Author Topic: Stop worrying about the 4% rule  (Read 748691 times)

nereo

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Re: Stop worrying about the 4% rule
« Reply #1800 on: February 23, 2020, 01:42:46 PM »
And indeed, that's the interesting flip side of the coin, GenX!

Are you eating lots of red meat? Do you get moderate to intense cardio exercise for at least 4 or 5 hours a week (so, really, almost an hour a day)? How about weight bearing/strength exercise? Balance work/yoga (go google how likely a fall is to kill you when you're old)? Do you spend excessive amounts of time sitting down at work/in traffic? Do you sleep 7 or 8 good hours a night?

Tons of us here are obsessed with getting that WR down - but it won't mean anything if you're not alive. And there are easy things you can do to improve your odds. They take planning (which you should already be good at if you're reading this thread) and effort (natch, stop eating shitty food) and sometimes stepping out of your comfort zone (hire a personal trainer, buy some workout clothes, be that weirdo who doesn't watch any TV so they can get good sleep, use lots of titanium-dioxide sunscreen that makes you look like a weirdo outdoors, etc).

-W

Reminds me of an observation my father (a physician) has made:  Tell people there's a drug that will lower their cholesteral and reduce the chance of a heart attack by 25% , but it costs $150/week, has to be taken 3 times a day and has a bunch of unpleasant side effects and patients will demand they get an Rx and will take it religiously for decades.

Tell them they can get the same results with no side effects and no cost just by walking briskly 30 minutes a day and they say: "I'm too busy".


waltworks

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Re: Stop worrying about the 4% rule
« Reply #1801 on: February 23, 2020, 01:50:30 PM »
As an FYI - sun exposure (especially sunburns) may increase the chance of skin cancer, but sunbathing seems to reduce all-cause mortality noticeably. Large, 20 year study:

https://www.ncbi.nlm.nih.gov/pubmed/24697969

Yes, if you live near the Arctic circle, getting enough sun can be a problem!

-W

DavidAnnArbor

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Re: Stop worrying about the 4% rule
« Reply #1802 on: February 24, 2020, 07:29:52 AM »
As an FYI - sun exposure (especially sunburns) may increase the chance of skin cancer, but sunbathing seems to reduce all-cause mortality noticeably. Large, 20 year study:

https://www.ncbi.nlm.nih.gov/pubmed/24697969

though I'm inclined to believe the conclusion of this study, do keep in mind this study shows a correlation but does not prove causation.

Malkynn

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Re: Stop worrying about the 4% rule
« Reply #1803 on: February 24, 2020, 07:45:06 AM »
As an FYI - sun exposure (especially sunburns) may increase the chance of skin cancer, but sunbathing seems to reduce all-cause mortality noticeably. Large, 20 year study:

https://www.ncbi.nlm.nih.gov/pubmed/24697969

though I'm inclined to believe the conclusion of this study, do keep in mind this study shows a correlation but does not prove causation.

Skin cancer also really sucks for the individual who does get it. DH and I have both had it.

pecunia

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Re: Stop worrying about the 4% rule
« Reply #1804 on: March 21, 2020, 12:33:27 PM »
MY belief in the 4 percent rule has been under some strain lately.  Any good words to help some of us along?  How does the Corona Virus fit with the study?  Can it be considered an anomaly?

SwordGuy

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Re: Stop worrying about the 4% rule
« Reply #1805 on: March 21, 2020, 12:52:35 PM »
MY belief in the 4 percent rule has been under some strain lately.  Any good words to help some of us along?  How does the Corona Virus fit with the study?  Can it be considered an anomaly?
  The "Spanish Flu" pandemic of 1918 is within the 4% rule historical time period.

This too shall pass.

It may pass like a kidney stone, but it will pass.

maizeman

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Re: Stop worrying about the 4% rule
« Reply #1806 on: March 21, 2020, 01:10:19 PM »
MY belief in the 4 percent rule has been under some strain lately.  Any good words to help some of us along?  How does the Corona Virus fit with the study?  Can it be considered an anomaly?

Sudden sharp crashes really have never been a problem for the 4% rule. It's markets that go down and stay down for a long time, and/or long term inflation combined with a stagnant stock market which result for the occasional failure year.

In some decades time it may turn out that 2020 was a bad year to retire, like 1966. But the stock market will have to stay down for a long time for that to happen, not just a year or two. The longest estimates for lockdown to "flatten the curve" are on the order of 18-24 months. The x-factor will be whether or not the economy is able to restart smoothly after going into such a broad shutdown. So really it's a wait and see situation.

However the current crash does seem likely to tip a hypothetical 2000 retiree into a failure state.

