Author Topic: Stop worrying about the 4% rule  (Read 442700 times)

Exflyboy

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Re: Stop worrying about the 4% rule
« Reply #1100 on: September 07, 2017, 04:36:13 PM »

[/quote]

Trying to project life and it's expenses ten years into the future isn't going to be accurate.  Ten years ago i was in sales and couldn't put on a bandaid, today I'm an acute care RN.  I would have never predicted that. 

[/quote]

Awesome..:)

secondcor521

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Re: Stop worrying about the 4% rule
« Reply #1101 on: September 07, 2017, 04:48:33 PM »
The 4% Rule factors in inflation once you FIRE, but if you are 10yrs out like Kenmoremmm mentions it does not account for inflation from your current spending to the date of your FIRE. That's the question he was asking.

Oh yes, quite right.  Sorry, my mistake - I should red more carefully.
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CanuckExpat

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Re: Stop worrying about the 4% rule
« Reply #1102 on: September 07, 2017, 06:31:45 PM »
If anyone likes very early reminders:

Wade Pfau, author of many Trinity Study Updates will be doing an "Ask Me Anything" Tuesday, 10/31/2017, at noon EDT on the Financial Independence Subreddit if you want to ask him any questions directly. Here is a link to the reminder with more information

Le Barbu

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Re: Stop worrying about the 4% rule
« Reply #1103 on: October 07, 2017, 06:06:49 AM »
1 month since the last post here...

Where is Runewell? His profile disapeared and many of his post to...

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1104 on: October 07, 2017, 06:40:16 AM »
1 month since the last post here...

Where is Runewell? His profile disapeared and many of his post to...

Banned and his posts cleaned up a mod.

Dicey

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Re: Stop worrying about the 4% rule
« Reply #1105 on: October 08, 2017, 10:38:23 PM »
1 month since the last post here...

Where is Runewell? His profile disapeared and many of his post to...

Banned and his posts cleaned up a mod.
Yes, and his mysterious twin, Mr. "Steed" has disappeared too.

Eucalyptus

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Re: Stop worrying about the 4% rule
« Reply #1106 on: October 13, 2017, 05:42:09 PM »
The 4% Rule factors in inflation once you FIRE, but if you are 10yrs out like Kenmoremmm mentions it does not account for inflation from your current spending to the date of your FIRE. That's the question he was asking.

Oh yes, quite right.  Sorry, my mistake - I should red more carefully.
don't feel blue, it happens to everyone once in a while...

I'm green with envy over your cleverness.

I think you are all dealing in shades of grey to be honest

secondcor521

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Re: Stop worrying about the 4% rule
« Reply #1107 on: October 13, 2017, 09:39:31 PM »
The 4% Rule factors in inflation once you FIRE, but if you are 10yrs out like Kenmoremmm mentions it does not account for inflation from your current spending to the date of your FIRE. That's the question he was asking.

Oh yes, quite right.  Sorry, my mistake - I should red more carefully.
don't feel blue, it happens to everyone once in a while...

I'm green with envy over your cleverness.

I think you are all dealing in shades of grey to be honest

I think there is an article on the Frugal Cyan-tist about that.

Exflyboy

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Re: Stop worrying about the 4% rule
« Reply #1108 on: October 14, 2017, 04:50:04 PM »
Question..

You have two early retirees.. its 2014 and one person retires with $1M and intends to spend $40K + inflation for the rest of his/her natural life.

Now you retiree #2 who says.. Naah I want a bit more and I don't have $1m yet (say he has $750k).

Fast forward to 2017 and they both have exactly $2M after the huge bull run we have just had and Retiree #2 says.. OK I'm done.

R1 is still locked into $40k per year (the 4% rule) , where as R2 can spend $80k per year because he retired with $2M.

Clearly this is nonsense.

Explain..:)

sol

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Re: Stop worrying about the 4% rule
« Reply #1109 on: October 14, 2017, 05:12:04 PM »
Question..

You have two early retirees.. its 2014 and one person retires with $1M and intends to spend $40K + inflation for the rest of his/her natural life.

Now you retiree #2 who says.. Naah I want a bit more and I don't have $1m yet (say he has $750k).

Fast forward to 2017 and they both have exactly $2M after the huge bull run we have just had and Retiree #2 says.. OK I'm done.

R1 is still locked into $40k per year (the 4% rule) , where as R2 can spend $80k per year because he retired with $2M.

Clearly this is nonsense.

Explain..:)

You should probably go back and read this thread, where this effect has been discussed at some length multiple times.

But to summarize,

1)  they do not have equivalent time horizons anymore, and

2)  retiree #1 isn't locked into anything, and

3)  a success rate of 95% and a success rate of 30% are both "successful" if they both happen to last your particular time duration, and

4)  you've totally misunderstood the 4% rule if this is still confusing to you.  It's a historical look back at sequence of return risk, not a predictive tool for how to withdraw your savings.

Just go back to page 1 of this thread and start reading, and all of your questions will be answered.  Follow the links for extra credit.

Exflyboy

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Re: Stop worrying about the 4% rule
« Reply #1110 on: October 14, 2017, 07:09:22 PM »
Question..

You have two early retirees.. its 2014 and one person retires with $1M and intends to spend $40K + inflation for the rest of his/her natural life.

