income and keeping 2x in cash to start out your ER, then spending down that two years in cash is beneficial.  Nor am I seeing one where keeping two years in cash forever is beneficial.

Other than, as we said, psychologically.

If it helps you sleep at night, great, more power to you.  But I don't see the math where it helps your success rate, or leaves you with more money.

in firecalc

75/25 had a slightly better success rate going out to 30 years

100% equity s had a higher success rate and bigger balance  going out to 40 years .

i would think you guys are more interested in the 40 year results retiring so young

30 years 4%  at 75/25


FIRECalc looked at the 116 possible 30 year periods in the available data, starting with a portfolio of $1,000,000   and spending your specified amounts each year thereafter.
Here is how your portfolio would have fared in each of the 116 cycles. The lowest and highest portfolio balance at the end of your retirement was $-400,986 to $5,679,475, with an average at the end of $1,845,488. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)
For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 6 cycles failed, for a success rate of 94.8%.

30 year 100% equity
FIRECalc looked at the 116 possible 30 year periods in the available data, starting with a portfolio of $1,000,000   and spending your specified amounts each year thereafter.
Here is how your portfolio would have fared in each of the 116 cycles. The lowest and highest portfolio balance at the end of your retirement was $-931,017 to $8,509,297, with an average at the end of $2,686,348. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)
For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 8 cycles failed, for a success rate of 93.1%



40 years 75/25
FIRECalc looked at the 106 possible 40 year periods in the available data, starting with a portfolio of $1,000,000   and spending your specified amounts each year thereafter.
Here is how your portfolio would have fared in each of the 106 cycles. The lowest and highest portfolio balance at the end of your retirement was $-1,120,937 to $12,410,499, with an average at the end of $2,365,051. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)
For our purposes, failure means the portfolio was depleted before the end of the 40 years. FIRECalc found that 16 cycles failed, for a success rate of 84.9%.


40 years 100% equity
FIRECalc looked at the 106 possible 40 year periods in the available data, starting with a portfolio of $1,000,000   and spending your specified amounts each year thereafter.
Here is how your portfolio would have fared in each of the 106 cycles. The lowest and highest portfolio balance at the end of your retirement was $-1,624,576 to $23,195,431, with an average at the end of $4,088,042. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)
For our purposes, failure means the portfolio was depleted before the end of the 40 years. FIRECalc found that 13 cycles failed, for a success rate of 87.7%.



Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: Retire-Canada on September 25, 2016, 07:49:52 PM
in firecalc

75/25 had a slightly better success rate going out to 30 years

100% equity s had a higher success rate and bigger balance  going out to 40 years .

i would think you guys are more interested in the 40 year results retiring so young

The numbers you posted are essentially equal in success for both options at either 30 or 40yrs within the limitations of the simulation. I wouldn't object to either asset allocation if those were the success rates. I haven't looked into it any deeper than that nor what the differences between FIRE Calc and cFIREsim are.

The issue I had was holding cash as a buffer due to the cost for portfolio returns - particularly if the plans is to hold cash for the long term. The costs far out weigh the benefits in my opinion. What I am still not clear on with your plan is if you will start with 23x COL invested and 2x COL cash and use the cash for the first two years or if you will start with those assets and keep the 2yrs in cash until there is a crash. With either option are you replenishing the cash allocation after the crash or then going 100% equities?
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: mathjak107 on September 26, 2016, 03:21:10 AM
our plan is to always have the current years cash ready to go , and to start filling up the 2nd year once we deplete the current year .

so far it worked well . our first year  in retirement our returns in total  were 1% as markets were pretty flat , while we spent 3.50% . had we used a heloc we would have had 4% interest too paid out .

this year we are up 5% with about 3.50% going out , we are just about down to just 1 years cash left which is next years . had we had a heloc another 4% in interest  would have went out .

no cash only works well after you are in retirement and had your first run up . once you are up comfortably holding cash is not a big issue . you can sell directly from assets up or down .

but the danger is the early years where any down year is like a trader having a string of losing trades  right up front and that starting principal is gone .

most of the ploys done with buckets ,rising glide paths and cash are to protect the early years going in .

in our case i don't need more than 40-50% equity. i don't want the volatility of it anymore as well as don't need it . in fact we are delaying ss just to cut market dependency  .  my wife being a widow once already and getting burned in 2000  does not want to get stuck with  a pile of investments again and no real base income .

