Author Topic: Stop worrying about the 4% rule  (Read 432707 times)

Exflyboy

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Re: Stop worrying about the 4% rule
« Reply #1600 on: August 05, 2018, 11:56:13 AM »
Honestly (unless you're in a job you HATE) OMY is not the end of the world. Heck AFTER I retired I took on some contracts paid hourly and it was the most fun (and profitable) work I have ever done.

Some would argue I have over saved just a smidge though..;)

DreamFIRE

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Re: Stop worrying about the 4% rule
« Reply #1601 on: August 05, 2018, 12:54:46 PM »

pecunia

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Re: Stop worrying about the 4% rule
« Reply #1602 on: August 05, 2018, 04:55:30 PM »
Swordguy - I like the way you posted this;


SNIP

Well, first of all, FIRECalc is based on historical results, i.e., "the past".   You won't be living in the past, you'll be living in the future.   So, really, we don't know what will happen.     

What FIRECalc does is tell you that if the future is no worse than the past (from an FI perspective), then your odds of success are thus and so.  Obviously, the future could be worse than the past.      (It could also be much the same and even better, which would be more likely.) 

So, 95% success and 100% success are really about the same thing, given that the future could be different (and worse).

SNIP

So, if you quit your job, can you get another one similar in pay to it within a 12 month period of time?


Do you really need one at your old salary if things go bad for a couple of years?  Can you cut spending for those years?  Or just get a part-time job and cover the gap?


Can you cut spending to cover the gap?

If you answer any of these questions Yes, then you are FI ready (money-wise).   If not, you should consider a larger stash.


Best of luck.  I understand OMY syndrome, we did it.   Of course, we had a mentally handicapped daughter who would pay the price of our mistake, so we went for the extra safety, so I don't feel foolish for doing that.


Great Questions - Firecalc is based on history and history is known to repeat itself so Firecalc should be given some level of trust.

  I'll apply this to myself: yes, yes and maybe.  Makes me feel good.





TomTX

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Re: Stop worrying about the 4% rule
« Reply #1603 on: September 30, 2018, 09:17:50 AM »
I'm not saying that it's actionable for everyone (like if you are just getting started building a portfolio), and certainly not the same action for everyone, but when you are ahead of the game it is prudent to dial back exposure to risk and volatility.  Given the exceptional returns we have experienced since 2009, high stock exposure and 4% SWR is not my best bet.  Everyone here seems to think they have high risk tolerance, but I'll be interested to see how they feel in the middle of a bear market, especially if they are retired.  Fortunately I only need 2 - 3% WR currently, but that assumes inflation stays tame until I get to Medicare and SS.  I will probably ER in a year or two depending mostly on circumstances outside my finances (other than healthcare, I might still work to have access to my company plan).

Dude. You won. Seriously. If you like to keep working, that's fine. Otherwise, enjoy ER.

TomTX

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Re: Stop worrying about the 4% rule
« Reply #1604 on: September 30, 2018, 09:19:49 AM »
The equity in your house does count as a part of your net worth [assets minus liabilities], but does not count as a part of your 'stache for 4% purposes. It may reduce your required expenses (if you own the house, hey, no mortgage! Somewhere to live!), but it doesn't generate income, so you can't use it for your 4% calculation. If you want to downsize and thus turn some home equity equity into extra 'stache, great!

I also consider home equity as a hedge against SORR. Before I retire, I intend to open a HELOC as a "just in case" measure. This will both allow a source of ready cash if the market takes a dump, and will keep variety in my credit report for longer.

sol

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Re: Stop worrying about the 4% rule
« Reply #1605 on: October 10, 2018, 07:06:12 PM »
For anyone worried about SWRs of 3% or lower, and there have been several of you in this thread, please note that today the rate on 10 year US Treasuries went to 3.24%.  That's about as close to a risk-free guaranteed return as you can find, and it is higher than the SWR targeted by some folks here.

AdrianC

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Re: Stop worrying about the 4% rule
« Reply #1606 on: October 10, 2018, 07:33:22 PM »
A half a percent real return isn’t going to do it.

“The current inflation rate for the United States is 2.7% for the 12 months ended August 2018, as published on September 13, 2018 by the U.S. Labor Department.“

sol

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Re: Stop worrying about the 4% rule
« Reply #1607 on: October 10, 2018, 11:42:00 PM »
A half a percent real return isn’t going to do it.