Now you retiree #2 who says.. Naah I want a bit more and I don't have $1m yet (say he has $750k).

Fast forward to 2017 and they both have exactly $2M after the huge bull run we have just had and Retiree #2 says.. OK I'm done.

R1 is still locked into $40k per year (the 4% rule) , where as R2 can spend $80k per year because he retired with $2M.

Clearly this is nonsense.

Explain..:)

You should probably go back and read this thread, where this effect has been discussed at some length multiple times.

But to summarize,

1)  they do not have equivalent time horizons anymore, and

2)  retiree #1 isn't locked into anything, and

3)  a success rate of 95% and a success rate of 30% are both "successful" if they both happen to last your particular time duration, and

4)  you've totally misunderstood the 4% rule if this is still confusing to you.  It's a historical look back at sequence of return risk, not a predictive tool for how to withdraw your savings.

Just go back to page 1 of this thread and start reading, and all of your questions will be answered.  Follow the links for extra credit.

Actually I'm not confused but #4 is the real answer.

In fact the curiosity of the 4% rule is such that 4% historically gets you to a 30 year horizon to 95% (or whatever that actual probability is). If however you happened to retire at the beginning of a major stock market run up you can in fact reset your dollar withdrawal number to a higher value based upon on 4% (or whatever you decide is your "safe" number) and get the same level of risk.

In my case my chosen WR is 3% and that can ride up with the market with the same level of future risk..


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Re: Stop worrying about the 4% rule
« Reply #1111 on: October 14, 2017, 08:53:51 PM »

In my case my chosen WR is 3% and that can ride up with the market with the same level of future risk..

That's true, but instead of retiring with 25x expenses, you need 33x expenses.  That means a number of extra years working, with no extra safety.

Exflyboy

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Re: Stop worrying about the 4% rule
« Reply #1112 on: October 14, 2017, 10:02:46 PM »

In my case my chosen WR is 3% and that can ride up with the market with the same level of future risk..

That's true, but instead of retiring with 25x expenses, you need 33x expenses.  That means a number of extra years working, with no extra safety.

Indeed, in my case though it sort of happened by accident as I was already FI before I started reading MMM.

Then I RE'd in 2014 and now have roughly 3.2 to 3.9 times what we need based on 4%.. Depends on if we stay in the rental business or not.

I guess this is a good problem to have and we intend to spend more in retirement.

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Re: Stop worrying about the 4% rule
« Reply #1113 on: October 14, 2017, 11:09:12 PM »

In my case my chosen WR is 3% and that can ride up with the market with the same level of future risk..

That's true, but instead of retiring with 25x expenses, you need 33x expenses.  That means a number of extra years working, with no extra safety.
i wanted to point out that this makes no sense.  more money = no extra safety?  that literally makes no logical sense.  more money means more cushion, literally by definition of what is a safety margin. How can you say 33x isnt more secure than 25x with a straight face?

(EDIT: Looks like what I was replying to was deleted. Leaving this response, because I think PS's question was a valid one that multiple people will have. /END EDIT.)

At some point, more money is not more safety, because your worry is no longer running out of money, but dying, or the country collapsing, or whatever, and a 3% WR won't be any different than 4% WR in those scenarios.

I would argue that there is extra safety in a 3% vs 4% (after all, 4% was only 95% safe historically--admittedly with robotic withdrawals/spending and no extra income), but there isn't really much extra safety in terms of mitigating sequence of returns risk in going from a 1% WR to a 0.5% WR.

Where the actual line is where you stop gaining extra safety from money is a sorites paradox, but I think you're probably right that there is extra safety going from a 4% to 3%, for most people, and that TC is right that at some point, extra money as a buffer doesn't add safety because the risks at that point aren't ones you can handle with money.

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Re: Stop worrying about the 4% rule
« Reply #1114 on: October 14, 2017, 11:31:32 PM »

In my case my chosen WR is 3% and that can ride up with the market with the same level of future risk..

That's true, but instead of retiring with 25x expenses, you need 33x expenses.  That means a number of extra years working, with no extra safety.
i wanted to point out that this makes no sense.  more money = no extra safety?  that literally makes no logical sense.  more money means more cushion, literally by definition of what is a safety margin. How can you say 33x isnt more secure than 25x with a straight face?

(EDIT: Looks like what I was replying to was deleted. Leaving this response, because I think PS's question was a valid one that multiple people will have. /END EDIT.)

At some point, more money is not more safety, because your worry is no longer running out of money, but dying, or the country collapsing, or whatever, and a 3% WR won't be any different than 4% WR in those scenarios.

I would argue that there is extra safety in a 3% vs 4% (after all, 4% was only 95% safe historically--admittedly with robotic withdrawals/spending and no extra income), but there isn't really much extra safety in terms of mitigating sequence of returns risk in going from a 1% WR to a 0.5% WR.

Where the actual line is where you stop gaining extra safety from money is a sorites paradox, but I think you're probably right that there is extra safety going from a 4% to 3%, for most people, and that TC is right that at some point, extra money as a buffer doesn't add safety because the risks at that point aren't ones you can handle with money.
Think about it.  When we use statistics to suggest having more money is meaningless, we are crossing over a line of what a statistical model is meant to represent in terms of guidance value.

Exflyboy

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Re: Stop worrying about the 4% rule
« Reply #1115 on: October 14, 2017, 11:40:01 PM »

In my case my chosen WR is 3% and that can ride up with the market with the same level of future risk..

