Author Topic: Stop worrying about the 4% rule  (Read 851964 times)

pecunia

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Re: Stop worrying about the 4% rule
« Reply #1900 on: December 18, 2020, 07:34:37 PM »
4 percent rule is overly conservative by design. 95% success means vast majority of the time, you worked longer than you needed to, often significantly so.

I personally think the 'rich-broke-dead' charts are the best illustration of this out there. Too much worrying about the sliver of red (broke).

https://engaging-data.com/will-money-last-retire-early/

Yeh - I'm good with that.  If it goes bad for me, I'll have lots of good company.

Thanks for the honest answer cat.

Malcat

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Re: Stop worrying about the 4% rule
« Reply #1901 on: December 18, 2020, 08:28:47 PM »
4 percent rule is overly conservative by design. 95% success means vast majority of the time, you worked longer than you needed to, often significantly so.

I personally think the 'rich-broke-dead' charts are the best illustration of this out there. Too much worrying about the sliver of red (broke).

https://engaging-data.com/will-money-last-retire-early/

Really what it comes down to is that whether or not the 4% is conservative depends on how much you enjoy making money.

Being FI is no reason to leave paid work if you enjoy it, and get a nice extra cushion of security to help hedge the personal risks in life, which are far, far riskier than market risks.

However, if you hate your job or simply are in a rush to get on with other plans in life, then 4% might be plenty conservative.

At the end of the day, it's all about what the trade offs are.

I know I wouldn't work even a half day longer than I absolutely had to at a job I didn't enjoy, but I would actually be out of there way before reaching full FI. I think *that* is way too conservative, not being willing to move on until having saved enough money to never work again. Seems like massive overkill to me.

markbike528CBX

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Re: Stop worrying about the 4% rule
« Reply #1902 on: December 18, 2020, 10:49:49 PM »
4 percent rule is overly conservative by design. 95% success means vast majority of the time, you worked longer than you needed to, often significantly so.

I personally think the 'rich-broke-dead' charts are the best illustration of this out there. Too much worrying about the sliver of red (broke).

https://engaging-data.com/will-money-last-retire-early/

Really what it comes down to is that whether or not the 4% is conservative depends on how much you enjoy making money.

Being FI is no reason to leave paid work if you enjoy it, and get a nice extra cushion of security to help hedge the personal risks in life, which are far, far riskier than market risks.

However, if you hate your job or simply are in a rush to get on with other plans in life, then 4% might be plenty conservative.

At the end of the day, it's all about what the trade offs are.

I know I wouldn't work even a half day longer than I absolutely had to at a job I didn't enjoy, but I would actually be out of there way before reaching full FI. I think *that* is way too conservative, not being willing to move on until having saved enough money to never work again. Seems like massive overkill to me.

https://www.ovalkwiki.com/index.php?title=The_Seventy_Maxims_of_Maximally_Effective_Mercenaries
#34There is no 'overkill.' There is only 'open fire' and 'reload.'

I have to admit that I agree with Malcat in this instance, despite the call of "The Seventy Maxims".
OMY is a big trigger for me, as I see people who have "overkill" stash and finance margin (slack) to pull off a permanent "FU Money" stunt and still shiver in fear.

Examples on this very forum upon request.

nereo

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Re: Stop worrying about the 4% rule
« Reply #1903 on: December 19, 2020, 12:18:43 PM »
Once you get much below a 4% WR, “more money” has less impact on retirement safety than “more flexibility”.

You can double your ‘Stache (giving you a 2% WR) with only a moderate  increase that you will never run out of money if you insist on being a giant boulder that won’t change anything you do regardless of the economic weather around you. 

Or... you can decide 4% is ‘safe enough’ and recognize that you are an adaptable human who can occasionally adjust your spending or take in a renter or (gasp!) get a part-time job or sell some of your unwanted stuff or move someplace cheaper if the weather really turns sour.

The latter is far more effective with far less money.  But some people just want to be stubborn and say “I’m going to have a WR so bulletproof that I never have to change my plan, ever!!” 

Seems like a much harder plan to me, but to each their own.

maizefolk

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Re: Stop worrying about the 4% rule
« Reply #1904 on: December 19, 2020, 12:32:46 PM »
The latter is far more effective with far less money.  But some people just want to be stubborn and say “I’m going to have a WR so bulletproof that I never have to change my plan, ever!!” 

Seems like a much harder plan to me, but to each their own.

And the thing is, people trying to argue they need a 2% withdrawal rate always point to economic history outside the USA where the 4% rule has failed .... during civil wars or world wars fought door to door in the country of interest.

Situations where even if you DID have enough money saved to continue to spend without any changes at all in your lifestyle, it'd be pretty hard to go on living your life unchanged in the middle of a war or revolution.

Malcat

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Re: Stop worrying about the 4% rule
« Reply #1905 on: December 19, 2020, 02:19:26 PM »
The latter is far more effective with far less money.  But some people just want to be stubborn and say “I’m going to have a WR so bulletproof that I never have to change my plan, ever!!” 

Seems like a much harder plan to me, but to each their own.

And the thing is, people trying to argue they need a 2% withdrawal rate always point to economic history outside the USA where the 4% rule has failed .... during civil wars or world wars fought door to door in the country of interest.

Situations where even if you DID have enough money saved to continue to spend without any changes at all in your lifestyle, it'd be pretty hard to go on living your life unchanged in the middle of a war or revolution.

This is *always* the point I make, if the system fails to the point that the 4% rule fails, then I have much bigger things to worry about than my withdrawal rate.

Now, that doesn't mean I'm one of these people who is only saving to 4% and then shrugging and never worrying about my finances. Quite the contrary. By the time we retire, I expect we'll probably have two to three times as much saved as we "need".

That's not because I'm worried about SORR, that's because I need to be prepared for the not too likely but entirely possible scenario of me ending up in a wheelchair. If that happens, having fun becomes a lot more expensive.

secondcor521

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Re: Stop worrying about the 4% rule
« Reply #1906 on: December 19, 2020, 02:34:51 PM »
I need to be prepared for the not too likely but entirely possible scenario of me ending up in a wheelchair. If that happens, having fun becomes a lot more expensive.

