So, does the 4% rule include all the previous times when stocks have been at a trailing PE of around 24 and bonds at about zero yield?
Not sure if this question was intended to be rhetorical, but Pfau's exact argument is that the historical record lacks enough instances of such low interest rates for us to draw meaningful conclusions about the implications of starting retirement in a low rate environment, and there is no precedent whatsoever for such low interest rates coupled with such high stock market valuations.
No, genuine question. So are the arguments valid:
1. That we are in an unprecedented situation, and
2. Therefore the previous "rules" are not applicable?
(And let's forget what Pfau says - he is discredited in my book).
I think Brooklynguy's comment is the crux of the discussion and is the reason why there are some people that think current conditions
may warrant a more conservative WR if no other reason to simply be more comfortably assured with FIRE - I am one of those people. IF there is no other time in history that has high valuations (PE or CAPE
and low rates caused by massive intervention so not a real market) then it could very well mean this time is different - that doesn't meant the 4% rule doesn't still work but it is rational to think that it might not be as safe as it once was. In a 2015 article
Pfau 2015 concluded that the SWR was much much less than 4% - 1.7% for a 60/40 portfolio based on high values/low rates - so who knows - suggest that the higher fees translate to 50-60bps so it would be a 2.2-2.3% for those of us with vanguard.
A far more simply/crudely approach I have thought about is using some basic assumptions - starting with $1mil, $40k spending, 50/50 stock/bond portfolio, and ignore inflation (generally stocks and dividends will increase at or greater than inflation overtime anyway). Using Vanguard total stock and total bond today would give you a blended 2.1% dividend/interest.
#1 Case - Base Case
Principal Balance: 1,000,000
Spending 4% 40,000
Dividends/Interest -2.10% (21,000)
Principal Drawdown 19,000
Years to Depletion 52.6
#2 Case - Portfolio Declines 25%, Income Remains Same
Principal Balance: 750,000
Spending 40,000
Dividends/Interest -2.10% (21,000)
Principal Drawdown 19,000
Years to Depletion 39.5
#3 Case - Portfolio and Income declines 25%
Principal Balance: 750,000
Spending: 40,000
Dividends/Interest (15,750)
Principal Drawdown 24,250
Years to Depletion 30.9
Even in the dire situation the 4% rule under this crude analysis would be true - remember that 4% rule only needs to get you past 30 years to be considered not failing. Keep in mind that for a 25% decline in a 50/50 portfolio basically is 50% decline in stocks with no change in bonds, which has happened and can but is still pretty severe and doesn't count for the likely higher growth following the decline and the years remaining are after the decline and basically a 5.3% WR on #3.
Inflation is a factor but not as much as you may think - here is the Years to Depletion assuming stocks and dividends (50% of portfolio) grow by inflation (3%) and bonds stay flat (ie 1.5% growth on total principal and income) but withdrawals grow at 3%, then would last:
#1 - 33 years
#2 - 27 years
#3 - 23 years
2% Returns Above Inflation would yield
#1 - 38 years
#2 - 30 years
#3 - 26 years
All seems pretty conservative and still seems to support the 4% rule on an back of the envelope/end around approach. I might need to rethink my conservatism.