That's true, but instead of retiring with 25x expenses, you need 33x expenses.  That means a number of extra years working, with no extra safety.
i wanted to point out that this makes no sense.  more money = no extra safety?  that literally makes no logical sense.  more money means more cushion, literally by definition of what is a safety margin. How can you say 33x isnt more secure than 25x with a straight face?

(EDIT: Looks like what I was replying to was deleted. Leaving this response, because I think PS's question was a valid one that multiple people will have. /END EDIT.)

At some point, more money is not more safety, because your worry is no longer running out of money, but dying, or the country collapsing, or whatever, and a 3% WR won't be any different than 4% WR in those scenarios.

I would argue that there is extra safety in a 3% vs 4% (after all, 4% was only 95% safe historically--admittedly with robotic withdrawals/spending and no extra income), but there isn't really much extra safety in terms of mitigating sequence of returns risk in going from a 1% WR to a 0.5% WR.

Where the actual line is where you stop gaining extra safety from money is a sorites paradox, but I think you're probably right that there is extra safety going from a 4% to 3%, for most people, and that TC is right that at some point, extra money as a buffer doesn't add safety because the risks at that point aren't ones you can handle with money.

A bit like Steve Jobs.. even his billions couldn't buy a ticket out of pancreatic cancer sadly..:(

And for me 3% is because I'm there already and, well, its gives me warm and fuzzy feelings all over..:)
« Last Edit: October 14, 2017, 11:45:19 PM by Exflyboy »

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Re: Stop worrying about the 4% rule
« Reply #1116 on: October 15, 2017, 12:10:43 AM »

In my case my chosen WR is 3% and that can ride up with the market with the same level of future risk..

That's true, but instead of retiring with 25x expenses, you need 33x expenses.  That means a number of extra years working, with no extra safety.
i wanted to point out that this makes no sense.  more money = no extra safety?  that literally makes no logical sense.  more money means more cushion, literally by definition of what is a safety margin. How can you say 33x isnt more secure than 25x with a straight face?

(EDIT: Looks like what I was replying to was deleted. Leaving this response, because I think PS's question was a valid one that multiple people will have. /END EDIT.)

At some point, more money is not more safety, because your worry is no longer running out of money, but dying, or the country collapsing, or whatever, and a 3% WR won't be any different than 4% WR in those scenarios.

I would argue that there is extra safety in a 3% vs 4% (after all, 4% was only 95% safe historically--admittedly with robotic withdrawals/spending and no extra income), but there isn't really much extra safety in terms of mitigating sequence of returns risk in going from a 1% WR to a 0.5% WR.

Where the actual line is where you stop gaining extra safety from money is a sorites paradox, but I think you're probably right that there is extra safety going from a 4% to 3%, for most people, and that TC is right that at some point, extra money as a buffer doesn't add safety because the risks at that point aren't ones you can handle with money.

In addition, the extra time you need to work to collect that 33x stache vs 25x is also a guaranteed shortening of your time in retirement by exactly the number of extra years you worked.

Lets say you are 40 yrs old, with a paid off mortgage, and have anticipated spending of $40k/yr. You are earning $100k/yr net. Your stache is $1 million, so 4% rule says you can FIRE away. But you decide to use a 3% SWR because you assume 'it's safer'. Thus you would need an equiv of a an extra $333,000 saved, so you work about an extra 3 years to get this (how long that will take depends on how quickly your $1million 'stache grows in the meantime). If your life expectancy is 90, you have chosen to lose 6% of your retirement time. If you actually end up dying at 70, you lost 10%. That's a pretty big decision IMHO.

Exflyboy

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Re: Stop worrying about the 4% rule
« Reply #1117 on: October 15, 2017, 12:38:03 AM »
Each to their own of course but retiring at 43 instead of 40 but with 33% more money sounds like a good deal to me. I mean what will be different say 10 years from now.. Will we have doubled healthcare costs or will we have a well run single payer system for example?

I mean that extra $333k is about $13k/year.. That seems to be a very real cost of healthcare for families even today.. let alone 10 years from now.

But then if you die at 50.. Maybe not such a great deal..

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Re: Stop worrying about the 4% rule
« Reply #1118 on: October 15, 2017, 03:32:56 AM »
Each to their own of course but retiring at 43 instead of 40 but with 33% more money sounds like a good deal to me. I mean what will be different say 10 years from now.. Will we have doubled healthcare costs or will we have a well run single payer system for example?


Depends on your work/life situation, I'd say.  For many work is a deeply unpleasant experience that leaves them unable to do much else time-wise and very often saps their health (e.g. sitting immoble at a desk, high stress, long/poor hours).  One could flip that question around and ask: how much would 3 healthy years of your life be worth in your 40s?  what if those are among the last years you'll spend with your kids (on a day-to-day basis)?

It's a different choice for everyone of course. 

TomTX

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Re: Stop worrying about the 4% rule
« Reply #1119 on: October 15, 2017, 08:16:17 AM »
Each to their own of course but retiring at 43 instead of 40 but with 33% more money sounds like a good deal to me. I mean what will be different say 10 years from now.. Will we have doubled healthcare costs or will we have a well run single payer system for example?