Really?  I know several mobility impaired people, and I don't really see that many additional expenses.  You need some cash to tip the people who are pushing the wheelchair through the airport, and you end up going on cruises and trips where there is more handholding and less on-your-own stuff, and those are expensive.  But it's not like 2x or 3x overall life expenses type of increases as far as I've seen.

I can envision scenarios where an illness or disease that puts a person in a wheelchair can have additional medical expenses related to the disease, but I wouldn't describe those expenses as "having fun" expenses.  I'd label them as medical expenses.

Sincerly curious what kinds of expenses you're talking about / envisioning.

Malcat

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Re: Stop worrying about the 4% rule
« Reply #1907 on: December 19, 2020, 05:46:13 PM »
I need to be prepared for the not too likely but entirely possible scenario of me ending up in a wheelchair. If that happens, having fun becomes a lot more expensive.

Really?  I know several mobility impaired people, and I don't really see that many additional expenses.  You need some cash to tip the people who are pushing the wheelchair through the airport, and you end up going on cruises and trips where there is more handholding and less on-your-own stuff, and those are expensive.  But it's not like 2x or 3x overall life expenses type of increases as far as I've seen.

I can envision scenarios where an illness or disease that puts a person in a wheelchair can have additional medical expenses related to the disease, but I wouldn't describe those expenses as "having fun" expenses.  I'd label them as medical expenses.

Sincerly curious what kinds of expenses you're talking about / envisioning.

Well, I'm not going to debate what *my* priorities are for *my* life if I am to further lose my ability to walk. I am very informed about what my options are.

I will however say that it's not like I'm stressed about saving the extra money and putting off happiness to do so. Working is part of my ideal life, and I can make 6 figures working part time, so it's really not a big deal for us to save 2-3 times what we need. Neither of us has any interest at all in ever fully retiring from work.

As I've said before, low withdrawal rates are only too conservative if you are trading off happiness to achieve them. I'm not, work is a huge part of my happiness.

secondcor521

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Re: Stop worrying about the 4% rule
« Reply #1908 on: December 19, 2020, 08:23:24 PM »
I need to be prepared for the not too likely but entirely possible scenario of me ending up in a wheelchair. If that happens, having fun becomes a lot more expensive.

Really?  I know several mobility impaired people, and I don't really see that many additional expenses.  You need some cash to tip the people who are pushing the wheelchair through the airport, and you end up going on cruises and trips where there is more handholding and less on-your-own stuff, and those are expensive.  But it's not like 2x or 3x overall life expenses type of increases as far as I've seen.

I can envision scenarios where an illness or disease that puts a person in a wheelchair can have additional medical expenses related to the disease, but I wouldn't describe those expenses as "having fun" expenses.  I'd label them as medical expenses.

Sincerly curious what kinds of expenses you're talking about / envisioning.

Well, I'm not going to debate what *my* priorities are for *my* life if I am to further lose my ability to walk. I am very informed about what my options are.

I will however say that it's not like I'm stressed about saving the extra money and putting off happiness to do so. Working is part of my ideal life, and I can make 6 figures working part time, so it's really not a big deal for us to save 2-3 times what we need. Neither of us has any interest at all in ever fully retiring from work.

As I've said before, low withdrawal rates are only too conservative if you are trading off happiness to achieve them. I'm not, work is a huge part of my happiness.

I'm not trying to debate you.  I'm trying to understand you.  If you don't want to share examples, OK by me; I'm learning to live with mysteries.  But if you had shared some explanation, it would have helped and I wouldn't have argued with you over them.

And as an aside, I am not a member of any retirement police, so if you want to work even if others think you're FI, then I don't care in the slightest and wouldn't criticize that either.

Malcat

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Re: Stop worrying about the 4% rule
« Reply #1909 on: December 19, 2020, 09:37:05 PM »
I need to be prepared for the not too likely but entirely possible scenario of me ending up in a wheelchair. If that happens, having fun becomes a lot more expensive.

Really?  I know several mobility impaired people, and I don't really see that many additional expenses.  You need some cash to tip the people who are pushing the wheelchair through the airport, and you end up going on cruises and trips where there is more handholding and less on-your-own stuff, and those are expensive.  But it's not like 2x or 3x overall life expenses type of increases as far as I've seen.

I can envision scenarios where an illness or disease that puts a person in a wheelchair can have additional medical expenses related to the disease, but I wouldn't describe those expenses as "having fun" expenses.  I'd label them as medical expenses.

Sincerly curious what kinds of expenses you're talking about / envisioning.

Well, I'm not going to debate what *my* priorities are for *my* life if I am to further lose my ability to walk. I am very informed about what my options are.

I will however say that it's not like I'm stressed about saving the extra money and putting off happiness to do so. Working is part of my ideal life, and I can make 6 figures working part time, so it's really not a big deal for us to save 2-3 times what we need. Neither of us has any interest at all in ever fully retiring from work.

As I've said before, low withdrawal rates are only too conservative if you are trading off happiness to achieve them. I'm not, work is a huge part of my happiness.

I'm not trying to debate you.  I'm trying to understand you.  If you don't want to share examples, OK by me; I'm learning to live with mysteries.  But if you had shared some explanation, it would have helped and I wouldn't have argued with you over them.

And as an aside, I am not a member of any retirement police, so if you want to work even if others think you're FI, then I don't care in the slightest and wouldn't criticize that either.

I didn't assume you were debating me. I just had no interest engaging on that topic beyond making a point, and didn't find it necessary to expand further for the point I was making. For the sake of not being unfriendly though, I will simply say that if I lose my mobility, I lose a lot of my favourite inexpensive things to do, and there are many very, very expensive cool things you can do if you are wheelchair bound. Which if I end up wheelchair bound, I sure as shit will be doing.

My actual thread-relevant point though, is that not worrying about the 4% rule doesn't necessarily mean not over-saving. Some of us have motivations to over save well beyond what's needed, but not because of SORR/market volatility.

I see a lot of people here equate not worrying about the 4% rule with not worrying about needing more money in retirement beyond 25X, and the two are not equivalent.