“The current inflation rate for the United States is 2.7% for the 12 months ended August 2018, as published on September 13, 2018 by the U.S. Labor Department.“

You're right, if you were to put 100% of your portfolio into ultra-secure US treasury bonds today with real returns only half a percent above inflation, you would only be guaranteed 28 years of inflation adjusted withdrawals before you would have to find another source of income.  What's your life expectancy?  When can you draw social security?

If only there were some other asset class we could invest in to close that gap!

EscapeVelocity2020

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Re: Stop worrying about the 4% rule
« Reply #1608 on: October 11, 2018, 09:53:17 AM »
A half a percent real return isn’t going to do it.

“The current inflation rate for the United States is 2.7% for the 12 months ended August 2018, as published on September 13, 2018 by the U.S. Labor Department.“

You're right, if you were to put 100% of your portfolio into ultra-secure US treasury bonds today with real returns only half a percent above inflation, you would only be guaranteed 28 years of inflation adjusted withdrawals before you would have to find another source of income.  What's your life expectancy?  When can you draw social security?

If only there were some other asset class we could invest in to close that gap!

At the risk of sounding like Suze Orman... If you're going to go a sarcastically suggested 'all bond' route, at least allocate some amount to something like VAIPX -a TIPS fund currently yielding 3.3%.

sol

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Re: Stop worrying about the 4% rule
« Reply #1609 on: October 11, 2018, 10:24:59 AM »
At the risk of sounding like Suze Orman... If you're going to go a sarcastically suggested 'all bond' route, at least allocate some amount to something like VAIPX -a TIPS fund currently yielding 3.3%.

In this case, AdrianC reduced the current US treasury yield of 3.22% to 0.5% by subtracting off the recent inflation numbers of ~2.7%.  TIPS would generate the same thing.

And yet, for some reason, we still have people here arguing for a 3.0% SWR "just in case".

As a reminder, a 3.22% inflation-adjusted withdrawal rate of a mixed US stock/bond portfolio has never failed, at any point in history, for any length of retirement. 

AdrianC

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Re: Stop worrying about the 4% rule
« Reply #1610 on: October 11, 2018, 03:45:50 PM »
You're right, if you were to put 100% of your portfolio into ultra-secure US treasury bonds today with real returns only half a percent above inflation, you would only be guaranteed 28 years of inflation adjusted withdrawals before you would have to find another source of income.  What's your life expectancy?  When can you draw social security?

If only there were some other asset class we could invest in to close that gap!

Actually, if you could guarantee a 0.5% real return and did a 3% SWR, your money would run out in about 37 years.

Personally, I want to do better than that - more years, higher SWR, so I'm invested in stocks, and I'm quite sure you are too.

We can't compare a nominal return to an SWR. It's not a meaningful comparison. Real returns are what counts.

PizzaSteve

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Re: Stop worrying about the 4% rule
« Reply #1611 on: October 17, 2018, 10:28:33 PM »
At the risk of sounding like Suze Orman... If you're going to go a sarcastically suggested 'all bond' route, at least allocate some amount to something like VAIPX -a TIPS fund currently yielding 3.3%.

In this case, AdrianC reduced the current US treasury yield of 3.22% to 0.5% by subtracting off the recent inflation numbers of ~2.7%.  TIPS would generate the same thing.

And yet, for some reason, we still have people here arguing for a 3.0% SWR "just in case".

As a reminder, a 3.22% inflation-adjusted withdrawal rate of a mixed US stock/bond portfolio has never failed, at any point in history, for any length of retirement.
I think that is because of a combination of the 'shit happens' factor and because some folks are in a quite high income/low consumption situation, where hitting 3% is relatively easy by only putting in a few more years.  Why not stay in a challenging, hot job a few more years to be set beyond reach?  i gree this should not be the typical target, but shaming them for picking it is being mono visual.

It is not disrespectful to say that safety margin depends on circumstances and opportunity.  You are young and healthy. 

For example, I have a friend with a spouse with MS.  Their safety cushion needs are not yours.  They need a savings fund that is higher than usual becauee they know their future yearly spending will increase.   They know the costs of the disease will create issues for their later years, and 3% was sensible.  Also, if I was earning 500k/yr in a high tech job and committed to a 50k/yr consumption lifestyle, I would work OMY to hit 3% for sure (I have a friend who will earn an almost guaranteed 4-10M by working only two more years due to vested options at a tech winner.  Why would anyone throw away a job they love paying over 2M/yr, just to prove they can FIRE by a targeted minimum date?