Depends on your work/life situation, I'd say.  For many work is a deeply unpleasant experience that leaves them unable to do much else time-wise and very often saps their health (e.g. sitting immoble at a desk, high stress, long/poor hours).  One could flip that question around and ask: how much would 3 healthy years of your life be worth in your 40s?  what if those are among the last years you'll spend with your kids (on a day-to-day basis)?

It's a different choice for everyone of course.

Yep. We don't know how much healthy, active time we're going to have.

My Dad's health issues really kicked in shortly before he hit age 70. His capability to actually go out and do stuff is severely diminished - and my Mom is spending most of her time in a caretaker role. Thankfully he retired semi-early at 56 and they got to do a fair amount of travel. Now, even some "easy" stuff like a cross-country train trip is canceled due to health issues.

Friend of mine at work - his brother has terminal brain cancer. Age 67.

Friend of mine in high school. Dead at 17. Car wreck.

These are just things that come to mind immediately.

CanuckExpat

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Re: Stop worrying about the 4% rule
« Reply #1120 on: October 15, 2017, 08:58:08 AM »
Each to their own of course but retiring at 43 instead of 40 but with 33% more money sounds like a good deal to me. I mean what will be different say 10 years from now.. Will we have doubled healthcare costs or will we have a well run single payer system for example?


Depends on your work/life situation, I'd say.  For many work is a deeply unpleasant experience that leaves them unable to do much else time-wise and very often saps their health (e.g. sitting immoble at a desk, high stress, long/poor hours).  One could flip that question around and ask: how much would 3 healthy years of your life be worth in your 40s?  what if those are among the last years you'll spend with your kids (on a day-to-day basis)?

It's a different choice for everyone of course.

Yes, you have to look at the overall picture and make the best decision you can.
If you work clearing landmines from a civilian area, love what you do and want to do it for another three years, do it.
If you work planting landmines in front of orphanages, hate your job, and don't want to work three more years, you should probably quit.

Most people's situations probably lie more in the middle

Exflyboy

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Re: Stop worrying about the 4% rule
« Reply #1121 on: October 15, 2017, 10:10:21 AM »
One would hope most peoples choices lie somewhere in the middle..:)

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Re: Stop worrying about the 4% rule
« Reply #1122 on: October 15, 2017, 03:04:48 PM »
...what exactly did/do you do, CanuckExpat?

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Re: Stop worrying about the 4% rule
« Reply #1123 on: October 15, 2017, 04:51:55 PM »
Think about it.  When we use statistics to suggest having more money is meaningless, we are crossing over a line of what a statistical model is meant to represent in terms of guidance value.

Let me be clear:  I'm definitely not saying there is zero utility in having more money.   I'm talking about the definition of "safe."  Specifically, when we talk about "safe" withdrawal rates, by "safe" we mean the portfolio won't run out of money.    The implied fear is that if we run out of money, we have to go back to work, thereby shortening our retirements.  So to avoid the possibility the future will be worse than the past, we work extra years before retiring--thereby shortening our retirements.    Either way, you have a shorter retirement, so there is no additional "safety."  In both cases all you are doing is reducing the withdrawal period.   

Obviously, if there is some big life crisis like a medical emergency that requires money, you are better off having more money.  But those events aren't included in the SWR studies.  The "safe" in SWR only knows about what happened in the past. 

But the 4% rule also implies a precision that doesn't exist in the data.  We don't have very much data, and the data aren't very good.  Let me explain what I mean by that.  First we only have three or so unique 30-year periods.  Next we are using past conditions to as a comparison for the future.   Let's look at the two worst starting dates, 1929 and 1966.  In 1929, there was a widespread nationwide banking failure followed by deflation and a long, deep, depression.  Economics wasn't as well understood back then, and it took years before the government started taking active measures to fix the economy.  In 2007, there was a major banking failure, which was contained fairly quickly.  Faltering banks were quickly shored up, there was almost no deflation, and the economy began recover quickly, in part bolstered by a robust safety net that didn't exist in 1929.   In short, I don't think we'll see a 1929 style crisis in the future.   

1966 was a poor year to start because it was characterized by stagnant stock market returns followed by a period of usually high inflation which the Fed (led by the bumbling Arthur Burns) failed to keep in check.  The Fed now has an inflation target in the low single digits.  I find it unlikely we'll see inflation that high ever again.  So 1929 and 1966 aren't directly comparable to 2017.  The world is a much different place now.  Can we use those data to form opinions about the future?  We have to.  We don't have anything else. 

But if we do see 1977 style inflation, a good hedge is to simply have a mortgage.  That way your housing expenses are fixed (for the most part), with allows you to withdraw fewer inflation-adjusted dollars.  And there are lots of hedging strategies, which most people are probably already using or could easily use.  Owning rental real estate, having an income producing hobby, relying on Social Security for a supplemental income, reducing withdrawal rate, etc.   So if "safe" means "not running out money" there are lots of common sense mid-course corrections available to most people--without shortening your retirement years which is what "safe" means in this context. 

As arebelspy points out, (wildly paraphrasing) nobody ever got hit by the bus they saw coming.  We're not going to have a 1929 style meltdown, and we won't have 1970s style inflation.  The next thing will be something nobody anticipates, and if the 4% rule won't save us, then 3.3% rule probably won't either.  In that case, we'll all have to fall back on hedging strategies--which most of us are already planning on doing.  To put it another way, if the future really is worse than the past, no one can quantifiably say a 3.3 WR is "safer" than 4.0.  The data aren't good enough to make that fine a distinction. 