The 4% rule is predicated on your financial needs never changing. There are real life risks that absolutely can change your expenses in life. I simply shared my example of a real life risk that the 4% rule can't account for.

As for my comment about continuing to work, that was just to clarify my position that continuing to work to pad your 'stache can either be incredibly foolish or no big deal, depending on how much you enjoy your work.

Working extra years in a job you hate to lower your WR from 4% to 3% out of fear about the markets is, to me, fucking nuts. However, working for many, many extra years at something you love, bringing your WR down to <1% isn't irrational at all if you are living your best life.

I mean, that's MMM himself in a nutshell. He's worked more years and made more money since leaving his job than he did working. His WR is 0% and his stache is probably massive beyond what he could possibly need.

I still maintain quite firmly that I think that people who dislike their jobs should quit well before reaching FI. As I've said before, I think it's crazy overkill to think you need to save all the money you will ever need before you can consider changing your life for the better.

mistymoney

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Re: Stop worrying about the 4% rule
« Reply #1910 on: December 19, 2020, 10:34:14 PM »
4 percent rule is overly conservative by design. 95% success means vast majority of the time, you worked longer than you needed to, often significantly so.

I personally think the 'rich-broke-dead' charts are the best illustration of this out there. Too much worrying about the sliver of red (broke).

https://engaging-data.com/will-money-last-retire-early/

Really what it comes down to is that whether or not the 4% is conservative depends on how much you enjoy making money.

Being FI is no reason to leave paid work if you enjoy it, and get a nice extra cushion of security to help hedge the personal risks in life, which are far, far riskier than market risks.

However, if you hate your job or simply are in a rush to get on with other plans in life, then 4% might be plenty conservative.

At the end of the day, it's all about what the trade offs are.

I know I wouldn't work even a half day longer than I absolutely had to at a job I didn't enjoy, but I would actually be out of there way before reaching full FI. I think *that* is way too conservative, not being willing to move on until having saved enough money to never work again. Seems like massive overkill to me.

https://www.ovalkwiki.com/index.php?title=The_Seventy_Maxims_of_Maximally_Effective_Mercenaries
#34There is no 'overkill.' There is only 'open fire' and 'reload.'

I have to admit that I agree with Malcat in this instance, despite the call of "The Seventy Maxims".
OMY is a big trigger for me, as I see people who have "overkill" stash and finance margin (slack) to pull off a permanent "FU Money" stunt and still shiver in fear.

Examples on this very forum upon request.

request!
« Last Edit: December 19, 2020, 10:52:32 PM by mistymoney »

markbike528CBX

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Re: Stop worrying about the 4% rule
« Reply #1911 on: December 20, 2020, 12:38:17 AM »
4 percent rule is overly conservative by design. 95% success means vast majority of the time, you worked longer than you needed to, often significantly so.

I personally think the 'rich-broke-dead' charts are the best illustration of this out there. Too much worrying about the sliver of red (broke).

https://engaging-data.com/will-money-last-retire-early/

Really what it comes down to is that whether or not the 4% is conservative depends on how much you enjoy making money.

Being FI is no reason to leave paid work if you enjoy it, and get a nice extra cushion of security to help hedge the personal risks in life, which are far, far riskier than market risks.

However, if you hate your job or simply are in a rush to get on with other plans in life, then 4% might be plenty conservative.

At the end of the day, it's all about what the trade offs are.

I know I wouldn't work even a half day longer than I absolutely had to at a job I didn't enjoy, but I would actually be out of there way before reaching full FI. I think *that* is way too conservative, not being willing to move on until having saved enough money to never work again. Seems like massive overkill to me.

https://www.ovalkwiki.com/index.php?title=The_Seventy_Maxims_of_Maximally_Effective_Mercenaries
#34There is no 'overkill.' There is only 'open fire' and 'reload.'

I have to admit that I agree with Malcat in this instance, despite the call of "The Seventy Maxims".
OMY is a big trigger for me, as I see people who have "overkill" stash and finance margin (slack) to pull off a permanent "FU Money" stunt and still shiver in fear.

Examples on this very forum upon request.

request!
"shiver in fear" IS a bit of hyperbole, but the level of OMY is pretty high, and not just SWAMI.   
For some users, "pad the stashe", nameless unforeseen expenses seem to crowd out the fact that they have 2M+, and are in the top 6% of US households.

https://forum.mrmoneymustache.com/throw-down-the-gauntlet/race-from-$2m-to-$3m/

American GenX

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Re: Stop worrying about the 4% rule
« Reply #1912 on: December 20, 2020, 07:42:40 PM »
I expect my financial needs to change, not remain static, so I build a buffer into my 4% rule.

Right now, my stache is at about 82.5X spending for required expenses and taxes during my first year of retirement.

And I like my job, or I probably would have already quit, despite not knowing for certain what the ACA ruling will be.

Also, notice I said "required" expenses aka "barebones".  I expect to have a lot of discretionary spending in FIRE, far exceeding the minimum required to pay the bills.  That also doesn't factor in pension, SS, downscaling/selling home, or windfalls I might experience.  When other retirement income kicks in, the stash should pretty much just be gravy.

Some people calculate pretty tight budgets without factoring in much discretionary spending, let alone allowing for changes in their financial situation.
« Last Edit: December 28, 2020, 05:41:24 PM by American GenX »

nereo

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Re: Stop worrying about the 4% rule
« Reply #1913 on: December 21, 2020, 11:04:22 AM »
I expect my financial needs to change, not remain static, so I build a buffer into my 4% rule.

Right now, my stache is at about 82.5X spending for required expenses and taxes during my first year of retirement.

And I like my job, or I probably would have already quit, despite not knowing for certain what the ACA ruling will be.

Also, notice I said "retired" expensive.  I expect to have a lot of discretionary spending in FIRE, far exceeding the minimum required to pay the bills.  That also doesn't factor in pension, SS, downscaling/selling home, or windfalls I might experience.  When other retirement income kicks in, the stash should pretty much just be gravy.

Some people calculate pretty tight budgets without factoring in much discretionary spending, let alone allowing for changes in their financial situation.