40-50% in equity's gives us all the volatility we want . we have seen single days already at that allocation where we have swung almost 40k in one day .

percentage wise it is not a lot but when you think a 7% move represents 9 years of maximizing our 401k's at catch up it is an insane amount in dollars .

so our plan really calls for matching our allocations to our needs , both dollar wise and mentally wise . we may cut dependency even more and ladder some spia's eventually as part of the overall plan .  we are far more comfortable betting on our longevity as a couple since odds are one of us will go on longer than betting on the whims of markets and rates at these levels .

for us it is no longer about growing richer , it is now about enjoying our lives and not growing poorer . so whatever we do is a balance .

eventually as you reach your 60's the decisions you have to make will all revolve around two choices , do i want more  longevity risk or market and interest rate risk .

as far as how many times savings we went ?

i never looked at it that way ,since i always was an investor since my teens and had enough to retire in my 50's if we wanted  to . we set our budget in a different way since we tailored our lives to fit the budget we had  instead of having the life  in place and then working at  growing enough  to fit that life  .

so what we did is add up all our non discretionary bills . things like rent , insurance , and all the costs that were pretty much written in stone that we wanted to keep in place .  it did not include food ,travel,gifts ,entertainment , etc.

we then doubled that amount we had in non discretionary spending  to allow for discretionary spending . that big 50%  budget in discretionary spending gave us plenty of wiggle room for the awe craps like the more than 20k in dental we just got hit with .

so lets use some hypothetical numbers .

lets say non discretionary was 50k  so our budget would be 100k plus taxes . lets call it 120k .

we would then subtract out pension and eventual social security .  lets say the two are 75k . 

so we need 45k from our portfolio.

a rough check by taking 45k and multiplying it by 25 times says we need a ballpark of  1.25 million to support that at 4% .

using both firecalc and the fidelity planner shows that an allocation of 40-50% equity's should be able to sustain that before we introduce life expectancy and human spending patterns which tend to increase odds even greater .

in practice our draw worked out to about 3.50% and once ss kicks in it will fall to 2% .

the extra ss money from delaying  will refill what we spent down  delaying up front .

that method worked out well for us and we pretty much did  and bought whatever we wanted and it still worked out we did not spend the max we could have if need be .
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: arebelspy on September 26, 2016, 04:00:22 AM
our plan is to always have the current years cash ready to go , and to start filling up the 2nd year once we deplete the current year .

I think that's what most early retirees do, pull their budget beginning of the year (though some may do it quarterly or monthly).
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: mathjak107 on September 26, 2016, 04:02:47 AM
we are just more comfortable doing it in one shot  . we know we do not have to make selling decisions through the year . i just added to the above post so you may have read it before i gave you all our details .

we put all dividends and interest towards next years income . we find our distributions from our funds have run from 29k to 69k in a year . it is to hard to keep the income flow going with that kind of spread  so we just put it towards filling next years money and that gives us time to plan how to fund the shortfall rather than do it in real time by trying to use that money today .

all cash we do hold is laddered in cd's and matures monthly going out the two years . we buy them through fidelity so if need be we can click and sell the cd's instantly in their market .

january will be our first refill date since we retired 2 years ago  . so in january we will have the current year in place but then have to see what to sell to start to form the 2nd year we hold in reserve .
Title: Re: Does The 4% Rule Work In Today’s Markets?
Post by: TomTX on October 01, 2016, 06:28:02 AM
our plan is to always have the current years cash ready to go , and to start filling up the 2nd year once we deplete the current year .

so far it worked well . our first year  in retirement our returns in total  were 1% as markets were pretty flat , while we spent 3.50% . had we used a heloc we would have had 4% interest too paid out .

No.  Your sentence implies you are paying WAY more interest than you actually would by mixing your percentages improperly. Below I convert the HELOC numbers to percent of the portfolio.

Even following your method, your HELOC interest would have been 0.04 x 2.5%  to cover the portfolio shortfall (the first 1% is covered by portfolio growth) if you took it all at the beginning of the year instead of as needed. So, added cost is 0.075% of the portfolio

This brings your spend from 3.50% to 3.575%

If you took it as-needed, it would have been 2% of 2.5%. So, 0.038% of the portfolio

This brings your spend from 3.5% to 3.538%

4% isn't a great rate for a HELOC. My credit union is 3%. So, if you shop around, you can cut the amount even further.

The second year with your 5% gain would have 3.5% used for spend, and 1.5% to pay back the HELOC. You would carry over 1% in cheap debt.