So, IMO, stop worrying about the 4% rule. 


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Re: Stop worrying about the 4% rule
« Reply #1124 on: October 17, 2017, 09:04:05 AM »

Yep. We don't know how much healthy, active time we're going to have.

My Dad's health issues really kicked in shortly before he hit age 70. His capability to actually go out and do stuff is severely diminished - and my Mom is spending most of her time in a caretaker role. Thankfully he retired semi-early at 56 and they got to do a fair amount of travel. Now, even some "easy" stuff like a cross-country train trip is canceled due to health issues.

Friend of mine at work - his brother has terminal brain cancer. Age 67.

Friend of mine in high school. Dead at 17. Car wreck.

These are just things that come to mind immediately.

This is the type of thinking that leads to YOLO approach to life.  The reality is these are smaller more isolated events than your statistical odds are - for one I suspect you have already lived past 17.  Death is certain, when is not - so for IMO you have to go with the statistical probabilities as your baseline, which by the way change as you age (ie. avg. life expectancy for those born in 2015 is 79 but if you were 65 in 2015 your life expectancy is 84). Lifestyle factors, sex, race also play a part.

Aside from that, I think about it too - I would hate waste more of my life to only having it be short.  Although I take comfort that my family would be fine.

tooqk4u22

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Re: Stop worrying about the 4% rule
« Reply #1125 on: October 17, 2017, 09:05:36 AM »
Each to their own of course but retiring at 43 instead of 40 but with 33% more money sounds like a good deal to me. I mean what will be different say 10 years from now.. Will we have doubled healthcare costs or will we have a well run single payer system for example?


Depends on your work/life situation, I'd say.  For many work is a deeply unpleasant experience that leaves them unable to do much else time-wise and very often saps their health (e.g. sitting immoble at a desk, high stress, long/poor hours).  One could flip that question around and ask: how much would 3 healthy years of your life be worth in your 40s?  what if those are among the last years you'll spend with your kids (on a day-to-day basis)?

It's a different choice for everyone of course.

Yes, you have to look at the overall picture and make the best decision you can.
If you work clearing landmines from a civilian area, love what you do and want to do it for another three years, do it.
If you work planting landmines in front of orphanages, hate your job, and don't want to work three more years, you should probably quit.

Most people's situations probably lie more in the middle

Be a demand creator.....plant the mines then get paid to clear them....sure fire way to FIRE (or getting blown up).

maizeman

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Re: Stop worrying about the 4% rule
« Reply #1126 on: October 17, 2017, 09:07:45 AM »
Better yet, pretend to the mines and still get paid to clean them up. Lower Cost of Goods, and reduced risk of getting blown up.

cerat0n1a

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Re: Stop worrying about the 4% rule
« Reply #1127 on: October 17, 2017, 01:49:08 PM »
Better yet, pretend to the mines and still get paid to clean them up. Lower Cost of Goods, and reduced risk of getting blown up.

Just don't be this guy and sell pretend mine detectors.

http://www.bbc.co.uk/news/uk-22266051

Classical_Liberal

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Re: Stop worrying about the 4% rule
« Reply #1128 on: October 17, 2017, 04:54:39 PM »
Be a demand creator.....plant the mines then get paid to clear them....sure fire way to FIRE (or getting blown up).

John Maynard Keynes predicted this exact activity.  Except he used digging holes and filling them again as the example, but adding the manufacturing jobs to produce mines that are never actually used only makes it better.

Better yet, pretend to the mines and still get paid to clean them up. Lower Cost of Goods, and reduced risk of getting blown up.
UBI?

OurTown

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Re: Stop worrying about the 4% rule
« Reply #1129 on: October 27, 2017, 01:05:12 PM »
This is a fantastic thread.  I encourage everyone to read all the way from the beginning.

tyort1

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Re: Stop worrying about the 4% rule
« Reply #1130 on: October 27, 2017, 01:12:33 PM »
Question..

You have two early retirees.. its 2014 and one person retires with $1M and intends to spend $40K + inflation for the rest of his/her natural life.

Now you retiree #2 who says.. Naah I want a bit more and I don't have $1m yet (say he has $750k).

Fast forward to 2017 and they both have exactly $2M after the huge bull run we have just had and Retiree #2 says.. OK I'm done.

R1 is still locked into $40k per year (the 4% rule) , where as R2 can spend $80k per year because he retired with $2M.

Clearly this is nonsense.

Explain..:)

You should probably go back and read this thread, where this effect has been discussed at some length multiple times.

But to summarize,
1)  they do not have equivalent time horizons anymore, and

2)  retiree #1 isn't locked into anything, and

3)  a success rate of 95% and a success rate of 30% are both "successful" if they both happen to last your particular time duration, and

4)  you've totally misunderstood the 4% rule if this is still confusing to you.  It's a historical look back at sequence of return risk, not a predictive tool for how to withdraw your savings.

Just go back to page 1 of this thread and start reading, and all of your questions will be answered.  Follow the links for extra credit.

Actually I'm not confused but #4 is the real answer.