A hypothetical retiree who retired at the peak of the 2000 stock bubble with 25x living expenses and who had continued to adjust their spending with inflation ever year was down to a new worth of about 10 years living expenses as of late 2019. After the recent drops they probably have a net worth of only ~7 years worth of living expenses left to support their annual expenses.

SwordGuy

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Re: Stop worrying about the 4% rule
« Reply #1807 on: March 21, 2020, 02:17:31 PM »
MY belief in the 4 percent rule has been under some strain lately.  Any good words to help some of us along?  How does the Corona Virus fit with the study?  Can it be considered an anomaly?

Sudden sharp crashes really have never been a problem for the 4% rule. It's markets that go down and stay down for a long time, and/or long term inflation combined with a stagnant stock market which result for the occasional failure year.

In some decades time it may turn out that 2020 was a bad year to retire, like 1966. But the stock market will have to stay down for a long time for that to happen, not just a year or two. The longest estimates for lockdown to "flatten the curve" are on the order of 18-24 months. The x-factor will be whether or not the economy is able to restart smoothly after going into such a broad shutdown. So really it's a wait and see situation.

However the current crash does seem likely to tip a hypothetical 2000 retiree into a failure state.

A hypothetical retiree who retired at the peak of the 2000 stock bubble with 25x living expenses and who had continued to adjust their spending with inflation ever year was down to a new worth of about 10 years living expenses as of late 2019. After the recent drops they probably have a net worth of only ~7 years worth of living expenses left to support their annual expenses.

If I remember correctly, the 4% rule formulated by the Trinity study assumed a 30 year retirement.   Running out after 27 years would be a failure.     

maizeman

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Re: Stop worrying about the 4% rule
« Reply #1808 on: March 21, 2020, 03:51:54 PM »
A hypothetical retiree who retired at the peak of the 2000 stock bubble with 25x living expenses and who had continued to adjust their spending with inflation ever year was down to a new worth of about 10 years living expenses as of late 2019. After the recent drops they probably have a net worth of only ~7 years worth of living expenses left to support their annual expenses.

If I remember correctly, the 4% rule formulated by the Trinity study assumed a 30 year retirement.   Running out after 27 years would be a failure.   

Yup. Like the failures you see around 1966 +/- a year. The 2000 retiree isn't necessarily going to fail by the Trinity study's standards. If we return to the long run post inflation CAGR of the US stock market 7 years of living expenses would last about 9.75 years. If our retiree is a little lucky they may make it the full 30 years running on autopilot taking inflation adjusted withdrawals even as their portfolio shrinks. But if they do make it across the 30 year line they will be running on empty.

These things happen at a low but non-zero rate. It is good to be a bit flexible about reduced spending during major recessions, just like most people still earning a paycheck also do.

EscapeVelocity2020

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Re: Stop worrying about the 4% rule
« Reply #1809 on: March 21, 2020, 04:10:59 PM »
This forum would be really great if it had a whiteboard so I could draw as I write, but basically, the higher the current market is vs. historical CAPE, the lower you should expect your future returns.

Current Shiller PE Ratio: 31.77 -0.12 (-0.39%)
4:00 PM EST, Thu Feb 20
Mean:   16.70   
Median:   15.76   
Min:   4.78   (Dec 1920)
Max:   44.19   (Dec 1999)

The 4% rule is great based on being at or below the historical average Shiller/CAPE...  So yeah, we are not on solid ground relying upon the historical 4% inflation adjusted return for our 30 year rolling period.

Current Shiller PE Ratio: 21.76 -1.20 (-5.22%)
4:00 PM EDT, Fri Mar 20

Wow, in just one month, you're probably back on track with relying on the 4% rule if you ER now.  Too bad the market had to go from ~3400 to 2300 to get back to reasonable valuation.  Feel bad for folks that were investing at inflated prices these last 4 years (myself included), but we are back to a period where investments should produce historical average returns (or only slightly below) going forward.

Unless society and the market collapses, of course.   

dividendman

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Re: Stop worrying about the 4% rule
« Reply #1810 on: March 21, 2020, 04:44:15 PM »
Unless society and the market collapses, of course.

Then we'll get even better deals on stocks :P

kenmoremmm

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Re: Stop worrying about the 4% rule
« Reply #1811 on: March 21, 2020, 09:07:05 PM »
This forum would be really great if it had a whiteboard so I could draw as I write, but basically, the higher the current market is vs. historical CAPE, the lower you should expect your future returns.

Current Shiller PE Ratio: 31.77 -0.12 (-0.39%)
4:00 PM EST, Thu Feb 20
Mean:   16.70   
Median:   15.76   
Min:   4.78   (Dec 1920)
Max:   44.19   (Dec 1999)

The 4% rule is great based on being at or below the historical average Shiller/CAPE...  So yeah, we are not on solid ground relying upon the historical 4% inflation adjusted return for our 30 year rolling period.

