Nords - great web site! The Real Life Retire Investment Returns was most interesting to me. The only points which I wasn't clear on in the various portfolios... 1) were all portfolios rebalanced once a yr or just those noted? 2) Was the 4% harvested equally amongst the individual portfolio mixes or was there some sort of order (I.e. Interest, dividends, cash, bonds, last stock sales)?Thanks!
I don't think that those differences are significant. If they were relevant then Greaney would've taken the time to highlight them.
Those questions might not be relevant for any retirees, especially if the advice isn't suited for the retiree. For example, some are firm believers in rebalancing every 1 January while others just do it when their asset allocation gets too far out of whack (I'm in the latter camp). Some research says annual rebalancing is better, other research says every 2-3 years. You have to pick the system with which you're most likely to stick.
You'll harvest your 4% with cash first, then the annual cap gains & dividends & interest, and then you'll sell off the assets that are farthest out of whack from your asset allocation. So it doesn't matter what the study did-- your real-life practice is pretty close to the study, so minor differences won't be significant.As a 4 yrs from FIRE guy, here is my takeaway so far for someone who is planning for 40+ yrs RE...Absolutely. It's the investor behavioral psychology aspect of investing, where you have to be able to sleep comfortably at night.
- Understand your risk temperment and don't kid yourself if your a 60/40 guy and going with a 100% stock portfolio- After taking into account any other income sources, 3 - 3.5% may be a safer withdrawal rateUm, no. By that logic 0.0% would be even safer.
Consider the assumptions in the 4% SWR studies:
no annuitized income (not even Social Security),
1% account expense ratios,
constant withdrawals (adjusted for inflation),
no extra cash beyond one year of expenses (just stocks/bonds).
Those are all simplifying assumptions for the benefit of the computer programming. Nobody lives like that!
Imagine that some of your income was annuitized (even if it was "just" Social Security). If you encounter one of the failure scenarios where you blithely spend all of your assets at a 4% SWR, then you'll still have your annuity income. In other words, your failure rate is actually zero because you have longevity insurance. Yet the SWR studies never include this reality.
You're going to pay much less in fund expenses. If you get your expense ratios down to 0.5% instead of 1% then the real SWR becomes 4.5%. If you're thinking that you'll maintain a 3%-3.5% SWR then just cut your expense ratios and add the savings. Now you're at 3.5%-4%.
But wait, there's more: variable spending. You'll spend more when the markets are up ("wealth effect") and cut back your spending during recessions ("loss aversion"). Some years you'll have a big fantasy vacation or a roof replacement, other years you'll hang out at home most of the year. During the first five years of ER you'll be particularly sensitive to a recession and you'll probably cut your spending way back when it happens. Even just using Bob Clyatt's variable spending scheme of 4%/95% in "Work Less, Live More" raises the 4% SWR to about 4.5%. So variable spending is probably worth another 0.5% added to your more conservative version of the SWR.
Now if you keep two years of expenses in a money market or CD (instead of just one) then your asset allocation is more like 60/36/4. Yet starting the year with two years' expenses in cash means that you can outlast almost any recession by just spending down your cash (which you're trying to conserve anyway) and letting your stocks recover.
Just by addressing some of those simplifying assumptions, we've taken your 3%-3.5% SWR right back up over 4%.
If you retire on a 4% SWR then you'll have a success ratio of 80%-100%, depending on your personal willingness to work longer to boost it past 80%. (Anything over 80% is meaningless precision, but it'll help you sleep better at night.) Your annuitized income (for a bare-bones budget) will guarantee that you'll avoid the failure rates of 0%-20%, so already your actual success ratio is at 100%. In other words then you'll have more money than you need.
If you cut your spending to 3%-3.5% then you won't be any happier, although you might sleep better at night. But eventually you'll realize that you have more money than you have health & mobility to enjoy it. Your great-grandchildren will be happy with your legacy, but you'll have missed a lot of life-enhancing opportunities because you were too conservative with your spending.
Here's another way to look at it: reducing your SWR from 4% to 3-3.5% is the same effect as cutting your current spending by 12%-25%. Try that test now. Cut your spending by that much for the next couple of years, while you're still working, and see how you feel about it.
I think you're good with a 4% SWR and behavioral psychology. Don't over-think it.- Using common sense and making sure you have flexibility to lower your annual expenses when needed (market tanks)Yep, as mentioned in my previous paragraphs.
- 1 - 2 yr cash/CD/short term bond acct not a bad way to cushion a heavier stock portfolio mix- Be sensitive to stock valuations when you launch and adjust your SWR accordingly if neededWhatever the heck "valuation" means. Trailing earnings? Projected earnings? EBIDTA? Free cash flow? One of the Internet's most notorious personal-finance trolls claims that he's been in cash since 1996 because valuations are still "too high". Even 2009 wasn't good enough for him because future earnings were projected to be zero, and when a zero is in the denominator of P/E then valuations will always be too high.
A more concrete approach would be to start your ER at your personal conservative asset allocation, say at 60%/40% equities/bonds. (I would not be more conservative than that.) If a recession occurs during the first few years of ER then you'll cut your spending. You'll spend your cash. You'll spend some of your bonds. Just by your spending, even though it's reduced, your AA will begin to drift up to 65%/35% or even 70/30. At the end of the recession you'll resume your 4% SWR, your portfolio will have survived a recession and assumed a more aggressive AA, and it'll recover its value more quickly because you held on to your equities. You'll have also endured the dreaded "sequence of returns" risk which is critical to portfolio survival during the first 5-10 years of ER. Once you've survived that then your portfolio is nearly bulletproof.- Maybe give consideration to a more aggressive SWR in yrs prior to age say 75 with a reduced SWR there after (This is basically my own research/observations as the theory is while you are younger/healthier, you will want to do more that may cost more $$ and as you get in your golden yrs you may be a little less active. Yes, exceptions everywhere, but I see this/hear this from people in my life)One of the earliest mentions of this was a 1990s book by Michael Stein "The Prosperous Retirement." The anecdotal evidence is strong, but the research is mixed. Are people spending less because they have to (running out of assets), or because they can't spend it? (Poor health, limited mobility.) What about medical expenses or end-of-life care? In any case, I'm going to agree with the anecdotal data because it closely matches my personal experience.
I think your instincts are correct. You could start your ER at a 4% SWR, and as you get into your 70s you might find out that your new 30-year SWR is really 5% or even 6%.
I'm 54 years old, so it'll be interesting to see whether the actuarial analysis reaches a firm conclusion over the next decade. However I'll still spend a little more now out of concern that I won't be able to spend it later.
this is why I'm not a fan of FIRE = 25x annual expenses. As
Keep in mind that the 25x rule and 4% rule already account for 95 percent of scenarios, so you would only have a one in 20 chance of needing to ever reduce your expenses.
To extend your hotel analogy, the correct plan would be to take the average expectation, which in this case is a 6% withdrawal rate (has a 50/50 chance of success over 30 years) and then add a 10% safety buffer (another 0.6%) and still plan on a withdrawal rate over 5 percent. Your plan of going with 40x expenses is like planning for every party that makes a reservation to need the entire hotel, just to be safe, even though that has never happened before in all of history.
Yes, it is safer. No, it's not a very efficient way to make plans.
Jumping in here, this is why I'm not a fan of FIRE = 25x annual expenses. As brooklynguy stated a few posts back, none of us really know what the future will hold for the market. Instead of skirting by on 25x expenses, I think it's more prudent to go for 30 or 40x expenses. Because if your adaptation alternative is going back to work, you aren't FIRE anymore.
That's totally cool if that's your comfort level, but realize the trade off. You're talking many extra years of guaranteed work, probably 5-10 years to get to 40x, versus a possible but unlikely part time work here and there if your 25x takes a big hit initially (and you choose to do that instead of implement other safety margins). So if you go back to work "you aren't FIRE anymore", that still sounds better to a lot of us than never being FIRE to begin with until many years after 25x.
Sol touched on it above, but that 4% is already a pretty worse case scenario. To add some numbers, the average portfolio balance at the end of 30 years using the 4% rule is over twice of what you started with (in real terms, not nominal).
To second (third?) Sol's and Eric's point, take a look at this excellent recent post by Nords (http://forum.mrmoneymustache.com/post-fire/what-has-workednot-worked-for-you-guys-who-have-been-fire-for-10-yrs/msg700740/#msg700740) highlighting the ridiculous amount of safety built into the 4% rule (in that, besides having an excessively high historical success rate to begin with, it deliberately ignores various external levels of safety margin which, in reality, will inure to the benefit of most retirees) -- and he's one of our more conservative early retirement planners!
If you need to maximize your 25x based on 4%, in the case of any growth oriented portfolio over 60% stock, there needs to be a draw down strategy that plays the law of averages the best.
If you believe in a 4% SWR, then you're totally overthinking all of this.
The research that created the 4% SWR assumed the same withdrawal strategy that forummm is describing: simply withdraw your 4%, and rebalance to your original AA (or withdraw your 4% in a manner that maintains the original AA; that's a mathematically identical way of saying the same thing).
A "down market" doesn't require any different approach. The existence of "down markets" and the simple withdrawal method are baked into the 4% SWR number, and any attempts at fancy withdrawal gymnastics are more likely to hurt your portfolio survival than help.
To second (third?) Sol's and Eric's point, take a look at this excellent recent post by Nords (http://forum.mrmoneymustache.com/post-fire/what-has-workednot-worked-for-you-guys-who-have-been-fire-for-10-yrs/msg700740/#msg700740) highlighting the ridiculous amount of safety built into the 4% rule (in that, besides having an excessively high historical success rate to begin with, it deliberately ignores various external levels of safety margin which, in reality, will inure to the benefit of most retirees) -- and he's one of our more conservative early retirement planners!
I too agree with the sentiment provide your willing to be flexible as noted above and in Nords post. If not then a lower SWR may be more prudent given the current valuations, lower interest rates, slow growth prospects.
I complete agree about not worrying about the 4% rule if we were talking about people retiring in their 60s. But according to this calculator http://gosset.wharton.upenn.edu/mortality/perl/CalcForm.html (http://gosset.wharton.upenn.edu/mortality/perl/CalcForm.html), I as a 55 year old, have a 25% change of living another 34 years (same age as my mom) and if I was a woman a 50% chance. So anybody planning on retiring before 50 should be looking at 40 year retirement (especially a couple) . At 40 years a 4% WR only gives 81% success rate according to CFiresim. Plus life expectancy is increasing at >1.2 year/decade in the US so a 25 year old today is likely to have a life expectancy at age 50 that is 3 years longer than a 50 year old today. In order to get to a 95% success rate you need to dial the withdrawal rate down to 3.5%.
For somebody looking to retire in their early 40s or before, who has already slashed their lifestyle expenditures to Mustachian levels, I don't think you are being too conservative to move the SWR rate to 3.0%. Social security for a 40 year old is 22 years away and conceivably that age maybe raised by a couple of year.
Based on the trinity study and cfiresim you should be very safe at 4%. Saying that it only has a 52% success rate shows something is wrong. Also at some point having 50 years or 250 years should have a minimal change to the SWR. I will stick to cfiresim until a better model comes out.
Some food for thought - in MMM's post http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/ (http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/) he shows the 4.04% SAFEMAX value in Figure 2.1. Actually, that figure is derived from William Bengen's work in 1994 (the author, Wade Pfau, extended the results to 1981 using data up to 2010), not the Trinity study. The Trinity study occurred four years after Bengen's seminal work. The only difference between their work is the bond indices they chose. With Bengen, he showed 100% success at 4.15% WR; the Trinity study showed a 95% success rate at 4% WR (not 100%!!!).
If you go to the webpage MMM got that figure from, it redirects to http://retirementresearcher.com/the-trinity-study-and-portfolio-success-rates/ (http://retirementresearcher.com/the-trinity-study-and-portfolio-success-rates/). Looking at Table 2.1, you can see that at 4% withdrawal rates you have 100% success at 30 years, but only 96% at 35 years and 85% at 40 years.
I tried a really simple experiment in cFIREsim and obtained comparable results. I started with 2015-2045 for a 30 year retirement, with $100 portfolio, $4 spending (4%) with inflation adjust , 50/50 stocks/bonds, no fees, and everything else set to zero. That matches the study parameters. I then ran simulations for 30, 35, 40, ...., 70, and 75 year retirements. I stopped at 75 years for two reasons: most people won't be retired that long and also the data starts to be statistically insignificant because at 75 years only 70 cycles are ran, 80 years gives 65 cycles, etc.
Well, the results were so bad for 50/50 stock/bond allocation I also ran 70/30. The results are shown in the table below. As you can see the success rate keeps dropping and it is not clear to me that there is an asymptotic limit. I'm not sure where the assumption that if the money lasts 30 years it will last forever came from but I consider it suspect. If someone can post some hard calculations or a research paper that shows this I would appreciate it.
Years Retired 50/50 Success 70/30 Success 30 90.4% 93.9% 35 82.7% 90.9% 40 67.6% 84.8% 45 65.0% 80.0% 50 63.2% 81.1% 55 60.0% 82.2% 60 60.0% 82.4% 65 55.0% 80.0% 70 53.3% 78.7% 75 50.0% 77.1%
Also, I ran the MMM values in cFIREsim that I used in the spreadsheet. 90/10 allocation, 4% spend, 0.1% fees, inflation adjust, 46 year retirement. I got an 83.84% success rate with cFIREsim. Higher than the simple spreadsheet but still not 100%.
So, the safety factors MMM mentions in article listed above are not safety factors; they are an absolute requirement.
Rate/yr Principal
0% $73,900
1% $83,500
2% $98,100
3% $116,000
4% $138,100
5% $165,600
10% $449,800
Here is the live thread: I'm Bill Bengen, and I first proposed the 4% safe withdrawal rate in 1994. Ask me anything! (https://www.reddit.com/r/financialindependence/comments/6vazih/im_bill_bengen_and_i_first_proposed_the_4_safe/)
Highly recommend reading the thread.
His opening remarks and a few intersting points are reposted below. I hope this is acceptable.
Reposting without comment, as it is of general interest to forum participants:
/financialindependence
I'm Bill Bengen, and I first proposed the 4% safe withdrawal rate in 1994. Ask me anything!
Thanks to ER10years_throwaway for this invite. I was a financial advisor for 25 years, now retired, but still expanding my research into safe withdrawals from retirement portfolios. I am eager to share my thoughts with you, so please bring on the questions. Caveat: I can't answer questions specific to a particular person's financial situation, as I am no longer a practicing financial planner or investment advisor. Hope to hear from you. I'll start answering questions at noon eastern on Tuesday, 8/21.
Q: Since these questions get asked all the time here: Is the 4% rule still relevant in today's economy? What safe withdrawal rate would you recommend for someone planning for longer than 30 years of retirement?
A: billbengen • Thanks for your question. Before I answer it specifically, why don't we dispense with some preliminaries, so we are all on the same page?
The "4% rule" is actually the "4.5% rule"- I modified it some years ago on the basis of new research. The 4.5% is the percentage you could "safely" withdraw from a tax-advantaged portfolio (like an IRA, Roth IRA, or 401(k)) the first year of retirement, with the expectation you would live for 30 years in retirement. After the first year, you "throw away" the 4.5% rule and just increase the dollar amount of your withdrawals each year by the prior year's inflation rate. Example: $100,000 in an IRA at retirement. First year withdrawal $4,500. Inflation first year is 10%, so second-year withdrawal would be $4,950. Now, on to your specific question. I find that the state of the "economy" had little bearing on safe withdrawal rates. Two things count: if you encounter a major bear market early in retirement, and/or if you experience high inflation during retirement. Both factors drive the safe withdrawal rate down. My research is based on data about investments and inflation going back to 1926. I test the withdrawal rates for retirement dates beginning on the first day of each quarter, beginning with January 1, 1926. The average safe withdrawal rate for all those 200+ retirees is, believe it or not, 7%! However, if you experience a major bear market early in retirement, as in 1937 or 2000, that drops to 5.25%. Add in heavy inflation, as occurred in the 1970's, and it takes you down to 4.5%. So far, I have not seen any indication that the 4.5% rule will be violated. Both the 2000 and 2007 retirees, who experienced big bear markets early in retirement, appear to be doing OK with 4.5%. However, if we were to encounter a decade or more of high inflation, that might change things. In my opinion, inflation is the retiree's worst enemy. As your "time horizon" increases beyond 30 years, as you might expect, the safe withdrawal rate decreases. For example for 35 years, I calculated 4.3%; for 40 years, 4.2%; and for 45 years, 4.1%. I have a chart listing all these in a book I wrote in 2006, but I know Reddit frowns on self-promotion, so that is the last I will have to say about that. If you plan to live forever, 4% should do it.
Q: Because your assumption is not correct. The S&P500 is not 'offering' ANY future return. You are likely referring to past returns. Expected future returns are at issue here.
A: billbengen • Expected returns for the S&P 500 over the next decade are, according to a number of sources, very low, possibly zero or less. I recall that between 1966 and 1982, the S&P 500 did return zero. Michael Kitces, a brilliant financial advisor, created a chart matching stock market valuations with subsequent 30-year safe withdrawal rates. The negative correlation is virtually perfect; when stock valuations are high, the safe withdrawal rate was low, and vice versa. His advice, with which I concur, is that when stock market valuations are at very high levels, as they are today, it is best to stick with the appropriate safe withdrawal rate, and not try for something higher.
Q: Obviously market conditions have changed a lot since 1994. Given that we've been in a bull bond market for so long, and given we're currently looking at corporate bond yields of maybe 4%, does it still make sense to have a bond component in your portfolio?
Also: did you ever foresee the development of a financial independence / early retirement movement like we have today?
A: billbengen • Yes, I still believe bonds should play a significant role in most retirement portfolios. During a stock bear market, interest rates often decline, which causes an increase in the price of bonds. This can offset some of the losses from the stocks. Overall, I believe a 50% equities/50% bonds mixture at the start of retirement is close to ideal. Years ago, I talked to Harry Markowitz, the founder of Modern Portfolio Theory, about this. He used that 50/50 ratio in his personal portfolio, which speaks volumes! Some recent research advocates increasing the fraction of stocks in the portfolio as the retiree ages. I haven't had an opportunity to verify this, but I plan to look into it in the next year. No shortage of intriguing ideas in this field! I think the financial independence movement is great, in part because it means people must educate themselves more in this field so they make good decisions. I have "retired' three times, and am now in my fourth career, as a writer/researcher. But many friends and acquaintances of my generation are still working, even into their late 70's, so I wonder how "early retirement" is succeeding in this environment. Like everything else, if you plan and execute early and well, you will most likely achieve what you want.
Q: Related to the question on low bond returns, are you bothered at all by the number of people in the FI/RE community who are retiring with 100% stock portfolios?
A: billbengen • It doesn't "bother" me, as when the big stock market decline comes (and it will, eventually), I will not be the one with big losses! All kidding aside, my research indicates that using a 100% stock allocation sharply reduces your SWR. These folks might have to make some major adjustments in lifestyle during a major bear market. But if they are prepared to do so, they might get by.
A few interesting perspectives worth discussing.
Rule revised in Bengen (2006) to 4.5% if tax-free and 4.1% for taxable, underlying assumption, asset allocation of roughly 50/50 equities and debt, with at least 50-55% low cost index funds. The rest in quality bonds and cash (recommends 10% cash).
Q: Inflation assumptions sensitivity
A: billbengen • It all depends on your view of future inflation. I like to remind people that the 4.5% rule is not a law of nature, like Newton's laws of motion, which will probably never change. Markets can change, and it is possible that in the future the 4.5% rule, which has held up for 50 years, might be violated. But I haven't seen those circumstances yet.
Q: For a traditional retirement, 4% safe withdrawal rate is a pretty standard assumption for a 30 year period. What is your perspective for using the 4% SWR for a longer period of time, say 60 years? A lot of people pursuing financial independence aim for lower than 4%- it is pretty common to hear SWR's around 3.25%- 3.75% to be more conservative for a longer retirement horizon.
A: billbengen • As your "time horizon" lengthens, my research indicates that you should reduce your withdrawal rate concomitantly. For a 60-year time horizon, the indicated safe withdrawal rate is reduced from 4.5% to 4.0%.
billbengen • It is an interesting fact that in the past, 96% of retirees, at the end of 30 years, have a portfolio still worth at least as much as they started with, in nominal terms. Of course, when inflation is factored in, the real value of those investments has diminished considerably. It should also be noted that the SWR assumes that at the end of 30 years, the retiree will run out of money with his or her dying breath. If you wish to specify a minimum balance at the end of 30 years, that will result in lower initial withdrawal rates.
The 4% SWR also assumes you live in the USA and the USA continues to be similar to what it was in the past.
Other places have much lower SWRs - Australia is about 3.6%, Japan is (from memory) 0.6%.
The 4% SWR also assumes you live in the USA and the USA continues to be similar to what it was in the past.
Other places have much lower SWRs - Australia is about 3.6%, Japan is (from memory) 0.6%.
No, it doesn't assume it will be similar to the past--it assumes it will be no worse than the past. And those other countries worst case scenarios are worse than ours have been, yes, but I'm curious what their average scenarios were. That would be a lot more interesting to me, but I'm not aware of that data existing.
Well, the results were so bad for 50/50 stock/bond allocation I also ran 70/30. The results are shown in the table below. As you can see the success rate keeps dropping and it is not clear to me that there is an asymptotic limit. I'm not sure where the assumption that if the money lasts 30 years it will last forever came from but I consider it suspect. If someone can post some hard calculations or a research paper that shows this I would appreciate it.
Years Retired 50/50 Success 70/30 Success 30 90.4% 93.9% 35 82.7% 90.9% 40 67.6% 84.8% 45 65.0% 80.0% 50 63.2% 81.1% 55 60.0% 82.2% 60 60.0% 82.4% 65 55.0% 80.0% 70 53.3% 78.7% 75 50.0% 77.1%
Also, I ran the MMM values in cFIREsim that I used in the spreadsheet. 90/10 allocation, 4% spend, 0.1% fees, inflation adjust, 46 year retirement. I got an 83.84% success rate with cFIREsim. Higher than the simple spreadsheet but still not 100%.
So, the safety factors MMM mentions in article listed above are not safety factors; they are an absolute requirement.
But all these things happened to other economies as well. It is interesting that when those things happened in other countries (for example when run away inflation hit Germany), they DID cause their SWRs to go lower, and the study that talks about why each economy had its worst outcomes (which then feed into the lower SWRs) really shows (to me) that ANY country could have had some of these things happen (perhaps not the things that caused the very low SWRs of Germany and Japan).The 4% SWR also assumes you live in the USA and the USA continues to be similar to what it was in the past.
Other places have much lower SWRs - Australia is about 3.6%, Japan is (from memory) 0.6%.
No, it doesn't assume it will be similar to the past--it assumes it will be no worse than the past. And those other countries worst case scenarios are worse than ours have been, yes, but I'm curious what their average scenarios were. That would be a lot more interesting to me, but I'm not aware of that data existing.
Even better
It assumes that it won't be worse than the WORST period in the history of the US
As a refresher, that period included an Oil Embargo, the closing of the gold window, discredited economic policies (Laffer Curve anyone?), price fixing, runaway inflation, gasoline shortages, etc... just about the perfect storm of horrible economic conditions
And yet the 4% rule worked, by definition
Something I started thinking about yesterday and haven't seen anywhere (although "anywhere" means here or reddit) is legitimate arguments against 4% as a SWR.
For almost all theories and beliefs there are valid and legitimate counter beliefs, studies, science. And I'm just not seeing it regarding this topic. Is this because I hang out in places where this is essentially the mantra? or is it because nothing has come up to prove otherwise? Or is it because this is relatively simple so the science/maths behind what is going on is not up for debate?
I think this table illustrates the limitation of historical calculators. As you may notice 45 years appears the worse case such that a 60 year retirement is better than a 45. Both Firecalc and cFIREsim give similar result although the AA matters.
I think this table illustrates the limitation of historical calculators. As you may notice 45 years appears the worse case such that a 60 year retirement is better than a 45. Both Firecalc and cFIREsim give similar result although the AA matters.
I just found another nice thread started by sol discussing firecalc and cFIREsim.
firecalc and cFIREsim both lie? (http://forum.mrmoneymustache.com/ask-a-mustachian/firecalc-and-cfiresim-both-lie/)
I think it is pertinent to this thread since many people are using those tools to pick a SWR, probably starting with 4%.
Something I started thinking about yesterday and haven't seen anywhere (although "anywhere" means here or reddit) is legitimate arguments against 4% as a SWR.
For almost all theories and beliefs there are valid and legitimate counter beliefs, studies, science. And I'm just not seeing it regarding this topic. Is this because I hang out in places where this is essentially the mantra? or is it because nothing has come up to prove otherwise? Or is it because this is relatively simple so the science/maths behind what is going on is not up for debate?
Some of those arguments are already popping up in this thread. The most common I see is "the SWR is XX% for country YYY". But if you just have a globally diversified portfolio, then it doesn't matter so much if Japan's equity returns sucked for 20+ years, because your eggs aren't all in one country's basket.
I guess I should have emphasize legitimate arguments against it?
So many I see are "4% won't work because of downturns in the economy!" or "4% is not feasible because we can't predict the future!"
I'm curious is the is reasonable, empirically researched data/studies that make a sincere or valid attempt at invalidating a 4% SWR. In really dumb terms: the Sith to the Trinity Study's Jedi?
I'm curious is the is reasonable, empirically researched data/studies that make a sincere or valid attempt at invalidating a 4% SWR. In really dumb terms: the Sith to the Trinity Study's Jedi?
By none other than Wade Pfau, the guy who made the 4% rule popular.
No, it doesn't assume it will be similar to the past--it assumes it will be no worse than the past. And those other countries worst case scenarios are worse than ours have been, yes, but I'm curious what their average scenarios were. That would be a lot more interesting to me, but I'm not aware of that data existing.
I'm happy to walk back the "made it popular" comment. But there's no denying he's very influential on the topic.
Pfau is probably the most widely quoted guy regarding SWR research, mostly because he continuously updates the original research with new data. His opinion is definitely more pessimistic lately. Here's a catalog of his research. https://ideas.repec.org/e/ppf6.html
I make no judgments on his methodology. But he's put out some fine research worth noting and is willing to change his views with new information, and with a PhD from Princeton he's no internet hack.
No, it doesn't assume it will be similar to the past--it assumes it will be no worse than the past. And those other countries worst case scenarios are worse than ours have been, yes, but I'm curious what their average scenarios were. That would be a lot more interesting to me, but I'm not aware of that data existing.
Pfau's study from 2010 (http://retirementresearcher.com/an-international-perspective-on-safe-withdrawal-rates-from-retirement-savings-the-demise-of-the-4-percent-rule/) on SWR's in international markets has some limited data on "average" scenarios. In particular, Table 3 gives a bunch of data beyond the safemax WR's in various foreign markets, including the failure rates for a 5% WR (which was closer to being an "averagely successful" WR in some of the countries) and it also gives the WR that gave a 90% success rate in each of the countries (at least I think that's what the "10th percentile" column is showing).
I'm not sure what part of what I said translated to "who is this guy?" :)
I'm not sure what part of what I said translated to "who is this guy?" :)
Ha. Nothing at all! You're clearly well-versed in his background. The longer explanation was more for the larger group who may not necessarily recognize the name.
I'm curious is the is reasonable, empirically researched data/studies that make a sincere or valid attempt at invalidating a 4% SWR. In really dumb terms: the Sith to the Trinity Study's Jedi?
Sure. By none other than Wade Pfau, the guy who made the 4% rule popular.
http://tinyurl.com/nrywjny
Quoteignoring the fact that it's arguably impossible to be "safer" than, say, 85-90%"Let's be clear that isn't a fact, it's someone opinion (probably William Bernstein, a man who I respect). Yes you can argue there is 10% or so chance you die before you hit 30 years,and 10% chance the economy changes and that works out to be 80 odd percent. But minimizing your chances of running out of money for that 80% of the time things go as expected isn't being overly conservative.
I agree with this and have noted before the irony in how Bernstein's 80% concept of false precision has itself become an example of false precision.
If this thread's purpose is to serve as a compilation of arguments about the 4% Rule and SWRs, we might as well add a link to the full thread where I made that observation, which had some good discussion on these matters in general:
http://forum.mrmoneymustache.com/welcome-to-the-forum/cfiresim-success-rate/
EDIT: Oops, just realized this is not the "Stop worrying about the 4% Rule thread." But, for posterity's sake, clifp, maybe you want to respond to walt's identical post in that thread with the same response, and I'll do likewise to yours? :)
I'm curious is the is reasonable, empirically researched data/studies that make a sincere or valid attempt at invalidating a 4% SWR. In really dumb terms: the Sith to the Trinity Study's Jedi?
Sure. By none other than Wade Pfau, the guy who made the 4% rule popular.
http://tinyurl.com/nrywjny
Pfau's recent work doubting the 4% rule have been based on some way or another handicapping expected returns. I've seen two basic methods:
1) Sneak in a 1% management cost. Pretty damn obvious. I and others called him on this one since most of us are with Vanguard and low cost. So.... the next method:
2) Take historical returns. Cut them down 25-50%, then run the Monte Carlo. More subtle. Justified on current low bond yield. This is basically assuming we have times which will be considerably worse than the Great Depression, or 66-82 stagflation for investors. It's fine to play "What if?" - but this isn't really predictive.
I'm curious is the is reasonable, empirically researched data/studies that make a sincere or valid attempt at invalidating a 4% SWR. In really dumb terms: the Sith to the Trinity Study's Jedi?
Sure. By none other than Wade Pfau, the guy who made the 4% rule popular.
http://tinyurl.com/nrywjny
Pfau's recent work doubting the 4% rule have been based on some way or another handicapping expected returns. I've seen two basic methods:
1) Sneak in a 1% management cost. Pretty damn obvious. I and others called him on this one since most of us are with Vanguard and low cost. So.... the next method:
2) Take historical returns. Cut them down 25-50%, then run the Monte Carlo. More subtle. Justified on current low bond yield. This is basically assuming we have times which will be considerably worse than the Great Depression, or 66-82 stagflation for investors. It's fine to play "What if?" - but this isn't really predictive.
I too have found these methods by Pfau to be suspect. You could argue that he's aiming these studies at financial advisors, so the 1% is actually going to the advisor's pockets. But the Monte Carlo analysis has never been reflective of what has actually happened before. Sequence of returns get all crazy with that. In the real world, things don't behave that way.
Pfau's recent work doubting the 4% rule have been based on some way or another handicapping expected returns. I've seen two basic methods:
1) Sneak in a 1% management cost. Pretty damn obvious. I and others called him on this one since most of us are with Vanguard and low cost. So.... the next method:
2) Take historical returns. Cut them down 25-50%, then run the Monte Carlo. More subtle. Justified on current low bond yield. This is basically assuming we have times which will be considerably worse than the Great Depression, or 66-82 stagflation for investors. It's fine to play "What if?" - but this isn't really predictive.
Pfau's recent work doubting the 4% rule have been based on some way or another handicapping expected returns. I've seen two basic methods:
1) Sneak in a 1% management cost. Pretty damn obvious. I and others called him on this one since most of us are with Vanguard and low cost. So.... the next method:
2) Take historical returns. Cut them down 25-50%, then run the Monte Carlo. More subtle. Justified on current low bond yield. This is basically assuming we have times which will be considerably worse than the Great Depression, or 66-82 stagflation for investors. It's fine to play "What if?" - but this isn't really predictive.
For some people the 1% fee is going to be valid (or low). We just set up my wife's 401k for her part time job a few months ago and I just saw a 1% fee which appears to be taken out by the 401k administrator. So, that is in addition to the ER's of the funds we have chosen. The administrator just changed so hopefully those admin fees will be reduced and/or eliminated. There's not much we can do about this fee; luckily my 401k has no admin fees and very low ER funds.
I too have found these methods by Pfau to be suspect. You could argue that he's aiming these studies at financial advisors, so the 1% is actually going to the advisor's pockets.
I too have found these methods by Pfau to be suspect. You could argue that he's aiming these studies at financial advisors, so the 1% is actually going to the advisor's pockets.
A more charitable view is that Pfau (and financial planners in general), like the 4% rule itself, are simply overcautious by nature -- they err on the side of caution because the consequences of being proven wrong are worse if their predictions are too aggressive than if they are too conservative.
I too have found these methods by Pfau to be suspect. You could argue that he's aiming these studies at financial advisors, so the 1% is actually going to the advisor's pockets.
A more charitable view is that Pfau (and financial planners in general), like the 4% rule itself, are simply overcautious by nature -- they err on the side of caution because the consequences of being proven wrong are worse if their predictions are too aggressive than if they are too conservative.
I agree. Most people absolutely, positively don't want to run out of money but don't mind having more left over to pass on to heirs, charities, etc. Hence, the skewing towards conservatism.
Funny, I actually I thought I was being charitable. Providing a reasonable justification why 1% fees could be baked into his analysis, when no DIY investor should have anything close to that. I assume that Pfau's target audience is financial planners, and they do tend to charge 1%--rightly or wrongly. For those advisor's clients, the SWR would be appropriately substantially lowered. For people like most of us here, we can happily increase our SWR by 25% since we aren't burning that money on fees.Wade and I had a Twitter exchange on that a couple weeks ago:
I agree there's a skew towards conservatism in general. But a more informed approach would be to say the SWR is X% minus whatever fees your portfolio management has. That way if the advisor is actually charging 1% plus putting them in funds also charging 1%, the correct amount to let the clients live off of is only 2%. In this example, Pfau is actually not being conservative enough.
The defense against failure is not reducing the SWR to 0.0%, and it's not determining the one true SWR out to six significant figures. The answer is not abusing cFIRESim or FIRECalc until their success rate is 100.0000%. The defense against failure is annuitizing a part of your portfolio so that you have a bare-bones income for longevity insurance or a zombie apocalypse. Maybe that annuity is Social Security, maybe it's an SPIA, maybe it's a TSP inflation-adjusted annuity at age 70, maybe it's a military pension, or "all of the above". But annuities are how you handle the questions about failure. Hope you find a good insurance company to sell it to you!
Once you meet the boundary condition "assets = 25x annual expenses" then you're ready to figure out annuities and other asset-allocation questions. You're ready to assess variable-spending schemes or throttling back to part-time work or side-hustle income. You should not immediately revert to "assets = 33x annual expenses" or kick it up a notch to "assets = 40x annual expenses". Unless, of course, you're willing to work that long for that amount of assets.
So, the safety factors MMM mentions in article listed above are not safety factors; they are an absolute requirement.
Wade and I had a Twitter exchange on that a couple weeks ago:
@TheMilitaryGuid Jun 9
The 4% rule is "good enough", but study of variable spending: http://buff.ly/1Ggvc67 H/T @WadePfau Investors can beat an expense ratio of 0.5%!
@WadePfau
@TheMilitaryGuid I know, I know. But I'm trying to be representative for the general public, and that fee is still well below average.
I've used Fidelity's Retirement Income Planner to help set up my plan and it is variable SWR. Some years I have >>4% SWR and some years I have <4% SWR due to timing of when pension, SS start. This plan lets me retire sooner than having <=4% SWR at all times.I think that someday the research (and computer simulations) will catch up with reality to verify that the 4% SWR with a variable withdrawal plan has been the right answer all along.
PPS - I am building into my plan a 75% reduction in SS benefits starting in 2033 as mentioned in Status Of The Social Security And Medicare Programs - A SUMMARY OF THE 2014 ANNUAL REPORTS (http://www.ssa.gov/oact/trsum/)If the system performs better than the GAAP estimates, or if the payroll contribution cap is removed, then everyone will breathe a lot easier.
PS - It seems that we arrived at Pearl Harbor around the same time, I got there around the end of '81. I was on USS NYC (SSN-696) till 12/83. We're fellow nukes! :-) I really enjoyed the scuba diving when I was out there; unfortunately, most of my diving was on the sub.Wow-- not only that but we're shipmates. I was NYC's Weps from Dec '89 to Jul '92. (I spent '82 through '86 in the Atlantic, and '87-'89 at Monterey.) I got the Weps job because the incumbent had resigned his billet for psychiatric reasons, and the crew (let alone the CO) was a little skittish about me coming onboard as his replacement. NYC's Engineering dept graciously allowed me to stand my proficiency watches (and give the young O-3s their share of OOD time) but of course I was still occasionally regarded as a brain-damaged nuke stepchild-- just as if the nukes were treated if they'd wandered into sonar or the torpedo room. It was definitely not an easy tour but in retrospect I did what I needed to do, helped a lot of people out, and got what I needed to get.
The defense against failure is not reducing the SWR to 0.0%, and it's not determining the one true SWR out to six significant figures. The answer is not abusing cFIRESim or FIRECalc until their success rate is 100.0000%. The defense against failure is annuitizing a part of your portfolio so that you have a bare-bones income for longevity insurance or a zombie apocalypse. Maybe that annuity is Social Security, maybe it's an SPIA, maybe it's a TSP inflation-adjusted annuity at age 70, maybe it's a military pension, or "all of the above". But annuities are how you handle the questions about failure. Hope you find a good insurance company to sell it to you!
The defense against failure is not reducing the SWR to 0.0%, and it's not determining the one true SWR out to six significant figures. The answer is not abusing cFIRESim or FIRECalc until their success rate is 100.0000%. The defense against failure is annuitizing a part of your portfolio so that you have a bare-bones income for longevity insurance or a zombie apocalypse. Maybe that annuity is Social Security, maybe it's an SPIA, maybe it's a TSP inflation-adjusted annuity at age 70, maybe it's a military pension, or "all of the above". But annuities are how you handle the questions about failure. Hope you find a good insurance company to sell it to you!
This is one reason I would like to have some rental property income by the time we RE.
It's not as "guaranteed" as a pension/annuity but it would be nice to have a portion of FIRE income coming from rental properties instead of portfolio withdrawals.
I will have a small (slowly growing...) pension as well as, so we'll have some combination of SS, private pension, tax advantaged, and hopefully real estate. It'd be nice to have real estate investments covering 50% of our expenses - though I'm young enough I have no idea what life will bring for our FIRE timeframe.
The 4% SWR also assumes you live in the USA and the USA continues to be similar to what it was in the past.
Other places have much lower SWRs - Australia is about 3.6%, Japan is (from memory) 0.6%.
No, it doesn't assume it will be similar to the past--it assumes it will be no worse than the past. And those other countries worst case scenarios are worse than ours have been, yes, but I'm curious what their average scenarios were. That would be a lot more interesting to me, but I'm not aware of that data existing.
Even better
It assumes that it won't be worse than the WORST period in the history of the US
As a refresher, that period included an Oil Embargo, the closing of the gold window, discredited economic policies (Laffer Curve anyone?), price fixing, runaway inflation, gasoline shortages, etc... just about the perfect storm of horrible economic conditions
And yet the 4% rule worked, by definition
The 4% SWR also assumes you live in the USA and the USA continues to be similar to what it was in the past.
Other places have much lower SWRs - Australia is about 3.6%, Japan is (from memory) 0.6%.
No, it doesn't assume it will be similar to the past--it assumes it will be no worse than the past. And those other countries worst case scenarios are worse than ours have been, yes, but I'm curious what their average scenarios were. That would be a lot more interesting to me, but I'm not aware of that data existing.
Even better
It assumes that it won't be worse than the WORST period in the history of the US
As a refresher, that period included an Oil Embargo, the closing of the gold window, discredited economic policies (Laffer Curve anyone?), price fixing, runaway inflation, gasoline shortages, etc... just about the perfect storm of horrible economic conditions
And yet the 4% rule worked, by definition
I agree with the meat of this post, but I can't just let this go. The Laffer Curve has never been discredited. For that matter, it is mathmatically provable, so it cannot be discredited. The unknown variable of the Laffer Curve is where the "peak" is. Said another way, the 'ideal' tax rate is an unknown number, and one that is likely variable across economic conditions. If you don't agree, it's only because you didn't understand what the Laffer Curve actually was.
2) Take historical returns. Cut them down 25-50%, then run the Monte Carlo. More subtle. Justified on current low bond yield. This is basically assuming we have times which will be considerably worse than the Great Depression, or 66-82 stagflation for investors. It's fine to play "What if?" - but this isn't really predictive.
Nothing about the Trinity Study is predictive....its just many many iterations of potential outcomes using randomized historical data sets. There is no final say on this topic simply because it is not predicitive and in my opinion questioning the status quo with additional research and updated information and methodologies is not a fool's errand.When you link to a predictive study, I'll use it to determine tomorrow's stock market close.
Nothing about the Trinity Study is predictive....its just many many iterations of potential outcomes using randomized historical data sets.
But what about a 50 year retirement? Somebody FIREing in their 30s and living until their 80s? (or whatever start age you prefer, really)
With a constant 4% inflation adjusted withdrawal rate, here are the success rates:
50/50: 56.8%
60/40: 70.5%
70/30: 76.8%
80/20: 80%
90/10: 85.3%
100/0: 85.3%
And then with a variable spending rate of 3.5% to 4.5% of the initial portfolio, inflation adjusted every year:
50/50: 75.8%
60/40: 87.4%
70/30: 93.7%
80/20: 95.8%
90/10: 96.8%
100/0: 95.8%
Let's tone it down a bit. What about 40 year retirements?
Here's the constant 4% inflation adjusted withdrawal rate success rates:
50/50: 65.7%
60/40: 75.2%
70/30: 81%
80/20: 82.9%
90/10: 86.7%
100/0: 87.6%
And here's the numbers when you have a variable spending scheme of 3.5% to 4.5% of the original portfolio, inflation adjusted every year.
50/50: 87.6%
60/40:93.3%
70/30: 94.3%
80/20: 94.3%
90/10: 96.2%
100/0: 95.2%
So another approach to strengthen the 4% rule is to lower your spending for the first ten years.Quote from: Wade Pfau…the wealth remaining 10 years after retirement, combined with the cumulative inflation during those 10 years, can explain 80 percent of the variation in a retiree’s maximum sustainable withdrawal rate after 30 yearsIn other words, if you can make it through the first 10 years without severely depleting your portfolio or inflation going out of control, your portfolio is likely to enter Too Big to Fail territory. I’ve never heard better news, because I’ve always wanted to be a Bank
And as Jeremy at Go Curry Cracker (http://www.gocurrycracker.com) points out,Quote from: GCCSo another approach to strengthen the 4% rule is to lower your spending for the first ten years.Quote from: Wade Pfau…the wealth remaining 10 years after retirement, combined with the cumulative inflation during those 10 years, can explain 80 percent of the variation in a retiree’s maximum sustainable withdrawal rate after 30 yearsIn other words, if you can make it through the first 10 years without severely depleting your portfolio or inflation going out of control, your portfolio is likely to enter Too Big to Fail territory. I’ve never heard better news, because I’ve always wanted to be a Bank
And as Jeremy at Go Curry Cracker (http://www.gocurrycracker.com) points out,Quote from: GCCSo another approach to strengthen the 4% rule is to lower your spending for the first ten years.Quote from: Wade Pfau…the wealth remaining 10 years after retirement, combined with the cumulative inflation during those 10 years, can explain 80 percent of the variation in a retiree’s maximum sustainable withdrawal rate after 30 yearsIn other words, if you can make it through the first 10 years without severely depleting your portfolio or inflation going out of control, your portfolio is likely to enter Too Big to Fail territory. I’ve never heard better news, because I’ve always wanted to be a Bank
I've thought about the 10 year "rule" for sequence of returns risk and I think it is better to express it as a percentage of your retirement period since Wade Pfau was referring to a 30 year retirement when he mentioned 10 years. For someone retiring in their 50's-60's I think a 10 year period is probably accurate but I don't think you are home free from sequence of returns risk after 10 years if your retire at 30 and potentially have a 60 year retirement period. So, maybe something in the 30-35% range? Or is the sequence of returns risk present until the final 20 years of your retirement? Thoughts, anyone?
2) Take historical returns. Cut them down 25-50%, then run the Monte Carlo. More subtle. Justified on current low bond yield. This is basically assuming we have times which will be considerably worse than the Great Depression, or 66-82 stagflation for investors. It's fine to play "What if?" - but this isn't really predictive.
Nothing about the Trinity Study is predictive....its just many many iterations of potential outcomes using randomized historical data sets. There is no final say on this topic simply because it is not predicitive and in my opinion questioning the status quo with additional research and updated information and methodologies is not a fool's errand.
2) Take historical returns. Cut them down 25-50%, then run the Monte Carlo. More subtle. Justified on current low bond yield. This is basically assuming we have times which will be considerably worse than the Great Depression, or 66-82 stagflation for investors. It's fine to play "What if?" - but this isn't really predictive.
Nothing about the Trinity Study is predictive....its just many many iterations of potential outcomes using randomized historical data sets. There is no final say on this topic simply because it is not predicitive and in my opinion questioning the status quo with additional research and updated information and methodologies is not a fool's errand.
I phrased that poorly. Let me try again:
With the handicapping he is using, Pfau is indulging in trying to predict the market based on current conditions. It translates to "The market seems kinda expensive, returns are likely to be poor"
It's the same as the newbie investor saying "the market is near an all-time high, I need to wait in cash until it crashes."
The newbie investor is likely to miss out on gains while waiting. Those taking Pfau's paper's to heart are likely to miss out on years of retirement while waiting.
Using the default 75/25 stock/bond split in firecalc, the historical record suggests that you are more likely to succeed in a 30 year retirement with a withdrawal rate of 9.25% than you are to fail in a 30 year retirement with a 4% withdrawal rate. I'm calling it the "unsafe withdrawal rate" by analogy.
Using the default 75/25 stock/bond split in firecalc, the historical record suggests that you are more likely to succeed in a 30 year retirement with a withdrawal rate of 9.25% than you are to fail in a 30 year retirement with a 4% withdrawal rate. I'm calling it the "unsafe withdrawal rate" by analogy.
It's shocking to me the percent is that high (5-10?) of a success rate for 30 years with a 9.25% rate. Must have had quite a stock market run at the beginning of those successes.
The successes are 1874, 1877, 1878, 1922, 1936, and 1982. If you change to 100% equities, the success rate for 9.25% goes up to 17%.
Before the Securities Act (then known as the Rayburn-Fletcher Securities Bill, May 27, 1933), most stock issues and sales were governed by state laws, which were based on principles of merit. The merit-based state laws had been largely ineffective in preventing securities fraud, as enforcement, prosecution, and oversight were all generally ineffective because of weak provisions, inadequate funding, or deliberate efforts by state governments to look the other way. The act superseded state laws through the Interstate Commerce Clause, which applied to so many possible stock sale methods (telephones, mailings, and electronic transfers are all considered aspects of interstate commerce) that it effectively took over all regulation of large stock issues. This was particularly important in light of the vastly increased breadth of stock ownership preceding the Great Depression -- the number of stockholders increased more than fourfold from 1900 to 1928, to 18 million people, or roughly 10% of the population.
So along this line of reasoning, I'd say 9.25% is unrealistic.
Of course it's unrealistic. It's just as guaranteed to fail as a 4% SWR is guaranteed to succeed, which is to say it's almost certain but not quite. Hence the label "unsafe withdrawal rate", chosen to remind you that anything between 4 and 9.25% is neither safe nor unsafe.On one hand, that is a brilliant framing observation, but on the other hand it makes planning a total crap-shoot. How far toward 4% do you go before you pull the plug? You seem to argue that 9.25% and 4% are the extremes, but it's certainly not as easy as splitting the difference, although you could also make that argument if you really wanted to, since none of this examination of historical record can convince anyone of what the next 30 years has in store for us. That's why I like the 4% rule, people consider it to be a pretty dependable predictor of success for a 30 year period. That pretty much means you won't suddenly find out that you screwed up (which gives you the wherewithal to adjust), and within 30 years some form of social security is probably within view to help supplement what you have left.
I merely mention it to highlight that if you're using 4% to plan for the extreme tail of the probability curve, it might be good to keep in mind the perspective provided by the tail at the other end, too.
The average SWR for 30 year periods in the current historical record is just over 6%, not 4%. We use 4% to conservatively plan for worst case scenarios, fully cognizant of the fact that doing so means we are all but certain to work too long and save too much.
Of course it's unrealistic. It's just as guaranteed to fail as a 4% SWR is guaranteed to succeed, which is to say it's almost certain but not quite. Hence the label "unsafe withdrawal rate", chosen to remind you that anything between 4 and 9.25% is neither safe nor unsafe....
I merely mention it to highlight that if you're using 4% to plan for the extreme tail of the probability curve, it might be good to keep in mind the perspective provided by the tail at the other end, too.
The average SWR for 30 year periods in the current historical record is just over 6%, not 4%. We use 4% to conservatively plan for worst case scenarios, fully cognizant of the fact that doing so means we are all but certain to work too long and save too much.
I know this is the 'stop worrying about the 4% rule' thread, so I will at least contribute by saying that you should certainly not continue to work a soul-sucking, family-destroying, unhealthy job just to get to 4%. There are intangible benefits that offset the satisfaction of 100% bulletproof success, and there are also alternatives such as getting to 6% and then being willing to hustle a little, or go back to work when you get nervous. There are also things happening now (facilitated by the internet) that are disruptively making retirement more enjoyable, engaging, and inexpensive - helping to bring down costs closer to 4%.
...
Sounds like you missed sol's point entirely. There is no 100% bulletproof success.And you have apparently missed my point also, which is does not contribute to a constructive discussion. Not meaning to go negative, but I think I've heard quite a bit of Sol's repertoire, so 'missing his point entirely' gets a little under my skin. I don't (and didn't) disagree with him.
Someone's a Bayesian.I didn't know it had such a general defenitiion (https://en.wikipedia.org/wiki/Bayesian_probability). Bayesian Economics is a bit more derogatory, which is why I don't post much around here... so I hope you meant the former and not the latter. (http://econlog.econlib.org/archives/2009/11/why_arent_acade.html)
Sounds like you missed sol's point entirely. There is no 100% bulletproof success.And you have apparently missed my point also, which is does not contribute to a constructive discussion. Not meaning to go negative, but I think I've heard quite a bit of Sol's repertoire, so 'missing his point entirely' gets a little under my skin. I don't (and didn't) disagree with him.
Someone's a Bayesian.I didn't know it had such a general defenitiion (https://en.wikipedia.org/wiki/Bayesian_probability). Bayesian Economics is a bit more derogatory, which is why I don't post much around here... so I hope you meant the former and not the latter. (http://econlog.econlib.org/archives/2009/11/why_arent_acade.html)
Feel free to attack me pedantically (I was not meaning to pick on you, but you can pick on me all you want, I REALLY don't care, and I kinda' appreciate it). I said exactly what I meant - having a SWR of 4% is pretty much bulletproof if you are willing to actualize a little modification along the way. Or maybe that was what I meant to say and didn't articulate it perfectly.Sounds like you missed sol's point entirely. There is no 100% bulletproof success.And you have apparently missed my point also, which is does not contribute to a constructive discussion. Not meaning to go negative, but I think I've heard quite a bit of Sol's repertoire, so 'missing his point entirely' gets a little under my skin. I don't (and didn't) disagree with him.
Does or does not your statement "There are intangible benefits that offset the satisfaction of 100% bulletproof success" contradict sol's statement "It's just as guaranteed to fail as a 4% SWR is guaranteed to succeed, which is to say it's almost certain but not quite."
Feel free to attack me pedantically (I was not meaning to pick on you, but you can pick on me all you want, I REALLY don't care, and I kinda' appreciate it). I said exactly what I meant - having a SWR of 4% is pretty much bulletproof if you are willing to actualize a little modification along the way. Or maybe that was what I meant to say and didn't articulate it perfectly.Sounds like you missed sol's point entirely. There is no 100% bulletproof success.And you have apparently missed my point also, which is does not contribute to a constructive discussion. Not meaning to go negative, but I think I've heard quite a bit of Sol's repertoire, so 'missing his point entirely' gets a little under my skin. I don't (and didn't) disagree with him.
Does or does not your statement "There are intangible benefits that offset the satisfaction of 100% bulletproof success" contradict sol's statement "It's just as guaranteed to fail as a 4% SWR is guaranteed to succeed, which is to say it's almost certain but not quite."
In the past, I tried to modify my intention and eliminate mis-interpretation, but ARS responded to my raw posts right away and made me feel bad for editing posts.
Any anyways, who cares who wins online? I've never been sent a check saying - congratulations for outsmarting XYZ by telling people that they were mostly right but a little wrong, so you deserve this cut of the proceeds...
Why not just respect the intent of people's posts and internalize their intent, instead of nit-picking? We should be more concerned about creating (in this case, a bulletproof retirement) - so if you think 4% isn't bulletproof, then start putting up what is.
Why not just respect the intent of people's posts and internalize their intent, instead of nit-picking?
Thanks MoonShadow, for reminding me of an awesome song (https://www.youtube.com/watch?v=hr0rDW5j1KU). I'll happily internalize the idea of 'if I ever lose my teeth, north and south'. As many times in the past, and even more now, I sorta' regret not being born earlier, when people could just share ideas and have a corresponding reciprocation in the form of 'fun'.
Whoa, thanks for sharing, but I guess we are going off piste.Thanks MoonShadow, for reminding me of an awesome song (https://www.youtube.com/watch?v=hr0rDW5j1KU). I'll happily internalize the idea of 'if I ever lose my teeth, north and south'. As many times in the past, and even more now, I sorta' regret not being born earlier, when people could just share ideas and have a corresponding reciprocation in the form of 'fun'.
I never cared for that song, myself, and that is not where my handle comes from. I'm MoonShadow on a lot of forums, and the name doesn't really have a good story behind it. Basicly, my grandfather was part Cherokee by his mother, and once or twice called me that as a child. I think because I was a quiet and sneaky kid, but it was never explained well.
So along this line of reasoning, I'd say 9.25% is unrealistic.
Of course it's unrealistic. It's just as guaranteed to fail as a 4% SWR is guaranteed to succeed, which is to say it's almost certain but not quite. Hence the label "unsafe withdrawal rate", chosen to remind you that anything between 4 and 9.25% is neither safe nor unsafe.
I merely mention it to highlight that if you're using 4% to plan for the extreme tail of the probability curve, it might be good to keep in mind the perspective provided by the tail at the other end, too.
The average SWR for 30 year periods in the current historical record is just over 6%, not 4%. We use 4% to conservatively plan for worst case scenarios, fully cognizant of the fact that doing so means we are all but certain to work too long and save too much.
So along this line of reasoning, I'd say 9.25% is unrealistic.
Of course it's unrealistic. It's just as guaranteed to fail as a 4% SWR is guaranteed to succeed, which is to say it's almost certain but not quite. Hence the label "unsafe withdrawal rate", chosen to remind you that anything between 4 and 9.25% is neither safe nor unsafe.
I merely mention it to highlight that if you're using 4% to plan for the extreme tail of the probability curve, it might be good to keep in mind the perspective provided by the tail at the other end, too.
The average SWR for 30 year periods in the current historical record is just over 6%, not 4%. We use 4% to conservatively plan for worst case scenarios, fully cognizant of the fact that doing so means we are all but certain to work too long and save too much.
The thing about this is that to me is most compelling is that it is far easier to account for the "problems" in a 6% SWR (working part-time, lowering expenses, going back to work, starting side businesses, etc) than it is to account for the problems with working too long (you can't "undo" working years).
The more I think about this the more I find a higher than 4% withdrawal rate compelling.
I don't like belaboring this point and I know sol discusses this often but it's so important! Using the study for a 4% withdrawal, which is what everyone uses when picking their withdrawal percentage, you end up overworking in nearly all cases. So either you use 4%, understanding that the same logic to pick 4% means you will have a ton more after 30 years in most cases, or you pick a higher, and decide to adjust your lifestyle appropriately.
Nearly no-Mustachians here plan on doing nothing after FIRE so nearly all of us will have some income potential after that point. Perhaps not the same income as working, but definitely some earning potential (and pension/ss future income).
The thing about this is that to me is most compelling is that it is far easier to account for the "problems" in a 6% SWR (working part-time, lowering expenses, going back to work, starting side businesses, etc) than it is to account for the problems with working too long (you can't "undo" working years).Whether your SWR is 4% or 6% or 5.03899875%, you're still going to have to insure against portfolio failure and longevity. "Wal-Mart greeter" is not insurance, and even at age 54 my body is starting to grumble about physical labor. Going without some sort of FI insurance (an annuity) is like going without medical insurance.
The more I think about this the more I find a higher than 4% withdrawal rate compelling.
I don't like belaboring this point and I know sol discusses this often but it's so important! Using the study for a 4% withdrawal, which is what everyone uses when picking their withdrawal percentage, you end up overworking in nearly all cases. So either you use 4%, understanding that the same logic to pick 4% means you will have a ton more after 30 years in most cases, or you pick a higher, and decide to adjust your lifestyle appropriately.
Nearly no-Mustachians here plan on doing nothing after FIRE so nearly all of us will have some income potential after that point. Perhaps not the same income as working, but definitely some earning potential (and pension/ss future income).
I'm not against a 6% SWR. I'm just suggesting that it's better to test-drive these blithely-stated failure contingencies right now, while you're still earning a paycheck, and appreciating the implications.
Whether your SWR is 4% or 6% or 5.03899875%, you're still going to have to insure against portfolio failure and longevity. "Wal-Mart greeter" is not insurance, and even at age 54 my body is starting to grumble about physical labor. Going without some sort of FI insurance (an annuity) is like going without medical insurance.
On the bright side, I think people underestimate how awesome social security is. Someday soon I'll do a whole post about the ss benefits formula for early retirees, but the upshot is that it typically replaces half or more of a typical mustachians budget at age 67. It's way more than the chump change most people here seem to assume it is.
An important consideration in all this, too, is that if you look at the scenarios where a SWR fails, it's often initial years (first five or so) where the market crashes.I agree on that danger zone of the first 5-10 years for 30-year periods. I sure hope it's true for longer periods, but I doubt there's research to confirm it. I guess it also means that you start a new 30-year period every year until you're in your 60s or even 70s.
This is fortunately the best time to react. It is far easier to adjust in the years immediately after FIRE because as you say, the older you get, the harder it is. You can more easily get back into the job market or even start a second career if you have to.
Another thing which is good to think about along these lines is to ensure that after you FIRE you are still finding ways to grow your skills. This might be hobbies or DIY repairing of things, etc. If you like doing things like this that can be monetized then it's helpful "insurance" to continue to learn/enjoy those skills as in a pinch you can monetize them, too.I'd like to think that the financial skills which get someone to FI will also help them figure out how to earn while they're FI. That's certainly been the case for me.
On the bright side, I think people underestimate how awesome social security is. Someday soon I'll do a whole post about the ss benefits formula for early retirees, but the upshot is that it typically replaces half or more of a typical mustachians budget at age 67. It's way more than the chump change most people here seem to assume it is.
On the bright side, I think people underestimate how awesome social security is. Someday soon I'll do a whole post about the ss benefits formula for early retirees, but the upshot is that it typically replaces half or more of a typical mustachians budget at age 67. It's way more than the chump change most people here seem to assume it is.
Don't get your hopes high that SS will still look like it does now by the time you are 67. That's already mathmaticly impossible, so it will change in some fashion. Also, there is a 10 year (40 non-consecutive quarters, each with a full-time at minimum wage minimum for score) minimum work requirement to receive SS benefits. While this is unlikely to be an issue for most of us, the most hardcore FIRE's end up getting a high paying job out of college, with really low life expenses, and manage FIRE before they can get those 40 credit quarters. This is more likely for highly skilled women, who quit mid-20's to be a stay-at-home-mother for a term, without ever quite making the 40 quarters first. This has happened to my own wife, and now we are considering a job for her, in part, to round out her 10 year minimum requirement.
Granted, this is still a good problem to have.
Whether your SWR is 4% or 6% or 5.03899875%, you're still going to have to insure against portfolio failure and longevity. "Wal-Mart greeter" is not insurance, and even at age 54 my body is starting to grumble about physical labor. Going without some sort of FI insurance (an annuity) is like going without medical insurance.
An important consideration in all this, too, is that if you look at the scenarios where a SWR fails, it's often initial years (first five or so) where the market crashes.
This is fortunately the best time to react. It is far easier to adjust in the years immediately after FIRE because as you say, the older you get, the harder it is. You can more easily get back into the job market or even start a second career if you have to.
Another thing which is good to think about along these lines is to ensure that after you FIRE you are still finding ways to grow your skills. This might be hobbies or DIY repairing of things, etc. If you like doing things like this that can be monetized then it's helpful "insurance" to continue to learn/enjoy those skills as in a pinch you can monetize them, too.On the bright side, I think people underestimate how awesome social security is. Someday soon I'll do a whole post about the ss benefits formula for early retirees, but the upshot is that it typically replaces half or more of a typical mustachians budget at age 67. It's way more than the chump change most people here seem to assume it is.
+1
... but it now officially under 1/2 what I retired with after less than 10 years. I said "you fucking idiot, unless things turn around really soon you have blown a million dollar lottery ticket (aka stock options) and are going to have to find a job in the middle of recession."Heh. I seem to recall having a similar conversation on that date with my spouse! 17 September 2001 and October 2002 were also gloomy times for stock-market assessments.
And as Jeremy at Go Curry Cracker (http://www.gocurrycracker.com) points out,Quote from: GCCSo another approach to strengthen the 4% rule is to lower your spending for the first ten years.Quote from: Wade Pfau…the wealth remaining 10 years after retirement, combined with the cumulative inflation during those 10 years, can explain 80 percent of the variation in a retiree’s maximum sustainable withdrawal rate after 30 yearsIn other words, if you can make it through the first 10 years without severely depleting your portfolio or inflation going out of control, your portfolio is likely to enter Too Big to Fail territory. I’ve never heard better news, because I’ve always wanted to be a Bank
I've thought about the 10 year "rule" for sequence of returns risk and I think it is better to express it as a percentage of your retirement period since Wade Pfau was referring to a 30 year retirement when he mentioned 10 years. For someone retiring in their 50's-60's I think a 10 year period is probably accurate but I don't think you are home free from sequence of returns risk after 10 years if your retire at 30 and potentially have a 60 year retirement period. So, maybe something in the 30-35% range? Or is the sequence of returns risk present until the final 20 years of your retirement? Thoughts, anyone?
Ah true I should have thought about that more. I don't think you can simply say 10/30 = 33% for the interval after which you are home free with respect to sequence of returns risk though. We get compounding returns from our investments. This nonlinearity would imply that you can't just do a linear projection of taking the "10 year rule" to a 1/3 of your retirement period rule.
What is the analogous rule for longer retirements? That is something I need to think about.
Does anybody know if it is possible to get a CSV of all the terminal portfolio values in a simulation run?
Does anybody know if it is possible to get a CSV of all the terminal portfolio values in a simulation run?
I looked at cFIREsim and there is a checkbox for Create CSV file with output stats in the right column. Then, once you get the results plot there is a Download Simulation Data link at the bottom of the page. However, the CSV file was weird. I did the default simulation for 2015-2045 retirement and the CSV file only has rows for 1956-1985. The CSV file does have ending portfolio value with and w/o inflation adjust. So, it seems to have a bug in the CSV file generator.
Does anybody know if it is possible to get a CSV of all the terminal portfolio values in a simulation run?
I looked at cFIREsim and there is a checkbox for Create CSV file with output stats in the right column. Then, once you get the results plot there is a Download Simulation Data link at the bottom of the page. However, the CSV file was weird. I did the default simulation for 2015-2045 retirement and the CSV file only has rows for 1956-1985. The CSV file does have ending portfolio value with and w/o inflation adjust. So, it seems to have a bug in the CSV file generator.
It picks a retirement year for you (in this case 1956). I haven't been able to figure out how to get it to run a specific year you are interested in.
However on his way out the door of his firm, he agreed to return this December to "help out" during tax season. You tax workers know that a CPA's tax season runs through April and can easily suck up 60-70 hours per week. He's expecting to work a fraction of that time, but he's already looking ahead to his winter plans (and the winter driving) and beginning to chafe at the potential commitment. I feel the same way about earning money during FI... I don't mind an hour or two a day but when the surf is up I want to be free of commitments for at least 96 hours.
However on his way out the door of his firm, he agreed to return this December to "help out" during tax season. You tax workers know that a CPA's tax season runs through April and can easily suck up 60-70 hours per week. He's expecting to work a fraction of that time, but he's already looking ahead to his winter plans (and the winter driving) and beginning to chafe at the potential commitment. I feel the same way about earning money during FI... I don't mind an hour or two a day but when the surf is up I want to be free of commitments for at least 96 hours.
Yeah, I'm starting to get a little skeptical of the frequently tossed-around statements about how easy it is to make up the slack with part-time employment or monetizing a hobby. I've run some preliminary numbers on starting part-time businesses based around a couple of my hobbies (free-lance BBQ pitmaster and nature tour guide). Even using wildly optimistic assumptions about how much business I'd get, and assuming that I would work 30+ hrs/week during the 5-6 month warm season (the time of year when I'd really like to be pursuing my own recreational interests), I'd be lucky to clear more than $10k after income and self-employment taxes. Now, $10k is nothing to sneeze at in the context of $45k/yr total spending, but it doesn't seem like enough to make up for a major portfolio failure.
Taking a menial part-time job would be even worse. I'd have to work 30 hrs/week, 50 weeks/yr at $9/hr to clear around $11k.
To make a serious dent in your annual $ requirements, it seems like you'd have to do something similar to what Nords' BIL is doing. Working 60-70 hrs a week at my old career job for half the year is not my idea of retirement.
Now, $10k is nothing to sneeze at in the context of $45k/yr total spending, but it doesn't seem like enough to make up for a major portfolio failure.
Also keep in mind that depending on where your you might want to earn at least $1 of earned income if you want toridiculously gametake advantage of things like the EITC or savers credits.
http://www.irs.gov/Credits-&-Deductions/Individuals/Earned-Income-Tax-Credit/EITC-Income-Limits-Maximum-Credit-Amounts
http://www.irs.gov/Credits-&-Deductions/Individuals/Earned-Income-Tax-Credit/Do-I-Qualify-for-Earned-Income-Tax-Credit-EITC
Those hours working might translate to some big tax credits, depending on how much of your income is coming from Roth sources and/or how much in Roth conversions you are doing :)
For example, let's assume you spend $30k a year and have $100k in Roth IRA principle. You have 5 years you can withdraw $20k of principle and then need to make $10k/year. If you earn $10k/year, using the IRS EITC estimator with 1 child, you are eligible for an EITC of $3,305. If you bump your taxable income to $30k (maybe Roth conversions) you still have an EITC of $2,224. More kids increases this obviously and it may increase it to the point it's worthwhile to have your earned income at the ideal point you get a full EITC.
Since we're talking aboutgamingerr using tax incentives, you might as well put $2k into a Roth IRA and get 50% of that back on AGI up to $36k from the savers credit. So in our hypothetical example, let's say you make $10k, spend $30k (remainder is from Roth IRA withdrawals). You put $2k "back" into a Roth IRA, so when you file taxes you get back $4,305 (EITC of $3305 + $1000 savers credit).
While these numbers are small it should show that a modest income ($10k) can result in a very large percentage of your yearly spending ($14.3k in this case). So your withdrawal from your portfolio is not $30k but just about $15k. This could dramatically change your withdrawal percentage in initial years.
For me personally, where this is important is considering whether to scale down your work before going completely FIRE. It may not be ideal for someone who wants to go 100% working to 0% working and never change that percentage. But for me, if I end up working say 50% or 20% for some years then options for taking advantage of the tax code become numerous. Maybe I am able to scale back to 50% and make say $40k a year gross. I could put a bunch of that into a 401k to lower AGI/MAGI and then basically take advantage of all of the above, too. Perhaps living 50% retired is not what most here want but it is an option that makes the 4% perspective different to consider other scenarios.
Regardless, our tax system is not at all designed for people like mustachians who can save/live under their means on minimal income.. it provides a lot of opportunities for someone able to skillfully control their income to really maximize tax incentives.
Also note that with Roth conversions you can basically pick your taxable income to a dollar every year - have some unused unrefundable credits (such as savers)? Just convert the right amount of pretax to Roth!
I agree on that danger zone of the first 5-10 years for 30-year periods. I sure hope it's true for longer periods, but I doubt there's research to confirm it.
I guess it also means that you start a new 30-year period every year until you're in your 60s or even 70s.
Now I side with Nord's idea that the skills that got you there will probably take you pretty far in earning money when necessary.
I used think that as well.
Now I side with Nord's idea that the skills that got you there will probably take you pretty far in earning money when necessary.Now, $10k is nothing to sneeze at in the context of $45k/yr total spending, but it doesn't seem like enough to make up for a major portfolio failure.
You might be surprised--run some calculations in cFIREsim.
And your estimates seem really low to me in terms of time necessary to make 10-20k.
Like I said, I used to think he same way, now it seems to me that that there's so many ways to make money, it really isn't a problem.
Anyway, the whole point is that I don't really want to work nearly full time for half the year (or the whole year, in the case of the menial job) after I'm supposedly FIRE.
I used think that as well.
Now I side with Nord's idea that the skills that got you there will probably take you pretty far in earning money when necessary.Now, $10k is nothing to sneeze at in the context of $45k/yr total spending, but it doesn't seem like enough to make up for a major portfolio failure.
You might be surprised--run some calculations in cFIREsim.
And your estimates seem really low to me in terms of time necessary to make 10-20k.
Like I said, I used to think he same way, now it seems to me that that there's so many ways to make money, it really isn't a problem.
I'm pretty confident about my estimates of the amount of money I would take in on the business ventures, as I was pretty thorough in constructing those (actually, I was probably too optimistic). But I probably hi-balled the amount of taxes I would pay. I forgot about all the EITC and Saver's Credit business, as it's been quite a while since I was able to qualify for those. Ender's post is great, but I'm not sure how I would feel about claiming credits that are intended for the working poor, especially knowing that the money is coming straight out of the pockets of the still-working middle class.
Anyway, the whole point is that I don't really want to work nearly full time for half the year (or the whole year, in the case of the menial job) after I'm supposedly FIRE.
Anyway, the whole point is that I don't really want to work nearly full time for half the year (or the whole year, in the case of the menial job) after I'm supposedly FIRE.
That's fine, but if the comparison is working FT 100% for 3 years or only doing 60% (maybe Mon-Wed) for 5 years it gets less straightforward.
One of the reasons I want to be able to scale back work is to spend time with kids in their earlier years once we have them. Having a reduced work schedule, while working more years but similar total hours, better allows this. It also provides more security if I want to "scale up" for whatever reason (market plummeting, unanticipated higher expenses, whatever) since I'm still doing work.
Plus, there are situations where pensions/benefits better accrue with more years service. My current pension gives me a year credit I think for something like 500 hours in a service year, so working 25% would not only provide the benefits I discussed above but it would provide me more years credit towards a pension.
For what it's worth in situations like this you may benefit from paying off a house earlier too as you reduce your risk in retirement - because you have lower spending to "cover" and volatility affects you more. I might do some musing on this to see how paying off a house early affects situations where you continue to work to meet some/all of your expenses at a higher SWR than if you still had a mortgage payment. If a decent percentage of your expenses is a mortgage then paying it off frees some cashflow.
Anyway, the whole point is that I don't really want to work nearly full time for half the year (or the whole year, in the case of the menial job) after I'm supposedly FIRE.
That's fine, but if the comparison is working FT 100% for 3 years or only doing 60% (maybe Mon-Wed) for 5 years it gets less straightforward.
One of the reasons I want to be able to scale back work is to spend time with kids in their earlier years once we have them. Having a reduced work schedule, while working more years but similar total hours, better allows this. It also provides more security if I want to "scale up" for whatever reason (market plummeting, unanticipated higher expenses, whatever) since I'm still doing work.
Plus, there are situations where pensions/benefits better accrue with more years service. My current pension gives me a year credit I think for something like 500 hours in a service year, so working 25% would not only provide the benefits I discussed above but it would provide me more years credit towards a pension.
For what it's worth in situations like this you may benefit from paying off a house earlier too as you reduce your risk in retirement - because you have lower spending to "cover" and volatility affects you more. I might do some musing on this to see how paying off a house early affects situations where you continue to work to meet some/all of your expenses at a higher SWR than if you still had a mortgage payment. If a decent percentage of your expenses is a mortgage then paying it off frees some cashflow.
I get where you're coming from. But I think it's highly situation-dependent. I'm making close to 90k now, so in my situation it would not be as close as your 3 yrs full time vs. 5 years at 60%. And my kid is grown, so that ship has sailed. My job does not provide a part-time option that would still contribute to my pension (but continuing full-time increases my pension by 1% of hi-3 salary for each additional year, plus my hi-3 goes up as I continue to get COL and step increases). The house thing could apply, though. I probably wouldn't straight-up pay it off, as I have a 3 1/8% interest rate. But DW and I are talking about downsizing, which has the potential to reduce our housing expenditure. If we stick with the current house, it will be paid off in 12 years, and our annual expenses will drop by about $10k. I project that I'm 3-4 years from FIRE, so if I were to do PT work, I'm probably looking at 8-9 years to get to where expenses drop to the point that I don't really need the extra money (unless we downsize the house). We'll see how the numbers look when I get there, but if it's a choice between OMY (or TMY) and 8 or 9 years of PT work, I'd probably pick the former. I'm hoping the numbers look good enough that I don't have to choose either of those options. How good is that? If I can manage a 90-95% success rate in cFiresim/FireCalc and an 80-85% success rate in a Monte Carlo simulator, I'd probably feel good enough to pull the plug completely.
For what it's worth in situations like this you may benefit from paying off a house earlier too as you reduce your risk in retirement - because you have lower spending to "cover" and volatility affects you more. I might do some musing on this to see how paying off a house early affects situations where you continue to work to meet some/all of your expenses at a higher SWR than if you still had a mortgage payment. If a decent percentage of your expenses is a mortgage then paying it off frees some cashflow.
I did a little FIREcalc meta-analysis to get a better feel for Safe Withdrawal Rates....
I did a little FIREcalc meta-analysis to get a better feel for Safe Withdrawal Rates....
Nicely done!
3. The biggest increases in SWR come from shortening your time period. This suggests to me that annuities like social security are hugely valuable, probably worth significantly depleting your nest egg. For example, if you can buy a social security supplemental annuity at age 52 to cover all of your expenses after age 62, and by so doing lower your expected period of retirement drawdown from 30 years to 10 years, you can effectively increase your withdrawal rate on the remaining nest egg from 4% to 8.5% (from green's 95% to blue's 95% line) without negatively impacting your success probability. That means it would be worth spending over half of your nest egg to get that annuity. Short planned drawdown periods seem to make retirement super easy.
Regardless, our tax system is not at all designed for people like mustachians who can save/live under their means on minimal income.. it provides a lot of opportunities for someone able to skillfully control their income to really maximize tax incentives.
Sol, You are awesome. Thank you.X2. Thanks!
The article in summary: if you retire in a very bad year for sequence of return risk, and you draw 5%/year adjusted for inflation, and you invest conservatively in a 50/50 stock bond portfolio, you will run out of money in year 38. By adjusting to 60/40 and still drawing 5% you would still have 180% of your original starting value after 43 years.
The article in summary: if you retire in a very bad year for sequence of return risk, and you draw 5%/year adjusted for inflation, and you invest conservatively in a 50/50 stock bond portfolio, you will run out of money in year 38. By adjusting to 60/40 and still drawing 5% you would still have 180% of your original starting value after 43 years.
Something seems grossly amiss with this data (but first of all, note that the tables appear to be using nominal figures, so, on an inflation-adjusted basis, you wouldn't have "180% of your original starting value after 43 years" even assuming that the tables' data is accurate -- but that's just a footnote, because the data in the tables seems to be wildly inaccurate).
As you summarized, the table shows that a 50/50 portfolio with a 5% WR would not run out of money until year 38. But cFIREsim says a 50/50 portfolio with a 5% WR starting in 1970 would have run out of money in less than 20 years. Similarly, as you said, with a 60/40 portfolio, the table shows a positive balance of more than 180% of the original balance (in nominal terms) after 43 years, but cFIREsim shows total portfolio depletion in less than 20 years for this scenario as well.
What gives? Obviously there are some discrepancies between the underlying data used by cFIREsim and this article's tables (for example, cFIREsim uses a total equity index while the article uses the S&P 500) and probably also in other assumptions (investment fees, timing of withdrawals, etc.), but none of this should be sufficient to explain such outrageously different results.
This isn't a very useful study. It's a backtested portfolio that conveniently uses the asset classes that went crazy during that time period. "100% Stocks" means 20% LC, 20% LCV, 20% SC, 20% SCV, and 20% REIT.
. . . . .
I find this graph more interesting than the first one, in some respects. Once you've managed to save up 10x your expenses, your nest egg should last you an average of 15 years. Saving anothe ~10% to get down to 9% SWR only gets you to 20 years. But once you cross below that 6% SWR level (roughly 17x expenses) the time periods really start to take off. Each tiny additional bit of savings is then buying you a huge number of additional years of retirement.
Your graph is also a great way to illustrate that reducing your expenses even a little (for SWR < 6%) has a huge impact on how long your money will last due to the high sensitivity (slope) in that region of the graph.Good point. See linearized sensitivities below for various variables in the simplified "time to FI" calculation, given the first five numbers as inputs.
Quick calculation of "Time to FI" | |||
Planned Withdrawal Rate | WR | 4% | |
Annual Savings Invested | S | 50000 | $/yr |
Annual Retirement Expenses | E | 40000 | $/yr |
Current Assets Invested | A | 100000 | $ |
Investment return | r_ | 6% | |
Time to FI | t | 11.6 | yr |
Sensitivity of Time to FI for each input | |||
E/WR, stash needed | G | 1000000 | $ |
dt/dr_ | -0.6 | yr/% | |
dt/dS | -0.2 | yr/$K | |
dt/dG | 0.9 | yr/$100K | |
dt/dA | -1.8 | yr/$100K | |
dt/dE | 2.3 | yr/$10K | |
dt/dWR | -2.3 | yr/% | |
Calculate Savings needed based on time | |||
Desired time to FI | t | 10.00 | yr |
Annual Savings Needed | S | 62281 | $/yr |
Sensitivity of Time to FI for each input E/WR, stash needed G 1000000 $ dt/dr_ -0.6 yr/% dt/dS -0.2 yr/$K dt/dG 0.9 yr/$100K dt/dA -1.8 yr/$100K dt/dE 2.3 yr/$10K dt/dWR -2.3 yr/%
Interesting summary, but why compare dt/dS in yr/$k vs. dt/dE in yr/$10k?Don't remember why. Do remember not thinking about it all that much. Probably started down the list with unit ratios, increased the ones in the middle, then picked an in-between number for dE.
For most Mustachians, I would think it is just as likely to be able to save an extra 10k/yr for the earnings years as it would be to permanently lower annual expense from 40k to 30k. This would then make both sensitivities about equal, I think...The sensitivities do have the same order of magnitude. In this case, looking at two significant digits, dt/dS=-1.5$/10K. The calc'ns are on the 'Misc. calcs' tab of the case study spreadsheet (http://forum.mrmoneymustache.com/ask-a-mustachian/how-to-write-a-%27case-study%27-topic/msg274228/#msg274228) if anyone would like to explore more.
... dt/dS in yr/$k vs. dt/dE in yr/$10k? ...
... dt/dS in yr/$k vs. dt/dE in yr/$10k? ...
Ah, be still, my heart. I love it when you talk nerd to me! :)
Your graph is also a great way to illustrate that reducing your expenses even a little (for SWR < 6%) has a huge impact on how long your money will last due to the high sensitivity (slope) in that region of the graph.Good point. See linearized sensitivities below for various variables in the simplified "time to FI" calculation, given the first five numbers as inputs.
. . . . . .
Yes, those are the "first five numbers" in question. The equations are in the linked spreadsheet mentioned a few posts back.Your graph is also a great way to illustrate that reducing your expenses even a little (for SWR < 6%) has a huge impact on how long your money will last due to the high sensitivity (slope) in that region of the graph.Good point. See linearized sensitivities below for various variables in the simplified "time to FI" calculation, given the first five numbers as inputs.
. . . . . .
About what operating point are the equations linearized at? Is it the values listed under Quick calculation of "Time to FI" heading?
The 4% rule has been much maligned lately, as recent market woes of the past 15 years – from the tech crash of 2000 to the global financial crisis of 2008 – have pressured both market returns and the portfolios of retirees.
Yet a deeper look reveals that if a 2008 or even a 2000 retiree had been following the 4% rule since retirement, their portfolios would be no worse off than any of the other "terrible" historical market scenarios that created the 4% rule from retirement years like 1929, 1937, and 1966. To some extent, the portfolio of the modern retiree is buoyed by the (only) modest inflation that has been occurring in recent years, yet even after adjusting for inflation, today’s retirees are not doing any materially worse than other historical bad-market scenarios where the 4% rule worked.
I just came here to post the Kitces article and I see forummm beat me to it. I thought the article was terrific, but note that, as usual for Kitces, his numbers (based on a 60/40 stock/bond portfolio) are a bit more optimistic than what cFIREsim reports for the same allocation (but otherwise using its default settings) (as discussed in this thread (http://forum.mrmoneymustache.com/investor-alley/kitces-article-ratcheting-swr-data-discrepancy/)).You guys both beat me. Now I'm going to have to tweet about it instead.
Right, so now we're assuming that the future will be worse than anything we've ever had and as bad or worse than any other country has ever had in the last 200 years as well?
Seems pretty paranoid.
I'm just questioning the geographical bias of US investors. Your country has had an amazing century and you seem to take that for granted. No war. No hyperinflation. No sovereign default. No communist or fascist dictatorship. No multidecades bear market. This is exceptionally good.
I'm just questioning the geographical bias of US investors. Your country has had an amazing century and you seem to take that for granted. No war. No hyperinflation. No sovereign default. No communist or fascist dictatorship. No multidecades bear market. This is exceptionally good.So you're essentially saying that past history is no indication of future performance?
No war.Speaking as a military veteran, I find this statement incomprehensible as written. Feel free to elaborate.
No war.Speaking as a military veteran, I find this statement incomprehensible as written. Feel free to elaborate.
I'm just questioning the geographical bias of US investors. Your country has had an amazing century and you seem to take that for granted. No war. No hyperinflation. No sovereign default. No communist or fascist dictatorship. No multidecades bear market. This is exceptionally good.So you're essentially saying that past history is no indication of future performance?
The point of this thread is that the 4% SWR is a reasonable estimate of success. If you're trying to insure against failure then you'd use annuities and enough savings that you'd never have to touch the principal. But for people who are wondering "How much is enough?" the 4% SWR is a starting point.
No war.Speaking as a military veteran, I find this statement incomprehensible as written. Feel free to elaborate.
Not sure about what you mean here. According to the data from your other post (https://1.bp.blogspot.com/_7pcnNDkYOFE/TJLpRdCn9uI/AAAAAAAAAOI/e4WRVdW-D4U/s1600/Capture2.JPG), the worldwide SWR is about 0.25%. 400 years of income. That's pretty scary.
As a French investor, I should target a 0.95% SWR.
A 4% WR for 30 years would have failed most of the time. It kinda sucks.
Not sure about what you mean here. According to the data from your other post (https://1.bp.blogspot.com/_7pcnNDkYOFE/TJLpRdCn9uI/AAAAAAAAAOI/e4WRVdW-D4U/s1600/Capture2.JPG), the worldwide SWR is about 0.25%. 400 years of income. That's pretty scary.
Just to clarify (and to elaborate on what Rebs said), the linked table shows that the "worldwide" (where the 17 countries listed in the table constitute the entire universe of countries in the "world") SWR was 0.24% (for Japan) using a 50/50 stock/bond allocation if you define SWR to mean the WR that historically resulted in success 100% of the time (commonly referred to as the "safemax" in the SWR literature). Even in the US, the historical safemax is below 4% under the parameters most often used (in this table, it is 3.66%). Most early-retirement-planners in this forum use a more reasonable (but still extremely conservative) threshold for what constitutes a "safe" WR, like a 95% success rate. The table does also show the SWRs for the various countries using a 90%-success-rate threshold, and Japan is the single extreme outlier with a SWR (using that definition) below 1% -- but more importantly, even in Japan, a 4% WR succeeded most of the time (61.1% of the time).QuoteAs a French investor, I should target a 0.95% SWR.
Again, this is only true if you want to be extremely conservative and use the absolute historical worst case as your hurdle to clear (a hurdle that was set, keep in mind, based on a pretty conservative asset allocation -- as the other tables in the Pfau article make clear, stock-heavier portfolios in France had considerably higher SWRs)).QuoteA 4% WR for 30 years would have failed most of the time. It kinda sucks.
This is not true. The table says that a 4% WR in France worked most of the time (55.6% of the time).
Just buy the whole world. Why increase your risk by concentrating in one country? Even US investors shouldn't do that.
I know, I know. I was being rhetorical, just to underline the fact that 4% is not the worst that ever happened. I think 4% is good no matter what. If one really doesn't feel it, he should aim for 3%, no less. I mean, even if you did just as well as inflation (a 0% real return), 3% lasts 33 years and 4 months. And you don't need a very agressive allocation to do better than inflation on the long run.QuoteAs a French investor, I should target a 0.95% SWR.
Again, this is only true if you want to be extremely conservative and use the absolute historical worst case as your hurdle to clear (a hurdle that was set, keep in mind, based on a pretty conservative asset allocation -- as the other tables in the Pfau article make clear, stock-heavier portfolios in France had considerably higher SWRs)).
I agree on that danger zone of the first 5-10 years for 30-year periods. I sure hope it's true for longer periods, but I doubt there's research to confirm it.
Jeremy @ Go Curry Cracker has a blog post in the works on how to determine if/when your portfolio has gotten "too big to fail" (which, given Jeremy's thoroughness, will, I'm sure, include a survey of any existing research) and I have high hopes that it will become the early retirement community's definitive resource on the topic (and I keep mentioning it periodically in part to keep the pressure on him to finish it up so the rest of us can freeload off of his efforts).QuoteI guess it also means that you start a new 30-year period every year until you're in your 60s or even 70s.
It's tempting to think about the chances of portfolio success for super-long periods this way, but I don't think it's really accurate, because a 30+X year retirement period is not a rolling series of 30 year retirement periods, but a single 30+X year retirement period (and perhaps this line of thinking is what caused MMM to spread his bit of misinformation that having enough to last for 30 years is essentially equivalent to having enough to last forever).
And what about black swan events ? Yes, they happen (and that is what Pfau's chart shows). But you can hardly do anything about that. And that's, btw, why I agree it's silly to aim for 100% success in backtestings & simulations. 100% doesn't exist.
Been trying to read it all here, especially because I am about to start Retirement at age of 49. To me, this 4% rule should all be read with some common-sense. First of all, it is just a guide, not a fixed rule, and it only focus on a certain asset class, so you should look at the big picture of your Retirement-funding. In reality you would for instance:Well, I finally had a chance to follow the chain and I think my brain is about to explode. I am in Hankers camp... It seems like the 4% rule has been vetted out as well as it can be and is probably as good of a guide as anyone can hope for in planning their ER. What I have not heard discussed which I would suggest is that there could be a strong argument for an adjustable SWR, particularly anyone doing ER under the age of 60. I would argue that while you are "younger" and in better physical health, you will naturally be able to do more certain things on your bucket list that you might not be able to do after a certain age. Many of these to dos may cost more in the early years and you stand the chance to to miss them if you stick to a ridged SWR. I think the statistics show after a certain age typically expenses start to diminish (i.e. Entertainment, travel) and while the risk of major medical costs exists, odds are you will want to spend more $$ when your 50 then when your 80. Always exceptions, but I would almost argue error on the side of taking that extra trip when your 50 even if it pushes your SWR to 5% one year. If I am 85 and need round the clock medical attention, then chances are my days are numbered and my quality of life sucks so I am not worried about my 4%, but just making sure I am not a financial burden to my kids. As stated, there is no 100% guarantee of anything here, but using common sense with a plan is the best we all have. My only point is part of the attraction to ER is to do your bucket list and if you stay to strict to your SWR, you might miss some of the good stuff.
(1) Diversify in asset classes, for instance, my early retirement income will be partially based on Rental income (this forms a basis and not directly correlated with stock market)
(2) Vary the SWR depending on how the Market performs. I keep a variation between 2 and 4% in mind. In combination with Rental income, you should plan for variation in Retirement-spending because of this. This automatically means, you should have a buffer built into your funding of your lifestyle, and if Market turns out to be bad for 5-10 years, you should be happy with a lower funding (and still enjoy life). For me this means, I will travel less around the world if the Market is really bad, and I am happy with that. I see travel as a luxury that is not necessarily needed all the time.
(3) On top of this, I keep an emergency buffer of 3 years in Cash assets. If somehow a major crash happens, i would be willing to put some of this Cash into play of Stock market
I guess, for everyone this works out differently. My main comment is : use common sense, the 4% rule is just a guide :-)
Been trying to read it all here, especially because I am about to start Retirement at age of 49. To me, this 4% rule should all be read with some common-sense. First of all, it is just a guide, not a fixed rule, and it only focus on a certain asset class, so you should look at the big picture of your Retirement-funding. In reality you would for instance:Well, I finally had a chance to follow the chain and I think my brain is about to explode. I am in Hankers camp... It seems like the 4% rule has been vetted out as well as it can be and is probably as good of a guide as anyone can hope for in planning their ER. What I have not heard discussed which I would suggest is that there could be a strong argument for an adjustable SWR, particularly anyone doing ER under the age of 60. I would argue that while you are "younger" and in better physical health, you will naturally be able to do more certain things on your bucket list that you might not be able to do after a certain age. Many of these to dos may cost more in the early years and you stand the chance to to miss them if you stick to a ridged SWR. I think the statistics show after a certain age typically expenses start to diminish (i.e. Entertainment, travel) and while the risk of major medical costs exists, odds are you will want to spend more $$ when your 50 then when your 80. Always exceptions, but I would almost argue error on the side of taking that extra trip when your 50 even if it pushes your SWR to 5% one year. If I am 85 and need round the clock medical attention, then chances are my days are numbered and my quality of life sucks so I am not worried about my 4%, but just making sure I am not a financial burden to my kids. As stated, there is no 100% guarantee of anything here, but using common sense with a plan is the best we all have. My only point is part of the attraction to ER is to do your bucket list and if you stay to strict to your SWR, you might miss some of the good stuff.
(1) Diversify in asset classes, for instance, my early retirement income will be partially based on Rental income (this forms a basis and not directly correlated with stock market)
(2) Vary the SWR depending on how the Market performs. I keep a variation between 2 and 4% in mind. In combination with Rental income, you should plan for variation in Retirement-spending because of this. This automatically means, you should have a buffer built into your funding of your lifestyle, and if Market turns out to be bad for 5-10 years, you should be happy with a lower funding (and still enjoy life). For me this means, I will travel less around the world if the Market is really bad, and I am happy with that. I see travel as a luxury that is not necessarily needed all the time.
(3) On top of this, I keep an emergency buffer of 3 years in Cash assets. If somehow a major crash happens, i would be willing to put some of this Cash into play of Stock market
I guess, for everyone this works out differently. My main comment is : use common sense, the 4% rule is just a guide :-)
I too have found these methods by Pfau to be suspect. You could argue that he's aiming these studies at financial advisors, so the 1% is actually going to the advisor's pockets.
A more charitable view is that Pfau (and financial planners in general), like the 4% rule itself, are simply overcautious by nature -- they err on the side of caution because the consequences of being proven wrong are worse if their predictions are too aggressive than if they are too conservative.
I agree. Most people absolutely, positively don't want to run out of money but don't mind having more left over to pass on to heirs, charities, etc. Hence, the skewing towards conservatism.
Funny, I actually I thought I was being charitable. Providing a reasonable justification why 1% fees could be baked into his analysis, when no DIY investor should have anything close to that. I assume that Pfau's target audience is financial planners, and they do tend to charge 1%--rightly or wrongly. For those advisor's clients, the SWR would be appropriately substantially lowered. For people like most of us here, we can happily increase our SWR by 25% since we aren't burning that money on fees.
I agree there's a skew towards conservatism in general. But a more informed approach would be to say the SWR is X% minus whatever fees your portfolio management has. That way if the advisor is actually charging 1% plus putting them in funds also charging 1%, the correct amount to let the clients live off of is only 2%. In this example, Pfau is actually not being conservative enough.
I too have found these methods by Pfau to be suspect. You could argue that he's aiming these studies at financial advisors, so the 1% is actually going to the advisor's pockets.
A more charitable view is that Pfau (and financial planners in general), like the 4% rule itself, are simply overcautious by nature -- they err on the side of caution because the consequences of being proven wrong are worse if their predictions are too aggressive than if they are too conservative.
I agree. Most people absolutely, positively don't want to run out of money but don't mind having more left over to pass on to heirs, charities, etc. Hence, the skewing towards conservatism.
Funny, I actually I thought I was being charitable. Providing a reasonable justification why 1% fees could be baked into his analysis, when no DIY investor should have anything close to that. I assume that Pfau's target audience is financial planners, and they do tend to charge 1%--rightly or wrongly. For those advisor's clients, the SWR would be appropriately substantially lowered. For people like most of us here, we can happily increase our SWR by 25% since we aren't burning that money on fees.
I agree there's a skew towards conservatism in general. But a more informed approach would be to say the SWR is X% minus whatever fees your portfolio management has. That way if the advisor is actually charging 1% plus putting them in funds also charging 1%, the correct amount to let the clients live off of is only 2%. In this example, Pfau is actually not being conservative enough.
+1 , no better way to show how much the "advisors" are creaming than to illustrate it with withdrawal rate, how many clients who would not notice that 1% fee during accumulation but when shown the effect on SWR would go WTF - I have 1 million saved so I can pull down 40k and give 10K to the friendly advisor, suddenly 1% comes 25% and shit gets real.
I too have found these methods by Pfau to be suspect. You could argue that he's aiming these studies at financial advisors, so the 1% is actually going to the advisor's pockets.
A more charitable view is that Pfau (and financial planners in general), like the 4% rule itself, are simply overcautious by nature -- they err on the side of caution because the consequences of being proven wrong are worse if their predictions are too aggressive than if they are too conservative.
I agree. Most people absolutely, positively don't want to run out of money but don't mind having more left over to pass on to heirs, charities, etc. Hence, the skewing towards conservatism.
Funny, I actually I thought I was being charitable. Providing a reasonable justification why 1% fees could be baked into his analysis, when no DIY investor should have anything close to that. I assume that Pfau's target audience is financial planners, and they do tend to charge 1%--rightly or wrongly. For those advisor's clients, the SWR would be appropriately substantially lowered. For people like most of us here, we can happily increase our SWR by 25% since we aren't burning that money on fees.
I agree there's a skew towards conservatism in general. But a more informed approach would be to say the SWR is X% minus whatever fees your portfolio management has. That way if the advisor is actually charging 1% plus putting them in funds also charging 1%, the correct amount to let the clients live off of is only 2%. In this example, Pfau is actually not being conservative enough.
+1 , no better way to show how much the "advisors" are creaming than to illustrate it with withdrawal rate, how many clients who would not notice that 1% fee during accumulation but when shown the effect on SWR would go WTF - I have 1 million saved so I can pull down 40k and give 10K to the friendly advisor, suddenly 1% comes 25% and shit gets real.
A contrarian view would be that if markets are efficient then the 1% that is NOT flowing to the advisors (or ultimately shifts to low cost funds) would be invested and therefore bring the returns forward, thereby reducing future returns by similar amount - therefore 4% doesn't work or more likely the 1% being taken out doesn't matter.
And that is the conundrum for most people, even the amazing savers, that to be truly 'free', you must leave behind income (that you had some control over) and depend on your investments (that you have no influence on).
And that is the conundrum for most people, even the amazing savers, that to be truly 'free', you must leave behind income (that you had some control over) and depend on your investments (that you have no influence on).
It's only a conundrum if that income provides some value, and the entire point behind this site is that any amount beyond "enough" does not. The trick is how to know what constitutes "enough," and we have no bright lines to guide us, but as long as one does have enough there is no reason to regret what more one could have had.
In this case, I think you missed the point I tried to make, which was having control (e.g. the accumulation phase) vs. 'depending on returns' (withdrawal), which is what 'worrying about the 4% rule' entails.
I might be making this topic a little tougher however if a 4% WR is considered safe at what level is a WR still considered safe.
At this point I am intending to retire on a 5% WR. Is this too risky ?