It doesn’t appear like you are “building a buffer” so much as constructing an enormous wall, surrounded by a gator-filled moat and patrolled by loyal gorillas, with bazookas.

Everyone needs to evaluate their own expectations and assumptions. It’s worth repeating that on average a person’s spending decreases throughout retirement after a slight uptick the first few years. A select few plan on spending far more

EscapeVelocity2020

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Re: Stop worrying about the 4% rule
« Reply #1914 on: December 21, 2020, 11:38:00 AM »
I expect my financial needs to change, not remain static, so I build a buffer into my 4% rule.

Right now, my stache is at about 82.5X spending for required expenses and taxes during my first year of retirement.

And I like my job, or I probably would have already quit, despite not knowing for certain what the ACA ruling will be.

Also, notice I said "retired" expensive.  I expect to have a lot of discretionary spending in FIRE, far exceeding the minimum required to pay the bills.  That also doesn't factor in pension, SS, downscaling/selling home, or windfalls I might experience.  When other retirement income kicks in, the stash should pretty much just be gravy.

Some people calculate pretty tight budgets without factoring in much discretionary spending, let alone allowing for changes in their financial situation.

In other words, you're using a 1.2% Rule, on top of a generous budget with discretionary spending...  Not exactly sure what response you're hoping for, but 3% SWR on projected expenses is considered 'fail-proof' using FIRE calculators...  Hope you do enjoy the job because that income is not going to be used by you in your lifetime unless you increase that budget...  And if the 3% Rule fails, there will be a whole lot bigger problems than just cutting back a bit - we're talking historically bad inflation or a market worse than the Great Depression...   

waltworks

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Re: Stop worrying about the 4% rule
« Reply #1915 on: December 21, 2020, 12:55:16 PM »
Beyond the 4% rule, your failure modes have to do with:
-Personal health.
-Relationships/divorce.
-Black swan (non financial) like a meteor strike, runaway climate change, Yellowstone blows, etc.

Going to 3%, or 1.2%, or whatever, won't do you any good with any of that stuff. You could make a reasonable argument that you're making at least the first 2 worse continuing to work, unless you have a super low stress and flexible/healthful job. And if you truly love your work (many people, including me, do) then why aim to RE at all?

-W

Malcat

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Re: Stop worrying about the 4% rule
« Reply #1916 on: December 21, 2020, 01:50:58 PM »
I expect my financial needs to change, not remain static, so I build a buffer into my 4% rule.

Right now, my stache is at about 82.5X spending for required expenses and taxes during my first year of retirement.

And I like my job, or I probably would have already quit, despite not knowing for certain what the ACA ruling will be.

Also, notice I said "retired" expensive.  I expect to have a lot of discretionary spending in FIRE, far exceeding the minimum required to pay the bills.  That also doesn't factor in pension, SS, downscaling/selling home, or windfalls I might experience.  When other retirement income kicks in, the stash should pretty much just be gravy.

Some people calculate pretty tight budgets without factoring in much discretionary spending, let alone allowing for changes in their financial situation.

In other words, you're using a 1.2% Rule, on top of a generous budget with discretionary spending...  Not exactly sure what response you're hoping for, but 3% SWR on projected expenses is considered 'fail-proof' using FIRE calculators...  Hope you do enjoy the job because that income is not going to be used by you in your lifetime unless you increase that budget...  And if the 3% Rule fails, there will be a whole lot bigger problems than just cutting back a bit - we're talking historically bad inflation or a market worse than the Great Depression...

Their entire point was that they expect their spend to change, not that the market will crash and make their predicted spend not work.

chevy1956

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Re: Stop worrying about the 4% rule
« Reply #1917 on: December 21, 2020, 02:28:03 PM »
I expect my financial needs to change, not remain static, so I build a buffer into my 4% rule.

Right now, my stache is at about 82.5X spending for required expenses and taxes during my first year of retirement.

And I like my job, or I probably would have already quit, despite not knowing for certain what the ACA ruling will be.

Also, notice I said "retired" expensive.  I expect to have a lot of discretionary spending in FIRE, far exceeding the minimum required to pay the bills.  That also doesn't factor in pension, SS, downscaling/selling home, or windfalls I might experience.  When other retirement income kicks in, the stash should pretty much just be gravy.

Some people calculate pretty tight budgets without factoring in much discretionary spending, let alone allowing for changes in their financial situation.

In other words, you're using a 1.2% Rule, on top of a generous budget with discretionary spending...  Not exactly sure what response you're hoping for, but 3% SWR on projected expenses is considered 'fail-proof' using FIRE calculators...  Hope you do enjoy the job because that income is not going to be used by you in your lifetime unless you increase that budget...  And if the 3% Rule fails, there will be a whole lot bigger problems than just cutting back a bit - we're talking historically bad inflation or a market worse than the Great Depression...

Their entire point was that they expect their spend to change, not that the market will crash and make their predicted spend not work.

Correct. In stating that there is a potential problem with conservatism here. Do you like working and would work for free ? Then keep working. If though that isn't the case well then worrying about increasing expenses in the future at some point is very similar to the fear of why you have to get to a below 4% WR.

Increasing future expenses was my millstone stopping my retirement. I also didn't hate my job. I'd just prefer not to go to work. My solution is a buffer amount that I can spend on whatever is required. I may need a new car or a fancy overseas trip or to give my kids a fancy wedding present. I don't have anywhere near enough though to do all of these things.

Edited to add:- my personal opinion is that 4% is a pretty conservative figure. If you look at this thread and Sol's points I think a rational WR is more like 6%.
« Last Edit: December 21, 2020, 03:36:06 PM by chevy1956 »

American GenX

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Re: Stop worrying about the 4% rule
« Reply #1918 on: December 21, 2020, 04:57:03 PM »
I expect my financial needs to change, not remain static, so I build a buffer into my 4% rule.

Right now, my stache is at about 82.5X spending for required expenses and taxes during my first year of retirement.

And I like my job, or I probably would have already quit, despite not knowing for certain what the ACA ruling will be.

Also, notice I said "retired" expensive.  I expect to have a lot of discretionary spending in FIRE, far exceeding the minimum required to pay the bills.  That also doesn't factor in pension, SS, downscaling/selling home, or windfalls I might experience.  When other retirement income kicks in, the stash should pretty much just be gravy.