Current Shiller PE Ratio: 21.76 -1.20 (-5.22%)
4:00 PM EDT, Fri Mar 20

Wow, in just one month, you're probably back on track with relying on the 4% rule if you ER now.  Too bad the market had to go from ~3400 to 2300 to get back to reasonable valuation.  Feel bad for folks that were investing at inflated prices these last 4 years (myself included), but we are back to a period where investments should produce historical average returns (or only slightly below) going forward.

Unless society and the market collapses, of course.
pretty sure CAPE will go back to out of whack after Q1 earnings are reported. and Q2. in fact, it might even be more skewed given the immense slowdown.

waltworks

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Re: Stop worrying about the 4% rule
« Reply #1812 on: March 21, 2020, 09:09:34 PM »
Yeah, I wouldn't rely too much on CAPE for a while, given the context.

If you think the world economy will eventually recover, stocks are a pretty good deal right now. They might be an even better deal in the interim, of course, but as of now they're a good deal.

If you think the world is f'd, then might as well put some money (what you have left over after buying TP and ammo) in stocks in case you're wrong, since you can't eat green paper or ones and zeros on a computer somewhere.

-W
« Last Edit: March 21, 2020, 09:12:29 PM by waltworks »

EscapeVelocity2020

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Re: Stop worrying about the 4% rule
« Reply #1813 on: March 21, 2020, 09:27:51 PM »
Yeah, I wouldn't rely too much on CAPE for a while, given the context.

If you think the world economy will eventually recover, stocks are a pretty good deal right now. They might be an even better deal in the interim, of course, but as of now they're a good deal.

If you think the world is f'd, then might as well put some money (what you have left over after buying TP and ammo) in stocks in case you're wrong, since you can't eat green paper or ones and zeros on a computer somewhere.

-W

That's why I use CAPE (the Shiller PE which relies on a 10 year cyclically adjusted PE).  I've seen folks just talk about plain vanilla PE which will certainly be misleading.  CAPE is not perfect, but it has the best track record so far.  https://www.gurufocus.com/shiller-PE.php

waltworks

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Re: Stop worrying about the 4% rule
« Reply #1814 on: March 21, 2020, 09:33:20 PM »

That's why I use CAPE (the Shiller PE which relies on a 10 year cyclically adjusted PE).  I've seen folks just talk about plain vanilla PE which will certainly be misleading.  CAPE is not perfect, but it has the best track record so far.  https://www.gurufocus.com/shiller-PE.php

That's also what I was talking about. A few quarters of basically zero earnings will skew CAPE too, albeit not as badly as vanilla P/E.

-W

EscapeVelocity2020

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Re: Stop worrying about the 4% rule
« Reply #1815 on: March 21, 2020, 10:51:36 PM »

That's why I use CAPE (the Shiller PE which relies on a 10 year cyclically adjusted PE).  I've seen folks just talk about plain vanilla PE which will certainly be misleading.  CAPE is not perfect, but it has the best track record so far.  https://www.gurufocus.com/shiller-PE.php

That's also what I was talking about. A few quarters of basically zero earnings will skew CAPE too, albeit not as badly as vanilla P/E.

-W

@waltworks Thanks for clarifying, it's an interesting side discussion for sure.  Vanilla P/E is gonna be a mess since earnings are still too high and prices are meh.  I think CAPE S&P earnings will be a mix of some companies possibly getting a boost and walking dead companies falling out of the index.  Averaged over 10 years, earnings should not be too skewed.

pecunia

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Re: Stop worrying about the 4% rule
« Reply #1816 on: March 22, 2020, 10:20:43 AM »
This forum would be really great if it had a whiteboard so I could draw as I write, but basically, the higher the current market is vs. historical CAPE, the lower you should expect your future returns.

Current Shiller PE Ratio: 31.77 -0.12 (-0.39%)
4:00 PM EST, Thu Feb 20
Mean:   16.70   
Median:   15.76   
Min:   4.78   (Dec 1920)
Max:   44.19   (Dec 1999)

The 4% rule is great based on being at or below the historical average Shiller/CAPE...  So yeah, we are not on solid ground relying upon the historical 4% inflation adjusted return for our 30 year rolling period.

Current Shiller PE Ratio: 21.76 -1.20 (-5.22%)
4:00 PM EDT, Fri Mar 20

Wow, in just one month, you're probably back on track with relying on the 4% rule if you ER now.  Too bad the market had to go from ~3400 to 2300 to get back to reasonable valuation.  Feel bad for folks that were investing at inflated prices these last 4 years (myself included), but we are back to a period where investments should produce historical average returns (or only slightly below) going forward.