I might be making this topic a little tougher however if a 4% WR is considered safe at what level is a WR still considered safe.The value of that two-sided coin, Safety and Risk, is in the eye of the beholder. See https://www.kitces.com/blog/what-returns-are-safe-withdrawal-rates-really-based-upon/ for more background.
At this point I am intending to retire on a 5% WR. Is this too risky ?
I might be making this topic a little tougher however if a 4% WR is considered safe at what level is a WR still considered safe.
At this point I am intending to retire on a 5% WR. Is this too risky ?
If you re-read this thread, you'll see some charts I posted showing success percentages for other withdrawal rates and other time periods.
5% has historically been totally safe (100% success) for periods less than 17 years. At 19 years it's about as safe as 4% is at 30 years. On average (50% success) it should last 50 years.
I might be making this topic a little tougher however if a 4% WR is considered safe at what level is a WR still considered safe.The value of that two-sided coin, Safety and Risk, is in the eye of the beholder. See https://www.kitces.com/blog/what-returns-are-safe-withdrawal-rates-really-based-upon/ for more background.
At this point I am intending to retire on a 5% WR. Is this too risky ?
I might be making this topic a little tougher however if a 4% WR is considered safe at what level is a WR still considered safe.The value of that two-sided coin, Safety and Risk, is in the eye of the beholder. See https://www.kitces.com/blog/what-returns-are-safe-withdrawal-rates-really-based-upon/ for more background.
At this point I am intending to retire on a 5% WR. Is this too risky ?
There have been discussions on this forum about how Kitces' results do not match up with cFIREsim or FIREcalc's simulations. Forum members have been unable to get Kitces to explain the difference in outcomes. cFIREsim is created using public data. Kitces normally seems to know what he's taking about, so who knows what's going on here. Maybe someone can get him to share his data and methods?I might be making this topic a little tougher however if a 4% WR is considered safe at what level is a WR still considered safe.The value of that two-sided coin, Safety and Risk, is in the eye of the beholder. See https://www.kitces.com/blog/what-returns-are-safe-withdrawal-rates-really-based-upon/ for more background.
At this point I am intending to retire on a 5% WR. Is this too risky ?
That is a good article which is in my opinion pretty optimistic. I'm also optimistic that a 5% WR would be fine.
One obvious point that the article failed to address: if average returns going forward are expected to be below historical levels, wouldn't one also expect the worst case scenario to be worse than historical worst case scenarios?Not necessarily. It depends on the specific sequence of returns. E.g., an average real return of ~1.2-1.3% is sufficient to make a 4% WR work for 30 years - if that return is constant.
One obvious point that the article failed to address: if average returns going forward are expected to be below historical levels, wouldn't one also expect the worst case scenario to be worse than historical worst case scenarios?
The comfort to be had from historical SWR analysis is precisely the fact that the future would need to be worse than the worst of the past in order for a historically-100%-successful withdrawal rate to fail.
A contrarian view would be that if markets are efficient then the 1% that is NOT flowing to the advisors (or ultimately shifts to low cost funds) would be invested and therefore bring the returns forward, thereby reducing future returns by similar amount - therefore 4% doesn't work or more likely the 1% being taken out doesn't matter.
No. That 1% is being drawn. It either goes to the investor for living expenses, or it goes to the parasite advisor almost certainly for living expenses/business expenses. Gotta pay rent on that EJ storefront every month ya know.
With the $1MM portfolio, the choice* is draw $40k to live on, or draw $30k to live on while handing over $10k for the advisor to live on.
Handing over 25% of my spending money every year certainly does matter.
*For the topic at hand: a 4% WR.
this is based purely on the premise that the trinity study assumes a 1% fee
The comfort to be had from historical SWR analysis is precisely the fact that the future would need to be worse than the worst of the past in order for a historically-100%-successful withdrawal rate to fail.
There a couple of points that gives me some comfort that a 5% WR should be okay in my situation:-
1. The point quoted here is pretty critical. Its probably unlikely that when I retire the results will be worse than they have ever been.
2. I intend to retire but not draw down for a couple of years and then draw down less than the amount I will at a later point in time.
3. I do not include my house value in my FIRE assets. I can downsize my house.
4. I have 3 kids and the costs associated with them should continually decrease.
5. I am not including any inheritance or social security in my calculations.
6. I can live off less than 5% and intend to in the first say 5-10 years. I could always continue living off less.
7. My wife may continue to work part time. I could as well although I don't want too.
If I live for 50 years post retirement I still think I should have my money last that long although I think its unlikely I will live 50 years post retirement.
The comfort to be had from historical SWR analysis is precisely the fact that the future would need to be worse than the worst of the past in order for a historically-100%-successful withdrawal rate to fail.
There a couple of points that gives me some comfort that a 5% WR should be okay in my situation:-
1. The point quoted here is pretty critical. Its probably unlikely that when I retire the results will be worse than they have ever been.
2. I intend to retire but not draw down for a couple of years and then draw down less than the amount I will at a later point in time.
3. I do not include my house value in my FIRE assets. I can downsize my house.
4. I have 3 kids and the costs associated with them should continually decrease.
5. I am not including any inheritance or social security in my calculations.
6. I can live off less than 5% and intend to in the first say 5-10 years. I could always continue living off less.
7. My wife may continue to work part time. I could as well although I don't want too.
If I live for 50 years post retirement I still think I should have my money last that long although I think its unlikely I will live 50 years post retirement.
With all those caveats you aren't really talking about a 5% WR any more. cFIREsim has quite a few variable spending options that you can use to model your scenario with and see what happens vs. historical data.
this is based purely on the premise that the trinity study assumes a 1% fee
That assumption is incorrect; the Trinity study assumed 0% fees.
Subsequent research by people like Pfau typically includes a 1% fee, which is why their recommendations are typically about 1% lower.
One obvious point that the article failed to address: if average returns going forward are expected to be below historical levels, wouldn't one also expect the worst case scenario to be worse than historical worst case scenarios?
It's not really that the article failed to address that point, but that the assumption that the future will be no worse than the worst of the past (among other assumptions) implicitly underlies any SWR-based attempt to use historical success rates to predict the likelihood of future success.
In other words, the "obvious point" that you said the article failed to address is actually another way of stating its conclusion. The comfort to be had from historical SWR analysis is precisely the fact that the future would need to be worse than the worst of the past in order for a historically-100%-successful withdrawal rate to fail.
But if we are going to make the assumption that the best of the good times going forward will not be as good as the best times in the past...
So with a long stretch of social calm and an inability to 'jump start' the global economy in the future, it is conceivable to me that the next 30 years may contain some of the worst times to rely on 4% SWR.
Who makes that assumption? The 4% rule certainly doesn't.
I'm not sure why you think this isn't discussed.
All I know is, the Fed has never expanded its balance sheet, kept near zero fund rates, all while having at the same time no increase in inflation.
But if we are going to make the assumption that the best of the good times going forward will not be as good as the best times in the past...
Who makes that assumption? The 4% rule certainly doesn't.
As retirees and their planners adjust to the 'new normal' - a world of lower-than-average returns for the foreseeable future, many have questioned whether the historical safe withdrawal rate research is still valid. After all, if returns will be below average in the coming years, doesn't that imply safe withdrawal rates must be below average as well? In point of fact, though, safe withdrawal rates do not depend on average returns in the first place; the worst safe withdrawal rates in history that we rely upon are actually associated with 15-year real returns of less than 1%/year from a balanced portfolio! Accordingly, given current bond yields, dividend yields, and inflation, if the current environment for today's retirees will result in a "new record low" safe withdrawal rate, the S&P 500 would still have to be no higher in 2027 than it was in 2007 or even 2000! On the other hand, merely projecting equities to recover to new highs by the end of the decade or generating a mid-single-digits return would actually represent an upside surprise, allowing for higher retirement spending than 4.5% safe withdrawal rates!
The author grants that average returns will be below average for the foreseeable future, and then suggests that the downside will be no worse than the worst in history. So, by default, he has assumed that the potential upside in the future will be reduced relative to history.
The author grants that average returns will be below average for the foreseeable future, and then suggests that the downside will be no worse than the worst in history. So, by default, he has assumed that the potential upside in the future will be reduced relative to history.
I don't think that's a fair interpretation of what Kitces said. What he said is simply that even if you believe the "new normal" in which we currently find ourselves will return below-average returns, it would have to do so by historically unprecedented levels (that is, be worse than the worst of the past) in order for the 4% rule to fail you. There is no logical fallacy there. (But keep in mind that, as forummm noted above, whatever parameters are built into Kitces' version of the 4% rule differ from other versions and produce more optimistic results; using a nominally equivalent asset allocation in cFIREsim and its default setting for all other variables, the historical success rate of a 4% WR is closer to 95% than 100%).
All I know is, the Fed has never expanded its balance sheet, kept near zero fund rates, all while having at the same time no increase in inflation.
It's explicitly for this reason (the historically unprecedented combination of economic conditions in which we currently find ourselves) that Pfau argues we shouldn't rely on actual historical market performance and why some of his latest research uses Monte Carlo simulations with built-in capital market expectations instead of actual historical data.
(Feb. 2014) “The probability that a 4% withdrawal rate will work in the future is much lower,” he says. His new safe starting point: a 3% drawdown. That means that if you’ve saved $1 million, you’re living on $30,000 a year before Social Security and any other sources of income you might have, not $40,000. Ouch.
You may be relieved to hear that Pfau’s idea is controversial. Michael Kitces, partner and director of research, Pinnacle Advisory, who has worked with Pfau on other research (more on that later), is one of many experts who think that the long historical record is still a decent guide to the future.
Yet William Bengen, the planner who in 1994 came up with the 4% rule, says some rethinking may be in order. “I think Pfau has done a great job of looking at the issues,” he says. “Market valuations are important, and he may be right.”
Which results in sub-4% SWR's...
http://time.com/money/2795168/forget-the-4-withdrawal-rule/?iid=EL
Of course, this is just another way of saying tomaahto. If you assume the future will be worse than the past, then you will be forced to conclude the future will be worse than the past.
Personally, I think you're oversimplifying this and brushing it under the rug. It's not that Pfau is just assuming the future will be worse than the past, he (and his colleagues) are looking at the past vs. the present and coming to the conclusion that the future will, more likely than not, look different.
It's not that Pfau is just assuming the future will be worse than the past, he (and his colleagues) are looking at the past vs. the present and coming to the conclusion that the future will, more likely than not, look different.
Pure 4% withdrawals for a retirement starting in 1965 were a disaster, with the portfolio dropping to $0 in about 25 years. This occurred regardless of asset allocation. A portfolio of 50% stock / 50% bonds failed just as surely as a portfolio of 100% stock.
Per GoCurryCracker (http://www.gocurrycracker.com/the-worst-retirement-ever):QuotePure 4% withdrawals for a retirement starting in 1965 were a disaster, with the portfolio dropping to $0 in about 25 years. This occurred regardless of asset allocation. A portfolio of 50% stock / 50% bonds failed just as surely as a portfolio of 100% stock.
Yes, here's another example from just three weeks ago where he reached the same pessimistic conclusion:
http://www.fa-mag.com/news/why-4--could-fail-22881.html
Of course, this is just another way of saying tomaahto. If you assume the future will be worse than the past, then you will be forced to conclude the future will be worse than the past.
May be déjà vu here, but how does the above "4% would have failed in 1965" compare with the chart (as seen in http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/ and http://retirementresearcher.com/the-trinity-study-and-portfolio-success-rates/) below showing "4% would have succeeded in 1965"?
The Trinity Study had data from 1926 to 1995. To consider retirements lasting 30 years, this means they could only consider retirement dates from 1926 to 1966. For anyone retiring after 1966, they couldn’t calculate the withdrawal rate sustainable over 30 years because they didn’t have the data. 1926 to 1966 represents 41 beginning retirement dates. Of those 41 dates, the 4% inflation-adjusted withdrawal rate failed 2 times, in 1965 and 1966. Thus, it’s success rate was 39/41 = 95.12%, or 95% when rounded down.
I'm not sure why there would be differences, but Pfau's himself states that 4% failed in 1965 (http://retirementresearcher.com/trinity-study-retirement-withdrawal-rates-and-the-chance-for-success-updated-through-2009/)
May be déjà vu here, but how does the above "4% would have failed in 1965" compare with the chart (as seen in http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/ and http://retirementresearcher.com/the-trinity-study-and-portfolio-success-rates/) below showing "4% would have succeeded in 1965"?QuoteThe Trinity Study had data from 1926 to 1995. To consider retirements lasting 30 years, this means they could only consider retirement dates from 1926 to 1966. For anyone retiring after 1966, they couldn’t calculate the withdrawal rate sustainable over 30 years because they didn’t have the data. 1926 to 1966 represents 41 beginning retirement dates. Of those 41 dates, the 4% inflation-adjusted withdrawal rate failed 2 times, in 1965 and 1966. Thus, it’s success rate was 39/41 = 95.12%, or 95% when rounded down.
The only difference in assumptions between William Bengen’s work and the Trinity study regards the choice of bond indices. While Mr. Bengen’s original research combined the S&P 500 index with 5-year intermediate term government bond returns, the Trinity Study used long-term high-grade corporate bond returns instead. The different choice for bonds explains why the worst-case scenario for Mr. Bengen (his SAFEMAX) was a withdrawal rate of 4.15%, but why the original Trinity Study found that a 4% withdrawal rate only had a 95% success rate (with more volatile corporate bonds, the sustainable withdrawal rate dipped below 4% in 1965 and 1966).
Ok, now I remember - and if I'd reread better the Pfau article I linked...
What I'd like to hear, instead of catastrophic scenarios which I don't tend to spend much time worrying about, is what gives you encouragement that the past IS going to repeat in the future, and especially what 30 year period you think we are headed for?
If you'd like to hear what gives me that confidence, scroll up and reread this thread ;)
But I do have lots of confidence that my "4%-rule-plus-safety-margin"-based early retirement's chances of success will be more than high enough to justify my decision to avoid bolstering those odds even further by deferring my early retirement even longer.
Does anyone here think the future is really going to look worse than the past the 4% rule is based on? I'm not saying it's impossible, just that it's a pretty grim view of the future.
Does anyone here think the future is really going to look worse than the past the 4% rule is based on? I'm not saying it's impossible, just that it's a pretty grim view of the future.
I don't think so. I think the most pessimistic view of the future for early retirees with a close to break even portfolio (say 4%) is that people stop spending and the economy therefore goes through a slow down period ala Japan for 30-50 years. I just can't see that happening. Consumerism is ingrained in people.
Does anyone here think the future is really going to look worse than the past the 4% rule is based on? I'm not saying it's impossible, just that it's a pretty grim view of the future.
I don't think so. I think the most pessimistic view of the future for early retirees with a close to break even portfolio (say 4%) is that people stop spending and the economy therefore goes through a slow down period ala Japan for 30-50 years. I just can't see that happening. Consumerism is ingrained in people.
I have a suggestion for some reading, in this case. The Demographic Cliff by Harry Dent. The very simply summary is the book is about what happens to the economy (and by proxy, the stock market) when you cross the data about average spending as people age (Ty Bernicke's Reality Retirement Planning) with the two distinct birth peaks that resulted in the Boomers and the Millienials, with the X-gen stuck in the low between. The result is that he predicts a Japan-like 'lost decade' for the United States (and most of Europe as well) roughly between 2014 and 2022. Considering he was one of not very many predicting Japan's lost decade in the late 1980's, and for similar demographic reasons, his perspective should not be dismissed lightly. So, if he is correct, the next several years should be a great time to be accumulating.
Even still, the 4% rule should be fine. One decade or so of flatlined stock values isn't the worst we have seen.
(And, on a side note, I’m not a big fan of the Shiller PE right now, because the 10-year average earnings include the anomalous year or two of crashed earnings during the 2008 bust…so I think the current 25 number is actually artificially high.)
Bottom line—history says that 4% is where you should want to be today. One more reason not to worry about it and work on your flexibility instead.
There is a good historical correlation between the valuation of the market (Shiller PE ratio) at any given time and the SWR applicable to that point in time. I haven't seen anyone run the analysis before, so I did it. See http://plottingforjailbreak.com/safe-withdrawal-rates-for-all-markets/ (http://plottingforjailbreak.com/safe-withdrawal-rates-for-all-markets/).
I haven't seen anyone run the analysis before, so I did it.
That is an amazing correlation. Thanks for plotting it!
The more I read about stock allocations that have a SWR of 5% or more, the less I worry about the 4% rule. Oh, well, the stock-heavy crowd will have to live with 4%, I guess, but I'm happy to go for 20 years of expenses rather than 25.
Stocks have tended to perform better over longer time periods and should therefore provide the highest possible SWR's.
And to see an example of a portfolio with only 40% stocks that matches the long-term returns of the stock market with much lower volatility and a much higher SWR, try this (http://portfoliocharts.com/2015/09/22/catching-a-golden-butterfly/).
The more I read about stock allocations that have a SWR of 5% or more, the less I worry about the 4% rule. Oh, well, the stock-heavy crowd will have to live with 4%, I guess, but I'm happy to go for 20 years of expenses rather than 25.
Stocks have tended to perform better over longer time periods and should therefore provide the highest possible SWR's. The problem is that the valuation of stocks over the past 100+years may not occur again and therefore the 4% rule might be more likely to be required.
Personally I want to go for a 5% WR but I'd like to see stocks decrease a lot in value for me to be comfortable with that WR.
@Steveo --
IMHO, the point is not to try to back test the perfect portfolio. The important takeaway is simply that different portfolios never considered by the Trinity study may have different SWRs. I definitely don't think there's a single portfolio that works best for everyone, so you need to do your own due diligence and account for things like taxes and what you're comfortable investing in.
BTW, if you like William Bernstein you might be interested in the SWR for one of his portfolios mentioned in the Intelligent Asset Allocator. Scroll to the bottom. http://portfoliocharts.com/portfolio/bernstein-portfolio/ Regardless of your outlook for the future, the portfolios you are more personally comfortable with might also surprise you!
This. Reducing volatility is not only about reducing down years (and, therefore, sleeping better) at the expense of CAGR. It is also about improving SWR. The fun thing is, rebalancing two (or, better, more than two) very volatile but uncorrelated assets can produce a low-volatility portfolio with excellent CAGR, because then volatility is not your enemy, eating in your stache, but your friend, letting you make huge rebalancing gains. This is the mechanism that makes those great portfolios mentioned by Tyler shine, even when compared to 100% stocks.Stocks have tended to perform better over longer time periods and should therefore provide the highest possible SWR's.
This may seem instinctively true but mathematically it's more complicated than that. Safe Withdrawal Rates are highly influenced not only by average returns but also by annual volatility.
2. Gold doesn't perform well in most situations. Gold performs well in times of deflation however deflation is not a high probability event.
2. Gold doesn't perform well in most situations. Gold performs well in times of deflation however deflation is not a high probability event.
Gold's done really poorly the lat few years and we are certainly not in inflation.
2. Gold doesn't perform well in most situations. Gold performs well in times of deflation however deflation is not a high probability event.
Gold's done really poorly the lat few years and we are certainly not in inflation.
Gold is traditionally considered an inflation hedge, not the other way around.
I may have missed it but what about all the economist talk about secular stagnation? It looks like real interest rates have been declining for some time, which I assume could make the 4% rule a less safe benchmark. Are there any examples of 4% rule holding despite real interest rates <1-2% for an extended period of time?
I may have missed it but what about all the economist talk about secular stagnation? It looks like real interest rates have been declining for some time, which I assume could make the 4% rule a less safe benchmark. Are there any examples of 4% rule holding despite real interest rates <1-2% for an extended period of time?
The 4% number came from looking at all of the available historical data. The original Trinity study went back to 1926 or something, and others have extended it back to the 1880s.
The underlying assumption of the 4% rule is that the future will be no worse than the past, economically speaking. It is possible the future will be worse than the past? Sure! If you want extra safety, take 3%. My view is that I'm willing to forgo that extra bit of safety in order to retire sooner/higher lifestyle. If the stash doesn't look like it will last, then I will reduce my lifestyle.
But, but, but, what if there's a world war? An oil crisis? A major nuclear meltdown? A great depression? Super restrictive economic policy changes? Super aggressive economic policy changes? Stagflation? A missile crisis that takes us to the edge of nuclear annihilation? Another terrorist attack?
Oh wait, the 4% SWR has already survived all of that, and assumes all of those things will totally happen again, and yet it's still 95-100% safe.
Does anyone here think the future is really going to look worse than the past the 4% rule is based on? I'm not saying it's impossible, just that it's a pretty grim view of the future.
But, but, but, what if there's a world war? An oil crisis? A major nuclear meltdown? A great depression? Super restrictive economic policy changes? Super aggressive economic policy changes? Stagflation? A missile crisis that takes us to the edge of nuclear annihilation? Another terrorist attack?
Oh wait, the 4% SWR has already survived all of that, and assumes all of those things will totally happen again, and yet it's still 95-100% safe.
Does anyone here think the future is really going to look worse than the past the 4% rule is based on? I'm not saying it's impossible, just that it's a pretty grim view of the future.
Not only is it a grim view of the future it goes against the all global trends.
To be fair, not all of them. I'm far from a doomsayer, but one trend that might eventually require a re-visit of the 4% rule is the trendline of dividends. While the US stock markets have trended up by about 6% or 7%, on average, for it's entire existence; the ratio of dividends to capital has been declining. This is the inverse of the price to earnings ratio, so the PE has been trending up. I presume that this is a side effect of maturing industrial societies; as in, as the infrastructure & industry of a society improves, the relative number of discoverable improvements in those categories (and thus the relative number of profitable investing opportunities) declines.
To be fair, not all of them. I'm far from a doomsayer, but one trend that might eventually require a re-visit of the 4% rule is the trendline of dividends. While the US stock markets have trended up by about 6% or 7%, on average, for it's entire existence; the ratio of dividends to capital has been declining. This is the inverse of the price to earnings ratio, so the PE has been trending up. I presume that this is a side effect of maturing industrial societies; as in, as the infrastructure & industry of a society improves, the relative number of discoverable improvements in those categories (and thus the relative number of profitable investing opportunities) declines.
I don't follow your logic. If anything, a lower dividend payout ratio indicates higher (not lower) growth prospects, because it suggests that management believes reinvesting funds in the business is a better allocation of capital then returning it to shareholders in the form of dividends (which explains why companies traditionally increase their dividend payout ratios as they progress in their lifecycles from young, growing businesses with many reinvestment opportunities to mature, stable businesses with fewer reinvestment opportunities).
The increase in PE ratios that is directly attributable to the decrease in dividend payout ratios causes PE-based valuation metrics to overstate the expensiveness of the current market as compared to historical periods (because those PE-based valuation metrics do not correct for the effects of the downward trend in dividend payout ratios), suggesting that expected future returns are higher (not lower) than they otherwise would be using those PE-based valuation metrics in the absence of a secular change in dividend payout ratios. (In reality, the downward trend in dividend payout ratios is largely due to a shift in management preferences towards favoring returning capital to shareholders via share buybacks in lieu of dividend payments, in large part precisely because of a lower dividend payout ratio's "artificial" boost to performance metrics.)
You seem to be thinking about how a p/e ratio might rise or fall within a single company. I'm talking about the general trend of the entire market over it's lifetime. Take a look at it...
http://www.multpl.com/
Granted, there is a lot of volatility in there, and I don't have the tools to show a precise trend line, but if you look at it you can see that the overall trend of the S&P500 P/E ratio is gradually upwards. I suspect, but cannot know, that is because the 'lower hanging fruit' of private infrastructure (and thus many investment) opprotunities have already been picked, for an industrial economy as mature as the United States; and therefore, the newer investments are both of a more incremental improvement & of a longer ROI. Of course, I'm speaking of the entire market in the US today as compared to the past, and not speaking of particular companies, regions or industries; which could move counter to that slow trend over any time period. So, in our own lifetimes it may not matter, since the 4% rule is very conservative anyway; but it might matter eventually. It would also imply that 'emerging market' type investments should be part of a 4% withdrawal portfolio.
You seem to be thinking about how a p/e ratio might rise or fall within a single company. I'm talking about the general trend of the entire market over it's lifetime. Take a look at it...
http://www.multpl.com/
Granted, there is a lot of volatility in there, and I don't have the tools to show a precise trend line, but if you look at it you can see that the overall trend of the S&P500 P/E ratio is gradually upwards. I suspect, but cannot know, that is because the 'lower hanging fruit' of private infrastructure (and thus many investment) opprotunities have already been picked, for an industrial economy as mature as the United States; and therefore, the newer investments are both of a more incremental improvement & of a longer ROI. Of course, I'm speaking of the entire market in the US today as compared to the past, and not speaking of particular companies, regions or industries; which could move counter to that slow trend over any time period. So, in our own lifetimes it may not matter, since the 4% rule is very conservative anyway; but it might matter eventually. It would also imply that 'emerging market' type investments should be part of a 4% withdrawal portfolio.
Yes, I realized you were talking about the entire market, but the "entire market" is just a collection of individual companies, whose P/E ratio consists of the aggregate P/E ratios of those individual companies (and, for the reasons I stated, I still don't follow your logic -- higher P/E ratios imply that investors are expecting more growth, not less).
Stocks have tended to perform better over longer time periods and should therefore provide the highest possible SWR's.
This may seem instinctively true but mathematically it's more complicated than that. Safe Withdrawal Rates are highly influenced not only by average returns but also by annual volatility. All things being equal, higher volatility lowers the SWR. So two portfolios with equal average returns may have drastically different withdrawal rates based on the underlying volatility. And sometimes portfolios with lower average returns but lower volatility can still beat stocks. That's how you get interesting results like this:
(https://portfoliocharts.files.wordpress.com/2015/09/swr-vs-cagr.jpg)
This plots the returns and calculated SWRs of a variety of different popular lazy portfolios. Note that the Total Stock Market has one of the highest returns but the lowest SWR! Also note than none of the top-3 SWR portfolios have more than 40% stocks. For a more detailed walkthrough, I'd recommend reading this (http://portfoliocharts.com/2015/09/08/why-your-safe-withdrawal-rate-is-probably-wrong/). And to see an example of a portfolio with only 40% stocks that matches the long-term returns of the stock market with much lower volatility and a much higher SWR, try this (http://portfoliocharts.com/2015/09/22/catching-a-golden-butterfly/).
The math behind SWRs is more complicated than just adding up the long-term real return for each individual asset. For example, gold does generally average a 0% real return in the long run but it is quite volatile year to year. Rebalancing a diverse portfolio each year allows you to benefit from those short-term movements by selling high and buying low. Also, volatility of the overall portfolio is a lot more important than most people realize (see How Safe Withdrawal Rates Work (http://portfoliocharts.com/2015/11/17/how-safe-withdrawal-rates-work/)). So you have to look beyond yield and average returns to get the full story.
In any case, all portfolios are uncertain looking forward. IMHO, the key for an early retiree is not to fear or ignore uncertainty but to embrace and plan for it. Portfolio diversification is just one way to do that, but I think it's a good one.
You seem to be thinking about how a p/e ratio might rise or fall within a single company. I'm talking about the general trend of the entire market over it's lifetime. Take a look at it...
http://www.multpl.com/
Granted, there is a lot of volatility in there, and I don't have the tools to show a precise trend line, but if you look at it you can see that the overall trend of the S&P500 P/E ratio is gradually upwards. I suspect, but cannot know, that is because the 'lower hanging fruit' of private infrastructure (and thus many investment) opprotunities have already been picked, for an industrial economy as mature as the United States; and therefore, the newer investments are both of a more incremental improvement & of a longer ROI. Of course, I'm speaking of the entire market in the US today as compared to the past, and not speaking of particular companies, regions or industries; which could move counter to that slow trend over any time period. So, in our own lifetimes it may not matter, since the 4% rule is very conservative anyway; but it might matter eventually. It would also imply that 'emerging market' type investments should be part of a 4% withdrawal portfolio.
Yes, I realized you were talking about the entire market, but the "entire market" is just a collection of individual companies, whose P/E ratio consists of the aggregate P/E ratios of those individual companies (and, for the reasons I stated, I still don't follow your logic -- higher P/E ratios imply that investors are expecting more growth, not less).
Sometimes, but sometimes investors are simply seeking the best yield on capital that they can find. In fact, I'd say that that's what happens most of the time. While they may expect that one company is going to grow more than another, they are still two boats riding the same tide. So while P/E does make sense in your context, trying to decide between multiple specific investments, the overall trend in P/E is still higher. The demographics of investments (for lack of a better term) implies that capital is increasing & competing for fewer (sound) investments overall, which would be what we would expect to see in a maturing industry. What I'm saying is, that it looks like the entire investing marketplace, all industries included, are maturing on a multi-generational timeframe; and thus we can expect that yield on capital (dividends in this context) will trend lower, but very slowly.
You seem to be thinking about how a p/e ratio might rise or fall within a single company. I'm talking about the general trend of the entire market over it's lifetime. Take a look at it...
http://www.multpl.com/
Granted, there is a lot of volatility in there, and I don't have the tools to show a precise trend line, but if you look at it you can see that the overall trend of the S&P500 P/E ratio is gradually upwards. I suspect, but cannot know, that is because the 'lower hanging fruit' of private infrastructure (and thus many investment) opprotunities have already been picked, for an industrial economy as mature as the United States; and therefore, the newer investments are both of a more incremental improvement & of a longer ROI. Of course, I'm speaking of the entire market in the US today as compared to the past, and not speaking of particular companies, regions or industries; which could move counter to that slow trend over any time period. So, in our own lifetimes it may not matter, since the 4% rule is very conservative anyway; but it might matter eventually. It would also imply that 'emerging market' type investments should be part of a 4% withdrawal portfolio.
Yes, I realized you were talking about the entire market, but the "entire market" is just a collection of individual companies, whose P/E ratio consists of the aggregate P/E ratios of those individual companies (and, for the reasons I stated, I still don't follow your logic -- higher P/E ratios imply that investors are expecting more growth, not less).
Sometimes, but sometimes investors are simply seeking the best yield on capital that they can find. In fact, I'd say that that's what happens most of the time. While they may expect that one company is going to grow more than another, they are still two boats riding the same tide. So while P/E does make sense in your context, trying to decide between multiple specific investments, the overall trend in P/E is still higher. The demographics of investments (for lack of a better term) implies that capital is increasing & competing for fewer (sound) investments overall, which would be what we would expect to see in a maturing industry. What I'm saying is, that it looks like the entire investing marketplace, all industries included, are maturing on a multi-generational timeframe; and thus we can expect that yield on capital (dividends in this context) will trend lower, but very slowly.
Ah, I see what you are saying. But your argument is really based on the overall decrease in the earnings yield (the inverse of the P/E ratio), not the dividend yield (the ratio of dividends to share price). The downward trend in dividend yields is not just a function of higher P/E ratios, but also the downward trend in dividend payout ratios (the ratio of dividends to earnings, which is what I had been referring to). That is, we have lower dividend yields today than historically not only because share prices are higher relative to earnings (which, accordingly to your theory, may reflect increased investor competition for fewer investment opportunities in a mature market), but also, in large part, because companies simply choose to retain a higher percentage of their earnings instead of paying them out to shareholders in the form of dividends.
I can accept that observation, however the decisions of boardmembers regarding dividends retention or payout tend to reverse themselves over the long run
In the long run, the dividend yield must still go down proportional to the decrease in the earnings yield; because earnings beget dividends.
I can accept that observation, however the decisions of boardmembers regarding dividends retention or payout tend to reverse themselves over the long run
Do they? Dividend payout ratios have been declining since at least 1980 (see here (http://www.advisorperspectives.com/newsletters08/Jeremy_Siegel_on_why_Equities_are_Dirt_Cheap.html)), and I think for much longer (but I'm on my phone so I'm having trouble looking up data).QuoteIn the long run, the dividend yield must still go down proportional to the decrease in the earnings yield; because earnings beget dividends.
Not necessarily; that's exactly my point. For the past 35 years (at least) there has been a disproportionately high decrease in the dividend yield owing to the decrease in the dividend payout ratio. Consider what would happen if every company suddenly decided to follow Berkshire Hathaway's lead and stop paying dividends altogether; the overall dividend yield would suddenly shrink to zero, but that wouldn't indicate anything about underlying market fundamentals.
Still, that won't change the trend;if earnings are not paid out as dividends, that typically adds to the stock value anyway, so a generationally rising P/E is going to impact the 4% rule whether by dividends or by capital gains.
Still, that won't change the trend;if earnings are not paid out as dividends, that typically adds to the stock value anyway, so a generationally rising P/E is going to impact the 4% rule whether by dividends or by capital gains.
No, to the extent the increase in P/E is attributable to a decrease in the dividend payout ratio, it would have zero impact on the 4% rule (ignoring tax consequences, if any); all it would mean is that an investor relying on the 4% rule would need to sell more shares (which, as you said, would reflect the higher value of the retained earnings) to make up the shortfall in the dividend payouts, with no net overall impact.
You are absolutely right that in theory retaining dividends is neutral for investors
Stocks have tended to perform better over longer time periods and should therefore provide the highest possible SWR's.
This may seem instinctively true but mathematically it's more complicated than that. Safe Withdrawal Rates are highly influenced not only by average returns but also by annual volatility. All things being equal, higher volatility lowers the SWR. So two portfolios with equal average returns may have drastically different withdrawal rates based on the underlying volatility. And sometimes portfolios with lower average returns but lower volatility can still beat stocks. That's how you get interesting results like this:
(https://portfoliocharts.files.wordpress.com/2015/09/swr-vs-cagr.jpg)
This plots the returns and calculated SWRs of a variety of different popular lazy portfolios. Note that the Total Stock Market has one of the highest returns but the lowest SWR! Also note than none of the top-3 SWR portfolios have more than 40% stocks. For a more detailed walkthrough, I'd recommend reading this (http://portfoliocharts.com/2015/09/08/why-your-safe-withdrawal-rate-is-probably-wrong/). And to see an example of a portfolio with only 40% stocks that matches the long-term returns of the stock market with much lower volatility and a much higher SWR, try this (http://portfoliocharts.com/2015/09/22/catching-a-golden-butterfly/).
This is very interesting. I've been a stocks + cash guy during accumulation. No bonds. No gold. Now I'm thinking of going RE I wonder about the volatility of a stocks plus cash portfolio. However, I'm also concerned that bonds and gold are not going to do what they did in these SWR studies.
Example: The Permanent Portfolio:
•25% Long Term Treasuries
•25% Short Term Treasuries
•25% Gold
•25% Total Stock Market
For a portfolio to last 40 years at a 4% SWR it needs investment returns of about 2.5% per year after inflation. Then it's all gone.
•25% Long Term Treasuries - Vanguard Long-Term Treasury Fund Admiral Shares (VUSUX) current yield 2.68%
•25% Short Term Treasuries - Vanguard Short-Term Treasury Fund Admiral Shares (VFIRX) current yield 0.99%
•25% Gold - over the long term will likely keep up with inflation, real return of 0%
•25% Total Stock Market - who knows? But valuation is demonstrably high, which correlates well with sub-par returns.
That's not looking good. It's not looking promising for 2.5% over inflation. And it's certainly not looking like 4-5% over inflation, which is, I expect, what most of us really want (and need).
You are absolutely right that in theory retaining dividends is neutral for investors
I think practice is virtually assured to comport with theory on this point, because, although the stock market is not perfectly efficient (as posited by stronger forms of the efficient market hypothesis), it is nonetheless highly efficient, and certainly efficient enough to correctly reflect so obvious a change (or lack of change) in the intrinsic value of a company's shares as the company's divestiture (or non-divestiture) of cash in the form of a dividend payment (or non-payment) to its shareholders. In other words, dividend payments (or non-payments) are always correctly priced into the company's shares by the market to begin with, so any market fluctuations would have an equal impact on companies regardless of their dividend payout ratios.
Forum user skyrefuge (who has been inactive lately) was best at articulating this point, so I would recommend looking up some of his posts on the topic (and the discussion starting with this post (http://forum.mrmoneymustache.com/investor-alley/blending-dividend-investing-and-index-investing/msg654766/#msg654766) is a really fun read, if you're interested in going down a rabbit hole on this issue).
I'm curious is the is reasonable, empirically researched data/studies that make a sincere or valid attempt at invalidating a 4% SWR. In really dumb terms: the Sith to the Trinity Study's Jedi?
Sure. By none other than Wade Pfau, the guy who made the 4% rule popular.
http://tinyurl.com/nrywjny
Pfau's recent work doubting the 4% rule have been based on some way or another handicapping expected returns. I've seen two basic methods:
1) Sneak in a 1% management cost. Pretty damn obvious. I and others called him on this one since most of us are with Vanguard and low cost. So.... the next method:
2) Take historical returns. Cut them down 25-50%, then run the Monte Carlo. More subtle. Justified on current low bond yield. This is basically assuming we have times which will be considerably worse than the Great Depression, or 66-82 stagflation for investors. It's fine to play "What if?" - but this isn't really predictive.
How about sneaking in a 1.67% management fee?
http://www.retireearlyhomepage.com/wadepfau_2016.html
So, take the 1.7%, add back the 1.6% fee, subtract (say) 0.2% for low cost funds and we get 3.1%.
So, take the 1.7%, add back the 1.6% fee, subtract (say) 0.2% for low cost funds and we get 3.1%.
You can't simply add back the investment fee to the WR to correct for its adverse effect; as Pfau himself pointed out back in 2012 (http://retirementresearcher.com/retirement-income-and-the-tyranny-of-compounding-fees/), there is not a one-to-one tradeoff between investment fees and withdrawal rates, because the nominal dollar amount of an investment fee fluctuates in tandem with the nominal value of the portfolio, in contrast with the nominal dollar amount of the withdrawals, which do not change based on fluctuations in the portfolio value (instead, they remain a constant inflation-adjusted dollar amount).
So, take the 1.7%, add back the 1.6% fee, subtract (say) 0.2% for low cost funds and we get 3.1%.
You can't simply add back the investment fee to the WR to correct for its adverse effect; as Pfau himself pointed out back in 2012 (http://retirementresearcher.com/retirement-income-and-the-tyranny-of-compounding-fees/), there is not a one-to-one tradeoff between investment fees and withdrawal rates, because the nominal dollar amount of an investment fee fluctuates in tandem with the nominal value of the portfolio, in contrast with the nominal dollar amount of the withdrawals, which do not change based on fluctuations in the portfolio value (instead, they remain a constant inflation-adjusted dollar amount).
It's a reasonable first approximation. Yes, it overstates somewhat.
Wade Pfau sure gets a lot of press for offering such marginal advice.
Regarding this recent discussion, Scott Burns has an excellent piece today:
https://assetbuilder.com/knowledge-center/articles/how-we-live…-and-how-long-our-money-lasts
Regarding this recent discussion, Scott Burns has an excellent piece today:
https://assetbuilder.com/knowledge-center/articles/how-we-live…-and-how-long-our-money-lasts
So the 4% WR is in my opinion pretty safe so long as you use some common sense. I honestly think a 5% WR can be safe as well especially if you are prepared to work a little as well.
So the 4% WR is in my opinion pretty safe so long as you use some common sense. I honestly think a 5% WR can be safe as well especially if you are prepared to work a little as well.
I agree. And 5% may be safe a good chunk of the time even if you DON'T work again. If you're flexible AND willing to earn some?
(http://www.businessintelligence.com.s3.amazonaws.com/wp-content/uploads/2013/10/sticker375x360.png)
5% and some part time work and that is 100% correct.Are you sure you're getting those percentages right??
If you're pulling $50K offa' a Million invested, that's 5% and a higher risk of failure than 4%.
Quote from: steveo5% and some part time work and that is 100% correct.Are you sure you're getting those percentages right??
The only way to "fail" retirement is to be forced into working more than you want to, and there are two ways to do that. 1) work too little, and then have to go back to work, or 2) work too much in the first place. We can't know in advance what our financially optimal retirement date is because we don't know what future market returns will be. If you retire before that date, then you'll need to work more in the future. If you retire after that date then you have worked more than needed in the past. Using a 4% SWR virtually guarantees (95% chance) that you fail the second way, and decide to work too long.
Quote from: steveo5% and some part time work and that is 100% correct.Are you sure you're getting those percentages right??
Your investments don't know, or care, if you've got a part time job or not, so how are you factoring that in to your 5% being a success?
Quote from: steveo5% and some part time work and that is 100% correct.Are you sure you're getting those percentages right??
Your investments don't know, or care, if you've got a part time job or not, so how are you factoring that in to your 5% being a success?
Because that part time work can lower the SWR when necessary.
I.e. say you need 50k/yr on your 1MM stache--5% WR.
Some years you pick up some side work and make 20k. Your WR that year is only 3%. Effectively the part time work lowers your average WR, but you're planning on a "5% WR and some part time work." Some times you feel like a work, sometimes you don't. 5% is close to okay without it, and should be pretty good with it, especially with some spending flexibility (say, market is down, you earn 20k side gig and drop spending from 50k to 40k that year, due to spending more time at that job, and less on traveling, say). Now you're only withdrawing 20k from the stache that year, a 2% WR. That's where the spending and income flexibility come in. Many years you spend 5%. Other years your effective spending after spending flexibility and income is 2%.
That's what I meant by "5% may be safe a good chunk of the time even if you DON'T work again. If you're flexible AND willing to earn some?"
The point is simply that flexibility to supplement income and/or reduce spending are both part of the multiple external layers of safety margin that are deliberately ignored by the 4% rule but usually exist in the real world. So, to reiterate the overarching theme of this thread, strict adherence to the 4% rule is highly safe, and flexible adherence to the 4% rule is exceedingly safe.
MoonShadow pretty much just wrote what I was getting at.
Basically, it's not the "4% (or 5%) rule" at all if you're tacking on hugely random notions of going back to work to make up a large portion of your spending and/or dropping your spending drastically.
I think everyone agrees those tactics are totally smart and super useful, but it's wrong to word it like you're following the 4 (or 5) % rule, and that you believe it's safe so that's why you're following it, etc., when you're not at all.
If the future turns out to be as good or better than the past, you will have picked right. If it turns out to be worse than the past, you'll have to go back to work or reduce your inflation-adjusted spending limits. I don't think either of those options are so bad that they're worth deliberately failing by working too long up front.
But if you put caveats and asterisks on how to define your retirement number, then how do you know when to retire?
MoonShadow pretty much just wrote what I was getting at.
Basically, it's not the "4% (or 5%) rule" at all if you're tacking on hugely random notions of going back to work to make up a large portion of your spending and/or dropping your spending drastically.
I think everyone agrees those tactics are totally smart and super useful, but it's wrong to word it like you're following the 4 (or 5) % rule, and that you believe it's safe so that's why you're following it, etc., when you're not at all.
Literally no one ever picks an initial WR, increases it exactly by inflation, and always spends to the penny that exact amount, regardless of market conditions, external factors, etc.
It doesn't happen.
So you can talk about a 4% WR, but it's a rough guideline for how it will go.
It's safe to do on it's own, and it's even safer to be flexible. And that may allow you to go even higher, to 5-6%.
But for the people worried about 4%, having flexibility is just another level of safety margin, because your effective WR will be lower if you're willing to decrease spending or earn money. It's not necessary, but it may provide some peace of mind for the worriers.
What I am looking for, and I think what most of us are looking for, is what Sol was talking about; that special multiple of our expenses, that we can set as our target, where we cross from unlikely to succeed to likely to succeed historically, without falling back upon earning income in some other way.
the answer is a portfolio valued at slightly under 17x expenses, the inverse of a withdrawal rate slightly over 5.88%)--but that's not at all what most folks around here are actually looking for. It's a rare individual indeed who has the cojones to pull the retirement ripcord as soon as chances of success pass the "more likely than not" threshold
It's a rare individual indeed who has the cojones to pull the retirement ripcord as soon as chances of success pass the "more likely than not" threshold
You retire when you feel your FIRE tool kit is ready. That includes:
- $$ in investments
- PT work plans if any
- risk management plan
- FIRE plan AKA what the fuck do I do with all this time off plan
and the market isn't tanking. Probably nobody has the stomach to FIRE in the middle of a 20-30% crash.
That does not provide an exact answer, but focusing on 4% is no better - either in terms of $$ or frankly the more important issues like how you are going to adjust to FIRE mentally/emotionally.
The later issues lead to the OMY syndrome more than the $$ do in my opinion.
MoonShadow - I have 3 kids and I intend to be retired well before they all finish school. My oldest is 14 and I can't see myself retiring prior to her finishing school but my youngest is 5 and I expect to be retired before he starts high school.
My wife & I are pretty frugal, but kids are simply expensive
The 4% rule, as a worst case or near-worst case protection strategy, was deliberately designed to have a total or near-total historical success rate in order to compensate for our inability to pre-identify (with any reasonable degree of certainty) those retirement commencement dates that are destined to result in failure. But people tend to forget that, and start building layers of safety upon layers of safety to the point of absurdity, at the cost of years of lost retirement upfront.
My wife & I are pretty frugal, but kids are simply expensive
I get this. Kids just cost money. You can minimise this but I can't just cut this to bare bones level. If the kid needs swimming lessons for instance we pay for it.
My wife & I are pretty frugal, but kids are simply expensive
I get this. Kids just cost money. You can minimise this but I can't just cut this to bare bones level. If the kid needs swimming lessons for instance we pay for it.
Indeed.
We had enough saved at the end of 2007 that I could have retired at a 4% WR (it wasn't in my thoughts at the time). It would have seemed a particularly bad time to retire during the 2008/2009 crash, but by now our investments would be higher than at the start and that's with taking out 4% plus inflation a year. But we would have been starting to worry. Our expenses have increased over 30% since 2007. We had another child, the other two got older and into activities that cost a lot, and our medical costs have more than doubled.
Those of us with kids need to build in an extra safety margin, IMHO. Bare bones will not do it.
In my mind, 50% success rate of the 6% SWR means I am just as likely to have to increase my spending as reduce my spending, later in retirement.
My wife & I are pretty frugal, but kids are simply expensive
I get this. Kids just cost money. You can minimise this but I can't just cut this to bare bones level. If the kid needs swimming lessons for instance we pay for it.
Indeed.
We had enough saved at the end of 2007 that I could have retired at a 4% WR (it wasn't in my thoughts at the time). It would have seemed a particularly bad time to retire during the 2008/2009 crash, but by now our investments would be higher than at the start and that's with taking out 4% plus inflation a year. But we would have been starting to worry. Our expenses have increased over 30% since 2007. We had another child, the other two got older and into activities that cost a lot, and our medical costs have more than doubled.
Those of us with kids need to build in an extra safety margin, IMHO. Bare bones will not do it.
I'd say you need to accurately estimate your expenses, including known unknowns. But that doesn't require any extra safety margins, as it's already plenty safe, as long as that has been done correctly.
You can't go with a bare bones retirement however if you know how much you spend you can use that as a go forward position. I don't expect expenses to increase significantly but my kids are 14,12 and 5.
You can't go with a bare bones retirement however if you know how much you spend you can use that as a go forward position. I don't expect expenses to increase significantly but my kids are 14,12 and 5.
An example: Our largest budget item after groceries is medical insurance. It has gone up by 211% from 2008 to 2016. Out of pocket costs have also gone up since each year we take higher deductibles to keep premiums down. The increase last year to this is 18%. We could assume it will increase the same in 2017. The year after is anyone's guess.
Expenses can increase significantly and unpredictably.
As long as we have the ACA
As I mentioned, it's the subsidies that keep the premiums stable. So if you don't qualify for those, then your premiums wouldn't be stable. Best to cut some of that excess spending, considering that 400% of the FPL is pretty damn spendy.
(The costs of living on a sailboat tend to increase at an exponential rate relative to the length of the boat, so it's possible to live well & cheap living on a boat, but only if it's small & you are able to do your own maintenance, which I am). My wife & I are pretty frugal, but kids are simply expensive; and the state busybodies tend to get nosy if your kid's address at their school is a marina slip number. (And even the marina slip rental would kill the fiscal advantages of living aboard a boat) We do homeschool our older two, who are highschool aged now, and are likely to do so for our youngest (we might not for our two middle boys, who do not respond well to my wife's educational style) but to register a child in Kentucky as a homeschooler, a GPS location somewhere on the Ohio River doesn't fly, and neither does a PO box number.
We have several sets of friends who would be happy to rent a room to us for a nominal amount so that we had a fixed address for the school district. Get your bills delivered there, and use that address for your driver's license. Presto.
(The costs of living on a sailboat tend to increase at an exponential rate relative to the length of the boat, so it's possible to live well & cheap living on a boat, but only if it's small & you are able to do your own maintenance, which I am). My wife & I are pretty frugal, but kids are simply expensive; and the state busybodies tend to get nosy if your kid's address at their school is a marina slip number. (And even the marina slip rental would kill the fiscal advantages of living aboard a boat) We do homeschool our older two, who are highschool aged now, and are likely to do so for our youngest (we might not for our two middle boys, who do not respond well to my wife's educational style) but to register a child in Kentucky as a homeschooler, a GPS location somewhere on the Ohio River doesn't fly, and neither does a PO box number.
No offense, but don't you have any friends?
(The costs of living on a sailboat tend to increase at an exponential rate relative to the length of the boat, so it's possible to live well & cheap living on a boat, but only if it's small & you are able to do your own maintenance, which I am). My wife & I are pretty frugal, but kids are simply expensive; and the state busybodies tend to get nosy if your kid's address at their school is a marina slip number. (And even the marina slip rental would kill the fiscal advantages of living aboard a boat) We do homeschool our older two, who are highschool aged now, and are likely to do so for our youngest (we might not for our two middle boys, who do not respond well to my wife's educational style) but to register a child in Kentucky as a homeschooler, a GPS location somewhere on the Ohio River doesn't fly, and neither does a PO box number.
No offense, but don't you have any friends?
Unfortunately, none still alive. And in my school district, they actually investigate such claims.
Make some friends.
Which is why you have a (mobile) phone bill with that address on it and your name, and your driver's license has that address, etc.
Make some friends.
But, Dude, they keep dying.
Hey, Tom; would you be my friend. It's probably all just coincidence.
Does anybody know if it is possible to get a CSV of all the terminal portfolio values in a simulation run?
I looked at cFIREsim and there is a checkbox for Create CSV file with output stats in the right column. Then, once you get the results plot there is a Download Simulation Data link at the bottom of the page. However, the CSV file was weird. I did the default simulation for 2015-2045 retirement and the CSV file only has rows for 1956-1985. The CSV file does have ending portfolio value with and w/o inflation adjust. So, it seems to have a bug in the CSV file generator.
It picks a retirement year for you (in this case 1956). I haven't been able to figure out how to get it to run a specific year you are interested in.
This is my problem. I want all the output data, not just a subset.
Yes, I know, cFIREsim is a great resource that's provided for free, and I should be happy that I even have access to such a tool in the first place.
Which is why you have a (mobile) phone bill with that address on it and your name, and your driver's license has that address, etc.
By investigate, I mean that they actually do that. As in, knock on the front door as ask to see the child's bedroom, kind of investigate. Seriously, I live in one of the most desired public school districts in the state, and it's a criminal misdemeanor to claim a child lives in the home, when they do not. It's really asking too much of anyone.
Which is why you have a (mobile) phone bill with that address on it and your name, and your driver's license has that address, etc.
By investigate, I mean that they actually do that. As in, knock on the front door as ask to see the child's bedroom, kind of investigate. Seriously, I live in one of the most desired public school districts in the state, and it's a criminal misdemeanor to claim a child lives in the home, when they do not. It's really asking too much of anyone.
"I live in one of the most desired public school districts in the state" << everyone thinks this LOL. Anyway I doubt the local school reps have authority to inspect anyone's bedroom?
-I live in one of the most desired public school districts in the state-
Quote from: MoonShadow-I live in one of the most desired public school districts in the state-
There are 'desired school districts' in KY?
Wow... I did not know that.
heh... I kid
Quote from: MoonShadow-I live in one of the most desired public school districts in the state-
There are 'desired school districts' in KY?
Wow... I did not know that.
heh... I kid
Quote from: MoonShadow-I live in one of the most desired public school districts in the state-
There are 'desired school districts' in KY?
Wow... I did not know that.
heh... I kid
Best school district in KY, I guess everything is relative ;)
Quote from: MoonShadow-I live in one of the most desired public school districts in the state-
There are 'desired school districts' in KY?
Wow... I did not know that.
heh... I kid
Best school district in KY, I guess everything is relative ;)
A pox upon all your houses. Next you uppity yankees are going to insist that a education requires shoes.
Is 4.5% WR still safe?
For the 2000 and 2008 retiree Bengen says yes.
http://www.fa-mag.com/news/is-4-5---still-safe-27153.html?section=47
depends on if they were invested in Japanese stocks or US stocks (or other). I wonder what landlording has looked like in Japan over the last ~25-30 years. My guess is on an island, probably not too bad.
How does 4% withdrawal rule hold up with someone who retire in Japan around 1990ish?
How does 4% withdrawal rule hold up with someone who retire in Japan around 1990ish?
If they were (foolishly IMO) 100% Japanese stocks, then probably not great. But you can google for that. But if they were cap-weight globally diversified, they probably did OK.
How does 4% withdrawal rule hold up with someone who retire in Japan around 1990ish?
If they were (foolishly IMO) 100% Japanese stocks, then probably not great. But you can google for that. But if they were cap-weight globally diversified, they probably did OK.
forummm, do you think US investors that are almost-100% stocks are foolish, too? If not, what makes them different? (hint: in the 80s, there were Japanese stocks investors that believed stocks always go up on the long run, as it always did historically, so don't panic, stay the course and you'll be fine).
Anyway, according to portfoliocharts.com, a 50% pacific / 50% total bond investor (remember those studies are made on a 50/50 portfolio) has a... 4.4% SWR, which is better than 100% US stocks (4.2%). But a 100% pacific investor (sic) has a 2.3% SWR.
An interesting perspective ("The “Feel Free” Retirement Spending Strategy"):
http://www.investmentnews.com/assets/docs/CI105854622.PDF
It simple, but I would like to see a lot more math behind it and how the extra buffer addresses the one time events/tail risk (which is basically what is addressed by going below 4%)
Suppose you take a regular safe withdrawal rate of 4 percent from your portfolio? You’d need ... $1,945,600
Mad Fientist on the 4% SWR:
http://www.madfientist.com/safe-withdrawal-rate/
"As you can see, there is actually a strong correlation between the two so you can use the Shiller P/E 10 (a.k.a. Shiller CAPE) to predict safe withdrawal rates!
This exciting realization prompted me to use my programming skills to create a new Safe Withdrawal Rate indicator for the FI Laboratory. Now, you can log in at any time and see an up-to-date safe withdrawal rate estimate based on the most-recent Shiller CAPE value!"
Current SWR estimate: 3.8 - 3.9%
"Calculated using the 05/01/2016 Shiller CAPE Ratio of 25.49"
M1 and M2 both have the very same life expectancy, both have the very same net worth, the very same asset allocation and both spend $35k per year. How on earth can a spending pattern be very conservative and very aggressive at the same time ???For one thing, the SWR calculation is built on a 30 year assumption. M1 has used 5, so has only 25 to go, while M2 has to last the full 30.
M1 and M2 both have the very same life expectancy, both have the very same net worth, the very same asset allocation and both spend $35k per year. How on earth can a spending pattern be very conservative and very aggressive at the same time ???For one thing, the SWR calculation is built on a 30 year assumption. M1 has used 5, so has only 25 to go, while M2 has to last the full 30.
M1 and M2 both have the very same life expectancy, both have the very same net worth, the very same asset allocation and both spend $35k per year. How on earth can a spending pattern be very conservative and very aggressive at the same time ???For one thing, the SWR calculation is built on a 30 year assumption. M1 has used 5, so has only 25 to go, while M2 has to last the full 30.
M1 and M2 both have the very same life expectancy, both have the very same net worth, the very same asset allocation and both spend $35k per year. How on earth can a spending pattern be very conservative and very aggressive at the same time ???
Sounds like a riddle of the Sphinx. Enjoy.
For one thing, the SWR calculation is built on a 30 year assumption. M1 has used 5, so has only 25 to go, while M2 has to last the full 30.That has no bearing on this as both have a current portfolio of $700k. The answer is in the sequence of returns risk/benefit.
For one thing, the SWR calculation is built on a 30 year assumption. M1 has used 5, so has only 25 to go, while M2 has to last the full 30.That has no bearing on this as both have a current portfolio of $700k. The answer is in the sequence of returns risk/benefit.
The 30 year assumption is one thing, and the sequence of returns is yet another. No need to argue - both have a bearing.
The two identical spending plans (inflation-adjusted $35k per year for the next X years using a $700k portfolio commencing on the same date) obviously have identical risk profiles.
For one thing, the SWR calculation is built on a 30 year assumption. M1 has used 5, so has only 25 to go, while M2 has to last the full 30.Sure, but it keeps being used in FIRE communities where retirements are supposed to last much longer than 30 years.
That has no bearing on this as both have a current portfolio of $700k. The answer is in the sequence of returns risk/benefit.Yes, precisely. M1 and M2 will face the same sequence of returns from that point, and SWR theory just ignores that.
The approach of using historical SWRs to forecast the likelihood of future portfolio success deliberately ignores all current context, implicitly assuming that every retirement start date has an equal likelihood of success regardless of then-existing market conditions. In the real world, we all know this assumption is not true.My point exactly. I think that SWR thing is overrated. I agree 25 x annual expenses (which is just SWR-1) is a good approximate target for people hoping to FIRE (or just to retire at "regular" age), but that's about it.
If I had enough to FIRE in 2009 then 4% or higher WR would make sense, but in 2006 or even now I don't think so and am more in the 3-3.5% WR view.
If I had enough to FIRE in 2009 then 4% or higher WR would make sense, but in 2006 or even now I don't think so and am more in the 3-3.5% WR view.
Be careful. With that kind of rational thought you'll get labeled as a doomer-gloomer.
M1 and M2 will face the same sequence of returns from that point, and SWR theory just ignores that.
Or do what a rational early retiree would do, and adjust spending when the market has tanked. Market is down 30%? Maybe stop blindly following the 4% rule and pare back a bit. When it comes back up, maybe you start to draw 4% again, or go crazy and draw 5% or more?
M1 and M2 will face the same sequence of returns from that point, and SWR theory just ignores that.
But "SWR theory" deliberately ignores that, and compensates for its blindness to then-existing market conditions by setting the clearance hurdle at history's worst case or near-worst case scenarios (or whatever specific alternative threshold you opt for that makes you comfortable). It always remains true that at any given time, if you're using a SWR with an X% historical success rate, the future would have to be as bad as or worse than the worst 100-X% of cases in history [edited to add:] for your spending plan to fail.
Sure when you start out in the context of the 4% rule, but in the context of the actual question the timeframe doesn't matter.The 30 year assumption is one thing, and the sequence of returns is yet another. No need to argue - both have a bearing.For one thing, the SWR calculation is built on a 30 year assumption. M1 has used 5, so has only 25 to go, while M2 has to last the full 30.That has no bearing on this as both have a current portfolio of $700k. The answer is in the sequence of returns risk/benefit.
SWR states he can spend...4% per year...3% would be quite conservative, and...5% would be quite risky.
...
The 4% SWR rule states he can spend $ 28 000 per year, with ...3% being very conservative and ...5% being quite risky.
...
How on earth can a spending pattern be very conservative and very aggressive at the same time ???
But "SWR theory" deliberately ignores that, and compensates for its blindness to then-existing market conditions by setting the clearance hurdle at history's worst case or near-worst case scenarios (or whatever specific alternative threshold you opt for that makes you comfortable). It always remains true that at any given time, if you're using a SWR with an X% historical success rate, the future would have to be as bad as or worse than the worst 100-X% of cases in history [edited to add:] for your spending plan to fail.Yep, but you have to see the other side of the coin, too. Since SWR is so paranoïd (worst-case focused), more often than not, you end up with an absurd amount of wealth at your death. Sure, that's good news for your heirs, but that also means either you end up having worked too much in your life, or you have restreined yourself too much regarding spending. You're a 1961 mustachian, you're FI since 1933 and you're starting to get old (about 65-70). Your net worth is now an incredible 8 million bucks, while you started at 1 million. Couldn't you afford that wonderful trip around the world you delayed for so long ? Could you go to that very expensive but *amazing* restaurant you've heard about in France ? Just once in your lifetime ? Nope, 'coz SWR says you should only spend 40 000 (inflation adjusted) this year, again and again.
But "SWR theory" deliberately ignores that, and compensates for its blindness to then-existing market conditions by setting the clearance hurdle at history's worst case or near-worst case scenarios (or whatever specific alternative threshold you opt for that makes you comfortable). It always remains true that at any given time, if you're using a SWR with an X% historical success rate, the future would have to be as bad as or worse than the worst 100-X% of cases in history [edited to add:] for your spending plan to fail.Yep, but you have to see the other side of the coin, too. Since SWR is so paranoïd (worst-case focused), more often than not, you end up with an absurd amount of wealth at your death. Sure, that's good news for your heirs, but that also means either you end up having worked too much in your life, or you have restreined yourself too much regarding spending. You're a 1961 mustachian, you're FI since 1933 and you're starting to get old (about 65-70). Your net worth is now an incredible 8 million bucks, while you started at 1 million. Couldn't you afford that wonderful trip around the world you delayed for so long ? Could you go to that very expensive but *amazing* restaurant you've heard about in France ? Just once in your lifetime ? Nope, 'coz SWR says you should only spend 40 000 (inflation adjusted) this year, again and again.
Practical consequence, for instance : maybe FIREing earlier, at 20 years of expenses (5% SWR) *and* being ready to work part-time unless the markets are friendly in the first years of your retirement is a viable strategy, I dunno, but that would mean that, on average, you can work even less that advised. Don't try this at home though, I'm just thinking out loud.
Sure, that's good news for your heirs, but that also means either you end up having worked too much in your life, or you have restreined yourself too much regarding spending.
But "SWR theory" deliberately ignores that, and compensates for its blindness to then-existing market conditions by setting the clearance hurdle at history's worst case or near-worst case scenarios (or whatever specific alternative threshold you opt for that makes you comfortable). It always remains true that at any given time, if you're using a SWR with an X% historical success rate, the future would have to be as bad as or worse than the worst 100-X% of cases in history [edited to add:] for your spending plan to fail.Yep, but you have to see the other side of the coin, too. Since SWR is so paranoïd (worst-case focused), more often than not, you end up with an absurd amount of wealth at your death. Sure, that's good news for your heirs, but that also means either you end up having worked too much in your life, or you have restreined yourself too much regarding spending. You're a 1961 mustachian, you're FI since 1933 and you're starting to get old (about 65-70). Your net worth is now an incredible 8 million bucks, while you started at 1 million. Couldn't you afford that wonderful trip around the world you delayed for so long ? Could you go to that very expensive but *amazing* restaurant you've heard about in France ? Just once in your lifetime ? Nope, 'coz SWR says you should only spend 40 000 (inflation adjusted) this year, again and again.
Practical consequence, for instance : maybe FIREing earlier, at 20 years of expenses (5% SWR) *and* being ready to work part-time unless the markets are friendly in the first years of your retirement is a viable strategy, I dunno, but that would mean that, on average, you can work even less that advised. Don't try this at home though, I'm just thinking out loud.
As the chart reveals, the decision to follow a 4% initial withdrawal rate makes it exceptionally rare that the retiree finishes with less than what they started with, at the end of the 30-year time horizon; only a small number of wealth paths finish below the starting principal threshold. In fact, overall, the retiree finishes with more-than-double their starting wealth in a whopping 2/3rds of the scenarios, and is more likely to finish with quintuple their starting wealth than to finish with less than their starting principal!
As someone else said above, SWR theory just produces a reasonable estimate of the stash size you need to pull the plug. When you reach that number, retire. Run cFiresim every year on January 1 to determine how much you get to spend that year. If your stash keeps growing, your spending number will go up. If your stash is shrinking, your spending number may go down or stay the same, depending on how much your stash has shrunk relative to the time you have left. That way you get to take advantage of good market returns without taking on the risk of spending too much when you start out.
All true, but at some point in retirement under the 4% rule, I would think that you'd reassess your spending - be flexible in increasing (or decreasing if needed). I'd like to be in the position of someone like k9 described (ie large market returns) and have that flexibility to increase spending to splurge.As someone else said above, SWR theory just produces a reasonable estimate of the stash size you need to pull the plug. When you reach that number, retire. Run cFiresim every year on January 1 to determine how much you get to spend that year. If your stash keeps growing, your spending number will go up. If your stash is shrinking, your spending number may go down or stay the same, depending on how much your stash has shrunk relative to the time you have left. That way you get to take advantage of good market returns without taking on the risk of spending too much when you start out.
You can do that, but the place were the 4% rule really gives you protection is if you get a bad set of years early on in the sequence. Let's say the market goes up for the first three years of your retirement and you dutifully increase your spending, then down or sideways for the next ten. Now you are in the situation where your standard of living is decreasing for maybe 10 years in a row. That's a lot of belt tightening. Or you can just trust the 4% rule and everything will be fine.
more likely to finish with quintuple their starting wealth than to finish with less than their starting principal!
the 4% rule (including the fact that people will adjust)... meaning it's not really a rule ;)
the 4% rule (including the fact that people will adjust)... meaning it's not really a rule ;)
The goal is to maximize your happiness/well being. Not to accumulate the maximum "safety" or the maximum amount of money. It's a means to an end. 4% rule is a good indication that *you won the money game, now quit*. It doesn't mean you have to quit forever, and it doesn't mean you're guaranteed a perfect life. But it does mean that continuing to work is stupid unless continuing to work is what makes you happiest.
Good article Telecaster.more likely to finish with quintuple their starting wealth than to finish with less than their starting principal!
And yet the hand-wringing over the 4% rule (including the fact that people will adjust) continues. :D
Is all the hand-wringing over the 4% rule really about the 4% rule? Is it possible some of it is just a proxy for worrying about work stress or the fear involved in convincing yourself to trust the numbers that say you can fly if you jump off the cliff now?
I think I may be guilty of it at the very least.
Is all the hand-wringing over the 4% rule really about the 4% rule? Is it possible some of it is just a proxy for worrying about work stress or the fear involved in convincing yourself to trust the numbers that say you can fly if you jump off the cliff now?
I think I may be guilty of it at the very least.
Eh, it's because risk associated with running out of money is far more tangible than risks of overworking.
People are generally speaking, very risk adverse, and most people would prefer to work a few extra years 95% of the time than worry about a 5% chance of running out of money (ignoring the dozens of ways to increase likelihood of a given withdrawal rate working).
Is all the hand-wringing over the 4% rule really about the 4% rule? Is it possible some of it is just a proxy for worrying about work stress or the fear involved in convincing yourself to trust the numbers that say you can fly if you jump off the cliff now?
I think I may be guilty of it at the very least.
Eh, it's because risk associated with running out of money is far more tangible than risks of overworking.
People are generally speaking, very risk adverse, and most people would prefer to work a few extra years 95% of the time than worry about a 5% chance of running out of money (ignoring the dozens of ways to increase likelihood of a given withdrawal rate working).
Eh, it's because risk associated with running out of money is far more tangible than risks of overworking.
People are generally speaking, very risk adverse, and most people would prefer to work a few extra years 95% of the time than worry about a 5% chance of running out of money (ignoring the dozens of ways to increase likelihood of a given withdrawal rate working).
the 4% rule (including the fact that people will adjust)... meaning it's not really a rule ;)
The rule is one thing. The fact that no one would actually abide by it in a real world situation is another. :)
It's a spherical withdrawal rate, in a vacuum.
Eh, it's because risk associated with running out of money is far more tangible than risks of overworking.
People are generally speaking, very risk adverse, and most people would prefer to work a few extra years 95% of the time than worry about a 5% chance of running out of money (ignoring the dozens of ways to increase likelihood of a given withdrawal rate working).
Eh, it's because risk associated with running out of money is far more tangible than risks of overworking.
People are generally speaking, very risk adverse, and most people would prefer to work a few extra years 95% of the time than worry about a 5% chance of running out of money (ignoring the dozens of ways to increase likelihood of a given withdrawal rate working).
All true, but at some point in retirement under the 4% rule, I would think that you'd reassess your spending - be flexible in increasing (or decreasing if needed). I'd like to be in the position of someone like k9 described (ie large market returns) and have that flexibility to increase spending to splurge.As someone else said above, SWR theory just produces a reasonable estimate of the stash size you need to pull the plug. When you reach that number, retire. Run cFiresim every year on January 1 to determine how much you get to spend that year. If your stash keeps growing, your spending number will go up. If your stash is shrinking, your spending number may go down or stay the same, depending on how much your stash has shrunk relative to the time you have left. That way you get to take advantage of good market returns without taking on the risk of spending too much when you start out.
You can do that, but the place were the 4% rule really gives you protection is if you get a bad set of years early on in the sequence. Let's say the market goes up for the first three years of your retirement and you dutifully increase your spending, then down or sideways for the next ten. Now you are in the situation where your standard of living is decreasing for maybe 10 years in a row. That's a lot of belt tightening. Or you can just trust the 4% rule and everything will be fine.
The question is when and how to reevaluate spending as the retirement stash grows. It's a good "problem" to have.
If I'm 10 years into FIRE and I have a stash of 1MM, how is the modeling from that point forward any different from the modeling for a person with 1MM who is planning to FIRE at that time?
Likely the only difference is that my time frame is shorter, thus I'm going to have a higher projected success rate. The fact that I've been living off of my stash for 10 years up to that point has no bearing whatsoever on my probability of success going forward.
Interesting article from Kitces this week (emphasis original:).
...
https://www.kitces.com/blog/consumption-gap-in-retirement-why-most-retirees-will-never-spend-down-their-portfolio/
Interesting article from Kitces this week (emphasis original:).
...
https://www.kitces.com/blog/consumption-gap-in-retirement-why-most-retirees-will-never-spend-down-their-portfolio/
Thanks, I always enjoy reading Kitces work. On a related note, does any one know of any articles where Kitces has talked about Safe Withdrawal Rates in the context of historical international data and not just US returns?
M1 and M2 will face the same sequence of returns from that point, and SWR theory just ignores that.
But "SWR theory" deliberately ignores that, and compensates for its blindness to then-existing market conditions by setting the clearance hurdle at history's worst case or near-worst case scenarios (or whatever specific alternative threshold you opt for that makes you comfortable). It always remains true that at any given time, if you're using a SWR with an X% historical success rate, the future would have to be as bad as or worse than the worst 100-X% of cases in history [edited to add:] for your spending plan to fail.
That is why it is good to evaluate if when you FIRE you are in a period that resembles one of those 100-x% times - its not about focusing on things being worse than they ever have, its about the periods that failed - x%.
Interesting article from Kitces this week (emphasis original:).
...
https://www.kitces.com/blog/consumption-gap-in-retirement-why-most-retirees-will-never-spend-down-their-portfolio/
Thanks, I always enjoy reading Kitces work. On a related note, does any one know of any articles where Kitces has talked about Safe Withdrawal Rates in the context of historical international data and not just US returns?
Are you sure that was Kitces? Pfau has written about that...
https://ideas.repec.org/p/ngi/dpaper/10-12.html
http://www3.grips.ac.jp/~pinc/data/10-12.pdf
Interesting article from Kitces this week (emphasis original:).
...
https://www.kitces.com/blog/consumption-gap-in-retirement-why-most-retirees-will-never-spend-down-their-portfolio/
Thanks, I always enjoy reading Kitces work. On a related note, does any one know of any articles where Kitces has talked about Safe Withdrawal Rates in the context of historical international data and not just US returns?
M1 and M2 will face the same sequence of returns from that point, and SWR theory just ignores that.
But "SWR theory" deliberately ignores that, and compensates for its blindness to then-existing market conditions by setting the clearance hurdle at history's worst case or near-worst case scenarios (or whatever specific alternative threshold you opt for that makes you comfortable). It always remains true that at any given time, if you're using a SWR with an X% historical success rate, the future would have to be as bad as or worse than the worst 100-X% of cases in history [edited to add:] for your spending plan to fail.
That is why it is good to evaluate if when you FIRE you are in a period that resembles one of those 100-x% times - its not about focusing on things being worse than they ever have, its about the periods that failed - x%.
things only have to be close math wise not event wise . mathematically a 2% real return is needed over the first 15 years of a 30 year retirement to hold up to a 4% swr .
that is the common denominator to every one of the 4 worst case scenario's . the returns all fell below 1% real returns over the first 15 years but that math is only true for a 30 year retirement .
be careful testing for a safe withdrawal rate with gold . by definition a safe withdrawal rate means the portfolio was stress tested over very specific worst case time frames .
they are 1907 in some cases , 1929,1937,1965/1966 .
gold was not freely traded here in the usa and not a main stream investment until 1975 . then it had certain once in a life time events have it soaring . we have no idea what gold would have done under those time frames or different conditions for itself .
so we can not accurately compare what if's to any of the time frames that the 4% safe withdrawal rate is based on .
any other time frames you pick to use may be bad but they are not the worst case scenario's the so called "rule" is based on .
but if you wanted to see just how gold did since 1975 , get this :
1oz of gold in 1975 was 175.00 bucks . if you put the same 175 bucks in to a 1 month t-bill and rolled it over up until today the t-bill beat it by a few dollars .
equity's and bonds beat it many times over .
it always came to pass that no matter what the situation we had in time that was supposedly good for gold , longer term everything else ended up doing better .
this reply has a great illustration of why gold back-tests well.tylers data on gold and assumptions are just that . assumptions and what if's . we do not know what golds outcome would have been if it were freely traded here .
http://forum.mrmoneymustache.com/investor-alley/portfolio-charts-the-golden-butterfly/msg1048589/#msg1048589
Personally, I think that the next 'bubble' is a credit bubble. I'd be interested to know what others are doing / would do for such a thing...
Personally, I think that the next 'bubble' is a credit bubble. I'd be interested to know what others are doing / would do for such a thing...What do you mean by a "credit bubble"?
My bad -- I deleted the original post in favor of the simple link (I chose to add a new topic to the FAQ instead) before I saw that you replied. You're too quick. ;) I understand your concern with the coverage of the data and appreciate your preference for other studies. It's why I pointed to the FAQ that covers these things in detail.
BTW, I see that you're fond of Kitces' article on the importance of the first 15 years of real returns in retirement (as am I -- it's a good one). Even if the SWR calculator isn't your favorite, perhaps you'll find this one interesting: https://portfoliocharts.com/portfolio/rolling-returns/ It doesn't cover every 15-year period in history (I wish it could!), but it's a decent way to evaluate which portfolios have been most consistent over that length of time.
Early retirement blogger says: 25x Expenses Isn’t Enough for Early Retirement
http://retireby40.org/25x-expenses-isnt-enough-for-early-retirement/
Most of his points will be easily turned aside. He does talk about his own expense inflation, a very real risk for very early retirees on bare-bones budgets.
No expense multiplier is going to be enough if you consistently increase your spending to keep up with the Jones's and buy everything new under the sun.
Personally, I think that the next 'bubble' is a credit bubble. I'd be interested to know what others are doing / would do for such a thing...
Early retirement blogger says: 25x Expenses Isn’t Enough for Early Retirement
http://retireby40.org/25x-expenses-isnt-enough-for-early-retirement/
Most of his points will be easily turned aside.
Early retirement blogger says: 25x Expenses Isn’t Enough for Early Retirement
http://retireby40.org/25x-expenses-isnt-enough-for-early-retirement/
Most of his points will be easily turned aside.
Yep.
Early retirement blogger says: 25x Expenses Isn’t Enough for Early Retirement
http://retireby40.org/25x-expenses-isnt-enough-for-early-retirement/
Most of his points will be easily turned aside.
Yep.
"Using the 4% rule doesn't work if you refuse to follow the rule and instead spend more!"
Early retirement blogger says: 25x Expenses Isn’t Enough for Early Retirement
http://retireby40.org/25x-expenses-isnt-enough-for-early-retirement/
Most of his points will be easily turned aside.
Yep.
"Using the 4% rule doesn't work if you refuse to follow the rule and instead spend more!"
As a counter-point, if you are already living a frugal life, you have no fat to cut when you get older. And getting older typically entails having to hire younger people to do things you physically can no longer do (or are increasingly risky to push your limits to do) as well as other obvious medical costs. I, personally, didn't mind his blog post and thought it was well intentioned.
Also, Chasefish, thanks for your thoughts. Credit bubble is intentionally vague since it could mean a number of things. I live my life generally thinking the next decade may suck (hence the justification for indexing over, say, individual stocks which have been soaring lately) so I'm usually pleasantly surprised. But I am getting more and more tempted to put in the effort to prep. I have reallocated toward a few hedges in depressed, strong dividend stocks, munis, and foreign currency. None of these hedges have impacted the current standard of living, but I hope they defray any volatility going forward....
As a counter-point, if you are already living a frugal life, you have no fat to cut when you get older. And getting older typically entails having to hire younger people to do things you physically can no longer do (or are increasingly risky to push your limits to do) as well as other obvious medical costs. I, personally, didn't mind his blog post and thought it was well intentioned.
As a counter-point, if you are already living a frugal life, you have no fat to cut when you get older.
Early retirement blogger says: 25x Expenses Isn’t Enough for Early Retirement
http://retireby40.org/25x-expenses-isnt-enough-for-early-retirement/
Most of his points will be easily turned aside. He does talk about his own expense inflation, a very real risk for very early retirees on bare-bones budgets.
I think retireby40 makes a good point that extreme early retirees may not have sufficient understanding of future expenses. There is still too much life ahead for a 29-year-old to know for certain about children, medical costs, divorces, modest increases in hedonism, etc. It is hard to extrapolate the next 60 years from the last 6 years with any accuracy,so an extra margin of safety is probably necessary.
Well, duh. But worse, he also demonstrated a common noob misunderstanding of the 4% rule. He's says (basically that based on higher than average P/E, it is a reasonable assumption that stock returns will be lower than average going forward. No quibble from me on that point. Based on that, he posits the 4% rule won't work in future. But the 4% SWR isn't on average returns, it is the worst case scenario.
Well, duh. But worse, he also demonstrated a common noob misunderstanding of the 4% rule. He's says (basically that based on higher than average P/E, it is a reasonable assumption that stock returns will be lower than average going forward. No quibble from me on that point. Based on that, he posits the 4% rule won't work in future. But the 4% SWR isn't on average returns, it is the worst case scenario.
Quibble: 4% SWR isn't worst case scenario, is it?
Firecalc 30 years, 4%, 75/25
For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 6 cycles failed, for a success rate of 94.8%.
Zero failures at 3.6%.
Firecalc 40 years, 4%, 75/25
For our purposes, failure means the portfolio was depleted before the end of the 40 years. FIRECalc found that 15 cycles failed, for a success rate of 85.8%.
Zero failures at 3.3%.
mathematically you need at least a 2% real return average over the first 15 years of a 30 year retirement to support 4% inflation adjusted .
mathematically you need at least a 2% real return average over the first 15 years of a 30 year retirement to support 4% inflation adjusted .
Citation needed?
I can think of multiple scenarios where a 2% real return average for the first 15 years fails 30 year retirement. Or where a lower percentage succeeds.
1966-stocks minus .13%--bonds 1.08%--rebalanced .64%-- inflation 5.38%
it is those 15 year horrible time frames that the 4% safe withdrawal rate was born out of since you had to reduce from what could have been 6.50% as a swr down to just 4% to get through those worst of times.
mathematically you need at least a 2% real return average over the first 15 years of a 30 year retirement to support 4% inflation adjusted .
Citation needed?
I can think of multiple scenarios where a 2% real return average for the first 15 years fails 30 year retirement. Or where a lower percentage succeeds.
it is those 15 year horrible time frames that the 4% safe withdrawal rate was born out of since you had to reduce from what could have been 6.50% as a swr down to just 4% to get through those worst of times.
The poll on the bottom is ridiculous, too. Almost half his respondents (43% as of this writing) say you need 40x or 50x expenses. That's a 2% to 2.5% WR! Crazy! Of course, if you make up artificially low retirement budget numbers, and then save up 50x expenses, and then spend double in ER, guess what? You're at a 4% real WR, and will do just fine, as long as that actually is your ER spending, and it doesn't keep rising and rising. ;)Yeah. When your remaining life expectancy (typically, for a male who "retires by 40", a little less than 40 years) is lower than your multiple of expenses invested, you know there's a problem. Get a life annuity and you'll automatically improve your WR (which will be the safest you can come up with, by definition: 100% success rate). And, once again, that's without considering ability to work part-time if needed, or without considering SS.
as you see 2% real returns the first 15 years never failed . every worst case was less than 2%
mathematically you need at least a 2% real return average over the first 15 years of a 30 year retirement to support 4% inflation adjusted .
2% real returns, huh?In real terms, 1MM after 10 years of inflation at 3% you would need 1.344MM to have the same buying power as your starting portfolio. So this investor is down by about 25% with 33%of their 30y retirement over... Seems OK. No reason to panic anyway.
So if you assume 4% withdrawals, 3% inflation, and 5.06% nominal return for 10 years (which gives us a real return of 2% (Formula for real return = (1+nominal rate)/(1+inflation rate)-1)), ending portfolio after 10 years would be 6.675% higher than initial amount.
E.g. starting at 1MM, spending 40k/yr, increasing with inflation at 3%/yr, earning 5.06%/yr (this is, of course, assuming steady returns, which totally skews things, and is the whole point of the trinity study, but I'm ignoring that for the moment), you'll end with 1,066,750 after 10 years.
At what point along the way do you monitor, and with what triggers? Saying "2% real after a decade" is nice, but I'd probably be looking at it before then, and looking at portfolio value, not just return amount.
2% real returns, huh?In real terms, 1MM after 10 years of inflation at 3% you would need 1.344MM to have the same buying power as your starting portfolio. So this investor is down by about 25% with 33%of their 30y retirement over... Seems OK. No reason to panic anyway.
So if you assume 4% withdrawals, 3% inflation, and 5.06% nominal return for 10 years (which gives us a real return of 2% (Formula for real return = (1+nominal rate)/(1+inflation rate)-1)), ending portfolio after 10 years would be 6.675% higher than initial amount.
E.g. starting at 1MM, spending 40k/yr, increasing with inflation at 3%/yr, earning 5.06%/yr (this is, of course, assuming steady returns, which totally skews things, and is the whole point of the trinity study, but I'm ignoring that for the moment), you'll end with 1,066,750 after 10 years.
At what point along the way do you monitor, and with what triggers? Saying "2% real after a decade" is nice, but I'd probably be looking at it before then, and looking at portfolio value, not just return amount.
2% real returns, huh?In real terms, 1MM after 10 years of inflation at 3% you would need 1.344MM to have the same buying power as your starting portfolio. So this investor is down by about 25% with 33%of their 30y retirement over... Seems OK. No reason to panic anyway.
So if you assume 4% withdrawals, 3% inflation, and 5.06% nominal return for 10 years (which gives us a real return of 2% (Formula for real return = (1+nominal rate)/(1+inflation rate)-1)), ending portfolio after 10 years would be 6.675% higher than initial amount.
E.g. starting at 1MM, spending 40k/yr, increasing with inflation at 3%/yr, earning 5.06%/yr (this is, of course, assuming steady returns, which totally skews things, and is the whole point of the trinity study, but I'm ignoring that for the moment), you'll end with 1,066,750 after 10 years.
At what point along the way do you monitor, and with what triggers? Saying "2% real after a decade" is nice, but I'd probably be looking at it before then, and looking at portfolio value, not just return amount.
Right. And that was the minimum mathjak said he's looking for. He's mentioned this in many, many threads. I'm curious though what he's actually looking for. I mean, unless you don't check until the 10 year mark, it's not a super helpful indicator.
I'm curious if any of these calculations are taking dividends into account. A 2% WR would almost be covered by dividends alone at the moment, and dividend yields are really low compared to most of history.
I'm curious if any of these calculations are taking dividends into account. A 2% WR would almost be covered by dividends alone at the moment, and dividend yields are really low compared to most of history.
Keep in mind if 2% dividends remain constant, it's 2% of market value.
So if you start with $1M, and 20k/year spend, but the market drops to $500k but still has 2% dividends, you are only getting $10k/year in dividends. Not a constant $20k.
This is a common mistake when considering dividend yield and SWRs.
Notice the spikes that happened when the market went south.
I'm curious if any of these calculations are taking dividends into account. A 2% WR would almost be covered by dividends alone at the moment, and dividend yields are really low compared to most of history.
Keep in mind if 2% dividends remain constant, it's 2% of market value.
So if you start with $1M, and 20k/year spend, but the market drops to $500k but still has 2% dividends, you are only getting $10k/year in dividends. Not a constant $20k.
This is a common mistake when considering dividend yield and SWRs.
The 2% was relative to the numbers as they stand now. Dividends generally don't drop nearly as bad as prices when a crash happens, so if all your expenses are covered by dividends you should be golden. Just a quick run through cfiresim shows that you might have a sequence of returns risk if there's 70s style inflation, but it wouldn't be that bad. Anyway, my point is that a WR is pretty conservative if it is mostly covered by dividends when you start out.
http://www.multpl.com/s-p-500-dividend-yield/
Notice the spikes that happened when the market went south.
I'm curious if any of these calculations are taking dividends into account. A 2% WR would almost be covered by dividends alone at the moment, and dividend yields are really low compared to most of history.
Keep in mind if 2% dividends remain constant, it's 2% of market value.
So if you start with $1M, and 20k/year spend, but the market drops to $500k but still has 2% dividends, you are only getting $10k/year in dividends. Not a constant $20k.
This is a common mistake when considering dividend yield and SWRs.
I'm curious if any of these calculations are taking dividends into account. A 2% WR would almost be covered by dividends alone at the moment, and dividend yields are really low compared to most of history.
Keep in mind if 2% dividends remain constant, it's 2% of market value.
So if you start with $1M, and 20k/year spend, but the market drops to $500k but still has 2% dividends, you are only getting $10k/year in dividends. Not a constant $20k.
This is a common mistake when considering dividend yield and SWRs.
The 2% was relative to the numbers as they stand now. Dividends generally don't drop nearly as bad as prices when a crash happens, so if all your expenses are covered by dividends you should be golden. Just a quick run through cfiresim shows that you might have a sequence of returns risk if there's 70s style inflation, but it wouldn't be that bad. Anyway, my point is that a WR is pretty conservative if it is mostly covered by dividends when you start out.
http://www.multpl.com/s-p-500-dividend-yield/
Notice the spikes that happened when the market went south.
I'm curious if any of these calculations are taking dividends into account. A 2% WR would almost be covered by dividends alone at the moment, and dividend yields are really low compared to most of history.
Keep in mind if 2% dividends remain constant, it's 2% of market value.
So if you start with $1M, and 20k/year spend, but the market drops to $500k but still has 2% dividends, you are only getting $10k/year in dividends. Not a constant $20k.
This is a common mistake when considering dividend yield and SWRs.
unless dividends are cut or raised the dividend is constant while the yield from share price changes with nav for new buyers only .
a dividend is declared as a dollar amount not a percentage of share price .
if i get a 1 dollar dividend it stays 1 dollar regardless of share price . only those first buying in are getting a higher or lower yield percentage wise since they still get the same 1 dollar i do
I'm curious if any of these calculations are taking dividends into account. A 2% WR would almost be covered by dividends alone at the moment, and dividend yields are really low compared to most of history.
Keep in mind if 2% dividends remain constant, it's 2% of market value.
So if you start with $1M, and 20k/year spend, but the market drops to $500k but still has 2% dividends, you are only getting $10k/year in dividends. Not a constant $20k.
This is a common mistake when considering dividend yield and SWRs.
unless dividends are cut or raised the dividend is constant while the yield from share price changes with nav for new buyers only .
a dividend is declared as a dollar amount not a percentage of share price .
if i get a 1 dollar dividend it stays 1 dollar regardless of share price . only those first buying in are getting a higher or lower yield percentage wise since they still get the same 1 dollar i do
Right, he's saying they're often cut. So if dividends remain 2% (which is a percentage), they'll be cut to match the new share price. The graph shows they're much more aligned with market price than dividend chasers would have you believe.
Interesting article, related to the SafeMax discussion. Back-tests the Kitces/Pfau "rising equity glide paths" strategy against other fixed allocation and declining glide path (the norm in financial planning) strategies. Was surprised to see the 60% fixed allocation a pretty clear winner here, all things considered (esp. when considering its simplicity). Was equally surprised to see a 60/40 stocks/bills allocation generally superior to 60/40 stocks/bonds (probably good news for TSP participants with the G Fund). It's long and detailed, but worth the read, IMHO:
https://www.onefpa.org/journal/Pages/MAR15-Retirement-Risk,-Rising-Equity-Glide-Paths,-and-Valuation-Based-Asset.aspx
The value of the dividend comes right out of the stock price. That is why "dividend capture" trading schemes don't work. There is nothing magical about receiving a dividend. It is a forced taxable event and can be achieved in the exact same manner by selling shares.
The term total return means your complete roi regardless of how the roi is achieved .
I am retired . I reinvest all dividends right now . I own dividend paying funds , bond funds and non dividend paying funds .
I have a withdrawal rate of 3.50% . I take that from cash instruments right now while letting all investments still grow . My total portfolio yield income wise is about 3% with total return about 5% right now ytd on the portfolio.
Except for the fact that i draw my money for living from a cash buffer my outcome in down markets is identical to if i spent the dividends directly and held less cash .
There is no diifference in down markets as to how my income is constructed ,whether apreciation or dividends or both .
The outcome in down markets is the same whether you use cash buckets , stocks and bonds or whether you spend dividends and don't reinvest them or even spend equally from all parts of the portfolio in a systematic withdrawal that preserves your allocation as you spend .
To think you are any different spending down dividends that come off the share price vs a whole portfolio in a down market or up market is nonsense.
Just ask yourself if you reinvested the dividend and took the same money out of the overall portfolio or out of a non dividend payer with the same return would a down market effect you any less . Of course not is the answer .you are just fooling yourself if you think there is any difference except for some small tax differences. Funds have no fee to sell
The value of the dividend comes right out of the stock price. That is why "dividend capture" trading schemes don't work. There is nothing magical about receiving a dividend. It is a forced taxable event and can be achieved in the exact same manner by selling shares.
^^ Thank Odin someone understands this!
that is the hardest concept for folks to get in to their heads . it is so misunderstood .
I am probably wasting my time writing this, but the incorrect statements keep coming.
RECEIVING A DIVIDEND IS NOT THE SAME AS SELLING A SHARE OF STOCK!
I agree as a practical note that an investor should focus on total return as apposed to dividends or capital appreciation at the exclusion of the other. However, dividends are different then capital appreciation. These are viewed differently by the IRS, SEC, and GAAP.
Dividends and capital appreciation affect the ownership of the company differently. If I own several shares of Target and sell several shares Target has the exact same market capitalization but I own a smaller piece of it as I sold some of my ownership to another investor (Transaction between another investor and me). If Target pays a dividend my ownership % stays the same but the value of what I own decreases(Transaction between Target and me).
There is a theory that when a dividend is received an investor will have the same net worth, ignoring taxes; but it is practically impossible to view this in the real world as the market price is affected by so many variables simultaneously. Further this theory leaves out the fact that the markets valuation of a company is based on many different factors such as future growth and not liquidation value of the companies assets. Why does this matter? I think an example will shed light on this.
LinkedIn has a market cap of $26 billion and a cash balance of $546 million. If it issued a dividend totaling $540 million do you think the market cap would decrease to $25.46 billion after it was paid? It would likely decrease much more because they would be cash starved. Dividends affect the financial statements of entities and are an indicator of organizational health, investment opportunities, and the growth stage of the organization.
Dividends are going to get taxed at the high pre-FIRE rate for me instead of the nice post-FIRE capital gains rate for selling shares.
Dividends are going to get taxed at the high pre-FIRE rate for me instead of the nice post-FIRE capital gains rate for selling shares.
for 10 and 15% tax brackets, BOTH dividends and cap gains are taxed at 0%.
Yep. 0% is pretty nice. We're definitely not in that bracket at the moment.
no way could we see that zero % bracket . but heck i will take having more income any day and pay the taxes . as long as i got the taxes as low as i can .
yes , that is true . our time frame is different , our needs from our resources are different and our lifestyle goals and wants are likely very different . i was never one for living a frugal life style in retirement . we went the opposite route . we are living better in retirement with a bigger budget than we did working and having our time consumed .
yes , that is true . our time frame is different , our needs from our resources are different and our lifestyle goals and wants are likely very different . i was never one for living a frugal life style in retirement . we went the opposite route . we are living better in retirement with a bigger budget than we did working and having our time consumed .
It's important to remember that.
Good, generalized ER advice is often different than "planning on retiring at 65" advice.
Withdrawal Rates During Retirement: Are We Being Too Conservative?
https://www.ifa.com/articles/withdrawal_rates_during_retirement_being_conservative/
The conclusion:
This analysis was simple but leaves a very powerful message for investors. While many prognosticators may be saying “death to the 4% rule” based on their prediction of future returns, most investors are going to be JUST FINE. We analyzed withdrawal rates looking at the worst rolling period returns that we have ever experienced and we are getting results that are right on track and even better with what has been recommended in the past. Remember, this leaves the investor with the same amount of principal they started with at retirement. If we were trying to liquidate all retirement assets, these withdrawal rates would be even higher. As a general rule, we have been advising our clients for years that a withdrawal rate of 5-6% is a safe bet throughout retirement and also allows for consistency in cash flows from year to year. This accommodates possible events or return scenarios that we have never experienced before (like 2008) as well as the multiple risk capacities that our investors have in retirement.
IFA use portfolios of index funds from Dimensional Fund Advisors, that are typically not available to retail investors. DFA funds tend to perform a little better than equivalent Vanguard funds, but to get them you have to go through an advisor. Not sure what IFA charge, perhaps 1%?
https://www.kitces.com/blog/how-has-the-4-rule-held-up-since-the-tech-bubble-and-the-2008-financial-crisis/#more-7856
Actually, my parents retired in 1986 (they were early retirees), and they are having a lot of trouble with their financial situation. However, one of their issues is that the products we are relying on - such as indexes rather than buying individual shares, and retirement products - were not available to them then. They also have a fear of the new products available because of the problems people have had being cheated by financial advisors, so they are not taking advantage of these products. I keep looking at them and thinking that this could be me in 30 years. In 30 years will I trust new products? Will I select the best way to go?Withdrawal Rates During Retirement: Are We Being Too Conservative?
https://www.ifa.com/articles/withdrawal_rates_during_retirement_being_conservative/
The conclusion:
This analysis was simple but leaves a very powerful message for investors. While many prognosticators may be saying “death to the 4% rule” based on their prediction of future returns, most investors are going to be JUST FINE. We analyzed withdrawal rates looking at the worst rolling period returns that we have ever experienced and we are getting results that are right on track and even better with what has been recommended in the past. Remember, this leaves the investor with the same amount of principal they started with at retirement. If we were trying to liquidate all retirement assets, these withdrawal rates would be even higher. As a general rule, we have been advising our clients for years that a withdrawal rate of 5-6% is a safe bet throughout retirement and also allows for consistency in cash flows from year to year. This accommodates possible events or return scenarios that we have never experienced before (like 2008) as well as the multiple risk capacities that our investors have in retirement.
IFA use portfolios of index funds from Dimensional Fund Advisors, that are typically not available to retail investors. DFA funds tend to perform a little better than equivalent Vanguard funds, but to get them you have to go through an advisor. Not sure what IFA charge, perhaps 1%?
I like that they are downplaying the risk to 4%WR, however, the limited data they are working with really skews the WR upwards for the longer rolling periods (20 & 30yrs). The worst 30 year rolling return year used was a start year of 1986. The two biggest threats to a 4%WR are sequence of returns and low returns coupled with high inflation. Their WORST case (a 1986 retiree) had neither of those, the 2000 & 2008 market downturns were meaningless after so many years of great returns and average inflation. As a matter of fact, if I had a choice of when to retire in the past century for best financial outcome (using the power of hindsight) it would be anytime from 1981-1994. This articles "worst" period is actually a historical "very good" period.
Actually, my parents retired in 1986 (they were early retirees), and they are having a lot of trouble with their financial situation. However, one of their issues is that the products we are relying on - such as indexes rather than buying individual shares, and retirement products - were not available to them then. They also have a fear of the new products available because of the problems people have had being cheated by financial advisors, so they are not taking advantage of these products. I keep looking at them and thinking that this could be me in 30 years. In 30 years will I trust new products? Will I select the best way to go?