My point is that 3% is the right number for some (including Suzi, perhaps, who is certainly far from typical 😉).
« Last Edit: October 18, 2018, 06:46:27 PM by PizzaSteve »

Exflyboy

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Re: Stop worrying about the 4% rule
« Reply #1612 on: October 18, 2018, 03:14:24 AM »
Also a lot of FIREe's will end up with a ridiculously low WR simply because their portfolios will grow faster than they will spend it. Right now we are are running at somewhere slightly below 1.5% due to the fact that we have rental income and our pensions when they kick in will make our WR even more conservative.

Once that snowball starts rolling, unless you start spending boatloads of money then your net worth (and 1/your WR) will become ever larger as time goes by.

When I quit back in 2014 we had about $1.25M, Now we have about $2.5M simply because our spending rate hasn't risen that much.. Although I can tell you its easier to spend more in retirement than when you were working..:)

I suspect MMM himself with his $27k annual spend has a barley measurable WR!

nereo

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Re: Stop worrying about the 4% rule
« Reply #1613 on: October 18, 2018, 05:55:31 AM »
Also a lot of FIREe's will end up with a ridiculously low WR simply because their portfolios will grow faster than they will spend it. Right now we are are running at somewhere slightly below 1.5% due to the fact that we have rental income and our pensions when they kick in will make our WR even more conservative.

Once that snowball starts rolling, unless you start spending boatloads of money then your net worth (and 1/your WR) will become ever larger as time goes by.

When I quit back in 2014 we had about $1.25M, Now we have about $2.5M simply because our spending rate hasn't risen that much.. Although I can tell you its easier to spend more in retirement than when you were working..:)

I suspect MMM himself with his $27k annual spend has a barley measurable WR!

By his own, seldom-reported accounts MMM is earning far more than they spend through his various semi-passive income streams.  He mentioned one year that htis blog generated $400k, and his rental properties have (at least in some years... he always seems to be buying and selling) covered all his spending.  He mentioned a while back that they've yet to even touch their original 'stache, and instead have been writing sizable checks to Betterment each year. 

with a low annual spend its pretty easy to meet that through a variety of independent measures. Earning enough to cover an $80k lifestyle can be tough without a FT job or several rental properties you have to manage-- earning $27k is easy.  One of the reasons we feel comfortable with you plan to use the 'glide-path' into FI/RE and go part time in our 40s. 

matchewed

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Re: Stop worrying about the 4% rule
« Reply #1614 on: October 18, 2018, 07:58:33 AM »
Also a lot of FIREe's will end up with a ridiculously low WR simply because their portfolios will grow faster than they will spend it. Right now we are are running at somewhere slightly below 1.5% due to the fact that we have rental income and our pensions when they kick in will make our WR even more conservative.

Once that snowball starts rolling, unless you start spending boatloads of money then your net worth (and 1/your WR) will become ever larger as time goes by.

When I quit back in 2014 we had about $1.25M, Now we have about $2.5M simply because our spending rate hasn't risen that much.. Although I can tell you its easier to spend more in retirement than when you were working..:)

I suspect MMM himself with his $27k annual spend has a barley measurable WR!

By his own, seldom-reported accounts MMM is earning far more than they spend through his various semi-passive income streams.  He mentioned one year that htis blog generated $400k, and his rental properties have (at least in some years... he always seems to be buying and selling) covered all his spending.  He mentioned a while back that they've yet to even touch their original 'stache, and instead have been writing sizable checks to Betterment each year. 

with a low annual spend its pretty easy to meet that through a variety of independent measures. Earning enough to cover an $80k lifestyle can be tough without a FT job or several rental properties you have to manage-- earning $27k is easy.  One of the reasons we feel comfortable with you plan to use the 'glide-path' into FI/RE and go part time in our 40s.

My plan has changed a bit in a similar fashion. We have RE that after we move out of it can generate around $10k per year. I use only $7k for my calculations. An additional part time job for me and my SO will take us to only pulling a few thousand out of investments per year for a few years. After that we can ramp up the withdrawals and reduce the working. At some point we will sell the RE for a lump sum later in life and carry on with full income from investments.