Unless society and the market collapses, of course.

Thanks - It just so happens that I hope to retire in a month.  However, I will live on cash for a bit and give it some time to bounce back.  Average recession is 18 months, but this one is probably not average due to the prolonged rise before the crash.

I don't see much choice other than riding that tiger.

vand

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Re: Stop worrying about the 4% rule
« Reply #1817 on: March 22, 2020, 10:51:26 AM »
This forum would be really great if it had a whiteboard so I could draw as I write, but basically, the higher the current market is vs. historical CAPE, the lower you should expect your future returns.

Current Shiller PE Ratio: 31.77 -0.12 (-0.39%)
4:00 PM EST, Thu Feb 20
Mean:   16.70   
Median:   15.76   
Min:   4.78   (Dec 1920)
Max:   44.19   (Dec 1999)

The 4% rule is great based on being at or below the historical average Shiller/CAPE...  So yeah, we are not on solid ground relying upon the historical 4% inflation adjusted return for our 30 year rolling period.

Current Shiller PE Ratio: 21.76 -1.20 (-5.22%)
4:00 PM EDT, Fri Mar 20

Wow, in just one month, you're probably back on track with relying on the 4% rule if you ER now.  Too bad the market had to go from ~3400 to 2300 to get back to reasonable valuation.  Feel bad for folks that were investing at inflated prices these last 4 years (myself included), but we are back to a period where investments should produce historical average returns (or only slightly below) going forward.

Unless society and the market collapses, of course.
pretty sure CAPE will go back to out of whack after Q1 earnings are reported. and Q2. in fact, it might even be more skewed given the immense slowdown.

You do actually understand that CAPE is a 10yr average, right? that's 40 individual quarters'. Knock off the last couple of quarters from Q1/Q2 2010 to make space for the Q1/Q2 2020 numbers and it still isn't going to budge much. That's the whole point of CAPE - it shows you what you can reasonably expect stocks to earn over a long time period.

pecunia

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Re: Stop worrying about the 4% rule
« Reply #1818 on: March 22, 2020, 03:55:52 PM »


- SNIP -

You do actually understand that CAPE is a 10yr average, right? that's 40 individual quarters'. Knock off the last couple of quarters from Q1/Q2 2010 to make space for the Q1/Q2 2020 numbers and it still isn't going to budge much. That's the whole point of CAPE - it shows you what you can reasonably expect stocks to earn over a long time period.

So CAPE is a long run thing.

This explained it pretty well.

https://www.investopedia.com/terms/c/cape-ratio.asp

"In the long run we are all dead," John Maynard Keynes

Classical_Liberal

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Re: Stop worrying about the 4% rule
« Reply #1819 on: March 22, 2020, 06:55:16 PM »
Another similarly (to CAPE) accurate long term measurement is total market cap to GDP.  It's looking much better as well.

TomTX

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Re: Stop worrying about the 4% rule
« Reply #1820 on: March 22, 2020, 08:12:23 PM »
Another similarly (to CAPE) accurate long term measurement is total market cap to GDP.  It's looking much better as well.

Until the 2Q GDP numbers come in...

vand

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Re: Stop worrying about the 4% rule
« Reply #1821 on: March 23, 2020, 06:21:34 AM »


- SNIP -

You do actually understand that CAPE is a 10yr average, right? that's 40 individual quarters'. Knock off the last couple of quarters from Q1/Q2 2010 to make space for the Q1/Q2 2020 numbers and it still isn't going to budge much. That's the whole point of CAPE - it shows you what you can reasonably expect stocks to earn over a long time period.

So CAPE is a long run thing.

This explained it pretty well.

https://www.investopedia.com/terms/c/cape-ratio.asp

"In the long run we are all dead," John Maynard Keynes

Why bother living at all then. Duh.

desk_jockey

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Re: Stop worrying about the 4% rule
« Reply #1822 on: March 24, 2020, 11:39:05 AM »
You do actually understand that CAPE is a 10yr average, right? that's 40 individual quarters'. Knock off the last couple of quarters from Q1/Q2 2010 to make space for the Q1/Q2 2020 numbers and it still isn't going to budge much. That's the whole point of CAPE - it shows you what you can reasonably expect stocks to earn over a long time period.

Exactly.   The CAPE was created as a 10 year average precisely because business cycles showed in every 10 year period there were some down years.  It was only a short time ago when company’s financial losses of 2H07-1H09 began to roll off the PE10.   For a brief time, the PE10 reflected a period of 40 financial quarters with good financial results. To be a truer reflection of the markets and all the historical studies that we reference, it should be expected that the CAPE includes at least 4 bad quarters.