Actually, my parents retired in 1986 (they were early retirees), and they are having a lot of trouble with their financial situation. However, one of their issues is that the products we are relying on - such as indexes rather than buying individual shares, and retirement products - were not available to them then. They also have a fear of the new products available because of the problems people have had being cheated by financial advisors, so they are not taking advantage of these products. I keep looking at them and thinking that this could be me in 30 years. In 30 years will I trust new products? Will I select the best way to go?
actually retiring in 2008 was just an average retirement time frame 15 years in . 2008 was v-shaped and really had not much of an effect . a more modest drop that was extended out longer would have been far worse .
in fact the 2008 retiree stands no different than where any other average time frame retiree stood 15 years in .
kices looked in to that very issue .
https://www.kitces.com/blog/how-has-the-4-rule-held-up-since-the-tech-bubble-and-the-2008-financial-crisis/#more-7856
I disagree with this article. I have run the math and I have a 2000 retiree in big trouble. It looks like they are pulling out over 10% WDR at this point assuming 100% stocks. Definitely possible I made a mistake but yeah it looks like a fail at this point.A year by year comparison among your results and ones from, say, cfiresim and firecalc, might be instructive. I have no idea what the results would be, but it seems a worthwhile way to get at the root cause of any differences.
It's a good point MDM. With 60/40 in cfiresim starting in 2000, you now have $690k (adjusted for inflation). That indicates a 5.8% wdr going forward and very likely a fail.Why "very likely a fail"? Only has to last ~14 more years now, and with a current 5.8% WR that can happen with returns below inflation.
It's a good point MDM. With 60/40 in cfiresim starting in 2000, you now have $690k (adjusted for inflation). That indicates a 5.8% wdr going forward and very likely a fail.
If you use a 60/40 allocation and look at the late 60's almost every single year there fails with that ratio.
Overall, if you run cfiresim with 40 year time horizons and a 60/40 split your success rate is only 82%. This is why I don't think it's a reasonable asset mix to consider for a 4% WDR. You really have no choice but to go to higher stock allocations.
When you look at these scenarios you might have to work full time for 10+ years. These scenarios are not even close.
I get what people are saying here regarding cutting back or getting a part time job but then why don't we just say that from the outset. You can retire and pull out 4% a year as long as you are willing to go back to work for a decade or more if things go bad. I can see why you would be willing to take that bet but let's just be up front about it.
If you really want to retire and not have to have worried historically you should be more in the 3-3.5% WDR.
The point is that the article has the portfolio as just fine with similar to starting assets, I am not seeing that.That's a good point.
The point is that the article has the portfolio as just fine with similar to starting assets, I am not seeing that.That's a good point.
A quick check using some S&P 500 data (see http://forum.mrmoneymustache.com/welcome-to-the-forum/stock-market-gains-401k/msg1302928/#msg1302928) also indicates a large drop between 2000 and 2015. Of course, that gets us back to 60/40 vs. 100/0. Don't know if Kitces provides details that would allow one to reconstruct his year by year values for comparison with yours.
Until one understands the difference in these calculations (offhand, I don't), discussion of conclusions based on the differences seems not worthwhile.
I ran the numbers on cfiresim with a 60/40 split, same as in the article. The article has things ending at around $1m, I have it ending at $690k. In my mind cfiresim refutes the article.Don't know that we have reached "refutes" yet, unless you know why the results are different. Could be unrecognized differences in assumptions, a Kitces error, a cfiresim error, etc.
When you look at these scenarios you might have to work full time for 10+ years. These scenarios are not even close.
I get what people are saying here regarding cutting back or getting a part time job but then why don't we just say that from the outset. You can retire and pull out 4% a year as long as you are willing to go back to work for a decade or more if things go bad. I can see why you would be willing to take that bet but let's just be up front about it.
If you really want to retire and not have to have worried historically you should be more in the 3-3.5% WDR.
Why would I go back to work for a decade? Are you thinking that I would just sit on my ass until my assets are depleted, then work? That would be stupid.
If the market crashes hard in the first 5 years, I work (or whatever for cash) for maybe a year to avoid selling the devalued assets. When the market recovers, I go back to being retired for 30-40 more years. If everything is great for 5 years, my assets are building and even if the market crashes my portfolio is big enough to take it.
You're trying to convince me that a 100% chance of working 2-3 extra years (adding padding) is a better choice than an 18% chance of needing to go back to work for 1-2 years after I take a sabbatical/ER until the market crashes...
That makes no sense.
I ran the numbers on cfiresim with a 60/40 split, same as in the article. The article has things ending at around $1m, I have it ending at $690k. In my mind cfiresim refutes the article.
I ran the numbers on cfiresim with a 60/40 split, same as in the article. The article has things ending at around $1m, I have it ending at $690k. In my mind cfiresim refutes the article.
I read the article and the comments. It does not appear to state which types of bonds were used in the articles calculations, this matters big-time. It also doesn't specify which stocks either, but I'm guessing it was S&P 500. Secondly, the around $1million number you are taking from the article was nominal, not real. The Cfiresim numbers are real(inflation adjusted) dollars. The combination of these factors likely explains the difference in results you are seeing.
Relevant to the 4% discussion:
https://assetbuilder.com/knowledge-center/articles/how-to-spend-the-kids-inheritance
Have you seen the book, “How To Spend the Kids’ Inheritance”? If not, perhaps you've seen the British Airways ads offering “101 Ways to Spend the Kids’ Inheritance.” Both are in the spirit of the old Irish saying, “Only a fool would die solvent.”
That article basically says 4% is too low because in 95% of cases you can't spend it down before you die and in more than half of the cases you die with more money than you started with, which is exactly what we've been saying in this thread all along.
They even propose the same solution: retire on 5-6% SWR and then be prepared to modify your spending up or down as necessary.
The only thing is that lots of people on here will have a retirement period greater than 30 years. Still personally I don't see the issue. We should all be able to adjust something if it is required.
The only thing is that lots of people on here will have a retirement period greater than 30 years. Still personally I don't see the issue. We should all be able to adjust something if it is required.
Yes the main concern is an initial poor sequence of returns which will be early on and allow you to act as appropriate. If you make it through the first decade with good returns you are likely sitting on a massive stash and no worries even with a 50yr+ FIRE. Especially if you are doing like a lot of people I read on this forum and ignoring Gov't retirement benefits, which will kick in 30yrs or less for most of us.
So I'm using a lower initial withdrawal rate to be less dependent on a good first decade (even though a 33% increase in portfolio value is not a good return over a decade).
So I'm using a lower initial withdrawal rate to be less dependent on a good first decade (even though a 33% increase in portfolio value is not a good return over a decade).
Sure, you're just working longer to do so.
That's a trade off some of us were no longer willing to make. :)
Yeah, sometimes it baffles me - people will choose to work another 10 years to get their portfolio failure rate down by 5% or something - but 5% of your remaining life is what, 2 or 3 years?
We've discussed this here before, but the short version is that sometimes working at your job IS your highest purpose in life.
If what you really want to do with your life is sleep late and watch tv, then by all means retire asap and get on with it. But if your goals include being part of something, or working towards something, sometimes you are better served by staying employed and involved in that something.
In those cases, we have to more carefully consider whether we would do the same work for free, which is effectively what you're doing if you continue to work after achieving a 4% SWR. Sometimes the answer is yes. Some people think that's crazy irrational.
Sure. If you've hit a 4% WR and acknowledge that you have enough, but want to keep working, that's great! More power to you.Yeah, sometimes it baffles me - people will choose to work another 10 years to get their portfolio failure rate down by 5% or something - but 5% of your remaining life is what, 2 or 3 years?
We've discussed this here before, but the short version is that sometimes working at your job IS your highest purpose in life.
If what you really want to do with your life is sleep late and watch tv, then by all means retire asap and get on with it. But if your goals include being part of something, or working towards something, sometimes you are better served by staying employed and involved in that something.
In those cases, we have to more carefully consider whether we would do the same work for free, which is effectively what you're doing if you continue to work after achieving a 4% SWR. Sometimes the answer is yes. Some people think that's crazy irrational.
It seems like though the vast majority who are going for a 3% WR are doing it out of fear, and their plan is to pull the plug as soon as they can, as soon as they hit their number. They aren't working in their job for a sense of purpose, as you suggest in your post.
It seems like though the vast majority who are going for a 3% WR are doing it out of fear, and their plan is to pull the plug as soon as they can, as soon as they hit their number. They aren't working in their job for a sense of purpose, as you suggest in your post.
If anything, I think these folks are dissatisfied with their work MORE than the average forum member. The irrational need to save way past a "safe" amount is a reflex to ensure never having to go back, like PTSD or something. Those that Sol mentions, who work for the sake of greater good or enjoyment are rarely debating the math of WR's and AA's.
In those cases, we have to more carefully consider whether we would do the same work for free, which is effectively what you're doing if you continue to work after achieving a 4% SWR. Sometimes the answer is yes. Some people think that's crazy irrational.
Because we've done polls, and found that the majority don't like their jobs. That's the majority of the general population, and of Mustachians.
It seems like though the vast majority who are going for a 3% WR are doing it out of fear, and their plan is to pull the plug as soon as they can, as soon as they hit their number. They aren't working in their job for a sense of purpose, as you suggest in your post.
If anything, I think these folks are dissatisfied with their work MORE than the average forum member. The irrational need to save way past a "safe" amount is a reflex to ensure never having to go back, like PTSD or something. Those that Sol mentions, who work for the sake of greater good or enjoyment are rarely debating the math of WR's and AA's.
I think it's a stretch to say that these folks are dissatisfied with their work MORE than the average forum member. Given the run in the equities market and from what was shared about Mustachian household incomes (http://forum.mrmoneymustache.com/welcome-to-the-forum/this-is-the-average-us-household-income-how-do-you-compare-(usa-today-article)/msg1320217/#msg1320217) (almost 50% above 125k), it is almost inevitable that going a little further than 4% quickly (OMY maybe) becomes 3%.
Also, in my case, I got to a bare bones FI (5 - 6% WR) and was emboldened to get a better job. I think several other FI bloggers and forum members have 'dream jobs' or working spouses that have them continuing to stash beyond the 4% WR number.
I'd be interested to understand why you'd think FI folks at 4% or below are so unhappy with working or having an income.
I'd be interested to understand why you'd think FI folks at 4% or below are so unhappy with working or having an income.
The thing is you aren't working for free. So the additional caveat is that the additional work might mean that you can go on a fancy holiday or get a fancy bike or whatever it is that you consider a luxury type purchase.
My version of FI is I think a pretty great existence but it's definitely not excessive. My work also isn't bad even if I definitely wouldn't do it for free. I could though work a little longer to afford some luxury type spending.
By instead working those years up front, you've guaranteed that you have to work them. Still seems like an ER failure, to me.
My tender age. :DBy instead working those years up front, you've guaranteed that you have to work them. Still seems like an ER failure, to me.
I gotta say arebelspy, despite your tender age, you continually impress me with your wisdom.
My tender age. :DBy instead working those years up front, you've guaranteed that you have to work them. Still seems like an ER failure, to me.
I gotta say arebelspy, despite your tender age, you continually impress me with your wisdom.
And here I've been feeling so old lately.
Thanks for the double compliment!
Ty Bernicke's Reality Retirement Planning: A New Paradigm for an Old Science describes extensive research showing that most people see significant reductions in spending with age (not related to reduced assets or income). If selected, this option will reduce your inflation-adjusted yearly spending by 2-3% per year starting at age 56, and then stabilizing at age 76 to keep up with inflation. You should read his article for details if you plan to use this option.
I've started viewing a low WR as a guaranteed ER failure.
The failure is just up front, not down the line.
That is, if you have a higher WR because you pull the plug early, and you end up having to go back to work for a few years to bolster the stache at some point down the line, we'd call that ER failure.
By instead working those years up front, you've guaranteed that you have to work them. Still seems like an ER failure, to me.
Compare to someone else who pulls the plug a few years earlier than you, and then gets a part time job a few different years to supplement in a crash. Both of you work the same. Why is only one a failure?
Consider the person who ERs a few years earlier, and never has to go back, because early returns drop their WR low enough. They never worked the extra years. Why should your working them not be considered ER failure?
Maybe something to challenge your thinking today. ;)
(I understand and recognize all the caveats that the up front years are likely at a higher rate, you may not be able to find a job when the economy is bad, etc. I'm providing food for thought, ignore the nit picking, please.)
This automatically assumes you literally hate what you do.
I could say that I see owning real estate as an automatic failure because I would literally hate dealing with it.
This automatically assumes you literally hate what you do. I could say that I see owning real estate as an automatic failure because I would literally hate dealing with it. It doesn't make it true, but it makes it true in my case. My issue with the 30 year studies vs. the 40 & 50 year simulations is as you start to get into larger and larger years for simulation purposes the number of unique combinations goes down. So we have no where near as much historical data on a 50 year withdrawal rate as compared to a 30 year withdrawal rate. It also assumes the US will continue to be a GDP super power or that you will know when to invest in any new emerging markets that become the new GDP grower that the US has been over the last century. Could a 4% withdrawal rate work over 50-60 years, sure, but I wouldn't rely on historical simulations of that considering most of the data used in the simulation is not even double the time period you are trying to simulate. We need to remember that the life expectancy of healthy adults continues to increase. I am in my early 30s, there's a strong chance that the average life expectancy for people my age as long as they are healthy at 60 is into the mid 90s. So if you retire planning on a 4% WD exactly and little no wiggle room at 40 you may need to plan on supporting yourself for 55 years and that is just assuming it is you that needs to be supported by that money. A married couple may have an average life expectancy between the two of over 100, which would mean you need to make sure that money lasts over 60 years.
Now you could say don't worry about it because you can always go back to work, but I'd rather do what I do and enjoy for a few more years than chance needing to go back to work in my 60s or 70s. To each their own, but I definitely wouldn't say working a few years longer is automatically a failure especially if you don't dislike what you do in the first place. You need to keep in mind that not everyone in this forum is aiming for FIRE as fast as possible, some are aiming for FI and a relatively early RE.
The point of FIRE is not "sit on your ass", it's "you can do whatever you want to do most and not worry about the money".Why not sit on your ass, if that's what you want to do?
Well if we're being philisophical, it would be a waste of a life.The point of FIRE is not "sit on your ass", it's "you can do whatever you want to do most and not worry about the money".Why not sit on your ass, if that's what you want to do?
I guess it seems to me that, from your perspective, those extra X years are a guaranteed spend now versus maybe X+epsilon years later, and from that point of view you are absolutely accurate. I'm just throwing out there that for others, the contiguity of the working years, the relative size of epsilon, the probability of "maybe", the likelihood of being able to get a job (ageism still happens despite the law), and similar factors may be weighted as heavily or even more so.
Young years are also MUCH more valuable than older years. Working extra years for perceived safety beyond the 4% SWR (already insanely conservative) is nuts. If doing some form of part-time paid work at some point in the future is your *worst case scenario*, then go at it, I guess.
Keep in mind, too - you could die tomorrow, or the day after you hit your 3.3% or whatever you're going for. The downside risks are kinda nuts on the work-longer side IMO.
-W
I guess it seems to me that, from your perspective, those extra X years are a guaranteed spend now versus maybe X+epsilon years later, and from that point of view you are absolutely accurate. I'm just throwing out there that for others, the contiguity of the working years, the relative size of epsilon, the probability of "maybe", the likelihood of being able to get a job (ageism still happens despite the law), and similar factors may be weighted as heavily or even more so.
Young years are also MUCH more valuable than older years. Working extra years for perceived safety beyond the 4% SWR (already insanely conservative) is nuts. If doing some form of part-time paid work at some point in the future is your *worst case scenario*, then go at it, I guess.
Keep in mind, too - you could die tomorrow, or the day after you hit your 3.3% or whatever you're going for. The downside risks are kinda nuts on the work-longer side IMO.
-W
ARS, you know I respect you. And I understand your POV and the math about working longer as a failed RE situation. I also respect each individual person's decision to FIRE when and whether they see fit.
I would like to point out, though, that some folks - me included - attach a high negative value to the transition event of being forced to go back to work. There is also the calculus of the tradeoff between a shorter time now at a relatively higher paying job vs. a longer time at some point in the future at a relatively lower paying job. These two things mean there are some situations and value systems where paying what is effectively an insurance policy premium of working longer can make sense.
I guess it seems to me that, from your perspective, those extra X years are a guaranteed spend now versus maybe X+epsilon years later, and from that point of view you are absolutely accurate. I'm just throwing out there that for others, the contiguity of the working years, the relative size of epsilon, the probability of "maybe", the likelihood of being able to get a job (ageism still happens despite the law), and similar factors may be weighted as heavily or even more so.
Cheers!
what you get for a 40-year planning period if you toss out or ignore four or five of those 1960's start dates.
Agreed. I think the older one is too the more likely one is to not be willing to go back. It didn't work for me, but even so a strategy of being young and flexible and RE'ing at 30 or 35 at a 5% SWR and being willing to take the bet makes sense to me.
You can't say, "there's a risk of having to go back to work, so I'll keep working for a few OMYs so I can negate the risk" without acknowledging that by doing so, you are guaranteeing that you work extra years.
And if you have the flexibility to vary your annual spending say +/- 0.5% in response to market conditions you can get a nice bump in your success rate
And if you have the flexibility to vary your annual spending say +/- 0.5% in response to market conditions you can get a nice bump in your success rate.
Using stock cFIREsim values and a 40yr FIRE
4%WR
- $40K/yr WR
- 90% success rate
3.5% - 4.5%WR
- $44K/yr median WR
- 96% success rate
3% - 5% WR
- $44K/yr median WR
- 100% success rate
For most FIRErs the variable rate options means you'll get more $$/yr and a higher probability of success.
To me, the even rarer discussion (and one that, incidentally, I was among the first to point out <- my extraordinarily minor contribution to FIRE research) is on the other end of lifespan - the 4% rule is even safer than we think because we discount the successes associated with dying early. Most if not all of us breezily assume that we'll live to 85 or 100 or whatever and then look to make sure our money will last that long. [snip]
And if you have the flexibility to vary your annual spending say +/- 0.5% in response to market conditions you can get a nice bump in your success rate
To clarify: That's varying your WR by 0.5%, not your annual spending--your spending would vary by 12.5%.
Could you temporarily take a 12.5% pay cut, basically? Or earn 12.5%. Or some combination of the two. Either of which would reduce your WR by 0.5%, and then your numbers illustrate what would have happened historically in that case.
What I don't want to do is spend extra years working FT because I am afraid of a small % risk of working PT for a few years. That makes no sense to me.
So where does your comfort level lie regarding portfolio success rates? 80%? 95%?
To me, the even rarer discussion (and one that, incidentally, I was among the first to point out <- my extraordinarily minor contribution to FIRE research) is on the other end of lifespan - the 4% rule is even safer than we think because we discount the successes associated with dying early.
To me, the even rarer discussion (and one that, incidentally, I was among the first to point out <- my extraordinarily minor contribution to FIRE research) is on the other end of lifespan - the 4% rule is even safer than we think because we discount the successes associated with dying early.
Indeed. But to be fair, it is hard to wrap your brain around the mindset that dying early is a success :)
The trouble is that most people are part of a couple. In Australia, life expectancy is 80, but at least one of a couple is expected to live until 90-something. This is going to be similar elsewhere, so you actually need to think about how long your stash will need to last to cover both of you.It's extremely likely (I'd bet on it) that someone who is 90 has limited mobility and therefore spends little. By limited mobility I mean aches and pains become the norm and you become less and less likely to take trips. My grandmother on my mom's side just died at 87 and my grandfather (her husband) is still alive at 90. They were the healthiest elderly people I ever met. Indeed all their friends had died off before them. And they stopped travelling 10 years ago, with the exception of visiting family. And there was a healthy tapering in the decade before that. At that age they just couldn't string together enough good days to take week long vacations and such. Now that Grandma is gone (died last January), I'd say Grandpa barely spends anything. I can't say for sure that the same healthcare system will be in place when I'm that age but they used medicare and they paid for extra insurance that covered their 20% coinsurance beyond medicare. Those two costs covered everything so there were never any surprises. Of course they weren't taking heaps of pills either. I know prescriptions can be very costly.
The trouble is that most people are part of a couple. In Australia, life expectancy is 80, but at least one of a couple is expected to live until 90-something. This is going to be similar elsewhere, so you actually need to think about how long your stash will need to last to cover both of you.
I've attached a spreadsheet that calculates the probability of one or both of you surviving to given ages...
It's extremely likely (I'd bet on it) that someone who is 90 has limited mobility and therefore spends little. By limited mobility I mean aches and pains become the norm and you become less and less likely to take trips. My grandmother on my mom's side just died at 87 and my grandfather (her husband) is still alive at 90. They were the healthiest elderly people I ever met. Indeed all their friends had died off before them. And they stopped travelling 10 years ago, with the exception of visiting family. And there was a healthy tapering in the decade before that. At that age they just couldn't string together enough good days to take week long vacations and such. Now that Grandma is gone (died last January), I'd say Grandpa barely spends anything. I can't say for sure that the same healthcare system will be in place when I'm that age but they used medicare and they paid for extra insurance that covered their 20% coinsurance beyond medicare. Those two costs covered everything so there were never any surprises. Of course they weren't taking heaps of pills either. I know prescriptions can be very costly.Ah dear! There are a few things here that I need to comment on.
There are communities popping up in the US where 3 types of housing are offered. Villas for independent living, apartments for the less mobile, and full on nursing care. You buy into the community and you have equity for 10 years. If you die before 10 years some equity is returned to the estate. If you live longer than 10 years there is an additional cost to stay there if you have the money to pay it but they can never kick you out. As a person or couple ages they can start in the independent living space and move to more assisted care as they need it, without having to leave the community. There's a communal space that allows people to get together and enjoy activities with other people of a similar age and new friendships can be formed if people are so inclined. It's a great way to limit the "long term care" cost that people seem to fear so much, provided a couple or individual has the means to buy into the community. The cost is no more expensive than buying a small home, and typically older people are able to pay for the transition by selling the home they lived in and no longer need. It's a cool concept, particularly since you do lose friends at that age and the community you live in can start to look like a bunch of strangers. My grandfather talks about this now. He's basically the last man standing of all their friends.
That being said, I still think overall costs for most people will go down from 60 to 80, assuming you live that long, unless your base spending is already incredibly low. Perhaps a mustachian, spending only 40k a year, would see spending essentially stay flat as travel decreases and increased medical expenses replace the travel budget.
I've attached a spreadsheet that calculates the probability of one or both of you surviving to given ages...
I love that you are posting this, particularly given that from what I know about you none of this stuff matters. You FIREd based on real cash flow rather than 4% theory fluff. Thanks for continuing to provide resources for the rest of us.
As to the recent conversation, +1 to retire-canada. My current plan (hope) is to just get close to something reasonable, then slow down and pick up some random cash here and there to supplement. A 6-7% WR can be super "safe" if you keep picking up a few dollars, rely on SS, and remain flexible.
Because we've done polls, and found that the majority don't like their jobs. That's the majority of the general population, and of Mustachians.
It seems like though the vast majority who are going for a 3% WR are doing it out of fear, and their plan is to pull the plug as soon as they can, as soon as they hit their number. They aren't working in their job for a sense of purpose, as you suggest in your post.
If anything, I think these folks are dissatisfied with their work MORE than the average forum member. The irrational need to save way past a "safe" amount is a reflex to ensure never having to go back, like PTSD or something. Those that Sol mentions, who work for the sake of greater good or enjoyment are rarely debating the math of WR's and AA's.
I think it's a stretch to say that these folks are dissatisfied with their work MORE than the average forum member. Given the run in the equities market and from what was shared about Mustachian household incomes (http://forum.mrmoneymustache.com/welcome-to-the-forum/this-is-the-average-us-household-income-how-do-you-compare-(usa-today-article)/msg1320217/#msg1320217) (almost 50% above 125k), it is almost inevitable that going a little further than 4% quickly (OMY maybe) becomes 3%.
Also, in my case, I got to a bare bones FI (5 - 6% WR) and was emboldened to get a better job. I think several other FI bloggers and forum members have 'dream jobs' or working spouses that have them continuing to stash beyond the 4% WR number.
I'd be interested to understand why you'd think FI folks at 4% or below are so unhappy with working or having an income.
Your experience and ideas of a "dream job" seem normal to you, because it's your experience. But it seems not to be the case for the majority.
And as CL points out, if you are enjoying your dream job and past the FI point, you aren't on an early retirement forum handwringing about the success rate of 3% vs. 4%.
So the vast majority of people on here talking about how they want to pull the plug at 3% WR are very likely doing it out of fear.
If they were in their dream job, and wanted to work forever, they wouldn't be talking about pulling the plug as soon as they hit 3%, because they'd want to keep working, because they love their job.
I actually would like my job if I didn't have to go in every day :D It's the day in, day out aspect of it (and the solo travel) that's most wearing.
Doing it an average of a week or two per month would be great.
I've attached a spreadsheet that calculates the probability of one or both of you surviving to given ages (based on US data, but I bet Australia is quite similar, though perhaps slightly longer--within the margin of error though).I tried your spreadsheet and as a 33 year old male, with a 30 year old wife, both in average health, it says I have a 99% chance of living 13 more years. She has a 99% chance of living 24 more years. Together we have a 99% chance of living 40 more years. So by having a wife my 99% chance of being alive increases from 13 to 40 years? Something about that doesn't seem right to me. That's an insane jump.
Put in your current age, and select your health level (from above average, average, or below average) and it'll calculate the probability that each of you makes it X number more years, and the probability that AT LEAST one of you makes it there.
I've attached a spreadsheet that calculates the probability of one or both of you surviving to given ages (based on US data, but I bet Australia is quite similar, though perhaps slightly longer--within the margin of error though).I tried your spreadsheet and as a 33 year old male, with a 30 year old wife, both in average health, it says I have a 99% chance of living 13 more years. She has a 99% chance of living 24 more years. Together we have a 99% chance of living 40 more years. So by having a wife my 99% chance of being alive increases from 13 to 40 years? Something about that doesn't seem right to me. That's an insane jump.
Put in your current age, and select your health level (from above average, average, or below average) and it'll calculate the probability that each of you makes it X number more years, and the probability that AT LEAST one of you makes it there.
The "Joint" time is that one of you makes it. Turning it around - you're looking for a 1% chance of both being dead at that age : 10% * 10% = 1%. So the 90% lines for individuals are what you'd look at to "validate" the 99% line for joint. Roughly.I've attached a spreadsheet that calculates the probability of one or both of you surviving to given ages (based on US data, but I bet Australia is quite similar, though perhaps slightly longer--within the margin of error though).I tried your spreadsheet and as a 33 year old male, with a 30 year old wife, both in average health, it says I have a 99% chance of living 13 more years. She has a 99% chance of living 24 more years. Together we have a 99% chance of living 40 more years. So by having a wife my 99% chance of being alive increases from 13 to 40 years? Something about that doesn't seem right to me. That's an insane jump.
Put in your current age, and select your health level (from above average, average, or below average) and it'll calculate the probability that each of you makes it X number more years, and the probability that AT LEAST one of you makes it there.
I've attached a spreadsheet that calculates the probability of one or both of you surviving to given ages (based on US data, but I bet Australia is quite similar, though perhaps slightly longer--within the margin of error though).I tried your spreadsheet and as a 33 year old male, with a 30 year old wife, both in average health, it says I have a 99% chance of living 13 more years. She has a 99% chance of living 24 more years. Together we have a 99% chance of living 40 more years. So by having a wife my 99% chance of being alive increases from 13 to 40 years? Something about that doesn't seem right to me. That's an insane jump.
Put in your current age, and select your health level (from above average, average, or below average) and it'll calculate the probability that each of you makes it X number more years, and the probability that AT LEAST one of you makes it there.
...Secondly, the last eight years of life tend to be the most expensive years of all (according to the Australian stats). People tend to take eight years going downhill before they die. They may have a fall and break a hip, and never walk again (this is very common). Or some other progressive problem occurs. My grandmother (who was just short of 100 when she died) was in nursing homes for the last eighteen years of her life with dementia - for years she was just a skeleton lying on a bed, with no speech, no ability to walk - and ll this takes an amazing amount of money to support. So I really disagree about being elderly costing less.
Ah! Totally makes more sense now. I knew I had to be missing something.I've attached a spreadsheet that calculates the probability of one or both of you surviving to given ages (based on US data, but I bet Australia is quite similar, though perhaps slightly longer--within the margin of error though).I tried your spreadsheet and as a 33 year old male, with a 30 year old wife, both in average health, it says I have a 99% chance of living 13 more years. She has a 99% chance of living 24 more years. Together we have a 99% chance of living 40 more years. So by having a wife my 99% chance of being alive increases from 13 to 40 years? Something about that doesn't seem right to me. That's an insane jump.
Put in your current age, and select your health level (from above average, average, or below average) and it'll calculate the probability that each of you makes it X number more years, and the probability that AT LEAST one of you makes it there.
You ALONE have a 99% chance of living 13 more years
Wife ALONE had a 99% chance of living 24 more years
Together, there is a 99% chance that ONE OF YOU is alive for 40 more years.
There is NOT a 99% chance that BOTH of you are alive for 40 more years.
Seems pretty reasonable to me.
Actually, it is supported by data from the US - https://www.sciencedaily.com/releases/2016/06/160615163036.htm - however, I was unaware that your medical expenses were also capped.
Another article somewhat skeptical of the 4% rule:
https://earlyretirementnow.com/2017/01/18/the-ultimate-guide-to-safe-withdrawal-rates-part-6-a-2000-2016-case-study/
If you’ve been following our series on withdrawal rates (part 1 here) you have noticed that we’re quite skeptical about the 4% rule. That would be especially true for early retirees with a much longer horizon than the standard 30 years.
....
Summary
The 4% rule worked just fine during the Tech Bubble and Global Financial Crisis IF:
•You have a 30-year retirement horizon.
•You are comfortable depleting your money at the end of that horizon and/or significantly cutting your real withdrawal amounts.
•You had a relatively low equity portion (60% or less).
•You are not a passive investor but rather have the foresight to time long-term vs. short-term bonds. Specifically, you needed the ability (or dumb luck?) to implement the exact allocation that didn’t work in 1965/66 and avoid the allocation that did actually work quite beautifully in 1965/66.
•Did we miss any other qualifiers? Please let us know in the comments section!
i trust michael kitce's studies and looks at things far more than 90% of these financial writer jerks out there .
Another article somewhat skeptical of the 4% rule:This is by far the best and most detailed study about the 4% rule that is available until now. Everybody who is dismissing this should take a break and read it from front to end.
https://earlyretirementnow.com/2017/01/18/the-ultimate-guide-to-safe-withdrawal-rates-part-6-a-2000-2016-case-study/
If you’ve been following our series on withdrawal rates (part 1 here) you have noticed that we’re quite skeptical about the 4% rule. That would be especially true for early retirees with a much longer horizon than the standard 30 years.
....
Summary
The 4% rule worked just fine during the Tech Bubble and Global Financial Crisis IF:
•You have a 30-year retirement horizon.
•You are comfortable depleting your money at the end of that horizon and/or significantly cutting your real withdrawal amounts.
•You had a relatively low equity portion (60% or less).
•You are not a passive investor but rather have the foresight to time long-term vs. short-term bonds. Specifically, you needed the ability (or dumb luck?) to implement the exact allocation that didn’t work in 1965/66 and avoid the allocation that did actually work quite beautifully in 1965/66.
•Did we miss any other qualifiers? Please let us know in the comments section!
The KITCES study does not account for any inflation.
KITCES inflation is only calculated for the withdrawal but not for the portfolio value.The KITCES study does not account for any inflation.
This is not true. The Kitces study in question (https://www.kitces.com/blog/how-has-the-4-rule-held-up-since-the-tech-bubble-and-the-2008-financial-crisis/) most certainly takes inflation into account. The commentary in the Kitces article pertaining to the specific chart critiqued by the ERN article (which uses nominal figures) expressly discusses the fact that it is based on nominal (non-inflation-adjusted) dollars. And it goes on to provide another chart displaying inflation-adjusted spending as a percentage of total portfolio value, which demonstrates that the year 2000 retiree (whose portfolio followed the parameters of Kitces' asset allocation and other assumptions) was faring better (in terms of inflation-adjusted withdrawal rate) at the 15-year mark than history's worst-case retiree (which the ERN article seems to have conveniently overlooked when it highlighted Kitces' use of a portfolio value chart based on nominal dollars).
Why would you need to count inflation twice?KITCES inflation is only calculated for the withdrawal but not for the portfolio value.The KITCES study does not account for any inflation.
This is not true. The Kitces study in question (https://www.kitces.com/blog/how-has-the-4-rule-held-up-since-the-tech-bubble-and-the-2008-financial-crisis/) most certainly takes inflation into account. The commentary in the Kitces article pertaining to the specific chart critiqued by the ERN article (which uses nominal figures) expressly discusses the fact that it is based on nominal (non-inflation-adjusted) dollars. And it goes on to provide another chart displaying inflation-adjusted spending as a percentage of total portfolio value, which demonstrates that the year 2000 retiree (whose portfolio followed the parameters of Kitces' asset allocation and other assumptions) was faring better (in terms of inflation-adjusted withdrawal rate) at the 15-year mark than history's worst-case retiree (which the ERN article seems to have conveniently overlooked when it highlighted Kitces' use of a portfolio value chart based on nominal dollars).
You can check the results easily with cfiresim. (when you check the period from 1966 onwards this flaw becomes even more obvious because of high inflation rates).
Starting year 2000 with a 60/40 portfolio with 0.1% fees leaves you with ~$700k adjusted now. (and not a nearly $1M like in the kitces study, because account value is not inflation adjusted (only the yearly withdrawal).
Everybody with a higher stock mix would have fared worse.
Currently the 10year bond yield is at ~2.5% instead of ~6% @ year 2000. The damage limiting component of bond yields is just not there today.
The ERN study is covering all that.
KITCES inflation is only calculated for the withdrawal but not for the portfolio value.
Starting year 2000 with a 60/40 portfolio with 0.1% fees leaves you with ~$700k adjusted now.
Why would you need to count inflation twice?KITCES inflation is only calculated for the withdrawal but not for the portfolio value.The KITCES study does not account for any inflation.
This is not true. The Kitces study in question (https://www.kitces.com/blog/how-has-the-4-rule-held-up-since-the-tech-bubble-and-the-2008-financial-crisis/) most certainly takes inflation into account. The commentary in the Kitces article pertaining to the specific chart critiqued by the ERN article (which uses nominal figures) expressly discusses the fact that it is based on nominal (non-inflation-adjusted) dollars. And it goes on to provide another chart displaying inflation-adjusted spending as a percentage of total portfolio value, which demonstrates that the year 2000 retiree (whose portfolio followed the parameters of Kitces' asset allocation and other assumptions) was faring better (in terms of inflation-adjusted withdrawal rate) at the 15-year mark than history's worst-case retiree (which the ERN article seems to have conveniently overlooked when it highlighted Kitces' use of a portfolio value chart based on nominal dollars).
You can check the results easily with cfiresim. (when you check the period from 1966 onwards this flaw becomes even more obvious because of high inflation rates).
Starting year 2000 with a 60/40 portfolio with 0.1% fees leaves you with ~$700k adjusted now. (and not a nearly $1M like in the kitces study, because account value is not inflation adjusted (only the yearly withdrawal).
Everybody with a higher stock mix would have fared worse.
Currently the 10year bond yield is at ~2.5% instead of ~6% @ year 2000. The damage limiting component of bond yields is just not there today.
The ERN study is covering all that.
Why would you need to count inflation twice?KITCES inflation is only calculated for the withdrawal but not for the portfolio value.The KITCES study does not account for any inflation.
This is not true. The Kitces study in question (https://www.kitces.com/blog/how-has-the-4-rule-held-up-since-the-tech-bubble-and-the-2008-financial-crisis/) most certainly takes inflation into account. The commentary in the Kitces article pertaining to the specific chart critiqued by the ERN article (which uses nominal figures) expressly discusses the fact that it is based on nominal (non-inflation-adjusted) dollars. And it goes on to provide another chart displaying inflation-adjusted spending as a percentage of total portfolio value, which demonstrates that the year 2000 retiree (whose portfolio followed the parameters of Kitces' asset allocation and other assumptions) was faring better (in terms of inflation-adjusted withdrawal rate) at the 15-year mark than history's worst-case retiree (which the ERN article seems to have conveniently overlooked when it highlighted Kitces' use of a portfolio value chart based on nominal dollars).
You can check the results easily with cfiresim. (when you check the period from 1966 onwards this flaw becomes even more obvious because of high inflation rates).
Starting year 2000 with a 60/40 portfolio with 0.1% fees leaves you with ~$700k adjusted now. (and not a nearly $1M like in the kitces study, because account value is not inflation adjusted (only the yearly withdrawal).
Everybody with a higher stock mix would have fared worse.
Currently the 10year bond yield is at ~2.5% instead of ~6% @ year 2000. The damage limiting component of bond yields is just not there today.
The ERN study is covering all that.
Not counting twice but to ignore inflation on the portfolio size gives a complete wrong sense of safety for longer periods:
(https://www.kitces.com/wp-content/uploads/2015/08/Graphics_2.png)
For example the 1966 cohort from the KITCES chart where you see nearly $1M in 1981 with 4% withdrawal rate are in reality only around $225k inflation adjusted! 1981 $
That means you have to withdraw more than 15% per year from this portfolio after only 15 years of retirement. So its failing before it reaches even 30 years.
When you take all historical years with Shiller Cape ~25 or higher and also take into account the currently non existing bond yield after inflation what do you expect? Its pure and simple math.
This is what you can see in the ERN study.
...Yes that's correct. And on top they had in common, that in each case Shiller Cape was in the mid twenties (to low thirties in 1929).
so what made those time frames the worst ? what made them the worst is the fact in every single retirement time frame the outcome of that 30 year period was determined not by what happened over the 30 years but the entire outcome was decided in the first 15 years.
...
...Yes that's correct. And on top they had in common, that in each case Shiller Cape was in the mid twenties (to low thirties in 1929).
so what made those time frames the worst ? what made them the worst is the fact in every single retirement time frame the outcome of that 30 year period was determined not by what happened over the 30 years but the entire outcome was decided in the first 15 years.
...
That makes the ERN study so valuable. It separates cases with low and high Cape and makes probabilities for each group.
After reading, it gets obvious that the current statistical risk/failure rate, specially for early retires, is a good amount higher than Trinity study or others suggest.
This writeup gets into these issues (deeply) if you want to better understand why CAPE is not a great comparison tool over time periods with different characteristics.
http://www.philosophicaleconomics.com/2013/12/shiller/
+1 - I'd read about the accounting standards change's impact on CAPE, but it wasn't presented this clearly.This writeup gets into these issues (deeply) if you want to better understand why CAPE is not a great comparison tool over time periods with different characteristics.
http://www.philosophicaleconomics.com/2013/12/shiller/
Thanks for posting. That was a good read.
+1 - I'd read about the accounting standards change's impact on CAPE, but it wasn't presented this clearly.This writeup gets into these issues (deeply) if you want to better understand why CAPE is not a great comparison tool over time periods with different characteristics.
http://www.philosophicaleconomics.com/2013/12/shiller/
Thanks for posting. That was a good read.
http://www.philosophicaleconomics.com/2015/03/payout/
"We conclude with the question that all of this exists to answer: Is the market expensive? Yes, and returns are likely to be below the historical average, pulled down by a number of different mechanisms. Should the market be expensive? “Should” is not an appropriate word to use in markets. What matters is that there are secular, sustainable forces behind the market’s expensiveness–to name a few: low real interest rates, a lack of alternative investment opportunities (TINA), aggressive policymaker support, and improved market efficiency yielding a reduced equity risk premium (difference between equity returns and fixed income returns). Unlike in prior eras of history, the secret of “stocks for the long run” is now well known–thoroughly studied by academics all over the world, and seared into the brain of every investor that sets foot on Wall Street. For this reason, absent extreme levels of cyclically-induced fear, investors simply aren’t going to foolishly sell equities at bargain prices when there’s nowhere else to go–as they did, for example, in the 1940s and 1950s, when they had limited history and limited studied knowledge on which to rely.
As for the future, the interest-rate-related forces that are pushing up on valuations will get pulled out from under the market if and when inflationary pressures tie the Fed’s hands–i.e., force the Fed to impose a higher real interest rate on the economy. For all we know, that may never happen. Similarly, on a cyclically-adjusted basis, the equity risk premium may never again return to what it was in prior periods, as secrets cannot be taken back."
Not sure if this idea has been brought up before - get a quote on an annuity and see how it compares to your SWR assumption.So was your quote from one of those insurance companies that take out 30% in fees? If not, then you might be adding (or subtracting or dividing apples and oranges.
The idea was raised in a recent Motley Fool discussion. It factors in expected longevity and the current interest rate environment.
I got a quote for my wife (younger than me, female, longer life expectancy) for an SPIA with a CPI cost of living adjustment. It gives us an initial 2.7%.
From here:
http://www.retireearlyhomepage.com/annuity_costs.html
We learn that "hidden fees and costs can capture as much as 30% of the money you put into an annuity" (thank you intercst).
Backing out the 30% in fees gives us an initial 2.7/0.7 = 3.86%.
Pretty close to 4%. And that's in our low interest rate environment. Quite interesting as a double check against our SWR assumptions.
That's a pretty good one Adrian because:
A) It takes into account your age (younger = more expensive annuity, because you have longer to live), and
B) The annuity companies will be conservative so they can ensure a profit.
That's a pretty good one Adrian because:
A) It takes into account your age (younger = more expensive annuity, because you have longer to live), and
B) The annuity companies will be conservative so they can ensure a profit.
It sure is an interesting data point, but I don't understand what it does prove for you or what the point is in regard to the 4% rule?
Sure you could hedge your longevity risk by using a few % of your portfolio to buy a deferred annuity. Then you know exactly how long your portfolio needs to last. I don't think though it says much about the SWR from a (presumably) predominately equity-based portfolio.
Perhaps you could explain your thinking on this a little more.
So was your quote from one of those insurance companies that take out 30% in fees? If not, then you might be adding (or subtracting or dividing apples and oranges.
That's a pretty good one Adrian because:
A) It takes into account your age (younger = more expensive annuity, because you have longer to live), and
B) The annuity companies will be conservative so they can ensure a profit.
It sure is an interesting data point, but I don't understand what it does prove for you or what the point is in regard to the 4% rule?
Sure you could hedge your longevity risk by using a few % of your portfolio to buy a deferred annuity. Then you know exactly how long your portfolio needs to last. I don't think though it says much about the SWR from a (presumably) predominately equity-based portfolio.
Perhaps you could explain your thinking on this a little more.
It may give peace of mind to those worried about their money running out.
What it says is that major companies, with their actuaries and data, feel comfortable pricing it at that and making a profit, so they think the chances are pretty good.
It doesn't change anything in terms of your odds, but perhaps peace of mind.
He basically said that the annuity is not a good proxy because he would never buy one
That's a pretty good one Adrian because:
A) It takes into account your age (younger = more expensive annuity, because you have longer to live), and
B) The annuity companies will be conservative so they can ensure a profit.
It sure is an interesting data point, but I don't understand what it does prove for you or what the point is in regard to the 4% rule?
Sure you could hedge your longevity risk by using a few % of your portfolio to buy a deferred annuity. Then you know exactly how long your portfolio needs to last. I don't think though it says much about the SWR from a (presumably) predominately equity-based portfolio.
Perhaps you could explain your thinking on this a little more.
It may give peace of mind to those worried about their money running out.
What it says is that major companies, with their actuaries and data, feel comfortable pricing it at that and making a profit, so they think the chances are pretty good.
It doesn't change anything in terms of your odds, but perhaps peace of mind.
Not sure if this idea has been brought up before - get a quote on an annuity and see how it compares to your SWR assumption.
The idea was raised in a recent Motley Fool discussion. It factors in expected longevity and the current interest rate environment.
I got a quote for my wife (younger than me, female, longer life expectancy) for an SPIA with a CPI cost of living adjustment. It gives us an initial 2.7%.
From here:
http://www.retireearlyhomepage.com/annuity_costs.html
We learn that "hidden fees and costs can capture as much as 30% of the money you put into an annuity" (thank you intercst).
Backing out the 30% in fees gives us an initial 2.7/0.7 = 3.86%.
Pretty close to 4%. And that's in our low interest rate environment. Quite interesting as a double check against our SWR assumptions.
To be fair though, a $40k+ military pension makes it considerably easier to "rely" on the 4% rule than someone who will be 100% sustained from portfolio withdrawals. I would be careful presuming the risk tolerance for your situation is the same as someone where 100% of their annual spend is from investments.
...
You can run your own numbers here (https://investor.vanguard.com/annuity/fixed), but for a 42 year old getting a 'pension' with COLA, sole annuitant and lifetime immediate annuity worth $42k/yr starting April 2016, I'd have to pay $1,589,000 today. Relying on 4% SWR I only have to pay $1,050,000... not to mention the many other benefits to investing it outside the annuity, so no, I don't call that a real option for ER.
Also, I have to mention, the annuity provider could conceivably go bankrupt in the 50 or so years I'm receiving benefits, so it's not even that good for diversification.
He basically said that the annuity is not a good proxy because he would never buy one
I would be shocked if that was the crux of his argument, because him buying one is irrelevant to if it's a good comparison or not. I think you're probably vastly oversimplifying his position.
He basically said that the annuity is not a good proxy because he would never buy one
I would be shocked if that was the crux of his argument, because him buying one is irrelevant to if it's a good comparison or not. I think you're probably vastly oversimplifying his position.
ARS, you should look at his response (http://forum.mrmoneymustache.com/post-fire/fire-on-4/msg995516/#msg995516) and tell me how you would better summarize it.
This thread isn't about the military (or about any particular occupation) or about defined benefits pensions. This is about asset allocation.
Don't know about summarizing it, but I particularly liked "I occasionally hear "Yeah, I'd be able to retire too if I had a <insert high-risk career here> pension." Very few of those commenters have the context of any part of the marathon but the finish line" and what followed.ARS, you should look at his response (http://forum.mrmoneymustache.com/post-fire/fire-on-4/msg995516/#msg995516) and tell me how you would better summarize it.He basically said that the annuity is not a good proxy because he would never buy oneI would be shocked if that was the crux of his argument, because him buying one is irrelevant to if it's a good comparison or not. I think you're probably vastly oversimplifying his position.
He basically said that the annuity is not a good proxy because he would never buy one
I would be shocked if that was the crux of his argument, because him buying one is irrelevant to if it's a good comparison or not. I think you're probably vastly oversimplifying his position.
ARS, you should look at his response (http://forum.mrmoneymustache.com/post-fire/fire-on-4/msg995516/#msg995516) and tell me how you would better summarize it.
You apparently failed to grok his point.
The key sentence:QuoteThis thread isn't about the military (or about any particular occupation) or about defined benefits pensions. This is about asset allocation.
Re-read the posts with that in mind.
But you have to remember that the company probably issues thousands of annuity contracts. They get to run many trials, so only a bare majority of them have to succeed for them to make a profit. So they could handle, say, a 70% chance of success and still be profitable. An individual only gets one trial, and so typically aims for a much higher chance of success, thereby reducing the SWR.
Here is the conversation I was referring to (http://forum.mrmoneymustache.com/post-fire/fire-on-4/msg995297/#msg995297[/url), I went about the annuity arguement from the other side (that it would cost me ~1.6M to 'guarantee' 40k/yr inflation adjusted, which was ~$600,000 more than SWR).
Most people don't seem to understand this important difference. We're not each gambling that our personal portfolio will be in the 95% of successful cases like it's a random spin, we're gambling that our chosen retirement moment will not be among the 5% of worst years in world history to invest.
But you have to remember that the company probably issues thousands of annuity contracts. They get to run many trials, so only a bare majority of them have to succeed for them to make a profit. So they could handle, say, a 70% chance of success and still be profitable. An individual only gets one trial, and so typically aims for a much higher chance of success, thereby reducing the SWR.
I think you might have misunderstood what the SWR literature is saying. It's not that 95% of individual retirees with a 4% SWR successfully last 30 years, it's that 100% of people who retire in 95% of YEARS will successfully last 30 years.
Every single person in a given year with succeed or fail together. There is no averaging effect for an insurance company to exploit, because if 2017 turns out to be one of the few years when a 4% SWR fails, then every single annuity contract they sell in 2017 will go bankrupt.
Most people don't seem to understand this important difference. We're not each gambling that our personal portfolio will be in the 95% of successful cases like it's a random spin, we're gambling that our chosen retirement moment will not be among the 5% of worst years in world history to invest.
Most people don't seem to understand this important difference. We're not each gambling that our personal portfolio will be in the 95% of successful cases like it's a random spin, we're gambling that our chosen retirement moment will not be among the 5% of worst years in world history to invest.
We need a Vanguard investor owned annuity/pooled risk product that isn't trying to make a ton of profit for the FIRE community. If we shared the risk over the decades as well we should all be better off at the expense of not growing a massive fortune for most FIREers.
We call that annuity program "social security" and it already does exactly what you describe.
What I'm thinking of would be totally self-funded at level you choose and for a duration you choose so you could retire early, but with pooled risk across starting years and not for profit so the cost isn't as high as the annuity stuff we are talking about.
What I'm thinking of would be totally self-funded at level you choose and for a duration you choose so you could retire early, but with pooled risk across starting years and not for profit so the cost isn't as high as the annuity stuff we are talking about.
Done. I just started a mustachian annuity fund open to all of you. Send me your deposits, and I will guarantee you a fixed SWR on that money for the remainder of your natural life, regardless of duration or maximum dollar amounts. Today I am offering an inflation-adjusted 1% per year SWR on your money. PM me for account details. All transactions must be made electronically, because I'm not mailing you any paper statements.
If anyone else would like to offer a rate higher than 1%, you are free to start your own mustachian insurance company.
You failed at a key point I highlighted.
I think single premium immediate annuity are great products, and I'd consider it a part of my retirement planning at some point, if needed, but it doesn't work well for the extreme early retiree. It's almost impossible to get one younger than 40 or 50, and even if you do, the quoted rates will be horrible. There are not enough people retiring that early and buying annuities for it to work out.
The annuity comparison is a nice thought if it makes you feel better, but there are difference (that make it a more aggressive or conservative estimate):
<snip>
2) With an annuity, you can count on living off dead people's money as long as you live long enough. You don't get that advantage with DIY investing and 4% rule: me and you could both FIRE tomorrow at 4%, but if you get hit by a bus, your stash is going to your heir, not me. If we both FIRE tomorrow using an annuity and you get hit by a bus, your stash is going to pay me in my old age (assuming I live that long).
The annuity comparison is a nice thought if it makes you feel better, but there are difference (that make it a more aggressive or conservative estimate):
<snip>
2) With an annuity, you can count on living off dead people's money as long as you live long enough. You don't get that advantage with DIY investing and 4% rule: me and you could both FIRE tomorrow at 4%, but if you get hit by a bus, your stash is going to your heir, not me. If we both FIRE tomorrow using an annuity and you get hit by a bus, your stash is going to pay me in my old age (assuming I live that long).
The other thing though, is that by following the 4% rule in most cases you wind up fabulously wealthy in old age.
With a SPIA you most likely will get your principle back, and you'll be lucky to get much if anything more than that.
To put it another way, insurance companies feel unlucky if they have to pay you much more than your principle, and are betting they will wind up fabulously wealthy in your old age.
...
2) With an annuity, you can count on living off dead people's money as long as you live long enough. You don't get that advantage with DIY investing and 4% rule: me and you could both FIRE tomorrow at 4%, but if you get hit by a bus, your stash is going to your heir, not me. If we both FIRE tomorrow using an annuity and you get hit by a bus, your stash is going to pay me in my old age (assuming I live that long).
3) The insurance company "plays both sides" which helps even things out for them: they sell life insurance and annuities, if people live longer than their actuarial tables predict, one product turns out better for them while the other turns out worse, and vice versa.
I think single premium immediate annuity are great products, and I'd consider it a part of my retirement planning at some point, if needed, but it doesn't work well for the extreme early retiree. It's almost impossible to get one younger than 40 or 50, and even if you do, the quoted rates will be horrible. There are not enough people retiring that early and buying annuities for it to work out.
But you have to remember that the company probably issues thousands of annuity contracts. They get to run many trials, so only a bare majority of them have to succeed for them to make a profit. So they could handle, say, a 70% chance of success and still be profitable. An individual only gets one trial, and so typically aims for a much higher chance of success, thereby reducing the SWR.
I think you might have misunderstood what the SWR literature is saying. It's not that 95% of individual retirees with a 4% SWR successfully last 30 years, it's that 100% of people who retire in 95% of YEARS will successfully last 30 years.
Every single person in a given year will succeed or fail together. There is no averaging effect for an insurance company to exploit, because if 2017 turns out to be one of the few years when a 4% SWR fails, then every single annuity contract they sell in 2017 will go bankrupt.
Most people don't seem to understand this important difference. We're not each gambling that our personal portfolio will be in the 95% of successful cases like it's a random spin, we're gambling that our chosen retirement moment will not be among the 5% of worst years in world history to invest.
Question 1 - where should I put the rest? Small Cap? International? is there a good thread to point me toward regarding the perfect vanguard portfolio? Or is it so personal that there's no right answer?
Question 2 - Is there any benefit to choosing a vanguard ETV vs. Mutual Fund?
Hey, hoping you have some opinions on this without starting a new thread.
I moved my 401k to a selfdirected portfolio - and I'm not 100% where I want to put the money.
I put the first batch in VOO.
Question 1 - where should I put the rest? Small Cap? International? is there a good thread to point me toward regarding the perfect vanguard portfolio? Or is it so personal that there's no right answer?
Question 2 - Is there any benefit to choosing a vanguard ETV vs. Mutual Fund?
Well, I could complicate it. It's frustrating to be quoted without context.He basically said that the annuity is not a good proxy because he would never buy one
I would be shocked if that was the crux of his argument, because him buying one is irrelevant to if it's a good comparison or not. I think you're probably vastly oversimplifying his position.
There are problems with using it, but like I said above, it may make someone feel better about DIYing.
Set a budget, save up 25x, declare financial independence, and live your best life.
All trends point the other direction.
...I'll comment on the bolded sections in order. Perhaps this is what 'rebs was getting at
One thing I do disagree with is the idea that folks today retiring in their 30's should expect to fall back on Social Security in 35+ years. Maybe you are removed from just how different the working world has been from the 1990's to today, but I fear that folks think hitting that 4% / 25x threshold is still magical. 40 years from 1976 (the rolling period you should compare to if your plan includes SS, and I think there were still lines at gas stations and Presidents telling us to wear sweaters) is vastly different from 40 years from 2017. I have all sorts of strong opinions that Medicare will be bankrupt or severely curtailed, social security will be only for poverty protection, and the USA will have a lower quality of living on average (somewhat better for 1%, much worse for 99%).
Being pessimistic has a huge financial, opportunity and mental health cost so unless the evidence clearly points to needing to be pessimistic I'll choose to be an optimist.
Being pessimistic has a huge financial, opportunity and mental health cost so unless the evidence clearly points to needing to be pessimistic I'll choose to be an optimist.
Being pessimistic has a huge financial, opportunity and mental health cost so unless the evidence clearly points to needing to be pessimistic I'll choose to be an optimist.
...It's an interesting viewpoint, but not one I agree with. The trouble with "advancements" is that they are often difficult to notice while they are happening but obvious when viewed by future generations. Looking specifically at the last 20 years I think one of our biggest "advancements"* has been the increasing connectedness of our world; video-conferencing, instant messages, long-distance/international calling and file sharing have become so common place that it's easy to forget 25 years ago these things were prohibitively expensive and time consuming (when available at all). As a scientist I also have to note that our ability to collect, store and process data has been growing exponentially for quite some time. By one measure the environmental data collected in the last 15 years exceeds that collected within the previous 150.
But like I said, I would prefer to be reading too much into current events. I'm perfectly aware we've gone through significant social upheaval in the past, but back then QOL gains involved getting the first household radio, TV, microwave, and VHS player. Nowadays QOL comes from genetically modified food and targeted big data mining. In other words, these improvements are more ambiguous and could likely be causing more harm than good (for the individual).
“If we examine technologies honestly, each one as its faults as well as its virtues. There are no technologies without vices and none that are neutral. The consequences of a technology expand with its disruptive nature. Powerful technologies will be powerful in both directions, for good and bad. There is no powerfully constructive technology that is not also powerfully destructive in another direction, just as there is no great idea that cannot be greatly perverted for great harm. The greater the promise of a new technology, the greater its potential for harm as well”
Thanks for your viewpoint Nereo. I don't mean to say all advancements have 100% been dragging humanity down, but more pointing out that advancements in the past (that changed society) were pretty benign. I'm sure families thought the world was coming to an end when Elvis shaking his hips on their radio (figuratively), then black and white TV subversively showed men on the moon, and don't even get me started on when MTV started showing videos :) Those were the days, before we paid for cable to then have to sit through commercials - and they wonder why people are cutting the cord, but I digress.
I like that you chose global connectedness. In some ways it has improved life making it a little easier to keep in touch as we travel, but also facilitates things like terrorism and propaganda. Reminds me of Kevin Kelly's What Technology Wants (http://www.econtalk.org/archives/2010/11/kelly_on_techno.html)....and child pornography. The FBI had that so under wraps by the mid 1990s that it was practically non-existent. Then all of a sudden the internet allowed the disease to spread, and now it's the law enforcement equivalent of playing whack-a-mole. Sigh...
When I get pessimistic about the world, this usually puts it into perspective:^^ :-)
http://www.humanprogress.org/
One thing I do disagree with is the idea that folks today retiring in their 30's should expect to fall back on Social Security in 35+ years. Maybe you are removed from just how different the working world has been from the 1990's to today, but I fear that folks think hitting that 4% / 25x threshold is still magical. 40 years from 1976 (the rolling period you should compare to if your plan includes SS, and I think there were still lines at gas stations and Presidents telling us to wear sweaters) is vastly different from 40 years from 2017. I have all sorts of strong opinions that Medicare will be bankrupt or severely curtailed, social security will be only for poverty protection, and the USA will have a lower quality of living on average (somewhat better for 1%, much worse for 99%).I watched Becoming Warren Buffet the other day and in it he says that he is extremely bullish on America's future. The documentary talks about his involvement in the Civil Rights and Women's movements through his first wife and he says one of the reasons he is so bullish is that we've managed to achieve what we have using literally only half our talent pool. If recent years have shown us anything, it's that women are just as capable as men, if not more so, to hold high level corporate positions and make great contributions to our society. If Buffet is such a bull about our country, I would feel a bit foolish thinking my opinion to the contrary is a smart one to have. I just think his sentiments about our future speak volumes about how resilient our society is, regardless of what issues we see in the news today that make us think otherwise.
Specifically on his comments about bringing women into the workforce - that was a 'Yuge' one-time gain that I don't see happening again. I hope that electric cars are on a similar economy-changing level, and I'm optimistic seeing Teslas winning market share for the foreseeable future. I think electric and self-driving cars are significant positives for the environment and also for humanity doing something more productive than staring out of a windshield at brake-lights for increasingly prolonged spans of our lives.I work in a field closely related to "Big Data" and machine learning. I also have the opportunity to read summaries of the latest scientific research in technology and science on a daily basis. I have no doubt in my mind that the same pace of advancement will continue, if not accelerate. People will no longer drive. Graphene will replace the silicon chip and allow Moore's Law to continue. You will have a super computer in your living room that learns your habits and optimizes your life. Electricity will be wireless. A wind turbine was just deployed off the coast of Denmark that, if used worldwide, has the ability to generate 40 times the amount of power we consume globally. And that's just wind power! Many of the concepts you see in movies like Minority Report and I, Robot are not science fiction. They are the future. All of that advancement will drive growth and create new opportunities that we can only imagine as science fiction right now. I believe that the coming super computing revolution will make the industrial revolution look like cavemen discovering fire. I think my portfolio is in good hands when it comes to expected future returns over the next 60 years.
Your delayed FIRE due to fear reduces the risk of portfolio failure in exchange for guaranteed years of life's gone forever.
You can call portfolio failing risk, but the latter is a much bigger failure, to me.
In other words, I'd rather ER at 30 and run out of money at 85 (with an unknown amount of life left) than ER at 65 and have way too much at 85 (with the same unknown amount of life left).
Obviously there are scenarios in between, but how many years are you going to give up? What if you can only choose one of those options?
What if, in the option where you run out of money, you're allowed to make more along the way, but in the other one, you're not allowed to get years back?
You can call portfolio failing risk, but the latter is a much bigger failure, to me.
In other words, I'd rather ER at 30 and run out of money at 85 (with an unknown amount of life left) than ER at 65 and have way too much at 85 (with the same unknown amount of life left).
I feel heistant to hang it up early just because I might only live 40 more years....
As someone who will FIRE around 50 at above 4%WR I be far happier starting FIRE at 40 because of the extra years in the prime of my life that are really mine, the reduced serious negative health impacts of sedentary work and being able to deal with the early sequence of returns risk in my 40's vs. my 50's.
If I could really turn back the clock doing so in my 30's would be even better. Although cFIREsim will give you a lower success rate for a longer FIRE period it's a limited simulation and ignores all the benefits of having extra time in your youth to address FIRE issues. My gut feel is that the situation is safer overall.
In other words, I'd rather ER at 30 and run out of money at 85 (with an unknown amount of life left) than ER at 65 and have way too much at 85 (with the same unknown amount of life left).There's a couple of tweetables in those thoughts.
What if, in the option where you run out of money, you're allowed to make more along the way, but in the other one, you're not allowed to get years back?
In other words, I'd rather ER at 30 and run out of money at 85 (with an unknown amount of life left) than ER at 65 and have way too much at 85 (with the same unknown amount of life left).There's a couple of tweetables in those thoughts.
What if, in the option where you run out of money, you're allowed to make more along the way, but in the other one, you're not allowed to get years back?
I should mention that the "retirement spending smile" chart in that article has been around for a while. (Wade Pfau either created or popularized the phrase.) I think most of the academic financial research community accepts that.
The latest bleeding-edge research is beginning to hypothesize that the smile is more of a glide slope down to death, and that perhaps end-of-life expenses are at least as rare as the 5% risk of sequence-of-returns failure. This matches the Boston College Center For Retirement Research paper which has determined that long-term care is rare (only 5% of elders are in a care facility) and the majority of the duration is within the 100 days of Medicare benefits.
I take this research personally, and I'd better not screw it up. My father and his father spent over six years (so far) and 14 years (respectively) in dementia care facilities, with longevity of 83 (and still going) and 97. If genetics loads the gun, then I might be playing Russian Roulette with a semi-automatic pistol. Regardless of the rest of my life, I'm really really glad that I didn't spend my 40s at a bridge career.
Our total annual spending during our 14+ years of financial independence has been all over the map-- because parenting, slow travel, and other projects like personal-finance writing.
However our non-discretionary expenses have dropped steadily and we can play fiscal defense like Mustachian hall-of-fame candidates. Our daughter launched from the nest in 2010. Although she was a frugal expense (and the best bargain ever) she's now off the payroll. Since 2002 we've refinanced mortgages nine times (between a home and a rental) and dropped those expenses nearly 40%.* We eat a lot less calories than in my 30s and 40s, and even at a higher quality of protein (ahi and mahi mahi, please) we're still spending less overall. We hardly ever eat out (and we rarely eat fast food) because it's more hassle than prepping home-cooked. Our utilities have dropped steadily due to a photovoltaic array and a net-metering agreement as well as solar water heating. We use less water for irrigation and we use a lot less water in our house (launching a teen from the nest). Our gasoline and car expenses have dropped steadily (not commuting) and we could hammer them down even further with an electric vehicle (no oil changes!) recharged from our photovoltaic array. Internet access is cheaper and faster every year. Our landline ($26/month) has been replaced by a used iPhone. Just about every electronic device in the house is cheap and getting cheaper. The public library and eBooks cost less than paperbacks ever have. We now only have one paid magazine subscription (Family Handyman, $12/year). I've had to stop training taekwondo (knee injuries) but I still pay for surf wax by the pound.
* [We just started a new refinance, and this one's going to be a monster equity cash-out of our home. We'll be making payments until I'm 86 years old... hopefully in 30 years I'll still have the cognition to understand that! Our mortgage is a discretionary expense-- a way for us to tap our dead equity as well as pay back a fixed long-term monthly debt with inflation-adjusted military pensions.]
Even our state & federal taxes have gone down since I retired from active duty. In a few years the federal taxes will go back up when my spouse starts her Reserve pension, but by then both of our retirement accounts will be Roth IRAs.
The only expenses which have crept up over the last 14 years have been sewage (Hawaii's rotting infrastructure), cable TV, and travel. I reluctantly endure the first (although our daughter is a civil engineer) and my spouse is inching ever closer to eliminating the second. (http://forum.mrmoneymustache.com/do-it-yourself-forum!/cutting-the-nords-cord/msg1394335/#msg1394335) The third is totally discretionary and offset by crashing at our daughter's place (wherever the Navy sends her) or military Space A flights.
The longer we've been retired, the more our checking account goes up. By the time we're drawing Social Security (age 70), we'll be able to pay our non-discretionary expenses within that budget.
I'm curious, you mentioned a mortgage. Have you looked into or written about reverse mortgages (HECM). You have to be 62 to use it so probably useless to almost everyone here, but it seems like an interesting strategy to use if you get to 62, have not quite made it to 4%, have a large amt of home equity and want to hedge against sequencing risk and/or delay SS to 70.I've read about them, but I haven't written about them.
the two biggest pitfalls with reverse mortgages are seniors are finding that as their health changes so do the requirements they have for living .Great points! Thanks. I did not think of the forced repair issue, definitely something to research. Hard to imagine how a lender would really know what needs work though. Unless there is obvious structural damage how would they know? Does anyone know hoe frequently this occurs?
not being able to drive and finding yourself living in an area with no public transportation can suck . you may have little to no equity left if you sell . reverse compounding interest and fees ain't your friend .
many run in to the same issues when they become ill and want to be closer to family or move in with family for care .
one other point is that you agree to make all needed repairs when you take that reverse mortgage . nothing could be worse than having to replace a roof that is still fairly okay because the lender tells you to . the reason you took the reverse mortgage in the first place is because cash is so tight .
many find that the fact almost half the value of their property is not loaned against does not help out as much as they thought and it can still be a struggle .
one aspect of reverse mortgages had interested me and that was a reverse mortgage to purchase .
that is where you put down about 1/2 on a new place and never make another mortgage payment again . but when i looked in to it i learned those mortgages were really designed for lower income seniors who are a higher risk group . the interest rates on them and fees were just to high to make it worth it compared to a conventional loan
Could you not just have a HELOC on the house and use that when you needed money? At some point you'll sell and move into an apartment or car home at that time you discharge the HELOC. That would let you get a significant amount of money out of the house and keep control over both how much you take out and what you spend it one.
Could you not just have a HELOC on the house and use that when you needed money? At some point you'll sell and move into an apartment or car home at that time you discharge the HELOC. That would let you get a significant amount of money out of the house and keep control over both how much you take out and what you spend it one.
Could you not just have a HELOC on the house and use that when you needed money? At some point you'll sell and move into an apartment or car home at that time you discharge the HELOC. That would let you get a significant amount of money out of the house and keep control over both how much you take out and what you spend it one.
the last thing you want to do is borrow money when you need money and pay it back with interest and a floating rate
Could you not just have a HELOC on the house and use that when you needed money? At some point you'll sell and move into an apartment or car home at that time you discharge the HELOC. That would let you get a significant amount of money out of the house and keep control over both how much you take out and what you spend it one.
the last thing you want to do is borrow money when you need money and pay it back with interest and a floating rate
Only if you expect the market to remain crashed forever.
Now that I really think about it - taking out a HELOC and using it to deal with a stock market downturn is functionally the same as selling bonds when the stock market is down. You are spending equity + interest (either interest incurred from the HELOC, or interest forgone from the bond sale)
Could you not just have a HELOC on the house and use that when you needed money? At some point you'll sell and move into an apartment or car home at that time you discharge the HELOC. That would let you get a significant amount of money out of the house and keep control over both how much you take out and what you spend it one.
the last thing you want to do is borrow money when you need money and pay it back with interest and a floating rate
Only if you expect the market to remain crashed forever.
Now that I really think about it - taking out a HELOC and using it to deal with a stock market downturn is functionally the same as selling bonds when the stock market is down. You are spending equity + interest (either interest incurred from the HELOC, or interest forgone from the bond sale)
Assuming the HELOC is stable (i.e. won't be closed or reduced on you--a big assumption that turned out to not be true in the last big downturn), yes.
Still, being 100% stocks, seeing them crash, then taking on more debt via HELOC to buy more as they continue to fall? Scary ride, probably not one many people could do (besides the gamblers who will lose it all anyways, or never get to that point).
Assuming the HELOC is stable (i.e. won't be closed or reduced on you--a big assumption that turned out to not be true in the last big downturn), yes.
Assuming the HELOC is stable (i.e. won't be closed or reduced on you--a big assumption that turned out to not be true in the last big downturn), yes.
When we asked "Did anyone actually have a HELOC reduced or closed down in 2008?" We came up with one person who that happened to. The take away from me was don't count on a HELOC up to the full credit level of your current home value as that is the risk that could occur. If your house is worth $500K and you want a max HELOC at say $400K and the house value drops the bank may choose to reduce your HELOC limit. OTOH I think if you had a $500K home and wanted a $100K HELOC as an emergency fund you would be pretty safe. Your bank would have to feel the home was worth less than $125K to be worried at that credit limit assuming they were after an 80% max to their HELOC lending.
Assuming the HELOC is stable (i.e. won't be closed or reduced on you--a big assumption that turned out to not be true in the last big downturn), yes.
When we asked "Did anyone actually have a HELOC reduced or closed down in 2008?" We came up with one person who that happened to.
Who is "we" and who were you asking?
I had a $400k HELOC sitting at zero amount for nearly 8 years, it was closed after the Great Recession. I didn't protest because I never used it.http://www.early-retirement.org/forums/f28/heloc-paydown-vs-1st-mortgage-paydown-which-first-81098.html#post1707311 (http://www.early-retirement.org/forums/f28/heloc-paydown-vs-1st-mortgage-paydown-which-first-81098.html#post1707311)
You can't count on being able to tap your home equity/HELOC in a crisis. I had a $100,000 HELOC which was closed by the bank (it was Washington Mutual) during the financial crisis. It wasn't because I abused it, I now realize they were in the process of going belly up.https://www.bogleheads.org/forum/viewtopic.php?p=722602&sid=2fed613e7ad856e9e7b06f84033a0f71#p722602 (https://www.bogleheads.org/forum/viewtopic.php?p=722602&sid=2fed613e7ad856e9e7b06f84033a0f71#p722602)
The point being cash or equivalents is cash; HELOC is not reliable.
I have two anecdotes.Who is "we" and who were you asking?
It was a point of discussion in one of threads here on the MMM Forums. People frequently talk about HELOCs being affected in 2008, but when the I asked for first person accounts there was only one. While this forum may not have people who have been on the FIRE path for decades there are lots of older folks who lived through 2008 and having a HELOC is nothing special.
If you have links to discussions on the topic with first person accounts of this happening I'd love to read about them.
A HELOC is just one of many, many "fallback" options if the market goes sour. NONE of them are guaranteed.
I have two anecdotes.Who is "we" and who were you asking?
It was a point of discussion in one of threads here on the MMM Forums. People frequently talk about HELOCs being affected in 2008, but when the I asked for first person accounts there was only one. While this forum may not have people who have been on the FIRE path for decades there are lots of older folks who lived through 2008 and having a HELOC is nothing special.
If you have links to discussions on the topic with first person accounts of this happening I'd love to read about them.
Laurence from Early-Retirement.org had his HELOC frozen by his lender in 2008. Not just limited, but frozen. He could make payments of course, but he couldn't write more checks at all. Here's a thread which summarizes that incident and more:
http://www.early-retirement.org/forums/f28/emergency-fund-upside-down-and-backwards-38755.html#post715441
Rumor in that thread had Chase freezing HELOCs in entire regions, not just individual homes.
<snip>
A HELOC is just one of many, many "fallback" options if the market goes sour. NONE of them are guaranteed.
Yep. That's exactly what we're pointing out. It's not guaranteed, and should be a fallback plan, not the primary one. :)
Especially since 2013, the federal government has been refining regulations for its HECM program in order to improve the sustainability of the underlying mortgage insurance fund, to better protect eligible non-borrowing spouses, and to ensure borrowers have sufficient financial resources to meet their homeowner obligations.
Financial planning research has shown that coordinated use of a reverse mortgage starting earlier in retirement outperforms waiting to open a reverse mortgage as a last resort option once all else has failed.
Reverse mortgages have transitioned from a last resort to a retirement income tool that can be incorporated as part of an overall efficient retirement income plan. Two benefits give opening a reverse mortgage earlier in retirement the potential to improve retirement outcomes, even after accounting for loan costs.
Interesting, but I can no longer take anything Pfau says at face value.
I provided a specific example on that other thread, along with links. None of which persuaded R-C to reconsider their position, alas. Perhaps the same words coming from the mighty ARS might have greater effect. Meh, it will or it won't, but I'd hate for others to be lulled into a sense of security when recent, actual events are so easily verified.Assuming the HELOC is stable (i.e. won't be closed or reduced on you--a big assumption that turned out to not be true in the last big downturn), yes.
When we asked "Did anyone actually have a HELOC reduced or closed down in 2008?" We came up with one person who that happened to.
Who is "we" and who were you asking?
IIRC, there were quite a few people on the E-R.org forum it happened to.
I hope you weren't asking here at these forums, where most of the crowd is going [autofill for young?] enough to barely begin investing at that time, let alone have large HELOCs, and basing results on that.
This forum is good for a lot of things, but experience over decades much less so (apart from a few individuals, like Another Reader, but then that just gives you anecdotes with a small sample size). Bogleheads and E-R.org would be much better for that (and asking 6 years ago...The make up of such sites obviously changes over time).
If you meant some other people, I'm not sure what you're talking about.
The problem I have with reverse mortgages is more of a philosophical/ideological issue. It's just one more tool to drain intergenerational wealth in favor of increased consumption now. I realize they have a place (better than eating cat food or part of a calculated plan), but I would hope most on this forum plan better than to squeeze out every last bit of net worth, even if it means giving the banks more of your lifetime earnings. IMHO, it's better for one to admit they have over consumed in housing, sell and downsize than give interest to the banks.Meh.
Whats next? Financial products to borrow against your SS or your kids future SS? At a very low fees and rate, of course!
Interesting, but I can no longer take anything Pfau says at face value.
Why not?
The problem I have with reverse mortgages is more of a philosophical/ideological issue. It's just one more tool to drain intergenerational wealth in favor of increased consumption now. I realize they have a place (better than eating cat food or part of a calculated plan), but I would hope most on this forum plan better than to squeeze out every last bit of net worth, even if it means giving the banks more of your lifetime earnings. IMHO, it's better for one to admit they have over consumed in housing, sell and downsize than give interest to the banks.I think that for the Mustachian, the fact the tool can be used early to head off a potentially worse outcome is the real value. For instance, say my home is worth $250,000 (we'll skip inflation for the sake of ease). Let's say my intended retirement is based on a million dollar stash, spending $40,000 a year. If I retire at 35 and my first 30 year retirement period leaves my stash balance a little short of the original million, it would be advantageous for me to be able to tap the dead equity (not earning a return) in my house starting at 65, knowing that means I can leave more money invested and increase my chances that my portfolio will go the distance.
Whats next? Financial products to borrow against your SS or your kids future SS? At a very low fees and rate, of course!
None of which persuaded R-C to reconsider their position,
Actually in one paper I read (maybe it was Pfau) there is on average MORE wealth when using a HECM due to the ability to not touch the IRA's and potentially delay social security. Passing on a house to your heirs is likely not the most efficient way to do it. Personally I would rather inherit an IRA rather than a house that I have to sell (potentially in another state).The problem I have with reverse mortgages is more of a philosophical/ideological issue. It's just one more tool to drain intergenerational wealth in favor of increased consumption now. I realize they have a place (better than eating cat food or part of a calculated plan), but I would hope most on this forum plan better than to squeeze out every last bit of net worth, even if it means giving the banks more of your lifetime earnings. IMHO, it's better for one to admit they have over consumed in housing, sell and downsize than give interest to the banks.I think that for the Mustachian, the fact the tool can be used early to head off a potentially worse outcome is the real value. For instance, say my home is worth $250,000 (we'll skip inflation for the sake of ease). Let's say my intended retirement is based on a million dollar stash, spending $40,000 a year. If I retire at 35 and my first 30 year retirement period leaves my stash balance a little short of the original million, it would be advantageous for me to be able to tap the dead equity (not earning a return) in my house starting at 65, knowing that means I can leave more money invested and increase my chances that my portfolio will go the distance.
Whats next? Financial products to borrow against your SS or your kids future SS? At a very low fees and rate, of course!
I obviously had the first 30 year retirement period to try and address my under performing portfolio but if my spending cutbacks or income infusions weren't enough, this would be another tool to help get me to the finish line. This scenario would certainly work better than waiting until my stash dropped close to zero and being completely reliant on the reverse mortgage to create my needed cashflow buffer.
I'm not familiar with the HECM. I may be a superior tool to a reverse mortgage. I only wanted to say that using a reverse mortgage earlier in old age, than later as an emergency cashflow issue, would likely be a far greater use of that tool. Though this would apply to any tool that allowed you to tap the equity in your house and let your portfolio continue growing.Actually in one paper I read (maybe it was Pfau) there is on average MORE wealth when using a HECM due to the ability to not touch the IRA's and potentially delay social security. Passing on a house to your heirs is likely not the most efficient way to do it. Personally I would rather inherit an IRA rather than a house that I have to sell (potentially in another state).The problem I have with reverse mortgages is more of a philosophical/ideological issue. It's just one more tool to drain intergenerational wealth in favor of increased consumption now. I realize they have a place (better than eating cat food or part of a calculated plan), but I would hope most on this forum plan better than to squeeze out every last bit of net worth, even if it means giving the banks more of your lifetime earnings. IMHO, it's better for one to admit they have over consumed in housing, sell and downsize than give interest to the banks.I think that for the Mustachian, the fact the tool can be used early to head off a potentially worse outcome is the real value. For instance, say my home is worth $250,000 (we'll skip inflation for the sake of ease). Let's say my intended retirement is based on a million dollar stash, spending $40,000 a year. If I retire at 35 and my first 30 year retirement period leaves my stash balance a little short of the original million, it would be advantageous for me to be able to tap the dead equity (not earning a return) in my house starting at 65, knowing that means I can leave more money invested and increase my chances that my portfolio will go the distance.
Whats next? Financial products to borrow against your SS or your kids future SS? At a very low fees and rate, of course!
I obviously had the first 30 year retirement period to try and address my under performing portfolio but if my spending cutbacks or income infusions weren't enough, this would be another tool to help get me to the finish line. This scenario would certainly work better than waiting until my stash dropped close to zero and being completely reliant on the reverse mortgage to create my needed cashflow buffer.
These are all financial tools. They are neither good nor evil, just tools. In my experience sometimes the best uses of these financial products is 'off label use', in other words using them not for their original purpose. The original purpose of a HECM was to help out someone who is struggling in retirement, but I think the real benefit is for people that don't necessarily need them. I just need someone smarter than me to do all the complex analysis to figure out when the fees are worth it. I'm sure these are a useful product, I just can't figure out on the back of a napkin who they are best for and who should avoid them.
This is a good point. The home that we will have in our 50s is almost certainly NOT the home we will want when we are 80. If using a reverse mortgage allowed us to go a few decades without touching (or barely touching) the rest of our portfolio it could help reduce the dreaded early-year sequence of returns portfolio failure that cause most portfolio failures.
I'm not familiar with the HECM. I may be a superior tool to a reverse mortgage. I only wanted to say that using a reverse mortgage earlier in old age, than later as an emergency cashflow issue, would likely be a far greater use of that tool. Though this would apply to any tool that allowed you to tap the equity in your house and let your portfolio continue growing.
I'm not familiar with the HECM. I may be a superior tool to a reverse mortgage.
With the first ten years of early retirement considered the riskiest point of failure, the heloc seems to be a great tool.
Actually in one paper I read (maybe it was Pfau) there is on average MORE wealth when using a HECM due to the ability to not touch the IRA's and potentially delay social security. Passing on a house to your heirs is likely not the most efficient way to do it. Personally I would rather inherit an IRA rather than a house that I have to sell (potentially in another state).The problem I have with reverse mortgages is more of a philosophical/ideological issue. It's just one more tool to drain intergenerational wealth in favor of increased consumption now. I realize they have a place (better than eating cat food or part of a calculated plan), but I would hope most on this forum plan better than to squeeze out every last bit of net worth, even if it means giving the banks more of your lifetime earnings. IMHO, it's better for one to admit they have over consumed in housing, sell and downsize than give interest to the banks.I think that for the Mustachian, the fact the tool can be used early to head off a potentially worse outcome is the real value. For instance, say my home is worth $250,000 (we'll skip inflation for the sake of ease). Let's say my intended retirement is based on a million dollar stash, spending $40,000 a year. If I retire at 35 and my first 30 year retirement period leaves my stash balance a little short of the original million, it would be advantageous for me to be able to tap the dead equity (not earning a return) in my house starting at 65, knowing that means I can leave more money invested and increase my chances that my portfolio will go the distance.
Whats next? Financial products to borrow against your SS or your kids future SS? At a very low fees and rate, of course!
I obviously had the first 30 year retirement period to try and address my under performing portfolio but if my spending cutbacks or income infusions weren't enough, this would be another tool to help get me to the finish line. This scenario would certainly work better than waiting until my stash dropped close to zero and being completely reliant on the reverse mortgage to create my needed cashflow buffer.
These are all financial tools. They are neither good nor evil, just tools. In my experience sometimes the best uses of these financial products is 'off label use', in other words using them not for their original purpose. The original purpose of a HECM was to help out someone who is struggling in retirement, but I think the real benefit is for people that don't necessarily need them. I just need someone smarter than me to do all the complex analysis to figure out when the fees are worth it. I'm sure these are a useful product, I just can't figure out on the back of a napkin who they are best for and who should avoid them.
BTW - Ars you should use that THE GREAT ARS has a nice ring to it. :)
With the first ten years of early retirement considered the riskiest point of failure, the heloc seems to be a great tool.
Yes definitely. Best of all it cost nothing until you need it.
I agree they (HELOCs)are tools and can be used for good, but they were developed for evil...This seems to contradict itself. If it can be a good tool, then why's it inherently evil? The rest of your point said (rightly IMO) that most people make messes out of it for themselves. Banks are greedy, but this isn't something they go out of their way tricking people into, is it? I didn't think so. Not like getting people to buy as much home as they can barely afford, shit like that.
-The median family has put themselves in this situation, likely due to high consumption.
Quote from: Classical_LiberalI agree they (HELOCs)are tools and can be used for good, but they were developed for evil...This seems to contradict itself. If it can be a good tool, then why's it inherently evil? The rest of your point said (rightly IMO) that most people make messes out of it for themselves. Banks are greedy, but this isn't something they go out of their way tricking people into, is it? I didn't think so. Not like getting people to buy as much home as they can barely afford, shit like that.
Sorry if I was unclear.
snip
I agree they are tools and can be used for good, but they were developed for evil. The issue arises when most middle class Americans have almost all of their net worth tied up in primary residence at retirement. Which is the case:
(https://timedotcom.files.wordpress.com/2015/05/median-net-worth-by-age_large.jpg)
That is one scary plot...Isn't it. Sometimes the daily volatility of our portfolio is greater than the median net worth of our age group. Yikes!
It'd be scary without the numbers.
And I don't know which set of numbers is scarier, the red bar numbers, or the fact that when you include home equity, you still only hit the blue bar numbers.
Gulp.
That is one scary plot...Isn't it. Sometimes the daily volatility of our portfolio is greater than the median net worth of our age group. Yikes!
That is one scary plot...Isn't it. Sometimes the daily volatility of our portfolio is greater than the median net worth of our age group. Yikes!
It is and it isn't -- because a great many people do just fine living on Social Security alone in retirement (and for a good chunk of those over 65, small pensions as well). What's scary is right-wing plans to kill or reduce SS -- then those numbers become much more concerning.
And as old people become an even greater % of the overall population, thanks to science and medicine, their influence will grow.That is one scary plot...Isn't it. Sometimes the daily volatility of our portfolio is greater than the median net worth of our age group. Yikes!
It is and it isn't -- because a great many people do just fine living on Social Security alone in retirement (and for a good chunk of those over 65, small pensions as well). What's scary is right-wing plans to kill or reduce SS -- then those numbers become much more concerning.
Third rail of politics. Old people vote.
That is one scary plot...Isn't it. Sometimes the daily volatility of our portfolio is greater than the median net worth of our age group. Yikes!
It is and it isn't -- because a great many people do just fine living on Social Security alone in retirement (and for a good chunk of those over 65, small pensions as well). What's scary is right-wing plans to kill or reduce SS -- then those numbers become much more concerning.
BTW - Ars you should use that THE GREAT ARS has a nice ring to it. :)
I'll have to practice my Wizard of Oz voice.
The idea of being able to depend on drawing 4% from a risky investment portfolio thru retirement always seemed like the dumbest thing in the world to me. One retires at 65. If you're lucky you make it to 90, so 25 years. Putting $1M in a checking account and withdrawing $40k every year is guaranteed to make it till 90. There is inflation, so investing the $1M in something like TIPs would allow for the inflation increases needed at last till 90, so why in the world would I put my money in a crazy fluctuating market to try and accomplish the same thing spending?That's a pretty novel idea for a forum focused on early retirement. Please, enlighten us further...
Now that my idea of retirement is not set at 25 years or less...and the 4% withdraw can continue to work for all these additional years, it finally became interesting.
Specific words, sentences and ideas in a post can be critiqued, especially when they describe separate ideas. Or is one only allowed to respond to the last sentence?
[mathjak107 is a kinder soul than I and responded to the point. In this forum, both glides and reverse glides for post-retirement have been discussed in great detail, dismissing the "dumbest thing in the world" to Strick]
Though bananas are tasty, banana-flavored food is often not tasty at all.
the 2000 retiree is still doing okay. not great but about on par with the group that retired in 1929 . michael kitce's took an in depth look at the 2000 and 2008 retiree .
this is the summary
EXECUTIVE SUMMARY
The 4% rule has been much maligned lately, as recent market woes of the past 15 years – from the tech crash of 2000 to the global financial crisis of 2008 – have pressured both market returns and the portfolios of retirees.
Yet a deeper look reveals that if a 2008 or even a 2000 retiree had been following the 4% rule since retirement, their portfolios would be no worse off than any of the other “terrible” historical market scenarios that created the 4% rule from retirement years like 1929, 1937, and 1966. To some extent, the portfolio of the modern retiree is buoyed by the (only) modest inflation that has been occurring in recent years, yet even after adjusting for inflation, today’s retirees are not doing any materially worse than other historical bad-market scenarios where the 4% rule worked.
Ultimately, this doesn’t necessarily mean that the coming years won’t turn out to be even worse or that the 4% rule is “sacred”, but it does emphasize just how bad the historical market returns were that created it and just how conservative the 4% rule actually is, and that recent market events like the financial crisis are not an example of the failings of the 4% rule but how robustly it succeeds!
https://www.kitces.com/blog/how-has-the-4-rule-held-up-since-the-tech-bubble-and-the-2008-financial-crisis/
even a 95% success rate when combined with life expectancy success have the 4% safe withdrawal rate up close to 100% even though the portfolio runs 95% .
*snip*Yep, I'm looking at 22 years from planned date to age 70 where my SSA benefits add up to $54k, which is a little more than my planned withdrawals. 5% withdrawal looks quite safe to me, for my situation. I have the added buffer of knowing my kid should stop being a major ongoing cost less than halfway through my early retirement period.
This is very encouraging given that it assumes FIRE at 30 which is on the early end of the spectrum for many Mustachians and does not include Social Security.
even a 95% success rate when combined with life expectancy success have the 4% safe withdrawal rate up close to 100% even though the portfolio runs 95% .
(https://c1.staticflickr.com/3/2555/32137492394_f092c80db8_b.jpg)
Charts from Maizeman. Red is the "Go Broke" zone for a 30yr old FIREr. If you retire later in life at a 4%WR the red zone gets hard to see. We should be worrying about dying not going broke. ;)
This is very encouraging given that it assumes FIRE at 30 which is on the early end of the spectrum for many Mustachians and does not include Social Security.
even a 95% success rate when combined with life expectancy success have the 4% safe withdrawal rate up close to 100% even though the portfolio runs 95% .
(https://c1.staticflickr.com/3/2555/32137492394_f092c80db8_b.jpg)
Charts from Maizeman. Red is the "Go Broke" zone for a 30yr old FIREr. If you retire later in life at a 4%WR the red zone gets hard to see. We should be worrying about dying not going broke. ;)
This is very encouraging given that it assumes FIRE at 30 which is on the early end of the spectrum for many Mustachians and does not include Social Security.
exactly what life expectancy are those charts supposed to be illustrating ? life expectancy can vary greatly based on what is being looked at . if it is from birth it is the most skewed .
as michael kitces points out :
"“life expectancy” can be a somewhat misleading term. Many people hear the term and think of it as a measure of how long they can “expect to live”. In reality, though, life expectancy is a measure of the average time a person within some particular population is expected to live. While the average is meaningful in many respects, it may not always provide the best measure for setting expectations about the actual age someone is likely to reach. Because mortality rates aren’t constant across a lifespan and the distribution of ages at death are heavily skewed (i.e., more people die old than young), commonly cited life expectancy measures—particularly life expectancy at birth, which is most often cited in the media—may result in misleading expectations.
For instance, a child born in 2014 has a life expectancy (average age at death) of 79. However, the median age of death for the same child is 83, and the modal (most common) age at death is 89! Given the shape of the distribution of ages at death (negatively skewed), it’s simply a mathematical fact that the mean is going to be lower than the median or the mode."
exactly what life expectancy are those charts supposed to be illustrating ? life expectancy can vary greatly based on what is being looked at . if it is from birth it is the most skewed .
as michael kitces points out :
"“life expectancy” can be a somewhat misleading term. Many people hear the term and think of it as a measure of how long they can “expect to live”. In reality, though, life expectancy is a measure of the average time a person within some particular population is expected to live. While the average is meaningful in many respects, it may not always provide the best measure for setting expectations about the actual age someone is likely to reach. Because mortality rates aren’t constant across a lifespan and the distribution of ages at death are heavily skewed (i.e., more people die old than young), commonly cited life expectancy measures—particularly life expectancy at birth, which is most often cited in the media—may result in misleading expectations.
For instance, a child born in 2014 has a life expectancy (average age at death) of 79. However, the median age of death for the same child is 83, and the modal (most common) age at death is 89! Given the shape of the distribution of ages at death (negatively skewed), it’s simply a mathematical fact that the mean is going to be lower than the median or the mode."
...How, exactly?
But it is a disservice that a lot of the time these graphs purport to shed some hard-won light on the user's expectations for the future.
Haven't spent much time here, but I'm horrified to see 'hand drawn' looking graphics with no real explanation of assumptions become an acceptable way to give people life-changing information.
Haven't spent much time here, but I'm horrified to see 'hand drawn' looking graphics with no real explanation of assumptions become an acceptable way to give people life-changing information. I suppose I'm from an earlier era where we had to read a 40 page study with a few dry graphics in order to be educated sufficiently on the subject matter and make my own judgments. Just looking at the graphs, I have plenty of qualms with pretty pictures and can see how they can mislead. Hopefully the pretty graphics encourage people to dig deeper in to what applies to their own future. But it is a disservice that a lot of the time these graphs purport to shed some hard-won light on the user's expectations for the future.
Maizeman posted these charts in another thread to help illustrate the topics discussed there. I can't lay my finger on the link and because there are so many "OH MY GOD The 4% is NOT GOING TO WORK!" threads on this forum it's a bit hard to search for. If anyone recalls the original thread's link please post it.
The graphs are based off of essentially two numbers (let's leave aside the light blue vs dark blue distinction).
The SSA provides a number that is essentially the "risk of death" for a person in a given year based off of their age and gender. By looking at the inflation adjusted returns of the different 100% stock portfolio histories by starting in each different month of Shiller's dataset of 1871-present stock market returns, I calculated a "risk of bankruptcy" in a given year, using the number of years since a person started taking withdrawals from their portfolios and the withdrawal rate they've been using.
With those two numbers, it's just a matter of calculating proportions. At the start 100% of people are alive, 30 years old, none of them are bankrupt. Over the next year X% go bankrupt*, and 0.1505% of both bankrupt and non-bankrupt people die. Then at the start of the second year, 99.8405% of people are alive, 31 years old, and none of them are bankrupt. The graph continues that on for the next 70 years (so at the end 0.57% people are alive and 101 years old and 0.05% of people are alive and broke).
Age at FIRE, gender (different life expectancy), and withdrawal rate used are all going to chance the shape of the graph. In principle it'd also be possible to generate these for different investment mixes but *shrug* gotta draw the line somewhere.
*Actually with a 4% withdrawal rate and 100% stocks, no one manages to go bankrupt in year 1, but hopefully you see my point. With a 4% withdrawal rate the first year with a non-zero bankruptcy probability is year 17. Of the 1,546 start months with enough history to calculate stock returns out 17 years, one drops below zero during that year, giving a bankruptcy risk rate of 0.065% for 17 years into FIRE with a 4% withdrawal rate.
Things to know that mean my projections may not line up with the standard ones you might get out of a website like cfiresim: 1) I use monthly data on stock returns (shiller data) to calculate a lot more total scenarios. 2) that means I also calculate withdrawals on a monthly basis, not one lump sum per year 3) to calculate failure rates I use portfolio life expectancy, which I think provides a more accurate estimate of failure rates over extremely long retirements than looking at the number of failures out of all the time intervals that are as long as your estimate retirement in historical data (traditional Trinity approach).
(https://i1.imgpile.com/i/prywk.png) (https://imgpile.com/i/prywk)
My approach is the green line, the traditional approach is the blue line. Intuitively, failure rates shouldn't decrease as we go to longer retirement lengths, but the problem is that really bad years (like the mid 60s) start dropping out of your dataset once your retirement window gets long enough.
Sure thing FarFromFire. I'm attaching three files, one with the python code for actually generating the graphs, and the other two are example csv files carrying the data on mortality rates for people (from SSA) and portfolios (calculated using the shiller data). Any other human mortality data should work if you change it into the same csv format as "Death_rate.csv." Same for the portfolio withdrawal rate data (I had to regenerate the portfolio mortality rates for each withdrawal rate tested). The attached portfolio mortality rate file (broke_rates.csv) is for a 4% withdrawal rate.Thanks! I'll be playing with it soon enough.
In addition to tweaking the input files there are two configurable variables at the start of the python script. The first is "fire_age" and should be the age at which portfolio withdrawals start. The second is "male" and is either true which means the mortality data from men in the death_rate.csv spreadsheet is used, or false in which case the mortality data from women in the death_rate.csv spreadsheet is used.
Also, just for fun: If there are concerns that the the graphs don't look like the ones one would find in a 40 page peer reviewed paper from back when there was a per figure charge for including color and this makes people less likely to take the results seriously, that's a relatively straightforward issue to address.
The following are the basic charges for color:Online color is free, but they wouldn't accept figures in which color was necessary for the sake of print-only readers. IDK about other organizations/journals.
$1,045.00 US for printing charges (four or fewer color pages)
$2,090.00 US (four to eight pages)
$3,135.00 US (nine to twelve pages)
+ $62.50 US per color image (i.e., if you have two color figures the charge would be $125 US, + $1,045)
All authors are assessed the following fees:
Regular research articles: $1,700 per article, with no additional fees for color figures or SI.
PNAS Plus articles: $2,300 per article, with no additional fees for color figures or SI.
Open access: Authors of research articles may pay a surcharge of $1,450 to make their paper freely available through PNAS open access option. If your institution has a site license, the open access surcharge is $1,100. All articles are free online after 6 months.
"either we can pay for a color figure, or I can by another student a laptop."Lol, that's a great line.
even a 95% success rate when combined with life expectancy success have the 4% safe withdrawal rate up close to 100% even though the portfolio runs 95% .
(https://c1.staticflickr.com/3/2555/32137492394_f092c80db8_b.jpg)
Charts from Maizeman. Red is the "Go Broke" zone for a 30yr old FIREr. If you retire later in life at a 4%WR the red zone gets hard to see. We should be worrying about dying not going broke. ;)
This is very encouraging given that it assumes FIRE at 30 which is on the early end of the spectrum for many Mustachians and does not include Social Security.
