question on the 4% rule

[mistymoney]

I'm a little confused as to what it is suppose to represent.

Is it suppose be the WR that is likely to leave the stache intact over the long term or the one that is likely to leave it exhausted by the likely death date? So portfolio failure seems defined as the protfolio going to 0 before 30 years - but what is success? is it just making full payout on month 360 even if only $1 is left - or is it a porfolio that is equal to the start amount, adjust by inflation?

And if the 4% is not descriptive as likely exhausting on monthe 361 - what % rate would be?

So these are kind of broad, but my got thinking about this looking at my employer contributions to my 401k and trying to think about what kind of pension that would look like. (hint - super paltry.....)

[ixtap]

4% is meant to not reach zero over 30 years of inflation adjusted withdrawals, in a wide variety of circumstances. Some of those circumstances will actually result in a larger pot at the end than the beginning.

You can only tell what % would be exhausted on a particular date after you know what earnings and inflation were.

[MDM]

Does the Safe withdrawal rates page help?

[MustacheAndaHalf]

You can see some of the answers yourself using Vanguard's nest egg calculator.
https://www.vanguard.com/nesteggcalculator

You plug in stock / bond / cash percentage, withdrawal rate, and number of years.  It gives you a success percentage based on simulating random stock market performance thousands of times.  I believe success is defined there as having any assets left after the years you specify.  You can change parameters and see how that changes the outcome.

[reeshau]

If it helps, here is a graph of the data behind Bill Bengen's original study that established the 4% rule.

Note that he calls this magic number "SAFEMAX."  Meaning, the maximum withdrawal rate you can be safe with, over an expected 30 year retirement.

Here, success is not going below $0 in a worst-case scenario.  But look at how high the number goes for other scenarios.  The problem is, you never know what scenario you fall into until after the fact--there is no retcon-ing of your spending, saving, and investing habits.  So, planning for the worst case will likely leave you with a lot of money, but you won't go broke.

What is also interesting to me is that the Great Depression is *not* the worst case scenario.  It is, in fact, the mid- to late- 1960's, which do not live in investing infamy.  They do, however precede the 1970's, which featured stagflation.  That is what eats into nest eggs.

Lest you fear we are in "Stagflation II," you often hear our current inflation as being at a "40-year high."  Note, 40 years ago is the early 80's, after the fever of 1970's inflation, which needed mortgage rates of 18% to control, was already well on its way to recovery.

[reeshau]

Now, while Bengen is the source of the idea, many cite the Trinity Study as the foundation.  They took Bill's numbers, which he used the miraculous new invention of the desktop spreadsheet program to calculate, and modeled a number of different scenarios.  They also expressed these scenarios as probabilities of success, rather than the absolutes of success or failure.

As the picture states below, this graph of Trinity data comes from Wade Pfau, who has extended their study several times as new years' data comes out.  The highlight outlining Bengen's SAFEMAX is mine.

[Metalcat]

Its also not meant to be predictive for individuals. There are too many assumptions within the math that don't actually apply to normal human beings.

It's really best used as a very, very rough starting point.

[FIRE Artist]

I'm a little confused as to what it is suppose to represent.

Is it suppose be the WR that is likely to leave the stache intact over the long term or the one that is likely to leave it exhausted by the likely death date? So portfolio failure seems defined as the protfolio going to 0 before 30 years - but what is success? is it just making full payout on month 360 even if only $1 is left - or is it a porfolio that is equal to the start amount, adjust by inflation?

And if the 4% is not descriptive as likely exhausting on monthe 361 - what % rate would be?

So these are kind of broad, but my got thinking about this looking at my employer contributions to my 401k and trying to think about what kind of pension that would look like. (hint - super paltry.....)

If you are looking to withdraw all of your money by a certain date, then you should look at VPW, Variable Percentage Withdrawal over at Boggleheads.  This system is designed to spend your money by age 100 (personally I have cut that down to 95 in my personal projections),  It guarantees that your money will last until your end date, but the cash value will vary year to year on how much you can withdraw, but will be more money than the 4% rule.  It also allows you to include in future SS, pension payments etc. in the model. 

[Tyler]

I'm a little confused as to what it is suppose to represent.