Some people calculate pretty tight budgets without factoring in much discretionary spending, let alone allowing for changes in their financial situation.

In other words, you're using a 1.2% Rule, on top of a generous budget with discretionary spending...  Not exactly sure what response you're hoping for, but 3% SWR on projected expenses is considered 'fail-proof' using FIRE calculators...  Hope you do enjoy the job because that income is not going to be used by you in your lifetime unless you increase that budget...  And if the 3% Rule fails, there will be a whole lot bigger problems than just cutting back a bit - we're talking historically bad inflation or a market worse than the Great Depression...

Their entire point was that they expect their spend to change, not that the market will crash and make their predicted spend not work.

Correct. In stating that there is a potential problem with conservatism here. Do you like working and would work for free ? Then keep working. If though that isn't the case well then worrying about increasing expenses in the future at some point is very similar to the fear of why you have to get to a below 4% WR.

Who said they were "worrying?"  I'm preparing for a certain increase in spending when I FIRE.  Preparing doesn't mean worrying.

Quote
My solution is a buffer amount that I can spend on whatever is required. I may need a new car or a fancy overseas trip or to give my kids a fancy wedding present. I don't have anywhere near enough though to do all of these things.

That sounds a lot like discretionary spending, that I mentioned as well.  And I also mentioned a buffer.  Are you worried?  I'm not.

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Edited to add:- my personal opinion is that 4% is a pretty conservative figure. If you look at this thread and Sol's points I think a rational WR is more like 6%.

That depends on your risk tolerance.  We're riding high right now, so I wouldn't push it if I were retiring today.

American GenX

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Re: Stop worrying about the 4% rule
« Reply #1919 on: December 21, 2020, 05:05:22 PM »
I expect my financial needs to change, not remain static, so I build a buffer into my 4% rule.

Right now, my stache is at about 82.5X spending for required expenses and taxes during my first year of retirement.

And I like my job, or I probably would have already quit, despite not knowing for certain what the ACA ruling will be.

Also, notice I said "retired" expensive.  I expect to have a lot of discretionary spending in FIRE, far exceeding the minimum required to pay the bills.  That also doesn't factor in pension, SS, downscaling/selling home, or windfalls I might experience.  When other retirement income kicks in, the stash should pretty much just be gravy.

Some people calculate pretty tight budgets without factoring in much discretionary spending, let alone allowing for changes in their financial situation.

In other words, you're using a 1.2% Rule, on top of a generous budget with discretionary spending...  Not exactly sure what response you're hoping for, but 3% SWR on projected expenses is considered 'fail-proof' using FIRE calculators...  Hope you do enjoy the job because that income is not going to be used by you in your lifetime unless you increase that budget...  And if the 3% Rule fails, there will be a whole lot bigger problems than just cutting back a bit - we're talking historically bad inflation or a market worse than the Great Depression...

I made a typo in my previous post, so I edited and corrected in bold.  1.2% would only cover required expenses in early retirement, with no buffer, and no allowance for required increases beyond inflation in future years, with zero discretionary spending.  I wouldn't retire like that.  I'm planning more of a 4% rule, but I can cut back if needed since most of it will be discretionary.

chevy1956

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Re: Stop worrying about the 4% rule
« Reply #1920 on: December 21, 2020, 05:46:22 PM »
@American GenX - I didn't mean to state that you personally were worried. I actually responded stating "correct" to this comment "Their entire point was that they expect their spend to change, not that the market will crash and make their predicted spend not work.".

So I completely understood that you were really planning to retire on whatever your expected future spend would be. If that is the best way for you to gauge your expenses so be it. It does also show how worrying about getting to a 4% or lower WR misses the point in that your expenses aren't very clear. I mean in your situation I assume you are spending a lot less than your expected spending. I doubt your future spending is going to be completely accurate which makes the WR point a little moot.

As you state I'm in the same situation. I just randomly came up with a number that I call buffer to handle unplanned future expenses such as gifts to the kids, overseas holidays, fancy events, car upgrades etc.
« Last Edit: December 21, 2020, 05:47:53 PM by chevy1956 »

American GenX

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Re: Stop worrying about the 4% rule
« Reply #1921 on: December 22, 2020, 10:56:51 AM »
@American GenX - I didn't mean to state that you personally were worried. I actually responded stating "correct" to this comment "Their entire point was that they expect their spend to change, not that the market will crash and make their predicted spend not work.".

So I completely understood that you were really planning to retire on whatever your expected future spend would be. If that is the best way for you to gauge your expenses so be it. It does also show how worrying about getting to a 4% or lower WR misses the point in that your expenses aren't very clear. I mean in your situation I assume you are spending a lot less than your expected spending. I doubt your future spending is going to be completely accurate which makes the WR point a little moot.

As you state I'm in the same situation. I just randomly came up with a number that I call buffer to handle unplanned future expenses such as gifts to the kids, overseas holidays, fancy events, car upgrades etc.

Understood.  I might FIRE as early as spring, so I base my yearly FIRE spending on what my stash will allow using the 4% rule and will adjust as needed year to year.  I knew I wanted a decent amount of discretionary spending funds available to me when I FIRE so that lack of money wouldn't overly restrict my means to enjoyment during FIRE.  It's difficult to know just how much spending that will amount to.  Some people say that since I've built a life long habit of saving so much, even more so over the last decade, that I won't be able to change my ways to spend so much more on discretionary when I FIRE.  But, it's a big difference to have a lot of free time compared to when I was working 50 hours per week.  So, I can definitely see myself ramping up discretionary spending quite a bit when FIREd.  There's also a reasonable possibility that I will relocate, which would more than likely increase my expenses since I'm in a lower cost of housing area.

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Re: Stop worrying about the 4% rule
« Reply #1922 on: December 22, 2020, 01:44:15 PM »
Thanks for the clarification @American GenX , that is one problem with using multipliers vs. actual numbers.  If an individual has 83x 'required living expenses' which is $10/yr ($830k net worth), then it is a totally different conversation... 