I think that someday the research (and computer simulations) will catch up with reality to verify that the 4% SWR with a variable withdrawal plan has been the right answer all along.
right so i have read most the threads now on this 4%
I must say the "stop worrying about the 4%" aspect of this thread has really been counterproductive :) there is so many for and against points that a newer guy sorting his finances out over the next 12 months to then go all into preparing for FIRE just cant nail down a point in time when I can pull the trigger!
just merely looking at MMM's post i like the idea of 5% personally but there is so many of you well educated folks putting the crappers up me just on 4% that I feel like I am taking a huge risk!! :)
i can understand it because nobody knows how stocks are going to do in reality do they - so how do we plan on this? i would agree they always end up going up in the long haul but that still doesn't really mean it will continue.
at the moment i am just taking buffets advice and will just keep investing in businesses knowing they will keep growing and making money and i should do fine.
In summary, its almost unhelpful when there are so many conflicting viewpoints! :)
While dynamic programming’s biggest strength is the ability to utilize some elegant models and complex math in order to optimize both asset allocation and distributions, arguably, this could also be one of dynamic programming’s biggest weakness. The insights of dynamic programming are only valuable so long as they reflect reality. If a utility function doesn’t actually capture a retiree’s utility or distributions aren’t actually as flexible as assumed, then the optimization under dynamic programming may not actually be optimizing utility and might even be suggesting actions that would decrease satisfaction in retirement.
thanks for the notes virtus,
i guess it depends on how well you know the stock market and how well you think it will do and your confidence level in that.
thanks for the notes virtus,
i guess it depends on how well you know the stock market and how well you think it will do and your confidence level in that.
It isn't even that complicated. It really comes down to a question no one knows the answer to: Will the investing future be worse than the past?
History says 5% should be fine. No one wants to recommend you take 5% because it in fact is a little riskier. I don't recommend people drink beer. I still do though. It is a calculated risk. The upside is a higher lifestyle. The downside is you could run out of money at some point. But as has been pointed out lots of times, it is possible to have a Plan B. Some income on the side, downgrading your lifestyle, etc.
(http://i.imgur.com/TaJYTn1.jpg)thanks for the notes virtus,
i guess it depends on how well you know the stock market and how well you think it will do and your confidence level in that.
It isn't even that complicated. It really comes down to a question no one knows the answer to: Will the investing future be worse than the past?
History says 5% should be fine. No one wants to recommend you take 5% because it in fact is a little riskier. I don't recommend people drink beer. I still do though. It is a calculated risk. The upside is a higher lifestyle. The downside is you could run out of money at some point. But as has been pointed out lots of times, it is possible to have a Plan B. Some income on the side, downgrading your lifestyle, etc.
Damn dude. How much beer do you drink?
This thread and the other one that Maizeman provided the graphs for have been fantastic for clarifying my thinking. It really brings home that in my situation, I should care more about early death, ill health, divorce, effects of global warming, war, politics than about running out of money with a 4% withdrawal rate.I'd probably stick to caring most about early death, ill health, and divorce, as those areas you have the most control over.
So with a 70/30 split what's the breakdown of the 70 between domestic/international and cap sizes?
This thread and the other one that Maizeman provided the graphs for have been fantastic for clarifying my thinking. It really brings home that in my situation, I should care more about early death, ill health, divorce, effects of global warming, war, politics than about running out of money with a 4% withdrawal rate.I'd probably stick to caring most about early death, ill health, and divorce, as those areas you have the most control over.
And again, I'll just point out that the graphs are a gross oversimplification of reality.
So with a 70/30 split what's the breakdown of the 70 between domestic/international and cap sizes?
thanks for the notes virtus,
i guess it depends on how well you know the stock market and how well you think it will do and your confidence level in that.
It isn't even that complicated. It really comes down to a question no one knows the answer to: Will the investing future be worse than the past?
History says 5% should be fine. No one wants to recommend you take 5% because it in fact is a little riskier. I don't recommend people drink beer. I still do though. It is a calculated risk. The upside is a higher lifestyle. The downside is you could run out of money at some point. But as has been pointed out lots of times, it is possible to have a Plan B. Some income on the side, downgrading your lifestyle, etc.
Damn dude. How much beer do you drink?
If you're interested in a cringe worthy Northwestern Mutual ad that makes some strong "what if" statements...OMG those assumptions.
https://youtu.be/WBN_3sVWyUw
Basically he's talking about sequence of returns risk, and how the returns in the initial period are the ones that people ought to worry about.If you're interested in a cringe worthy Northwestern Mutual ad that makes some strong "what if" statements...OMG those assumptions.
https://youtu.be/WBN_3sVWyUw
BUt yes... the assumptions he was making was three or four consecutive years of 20% losses. 1930-32 is the only period that approximates this kind of incredible loss. So much so that we've given it a name; the 'great depression'.If you're interested in a cringe worthy Northwestern Mutual ad that makes some strong "what if" statements...OMG those assumptions.
https://youtu.be/WBN_3sVWyUw
Then again, fear sells, and this is a bank presumably trying to sell financial services by making people too afraid to handle their own money.
...I had a roommate who was a borderline prepper, but deeply entrenched in the prepper community. There were times when it felt like they were actually rooting for the collapse of civilization so that they could feel good about all the resources they were stashing and fear they were spreading.
Yet people are still afraid. It boggles my mind.
And you even see it here on MMM - just hit one of the prepper threads. For them, the fact that things are so good is proof positive that "its all coming down, man". I just don't understand it.
Being afraid is popular. Especially when the result of being afraid is getting to keep doing the "safe" thing staying chained to a desk. I suspect the psychology of FIRE is far more daunting than we think.
Being afraid is popular. Especially when the result of being afraid is getting to keep doing the "safe" thing staying chained to a desk. I suspect the psychology of FIRE is far more daunting than we think.
Well sure it is. We spend all of our youth going to school preparing for a job. Many of us that's 16 years invested in education alone. Then you work a job for another 10 years and you finally start getting a high income in your 30's and 40's. It's going to be really really hard for a lot of people to turn off that firehose of cash - they feel like they've worked their whole life for this and now it's finally paying off. No wonder OMY is such a big thing.
Being afraid is popular. Especially when the result of being afraid is getting to keep doing the "safe" thing staying chained to a desk. I suspect the psychology of FIRE is far more daunting than we think.
Well sure it is. We spend all of our youth going to school preparing for a job. Many of us that's 16 years invested in education alone. Then you work a job for another 10 years and you finally start getting a high income in your 30's and 40's. It's going to be really really hard for a lot of people to turn off that firehose of cash - they feel like they've worked their whole life for this and now it's finally paying off. No wonder OMY is such a big thing.
Not to mention most of our daily social contacts, peers, and even family members are reinforcing this fear-based thought and the "normal lifestyle". Don't underestimate the psychological power of peers and group-think. This is why forums such as this & ERE are on my daily reading list, at least for a few minutes, to help counter these forces.
Frankly, I think people as whole vastly underestimate their own resourcefulness & resilience. Yet another reason to practice some stoic deprivation from time-to-time; simply to give oneself a taste of how well evolution has built our bodies and minds. Live for a few months at poverty level spending, suddenly the thought of shaving a few percentage points off of a FIRE budget to weather a bad run for investments is no longer a fear at all.
It could be much, much simpler than this. Telling people how the 4% rule is doomed to fail gets clicks and page views. Telling people that the status quo is just fine doesn't. Just putting that out there...
Well I feel like a chump - I've been in school for no less than 26 years. Kindergarden through my PhD.
Well sure it is. We spend all of our youth going to school preparing for a job. Many of us that's 16 years invested in education alone.
There are an impressive number of commenters (including many ER-bloggers) who are "worrying about the 4% rule" and making various arguments for 3%, 2.5%, and even 0% (!)Anything less than 3.25% and you're banking that the future will be worse than any 30 year period we've experienced in the last 100+ years. When you're talking about sub3% it doesn't matter if it's a 30 year term of a 70 year term. In every historical simulation your portfolio increases with such a low WR. So teh only following argument is that we're in for worse than the great depression. At that point, why even worry about the future? Preppers...
...
Weird. Maybe they're all 20 years old and planning to retire at 22, so are trying to plan a 70-year retirement.
Still, even us financial preppers (have to admit i am one of those...you know its true) know that universal life (or whatever they are calling it these days) is a bad deal with higher failure risk than indexed equities, well invested (look at all the financial firm failures).
If you really are afraid the answer isnt fake 'guaranteed returns', its financial resilience by either saving more or spending less. That simple. Very few people need lifelong insurance. Its like buying a contraft for a lifetime supply of coke because you want a beverage for lunch. Buy what you need, when you need it (term)...build wealth via a good savings rate, low spending and the most efficient assets around (index funds).
Yeah, I get the impression the internet information explosion has started to really have a negative impact on all these financial advisors and the active fund managercon game"business". Vanguard is pulling in so much money it's got the financial industry running scared. With over $4 trillion AUM in Vanguard alone... in the good ol' days (when they could cream 2% in fees) that's 80 billion dollars a year they're losing in fee revenue.
Plus the competition from Vanguard has forced the for-profit firms like Fidelity et al to cut their passive fund fees to the bone as well.
So what to do to stop the leakage to Vanguard and other cheap index funds? Keep pumping out articles about how dangerous index funds are, how an active strategy can beat the market and index funds are dumb, cherry pick historical returns to show your strategy beating the index, etc. Make the market seem complex, and scary. Emphasise the big corrections and how terrible it would be to "loose" 50% of your savings (even though that only happens if you happen to have bought the top, then panic, and sell the low.)
heck, some of them might even believe that crap. As the famous quote from Upton Sinclair goes — 'It is difficult to get a man to understand something, when his salary depends on his not understanding it.'
Yeah, I get the impression the internet information explosion has started to really have a negative impact on all these financial advisors and the active fund managercon game"business". Vanguard is pulling in so much money it's got the financial industry running scared. With over $4 trillion AUM in Vanguard alone... in the good ol' days (when they could cream 2% in fees) that's 80 billion dollars a year they're losing in fee revenue.
Plus the competition from Vanguard has forced the for-profit firms like Fidelity et al to cut their passive fund fees to the bone as well.
So what to do to stop the leakage to Vanguard and other cheap index funds? Keep pumping out articles about how dangerous index funds are, how an active strategy can beat the market and index funds are dumb, cherry pick historical returns to show your strategy beating the index, etc. Make the market seem complex, and scary. Emphasise the big corrections and how terrible it would be to "loose" 50% of your savings (even though that only happens if you happen to have bought the top, then panic, and sell the low.)
heck, some of them might even believe that crap. As the famous quote from Upton Sinclair goes — 'It is difficult to get a man to understand something, when his salary depends on his not understanding it.'
To be fair, several for profit firms have also been on the same side as Vanguard, pushing for efficient investing. Charles Schwab was amonb the first to undercut broker trading fees and promote the idea investors can do it themselves, and dont need advisors. Fidelity has pushed low cost passive funds right along the way. I dont thing Vanguard competition 'forced this strategy.' We should reward these for profit firms with our support, when appropriate. Low cost, passive funds from companies like Charles Schwab are fine and us customers should constantly remind them what created their success (driving down investing costs) and that they risk losing their clients if they backslide towards shady practices.
This is personal fiance, and because of this everyone is viewing the 4% SWR through there own biases. Some people are high corporate earners with no plans of producing any income after they FIRE. They are decide to shoot for a 3% SWR because it provides additional safety and will only take year to reach once they have hit a 4% SWR.
Others are entrepreneurial and plan to generate a little bit of income in FIRE so they are comfortable with a SWR of 5%. Others hate there job so much they are willing to take the additional risk of a SWR of 5% to get out of it.
Some people have extra "room" in there monthly budget. Some people on the forums have a family to support. Others have a pension or social security right around the corner. The older folks may be more risk averse after seeing recessions and other world problems first hand.
Given all this variation what is one to do? Summarize! I have rarely if ever seen anyone advocate a SWR of 2% or 6% on the forums with good reason. The 2% is overly conservative while the 6% is extremely aggressive, so we will through these out. We have a remaining range of 3% to 5%. I have seen people on these forums recommend and use a SWR in this range and the math shows, historically, a SWR in this range has a reasonable chance of success.
My advice to you is to plug 4% in your spreadsheet. When you get close to FIRE and know what your life looks like you can pick a SWR date based on something between 3% and 5%.
We do have some outliers on the 2% and less side (those who can't seem to let go of their jobs).
Feel the pull to quit and travel? Do it once you're in that range. Feel scared and need to OMY, and are willing to sell another year of your life for more warm fuzzies? Okay, stay and lower your ER a bit more towards the low end of that range. Anything in there, and you should be fine.
What is USE?
We do have some outliers on the 2% and less side (those who can't seem to let go of their jobs).
Feel the pull to quit and travel? Do it once you're in that range. Feel scared and need to OMY, and are willing to sell another year of your life for more warm fuzzies? Okay, stay and lower your ER a bit more towards the low end of that range. Anything in there, and you should be fine.
Also a really good summary of the extremes. Obviously USE has been in a generous market return phase, so I encourage those at 4% SWR, who are courageous, to quit and travel too! And blog and YouTube (although it is not very lucrative anymore, you might meet interesting people which may enrich your life). If you stick with it, you might find a new income source or learn to live well on less. But those that quit and travel should not think they now have the answer to where USE goes next, nor that 4% SWR is 100% success for the future. OMY could be more valuable going forward than most had given it credit for (one less year of retirement, one more year of retirement savings in a stagnant or declining market), but I could be wrong :)
Well, no one firm is perfect, including Vanguard, who have their own internal governance challenges. I think the temptations of the money game are always there, so lets keep a healthy competition going, and read those annual reports. 😉
Yeah, I get the impression the internet information explosion has started to really have a negative impact on all these financial advisors and the active fund managercon game"business". Vanguard is pulling in so much money it's got the financial industry running scared. With over $4 trillion AUM in Vanguard alone... in the good ol' days (when they could cream 2% in fees) that's 80 billion dollars a year they're losing in fee revenue.
Plus the competition from Vanguard has forced the for-profit firms like Fidelity et al to cut their passive fund fees to the bone as well.
So what to do to stop the leakage to Vanguard and other cheap index funds? Keep pumping out articles about how dangerous index funds are, how an active strategy can beat the market and index funds are dumb, cherry pick historical returns to show your strategy beating the index, etc. Make the market seem complex, and scary. Emphasise the big corrections and how terrible it would be to "loose" 50% of your savings (even though that only happens if you happen to have bought the top, then panic, and sell the low.)
heck, some of them might even believe that crap. As the famous quote from Upton Sinclair goes — 'It is difficult to get a man to understand something, when his salary depends on his not understanding it.'
To be fair, several for profit firms have also been on the same side as Vanguard, pushing for efficient investing. Charles Schwab was amonb the first to undercut broker trading fees and promote the idea investors can do it themselves, and dont need advisors. Fidelity has pushed low cost passive funds right along the way. I dont thing Vanguard competition 'forced this strategy.' We should reward these for profit firms with our support, when appropriate. Low cost, passive funds from companies like Charles Schwab are fine and us customers should constantly remind them what created their success (driving down investing costs) and that they risk losing their clients if they backslide towards shady practices.
Pizzasteve
Sure, fair enough, Schwab et al started cutting fees too especially for brokerage services, but I think competition from Vanguard (and passive index funds in general) were a big driver. However, I'd say their objective is not to get you and I to invest 100% into a cheap low cost index fund, but to up-sell people into more actively managed funds and products where the fees are much higher. The index funds are almost being operated as 'loss leaders'.
Meanwhile the shadier end of the investment services spectrum (Jones, Deveer, et al) are actively pushing this sort of high fee/high selling bonus Universal life shit, or high churn rebalancing strategies. There's a reason the industry lobbied hard to get the new administration to drop the feduciary rule requirement for financial advisors. They simply do not want to have to act in the true financial interest of their clients. They want to earn as much as they can in bonuses for themselves and fees and profits for their shareholders. Those fees and costs - by definition - will come at the expense of lower compounded returns in investors' portfolios.
This is personal fiance, and because of this everyone is viewing the 4% SWR through there own biases. Some people are high corporate earners with no plans of producing any income after they FIRE. They are decide to shoot for a 3% SWR because it provides additional safety and will only take year to reach once they have hit a 4% SWR.
Others are entrepreneurial and plan to generate a little bit of income in FIRE so they are comfortable with a SWR of 5%. Others hate there job so much they are willing to take the additional risk of a SWR of 5% to get out of it.
Some people have extra "room" in there monthly budget. Some people on the forums have a family to support. Others have a pension or social security right around the corner. The older folks may be more risk averse after seeing recessions and other world problems first hand.
Given all this variation what is one to do? Summarize! I have rarely if ever seen anyone advocate a SWR of 2% or 6% on the forums with good reason. The 2% is overly conservative while the 6% is extremely aggressive, so we will through these out. We have a remaining range of 3% to 5%. I have seen people on these forums recommend and use a SWR in this range and the math shows, historically, a SWR in this range has a reasonable chance of success.
My advice to you is to plug 4% in your spreadsheet. When you get close to FIRE and know what your life looks like you can pick a SWR date based on something between 3% and 5%.
This is a great post.
We do have some outliers on the 2% and less side (those who can't seem to let go of their jobs), and a few who go 6%+ (though usually with a semi-ER plan to earn more, very rarely have I seen a straight 6%+ plan to withdraw and see how it goes w/o a plan to earn more), but the vast majority, as you say, is between 3 and 5%. So pick something in there, and when you get close, go with what makes you happy. Feel the pull to quit and travel? Do it once you're in that range. Feel scared and need to OMY, and are willing to sell another year of your life for more warm fuzzies? Okay, stay and lower your ER a bit more towards the low end of that range. Anything in there, and you should be fine.
Basic thesis: 4% rule may be best we have but clearly model misses a lot of important info. I agree the problem is obvious, based on people's endless discussions about whether or not to really use 3.5%, 3%, how to time it, etc.
This is personal fiance, and because of this everyone is viewing the 4% SWR through there own biases.
...
This is a great post.
We do have some outliers on the 2% and less side (those who can't seem to let go of their jobs), and a few who go 6%+ (though usually with a semi-ER plan to earn more, very rarely have I seen a straight 6%+ plan to withdraw and see how it goes w/o a plan to earn more), but the vast majority, as you say, is between 3 and 5%. So pick something in there, and when you get close, go with what makes you happy. Feel the pull to quit and travel? Do it once you're in that range. Feel scared and need to OMY, and are willing to sell another year of your life for more warm fuzzies? Okay, stay and lower your ER a bit more towards the low end of that range. Anything in there, and you should be fine.
Maybe I should have just posted the thread I started in here instead: https://forum.mrmoneymustache.com/investor-alley/nobel-winner-william-sharpe-(sharpe-ratio)-tackling-retirement-planning/QuoteBasic thesis: 4% rule may be best we have but clearly model misses a lot of important info. I agree the problem is obvious, based on people's endless discussions about whether or not to really use 3.5%, 3%, how to time it, etc.
https://www.bloomberg.com/view/articles/2017-06-05/tackling-the-nastiest-hardest-problem-in-finance
Good contributions, but I think all of this is trending toward 4% being less than a foolproof number for ER. In fact, I predict that we will start to hear from ER failures within the next 4 years. Some of it may be quite ugly, depending on how long the passive income drought lasts. And those survivors will be much more instructive than all of this "I ER'ed at 30 into a bull market and now make great passive income blogging about it" stuff. That, obviously, is not sustainable, or else the stock market will go up faster and faster forever, and we know that never happens.
Hey guys, the great Oz has spoken, alright :)
But yeah, I'd hope people go back to work in a 2008-type scenario. Being ER and hoping the market comes back is ridiculous. I mean, it came back eventually, but the trajectory of portfolio recovery is breathtaking if you look at retired and waiting vs. actively investing through the downturn. I'll have to look for a reference paper or do a quick follow-up comparison, but it was night and day. When you are spending, even a reduced amount, of depressed assets vs. consistently buying...
Anyways, I made my prediction and we all know predictions turn out to be wrong. Except when you beat the house, win the lottery, and all the other cool stuff :) Maybe 2008/9 was my only win. I'd be cool with that.
MMM retired in 2005, just two years or so before the market top. Plus he made some stupid mistakes on a spec house, IIRC. He didn't start blogging until 2011. Did his side income from the construction business carry him through the Great Recession?
Things didn’t always go smoothly. The Great Financial crisis hit in 2008, and caused the worst recession since the Great Depression. The value of my retirement savings in stocks was sliced in half. I was also stuck with an extra house I couldn’t sell. We had been blindsided by something we never could have predicted a few years earlier.
Were our early retirement dreams shattered?
Amazingly enough, they barely took a hit! (because it was 2012 when he wrote this, just a minute ago he was talking about losing half his savings). Most US companies continued to make their dividend payments at a barely-reduced level throughout 2008 and 2009 (he earlier stated a 21% decline). The rental market remained strong enough to keep properties from sitting vacant (although the home was underwater). Sure, the stock prices were down, but who cares about stock prices when you’re not selling them? (never selling stocks if prices decline is not the 4% rule, especially if yields are low, more like a 2.5% rule).
We dialed back our spending for a year or two, continued to rent out the un-sellable house, and I even made a point of doing some extra work so I could afford to buy some of the stocks that had been beaten down to bargain levels. (which is a 'retirement fail' scenario, needing to work for income, in this case to buy stock).
His actions speak louder than his words, at least to me.
His actions speak louder than his words, at least to me.Yup. Don't work extra years at the prime of your life just in case. Just get to a reasonable point [like 4%WR] and then get on with your life.
Good contributions, but I think all of this is trending toward 4% being less than a foolproof number for ER. In fact, I predict that we will start to hear from ER failures within the next 4 years. Some of it may be quite ugly, depending on how long the passive income drought lasts. And those survivors will be much more instructive than all of this "I ER'ed at 30 into a bull market and now make great passive income blogging about it" stuff. That, obviously, is not sustainable, or else the stock market will go up faster and faster forever, and we know that never happens.
Phase Three: End accumulation/beginning draw-down. Small chances of 4% rule failure are exaggerated. Whatever the financial markets look like, the future is obviously going to be worse than historical. After years of planning the idea of failure is scary. The idea of working again for less $ at some unknown point also sucks. These are the folks most concerned about the 4% rule. Known, Unknowns with potential immediate consequences
[snip]
I'm sitting squarely in the phase two camp, trying to learn from the phase four folks so I can partially avoid phase three.
What will my withdrawal rate be? Who knows. I'm simply planning to spend at the level I've already committed to, no matter what my balance is in 18 months.
What will my withdrawal rate be? Who knows. I'm simply planning to spend at the level I've already committed to, no matter what my balance is in 18 months.
By definition this is not the 4% rule. It's your plan or "Eric percent rule" (maybe a book deal?). Essentially it's your variation of OMY (or 18mos) because the US S&P 500 CAPE is sitting at 29. I get it, I may do the same thing if I were you, so no judgement. However, its clearly phase three, or some plan other than 4%WR.
FIRE'd for multiple years. Returns have been good and FIRE'ee accidentally made a few unplanned thousand dollars each year due to serendipitous opportunities which arise from freedom of time and location. WR is now well below 4%, so no concerns. OR Horrible recession, stache dips to levels that are scary. FIRE'ee decides to take some part time work to avoid long term failure, even though the numbers are still on her side; "better safe than sorry". FIRE'ee manufactures some employment around life, whereas before life revolved around employment. Soon recession is over, WR back to under 4% and FIRE'ee thinks "wow, that wasn't so bad, I can't believe I wasted so much time worrying about the worse cases of the 4% rule"(this is where MMM writes that article). Either way it's now Known, Knowns.
Do you have to pay taxes on your Super when you take it out as income?No. They have recently changed things so that it's only the first $1.6million that can actually be in pension phase, and thus be tax free.
In phase 3, I get to be about as free as I can imagine. I don't stress about taking sick days, half days for family matters, and long vacations, as long as I get my critical work done. Most of my bosses are near traditional retirement, so they're around even less than I am. As a bonus, my net worth goes up in one year what it used to take 5 -10 years of hard work and saving to accomplish when I started out. Think of all the good I can do for others in the future! So many possibilities.
....
But I do think I'll ER at 45. 20 extra years of retirement sounds pretty good too. Anyway, in phase 3 you've got pretty much all the options to pick from (as long as you don't let working be too confining). I am OK with the work / life balance (my wife is a SAHP) but I understand others aren't.
It sounds like the 4% rule simulates success rates based on the distribution of historical returns.
However, research shows that high CAPE ratios are generally followed by periods of low returns.
http://www.starcapital.de/research/CAPE_Stock_Market_Expectations
They are only expecting 3.1%-3.5% returns on US investments going forward.
They are only expecting 3.1%-3.5% returns on US investments going forward.
It sounds like the 4% rule simulates success rates based on the distribution of historical returns.
However, research shows that high CAPE ratios are generally followed by periods of low returns.
http://www.starcapital.de/research/CAPE_Stock_Market_Expectations
They are only expecting 3.1%-3.5% returns on US investments going forward.
How much of that high CAPE is due to changes in GAAP accounting?
"Earnings" today are pretty different than "Earnings" 30 years ago.
So should I be reassured or worried if 'this time it's different'?
Rhetorical question EFB, we are the adults in the room with both the temperament and wealth not to have a care in the world, but that is through experience and reasonable expectation. It's those that are on the fence about retiring at 30 or even 40 with just about 1 million that worry me a bit. This latest justification that 4% is still as solid as it was 30 years ago seems a stretch too far, but 30 years from now I'll be 73 yo and no-one's going to have a clue about what I posted on the MMM forum today. If I was right, I'll feel bad if I didn't post, that's about it.So should I be reassured or worried if 'this time it's different'?
I'd say if your WR is 2% (or less) then No!...;)
Rhetorical question EFB, we are the adults in the room with both the temperament and wealth not to have a care in the world, but that is through experience and reasonable expectation. It's those that are on the fence about retiring at 30 or even 40 with just about 1 million that worry me a bit. This latest justification that 4% is still as solid as it was 30 years ago seems a stretch too far, but 30 years from now I'll be 73 yo and no-one's going to have a clue about what I posted on the MMM forum today. If I was right, I'll feel bad if I didn't post, that's about it.So should I be reassured or worried if 'this time it's different'?
I'd say if your WR is 2% (or less) then No!...;)
Rhetorical question EFB, we are the adults in the room with both the temperament and wealth not to have a care in the world, but that is through experience and reasonable expectation. It's those that are on the fence about retiring at 30 or even 40 with just about 1 million that worry me a bit. This latest justification that 4% is still as solid as it was 30 years ago seems a stretch too far, but 30 years from now I'll be 73 yo and no-one's going to have a clue about what I posted on the MMM forum today. If I was right, I'll feel bad if I didn't post, that's about it.So should I be reassured or worried if 'this time it's different'?
I'd say if your WR is 2% (or less) then No!...;)
Well the way I look at it is this.. If the solution to a financial uncertainty is a big pile of moolah.. Then the solution to more uncertainty is "More moolah".
In theory I have more than 2X the moolah required plus some (future) pension and rental income. Thus I am not worried.. much.
Well the way I look at it is this.. If the solution to a financial uncertainty is a big pile of moolah.. Then the solution to more uncertainty is "More moolah".
In theory I have more than 2X the moolah required plus some (future) pension and rental income. Thus I am not worried.. much.
My issue with amassing double what's needed is the opportunity cost in terms of time spent working to hit 2%WR and the fact that some of the possible FIRE scenarios are not mitigated by more money and are in fact exacerbated by more time working. Beyond a reasonable point [to me ~4%WR] I see money as being the primary risk to FIRE success.
Well the way I look at it is this.. If the solution to a financial uncertainty is a big pile of moolah.. Then the solution to more uncertainty is "More moolah".
In theory I have more than 2X the moolah required plus some (future) pension and rental income. Thus I am not worried.. much.
My issue with amassing double what's needed is the opportunity cost in terms of time spent working to hit 2%WR and the fact that some of the possible FIRE scenarios are not mitigated by more money and are in fact exacerbated by more time working. Beyond a reasonable point [to me ~4%WR] I see money as being the primary risk to FIRE success.
I don't understand this. Are you stating that too much money leads to less chance of fire success. I'd rather have too much compared to too little. Are you stating that working too long leads to more of an obsession with work which could impact your life post retirement.
I don't understand this. Are you stating that too much money leads to less chance of fire success. I'd rather have too much compared to too little. Are you stating that working too long leads to more of an obsession with work which could impact your life post retirement.
I think they were saying that, suppose you think you need $X for retirement. That $X makes all sorts of potentially flawed assumptions like, future investment returns will allow the 4% withdrawal rate to work, I won't have something devastating and costly happen,etc.
It probably makes sense to have a margin of safety. Maybe $1.1X or $1.25X. $2X is probably going overboard though.
I don't understand this. Are you stating that too much money leads to less chance of fire success. I'd rather have too much compared to too little. Are you stating that working too long leads to more of an obsession with work which could impact your life post retirement.
I think they were saying that, suppose you think you need $X for retirement. That $X makes all sorts of potentially flawed assumptions like, future investment returns will allow the 4% withdrawal rate to work, I won't have something devastating and costly happen,etc.
It probably makes sense to have a margin of safety. Maybe $1.1X or $1.25X. $2X is probably going overboard though.
I'm moving an opinion here in hopes that people will weigh in on it. I have two concerns here.
1. My first concern about the beloved 4% rule is that it may be inadequate if people retire now while stocks are expensively valued.
The authors basically said, oh you have 20 years to eat away at your retirement? We'll look at as many 20-yr consecutive time periods as we can in our study and see how things fared. However, they don't account for the possibility that the market starts out very expensive and that subsequent years could perform poorly. Also, the study is also nearly 20 years old.
Modern CAPE research says, what is the long-term returns 10-15 years from now given we are starting at a specific CAPE ratio? Historicaily a CAPE ratio of <10 should has an expected return of 11.7% going forward while a CAPE ratio of 30+ has an expected return of 0.5%. This research is 18 months old, and it explicitly recognizes some CAPE shortcomings and attempts to address them or adjust for them.
The original trinity study and the modern studies that have replicated and expanded on its results used 30 year intervals, not 20 year intervals. That's an important distinction because making 25 years of living expenses (the retirement stash suggested by the 4% rule) last 20 years would mean you could afford to actually lose money on your investments and make it to the end. A 30 year interval requires you at least earn a positive return.
You also have mentioned in multiple threads about the trinity study being nearly 20 years old. That'd be a valid point if it was one paper that was never replicated or iterated upon. Instead, you'll see that there are dozens if not hundreds of follow up studies that have tested different sets of assumptions and investment strategies and spending strategies.
Finally with regards to using historical data to test the success of investment strategies you say: "However, they don't account for the possibility that the market starts out very expensive and that subsequent years could perform poorly." Is it your position that there are no historical time points where the stock market started out extremely overvalued and performed poorly for years?
Those are the predicted average returns, but what is the variance around those estimates? Within the range of historical returns on investment, variance and sequence of return has a much bigger impact on sustainable withdrawal rates than the overall CAGR of the time frame.
Also, you're falling into a bit of a fallacy by trying to correlate the comparative recentness or antiquity of an idea with accuracy.
But if you buy into the idea that the older an idea is the less accurate it is, I'll point out that the idea of looking of CAPE dates back also 30 years to this 1988 paper by Shiller & Campbell (sorry for the PDF link):
http://scholar.harvard.edu/files/campbell/files/campbellshiller_jf1988.pdf
Not to mention that using something like CAPE to try to time the market is, well, trying to time the market. We all know how that goes (badly).
Not to mention that using something like CAPE to try to time the market is, well, trying to time the market. We all know how that goes (badly).The whole point is you don't know this.
Nobody knows what the next 10-15 years of investment returns will be for today's CAPE 30 scenario. But historically about 35-40% of the time the return was negative for the next decade and 75% of the time it was no better than 3%.
Finally with regards to using historical data to test the success of investment strategies you say: "However, they don't account for the possibility that the market starts out very expensive and that subsequent years could perform poorly." Is it your position that there are no historical time points where the stock market started out extremely overvalued and performed poorly for years?
No, my position is that if retirement begins with stocks overvalued, it is faulty to assume that future 15-30 yr investment returns will follow historical experience. This position to supported not only by the CAPE link but also in Ben Stein's interesting book "Yes You Can Time the Market".
People have been saying CAPE was high for at least the last 3 years, maybe longer. Ask those people that sat on cash because of high CAPE how much money they lost out on because they tried to use CAPE to time the market.
I think the insight you're missing from the Trinity study (and successors) is that over the past 100 years the market has been overvalued before, and has experienced periods of slow to negative growth before. Even given the worst market returns in recorded history, 4% was a low enough withdrawal rate to make it through. In average to good times, 4% was excessively conservative and someone following that plan would die filthy rich.
The original trinity study and the modern studies that have replicated and expanded on its results used 30 year intervals, not 20 year intervals. That's an important distinction because making 25 years of living expenses (the retirement stash suggested by the 4% rule) last 20 years would mean you could afford to actually lose money on your investments and make it to the end. A 30 year interval requires you at least earn a positive return.
Actually, the original study and the 2009 update both report results based on 15, 20, 25, and 30-yr time horizons.
Finally with regards to using historical data to test the success of investment strategies you say: "However, they don't account for the possibility that the market starts out very expensive and that subsequent years could perform poorly." Is it your position that there are no historical time points where the stock market started out extremely overvalued and performed poorly for years?
No, my position is that if retirement begins with stocks overvalued, it is faulty to assume that future 15-30 yr investment returns will follow historical experience. This position to supported not only by the CAPE link but also in Ben Stein's interesting book "Yes You Can Time the Market".
You also have mentioned in multiple threads about the trinity study being nearly 20 years old. That'd be a valid point if it was one paper that was never replicated or iterated upon. Instead, you'll see that there are dozens if not hundreds of follow up studies that have tested different sets of assumptions and investment strategies and spending strategies.
So why aren't we referencing them as well?
I think the insight you're missing from the Trinity study (and successors) is that over the past 100 years the market has been overvalued before, and has experienced periods of slow to negative growth before. Even given the worst market returns in recorded history, 4% was a low enough withdrawal rate to make it through.
runewell, as you indicate there is a high likelihood of negative returns in the future since the CAPE is over 30. Are you using your information to short the market or buy puts and take advantage of this bet while the odds are in your favor?
People have been saying CAPE was high for at least the last 3 years, maybe longer. Ask those people that sat on cash because of high CAPE how much money they lost out on because they tried to use CAPE to time the market.
I'm not advocating sitting in cash. The are plenty of lower-CAPE options out there.
Talking about a single anecdote between 2014-2017 doesn't prove anything anyway, there are always counter-arguments. Imagine how much richer you would be had you sold off at the CAPE of 44 at the dot-com bust, or the CAPE of 27 before the financial crisis and bought back in at CAPES of 23 and 15 respectively.
I think the sensible thing to do is shift the asset allocation to ETFs that have lower CAPE ratios in the hopes that you generate +8.7% long term rather than +0.5%
Yes, you're right. The study also looked at shorter time horizons. Still omitting the longest interval studied (30 years) and claiming the study looked at 20 year intervals as a bit misleading no?
And my position is that if stocks are within the range of valuations observed in the past (which they are), then it is more likely that investment returns over the next 30 years will fall within the range of valuations observed in the past than outside of that range. The idea of historical backtesting is to measure the distribution of outcomes not simply to estimate a mean (if it was, everyone would be talking about the 6.8% rule).
You also have mentioned in multiple threads about the trinity study being nearly 20 years old. That'd be a valid point if it was one paper that was never replicated or iterated upon. Instead, you'll see that there are dozens if not hundreds of follow up studies that have tested different sets of assumptions and investment strategies and spending strategies.
So why aren't we referencing them as well?
If you're concerned about US equity CAPE then make sure to diversify into international.
A Japanese investor would have seen his investments improved if he diversified out of his country's equity markets that were devastated in the early 1990's and have never fully recovered.
Diversify your CAPE by diversifying equity exposure.
If you're concerned about US equity CAPE then make sure to diversify into international.
A Japanese investor would have seen his investments improved if he diversified out of his country's equity markets that were devastated in the early 1990's and have never fully recovered.
Diversify your CAPE by diversifying equity exposure.
Thanks that is exactly what I plan to do! I am about 75% US, 20% International and I am going to drop that to about 55/40 in the coming week.
If you're concerned about US equity CAPE then make sure to diversify into international.
A Japanese investor would have seen his investments improved if he diversified out of his country's equity markets that were devastated in the early 1990's and have never fully recovered.
Diversify your CAPE by diversifying equity exposure.
Thanks that is exactly what I plan to do! I am about 75% US, 20% International and I am going to drop that to about 55/40 in the coming week.
This is exactly market timing.
We're at 30 now, so should we sell right this moment because we're above the 27 it was at before the financial crash? Or should we wait and sell later, because it's no where near the 44 of the dot-com bust?
By definition this is more risk. Anytime you try to pick winners, you might be right, but you are definitely engaging in higher risk than VTSAX that tracks the whole market. Essentially, your solution to the 4% rule (which is very low risk) is to engage in more risk in hopes of beating the market. Well, that might work for you and it might not. But don't pretend that what your doing is less risky than VTSAX. It's not. It's actually more risky.
Thanks. I feel like I have generated a surprising amount of subtle hostility just for suggesting some enhancements to the 4% rule. I'm sorry if I come across as a know-it-all, i assure you that is not the case. Do you guys really not like the idea? Do you think it is ridiculous and without merit? I know it might only apply once every 40 years but if that's the case there's a 75% it will surface in a 30-yr time horizon.... I suspect after so many good years in the stock market nobody wants to imagine it reversing course?
If you learn new things about why international exposure should be higher %wise then I think that's a different issue. For example, you might read that international represents approx. 45% of the global stock market.
2) The dangers of overfitting models. The overall historical record for the stock market just isn't that long as statistical datasets go. It wouldn't take putting too many factors into a model to predict historical data perfectly but aren't useful at all to predict future returns. Without doing cross validation it's very easy to end up very confident and very wrong at the same time.
3) In your posts so far you've kind of waved aside the expertise already present on the forum regarding CAPE ratios and the (very legitimate I think) issues those folks brought up with the changes in how earnings must legally be reported and how this means a CAPE of 20 today doesn't reflect the same underlying ratio of business productivity to stock price as it would have in 1965.
even then, P/E ratios have “explained”only about 40% of the time variation in net-of-inflation returns.
Well the CAPE is perched at 30 again. You can call me chicken little if you want for emphasizing the low points in our stock market's history. I just want you to know that there a lot of reasons why we should be cautious where we are now. This is only the third time the CAPE has been this high for the S&P, and the last two did not end well for the investor.
even then, P/E ratios have “explained”only about 40% of the time variation in net-of-inflation returns.
You're making investing decisions on indicators that are only right about 40% of the time? Holy crap!
even then, P/E ratios have “explained”only about 40% of the time variation in net-of-inflation returns.
You're making investing decisions on indicators that are only right about 40% of the time? Holy crap!
First of all, that's not what it means.
Second of all, it's "40% more" information than you have.
2) The dangers of overfitting models. The overall historical record for the stock market just isn't that long as statistical datasets go. It wouldn't take putting too many factors into a model to predict historical data perfectly but aren't useful at all to predict future returns. Without doing cross validation it's very easy to end up very confident and very wrong at the same time.
3) In your posts so far you've kind of waved aside the expertise already present on the forum regarding CAPE ratios and the (very legitimate I think) issues those folks brought up with the changes in how earnings must legally be reported and how this means a CAPE of 20 today doesn't reflect the same underlying ratio of business productivity to stock price as it would have in 1965.
Fair enough. A portion of my time at work is trying to fit new variables to insurance pricing models so I am very interested in all of this.
If all that is correct so far, even if the CAPE data predicts it, I'm having a little bit of trouble understanding the proposed mechanism by which a recession in 2007-2009 predicts lower than average earnings in 2017-2037. In other words, my suspicion is that it is data-fitting rather than an economic theory - the same as the price of butter in Bangladesh or skirt lengths or who wins the Super Bowl.
I'd really appreciate your (or anyone else's) thoughts or clarifications.
If the CAPE has been rising recently but the current PE's have been historically average, the only reason I can imagine that to be the case is that the rolling 10-year window of CAPE is having some lower-than-average PE ratios drop out of the data set.
The thing you've got to remember with historical stock market data we have only ~150 years of data and the data is autocorrelated (bad years are more likely like come before or after each other expected than by chance alone, and good years also tend to cluster). This is why monte carlo stock market simulations tend to produce more optimistic outcomes than historical backtesting. It also means that it's much much easier to develop overfit models than the types of data you're used to working with.
No, the 4% test failed for 20+ years during a 1929 start.
To me it looks like high CAPE is correlated with high returns and low CAPE is correlated with low returns. If this is true, you shouldn't get out when CAPE is increasing. You should ride it as long as possible because that's where your gains are.
On the other hand, when should one get off and move $$ elsewhere? That's impossible to predict. We might tap out at CAPE 30, or we might to to CAPE 44, or even higher. That's what it means when we say the future is not really predictable. Which is why you invest in VTSAX and don't ever sell. If you are in the accumulation phase, keep buying, even during dips. Make sure you have some bonds, they act like dry powder during stock dips. Diversify with international stocks (I do). These 2 things are hedges against 100% VTSAX and I think they are smart given volatility is inevitable with stocks.
don't get me started about dollar-cost averaging (otherwise known as market timing). And I don't want bonds (those hurt your long-term portfolio survival
If you're concerned about US equity CAPE then make sure to diversify into international.
A Japanese investor would have seen his investments improved if he diversified out of his country's equity markets that were devastated in the early 1990's and have never fully recovered.
Diversify your CAPE by diversifying equity exposure.
And I don't want bonds (those hurt your long-term portfolio survival and the yields are way too low to get me interested)
Finally with regards to using historical data to test the success of investment strategies you say: "However, they don't account for the possibility that the market starts out very expensive and that subsequent years could perform poorly." Is it your position that there are no historical time points where the stock market started out extremely overvalued and performed poorly for years?
No, my position is that if retirement begins with stocks overvalued, it is faulty to assume that future 15-30 yr investment returns will follow historical experience. This position to supported not only by the CAPE link but also in Ben Stein's interesting book "Yes You Can Time the Market".
I think the insight you're missing from the Trinity study (and successors) is that over the past 100 years the market has been overvalued before, and has experienced periods of slow to negative growth before. Even given the worst market returns in recorded history, 4% was a low enough withdrawal rate to make it through. In average to good times, 4% was excessively conservative and someone following that plan would die filthy rich.
If you wish to cast doubt on the validity of a 4% SWR, it's not sufficient to claim that stocks are overvalued and that you expect returns to be lower than their historical averages. All that has happened before, and 4% was just fine during those times. Instead you need to show that the next 30 years will be historically bad, the worst ever. That's certainly possible! That said, I don't think that a high CAPE ratio is sufficient evidence that this is likely to be the case.
The CAPE is high enough that I think we will see a lot more sideways return in the future 10-15 years.
The CAPE is high enough that I think we will see a lot more sideways return in the future 10-15 years.
Right, you're making a prediction about the future. That's market timing. You might think "but wait, I'm smarter than all those other people out there that are also trying to time the market, and I have better data and better insight, so I'll succeed where they all failed". I can assure you, this is not the case.
No, the 4% test failed for 20+ years during a 1929 start.
I think this statement proves that you do not understand this topic very well. Perhaps you expressed your true intentions poorly, but as written that sentence is clearly false.
If you wish to cast doubt on the validity of a 4% SWR, it's not sufficient to claim that stocks are overvalued and that you expect returns to be lower than their historical averages. All that has happened before, and 4% was just fine during those times. Instead you need to show that the next 30 years will be historically bad, the worst ever. That's certainly possible! That said, I don't think that a high CAPE ratio is sufficient evidence that this is likely to be the case.
For the 1929 year, the 4% test failed for the 20-yr, 25-yr, and 30-yr time horizons. NOT 20 different sets of failures :)
Year CumulativeInflation portfolio.start portfolio.infAdjStart spending infAdjSpending PortfolioAdjustments Equities Bonds Gold Cash equities.growth dividends bonds.growth gold.growth cash.growth fees portfolio.end portfolio.infAdjEnd
1929 1 1000000 1000000 0 0 0 750000 250000 0 0 -95032.18 25945.29 14953.45 0 0 0 945866.56 945866
1930 1 905866.56 945866.56 40000 40000 0 679399.92 226466.64 0 0 -179316.51 30380.54 6582.92 0 0 0 763513.51 763513
1931 0.929824561 726320.53 821137.17 37192.98 40000 0 544740.3975 181580.1325 0 0 -261802.64 32953.73 1406.73 0 0 0 498878.35 536529
1932 0.83625731 465428.06 596560.82 33450.29 40000 0 349071.045 116357.015 0 0 -50888.67 33363.62 7586.08 0 0 0 455489.09 544675
1933 0.754385965 425313.65 603787.86 30175.44 40000 0 318985.2375 106328.4125 0 0 155218.49 22270.48 5083.69 0 0 0 607886.31 805802
1934 0.771929825 577009.12 787489.08 30877.19 40000 0 432756.84 144252.28 0 0 -52554.91 18098.6 8243.68 0 0 0 550796.49 713531
1935 0.795321637 518983.62 692545.59 31812.87 40000 0 389237.715 129745.905 0 0 189154.4 18915.44 5057.58 0 0 0 732111.03 920521
1936 0.807017544 699830.33 907181.06 32280.7 40000 0 524872.7475 174957.5825 0 0 146094.67 18309.51 4221.54 0 0 0 868456.05 1076130
1937 0.824561404 835473.59 1053233.93 32982.46 40000 0 626605.1925 208868.3975 0 0 -223711.23 26004.65 7589.86 0 0 0 645356.87 782666
1938 0.830409357 612140.5 777155.1 33216.37 40000 0 459105.375 153035.125 0 0 48305.52 32203.67 6373.54 0 0 0 699023.24 841781
1939 0.81871345 666274.7 853806.96 32748.54 40000 0 499706.025 166568.675 0 0 -7995.3 20521.25 5950.09 0 0 0 684750.73 836374
1940 0.812865497 652236.11 842391.19 32514.62 40000 0 489177.0825 163059.0275 0 0 -69598.36 24790.26 7072.29 0 0 0 614500.3 755967
1941 0.824561404 581517.84 745245.04 32982.46 40000 0 436138.38 145379.46 0 0 -66971.01 27835.67 -3086.15 0 0 0 539296.35 654040
1942 0.918128655 502571.2 587386.47 36725.15 40000 0 376928.4 125642.8 0 0 48962.71 29687.14 2990.52 0 0 0 584211.57 636306
1943 0.988304094 544679.41 591125.32 39532.16 40000 0 408509.5575 136169.8525 0 0 71256.38 23887.08 3254.75 0 0 0 643077.62 650688
1944 1.01754386 602375.87 631990.07 40701.75 40000 0 451781.9025 150593.9675 0 0 62525.09 23383.35 5063.27 0 0 0 693347.58 681393
1945 1.040935673 651710.15 666081.1 41637.43 40000 0 488782.6125 162927.5375 0 0 164135.3 23309.86 6233.56 0 0 0 845388.87 812143
1946 1.064327485 802815.77 794293.94 42573.1 40000 0 602111.8275 200703.9425 0 0 -93892.02 22275.7 3424.12 0 0 0 734623.57 690223
1947 1.257309942 684331.17 584282 50292.4 40000 0 513248.3775 171082.7925 0 0 -12822.77 24070.81 1251.03 0 0 0 696830.24 554223
1948 1.385964912 641391.64 502776.25 55438.6 40000 0 481043.73 160347.91 0 0 17191.72 27355.36 5589.03 0 0 0 691527.75 498950
1949 1.403508772 635387.4 492713.52 56140.35 40000 0 476540.55 158846.85 0 0 47157.66 29370.13 3541.67 0 0 0 715456.86 509763
1950 1.374269006 660486.1 520609.03 54970.76 40000 0 495364.575 165121.525 0 0 127069.23 33748.18 551.25 0 0 0 821854.75 598030
As for the great depression, it was the single year where the 4% rule FAILED.
A small to moderate bond allocation, approximately 20%, has historically reduced volatility much more than it has decreased overall returns. Check efficient frontier. Once more, limited to historical data, and based on geography of your choosing.
As for the great depression, it was the single year where the 4% rule FAILED.
Well that's not true either. It didn't fail in 1929, and most of the actual 4% SWR failures in the historic record are in the 60s, due to stagflation in the 70s, while CAPE was very normal. Are you sure you're comfortable with this topic?
I'll readily admit, I need to catch up a bit on the 'runewell debates' above, however, I struggle with how the 4% rule fixes expenses at a level which might be artificially low. One thing I don't hear discussed much from ER's is how reliable that is if you ER at 30 or 40 that expenses don't increase. I can imagine, for the intended 55 or 65 yo demographic, there will be little or discretionary expense increase, but 30 yo ERs?
If you ER at 30 - don't you expect that (especially if inflation kicks in) you'll have to spend more at 40 and 50, even if you live the same quality of life? There's health, sending the kids to college, buying a car, or whatever. Of course, it is always discretionary up to a point - kids don't need to drive, or go to college... but healthcare is obviously concerning...
I'll readily admit, I need to catch up a bit on the 'runewell debates' above, however, I struggle with how the 4% rule fixes expenses at a level which might be artificially low. One thing I don't hear discussed much from ER's is how reliable that is if you ER at 30 or 40 that expenses don't increase. I can imagine, for the intended 55 or 65 yo demographic, there will be little or discretionary expense increase, but 30 yo ERs?
If you ER at 30 - don't you expect that (especially if inflation kicks in) you'll have to spend more at 40 and 50, even if you live the same quality of life? There's health, sending the kids to college, buying a car, or whatever. Of course, it is always discretionary up to a point - kids don't need to drive, or go to college... but healthcare is obviously concerning...
I'll readily admit, I need to catch up a bit on the 'runewell debates' above, however, I struggle with how the 4% rule fixes expenses at a level which might be artificially low. One thing I don't hear discussed much from ER's is how reliable that is if you ER at 30 or 40 that expenses don't increase. I can imagine, for the intended 55 or 65 yo demographic, there will be little or discretionary expense increase, but 30 yo ERs?
If you ER at 30 - don't you expect that (especially if inflation kicks in) you'll have to spend more at 40 and 50, even if you live the same quality of life? There's health, sending the kids to college, buying a car, or whatever. Of course, it is always discretionary up to a point - kids don't need to drive, or go to college... but healthcare is obviously concerning...
Inflation is accounted for in the 4% rule. If you have kids, and want to help them with college or a car or whatever, you should factor that in to your savings amount. And I agree, healthcare is concerning.
But even "inflation" can be considered a misleading indicator. I agree that technically CPI is included in the 4% rule, and if you aren't buying new iPhones and a Tesla, maybe that is a good enough benchmark, but it is a broad basket of goods and also makes value judgements for you about tangible cost discounted by added features. So I'd argue that a 30 and 40 y.o. experiences higher inflation (compounded if you are raising kids) than what the CPI reports. Of course, with the reported figure being so low for so long, Americans have been able to ignore this, but go to other countries where their prices in their local currency are 'outrageous'... We are very fortunate to enjoy a strong dollar and the benefits of importing cheap goods.
While you're employed, your income generally rises with inflation and when you are collecting Social Security, that adjusts for COL, but ER'd folks are SOL :).
However, one issue that I think is often overlooked is that for folks who don't rent, whether they own a house outright or carry a mortgage in FIRE -- and please let us not reopen that obnoxious can of worms -- a very big component of their cost of living is experiencing no inflation at all. (Although property taxes, maintenance, and home insurance will still increase with inflation over time). This tends to drag personal inflation rates down below the overall CPI, and may, to some extent, balance out the biases dragging personal inflation higher than CPI that you identify above.
If you're concerned about US equity CAPE then make sure to diversify into international.
A Japanese investor would have seen his investments improved if he diversified out of his country's equity markets that were devastated in the early 1990's and have never fully recovered.
Diversify your CAPE by diversifying equity exposure.
Thanks that is exactly what I plan to do! I am about 75% US, 20% International and I am going to drop that to about 55/40 in the coming week.
Yes, I guess you are right, we don't really talk enough about diversification. I'm 80-20 Stocks/Bonds, but within stocks I'm about 65/35 US/International. Those are smart things to do, IMHO.
My understanding from the Nightly Business Report is that the current PE, which I'm assuming is price/TTM, is just somewhat higher than the historical average. I think the average is 16.something, and we're at 18, more or less. And this has been the case for about the last six months to a year.
If you're concerned about US equity CAPE then make sure to diversify into international.
A Japanese investor would have seen his investments improved if he diversified out of his country's equity markets that were devastated in the early 1990's and have never fully recovered.
Diversify your CAPE by diversifying equity exposure.
Thanks that is exactly what I plan to do! I am about 75% US, 20% International and I am going to drop that to about 55/40 in the coming week.
Yes, I guess you are right, we don't really talk enough about diversification. I'm 80-20 Stocks/Bonds, but within stocks I'm about 65/35 US/International. Those are smart things to do, IMHO.
I believe in international exposure in the AA as well, but by doing so you/we/me are moving away from the 4% rule analysis as no international was included so it becomes more apples and oranges. And in many developed countries SWR are well below the US 4%.
However, one issue that I think is often overlooked is that for folks who don't rent, whether they own a house outright or carry a mortgage in FIRE -- and please let us not reopen that obnoxious can of worms -- a very big component of their cost of living is experiencing no inflation at all. (Although property taxes, maintenance, and home insurance will still increase with inflation over time). This tends to drag personal inflation rates down below the overall CPI, and may, to some extent, balance out the biases dragging personal inflation higher than CPI that you identify above.
But only to the extent you include these inflation-shielded housing costs as part of your "cost of living" in the first place, which virtually no one who owns their home free and clear would do (most people would simply treat the elimination of rental expense from their cost of living as exactly that, unless they're using some kind of funky imputed rent accounting), and which most informed mortgage-loan-carriers would not do without accounting for the inflation-protected nature of that cash flow item in their financial planning (for example, in my own accounting for my personal retirement planning, I deduct my outstanding mortgage loan balance from my investment portfolio to determine my stash size, and ignore the principal + interest payments when determining my expenses).
I point this out only because your post feels like a step in the direction of the argument, commonly made in early retirement circles, that frugal mustachians are better-protected from inflation simply by virtue of their low expenses, which doesn't really hold water -- those low expenses (which presumably serve as the basis for determining the required stash size to support them in retirement) are just as subject to inflation as any others.
I believe in international exposure in the AA as well, but by doing so you/we/me are moving away from the 4% rule analysis as no international was included so it becomes more apples and oranges. And in many developed countries SWR are well below the US 4%.
There's no difference between selling appreciated stock and spending the dividends.
There's no difference between selling appreciated stock and spending the dividends.
Except taxation.
With selling stock that's appreciated you have less of an ownership stake in the company, that's another difference.
My understanding from the Nightly Business Report is that the current PE, which I'm assuming is price/TTM, is just somewhat higher than the historical average. I think the average is 16.something, and we're at 18, more or less. And this has been the case for about the last six months to a year.
Except that it is not at 18, it is at 26. The 18 is most likely a forward looking PE - ie expected earnings for the next 12 months / current price.
If you're concerned about US equity CAPE then make sure to diversify into international.
A Japanese investor would have seen his investments improved if he diversified out of his country's equity markets that were devastated in the early 1990's and have never fully recovered.
Diversify your CAPE by diversifying equity exposure.
Thanks that is exactly what I plan to do! I am about 75% US, 20% International and I am going to drop that to about 55/40 in the coming week.
Yes, I guess you are right, we don't really talk enough about diversification. I'm 80-20 Stocks/Bonds, but within stocks I'm about 65/35 US/International. Those are smart things to do, IMHO.
I believe in international exposure in the AA as well, but by doing so you/we/me are moving away from the 4% rule analysis as no international was included so it becomes more apples and oranges. And in many developed countries SWR are well below the US 4%.
The key points of the trinity study are that saving 20-30 times your annual expenses should result in your stash lasting 30 years.
How do you figure? Cfiresim seems to disagree with you.
Also remember that if Cfiresim is updated with new information, eventually the dot-com boom and the financial crisis are likely to add more examples of failure to the simulations.And success. One of the things I got from the trinity study was that even the worst market downturns tend to be only for a year or two, and really don't make much difference to you (if you have some bonds, a 3 year cash supply or any other means of support while markets rally). The examples of failure you mention fall well within these parameters, and I would be surprised if they made much of a blip on the simulations.
said Wade Pfau [the guy who updated the Trinity study], a professor of retirement income at the American College of Financial Services and another researcher within the financial planning community.
The key points of the trinity study are that saving 20-30 times your annual expenses should result in your stash lasting 30 years.
Actually that's just people's interpretation of the study conclusions. Even though it seems like an appropriate corollary, the study never actually mentions anything about multiplying by the desired annual amount before inflation adjustments by the reciprocal of the withdrawal rate.
Why don't we have a look at the actual conclusions ending the study:
• Early retirees who anticipate long payout periods should plan on lower withdrawal rates.
• The presence of bonds in the portfolio increases the success rate for low to mid-level withdrawal rates. However, the presence of common stocks provides upside
potential and holds the promise of higher sustainable withdrawal rates. In other words, the addition of bonds helps increase certainty but at the expense of potentially
higher consumption. Most retirees would likely benefit from allocating at least 50% to common stocks.
• Retirees who demand CPI-adjusted withdrawals during their retirement years must accept a substantially reduced
withdrawal rate from the initial portfolio. For retirees with significant fixed costs and for those who
tend to spend less as they age, CPI-adjustments will likely cause a suboptimal exchange of present consumption
for future consumption.
• For stock-dominated portfolios, withdrawal rates of 3% and 4% represent exceedingly conservative behavior. At
these rates, retirees who wish to bequeath large estates to their heirs will likely be successful. Ironically, even
those retirees who adopt higher withdrawal rates and who have little or no desire to leave large estates may
end up doing so if they act reasonably prudent in protecting themselves from prematurely exhausting their
portfolio. Table 4 shows large expected terminal values of portfolios under numerous reasonably prudent scenarios
that include withdrawal rates greater than 4%.
• For short payout periods (15 years or less), withdrawal rates of 8% or 9% from stock-dominated portfolios appear
to be sustainable. Since the life expectancy of most retirees exceeds 15 years, however, these withdrawal
rates represent aggressive behavior in most cases. By definition, you have a 50% chance of living beyond your
actuarially determined life expectancy, so it is wise to be conservative and add a few years.
A multiplier of 20 would correspond to a withdrawal rate of 5% and under the inflation-adjustment scenario there are a lot of instances where that fails.
How do you figure? Cfiresim seems to disagree with you.
You know, I looked up in the wrong table. People say that the withdrawals are adjusted for inflation but that only occurred in the second half of the article, and uses table 3. Having just realized this I wanted to clarify what the study shows in Table 4:
A 3% withdrawal rate was pretty darn safe.
At a 4% withdrawal rate, the 30-yr portfolio was never 100% successful at any allocation of bonds and stocks, but it was much higher when it was not 100% bonds. (seems obvious)
At a 5% withdrawal rate, the 15-yr portfolios were 100% safe but longer time periods were never more than 90% safe, sometimes considerably less.
Also keep in mind that on the default settings Cfiresim's latest simulation period is approximately 1987-2016. More recent instances of 30-yr scenarios starting at 25+ CAPE ratios aren't really possible simulate because the data doesn't exist yet, but we know they're coming.
lol, you must be new here. We all know who Wade is. He's even posted to the forum before.
You probably need to stop thinking of the forum as a bunch of know-nothing amateurs. I would argue that there is more expertise on this topic here than anywhere else on the internet, including wade's site or bogleheads. This is crowdsourcing at its best.
I agree with the points that are made above excluding the comment related to 5% failure rates. This is another key point in the Trinity study that needs to be recognised and has already been mentioned on this thread multiple times. The assumptions within the Trinity study are basically ridiculous. When you start taking into account factors such as social security/inheritance/the ability to go back to work the picture changes significantly.
Also keep in mind that on the default settings Cfiresim's latest simulation period is approximately 1987-2016. More recent instances of 30-yr scenarios starting at 25+ CAPE ratios aren't really possible simulate because the data doesn't exist yet, but we know they're coming.
Ultimately, the key point here is simply to recognize that the 2000 retiree is merely ‘in line’ with the 1929 retiree, and doing better than the rest. And the 2008 retiree – even having started with the global financial crisis out of the gate – is already doing far better than any of these historical scenarios! In other words, while the tech crash and especially the global financial crisis were scary, they still haven’t been the kind of scenarios that spell outright doom for the 4% rule. ...
The bottom line, though, is simply to recognize that even market scenarios like the tech crash in 2000 or the financial crisis of 2008 are not ones that will likely breach the 4% safe withdrawal rate, but merely examples of bad market declines for which the 4% rule was created. In turn, this is an implicit acknowledgement of just how conservative the 4% rule actually is, and how horrible the historical market returns really were that created it. In the end, this doesn’t necessarily mean that the 4% rule is ‘sacred’ and that some future market disaster couldn’t be bad enough to undermine it ... But when the Great Depression and the stagflationary 1970s couldn’t break it, and the crash of 1987 and even the global financial crisis of 2008 were just speed bumps, it will take a lot to set a new safe withdrawal rate below 4%!
The hostility and comments I have experienced so far don't give me a lot of confidence, although a few posters do seem to have some good contributions. Just because I am new here doesn't mean you have to emit a condescending attitude. Frankly I was hoping to get more constructive criticism on my "add caution to the 4% due to this CAPE article" and I got some feedback but it sounded like most people didn't want to hear anything that would challenge the established 4% motto.
This is correct, but we can certainly look at how more recent retirement scenarios are doing already, and compare them to the patterns of the existing worst 30 year intervals on record. A couple of years Kitces did just that for hypothetical retirees who pulled the trigger in 2000 and 2008, after the two more recent crashes and compared the performance of these portfolios so far to how things were looking for retirees in 1929, 1935, and 1966 (some of the worst years to retire in historically) after the same length of time.
This isn't ideal, but it does a good job of harvesting some information we do have about more recent retirements, rather than pretending we have absolutely no idea what the outcome for the 1987-2017 retiree will look like until January 1st 2018.
No, we don't all know who Wade is. I didn't know who Wade was.
https://www.nytimes.com/2015/05/09/your-money/some-new-math-for-the-4-percent-retirement-rule.html
“Because interest rates are so low now, while stock markets are also very highly valued, we are in uncharted waters in terms of the conditions at the start of retirement and knowing whether the 4 percent rule can work in those cases,” said Wade Pfau [the guy who updated the Trinity study], a professor of retirement income at the American College of Financial Services and another researcher within the financial planning community.
lol, you must be new here. We all know who Wade is. He's even posted to the forum before.
No, we don't all know who Wade is. I didn't know who Wade was. Other people new to the forum probably won't know who he is.You probably need to stop thinking of the forum as a bunch of know-nothing amateurs. I would argue that there is more expertise on this topic here than anywhere else on the internet, including wade's site or bogleheads. This is crowdsourcing at its best.
The hostility and comments I have experienced so far don't give me a lot of confidence, although a few posters do seem to have some good contributions. Just because I am new here doesn't mean you have to emit a condescending attitude. Frankly I was hoping to get more constructive criticism on my "add caution to the 4% due to this CAPE article" and I got some feedback but it sounded like most people didn't want to hear anything that would challenge the established 4% motto.
He doesn't even need to search. If he just read the thread we're current posting in, and some of the links it contains, he wouldn't have to repeat the same tired misconceptions over and over again.
You must be new here
OK let me (re)open up another topic for discussion:
Do your simulations account for the fact that a chunk of your equities should be in international markets? Or is the simulated number based only on US returns. And if that is the case, how does that affect any X% withdrawal assumption.
OK let me (re)open up another topic for discussion:
Do your simulations account for the fact that a chunk of your equities should be in international markets? Or is the simulated number based only on US returns. And if that is the case, how does that affect any X% withdrawal assumption.
The key points of the trinity study are that saving 20-30 times your annual expenses should result in your stash lasting 30 years.
When it comes to portfolio theory it should be as simple as stating that a diversified portfolio (across asset classes and within asset classes) is a good idea. It's also a good idea to utilise a stock heavy portfolio because the no 1 risk to portfolio failure tends to be inflation which stocks protect against.
Based on these points a portfolio of 50/50 through to 90/10 (international stocks/domestic bonds) that is 20-30 times your annual expenses means that you have placed yourself in a statistically likely position for your retirement to be a success from a financial perspective. That is the best that you are going to get. Trying to mimic the best past performance or protect yourself perfectly is not possible as we can't predict the future.
The past can only offer broad general principles to follow. It can't offer completely detailed mathematically exact criteria to follow.
He doesn't even need to search. If he just read the thread we're current posting in, and some of the links it contains, he wouldn't have to repeat the same tired misconceptions over and over again.
You must be new here
A couple of years Kitces did just that for hypothetical retirees who pulled the trigger in 2000 and 2008, after the two more recent crashes and compared the performance of these portfolios so far to how things were looking for retirees in 1929, 1935, and 1966 (some of the worst years to retire in historically) after the same length of time.
This isn't ideal, but it does a good job of harvesting some information we do have about more recent retirements, rather than pretending we have absolutely no idea what the outcome for the 1987-2017 retiree will look like until January 1st 2018.
https://www.kitces.com/blog/how-has-the-4-rule-held-up-since-the-tech-bubble-and-the-2008-financial-crisis/
If it brings you joy to save even more and retire, I'd say you saved a lot, good for you, no harm done and it's your life.
Most tests of safe withdrawal rates use US-only data because that's the longest historical dataset in the public sector. Conceptually including investments across multiple countries as part of an international index provides greater diversification across imperfectly correlated assets, which would reduce sequence of returns risk and hence increase the minimum safe withdrawal rate above what has been calculated using data the USA alone. However, there are no public domain datasets of stock/bond performance for other countries that go back far enough to test this concept with any sort of statistical rigor.*
The Dimson, Marsh, and Staunton dataset does have that type of historical performance data for 20 plus countries that have accounted for the vast majority of world equity valuations for the past century, so someone who had access to it could run this test. Instead it seems to only get used whenever some idiot wants to write another "the 4% rule doesn't work in countries other than the USA" article about the groundbreaking finding that the 4% rule would not have protected retirees while whose entire countries were leveled to the ground during world war II.
*And the concern even if there were is that global markets are more integrated now than in the past, so the performance of US, German, and Brazilian stock market indices are likely more correlated than historical data would indicate, meaning we may well get less of a reduction in volatility from international investing than historical data would show, giving folks a false sense of security.
If it brings you joy to save even more and retire, I'd say you saved a lot, good for you, no harm done and it's your life.
I'd say there could be plenty of damage done by over saving that people either ignore or is long-term enough they don't appreciate until it's too late...health and relationship damage would be two examples. It's easy to focus on earning money to secure your family's future only to realize later on you've destroyed the family by not being there for decades in order to earn all that money. Same goes for health.
That's why I think it's pretty critical for FIRE success to open your mind to factors that are not numerically based and can't be spreadsheeted. These are also factors that our societal programming to work, work, work, spend, spend, spend....is designed to have you ignore so the risk is high you'll do just that!
The closer I get to FIRE the more I start thinking about the factors that are important to a successful retirement that don't include money. How am I going to spend my time ? Will I travel ? Will I downsize my house and if so when ? Will I work part time for a year or two to pay for some bigger expenses (for instance painting the house or a new car or a holiday) ?
The closer I get to FIRE the more I start thinking about the factors that are important to a successful retirement that don't include money. How am I going to spend my time ? Will I travel ? Will I downsize my house and if so when ? Will I work part time for a year or two to pay for some bigger expenses (for instance painting the house or a new car or a holiday) ?
That makes sense. When you are a decade out it doesn't make sense to sweat the details, but as you get closer to pulling the trigger you are motivated to work out your FIRE plan in finer detail. I'm doing the same thing.
Congrats on getting close. That's a wonderful feeling. :)
Micro analysing cape or P/E ratios or historical data to try and figure out the specific reason why portfolios fail or trying to get to a ridiculously low WR (unless you are working because you love it) all miss the point that we have imperfect information because we are to a degree trying to predict the future.
Is the 4% rule immune from this criticism? People have argued that the US market has also changed over time. Therefore isn't trying to predict the adequacy of future withdrawal rates merely another flawed attempt to predict the future usinh imperfect information?
A general rule of thumb is that you should have no more than one variable for every 10 or 15 cases in your data set. So a model to explain what happened in 15 elections should ideally contain no more than one or two inputs. By a strict interpretation, in fact, not only should a model like this one not contain more than one or two input variables, but the statistician should not even consider more than one or two variables as candidates for the model, since otherwise he can cherry-pick the ones that happen to fit the data the best (a related problem known as data dredging). If you ignore these principles, you may wind up with a model that fits the noise in the data rather than the signal.
But even "inflation" can be considered a misleading indicator. I agree that technically CPI is included in the 4% rule, and if you aren't buying new iPhones and a Tesla, maybe that is a good enough benchmark, but it is a broad basket of goods and also makes value judgements for you about tangible cost discounted by added features. So I'd argue that a 30 and 40 y.o. experiences higher inflation (compounded if you are raising kids) than what the CPI reports. Of course, with the reported figure being so low for so long, Americans have been able to ignore this, but go to other countries where their prices in their local currency are 'outrageous'... We are very fortunate to enjoy a strong dollar and the benefits of importing cheap goods.
While you're employed, your income generally rises with inflation and when you are collecting Social Security, that adjusts for COL, but ER'd folks are SOL :).
Micro analysing cape or P/E ratios or historical data to try and figure out the specific reason why portfolios fail or trying to get to a ridiculously low WR (unless you are working because you love it) all miss the point that we have imperfect information because we are to a degree trying to predict the future.
Is the 4% rule immune from this criticism? People have argued that the US market has also changed over time. Therefore isn't trying to predict the adequacy of future withdrawal rates merely another flawed attempt to predict the future usinh imperfect information?
If you have saved up 25 years of spending, in my opinion, it's not going to help to save more because you're just incapable of figuring out what the world will look like 15 years from now, never mind 25.
Those graphs combining the portfolio success and mortality really make the point. People get up in arms over that tiny slice in the middle, when odds are extremely high that by the time you die, you're just fine from a running-out-of-money perspective either because your portfolio succeeded or you died young enough. One look and some thought was enough to get me completely over "is 4% enough?" and leaning more and more towards "5% is probably plenty".If you have saved up 25 years of spending, in my opinion, it's not going to help to save more because you're just incapable of figuring out what the world will look like 15 years from now, never mind 25.
Agreed that predicting what will happen is impossible, however, there is one benefit I can think of to saving more than 25x annual spending. Every extra year you work past that point is one year you'll be closer to dying and that makes your chance of running out of money less since your retirement will be shorter. Of course this approach at risk mitigation has an obvious downside. ;)
One look and some thought was enough to get me completely over "is 4% enough?" and leaning more and more towards "5% is probably plenty".
But even "inflation" can be considered a misleading indicator. I agree that technically CPI is included in the 4% rule, and if you aren't buying new iPhones and a Tesla, maybe that is a good enough benchmark, but it is a broad basket of goods and also makes value judgements for you about tangible cost discounted by added features. So I'd argue that a 30 and 40 y.o. experiences higher inflation (compounded if you are raising kids) than what the CPI reports. Of course, with the reported figure being so low for so long, Americans have been able to ignore this, but go to other countries where their prices in their local currency are 'outrageous'... We are very fortunate to enjoy a strong dollar and the benefits of importing cheap goods.
While you're employed, your income generally rises with inflation and when you are collecting Social Security, that adjusts for COL, but ER'd folks are SOL :).
That's easy enough to deal with. Just start with a lower SWR.
One look and some thought was enough to get me completely over "is 4% enough?" and leaning more and more towards "5% is probably plenty".
Yes! I'm excitedly waiting for my investments to reach 5%WR. 4%WR seems sane, but cautious. Going any lower and for me personally the trade off between opportunity cost for extra time worked plus the negative health impacts don't compute.
I'm far more worried about my health failing or death than I am running out of money once I get into the 4%WR-5%WR range.
I wonder if for a lot of people it's more about keeping score than it is about a safety net.
I wonder if for a lot of people it's more about keeping score than it is about a safety net.
I suspect a lot of people are so conditioned to work that facing retirement is very challenging and the fear around that is a great motivator to look for reasons to keep working. Shooting for a low withdrawal rate accomplishes that goal.
If you have saved up 25 years of spending, in my opinion, it's not going to help to save more because you're just incapable of figuring out what the world will look like 15 years from now, never mind 25.
Also, the pace of change is accelerating, so you're even less likely to figure anything out.
The world has changed, but it doesn't seem like the need for retirement savings has hardly changed at all. We still invest in stocks and mutual funds and now ETFs. A lot more investment opportunities have opened up during this time. Perhaps the biggest change is that I can go on my computer and buy a basket of stocks in Egypt if I want, effortlessly and at little or nor cost, in only a minute.
There is also a lot of research on investing, and twenty more years of investing ups and downs on the record books, but I don't see change in the world as a big problem for the individual investor.
Finally, I read upthread about 3% and 2% WR. This starts to get into the really silly territory. If you're 40 and have 50x savings - you've won. Junk that 50x into TIPS and you're fine. You're not living to 90, don't worry (and if you do you still have social security not to mention everything could be free by then or some other gigantic change like WW3 makes savings irrelevant).
It's not going to become the new normal anytime soon, with as little as people save already. A 19% portfolio survival with a 50-yr timeframe doesn't appeal to me either.
If your time period is 60 years, 19% = 1 - ~81% seems consistent with the chart, does it not?edited to add: look at that top left corner. An inflation adjusted 3% SWR has never failed, in the history of the US stock market. Never.The withdrawal rate in question was 4%. cFiresim is telling me 19% failure rate - what am I doing wrong. Don't you just have to change one number.
But there seems to be more folks on the cusp of ER / ERE, just not yet a critical mass / tipping point. Maybe in 5 - 10 years? These are interesting times, whether we are creating the wave or just riding it...
I think it will become less likely. If more and more people need to direct some of their paycheck to a 401k and fail to do so sufficiently, the acronym will stand for
Financially Inadequate, Retirement Eliminated.
I think the main thing that will stop FIRE becoming significantly more common, is the simple and age-old fact of life that most people aren't able/willing to delay gratification to such a degree as to enable FIRE or anything close to it. This is the same thing that keeps our economy chugging along at its current rate though I suppose, so I probably shouldn't complain too much.
Micro analysing cape or P/E ratios or historical data to try and figure out the specific reason why portfolios fail or trying to get to a ridiculously low WR (unless you are working because you love it) all miss the point that we have imperfect information because we are to a degree trying to predict the future.
Is the 4% rule immune from this criticism? People have argued that the US market has also changed over time. Therefore isn't trying to predict the adequacy of future withdrawal rates merely another flawed attempt to predict the future usinh imperfect information?
Look at the big picture. Every year you keep working, you have sacrificed a significant fraction of healthy, active retirement.
Micro analysing cape or P/E ratios or historical data to try and figure out the specific reason why portfolios fail or trying to get to a ridiculously low WR (unless you are working because you love it) all miss the point that we have imperfect information because we are to a degree trying to predict the future.
I wasn't trying to figure out a reason why portfolios fail or trying to get to a ridiculously low WR.
My whole point was that I think that the composition of one's portfolio should shift in response to high P/E ratios (or high P/B ratios).
If you're retired on a 4% withdrawal rate and the market drops 30%, you probably adjust your strategy - you consider living on less for awhile, or possible pick up some side income.
I think you should look at the composition of your portfolio similarly. You look at the 21.5 P/E and 3.0 P/B ratios on the US stocks and the 16.6 P/E and 1.6 P/B ratios on the non-US stocks and maybe think Hmmm historical data tells me non-US should perform better going forward until this imbalance equalizes, let me sell of some of my VOO and pick up a bit more of this VEU just to be safe.
Um... isn't that just portfolio balancing? I have 50% VTI/VOO, 30% VEU, 20% BND.... so if US stocks tank i'll necessarily be buying more of them when I re-balance (same with x-US and bonds).Quibble: you're not going to receive average market returns over the long run because you don't own the market - you're biased towards US stocks. Is that a market-timing call?
I'll be doing what you're saying automatically.
If you're saying i should change the weightage based on market conditions then I think you can fool yourself into thinking you can time the market which is dangerous and why investors don't achieve average market returns over the long run.
Um... isn't that just portfolio balancing? I have 50% VTI/VOO, 30% VEU, 20% BND.... so if US stocks tank i'll necessarily be buying more of them when I re-balance (same with x-US and bonds).Quibble: you're not going to receive average market returns over the long run because you don't own the market - you're biased towards US stocks. Is that a market-timing call?
I'll be doing what you're saying automatically.
If you're saying i should change the weightage based on market conditions then I think you can fool yourself into thinking you can time the market which is dangerous and why investors don't achieve average market returns over the long run.
Runewell, you like the idea that things like CAPE and other measures can predict the future. They cannot. But as long as you feel like they can, you'll continue to hold on to it as a means to have some level of control over the future.
If you're going to index, at some point you'll have to accept that the market is gonna do what it's gonna do, and the only rational response is to just let it ride (ie, buy and hold). Then o8nce a year, re-balance your portfolio so you maintain your 80/20 (or 60/40 or whatever) stocks/bonds ratio.
Vanguard disagrees with you, saying on page 2 of https://personal.vanguard.com/pdf/s338.pdfQuoteWe confirm that valuation metrics such as price/earnings ratios, or P/Es, have had an inverse or mean-reverting relationship with future stock market returns, although it
has only been meaningful at long horizons and, even then, P/E ratios have “explained” only about 40% of the time variation in net-of-inflation returns. Our results are similar whether or not trailing earnings are smoothed or cyclically adjusted (as is done in Robert Shiller’s popular P/E10 ratio).
They say that: historically higher P/E's (and CAPEs) have result in lower returns going forward.
I also have no reason to believe that the selection of a portfolio at one point in time precludes making adjustments later.
So let's get this straight:
You don't own the market, stock portion of your portfolio is overweighted US and you have 20% bonds.
Do you rebalance? Isn't that market timing too? If having a certain allocation is important, why don't you reallocate more often then you do? If you only rebalance as often as you do, do you think you have some special information on how often to rebalance?
I don't care who says it - it's wrong to listen to it and it's even more wrong to act on it. Vanguard doesn't know. Buffet doesn't know, runewell doesn't know. No one knows, that's the point. That's why you create your asset allocation and your investment plan and you stick with it.
So let's get this straight:
You don't own the market, stock portion of your portfolio is overweighted US and you have 20% bonds.
Do you rebalance? Isn't that market timing too? If having a certain allocation is important, why don't you reallocate more often then you do? If you only rebalance as often as you do, do you think you have some special information on how often to rebalance?
I think you should look at the composition of your portfolio similarly. You look at the 21.5 P/E and 3.0 P/B ratios on the US stocks and the 16.6 P/E and 1.6 P/B ratios on the non-US stocks and maybe think Hmmm historical data tells me non-US should perform better going forward until this imbalance equalizes, let me sell of some of my VOO and pick up a bit more of this VEU just to be safe.
Yeah, i'm also not going to achieve it due to bonds :(Yeah. I was just ribbing a little.
I don't really have a good reason for doing the 5:3 ratio between US and international. I just started off with that since I wanted to get started and read about it on bogleheads and don't want to change now. There is a good argument to be made that it should be half-half since the US represents about half of the global market.
It's not timing because i'm not changing it based on anything that happens... i set it and that's it. Timing implies I will change the ratio based on the events of the day... I will not.
If it brings you joy to save 20x your expenses and retire, do it.
It is good to have at least a 3/4 chance.
If it brings you joy to save even more and retire, I'd say you saved a lot, good for you, no harm done and it's your life.
I'd say there could be plenty of damage done by over saving that people either ignore or is long-term enough they don't appreciate until it's too late...health and relationship damage would be two examples. ..
My whole point was that I think that the composition of one's portfolio should shift in response to high P/E ratios (or high P/B ratios).
If you like that sort of thing and are wondering about safe withdrawal rates, you might be interested in some of the stuff Kitces previously looked at Resolving the Paradox – Is the Safe Withdrawal Rate Sometimes Too Safe? (https://www.kitces.com/wp-content/uploads/2014/11/Kitces-Report-May-2008.pdf). He looks at adjusting withdrawal rate based on valuations.
While I like CAPE because it's really the only measure shown to have any predictive value at all.
I liked this article, it was very much along the lines of what I was thinking. Safe withdrawal rates and portfolio longevity can be enhanced with a system of rules that recognizes that less equity exposure is ideal during higher P/E periods. It is exactly the sort of mindset I was thinking about all along. My portfolio was probably 85% US stocks until I lowered it to 75% just recently, and I could possibly get it down into the 60's eventually here. If balancing your portfolio based on P/Es is wise during retirement, it's probably wise before retirement as well.
Thanks so much for posting it.
I agree that the 4% rule will probably work throughout retirement. But let's say I'm just really fiscally conservative, and had the ability to vary my discretionary spending 3-4% to maximize the chances that my investments will last (and that I'll have something to leave to my kids). I'd rather not just spend 3% all the time. But, do I spend 4% when the market is good and 3% when it isn't? Should I be contrarian and do the opposite? Or should I do something more complicated like try to anticipate using a market indicator or several?Perhaps consider Variable Percentage Withdrawal (VPW) - Bogleheads.org (https://www.bogleheads.org/forum/viewtopic.php?f=10&t=120430).
I agree that the 4% rule will probably work throughout retirement. But let's say I'm just really fiscally conservative, and had the ability to vary my discretionary spending 3-4% to maximize the chances that my investments will last (and that I'll have something to leave to my kids). I'd rather not just spend 3% all the time. But, do I spend 4% when the market is good and 3% when it isn't? Should I be contrarian and do the opposite? Or should I do something more complicated like try to anticipate using a market indicator or several?
networth is above your starting point and 3.3% of your starting portfolio balance when your network is below your starting balance you wouldn't run out of money in any historical retirement window using retirement lengths from 20 years to 100 years.
https://forum.mrmoneymustache.com/investor-alley/the-4-rule-for-those-in-their-mid-20's-completely-unrealistic/msg1368531/#msg1368531
Theoretically the amount of net worth you need every year is less than the year before, since your expected life expectancy is lower. Even though it is hard to tell what your net worth goal line should look like, you could probably squeeze out a few more tenths of withdrawal if you had some such adjustment. I don't know exactly what this would look like though.
networth is above your starting point and 3.3% of your starting portfolio balance when your network is below your starting balance you wouldn't run out of money in any historical retirement window using retirement lengths from 20 years to 100 years.
https://forum.mrmoneymustache.com/investor-alley/the-4-rule-for-those-in-their-mid-20's-completely-unrealistic/msg1368531/#msg1368531
Theoretically the amount of net worth you need every year is less than the year before, since your expected life expectancy is lower. Even though it is hard to tell what your net worth goal line should look like, you could probably squeeze out a few more tenths of withdrawal if you had some such adjustment. I don't know exactly what this would look like though.
Yup, that's the idea behind the death and bankruptcy graphs from further upthread.
(https://raw.githubusercontent.com/maizeman/dead_broke/master/DAB_graphs/Example_Output.png)
If you read up on the variable percentage withdrawal method (link (https://www.bogleheads.org/wiki/Variable_percentage_withdrawal)), they're also using actuarial data to increase your withdrawal rate by spending more and more of your portfolio each year the expected number of years you have left in your life decreases.
I posted the source code I used to rule the calculations in make the charts in my signature, but I don't know if anyone else has gotten it working or not (if not it says more about my poor documentation than anything else), so I ran some of the scenarios you mentioned myself. If you feel up to getting the code working, I've added in the option to experiment with different percentages of your portfolio allocated to stocks, bonds, and cash.
5% WR, starting at age 45.
(https://i.imgpile.com/nRsJwk.png[/imgg][/url]
Risk of bankruptcy before death was 15.5%
4% WR, starting at age 50.
[url=https://imgpile.com/i/nRsPsM][img width=600]https://i.imgpile.com/nRsPsM.png) (https://imgpile.com/i/nRsJwk)
Risk of bankruptcy before death was 2.4%.
At that point there's already basically no visible red left, but if I raised the starting age to 55 and kept the WR at 4% the risk of bankruptcy before death dropped to 1.6%
1: This isn't an active vs. passive investing thread.It also isn't a thread where someone unilaterally decides whether it's an active vs passive investing thread.
1: This isn't an active vs. passive investing thread.It also isn't a thread where someone unilaterally decides whether it's an active vs passive investing thread.
Well, I could try to get everyone to talk about golf, or investing in gold, or GOT, or post endless cute cat pictures, but that would presumably annoy the people who are trying to discuss/learn about the 4% rule, right? Which is based on *market returns* rather than beating/not beating said returns via clever/lucky/disastrous investing. If I go to Vegas every year and turn my remaining $1000 of savings into a million bucks at the slot machines, I don't start talking about how the 4% rule doesn't apply to me.
Because that would be stupid, since I'm talking about something irrelevant to the discussion.
-W
I'm not advocating gambling. I'm advocating that we not pretend that the market, at high as it is right now, will actually realize the historical market returns that the 4% rule blindly assumes.
I'm advocating that we not pretend that the market, at high as it is right now, will actually realize the historical market returns that the 4% rule blindly assumes.
I don't think that's true, that we're in for lower returns. But even if it were, what is you alternative? 3%, 2%? Never retire?Have you considered there might be numbers between 3% and 4%?
And that the safe withdrawal rate might change over time?
I don't think that's true, that we're in for lower returns. But even if it were, what is you alternative? 3%, 2%? Never retire?Have you considered there might be numbers between 3% and 4%?
And that the safe withdrawal rate might change over time?
Have you considered reading the rest of this thread, where these very ideas have been discussed already?
On top of that, runewell, what is your actual position assuming the goal of retiring early and/or having financial independence?
You think the 4% rule isn't sufficient. So, what is your position? How are you going about achieving FIRE?
If you're not interested in FIRE or think it cannot be achieved then I agree with Sol that you've come to the wrong place.
I'm here to stay, and there's no way you're going to bully me to leave.
I think diversity of opinion is important, and if you disagree than I guess I look forward to irritating you.
You are quite arrogant, aren't you?
I'm definitely not furious. Ok cool, your opinion has been stated many many times. Now what? What do we do with that opinion?
On top of that, runewell, what is your actual position assuming the goal of retiring early and/or having financial independence?
You think the 4% rule isn't sufficient. So, what is your position? How are you going about achieving FIRE?
If you're not interested in FIRE or think it cannot be achieved then I agree with Sol that you've come to the wrong place.
I currently have about 10x-15x of expenses saved up. If I wanted to aggressively retire early and scrape by, I could probably do that in 6-10 years.
But, I might prefer to provide more to my kids and to charity, so I probably won't retire for 13-20 years.
It's pointless to narrow these ranges down until the ideal date approaches since there are so many unknowns.
I think that IF you use the 4% study as a STARTING POINT, you should be more pessimistic since current market valuations and higher than historical, that's all. I can't understand why that statement generates so much fury.
I currently have about 10x-15x of expenses saved up. If I wanted to aggressively retire early and scrape by, I could probably do that in 6-10 years.I should also point out that if you are at least 10 years away from retirement, as you state, then things like CAPE are irrelevant to you. During accumulation you shouldn't care one way or another about any of that - just keep socking money away and see where things stand as you get closer to you end point. Seriously, I thought you were are lot closer to FIRE. Most of your posts are sort of pointless in view of your time horizon.
But, I might prefer to provide more to my kids and to charity, so I probably won't retire for 13-20 years.
It's pointless to narrow these ranges down until the ideal date approaches since there are so many unknowns.
Sigh. Yes all history backs up the idea that the 4% rule is safe.
The Trinity Study itself shows that the 4% rule is not completely safe.QuoteLike I said in a previous post, you're main problem is fear. CAPE is just an excuse to indulge that fear. If it wasn't CAPE, it'd be some other measure that allows you to wrap your emotional reasoning within the illusion of logic.
Actually I think it is you that is afraid. Fear that modern research will debunk the 4% rule and threaten early retirement.
Sigh. Yes all history backs up the idea that the 4% rule is safe.
The Trinity Study itself shows that the 4% rule is not completely safe.QuoteLike I said in a previous post, you're main problem is fear. CAPE is just an excuse to indulge that fear. If it wasn't CAPE, it'd be some other measure that allows you to wrap your emotional reasoning within the illusion of logic.
Actually I think it is you that is afraid. Fear that modern research will debunk the 4% rule and threaten early retirement.
Nothing is completely safe, ever. The 4% rule fails about 5% of the time. Which means it has a 95% success rate. That's an overwhelming success rate. But even then, there's more you can do to bolster it, such as flexible spending in retirement, etc...
I didn't start seriously saving until a few years ago, so I might RE but not by much :)
And re: modern research. Riddle me this, Batman. Why is it that "modern research" ALWAYS weights toward things being worse in the future than in the past? I've never, ever seen any analysis that says "Hey, the future is different than the past, and it's BETTER! Hello 6% withdrawal".
No, the research is always doom and gloom. "The future is different from the past, and it's WORSE. Hello 3% (or 2%) withdrawal." It'd be funny if it weren't so tragic.
You can't sell "well things are probably going to be just fine". :)
You can't sell "well things are probably going to be just fine". :)
Sure you can!
http://www.billboard.com/artist/294987/bobby-mcferrin/chart?sort=timeon&f=379
26 weeks on the Billboard charts.
I still think you're an ignorant troll, but I admire your perseverance. Maybe if you stick around long enough, you'll actually read this thread and learn something.
Maybe I have read the entire thread and still believe that I have something meaningful to contribute. Besides, I can't remember everything that has been said on this forum.
Actually I think it is you that is afraid. Fear that modern research will debunk the 4% rule and threaten early retirement.
Maybe a vocal advocate for the 4% rule ran over your dog
.... big snip.....
. Maybe a vocal advocate for the 4% rule ran over your dog, or stole your spouse, or something.
.....snip....
over the last 72 years the only time this metric was higher was 1965-1972 and 1997-2001 and both those periods went on to experience lower than average market returns.
runewell, your stance is basically to trot out a figure (CAPE) that may or may not predict the future, use it to say "the future will be much, much worse than the past" and then say "prove that it won't". It's not up to us to prove that it won't. It's up to you to prove that it will. Correlation and speculation aren't proof. Till you have something substantive to add, I'm done with you.
And no, you don't 'win' because I stopped engaging with you.
You didn't stop engaging, otherwise you wouldn't have written this.
The 4% rule doesn't prove anything either. It also tries to guess at what future returns are. If you can't admit the CAPE, you can't have the 4% rule either.
OK fine, I'll respond. 4% rule says the future won't be worse than the worst times in the history of the stock market.
Prove it.
OK fine, I'll respond. 4% rule says the future won't be worse than the worst times in the history of the stock market.
Prove it.
If your horizon is instead 40-50 years Now you need a 2.0%-2.5% SWR.
4% rule says the future won't be worse than the worst times in the history of the stock market.
This is indeed a weakness of the 4% rule, it is possible that worse 30-yr stock market outcomes might occur.
A problem with the 4% rule is that it also says that the distribution of future 30-yr sequences will match the distribution of 30-yr sequences from the last 100-or-so years. With no account for whether the market is priced low or high when the person retires.
I think that the ideal starting SWR could be anywhere between 3.25%-4.75% depending on a multitude of factors, many of which I can't know about until retirement is closer.
I think that the ideal starting SWR could be anywhere between 3.25%-4.75%
I said something along these lines several pages ago to you. These are things you don't even have to begin to worry about until you are much closer to retirement.
I also said, many, many times - if you're more comfortable with 3.5 (or 3.25) then go for it. No one is stopping you.
Good. I have a spreadsheet at home that forecasts my investments. It assumes a 6% return until I retire and a 4% SWR. If I wait until 60, I will probably have $2M.
But, 6% is probably not likely in the next ten years. The % of equity allocation graph I showed earlier predicts 4%, and the CAPE method predicts even less (although if we go with the fact that CAPE might be a bit exaggerated, it might get closer to 4%).
If I go on assuming 6% forever, that might be too optimistic. I think things will be fine, and then returns sputter between 2017-2025 and now my retirement is delayed. Maybe it's better to plug in 4% and assume a lesser, later retirement until market conditions tell me otherwise.
This isn't stuff that needs to be ignored until six months before retirement.
Willingness to change one's own mind when presented with appropriate information is a good thing. Refusal to consider changing one's own mind, regardless of information, is not a good thing - agreed?runewell,I don't understand why you want to change my mind.
I ask again, what would it take to change your mind on this topic?
Not trying to eliminate your suggestions, just trying to understand them.Another way of stating this is "There is no point in making hypotheses that are not falsifiable, because such hypotheses do not say anything (http://pages.cs.wisc.edu/~markhill/science64_strong_inference.pdf)."
What is your hypothesis, and what information would falsify it?
Maybe you guys could weigh in on my suggestions before eliminating them. Up to this point nobody has made it clear that they even comprehend my point, which is probably why they are being ignored. Everyone keeps on saying "The 4% rule accounts for it" but they don't even know what it is.
So your premise is in fact that we are in overvalued territory therefore you may only compare potential success against other overvalued historical times.Quote
Yes. How overvalued we are now vs then is a tricky question.QuoteOkay, how do you come to the conclusion that we are in overvalued territory? Is it using CAPE? Just other people's say so?
CAPE and normal P/E are one metric, P/B is another. % of total equity allocation is another. There are problem plenty others out there I haven't looked for yet. but go up a few posts where I enumerated some concerns and start there.
If you are able to find a government backed inflation linked bond with a 0% real return, a 4% WR gets you 25 years, by definition. As it happens, you can go out right now and buy US treasury 30-year TIPs which give a real return of 0.98% and that will let you have a withdrawal rate of 4% for 30 years in absolute safety. You don't need to worry about CAPE or stock market volatility or any of that. Not for me - but it shows how very conservative a 4% WR over 30 years actually is.But how do you know you need exactly 30 years? You don't.
If you live the MMM dream and retire at 40, your life expectancy is about 40 years. That's just the mean, you could very well outlive that. If the retirement period were a set amount of years I would agree with you and we wouldn't have a thread named Stop worrying about the 4% rule. If your horizon is instead 40-50 years Now you need a 2.0%-2.5% SWR. Or equities and volatility.
4% rule says the future won't be worse than the worst times in the history of the stock market.
This is indeed a weakness of the 4% rule, it is possible that worse 30-yr stock market outcomes might occur.
A problem with the 4% rule is that it also says that the distribution of future 30-yr sequences will match the distribution of 30-yr sequences from the last 100-or-so years. With no account for whether the market is priced low or high when the person retires.
runewell,
I ask again, what would it take to change your mind on this topic?
I don't understand why you want to change my mind.
People can do whatever they want. But to advocate the 4% rule to the public that isn't likely to think through its assumptions, weaknesses, and strengths, is to potentially provide inaccurate retirement advice to everyone on this board. ... But I think people should admit that the market is more expensive and that the rosy 95% success rate from the Trinity study could very well be lower once we factor in these other findings.
runewell,
I ask again, what would it take to change your mind on this topic?
I don't understand why you want to change my mind.
I guess I'll have to create a post that outlines all the problems with the 4% rule and post it over and over again unless someone can address my ideas intelligently.
Maybe you guys could weigh in on my suggestions before eliminating them. Up to this point nobody has made it clear that they even comprehend my point, which is probably why they are being ignored. Everyone keeps on saying "The 4% rule accounts for it" but they don't even know what it is.
No we have that data, the 4% rule takes it into account. The historical events when the market was overvalued occurred and the 4% rule prevailed. So again, what is different today?
The 4% rule failed 5% of the time across all time periods for a particular set of criteria.
Now remove the time periods where the market started out undervalued or fairly valued. Same number of failures, less years, higher failure rate.
The concern of Runewell seems to be that with the US stock market at a high valuation, and it is, sequence of returns or simply low long-term investment returns make FIREing now riskier than in the past. OK.
It’s hard to make the case that long term returns on stocks will be less than about 4% real. Bonds, yes. Bond returns will be low for many years, no doubt. For those who can accept the volatility of a mainly stock portfolio, 4% should be OK. Add in social security and a bit of part-time work and we are golden.