In fact the curiosity of the 4% rule is such that 4% historically gets you to a 30 year horizon to 95% (or whatever that actual probability is). If however you happened to retire at the beginning of a major stock market run up you can in fact reset your dollar withdrawal number to a higher value based upon on 4% (or whatever you decide is your "safe" number) and get the same level of risk.

In my case my chosen WR is 3% and that can ride up with the market with the same level of future risk..
This isnt a contradiction. It is the 4% rate that is `fixed` not your withdraw amount.  The nominal dollars to withdraw adjust every year under the methodology.  A fixed withdraw is actually a declining rate of withdraw percentage wise, which isnt what the study recommends (and why others suggested a reread)

Wait, you mean that 4% of $2mil is more than 4% of $1mil?  Shut the front door! 

But you are right, people fixate on "My expenses are $40k per year so I need $1mil to retire", and they entirely forget that the stash will grow over time.  As the stash grows over time, you're "4%" withdrawals go up, too. 

4% of $1mil = $40,000
Stash grows to $1.5 mil.
4% of $1.5 mil = $60,000
Stash grows to $2 mil.
4% of $2mil = $80,000

The point is, that your income from your stash goes up when the stash grows.  Even if you just stick with 4% withdrawals.  It seems like some people don't get this.

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1131 on: October 27, 2017, 01:22:49 PM »
The point is, that your income from your stash goes up when the stash grows.  Even if you just stick with 4% withdrawals.  It seems like some people don't get this.

The Trinity Study-esque 4% Rule most of us use as a basis for FIRE planning does not increase your annual WR based on an increase in 'stash value. Each year the nominal WR amount = 4% of the starting portfolio value + inflation irregardless of 'stash value.




tyort1

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Re: Stop worrying about the 4% rule
« Reply #1132 on: October 27, 2017, 01:29:53 PM »
The point is, that your income from your stash goes up when the stash grows.  Even if you just stick with 4% withdrawals.  It seems like some people don't get this.

The Trinity Study-esque 4% Rule most of us use as a basis for FIRE planning does not increase your annual WR based on an increase in 'stash value. Each year the nominal WR amount = 4% of the starting portfolio value + inflation irregardless of 'stash value.

Agreed, withdrawal rate stays the same at 4%.  I'm just pointing out that the actual dollars you withdraw every year goes up, assuming your stash goes up. 

I just see a lot of people posting with this idea that "I can withdraw $40k per year when I retire and can only withdraw $40k per year, every year, until I die.  And that's simply not true.  As the stash grows, the total dollars you can withdraw every year goes up too. 

sol

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Re: Stop worrying about the 4% rule
« Reply #1133 on: October 27, 2017, 01:32:47 PM »
The point is, that your income from your stash goes up when the stash grows.  Even if you just stick with 4% withdrawals.  It seems like some people don't get this.

The Trinity Study-esque 4% Rule most of us use as a basis for FIRE planning does not increase your annual WR based on an increase in 'stash value. Each year the nominal WR amount = 4% of the starting portfolio value + inflation irregardless of 'stash value.

Agreed, withdrawal rate stays the same at 4%.  I'm just pointing out that the actual dollars you withdraw every year goes up, assuming your stash goes up. 

I just see a lot of people posting with this idea that "I can withdraw $40k per year when I retire and can only withdraw $40k per year, every year, until I die.  And that's simply not true.  As the stash grows, the total dollars you can withdraw every year goes up too.

RC was pointing out that under the guidelines of the trinity study you withdraw 4% in your first year and then increase that amount by inflation every year thereafter, even when your stash doesn't grow.  Market drops 40% in a year?  Trinity says increase your withdrawals by last year's inflation amount and carry on. 

The size of your stash today has nothing to do with today's withdrawal rate, under the Trinity assumptions.  All that matters is the size of your stash on the day you retired. 

tyort1

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Re: Stop worrying about the 4% rule
« Reply #1134 on: October 27, 2017, 01:39:19 PM »
Ah, I did not realize that.  Thanks for correcting me, seriously.

Isn't inflation like 2%?  So shouldn't they call it the 6% withdrawal rate?  Of course I know inflation varies, so maybe call it the 4% plus inflation rule? 

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1135 on: October 27, 2017, 01:42:02 PM »
Ah, I did not realize that.  Thanks for correcting me, seriously.

Isn't inflation like 2%?  So shouldn't they call it the 6% withdrawal rate?  Of course I know inflation varies, so maybe call it the 4% plus inflation rule?

If you started with $1M taking out $40K and inflation was 2% the next year you could take out $40K +$800 [2% of $40K] = $40.8K.

boarder42

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Re: Stop worrying about the 4% rule
« Reply #1136 on: October 27, 2017, 01:47:55 PM »
Ah, I did not realize that.  Thanks for correcting me, seriously.

Isn't inflation like 2%?  So shouldn't they call it the 6% withdrawal rate?  Of course I know inflation varies, so maybe call it the 4% plus inflation rule?

its just understood that is what it is.  the 4% rule means you can withdraw 4% of your beginning stache adjusted for inflation every year.  The trinity study said it wouldnt fail over any 30 year period.  so in reality its much much safer b/c it was designed for worst case. 

tyort1

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Re: Stop worrying about the 4% rule
« Reply #1137 on: October 27, 2017, 01:51:27 PM »
Ah, I did not realize that.  Thanks for correcting me, seriously.

