Author Topic: Stop worrying about the 4% rule  (Read 1035519 times)

mistymoney

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lutorm

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Re: Stop worrying about the 4% rule
« Reply #2052 on: July 10, 2022, 07:43:56 PM »
Arguably for a 60 year horizon we have an even worse idea of the real failure rate since there are only 2 fully independent such retirement periods since 1900...

nereo

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Re: Stop worrying about the 4% rule
« Reply #2053 on: July 11, 2022, 04:32:15 AM »
Arguably for a 60 year horizon we have an even worse idea of the real failure rate since there are only 2 fully independent such retirement periods since 1900...

If we are viewing things from that lens, there can be only ONE Ďfully independentí 60 year period since 1903.  That doesnít mean that we canít infer much from using multiple, overlapping periods. Regardless of whether you are using a 20, 30, or 60 year rolling period, what stands out is how substantially different each period performs, even when they overlap by >90%.  Put another way, multi-decade periods whose start dates are just 1-2 years apart can increase in value or fail completely. Such is the power of SORR


Thereís a human tendency to want ďmore data!Ē - The underlying belief being that weíd improve both our precision and accuracy for longer-term modeling. Highly variable systems donít work like that.  Even if we had another 50 or even 100 years of highly accurate market returns weíd see much the same patterns; most portfolios do just find with sub-5% WR, while a few fail miserably. Most failures occur due to poor performance in the first decade (and typically within the first 6 years).

tooqk4u22

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Re: Stop worrying about the 4% rule
« Reply #2054 on: July 11, 2022, 05:37:30 PM »
Arguably for a 60 year horizon we have an even worse idea of the real failure rate since there are only 2 fully independent such retirement periods since 1900...

The reality it's difficult to predict out five years let alone 30 or 60 as there is too much unknown....wars, family, tech changes, who knows.   But it stands to reason if you can make it work for 30 years then you should be able to make it work for 60.   

History from other countries would suggest that a war on our soil would be most devastating and unrecoverable for a long time

ender

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Re: Stop worrying about the 4% rule
« Reply #2055 on: July 12, 2022, 10:09:05 AM »
No one in their right mind should expect a 30 year old can reliably predict their expenses for six decades and expect them to be constant throughout that duration.


nereo

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Re: Stop worrying about the 4% rule
« Reply #2056 on: July 12, 2022, 10:32:36 AM »
No one in their right mind should expect a 30 year old can reliably predict their expenses for six decades and expect them to be constant throughout that duration.

I take a different view here.  So often I hear "how am I supposed to know what my expenses will be X years from now??!!" yet the daily reality of most working people is that they have a largely fixed income, and that income dictates their spending.

So why is it so different for the retirement phase?  IME most retirees have a long-ago determined "income" (typically a mixture of SS, pension and withdrawals from savings) and whatever that is, that's what they live on.
If I say right now "I'm going to live on the 2022 equivalent of $40k/year" (or $100k or whatever)... wouldn't I largely design my lifestyle around this amount?    Does it matter if that's 5 years in the future or 40?

EscapeVelocity2020

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Re: Stop worrying about the 4% rule
« Reply #2057 on: July 12, 2022, 11:25:29 AM »
I try to frame it more as, if I work one more year to grow my stash $100k, then thatís $4k more I can spend per year or $100k in buffer for unexpected health, family expenses, charityÖ. So is this OMY worth that trade off?  (My numbers are different than this, but thatís the general framework).

pecunia

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Re: Stop worrying about the 4% rule
« Reply #2058 on: July 12, 2022, 02:10:47 PM »
I try to frame it more as, if I work one more year to grow my stash $100k, then thatís $4k more I can spend per year or $100k in buffer for unexpected health, family expenses, charityÖ. So is this OMY worth that trade off?  (My numbers are different than this, but thatís the general framework).