Almost nobody here would freak out over someone continuing to work with $830k net worth and putting in a little more time.  But if your comfortable annual spend is 100k/yr ($8.3M net worth), and you put in any more time at a job that is anything less than utopian building more 'stache, then almost everyone here freaks out :)

ender

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Re: Stop worrying about the 4% rule
« Reply #1923 on: December 22, 2020, 05:03:31 PM »
I'm really confused why someone would come to a thread about the 4% rule, say they have 80x their expenses and a buffer, but then also say they plan on their expenses going up a lot.

The idea behind the 4% rule is pretty straightforward. It is to estimate how much $ you need for retirement spending.

If your spending is super inconsistent, using any percentage based withdrawal rule is going to be problematic.

It's a "SWR" - safe withdrawal rate.

I don't know why you'd even try to use a perspective which involves dramatically changing your spending and then compare your multiplier in expenses vs your stash and even try to use a X% rule on it. The model just doesn't apply.

It'd be like someone saying "I'm retiring on a 10% withdrawal rate!" only to then clarify "oh, yeah, after my first year our mortgage will be gone so then it's only 4%."

Massive variability in yearly spending makes models built on fairly consistent spending (the studies are heavily proscriptive spending) results in less and less valuable outputs.


Malcat

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Re: Stop worrying about the 4% rule
« Reply #1924 on: December 22, 2020, 05:11:00 PM »
I'm really confused why someone would come to a thread about the 4% rule, say they have 80x their expenses and a buffer, but then also say they plan on their expenses going up a lot.

The idea behind the 4% rule is pretty straightforward. It is to estimate how much $ you need for retirement spending.

If your spending is super inconsistent, using any percentage based withdrawal rule is going to be problematic.

It's a "SWR" - safe withdrawal rate.

I don't know why you'd even try to use a perspective which involves dramatically changing your spending and then compare your multiplier in expenses vs your stash and even try to use a X% rule on it. The model just doesn't apply.

It'd be like someone saying "I'm retiring on a 10% withdrawal rate!" only to then clarify "oh, yeah, after my first year our mortgage will be gone so then it's only 4%."

Massive variability in yearly spending makes models built on fairly consistent spending (the studies are heavily proscriptive spending) results in less and less valuable outputs.

It's not confusing in the context of the replies before it.
At least I completely understood the logic pp was following...mostly because I'm pretty sure I started it ;)

tooqk4u22

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Re: Stop worrying about the 4% rule
« Reply #1925 on: December 28, 2020, 11:20:04 AM »
I'm really confused why someone would come to a thread about the 4% rule, say they have 80x their expenses and a buffer, but then also say they plan on their expenses going up a lot.

The idea behind the 4% rule is pretty straightforward. It is to estimate how much $ you need for retirement spending.

If your spending is super inconsistent, using any percentage based withdrawal rule is going to be problematic.

It's a "SWR" - safe withdrawal rate.

I don't know why you'd even try to use a perspective which involves dramatically changing your spending and then compare your multiplier in expenses vs your stash and even try to use a X% rule on it. The model just doesn't apply.

It'd be like someone saying "I'm retiring on a 10% withdrawal rate!" only to then clarify "oh, yeah, after my first year our mortgage will be gone so then it's only 4%."

Massive variability in yearly spending makes models built on fairly consistent spending (the studies are heavily proscriptive spending) results in less and less valuable outputs.

It's not confusing in the context of the replies before it.
At least I completely understood the logic pp was following...mostly because I'm pretty sure I started it ;)

I think others are misinterpreting it as they AGx is saying I have 83x but will probably need more when what they are saying is my basic fundamental needs are X and I have 83x X but I don't plan to LIVE/SPEND X.   

In my case about half of my WR goes to basic living (house costs, food, insurance, etc.) and the other half goes to discretionary/wants (kids activities, electronics, higher quality food/eating out, travel, etc.)

vand

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Re: Stop worrying about the 4% rule
« Reply #1926 on: February 05, 2021, 07:07:58 AM »
I thought Ben Carlson was going to give us some previously undiscovered insight into withdrawal rates and portfolio structure.. but nope, he's just reinterating the importance of diversification to improve portfolio stability in order to protect against SORR during drawdown.

https://awealthofcommonsense.com/2021/02/the-best-way-to-manage-sequence-of-return-risk/

The case of the retiree in 2000 with a $1m TSM portfolio is interesting. Now 21 years down the line, the portfolio is down to $470k having taken out over $1m. Remember that prices are now 50% higher than in 2000 thanks to inflation. So the $40k initial withdrawals now need to be $60k. At the moment, it looks as if the portfolio is more likely than not to fail the 30yr survival test.  By contrast a straightforward 60/40, while slightly underperforming a TSM in terms of overall CAGR has left the retiree much better off, with a portfolio value of $1.1-$1.2m (depending on rebalancing), and almost certain to survive the 30yr drawdown period and then some.




I would go as far as to say that, as of today, with growth likely to be lower in the coming decade than it has been in the previous, portfolio stability will be the dominant factor in how well the portfolios of today's retirees' ultimately end up faring.
« Last Edit: February 05, 2021, 07:11:11 AM by vand »

waltworks

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Re: Stop worrying about the 4% rule
« Reply #1927 on: February 05, 2021, 07:34:55 AM »
Yeah, if you kept blindly withdrawing for that first 5 years starting in 2000 and were all stocks, you did some major damage.

-W

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Re: Stop worrying about the 4% rule
« Reply #1928 on: February 05, 2021, 08:11:14 AM »
Perhaps not surprisingly, had the same retiree had a small 18 month bond ladder, s/he would have a portfolio today with net-positive growth. Color me shocked!

dandarc

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Re: Stop worrying about the 4% rule
« Reply #1929 on: February 05, 2021, 08:16:46 AM »
Has inflation been 2% / year since 2000? Pretty reasonable number since I see it has ranged from 0.1% to 4.1%, but it might be interesting to see if the same thing bears out to the same extent with the actual reported inflation numbers vs. a constant 2%.