There is another risk, though, one that I think could cause many FIRE-failures in the USA. It’s expense inflation due to healthcare costs. Health care costs for the early retiree not covered by group insurance and without government subsidy will continue to rise faster than CPI inflation. It is a given. As we age health care costs increase faster than CPI. I think this expense inflation has to be built into our FIRE plan.
That is why people say don't worry about the 4% rule, not because they blindly follow it, but because they understand the risks and mitigate.
Maybe the people in this thread understand the risks and mitigate - maybe. But I think that's giving people in general a bit more credit than they deserve.
It's also a bit of a cop-out answer if I'm honest, but I'm not trying to give you crap here.
This line of thought basically says that I have decided I am going to take 4% and will assume the risk of failure with reduced expenses and golden age employment. When the market is expensive, theoretically this risk goes up, but it is a challenge to quantify it.
Let's say the risk of failure at 4% SWR is 5%. Once you adjust the 4% experiment for the pricey-market-lower-return hypothesis, the failure rate should go up. Theoretically the SWR should back off to 3.75% or 3.9% or some number to get back to a 5% failure rate. Without quantifying the risk of failure I really don't think this line of thinking deserves to be attached the 4% rule since the Trinity study which never said anything about going back to work. In fact that study recognizes the risk of inflation and advises people to back off the SWR to add a margin of safety.
I think that you may be trying to sound an alarm that many people here actually acknowledge and understand and have mitigated or have plans to mitigate in some shape or form.
If I hit my number tomorrow even with CAPE and the possibility of low returns for the next 10-15 years I'd still pull the trigger on my plan because I've intentionally designed it to be robust enough and to contain enough contingencies to deal with failure modes. Some of it is the 4% rule, some of it is knowing how to cut expenses, some of it is knowing how to generate income if I need to...etc.
That is why people say don't worry about the 4% rule, not because they blindly follow it, but because they understand the risks and mitigate.
Actually the paper for the 4% rule says that if inflation is a concern, you should reduce your SWR to provide a margin of safety, so it is very much related to the 4% rule.Yes, indeed it is.
There is another risk, though, one that I think could cause many FIRE-failures in the USA. Its expense inflation due to healthcare costs.
I think this (and any other expense inflation) is a more real risk to FIRE - but it doesn't affect the 4% rule.
Actually the paper for the 4% rule says that if inflation is a concern, you should reduce your SWR to provide a margin of safety, so it is very much related to the 4% rule.
Alternatively if you think that healthcare costs start out $5,000 but will go up twice as fast as other expenses, it might be necesasry to estimate the average present value of all future healthcare costs. You might have to budget for $8,000 or $10,000 in the first year even though it's too much to provide for the later years when it's not enough. This is going to increase your expenses and with a 25x multiplier it's going to impact your target amount.
The 4% rule takes general inflation into account, not specific inflation such as health care or lifestyle inflation. One's individual inflation can vary dramatically +/- to general inflation. Health care is a biggie and yes if you expect HC to be 25% of your costs and that is going to grow 5% faster then inflation then you would have to lower your WR % to account for this.
So if the CAPE today is 21+ and history tells us we should expect a 5.4%/yr return for the next ten years, we might severely understate the failure rate when we use a simulator that uses all historical return sequences and thereby gives the portfolio a 10.1%/yr average return for the next ten years.
Since it is impossible to know what will happen over the next 10 years, it becomes difficult to come to conclusions about 30-yr periods. I think it would be better to simulate underperformance for the next ten years followed by a 20 years of historical returns.
So if the CAPE today is 21+ and history tells us we should expect a 5.4%/yr return for the next ten years, we might severely understate the failure rate when we use a simulator that uses all historical return sequences and thereby gives the portfolio a 10.1%/yr average return for the next ten years.
Stop right there.
We've been over this, ad nauseum. You are using something with a variable definition as your standard. CAPE today is overstated compared to CAPE in any of the failure years.
Yes. It's like switching from C to F in how you report temperatures and complaining that it's far hotter since the change. ;)
Including dividends, I make out the average S&P return to be about 10.1%/yr historically.
The four failure years had a CAPE of 21+.
Historically years with CAPEs under 21 would experience an average return of 11.1%/yr for the following ten years.
But for years with CAPEs over 21 the average return would only be 5.4%/yr for the following ten years.
So if the CAPE today is 21+ and history tells us we should expect a 5.4%/yr return for the next ten years, we might severely understate the failure rate when we use a simulator that uses all historical return sequences and thereby gives the portfolio a 10.1%/yr average return for the next ten years.
Since it is impossible to know what will happen over the next 10 years, it becomes difficult to come to conclusions about 30-yr periods. I think it would be better to simulate underperformance for the next ten years followed by a 20 years of historical returns.
We do know that a good target to get to is 25 times your spending. I also think that if you want to reach a higher target because you are risk averse then that is a personal decision and it's all good.
--snip--
We just simply don't know if now is a bad time to retire or not on the 4% rule. We do know that a good target to get to is 25 times your spending. I also think that if you want to reach a higher target because you are risk averse then that is a personal decision and it's all good. There is no need though to try and state that this is one of the years where the 4% rule will fail. You can't know that.
We do know that a good target to get to is 25 times your spending. I also think that if you want to reach a higher target because you are risk averse then that is a personal decision and it's all good.
I just want to point out that mitigating potential risks to the 4%WR rule does not automatically mean saving more money. I don't disagree with your point overall, but we should acknowledge that more money isn't the only or even a good solution to the risks facing an aspiring FIREer.
"I refuse to read this thread, and I revel in the attention I get by making people repeat answers already contained here because it makes me feel special to get a personal response instead of learning from the content already available to me if I wasn't too stubborn to go back and read it?"
I'll go with "Hey, I'm gonna be an asshole and refuse to actually read the whole thread or really do anything except repeating my pet theory ad nauseum"
For everyone, there is a block user feature if people drive you to frustration. Normally I'd say let it run, but this is a stickied thread that should be useful and it's now several pages full of bickering.
When you consider the length of time most folks would have to work longer to go from 95% to 100%, for the gain of changing one or two historical 30-year periods from a failure to a success, it gets ugly. The opportunity cost is enormous.
For everyone, there is a block user feature if people drive you to frustration. Normally I'd say let it run, but this is a stickied thread that should be useful and it's now several pages full of bickering.
I'd like to do that, but I can't find the option on this forum. Are you maybe thinking of another forum (which I hesitate to name to help ensure that it does not similarly become afflicted)?
For everyone, there is a block user feature if people drive you to frustration. Normally I'd say let it run, but this is a stickied thread that should be useful and it's now several pages full of bickering.
I'd like to do that, but I can't find the option on this forum. Are you maybe thinking of another forum (which I hesitate to name to help ensure that it does not similarly become afflicted)?
Click on your profile, then hover over the "modify profile" button, then move down to the last option "buddies/ignore list." I finally had to do this with one user and my experience on the forums improved significantly.
Its important to remember, even a WR of 6% on average succeeds. So at what point below 6% does a WR become a SWR? Its hard to say, but one would be a fool to not realize that a WR selected by an investor should consider, retirement duration, other income, pensions, social security, market conditions, expense flexibility along with a host of other variable.
For everyone, there is a block user feature if people drive you to frustration. Normally I'd say let it run, but this is a stickied thread that should be useful and it's now several pages full of bickering.
I'd like to do that, but I can't find the option on this forum. Are you maybe thinking of another forum (which I hesitate to name to help ensure that it does not similarly become afflicted)?
Click on your profile, then hover over the "modify profile" button, then move down to the last option "buddies/ignore list." I finally had to do this with one user and my experience on the forums improved significantly.
Thanks!!
My questions whether the 4% withdrawal rate is truly 95% safe as people assume.Those two sentences don't logically make sense together. You're asking if something truly succeeds 95% of the time when one thinks he might be looking at a scenario that falls within the 5% where it fails. The percentage is market agnostic, and doesn't care what the CAPE or any other metric is. 95% is 95%.
It very well could be, especially starting out with a market that is average or below-average price, I would guess that it is.
Exactly my previous point. In order for someone to state that the 95% rule is no longer valid they have to be assuming that the future will be worse than the past. Where that assumption comes from? It seems to be from CAPE which is not 100% predictive. So even if there is other evidence or crystal ball utilization going on here that we're unaware of, the 4% SWR still stands at 95% regardless of where the current market stands as it is a backwards looking conclusion.
If you're not comfortable with it then feel free to sacrifice your time to shore up your certainty. I see a rather brighter future regardless of immediate data points that don't fully predict future events and may or may not point in a positive direction.
I don't think you understand the 4% rule and the analysis surrounding it. If we forecast that the next 10 years will have average returns compared to the last 146 years, than we have a 95% chance of success with a WR of 4%. If we predict they will below average (not below any historical time period) then you have less than a 95% chance of success. In the extreme, if you knew the great depression would start in the next year you would have a 0% chance of success using the 4% rule.
You don't have to predict worse than historical results to have the 4% rule fail because it failed in 5% of historical time periods.
Now the common response would be that no one knows the future, which is correct. But we all make forecasts of the future in our plans. Do you think you have a 95% chance of success using a 4% WR starting today? That would assume that the next 10 years or so have the same returns as the average of the last 146 years. Do you have a crystal ball? Why will the returns over the next 10 years not be the average of the last 30 years, average of the last 200 years, better than the average of the last 146 years, or etc?
We all make forecasts about the future in our planning for FIRE, however, some people on this forum realize they are making them, that they are uncertain, and act accordingly.
Exactly my previous point. In order for someone to state that the 95% rule is no longer valid they have to be assuming that the future will be worse than the past. Where that assumption comes from? It seems to be from CAPE which is not 100% predictive. So even if there is other evidence or crystal ball utilization going on here that we're unaware of, the 4% SWR still stands at 95% regardless of where the current market stands as it is a backwards looking conclusion.
If you're not comfortable with it then feel free to sacrifice your time to shore up your certainty. I see a rather brighter future regardless of immediate data points that don't fully predict future events and may or may not point in a positive direction.
I don't think you understand the 4% rule and the analysis surrounding it. If we forecast that the next 10 years will have average returns compared to the last 146 years, than we have a 95% chance of success with a WR of 4%. If we predict they will below average (not below any historical time period) then you have less than a 95% chance of success. In the extreme, if you knew the great depression would start in the next year you would have a 0% chance of success using the 4% rule.
You don't have to predict worse than historical results to have the 4% rule fail because it failed in 5% of historical time periods.
Now the common response would be that no one knows the future, which is correct. But we all make forecasts of the future in our plans. Do you think you have a 95% chance of success using a 4% WR starting today? That would assume that the next 10 years or so have the same returns as the average of the last 146 years. Do you have a crystal ball? Why will the returns over the next 10 years not be the average of the last 30 years, average of the last 200 years, better than the average of the last 146 years, or etc?
We all make forecasts about the future in our planning for FIRE, however, some people on this forum realize they are making them, that they are uncertain, and act accordingly.
No I understand it just fine. You're just twisting it to make a future statement. I'm stating that I will use it to make a rough assumption about the future and will proceed to shore up risks where I see them and using different methods to do so. That is not saying the 4% SWR is going to be successful in the future, again this is all about building resiliency in FIRE not about assuming a historical analysis for future returns. View it more as a springboard and less as something you have to solve or disprove. There is nothing to solve or disprove with the 4% SWR. It is factually correct today and will be tomorrow. We'll see about what it is in 10-15 years but won't know until that happens.
Yes I do think I have a 95% chance of success using 4% today, solely because I think the next 50 years may actually be better than the last 100. Just in case though I keep a few contingency plans and a few mitigating factors to increase those odds. Some people are looking for guarantees where there are none. I'm going to FIRE on probably a greater than 4% solely because of that.
Yes I do think I have a 95% chance of success using 4% today, solely because I think the next 50 years may actually be better than the last 100.Exactly my previous point. In order for someone to state that the 95% rule is no longer valid they have to be assuming that the future will be worse than the past. Where that assumption comes from? It seems to be from CAPE which is not 100% predictive. So even if there is other evidence or crystal ball utilization going on here that we're unaware of, the 4% SWR still stands at 95% regardless of where the current market stands as it is a backwards looking conclusion.
If you're not comfortable with it then feel free to sacrifice your time to shore up your certainty. I see a rather brighter future regardless of immediate data points that don't fully predict future events and may or may not point in a positive direction.
I don't think you understand the 4% rule and the analysis surrounding it. If we forecast that the next 10 years will have average returns compared to the last 146 years, than we have a 95% chance of success with a WR of 4%. If we predict they will below average (not below any historical time period) then you have less than a 95% chance of success. In the extreme, if you knew the great depression would start in the next year you would have a 0% chance of success using the 4% rule.
You don't have to predict worse than historical results to have the 4% rule fail because it failed in 5% of historical time periods.
Now the common response would be that no one knows the future, which is correct. But we all make forecasts of the future in our plans. Do you think you have a 95% chance of success using a 4% WR starting today? That would assume that the next 10 years or so have the same returns as the average of the last 146 years. Do you have a crystal ball? Why will the returns over the next 10 years not be the average of the last 30 years, average of the last 200 years, better than the average of the last 146 years, or etc?
We all make forecasts about the future in our planning for FIRE, however, some people on this forum realize they are making them, that they are uncertain, and act accordingly.
You do realize this is logically inconsistent. In the same breath you estimate your odds going forward assuming the next 10 years has an equally weighted chance as mimicking any 10 year period during the last 100 years but then say you think that the next 50 years will be better than the last 100.
For portfolio success, you should be focused on the first 10 years of draw down not the first 50.
PS: Over the last 100 years (30 cycles starting in 1917 and ending in 2016) the historical success rate was only 91.67% per cfiresim.
runewell, what is your suggestion and why?Here is the issue. Some people don't actually appear to understand what the Trinity study is and how to utilise it. It's not about micromanaging all the potential scenarios where the 4% rule failed to try and make it more robust.
It's about using it as a guide and stating that we don't know exactly what the future will hold.
Since we don't know what the future will hold and the conditions today are very different from the conditions for the last 150 years, why do we have any reason to think that the 4% rule will work at all?
runewell, what is your suggestion and why?No particular suggestion, just saying that if we can't predict the future, why do we have any reason to believe the 4% rule will work at all.
No particular suggestion, just saying that if we can't predict the future, why do we have any reason to believe the 4% rule will work at all.
Since we don't know what the future will hold and the conditions today are very different from the conditions for the last 150 years, why do we have any reason to think that the 4% rule will work at all?
Ok, thanks, that makes things clearer.runewell, what is your suggestion and why?No particular suggestion....
No particular suggestion, just saying that if we can't predict the future, why do we have any reason to believe the 4% rule will work at all.If you believe the present is so far different from the past that we can't use historical data as a guide then you have no data to use, which again leaves you with no recourse but to simply work until you die. If you have no data then we can make anything up. Since the future will be so different than the past, I claim a 2% withdrawal rate isn't good enough. All those ideas you had about your stash? Double them, and then add some for good measure because I made that number up so even it might not be good enough. If you're going to claim that no data is useful you're not really adding anything to the conversation.
My argument is that the 4% rule does not sufficiently take this account the likelihood that future returns will be lower.
Do you really want to advocate for the 4% rule so strongly even though the reason you rely on it is "because we don't have anything better."
A vacuous statement. Do you really want to advocate for the 4% rule so strongly even though the reason you rely on it is "because we don't have anything better."
There is a value calculated by the government quarterly that has a 91% correlation with the ensuing 10-yr returns from 1952-2003. ... That value is 42.05% and corresponds to a future 10-yr return of about 4%.
Since we don't know what the future will hold and the conditions today are very different from the conditions for the last 150 years, why do we have any reason to think that the4% rule(Edit: predictions based on the CAPE ratio, equity allocations, etc) will work at all?
In an attempt to find something that doesn't have the perceived drawbacks of CAPE, what do you all make of this article:
http://www.philosophicaleconomics.com/2013/12/the-single-greatest-predictor-of-future-stock-market-returns/
It's a long article, but the graph at the top sums it up. There is a value calculated by the government quarterly that has a 91% correlation with the ensuing 10-yr returns from 1952-2003.
(http://i1.wp.com/www.philosophicaleconomics.com/wp-content/uploads/2013/12/avginv11.jpg)
You can go here to see the current value: https://fred.stlouisfed.org/graph/?g=qis
That value is 42.05% and corresponds to a future 10-yr return of about 4%.
This looks rather predictive. If you go on clinging to the Trinity study without adjusting for this, then (from EarlyRetirementNow)QuoteLooking at long-term average equity returns to compute safe withdrawal rates might overstate the success probabilities considering that today’s equity valuations are much less attractive than the average during the 1926-current period (Trinity Study) and/or the period going back to 1871 that we use in our SWR study.
Following the Trinity Study too religiously and ignoring equity valuations is a little bit like traveling to Minneapolis, MN and dressing for the average annual temperature. That may work out just fine in April and October when the average temperature is indeed pretty close to that annual average. But if we already know that we’ll visit in January and wear only long sleeves and a light jacket we should be prepared to freeze our butt off. Likewise, be prepared to work with lower withdrawal rates considering that we’re now 7+ years into the post GFC-recovery with pretty lofty equity valuations.
That value is 42.05% and corresponds to a future 10-yr return of about 4%.
Yep, there's a pretty good correlation between the red line and the blue line. Now, if you can just recognize when the red line is at a peak, before it starts to go down, you've got it made!
You don't have to do that even! All you have to do is observe that the expected return for the next 10 years should be much lower than the historical average, putting retirements at risk. It's so easy.
I may very well die from cancer, but there's not much I can do to mitigate that so I don't spend a lot of time worrying about it.
Yep, there's a pretty good correlation between the red line and the blue line. Now, if you can just recognize when the red line is at a peak, before it starts to go down, you've got it made!
You don't have to do that even! All you have to do is observe that the expected return for the next 10 years should be much lower than the historical average, putting retirements at risk. It's so easy.
QuoteRunewell, it appears to me that you're actively arguing with yourself at this point.
I'm talking out of both sides of my mouth. Although the reality is between those two statements, people seem to be singularly focused on the second one. I believe there is SOME predictive value in CAPE and this other number, but not enough to accurately time the market, but enough to take a cautionary view.
The statements about not being able to predict the future at all is what other people on this thread keep saying, so I have to consider that possibility too for their sake, even though I don't agree with it.QuoteThe only common thread through it all is that you really REALLY don't like the 4% rule and don't seem to separate the decades of research and discussion of this general principle from the original paper that kicked things off: "I don't see how you can love the Trinity study from the dark ages..." "If you go on clinging to the Trinity study..."
I actually like the Trinity Study as a starting point in this conversation but I think new research needs to be taken into account. Many people here strongly resist this.
Yes I definitely do and I think a lot of people feel the same way as me. We also understand the 4% rule in some depth. There are so many assumptions underlying the 4% rule that don't make sense in reality that gives you heaps of options when it comes to utilising this rule.
I know that I won't always withdraw 4%. I may withdraw less and sometimes more
Hmmm. I don't think you guys don't actually believe in the 4% rule, but you have created something entirely different that you like to call the 4% rule.
I may very well die from cancer, but there's not much I can do to mitigate that so I don't spend a lot of time worrying about it.
Way off-topic, but seeing as runewell has already wrecked the thread... There's plenty you can do to mitigate cancer risks. Stop smoking, moderate alcohol intake, exercise, eating plenty of vegetables, avoiding too much UV, having a good social life, being richer than those around you, avoiding too much stress - all have well established correlations with lower cancer rates.
I wonder whether it would be possible for the moderators to 'unsticky' this thread, rename it to "arguments about SWR" and create a new sticky thread which contains all the useful, earlier stuff. The content (certain posts, links, maizeman's graphs) has literally changed my life and it would be a shame if future readers couldn't find it as easily.
Runewell, if you feel like everyone else's definition of what the 4% rule is doesn't match with your own, why don't you come up with a new word for the idea that you are arguing against?Runewell has studiously avoided positive statements of his/her own, preferring instead to tell others "you're wrong." Let's wait for runewell to make a concrete proposal....
...
Alternatively if you come up with a new phrase to describe the concept you're arguing against it may be a lot easier for you to convince people that this new concept is a false one, because people will be able to focus only on the concept as you've defined it (with whatever inherent flaws you'd like to put into the concept). You may well counter "why should I change? I think they should change?" The answer to that question depends on whether your goal is first to convince people of your idea, or to prolong your argument as long as possible.
This looks rather predictive. If you go on clinging to the Trinity study without adjusting for this, then (from EarlyRetirementNow)QuoteLooking at long-term average equity returns to compute safe withdrawal rates might overstate the success probabilities considering that today’s equity valuations are much less attractive than the average during the 1926-current period (Trinity Study) and/or the period going back to 1871 that we use in our SWR study.
Following the Trinity Study too religiously and ignoring equity valuations is a little bit like traveling to Minneapolis, MN and dressing for the average annual temperature. That may work out just fine in April and October when the average temperature is indeed pretty close to that annual average. But if we already know that we’ll visit in January and wear only long sleeves and a light jacket we should be prepared to freeze our butt off. Likewise, be prepared to work with lower withdrawal rates considering that we’re now 7+ years into the post GFC-recovery with pretty lofty equity valuations.
Once [the current argument] comes to an end, we can repost a lot of the good stuff, or create a new index to this thread for newbies to find those important posts, or get the mods to swap out this thread for new pinned one (although that'd be my last choice just because this thread contains a lot of important contributions from awesome forum members who are no longer active).
I don't know anyone who would robotically WR 4%/yr + inflation during retirement partially due to the fact that expenses are not smooth year to year [ie. you don't replace a car or a roof annually] and partially because in the teeth of a crash it's hard not to reduce optional spending [ie. travel] and if your portfolio value doubles it will be easier to treat yourself to a luxury [ie. international travel].
If I run a cFIREsim simulation with default values except [0.1% drag and 90/10 stock bonds] I get:
- $40K/yr = 96.6% success
- $38K-$50K/yr = 99.1% success
- if I add in some likely gov't retirement benefits I am at 100%
It doesn't take much flexibility [either through spending reduction or easy PT work] to push your historical success rates close to 100%.
Beyond that I would worry far more about stuff like your mental/physical health and your relationships than thinking about money. I can imagine many futures where more money won't be the key to success so having a plan that balances money against non-financial success factors is key in my mind.
I'm also solidly in the camp that thinks the future will not be worse than the past and I worry about having worked too long not about having saved too little.
Your views on not timing the market but being cautionary when the market appears to be high line up with Warren Buffet, Vanguard, Howard Marks (from Oaktree), and Jacob Fisker (From ERE), not bad company to be in.
I just spent a few hours reading the last month's worth of posts in this thread. I thought Runewell started off with some legitimate concerns, including some that I share, such as market valuations and dynamic asset allocation. At first (way back in July), I actually thought he was interested in having a conversation about them. So naive. So, so naive.
Although I do want to point out the irony of having Sol dismiss some of Runewell's concerns about the likelihood of increased failure due to higher valuations, considering that FIRECalc and cFIREsim both lie. (https://forum.mrmoneymustache.com/ask-a-mustachian/firecalc-and-cfiresim-both-lie/)
Although I do want to point out the irony of having Sol dismiss some of Runewell's concerns about the likelihood of increased failure due to higher valuations, considering that FIRECalc and cFIREsim both lie. (https://forum.mrmoneymustache.com/ask-a-mustachian/firecalc-and-cfiresim-both-lie/)
Sincere question:Why do you think this person is well educated? Because they are an actuary? Seriously, lots of well-educated people get things wrong from time to time. Nobody is an expert on everything. There's a difference between education and intelligence. And a troll is a troll is a troll, "educated" or otherwise.
Runewell is a well educated TROLL, but he is still a troll. Why are you all feeding the troll?
Yep, there's a pretty good correlation between the red line and the blue line. Now, if you can just recognize when the red line is at a peak, before it starts to go down, you've got it made!
You don't have to do that even! All you have to do is observe that the expected return for the next 10 years should be much lower than the historical average, putting retirements at risk. It's so easy.
Although I do want to point out the irony of having Sol dismiss some of Runewell's concerns about the likelihood of increased failure due to higher valuations, considering that FIRECalc and cFIREsim both lie. (https://forum.mrmoneymustache.com/ask-a-mustachian/firecalc-and-cfiresim-both-lie/)
I don't think it's ironic at all, it's exactly the point I was trying to make. This was well trodden ground around here, and if he had just bothered to read this thread or any of the links contained herein (and I think you picked a good one) where we answered all of his questions, he would have realized how dumb he sounded asking the same trite questions that we've answered over and over again, and then re-raising the same trite arguments we've already covered and resolved.
Those that claim CAPE is not a future predictor of returns are burying their heads in the sand IMO. Obviously sequence of returns matters too, but there is definite reason for concern for people looking to retire today.
Those that claim CAPE is not a future predictor of returns are burying their heads in the sand IMO. Obviously sequence of returns matters too, but there is definite reason for concern for people looking to retire today.
I disagree with this assessment completely and there are plenty of reasons to disagree with it. It presumes that a high CAPE can be used to predict 30 years of returns accurately. I don't believe that it can. CAPE might now be a terrible indicator.
Predicting market returns is inherently difficult and you are more likely to lose money than gain money by doing it.
People today really shouldn't be worried and if they are they can work longer or use more bonds or be prepared to work part time or spend less or heaps of other alternatives other than just stating well the 4% rule now isn't valid. No one can state the 4% rule now isn't valid because you can't predict the future. It might not be or it might be. It's the best guideline that we have and a high cape definitely doesn't invalidate that. We have no idea if today or tomorrow or whenever is the day that results in a failure of a 30 year retirement which is funded by 25 years of expenses in a typical stock/bond portfolio. We can though bet with a fair degree of confidence that if we save up 25 years of expenses (assuming we get the expenses part correct) and invest with a degree of rationality that we should be able to last 30 years or more without working especially if we have some flexibility within our approach.
...
I never said anything was invalidated. Only that I was worried. Of the times that the 4% rule has failed in the past, all of them had a CAPE between 18-25. (https://forum.mrmoneymustache.com/ask-a-mustachian/firecalc-and-cfiresim-both-lie/msg265083/#msg265083) We're at (or fast approaching) 30. Now of course there were times with high valuations that ended up just fine. But looking at all the data, it's pretty easy to conclude that it might not be as safe to retire right now as it would been 2 years ago or could be 2 years from now using 4%.
My take on the issue is that regardless of CAPE or whatever indicator you prognosticate with any serious aspirant FIREr should have a plan to deal with the threat of a poor sequence of returns. There are a number of ways to address this risk that have been beaten to death in this thread and others so I won't enumerate them, but assuming you have a plan for that potentiality you should feel fine about FIREing whether the indicators point one way or the other.
I would also add that the less your plan relies on you predicting future outcomes the better.
The trouble is that where we are, the markets aren't - they haven't even reached their pre 2008 peak, whereas in the US it is completely different.My take on the issue is that regardless of CAPE or whatever indicator you prognosticate with any serious aspirant FIREr should have a plan to deal with the threat of a poor sequence of returns. There are a number of ways to address this risk that have been beaten to death in this thread and others so I won't enumerate them, but assuming you have a plan for that potentiality you should feel fine about FIREing whether the indicators point one way or the other.
I would also add that the less your plan relies on you predicting future outcomes the better.
Exactly.
I'll add that I'm not sure that equities are so overbought at the moment. This is an opinion no matter who states it and what indicators are being used but I don't feel that the markets are exceptionally high at this point.
Sincere question:Why do you think this person is well educated? Because they are an actuary? Seriously, lots of well-educated people get things wrong from time to time. Nobody is an expert on everything. There's a difference between education and intelligence. And a troll is a troll is a troll, "educated" or otherwise.
Runewell is a well educated TROLL, but he is still a troll. Why are you all feeding the troll?
Those that claim CAPE is not a future predictor of returns are burying their heads in the sand IMO. Obviously sequence of returns matters too, but there is definite reason for concern for people looking to retire today.
I disagree with this assessment completely and there are plenty of reasons to disagree with it. It presumes that a high CAPE can be used to predict 30 years of returns accurately. I don't believe that it can. CAPE might now be a terrible indicator.
I don't think it can predict 30 years of returns either. However, that doesn't really matter, because any portfolio that's going to fail would do so because of sequence of returns risk that happens at the beginning. In fact, portfolio success/failure has the highest correlation to 10 year real returns (https://www.kitces.com/blog/understanding-sequence-of-return-risk-safe-withdrawal-rates-bear-market-crashes-and-bad-decades/). When you hear Bogle and all the other investing icons out there talk about expecting lower returns going forward, they're basically talking about the next decade. And luckily for us, CAPE has a fairly strong correlation to 10 year returns. (https://www.kitces.com/blog/shiller-cape-market-valuation-terrible-for-market-timing-but-valuable-for-long-term-retirement-planning/)Predicting market returns is inherently difficult and you are more likely to lose money than gain money by doing it.
I'm simply talking about the likelihood receiving lower than average market returns. You don't have to have an exact prediction to understand that high valuations now are likely to lead to lower returns in the near future. Expansion cycles don't last forever. It's just part of the business cycle. In fact, we're currently in one of the longest expansions in history. Could it continue for 10 more years? Sure. Is it likely? No.
Now even with lower that average returns, 4% could be fine. It depends on the actual sequence of those returns. A long period of low returns without any major crashes would likely be fine, whereas a large major crash early with years without recovery likely would not be. At the same time, if you're expecting lower than average returns, it's adds more risk.People today really shouldn't be worried and if they are they can work longer or use more bonds or be prepared to work part time or spend less or heaps of other alternatives other than just stating well the 4% rule now isn't valid. No one can state the 4% rule now isn't valid because you can't predict the future. It might not be or it might be. It's the best guideline that we have and a high cape definitely doesn't invalidate that. We have no idea if today or tomorrow or whenever is the day that results in a failure of a 30 year retirement which is funded by 25 years of expenses in a typical stock/bond portfolio. We can though bet with a fair degree of confidence that if we save up 25 years of expenses (assuming we get the expenses part correct) and invest with a degree of rationality that we should be able to last 30 years or more without working especially if we have some flexibility within our approach.
I never said anything was invalidated. Only that I was worried. Of the times that the 4% rule has failed in the past, all of them had a CAPE between 18-25. (https://forum.mrmoneymustache.com/ask-a-mustachian/firecalc-and-cfiresim-both-lie/msg265083/#msg265083) We're at (or fast approaching) 30. Now of course there were times with high valuations that ended up just fine. But looking at all the data, it's pretty easy to conclude that it might not be as safe to retire right now as it would been 2 years ago or could be 2 years from now using 4%.
Your views on not timing the market but being cautionary when the market appears to be high line up with Warren Buffet, Vanguard, Howard Marks (from Oaktree), and Jacob Fisker (From ERE), not bad company to be in.
And Jack Bogle and Robert Shiller to name a couple others.I just spent a few hours reading the last month's worth of posts in this thread. I thought Runewell started off with some legitimate concerns, including some that I share, such as market valuations and dynamic asset allocation. At first (way back in July), I actually thought he was interested in having a conversation about them. So naive. So, so naive.
Although I do want to point out the irony of having Sol dismiss some of Runewell's concerns about the likelihood of increased failure due to higher valuations, considering that FIRECalc and cFIREsim both lie. (https://forum.mrmoneymustache.com/ask-a-mustachian/firecalc-and-cfiresim-both-lie/)
Yes, some posters on this forum have posted the same concerns. Runewell made an appearance in this thread as well:
https://forum.mrmoneymustache.com/welcome-to-the-forum/cfiresim-severely-overestimates-success-rates-for-mustachians/
Well said, and as noted earlier, you, Runewell, and some others here are in good company.They may be in good company, but it's entirely possible that they're making their arguments on the wrong thread. This one was started for the purpose of thoroughly exploring the opposing viewpoint, but somebody doesn't like that it doesn't have a sticky.
I just waded through 6 pages of people patiently and impatiently answering questions that had already been asked and answered pages before.
+1I just waded through 6 pages of people patiently and impatiently answering questions that had already been asked and answered pages before.
Thank you.
+1I just waded through 6 pages of people patiently and impatiently answering questions that had already been asked and answered pages before.
Thank you.
Here is the live thread: I'm Bill Bengen, and I first proposed the 4% safe withdrawal rate in 1994. Ask me anything! (https://www.reddit.com/r/financialindependence/comments/6vazih/im_bill_bengen_and_i_first_proposed_the_4_safe/)
Reposting without comment, as it is of general interest to forum participants:PizzaSteve, thanks for posting this.
I did a bit of further clean up and additions. Feel free to repost.Done. Editing is easy. :)
Wow thanks for posting all that info. I was struck by how he felt the 100% stock portfolio would require a lower SWR, I seemed to believe that cfiresim would suggest otherwise.
Two things count: if you encounter a major bear market early in retirement, and/or if you experience high inflation during retirement.
I don't see how he is coming up with 4.5%. I ran cFiresim with a 4.5% withdrawal for 30 years, using Bengen's inputs (50/50 allocation and starting in 1926), and I got a 73% success rate. Using all data only gets me up to 77%. Going back to the default 75/25 portfolio gets it to 84%. I guess 73 - 84% success is good enough for some people, but he didn't say anything about accepting a lower historical success in exchange for that higher withdrawal rate.
I don't see how he is coming up with 4.5%. I ran cFiresim with a 4.5% withdrawal for 30 years, using Bengen's inputs (50/50 allocation and starting in 1926), and I got a 73% success rate. Using all data only gets me up to 77%. Going back to the default 75/25 portfolio gets it to 84%. I guess 73 - 84% success is good enough for some people, but he didn't say anything about accepting a lower historical success in exchange for that higher withdrawal rate.
Chairman posted this link in one of the several stockmarket valuation panic threads that are happening at the moment. I thought it was worth a repost here in relation to the concerns about FIREing, 4%WR and using CAPE as a predictor of future stockmarket performance.
http://www.etf.com/sections/index-investor-corner/swedroe-wait-youll-likely-miss-out?nopaging=1
I don't see how he is coming up with 4.5%. I ran cFiresim with a 4.5% withdrawal for 30 years, using Bengen's inputs (50/50 allocation and starting in 1926), and I got a 73% success rate. Using all data only gets me up to 77%. Going back to the default 75/25 portfolio gets it to 84%. I guess 73 - 84% success is good enough for some people, but he didn't say anything about accepting a lower historical success in exchange for that higher withdrawal rate.
From his comments and this article (http://www.fa-mag.com/news/how-much-is-enough-10496.html), I think he is talking about a very specific allocation: "35% U.S. large-cap stocks, 18% U.S. small-cap stocks and 47% intermediate-term government bonds".
Perhaps there are more details and justification in his book (http://amzn.to/2w33G9Y).
At first glance, looks like major over weighting of small cap stocks, which historically would have given better returns than a normal equity allocation. So my guess is a similar trick (http://www.nytimes.com/2011/12/24/your-money/stocks-and-bonds/taking-a-chance-on-the-larry-portfolio.html?mcubz=0) seen with the The Larry Portfolio (https://portfoliocharts.com/portfolio/larry-portfolio/): get S&P 500 like returns with only a 30% equity allocation overall by massively over-weighting small cap value stocks. Historically has worked very well.
Chairman posted this link in one of the several stockmarket valuation panic threads that are happening at the moment. I thought it was worth a repost here in relation to the concerns about FIREing, 4%WR and using CAPE as a predictor of future stockmarket performance.
http://www.etf.com/sections/index-investor-corner/swedroe-wait-youll-likely-miss-out?nopaging=1
i haven't had time to read this entire thread, so my apologies if it's been discussed before.
when you are projecting your spend levels to calculate your required withdrawal rate, what are people using for things like insurance, medical coverage, dental, food, etc? if you're 10 years out, are you taking today's dollar values and adjusting for inflation at 10 years? or do you apply a premium?
or, is the thought process more like: in today's dollars, i spend $15000/yr on all this stuff. therefore, my 4% target withdrawal amount should be $15000/yr?
i haven't had time to read this entire thread, so my apologies if it's been discussed before.
when you are projecting your spend levels to calculate your required withdrawal rate, what are people using for things like insurance, medical coverage, dental, food, etc? if you're 10 years out, are you taking today's dollar values and adjusting for inflation at 10 years? or do you apply a premium?
or, is the thought process more like: in today's dollars, i spend $15000/yr on all this stuff. therefore, my 4% target withdrawal amount should be $15000/yr?
The 4% Rule factors in inflation once you FIRE, but if you are 10yrs out like Kenmoremmm mentions it does not account for inflation from your current spending to the date of your FIRE. That's the question he was asking.
don't feel blue, it happens to everyone once in a while...The 4% Rule factors in inflation once you FIRE, but if you are 10yrs out like Kenmoremmm mentions it does not account for inflation from your current spending to the date of your FIRE. That's the question he was asking.
Oh yes, quite right. Sorry, my mistake - I should red more carefully.
when you are projecting your spend levels to calculate your required withdrawal rate, what are people using for things like insurance, medical coverage, dental, food, etc? if you're 10 years out, are you taking today's dollar values and adjusting for inflation at 10 years? or do you apply a premium?
when you are projecting your spend levels to calculate your required withdrawal rate, what are people using for things like insurance, medical coverage, dental, food, etc? if you're 10 years out, are you taking today's dollar values and adjusting for inflation at 10 years? or do you apply a premium?
don't feel blue, it happens to everyone once in a while...The 4% Rule factors in inflation once you FIRE, but if you are 10yrs out like Kenmoremmm mentions it does not account for inflation from your current spending to the date of your FIRE. That's the question he was asking.
Oh yes, quite right. Sorry, my mistake - I should red more carefully.
1 month since the last post here...
Where is Runewell? His profile disapeared and many of his post to...
Yes, and his mysterious twin, Mr. "Steed" has disappeared too.1 month since the last post here...
Where is Runewell? His profile disapeared and many of his post to...
Banned and his posts cleaned up a mod.
don't feel blue, it happens to everyone once in a while...The 4% Rule factors in inflation once you FIRE, but if you are 10yrs out like Kenmoremmm mentions it does not account for inflation from your current spending to the date of your FIRE. That's the question he was asking.
Oh yes, quite right. Sorry, my mistake - I should red more carefully.
I'm green with envy over your cleverness.
don't feel blue, it happens to everyone once in a while...The 4% Rule factors in inflation once you FIRE, but if you are 10yrs out like Kenmoremmm mentions it does not account for inflation from your current spending to the date of your FIRE. That's the question he was asking.
Oh yes, quite right. Sorry, my mistake - I should red more carefully.
I'm green with envy over your cleverness.
I think you are all dealing in shades of grey to be honest
Question..
You have two early retirees.. its 2014 and one person retires with $1M and intends to spend $40K + inflation for the rest of his/her natural life.
Now you retiree #2 who says.. Naah I want a bit more and I don't have $1m yet (say he has $750k).
Fast forward to 2017 and they both have exactly $2M after the huge bull run we have just had and Retiree #2 says.. OK I'm done.
R1 is still locked into $40k per year (the 4% rule) , where as R2 can spend $80k per year because he retired with $2M.
Clearly this is nonsense.
Explain..:)
Question..
You have two early retirees.. its 2014 and one person retires with $1M and intends to spend $40K + inflation for the rest of his/her natural life.
Now you retiree #2 who says.. Naah I want a bit more and I don't have $1m yet (say he has $750k).
Fast forward to 2017 and they both have exactly $2M after the huge bull run we have just had and Retiree #2 says.. OK I'm done.
R1 is still locked into $40k per year (the 4% rule) , where as R2 can spend $80k per year because he retired with $2M.
Clearly this is nonsense.
Explain..:)
You should probably go back and read this thread, where this effect has been discussed at some length multiple times.
But to summarize,
1) they do not have equivalent time horizons anymore, and
2) retiree #1 isn't locked into anything, and
3) a success rate of 95% and a success rate of 30% are both "successful" if they both happen to last your particular time duration, and
4) you've totally misunderstood the 4% rule if this is still confusing to you. It's a historical look back at sequence of return risk, not a predictive tool for how to withdraw your savings.
Just go back to page 1 of this thread and start reading, and all of your questions will be answered. Follow the links for extra credit.
In my case my chosen WR is 3% and that can ride up with the market with the same level of future risk..
In my case my chosen WR is 3% and that can ride up with the market with the same level of future risk..
That's true, but instead of retiring with 25x expenses, you need 33x expenses. That means a number of extra years working, with no extra safety.
i wanted to point out that this makes no sense. more money = no extra safety? that literally makes no logical sense. more money means more cushion, literally by definition of what is a safety margin. How can you say 33x isnt more secure than 25x with a straight face?
In my case my chosen WR is 3% and that can ride up with the market with the same level of future risk..
That's true, but instead of retiring with 25x expenses, you need 33x expenses. That means a number of extra years working, with no extra safety.
Think about it. When we use statistics to suggest having more money is meaningless, we are crossing over a line of what a statistical model is meant to represent in terms of guidance value.i wanted to point out that this makes no sense. more money = no extra safety? that literally makes no logical sense. more money means more cushion, literally by definition of what is a safety margin. How can you say 33x isnt more secure than 25x with a straight face?
In my case my chosen WR is 3% and that can ride up with the market with the same level of future risk..
That's true, but instead of retiring with 25x expenses, you need 33x expenses. That means a number of extra years working, with no extra safety.
(EDIT: Looks like what I was replying to was deleted. Leaving this response, because I think PS's question was a valid one that multiple people will have. /END EDIT.)
At some point, more money is not more safety, because your worry is no longer running out of money, but dying, or the country collapsing, or whatever, and a 3% WR won't be any different than 4% WR in those scenarios.
I would argue that there is extra safety in a 3% vs 4% (after all, 4% was only 95% safe historically--admittedly with robotic withdrawals/spending and no extra income), but there isn't really much extra safety in terms of mitigating sequence of returns risk in going from a 1% WR to a 0.5% WR.
Where the actual line is where you stop gaining extra safety from money is a sorites paradox (https://en.wikipedia.org/wiki/Sorites_paradox), but I think you're probably right that there is extra safety going from a 4% to 3%, for most people, and that TC is right that at some point, extra money as a buffer doesn't add safety because the risks at that point aren't ones you can handle with money.
i wanted to point out that this makes no sense. more money = no extra safety? that literally makes no logical sense. more money means more cushion, literally by definition of what is a safety margin. How can you say 33x isnt more secure than 25x with a straight face?
In my case my chosen WR is 3% and that can ride up with the market with the same level of future risk..
That's true, but instead of retiring with 25x expenses, you need 33x expenses. That means a number of extra years working, with no extra safety.
(EDIT: Looks like what I was replying to was deleted. Leaving this response, because I think PS's question was a valid one that multiple people will have. /END EDIT.)
At some point, more money is not more safety, because your worry is no longer running out of money, but dying, or the country collapsing, or whatever, and a 3% WR won't be any different than 4% WR in those scenarios.
I would argue that there is extra safety in a 3% vs 4% (after all, 4% was only 95% safe historically--admittedly with robotic withdrawals/spending and no extra income), but there isn't really much extra safety in terms of mitigating sequence of returns risk in going from a 1% WR to a 0.5% WR.
Where the actual line is where you stop gaining extra safety from money is a sorites paradox (https://en.wikipedia.org/wiki/Sorites_paradox), but I think you're probably right that there is extra safety going from a 4% to 3%, for most people, and that TC is right that at some point, extra money as a buffer doesn't add safety because the risks at that point aren't ones you can handle with money.
i wanted to point out that this makes no sense. more money = no extra safety? that literally makes no logical sense. more money means more cushion, literally by definition of what is a safety margin. How can you say 33x isnt more secure than 25x with a straight face?
In my case my chosen WR is 3% and that can ride up with the market with the same level of future risk..
That's true, but instead of retiring with 25x expenses, you need 33x expenses. That means a number of extra years working, with no extra safety.
(EDIT: Looks like what I was replying to was deleted. Leaving this response, because I think PS's question was a valid one that multiple people will have. /END EDIT.)
At some point, more money is not more safety, because your worry is no longer running out of money, but dying, or the country collapsing, or whatever, and a 3% WR won't be any different than 4% WR in those scenarios.
I would argue that there is extra safety in a 3% vs 4% (after all, 4% was only 95% safe historically--admittedly with robotic withdrawals/spending and no extra income), but there isn't really much extra safety in terms of mitigating sequence of returns risk in going from a 1% WR to a 0.5% WR.
Where the actual line is where you stop gaining extra safety from money is a sorites paradox (https://en.wikipedia.org/wiki/Sorites_paradox), but I think you're probably right that there is extra safety going from a 4% to 3%, for most people, and that TC is right that at some point, extra money as a buffer doesn't add safety because the risks at that point aren't ones you can handle with money.
Each to their own of course but retiring at 43 instead of 40 but with 33% more money sounds like a good deal to me. I mean what will be different say 10 years from now.. Will we have doubled healthcare costs or will we have a well run single payer system for example?
Each to their own of course but retiring at 43 instead of 40 but with 33% more money sounds like a good deal to me. I mean what will be different say 10 years from now.. Will we have doubled healthcare costs or will we have a well run single payer system for example?
Depends on your work/life situation, I'd say. For many work is a deeply unpleasant experience that leaves them unable to do much else time-wise and very often saps their health (e.g. sitting immoble at a desk, high stress, long/poor hours). One could flip that question around and ask: how much would 3 healthy years of your life be worth in your 40s? what if those are among the last years you'll spend with your kids (on a day-to-day basis)?
It's a different choice for everyone of course.
Each to their own of course but retiring at 43 instead of 40 but with 33% more money sounds like a good deal to me. I mean what will be different say 10 years from now.. Will we have doubled healthcare costs or will we have a well run single payer system for example?
Depends on your work/life situation, I'd say. For many work is a deeply unpleasant experience that leaves them unable to do much else time-wise and very often saps their health (e.g. sitting immoble at a desk, high stress, long/poor hours). One could flip that question around and ask: how much would 3 healthy years of your life be worth in your 40s? what if those are among the last years you'll spend with your kids (on a day-to-day basis)?
It's a different choice for everyone of course.
Think about it. When we use statistics to suggest having more money is meaningless, we are crossing over a line of what a statistical model is meant to represent in terms of guidance value.
Yep. We don't know how much healthy, active time we're going to have.
My Dad's health issues really kicked in shortly before he hit age 70. His capability to actually go out and do stuff is severely diminished - and my Mom is spending most of her time in a caretaker role. Thankfully he retired semi-early at 56 and they got to do a fair amount of travel. Now, even some "easy" stuff like a cross-country train trip is canceled due to health issues.
Friend of mine at work - his brother has terminal brain cancer. Age 67.
Friend of mine in high school. Dead at 17. Car wreck.
These are just things that come to mind immediately.
Each to their own of course but retiring at 43 instead of 40 but with 33% more money sounds like a good deal to me. I mean what will be different say 10 years from now.. Will we have doubled healthcare costs or will we have a well run single payer system for example?
Depends on your work/life situation, I'd say. For many work is a deeply unpleasant experience that leaves them unable to do much else time-wise and very often saps their health (e.g. sitting immoble at a desk, high stress, long/poor hours). One could flip that question around and ask: how much would 3 healthy years of your life be worth in your 40s? what if those are among the last years you'll spend with your kids (on a day-to-day basis)?
It's a different choice for everyone of course.
Yes, you have to look at the overall picture and make the best decision you can.
If you work clearing landmines from a civilian area, love what you do and want to do it for another three years, do it.
If you work planting landmines in front of orphanages, hate your job, and don't want to work three more years, you should probably quit.
Most people's situations probably lie more in the middle
Better yet, pretend to the mines and still get paid to clean them up. Lower Cost of Goods, and reduced risk of getting blown up.
Be a demand creator.....plant the mines then get paid to clear them....sure fire way to FIRE (or getting blown up).
Better yet, pretend to the mines and still get paid to clean them up. Lower Cost of Goods, and reduced risk of getting blown up.UBI?
This isnt a contradiction. It is the 4% rate that is `fixed` not your withdraw amount. The nominal dollars to withdraw adjust every year under the methodology. A fixed withdraw is actually a declining rate of withdraw percentage wise, which isnt what the study recommends (and why others suggested a reread)Question..
You have two early retirees.. its 2014 and one person retires with $1M and intends to spend $40K + inflation for the rest of his/her natural life.
Now you retiree #2 who says.. Naah I want a bit more and I don't have $1m yet (say he has $750k).
Fast forward to 2017 and they both have exactly $2M after the huge bull run we have just had and Retiree #2 says.. OK I'm done.
R1 is still locked into $40k per year (the 4% rule) , where as R2 can spend $80k per year because he retired with $2M.
Clearly this is nonsense.
Explain..:)
You should probably go back and read this thread, where this effect has been discussed at some length multiple times.
But to summarize,
1) they do not have equivalent time horizons anymore, and
2) retiree #1 isn't locked into anything, and
3) a success rate of 95% and a success rate of 30% are both "successful" if they both happen to last your particular time duration, and
4) you've totally misunderstood the 4% rule if this is still confusing to you. It's a historical look back at sequence of return risk, not a predictive tool for how to withdraw your savings.
Just go back to page 1 of this thread and start reading, and all of your questions will be answered. Follow the links for extra credit.
Actually I'm not confused but #4 is the real answer.
In fact the curiosity of the 4% rule is such that 4% historically gets you to a 30 year horizon to 95% (or whatever that actual probability is). If however you happened to retire at the beginning of a major stock market run up you can in fact reset your dollar withdrawal number to a higher value based upon on 4% (or whatever you decide is your "safe" number) and get the same level of risk.
In my case my chosen WR is 3% and that can ride up with the market with the same level of future risk..
The point is, that your income from your stash goes up when the stash grows. Even if you just stick with 4% withdrawals. It seems like some people don't get this.
The point is, that your income from your stash goes up when the stash grows. Even if you just stick with 4% withdrawals. It seems like some people don't get this.
The Trinity Study-esque 4% Rule most of us use as a basis for FIRE planning does not increase your annual WR based on an increase in 'stash value. Each year the nominal WR amount = 4% of the starting portfolio value + inflation irregardless of 'stash value.
The point is, that your income from your stash goes up when the stash grows. Even if you just stick with 4% withdrawals. It seems like some people don't get this.
The Trinity Study-esque 4% Rule most of us use as a basis for FIRE planning does not increase your annual WR based on an increase in 'stash value. Each year the nominal WR amount = 4% of the starting portfolio value + inflation irregardless of 'stash value.
Agreed, withdrawal rate stays the same at 4%. I'm just pointing out that the actual dollars you withdraw every year goes up, assuming your stash goes up.
I just see a lot of people posting with this idea that "I can withdraw $40k per year when I retire and can only withdraw $40k per year, every year, until I die. And that's simply not true. As the stash grows, the total dollars you can withdraw every year goes up too.
Ah, I did not realize that. Thanks for correcting me, seriously.
Isn't inflation like 2%? So shouldn't they call it the 6% withdrawal rate? Of course I know inflation varies, so maybe call it the 4% plus inflation rule?
Ah, I did not realize that. Thanks for correcting me, seriously.
Isn't inflation like 2%? So shouldn't they call it the 6% withdrawal rate? Of course I know inflation varies, so maybe call it the 4% plus inflation rule?
Ah, I did not realize that. Thanks for correcting me, seriously.
Isn't inflation like 2%? So shouldn't they call it the 6% withdrawal rate? Of course I know inflation varies, so maybe call it the 4% plus inflation rule?
If you started with $1M taking out $40K and inflation was 2% the next year you could take out $40K +$800 [2% of $40K] = $40.8K.
Ah, I did not realize that. Thanks for correcting me, seriously.
Isn't inflation like 2%? So shouldn't they call it the 6% withdrawal rate? Of course I know inflation varies, so maybe call it the 4% plus inflation rule?
its just understood that is what it is. the 4% rule means you can withdraw 4% of your beginning stache adjusted for inflation every year. The trinity study said it wouldnt fail over any 30 year period. so in reality its much much safer b/c it was designed for worst case.
The trinity study said it wouldnt fail over any 30 year period. so in reality its much much safer b/c it was designed for worst case.
The trinity study said it wouldnt fail over any 30 year period. so in reality its much much safer b/c it was designed for worst case.
Well that's not quite true either. Depending on the asset allocation you use, there have been some years where an initial 4% SWR adjusted up for inflation was depleted before 30 years. All of those scenarios include very low market returns, and a few of them also include crazy high inflation adjustments. If you retire with a million dollars and withdraw $40k in your first year, then the next year the market tanks 20% and inflation is up 10%, then withdrawing the proscribed $44k out of your remaining $760k has effectively turned what used to be a 4% rate into a 5.8% rate, and some of those scenarios didn't recover in time to survive 30 years. Most did, though.
Holy shit, the 4% rule is even MORE conservative/safe than I originally thought it was.
As a real person, if there was a drop of 20% and a big jump in inflation, why in the world would I stupidly spend $44k during that year? I'd cut down on my spending. Wouldn't anyone?
Yes, I see that now. Holy shit, the 4% rule is even MORE conservative/safe than I originally thought it was. Which is, I guess, the whole point of this thread :D
Yes, I see that now. Holy shit, the 4% rule is even MORE conservative/safe than I originally thought it was. Which is, I guess, the whole point of this thread :D
Yup. Most of us have some safety margin built into our FIRE budgets as well. My annual spend is $40K + taxes, but $10K of that is not essential and could be deferred if my portfolio was doing terribly. I could also make $10K in a year without breaking a sweat. So that very conservative 4%WR rule got even safer.
Thread is live: Hi, I'm Wade Pfau Ask me Anything (https://www.reddit.com/r/financialindependence/comments/79wbhb/hi_im_wade_pfau_professor_of_retirement_income_at/)Thanks CanuckExpat. Everyone who has followed this thread, or 4% rule ideology in general, should be aware the Pfau tends to be more conservative in his assumptions than most. As a result, he is often cited by those in this community who think the 4% rule is too optimistic. Here's is a quote from Pfau in this Q&A and I think it's important. He was responding to a question about international diversification in equities.
I'm a big fan of global diversification. Even if it doesn't increase the returns, if it helps to reduce volatility then this is a way to increase the safe withdrawal rate (SWR). It's hard to say the specific improvement because it requires assumptions about returns, volatilities, and correlations between all the asset classes. But as an example, for a case I looked at in my book, broader diversification increased the SWR estimate from 3.34% to 3.61%. WW1 & WW2 created some really bad SAFEMAX outcomes around the world, but even without that there are plenty of cases of withdrawal rates internationally falling well below 4%.
Everyone who has followed this thread, or 4% rule ideology in general, should be aware the Pfau tends to be more conservative in his assumptions than most.
Yes, I see that now. Holy shit, the 4% rule is even MORE conservative/safe than I originally thought it was. Which is, I guess, the whole point of this thread :D
Yup. Most of us have some safety margin built into our FIRE budgets as well. My annual spend is $40K + taxes, but $10K of that is not essential and could be deferred if my portfolio was doing terribly. I could also make $10K in a year without breaking a sweat. So that very conservative 4%WR rule got even safer.
@Retire-Canada
I read that as well and feel it actually supports my logic. Using data sets that include things (like wholesale destruction of infrastructure due to years of war with massive civilian casualties) that haven't happened in the US, during the period we have investment data for, is a bad idea. Mainly because if such events occur here, we won't care about SWR, rather we will be focused on survival.
Thanks for organizing today, and two great questions! 1) I am concerned about 4% being too high at the present for someone without much flexibility to reduce spending after market downturns. Reasons include: our extremely low interest rates plus high stock valuations have not been tested in the US historical data; the 4% rule has not worked internationally -- only in the US and Canada but not in 18 other countries with data back to 1900; 30 years may not be long enough any more, especially for early retirees; it is hard for investors to earn the underlying index market returns net of fees
This is a prime example of how experts in any singular field are hyper focused on the area of their expertise. They are unable to look at the practicalities of situations outside of their hyper focused specialty.
Here is my problem with this sentiment from Pfau. If I was living in Berlin in 1944, or London in 1940, or Paris in 1941; do you really think I would give two shits about my SWR? or would I be busy hiding from bombs/Nazis (the real ones, not the political party I disagree with)? To include data from these areas, during these periods, and come to a conclusion SWR could be worse given bad circumstances is ridiculous, IMO.
I'm a pessimist by this forums standards. I think North America has a chance of suffering the same fate as old Europe. Even as a pessimist, I'd give it maybe a 10% chance of something like a Europe during WWII happening in my lifetime. However, to assume I would care about my SWR during such a crisis is ridiculous. I'd be in survival mode, along with the rest of the population.
Saving to a 3 or 2% WR is not going provide me with any additional safety in such circumstances (in the above example, extra shares of VTI won't help me hide from bombs). I would argue that any intelligent, adaptive investor should lump 4% rule failure risk in with SHTF circumstances and call it a day. IOW, it may happen, but doubling assets will have little effect in mitigating such a crisis in true S-curve fashion (https://en.wikipedia.org/wiki/Sigmoid_function). One is far better off being generally flexible in life and sticking with a 4%WR.
The attitude here on the MMM forums are so much more relaxed about the 4% rule as compared to the bogleheads forums.
There is a guy who posted there that he has over 1 million invested, and he's 35 and wants to retire and he only has 30,000 in expenses.
He's getting so much criticism there for not having enough money and how living on 30,000 as a single person is just scraping by.
The responses from posters there seem to suggest he needs 3-5 million and have a 2% safe withdrawal rate.
It's really very crazy and different there.
https://www.bogleheads.org/forum/viewtopic.php?f=1&t=230893
The attitude here on the MMM forums are so much more relaxed about the 4% rule as compared to the bogleheads forums.
There is a guy who posted there that he has over 1 million invested, and he's 35 and wants to retire and he only has 30,000 in expenses.
He's getting so much criticism there for not having enough money and how living on 30,000 as a single person is just scraping by.
The responses from posters there seem to suggest he needs 3-5 million and have a 2% safe withdrawal rate.
It's really very crazy and different there.
https://www.bogleheads.org/forum/viewtopic.php?f=1&t=230893
The attitude here on the MMM forums are so much more relaxed about the 4% rule as compared to the bogleheads forums.
There is a guy who posted there that he has over 1 million invested, and he's 35 and wants to retire and he only has 30,000 in expenses.
He's getting so much criticism there for not having enough money and how living on 30,000 as a single person is just scraping by.
The responses from posters there seem to suggest he needs 3-5 million and have a 2% safe withdrawal rate.
It's really very crazy and different there.
https://www.bogleheads.org/forum/viewtopic.php?f=1&t=230893
The disconnect is that $30k per year for people over there is living "like a poor person" and "barely scraping by". Over here on MMM it's viewed more as a pretty normal/happy life, especially if there's no mortgage/rent. Which means most of the $30k is discretionary spending.
QuoteI'm a big fan of global diversification. Even if it doesn't increase the returns, if it helps to reduce volatility then this is a way to increase the safe withdrawal rate (SWR). It's hard to say the specific improvement because it requires assumptions about returns, volatilities, and correlations between all the asset classes. But as an example, for a case I looked at in my book, broader diversification increased the SWR estimate from 3.34% to 3.61%. WW1 & WW2 created some really bad SAFEMAX outcomes around the world, but even without that there are plenty of cases of withdrawal rates internationally falling well below 4%.
This is a prime example of how experts in any singular field are hyper focused on the area of their expertise. They are unable to look at the practicalities of situations outside of their hyper focused specialty.
Here is my problem with this sentiment from Pfau. If I was living in Berlin in 1944, or London in 1940, or Paris in 1941; do you really think I would give two shits about my SWR? or would I be busy hiding from bombs/Nazis (the real ones, not the political party I disagree with)? To include data from these areas, during these periods, and come to a conclusion SWR could be worse given bad circumstances is ridiculous, IMO.
I'm a pessimist by this forums standards. I think North America has a chance of suffering the same fate as old Europe. Even as a pessimist, I'd give it maybe a 10% chance of something like a Europe during WWII happening in my lifetime. However, to assume I would care about my SWR during such a crisis is ridiculous. I'd be in survival mode, along with the rest of the population.
Saving to a 3 or 2% WR is not going provide me with any additional safety in such circumstances (in the above example, extra shares of VTI won't help me hide from bombs). I would argue that any intelligent, adaptive investor should lump 4% rule failure risk in with SHTF circumstances and call it a day. IOW, it may happen, but doubling assets will have little effect in mitigating such a crisis in true S-curve fashion (https://en.wikipedia.org/wiki/Sigmoid_function). One is far better off being generally flexible in life and sticking with a 4%WR.
Quote from: Wade PfauThanks for organizing today, and two great questions! 1) I am concerned about 4% being too high at the present for someone without much flexibility to reduce spending after market downturns. Reasons include: our extremely low interest rates plus high stock valuations have not been tested in the US historical data; the 4% rule has not worked internationally -- only in the US and Canada but not in 18 other countries with data back to 1900; 30 years may not be long enough any more, especially for early retirees; it is hard for investors to earn the underlying index market returns net of fees
Here's another sort of sneaky thing that he does. Look at the part I bolded above. If you add in a 1% fee/cost, then yes the 4% WR gets knocked down to 3% pretty quick.
A more interesting way to phrase the question - what's his view of safe withdrawal rate for people savvy enough to pay very low fees (ala Vanguard VTSAX)?
Quote from: Wade PfauThanks for organizing today, and two great questions! 1) I am concerned about 4% being too high at the present for someone without much flexibility to reduce spending after market downturns. Reasons include: our extremely low interest rates plus high stock valuations have not been tested in the US historical data; the 4% rule has not worked internationally -- only in the US and Canada but not in 18 other countries with data back to 1900; 30 years may not be long enough any more, especially for early retirees; it is hard for investors to earn the underlying index market returns net of fees
Here's another sort of sneaky thing that he does. Look at the part I bolded above. If you add in a 1% fee/cost, then yes the 4% WR gets knocked down to 3% pretty quick.
A more interesting way to phrase the question - what's his view of safe withdrawal rate for people savvy enough to pay very low fees (ala Vanguard VTSAX)?
Right. Wade finds it hard for investors to earn the underlying market returns because he assumes they will only use professional advisors
The actuality is that it is dead simple for the individual investor to achieve extremely close to market returns, net of fees. Buy VTI. Done. If you want to diversify further, buy similar low-cost indexes for bonds, or international or whatever and rebalance every year or two. Done.
The other sneaky thing Wade has done is for historical simulations, assume everything will be 25% worse than ever in history. Great Depression? It's 25% worse. Black Monday? 25% worse. Best day ever in the markets? 25% worse. He first used this tactic on the paper published after I took him to task (via email) for the outrageous management fees he assumed everyone would pay.
The attitude here on the MMM forums are so much more relaxed about the 4% rule as compared to the bogleheads forums.
There is a guy who posted there that he has over 1 million invested, and he's 35 and wants to retire and he only has 30,000 in expenses.
He's getting so much criticism there for not having enough money and how living on 30,000 as a single person is just scraping by.
The responses from posters there seem to suggest he needs 3-5 million and have a 2% safe withdrawal rate.
It's really very crazy and different there.
https://www.bogleheads.org/forum/viewtopic.php?f=1&t=230893
The disconnect is that $30k per year for people over there is living "like a poor person" and "barely scraping by". Over here on MMM it's viewed more as a pretty normal/happy life, especially if there's no mortgage/rent. Which means most of the $30k is discretionary spending.
And couldn't you go earn more money at that point?The disconnect is that $30k per year for people over there is living "like a poor person" and "barely scraping by". Over here on MMM it's viewed more as a pretty normal/happy life, especially if there's no mortgage/rent. Which means most of the $30k is discretionary spending.
I don't think it's completely crazy of them to point out to someone his age that if you need $30k per year as a single person, you might want to take into account that the future could hold a partner + children and those children turn into teenagers who'll have the same food & housing requirements as an adult at least for a couple of years.
...and those children turn into teenagers who'll have the same food & housing requirements as an adult at least for a couple of years.
Should I keep working until I can cover pretty much every contingency? (Let's call it, oh, 100MM or so.)
Should I keep working until I can cover pretty much every contingency? (Let's call it, oh, 100MM or so.)
That ^^ is the problem with fear based planning. There are literally an infinite number of "What Ifs?" that can be used to justify a crazy high FIRE $$ Target and infinite OMYs.
This is my personal biggest fear. that i wont pull the plug.. the largest risk to FIRE we never talk about is continuing to work past when you really need to.Never talk about OMY?
There's a bunch of future possibilities I could oversave for.
Maybe I'll get divorced, split half my assets
...and those children turn into teenagers who'll have the same food & housing requirements as an adult at least for a couple of years.
Helping them get PT jobs to contribute to their costs as teenagers sounds like a wonderful learning opportunity for them around work, budgeting and how to deal with changes in life. ;)
This is my personal biggest fear. that i wont pull the plug.. the largest risk to FIRE we never talk about is continuing to work past when you really need to.Never talk about OMY?
https://www.google.com/search?q=site%3Aforum.mrmoneymustache.com+omy&oq=site%3Aforum.mrmoneymustache.com+omy&aqs=chrome..69i57j69i58.13423j0j4&sourceid=chrome&ie=UTF-8 (https://www.google.com/search?q=site%3Aforum.mrmoneymustache.com+omy&oq=site%3Aforum.mrmoneymustache.com+omy&aqs=chrome..69i57j69i58.13423j0j4&sourceid=chrome&ie=UTF-8)
Personally, I find the biggest difference between MMM Forum and Bogleheads / Early-Retirement.org is that this is a younger forum. If I were in my 50's and 60's with a few pre-existing conditions and having to pay health insurance premiums for a family until I'm 65, I'd probably think $30k/yr does not leave very much discretionary income either.
But being that MMM is a lot of healthy 35 - 45 y.o.s and that ACA subsidies and great market returns have been the norm for the recent past, $30k probably does seem like more than enough...
Personally, I find the biggest difference between MMM Forum and Bogleheads / Early-Retirement.org is that this is a younger forum. If I were in my 50's and 60's with a few pre-existing conditions and having to pay health insurance premiums for a family until I'm 65, I'd probably think $30k/yr does not leave very much discretionary income either.
But being that MMM is a lot of healthy 35 - 45 y.o.s and that ACA subsidies and great market returns have been the norm for the recent past, $30k probably does seem like more than enough...
Well, given the amount my youngest has made from bitcoin/either in the past couple of years, not sure I'm in any position to give financial advice right now. Still, if you know any 14 year olds that can cover the mortgage costs of having an extra bedroom in a HCOL?
Well, given the amount my youngest has made from bitcoin/either in the past couple of years, not sure I'm in any position to give financial advice right now. Still, if you know any 14 year olds that can cover the mortgage costs of having an extra bedroom in a HCOL?
It sounds like your youngest kid might fit that bill. ;) A teenager can certainly contribute towards their portion of the family's expenses. If the parents choose to buy an expensive house in a HCOL area of course that contribution would be less significant, but presumably someone who is smart enough to FIRE at 30yrs old can work out what accommodation they can afford with their partner and make a reasonable choice.
Personally, I find the biggest difference between MMM Forum and Bogleheads / Early-Retirement.org is that this is a younger forum. If I were in my 50's and 60's with a few pre-existing conditions and having to pay health insurance premiums for a family until I'm 65, I'd probably think $30k/yr does not leave very much discretionary income either.
But being that MMM is a lot of healthy 35 - 45 y.o.s and that ACA subsidies and great market returns have been the norm for the recent past, $30k probably does seem like more than enough...
Well considering DW and I are going to pay $15/month for HC at 52 and 56 respectively I'd say $30k is plenty to live on, with a paid off mortgage at least.
Personally, I find the biggest difference between MMM Forum and Bogleheads / Early-Retirement.org is that this is a younger forum. If I were in my 50's and 60's with a few pre-existing conditions and having to pay health insurance premiums for a family until I'm 65, I'd probably think $30k/yr does not leave very much discretionary income either.
But being that MMM is a lot of healthy 35 - 45 y.o.s and that ACA subsidies and great market returns have been the norm for the recent past, $30k probably does seem like more than enough...
Wouldn't the older Bogglehead have a much shorter retirement to fund and access to Government/Corporate benefits in short order since they are either at or close to a more typical retirement age?
Personally, I find the biggest difference between MMM Forum and Bogleheads / Early-Retirement.org is that this is a younger forum. If I were in my 50's and 60's with a few pre-existing conditions and having to pay health insurance premiums for a family until I'm 65, I'd probably think $30k/yr does not leave very much discretionary income either.
But being that MMM is a lot of healthy 35 - 45 y.o.s and that ACA subsidies and great market returns have been the norm for the recent past, $30k probably does seem like more than enough...
Well considering DW and I are going to pay $15/month for HC at 52 and 56 respectively I'd say $30k is plenty to live on, with a paid off mortgage at least.
You are certainly an exceptional case EFB! You must not need HC (I'm guessing your deductible is pretty darn high and pretty much nothing is covered). Just reading around the forum, quite a few folks are struggling to find anything under $500 - $1500/mo that is comparable to what they had in 2017 or need. Also, you aren't covering kids that, at least in my case, are notorious for breaking a bone or having an emergency at some point or other. We have been to the ER, physician, and emergency dental work a few times in the past decade. Very glad for our coverage!
The attitude here on the MMM forums are so much more relaxed about the 4% rule as compared to the bogleheads forums.
There is a guy who posted there that he has over 1 million invested, and he's 35 and wants to retire and he only has 30,000 in expenses.
He's getting so much criticism there for not having enough money and how living on 30,000 as a single person is just scraping by.
The responses from posters there seem to suggest he needs 3-5 million and have a 2% safe withdrawal rate.
It's really very crazy and different there.
https://www.bogleheads.org/forum/viewtopic.php?f=1&t=230893
Geez, I bet the Bogleheads are a barrel of monkeys at parties.
What parties? They have to work all the time to hit that 2%WR on $100K+/yr spend. ;)
Like high school anti gay humor.
Your points are valid, Sol, but I agree with PS. We can be better.
comments sound like sour grapes
I am in a home wine making club
And that's a great forum too, but Jacob at ERExtreme beat you to the bottom on that :)
Sol, I am cool with the debate, just dont need the broad based BH bashing and sarcastic comments using false strawmen about lifestyle choices (like BH members are all work, no play so they can buy a Mercedes) targeted at a community that shares many of our goals. I've seen too many good internet forums be taken over by bullies and become echo chambers, repeating the same thought without dialog (go back to the 80s on the internet).Like high school anti gay humor.
1. No one is bashing the income or the savings rate, just the incredibly pessimistic assumptions about SWRs that seem to pervade the culture there.
2. I have seem far FAR worse denigration of the MMM community on the bogleheads forum than I have ever seen posted here about them.
Similar to what ExFlyboy asked earlier (a page ago), but with a twist. What if Retiree A and B have $1M. Retiree A calls it quits in 2007 and withdraws his inflation adjusted $40k for 30 years. Retiree B hangs in a little longer only to suffer the ~37% decline (https://seekingalpha.com/instablog/605212-robert-allan-schwartz/4831186-annual-returns-s-and-p-500-1928-2015) in 2008. Retiree A has roughly 605k and Retiree B has roughly 630k.
How much can Retiree B plan to spend for the next 30 years?
Similar to what ExFlyboy asked earlier (a page ago), but with a twist. What if Retiree A and B have $1M. Retiree A calls it quits in 2007 and withdraws his inflation adjusted $40k for 30 years. Retiree B hangs in a little longer only to suffer the ~37% decline (https://seekingalpha.com/instablog/605212-robert-allan-schwartz/4831186-annual-returns-s-and-p-500-1928-2015) in 2008. Retiree A has roughly 605k and Retiree B has roughly 630k.Based on the 4% "rule", 4% of $630K.
How much can Retiree B plan to spend for the next 30 years?
Your points are valid, Sol, but I agree with PS. We can be better.
Honestly, if you kick PizzaSteve and I out of here, then it'll be an echo chamber of 4% is so ridiculously conservative I should've retired at 5% or figured out how to shave off $100 more dollars of recurring expenses (e.g. I know I don't need Netflix to 'survive') ... And that's a great forum too, but Jacob at ERExtreme beat you to the bottom on that :)
Your points are valid, Sol, but I agree with PS. We can be better.
Honestly, if you kick PizzaSteve and I out of here, then it'll be an echo chamber of 4% is so ridiculously conservative I should've retired at 5% or figured out how to shave off $100 more dollars of recurring expenses (e.g. I know I don't need Netflix to 'survive') ... And that's a great forum too, but Jacob at ERExtreme beat you to the bottom on that :)
No one should be kicked for a healthy debate about these issues.
Similar to what ExFlyboy asked earlier (a page ago), but with a twist. What if Retiree A and B have $1M. Retiree A calls it quits in 2007 and withdraws his inflation adjusted $40k for 30 years. Retiree B hangs in a little longer only to suffer the ~37% decline (https://seekingalpha.com/instablog/605212-robert-allan-schwartz/4831186-annual-returns-s-and-p-500-1928-2015) in 2008. Retiree A has roughly 605k and Retiree B has roughly 630k.Based on the 4% "rule", 4% of $630K.
How much can Retiree B plan to spend for the next 30 years?
Of course, the "4% rule" is not as straightforward as, say, the solution to the quadratic equation. It is the result of backtesting a simplistic withdrawal strategy. Perhaps a more convoluted withdrawal strategy could be backtested, such as "use (a + b*X) as the initial withdrawal amount, where X is the CAGR of the previous 3 years for the S&P500 and 'a' and 'b' are fit to the historical data." But ol' Occam would object, and I think rightly so.
Using 4% (or its inverse, 25X) to determine if one is "in the ballpark" for retirability is reasonable. Asking for exactitude in predicting the future is not.
Agreed - good debate should be encouraged. The pushback I see a lot with early retiring is really not about the 4% rule, but rather its about whether a person has estimated/anticipated their expenses correctly.
And I think that's valid. It's far more likely that you'll make a mistake with estimating expenses than it is for the 4% rule to fail.
Here's an example - divorce. As a 45 year old, employed white male, I have a 7% chance of getting divorced. That rises to over 20% by the time I am 60. So my RE is far more likely to fail from divorce than it is for the 4% rule to fail.
http://flowingdata.com/2016/03/30/divorce-rates-for-different-groups/
Its 3x to 5x more likely that divorce will do me in than a 4% rule failure.
Similar to what ExFlyboy asked earlier (a page ago), but with a twist. What if Retiree A and B have $1M. Retiree A calls it quits in 2007 and withdraws his inflation adjusted $40k for 30 years. Retiree B hangs in a little longer only to suffer the ~37% decline (https://seekingalpha.com/instablog/605212-robert-allan-schwartz/4831186-annual-returns-s-and-p-500-1928-2015) in 2008. Retiree A has roughly 605k and Retiree B has roughly 630k.Based on the 4% "rule", 4% of $630K.
How much can Retiree B plan to spend for the next 30 years?
Of course, the "4% rule" is not as straightforward as, say, the solution to the quadratic equation. It is the result of backtesting a simplistic withdrawal strategy. Perhaps a more convoluted withdrawal strategy could be backtested, such as "use (a + b*X) as the initial withdrawal amount, where X is the CAGR of the previous 3 years for the S&P500 and 'a' and 'b' are fit to the historical data." But ol' Occam would object, and I think rightly so.
Using 4% (or its inverse, 25X) to determine if one is "in the ballpark" for retirability is reasonable. Asking for exactitude in predicting the future is not.
This is the circular logic that gets missed IMO.
So in 2008 assuming 2% inflation, Retiree A would pull out $40,800 of the $605,000 but based on 4% SWR they should still have a 96% chance of success for the money lasting them 29 more years.
Retiree B can only take out $25,200 in 2008 but still only has a 96% success probability.
This is something I can never seem to reconcile. If the odds are the same then Retiree B should be able at least take out as much as Retiree A.
This is obviously sequence of return risk (Retiree A) and what never gets talked about sequence of returns opportunity (Retiree B). But to believe in either you must have to also believe in some form of market fundamentals matter or market timing or whatever because it is absolutely certain that the risk profile between the two is drastically different.
Agreed - good debate should be encouraged. The pushback I see a lot with early retiring is really not about the 4% rule, but rather its about whether a person has estimated/anticipated their expenses correctly.
And I think that's valid. It's far more likely that you'll make a mistake with estimating expenses than it is for the 4% rule to fail.
Here's an example - divorce. As a 45 year old, employed white male, I have a 7% chance of getting divorced. That rises to over 20% by the time I am 60. So my RE is far more likely to fail from divorce than it is for the 4% rule to fail.
http://flowingdata.com/2016/03/30/divorce-rates-for-different-groups/
Its 3x to 5x more likely that divorce will do me in than a 4% rule failure.
I went to your link, maybe I'm looking at the wrong graph, but if it's the right one it is labeled "divorced or married more than once" which would sound like it includes both your risk of divorce AND your risk that your spouse passes away and, after an appropriate interval you meet someone else and remarry (which would explain why the risk goes up so much as you get older).
Yup. I wasn't disagreeing with your main point, just pointing out the other explanations in that particular dataset.
I agree that there are all sorts of personal disasters (divorce, expensive non-covered medical conditions, or just early death*) and national/civilizational disasters (world wars, nuclear wars, government collapses, etc) which cumulatively are probably much more likely to result in a "failed" retirement than just running out of money when making withdrawals using the 4% method.
*That was the idea behind those death vs bankruptcy graphs I tried making a few months ago.
Yup. I wasn't disagreeing with your main point, just pointing out the other explanations in that particular dataset.
I agree that there are all sorts of personal disasters (divorce, expensive non-covered medical conditions, or just early death*) and national/civilizational disasters (world wars, nuclear wars, government collapses, etc) which cumulatively are probably much more likely to result in a "failed" retirement than just running out of money when making withdrawals using the 4% method.
*That was the idea behind those death vs bankruptcy graphs I tried making a few months ago.
Emphasis added.
I love your graphs, but as a side comment I don't consider early death to be a failed retirement.
Yup. I wasn't disagreeing with your main point, just pointing out the other explanations in that particular dataset.
I agree that there are all sorts of personal disasters (divorce, expensive non-covered medical conditions, or just early death*) and national/civilizational disasters (world wars, nuclear wars, government collapses, etc) which cumulatively are probably much more likely to result in a "failed" retirement than just running out of money when making withdrawals using the 4% method.
*That was the idea behind those death vs bankruptcy graphs I tried making a few months ago.
Emphasis added.
I love your graphs, but as a side comment I don't consider early death to be a failed retirement.
Depends on a definition, of course. If your definition of early retirement is "X number of years not working," (typically 30 in the normal retirement literature), death sure is a failure. If it's just defined as running out of money, it's not.
In other words, we can look at "lasting 30 years"-- is it just your money? Or you as well?
So in 2008 assuming 2% inflation, Retiree A would pull out $40,800 of the $605,000 but based on 4% SWR they should still have a 96% chance of success for the money lasting them 29 more years.
Retiree B can only take out $25,200 in 2008 but still only has a 96% success probability.
This is something I can never seem to reconcile. If the odds are the same then Retiree B should be able at least take out as much as Retiree A.
Agreed - good debate should be encouraged. The pushback I see a lot with early retiring is really not about the 4% rule, but rather its about whether a person has estimated/anticipated their expenses correctly.
And I think that's valid. It's far more likely that you'll make a mistake with estimating expenses than it is for the 4% rule to fail.
Here's an example - divorce. As a 45 year old, employed white male, I have a 7% chance of getting divorced. That rises to over 20% by the time I am 60. So my RE is far more likely to fail from divorce than it is for the 4% rule to fail.
http://flowingdata.com/2016/03/30/divorce-rates-for-different-groups/
Its 3x to 5x more likely that divorce will do me in than a 4% rule failure.
I went to your link, maybe I'm looking at the wrong graph, but if it's the right one it is labeled "divorced or married more than once" which would sound like it includes both your risk of divorce AND your risk that your spouse passes away and, after an appropriate interval you meet someone else and remarry (which would explain why the risk goes up so much as you get older).
You're right, I was in a hurry and didn't read it as closely as I should have. This has better data - http://www.pewresearch.org/fact-tank/2017/03/09/led-by-baby-boomers-divorce-rates-climb-for-americas-50-population/
And still, 21% chance of divorce for 40-49 year olds and 10% for 50 and over. Way higher fail rates than the 4% rule.
My take on the BH side of things is not based on hanging out on those forums just the high savings targets and low WR rates that get reported here. I think the assumptions around that approach needs to be challenged because the trade off in time working at the prime of your life is a really high cost to pay. Both for the specific health and relationship impacts on the person working as well as their loved ones and also because of the environmental impacts that affect us all from high spending lifestyles. My party comment about BH was flippant shorthand for over working vs. spending time on relationships. If anyone was offended I apologize and I'll delete the comment.
Right, and even more incredible is that Retiree A could use the bulletproof 3% SWR and have $30,600 to spend in 2008, with 100% historic success, and Retiree B still only gets $25,200 with 96% success!
I have a better idea. Instead of trying to make your money out last your life. Why not try to make your life end before your money? Therefore I have started drinking heavily, taken up smoking and got into sky diving and rock climbing! I bet I dont last 5 years at this rate. There fore I am pulling out 20% a year!!
I have a better idea. Instead of trying to make your money out last your life. Why not try to make your life end before your money? Therefore I have started drinking heavily, taken up smoking and got into sky diving and rock climbing! I bet I dont last 5 years at this rate. There fore I am pulling out 20% a year!!
As an ex-skydiver, rock climber (and engineer, therefore risk adverse). I can tell you that skydiving and rock climbing are both very safe sports if done properly.. I recommend driving and taking opioids as "better" alternatives..:)
My take on the BH side of things is not based on hanging out on those forums just the high savings targets and low WR rates that get reported here. I think the assumptions around that approach needs to be challenged because the trade off in time working at the prime of your life is a really high cost to pay. Both for the specific health and relationship impacts on the person working as well as their loved ones and also because of the environmental impacts that affect us all from high spending lifestyles. My party comment about BH was flippant shorthand for over working vs. spending time on relationships. If anyone was offended I apologize and I'll delete the comment.
That, and the fact that there is no evidence to support the need for such super-low withdrawal rates, other than the world as we know it might end. Well, yes, it might. In which case we are all screwed, and your WR won't matter.
Similar to what ExFlyboy asked earlier (a page ago), but with a twist. What if Retiree A and B have $1M. Retiree A calls it quits in 2007 and withdraws his inflation adjusted $40k for 30 years. Retiree B hangs in a little longer only to suffer the ~37% decline (https://seekingalpha.com/instablog/605212-robert-allan-schwartz/4831186-annual-returns-s-and-p-500-1928-2015) in 2008. Retiree A has roughly 605k and Retiree B has roughly 630k.Based on the 4% "rule", 4% of $630K.
How much can Retiree B plan to spend for the next 30 years?
Of course, the "4% rule" is not as straightforward as, say, the solution to the quadratic equation. It is the result of backtesting a simplistic withdrawal strategy. Perhaps a more convoluted withdrawal strategy could be backtested, such as "use (a + b*X) as the initial withdrawal amount, where X is the CAGR of the previous 3 years for the S&P500 and 'a' and 'b' are fit to the historical data." But ol' Occam would object, and I think rightly so.
Using 4% (or its inverse, 25X) to determine if one is "in the ballpark" for retirability is reasonable. Asking for exactitude in predicting the future is not.
This is the circular logic that gets missed IMO.
So in 2008 assuming 2% inflation, Retiree A would pull out $40,800 of the $605,000 but based on 4% SWR they should still have a 96% chance of success for the money lasting them 29 more years.
Retiree B can only take out $25,200 in 2008 but still only has a 96% success probability.
This is something I can never seem to reconcile. If the odds are the same then Retiree B should be able at least take out as much as Retiree A.
This is obviously sequence of return risk (Retiree A) and what never gets talked about sequence of returns opportunity (Retiree B). But to believe in either you must have to also believe in some form of market fundamentals matter or market timing or whatever because it is absolutely certain that the risk profile between the two is drastically different.
The bolded part is profound.
ERE sometimes takes a bunker mentality. Become self-sufficient in case TSHTF.
MMM's optimism seems unique among the ER crowd, which is why it's such a draw for many of us.
Yes, it means we are rosy about the 4% rule, but it also means if it doesn't pan out, we'll happily get back to work (literally or figuratively) and make adjustments and be fine. :)
Similar to what ExFlyboy asked earlier (a page ago), but with a twist. What if Retiree A and B have $1M. Retiree A calls it quits in 2007 and withdraws his inflation adjusted $40k for 30 years. Retiree B hangs in a little longer only to suffer the ~37% decline (https://seekingalpha.com/instablog/605212-robert-allan-schwartz/4831186-annual-returns-s-and-p-500-1928-2015) in 2008. Retiree A has roughly 605k and Retiree B has roughly 630k.Based on the 4% "rule", 4% of $630K.
How much can Retiree B plan to spend for the next 30 years?
Of course, the "4% rule" is not as straightforward as, say, the solution to the quadratic equation. It is the result of backtesting a simplistic withdrawal strategy. Perhaps a more convoluted withdrawal strategy could be backtested, such as "use (a + b*X) as the initial withdrawal amount, where X is the CAGR of the previous 3 years for the S&P500 and 'a' and 'b' are fit to the historical data." But ol' Occam would object, and I think rightly so.
Using 4% (or its inverse, 25X) to determine if one is "in the ballpark" for retirability is reasonable. Asking for exactitude in predicting the future is not.
This is the circular logic that gets missed IMO.
So in 2008 assuming 2% inflation, Retiree A would pull out $40,800 of the $605,000 but based on 4% SWR they should still have a 96% chance of success for the money lasting them 29 more years.
Retiree B can only take out $25,200 in 2008 but still only has a 96% success probability.
This is something I can never seem to reconcile. If the odds are the same then Retiree B should be able at least take out as much as Retiree A.
This is obviously sequence of return risk (Retiree A) and what never gets talked about sequence of returns opportunity (Retiree B). But to believe in either you must have to also believe in some form of market fundamentals matter or market timing or whatever because it is absolutely certain that the risk profile between the two is drastically different.
Similar to what ExFlyboy asked earlier (a page ago), but with a twist. What if Retiree A and B have $1M. Retiree A calls it quits in 2007 and withdraws his inflation adjusted $40k for 30 years. Retiree B hangs in a little longer only to suffer the ~37% decline (https://seekingalpha.com/instablog/605212-robert-allan-schwartz/4831186-annual-returns-s-and-p-500-1928-2015) in 2008. Retiree A has roughly 605k and Retiree B has roughly 630k.Based on the 4% "rule", 4% of $630K.
How much can Retiree B plan to spend for the next 30 years?
Of course, the "4% rule" is not as straightforward as, say, the solution to the quadratic equation. It is the result of backtesting a simplistic withdrawal strategy. Perhaps a more convoluted withdrawal strategy could be backtested, such as "use (a + b*X) as the initial withdrawal amount, where X is the CAGR of the previous 3 years for the S&P500 and 'a' and 'b' are fit to the historical data." But ol' Occam would object, and I think rightly so.
Using 4% (or its inverse, 25X) to determine if one is "in the ballpark" for retirability is reasonable. Asking for exactitude in predicting the future is not.
This is the circular logic that gets missed IMO.
So in 2008 assuming 2% inflation, Retiree A would pull out $40,800 of the $605,000 but based on 4% SWR they should still have a 96% chance of success for the money lasting them 29 more years.
Retiree B can only take out $25,200 in 2008 but still only has a 96% success probability.
This is something I can never seem to reconcile. If the odds are the same then Retiree B should be able at least take out as much as Retiree A.
This is obviously sequence of return risk (Retiree A) and what never gets talked about sequence of returns opportunity (Retiree B). But to believe in either you must have to also believe in some form of market fundamentals matter or market timing or whatever because it is absolutely certain that the risk profile between the two is drastically different.
The 4% rule does NOT say that retiree A has a 96% chance of success at the end of 2008, one year into retirement and after a huge market decline. It says that, in 2007, on the cusp of retirement and with no crystal ball knowledge about what the future holds, retiree A has an average probability of success of 96%, assuming that the future is no worse than the past. Once his retirement has started, he is on a specific trajectory and the universe of possible trajectories that was open to him at the outset (i.e., the average) no longer exists. He might be on one of the 4% of initial trajectories that lead to failure. If you want to know his probability of success at the end of 2008, it would be easy enough to calculate using his balance at that time, withdrawal rate, and life expectancy at that time. But again, that would assume no crystal ball knowledge about the future, so if the result is, say, 68% (I'm just making that up), that doesn't mean his retirement going forward will be a 32% failure. He is still on a trajectory, and that trajectory might wind up in the 68% of possible scenarios that succeed.
Retiree B can spend the same amount as Retiree A, and have the same odds of success.
However, the benefit of addition data (one year of post FIRE returns), is that it allows us to update our prior estimate for the probability of success for retiree A (and hence B) -- given completely inflexibly 4% spending for the next 29 years, which is probably an unrealistic assumption in a recession -- as being less than 96%.*
The difference between A & B isn't necessarily their net worth. It is that retiree B has an extra year of data which retiree A lacked.
If retiree B wants to spend 4% of their current stash for 30 years they have a 96% chance of success.
I think it would be most helpful to people reading this thread if we stopped saying stuff like "The 4% Rule says Retiree A has a 96% chance of success...." The 4% Rule doesn't know shit about Retiree A. All it says is that based on historical data a 4% WR had a 96% success rate in the past. That's it. As soon as you project its results into the future with statements like "...assuming the future is no worse than the past..." you are on shaky ground. I get what you are trying to say, but I think it's just more easily understood to say nothing about the 4% Rule and the future.
Now you may say to yourself based on past results with a 4%WR I am happy to base my retirement on it because I am optimistic for the future. That's a reasonable statement and I think it puts the 4% Rule input in the correct context as a guideline for FIRE planning not a predictive tool. In particular because nobody I know of is actually going to follow the exact WR process used by the research that forms the basis of the 4% Rule.
Big edit to my last post based on EV's update (thanks for the PM to let me know you'd added extra text).As stated, it is important to remember thst the % success rate the study provides is the result of a model, meant to be applied specifically at the point of retirement. The assumptions include withdraw rate and sequence of returns consistent with the recent past. That is it. It is not a life plan, nor a true statement of success probability, though we assume the correlations are high.
brooklynguy, no that's an important point but my forgotten footnote was just going to be the point that I don't know of a good way to estimate how much the estimate of the odds of retiree A should be reduced relative to the estimate of success when they pulled the trigger on FIRE, just that the change from the new data is non-zero and negative.
All that may be true or not but the fact of the matter is that the 4% rule doesn't go far enough (but still may be valid) and the two retiree scenario posted before would have drastically different withdrawals based on the time they retired (absent adjustments/flexibility/current market knowledge as none that has any factor on WR analysis).I don't understand your point here. The 4% rule is based on having no knowledge of what the stock market is going to do the year after you retire. Of course, once you've lived through that year, you can make a better estimate of whether your stash is going to last the remaining 29 years than you could before. That's how adding more information works.
The scenario presented was the negative view - markets go down, but the inverse is also a problem.....Retiree A goes in x year and retiree B goes one year later but after a 30% return. Same thing applies Retiree A is living off of $40k (+inflation) and Retiree B is living off of $52k (+inflation) (based on $1mil and 4%WR). Yet both still have the same probability at the start of the retirement.
It's like saying "your odds of being attacked by a shark are 1 in 11.5 million" but if you go to the beach, and you're out surfing and you see a shark fin circling around you, at that point your odds of being attacked as significantly higher than 1 in 11.5M. That doesn't make the first estimate wrong, invalid, or misleading. It just means that as time passed and more data accumulates on your risk factors, we can do a better job of estimating the chances that you're going to fall into that 1 in 11.5 million.
I love it, so hysterical. General theme is that 4% rule is rock solid and you should absolutely base your retirement (but always with the caveat to be flexible)....until it is challenged of course.
Question two different scenarios for timing of FIRE....all these hedges come out
...its not a rule
...based on historical data
....its just a model and doesn't mean anything going forward
....you can't control the future
....retiree would or should reduce their withdrawals
...its not realistic to just blindly follow it
...blah blah blah.
All that may be true or not but the fact of the matter is that the 4% rule doesn't go far enough (but still may be valid) and the two retiree scenario posted before would have drastically different withdrawals based on the time they retired (absent adjustments/flexibility/current market knowledge as none that has any factor on WR analysis).
The scenario presented was the negative view - markets go down, but the inverse is also a problem.....Retiree A goes in x year and retiree B goes one year later but after a 30% return. Same thing applies Retiree A is living off of $40k (+inflation) and Retiree B is living off of $52k (+inflation) (based on $1mil and 4%WR). Yet both still have the same probability at the start of the retirement.
I would be far more willing to accept a higher WR after a downturn or lower rate after a good run...call it logic or intuition or whatever....but then if I do this I am basically conceding that the 4% rule is worthless and should instead focus on my own views (that doesn't seem quite right either).
We have all heard and believe that during the accumulation phase that savings rate is more important than returns....well I think based on all of this entire thread's discussion and discussions elsewhere that we could probably all agree that during retirement that being flexible is far more important than WR, which kind of sucks bc then it diminishes the more data driven approach.
All that may be true or not but the fact of the matter is that the 4% rule doesn't go far enough (but still may be valid) and the two retiree scenario posted before would have drastically different withdrawals based on the time they retired (absent adjustments/flexibility/current market knowledge as none that has any factor on WR analysis).I don't understand your point here. The 4% rule is based on having no knowledge of what the stock market is going to do the year after you retire. Of course, once you've lived through that year, you can make a better estimate of whether your stash is going to last the remaining 29 years than you could before. That's how adding more information works.
But until we have a way to predict what next year's returns are before we get to next year, I'm not sure the above observation is actually helpful to people trying to make decisions about when to FIRE.QuoteThe scenario presented was the negative view - markets go down, but the inverse is also a problem.....Retiree A goes in x year and retiree B goes one year later but after a 30% return. Same thing applies Retiree A is living off of $40k (+inflation) and Retiree B is living off of $52k (+inflation) (based on $1mil and 4%WR). Yet both still have the same probability at the start of the retirement.
But this is just another example of "yes, you can improve your predictions over time as you get more data about how your own retirement window has already behaved."
It's like saying "your odds of being attacked by a shark are 1 in 11.5 million" but if you go to the beach, and you're out surfing and you see a shark fin circling around you, at that point your odds of being attacked as significantly higher than 1 in 11.5M. That doesn't make the first estimate wrong, invalid, or misleading. It just means that as time passed and more data accumulates on your risk factors, we can do a better job of estimating the chances that you're going to fall into that 1 in 11.5 million.
Similar to what ExFlyboy asked earlier (a page ago), but with a twist. What if Retiree A and B have $1M. Retiree A calls it quits in 2007 and withdraws his inflation adjusted $40k for 30 years. Retiree B hangs in a little longer only to suffer the ~37% decline (https://seekingalpha.com/instablog/605212-robert-allan-schwartz/4831186-annual-returns-s-and-p-500-1928-2015) in 2008. Retiree A has roughly 605k and Retiree B has roughly 630k.
How much can Retiree B plan to spend for the next 30 years?
So is there a consensus on how much Retiree B can spend?
Similar to what ExFlyboy asked earlier (a page ago), but with a twist. What if Retiree A and B have $1M. Retiree A calls it quits in 2007 and withdraws his inflation adjusted $40k for 30 years. Retiree B hangs in a little longer only to suffer the ~37% decline (https://seekingalpha.com/instablog/605212-robert-allan-schwartz/4831186-annual-returns-s-and-p-500-1928-2015) in 2008. Retiree A has roughly 605k and Retiree B has roughly 630k.
How much can Retiree B plan to spend for the next 30 years?
So is there a consensus on how much Retiree B can spend? I've heard the strict interpretation of the 4% Rule = $25,200 (inflation adjusted) for the next 30 years and also heard 'something closer to $40,800, since that what Retiree A can spend'. There is a pretty big difference between those answers, and a whole lot of handwaving around 'being flexible' doesn't really help Retiree B know what to do.
Similar to what ExFlyboy asked earlier (a page ago), but with a twist. What if Retiree A and B have $1M. Retiree A calls it quits in 2007 and withdraws his inflation adjusted $40k for 30 years. Retiree B hangs in a little longer only to suffer the ~37% decline (https://seekingalpha.com/instablog/605212-robert-allan-schwartz/4831186-annual-returns-s-and-p-500-1928-2015) in 2008. Retiree A has roughly 605k and Retiree B has roughly 630k.