It is another way of showing that all those issues that people have with the 4% rule can just easily be mitigated for a ridiculous success rate. And many of those things don't require OMY at some time/stress demanding job.

PizzaSteve

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Re: Stop worrying about the 4% rule
« Reply #1615 on: October 18, 2018, 06:44:40 PM »
Agreed.  Thats why I get so annoyed about the mortgage debates.  It's really all about spending management, with investment returns really secondary.  Any decent investment strategy will do, ETFs, being debt free, individual stocks, rentals, even bonds or CDs are fine, assuming you live honestly and without that need to consume.

So much focus on x% withdraw rates misses the big picture. The models are just a tool/framework.  Lifestyle and savings are what matters, whether at a 2% or an 8% withdraw rate.  If you can manage yourself, track your status and be flexible, you will be fine.

Investment optimization threads are all fine, but secondary IMHO.
« Last Edit: October 18, 2018, 06:49:37 PM by PizzaSteve »

matchewed

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Re: Stop worrying about the 4% rule
« Reply #1616 on: October 19, 2018, 04:30:13 AM »
Agreed.  Thats why I get so annoyed about the mortgage debates.  It's really all about spending management, with investment returns really secondary.  Any decent investment strategy will do, ETFs, being debt free, individual stocks, rentals, even bonds or CDs are fine, assuming you live honestly and without that need to consume.

So much focus on x% withdraw rates misses the big picture. The models are just a tool/framework.  Lifestyle and savings are what matters, whether at a 2% or an 8% withdraw rate.  If you can manage yourself, track your status and be flexible, you will be fine.

Investment optimization threads are all fine, but secondary IMHO.

Well the underlying what you're invested in still matters a great deal. There are probably more unsuccessful investment to SWR mixes than successful ones.

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1617 on: October 19, 2018, 07:08:57 AM »
Well the underlying what you're invested in still matters a great deal. There are probably more unsuccessful investment to SWR mixes than successful ones.

Especially at 8%WR.The folks that FIRE at 2%WR at 65yrs with short lived family members in their gene pool probably can relax. ;-)

TempusFugit

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Re: Stop worrying about the 4% rule
« Reply #1618 on: October 19, 2018, 08:34:51 AM »
Well the underlying what you're invested in still matters a great deal. There are probably more unsuccessful investment to SWR mixes than successful ones.

Especially at 8%WR.The folks that FIRE at 2%WR at 65yrs with short lived family members in their gene pool probably can relax. ;-)

Except for the spectre of approaching death. 

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1619 on: October 19, 2018, 08:39:10 AM »
Except for the spectre of approaching death.

Let's face it people shooting for 2%WR or lower a secretly using the "if I die at my desk" strategy as a way to ensure they never have to worry about running out of money and perhaps even better "if I die at my desk I never have to face the scary possibility of actually having to stop working!" So I don't think death holds the same concern for them as it does for folks who are eager to retire and get off the hamster wheel. ;-)

Virtus

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Re: Stop worrying about the 4% rule
« Reply #1620 on: October 19, 2018, 09:06:22 AM »
Except for the spectre of approaching death.

Let's face it people shooting for 2%WR or lower a secretly using the "if I die at my desk" strategy as a way to ensure they never have to worry about running out of money and perhaps even better "if I die at my desk I never have to face the scary possibility of actually having to stop working!" So I don't think death holds the same concern for them as it does for folks who are eager to retire and get off the hamster wheel. ;-)

This is an over generalization and not true for everyone.

It would be accurate for someone making $40k and living on $25k. However, this is not at all accurate for someone making $500k and living on $50k. For a high income earner, moving form a 5% WR to a 2% WR may only take one or two more years of work. Additionally, once a high earner gives up the $500k per year job, and spends some time not working, it is very possible they could not even get close to their prior earnings level if they rejoined the workforce.

The other item people forget to think about is the spending aspect of a WR. Spending is not a constant over 50 years. It is very risky and unwise for a single guy living with roommates and spending nothing to FIRE on a 2% WR if he plans to have a family and kids. However, a couple in the high spending years of having a family (maybe paying for college?) may be able to FIRE very safely on a 5% WR with the knowledge that expenses will decline rapidly in the coming years.

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1621 on: October 19, 2018, 09:18:19 AM »
The other item people forget to think about is the spending aspect of a WR. Spending is not a constant over 50 years.