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Re: Stop worrying about the 4% rule
« Reply #1930 on: February 05, 2021, 11:09:54 AM »
Has inflation been 2% / year since 2000? Pretty reasonable number since I see it has ranged from 0.1% to 4.1%, but it might be interesting to see if the same thing bears out to the same extent with the actual reported inflation numbers vs. a constant 2%.

I've been hearing people talk lately that the inflation that the rate which the government tells us does not match to what some people consider as the "real" inflation rate.  I have noticed some price creep as of late.  The cost of medicine and the cost of education do not seem aligned with that 2 percent.  Without an accurate inflation indicator, it's a bit harder to adjust the 4 percent the proper amount upward.

nereo

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Re: Stop worrying about the 4% rule
« Reply #1931 on: February 05, 2021, 02:52:29 PM »
Has inflation been 2% / year since 2000? Pretty reasonable number since I see it has ranged from 0.1% to 4.1%, but it might be interesting to see if the same thing bears out to the same extent with the actual reported inflation numbers vs. a constant 2%.

I've been hearing people talk lately that the inflation that the rate which the government tells us does not match to what some people consider as the "real" inflation rate.  I have noticed some price creep as of late.  The cost of medicine and the cost of education do not seem aligned with that 2 percent.  Without an accurate inflation indicator, it's a bit harder to adjust the 4 percent the proper amount upward.

There was an entire thread on this not too long ago.  Most people have a poor understanding of CPI, and a few think it’s some sort of governmental conspiracy.  It should go without saying that an individual’s exposure to inflation will not be the same as median exposure across the entire population (which is closer to what CPI measures). This is probably particularly true of dedicated mustachians, as our spending categories are often vastly different from the average Joe and Jane.

SwordGuy

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Re: Stop worrying about the 4% rule
« Reply #1932 on: February 05, 2021, 02:55:33 PM »
Has inflation been 2% / year since 2000? Pretty reasonable number since I see it has ranged from 0.1% to 4.1%, but it might be interesting to see if the same thing bears out to the same extent with the actual reported inflation numbers vs. a constant 2%.

I've been hearing people talk lately that the inflation that the rate which the government tells us does not match to what some people consider as the "real" inflation rate.  I have noticed some price creep as of late.  The cost of medicine and the cost of education do not seem aligned with that 2 percent.  Without an accurate inflation indicator, it's a bit harder to adjust the 4 percent the proper amount upward.

There was an entire thread on this not too long ago.  Most people have a poor understanding of CPI, and a few think it’s some sort of governmental conspiracy.  It should go without saying that an individual’s exposure to inflation will not be the same as median exposure across the entire population (which is closer to what CPI measures). This is probably particularly true of dedicated mustachians, as our spending categories are often vastly different from the average Joe and Jane.

That doesn't mean that the government doesn't -- ahem -- "adjust" the formula from time to time in ways that benefit it and not us.   I recollect a change some years ago that cut the rate of social security inflation adjustments.   It's possible that it was even justified, it's been some years ago and the details are hazy.

But that's a far cry from some kind of "conspiracy".

vand

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Re: Stop worrying about the 4% rule
« Reply #1933 on: February 07, 2021, 12:49:41 AM »

robartsd

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Re: Stop worrying about the 4% rule
« Reply #1934 on: February 09, 2021, 09:51:36 AM »
I've been hearing people talk lately that the inflation that the rate which the government tells us does not match to what some people consider as the "real" inflation rate.  I have noticed some price creep as of late.  The cost of medicine and the cost of education do not seem aligned with that 2 percent.  Without an accurate inflation indicator, it's a bit harder to adjust the 4 percent the proper amount upward.
Inflation for both healthcare and education have outpaced CPI for many years.

https://www.in2013dollars.com/Medical-care/price-inflation
https://www.forbes.com/sites/zengernews/2020/08/31/college-tuition-is-rising-at-twice-the-inflation-rate-while-students-learn-at-home/?sh=5eeeffc42f98

American GenX

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Re: Stop worrying about the 4% rule
« Reply #1935 on: February 11, 2021, 05:53:01 PM »
Has inflation been 2% / year since 2000? Pretty reasonable number since I see it has ranged from 0.1% to 4.1%, but it might be interesting to see if the same thing bears out to the same extent with the actual reported inflation numbers vs. a constant 2%.

I've been hearing people talk lately that the inflation that the rate which the government tells us does not match to what some people consider as the "real" inflation rate.  I have noticed some price creep as of late.  The cost of medicine and the cost of education do not seem aligned with that 2 percent.  Without an accurate inflation indicator, it's a bit harder to adjust the 4 percent the proper amount upward.

Heck, my largest bills are going up 7% or more per year in recent years.  Property tax, homeowner's insurance, health care premiums (~60% increase with MUCH higher deductible and out of pocket).  Even grocery costs going up much faster than government figures despite making the effort to get the best deals/sales as I have been doing for years.  And typically, costs for seniors goes up at an even faster rate, so that's something scary to look forward to!

This is weakest part of the 4% rule (or 4.5% rule) for me because it's based on the government inflation figures in the calcuations, and you're likely looking at considerably higher inflation than CPI figures, so your money will run out faster.

nereo

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Re: Stop worrying about the 4% rule
« Reply #1936 on: February 11, 2021, 05:57:38 PM »
Has inflation been 2% / year since 2000? Pretty reasonable number since I see it has ranged from 0.1% to 4.1%, but it might be interesting to see if the same thing bears out to the same extent with the actual reported inflation numbers vs. a constant 2%.

I've been hearing people talk lately that the inflation that the rate which the government tells us does not match to what some people consider as the "real" inflation rate.  I have noticed some price creep as of late.  The cost of medicine and the cost of education do not seem aligned with that 2 percent.  Without an accurate inflation indicator, it's a bit harder to adjust the 4 percent the proper amount upward.

Heck, my largest bills are going up 7% or more per year in recent years.  Property tax, homeowner's insurance, health care premiums (~60% increase with MUCH higher deductible and out of pocket).  Even grocery costs going up much faster than government figures despite making the effort to get the best deals/sales as I have been doing for years.  And typically, costs for seniors goes up at an even faster rate, so that's something scary to look forward to!