How much can Retiree B plan to spend for the next 30 years?
So is there a consensus on how much Retiree B can spend? I've heard the strict interpretation of the 4% Rule = $25,200 (inflation adjusted) for the next 30 years and also heard 'something closer to $40,800, since that what Retiree A can spend'. There is a pretty big difference between those answers, and a whole lot of handwaving around 'being flexible' doesn't really help Retiree B know what to do.
I think the answer in terms of the 4% rule is that *in the past* it has worked out 96% of the time if a person with that amount of stash spent 4% of the balance of that stash each year.
The 4% rule isn't really a prediction, it is a statement about what has happened before. Now if you want to use Person A's conditions to determine Person B's spending, the fact is that even Person A's plan isn't looking too great now. Even though they followed the 4% rule properly, the fact is that even the historical model shows that it does fail sometimes (4% of the time during the historical period). The new information that we now have - the large market drop one year into Person A's retirement) now means that we have more information to plug into that historical model to see how he *would have done* in the past. You would have to look at the subset of periods in which a similar market drop occurred right after a person retired. He might still be fine, both in the past model and in the future reality. It would now be the role of the thinking rational human being to look at all of the available information and re-evaluate.
The 4% rule is kind of an anchor point that gives us a model of the best information we currently have about how market performance and withdrawal rates ultimately affect a retirement plan. We can look at all of the historical circumstances such as the great depression, the tech bubble crash, the inflationary 70's, the crappy stock market returns of the late 60's - early 70's and use that knowledge to help us put a confidence level on our historical model.
No matter what cFireSim tells you when you plug in your numbers, you might still run out of money. Even if you use 2% instead of 4%, you might run out of money. Because no one can predict the future.
But it's a trade-off. Running out of money is one kind of failure. Dying one year into your retirement is another kind of failure. Having a long retirement of worrying about money and not travelling to see your family or not enjoying your life but then leaving a million bucks in the bank when you kick off is another kind of failure. We all have to use our own judgment and our own priorities to determine where we feel comfortable.
Has anyone done the math based on monthly withdrawals? Suppose I retire and withdraw tomorrow. I don't need to draw out 4% right away, I only need to draw out a months worth, or 1/12 of 4% or 0.33%. That would mean that the other 3.67% would be earning for me for another 1-11 months.
Has anyone done the math based on monthly withdrawals? Suppose I retire and withdraw tomorrow. I don't need to draw out 4% right away, I only need to draw out a months worth, or 1/12 of 4% or 0.33%. That would mean that the other 3.67% would be earning for me for another 1-11 months.
Has anyone done the math based on monthly withdrawals? Suppose I retire and withdraw tomorrow. I don't need to draw out 4% right away, I only need to draw out a months worth, or 1/12 of 4% or 0.33%. That would mean that the other 3.67% would be earning for me for another 1-11 months.
Twelve transactions a year does not seem like a lot to me. I'm currently buying more than 12 times a year; I'm not sure why selling 12 times a year would be any different.Has anyone done the math based on monthly withdrawals? Suppose I retire and withdraw tomorrow. I don't need to draw out 4% right away, I only need to draw out a months worth, or 1/12 of 4% or 0.33%. That would mean that the other 3.67% would be earning for me for another 1-11 months.
That is a strategy I guess but would generate a great deal of transactions. Also if your plan relies on trying to ensure that everything but what you spend is actively in some market maybe your plan isn't flexible enough.
Has anyone done the math based on monthly withdrawals? Suppose I retire and withdraw tomorrow. I don't need to draw out 4% right away, I only need to draw out a months worth, or 1/12 of 4% or 0.33%. That would mean that the other 3.67% would be earning for me for another 1-11 months.
I suspect that if you did this it wouldn't really change anything. It would all even out.
I just need to have my money invested in something where my transactions cost is low enough that it would be less than $700/year for an extra 11 transactions. I do.
The challenge to us worriers (and yes I am one) is to learn to be comfortable spending our allocation after a lifetime of saving. I am attempting to do this by being comfortable blowing 3%.. As in blowing it and not giving a second thought.
Sounds easy, but when it comes to paying for unsubsidised Health care I immediately "optimise" and go for the max subsidy, i.e spend way less.
Has anyone done the math based on monthly withdrawals? Suppose I retire and withdraw tomorrow. I don't need to draw out 4% right away, I only need to draw out a months worth, or 1/12 of 4% or 0.33%. That would mean that the other 3.67% would be earning for me for another 1-11 months.
That is a strategy I guess but would generate a great deal of transactions. Also if your plan relies on trying to ensure that everything but what you spend is actively in some market maybe your plan isn't flexible enough.
A much more common strategy would be to have some cash or easily available position that you can access and rely on in a downturn. One which allows you to fill that cash or cash alternative position with the other funds when the market recovers. That position would be based on your risk tolerance and historical recovery periods.
In short I don't think anyone has done that math on such a granular level as given the above I'm not sure it's a solid strategy.
Has anyone done the math based on monthly withdrawals? Suppose I retire and withdraw tomorrow. I don't need to draw out 4% right away, I only need to draw out a months worth, or 1/12 of 4% or 0.33%. That would mean that the other 3.67% would be earning for me for another 1-11 months.
Imo a plan failing within 2 years of 40 or 10 years of 40 isn't relevant bc most will need 50-80+ years of withdrawals.
Imo a plan failing within 2 years of 40 or 10 years of 40 isn't relevant bc most will need 50-80+ years of withdrawals.
I didn't specify 40 years, but in fairness, it is in the general range I was thinking. While I appreciate your optimism; the reality of life expediencies are a bit different (https://www.ssa.gov/oact/STATS/table4c6.html). Unless someone FIRE's several years before conception an 80yr span is probably not needed, nor is it a statistically significant difference from a perpetual WR.
Correct. 40 years is greatly determined to mean money should last bear indefinitely if it makes it there. But my point was. Why do I care if I ran out at 30 years vs 38 years it still failed and didn't support me and I had to change my plan to make something else happen.
And I think it's shortsighted to plan based on current life expectancy. They keep rising at least for the healthy non drug users.
All of my grandparents and great aunts and uncles are living well into there late 80s still active and all of them are making into the 90s still living. So it's much more likely for me to need to plan on that. Esp as medical advances continue.
I have this same "problem".
I will point out that a quick calculation suggests that moving maybe 2% of that hypothetical $500K from bonds to stocks - i.e., a very slightly riskier asset allocation - gets you that same $700 per year with a lot less hassle.
But yeah, the principle of moving money monthly instead of yearly is sound. Again, just the hassle factor.
I have this same "problem".
I do as well, but I've noticed my parents [divorced - living apart] now in their 90's haven't spent hardly any money in a couple decades. So if I get through the early sequence of returns risk, end up paying off my mortgage and getting gov't benefits those later years don't particularly worry me from a financial perspective.
I have this same "problem".
I do as well, but I've noticed my parents [divorced - living apart] now in their 90's haven't spent hardly any money in a couple decades. So if I get through the early sequence of returns risk, end up paying off my mortgage and getting gov't benefits those later years don't particularly worry me from a financial perspective.
That's probably true none of our calcs include ssa or Medicare.
I have this same "problem".
I do as well, but I've noticed my parents [divorced - living apart] now in their 90's haven't spent hardly any money in a couple decades. So if I get through the early sequence of returns risk, end up paying off my mortgage and getting gov't benefits those later years don't particularly worry me from a financial perspective.
That's probably true none of our calcs include ssa or Medicare.
To put that into perspective 22% of all retirees (https://usatoday30.usatoday.com/money/perfi/general/2005-08-15-getting-by-usat_x.htm) in the US live on SS alone. So your plan doesn't even include what nearly a quarter of folks are completely reliant upon.
I currently live off an amount just over my anticipated full SS, without additional contributions. Even if benefits get cut in half my WR drops to nearly half at 67...and I don't even count it! To think, many think this forums calculations aren't conservative enough?
One of the largest risks to FIRE is working longer than necessary. We don't ever really discuss it. Bc what's omy when you made it already for some extra padding.
One of the largest risks to FIRE is working longer than necessary. We don't ever really discuss it. Bc what's omy when you made it already for some extra padding.
Well I promise you I will not be working a regular job if my stash were to get to 4%WR. I doubt I'll even make it there before I pull the plug. I'm waiting to cross 5%WR and then start to look at specific exit strategies so I am out before or on 4%WR.
Its all a philosophical perspective.One of the largest risks to FIRE is working longer than necessary. We don't ever really discuss it. Bc what's omy when you made it already for some extra padding.
Well I promise you I will not be working a regular job if my stash were to get to 4%WR. I doubt I'll even make it there before I pull the plug. I'm waiting to cross 5%WR and then start to look at specific exit strategies so I am out before or on 4%WR.
Agreed!
It could be that it was the best year of your life... Which never happened because it was instead spent working a mediocre, high-paying job. Even if you actually do live to a healthy 100, how many years are left? If I lost a random year of my life, depending on winch year it was (the best have been self-directed), l would have really missed out!
I think it is disrespectful to criticize thise who work past 4% as wasting time.
I think it is disrespectful to criticize those who work past 4% as wasting time.
Finally, it's incredibly hypocritical for you to criticize others opinions when you demand your own stand unanswered. Practice what you preach.
(for those confused, see PizzaSteve's .sig )
I will admit to working on this Sol, but not wanting to argue and avoiding personal attacks is different from accepting that someone has a contrary view.Finally, it's incredibly hypocritical for you to criticize others opinions when you demand your own stand unanswered. Practice what you preach.
(for those confused, see PizzaSteve's .sig )
This has been a continuous problem with PizzaSteve. He has strong and well-voiced opinions, which I am grateful that he shares, but he then refuses to engage with anyone even after calling them out. It's like he wants to write, but he doesn't want anyone to read.
Better to just locate that "block poster" button, then he can write all he wants and nobody has to know.
When people form their writing in terms like, `I disagree, my view is X' I will engage. When they say 'You are wrong to have your view followed by isukts and personal attacks, I dont want to engage.
For example you just fired off a generalized personal attack, which you sometimes do. And while you are obviously very intelligent with views I mostly agree with, your style of doing that puts me off wanting to debate with you.
Its that simple. So yes, I would prefer you stop talking about me in that way. If you want to pkace me oin ignore and stop talking to or about me, that us fine...yet here you are talking about me in public, yet again.
In the event of a post, no need to reply or quote if you disagree. I am posting information meant to stand on its own and hope to avoid back and forth debating.
I will admit to working on this Sol, but not wanting to argue and avoiding personal attacks is different from accepting that someone has a contrary view.
Here you are talking about me in public, yet again, after i asked you not to, I thought somewhat politely.
Your .sig is not only silly, it seems antithetical to everything the internet is about. You might as well rephrase it to say "I am right and everyone else needs to shut up."
But I get it...you successfully shut me up. I will go away.
But I get it...you successfully shut me up. I will go away.
But I get it...you successfully shut me up. I will go away.
You passive aggressive BS gets really old. You are the one creating this drama. You could just participate in the forum normally like the rest of us. Nobody is telling you to shut up.
No, Sol started the drama with a comment aimed at me. But again, feel free to clean up the thread. I will delete my off topic posts.But I get it...you successfully shut me up. I will go away.
You passive aggressive BS gets really old. You are the one creating this drama. You could just participate in the forum normally like the rest of us. Nobody is telling you to shut up.
You need to be right so badly, you feel obligated to twist words. It has nothing to do with the 4% rule for Sol to insult me or comment on my sig. To say I started the drama is false.
No, Sol started the drama with a comment aimed at me. But again, feel free to clean up the thread. I will delete my off topic posts.But I get it...you successfully shut me up. I will go away.
You passive aggressive BS gets really old. You are the one creating this drama. You could just participate in the forum normally like the rest of us. Nobody is telling you to shut up.
You need to be right so badly, you feel obligated to twist words. It has nothing to do with the 4% rule for Sol to insult me or comment on my sig. To say I started the drama is false.
To say I started the drama is false.
No, Sol started the drama with a comment aimed at me. But again, feel free to clean up the thread. I will delete my off topic posts.But I get it...you successfully shut me up. I will go away.
You passive aggressive BS gets really old. You are the one creating this drama. You could just participate in the forum normally like the rest of us. Nobody is telling you to shut up.
You need to be right so badly, you feel obligated to twist words. It has nothing to do with the 4% rule for Sol to insult me or comment on my sig. To say I started the drama is false.
Work has many purposes. Your life includes many hours that are not at your desk or field work location. I think we should all try to honor our life choices, and while planning for the futue, also enjoy our life in every moment.I think your assumption does not reflect reality. Surveys have shown for many years that the majority of people in America are dissatisfied with their jobs. They do it for the money and the stability. So it kinda makes sense that if those people suddenly found themselves in a stable situation where they no longer needed the money (FIRE) that they would choose to do something else. However, most people cannot grasp the concept, just like most people can't choose to delay gratification. So the working reality becomes ingrained until eventually, you can't even imagine what life would be like without working. Those are the people that die early when they do stop working in their 60's, because they end up lost, feeling like they have no purpose. Borrowing a line from The Shawshank Redemption, "They're institutionalized."
One assumes that most of us picked a profession with some notion or passion for something enjoyable or meaningful. I assume we are in our situation based on ideas of what we wanted to do with our life, whether it is have kids, marry, life a particular place, buy a car or home, how we wanted to contribute to society, etc.
"Insights on Using the 4% Withdrawal Rule From Its Creator" [William Bengen]
http://www.aaii.com/journal/article/insights-on-using-the-withdrawal-rule-from-its-creator
CR: Originally, in your 1994 study, “Determining Withdrawal Rates Using Historical Data,” (Journal of Financial Planning, October 1994), you used a 4% withdrawal rate. What prompted you to increase the withdrawal rate to 4.5%?
WB: I included more asset classes.
Originally, I only worked with two asset classes. I used U.S. large-company stocks and U.S. intermediate-term government bonds. I then added small-cap stocks. The small-cap stocks added enough of a boost in terms of return to allow the withdrawal rate to be increased.
It was originally around 4.2%, actually. Including small-cap stocks raised it a little bit to about 4.5%. This shows you the importance of having a diversified portfolio during retirement.
I thought this comment was also interesting:
WB: A couple of years ago, he [Michael Kitces] developed a terrific chart where he plotted market valuations against the safe withdrawal rate year by year. It was an amazingly close negative correlation between the two. The higher that stock valuations are, the lower the safe withdrawal rate turned out to be.
His conclusion was that when you get a CAPE (cyclically adjusted price-earnings ratio) above 20, you should stick with the lowest, the safe, withdrawal rate because otherwise it’s too risky. We’re certainly well above that now. So, I don’t think any kind of a scheme where you attempt to try to take out 5% or 5.5% now is likely to work.
I expect, at some point, that there’s going to be another serious decline back to more normal valuations. You’re going to have to start scaling back what you withdraw each year. It might be painful, after you have misled yourself about the kind of lifestyle you really think you can afford.
yep i plan to use the CAPE as an indicator. i'd likely work PT for one more year if i were at a 4% swr today.
I agree just bc the cape is high doesn't mean a 4% won't work. But it's historically been a good indicator. But keeping 30% bonds on hand is worse at making your money last. Anything less than 80/20 starts to get detrimental fast.
This article by the Mad Fientist goes into a safe withdrawal rate prediction as a function of CAPE. There is also a calculator on the website that currently lists SWR at 3.5% due to a Shiller CAPE ratio of 32. This does assume a 80/20 asset allocation.
For what it’s worth.
https://www.madfientist.com/safe-withdrawal-rate/
I agree just bc the cape is high doesn't mean a 4% won't work. But it's historically been a good indicator. But keeping 30% bonds on hand is worse at making your money last. Anything less than 80/20 starts to get detrimental fast.
I think most people on here just look at portfolio success rate and don't even consider a different income generating strategy when they are drawing down on their portfolio.
My personal safety buffer is: if you're retiring when the market is making new highs, your SWR should produce a 100% historical success rate. That way you at least know that it would take something worse than the worst that history has ever served up to sink your plan. If you end up with too much, I'm sure there are many worthy charities that could benefit from your mistake.
I totally understand the desire of early FIREees to have some sort of calculated assurance that their plan is likely to succeed. But these exercises often end up giving the impression of much greater precision and accuracy than is really warranted by the data available.
My personal safety buffer is: if you're retiring when the market is making new highs, your SWR should produce a 100% historical success rate. That way you at least know that it would take something worse than the worst that history has ever served up to sink your plan. If you end up with too much, I'm sure there are many worthy charities that could benefit from your mistake.
I agree, but then it's not the 4% rule anymore...it would be something less than 4%...probably 3.5%.
I wish cFIREsim would allow for asset allocations different that stocks to bonds - at least throw in small cap and maybe international so we can play with that too.
I wish cFIREsim would allow for asset allocations different that stocks to bonds - at least throw in small cap and maybe international so we can play with that too.
I think the problem is getting accurate data about these subset allocations back far enough. Tyler's Site (https://portfoliocharts.com/calculators/) has all AA's, even from different counties back to 1970.
Monkeys uncle is correct. With the limited data available, we are grasping a straws to try to gleam more than what's already been repeated to death. 4% rule is the best model to follow.
typically takes a 3.5% with a large mortgage otherwise you have to go lower if you're looking for 40+ years of retirement. the mortgage helps you ride out the hyper inflation of the 60s and 70s and still maintain solvency - otherwise i think you have to get around 3.3%
I don't agree with any of these ideas that a high CAPE means you have to retire on less than 4%. In all cases the chance of failure with no adjustments at all is 5% if you get to a 4% WR. Do you seriously think that you can't adjust a little bit.
I don't agree with any of these ideas that a high CAPE means you have to retire on less than 4%. In all cases the chance of failure with no adjustments at all is 5% if you get to a 4% WR. Do you seriously think that you can't adjust a little bit.
There's a pessimistic and optimistic way of looking at it. The MadFientist tool extrapolates from Kitces research and can present lower SWR at high CAPE values. The original Kitces article essentially says 4% is safe enough, if CAPE is very low, maybe safe to withdraw even higher.
I think most people on here just look at portfolio success rate and don't even consider a different income generating strategy when they are drawing down on their portfolio.
I think you are entirely wrong. It is considered. However, having income (even a relatively small one) makes portfolio survival in a downturn effectively trivial. There's nothing to discuss, because additional income in a downturn makes it almost impossible to generate a portfolio failure when starting with a reasonable SWR.
I'm closing in on 5%WR at the moment. When I hit that mark I'll start my exit planning in detail and give my client notice. With an actual FIRE of something like 4.5%WR. I'll have plans to address an early sequence of returns risk. My FIRE plan has so many levels of risk mitigation depth that I am not working to sub-4%WR because of CAPE or any similar indicator. Free time in the prime of my life is worth more than making more money for some unlikely scenario that may well be mitigated more effectively a different way. It also ignores all the other ways you can fail FIRE that don't involve running out of money and none of those risks are reduced by OMYing.
For example, if the market crash is accompanied by rapid inflation - trying to live on $30k in bonds per year with no inflation adjustment is going to start really being untenable after a few years. The buying power of those bonds would be eroded away (even assuming I-Bonds that aren't devalued by rising interest rates)
I think most people on here just look at portfolio success rate and don't even consider a different income generating strategy when they are drawing down on their portfolio.
I think you are entirely wrong. It is considered. However, having income (even a relatively small one) makes portfolio survival in a downturn effectively trivial. There's nothing to discuss, because additional income in a downturn makes it almost impossible to generate a portfolio failure when starting with a reasonable SWR.
I suggest you go and read McClung's book on this and to compare that to the analysis that people are doing. Is anyone here really thinking about a withdrawal strategy with any sort of smarts at all. They aren't. It's completely about maintaining the same portfolio pre and post retirement. That is how we are getting all these comments about having high stock percentages despite analysis stating a lower stock percentage may result in more rather than less successes within retirement.
You actually didn't grasp my point either. An income generating strategy is from your portfolio not from going back to work. I'm talking about living off your portfolio.
In stating all of that I think having the ability to return to work even if it's part time packing shelves and earning a trivial income will make your chances of success really high.
For example, if the market crash is accompanied by rapid inflation - trying to live on $30k in bonds per year with no inflation adjustment is going to start really being untenable after a few years. The buying power of those bonds would be eroded away (even assuming I-Bonds that aren't devalued by rising interest rates)
This is what caused the mid/late-1960's failures of 4% rule. If one is worried about this environment, add a small percentage of an asset class to AA which has historically done well; both in market downturns and in high inflationary periods.
A better way is to use an increased bond percentage and attempt to never sell your stocks. I'm pretty sure that is exactly what McClung investigated and the data supports this approach.
Was it @Retire-Canada who said upthread that he/she would pull the plug at 5% WR? I just calculated that we have reached 5% WR right now. Pulling the plug now would scare the bejesus out of me, even though we would have a decent chance of making it work. I understand the OMY syndrome a little better all of a sudden.
For example, if the market crash is accompanied by rapid inflation - trying to live on $30k in bonds per year with no inflation adjustment is going to start really being untenable after a few years. The buying power of those bonds would be eroded away (even assuming I-Bonds that aren't devalued by rising interest rates)
This is what caused the mid/late-1960's failures of 4% rule. If one is worried about this environment, add a small percentage of an asset class to AA which has historically done well; both in market downturns and in high inflationary periods.
A better way is to use an increased bond percentage and attempt to never sell your stocks. I'm pretty sure that is exactly what McClung investigated and the data supports this approach.
So start with say 30% bonds and withdraw only from bonds until they are exhausted or only use the bonds if there is crash early in FIRE?
Can you provide a Coles Notes [yes I am that old] summary of your WR plan?
A better way is to use an increased bond percentage and attempt to never sell your stocks. I'm pretty sure that is exactly what McClung investigated and the data supports this approach.
So start with say 30% bonds and withdraw only from bonds until they are exhausted or only use the bonds if there is crash early in FIRE?
Can you provide a Coles Notes [yes I am that old] summary of your WR plan?
Sorry for mis-remembering (and being too lazy to go back and read, hah). I’ll be curious how you act when you do get to 5% and how the risk profile looks from there.
A better way is to use an increased bond percentage and attempt to never sell your stocks. I'm pretty sure that is exactly what McClung investigated and the data supports this approach.
So start with say 30% bonds and withdraw only from bonds until they are exhausted or only use the bonds if there is crash early in FIRE?
Can you provide a Coles Notes [yes I am that old] summary of your WR plan?
Is it this approach (https://earlyretirementnow.com/2017/04/19/the-ultimate-guide-to-safe-withdrawal-rates-part-13-dynamic-stock-bond-allocation-through-prime-harvesting/):
"
Basic McClung Prime Harvesting Rules
- This rule was proposed by Michael McClung in his book Living Off Your Money.
- Pick an initial asset allocation, e.g., 60% Stocks, 40% Bonds.
- There is an upper “guardrail” for the stock portfolio. You never withdraw from the stock portfolio until you reach that upper guardrail of equity holdings (and the guardrail is adjusted for CPI inflation). Normally that guardrail is set to 1.2 times the original equity holdings.
- If stocks are at or above 1.2-times their initial level (adjusted for inflation) then sell 20% of stocks and shift into bonds.
- Sell from bonds to fund upcoming withdrawal. If no more bonds are available then sell stocks.
- That’s it. It’s really that easy!
"
?
Was it @Retire-Canada who said upthread that he/she would pull the plug at 5% WR? I just calculated that we have reached 5% WR right now. Pulling the plug now would scare the bejesus out of me, even though we would have a decent chance of making it work. I understand the OMY syndrome a little better all of a sudden.
For example, if the market crash is accompanied by rapid inflation - trying to live on $30k in bonds per year with no inflation adjustment is going to start really being untenable after a few years. The buying power of those bonds would be eroded away (even assuming I-Bonds that aren't devalued by rising interest rates)
This is what caused the mid/late-1960's failures of 4% rule. If one is worried about this environment, add a small percentage of an asset class to AA which has historically done well; both in market downturns and in high inflationary periods.
I believe that this is simply not factually correct. I think it details exactly my point in that people on here don't understand how to withdraw money from their portfolio in retirement. There is a difference between drawing down from a portfolio and maintaining the same portfolio over the course of your drawdown phase to using a smarter drawdown process which gives you the best chance to maintain a higher income or have a higher success rate within the drawdown phase.
Adding to your stock portfolio is factually the incorrect way to manage the drawdown phase if you want to increase your success rate.
A better way is to use an increased bond percentage and attempt to never sell your stocks. I'm pretty sure that is exactly what McClung investigated and the data supports this approach.
Has anyone done the math based on monthly withdrawals? Suppose I retire and withdraw tomorrow. I don't need to draw out 4% right away, I only need to draw out a months worth, or 1/12 of 4% or 0.33%. That would mean that the other 3.67% would be earning for me for another 1-11 months.
Data and Methodology
The principal objective of our analysis is to calculate retirement portfolio success rates for various monthly withdrawal rate assumptions and various portfolio asset allocations from 1926 to 2009, and show how an adviser can use the findings to manage portfolio withdrawal rates adaptively.
....
The monthly data on financial market returns are provided in the 2010 Ibbotson SBBI Classic Yearbook by Morningstar. The stock returns in the analysis are monthly total returns to the Standard & Poor’s 500 Index. Corporate bond returns are monthly total returns calculated from the Salomon Brothers Long-Term High-Grade Corporate Bond Index and Standard & Poor’s monthly high-grade corporate composite yield data. Monthly portfolio returns, month-end values, and month-end values after withdrawals are calculated for overlapping 15-, 20-, 25-, and 30-year periods from January 1926 to December 2009.
It is like seeing other people jump off the high diving board and egging them on, versus being up there yourself and seeing how very far down the pool is.
It is like seeing other people jump off the high diving board and egging them on, versus being up there yourself and seeing how very far down the pool is.
Excellent analogy! I feel like the diving board continues to rise with PE too.
For the record, the Trinity Study (https://www.onefpa.org/journal/Pages/Portfolio%20Success%20Rates%20Where%20to%20Draw%20the%20Line.aspx) used monthly withdrawals. I'm pretty surprised that of all of the people responding to you, no one mentioned that. Doesn't anyone read things that they are basing their retirement on? Scary thought.
Early studies which helped develop the 4% rule did recommend asset allocations for retirees that were on the aggressive side. In the conclusion of William Bengen’s original 1994 article that started research in this area, he wrote, “Despite advice you may have heard to the contrary, the historical record supports an allocation of between 50-percent and 75-percent stocks as the best starting allocation for a client. For most clients, it can be maintained throughout retirement, or until their investing goals change. Stock allocations below 50 percent and above 75 percent are counterproductive.
For the record, the Trinity Study (https://www.onefpa.org/journal/Pages/Portfolio%20Success%20Rates%20Where%20to%20Draw%20the%20Line.aspx) used monthly withdrawals. I'm pretty surprised that of all of the people responding to you, no one mentioned that. Doesn't anyone read things that they are basing their retirement on? Scary thought.
It's also surprising that people don't highlight the fact that 4% rule advocates 50 - 75% equities (https://www.bogleheads.org/wiki/Trinity_study_update), not 100% - which has a far greater impact on outcome than re-balance bands, frequency of withdrawals, frequency of inflation adjustment, etc. There are infinite levers to tweak on the margins, but let's not lose the forest for the trees. In this low rate / high PE environment, AA has a large influence on outcome and it is hardly ever discussed.QuoteEarly studies which helped develop the 4% rule did recommend asset allocations for retirees that were on the aggressive side. In the conclusion of William Bengen’s original 1994 article that started research in this area, he wrote, “Despite advice you may have heard to the contrary, the historical record supports an allocation of between 50-percent and 75-percent stocks as the best starting allocation for a client. For most clients, it can be maintained throughout retirement, or until their investing goals change. Stock allocations below 50 percent and above 75 percent are counterproductive.
For the record, the Trinity Study (https://www.onefpa.org/journal/Pages/Portfolio%20Success%20Rates%20Where%20to%20Draw%20the%20Line.aspx) used monthly withdrawals. I'm pretty surprised that of all of the people responding to you, no one mentioned that. Doesn't anyone read things that they are basing their retirement on? Scary thought.
It's also surprising that people don't highlight the fact that 4% rule advocates 50 - 75% equities (https://www.bogleheads.org/wiki/Trinity_study_update), not 100% - which has a far greater impact on outcome than re-balance bands, frequency of withdrawals, frequency of inflation adjustment, etc. There are infinite levers to tweak on the margins, but let's not lose the forest for the trees. In this low rate / high PE environment, AA has a large influence on outcome and it is hardly ever discussed.QuoteEarly studies which helped develop the 4% rule did recommend asset allocations for retirees that were on the aggressive side. In the conclusion of William Bengen’s original 1994 article that started research in this area, he wrote, “Despite advice you may have heard to the contrary, the historical record supports an allocation of between 50-percent and 75-percent stocks as the best starting allocation for a client. For most clients, it can be maintained throughout retirement, or until their investing goals change. Stock allocations below 50 percent and above 75 percent are counterproductive.
The Trinity study was based on a 30 year retirement. And was the absolute worst case withdrawal. It doesn't really matter if you've read that study and understand what's in it bc with cfiresim you can historically back test multiple AAs and different withdrawal strategies to your hearts content. It was a good basis for the jumping off point for all the FIRE forums. But the tools to test plans have since been made better and the discussion around here means you don't need to go read a study that was never intended to do what we're trying to do.
For the record, the Trinity Study (https://www.onefpa.org/journal/Pages/Portfolio%20Success%20Rates%20Where%20to%20Draw%20the%20Line.aspx) used monthly withdrawals. I'm pretty surprised that of all of the people responding to you, no one mentioned that. Doesn't anyone read things that they are basing their retirement on? Scary thought.
It's also surprising that people don't highlight the fact that 4% rule advocates 50 - 75% equities (https://www.bogleheads.org/wiki/Trinity_study_update), not 100% - which has a far greater impact on outcome than re-balance bands, frequency of withdrawals, frequency of inflation adjustment, etc. There are infinite levers to tweak on the margins, but let's not lose the forest for the trees. In this low rate / high PE environment, AA has a large influence on outcome and it is hardly ever discussed.QuoteEarly studies which helped develop the 4% rule did recommend asset allocations for retirees that were on the aggressive side. In the conclusion of William Bengen’s original 1994 article that started research in this area, he wrote, “Despite advice you may have heard to the contrary, the historical record supports an allocation of between 50-percent and 75-percent stocks as the best starting allocation for a client. For most clients, it can be maintained throughout retirement, or until their investing goals change. Stock allocations below 50 percent and above 75 percent are counterproductive.
The Trinity study was based on a 30 year retirement. And was the absolute worst case withdrawal. It doesn't really matter if you've read that study and understand what's in it bc with cfiresim you can historically back test multiple AAs and different withdrawal strategies to your hearts content. It was a good basis for the jumping off point for all the FIRE forums. But the tools to test plans have since been made better and the discussion around here means you don't need to go read a study that was never intended to do what we're trying to do.
I'm not sure I'd recommend anyone retire using any withdrawal rule that they personally haven't read and understood. That seems like particularly bad advice, no matter the calculators that exist. If you don't understand the input, the output is useless.
The Trinity study was based on a 30 year retirement. And was the absolute worst case withdrawal. It doesn't really matter if you've read that study and understand what's in it bc with cfiresim you can historically back test multiple AAs and different withdrawal strategies to your hearts content. It was a good basis for the jumping off point for all the FIRE forums. But the tools to test plans have since been made better and the discussion around here means you don't need to go read a study that was never intended to do what we're trying to do.
I'm not sure I'd recommend anyone retire using any withdrawal rule that they personally haven't read and understood. That seems like particularly bad advice, no matter the calculators that exist. If you don't understand the input, the output is useless.
you dont have to read the trinity study to understand what the trinity study was based on - but all they did was back test data and find the highest posslbe SWR that was safe for 30 years - this is no different than just using cFIREsim to run your own thing.
It is like seeing other people jump off the high diving board and egging them on, versus being up there yourself and seeing how very far down the pool is.
We could easily earn money part-time, we could cut our spending quite a bit, and chances are we will get some sizable inheritances one day between my parents and my childless Aunt and Uncle, both sets of whom are comfortable. But still, not willing to jump off the diving board. Heck, I’m sure the careful nature that allows us to get to the point of FIRE is half the problem in being able to pull the plug
It is like seeing other people jump off the high diving board and egging them on, versus being up there yourself and seeing how very far down the pool is.
We could easily earn money part-time, we could cut our spending quite a bit, and chances are we will get some sizable inheritances one day between my parents and my childless Aunt and Uncle, both sets of whom are comfortable. But still, not willing to jump off the diving board. Heck, I’m sure the careful nature that allows us to get to the point of FIRE is half the problem in being able to pull the plug
I had a thought today and would like to share it. Nothing scientific, just a thought about the 4% rule.
You can make a retirement plan based on the 4% rule more reliable by adding multiple "safety nets" which could save you even if if the plan failed. In fact, I am sure that many of us already have a number of safety nets in place, we just don't realize it.
It's a good thought. Even a slight temporary reduction in withdrawals in response poor market returns pushes you towards 100% historical success. Personally my FIRE plans start with 4%WR and then defend in depth through a number of safety mechanisms as you note. The key to my mind is that at some point [for me that's 4%WR] saving more money isn't as useful and diversifying your defense strategies.
More money has diminishing returns, but would still make a FIRE plan more robust. As per your second statement, are the costs of these diminished returns worth it?
I do sympathize though. If you spend decades being programmed and groomed to work. You excel at it. You build a life and a personal identity around it. It's damn hard to stop and start from scratch in a post-FIRE life that doesn't involve work.
A great and always relevant comic (https://www.smbc-comics.com/comic/2012-09-02), see panel six, "Most people never let themselves die"
I agree just bc the cape is high doesn't mean a 4% won't work. But it's historically been a good indicator. But keeping 30% bonds on hand is worse at making your money last. Anything less than 80/20 starts to get detrimental fast.
A simple question that may have been addressed already in these 20-some odd pages, so apologies up front. For a person (like me) who really has a 30 year retirement expectation, based on my age, to start in about 2 years, is the 4% SWR a safe assumption? Safer than an early retiree with a 40 or 50 year retirement plan? I see lots of folks questioning the Trinity Study in that the SWR should be lower based on a longer retirement, but not a lot of discussion about a 30 year plan. Thanks in advance!
A simple question that may have been addressed already in these 20-some odd pages, so apologies up front. For a person (like me) who really has a 30 year retirement expectation, based on my age, to start in about 2 years, is the 4% SWR a safe assumption?
Safer than an early retiree with a 40 or 50 year retirement plan?
A simple question that may have been addressed already in these 20-some odd pages, so apologies up front. For a person (like me) who really has a 30 year retirement expectation, based on my age, to start in about 2 years, is the 4% SWR a safe assumption?
You have 25 years of expenses saved up and only need to get them to last 30 years. So 5 years worth of investment earnings over three decades. A constant 1.3% return after inflation would be more than enough.QuoteSafer than an early retiree with a 40 or 50 year retirement plan?
A little bit, but not strikingly so. Take a look at the green line in this graph. (The blue line is to illustrate how just using conventional trinity style calculations with longer and longer retirement windows isn't a good way to estimate this because eventually bad start years -- 1970s and great depression -- drop out of the model so it doesn't actually produce more conservative estimates.)
Detailed methods and assumptions from this post (https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/msg1508268/#msg1508268) earlier in this same thread.
Second, you left out how important expenses are to the 4% rule. You can expect success of 40k expenses on 1MM portfolio if expenses are fixed or at inflation. What about health care? What about college for my kids? These 'luxuries' are certainly rising faster than inflation.
A few significant omissions and observations from your response - first, inflation is obviously significant to success, and most of us have no idea what 'real' 1970-style inflation looks like. We should probably plan for higher than 2-3% inflation, especially with all the historically inflationary inputs like higher wages, low tax rates, and low borrowing rates.
Second, you left out how important expenses are to the 4% rule. You can expect success of 40k expenses on 1MM portfolio if expenses are fixed or at inflation. What about health care? What about college for my kids? These 'luxuries' are certainly rising faster than inflation.
The final thing I'd like to put out there is that 95% success does not mean that you are guaranteed to make it to 75+ years old and then have to tighten your belt if your were unlucky.
It means that if you are any one of the people that retired at a peak and experience an adverse sequence of returns; that you are going to struggle from that point forward. It could be especially terrible this time around with good ACA healthcare plans melting quicker than the polar ice caps...
Sorry to rain on the 'stop worrying about the 4% rule' parade again, it has turned out to be a good parade for the 2009 retiree, but if you are just hitting 4% now and have a 30+ year retirement, maybe hang in there for 3% (unless you're in a sane country that provides basic healthcare to their population regardless of being employed).
In other words, I think the fantastic distributed growth we have enjoyed up until recent times may be gone forever. The rise of Gates, Bezos, and Musk, is like a perfect echo to Vanderbilt, Carnegie, Rockefeller, and Morgan.
You might enjoy reading the book "The Rational Optimist" for a well-reasoned counterpoint to the above.
Every day extra you work passed 4% swr guarantees just 1 thing. You will have worked an extra day. The older you are the more likely you are to die first than run out of money I'd prefer to not work extra and be flexible in retirement. And I'll be walking away from a 250k job with private stock making me over 100k a year in returns when I leave.
Yep. Maizeman, care to bring out your graphs again?
Always great when we get people here who obviously haven't actually read the thread before attacking the 4% rule. Not.
Looks like the probability of being dead between the ages of 70 and 100 is unacceptably high...:)
You won't be surprised to hear that there's communities on the internet talking about life extension and using themselves as guinea pigs by taking various supplements that have been shown to work on rats etc.Looks like the probability of being dead between the ages of 70 and 100 is unacceptably high...:)
Looking for suggestions to mitigate the risk.
You won't be surprised to hear that there's communities on the internet talking about life extension and using themselves as guinea pigs by taking various supplements that have been shown to work on rats etc.Looks like the probability of being dead between the ages of 70 and 100 is unacceptably high...:)
Looking for suggestions to mitigate the risk.
...well there's always the SciFi idea of the 'Singularity' - uploading our consciousness into a computer to live in perpetuity...You won't be surprised to hear that there's communities on the internet talking about life extension and using themselves as guinea pigs by taking various supplements that have been shown to work on rats etc.Looks like the probability of being dead between the ages of 70 and 100 is unacceptably high...:)
Looking for suggestions to mitigate the risk.
google's futurist predicts the millenial generation will be the first to have to decide to die, we will reach a point where we can fix most mental failures and physical failures that people can continue good quality of life more or less indefinitely. So either the govt or individuals will have to set life limits on human life.
...well there's always the SciFi idea of the 'Singularity' - uploading our consciousness into a computer to live in perpetuity...
Looks like the probability of being dead between the ages of 70 and 100 is unacceptably high...:)
Looking for suggestions to mitigate the risk.
...well there's always the SciFi idea of the 'Singularity' - uploading our consciousness into a computer to live in perpetuity...
Yea, nobody wants me around forever. Society stops evolving the moment individuals stop dying. I loved my grandfather, but he was a born and raised a racist and the world is better off with his generation moved on. I'm sure future generations will say something similar about me.
And besides, the singularity isn't exactly a FIRE utopia either. Just think of all of the problems around maintaining a SWR in a virtual world. Who's going to pay all of the maintenance workers who keep the servers running? Where does the electricity come from, and who maintains that infrastructure? How does asset ownership in the physical world translate into income streams in the virtual world?
Personally I think the whole idea is a hoax. By the time we have generalist AI capable of indistinguishably reproducing my forum personality, that AI will also be capable of simultaneously reproducing every other forum member's personality too, and all of those digital representations of long-dead individuals will exist together in a hive mind. In that situation, I think it would be pretty clear that fencing off one little personality (mine, yours, MMM's) as distinct from the others is sort of inefficiently redundant. Why keep sol alive as forum bot? Just to amuse the other forum bots? Can bots even be amused? The hive mind would surely have to recognize that sol is kind of a dumb ass, on 99% of the possible topics of discussion, so why devote resources to letting him continue to be stupid when there are other parts of the hive mind that can do better?
The singularity proponents want to live forever, but I'm pretty sure that digital superintelligence will have better things to do than play Renaissance Faire all day with the personalities of stupid racist dead people who are only holding the world back.
In support of EV I will point out that the "full freight" cost of our shitty HC plan is currently $1100/month.. I don't know what that was say 5 years ago but its currently the cost for a mid to late 50"s couple on a Bronze plan is $13k per year in premiums alone, add to that the OOP costs ($13k if you both had pre-existing conditions, or developed something).
So thats up to $26k/year today. How will costs increase and will the ACA subsidies be there for much longer?
So while I agree 4% works, that 4% could be over half a million bucks more than the days when your employer paid almost all your HC costs. And thats assuming you don't have kids.
In support of EV I will point out that the "full freight" cost of our shitty HC plan is currently $1100/month.. I don't know what that was say 5 years ago but its currently the cost for a mid to late 50"s couple on a Bronze plan is $13k per year in premiums alone, add to that the OOP costs ($13k if you both had pre-existing conditions, or developed something).
So thats up to $26k/year today. How will costs increase and will the ACA subsidies be there for much longer?
So while I agree 4% works, that 4% could be over half a million bucks more than the days when your employer paid almost all your HC costs. And thats assuming you don't have kids.
4% works only if your $26K health cost increases at regular inflation rates. If we think health care costs will rise faster than normal inflation (I do) then we have to account for that in our expenses estimate. The same methodology that gave us the 4% rule still works, but because of the extra rising costs we end up with a somewhat lower SWR.
I used $28K for healthcare inflated at 13% till we reach medicare age. For a 95% success rate in cFIREsim I get a 3.5% initial WR. Everyone's answer will be different, of course.
In support of EV I will point out that the "full freight" cost of our shitty HC plan is currently $1100/month.. I don't know what that was say 5 years ago but its currently the cost for a mid to late 50"s couple on a Bronze plan is $13k per year in premiums alone, add to that the OOP costs ($13k if you both had pre-existing conditions, or developed something).
So thats up to $26k/year today. How will costs increase and will the ACA subsidies be there for much longer?
So while I agree 4% works, that 4% could be over half a million bucks more than the days when your employer paid almost all your HC costs. And thats assuming you don't have kids.
4% works only if your $26K health cost increases at regular inflation rates. If we think health care costs will rise faster than normal inflation (I do) then we have to account for that in our expenses estimate. The same methodology that gave us the 4% rule still works, but because of the extra rising costs we end up with a somewhat lower SWR.
I used $28K for healthcare inflated at 13% till we reach medicare age. For a 95% success rate in cFIREsim I get a 3.5% initial WR. Everyone's answer will be different, of course.
I don't intend to post as a pessimist when I post my 'wait, but what about' posts; hopefully I provide food for thought.
I'm very skeptical of headline inflation - even chained-CPI is very different from what a young 'individual' would expect. To ignore inflation, or say that inflation is counted in the 4% SWR literature is to read one thing superficially and not start studying it as it pertains to your own situation. My hope would be that folks continue to educate in this forum as to things like the good starting point and yet potential pitfalls of the 4% rule.
One last point, there was a comment against my statement that 95% success means you get to 75+ yo and then struggle. I made my comment about those 55 - 65 y.o. ER's in 2007 that then hit 2008-2009 and lost 37% or more (sometimes painfully more) of their nest egg. Most of them bailed out as they "played chicken" with Wall St. and pulled right. They are doing OK today, but nothing like if they had either been more conservative before the crash or still been in the accumulation phase and benefiting from depressed stock price opportunity.
But here we are. As long as we are aware of the nuances of the basis of our decisions, then we should be ready for what comes in the foreseeable future. Sadly, 30+ years includes many things that cannot possibly be foreseen. But if you are willing to make it work and aware of what mistakes you might be making, then that shouldn't worry us.
Hopefully that clarifies my position on the somewhat outdated Trinity Study.
Well the inflation discussion has been had before as well. Every individual's personal inflation will be different (regardless of youthfulness). I don't think anyone is "ignoring" inflation, just stating that you have to incorporate it into your spending plan. As others pointed the actions you take to mitigate particular inflationary risks depends on what is inflating. I haven't seen anyone say ignore inflation or to say that inflation is not a risk. Just that as it pertains to the 4% rule it is in fact incorporated into the model and that it is still just a model and you as an individual will have to adjust accordingly.
Well the inflation discussion has been had before as well. Every individual's personal inflation will be different (regardless of youthfulness). I don't think anyone is "ignoring" inflation, just stating that you have to incorporate it into your spending plan. As others pointed the actions you take to mitigate particular inflationary risks depends on what is inflating. I haven't seen anyone say ignore inflation or to say that inflation is not a risk. Just that as it pertains to the 4% rule it is in fact incorporated into the model and that it is still just a model and you as an individual will have to adjust accordingly.
You speak very well for yourself, but do you represent everyone? And I'm still not sure you get just how tough higher than expected inflation might get on a fixed income.
Yup. I don't see "you may be wrong about your estimated expenses" as an issue with the math about the 4% SWR. It's a separate question of "how accurate are the numbers you're plugging into the 4% SWR formula to figure out how much you need to save." Like nereo I realize this may sound like an academic distinction, but I think it reduces confusion for newbies reading the thread if we avoid confounding problems with the SWR rate math itself and problems with accurately estimating the variables an individual person plugs into that SWR math when they're deciding how much they need to save before they consider themselves FI.
With regards to the higher rate of healthcare inflation, remember that healthcare in already a component of the CPI and the higher inflation for healthcare also pulls the overall CPI number up so if you pull it out and look at a higher inflation rate for it specifically, it also means you should adjust your assumptions about overall inflation for the rest of your spending downwards.
It still may make sense to split them out, because the proportion of total spending which goes to healthcare for a FIREd individual may be substantially higher than the proportion in the overall population, but assuming healthcare will inflate at a higher rate and all your other expenses will inflate at a rate that includes the higher rate of healthcare is double counting pessimism.
Yes, I'm double counting, but that hardly makes a difference (13% vs about 2%).It actually in many scenarios it will make a significant difference because the lower inflation number is applied to the majority (hopefully) of your spending so smaller changes in that number will have an outsized effect on overall spending growth.
It's going to be more than CPI, simply because each year we're one year older.
I used 13% and got an answer that was pleasing. It seems sufficiently conservative, some would say ridiculously over the top, but it works for me (the stash is big enough) so it's not an issue. YMMV.
Just to be clear on the inflation thing.....CPI is fundamentally BS. It excludes food and energy, it makes up a figure for housing via imputed rent that is not based on any current information, it excludes government and employer funded health care, and on and on. Some of these things will be very meaningful or less meaningful to a FIREe.
The first task obviously calls for a much more pessimistic set of assumptions than the second one, yet people mix the two discussions together without usually specifying which task they're currently working on themselves (although in this case you did explicitly explain what was motivating your assumptions, which was quite helpful, thanks).
...the one guaranteed thing that working longer brings you - you're closer to dieing [sic] than you were the day before.
...the one guaranteed thing that working longer brings you - you're closer to dieing [sic] than you were the day before.
You (and Maizeman, and many other ER bloggers) bring this up frequently. As a counterpoint, there is also plently of correlation between wealth and longevity (https://www.theguardian.com/us-news/2017/apr/06/us-healthcare-wealth-income-inequality-lifespan). Of course, if working is more stressful than poverty, then I agree that you're better of ER'ing.
You (and Maizeman, and many other ER bloggers) bring this up frequently. As a counterpoint, there is also plently of correlation between wealth and longevity (https://www.theguardian.com/us-news/2017/apr/06/us-healthcare-wealth-income-inequality-lifespan). Of course, if working is more stressful than poverty, then I agree that you're better of ER'ing.
You (and Maizeman, and many other ER bloggers) bring this up frequently. As a counterpoint, there is also plently of correlation between wealth and longevity (https://www.theguardian.com/us-news/2017/apr/06/us-healthcare-wealth-income-inequality-lifespan). Of course, if working is more stressful than poverty, then I agree that you're better of ER'ing.
...at the same time patients who receive more treatments, and hence are happier with their medical care, may actually have worse outcomes (ie die more often) than patients whose treatment decisions aren't influenced by trying to optimize patient satisfaction.**
Sixty percent of patients with cardiac arrest who were admitted to a teaching hospital during the days when cardiologists were at scientific meetings died within 30 days, compared to 70 percent of patients who were admitted on non-meeting days.
I bet the story you heard was based on was this study: "The Startling Benefit of Cardiology Meetings." A really clever approach to analyzing the data and a fascinating -- if rather worrying -- result.QuoteSixty percent of patients with cardiac arrest who were admitted to a teaching hospital during the days when cardiologists were at scientific meetings died within 30 days, compared to 70 percent of patients who were admitted on non-meeting days.
News article: https://hms.harvard.edu/news/startling-benefit-cardiology-meetings
Original article: https://jamanetwork.com/journals/jamainternalmedicine/fullarticle/2038979
I bet the story you heard was based on was this study: "The Startling Benefit of Cardiology Meetings." A really clever approach to analyzing the data and a fascinating -- if rather worrying -- result.QuoteSixty percent of patients with cardiac arrest who were admitted to a teaching hospital during the days when cardiologists were at scientific meetings died within 30 days, compared to 70 percent of patients who were admitted on non-meeting days.
News article: https://hms.harvard.edu/news/startling-benefit-cardiology-meetings
Original article: https://jamanetwork.com/journals/jamainternalmedicine/fullarticle/2038979
Great post!...well there's always the SciFi idea of the 'Singularity' - uploading our consciousness into a computer to live in perpetuity...
Yea, nobody wants me around forever. Society stops evolving the moment individuals stop dying. I loved my grandfather, but he was a born and raised a racist and the world is better off with his generation moved on. I'm sure future generations will say something similar about me.
And besides, the singularity isn't exactly a FIRE utopia either. Just think of all of the problems around maintaining a SWR in a virtual world. Who's going to pay all of the maintenance workers who keep the servers running? Where does the electricity come from, and who maintains that infrastructure? How does asset ownership in the physical world translate into income streams in the virtual world?
Personally I think the whole idea is a hoax. By the time we have generalist AI capable of indistinguishably reproducing my forum personality, that AI will also be capable of simultaneously reproducing every other forum member's personality too, and all of those digital representations of long-dead individuals will exist together in a hive mind. In that situation, I think it would be pretty clear that fencing off one little personality (mine, yours, MMM's) as distinct from the others is sort of inefficiently redundant. Why keep sol alive as a forum bot? Just to amuse the other forum bots? Can bots even be amused? The hive mind would surely have to recognize that sol is kind of a dumb ass, on 99% of the possible topics of discussion, so why devote resources to letting him continue to be stupid when there are other parts of the hive mind that can do better?
The singularity proponents want to live forever, but I'm pretty sure that digital superintelligence will have better things to do than play Renaissance Faire all day with the personalities of stupid racist dead people who are only holding the world back.
Looks like the probability of being dead between the ages of 70 and 100 is unacceptably high...:)
Looks like the probability of being dead between the ages of 70 and 100 is unacceptably high...:)
Maybe if you cut back on living in your 50's/60's - there will be less chance of running out of life in your 70's/80's :)
Looks like the probability of being dead between the ages of 70 and 100 is unacceptably high...:)
Maybe if you cut back on living in your 50's/60's - there will be less chance of running out of life in your 70's/80's :)
I've taken the opposite approach to making my money last longer than I do. Instead of trying to make my money last longer, I've taken up smoking and drinking, this improves my chances of not running out of money before I die.
Noted is that study us for a 30 yr retirement, not longer and assumptions should be adjusted accordingly for longer plans (like mine :-)).
1. Do you consider the value of your paid-for house in the net worth upon which your initial SWR is calculated?1. No, because
2. Which is the traditional way to calculate things?
Your house can definitely be counted as part of your stash assuming that you are prepared to downsize within a certain time frame and you have realistic expectations of the bump to your stash of downsizing.
I live in a HCOL area. My house is probably worth 1.3 million. We could probably buy a house for anywhere between 400k - 800k. The difference could definitely be part of our stash.
In stating that at the moment I'm not including my house in my net worth because I'm not 100% sure we will move.
Your house can definitely be counted as part of your stash assuming that you are prepared to downsize within a certain time frame and you have realistic expectations of the bump to your stash of downsizing.
I live in a HCOL area. My house is probably worth 1.3 million. We could probably buy a house for anywhere between 400k - 800k. The difference could definitely be part of our stash.
In stating that at the moment I'm not including my house in my net worth because I'm not 100% sure we will move.
My home equity is included in my NW but not in my FI stash
Your house can definitely be counted as part of your stash assuming that you are prepared to downsize within a certain time frame and you have realistic expectations of the bump to your stash of downsizing.
I live in a HCOL area. My house is probably worth 1.3 million. We could probably buy a house for anywhere between 400k - 800k. The difference could definitely be part of our stash.
In stating that at the moment I'm not including my house in my net worth because I'm not 100% sure we will move.
My home equity is included in my NW but not in my FI stash
This is just semantics though. When I talk about my net worth I am stating my stash. You can definitely use home equity as part of your stash assuming you can convert that equity to investment funds - i.e. downsize your house and put the difference into your investment portfolio.
So in my case if I'm confident I will sell my house and pocket say $500k I would consider that part of my stash.
Do you consider the value of your paid-for house in the net worth upon which your initial SWR is calculated? Or do you consider it a buffer that you could convert to some cash later if needed?I include it in my total net worth, but it is not part my FI net worth (ie assets used to determine SWR). I do factor it back in around age 90. I know the house will get sold and I'll move into some kind of senior's condo or retirement home by then (probably sooner - since our retirement home is outside of town - depends on how soon self driving cars become a reality for the average person).
Your house can definitely be counted as part of your stash assuming that you are prepared to downsize within a certain time frame and you have realistic expectations of the bump to your stash of downsizing.
I live in a HCOL area. My house is probably worth 1.3 million. We could probably buy a house for anywhere between 400k - 800k. The difference could definitely be part of our stash.
In stating that at the moment I'm not including my house in my net worth because I'm not 100% sure we will move.
Your house can definitely be counted as part of your stash assuming that you are prepared to downsize within a certain time frame and you have realistic expectations of the bump to your stash of downsizing.
I live in a HCOL area. My house is probably worth 1.3 million. We could probably buy a house for anywhere between 400k - 800k. The difference could definitely be part of our stash.
In stating that at the moment I'm not including my house in my net worth because I'm not 100% sure we will move.
Steveo; I think the ultimate stash back up for all us Aussie MMM's is we all sell our houses then live a life of luxury in our own little community more than 100km from the nearest "city". We can all have big non-moustachian cars to get around. Won't matter, relatively.
For me, I'm going to start FIRE much higher than 4%. The house is definitely one of the backups. I can live in a van if I have to, or just go hiking for a year. I can go back to work if I have to easily enough; I LOVE my work (I'll actually keep working, unpaid, on exactly what I want to research; that's one of my main FIRE goals), when I get to choose what I do (research). Its not hard for me to pick up small research contracts, bits of teaching, etc. My FIRE portfolio will be quite diverse, not just a 60/40 like the Trinity Studies (if i remember correctly). It will be agressive on stocks, with glidepaths to the FIRE date, and rising equity glide path after FIRE. The 4% rule doesn't scare me at all.
Hey MMMers, remedial question here:
Do you consider the value of your paid-for house in the net worth upon which your initial SWR is calculated? Or do you consider it a buffer that you could convert to some cash later if needed?
For simple math, if I have $1M net worth including a $200K house, initial 4% SWR would be $40K and I should set that as my ongoing retirement number.
If I only consider $800K that means I should set $32K as my number, but I know I have the house on the side (growing in value hopefully) that I can tap into by downsizing or becoming a renter if I need to.
In each case I can give myself inflationary raises of 2-3% a year and should monitor things to adjust spending if shit hits the fan in the economy, so we can disregard those distractions for this question.
Which is the traditional way to calculate things? I realize that the ultra conservative thing to do is to not include the house and to only pull 3% as the SWR, a bulletproof method that will make my heirs very rich. I am wondering what the 'standard' guidance is or what the original theory suggests.
(I word-searched all 29 pages of this thread manually and hit deborah's journal a bunch of times and learned steveo is considering downsizing, but this question is not answered. Sending up a balloon, thanks!)
Hey MMMers, remedial question here:(3) under current tax rules in USA you can pull US$90k /yr from long term capital gains and dividends and pay ZERO federal tax.
Stocks have tended to perform better over longer time periods and should therefore provide the highest possible SWR's.
This may seem instinctively true but mathematically it's more complicated than that. Safe Withdrawal Rates are highly influenced not only by average returns but also by annual volatility. All things being equal, higher volatility lowers the SWR. So two portfolios with equal average returns may have drastically different withdrawal rates based on the underlying volatility. And sometimes portfolios with lower average returns but lower volatility can still beat stocks. That's how you get interesting results like this:
(https://portfoliocharts.files.wordpress.com/2015/09/swr-vs-cagr.jpg)
This plots the returns and calculated SWRs of a variety of different popular lazy portfolios. Note that the Total Stock Market has one of the highest returns but the lowest SWR! Also note than none of the top-3 SWR portfolios have more than 40% stocks. For a more detailed walkthrough, I'd recommend reading this (http://portfoliocharts.com/2015/09/08/why-your-safe-withdrawal-rate-is-probably-wrong/). And to see an example of a portfolio with only 40% stocks that matches the long-term returns of the stock market with much lower volatility and a much higher SWR, try this (http://portfoliocharts.com/2015/09/22/catching-a-golden-butterfly/).
Stocks have tended to perform better over longer time periods and should therefore provide the highest possible SWR's.
This may seem instinctively true but mathematically it's more complicated than that. Safe Withdrawal Rates are highly influenced not only by average returns but also by annual volatility. All things being equal, higher volatility lowers the SWR. So two portfolios with equal average returns may have drastically different withdrawal rates based on the underlying volatility. And sometimes portfolios with lower average returns but lower volatility can still beat stocks. That's how you get interesting results like this:
(https://portfoliocharts.files.wordpress.com/2015/09/swr-vs-cagr.jpg)
This plots the returns and calculated SWRs of a variety of different popular lazy portfolios. Note that the Total Stock Market has one of the highest returns but the lowest SWR! Also note than none of the top-3 SWR portfolios have more than 40% stocks. For a more detailed walkthrough, I'd recommend reading this (http://portfoliocharts.com/2015/09/08/why-your-safe-withdrawal-rate-is-probably-wrong/). And to see an example of a portfolio with only 40% stocks that matches the long-term returns of the stock market with much lower volatility and a much higher SWR, try this (http://portfoliocharts.com/2015/09/22/catching-a-golden-butterfly/).
Mind blown. This is an awesome application of the best kind of intensive geekiness. I am in awe. Also, I am three years behind, but don't want to lose this thread. Thank you so much!
Stocks have tended to perform better over longer time periods and should therefore provide the highest possible SWR's.
This may seem instinctively true but mathematically it's more complicated than that. Safe Withdrawal Rates are highly influenced not only by average returns but also by annual volatility. All things being equal, higher volatility lowers the SWR. So two portfolios with equal average returns may have drastically different withdrawal rates based on the underlying volatility. And sometimes portfolios with lower average returns but lower volatility can still beat stocks. That's how you get interesting results like this:
(https://portfoliocharts.files.wordpress.com/2015/09/swr-vs-cagr.jpg)
This plots the returns and calculated SWRs of a variety of different popular lazy portfolios. Note that the Total Stock Market has one of the highest returns but the lowest SWR! Also note than none of the top-3 SWR portfolios have more than 40% stocks. For a more detailed walkthrough, I'd recommend reading this (http://portfoliocharts.com/2015/09/08/why-your-safe-withdrawal-rate-is-probably-wrong/). And to see an example of a portfolio with only 40% stocks that matches the long-term returns of the stock market with much lower volatility and a much higher SWR, try this (http://portfoliocharts.com/2015/09/22/catching-a-golden-butterfly/).
Mind blown. This is an awesome application of the best kind of intensive geekiness. I am in awe. Also, I am three years behind, but don't want to lose this thread. Thank you so much!
you need to take this with a grain of salt the data only goes back to 1970 this isnt data from the beginning of the markets. Some think 1970 is sufficient to set their portfolio - i don't believe it is.
Oh absolutely do worry!
Just find one best home in your calculations for each terrible thing which could possibly go wrong. Then if you're tempted to worry about it somewhere else and correct for the same risk a second time, just remember: "Hey I've taken into account (radical healthcare inflation/the odds of living to 120/a big uptick in inflation/minor nuclear war/the odds I'll start a harem at 85 and having to send a dozen kids to college when I'm in my early 100s) in my math already."
Stocks have tended to perform better over longer time periods and should therefore provide the highest possible SWR's.
This may seem instinctively true but mathematically it's more complicated than that. Safe Withdrawal Rates are highly influenced not only by average returns but also by annual volatility. All things being equal, higher volatility lowers the SWR. So two portfolios with equal average returns may have drastically different withdrawal rates based on the underlying volatility. And sometimes portfolios with lower average returns but lower volatility can still beat stocks. That's how you get interesting results like this:
(https://portfoliocharts.files.wordpress.com/2015/09/swr-vs-cagr.jpg)
This plots the returns and calculated SWRs of a variety of different popular lazy portfolios. Note that the Total Stock Market has one of the highest returns but the lowest SWR! Also note than none of the top-3 SWR portfolios have more than 40% stocks. For a more detailed walkthrough, I'd recommend reading this (http://portfoliocharts.com/2015/09/08/why-your-safe-withdrawal-rate-is-probably-wrong/). And to see an example of a portfolio with only 40% stocks that matches the long-term returns of the stock market with much lower volatility and a much higher SWR, try this (http://portfoliocharts.com/2015/09/22/catching-a-golden-butterfly/).
Mind blown. This is an awesome application of the best kind of intensive geekiness. I am in awe. Also, I am three years behind, but don't want to lose this thread. Thank you so much!
you need to take this with a grain of salt the data only goes back to 1970 this isnt data from the beginning of the markets. Some think 1970 is sufficient to set their portfolio - i don't believe it is.
Yep. I agree.
Be aware by being from 1970 it also takes in the transition from gold standard to market priced gold, so the back tested gold portfolios - such as the PP and 'golden butterfly' - do a lot better than I think they should (because the US coming off the gold standard was a one off event).
But the issue of volatility reducing SWR is a really great point.
i am from the UK and HATE that there is very limited literature from a UK based perspective on the 4% rule other than ours should be lower
...US outperformed UK over the last century or so, but there's no guarantee UK won't outperform US next century...
Perhaps the SWR rules based on historical data for the UK would be somewhat useless due to the dramatic affects of those wars on returns. That being said, I have seen some SWR calculations for other countries in the context of showing how there is no SWR if your country loses a major war, such as what happened to Japan and Germany. That probably falls into the category of having 'bigger problems'.
hi all,https://portfoliocharts.com/calculators/
i am from the UK and HATE that there is very limited literature from a UK based perspective on the 4% rule other than ours should be lower (like 2.5%) which are just for click-bait i am sure because even this country has averaged 5% returns after inflation over 100+ years.
equally frustrating is I dont find much literature from a global portfolio perspective and what the 4% rule would look like then?
hard to not worry about the 4% rule when 1. you are not from the states 2. no specific studies I can see that dont have some agenda of creating click bait.
p.s I have one major gripe with the 4% rule is alot of FI blogs answers to making sure it doesnt fail is "go back to work" I would class that as failure for me of the 4% rule if you need to go back to work because the 4% rule has made you go back to work, but that is just me
i am from the UK and HATE that there is very limited literature from a UK based perspective on the 4% rule other than ours should be lower
Absolutely no need to restrict yourself to investing in UK stocks though. You can buy a global index tracker like Vanguard's VWRL just as easily. (And in fact, even if you did limit yourself to the FTSE - something like 65-70% of earnings come from outside the UK - not to mention the built-in biases towards banks & oil and lack of tech stocks.)
Currency risk obviously comes into play, but offset against that is the state pension, no healthcare costs to worry about and the very generous tax treatment of FIREes through ISAs, pensions, no CGT on your own house, decent tax free allowances for dividends, interest and so on.
I guess I will just have to use it as a rough guide but I find answers like "just go back to work" really frustrating as that is not what I want to be doing if I decide to retire early.
Work sucks overall and alot of folks on FI sites claim to love it, maybe they do but I have to say I don't fit into that at the moment.
I guess I will just have to use it as a rough guide but I find answers like "just go back to work" really frustrating as that is not what I want to be doing if I decide to retire early.
Work sucks overall and alot of folks on FI sites claim to love it, maybe they do but I have to say I don't fit into that at the moment.
Let's agree work sucks.
Your choices are:
1. work extra years now to save/invest beyond a reasonable 4%WR
2. stop at 4%WR and face a small risk you might have to do some part-time work later
Option 1 means a 100% chance of doing a bunch more of that work that sucks. Option 2 most likely won't happen. Personally that leads me to choose Option 2.
sounds lovely in theory - i struggle at part time work that is enjoyable? unless I am just being really blind and stupid?
sounds lovely in theory - i struggle at part time work that is enjoyable? unless I am just being really blind and stupid?
1. the PT work is only a small possibility not a certainty
2. if your annual spend is say $40K/yr you only have to make $10K/yr to make a dramatic difference in your portfolio's performance
3. there is no panic in finding that PT job the second something happens in the market...you have months and years to make a move so you can find some work you don't hate
4. personally I can think of several ways to earn $10K/yr that I would not find objectionable for a limited period of time
5. keep reminding yourself about point #1
Ultimately if that ^^ doesn't work for you then go ahead and spend as much time at your full-time job as you want until you feel like you can safely stop. It's your life.
However, if you start off with the statement that "work sucks" then choose a 100% certainty of working more so you can avoid say a 5% chance of working for a short period part-time later on then I don't understand that your logic.
Mind blown. This is an awesome application of the best kind of intensive geekiness. I am in awe. Also, I am three years behind, but don't want to lose this thread. Thank you so much!
i am from the UK and HATE that there is very limited literature from a UK based perspective on the 4% rule other than ours should be lower (like 2.5%) which are just for click-bait i am sure because even this country has averaged 5% returns after inflation over 100+ years.https://portfoliocharts.com/calculators/
equally frustrating is I dont find much literature from a global portfolio perspective and what the 4% rule would look like then?
hard to not worry about the 4% rule when 1. you are not from the states 2. no specific studies I can see that dont have some agenda of creating click bait.
Tyler's calculators include UK and include data as far as 1970, which I understand was one of the worse starting periods for SWR.
I see the S&P500 is a mere 3.2% down from the Feb all time high...:)
THat is a very all-or-nothing way of thinking about it though. Certainly there is something else in the wide world of paying work that could bring in $10k/year with your education and experience? You could probably mow your neighbor’s lawns and pick up that kind of money if you put your brain into it. It doesn’t have to be work in your current profession or bust.
I would rather be full time professional with some self respect than having to mow my neighbors lawn because the 4% rule is failing me
I would rather be full time professional with some self respect than having to mow my neighbors lawn because the 4% rule is failing me
(https://farm4.staticflickr.com/3712/32600486490_6e61a470fb_b.jpg)
I think you've answered your question. Just work more. The beauty with shooting for a sub-4%WR is not only will you have more money you'll have less time you need to fund your retirement before you die. Quite cunning! ;)
Personally I'll retire earlier and enjoy my life. I'm flexible and adaptable. For FIRE success I think that's a lot more important than having a sub-4%WR.
Everyone is different so do what works for you.
Good points made. That said, work suckage is a relative thing.
The easiest path is not always the best for our soul, so consider that some people will choose to work beyond 4% for multiple reasons, not just to never run out of sufficient funds.
Good points made. That said, work suckage is a relative thing. Once its gone you appretiate some of its qualities, such as 1) adding productively to society, 2) opportunity and requirement to meet with and interact with people unlike you, you might otherwise meet (good to see and understand that people unlike you exist in society) and perhaps mentor/build relationships with them that are valuable, 3) direct opportunitiy to see and observe non mustacian people to create anecdotes for 'shame threads'....where will you get more material for `heard at work', if not working?, 4) earning money is a feel good thing that can be hard to say good bye too.I guess I will just have to use it as a rough guide but I find answers like "just go back to work" really frustrating as that is not what I want to be doing if I decide to retire early.
Work sucks overall and alot of folks on FI sites claim to love it, maybe they do but I have to say I don't fit into that at the moment.
Let's agree work sucks.
Your choices are:
1. work extra years now to save/invest beyond a reasonable 4%WR
2. stop at 4%WR and face a small risk you might have to do some part-time work later
Option 1 means a 100% chance of doing a bunch more of that work that sucks. Option 2 most likely won't happen. Personally that leads me to choose Option 2.
Anyway, just a thought that while some aspects of work can suck, we can also try to appretiate all the learning opportunities that work provides. I have learned a lot from my sucky work experiences, how to be more mindful and in control of myself, deal with bad people, etc. Many life experiences, including work, misfortune, illness, have plenty to learn from their challenges. The easiest path is not always the best for our soul, so consider that some people will choose to work beyond 4% for multiple reasons, not just to never run out of sufficient funds.
A pretty obvious point, perhaps and maybe off topic. Likely I will remove it later to keep the thread on the math and not the retirement psychology we will face on trigger day....still dealing with that myself.
But from the financial perspective, if someone's 4% is calculated on barebone just to pay the necessary expenses, then they better save extra for discretionary spending so that they're not "just getting by" in FIRE.
after all, they wouldn't call it "work" if it was in reality, some really wonderful thing to do :)
Good points made. That said, work suckage is a relative thing. Once its gone you appretiate some of its qualities, such as 1) adding productively to society, 2) opportunity and requirement to meet with and interact with people unlike you, you might otherwise meet (good to see and understand that people unlike you exist in society) and perhaps mentor/build relationships with them that are valuable, 3) direct opportunitiy to see and observe non mustacian people to create anecdotes for 'shame threads'....where will you get more material for `heard at work', if not working?, 4) earning money is a feel good thing that can be hard to say good bye too.
Anyway, just a thought that while some aspects of work can suck, we can also try to appretiate all the learning opportunities that work provides. I have learned a lot from my sucky work experiences, how to be more mindful and in control of myself, deal with bad people, etc. Many life experiences, including work, misfortune, illness, have plenty to learn from their challenges. The easiest path is not always the best for our soul, so consider that some people will choose to work beyond 4% for multiple reasons, not just to never run out of sufficient funds.
A pretty obvious point, perhaps and maybe off topic. Likely I will remove it later to keep the thread on the math and not the retirement psychology we will face on trigger day....still dealing with that myself.
I agree that everyone's situation is unique. This is likely why I react when people post absolute statements like 'we can all agree work sucks, so we should all quite once we are FI.' Many on here are teachers, MDs, police...they are helping society not just chained to a desk...
Well, I've both worked after being FI, and have chosen to retire. So speaking from personal experience I can say that you are wrong in at least instance (my own). I wasnt 'scared to retire.' I had plenty of money, but had things to complete, work wise.
That said I woukd hesitate to try to speak for other people, as I cant reasonably speak for them as being 'scared' or not, without actually being them.
I will say personally, as someone who is stoked about FIRE, the prospect of going through that massive life change is daunting and I am definitely scared/apprehensive, but that's just me. And I may be lying. ;)
https://www.getrichslowly.org/four-percent-rule/
Last October at Our Next Life, Tanja wrote that the fundamental problem with the 4% rule for early retirement isn’t the 4% rule. “The fundamental problem with any ‘safe’ withdrawal rate is the underlying assumption of level spending over time,” she said.
And you don’t have to be planning for dirtbag years followed by larger-living years, as we are, to be looking ahead to increasing costs in the future. You could be the most disciplined budgeter of all time and still need to plan for your spending to change over time.
The problem, Tanja says, is that many costs — especially costs for large expenses — can outpace inflation. Health care costs, for example, have been skyrocketing for years. So has the cost of higher education. Housing costs too have been increasing faster than inflation (and their historical average).
Meanwhile, Social Security and private pensions have not kept pace with inflation. (That’s one reason that, like many of you, I don’t even consider Social Security when calculating my retirement figures. Yes, I look at my projected benefits now and then. But to me, any future SS payments will be a bonus, not part of my actual calculations.)
False. Assumptions not based in fact and without statistical support. People spend less (https://www.bls.gov/opub/btn/volume-5/spending-patterns-of-older-americans.htm) as they age
False. Assumptions not based in fact and without statistical support. People spend less (https://www.bls.gov/opub/btn/volume-5/spending-patterns-of-older-americans.htm) as they age
From the linked article:
This article examines the spending patterns of households with a reference person age 55 and older.
Be interesting, and more relevant, to see a study of the spending patterns of households with a reference person age 40 and older.
Anyway, expected increases in spending - like healthcare inflation - can be planned for and built into our number. That's what I did.
In all actuality healthcare costs will start to be curbed over time. General services cant outpace inflation forever more players will enter tech will get more involved and people flat out won't continue to pay exorbitant rates. I have a much more optimistic out look on healthcare than most though.
Most of us have been programmed from nearly birth to work and power the economic engine of society. By the time you have saved up enough to hit a 4%WR you'll have done a lot of work. So my general advice is to get the hell out. From the perspective of someone who has always been working it's hard and scary to quite and see what you and your life are like without that career/job. It's always easier to stay chained to the desk. So people look for almost any rationale they can to OMY.
False. Assumptions not based in fact and without statistical support. People spend less (https://www.bls.gov/opub/btn/volume-5/spending-patterns-of-older-americans.htm) as they age
From the linked article:
This article examines the spending patterns of households with a reference person age 55 and older.
Be interesting, and more relevant, to see a study of the spending patterns of households with a reference person age 40 and older.
Anyway, expected increases in spending - like healthcare inflation - can be planned for and built into our number. That's what I did.
In all actuality healthcare costs will start to be curbed over time. General services cant outpace inflation forever more players will enter tech will get more involved and people flat out won't continue to pay exorbitant rates. I have a much more optimistic out look on healthcare than most though.
Yah, that article seems to be a little light on research. It also commits a large logical fallacy by looking at a short-term trend and extrapolating it indefinably into the future. I am referring to the below section:
"...especially costs for large expenses — can outpace inflation. Health care costs, for example, have been skyrocketing for years. So has the cost of higher education."
Medical care cost inflation has been moderating and is around 2%. [1]
The inflation rate for the cost of college has been falling since 1982 and is now around 1.9%. [2]
[1] https://fred.stlouisfed.org/series/CPIMEDSL#0
[2] https://fred.stlouisfed.org/series/CUSR0000SEEB#0
Right, I think over long periods of time we see mean reversions in these types of things. Unless, of course, there is a fundamental change; think industrial revolution. If Healthcare keeps up it's current pace it will cost more than GDP relatively soon. Obviously that can't happen.
Classical_Liberal:QuoteRight, I think over long periods of time we see mean reversions in these types of things. Unless, of course, there is a fundamental change; think industrial revolution. If Healthcare keeps up it's current pace it will cost more than GDP relatively soon. Obviously that can't happen.
There's already been a few times when I have self diagnosed minor ailments with the computer. Trips to the doctor are expensive. Can't we expect cost decreases with expert programming? Doctors are looking for patterns and they use these patterns to make a diagnosis. Seems like computers can do a lot of this. Will the necessity of needed medical care be the mother of one or more new inventions?
a machine can have all the knowledge.
We are pretty far off the beaten track for the thread topic, but as a side note I've started using an e-doctor service here in BC. I just log in on my computer and usually within minutes I am video conferencing with a doctor and so far have been totally satisfied with the service. Saves me time and money. Saves the doctor time and money. I am more likely to see a doctor because the hassle is next to zero. So I stay on top of anything that's bothering me rather than waiting until it's a more serious issue. Overall this should be a significant savings to the health care system as it gets adopted more widely.
Canada is talking about various pharmacare/dental care programs where the government is the sole buyer and can negotiate amazing rates on drugs and services. Then it gets paid for with taxes and possibly income tested fees. I hope that goes through. It has the potential to save the country and massive massive amount of money and result in a much healthier population when nobody is choosing between rent/food and RX drugs/dental care.
We are pretty far off the beaten track for the thread topic,
QuoteWe are pretty far off the beaten track for the thread topic,
Sure, but the cost of health care is one of the biggest worries stopping people from retirement. This can upset the most carefully laid 3-4-5 percent fiduciary plan. It is a major worry with the 4 percent rule.
Not really. It's a budgeting issue.
Says he who has the better and cheaper health care.
Says he who has the better and cheaper health care.
To be fair. I think if you have one of the better health care insurance plans in the US you get better health care. OTOH everyone in Canada has access to pretty good health care whether they have a lot of money or not. I prefer the latter system even if as a relatively wealthy person I could have better health care under the US system. I'm a one-for-all-and-all-for-one kinda person.
That's why geographic arbitrage exists. I can live a higher quality of life WHILE travelling the world AND get the same quality healthcare if I threw 25k on top on my planned expenses.Says he who has the better and cheaper health care.
To be fair. I think if you have one of the better health care insurance plans in the US you get better health care. OTOH everyone in Canada has access to pretty good health care whether they have a lot of money or not. I prefer the latter system even if as a relatively wealthy person I could have better health care under the US system. I'm a one-for-all-and-all-for-one kinda person.
You are both right in that it is a big concern for most FIRE people in the US AND it is a budgeting issue.
The problem is that with ever increasing costs, potential changes to the political wills, higher deductibles, poorer access, and cliffs and scales for income it is really difficult to budget the RIGHT amount - it could range from nothing due to subsidies to next year being $25k for a family when factoring deductibles/coinsurance. I guess the conservative thing is for everyone to budget $25k then to be safe.....boy oh boy that will shred a $40k a year expense budget.
I can live a higher quality of life WHILE travelling the world AND get the same quality healthcare if I threw 25k on top on my planned expenses.
How many of the countries with socialized medicine will treat a foreigner? I heard stories about US people getting hurt in Canada and having to pay next to nothing in health care costs.
Mr. Green:Even if I pay full boat as a foreigner, the costs are reasonable compared to US costs. Throw in some travel insurance to help defray those costs and it's definitely a viable alternative. Medical tourism is booming in plenty of countries with top notch healthcare.QuoteI can live a higher quality of life WHILE travelling the world AND get the same quality healthcare if I threw 25k on top on my planned expenses.
How many of the countries with socialized medicine will treat a foreigner? I heard stories about US people getting hurt in Canada and having to pay next to nothing in health care costs.
My daughter "broke her arm" in British Columbia, Canada while skiing. We had to pay $700 on the spot at the emergency room for XRays and the diagnosis. Took several hours.A misdiagnosis is unfortunate but had you gone to the ER in the US without insurance the bill would have been thousands, not $700. That's what I mean by the cost of care in other countries is reasonable.
So what exactly is the 'Trump Adjustment' on the 4% Rule? Because I can see how the 4% Rule was OK for ER in the 'irrationally exuberant' times of Greenspan (Regan, Bush, Clinton) + deregulation/tax cuts, internet, low oil price. It's more questionable in times of trade wars, less social services, and political instability. Commodities like gas prices are outpacing inflation, medical prices are going back to unaffordable, and unions just lost their lifeline. Inflation and the Fed raising interest rates.
Ultimately, it's a further acceleration of the rich getting richer (and increasingly expanding what it is to live the good life) vs. the labor force losing jobs and living 'well' but not good, struggling to get ahead, and ultimately going into debt to try to provide a better life for their children. The 'American Dream' is quickly becoming something to scoff.
Wait a second, you aren't meeting up with Trump this weekend at Mar-a-Lago but you think he is working on your behalf?
So what exactly is the 'Trump Adjustment' on the 4% Rule? Because I can see how the 4% Rule was OK for ER in the 'irrationally exuberant' times of Greenspan (Regan, Bush, Clinton) + deregulation/tax cuts, internet, low oil price. It's more questionable in times of trade wars, less social services, and political instability. Commodities like gas prices are outpacing inflation, medical prices are going back to unaffordable, and unions just lost their lifeline. Inflation and the Fed raising interest rates.
Ultimately, it's a further acceleration of the rich getting richer (and increasingly expanding what it is to live the good life) vs. the labor force losing jobs and living 'well' but not good, struggling to get ahead, and ultimately going into debt to try to provide a better life for their children. The 'American Dream' is quickly becoming something to scoff.
Wait a second, you aren't meeting up with Trump this weekend at Mar-a-Lago but you think he is working on your behalf?
So what exactly is the 'Trump Adjustment' on the 4% Rule? Because I can see how the 4% Rule was OK for ER in the 'irrationally exuberant' times of Greenspan (Regan, Bush, Clinton) + deregulation/tax cuts, internet, low oil price. It's more questionable in times of trade wars, less social services, and political instability. Commodities like gas prices are outpacing inflation, medical prices are going back to unaffordable, and unions just lost their lifeline. Inflation and the Fed raising interest rates.
Ultimately, it's a further acceleration of the rich getting richer (and increasingly expanding what it is to live the good life) vs. the labor force losing jobs and living 'well' but not good, struggling to get ahead, and ultimately going into debt to try to provide a better life for their children. The 'American Dream' is quickly becoming something to scoff.
Wait a second, you aren't meeting up with Trump this weekend at Mar-a-Lago but you think he is working on your behalf?
So with this entire thread about the 4% rule you think it's solely based in those "irrationally exuberant" times and not all the other things that happened between 1925 and 1995 that the original Trinity Study took into account?
/boggle
Good points! Maybe you can add your Trump Adjustments to the end of this graph?
(https://www.chartingyourfinancialfuture.com/wp-content/uploads/2016/08/Investments-never-a-good-time-to-invest.jpg)
So what exactly is the 'Trump Adjustment' on the 4% Rule? Because I can see how the 4% Rule was OK for ER in the 'irrationally exuberant' times of Greenspan (Regan, Bush, Clinton) + deregulation/tax cuts, internet, low oil price. It's more questionable in times of trade wars, less social services, and political instability. Commodities like gas prices are outpacing inflation, medical prices are going back to unaffordable, and unions just lost their lifeline. Inflation and the Fed raising interest rates.
Ultimately, it's a further acceleration of the rich getting richer (and increasingly expanding what it is to live the good life) vs. the labor force losing jobs and living 'well' but not good, struggling to get ahead, and ultimately going into debt to try to provide a better life for their children. The 'American Dream' is quickly becoming something to scoff.
Wait a second, you aren't meeting up with Trump this weekend at Mar-a-Lago but you think he is working on your behalf?
So with this entire thread about the 4% rule you think it's solely based in those "irrationally exuberant" times and not all the other things that happened between 1925 and 1995 that the original Trinity Study took into account?
/boggle
I'm much less confident in history (especially historic data when very few people owned stock and Index funds didn't exist) these days, yes. But feel free to disagree. Only the future knows which of us is right, but the past tells us very little IMHO. Just because it's the best we have is not a good reason to use it.
Just because it's the best we have is not a good reason to use it.
Good points! Maybe you can add your Trump Adjustments to the end of this graph?
(https://www.chartingyourfinancialfuture.com/wp-content/uploads/2016/08/Investments-never-a-good-time-to-invest.jpg)
That's a fun graph. One thing I notice though is that the points do get a little more sparse (and less serious sounding) after 2008-2009, especially compared the the 90s and the earlier 00s' It may be what we're seeing is that people have gotten out of practice with feeling like the world is going to end/society as we know it is gonna collapse, so those feelings are more uncomfortable than they otherwise would be.
Like how the first 100 degree day of summer makes you much more miserable than the same temperature after it's been that hot off and on for months.
Just because it's the best we have is not a good reason to use it.
So you are suggesting we should use something worse then? Like pretending we can predict future returns or working many extra years to hit an absurdly low WR?
If historical data is the "best" we have it does make a lot of sense to use it when developing FIRE plans.
However, as has been stated here like a million times a small amount of flexibility gives your FIRE plan a huge amount of resilience and doesn't "cost" much. If you are not prepared to be flexible and/or are pessimistic about the future the "cost" is significant in terms of your most valuable resource....time.
I'm trying to say we should not take US stock market history for granted that it is a predictor of anything going forward. This isn't a crazy call to ignore it, but more a call to deeper independent thought on how it has changed (especially in the case of participants in the stock market now vs. the whole history of the data set).
If you're not comfortable with using the past as a reference point then you literally have no reference point. Nothing is safe. How are you comfortable with anything other than dying at your deask?Just because it's the best we have is not a good reason to use it.
So you are suggesting we should use something worse then? Like pretending we can predict future returns or working many extra years to hit an absurdly low WR?
If historical data is the "best" we have it does make a lot of sense to use it when developing FIRE plans.
However, as has been stated here like a million times a small amount of flexibility gives your FIRE plan a huge amount of resilience and doesn't "cost" much. If you are not prepared to be flexible and/or are pessimistic about the future the "cost" is significant in terms of your most valuable resource....time.
I'm not trying to rehash everything, more so I am trying to head in a slightly new direction (even if I may not reach a very satisfying destination). I'm trying to say we should not take US stock market history for granted that it is a predictor of anything going forward. This isn't a crazy call to ignore it, but more a call to deeper independent thought on how it has changed (especially in the case of participants in the stock market now vs. the whole history of the data set).
We are currently benefitting from a time of relatively unbroken growth and reduced volatility in the US (the great moderation (https://en.wikipedia.org/wiki/Great_Moderation)) and did benefit greatly from increased access to the financial markets and capital. But maybe, going forward, it has come to an end and we begin to experience more downside. Going from globalization back to protectionist trade policy was just one Trump effect. Seeing just how much change can be effected in one year got me thinking about how the next 30 years probably won't look anything like the last 30 years. Another niggling thought I can't shake is that if the concentration of wealth continues its exponential trajectory for the next 30 years, economic growth in the US will certainly slow down (https://en.wikipedia.org/wiki/Wealth_inequality_in_the_United_States).
Just because it's the best we have is not a good reason to use it.
So you are suggesting we should use something worse then? Like pretending we can predict future returns or working many extra years to hit an absurdly low WR?
If historical data is the "best" we have it does make a lot of sense to use it when developing FIRE plans.
However, as has been stated here like a million times a small amount of flexibility gives your FIRE plan a huge amount of resilience and doesn't "cost" much. If you are not prepared to be flexible and/or are pessimistic about the future the "cost" is significant in terms of your most valuable resource....time.
I'm not trying to rehash everything, more so I am trying to head in a slightly new direction (even if I may not reach a very satisfying destination). I'm trying to say we should not take US stock market history for granted that it is a predictor of anything going forward. This isn't a crazy call to ignore it, but more a call to deeper independent thought on how it has changed (especially in the case of participants in the stock market now vs. the whole history of the data set).
We are currently benefitting from a time of relatively unbroken growth and reduced volatility in the US (the great moderation (https://en.wikipedia.org/wiki/Great_Moderation)) and did benefit greatly from increased access to the financial markets and capital. But maybe, going forward, it has come to an end and we begin to experience more downside. Going from globalization back to protectionist trade policy was just one Trump effect. Seeing just how much change can be effected in one year got me thinking about how the next 30 years probably won't look anything like the last 30 years. Another niggling thought I can't shake is that if the concentration of wealth continues its exponential trajectory for the next 30 years, economic growth in the US will certainly slow down (https://en.wikipedia.org/wiki/Wealth_inequality_in_the_United_States).
If you're not comfortable with using the past as a reference point then you literally have no reference point. Nothing is safe. How are you comfortable with anything other than dying at your deask?Just because it's the best we have is not a good reason to use it.
So you are suggesting we should use something worse then? Like pretending we can predict future returns or working many extra years to hit an absurdly low WR?
If historical data is the "best" we have it does make a lot of sense to use it when developing FIRE plans.
However, as has been stated here like a million times a small amount of flexibility gives your FIRE plan a huge amount of resilience and doesn't "cost" much. If you are not prepared to be flexible and/or are pessimistic about the future the "cost" is significant in terms of your most valuable resource....time.
I'm not trying to rehash everything, more so I am trying to head in a slightly new direction (even if I may not reach a very satisfying destination). I'm trying to say we should not take US stock market history for granted that it is a predictor of anything going forward. This isn't a crazy call to ignore it, but more a call to deeper independent thought on how it has changed (especially in the case of participants in the stock market now vs. the whole history of the data set).
We are currently benefitting from a time of relatively unbroken growth and reduced volatility in the US (the great moderation (https://en.wikipedia.org/wiki/Great_Moderation)) and did benefit greatly from increased access to the financial markets and capital. But maybe, going forward, it has come to an end and we begin to experience more downside. Going from globalization back to protectionist trade policy was just one Trump effect. Seeing just how much change can be effected in one year got me thinking about how the next 30 years probably won't look anything like the last 30 years. Another niggling thought I can't shake is that if the concentration of wealth continues its exponential trajectory for the next 30 years, economic growth in the US will certainly slow down (https://en.wikipedia.org/wiki/Wealth_inequality_in_the_United_States).
That can't be so bad... I can invest in pillow keys to soften the blow as my head hits the desk.
Coworker A: What?! What did you say his last words were as he died at his desk?That can't be so bad... I can invest in pillow keys to soften the blow as my head hits the desk.
...and just think of the satisfaction you'll have as you exhale your last breathe and your face starts heading for the keyboard knowing you didn't run out of money in retirement! ;)
Coworker A: What?! What did you say his last words were as he died at his desk?That can't be so bad... I can invest in pillow keys to soften the blow as my head hits the desk.
...and just think of the satisfaction you'll have as you exhale your last breathe and your face starts heading for the keyboard knowing you didn't run out of money in retirement! ;)
Coworker B: I swear I heard him say, "Hash tag winning!"
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).It's all risk. Life is risk. And 10 people have 10 different opinions about whether we're going to have a period of low returns.
Anyway, Financial Samurai has posted a bit about this recently (https://www.financialsamurai.com/ideal-retirement-scenario-conservative-returns-and-a-steady-income/).
The thing I think most working people don't understand is just how easy it is to be oblivious if you choose to be. I have no compelling reason to remember what day of the week it is, what the Dow Jones number is, or what is going on in the news. I'm doing my FIRE thing and it's real easy to get lost in living your life.
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).
Anyway, Financial Samurai has posted a bit about this recently (https://www.financialsamurai.com/ideal-retirement-scenario-conservative-returns-and-a-steady-income/).
This is one of the big reasons why I'm keeping a year or two of my living expenses in cash.
Like Mr. Green, I'll have 2 years cash to live on if there's a massive dip. I'll also have a paid off house, so if S really does HTF, at least I don't have a mortgage payment and my house is not at risk. I'm also over-estimating my FIRE budget a bit, mainly to give myself more flexibility and wiggle room from year to year. And I won't be 100% stocks, it's 80/20 for me, and even the stocks are split between US and World.
This is one of the big reasons why I'm keeping a year or two of my living expenses in cash.Like Mr. Green, I'll have 2 years cash to live on if there's a massive dip. I'll also have a paid off house, so if S really does HTF, at least I don't have a mortgage payment and my house is not at risk. I'm also over-estimating my FIRE budget a bit, mainly to give myself more flexibility and wiggle room from year to year. And I won't be 100% stocks, it's 80/20 for me, and even the stocks are split between US and World.
How does this cash allocation factor into your overall AA? I'm assuming that this cash in addition to your invested portfolio from which you would withdrawal your 4%, and not part of your 4% calc, right?
So couldn't you just re-frame this as using a lower WR? Portfolio + cash = total portfolio = WR < 4%.
(not trying to discourage your plans, but it seems a bit disingenuous to defend the 4% rule while also using a lower WR. this is what's happening here, right?)
The cash is part of my "fixed income", or bond allocation. However, the reality of our situation is that we probably won't hit a 4% WR because we just don't spend that much. We sold a property that we thought we'd build a house on so our stash is about 200k heavier than we planned for. We also have someone giving us 8k a year for a land lease so that's 8k less we have to pull out of the stash, though it may not run long term.This is one of the big reasons why I'm keeping a year or two of my living expenses in cash.Like Mr. Green, I'll have 2 years cash to live on if there's a massive dip. I'll also have a paid off house, so if S really does HTF, at least I don't have a mortgage payment and my house is not at risk. I'm also over-estimating my FIRE budget a bit, mainly to give myself more flexibility and wiggle room from year to year. And I won't be 100% stocks, it's 80/20 for me, and even the stocks are split between US and World.
How does this cash allocation factor into your overall AA? I'm assuming that this cash in addition to your invested portfolio from which you would withdrawal your 4%, and not part of your 4% calc, right?
So couldn't you just re-frame this as using a lower WR? Portfolio + cash = total portfolio = WR < 4%.
(not trying to discourage your plans, but it seems a bit disingenuous to defend the 4% rule while also using a lower WR. this is what's happening here, right?)
True. Although I tend to think of the cash more as an emergency fund. Emergency funds are good to have.
What do you all think of this:A bit simplistic and not aimed at early retirees.
https://www.msn.com/en-us/money/savingandinvesting/this-is-how-much-to-withdraw-from-your-retirement-savings/ar-AAzkdSm?li=BBnbfcN#image=1
A few thoughts I got out of this - having 2 years of WR in cash either means you have an effective SWR of 4.3% (if the cash is not part of your investments but you count it that way) or, more likely, a conservative 3.7% SWR (having 80k extra on a 1M portfolio spending 40k/yr, all nominal).I created a blog that doesn't really get any traffic, more so I would have a record 30 years from now about how life turned out based on retiring early under the conditions that are advocated for here. I suppose by then the youngsters will either have a whole bunch of examples about what not to do in life or a whole lot more confidence pulling the trigger because there are so many well documented examples of success.
It's also easier to stop worrying about the 4% rule when you hit 50 and older due to being 'able' to hold a bond allocation, knowing all you have to do is get to 65 for Medicare and SS. At 40 and younger, you both can and need to hold stocks to counterbalance longevity risk, but then you are exposed to sequence of return and inflation risk.
I'm still unsure about the 4% rule for ER's in the 40 - 50 age group. In some cases bonds and cash will be prudent, but they still need to lean heavily on stocks. I guess we will see, since this forum is going to be the hub for young ER's in a time of high PE's, except it still seems that most err on the side of caution around 4% and sub-50y.o. ER. Not that there's anything wrong with that :) still doing better than the Boomer generation.
It's also easier to stop worrying about the 4% rule when you hit 50 and older due to being 'able' to hold a bond allocation, knowing all you have to do is get to 65 for Medicare and SS.
Fortunately I only need 2 - 3% WR currently, but that assumes inflation stays tame until I get to Medicare and SS.
And what is to be gained? If I can convince a newbie who is aiming for a 2% WR that they can be comfortable with a 3.5% or 4% WR I may have helped in a little way to given them a few extra years to pursue whatever gives them happiness or meaning in life. If I convince a person who has already saved 50x their annual expenses that they didn't have to save that much.... it probably doesn't help them at all.
It seems very common to overestimate the risk of running out of money once you get to a 4%WR with a modicum of FIRE plan flexibility and to underestimate the risk to your health and personal relationships by continuing to work full-time at the typical sedentary desk jobs most of us professionals have.
I think it is very difficult to see the downside of continuing to work. It's all you know, and you can't even imagine how much healthier you will be when you are no longer chained to a desk. I'm 6 months FIREd now, and I'm amazed at how much less stress I feel, how much better I sleep, how much better my back feels, and how much girth I've lost. I don't own a scale, but I'm somewhere between 2 and 3 belt notches skinnier, and I haven't even been trying to lose weight.
I'm 6 months FIREd now, and I'm amazed at how much less stress I feel, how much better I sleep, how much better my back feels, and how much girth I've lost.
My quality of work has gone way up since I started working less, I’ve actually become a lot more profitable on a per-hour basis. That may not be the case for you, but it’s been amazing for me.
Good luck. Too many people undervalue present day time and energy and make trade offs that don’t actually work out in their favour, especially if it compromises their health and family’s wellbeing.
Man. Thanks for these posts above. And also due to a conversation with a recent normal age retiree I think I have to go to 4-8s when my child is born. We have the money saved we don't need to work. It doesn't even delay our fire date at this point I need to go to 4-8s and stop worrying about the 6 figure bonuses I'll get in 2 years if I don't. Bc time is now more valuable than money and I need to make this step.
My quality of work has gone way up since I started working less, I’ve actually become a lot more profitable on a per-hour basis. That may not be the case for you, but it’s been amazing for me.
Good luck. Too many people undervalue present day time and energy and make trade offs that don’t actually work out in their favour, especially if it compromises their health and family’s wellbeing.