When talking about %WRs spending is assumed to be appropriately budgeted. If you are at 2%WR and don't have a budget you can live with or you are at 8%WR and have 300% luxury spending built in than there is no point trying to even compare the two.

Before you bother working out a withdrawal rate you need to determine how much annual budget you need for your retirement. If you fail at that step nothing you do further down the planning process is going to be reliable.

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1622 on: October 19, 2018, 09:32:04 AM »
This is an over generalization and not true for everyone.

Nothing is true for everyone. People are very creative and will come up with all manner of reasons to OMY.

Exflyboy

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Re: Stop worrying about the 4% rule
« Reply #1623 on: October 19, 2018, 09:36:11 AM »
Yeah the budgeting step is interesting. We went from $30k/year prior to RE to something more like $45k after RE. Why? Well we are not exactly sure yet (this is the first year of no real employment for either of us), nor are we sure of what our actual spend is yet.

I know we did a few things around the house, such as installed a new deck plus bought a fancy large fridge but that would only account for about half the extra spend.

Part of the issue is that 2% WR is about $60k for us so in some ways the extra spend really doesn't matter.. Good problem to have/hedonistic adaption perhaps?

PizzaSteve

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Re: Stop worrying about the 4% rule
« Reply #1624 on: October 19, 2018, 09:57:39 AM »
Agreed.  Thats why I get so annoyed about the mortgage debates.  It's really all about spending management, with investment returns really secondary.  Any decent investment strategy will do, ETFs, being debt free, individual stocks, rentals, even bonds or CDs are fine, assuming you live honestly and without that need to consume.

So much focus on x% withdraw rates misses the big picture. The models are just a tool/framework.  Lifestyle and savings are what matters, whether at a 2% or an 8% withdraw rate.  If you can manage yourself, track your status and be flexible, you will be fine.

Investment optimization threads are all fine, but secondary IMHO.

Well the underlying what you're invested in still matters a great deal. There are probably more unsuccessful investment to SWR mixes than successful ones.
Yes, but lets analyze what an 8% 'failure' looks like.

8% YOLO failure..
1) Focused young on doing your dreams.
2) Lived well, for maybe 30 years during your youth traveling, doing your thing.
3) In your senior years your stash looks something like the typical person at retirement (e.g. not much).
4) So you live frugally on social security or the local equivalent, cause you ran out of money.  Welcome to the world of most people.  However, you also have awsome life skills from your experience living off savings.  Likely you know how to make a thin income awsome.  You walk daily (because you have a healthy body from a lifetime of having time to exercise and with low stress).  Maybe some successful friends you made while retired help out with free vacations at their home, etc)

Meanwhile, 2% 'success' may mean...
1) Working much longer, perhaps another 10 years until traditional retirement age
2) Having more money than you need so you get some luxuries at old age (not to be under estimated)
3) Never pursued those thing you wanted to do while young enough to do it (e.g. mountain climbing, extreme sports, etc)

I am not advocating 8%, just saying it might be a good plan for someone really not materialistic, and with very specific goals like wanting time with kids during their youth, assuming they understand the consequences.  Often an 8% er inherits some cash when they run out, not that that is a good plan.  aive seen many very poor savers bailed out at 60 by a parents bequest.

The deciding factor may just be how much one likes their income generating life phase.  We oversaved more because we had good jobs we enjoyed and a good lifestyle while earning, than because we feared a lack of money after early retirement.  So it worked for us.

@Exflyboy We struggle a bit with giving ourselves permission to spend, having also saved to 2%ish.  A life of frugal habits is good, but can get in the way.  Nothing is wrong with the occasional deck or fancy fridge, well deserved. Better to get it when you will enjoy it for decades than hoard money.
« Last Edit: October 19, 2018, 10:09:55 AM by PizzaSteve »

steveo

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Re: Stop worrying about the 4% rule
« Reply #1625 on: October 19, 2018, 05:31:52 PM »
Before you bother working out a withdrawal rate you need to determine how much annual budget you need for your retirement. If you fail at that step nothing you do further down the planning process is going to be reliable.

This is the most important point and it gets missed in these maths type debates. Unless you get your estimated spending right it's going to be shot in the dark. That in all reality is probably a variable spending idea. You need to have an idea though of what you can live off but it's probably going to be I'd like to live on x but I can live off y for a period of time if things go bad so that I can quit earlier.