Is it suppose be the WR that is likely to leave the stache intact over the long term or the one that is likely to leave it exhausted by the likely death date? So portfolio failure seems defined as the protfolio going to 0 before 30 years - but what is success? is it just making full payout on month 360 even if only $1 is left - or is it a porfolio that is equal to the start amount, adjust by inflation?

The short story is that the safe withdrawal rate is the one that completely depleted a portfolio over a certain timeframe in the worst case historical scenario. If your goal is to maintain the inflation-adjusted principal, then that's the purpose of the perpetual withdrawal rate.

For a more detailed explanation, I just happened to publish this article today that I think you might find helpful: How to Replace Income in Retirement

[mistymoney]

You can see some of the answers yourself using Vanguard's nest egg calculator.
https://www.vanguard.com/nesteggcalculator

You plug in stock / bond / cash percentage, withdrawal rate, and number of years.  It gives you a success percentage based on simulating random stock market performance thousands of times.  I believe success is defined there as having any assets left after the years you specify.  You can change parameters and see how that changes the outcome.

Ineresting. I haven't seen this one before.

So to simulate the function of a pension - I put in 100% stocks, 40 year timeframe, criteria of 50% probability savings will last over that time frame.

It came out to a 6.7% withdrawal rate, or $185/month pension equivalent based on my employer 401k balance.

[mistymoney]

Does the Safe withdrawal rates page help?

Very nice info, thanks for this! I guess they are willing to extrapolate outside the 30 years of the original work, which would be nice. But good info and easily layed out.

[mistymoney]

If it helps, here is a graph of the data behind Bill Bengen's original study that established the 4% rule.

Note that he calls this magic number "SAFEMAX."  Meaning, the maximum withdrawal rate you can be safe with, over an expected 30 year retirement.

Here, success is not going below $0 in a worst-case scenario.  But look at how high the number goes for other scenarios.  The problem is, you never know what scenario you fall into until after the fact--there is no recon-ing of your spending, saving, and investing habits.  So, planning for the worst case will likely leave you with a lot of money, but you won't go broke.

What is also interesting to me is that the Great Depression is *not* the worst case scenario.  It is, in fact, the mid- to late- 1960's, which do not live in investing infamy.  They do, however precede the 1970's, which featured stagflation.  That is what eats into nest eggs.

Lest you fear we are in "Stagflation II," you often hear our current inflation as being at a "40-year high."  Note, 40 years ago is the early 80's, after the fever of 1970's inflation, which needed mortgage rates of 18% to control, was already well on its way to recovery.

lot of info in that article! looked at the graphs, which were very informative. will try to give it a read soemtime.

[clarkfan1979]

https://www.choosefi.com/flexible-spending-rules-for-early-retirees/

I think Michael Kitces does the best job of explaining the math of the 4% rule. The 4% rule models what has happened in the past and based on worst case scenario. There is a 1% chance that you run out of money in year 31.

On the other side of the coin, if you start with a 1 million portfolio, based on best case scenario, there is a 1% chance you end up with 9 million dollars in year 31.

You can watch or listen to the episode for more specifics such as asset allocation. I think if people are going to consider worst case scenario, it should also be counter balanced with best case scenario.

[mistymoney]

https://www.choosefi.com/flexible-spending-rules-for-early-retirees/

I think Michael Kitces does the best job of explaining the math of the 4% rule. The 4% rule models what has happened in the past and based on worst case scenario. There is a 1% chance that you run out of money in year 31.

On the other side of the coin, if you start with a 1 million portfolio, based on best case scenario, there is a 1% chance you end up with 9 million dollars in year 31.

You can watch or listen to the episode for more specifics such as asset allocation. I think if people are going to consider worst case scenario, it should also be counter balanced with best case scenario.

Thanks, I think I didn't ask my question very clearly. I guess the question would have been what WR from a defined pot of money would most closely match that of a defined benefit plan.

My approximation was 6.7%.

Was just trying to compare my 401k match with a pension.

[blue_green_sparks]

All my analysis has taught me what a large impact that significant COLA defined benefit can have on the survival chances of a portfolio.

[mistymoney]

All my analysis has taught me what a large impact that significant COLA defined benefit can have on the survival chances of a portfolio.

excellent point. keeping my employer matched money in the market would be my closest approximation.