Every job can be replaced we're all not as critical as we think we are. If you do good work the conversation is worth having
Part time for me would be great. I'm using vacation days almost every week for the rest of the summer, so it will feel like part time for a while. If I could truly go part time after that, I would still be eligible for healthcare benefits if I worked at least 24 hours/wk. The problem is that my position is budgeted for full time, and it's unique in that I do a lot of specialized IT work that no one else knows how to do, and I don't think part time will fly with my director, at least not for long. And by merely mentioning my interest in going part time, it might be enough for them to have someone start training with me in fear that I might leave (and they would probably be proven right in less than a year). That would be no surprise for them to have me start training someone else, whether a new or existing employee, because they had a second person in my position for over a year before he quit, and that was due to the workload. That would suck to spend a lot of time training someone over the next year because I have my own peaceful office and am quite independent now, so I'm keeping the thought of part time work and FIRE close to the vest until much closer to my target date. I'll decide then if I want to offer working part time.
Man. Thanks for these posts above. And also due to a conversation with a recent normal age retiree I think I have to go to 4-8s when my child is born. We have the money saved we don't need to work. It doesn't even delay our fire date at this point I need to go to 4-8s and stop worrying about the 6 figure bonuses I'll get in 2 years if I don't. Bc time is now more valuable than money and I need to make this step.
My quality of work has gone way up since I started working less, I’ve actually become a lot more profitable on a per-hour basis. That may not be the case for you, but it’s been amazing for me.
Good luck. Too many people undervalue present day time and energy and make trade offs that don’t actually work out in their favour, especially if it compromises their health and family’s wellbeing.
I feel like the same will be true for me. Have to see how I like it. But a baby life event is the perfect time. My Dept manager is all about family
Anyway, Financial Samurai has posted a bit about this recently (https://www.financialsamurai.com/ideal-retirement-scenario-conservative-returns-and-a-steady-income/).
Hopefully by the time you reach 50, your net worth will be at least 20X your annual expenses. As soon as you get to 20X annual expenses, you can start considering downshifting or leaving an undesirable job altogether. If you can get to 20X your annual expenses at an earlier age, all the better.
By the time you have your “enough money,” there’s really no need to shoot for greater than a 5% annual return. If your net worth is indeed 20X your annual expenses or more, simple math dictates you can live off your net worth forever and never touch principal with a perpetual 5% return.
Holding a lot of bonds will lower your chances of success in a long retirement. Numbers bellow are for a 40yr FIRE @4%WR using cFIREsim [all settings default unless noted]:
Stocks %/Bonds % = Success %
- 100/0 = 91.7%
- 90/10 = 91.7%
- 80/20 =90.7%
- 70/30 = 88.9%
- 60/40 = 82.4%
Can you work from home? Is it possible to agree to the full-time job responsibilities and structure your day to be more efficient and perhaps get the work done in less than FT? Without being in an office with the distractions and the supervision maybe you can find a balance that is healthy and profitable?
I don't think most of us are equity heavy because we want to get crazy rich. We are heavy in stocks because they are a great hedge against inflation.
I have some issues with the article. If people could lock in a 5% return after inflation guaranteed for the rest of their lives a lot of us would jump on that. The problem is the article omits the danger inflation presents to a FIREr. Once you get past the early phase of FIRE and survive the sequence of returns risk you next mission is to beat inflation. Going to a conservative portfolio is dangerous if it doesn't project you from inflation.
Which also ties into the whole keeping the mortgage question. As it being a fixed cost and usually a significant portion of a person's expenses you can actually see a decrease in the share of spending towards housing as all other expenses will rise with inflation and that won't.
So those solid inflation hedges being; investing in stocks and having a low interest rate mortgage.
Also Pfau had discussed going into bonds early in retirement to protect yourself from SORR and then converting back to a more aggressive asset allocation as you pass that risk in order to preserve your longevity.
As long as my high credit score gets me low interest rate relative to expected long term equities returns I'd rather keep my money invested and pay down a mortgage. A much bigger liquid portfolio seems like the less risky path to me than a smaller portfolio and a paid off house with $400K - $500K tied up in home equity.
As long as my high credit score gets me low interest rate relative to expected long term equities returns I'd rather keep my money invested and pay down a mortgage. A much bigger liquid portfolio seems like the less risky path to me than a smaller portfolio and a paid off house with $400K - $500K tied up in home equity.
This is certainly the generic advice given on this forum (keep the mortgage and stay invested) but the American tax system significantly complicates this plan, and I'm not at all sure it's the best advice anymore.
For example, last year's tax law removed the deductibility of mortgage interest, and effectively capped itemized deductions. If many more people are now going to be taking the standard deduction, the mortgage is slightly less profitable than it was before.
As another example, carrying the mortgage may require you to show paper income in excess of one of the many threshhold levels in the US tax code (EITC, ACA, FAFSA, etc) and the resulting large step function in tax rates probably exceeds the nominal long term profit margin between the stock market and mortgage rates for millions of Americans. I agree there is still an exploitable gap there, I'm just not sure it's worth losing health care coverage.
The gap is decreasing as rates rise but even with ACA subsidies it still makes sense to maintain a mortgage now without the interest deduction. add to that the fact that many of us have rates locked in from the bottom and its even better.
The gap is decreasing as rates rise but even with ACA subsidies it still makes sense to maintain a mortgage now without the interest deduction. add to that the fact that many of us have rates locked in from the bottom and its even better.
I think that argument makes more sense for richer people than for more typical mustachians.
If you get $14k in health insurance subsidies for being below 400% of the FPL (income of $80k for a family of three), then it's suddenly much harder to justify. Using the 4% rule, you'd need $350k of mortgage money invested to cover that $14k/year, and that's assuming you had a 0% mortgage rate. Most households that make $80k don't carry $350k in mortgage debt.
You and I make more money than that, and carry bigger mortgages, and suddenly the math is less clear. I'm not nearly as convinced as most people seem to be that carrying the mortgage is the right answer, not when I have three kids hitting the FAFSA in addition to the ACA subsidies to worry about.
Which also ties into the whole keeping the mortgage question. As it being a fixed cost and usually a significant portion of a person's expenses you can actually see a decrease in the share of spending towards housing as all other expenses will rise with inflation and that won't.
So those solid inflation hedges being; investing in stocks and having a low interest rate mortgage.
Also Pfau had discussed going into bonds early in retirement to protect yourself from SORR and then converting back to a more aggressive asset allocation as you pass that risk in order to preserve your longevity.
Keeping your mortgage increases your SORR.
Keeping your mortgage increases your SORR.
Just out of curiosity I ran my numbers with a paid off mortgage and re-mortgaging my paid off house and investing the equity. Both options get me to a 100% success rate in cFIREsim over 40yrs. I do think that having the mortgage and a bigger investment account provides more financial flexibility. So I'd rather have the mortgage.
I don't have a paid off house so in reality I'll be somewhere in the middle I'll have something like a $300K mortgage when I FIRE and around $200K equity in the house and a straight up 4%WR. We are talking about moving in FIRE. If that happens we'll buy a joint property and I'll put in the minimum downpayment I can on the new place without needing mortgage insurance. The rest will go into my investments.
I'm in Canada so the whole ACA subsidy issue is irrelevant to me.
Which also ties into the whole keeping the mortgage question. As it being a fixed cost and usually a significant portion of a person's expenses you can actually see a decrease in the share of spending towards housing as all other expenses will rise with inflation and that won't.
So those solid inflation hedges being; investing in stocks and having a low interest rate mortgage.
Also Pfau had discussed going into bonds early in retirement to protect yourself from SORR and then converting back to a more aggressive asset allocation as you pass that risk in order to preserve your longevity.
You have to be very careful with this approach and understand your specific situation. I have no mortgage. I will keep a line of credit attached to my home available but only as an emergency source of funds.
Keeping your mortgage increases your SORR. If you are really worried about longevity risk but not SORR then it might be a good option. For me personally I have no interest in it. I'm not concerned about longevity risk because I should inherit money, I can downsize my size and I should be eligible for social security payments. If I get past the SORR years than I should be fine.
How does having the mortgage increase the SORR risk? If you have X expenses and you've saved your amount (25x the expenses) and have let's say some SORR risk Y. Yet I have X+650 expenses and saved my amount (25x my expenses). Don't I have identical SORR risk? Of course we're assuming all other things bring equal.
How does having the mortgage increase the SORR risk? If you have X expenses and you've saved your amount (25x the expenses) and have let's say some SORR risk Y. Yet I have X+650 expenses and saved my amount (25x my expenses). Don't I have identical SORR risk? Of course we're assuming all other things bring equal.
Consider two equivalent scenarios:
(mortgage paid off) - net worth X, expenses Y
(mortgage of $500k) - net worth X, amount which can be used to generate an income X+$500k, expenses, Y+ mortgage interest on $500k.
The second case is more exposed to SORR, even though it has greater mean expected long-term return - ignoring taxes, healthcare, whatever. You've effectively borrowed money to buy equities. A mortgage is like the opposite of a bond - rather than receiving money at a fixed interest rate, you're paying it out at a fixed interest rate. So your equity/bond ratio is (say) more like 150/-50 than 80/20.
How does having the mortgage increase the SORR risk? If you have X expenses and you've saved your amount (25x the expenses) and have let's say some SORR risk Y. Yet I have X+650 expenses and saved my amount (25x my expenses). Don't I have identical SORR risk? Of course we're assuming all other things bring equal.
Consider two equivalent scenarios:
(mortgage paid off) - net worth X, expenses Y
(mortgage of $500k) - net worth X, amount which can be used to generate an income X+$500k, expenses, Y+ mortgage interest on $500k.
The second case is more exposed to SORR, even though it has greater mean expected long-term return - ignoring taxes, healthcare, whatever. You've effectively borrowed money to buy equities. A mortgage is like the opposite of a bond - rather than receiving money at a fixed interest rate, you're paying it out at a fixed interest rate. So your equity/bond ratio is (say) more like 150/-50 than 80/20.
You didn't explain how though. You've just repeated the "because it does" argument. It doesn't actually change your AA as it is just easier to calculate a mortgage as a fixed expense rather than jump through the mental gymnastics to make it into a negative bond. Both paid off and people who carry the mortgage into FIRE still have housing related expenses.
I'm pretty sure though that the mortgage is a negative when it comes to SORR.
So just say you have 2 million in assets at a 4% WR. So you can spend say 80k per year. You have a mortgage for 1 million. If the market crashes 50% you would have assets of 1 million and just say you have to reduce your spending to 4%. That leaves you with 40k to spend but your mortgage would still have to be serviced with the same amount of money. So if your mortgage costs 20k to service each year that would mean your spending excluding the mortgage drops from 60k to 20k.
I guess it's also worth pointing out that local differences can have a significant effect on the calculations. Here in the UK, mortgage rates are typically fixed only for 2-5 years, and variable thereafter. There is no tax relief for mortgage interest and if you don't make the payments and lose the house, you still owe the money - you don't just hand in the keys and walk away. So your potential loss is certainly not limited to the small amount of equity you had at the start. The situation you have in the US, where federal government backed agencies intervene to subsidise/distort the mortgage market, makes it much more of a one-way bet.
I guess it's also worth pointing out that local differences can have a significant effect on the calculations. Here in the UK, mortgage rates are typically fixed only for 2-5 years, and variable thereafter.
so i ran the simulation and added a 300k income event 10 years into the mortgage and stopped the original mortgage and restarted a 30 year mortgage with 1.1MM being the new balance since 800k is what is still owed at the end of 10 years with your numbers above and it increased the success rate to 99.15% . this assumes you can get perpetual mortgages at 3.5% which is unlikely.
if you were able to do it again 10 years later you get to 100% success rate. proving that a perpetual mortgage actually stops SORR. assuming you can get a low rate
numbers re run with 5% interest rates on future finances 2 REFI's every 10 years - 99.15% chance of success
numbers re run with 7% interest rates on future refi's - 98.31%
i really think a perpetual mortgage with staged REFI's does the opposite of what many here are assuming. it would prevent SORR.
I guess it's also worth pointing out that local differences can have a significant effect on the calculations. Here in the UK, mortgage rates are typically fixed only for 2-5 years, and variable thereafter. There is no tax relief for mortgage interest and if you don't make the payments and lose the house, you still owe the money - you don't just hand in the keys and walk away. So your potential loss is certainly not limited to the small amount of equity you had at the start. The situation you have in the US, where federal government backed agencies intervene to subsidise/distort the mortgage market, makes it much more of a one-way bet.
yeah agreed its different. though mortgage interest deductions dont work for many anymore with our new tax law changes. but your mortgage rates are also insanely low compared to ours right now. i see UK people posting about sub 2% rates all the time. leverage that til its gone.
I guess it's also worth pointing out that local differences can have a significant effect on the calculations. Here in the UK, mortgage rates are typically fixed only for 2-5 years, and variable thereafter. There is no tax relief for mortgage interest and if you don't make the payments and lose the house, you still owe the money - you don't just hand in the keys and walk away. So your potential loss is certainly not limited to the small amount of equity you had at the start. The situation you have in the US, where federal government backed agencies intervene to subsidise/distort the mortgage market, makes it much more of a one-way bet.
yeah agreed its different. though mortgage interest deductions dont work for many anymore with our new tax law changes. but your mortgage rates are also insanely low compared to ours right now. i see UK people posting about sub 2% rates all the time. leverage that til its gone.
One thing here is to use a mortgage to help with the gap between RE age and the age you can access retirement savings accounts. You might have a 'stache of a certain amount but can't touch some of it yet, so running a mortgage that you intend to pay off with the tax-free lump sum you can take upon retirement is relatively common even away from the FIRE "community."
yes Retire canada that math is correct and in the 1.7% of years it does fail it just fails faster than the non mortgage holder - so you still fail - so the SORR is the same in both situations meaning you're going to fail in either case its just a matter of when you fail. typically 5-10years earlier with a mortgage.
How does having the mortgage increase the SORR risk? If you have X expenses and you've saved your amount (25x the expenses) and have let's say some SORR risk Y. Yet I have X+650 expenses and saved my amount (25x my expenses). Don't I have identical SORR risk? Of course we're assuming all other things bring equal.
Consider two equivalent scenarios:
(mortgage paid off) - net worth X, expenses Y
(mortgage of $500k) - net worth X, amount which can be used to generate an income X+$500k, expenses, Y+ mortgage interest on $500k.
The second case is more exposed to SORR, even though it has greater mean expected long-term return - ignoring taxes, healthcare, whatever. You've effectively borrowed money to buy equities. A mortgage is like the opposite of a bond - rather than receiving money at a fixed interest rate, you're paying it out at a fixed interest rate. So your equity/bond ratio is (say) more like 150/-50 than 80/20.
You didn't explain how though. You've just repeated the "because it does" argument. It doesn't actually change your AA as it is just easier to calculate a mortgage as a fixed expense rather than jump through the mental gymnastics to make it into a negative bond. Both paid off and people who carry the mortgage into FIRE still have housing related expenses.
Have a look at:
https://earlyretirementnow.com/2017/10/11/the-ultimate-guide-to-safe-withdrawal-rates-part-21-mortgage-in-retirement/
(and perhaps also the earlier posts e.g. part 14 & 15 which explain sequence of return risk more thoroughly.)
The case for having a mortgage is pretty simple: You can get a 30-year mortgage for about 4% right now. Probably even slightly below 4% when you shop around. Equities will certainly beat that nominal rate of return over the next 30 years. Open and shut case! End of the discussion, right? Well, not so fast! As we have seen in our posts on Sequence of Return Risk (Part 14 and Part 15), the average return is less relevant than the sequence of returns. Having a mortgage in retirement will exacerbate your sequence of return risk because you are frontloading your withdrawals early on during retirement to pay for the mortgage; not just interest but also principal payments. In other words, if we are unlucky and experience low returns early during our retirement (the definition of sequence risk) we’d withdraw more shares when equity prices are down. The definition of sequence risk!
The equity glidepath slope reverses in retirement! As we detailed in the previous two installments of the series (Part 19 and Part 20), a glidepath shifting from a moderate bond allocation at the commencement of retirement to a mostly equity portfolio later in retirement can serve as a hedge against Sequence Risk. But with a mortgage, we’d do the opposite. Having a mortgage is similar (though not identical, I know) to a short bond position, and paying off the mortgage means we shift money out of equities and into bonds. The wrong direction! That can only exacerbate Sequence Risk!
The lesson from this exercise: If you are risk-averse and like to hedge out the tail risk it’s best to have no mortgage and a moderate bond allocation. If you are a risk-taker (degenerate gambler?) then you might as well go all-in: Have a mortgage and 100% equities in the portfolio as well.
Who cares if we end up with $6 million instead of $7 million when we’re in our 80s? We are willing to pay that cost for the hedge against Sequence of Return Risk, i.e., the very unpleasant tail risk of running out of money after 30 or 40 years due to poor portfolio returns in the first few years after retirement.
I think we've shown above your SORR on the mortgage is the same or better than your 4%WR FIRE and definitely better than your 5%WR FIRE.
Add in the option of pulling equity out and that risk goes to close to zero historically. I wouldn't work extra years of my life to accumulate more money than 4%WR, but I would accept and utilize some addition money if it was available.
Perhaps the fact that I am facing FIRE with a mortgage and don't have an option to live in a paid off house provides a different view point, but I am not seeing the risk you are. You can lose your paid off house in FIRE if you can't pay the taxes on it or if you can't afford to maintain it so it's not risk free accommodation for life.
I think we've shown above your SORR on the mortgage is the same or better than your 4%WR FIRE and definitely better than your 5%WR FIRE.
I don't think that this is factually correct. Over the long term leverage will work for you but over the short term you can get hit. I suggest reading big ERN's post or even my post above. You are increasing your exposure to SORR by having a mortgage.
I ran these numbers in cFIREsim:
- $1M invested 70/30 with 0.1% fees
- 30yrs
- WR $53612/yr [not inflation adjusted] - this is what my mortgage calculator says is 52 weekly payments at 3.49% for $1M borrowed
I get a 98.3% historical success rate compared to the 95.8% for the main FIRE portfolio at 4%WR over 30yrs with same AA. So the mortgage portfolio is less risky than the FIRE portfolio. It also has one additional safety element...namely that you are building equity the whole time so that you could pull more equity out and reinvest it should you feel you are in one of the very few problematic starting years. I don't have any math to simulate that [thinking about it], but I suspect you could take that historical failure rate to zero with that option.
Retire-Canada - I think something is wrong with your analysis but I'm not sure what it is. I suggest that you read the article that was linked and go from there. Maybe you can pick what ERN is doing incorrectly. I think though your model is a simplistic model and if some options were tweaked such as increasing your repayments over time (interest rates could increase) then the analysis may change.
I don't think my 5% WR (which I'm fine with) is comparable to having a mortgage. The mortgage adds a different take to the whole analysis. I still believe (via reading big ERN's article and using logic as I did above) that a mortgage increases your SORR but increases your chances of increased returns over a longer time period (say 30 years) and for me that is a dumb bet to take but I am not really worried about longevity risk or having the most money when I die.
Retire-Canada - I think something is wrong with your analysis but I'm not sure what it is. I suggest that you read the article that was linked and go from there. Maybe you can pick what ERN is doing incorrectly. I think though your model is a simplistic model and if some options were tweaked such as increasing your repayments over time (interest rates could increase) then the analysis may change.
The one thing I noticed was ERN assumes a 2% inflation rate. cFIREsim uses historical inflation rates. Given the mortgage is not adjusted for inflation this handicaps it in ERNs simulation. I agree my use of cFIREsim is simple and I think that's a strength of this analysis. It's an easy tool for people to use and enter their own numbers for comparison. If you think my analysis is wrong run some of your own and share the results.
If you are in the US you can lock in rates for 30yrs so that seems reasonable to hold the rate steady in the analysis at least that far. ERN does the same thing. So you can ignore my 2nd 40yr analysis and just look at the 30yr results that are comparable to ERNs analysis. That still gives us a 98.3% success rate using cFIREsim's historical dataset.I don't think my 5% WR (which I'm fine with) is comparable to having a mortgage. The mortgage adds a different take to the whole analysis. I still believe (via reading big ERN's article and using logic as I did above) that a mortgage increases your SORR but increases your chances of increased returns over a longer time period (say 30 years) and for me that is a dumb bet to take but I am not really worried about longevity risk or having the most money when I die.
To your bolded point a 5%WR is not comparable to investing the mortgage like we've shown above. It's a lot more risky.
Personally I am not looking to get super rich and I am not super rich hence wanting to have my money continue to work for me and not sit idle in a very expensive piece of land/building. While I feel pretty strongly that trading extra years of your life to go sub-4%WR is a bad transaction from an opportunity cost perspective I don't feel like having some additional money is a bad thing if I don't have to work for it and it's not super risky. So far you haven't made a compelling case for your increased SORR argument.
If I was spending 2% of my invested portfolio I wouldn't bother with investing the mortgage because I would have more money than I could ever realistically use. I'm not even close to that at this point and I wouldn't keep working to make that happen, but I would let my money work for me while I am FIRE to hit a sub-4%WR.
Keeping in mind I am currently almost at 5%WR so I can't even see 2%WR from where I am standing. ;)
Retire-Canada - I think something is wrong with your analysis but I'm not sure what it is. I suggest that you read the article that was linked and go from there. Maybe you can pick what ERN is doing incorrectly. I think though your model is a simplistic model and if some options were tweaked such as increasing your repayments over time (interest rates could increase) then the analysis may change.
The one thing I noticed was ERN assumes a 2% inflation rate. cFIREsim uses historical inflation rates. Given the mortgage is not adjusted for inflation this handicaps it in ERNs simulation. I agree my use of cFIREsim is simple and I think that's a strength of this analysis. It's an easy tool for people to use and enter their own numbers for comparison. If you think my analysis is wrong run some of your own and share the results.
If you are in the US you can lock in rates for 30yrs so that seems reasonable to hold the rate steady in the analysis at least that far. ERN does the same thing. So you can ignore my 2nd 40yr analysis and just look at the 30yr results that are comparable to ERNs analysis. That still gives us a 98.3% success rate using cFIREsim's historical dataset.I don't think my 5% WR (which I'm fine with) is comparable to having a mortgage. The mortgage adds a different take to the whole analysis. I still believe (via reading big ERN's article and using logic as I did above) that a mortgage increases your SORR but increases your chances of increased returns over a longer time period (say 30 years) and for me that is a dumb bet to take but I am not really worried about longevity risk or having the most money when I die.
To your bolded point a 5%WR is not comparable to investing the mortgage like we've shown above. It's a lot more risky.
Personally I am not looking to get super rich and I am not super rich hence wanting to have my money continue to work for me and not sit idle in a very expensive piece of land/building. While I feel pretty strongly that trading extra years of your life to go sub-4%WR is a bad transaction from an opportunity cost perspective I don't feel like having some additional money is a bad thing if I don't have to work for it and it's not super risky. So far you haven't made a compelling case for your increased SORR argument.
If I was spending 2% of my invested portfolio I wouldn't bother with investing the mortgage because I would have more money than I could ever realistically use. I'm not even close to that at this point and I wouldn't keep working to make that happen, but I would let my money work for me while I am FIRE to hit a sub-4%WR.
Keeping in mind I am currently almost at 5%WR so I can't even see 2%WR from where I am standing. ;)
The bolded/underlined/italics - that statement is GREAT. Really captures the heart of the logic behind not paying down the mortgage.
Retire-Canada - I think something is wrong with your analysis but I'm not sure what it is. I suggest that you read the article that was linked and go from there. Maybe you can pick what ERN is doing incorrectly. I think though your model is a simplistic model and if some options were tweaked such as increasing your repayments over time (interest rates could increase) then the analysis may change.
The one thing I noticed was ERN assumes a 2% inflation rate. cFIREsim uses historical inflation rates. Given the mortgage is not adjusted for inflation this handicaps it in ERNs simulation. I agree my use of cFIREsim is simple and I think that's a strength of this analysis. It's an easy tool for people to use and enter their own numbers for comparison. If you think my analysis is wrong run some of your own and share the results.
If you are in the US you can lock in rates for 30yrs so that seems reasonable to hold the rate steady in the analysis at least that far. ERN does the same thing. So you can ignore my 2nd 40yr analysis and just look at the 30yr results that are comparable to ERNs analysis. That still gives us a 98.3% success rate using cFIREsim's historical dataset.I don't think my 5% WR (which I'm fine with) is comparable to having a mortgage. The mortgage adds a different take to the whole analysis. I still believe (via reading big ERN's article and using logic as I did above) that a mortgage increases your SORR but increases your chances of increased returns over a longer time period (say 30 years) and for me that is a dumb bet to take but I am not really worried about longevity risk or having the most money when I die.
To your bolded point a 5%WR is not comparable to investing the mortgage like we've shown above. It's a lot more risky.
Personally I am not looking to get super rich and I am not super rich hence wanting to have my money continue to work for me and not sit idle in a very expensive piece of land/building. While I feel pretty strongly that trading extra years of your life to go sub-4%WR is a bad transaction from an opportunity cost perspective I don't feel like having some additional money is a bad thing if I don't have to work for it and it's not super risky. So far you haven't made a compelling case for your increased SORR argument.
If I was spending 2% of my invested portfolio I wouldn't bother with investing the mortgage because I would have more money than I could ever realistically use. I'm not even close to that at this point and I wouldn't keep working to make that happen, but I would let my money work for me while I am FIRE to hit a sub-4%WR.
Keeping in mind I am currently almost at 5%WR so I can't even see 2%WR from where I am standing. ;)
The bolded/underlined/italics - that statement is GREAT. Really captures the heart of the logic behind not paying down the mortgage.
This is another one of those picking the returns arguments though. My returns on housing have been great. Probably better than the stock market. I wouldn't though leverage more into the property market. To state that paying off the mortgage means you have your money working for you rather than in an unproductive expensive asset may be true but it also may be completely untrue. It's the same argument as stating invest in small cap stocks in Ethiopia because they are going to have a run. My take is you invest based on your asset allocation and use leverage if you are so inclined. If property is such a bad investment then don't invest in it. The leverage question is basically irrelevant.
I should add that none of those comments add anything at all to the argument (which appears correct) that having a mortgage increases your SORR. If you are so inclined then go for it.
SORR = sequence of returns risk. It's a relatively new phrase in early retirement jargon. It refers to the fact that if you have a bad few years at the beginning of retirement, that you can get into trouble with sustaining your retirement because the remaining investments can't recover from the double whammy of bad returns plus your withdrawals.
I should add that none of those comments add anything at all to the argument (which appears correct) that having a mortgage increases your SORR. If you are so inclined then go for it.
I should add that none of those comments add anything at all to the argument (which appears correct) that having a mortgage increases your SORR. If you are so inclined then go for it.
Sorry Steveo you really have not shown this ^^^ is true at all. The numbers I have posted [which you can verify with cFIREsim] show the mortgage account is less risky than the FIRE account at 4%WR over 30yrs. Instead of just insisting you are correct just because please demonstrate it. If it is true you'll be able to show it.
To Exflyboy's point there is nothing at all wrong with doing something that is not optimal according to the math for any number of reasons. If it makes you happy or more secure emotionally/psychologically in your retirement plans. Even if you just read a blog post and decided that sounds cool. We are not robots. We don't have to compute every decision.
That said I think it is important to dig down into these issues and see what's what so we can have the facts to support the various options.
Good explanation, though it is not a relatively new term. It is an old concept.SORR = sequence of returns risk. It's a relatively new phrase in early retirement jargon. It refers to the fact that if you have a bad few years at the beginning of retirement, that you can get into trouble with sustaining your retirement because the remaining investments can't recover from the double whammy of bad returns plus your withdrawals.
Thank you for the explanation!
The only evidence that it effects your safety is that you run out of money sooner with a mortgage in some cases you still fail fire in both situations. Doesn't really matter if the money lasts 20 years or 15 years you lost. The mortgage prevents failures of more historic scenarios specifically when related to inflation.
also suggest the time to run out of money does matter.
The only evidence that it effects your safety is that you run out of money sooner with a mortgage in some cases you still fail fire in both situations. Doesn't really matter if the money lasts 20 years or 15 years you lost. The mortgage prevents failures of more historic scenarios specifically when related to inflation.
Where is your analysis that supports this ? I'd also suggest the time to run out of money does matter. You may be close to receiving social security or some other payments for instance.
It's probably a good idea to also read ERN's posting on this issue and even the whole WR question. There is lots of good stuff on his site.
This is a very important point that seems to be lost on folks. A failure is not just a failure. Failure scenario "a" can be waaay different than scenario "b". This is of particular importance to the crowd that promotes adding in extra income or decreasing spending to avoid SORR, or those with higher WR's who are OK with increased risk for those necessities at some point in a 50-60 retirement. IOW a failure rate of 20%, but one in which a worst case is coming up 50K short, is totally different than a failure rate of 5% when the fewer in frequency failures are massive misses. One implies minor corrections could put you at 100%. While the other implies in 5% of the cases it's cat food and government housing, or some huge lifestyle changes at some point.
I haven't run the numbers with mortgages and make no claim how one way or another works towards either end of such a failure spectrum. I just think it's definitely something people should keep in mind when playing with these historical numbers and regarding AA.
I agree with your comments about having to judge things rationally and factually. It's also okay to do something sub-optimal. I'm not convinced in relation to your analysis and I trust ERN's analysis more but he and myself could be wrong. I think I have shown that the analysis in relation to SORR is correct. I've used ERN's blog post (his analysis on the whole is the best I've seen on WR's) plus a logical definition of what could occur when it comes to holding a mortgage whereas I think your analysis is a little too simplistic however that doesn't mean you are wrong.
Good explanation, though it is not a relatively new term. It is an old concept.SORR = sequence of returns risk. It's a relatively new phrase in early retirement jargon. It refers to the fact that if you have a bad few years at the beginning of retirement, that you can get into trouble with sustaining your retirement because the remaining investments can't recover from the double whammy of bad returns plus your withdrawals.
Thank you for the explanation!
Basically, equity markets are volatile, so financial analysts sought to quantify the risks of the market. Using old data (and assuming that old data has value as predictive of future events (a key assumption), the analysis showed that market volatility ranges could be quantified and then a range and probability of possible return outcomes could be simulated (fitting data to the bell curve of prior outcomes).
This type of simulation is the foundation behind papers like the Trinity Study and derived conclusions from it (like 4% is a pretty secure withdraw rate). will the future fit the past? No one knows, but a sequence of returns similar to the past is a fundamental assumption behind the models. Note that I was doing this at Wharton on minicomputers using Minitab in 1984.
Anyway, this all this boils down to using mathmatical models to help people plan. Since you only have one life, it is up to you to decide if you want to work more, save more and be conservative or YOLO it, trust the data will apply to you and plan to live off better than 4% returns.
The thread is a good resource to explore various people's decisions.
As for the second bolded statement, you are incorrect. The Trinity study (at least the famous one that I assume you are referring to) was based on historical data, not parameterized simulations a la Monte Carlo. There are no bell curves in the Trinity study as far as I know.
I agree with your comments about having to judge things rationally and factually. It's also okay to do something sub-optimal. I'm not convinced in relation to your analysis and I trust ERN's analysis more but he and myself could be wrong. I think I have shown that the analysis in relation to SORR is correct. I've used ERN's blog post (his analysis on the whole is the best I've seen on WR's) plus a logical definition of what could occur when it comes to holding a mortgage whereas I think your analysis is a little too simplistic however that doesn't mean you are wrong.
Rather than believing anyone Steveo about an important life decision like this I'd encourage you to do your own analysis. It's not that hard.
ERN fails to account for realistic inflation possibilities over the course of the 30yr mortgage. If you do use historical inflation values that lowers the risk of the plan considerably. He also fails to look at any of the obvious ways to take the invested mortgage risk to zero against historical market returns. For example only invest $800K of the $1M mortgage and drop the other $200K in after 10yrs or the SORR has played out.
"...SORR has played out."
When would you know that sequence of returns risk has played out?
Good point."...SORR has played out."
When would you know that sequence of returns risk has played out?
When you get through your initial phase of FIRE say after 10yrs and have had the pleasure of significant positive returns such that you feel it's unlikely your portfolio would fail due to a poor early sequence of returns.
If you started with a $40K/yr + inflation from $1M portfolio FIRE plan and at 10yrs you $1.8M after inflation I'd feel comfortable calling the early sequence of return risk to have not been an issue for your start year. If you re-started your FIRE at that point you'd be at a 2.2%WR and have 10yrs less duration to deal with.
In the example you were quoting from you could also just hold that $200K in some inflation mitigated vehicle and not add it to your main mortgage investment account. Unless you needed it and in that case you don't have to make any judgement call about SORR.
with the extreme example being 100% cash, 0% SOR risk.
with the extreme example being 100% cash, 0% SOR risk.
Also known as "100% inflation risk".
But if inflation is fixed at 2%
How about these lower returns predicted by Vanguard?
https://www.cnbc.com/2017/11/20/jack-bogles-5-bold-investment-predictions-for-2018-and-beyond.html (https://www.cnbc.com/2017/11/20/jack-bogles-5-bold-investment-predictions-for-2018-and-beyond.html)
Mr. Bogle says to expect about a 4% return. If you FIRE, won't this shrink the stash and make you more susceptible to inflation problems? He could be wrong too, but "Laissez les bon temps rouler" can't go on forever.
Many high income savers could literally hold cash at 0% and never fail an @ 50 retirement. There is nothing wrong with that person following a strategy of forgoing market returns for 100% safety because they wont ever need all the value from the money they earned. It is not optimal, but it is fine.
"...SORR has played out."
When would you know that sequence of returns risk has played out?
When you get through your initial phase of FIRE say after 10yrs and have had the pleasure of significant positive returns such that you feel it's unlikely your portfolio would fail due to a poor early sequence of returns.
If you started with a $40K/yr + inflation from $1M portfolio FIRE plan and at 10yrs you $1.8M after inflation I'd feel comfortable calling the early sequence of return risk to have not been an issue for your start year. If you re-started your FIRE at that point you'd be at a 2.2%WR and have 10yrs less duration to deal with.
If you want to be conservative, you can get cash equivalents that earn more than 0% nominal. For example, a 3 year CD is yielding 3%.
So really, we know that sequence of returns risk has played out when we are withdrawing substantially less than 4%. To quantify, would it be when we get a 100% success rate in cFIREsim?
At the same time let's not try and make out that having a mortgage is always the right idea when that is definitely not clear.
Question for the group- very early in the thread Nords is quoted as saying that anything over something like 80% on FIRECalc is just "meaningless precision". Really? How so? (Not a critical question, rather a genuine I-don't-get-it thing, sorry to be remedial here). How does that precision thing work?
My numbers are running in the 95% range on this and other calculators and still I sit a-quivering about my likelihood of success. Supposed to be a 2019 cohort and my numbers are good but I am getting OMY sickness.
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.
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).
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!
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.“
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%.
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!
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.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.
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!
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.
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.
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.
The other item people forget to think about is the spending aspect of a WR. Spending is not a constant over 50 years.
This is an over generalization and not true for everyone.
Yes, but lets analyze what an 8% 'failure' looks like.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.
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.
-snip-
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?
It's not adjusted for inflation, but it does include dividends. You can't just ignore dividends, they're a big part of the total return.
This is just for the time period you mentioned.
The inflation adjusted chart lets you compare apples and apples better.
It's not all gravy - it doesn't make it back to 1965 levels until 1983. Better than 1992 but still a bloody long time.
Don't forget that the downturn in the market in 1966 is what defines the 4% rule for the US market. 4% withdrawals kept the 1965 retiree out of trouble, barely.
Perhaps this has been discussed previously. I did not scour the entries to check. Perhaps there are thoughts on this quote from Jack Bogle (Bloomberg) who recently passed:
"JB Great markets don’t go on forever. We’re certainly looking at an era of much lower returns. I don’t think 4 or 5 percent for stocks is a bad guess. You might get lucky and get 2.5 percent on bonds and maybe almost 3 percent if you get into some corporates. But you put the 5 and the 3 together, and you have a 50-50 balanced fund, that’s 4 percent for a balanced portfolio. Then you take out inflation—say we’re lucky enough to have 1 percent. I don’t think we’ll get that lucky, but it should be lower than in the past. Maybe it’s a 3 percent real return? Then you have your friendly mutual fund managers taking 2 percent. Easy math."
Does this give added credence to lowering the 4 percent rule to 3 percent? Save a little longer to 33.34X your expected yearly expenditures?
-SNIP-
A lower WR will always be safer. But remember the 4% rule was based on a 30-year time horizon. Bogle could well be correct that returns will be lower than average in the future. I'm not sure what he's defining as an "era." 5, 10, 15 years? But that doesn't mean the 4% rule will fail. Because presumably a period of lower than average returns would be followed by above average returns.
-SNIP-
A lower WR will always be safer. But remember the 4% rule was based on a 30-year time horizon. Bogle could well be correct that returns will be lower than average in the future. I'm not sure what he's defining as an "era." 5, 10, 15 years? But that doesn't mean the 4% rule will fail. Because presumably a period of lower than average returns would be followed by above average returns.
Yes - he was a smart man. I don't know how long an era is either, but the term suggests a long time. Wikipedia makes me think it could be a very long time, a very long run.
https://en.wikipedia.org/wiki/Era_(geology) (https://en.wikipedia.org/wiki/Era_(geology))
In the long run we are all dead. Even Gibson guitar went bankrupt last year.
I think I can hedge a bit and go for 3 percent.
So the question is less about average rates of return, but whether future bear markets will be much worse than in the past, and when will they occur.
So the question is less about average rates of return, but whether future bear markets will be much worse than in the past, and when will they occur.
The future is notoriously hard to predict.
The 4% SWR basically solves the financial side of things, but there are always other risks to consider. There are still about 5% of historical cases where someone who blindly withdrew an inflation-adjusted 4% per year didn't quite make it the full 30 years because of sequential market crashes. By contrast, about 50% of all US deaths are due to heart disease, but I'm guessing that most of us have spent a lot more time worrying about the 5% chance of market crashes causing us to curtail our spending than we do about the 50% chance of heart disease causing our deaths.
Maybe take a few of those hours plotting up sequence of return risk scenarios and spend them going for a brisk walk instead.
Eating red or processed meat daily increases your risk of stomach and colon cancers by more than 15%. Where's the thread about the dangers of that? People who sometimes forego their seatbelt are increasing their risk of death in an accident by more than 50%. Do you have a firearm or swimming pool in your home? Do you smoke? Do you see where I'm going here?
Historical stats about the stock market are descriptive, not predictive. Russia could nuke your city later today and then all of your careful portfolio spreadsheets that you worried so much about would look pretty silly, right? At some point, you have to accept that your financial models are "good enough" and then start using your precious remaining hours on Earth to address other risks instead.
The future is notoriously hard to predict.
The 4% SWR basically solves the financial side of things, but there are always other risks to consider. There are still about 5% of historical cases where someone who blindly withdrew an inflation-adjusted 4% per year didn't quite make it the full 30 years because of sequential market crashes. By contrast, about 50% of all US deaths are due to heart disease, but I'm guessing that most of us have spent a lot more time worrying about the 5% chance of market crashes causing us to curtail our spending than we do about the 50% chance of heart disease causing our deaths.
Maybe take a few of those hours plotting up sequence of return risk scenarios and spend them going for a brisk walk instead.
Eating red or processed meat daily increases your risk of stomach and colon cancers by more than 15%. Where's the thread about the dangers of that? People who sometimes forego their seatbelt are increasing their risk of death in an accident by more than 50%. Do you have a firearm or swimming pool in your home? Do you smoke? Do you see where I'm going here?
Historical stats about the stock market are descriptive, not predictive. Russia could nuke your city later today and then all of your careful portfolio spreadsheets that you worried so much about would look pretty silly, right? At some point, you have to accept that your financial models are "good enough" and then start using your precious remaining hours on Earth to address other risks instead.
Perhaps this has been discussed previously. I did not scour the entries to check. Perhaps there are thoughts on this quote from Jack Bogle (Bloomberg) who recently passed:
"JB Great markets don’t go on forever. We’re certainly looking at an era of much lower returns. I don’t think 4 or 5 percent for stocks is a bad guess. You might get lucky and get 2.5 percent on bonds and maybe almost 3 percent if you get into some corporates. But you put the 5 and the 3 together, and you have a 50-50 balanced fund, that’s 4 percent for a balanced portfolio. Then you take out inflation—say we’re lucky enough to have 1 percent. I don’t think we’ll get that lucky, but it should be lower than in the past. Maybe it’s a 3 percent real return? Then you have your friendly mutual fund managers taking 2 percent. Easy math."
Does this give added credence to lowering the 4 percent rule to 3 percent? Save a little longer to 33.34X your expected yearly expenditures?
However, if your job is preventing you from exercising, eating well, focusing on your marriage, and generally just slowly killing you, then by working longer you are increasing your risk of your portfolio being hit by divorce, early severe illness requiring expensive treatment, late in life illness requiring ongoing nursing care, mobility challenges that make day to day life more challenging and expensive, etc, etc.
If your job is compromising your mental and physical health, then quitting at 10-15X and coasting to full FI may be a much saner option. It depends on your individual circumstances.
There are the possible risks of what the markets will do and then there is the guaranteed risk of working longer if you choose a more conservative WR.
This group is such a conservative and paranoid bunch, I fully suspect that most Mustachians aren't FIREing on super lean budgets at exactly 4% WR. The risk of OMY among this population is MUCH MUCH higher than SORR.
I suspect most people here will die with substantially more money than they initially saved.
Clip-n-save comment, adding it to my journal. I am definitely in the camp of "this job is killing me" and I realize I just have to get out of here. Just a short while left, I really am committed to going this year with my 2019 cohort.
As a side note, I have seen you quoted as the "best post of the day" but the link is gone to prior posts. @spartana and others also have posts gone- do folks blank their history for some reason and start over at 5 o'clock shadow status for privacy or something? Are people manually deleting hundreds of old posts or going to the mods to do it? Just curious.
Anyone remember @scrubbyfish? She totally disappeared and and all posts evaporated, I miss her voice. You never know the circumstances of course, perhaps people have to abandon their old stuff because they are being stalked or have been outed at work. I get it, no criticism from me but I am curious. I could envision needing to go underground myself at some point but would hope not.
Thanks for the reply, I totally get it. And thanks for the frequently brilliant posts.
You mean like a personal description? Spartana: White, 1'8", fluffy. Often sports a monocle and top hat.aww... poor spartana, all stubble again. Can I gift you a few thousand of my posts so you can at least sport a handlebar mustache?Its Walrus or nothing!! I demand only the biggest and fanciest of staches ;-). At least I promised the mods I wouldn't delete any more of my posts so that they don't kick me out. I'll just remove incriminating info.
And its not only death that's the issue with waiting to retire later - its age related infirmity. That isn't in @CCCA great graph but its something to be considered if choosing to work years longer than you need. I'm pretty sure a persons physical and mental abilities, and quality of life, is going to higher in your 40, 50s and 60s then in your 70s, 80s and 90s. So someone may work years longer than needed to fund a higher retirement lifestyle might find that even if they live a long life, the quality may be so poor due to old age problems.
I tend to frame everything in terms of the feelings over the numbers because what are these numbers even for except to facilitate better feelings?
If the pursuit of the numbers creates a net lifetime deficit in the feelings column, then something went very very wrong along the way.
I tend to frame everything in terms of the feelings over the numbers because what are these numbers even for except to facilitate better feelings?
If the pursuit of the numbers creates a net lifetime deficit in the feelings column, then something went very very wrong along the way.
It can take me time just to figure out what I'm actually feeling. It's now always clear to me.
On another note TheFinanceBuff sent out in his email an article that argues the feelings one has when dealing with rate of return risk during the drawdown phase of the early retirement.
https://medium.com/@justusjp/the-myopia-of-failure-rates-846f35a1c8eb
Harry Sit's response to the article was, "One more reason for calculating the withdrawal off the current portfolio value. If you don't want to be stressed for 10-15 years, be ready to live on less when your portfolio is down."
And its not only death that's the issue with waiting to retire later - its age related infirmity. That isn't in @CCCA great graph but its something to be considered if choosing to work years longer than you need. I'm pretty sure a persons physical and mental abilities, and quality of life, is going to higher in your 40, 50s and 60s then in your 70s, 80s and 90s. So someone may work years longer than needed to fund a higher retirement lifestyle might find that even if they live a long life, the quality may be so poor due to old age problems.
I've now watched my parents, PIL, and at least one uncle 'overshoot' their retirement. OMY syndrome hit and now the common refrain is "we should have retired years earlier'. They traded years and lots and lots of health problems for more money they will likely never spend. At least their alma maters will benefit...
And its not only death that's the issue with waiting to retire later - its age related infirmity. That isn't in @CCCA great graph but its something to be considered if choosing to work years longer than you need. I'm pretty sure a persons physical and mental abilities, and quality of life, is going to higher in your 40, 50s and 60s then in your 70s, 80s and 90s. So someone may work years longer than needed to fund a higher retirement lifestyle might find that even if they live a long life, the quality may be so poor due to old age problems.
I've now watched my parents, PIL, and at least one uncle 'overshoot' their retirement. OMY syndrome hit and now the common refrain is "we should have retired years earlier'. They traded years and lots and lots of health problems for more money they will likely never spend. At least their alma maters will benefit...
Must be nice. I have two older sisters, a BIL, and a few relatives that only wish they were FI. ER is off the table for them, but even Retirement is looking pretty skimpy other than SS and Medicare. Not sure why I turned out so different, but I was focused on FI since graduating from HS and got there at 35 (using 4%). Nowadays we are practicing stealth wealth and SWR falling further below 3%, although we live a similarly high lifestyle as the aforementioned relatives... Guess I'm stuck in OMY but no 'should have retired years earlier' regrets - being FI regardless of the market and exciting one-off spending (enjoying things like SCUBA and a safari with the kids before they go off to college)... Not really sure how a person can lament being FI and not ER to be honest... why couldn't your parents, PIL, and uncle have retired years earlier if they regret it now?
It's decidedly *not* nice, though certainly better than winding up destitute, to be sure. Each has their own story of how they got there, but now they share the same regret - that their retirement will be substantially shorter and their bodies have suffered (age of course was a factor but compounded by working). Since they all retired closer to traditional retirment age the result, proportionally, their retirements will be substantially shorter. IME I think regret about OMY tends to strike only after pulling the plug and getting past the mental hurdle of relying one's stashe instead of working a job. BUt they lament it precisely because of the time lost spent working literally over a thousand days - that they now wish they had spent doing other things while they were still able.
QuoteIt's decidedly *not* nice, though certainly better than winding up destitute, to be sure. Each has their own story of how they got there, but now they share the same regret - that their retirement will be substantially shorter and their bodies have suffered (age of course was a factor but compounded by working). Since they all retired closer to traditional retirment age the result, proportionally, their retirements will be substantially shorter. IME I think regret about OMY tends to strike only after pulling the plug and getting past the mental hurdle of relying one's stashe instead of working a job. BUt they lament it precisely because of the time lost spent working literally over a thousand days - that they now wish they had spent doing other things while they were still able.
Thanks for the answer, it was a sincere question. I can see how a person's perspective changes once they retire. There's a poll on the ER.org forum (http://www.early-retirement.org/forums/f28/poll-did-you-retire-too-early-too-late-or-about-right-96015.html) about this, with most folks thinking they retired at the right time (of course biased by the fact returns have been pretty good for the last 10 years, might have a different outcome after the 2008-9 45% drop).
QuoteIt's decidedly *not* nice, though certainly better than winding up destitute, to be sure. Each has their own story of how they got there, but now they share the same regret - that their retirement will be substantially shorter and their bodies have suffered (age of course was a factor but compounded by working). Since they all retired closer to traditional retirment age the result, proportionally, their retirements will be substantially shorter. IME I think regret about OMY tends to strike only after pulling the plug and getting past the mental hurdle of relying one's stashe instead of working a job. BUt they lament it precisely because of the time lost spent working literally over a thousand days - that they now wish they had spent doing other things while they were still able.
Thanks for the answer, it was a sincere question. I can see how a person's perspective changes once they retire. There's a poll on the ER.org forum (http://www.early-retirement.org/forums/f28/poll-did-you-retire-too-early-too-late-or-about-right-96015.html) about this, with most folks thinking they retired at the right time (of course biased by the fact returns have been pretty good for the last 10 years, might have a different outcome after the 2008-9 45% drop).
Also biased by the fact that people who are attracted to the ERE approach aren't likely to be the kind of people who deeply enjoy their work and get paid really well to do it.
That group is "extremely" motivated to FIRE as soon as humanly possible, so they are the least likely to be sucked into unnecessary OMY.
Risk is highly individual and depends entirely on personal circumstances. OMY might be wise for one person and tragic for another.
It's hard to know yourself well enough to know which side of the OMY risk you are on.
QuoteIt's decidedly *not* nice, though certainly better than winding up destitute, to be sure. Each has their own story of how they got there, but now they share the same regret - that their retirement will be substantially shorter and their bodies have suffered (age of course was a factor but compounded by working). Since they all retired closer to traditional retirment age the result, proportionally, their retirements will be substantially shorter. IME I think regret about OMY tends to strike only after pulling the plug and getting past the mental hurdle of relying one's stashe instead of working a job. BUt they lament it precisely because of the time lost spent working literally over a thousand days - that they now wish they had spent doing other things while they were still able.
Thanks for the answer, it was a sincere question. I can see how a person's perspective changes once they retire. There's a poll on the ER.org forum (http://www.early-retirement.org/forums/f28/poll-did-you-retire-too-early-too-late-or-about-right-96015.html) about this, with most folks thinking they retired at the right time (of course biased by the fact returns have been pretty good for the last 10 years, might have a different outcome after the 2008-9 45% drop).
Also biased by the fact that people who are attracted to the ERE approach aren't likely to be the kind of people who deeply enjoy their work and get paid really well to do it.
That group is "extremely" motivated to FIRE as soon as humanly possible, so they are the least likely to be sucked into unnecessary OMY.
Risk is highly individual and depends entirely on personal circumstances. OMY might be wise for one person and tragic for another.
It's hard to know yourself well enough to know which side of the OMY risk you are on.
I think a small miscommunication. ER (early-retirement.org) is "early retirement" not "early retirement extreme." The average ER folk is probably closer to the mainstream than the average MMMer, while the average ERE forum member is probably farther from the mainstream than the average forum member here.
QuoteIt's decidedly *not* nice, though certainly better than winding up destitute, to be sure. Each has their own story of how they got there, but now they share the same regret - that their retirement will be substantially shorter and their bodies have suffered (age of course was a factor but compounded by working). Since they all retired closer to traditional retirment age the result, proportionally, their retirements will be substantially shorter. IME I think regret about OMY tends to strike only after pulling the plug and getting past the mental hurdle of relying one's stashe instead of working a job. BUt they lament it precisely because of the time lost spent working literally over a thousand days - that they now wish they had spent doing other things while they were still able.
Thanks for the answer, it was a sincere question. I can see how a person's perspective changes once they retire. There's a poll on the ER.org forum (http://www.early-retirement.org/forums/f28/poll-did-you-retire-too-early-too-late-or-about-right-96015.html) about this, with most folks thinking they retired at the right time (of course biased by the fact returns have been pretty good for the last 10 years, might have a different outcome after the 2008-9 45% drop).
Also biased by the fact that people who are attracted to the ERE approach aren't likely to be the kind of people who deeply enjoy their work and get paid really well to do it.
That group is "extremely" motivated to FIRE as soon as humanly possible, so they are the least likely to be sucked into unnecessary OMY.
Risk is highly individual and depends entirely on personal circumstances. OMY might be wise for one person and tragic for another.
It's hard to know yourself well enough to know which side of the OMY risk you are on.
I think a small miscommunication. ER (early-retirement.org) is "early retirement" not "early retirement extreme." The average ER folk is probably closer to the mainstream than the average MMMer, while the average ERE forum member is probably farther from the mainstream than the average forum member here.
I bet it's supposed to be 45-49 and 40-44Snort! No one can retire at 49 or earlier so that can't be it ;-). I saw that here before and no one knew why there were two 50-54 brackets. I'm guessing a typo. At least I'm a one-percenter of something!
Just heard Dave Ramsey tell a caller to go with 8% withdrawal rate
Just heard Dave Ramsey tell a caller to go with 8% withdrawal rate
Of course that'll work! The funds heshillsrecommends give 12% returns!
Just heard Dave Ramsey tell a caller to go with 8% withdrawal rate
Of course that'll work! The funds heshillsrecommends give 12% returns!
So what is this 12% unicorn fund that Ramsey recommends? It must be an actively managed fund and I assume has not had too long of a track record.
Just heard Dave Ramsey tell a caller to go with 8% withdrawal rate
Of course that'll work! The funds heshillsrecommends give 12% returns!
Just heard Dave Ramsey tell a caller to go with 8% withdrawal rate
Of course that'll work! The funds heshillsrecommends give 12% returns!
It might actually work for the average American male who works until his late 60s, develops a few lifestyle-related health conditions along the way, and doesn't make it to 80.
Well, with 12 percent expected return, no problem with drawing out 4 percent per year. Shucks, I was looking at backing it down to 3-1/2 percent per annum in December.
Well, with 12 percent expected return, no problem with drawing out 4 percent per year. Shucks, I was looking at backing it down to 3-1/2 percent per annum in December.
Just have to give DR some money to get his secret investing formula.. Sounds strangely familiar somehow?..:)
Just heard Dave Ramsey tell a caller to go with 8% withdrawal rate
Well, with 12 percent expected return, no problem with drawing out 4 percent per year. Shucks, I was looking at backing it down to 3-1/2 percent per annum in December.
Just heard Dave Ramsey tell a caller to go with 8% withdrawal rate
To be fair, an 8% withdrawal rate is not entirely unreasonable for the right investor. Especially if he's in the last 10 years or so of life expectancy, higher withdrawal rates are the norm.
Well, with 12 percent expected return, no problem with drawing out 4 percent per year. Shucks, I was looking at backing it down to 3-1/2 percent per annum in December.
Theoretically, that is when you should be increasing your WR. Markets down 20% and with a 75/25 portfolio your WR would be 4.7% and that should have the same adjusted probabilities of the standard 4% "Rule". Not saying I would do that, but it certainly wouldn't be the moment to decrease the WR. Back in September before the drop or now for that matter as we are close to being back to the highs, then yes I would think about backing it down.
Does he sell Dr. Dave Ramsey's patent medicine too?
Just heard Dave Ramsey tell a caller to go with 8% withdrawal rate
To be fair, an 8% withdrawal rate is not entirely unreasonable for the right investor. Especially if he's in the last 10 years or so of life expectancy, higher withdrawal rates are the norm.
Yep.
Not everyone wants to die rich.
Just heard Dave Ramsey tell a caller to go with 8% withdrawal rate
To be fair, an 8% withdrawal rate is not entirely unreasonable for the right investor. Especially if he's in the last 10 years or so of life expectancy, higher withdrawal rates are the norm.
Yep.
Not everyone wants to die rich.
"Rich" is a qualitative term.
As in I am not rich as my NW is ONLY around $3M.. Warren Buffet is rich at $87bN
Some might have a different perspective..:)
@Malkynn .. Wait, having a private plane makes you rich?.. I sold mine.. So I WAS rich, but I'm not now, even though I have more money..
I'm so confused.
I am working on increasing my 1.5% WR though...:)
@Malkynn .. Wait, having a private plane makes you rich?.. I sold mine.. So I WAS rich, but I'm not now, even though I have more money..
I'm so confused.
I am working on increasing my 1.5% WR though...:)
I suspect not just any private plane will do. Gotta be a private jet. And not some cheap junk like an old Westwind either, you need at least a modern Citation. My personal preference is the Phenom 300, strikes a nice balance between practical and opulent.
@Malkynn .. Wait, having a private plane makes you rich?.. I sold mine.. So I WAS rich, but I'm not now, even though I have more money..
I'm so confused.
I am working on increasing my 1.5% WR though...:)
I suspect not just any private plane will do. Gotta be a private jet. And not some cheap junk like an old Westwind either, you need at least a modern Citation. My personal preference is the Phenom 300, strikes a nice balance between practical and opulent.
Yes the Phenom is my best plane too. They normally fly at 45,000ft.. i.e above the airliners..:)
Ok - why is this important? I mean, I get that the air is smoother at 30,000 feet commericial jetliners) than 5,000 feet (private prop planes), but is there a big advantage of staying at 45,000 vs 30,0000?Think about having another highway located 3 miles above the main highway - except with far less traffic and zero of those big semi trucks.
Genuinely curious...
Yes the Phenom is my best plane too. They normally fly at 45,000ft.. i.e above the airliners..:)
Ok - why is this important?
Is the sky that crowded where flying higher would significantly cut down on travel time? I was under the impression that the bottlenecks were coming in/around major airport hubs - something cruising altitude wouldn't change.Ok - why is this important? I mean, I get that the air is smoother at 30,000 feet commericial jetliners) than 5,000 feet (private prop planes), but is there a big advantage of staying at 45,000 vs 30,0000?Think about having another highway located 3 miles above the main highway - except with far less traffic and zero of those big semi trucks.
Genuinely curious...
At least that's how I picture it.
Yes the Phenom is my best plane too. They normally fly at 45,000ft.. i.e above the airliners..:)
Ok - why is this important?
Pilots are a very ego-driven bunch. They always want to fly higher and faster than everyone else in the sky.
Is the stock market flying to high on too lean a fuel to deliver the returns needed for 4 percent?
Here's an article from a guy who says 2-3 percent are in order for the next 20 years. That wouldn't break even with the policy of maintaining inflation at 2 percent or lower.
https://www.marketwatch.com/story/investor-credited-with-calling-the-2008-crisis-says-the-next-20-years-in-the-stock-market-will-break-a-lot-of-hearts-2019-03-07 (https://www.marketwatch.com/story/investor-credited-with-calling-the-2008-crisis-says-the-next-20-years-in-the-stock-market-will-break-a-lot-of-hearts-2019-03-07)
He has a blurb in there about climate change. The world is kind of behind where they ought to be in regards to climate change. Could investment by governments and industry into climate change development be the stimulus that will keep the stock market values up and prove this guy wrong? This will be a sea change (pun intended).
Is the stock market flying to high on too lean a fuel to deliver the returns needed for 4 percent?Don't know, but it need deliver only 1.31% CAGR (and not drop so much early on that an investor's balance goes to $0) to satisfy the "last for 30 years" condition.
I'd say an 8% WR is good for 12 years of life expectancy with a conservative allocation. If the investment is only a supplement to other income streams (skip that cruise if the market is down), you could realistically plan on 15 years of 8% withdraw with a moderate allocation.Just heard Dave Ramsey tell a caller to go with 8% withdrawal rate
To be fair, an 8% withdrawal rate is not entirely unreasonable for the right investor. Especially if he's in the last 10 years or so of life expectancy, higher withdrawal rates are the norm.
I'd say an 8% WR is good for 12 years of life expectancy with a conservative allocation. If the investment is only a supplement to other income streams (skip that cruise if the market is down), you could realistically plan on 15 years of 8% withdraw with a moderate allocation.Just heard Dave Ramsey tell a caller to go with 8% withdrawal rate
To be fair, an 8% withdrawal rate is not entirely unreasonable for the right investor. Especially if he's in the last 10 years or so of life expectancy, higher withdrawal rates are the norm.
Plugging in an 8% withdrawal on Vanguard's simulator shows a 50/50 chance of going broke at 19 years.
(8% withdrawal using 60% stocks/40% bonds portfolio)
https://www.vanguard.com/nesteggcalculator
The chance of having money left starts dropping quickly after 10 years:
10 years, 97%
12 years, 89%
14 years, 78%
...
Is the stock market flying to high on too lean a fuel to deliver the returns needed for 4 percent?
Here's an article from a guy who says 2-3 percent are in order for the next 20 years. That wouldn't break even with the policy of maintaining inflation at 2 percent or lower.
https://www.marketwatch.com/story/investor-credited-with-calling-the-2008-crisis-says-the-next-20-years-in-the-stock-market-will-break-a-lot-of-hearts-2019-03-07 (https://www.marketwatch.com/story/investor-credited-with-calling-the-2008-crisis-says-the-next-20-years-in-the-stock-market-will-break-a-lot-of-hearts-2019-03-07)
- SNIP -
This is a guy who is always warning about market slowdowns/crashes/lower results going forward. If you predict bad performance every year - you're gonna be right eventually.
Just heard Dave Ramsey tell a caller to go with 8% withdrawal rate
Is the stock market flying to high on too lean a fuel to deliver the returns needed for 4 percent?
Here's an article from a guy who says 2-3 percent are in order for the next 20 years. That wouldn't break even with the policy of maintaining inflation at 2 percent or lower.
Is the stock market flying to high on too lean a fuel to deliver the returns needed for 4 percent?
Here's an article from a guy who says 2-3 percent are in order for the next 20 years. That wouldn't break even with the policy of maintaining inflation at 2 percent or lower.
that prediction has no basis, if you look at historical averages through 2018 and then removing the prior 20 years they are very much in sync. So, the huge run up between 2011-2019 is just a catch up from the horrendous 2000-2009 decade which had 2 major busts. Infact, if we look at 2000-2018 as a whole the return is not all that spectacular at a CAGR of 4.83% so not quite sure what these "experts" are talking about as though the market has been returning 20% a year for the last 20 years...no, it hasn't. 2000-2013 had a negative CAGR so obviously we have to have a re-adjustment upward.
Just because 2000-2018 wasn't all that great doesn't mean that 2019 and on will be better. It also doesn't mean that it won't be better.
Yes, I was quoting Vanguard's retirement simulator.Running a basic 60/40 through cfiresim gives a 95% success rate.Are you talking about http://www.cfiresim.com/ ? I don't see where you're getting the 95% success rate.
^ The Vanguard tool is a Monte Carlo simulator. Cfiresim (and firecalc, from which it was derived) are historical analysis calculators. In my experience, Monte Carlo simulators tend to produce significantly more conservative results that historical analysis calculators.
^ The Vanguard tool is a Monte Carlo simulator. Cfiresim (and firecalc, from which it was derived) are historical analysis calculators. In my experience, Monte Carlo simulators tend to produce significantly more conservative results that historical analysis calculators.
We have previously discussed this effect, in this very thread. Monte Carlo simulators randomly scramble the sequence of years, which gives you more negative results because the real world is not random. In a Monte Carlo simulation, you can get the Great Recession immediately on the tails of the Great Depression immediately on the tails of Black Friday, but in the real world economies tend to go through up and down cycles and markets tend to overcorrect. The real world never puts all of the worst days in history back to back, because that's not how the real world works. But it IS how Monte Carlo sims work, sometimes, and since we're only talking about the worst case scenarios when discussing failure rates, the Monte Carlo sims give you more of those negative scenarios.
But back in the real world of history, terrible down years like 1932 (or 1974 or 2008) are often followed soon after by great years like 1933 or (1975 or 2009). That means that historical simulators give you higher SWRs than do the Monte Carlo simulators, because history is not random.
So this is one case where I really think Vanguard has missed the boat. MC simulations are very popular in lots of scientific fields where sequential results are randomly generated, but they're just not terribly appropriate for modelling stock market returns.
I guess each company can design their MC simulations using whatever rules they want. But I always assumed they just took the average rate of return and the standard deviation and randomly calculated a return for each year in the simulation time frame. They never used actual years returns like Cfiresim or Firecalc. However Sol's point still holds. Since SD is based on independent variables and in the real world each years returns are somewhat correlated with the surrounding years. The MC will always give you lower returns in the worst case and higher returns in the best case.^ The Vanguard tool is a Monte Carlo simulator. Cfiresim (and firecalc, from which it was derived) are historical analysis calculators. In my experience, Monte Carlo simulators tend to produce significantly more conservative results that historical analysis calculators.
We have previously discussed this effect, in this very thread. Monte Carlo simulators randomly scramble the sequence of years, which gives you more negative results because the real world is not random. In a Monte Carlo simulation, you can get the Great Recession immediately on the tails of the Great Depression immediately on the tails of Black Friday, but in the real world economies tend to go through up and down cycles and markets tend to overcorrect. The real world never puts all of the worst days in history back to back, because that's not how the real world works. But it IS how Monte Carlo sims work, sometimes, and since we're only talking about the worst case scenarios when discussing failure rates, the Monte Carlo sims give you more of those negative scenarios.
But back in the real world of history, terrible down years like 1932 (or 1974 or 2008) are often followed soon after by great years like 1933 or (1975 or 2009). That means that historical simulators give you higher SWRs than do the Monte Carlo simulators, because history is not random.
So this is one case where I really think Vanguard has missed the boat. MC simulations are very popular in lots of scientific fields where sequential results are randomly generated, but they're just not terribly appropriate for modelling stock market returns.
I didn't know MC simulators did this.. I guess you learn something new every day..:)..Thanks Sol
I guess each company can design their MC simulations using whatever rules they want. But I always assumed they just took the average rate of return and the standard deviation and randomly calculated a return for each year in the simulation time frame. They never used actual years returns like Cfiresim or Firecalc. However Sol's point still holds. Since SD is based on independent variables and in the real world each years returns are somewhat correlated with the surrounding years. The MC will always give you lower returns in the worst case and higher returns in the best case.
I guess each company can design their MC simulations using whatever rules they want. But I always assumed they just took the average rate of return and the standard deviation and randomly calculated a return for each year in the simulation time frame.
- SNIP -
. While nothing can be 100% excluded we can be sure that something happening that is worse than the worst event in history would be so severe that I doubt you would be worry about your portfolio then, you would have to worry about your life. Perhaps something like worldwide nuclear war.
It's actually an interesting mental puzzle. How much worse could we get than the worst events in modern history and still bounce back to a civilization where having money matters within a single person's lifetime? Put another way: what is the closest our current civilization come to collapsing with the past 150 or so years?
If the answer is "pretty darn close" then we don't have to worry about events worse than what is in the historical record. If you think things could have gotten much much worse than anything we've seen and modern civilization would still managing to hold things together, then you do have to worry about historical data being too optimistic about the future.
For me, I see any situation that is substantially worse than those we've experienced in the last century (e.g. the Great Depression, WWII) as being 'beyond where any realistic amount of money can save you," ergo no WR would be considered 'safe' - not even a sub 1% level.
The threats to the 4% SWR plan are not really about "catastrophic events", they're about multi-decadal trends in economic output.
Ramsey keeps saying 12% but never gives out the name of this super fund... let me guess, it does not exist? If it is performing so great and consistently then why not share the name?
At 12% you double your money every 6 years, if one could do this consistently it would be the holy grail of investing, apparently Ramsey claims to have found it...
Fire up your comparison tool, and you'll see that any of those outperforms VTI.The defensible tense is "outperformed."
Fire up your comparison tool, and you'll see that any of those outperforms VTI.
But ... but ...
I have one last question to ask. How can we have watertight faith that the next 30 years (i.e. 2049) will look anything like a non-internet 30 year period that proceeded it?
But ... but ...
I have one last question to ask. How can we have watertight faith that the next 30 years (i.e. 2049) will look anything like a non-internet 30 year period that proceeded it?
You can't.
I, for one, still don’t understand 4% SWR.
For example if I have 1M USD invested, and the real inflation rate is 1%, hence I need to make a net of 5% to preserve my wealth (growing at 1% per annum to fend off inflation) and have 4% to spend.
What if the inflation is 5% per year, which is common in many international markets, does it mean that I’ll have to make 9% to preserve my wealth. Let’s put aside FX rate between USD and local currency for now, that’s another story.
I, for one, still don’t understand 4% SWR.
For example if I have 1M USD invested, and the real inflation rate is 1%, hence I need to make a net of 5% to preserve my wealth (growing at 1% per annum to fend off inflation) and have 4% to spend.
What if the inflation is 5% per year, which is common in many international markets, does it mean that I’ll have to make 9% to preserve my wealth. Let’s put aside FX rate between USD and local currency for now, that’s another story.
The 4% is not intended to preserve your wealth. It is intended to prevent your wealth from going to zero in less than 30 years. Most of the time it has also preserved and grown your wealth, but sometimes it depletes it below the starting value.
The goal is to avoid running out of money before you die. That's not the same as growing your balance.
The 4% is not intended to preserve your wealth. It is intended to prevent your wealth from going to zero in less than 30 years. Most of the time it has also preserved and grown your wealth, but sometimes it depletes it below the starting value.
The goal is to avoid running out of money before you die. That's not the same as growing your balance.
Thanks Sol, I think it is also meant to preserve wealth.
Quoting MMM’s post on SWR “At the most basic level, you can think of it like this: imagine you have your ‘stash of retirement savings invested in stocks or other assets. They pay dividends and appreciate in price at a total rate of 7% per year, before inflation. Inflation eats 3% on average, leaving you with 4% to spend reliably, forever.”
@neonlight , you've gotten some good answers to your question. To learn more about how and why the 4% rule failed, learn about "Sequence of Returns Risk". You'll learn why an average inflation adjusted return of 7% and an inflation adjusted withdrawal of 4% of the original portfolio can and has failed.
It's really important to understand that the 4% Rule is really badly misnamed. It's not a rule, as in a manmade law or a law of nature. It really should be named the "4% Observation", as in, we've observed this specific withdrawal rate works most of the time under certain specific conditions.
The 4% rule in the study worked 95% of the time over a 30 year period. That means, of course, that 5% of the time people following that plan would run out of money in less than 30 years. Furthermore, the study was assuming that people retired at 65 and were dead in 30 years by age 95. So if they had $1 left over at the end of 30 years the study considered that a successful case.
The study was fairly simplistic. The study did not allow withdrawing less or spending less in bad market years. The full withdrawal had to be made and had to be totally spent.
To be fair to MMM, although he simplified the study results, he also strongly advocates a number of activities that would mitigate the 5% failure rate.
Be adaptable. Be resourceful. If the market tanks, cut back your spending or get a part time job at any wage (because anything you can do to keep for selling stocks at 50% of their pre-crash value greatly ups the odds of success). Have fun while you're FIRED and look for opportunities to make money while you have fun. Learn how to do things so you're more employable at a host of activities and so you'll be able to do more repairs around your home for much less than hiring them out.
Doing all of those things makes it much, much less likely that the 4% rule will fail.
TempusFugit is correct. The MMM info is misleading. If you want to be more certain of preserving wealth, use a lower WR.
One challenge for non Americans like me is that our equity market might be worse (or better) than US, and our inflation rate usually higher (at least more volatile).
One challenge for non Americans like me is that our equity market might be worse (or better) than US, and our inflation rate usually higher (at least more volatile).
Maybe but I wouldn't be investing in your domestic market whatever that is. Maybe Americans can get away with investing in their domestic economy but everyone else should probably be investing in an international stock index and probably some domestic bonds or cash as their buffer. I know asset allocation can get a lot more complicated than that but investing solely in a small domestic equity market to me is not the best way to diversify your stock portfolio.
I will also add a common observation that the only thing permanent is change.
I think everyone needs to do their own figures, understand the principles behind asset allocation and check their strategy via tools like cFireSim. The 4% is a good rule but some people might like a 7% or 2% rule depending on their situationIf you have inflation adjusted defined benefit pension covering your essential costs, 7% WR on your portfolio for extra spending could be appropriate if you're willing to significantly adjust this spending downward if you get poor returns.
I get the arguments for 3.5% (perhaps even as low as 3%) WR based on the feeling that investment options are priced higher relative to yield than they have been in the past. I can't imagine a realistic situation where I would consider 2% WR a reasonable choice.
Most of the historical data is for periods where the US could be viewed as empire building, but we can't expect that to continue. I'm not pessimistic enough to accept the arguments for a WR below 3%, but I don't quite think the people who make the arguments are totally crazy for it (assuming that they want to strictly ensure absolutely no need for earning income in the future). Arguments that a 3.5% WR may be needed are compelling enough to me that I would be taking a closer look if I was within a year or two of FIRE, but I continue to use 4% for planning/projecting FIRE more than five years out.I get the arguments for 3.5% (perhaps even as low as 3%) WR based on the feeling that investment options are priced higher relative to yield than they have been in the past. I can't imagine a realistic situation where I would consider 2% WR a reasonable choice.
I've seen those arguments too, but I don't find them convincing. A 3% SWR with a 60/40 US stock/bond split has never failed. You can even push that to 3.2%. Not in 30 years or 100 years, not now or starting in 1929. Never, under any circumstances, has an American investor using a 3.2% SWR gone broke.
You can still argue that it could happen in the future, I guess, if you think America's future is worse than its past. That past was already pretty shitty, though, so things would have to get pretty bad for a really long time.
But what about the last several decades when the US was decidedly NOT empire building? Those periods hold up too. In fact, some of them rank as the greatest periods yet (ever) for a retiree... but of course there have been lots of shitty times as well. Oil crises, high inflation, cold war, hot war, the great recession, the dot-com bust, black monday, black sabbath, Chicago riots, Vietnam, ...Most of the historical data is for periods where the US could be viewed as empire building, but we can't expect that to continue.I get the arguments for 3.5% (perhaps even as low as 3%) WR based on the feeling that investment options are priced higher relative to yield than they have been in the past. I can't imagine a realistic situation where I would consider 2% WR a reasonable choice.
I've seen those arguments too, but I don't find them convincing. A 3% SWR with a 60/40 US stock/bond split has never failed. You can even push that to 3.2%. Not in 30 years or 100 years, not now or starting in 1929. Never, under any circumstances, has an American investor using a 3.2% SWR gone broke.
You can still argue that it could happen in the future, I guess, if you think America's future is worse than its past. That past was already pretty shitty, though, so things would have to get pretty bad for a really long time.
- SNIP -
But what about the last several decades when the US was decidedly NOT empire building? Those periods hold up too. In fact, some of them rank as the greatest periods yet (ever) for a retiree... but of course there have been lots of shitty times as well. Oil crises, high inflation, cold war, hot war, the great recession, the dot-com bust, black monday, black sabbath, Chicago riots, Vietnam, ...
Our lack of nation building and despite all sorts of civil unrest has failed to result in a 3.2% WR failing a retiree.
the statement has been said that the United States is "eating it's own seed corn."
But what about the last several decades when the US was decidedly NOT empire building? Those periods hold up too. In fact, some of them rank as the greatest periods yet (ever) for a retiree... but of course there have been lots of shitty times as well. Oil crises, high inflation, cold war, hot war, the great recession, the dot-com bust, black monday, black sabbath, Chicago riots, Vietnam, ...Most of the historical data is for periods where the US could be viewed as empire building, but we can't expect that to continue.I get the arguments for 3.5% (perhaps even as low as 3%) WR based on the feeling that investment options are priced higher relative to yield than they have been in the past. I can't imagine a realistic situation where I would consider 2% WR a reasonable choice.
I've seen those arguments too, but I don't find them convincing. A 3% SWR with a 60/40 US stock/bond split has never failed. You can even push that to 3.2%. Not in 30 years or 100 years, not now or starting in 1929. Never, under any circumstances, has an American investor using a 3.2% SWR gone broke.
You can still argue that it could happen in the future, I guess, if you think America's future is worse than its past. That past was already pretty shitty, though, so things would have to get pretty bad for a really long time.
Our lack of nation building and despite all sorts of civil unrest has failed to result in a 3.2% WR failing a retiree.
Arguments that a 3.5% WR may be needed are compelling enough to me that I would be taking a closer look if I was within a year or two of FIRE, but I continue to use 4% for planning/projecting FIRE more than five years out.
I'm inherently skeptical anytime people say "this time it's different".
We don't have the manufacturing workforce that we did in the 1970s, but that was a rather short blip of a few decades. Before that we were largely an agrarian and seafaring nation, two occupations that have become mechanized and largely outsourced to other nations, not unlike manufacturing. Its not what kind (http://kind) of workforce we have, but the fact the existence of that workforce and how it fits into the present day. we may have spent the last quarter-century+ in conflicts in the middle east, but before that it was in SE Asia, which followed all sorts of western-European entanglements.
Young people may need 2-3 jobs just to 'get by', but guess what? working 60-90 hours was the norm for many Americans for the first half of the 20th century, particularly those 'coveted' manufacturing jobs we so fondly remember.
Nereo / Sol - I am disappointed in both of you.
Better answer - I should look for my own answers to the questions and not reinvent the wheel. Well, I'm not retired yet so I think that is a valid excuse to not study past responses. Besides, it's Summer.
I think you missed my point entirely. Virtually every time someone suggests that a 3.x% WR will not work going forward their rationale boils down to "it's different this time". Generally they are suggesting that the US is different. I'm not suggesting 60-90 hour work weeks are ok, nor that military quagmires are ok. I'm merely observing that they are nothing new. If they are not new then they cannot be the reason why a retirement strategy based on a 4% WR will fail more often in the future than it has in the past.
Nereo - And this statement of a short blip of a couple decades. Well, it was the time from the 1920s to about 1980 where we seemed to be a manufacturing powerhouse. We still are by the way. Even a couple decades is a long time, 20 years. It's about a generation. A time not to be trifled away. Then, it was followed with basically agreeing with me. Your statements can be summarized that it is OK to go back to some of the less than favorable aspects of former times. Sixty - Ninety hour work weeks are NOT OK. Endless entanglements in foreign wars are not OK.
The US is the first major country in the world that has specialized in change. We change all the time.
That' why people who naturally don't like change are so often scared and unhappy here. It's because they don't understand that change is our national specialty.
Better answer - I should look for my own answers to the questions and not reinvent the wheel. Well, I'm not retired yet so I think that is a valid excuse to not study past responses. Besides, it's Summer.
The **entire point** of this thread is so people can read this **entire thread** so we aren't reinventing this particular wheel everywhere else on this forum! :)
I think you missed my point entirely. Virtually every time someone suggests that a 3.x% WR will not work going forward their rationale boils down to "it's different this time". Generally they are suggesting that the US is different. I'm not suggesting 60-90 hour work weeks are ok, nor that military quagmires are ok. I'm merely observing that they are nothing new. If they are not new then they cannot be the reason why a retirement strategy based on a 4% WR will fail more often in the future than it has in the past.
Nereo - And this statement of a short blip of a couple decades. Well, it was the time from the 1920s to about 1980 where we seemed to be a manufacturing powerhouse. We still are by the way. Even a couple decades is a long time, 20 years. It's about a generation. A time not to be trifled away. Then, it was followed with basically agreeing with me. Your statements can be summarized that it is OK to go back to some of the less than favorable aspects of former times. Sixty - Ninety hour work weeks are NOT OK. Endless entanglements in foreign wars are not OK.
People get all uppity that our economy has changed drastically, but this isn't the first time the fundamental underpinnings of our nation's GDP have changed, nor will it be the last.
The US is the first major country in the world that has specialized in change. We change all the time.
That' why people who naturally don't like change are so often scared and unhappy here. It's because they don't understand that change is our national specialty.
As a non-American, I put many of my eggs in the US equity market, but I am not sure if we can say that US is specialized in change, anymore.
While legacy system still dominates in US, some parts of the world have leapfrogged toward smart banking - like using NFC, QR, heck even facial - at groceries, bars, anywhere really. I actually feel more secure, for example, people have to verify payment by typing in a pin in the mobile phone, as compared to credit card which can be paid just via a swipe - anyone having ownership of your card, even the card number, can fraud.
Also worthy of note is that Both the Soviets and the US had access to the same Nazi rocket scientists at the end of WW2. In fact the USA had Werner Von Braun who was the main "guy"*
* guy as in most unpleasant Nazi scumbag who knew full well that Jewish slave workers we dying building his rockets.. This according to numerous video testimony I saw when I visited Peenemunde, location of the first rocket factory in East Germany.
Also worthy of note is that Both the Soviets and the US had access to the same Nazi rocket scientists at the end of WW2. In fact the USA had Werner Von Braun who was the main "guy"*
* guy as in most unpleasant Nazi scumbag who knew full well that Jewish slave workers we dying building his rockets.. This according to numerous video testimony I saw when I visited Peenemunde, location of the first rocket factory in East Germany.
Um, to be technically correct, they had access to different Nazi rocket scientists, 'cause we didn't share the ones we captured and they didn't share the ones they got their hands on.
I've just been listening to this book bu Douglas Brinkley, "American Moonshot." He gives the impression that Von Braun arranged to surrender to the Americans. Looks like he figured he might get more humane treatment, which he did. He notes the Stalin was not happy when the Americans got the Von Braun crew.
The Russians had 27 million of their people die in World War 2. I guess he did the math.
I've just been listening to this book bu Douglas Brinkley, "American Moonshot." He gives the impression that Von Braun arranged to surrender to the Americans. Looks like he figured he might get more humane treatment, which he did. He notes the Stalin was not happy when the Americans got the Von Braun crew.
The Russians had 27 million of their people die in World War 2. I guess he did the math.
Yeah that was quite a gamble because it was illegal to employ Nazi's. It was under the secret plan to whitewash war records called operation paperclip that he didn't get thrown in prison or hanged along with the other Nazis at Nuremberg.
Interestingly I note the question on my citizenship question this last year.. "have you been associated with the Nazi party in Germany between 1939 and 1945?".
The smart ass in me wanted to say.. "No, but the US Government has"...:)
I've just been listening to this book bu Douglas Brinkley, "American Moonshot." He gives the impression that Von Braun arranged to surrender to the Americans. Looks like he figured he might get more humane treatment, which he did. He notes the Stalin was not happy when the Americans got the Von Braun crew.
The Russians had 27 million of their people die in World War 2. I guess he did the math.
Yeah that was quite a gamble because it was illegal to employ Nazi's. It was under the secret plan to whitewash war records called operation paperclip that he didn't get thrown in prison or hanged along with the other Nazis at Nuremberg.
Interestingly I note the question on my citizenship question this last year.. "have you been associated with the Nazi party in Germany between 1939 and 1945?".
The smart ass in me wanted to say.. "No, but the US Government has"...:)
That gamble paid off. They were treated like local heroes here. I guess people forgot they had been Nazis when the Cold War and the space race heated up. We actually bought our rental house from the widow of one of the folks on his team.
broken system:
https://www.linkedin.com/pulse/world-has-gone-mad-system-broken-ray-dalio/
For clarity: the 4% rule does not guarantee preservation of capital. It doesn't guarantee anything, of course, but the stated goal is to end up with a portfolio above $0 after a 30 year retirement, based on historical returns. Period.
There are a lot of places that stretch that conclusion beyond recognition, but one person who has usefully expanded upon it is Wade Pfau, who has kept the data series updated as new years of market performance bring more data points. The chart below is from a Forbes article by Wade, expanding the data set through (ending year) 2018. (it's tiny in-line with this message. Click it to expand it to readable size.)
In the chart below, Bengen's original parameters are a 50/50 portfolio, for 30 years.
For more research:
Bengen's original article, defining the 4% rule: http://www.retailinvestor.org/pdf/Bengen1.pdf
The Trinity study, expanding on Bengen's results with retirements of different lengths, and differing asset allocations: https://www.aaii.com/files/pdf/6794_retirement-savings-choosing-a-withdrawal-rate-that-is-sustainable.pdf
Wade Pfau's Forbes article with the latest expansion: https://www.forbes.com/sites/wadepfau/2018/01/16/the-trinity-study-and-portfolio-success-rates-updated-to-2018/
There is nothing that says you can't withdraw 5%; it's just that you have a finite chance of failure, if things get bad. There are a number of ways you could react to that: reduce your spending in a market downturn, go back to work for a time, or ensure you have income-generating assets that enable you to avoid stock withdrawals when markets are down. Nobody can tell you whether you can or can't take a certain strategy; they can tell you implications, but in the end it's your life. There are no do-overs, so it's a gut check for you.
Reposted here to provide the links to the ORIGINAL documents that people swat about, ie The Trinity Study and Bengen's paper.
Current - 31.77
Mean - 16.70
31.77 / 16.7 is about 2.
Does this mean we are OK on a 2% withdrawal rate?
Better make it 1%. You know, “to be safe” [/sarcasm]
Better make it 1%. You know, “to be safe” [/sarcasm]
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.
The 4% rule is great based on being at or below the historical average Shiller/CAPE (https://www.multpl.com/shiller-pe)... So yeah, we are not on solid ground relying upon the historical 4% inflation adjusted return for our 30 year rolling period.
One undeniable advantage to a super low WR is that 0% of people that died working at their desks ran out of money in retirement. Let me say that again....0%.A company I used to work for had that actually happen a few years before I started. Dude stayed late on a Friday, and was found dead at his desk Monday. Suppose when you get into the thousands of employees and higher, it becomes inevitable.
Remember that the Trinity study assumes you won't make any further income (almost certainly not true for people on this forum), ever,
"No further income beyond what you draw from your portfolio" is implied in waltworks statement. Income in this context of a general discussion of withdrawal rates does not mean "taxable income".Remember that the Trinity study assumes you won't make any further income (almost certainly not true for people on this forum), ever,
Assumes no further income??? The Trinity study is based on historical growth of a portfolio during different 30 year time periods in order to maintain your SWR, so the Trinity study does assume income. In a tax deferred retirement account, it would be income when you take distributions. In taxed accounts, interest, dividends, capital gains distributions, and realized capital gains are income.
Assumes no further income??? The Trinity study is based on historical growth of a portfolio during different 30 year time periods in order to maintain your SWR, so the Trinity study does assume income. In a tax deferred retirement account, it would be income when you take distributions. In taxed accounts, interest, dividends, capital gains distributions, and realized capital gains are income.
Assumes no further income??? The Trinity study is based on historical growth of a portfolio during different 30 year time periods in order to maintain your SWR, so the Trinity study does assume income. In a tax deferred retirement account, it would be income when you take distributions. In taxed accounts, interest, dividends, capital gains distributions, and realized capital gains are income.
Are you being deliberately obtuse, or did you really not understand the post?
The Trinity study assumes you never again earn a dime at any kind of job, collect social security, inherit a few thousand bucks from crazy old uncle Roger, or find $20 on the sidewalk.
Is that better?
OK. You could have just edited your previous post to correct the error where you simply said "no income, ever". No reason to cop an attitude or throw insults. And of course the Trinity study isn't calculating in those other things, like SS and inheritance. Surely everyone on this web forum already knows that.
...the higher the current market is vs. historical CAPE, the lower you should expect your future returns.
And of course the Trinity study isn't calculating in those other things, like SS and inheritance. Surely everyone on this web forum already knows that.
And of course the Trinity study isn't calculating in those other things, like SS and inheritance. Surely everyone on this web forum already knows that.
Most (but not all) people probably know that, but in my experience most haven't taken the time to sit down and think what a strikingly conservative assumption it is they they will never receive a dollar of social security income, nor inherit a dollar from any family member, nor have a year where they simply don't spend as much as planned and have some money left over.
I bet a LOT of people on this forum will inherit *something* of enough value to have an effect on FIRE success. The general public, of course, not so much. But MMM forum members are overwhelmingly the products of upper middle class families that have substantial NW (there are of course lots of exceptions).
For reference, inheriting even $50k when you're 40 years old in that 65 year long 4% rule scenario increases your odds of success from 80% to 84%. Inheriting $100k takes you to 91%.
-W
I bet a LOT of people on this forum will inherit *something* of enough value to have an effect on FIRE success. The general public, of course, not so much. But MMM forum members are overwhelmingly the products of upper middle class families that have substantial NW (there are of course lots of exceptions).
For reference, inheriting even $50k when you're 40 years old in that 65 year long 4% rule scenario increases your odds of success from 80% to 84%. Inheriting $100k takes you to 91%.
-W
Hmm.. It would be interesting to get some data on the family economic backgrounds. Anecdotally I observe that a lot of wannabe FIRE's come from working class or lower middle class backgrounds that want a better outcome than their parents have/had.
According to a 2015 HSBC survey, American retirees expect to leave an average inheritance of almost $177,000 to their heirs. The Survey of Consumer Finances (SCF), reported that median inheritance was $69,000 (the average was $707,291).
And of course the Trinity study isn't calculating in those other things, like SS and inheritance. Surely everyone on this web forum already knows that.
Most (but not all) people probably know that, but in my experience most haven't taken the time to sit down and think what a strikingly conservative assumption it is they they will never receive a dollar of social security income, nor inherit a dollar from any family member, nor have a year where they simply don't spend as much as planned and have some money left over.
Just don't mix many bonds in there (1-2%?), or cash (0%), or gold (0%).Wrong, according to ERN's research.
Just don't mix many bonds in there (1-2%?), or cash (0%), or gold (0%).Wrong, according to ERN's research.
https://earlyretirementnow.com/2020/01/08/gold-hedge-against-sequence-risk-swr-series-part-34/
Making a major change is hard! For me to go from 0% gold to 10-15% gold allocation would be a major shift and I’d need to see evidence almost “beyond reasonable doubt” to make that move. But with the lingering doubts about whether gold will perform as well as in the past (see the disclaimer and the caveat about the gold ownership restrictions and the government fixing prices above), I’m still on the fence about putting a six-figure sum into some useless metal just sitting around and not generating any dividends. But likewise, if you currently do own 10-15% you probably don’t see any clear and convincing evidence to move out of gold either.
Just don't mix many bonds in there (1-2%?), or cash (0%), or gold (0%).Wrong, according to ERN's research.
https://earlyretirementnow.com/2020/01/08/gold-hedge-against-sequence-risk-swr-series-part-34/
Yep. Every time the economy sours there are gobs of adverts from companies selling gold because it's a great investment in bad economic times.Just don't mix many bonds in there (1-2%?), or cash (0%), or gold (0%).Wrong, according to ERN's research.
https://earlyretirementnow.com/2020/01/08/gold-hedge-against-sequence-risk-swr-series-part-34/
Remove all data during the gold standard when the price was fixed by the government, and for the first couple of years afterward to allow for finding the real current value when going off the gold standard. The usefulness of gold in a portfolio goes down noticeably.
Just don't mix many bonds in there (1-2%?), or cash (0%), or gold (0%).Wrong, according to ERN's research.
https://earlyretirementnow.com/2020/01/08/gold-hedge-against-sequence-risk-swr-series-part-34/
Remove all data during the gold standard when the price was fixed by the government, and for the first couple of years afterward to allow for finding the real current value when going off the gold standard. The usefulness of gold in a portfolio goes down noticeably.
So, the widely-cited exotic portfolios don’t exactly deliver any notable improvement in the safe withdrawal stats. I’d stay away from them! If you want to use gold to hedge against sequence risk, shift some of the equity portion into gold. But stay away from the “sexy” portfolio allocations recommended by the internet gurus and motivational speakers!
All of this conversation has led me to believe that most likely a lot of us will die with a shit-ton of money. When I retired 6 years ago I had a WR of about 3% and I was 52 at the time.
Since then our invested assets have more than doubled and so now we are at 1.5%.
When the company pensions kick in... Well its going to be approaching zero%. This is an extreme example but with SS just round the corner on top of that I can see we have been way too conservative.
All of this conversation has led me to believe that most likely a lot of us will die with a shit-ton of money. When I retired 6 years ago I had a WR of about 3% and I was 52 at the time.
Since then our invested assets have more than doubled and so now we are at 1.5%.
When the company pensions kick in... Well its going to be approaching zero%. This is an extreme example but with SS just round the corner on top of that I can see we have been way too conservative.
If this ever-diminishing WR is causing you stress I'm happy to take some of that burden off of you @Exflyboy, so you can return to a more sensible ~3% WR.
I think the "death chart" i.e. the chart that shows the chances of death compared to running out of money with the 4% rule should be somehow stickied in this thread so it shows on every page. I think maizeman put it up first. Somehow everyone assumes they'll be alive 30+ years from now.Assuming, or rather expecting that you'll still be alive and preparing for the possibility of being alive are two different things. You may not expect to live to a ripe old age, but you might want to prepare financially for that possibilty.
I hate to be the bearer of bad news, but a lot of us are going to die in the next 30 years, in which case you would have had a successful retirement, money-wise at least.
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
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
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
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.
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.
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?
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.
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.
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 (https://www.multpl.com/shiller-pe)... So yeah, we are not on solid ground relying upon the historical 4% inflation adjusted return for our 30 year rolling period.
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.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 (https://www.multpl.com/shiller-pe)... 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.
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
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
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 (https://www.multpl.com/shiller-pe)... 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.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 (https://www.multpl.com/shiller-pe)... 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.
- 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.
Another similarly (to CAPE) accurate long term measurement is total market cap to GDP. (https://www.gurufocus.com/stock-market-valuations.php) It's looking much better as well.
- 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 (https://www.investopedia.com/terms/c/cape-ratio.asp)
"In the long run we are all dead," John Maynard Keynes
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.
I did throw in 10% spending flexibility, which means the ability to avoid spending a mere $4k in a year when the markets are down. I didn't even remove the overly high investing fees. Taking investing fees down from 0.3% to 0.1% improves portfolio success rate from 95% to 98%. No effect on the death rate. If you have 15% spending flexibility and 0.1% fees, portfolio success goes to 100%. This means the ability to avoid spending (or generate income) of a mere $500 per month.
For those unfamiliar with this chart, the tiny red sliver is "portfolio failed" and the rising massive grey curve is "died".
https://engaging-data.com/will-money-last-retire-early/
For a few years now, it appears that the US and other nations have been creating money to quell the vile disruptions in nation's economies. As we have not dove into the dark recesses of another great depression, it looks like the policy has worked to some extent.
I wonder if there is a down side. Old Milton Friedman used to talk about governments and the money supply. I think he won a Nobel prize so he was probably on to something. I'd guess when they create more money out of thin air that it is an increase in the money supply. A good supply of most anything usually means that the unit cost of that something goes down in price.
An example is the current price of gasoline. The world is awash in oil so my fill up costs make me smile as the cost per gallon is low.
So, I figure all this new money is like the cost of oil. Lots of oil means a low price for gasoline. Lots of dollars mean a low price for dollars which means you will be able to buy less with each one.
If you have invested in index funds will your investment get buoyed up as the dollars become worth less? Will this then compensate for the expected rise in the cost of living? Inflation has been low for quite a long time and I wonder how it and the 4 percent rule actually interact. If I retire with a pot of money invested per the 4 percent rule at 25X my expected annual living costs, will I just ride with inflation and float on top of that sea of new currency?
Also important to read up about the velocity of money.
The deflation during the great depression wasn't because the supply of money shrunk. It was because the supply of money was constant but the velocity of money slowed down (a given dollar might have changed hands every two months now changed hands every three months).
Of course the velocity of money cuts both ways. In recessions people tend to hold on to their money longer because who knows that the future might bring. Slower velocity of money and, in the absence of increases in the money supply, deflation. Once inflation kicks in, people start working hard to spend money as soon as they receive it, because a month from now it'll be worth less. Faster velocity of money, which means even more inflation.
Also important to read up about the velocity of money.
The deflation during the great depression wasn't because the supply of money shrunk. It was because the supply of money was constant but the velocity of money slowed down (a given dollar might have changed hands every two months now changed hands every three months).
Of course the velocity of money cuts both ways. In recessions people tend to hold on to their money longer because who knows that the future might bring. Slower velocity of money and, in the absence of increases in the money supply, deflation. Once inflation kicks in, people start working hard to spend money as soon as they receive it, because a month from now it'll be worth less. Faster velocity of money, which means even more inflation.
For all we know, we might be into a new terminology - not stagflation, but more like stag-not-inflation-nor-deflation. Or worse yet, an unimaginable stag-deflation while inflating the money supply and taking on insurmountable debt. There is no doubt in my mind that we are in uncharted economic territory and treating this like a cavalier situation, that things will be brought back in line summarily once we shake off this moment in time. Russia might just emerge from this era looking like Rome ascendant - actually economically strong while the US and Europe fiddle with ways to issue more debt.
For all we know, we might be into a new terminology - not stagflation, but more like stag-not-inflation-nor-deflation.
Also important to read up about the velocity of money.
The deflation during the great depression wasn't because the supply of money shrunk. It was because the supply of money was constant but the velocity of money slowed down (a given dollar might have changed hands every two months now changed hands every three months).
Of course the velocity of money cuts both ways. In recessions people tend to hold on to their money longer because who knows that the future might bring. Slower velocity of money and, in the absence of increases in the money supply, deflation. Once inflation kicks in, people start working hard to spend money as soon as they receive it, because a month from now it'll be worth less. Faster velocity of money, which means even more inflation.
For all we know, we might be into a new terminology - not stagflation, but more like stag-not-inflation-nor-deflation. Or worse yet, an unimaginable stag-deflation while inflating the money supply and taking on insurmountable debt. There is no doubt in my mind that we are in uncharted economic territory and treating this like a cavalier situation, that things will be brought back in line summarily once we shake off this moment in time. Russia might just emerge from this era looking like Rome ascendant - actually economically strong while the US and Europe fiddle with ways to issue more debt.
Sorry but other than the Russia statement what does any of that even mean?