Until this recession (or near recession) if your stash was larger than that required for 4 percent withdrawal, your stash would have grown even when you were retired giving you two valuable things 1) Time you will never get back 2) the margin you desire

charis

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Re: Stop worrying about the 4% rule
« Reply #2059 on: July 12, 2022, 02:51:20 PM »
No one in their right mind should expect a 30 year old can reliably predict their expenses for six decades and expect them to be constant throughout that duration.

I take a different view here.  So often I hear "how am I supposed to know what my expenses will be X years from now??!!" yet the daily reality of most working people is that they have a largely fixed income, and that income dictates their spending.

So why is it so different for the retirement phase?  IME most retirees have a long-ago determined "income" (typically a mixture of SS, pension and withdrawals from savings) and whatever that is, that's what they live on.
If I say right now "I'm going to live on the 2022 equivalent of $40k/year" (or $100k or whatever)... wouldn't I largely design my lifestyle around this amount?    Does it matter if that's 5 years in the future or 40?

I agree that you can, but there are things that are difficult to predict, especially if you have dependents. The pandemic for instance created an unpredictable new cost for child and tuition would not have been necessary. A) we suddenly needed child care for fully remote school age children in order to keep our in-person jobs B) we discovered that remote learning 100% did not work for the 7 year ago and said child had a learning difficulty that compounded the situation and required expensive in-person services. 

We could have without these expenses with detrimental results, both career and educational.  Just an example of the many crazy situations that life can and will throw at us.

nereo

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Re: Stop worrying about the 4% rule
« Reply #2060 on: July 12, 2022, 03:30:40 PM »
No one in their right mind should expect a 30 year old can reliably predict their expenses for six decades and expect them to be constant throughout that duration.

I take a different view here.  So often I hear "how am I supposed to know what my expenses will be X years from now??!!" yet the daily reality of most working people is that they have a largely fixed income, and that income dictates their spending.

So why is it so different for the retirement phase?  IME most retirees have a long-ago determined "income" (typically a mixture of SS, pension and withdrawals from savings) and whatever that is, that's what they live on.
If I say right now "I'm going to live on the 2022 equivalent of $40k/year" (or $100k or whatever)... wouldn't I largely design my lifestyle around this amount?    Does it matter if that's 5 years in the future or 40?

I agree that you can, but there are things that are difficult to predict, especially if you have dependents. The pandemic for instance created an unpredictable new cost for child and tuition would not have been necessary. A) we suddenly needed child care for fully remote school age children in order to keep our in-person jobs B) we discovered that remote learning 100% did not work for the 7 year ago and said child had a learning difficulty that compounded the situation and required expensive in-person services. 

We could have without these expenses with detrimental results, both career and educational.  Just an example of the many crazy situations that life can and will throw at us.

Sure, but how does that change anything with regards to retirement? You still need to guesstimate a number, build in some amount of safety, and then you live on what you have or change how you live. Much as you do while your money comes from your job.

charis

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Re: Stop worrying about the 4% rule
« Reply #2061 on: July 12, 2022, 03:44:02 PM »
No one in their right mind should expect a 30 year old can reliably predict their expenses for six decades and expect them to be constant throughout that duration.

I take a different view here.  So often I hear "how am I supposed to know what my expenses will be X years from now??!!" yet the daily reality of most working people is that they have a largely fixed income, and that income dictates their spending.

So why is it so different for the retirement phase?  IME most retirees have a long-ago determined "income" (typically a mixture of SS, pension and withdrawals from savings) and whatever that is, that's what they live on.
If I say right now "I'm going to live on the 2022 equivalent of $40k/year" (or $100k or whatever)... wouldn't I largely design my lifestyle around this amount?    Does it matter if that's 5 years in the future or 40?

I agree that you can, but there are things that are difficult to predict, especially if you have dependents. The pandemic for instance created an unpredictable new cost for child and tuition would not have been necessary. A) we suddenly needed child care for fully remote school age children in order to keep our in-person jobs B) we discovered that remote learning 100% did not work for the 7 year ago and said child had a learning difficulty that compounded the situation and required expensive in-person services. 