Isn't inflation like 2%?  So shouldn't they call it the 6% withdrawal rate?  Of course I know inflation varies, so maybe call it the 4% plus inflation rule?

If you started with $1M taking out $40K and inflation was 2% the next year you could take out $40K +$800 [2% of $40K] = $40.8K.

Ah, I did not realize that.  Thanks for correcting me, seriously.

Isn't inflation like 2%?  So shouldn't they call it the 6% withdrawal rate?  Of course I know inflation varies, so maybe call it the 4% plus inflation rule?

its just understood that is what it is.  the 4% rule means you can withdraw 4% of your beginning stache adjusted for inflation every year.  The trinity study said it wouldnt fail over any 30 year period.  so in reality its much much safer b/c it was designed for worst case. 

Yes, I see that now.  Holy shit, the 4% rule is even MORE conservative/safe than I originally thought it was.  Which is, I guess, the whole point of this thread :D

sol

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Re: Stop worrying about the 4% rule
« Reply #1138 on: October 27, 2017, 02:03:48 PM »
The trinity study said it wouldnt fail over any 30 year period.  so in reality its much much safer b/c it was designed for worst case.

Well that's not quite true either.  Depending on the asset allocation you use, there have been some years where an initial 4% SWR adjusted up for inflation was depleted before 30 years.  All of those scenarios include very low market returns, and a few of them also include crazy high inflation adjustments.  If you retire with a million dollars and withdraw $40k in your first year, then the next year the market tanks 20% and inflation is up 10%, then withdrawing the proscribed $44k out of your remaining $760k has effectively turned what used to be a 4% rate into a 5.8% rate, and some of those scenarios didn't recover in time to survive 30 years.  Most did, though.

tyort1

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Re: Stop worrying about the 4% rule
« Reply #1139 on: October 27, 2017, 02:17:39 PM »
The trinity study said it wouldnt fail over any 30 year period.  so in reality its much much safer b/c it was designed for worst case.

Well that's not quite true either.  Depending on the asset allocation you use, there have been some years where an initial 4% SWR adjusted up for inflation was depleted before 30 years.  All of those scenarios include very low market returns, and a few of them also include crazy high inflation adjustments.  If you retire with a million dollars and withdraw $40k in your first year, then the next year the market tanks 20% and inflation is up 10%, then withdrawing the proscribed $44k out of your remaining $760k has effectively turned what used to be a 4% rate into a 5.8% rate, and some of those scenarios didn't recover in time to survive 30 years.  Most did, though.

As a real person, if there was a drop of 20% and a big jump in inflation, why in the world would I stupidly spend $44k during that year?  I'd cut down on my spending.  Wouldn't anyone?

brooklynguy

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Re: Stop worrying about the 4% rule
« Reply #1140 on: October 27, 2017, 02:24:48 PM »
Holy shit, the 4% rule is even MORE conservative/safe than I originally thought it was.

This isn't exactly true either, assuming that what you originally thought the rule was was what the SWR literature usually refers to as a "fixed percentage rule"--i.e., withdrawal of a constant percentage (4%) of your remaining portfolio balance every year, with no floors or ceilings.  By definition, this withdrawal plan will never deplete your portfolio (because it's only withdrawing a percentage of the available portfolio every year), so it can be thought of as more conservative (but of course it could result in lowering your withdrawals to levels that are insufficient to support your desired spending).

As a real person, if there was a drop of 20% and a big jump in inflation, why in the world would I stupidly spend $44k during that year?  I'd cut down on my spending.  Wouldn't anyone?

That is indeed one of the myriad reasons to stop worrying about the 4% rule.

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1141 on: October 27, 2017, 03:49:52 PM »
Yes, I see that now.  Holy shit, the 4% rule is even MORE conservative/safe than I originally thought it was.  Which is, I guess, the whole point of this thread :D

Yup. Most of us have some safety margin built into our FIRE budgets as well. My annual spend is $40K + taxes, but $10K of that is not essential and could be deferred if my portfolio was doing terribly. I could also make $10K in a year without breaking a sweat. So that very conservative 4%WR rule got even safer.

boarder42

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Re: Stop worrying about the 4% rule
« Reply #1142 on: October 27, 2017, 03:56:46 PM »
Yes, I see that now.  Holy shit, the 4% rule is even MORE conservative/safe than I originally thought it was.  Which is, I guess, the whole point of this thread :D

Yup. Most of us have some safety margin built into our FIRE budgets as well. My annual spend is $40K + taxes, but $10K of that is not essential and could be deferred if my portfolio was doing terribly. I could also make $10K in a year without breaking a sweat. So that very conservative 4%WR rule got even safer.

Yep the ability to make a little extra cash instead of cutting spending is often overlooked as well

CanuckExpat

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Re: Stop worrying about the 4% rule
« Reply #1143 on: October 31, 2017, 11:03:56 AM »

Classical_Liberal

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Re: Stop worrying about the 4% rule
« Reply #1144 on: October 31, 2017, 12:02:07 PM »
Thread is live: Hi, I'm Wade Pfau Ask me Anything
Thanks CanuckExpat.  Everyone who has followed this thread, or 4% rule ideology in general, should be aware the Pfau tends to be more conservative in his assumptions than most.  As a result, he is often cited by those in this community who think the 4% rule is too optimistic.  Here's is a quote from Pfau in this Q&A and I think it's important. He was responding to a question about international diversification in equities. 
Quote
I'm a big fan of global diversification. Even if it doesn't increase the returns, if it helps to reduce volatility then this is a way to increase the safe withdrawal rate (SWR). It's hard to say the specific improvement because it requires assumptions about returns, volatilities, and correlations between all the asset classes. But as an example, for a case I looked at in my book, broader diversification increased the SWR estimate from 3.34% to 3.61%. WW1 & WW2 created some really bad SAFEMAX outcomes around the world, but even without that there are plenty of cases of withdrawal rates internationally falling well below 4%.