This is weakest part of the 4% rule (or 4.5% rule) for me because it's based on the government inflation figures in the calcuations, and you're likely looking at considerably higher inflation than CPI figures, so your money will run out faster.

Kitces took a fairly deep dive into the information about spending during various decades of retirement.  Short version, actual spending declined decade-over-decade even when adjusted for inflation (via CPI, IIRC).  In other words, the 4% shows to be more conservative, not less.

pecunia

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Re: Stop worrying about the 4% rule
« Reply #1937 on: February 11, 2021, 07:14:13 PM »
I saw this YouTube video with an economist explaining why we don't have massive inflation despite the great increase in the money supply by governments and the banks.  As some people on this site have taught me it is more than just the money supply it is the velocity of money.  All that new money has found itself into the stock market and driven up stock prices.  So that money is just sitting in stocks like gasoline in a tank.  I'm wondering what type of event will cause the stock prices to be corrected and there will be a sell off.  It seems like this may release some of that stored money.  Then we may have some larger value of inflation as that money is used for goods and services.  I can see it driving the price of real estate up.  A large amount of money chasing a limited number of goods and services intuitively would seem to drive the price of those goods and services up.

Am I once again viewing this wrong? Could we see a situation of reduced stock value / return and higher prices?  Maybe the increased demand for the goods and services will have a rebound effect driving the stock prices back up.  The 4  percent rule may always be  be self correcting, I guess.  History shows it works.



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Re: Stop worrying about the 4% rule
« Reply #1938 on: February 11, 2021, 09:34:13 PM »
I saw this YouTube video with an economist explaining why we don't have massive inflation despite the great increase in the money supply by governments and the banks.  As some people on this site have taught me it is more than just the money supply it is the velocity of money.  All that new money has found itself into the stock market and driven up stock prices.  So that money is just sitting in stocks like gasoline in a tank.  I'm wondering what type of event will cause the stock prices to be corrected and there will be a sell off.  It seems like this may release some of that stored money.  Then we may have some larger value of inflation as that money is used for goods and services.  I can see it driving the price of real estate up.  A large amount of money chasing a limited number of goods and services intuitively would seem to drive the price of those goods and services up.

Am I once again viewing this wrong? Could we see a situation of reduced stock value / return and higher prices?  Maybe the increased demand for the goods and services will have a rebound effect driving the stock prices back up.  The 4  percent rule may always be  be self correcting, I guess.  History shows it works.

Perhaps, without certainty (I'm extracting the following from a unmentionable place), given that most stocks are sold near a bottom, that act destroys the cash used to acquire the stock.  Ie if you buy high and sell low, the cash value evaporates, at least for you.  You then have less money to buy other assets/crap/necessities. Multiply by multitudes.  So I don't see a crash as a release of stored money as much as the destruction of value.

pecunia

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Re: Stop worrying about the 4% rule
« Reply #1939 on: February 12, 2021, 07:49:00 AM »
"Perhaps, without certainty (I'm extracting the following from a unmentionable place), given that most stocks are sold near a bottom, that act destroys the cash used to acquire the stock.  Ie if you buy high and sell low, the cash value evaporates, at least for you.  You then have less money to buy other assets/crap/necessities. Multiply by multitudes.  So I don't see a crash as a release of stored money as much as the destruction of value."

Yeh - But it still still puts that money into circulation where it can be used to buy cars and stuff.  Multiply that by billions and there will be money chasing goods that was formerly static.  Besides, it may not actually be a loss.  If your money has doubled and you begin to see a downward slide in value but still above what you've paid, is it really a loss to sell?

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Re: Stop worrying about the 4% rule
« Reply #1940 on: February 12, 2021, 10:10:07 AM »
It won't put any money back into play.  For every person selling there is another person on the other side of the transaction buying and putting money into it.  The net transaction of buy/sell will be $0, but a lot of paper value will be destroyed.

The total value of all the stocks isn't real money either.  I know I'm not responsible for putting in every last dollar making up my portfolio, much of it is just growth over time.    So my $600k portfolio is valued at $600k, but I've only put like $300k into it, and the rest is growth. 

pecunia

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Re: Stop worrying about the 4% rule
« Reply #1941 on: February 12, 2021, 01:56:48 PM »
It won't put any money back into play.  For every person selling there is another person on the other side of the transaction buying and putting money into it.  The net transaction of buy/sell will be $0, but a lot of paper value will be destroyed.

The total value of all the stocks isn't real money either.  I know I'm not responsible for putting in every last dollar making up my portfolio, much of it is just growth over time.    So my $600k portfolio is valued at $600k, but I've only put like $300k into it, and the rest is growth.

Doesn't that growth come from somebody else being willing to pay the higher price of the stock?  Isn't the money that they use, "real money?"  I guess some of it is on credit where the argument could be made that its not "real money."  If you sold that stock would you be getting "real money?" 

I just listened to a discussion where people were saying that the assets of today's companies would no where fetch the stock value if the companies were liquidated so I guess you could say they are not composed of "real money."  In that case the value is gone.

I'm just trying to make the connection about all this big money supply increase and by what mechanism it could leave the banks / stock market and begin to create inflation.  If it can't, that's cool.

nereo

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Re: Stop worrying about the 4% rule
« Reply #1942 on: February 12, 2021, 02:17:00 PM »
Very, very few companies trade at prices where the total value of shares is at or more less than the assets of the company. To do so is called trading “below book” and typically indicated a company deep in trouble (ie investors won’t touch it unless it’s cheap). Most companies would need several years of profits plus assets to equal their share price

Ultimately the price of a stock is whatever the most recent investors are willing to pay (and sell for).

The total value of the SP500 right now is north of $35T. Our total GDP is about $21T (and includes a LOT more than those ~500 companies. Plus the entire public sector).

Edit: fixed “more” to “less”
« Last Edit: February 12, 2021, 03:27:07 PM by nereo »

dandarc

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Re: Stop worrying about the 4% rule
« Reply #1943 on: February 12, 2021, 02:28:27 PM »
Rational value of company could be thought of as "liquidation value plus present value of future earnings".  And as nereo points out, "present value of future earnings" is a lot larger than "liquidation value" for businesses with good prospects.