We could have without these expenses with detrimental results, both career and educational.  Just an example of the many crazy situations that life can and will throw at us.

Sure, but how does that change anything with regards to retirement? You still need to guesstimate a number, build in some amount of safety, and then you live on what you have or change how you live. Much as you do while your money comes from your job.

That's true. And if we had been retired, we could have avoided one of those expenses at least. But it opened my eyes to the possiblity that what I want spend money on, or feel is necessary, is likely to change in the future in ways that I can't fathom right now. So we'll probably build in more safety and plan to work longer or PT. It's plann-able to a certain degree but at 40, I want or need to spend $ on different things than I expected even 5 years ago at 35.

TempusFugit

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Re: Stop worrying about the 4% rule
« Reply #2062 on: July 12, 2022, 04:03:53 PM »
I try to frame it more as, if I work one more year to grow my stash $100k, then thatís $4k more I can spend per year or $100k in buffer for unexpected health, family expenses, charityÖ. So is this OMY worth that trade off?  (My numbers are different than this, but thatís the general framework).

OMY works in two directions of course. While working you (presumably) add more money to your stash in the form of contributions to your retirement accounts, etc and also you have the money that you didnít have to take out of your stash to support yourself for that year.  Possibly you could also consider that you have one year of expenses removed on the tail end (Ďcause you died).  So thatís three ways OMY can help the math. 

If you contribute $40K per year to your stash in the form of 401k contributions, etc and you spend $60K a year just living your life, thatís effectively $100K more in your stash a year later than would have been there had you retired.  If you assume your life ends at the same age regardless of when you retire, you also have reduced the number of years your stash has to support you (yay?)

Of course this is how we get trapped in the cycle.  You can never know with certainty what will happen.  Itís amazing how every downturn seems like Ďthis time itís different!í 

EscapeVelocity2020

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Re: Stop worrying about the 4% rule
« Reply #2063 on: July 12, 2022, 04:18:07 PM »
I try to frame it more as, if I work one more year to grow my stash $100k, then thatís $4k more I can spend per year or $100k in buffer for unexpected health, family expenses, charityÖ. So is this OMY worth that trade off?  (My numbers are different than this, but thatís the general framework).

OMY works in two directions of course. While working you (presumably) add more money to your stash in the form of contributions to your retirement accounts, etc and also you have the money that you didnít have to take out of your stash to support yourself for that year.  Possibly you could also consider that you have one year of expenses removed on the tail end (Ďcause you died).  So thatís three ways OMY can help the math. 

If you contribute $40K per year to your stash in the form of 401k contributions, etc and you spend $60K a year just living your life, thatís effectively $100K more in your stash a year later than would have been there had you retired.  If you assume your life ends at the same age regardless of when you retire, you also have reduced the number of years your stash has to support you (yay?)

Of course this is how we get trapped in the cycle.  You can never know with certainty what will happen.  Itís amazing how every downturn seems like Ďthis time itís different!í

Yeah, the framework is more geared toward a 30 or 40 year old.  At 50 and certainly 60, focus should be on straight up determining living expenses and using the 4% rule. 

lutorm

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Re: Stop worrying about the 4% rule
« Reply #2064 on: July 18, 2022, 01:35:34 PM »
One thing to keep in mind is that minor deviations from your "planned" expenses, like having to pay extra for childcare for a few years, has very little effect over a 40-50 year retirement period. You can also, to some extent, borrow from your future self (although that's subject to sequence of return risk) and compensate by tightening the belt a few years later.

If your expected living expenses are higher than, say, the median income, you can be pretty certain that you will be able to survive even if your desired spending level at some point in the future will be higher. So it's a matter of wants, not needs.

The thing to really worry about, IMHO, are things like major illness, accidents, or children with disabilities leading to huge medical costs, needing long term care, special accommodations, etc. that blow your expenses way past what you've planned for. Those expenses can be large and can justifiably be called "needs".

 

Wow, a phone plan for fifteen bucks!