This is a prime example of how experts in any singular field are hyper focused on the area of their expertise.  They are unable to look at the practicalities of situations outside of their hyper focused specialty.

Here is my problem with this sentiment from Pfau.  If I was living in Berlin in 1944, or London in 1940, or Paris in 1941; do you really think I would give two shits about my SWR?  or would I be busy hiding from bombs/Nazis (the real ones, not the political party I disagree with)?  To include data from these areas, during these periods, and come to a conclusion SWR could be worse given bad circumstances is ridiculous, IMO. 

I'm a pessimist by this forums standards.  I think North America has a chance of suffering the same fate as old Europe.  Even as a pessimist, I'd give it maybe a 10% chance of something like a Europe during WWII happening in my lifetime.  However, to assume I would care about my SWR during such a crisis is ridiculous.  I'd be in survival mode, along with the rest of the population.

Saving to a 3 or 2% WR is not going provide me with any additional safety in such circumstances (in the above example, extra shares of VTI won't help me hide from bombs).  I would argue that any intelligent, adaptive investor should lump 4% rule failure risk in with SHTF circumstances and call it a day.  IOW, it may happen, but doubling assets will have little effect in mitigating such a crisis in true S-curve fashion.  One is far better off being generally flexible in life and sticking with a 4%WR.

« Last Edit: October 31, 2017, 12:11:04 PM by Classical_Liberal »

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1145 on: October 31, 2017, 12:07:53 PM »
Everyone who has followed this thread, or 4% rule ideology in general, should be aware the Pfau tends to be more conservative in his assumptions than most. 




LadyDividend

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Re: Stop worrying about the 4% rule
« Reply #1146 on: October 31, 2017, 12:15:45 PM »
Yes, I see that now.  Holy shit, the 4% rule is even MORE conservative/safe than I originally thought it was.  Which is, I guess, the whole point of this thread :D

Yup. Most of us have some safety margin built into our FIRE budgets as well. My annual spend is $40K + taxes, but $10K of that is not essential and could be deferred if my portfolio was doing terribly. I could also make $10K in a year without breaking a sweat. So that very conservative 4%WR rule got even safer.

It's true. Frugality really is the most important aspect to early retirement, in my opinion. If you had a greater need for money it would be harder to fulfill.

Classical_Liberal

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Re: Stop worrying about the 4% rule
« Reply #1147 on: October 31, 2017, 12:21:50 PM »
@Retire-Canada
I read that as well and feel it actually supports my logic.  Using data sets that include things (like wholesale destruction of infrastructure due to years of war with massive civilian casualties) that haven't happened in the North America, during the period we have investment data for, is a bad idea.  Mainly because if such events occur here, we won't care about SWR, rather we will be focused on survival. 

Edit:  Put another way.  Life expectancy in the US around 1900 was under 50.  However, if you made it to the ripe old age of 1, suddenly it increased to mid 60's.  Obviously, there is something happen here to skew the data.  In this case high infant mortality rates.  In the case of SWR, in Pfau's apparent view, world wars fought on home soil, revolutions, hyper inflation, etc.   If you take out the extreme circumstances (situations in which SWR is meaningless anyway), 4% WR looks better.
« Last Edit: October 31, 2017, 12:30:24 PM by Classical_Liberal »

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1148 on: October 31, 2017, 12:26:12 PM »
@Retire-Canada
I read that as well and feel it actually supports my logic.  Using data sets that include things (like wholesale destruction of infrastructure due to years of war with massive civilian casualties) that haven't happened in the US, during the period we have investment data for, is a bad idea.  Mainly because if such events occur here, we won't care about SWR, rather we will be focused on survival.

Sure. I'm not arguing with you. I think he's pessimistic. I'll be FIREing with a WR between 4% and 5% most likely so you can see where I stand on the issue.

tyort1

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Re: Stop worrying about the 4% rule
« Reply #1149 on: October 31, 2017, 12:26:44 PM »
Quote from: Wade Pfau
Thanks for organizing today, and two great questions! 1) I am concerned about 4% being too high at the present for someone without much flexibility to reduce spending after market downturns. Reasons include: our extremely low interest rates plus high stock valuations have not been tested in the US historical data; the 4% rule has not worked internationally -- only in the US and Canada but not in 18 other countries with data back to 1900; 30 years may not be long enough any more, especially for early retirees; it is hard for investors to earn the underlying index market returns net of fees

Here's another sort of sneaky thing that he does.  Look at the part I bolded above.  If you add in a 1% fee/cost, then yes the 4% WR gets knocked down to 3% pretty quick. 

A more interesting way to phrase the question - what's his view of safe withdrawal rate for people savvy enough to pay very low fees (ala Vanguard VTSAX)?