Hasn't really been any inflation from when we did this 12 years ago. Maybe this time will be different, maybe not.
I'm not an economist, so I don't know what they will call a situation where, between Congress and the Fed, the government issues 4T in stimulus to a locked down country to keep the market up and businesses alive. Our economy is definitely in stagnation for the foreseeable future and there hasn't been a whiff of inflation for years. Some talk about deflation as goods become cheaper, but also hard to see much of that if businesses have government money and consumers have some government money - basically all the ingredients for inflation without any need or really ability to spend... Guess it all depends how long it takes to work our way back to normal, and what normal ends up being.
A great read: https://movement.capital/one-portfolio-risk-to-rule-them-all/That's easy then. I'm just going to use up my good return years first and save my bad return years till last. Problem solved.
He shows that given an 80/20 portfolio at various points in history, it was possible to pick out 30yr periods that only supported 2/3rds of the income that the same portfolio could have given despite a 78% higher growth rate, all thanks to sequence risk. Mind blown.
(https://movement.capital/wp-content/uploads/2020/02/early_retirement_now_sequence_risk_example.png)
A great read: https://movement.capital/one-portfolio-risk-to-rule-them-all/That's easy then. I'm just going to use up my good return years first and save my bad return years till last. Problem solved.
He shows that given an 80/20 portfolio at various points in history, it was possible to pick out 30yr periods that only supported 2/3rds of the income that the same portfolio could have given despite a 78% higher growth rate, all thanks to sequence risk. Mind blown.
(https://movement.capital/wp-content/uploads/2020/02/early_retirement_now_sequence_risk_example.png)
The proper safe withdrawal rate has plummeted. Maybe our government wants us to work forever to fund their massive spending!
Due to a record amount of stimulus created in a record short amount of time, interest rates have dropped faster than a cement block tied to a dead body thrown off a boat in the middle of Lake Tahoe by one of Capone’s capos. The 10-year bond yield is at ~0.7%. It will likely stay under 1% for years to come.
The 4 percent rule was first published in the Journal Of Financial Planning in 1994 by William P Bergen. It was subsequently made popular by three Trinity University professors in 1998 called the Trinity Study. Inflation and interest rates were much higher and pensions were common. The 4 percent rule is the most common safe retirement withdrawal rate cited.
Some like to naively claim that they are financially independent once they achieve a net worth equal to 25X their annual expenses. But if you think logically, there’s a big problem with the 4 percent rule. Let’s look at where the 10-year bond yield was back when the Trinity Study was published in 1998.
In 1998, the 10-year bond yield was between 4.41% to 5.6%. Let’s say the average 10-year yield rate was 5% in 1998.
Therefore, of course you’d likely never run out of money in retirement following the 4 percent rule. Back then, you could earn 1 percent more on average risk-free! And if you looked at the 10-year bond yield in 1994, it was even higher. If you had a classic 60/40 stock/bond portfolio, the historical return was about 8%. You were golden. Going forward, I’m not so sure with both bonds and stocks at all-time highs.
@EscapeVelocity2020 , please remove the link to the article you referenced. It's just click-bait trash and there's no valid reason to fund that particular click-bait-whore of a writer. And yes, that's exactly my opinion of the fellow and his work nowadays.
Hopefully I have given fair warning that the link is to the article and, I would expect, most people would read my post before clicking on the link. That said, viewing the article does not cost the reader anything but their time and gives miniscule income (on the individual level) to Financial Sam. Maybe I'm naive, but I do think that there are worse things in the world than this.One of the metrics search engines use for ranking sites is how many outside sites have links to them so you are making it more likely that a random person searching Google for financial advice will see Financial Samurai articles.
Maybe I'm naive, but I do think that there are worse things in the world than this.
Maybe I'm naive, but I do think that there are worse things in the world than this.
That's a dumb strawman unless you think it's OK to promote the second worst thing in the world.
FS is worthless clickbait and shouldn't be linked to other than from the "Antimustachian Shame And Comedy" section.
Hopefully I have given fair warning that the link is to the article and, I would expect, most people would read my post before clicking on the link. That said, viewing the article does not cost the reader anything but their time and gives miniscule income (on the individual level) to Financial Sam. Maybe I'm naive, but I do think that there are worse things in the world than this.
Also, yes, stocks are at all time highs which does happen often, but not typically during something like a pandemic and quarantines, especially in a country whose GDP primarily relies on the service sector. Stocks are usually at highs when bond yields are also high, because an economic expansion is competing for investor money. We now have a weird world where inflation can't happen (because people can't buy as much stuff) so the government can throw trillions in to the economy, keep treasury yields near zero, and the money has nowhere to go except the stock market and real estate. Whenever the dust settles, the rich will have become richer and the poor will have become poorer faster than ever. I'm willing to bet years like 2020 can't go on for the next 30 years.
So, in summary, I don't totally disagree with his calling attention to the idea that current times are different from the historical times that the Trinity Study used to formulate the 4% Rule. But I've also felt this way for the last few years and things have gone along swimmingly so far. I guess only time will tell.
... As Sam points out, many 4% SWR adherents find out that actually withdrawing 4% once retired is more difficult than you thought while you were in the accumulation phase.
... As Sam points out, many 4% SWR adherents find out that actually withdrawing 4% once retired is more difficult than you thought while you were in the accumulation phase.
I'm curious, do you mean mentally difficult or...?
Somewhere along the line Sam/Financial Samuri went from writing quality articles to click-bait trash. His early approach was to use math to make sense of finances and retirement. Now his posts are littered with mathematical mistakes that I can only describe them as gross-negligence. And he doesnt’ seem to care. His articles are the epitome of confirmation bias - he starts with some conclusion (that will get clicks) and then cherry-picks odd datasets that will help him reach that conclusion.,
He monetized his blog Right around when he decided that he was bored with FIRE and didn’t like the ‘constraints’ of living off a couple million in a HCOL (SF Bay) area.
Somewhere along the line Sam/Financial Samuri went from writing quality articles to click-bait trash. His early approach was to use math to make sense of finances and retirement. Now his posts are littered with mathematical mistakes that I can only describe them as gross-negligence. And he doesnt’ seem to care. His articles are the epitome of confirmation bias - he starts with some conclusion (that will get clicks) and then cherry-picks odd datasets that will help him reach that conclusion.,
He monetized his blog Right around when he decided that he was bored with FIRE and didn’t like the ‘constraints’ of living off a couple million in a HCOL (SF Bay) area.
I've said this before when Samurai gets brought up, what I think is unfortunate is that what's driving his crap is really worth discussing.
This guy did it, he managed to FIRE, and yet, he's not happy with it and he finds its not enough, and would rather turn the fire hose of cash back on because working for him is better than living frugally compared to those around him.
He's basically the opposite of MMM who FIRED on far less, built a really exciting and rich life, ended up with massive amounts of extra money, and still really enjoys his frugal lifestyle.
But what made one of them FIRE into his best life and the other feel so let down by the whole experience? What's the cautionary tale here? I'm really quite fascinated by the whole thing, but now that he's just writing nonsense click-bait, it's hard to parse anything meaningful behind it.
It's really too bad, because I think there would be a lot of value in seeing inside why FIRE doesn't work out for some people.
Somewhere along the line Sam/Financial Samuri went from writing quality articles to click-bait trash. His early approach was to use math to make sense of finances and retirement. Now his posts are littered with mathematical mistakes that I can only describe them as gross-negligence. And he doesnt’ seem to care. His articles are the epitome of confirmation bias - he starts with some conclusion (that will get clicks) and then cherry-picks odd datasets that will help him reach that conclusion.,
He monetized his blog Right around when he decided that he was bored with FIRE and didn’t like the ‘constraints’ of living off a couple million in a HCOL (SF Bay) area.
I've said this before when Samurai gets brought up, what I think is unfortunate is that what's driving his crap is really worth discussing.
This guy did it, he managed to FIRE, and yet, he's not happy with it and he finds its not enough, and would rather turn the fire hose of cash back on because working for him is better than living frugally compared to those around him.
He's basically the opposite of MMM who FIRED on far less, built a really exciting and rich life, ended up with massive amounts of extra money, and still really enjoys his frugal lifestyle.
But what made one of them FIRE into his best life and the other feel so let down by the whole experience? What's the cautionary tale here? I'm really quite fascinated by the whole thing, but now that he's just writing nonsense click-bait, it's hard to parse anything meaningful behind it.
It's really too bad, because I think there would be a lot of value in seeing inside why FIRE doesn't work out for some people.
I see what you see, poster formerly known as Malkynn. And the juxtaposition between Pete and Sam does fascinate me as well.
But where I really get angry at Financial Samuri is what I call blogging malpractice - using absolutely ludicrous data to prove his point*.
Here's just one example: In his case for why a FIREd couple with one toddler cannot live comfortably on 'just' $200k/year of investment income, he inexplicably i) ignored forever $750k in retirement accounts as 'inaccessable', ii) calculated $24k/year in college savings forever and iii) assumed over $10k for child care forever. Ironically his sample 'budget' showed a slight surplus despite a huge amount of fat. What's head-smackingly ridiculous (and why I call it "financial-blogging malpractice") is that these calculations assume $504k invested towards higher education, the assumption that two adults with no jobs still need considerable childcare (and that childcare will not go away in a few years when toddler goes to elementary school) and that, even at 15 years later that $750k in retirement accounts should be meaningless (at a minimum it makes saving $504k for your only child's college fund a bit redundant, no?)
And that's just one example. As Telecaster and others have pointed out, he's made a recent habit of using math to obfuscate rather than enlighten.
While we debate and with each other disagree about plenty of stuff on these boards, I think we are all united in saying that FS has morphed into a less than worthless piece of unprintable trash whose current articles are a disingenuous, misleading, trolling-baiting shitshow.
Normally I would say "good luck to the guy" but on this occasion if it were possible I would have him blacklisted from the personal finance community.
Bill Bengen Revisits The 4% Rule Using Shiller's CAPE Ratio, Michael Kitces's Research
https://www.fa-mag.com/news/choosing-the-highest--safe--withdrawal-rate-at-retirement-57731.html?section=40
"In summary, based on the earlier work of Michael Kitces, I have presented a tabular method to select an initial withdrawal rate for retirement portfolios, based on both recent inflation and stock market valuations. It exhibits a wide range of choices, between the “worst case” of 4.5% and a high of 13%, representing the full range of historically successful withdrawal rates. It is simple to use, though right now it applies only to tax-advantaged portfolios with a desired longevity of 30 years."
Bill Bengen Revisits The 4% Rule Using Shiller's CAPE Ratio, Michael Kitces's Research
https://www.fa-mag.com/news/choosing-the-highest--safe--withdrawal-rate-at-retirement-57731.html?section=40
"In summary, based on the earlier work of Michael Kitces, I have presented a tabular method to select an initial withdrawal rate for retirement portfolios, based on both recent inflation and stock market valuations. It exhibits a wide range of choices, between the “worst case” of 4.5% and a high of 13%, representing the full range of historically successful withdrawal rates. It is simple to use, though right now it applies only to tax-advantaged portfolios with a desired longevity of 30 years."
O.K., so I read through very quickly, and may be missing something. But at first glance it appears that he is basing everything on CAPE values from 1926 through 1990. CAPE behaves totally differently now that it did then. He is considering a CAPE value over 20 to be overvalued. Since the early 1990s, CAPE has only dipped below 20 during the Great Recession of 2008-09. It appears that he makes no acknowledgement of the huge change in behavior of CAPE in the last 30 years. Of course, if it were possible to take this change into account, it would argue for even greater withdrawal rates. So perhaps he is being conservative. But still, I have trouble giving the analysis much credence when he doesn't even acknowledge the fact that his metric of choice has been wildly inconsistent over the decades.
Unless these changes are accounted for, CAPE is questionable and would tend to report higher values in more recent years.
On the flip side, half his example portfolio is intermediate treasuries. Good luck with that.Bill Bengen Revisits The 4% Rule Using Shiller's CAPE Ratio, Michael Kitces's Research
https://www.fa-mag.com/news/choosing-the-highest--safe--withdrawal-rate-at-retirement-57731.html?section=40
"In summary, based on the earlier work of Michael Kitces, I have presented a tabular method to select an initial withdrawal rate for retirement portfolios, based on both recent inflation and stock market valuations. It exhibits a wide range of choices, between the “worst case” of 4.5% and a high of 13%, representing the full range of historically successful withdrawal rates. It is simple to use, though right now it applies only to tax-advantaged portfolios with a desired longevity of 30 years."
O.K., so I read through very quickly, and may be missing something. But at first glance it appears that he is basing everything on CAPE values from 1926 through 1990. CAPE behaves totally differently now that it did then. He is considering a CAPE value over 20 to be overvalued. Since the early 1990s, CAPE has only dipped below 20 during the Great Recession of 2008-09. It appears that he makes no acknowledgement of the huge change in behavior of CAPE in the last 30 years. Of course, if it were possible to take this change into account, it would argue for even greater withdrawal rates. So perhaps he is being conservative. But still, I have trouble giving the analysis much credence when he doesn't even acknowledge the fact that his metric of choice has been wildly inconsistent over the decades.
Marshall Burke projects that over the next 80 years, per capita G.D.P. in the United States will drop by 36 percent compared to what it would be in a nonwarming world, even as per capita G.D.P. in Russia will quadruple. A recent study led by researchers at Columbia University found that a disruption in U.S. agriculture would quickly propagate throughout the world. After just four years of a Dust Bowl-like event — a time when some crop yields dropped by 60 percent — global wheat reserves would be cut by nearly a third, and U.S. reserves would be almost entirely gone. And as the livability and capacity of American land wanes, U.S. influence in the world may fade along with it.
https://www.nytimes.com/interactive/2020/12/16/magazine/russia-climate-migration-crisis.html
notable quote and food for thought:QuoteMarshall Burke projects that over the next 80 years, per capita G.D.P. in the United States will drop by 36 percent compared to what it would be in a nonwarming world, even as per capita G.D.P. in Russia will quadruple. A recent study led by researchers at Columbia University found that a disruption in U.S. agriculture would quickly propagate throughout the world. After just four years of a Dust Bowl-like event — a time when some crop yields dropped by 60 percent — global wheat reserves would be cut by nearly a third, and U.S. reserves would be almost entirely gone. And as the livability and capacity of American land wanes, U.S. influence in the world may fade along with it.
Why does there have to be a dust bowl event? People are already looking at the water issues in the West and Great Plains. I figure in 80 years, people ought to have the wherewithal to desalinate and pump water to where it is needed increasing agricultural output.
It's also worth noting that more than half of the grain grown in the US goes to feed animals. So what you might see is more of a dramatic shift in diets.
-W
*As much of a hard time as I give the metric system, conversions like this are so much easier than the standard unit equivalents.
*As much of a hard time as I give the metric system, conversions like this are so much easier than the standard unit equivalents.
Rofl. Only a yank could try and give the metric system a hard time. The ONLY bad thing about the metric system is that it was invesnted by the French. Get with the programme, America.
I'm well aware that "yank" to you good selves means someone from the tri-state area, but that won't stop us calling you that as a collective.
At least I didn't call you a 'septic'.
To foreigners, a Yankee is an American.
To Americans, a Yankee is a Northerner.
To Northerners, a Yankee is an Easterner.
To Easterners, a Yankee is a New Englander.
To New Englanders, a Yankee is a Vermonter.
And in Vermont, a Yankee is somebody who eats pie for breakfast.
- Yankee | National Geographic Society (https://www.nationalgeographic.org/encyclopedia/yankee/)
80 year timelines are tough. Imagine trying to predict what our current world and it's problems would be like in 1940.
-W
‘Septoic’? Please explain...
‘Septoic’? Please explain...
https://www.macquariedictionary.com.au/resources/aus/word/map/search/word/seppo/Australia/
It's not even deregatory, it's said with affection.
One thing that defines Americans is their collective ignorance of the rest of the world, including what the ROTW thinks of them.
Just like their pig-headed refusal to adopt the metric system despite its obvious superiority to ye-olde imperial units (albeit themselves bastardised by Yanks), which is what my post was about.
‘Septoic’? Please explain...
https://www.macquariedictionary.com.au/resources/aus/word/map/search/word/seppo/Australia/
It's not even deregatory, it's said with affection.
One thing that defines Americans is their collective ignorance of the rest of the world, including what the ROTW thinks of them.
Just like their pig-headed refusal to adopt the metric system despite its obvious superiority to ye-olde imperial units (albeit themselves bastardised by Yanks), which is what my post was about.
Why is it so much skin off your nose that american children, on the far side of the planet, learn two sets of units in school instead of one?
I've seen little evidence that most Americans can actually use both sets of measurements fluently. I'm not convinced that most Americans can use even one set of units fluently.
I mean if most americans cannot use even one set of units, that's not a question of adopting the metric system, just that we have a terrible education system combined with a vastly under appreciated problem with innumeracy in our population.
In my experience, people who are able to work fluently in feet, gallons and pounds can generally do just about as well in meters, liters, and kilos. The two places I think americans are pretty uncomfortable with metric both aren't in doing math but in figuring out the impact of a number in non-standard units without converting it into the units we're familiar with: If you tell many of us (including me) a distance in kilometers, I have to mentally convert to miles before I have a gut sense of "how far is that" and if you tell me a temperature in celsius I have to mentally convert before I have a gut sense of "how cold is that"
Oh and the answer to the math question is that the hole is 3.2 meters deep.
Wait... aren’t you Canadian?I've seen little evidence that most Americans can actually use both sets of measurements fluently. I'm not convinced that most Americans can use even one set of units fluently.
I mean if most americans cannot use even one set of units, that's not a question of adopting the metric system, just that we have a terrible education system combined with a vastly under appreciated problem with innumeracy in our population.
In my experience, people who are able to work fluently in feet, gallons and pounds can generally do just about as well in meters, liters, and kilos. The two places I think americans are pretty uncomfortable with metric both aren't in doing math but in figuring out the impact of a number in non-standard units without converting it into the units we're familiar with: If you tell many of us (including me) a distance in kilometers, I have to mentally convert to miles before I have a gut sense of "how far is that" and if you tell me a temperature in celsius I have to mentally convert before I have a gut sense of "how cold is that"
Oh and the answer to the math question is that the hole is 3.2 meters deep.
Well...a lot more of those Americans would easily understand one system if that one system was metric.
It's really easy.
Correct on the depth of the hole.I've seen little evidence that most Americans can actually use both sets of measurements fluently. I'm not convinced that most Americans can use even one set of units fluently.
I mean if most americans cannot use even one set of units, that's not a question of adopting the metric system, just that we have a terrible education system combined with a vastly under appreciated problem with innumeracy in our population.
In my experience, people who are able to work fluently in feet, gallons and pounds can generally do just about as well in meters, liters, and kilos. The two places I think americans are pretty uncomfortable with metric both aren't in doing math but in figuring out the impact of a number in non-standard units without converting it into the units we're familiar with: If you tell many of us (including me) a distance in kilometers, I have to mentally convert to miles before I have a gut sense of "how far is that" and if you tell me a temperature in celsius I have to mentally convert before I have a gut sense of "how cold is that"
Oh and the answer to the math question is that the hole is 3.2 meters deep.
Here's a math puzzle for you all:
Joe and Mary dig a hole. They set a rod on the bottom of the hole and hold it upright. The rod extends 6 feet out of the hole. How deep is the hole?
Here's a math puzzle for you all:
Joe and Mary dig a hole. They set a rod on the bottom of the hole and hold it upright. The rod extends 6 feet out of the hole. How deep is the hole?
I'm lost. The rod is 6 feet longer than the depth of the hole. How do we know the depth of the hole?
The joke here is that a rod was (is?) surveyor's tool that was standardized at ~5 meters/16.5 feet. So 1 rod = 16.5 feet is one of of the unit conversions if you look up a list of standard US units (e.g. non metric ones). Sort of like the joke about measuring velocity in furlongs per fortnight.
Yes, I completely agree it's easier to teach metric than the US standard units (I just don't think having the standard units taught in parallel makes metric any harder*). And the units are a lot easier to do the math when doing unit conversions and crazy back of the envelope math like pumping water from the ocean to Colorado.
I just genuinely don't understand why every some often I run into a person from outside the US that seems to take it as a personal affront that, even though we teach both, amongst ourselves we still mostly talk in feet and gallons and pounds. Was hoping that you as someone from the outside looking in, or someone else in the discussion, might understand why that is.
*And now that I think about it, standard unit conversions aren't even taught that much in schools anymore. My parents generation could tell you how many feet were in a mile. I'd have to look it up.
(https://lh3.googleusercontent.com/proxy/W8PiHSxaDLzdy2oS79LtbNkhUOKDl9UxtUbfR3fHWlQbtxpWXfGSR9pBe3dPdQDbjoLHQI89hKTirdJ7UPzbQ6emv_uDrhMVSBd9_bziJ5F1Ko3HRA)
I'm going to try one more time.
Sorry folks can we avoid going too far OT in a sticky about the 4% Rule? It makes reading this thread for OT content much harder for someone trying to get up to speed at a later date.
I made a reasonable request. You don't have to be a jerk about it.
Why does there have to be a dust bowl event? People are already looking at the water issues in the West and Great Plains. I figure in 80 years, people ought to have the wherewithal to desalinate and pump water to where it is needed increasing agricultural output.
It's also worth noting that more than half of the grain grown in the US goes to feed animals. So what you might see is more of a dramatic shift in diets.
-W
Why does there have to be a dust bowl event? People are already looking at the water issues in the West and Great Plains. I figure in 80 years, people ought to have the wherewithal to desalinate and pump water to where it is needed increasing agricultural output.It's also worth noting that more than half of the grain grown in the US goes to feed animals. So what you might see is more of a dramatic shift in diets.
-W
The dust bowl reference got me wondering......was there a climate change issue back in the 1920-1930s when the dust bowl actually occurred? Is there a climate change issue in the midwest and west or is it that populations increased dramatically along with water consumption for keeping lawns green and the spigots ever flowing along with the aforementioned water demands for ever increasing (and more stable as a result) agricultural consumption....both of which are derived from a source of water that is finite in volume whether by ongoing rain or snowmelt in the mountains. I mean natures faucet only has so much capacity. So yeah in the west especially, regardless of expense and energy, desalination might be the only viable option at some point.
Why does there have to be a dust bowl event? People are already looking at the water issues in the West and Great Plains. I figure in 80 years, people ought to have the wherewithal to desalinate and pump water to where it is needed increasing agricultural output.It's also worth noting that more than half of the grain grown in the US goes to feed animals. So what you might see is more of a dramatic shift in diets.
-W
The dust bowl reference got me wondering......was there a climate change issue back in the 1920-1930s when the dust bowl actually occurred? Is there a climate change issue in the midwest and west or is it that populations increased dramatically along with water consumption for keeping lawns green and the spigots ever flowing along with the aforementioned water demands for ever increasing (and more stable as a result) agricultural consumption....both of which are derived from a source of water that is finite in volume whether by ongoing rain or snowmelt in the mountains. I mean natures faucet only has so much capacity. So yeah in the west especially, regardless of expense and energy, desalination might be the only viable option at some point.
The concept that the climate *could* change wasn’t well understood until the 1960s. Heck, plate tectonics weren’t knows back then.
One of the core problems of water allocation in the west is that the estimates for rainfall were taken during an abnormally wet timeframe, and now we’ve moved into abnormally dry (drought)
All of you folks comments make me wonder if the 4 percent rule may be overly conservative. Sure there are water problems such as climate change desertification and the excess pumping of ground water aquifers, but looking at history people have solved a lot of problems. You don't hear much about smallpox, the Bubonic plague or tuberculosis, for example. In fact, technology and problem solving are not occurring at a linear rate. Some say technological changes are happening at an exponential rate.
So, will this be reflected in the return on investments as well. Can the return in, for example, index funds be expected to grow at an increasing rate as a reflection of the rate of technological problem solving?
Why does there have to be a dust bowl event? People are already looking at the water issues in the West and Great Plains. I figure in 80 years, people ought to have the wherewithal to desalinate and pump water to where it is needed increasing agricultural output.It's also worth noting that more than half of the grain grown in the US goes to feed animals. So what you might see is more of a dramatic shift in diets.
-W
The dust bowl reference got me wondering......was there a climate change issue back in the 1920-1930s when the dust bowl actually occurred? Is there a climate change issue in the midwest and west or is it that populations increased dramatically along with water consumption for keeping lawns green and the spigots ever flowing along with the aforementioned water demands for ever increasing (and more stable as a result) agricultural consumption....both of which are derived from a source of water that is finite in volume whether by ongoing rain or snowmelt in the mountains. I mean natures faucet only has so much capacity. So yeah in the west especially, regardless of expense and energy, desalination might be the only viable option at some point.
The concept that the climate *could* change wasn’t well understood until the 1960s. Heck, plate tectonics weren’t knows back then.
One of the core problems of water allocation in the west is that the estimates for rainfall were taken during an abnormally wet timeframe, and now we’ve moved into abnormally dry (drought)
That's part of the problem - what is abnormally wet or dry, can't it also be that the earth has a cycle as well that we don't fully understand. I mean the concept of climate change and all the data is mostly based on recent history and geotech/snow samples and all that data is then extrapolated over a much greater part of history. Even in the best case we have what maybe 200-300 years of some data such as a harbor masters log from 1780. Its not fact, it's theory. Its the same argument when an hurricanes result in billions of dollars of damage and many lost and displaced lives.....ummm, there are billions of dollars of property and many more people in those zones than there were 50, 100 years ago. So of course there will be more damage. Sure we can have
Climate change isn't a farce and we all need to do better but it also isn't the only driver.
But back to the 4% rule, even if it is - the concept of climate change will drive differing technologies and skill sets to mitigate or even adapt to whatever changes occur. Hell we have a whole green energy industry that already is growing as a result.
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/ (https://engaging-data.com/will-money-last-retire-early/)
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/ (https://engaging-data.com/will-money-last-retire-early/)
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/ (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.
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.
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.
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.
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.
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 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.
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/ (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.
"shiver in fear" IS a bit of hyperbole, but the level of OMY is pretty high, and not just SWAMI.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/ (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!
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.
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.
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 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.
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.
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%.
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...
@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.
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.
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 ;)
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%.
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.
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.
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.
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.
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.
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.
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.
Yes it is nearly all due to the ordering sequence of the returns.
If you have lousy first few years then even a long period of above average returns may not be enough to make up for the damage done in those early years.
I find absolutely amazing that for the 2 years with the highest subsequent 30yr real return which was was over 11% BOTH were unable to support a 5% withdrawal rate.
If I was retiring tomorrow and someone told me that we are about to enter a the highest returning 30yr period in recorded history, I wouls not have believed that statistically it is completely meaningless to the survivability chances of the portfolio.. yet that is exactly the conclusion you should draw from this data.
Secondcor521 - but with the 4% rule I think the only time it failed with inflation was in late 60s/early 70s when there was really high inflation....actually it was stagflation, which is the worse bc can't win anywhere
In addition to the sequence of the returns, another factor would be inflation. That chart looks like nominal returns, but it is real returns that usually matter when people go to calculate SWRs, because the usual method is to adjust spending for inflation. A more useful chart would be the supported SWR compared with real rates of return.
Here's a useful chart:
https://i2.wp.com/www.philosophicaleconomics.com/wp-content/uploads/2013/12/linearavg1.jpg
Historically, the higher the percentage of all US assets that are equities, the lower the ensuing 10-yr return.
https://fred.stlouisfed.org/graph/?g=qis
We are sitting on a ratio of 0.476 which was only higher in the last 60 years during the 1998-2000 bubble. The formula (which has an R^2 of 0.91) tells us to expect a 1% return over the next decade. You can quote the historical performance of the market as some high single-digit number, and the graph would agree, but it would tell also to tell you to cancel that expectation for the next ten years.
https://www.philosophicaleconomics.com/2013/12/the-single-greatest-predictor-of-future-stock-market-returns/
A good rule of thumb for valuations vs SWR:
"In a 2008 paper, Kitces examined the relationship between the Shiller CAPE ratio and initial withdrawal rates. In statistical terms, he concluded that the correlation between the two was -0.74. So as the Shiller CAPE goes up, the safe initial withdrawal rate goes down."
https://www.forbes.com/advisor/investing/is-4-four-percent-rule-still-valid/?fbclid=IwAR2C25UG_gU9Ts3qPN9fqFHSpHVhR1yglnHTyHSOgDkOBOavhXtXjfwu1UM
Past results are no guarantee of future success, but since this thread was posted the SP500 has more than doubled.
Someone who retired in mid-2015 could suffer almost a 50% permanent portfolio loss and be no worse off than they started, though of course they'd feel it differently.
Now the question for FI people is when does it feel like you're not nervous about the 4% rule...
Now the question for FI people is when does it feel like you're not nervous about the 4% rule...
When my 4%WR drops to a %WR that's never failed historically I'd feel pretty confident and that's a whole lot sooner than 2%WR. At 2%WR you are silly safe...at least from normal financial risks. If civilization falls, zombies, killer asteroids...well those are not problems money can solve.
Now the question for FI people is when does it feel like you're not nervous about the 4% rule...
When my 4%WR drops to a %WR that's never failed historically I'd feel pretty confident and that's a whole lot sooner than 2%WR. At 2%WR you are silly safe...at least from normal financial risks. If civilization falls, zombies, killer asteroids...well those are not problems money can solve.
Luckily just looking at the various fire calculators makes it pretty clear that historically portfolio failure modes (or risky ones) are obvious pretty quickly.
I think it depends if you ever plan on reducing it.
If you constantly increase it, and never decrease it, you basically guarantee at some point you're going to hit a "failure" in the 30 year timeline since almost all of them are a sequence of returns risk in your early years.
The reason most retirements do not trigger this is because of your situation.
That being said, increasing to 3% is still irrelevant as you aren't increasing it to 4% ;-)
If you reset to 3% you will always have money left.
Even in extremes. If the start is $1m, even if the market drops 90% you'd just withdraw 3k.
This might be too low though :-)
I'll bet Mr. Money Mustache has less than a 4 percent withdrawal rate. Simple living makes it a non problem. There will be money for special things when they come up.
I'll bet Mr. Money Mustache has less than a 4 percent withdrawal rate. Simple living makes it a non problem. There will be money for special things when they come up.
MMM has a negative withdrawal rate as he's still in the accumulation phase of his life since his blog generates half a million dollars. In general most people here won't just keep inflating lifestyle. Its likely lots of money will be invested in worthwhile charities since the 4% SWR is very conservative.
I'll bet Mr. Money Mustache has less than a 4 percent withdrawal rate. Simple living makes it a non problem. There will be money for special things when they come up.
MMM has a negative withdrawal rate as he's still in the accumulation phase of his life since his blog generates half a million dollars. In general most people here won't just keep inflating lifestyle. Its likely lots of money will be invested in worthwhile charities since the 4% SWR is very conservative.
Even without the blog, he had a negative WR with his construction/real estate ventures.
yes he is very creative at hiding his spending on things he enjoys like his property in downtown that is a business space full of expensive toys.
yes he is very creative at hiding his spending on things he enjoys like his property in downtown that is a business space full of expensive toys.
Well, that's one way to look at it.
If you asked me how much I spend a year to live on, I wouldn't include the $6,000 in rental property taxes or the $6,000 in rental property insurance or the $4,500 in property management fees or however much rental repairs or maintenance cost that year.
I'm not "hiding" it. It's not relevant to the question being asked, which is how much do you spend on your household to live on.
Same with MMM.
Not to mention business expenses for tons of travel.
If you had a vacation you took and categorized it as "business" because you looked at some properties, would you still feel similarly about not including that spending as your personal spending @SwordGuy?
Not to mention business expenses for tons of travel.
If you had a vacation you took and categorized it as "business" because you looked at some properties, would you still feel similarly about not including that spending as your personal spending @SwordGuy?
If it was a legitimate business expense (as opposed to a IRS qualified business expense), I wouldn't include the expenses related to just that portion of the trip. Any extra expenses that were purely vacation oriented would be counted under personal spending for FIRE calculations.
Piggy-backing a vacation on a business trip is just being smart with your money.
MMM did lots of travel to spread the word about FIRE, which he did a great job of. His blog funded that. I consider the basic costs of making those trips business expenses. If he brought the family along, those would be personal expenses. If he stayed over an extra week for fun, that would be personal expenses.
If he quit his blog business those business expenses and the need for them would vanish. They aren't an essential part of his post-retirement expenses to live on.
Complaining that he doesn't use some types of insurance because he's backstopped by a stash is the same way. We don't use life insurance anymore. Why? Because at our ages it costs a lot of money and it doesn't really add much value for that cost. We no longer need life insurance to survive on if one of us died. I'm not "cheating" on my FIRE expenses because I don't buy it.
Same thing with not paying a mortgage because I paid off the mortgage early. I've seen people get their knickers in a wad over that issue, too. It's no longer an expense so I don't count it for tracking the answer to the all-important question, "How much income do I need to remain retired?"
Seems very clear to me.
Not to mention business expenses for tons of travel.
If you had a vacation you took and categorized it as "business" because you looked at some properties, would you still feel similarly about not including that spending as your personal spending @SwordGuy?
If it was a legitimate business expense (as opposed to a IRS qualified business expense), I wouldn't include the expenses related to just that portion of the trip. Any extra expenses that were purely vacation oriented would be counted under personal spending for FIRE calculations.
Piggy-backing a vacation on a business trip is just being smart with your money.
MMM did lots of travel to spread the word about FIRE, which he did a great job of. His blog funded that. I consider the basic costs of making those trips business expenses. If he brought the family along, those would be personal expenses. If he stayed over an extra week for fun, that would be personal expenses.
If he quit his blog business those business expenses and the need for them would vanish. They aren't an essential part of his post-retirement expenses to live on.
Complaining that he doesn't use some types of insurance because he's backstopped by a stash is the same way. We don't use life insurance anymore. Why? Because at our ages it costs a lot of money and it doesn't really add much value for that cost. We no longer need life insurance to survive on if one of us died. I'm not "cheating" on my FIRE expenses because I don't buy it.
Same thing with not paying a mortgage because I paid off the mortgage early. I've seen people get their knickers in a wad over that issue, too. It's no longer an expense so I don't count it for tracking the answer to the all-important question, "How much income do I need to remain retired?"
Seems very clear to me.
all of those things are barriers to the avg person when they see him proclaim his expenses and they also become excuses for the avg person not to join in the great journey we're on. I think ChooseFI has probably done the best to bring this mainstream recently and declassify the RE stigma from the mantra. They have different motives than MMM though - as he wants people to consume less overall. Where chooseFI promotes just financial literacy and consuming less can and is one of the easier paths to FI in accumulation.
but we're super off topic now - the 4% rule is crazy safe
To be honest, the spending side of the 4% Rule is probably the hardest part to really nail down, so I find the debate about MMM's spending to be interesting. When the owner of a blog details their spending and it doesn't line up with reality (especially the reveal that he has Keith the Tax Guy do his taxes because they are so complicated), then you have to wonder if you are missing something. Maybe ER and keeping spending at a low level just isn't that great after all. It's even more relevant now that the FIRE crowd is collectively oohing and aahing that inflation is creeping in to their grocery bills (Retire by 40, Root of Good, etc.) and that maybe they should have bought a house sooner (Millenial Revolution, GRS, GoCurryCracker)...
The math and investment / funding side is fairly straightforward, but really knowing what my desired spending will be in 10 years, when my job no longer pays for business class flights, health insurance, gives me raises to compensate for inflation, etc. Well that is still interesting for me to hear people talk about.
Not to mention business expenses for tons of travel.
If you had a vacation you took and categorized it as "business" because you looked at some properties, would you still feel similarly about not including that spending as your personal spending @SwordGuy?
If it was a legitimate business expense (as opposed to a IRS qualified business expense), I wouldn't include the expenses related to just that portion of the trip. Any extra expenses that were purely vacation oriented would be counted under personal spending for FIRE calculations.
Piggy-backing a vacation on a business trip is just being smart with your money.
MMM did lots of travel to spread the word about FIRE, which he did a great job of. His blog funded that. I consider the basic costs of making those trips business expenses. If he brought the family along, those would be personal expenses. If he stayed over an extra week for fun, that would be personal expenses.
If he quit his blog business those business expenses and the need for them would vanish. They aren't an essential part of his post-retirement expenses to live on.
Complaining that he doesn't use some types of insurance because he's backstopped by a stash is the same way. We don't use life insurance anymore. Why? Because at our ages it costs a lot of money and it doesn't really add much value for that cost. We no longer need life insurance to survive on if one of us died. I'm not "cheating" on my FIRE expenses because I don't buy it.
Same thing with not paying a mortgage because I paid off the mortgage early. I've seen people get their knickers in a wad over that issue, too. It's no longer an expense so I don't count it for tracking the answer to the all-important question, "How much income do I need to remain retired?"
Seems very clear to me.
all of those things are barriers to the avg person when they see him proclaim his expenses and they also become excuses for the avg person not to join in the great journey we're on. I think ChooseFI has probably done the best to bring this mainstream recently and declassify the RE stigma from the mantra. They have different motives than MMM though - as he wants people to consume less overall. Where chooseFI promotes just financial literacy and consuming less can and is one of the easier paths to FI in accumulation.
but we're super off topic now - the 4% rule is crazy safe
I get that point, but I also see it as one of the awesome benefits of being financially independent and focusing on just building the life you want.
I agree that continuing to call it a 25K spend is a bit silly, but on the flip side, it's also kind of awesome that this guy retired because he could afford to and then by focusing on just doing what he enjoys, managed to find a way to get other people to pay for all of his luxuries.
I know for me, part of the perks for my work was endless high end dinners, often at private clubs, and galas, and high end conferences, and free luxury sports tickets. But now that I can't do that work, I would never pay for those things out of my own pocket.
Was it disingenuous for me to not claim those dinners and events in my spending? Few of them were absolute requirements of my job.
Should someone who gets free theater tickets because they volunteer there include the cost of tickets in their spending?
What about cc churning?
There's no clear line as to where a perk or business expense should or shouldn't be counted towards someone's spend. Instead, the main focus of Pete's retirement budget should be "holy fuck, this dude found a way to live this remarkable lifestyle where he has more luxury and it costs him negative money!"
I personally have never cared much for Pete's pre FIRE journey, it doesn't interest me. The part that caught my attention was his post-FIRE life. To me, that's where the really appealing story is.
Not "Dude saved a bunch of money in his 20s and never again had to work". I mean, cool story, but not my jam.
But "Dude at 30 pursues a life of following his passions, quits his day job, and stumbles face fucking first into a fantasy dream life where he can do whatever he wants and live like a fucking king"
Now that's a story that turns my head.
Was it disingenuous for me to not claim those dinners and events in my spending?
Personally I think it's rather amusing that this thread, which was started to help people realize the 4% rule is safe, has had a discussion with numerous people who are FIRE'd or planning on FIREing talking about what is effectively the "shit I accidentally am making income in retirement, is it really a 4% rule retirement anymore?" problem.
By now it’s obvious I botched our relocation last year. The decision to relocate was correct but I executed it poorly due to my lack of experience. I also didn’t think through all the options when I only relied on some “rules” that were either outdated or didn’t apply to our situation. In the end, my poor execution cost us $300,000.
Was it disingenuous for me to not claim those dinners and events in my spending?
If you aren't running a MMM-esque FIRE empire it's irrelevant how you classify your spending. If you are trying to convince other people to change their lives and using your own life as an example, and making a fair buck in the process, than I'd say it was disingenuous not to be accurate/clear with your spending.
Was it disingenuous for me to not claim those dinners and events in my spending?
If you aren't running a MMM-esque FIRE empire it's irrelevant how you classify your spending. If you are trying to convince other people to change their lives and using your own life as an example, and making a fair buck in the process, than I'd say it was disingenuous not to be accurate/clear with your spending.
and its not hard for him to do this the "right" way
What my spending would be if i'd just quit and never made a single dollar - here you go.
Here are the cool things i've done that helped me do this other cool shit i do and what it costs me.
]
The luxury of these wore off for me about 2 years ago - its cool for awhile but its all the same eventually and we're just pouring money down the drain. My client doesn't care if i take him to a michellin 3 star place or the bar down the street he just want to hang out and shoot the shit.
If your clients are only showing up to the big spendy things you haven't cultivated the right relationships.
Where's the line? I know there is a line, but I doubt everyone would agree as to where it is.
]
The luxury of these wore off for me about 2 years ago - its cool for awhile but its all the same eventually and we're just pouring money down the drain. My client doesn't care if i take him to a michellin 3 star place or the bar down the street he just want to hang out and shoot the shit.
If your clients are only showing up to the big spendy things you haven't cultivated the right relationships.
I was the client, and a lot of the people wining and dining me are good personal friends. So basically, my social life was being subsidized.
ETA: whether *you* see value in it at all is completely beside my point. My point was, there are some luxuries that people are willing to engage in, but only if they are paid for by someone else. So should I count those dinners and sports tickets when accounting for the cost of my lifestyle, or should I not because I'm not willing to spend after tax dollars on them?
Likewise, should Pete's "business expenses" count? What if he were to give them up if he wasn't able to pay for them as business expenses?
Where's the line? I know there is a line, but I doubt everyone would agree as to where it is.
Personally, I don't care, as I said, I think the more interesting story is how he created the life he wanted and managed to not have to pay for his luxuries with any after tax dollars. The same way a lot of my colleagues do international lectures, which gets their flights and some travel costs covered for international trips. They travel to Amsterdam to attend a 3 day event, give a 3 hour lecture, get all of their expenses paid, but extend their stay by 5 days.
]
The luxury of these wore off for me about 2 years ago - its cool for awhile but its all the same eventually and we're just pouring money down the drain. My client doesn't care if i take him to a michellin 3 star place or the bar down the street he just want to hang out and shoot the shit.
If your clients are only showing up to the big spendy things you haven't cultivated the right relationships.
I was the client, and a lot of the people wining and dining me are good personal friends. So basically, my social life was being subsidized.
ETA: whether *you* see value in it at all is completely beside my point. My point was, there are some luxuries that people are willing to engage in, but only if they are paid for by someone else. So should I count those dinners and sports tickets when accounting for the cost of my lifestyle, or should I not because I'm not willing to spend after tax dollars on them?
Likewise, should Pete's "business expenses" count? What if he were to give them up if he wasn't able to pay for them as business expenses?
Where's the line? I know there is a line, but I doubt everyone would agree as to where it is.
Personally, I don't care, as I said, I think the more interesting story is how he created the life he wanted and managed to not have to pay for his luxuries with any after tax dollars. The same way a lot of my colleagues do international lectures, which gets their flights and some travel costs covered for international trips. They travel to Amsterdam to attend a 3 day event, give a 3 hour lecture, get all of their expenses paid, but extend their stay by 5 days.
i see my statement came a bit off as me talking to YOU but it was a global you. And i agree what he's done is great afterwards and its what i will do with anything i can make fit in a bubble that i can write off. but i'd agree with ender above about where the line is drawn - HES NOT LIVING THE LIFE HE CLAIMS annually. which isnt a problem for me our you or any of us here b/c we're not global icons in the FIRE space. its the annual budget that should be revised b/c most people think living on 20k is insane to begin with.
- SNIP -
Agreed, and I really think he missed out on an opportunity to explore a whole new lifestyle concept that could be very relevant and popular for FI community folks.
- SNIP -
If your clients are only showing up to the big spendy things you haven't cultivated the right relationships.
If your clients are only showing up to the big spendy things you haven't cultivated the right relationships.
Back when I participated in such things, the vendor I most enjoyed the "free lunch" with would just take the whole group to have the $10-$15 lunch specials at a nearby restaurant.
If your clients are only showing up to the big spendy things you haven't cultivated the right relationships.
Back when I participated in such things, the vendor I most enjoyed the "free lunch" with would just take the whole group to have the $10-$15 lunch specials at a nearby restaurant.
How much poverty in America could be solved if that's what everyone did. I've been at 50k 15 person dinners. Like wtf are we doing.
How does a meal exceed 3k per person? Wine? Truffles?If your clients are only showing up to the big spendy things you haven't cultivated the right relationships.
Back when I participated in such things, the vendor I most enjoyed the "free lunch" with would just take the whole group to have the $10-$15 lunch specials at a nearby restaurant.
How much poverty in America could be solved if that's what everyone did. I've been at 50k 15 person dinners. Like wtf are we doing.
How does a meal exceed 3k per person? Wine? Truffles?If your clients are only showing up to the big spendy things you haven't cultivated the right relationships.
Back when I participated in such things, the vendor I most enjoyed the "free lunch" with would just take the whole group to have the $10-$15 lunch specials at a nearby restaurant.
How much poverty in America could be solved if that's what everyone did. I've been at 50k 15 person dinners. Like wtf are we doing.
How does a meal exceed 3k per person? Wine? Truffles?If your clients are only showing up to the big spendy things you haven't cultivated the right relationships.
Back when I participated in such things, the vendor I most enjoyed the "free lunch" with would just take the whole group to have the $10-$15 lunch specials at a nearby restaurant.
How much poverty in America could be solved if that's what everyone did. I've been at 50k 15 person dinners. Like wtf are we doing.
Won't even click the link because Sam can eat a big ol' bag of d!cks.
Has this been discussedYes
Has this been discussed: https://www.financialsamurai.com/proper-safe-withdrawal-rate/
Personally I disregarded most of it - but I am interested in whether others share the same view that 4% is no longer relevant in the low bond yield environment ?
Won't even click the link because Sam can eat a big ol' bag of d!cks.
Has this been discussed: https://www.financialsamurai.com/proper-safe-withdrawal-rate/
Personally I disregarded most of it - but I am interested in whether others share the same view that 4% is no longer relevant in the low bond yield environment ?
Has this been discussed: click-bait
Personally I disregarded most of it - but I am interested in whether others share the same view that 4% is no longer relevant in the low bond yield environment ?
QuoteBut in reality he started a blog for fun and it got to a point where it was making in two years what he (and spouse) retired on to begin with. Some of which he spends, some of which is donated, some is invested in other stuff (commercial buildings, homes). It all comes back to the blog (and forum), without that he wouldn't have the other stuff. The funny thing is the blog was only good for the first 5ish years, after that it was all garbage
I find this part of MMM totally dishonest. He talks about how he just casually tapped away at this blog thing for "friends" and then all of a sudden it just happened to blow up and now creates a fortune by accident almost. This is total dishonesty - anyone who has attempted to create a blog knows how much time and effort it takes to create a blog that doesnt succeed let alone a one this successful. When I find such things like this it pretty much puts the whole value of the blog into question for alot of people who are making such life altering decisions
If MMM was promoting the idea of retiring early by easily starting a blog and getting rich I'd agree that not actionable advice for most people. OTOH his message spend less, invest more and be happy is hard to be too critical of and anyone who can hit a reasonable savings rate can follow his index fund investing plan and have a good chance of success.
QuoteBut in reality he started a blog for fun and it got to a point where it was making in two years what he (and spouse) retired on to begin with. Some of which he spends, some of which is donated, some is invested in other stuff (commercial buildings, homes). It all comes back to the blog (and forum), without that he wouldn't have the other stuff. The funny thing is the blog was only good for the first 5ish years, after that it was all garbage
I find this part of MMM totally dishonest. He talks about how he just casually tapped away at this blog thing for "friends" and then all of a sudden it just happened to blow up and now creates a fortune by accident almost. This is total dishonesty - anyone who has attempted to create a blog knows how much time and effort it takes to create a blog that doesnt succeed let alone a one this successful. When I find such things like this it pretty much puts the whole value of the blog into question for alot of people who are making such life altering decisions
For some people, writing is slow and hard. For some it's fast and easy. MMM writes like he's explaining stuff over a few beers and adding in some over-the-top sarcasm for fun as he does it.
I've written a whole lot of technical articles and quite a few of them were written pretty quickly, as in an evening with a few hours a couple of days later for editing. Others were real slogs. Assuming you have solid writing skills, it just depends on what you're writing, whether you find "the right way" to present the material right off the bat, how well you know the material, how much research you have to do or how much supporting material you have to produce.
It's pretty obvious about when the transition from that phase to the next, the "I've got to come up with something to write" took place. The pace of writing really slowed down, the topics were (often) more forced, etc.
QuoteBut in reality he started a blog for fun and it got to a point where it was making in two years what he (and spouse) retired on to begin with. Some of which he spends, some of which is donated, some is invested in other stuff (commercial buildings, homes). It all comes back to the blog (and forum), without that he wouldn't have the other stuff. The funny thing is the blog was only good for the first 5ish years, after that it was all garbage
I find this part of MMM totally dishonest. He talks about how he just casually tapped away at this blog thing for "friends" and then all of a sudden it just happened to blow up and now creates a fortune by accident almost. This is total dishonesty - anyone who has attempted to create a blog knows how much time and effort it takes to create a blog that doesnt succeed let alone a one this successful. When I find such things like this it pretty much puts the whole value of the blog into question for alot of people who are making such life altering decisions
For some people, writing is slow and hard. For some it's fast and easy. MMM writes like he's explaining stuff over a few beers and adding in some over-the-top sarcasm for fun as he does it.
I've written a whole lot of technical articles and quite a few of them were written pretty quickly, as in an evening with a few hours a couple of days later for editing. Others were real slogs. Assuming you have solid writing skills, it just depends on what you're writing, whether you find "the right way" to present the material right off the bat, how well you know the material, how much research you have to do or how much supporting material you have to produce.
It's pretty obvious about when the transition from that phase to the next, the "I've got to come up with something to write" took place. The pace of writing really slowed down, the topics were (often) more forced, etc.
the general point i am making here is that its quite clear he worked his butt off making this blog, it takes huge effort and focus to create something like this. He didnt just casually type away and accidentally fall into a blogging success. I simply think it is not genuine to portray such effort and focus in this trivial way. He actively focused on making a money making blog - that is very clear to me
Absolutely! Given that "Half of U.S. adults can’t read a book written at the 8th-grade level." we can't expect most American adults to have solid writing skills. Or even decent writing skills! Without those foundational skills the act of writing a decent article doesn't get done quickly.
Absolutely! Given that "Half of U.S. adults can’t read a book written at the 8th-grade level." we can't expect most American adults to have solid writing skills. Or even decent writing skills! Without those foundational skills the act of writing a decent article doesn't get done quickly.
It wouldn't even matter if you were equally talented/perhaps more talented than MMM. Jacob over at ERE had a good article about success at blogging and the upshot was timing is everything. Once the dominant sources are in place in a niche it's hard for a new player to break into the market. MMM had a very healthy dose of luck that determined his blogging success that just can't be replicated. However, given he had saved and invested in a solid FIRE plan he would be a successful, if anonymous, retiree had he not turned out to be a famous blogger.
You are right though poor communications skills in the wider population limit the number of people that could write high quality blog posts if they wanted to.
the general point i am making here is that its quite clear he worked his butt off making this blog, it takes huge effort and focus to create something like this. He didnt just casually type away and accidentally fall into a blogging success. I simply think it is not genuine to portray such effort and focus in this trivial way. He actively focused on making a money making blog - that is very clear to me
But in reality he started a blog for fun and it got to a point where it was making in two years what he (and spouse) retired on to begin with. Some of which he spends, some of which is donated, some is invested in other stuff (commercial buildings, homes). It all comes back to the blog (and forum), without that he wouldn't have the other stuff. The funny thing is the blog was only good for the first 5ish years, after that it was all garbage
stop worrying about MMM's motivations
:-)
Some of us are very soon to be millionaires.
stop worrying about MMM's motivations
:-)
stop worrying about MMM's motivations
:-)
Right! If you want to worry there's always nuclear warfare and the global warming thing. That ought to be enough for you.
stop worrying about MMM's motivations
:-)
Right! If you want to worry there's always nuclear warfare and the global warming thing. That ought to be enough for you.
Nobody is worrying, it is a matter of ethics, the site name is clearly Marketing effort in of itself alone. I think the intention was very clear from the start with focused effort. Fair play to him, I wish I knew how to build one even half as successful, heck a 5th successful even. Just some integrity about it would be preferred
stop worrying about MMM's motivations
:-)
Right! If you want to worry there's always nuclear warfare and the global warming thing. That ought to be enough for you.
Nobody is worrying, it is a matter of ethics, the site name is clearly Marketing effort in of itself alone. I think the intention was very clear from the start with focused effort. Fair play to him, I wish I knew how to build one even half as successful, heck a 5th successful even. Just some integrity about it would be preferred
Have you seen the clip where he explains how he came up with the name? It literally sounded like something he came up with while drinking.
stop worrying about MMM's motivations
:-)
Right! If you want to worry there's always nuclear warfare and the global warming thing. That ought to be enough for you.
Nobody is worrying, it is a matter of ethics, the site name is clearly Marketing effort in of itself alone. I think the intention was very clear from the start with focused effort. Fair play to him, I wish I knew how to build one even half as successful, heck a 5th successful even. Just some integrity about it would be preferred
Have you seen the clip where he explains how he came up with the name? It literally sounded like something he came up with while drinking.
Its an internet marketing type name with the 3 MMMs, if you believe the idea he just sat around drinking and the next thing you know all this is built, well I don't know what to say. Hours upon hours went into this.
stop worrying about MMM's motivations
:-)
Right! If you want to worry there's always nuclear warfare and the global warming thing. That ought to be enough for you.
Nobody is worrying, it is a matter of ethics, the site name is clearly Marketing effort in of itself alone. I think the intention was very clear from the start with focused effort. Fair play to him, I wish I knew how to build one even half as successful, heck a 5th successful even. Just some integrity about it would be preferred
Have you seen the clip where he explains how he came up with the name? It literally sounded like something he came up with while drinking.
Its an internet marketing type name with the 3 MMMs, if you believe the idea he just sat around drinking and the next thing you know all this is built, well I don't know what to say. Hours upon hours went into this.
True, but someone can put hours and hours of work into a project with absolutely no intention or expectation of it becoming profitable.
I've personally invested hundreds and hundreds of hours into projects that might, buy probably won't pay off, and some of them do and most of them don't.
If one of them makes money, I still maintain that I was just noodling around and having fun, not trying to make a business out of it.
Having a project become successful is a very different process than setting out to build a successful business.
stop worrying about MMM's motivations
:-)
Right! If you want to worry there's always nuclear warfare and the global warming thing. That ought to be enough for you.
Nobody is worrying, it is a matter of ethics, the site name is clearly Marketing effort in of itself alone. I think the intention was very clear from the start with focused effort. Fair play to him, I wish I knew how to build one even half as successful, heck a 5th successful even. Just some integrity about it would be preferred
Have you seen the clip where he explains how he came up with the name? It literally sounded like something he came up with while drinking.
Its an internet marketing type name with the 3 MMMs, if you believe the idea he just sat around drinking and the next thing you know all this is built, well I don't know what to say. Hours upon hours went into this.
I'm not sure why we're 'disagreeing' about all of this on the 4% Rule thread,...
stop worrying about MMM's motivations
:-)
Right! If you want to worry there's always nuclear warfare and the global warming thing. That ought to be enough for you.
Nobody is worrying, it is a matter of ethics, the site name is clearly Marketing effort in of itself alone. I think the intention was very clear from the start with focused effort. Fair play to him, I wish I knew how to build one even half as successful, heck a 5th successful even. Just some integrity about it would be preferred
Have you seen the clip where he explains how he came up with the name? It literally sounded like something he came up with while drinking.
Its an internet marketing type name with the 3 MMMs, if you believe the idea he just sat around drinking and the next thing you know all this is built, well I don't know what to say. Hours upon hours went into this.
True, but someone can put hours and hours of work into a project with absolutely no intention or expectation of it becoming profitable.
I've personally invested hundreds and hundreds of hours into projects that might, buy probably won't pay off, and some of them do and most of them don't.
If one of them makes money, I still maintain that I was just noodling around and having fun, not trying to make a business out of it.
Having a project become successful is a very different process than setting out to build a successful business.
I'm not sure why we're 'disagreeing' about all of this on the 4% Rule thread, unless @Jamese20 actually does not think MMM / Pete could have survived on 4% of his 'stache. There is no doubt MMM spent time and effort turning this in to a profitable enterprise, blogging is not easy. Just managing the comments on a post is a PITA, let alone all the solicitations and business emails that come with the success he has seen. You also have a lot of back end stuff like scaling so your site runs smoothly, updating old posts that you've changed your mind on (like his praise of his breadmaker), and managing the financials - taxes and whatnot. But who cares? I believe MMM would have stayed ER (at least, true to his own definition of 'retired') even if he hadn't made a dime from his blog. His life might have looked a lot different, but he would not have gone back to work in software.
If you disagree with that, then maybe you can explain why the 4% rule would have failed for him and we can move on to a more productive discussion... Just my 2 cents
I wonder if there are any simulations where you back test a gradual glidepath into your target long term withdrawal amounts?
Let me give an example:
You target a $1m portfolio to provide 40k income in today's dollars, usual 4% stuff.
What do the simulations look like if you start off just withdrawing 3% in the first year, and increase that amount by an inflation adjusted $2500 for each year so that only in the 4th year are you taking your full desired amount.
Could have different starting withdrawal amounts, rate of increases to give different glidepaths into the long term spending amount.
Has this been discussed: https://www.financialsamurai.com/proper-safe-withdrawal-rate/
Personally I disregarded most of it - but I am interested in whether others share the same view that 4% is no longer relevant in the low bond yield environment ?
Yeah, it's probably been discussed, we used to discuss FS articles until we all basically agreed to stop feeding the troll.
Many members here won't click SF links because he's lost that much credibility.
Has this been discussed: https://www.financialsamurai.com/proper-safe-withdrawal-rate/
Personally I disregarded most of it - but I am interested in whether others share the same view that 4% is no longer relevant in the low bond yield environment ?
Yeah, it's probably been discussed, we used to discuss FS articles until we all basically agreed to stop feeding the troll.
Many members here won't click SF links because he's lost that much credibility.
Honest question- why, in a nutshell, does that site lack credibility?
Has this been discussed: https://www.financialsamurai.com/proper-safe-withdrawal-rate/
Personally I disregarded most of it - but I am interested in whether others share the same view that 4% is no longer relevant in the low bond yield environment ?
Yeah, it's probably been discussed, we used to discuss FS articles until we all basically agreed to stop feeding the troll.
Many members here won't click SF links because he's lost that much credibility.
Honest question- why, in a nutshell, does that site lack credibility?
While many retirees are banking on a continuing rise in stocks to keep their portfolios growing, Pfau worries that markets will plunge and imperil this “overly optimistic” approach. He has embraced oft-criticized insurance products like variable annuities and whole-life insurance that will hold their value even if stocks crash, and he has done consulting work for insurers. He wrote another book, “Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement,” because these loans also can be used as “buffer assets” during market meltdowns.
Just for fun, Wade Pfau is out again with another 4% Rule update - https://www.barrons.com/articles/retirement-4-percent-rule-downturn-strategy-51642806039QuoteWhile many retirees are banking on a continuing rise in stocks to keep their portfolios growing, Pfau worries that markets will plunge and imperil this “overly optimistic” approach. He has embraced oft-criticized insurance products like variable annuities and whole-life insurance that will hold their value even if stocks crash, and he has done consulting work for insurers. He wrote another book, “Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement,” because these loans also can be used as “buffer assets” during market meltdowns.
Plenty of material to attack, for those so inclined. I worry that his opinions are compromised by the scammy annuity and reverse mortgage industries, but once you take the pinch of salt, the rest of it is a worthwhile read. For example, he mentions how unrealistic mechanically spending 4% every year is.
Just for fun, Wade Pfau is out again with another 4% Rule update - https://www.barrons.com/articles/retirement-4-percent-rule-downturn-strategy-51642806039QuoteWhile many retirees are banking on a continuing rise in stocks to keep their portfolios growing, Pfau worries that markets will plunge and imperil this “overly optimistic” approach. He has embraced oft-criticized insurance products like variable annuities and whole-life insurance that will hold their value even if stocks crash, and he has done consulting work for insurers. He wrote another book, “Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement,” because these loans also can be used as “buffer assets” during market meltdowns.
Plenty of material to attack, for those so inclined. I worry that his opinions are compromised by the scammy annuity and reverse mortgage industries, but once you take the pinch of salt, the rest of it is a worthwhile read. For example, he mentions how unrealistic mechanically spending 4% every year is.
I don't get why anyone buys an annuity unless you know you're terrible with money and will spend every dime you have. They're paying you back with your own money at a rate that's usually less than inflation, never mind average market returns.
Also... the rule of thumb with insurance should be to get the minimum you can and only cover things that can actually bankrupt you. For instance, I don't get collision or comprehensive coverage on my car (if your car is a very small portion of your net worth, as it should be, insuring it against damage makes no sense) but do have umbrella insurance in case of getting sued.
People get all sorts of crazy insurance. Phone insurance? Computer insurance? TV insurance? It's nuts.... I wish I had the money to start an insurance company.
...
I don't get why anyone buys an annuity unless you know you're terrible with money and will spend every dime you have. They're paying you back with your own money at a rate that's usually less than inflation, never mind average market returns.
...
People get all sorts of crazy insurance. Phone insurance? Computer insurance? TV insurance? It's nuts.... I wish I had the money to start an insurance company.
@Parametric Censorship there's a case to be made that a person with a portfolio too small to retire on, and with limited income to grow that portfolio organically, could have spent the last 25 years just waiting for the next crisis to hit. After the dot-com bubble, after the GFC, and in the midst of the COVID correction would have all been great times to buy - probably good enough to support a 5% WR for 30y, but all the numbers aren't in yet.
The U.S. in particular has become a lot less stable than it was in prior decades. The 1999 repeal of the Depression-era Glass-Steagall Act allowed banks to mingle their investing and lending funds, which means deposits tend to chase the latest investment fad and lending gets cut back when investments do poorly - a pro-cyclical feedback mechanism. Most of the reforms introduced after the GFC, such as the Dodd-Frank bill, have been steadily watered down. Meanwhile, the increasing share of the economy that is devoted to services - most of which are discretionary - means layoffs are more pro-cyclical than in the past. The decline of traditional journalism and the rise of social media mean that corruption is less likely to be rooted out, tribal hatred is on the rise, and people are making worse decisions based on lower-quality information. The deaths of a million Americans from COVID amid conspiracy theories might be just the start of our descent into idiocy. Then there are the volatility-increasing effects of the national debt and deficits, the decline of the middle class, student loan burdens, and subsidy-driven boom-bust cycles in housing. The unaffordability of housing and higher education is leading to demographic graying, which means fewer workers supporting more non-workers, and increased reliance on cyclical investments.
If anything, it appears that we're moving in the opposite direction of stabilizing things. People are doubling down on getting their info from podcasters and YouTube/TikTok influencers rather than subscribing to journalists, despite watching people literally die from accepting internet info. A coup was attempted in the U.S. just last year, and more attempts are in the works. Meanwhile, housing prices are well beyond sustainable levels even as interest rates are rising and nobody is doing anything about any of this stuff. Our best hope of stabilization might be for a new cold war to unite people around certain realities, and that's the best longshot we have.
So, why not hang out in short-term bonds or gold and wait for the next major correction to dive into stocks and retire on a 5% WR? One reason might be that, contrary to expectations, the next crisis/opportunity might not come around for a half-dozen years or more, by which time a person riding the markets' waves would probably have retired earlier than the person waiting for a CAEY that supports a 5% or 6% WR.
As the economies of the rest of the world grow as they surely will, the bizarre behavior in the US may be more than offset by gains in international investments and the 4 percent rule will continue to rule.
As the economies of the rest of the world grow as they surely will, the bizarre behavior in the US may be more than offset by gains in international investments and the 4 percent rule will continue to rule.
It is good to note that international and emerging are all "cheap" by the earnings yield metric (as is small value, but that's self-referential). ERN talks about US large caps because that's the typical backtested SWR allocation, but using a tool like Tyler's you may be convinced that hedging that with some value is in a retiree's best interest.
I'm not sure the wait-for-a-panic timing strategy is a useful one, because of course we would not have been able to forecast the rate at which those panics would come. This is a distinct argument from that of ERN's model.
what's a CAEY?1/CAPE (https://earlyretirementnow.com/2017/03/22/cape-fear/)
what's a CAEY?1/CAPE (https://earlyretirementnow.com/2017/03/22/cape-fear/)
Arguably for a 60 year horizon we have an even worse idea of the real failure rate since there are only 2 fully independent such retirement periods since 1900...
Arguably for a 60 year horizon we have an even worse idea of the real failure rate since there are only 2 fully independent such retirement periods since 1900...
No one in their right mind should expect a 30 year old can reliably predict their expenses for six decades and expect them to be constant throughout that duration.
I try to frame it more as, if I work one more year to grow my stash $100k, then that’s $4k more I can spend per year or $100k in buffer for unexpected health, family expenses, charity…. So is this OMY worth that trade off? (My numbers are different than this, but that’s the general framework).
No one in their right mind should expect a 30 year old can reliably predict their expenses for six decades and expect them to be constant throughout that duration.
I take a different view here. So often I hear "how am I supposed to know what my expenses will be X years from now??!!" yet the daily reality of most working people is that they have a largely fixed income, and that income dictates their spending.
So why is it so different for the retirement phase? IME most retirees have a long-ago determined "income" (typically a mixture of SS, pension and withdrawals from savings) and whatever that is, that's what they live on.
If I say right now "I'm going to live on the 2022 equivalent of $40k/year" (or $100k or whatever)... wouldn't I largely design my lifestyle around this amount? Does it matter if that's 5 years in the future or 40?
No one in their right mind should expect a 30 year old can reliably predict their expenses for six decades and expect them to be constant throughout that duration.
I take a different view here. So often I hear "how am I supposed to know what my expenses will be X years from now??!!" yet the daily reality of most working people is that they have a largely fixed income, and that income dictates their spending.
So why is it so different for the retirement phase? IME most retirees have a long-ago determined "income" (typically a mixture of SS, pension and withdrawals from savings) and whatever that is, that's what they live on.
If I say right now "I'm going to live on the 2022 equivalent of $40k/year" (or $100k or whatever)... wouldn't I largely design my lifestyle around this amount? Does it matter if that's 5 years in the future or 40?
I agree that you can, but there are things that are difficult to predict, especially if you have dependents. The pandemic for instance created an unpredictable new cost for child and tuition would not have been necessary. A) we suddenly needed child care for fully remote school age children in order to keep our in-person jobs B) we discovered that remote learning 100% did not work for the 7 year ago and said child had a learning difficulty that compounded the situation and required expensive in-person services.
We could have without these expenses with detrimental results, both career and educational. Just an example of the many crazy situations that life can and will throw at us.
No one in their right mind should expect a 30 year old can reliably predict their expenses for six decades and expect them to be constant throughout that duration.
I take a different view here. So often I hear "how am I supposed to know what my expenses will be X years from now??!!" yet the daily reality of most working people is that they have a largely fixed income, and that income dictates their spending.
So why is it so different for the retirement phase? IME most retirees have a long-ago determined "income" (typically a mixture of SS, pension and withdrawals from savings) and whatever that is, that's what they live on.
If I say right now "I'm going to live on the 2022 equivalent of $40k/year" (or $100k or whatever)... wouldn't I largely design my lifestyle around this amount? Does it matter if that's 5 years in the future or 40?
I agree that you can, but there are things that are difficult to predict, especially if you have dependents. The pandemic for instance created an unpredictable new cost for child and tuition would not have been necessary. A) we suddenly needed child care for fully remote school age children in order to keep our in-person jobs B) we discovered that remote learning 100% did not work for the 7 year ago and said child had a learning difficulty that compounded the situation and required expensive in-person services.
We could have without these expenses with detrimental results, both career and educational. Just an example of the many crazy situations that life can and will throw at us.
Sure, but how does that change anything with regards to retirement? You still need to guesstimate a number, build in some amount of safety, and then you live on what you have or change how you live. Much as you do while your money comes from your job.
I try to frame it more as, if I work one more year to grow my stash $100k, then that’s $4k more I can spend per year or $100k in buffer for unexpected health, family expenses, charity…. So is this OMY worth that trade off? (My numbers are different than this, but that’s the general framework).
I try to frame it more as, if I work one more year to grow my stash $100k, then that’s $4k more I can spend per year or $100k in buffer for unexpected health, family expenses, charity…. So is this OMY worth that trade off? (My numbers are different than this, but that’s the general framework).
OMY works in two directions of course. While working you (presumably) add more money to your stash in the form of contributions to your retirement accounts, etc and also you have the money that you didn’t have to take out of your stash to support yourself for that year. Possibly you could also consider that you have one year of expenses removed on the tail end (‘cause you died). So that’s three ways OMY can help the math.
If you contribute $40K per year to your stash in the form of 401k contributions, etc and you spend $60K a year just living your life, that’s effectively $100K more in your stash a year later than would have been there had you retired. If you assume your life ends at the same age regardless of when you retire, you also have reduced the number of years your stash has to support you (yay?)
Of course this is how we get trapped in the cycle. You can never know with certainty what will happen. It’s amazing how every downturn seems like ‘this time it’s different!’
Well.....anyone who criticized the 4% bc of low interest rates please know that your concerns have been addressed, feel free to FIRE with ease now.
Low rates have left the building.
Attenion SORR crowd there are now plenty of seats available in the front rows.
Enjoy the show.
The Safe Withdrawal Rate: Evidence from a Broad Sample of Developed Markets
33 Pages Posted: 28 Sep 2022
We use a comprehensive new dataset of asset-class returns in 38 developed countries to examine a popular class of retirement spending rules that prescribe annual withdrawals as a constant percentage of the retirement account balance. A 65-year-old couple willing to bear a 5% chance of financial ruin can withdraw just 2.26% per year, a rate materially lower than conventional advice (e.g., the 4% rule). Our estimates of failure rates under conventional withdrawal policies have important implications for individuals (e.g., savings rates, retirement timing, and retirement consumption), public policy (e.g., participation rates in means-tested programs), and society (e.g., elderly poverty rates).
The data cover approximately 2,500 years of asset-class returns in 38 developed countries over the period from 1890 to 2019...
The dataset construction methods deliberately combat the survivor and easy data biases that impact prior studies.
We incorporate longevity risk into the simulation design using mortality tables from the Social Security Administration (SSA).
Our base case simulation focuses on the joint investment-longevity outcomes for a couple retiring in 2022 at age 65 who chooses a portfolio strategy of 60% domestic stocks and 40% bonds.
The 4% rule proves woefully inadequate for current retirees.
The Safe Withdrawal Rate: Evidence from a Broad Sample of Developed Markets
33 Pages Posted: 28 Sep 2022
We use a comprehensive new dataset of asset-class returns in 38 developed countries to examine a popular class of retirement spending rules that prescribe annual withdrawals as a constant percentage of the retirement account balance. A 65-year-old couple willing to bear a 5% chance of financial ruin can withdraw just 2.26% per year, a rate materially lower than conventional advice (e.g., the 4% rule). Our estimates of failure rates under conventional withdrawal policies have important implications for individuals (e.g., savings rates, retirement timing, and retirement consumption), public policy (e.g., participation rates in means-tested programs), and society (e.g., elderly poverty rates).
The data cover approximately 2,500 years of asset-class returns in 38 developed countries over the period from 1890 to 2019...
The dataset construction methods deliberately combat the survivor and easy data biases that impact prior studies.
We incorporate longevity risk into the simulation design using mortality tables from the Social Security Administration (SSA).
Our base case simulation focuses on the joint investment-longevity outcomes for a couple retiring in 2022 at age 65 who chooses a portfolio strategy of 60% domestic stocks and 40% bonds.
The 4% rule proves woefully inadequate for current retirees.
The Safe Withdrawal Rate: Evidence from a Broad Sample of Developed Markets
33 Pages Posted: 28 Sep 2022
We use a comprehensive new dataset of asset-class returns in 38 developed countries to examine a popular class of retirement spending rules that prescribe annual withdrawals as a constant percentage of the retirement account balance. A 65-year-old couple willing to bear a 5% chance of financial ruin can withdraw just 2.26% per year, a rate materially lower than conventional advice (e.g., the 4% rule). Our estimates of failure rates under conventional withdrawal policies have important implications for individuals (e.g., savings rates, retirement timing, and retirement consumption), public policy (e.g., participation rates in means-tested programs), and society (e.g., elderly poverty rates).
The data cover approximately 2,500 years of asset-class returns in 38 developed countries over the period from 1890 to 2019...
The dataset construction methods deliberately combat the survivor and easy data biases that impact prior studies.
We incorporate longevity risk into the simulation design using mortality tables from the Social Security Administration (SSA).
Our base case simulation focuses on the joint investment-longevity outcomes for a couple retiring in 2022 at age 65 who chooses a portfolio strategy of 60% domestic stocks and 40% bonds.
The 4% rule proves woefully inadequate for current retirees.
Anyone who actually understands the details of this stuff want to break down the reasoning behind this for me?
Like coles notes "here's why things are different now" sort of summary?
The Safe Withdrawal Rate: Evidence from a Broad Sample of Developed Markets
33 Pages Posted: 28 Sep 2022
We use a comprehensive new dataset of asset-class returns in 38 developed countries to examine a popular class of retirement spending rules that prescribe annual withdrawals as a constant percentage of the retirement account balance. A 65-year-old couple willing to bear a 5% chance of financial ruin can withdraw just 2.26% per year, a rate materially lower than conventional advice (e.g., the 4% rule). Our estimates of failure rates under conventional withdrawal policies have important implications for individuals (e.g., savings rates, retirement timing, and retirement consumption), public policy (e.g., participation rates in means-tested programs), and society (e.g., elderly poverty rates).
The data cover approximately 2,500 years of asset-class returns in 38 developed countries over the period from 1890 to 2019...
The dataset construction methods deliberately combat the survivor and easy data biases that impact prior studies.
We incorporate longevity risk into the simulation design using mortality tables from the Social Security Administration (SSA).
Our base case simulation focuses on the joint investment-longevity outcomes for a couple retiring in 2022 at age 65 who chooses a portfolio strategy of 60% domestic stocks and 40% bonds.
The 4% rule proves woefully inadequate for current retirees.
Anyone who actually understands the details of this stuff want to break down the reasoning behind this for me?
Like coles notes "here's why things are different now" sort of summary?
So, what this paper is saying is that a 65 year old couple who have an average life expectancy of 86 (i.e. 21 years), needs have 44 years worth of expenses saved... in order to have a 95% success rate (i.e. dying with money)?
It's just a clickbait paper. Great example of finding data to support your position.
The Safe Withdrawal Rate: Evidence from a Broad Sample of Developed Markets
33 Pages Posted: 28 Sep 2022
We use a comprehensive new dataset of asset-class returns in 38 developed countries to examine a popular class of retirement spending rules that prescribe annual withdrawals as a constant percentage of the retirement account balance. A 65-year-old couple willing to bear a 5% chance of financial ruin can withdraw just 2.26% per year, a rate materially lower than conventional advice (e.g., the 4% rule). Our estimates of failure rates under conventional withdrawal policies have important implications for individuals (e.g., savings rates, retirement timing, and retirement consumption), public policy (e.g., participation rates in means-tested programs), and society (e.g., elderly poverty rates).
The data cover approximately 2,500 years of asset-class returns in 38 developed countries over the period from 1890 to 2019...
The dataset construction methods deliberately combat the survivor and easy data biases that impact prior studies.
We incorporate longevity risk into the simulation design using mortality tables from the Social Security Administration (SSA).
Our base case simulation focuses on the joint investment-longevity outcomes for a couple retiring in 2022 at age 65 who chooses a portfolio strategy of 60% domestic stocks and 40% bonds.
The 4% rule proves woefully inadequate for current retirees.
Anyone who actually understands the details of this stuff want to break down the reasoning behind this for me?
Like coles notes "here's why things are different now" sort of summary?
It's just a clickbait paper. Great example of finding data to support your position.
They are using returns data for countries like Japan and Argentina then applying it to this sweet 65 year old American couple that doesn't have Social Security or access to the internet.
The concern is that US-centric analysis are assuming repetition of US returns that may not repeat. So they're trying to pull in data from all over the world. To add a cherry on top, they're also looking at expected lifespan in the US. They concluded that 4% rule is riskier than advertised (and them running US-only as a side-by-side lends some credibility as those numbers come in where you'd expect). But I think the analysis is likely flawed, but also don't understand stats well enough to say for sure.The Safe Withdrawal Rate: Evidence from a Broad Sample of Developed Markets
33 Pages Posted: 28 Sep 2022
We use a comprehensive new dataset of asset-class returns in 38 developed countries to examine a popular class of retirement spending rules that prescribe annual withdrawals as a constant percentage of the retirement account balance. A 65-year-old couple willing to bear a 5% chance of financial ruin can withdraw just 2.26% per year, a rate materially lower than conventional advice (e.g., the 4% rule). Our estimates of failure rates under conventional withdrawal policies have important implications for individuals (e.g., savings rates, retirement timing, and retirement consumption), public policy (e.g., participation rates in means-tested programs), and society (e.g., elderly poverty rates).
The data cover approximately 2,500 years of asset-class returns in 38 developed countries over the period from 1890 to 2019...
The dataset construction methods deliberately combat the survivor and easy data biases that impact prior studies.
We incorporate longevity risk into the simulation design using mortality tables from the Social Security Administration (SSA).
Our base case simulation focuses on the joint investment-longevity outcomes for a couple retiring in 2022 at age 65 who chooses a portfolio strategy of 60% domestic stocks and 40% bonds.
The 4% rule proves woefully inadequate for current retirees.
Anyone who actually understands the details of this stuff want to break down the reasoning behind this for me?
Like coles notes "here's why things are different now" sort of summary?
The Safe Withdrawal Rate: Evidence from a Broad Sample of Developed Markets
33 Pages Posted: 28 Sep 2022
We use a comprehensive new dataset of asset-class returns in 38 developed countries to examine a popular class of retirement spending rules that prescribe annual withdrawals as a constant percentage of the retirement account balance. A 65-year-old couple willing to bear a 5% chance of financial ruin can withdraw just 2.26% per year, a rate materially lower than conventional advice (e.g., the 4% rule). Our estimates of failure rates under conventional withdrawal policies have important implications for individuals (e.g., savings rates, retirement timing, and retirement consumption), public policy (e.g., participation rates in means-tested programs), and society (e.g., elderly poverty rates).
The data cover approximately 2,500 years of asset-class returns in 38 developed countries over the period from 1890 to 2019...
The dataset construction methods deliberately combat the survivor and easy data biases that impact prior studies.
We incorporate longevity risk into the simulation design using mortality tables from the Social Security Administration (SSA).
Our base case simulation focuses on the joint investment-longevity outcomes for a couple retiring in 2022 at age 65 who chooses a portfolio strategy of 60% domestic stocks and 40% bonds.
The 4% rule proves woefully inadequate for current retirees.
The Safe Withdrawal Rate: Evidence from a Broad Sample of Developed Markets
33 Pages Posted: 28 Sep 2022
The Safe Withdrawal Rate: Evidence from a Broad Sample of Developed Markets
33 Pages Posted: 28 Sep 2022
Why cross-post this particular article?
They were actually pretty clear about how they computed expected remaining age in the simulations. No need to assume - the exact distribution they used is spelled out in the paper, and based on publicly available data from the Social Security Administration.
So, what this paper is saying is that a 65 year old couple who have an average life expectancy of 86 (i.e. 21 years), needs have 44 years worth of expenses saved... in order to have a 95% success rate (i.e. dying with money)?
If I knew I were dying at age 75, it would make my retirement planning much easier. Assuming the mean is close to the median, half of the people are going to live past 86, and possibly for a number of years. And who knows what their expenses will be in old age.
The Safe Withdrawal Rate: Evidence from a Broad Sample of Developed Markets
33 Pages Posted: 28 Sep 2022
Why cross-post this particular article?
It's what trolls do.
The Safe Withdrawal Rate: Evidence from a Broad Sample of Developed Markets
33 Pages Posted: 28 Sep 2022
Why cross-post this particular article?
It's what trolls do.
To be fair, I think this is the exact appropriate place to cross post it. The other thread will disappear, this thread will persist, and this article will be addressed for posterity.
Remember that 4% rule? Inflation and lower returns means that it may be more like 3.3%—or even lower. But the better move for retirees just might be to scrap the old rule entirely and take a more dynamic approach. Rules of thumb help make an abstract and complicated process easier. The 4% rule was never meant as a one-size-fits-all solution, but with so many people endeavoring to turn their life savings into a paycheck in retirement, the rule has become entrenched in the zeitgeist. And, not surprisingly, its limitations are widely misunderstood: Based on actuarial tables and thousands of market-return scenarios, the rule determined that a heterosexual, same-age couple that retired at 65, withdrew 4% from their nest egg in the first year and then adjusted that amount for inflation every year after, had a high likelihood of not outliving their money, as long as they made no changes to that plan or their portfolio for the rest of their lives.
This is not a realistic look at retirement.
Morningstar looked at withdrawal rates for various allocation mixes that ensured a 90% chance of not running out of money over rolling 30-year periods from 1930 to 1990. An all-cash portfolio meant that retirees could safely withdraw only 1.4% to 2.5%; investing entirely in stocks allowed for a withdrawal rate of anywhere from 3.2% to 6.5%, depending on market volatility and when that volatility hits someone’s retirement. Historically speaking, taking less risk with a more balanced portfolio was the smart move: Investors were able to withdraw 3.7% to 6% with much less worry of volatility derailing their plans.
Going forward from here, though, is another story. Based on Morningstar’s research, the projected starting safe withdrawal rate for the next 30 years is 2.7% for those with money in their mattresses and 2.9% for people with everything in stocks. The highest safe withdrawal rate is 3.3% for portfolios with 40% to 60% in stocks—well below the historical “safe” withdrawal rate of 4%. But even that may be misguided. “If you retire now or soon, this fixed withdrawal rate just can’t apply to you. There is too much uncertainty about inflation and possibility of a market drop,”
I'm trying to puzzle out why the 4% rule applies to "a heterosexual, same-age couple that retired at 65".
I don't get what sexual orientation, marital status or the lack of an age difference has to do with the broad-brush scenarios on which a 4% WR is based. At first I thought "SS benefits" but I don't believe that factors into it at all (other than a person retiring in, say, their 50s might start taking SS disbursements more than a decade in, thereby reducing their WR considerably - but that's not a requirement or even an assumption AFAIK).
We use a comprehensive new dataset of asset-class returns in 38 developed countries to examine a popular class of retirement spending rules that prescribe annual withdrawals as a constant percentage of the retirement account balance. A 65-year-old couple willing to bear a 5% chance of financial ruin can withdraw just 2.26% per year, a rate materially lower than conventional advice (e.g., the 4% rule). Our estimates of failure rates under conventional withdrawal policies have important implications for individuals (e.g., savings rates, retirement timing, and retirement consumption), public policy (e.g., participation rates in means-tested programs), and society (e.g., elderly poverty rates).
We use a comprehensive new dataset of asset-class returns in 38 developed countries to examine a popular class of retirement spending rules that prescribe annual withdrawals as a constant percentage of the retirement account balance. A 65-year-old couple willing to bear a 5% chance of financial ruin can withdraw just 2.26% per year, a rate materially lower than conventional advice (e.g., the 4% rule). Our estimates of failure rates under conventional withdrawal policies have important implications for individuals (e.g., savings rates, retirement timing, and retirement consumption), public policy (e.g., participation rates in means-tested programs), and society (e.g., elderly poverty rates).
I'm confused. If I want to withdraw money for ~20 years (guesstimating the life expectancy of a 65 year old) and I get a real return on my investments of ZERO, I can still withdraw 5% per year and not quite run out of money.
There are obvious sequence of returns issues with that, of course, but it still seems basically ridiculous unless you think you'll have negative real returns most of the time.
-W
We use a comprehensive new dataset of asset-class returns in 38 developed countries to examine a popular class of retirement spending rules that prescribe annual withdrawals as a constant percentage of the retirement account balance. A 65-year-old couple willing to bear a 5% chance of financial ruin can withdraw just 2.26% per year, a rate materially lower than conventional advice (e.g., the 4% rule). Our estimates of failure rates under conventional withdrawal policies have important implications for individuals (e.g., savings rates, retirement timing, and retirement consumption), public policy (e.g., participation rates in means-tested programs), and society (e.g., elderly poverty rates).
I'm confused. If I want to withdraw money for ~20 years (guesstimating the life expectancy of a 65 year old) and I get a real return on my investments of ZERO, I can still withdraw 5% per year and not quite run out of money.
There are obvious sequence of returns issues with that, of course, but it still seems basically ridiculous unless you think you'll have negative real returns most of the time.
-W
Nobody is getting a real return of ZERO this year. Year-to-date the major stock indices are -20%, Treasuries got you 2-4%, while inflation worsened things by an additional 8.5%? That puts the real return on the stock market closer to -27%, and -6% for treasuries.
We've had a great run with a long bull market but I think there is a lot of air left to come out of the popping bubble. Interest rates are still significantly lower than average and the world is crying out about the pain that will be caused by ratcheting them up further. Sure, we've had a lot of years of generous positive returns but I don't think those will be as easy to come by for a while.
We use a comprehensive new dataset of asset-class returns in 38 developed countries to examine a popular class of retirement spending rules that prescribe annual withdrawals as a constant percentage of the retirement account balance. A 65-year-old couple willing to bear a 5% chance of financial ruin can withdraw just 2.26% per year, a rate materially lower than conventional advice (e.g., the 4% rule). Our estimates of failure rates under conventional withdrawal policies have important implications for individuals (e.g., savings rates, retirement timing, and retirement consumption), public policy (e.g., participation rates in means-tested programs), and society (e.g., elderly poverty rates).
I'm confused. If I want to withdraw money for ~20 years (guesstimating the life expectancy of a 65 year old) and I get a real return on my investments of ZERO, I can still withdraw 5% per year and not quite run out of money.
There are obvious sequence of returns issues with that, of course, but it still seems basically ridiculous unless you think you'll have negative real returns most of the time.
-W
Nobody is getting a real return of ZERO this year. Year-to-date the major stock indices are -20%, Treasuries got you 2-4%, while inflation worsened things by an additional 8.5%? That puts the real return on the stock market closer to -27%, and -6% for treasuries.
We've had a great run with a long bull market but I think there is a lot of air left to come out of the popping bubble. Interest rates are still significantly lower than average and the world is crying out about the pain that will be caused by ratcheting them up further. Sure, we've had a lot of years of generous positive returns but I don't think those will be as easy to come by for a while.
Real returns of the S&P 500 have never been less than 0% for periods longer than 20 years.
Real returns of the S&P 500 have never been less than 0% for periods longer than 20 years.
We use a comprehensive new dataset of asset-class returns in 38 developed countries to examine a popular class of retirement spending rules that prescribe annual withdrawals as a constant percentage of the retirement account balance. A 65-year-old couple willing to bear a 5% chance of financial ruin can withdraw just 2.26% per year, a rate materially lower than conventional advice (e.g., the 4% rule). Our estimates of failure rates under conventional withdrawal policies have important implications for individuals (e.g., savings rates, retirement timing, and retirement consumption), public policy (e.g., participation rates in means-tested programs), and society (e.g., elderly poverty rates).
I'm confused. If I want to withdraw money for ~20 years (guesstimating the life expectancy of a 65 year old) and I get a real return on my investments of ZERO, I can still withdraw 5% per year and not quite run out of money.
There are obvious sequence of returns issues with that, of course, but it still seems basically ridiculous unless you think you'll have negative real returns most of the time.
-W
Nobody is getting a real return of ZERO this year. Year-to-date the major stock indices are -20%, Treasuries got you 2-4%, while inflation worsened things by an additional 8.5%? That puts the real return on the stock market closer to -27%, and -6% for treasuries.
We've had a great run with a long bull market but I think there is a lot of air left to come out of the popping bubble. Interest rates are still significantly lower than average and the world is crying out about the pain that will be caused by ratcheting them up further. Sure, we've had a lot of years of generous positive returns but I don't think those will be as easy to come by for a while.
Looks like the S&P accounts for about 25% of the global stock market capitalization and the total US stock market accounts for about 1/2 of the world. I won't call 25% enormous, but certainly significant. Data is about a year old so doesn't reflect the 2022 bear market.I don't know about these numbers - isn't the S&P 500 more like 75-80% of the US market (here (https://www.thebalancemoney.com/total-stock-market-vs-sandp-500-2466403)), and the US is 62% of the world market (here, slide 62 (https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/)), so the S&P is at just below half of global publicly traded stock?
Looks like the S&P accounts for about 25% of the global stock market capitalization and the total US stock market accounts for about 1/2 of the world. I won't call 25% enormous, but certainly significant. Data is about a year old so doesn't reflect the 2022 bear market.I don't know about these numbers - isn't the S&P 500 more like 75-80% of the US market (here (https://www.thebalancemoney.com/total-stock-market-vs-sandp-500-2466403)), and the US is 62% of the world market (here, slide 62 (https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/)), so the S&P is at just below half of global publicly traded stock?
S&P 500 Market Cap is at a current level of 31.90T, down from 38.29T last month and down from 36.32T one year ago. Accurate today
https://www.slickcharts.com/sp500/marketcap#:~:text=The%20S%26P%20500%20has%20a,the%20outstanding%20float%20share%20count.
The total market capitalization of the U.S. stock market is currently $48,264,353.4 million (March 31st, 2022) different date. but doesn't include the CBOE, or AMEX.
https://siblisresearch.com/data/us-stock-market-value/
This statistic presents the global domestic equity market capitalization worldwide from 2013 to June 2022. The value of global domestic equity market increased from 65.04 trillion U.S. dollars in 2013 to121.94 trillion U.S. dollars in 2021. As of June 2022, the total market capitalization of domestic companies listed on stock exchanges worldwide recorded as 105.07 trillion U.S. dollars.
https://www.statista.com/statistics/274490/global-value-of-share-holdings-since-2000/
To be fair there are many estimate of the market cap of the world stocks, and with different dates it is hard to compare.
Depending on what index you consider gospel, US accounts for about 62-65% of a global cap weighted index.
US is dominant now, but it hasn't always been this way - at its peak the Japanese market accounted for about 47% and is down to around 6% now. You may think the US will always maintain a dominant position and be happy to keep your portfolio US based, but this itself is a form of extreme cherry picking. If you run the numbers with a global stocks, global bonds, then 4% begins to look rather shaky.
A globally diversified stock/bond portfolio would do fine. The problem is people don't test that. They test the 4% rule using stock/bond data from specific non-USA countries and see that it fails when countries lose world wars or experience major civil wars and conclude "the USA is an outlier because it experienced unusually good stock returns in the last century" instead of the "USA is an outlier because our country wasn't destroyed by one or more wars in the last century". Results from other countries that weren't invaded/occupied and didn't experience major civil wars in the 20th century but still have 100+ years of investment return data (Canada, UK, South Africa, Australia, etc) come up with safe withdrawal rates that are much more consistent with the results we're all so familiar with from the USA.
Quote from: maizefolk link=topic=39064.msg3066819#msg3066819A globally diversified stock/bond portfolio would do fine. The problem is people don't test that. They test the 4% rule using stock/bond data from specific non-USA countries and see that it fails when countries lose world wars or experience major civil wars and conclude "the USA is an outlier because it experienced unusually good stock returns in the last century" instead of the "USA is an outlier because our country wasn't destroyed by one or more wars in the last century". Results from other countries that weren't invaded/occupied and didn't experience major civil wars in the 20th century but still have 100+ years of investment return data (Canada, UK, South Africa, Australia, etc) come up with safe withdrawal rates that are much more consistent with the results we're all so familiar with from the USA.
In other words
- A 4% WR is a decent starting point
- regions which historically haven’t held up (ie a much higher failure) are ones which experienced intense geopolitical disruption
- in such periods “more money” was the least effective of a variety of strategies
A globally diversified stock/bond portfolio would do fine. The problem is people don't test that. They test the 4% rule using stock/bond data from specific non-USA countries and see that it fails when countries lose world wars or experience major civil wars and conclude "the USA is an outlier because it experienced unusually good stock returns in the last century" instead of the "USA is an outlier because our country wasn't destroyed by one or more wars in the last century". Results from other countries that weren't invaded/occupied and didn't experience major civil wars in the 20th century but still have 100+ years of investment return data (Canada, UK, South Africa, Australia, etc) come up with safe withdrawal rates that are much more consistent with the results we're all so familiar with from the USA.
A globally diversified stock/bond portfolio backtested across the 20th century would be expected to do worse than a US-only portfolio, because on top of the risk events experienced by US stocks, you'd have added all the risk from the countries wiped out in wars or economic crises. I.e. if the global SWR is lower than the US-only SWR, adding historical global returns to the historical US-only portfolio is not going to increase the SWR. E.g. US-only investors avoided the collapse of various markets during the world wars, the devaluations of the British pound, Communist nationalizations, multiple defaults by Argentina, etc.
I’m not sure what point you ar3 trying to make with these figures.
It is half, though, almost exactly.The figures I linked put it at 31.9 Trillion/ 105.07 Trillion= 30.3%
The trick is to find an recent and accurate link for the total world stock market.
A globally diversified stock/bond portfolio would do fine. The problem is people don't test that. They test the 4% rule using stock/bond data from specific non-USA countries and see that it fails when countries lose world wars or experience major civil wars and conclude "the USA is an outlier because it experienced unusually good stock returns in the last century" instead of the "USA is an outlier because our country wasn't destroyed by one or more wars in the last century". Results from other countries that weren't invaded/occupied and didn't experience major civil wars in the 20th century but still have 100+ years of investment return data (Canada, UK, South Africa, Australia, etc) come up with safe withdrawal rates that are much more consistent with the results we're all so familiar with from the USA.
A globally diversified stock/bond portfolio backtested across the 20th century would be expected to do worse than a US-only portfolio, because on top of the risk events experienced by US stocks, you'd have added all the risk from the countries wiped out in wars or economic crises. I.e. if the global SWR is lower than the US-only SWR, adding historical global returns to the historical US-only portfolio is not going to increase the SWR. E.g. US-only investors avoided the collapse of various markets during the world wars, the devaluations of the British pound, Communist nationalizations, multiple defaults by Argentina, etc.
A globally diversified stock/bond portfolio would do fine. The problem is people don't test that. They test the 4% rule using stock/bond data from specific non-USA countries and see that it fails when countries lose world wars or experience major civil wars and conclude "the USA is an outlier because it experienced unusually good stock returns in the last century" instead of the "USA is an outlier because our country wasn't destroyed by one or more wars in the last century". Results from other countries that weren't invaded/occupied and didn't experience major civil wars in the 20th century but still have 100+ years of investment return data (Canada, UK, South Africa, Australia, etc) come up with safe withdrawal rates that are much more consistent with the results we're all so familiar with from the USA.
A globally diversified stock/bond portfolio backtested across the 20th century would be expected to do worse than a US-only portfolio, because on top of the risk events experienced by US stocks, you'd have added all the risk from the countries wiped out in wars or economic crises. I.e. if the global SWR is lower than the US-only SWR, adding historical global returns to the historical US-only portfolio is not going to increase the SWR. E.g. US-only investors avoided the collapse of various markets during the world wars, the devaluations of the British pound, Communist nationalizations, multiple defaults by Argentina, etc.
Unless, of course, the fascists who support Trump and his ilk succeed in starting a Race War or a Civil War -- as many of them very much wish to do -- and the US suffers thru the devastation that would cause. And I'll fight them tooth and nail, too.
...
EarlyRetirementNow.com, which has a reputation for poo pooing the 4% rule and advocating a WR closer to 3.25% based on meticulous actuarial analysis, just came out with this headline:
The 4% Rule Works Again! An Update on Dynamic Withdrawal Rates based on the Shiller CAPE – SWR Series Part 54
The reasons are:
1) stocks have already fallen over 20% from a recent high, which makes it an inherently safer time to retire, and
...
I also like to highlight the extreme sensitivity of failure rates as a function of the withdrawal rate. And the sensitivity is more extreme if equity valuations are elevated. For example, shifting withdrawal rates from 3.50% to 3.75% and then 4.00%, when the CAPE is below 20, the failure rates go from essentially 0% to 1.7% and then 5%. But when the CAPE was above 20, the failure rates go from 2% to 24% and then over 37%.
A small caveat here: This CAPE-based dynamic withdrawal rate is not a one-time, set-it-and-forget-it kind of deal. The CAPE-based withdrawal amounts are still subject to portfolio risk over time. If the market were to tank another 20% you’ll certainly start reducing your withdrawals as well. But the nice feature of the CAPE-based withdrawal amounts is that even if your portfolio drops you may not have to reduce your withdrawals one-for-one by the same percentage. That’s because a further drop in the equity market will also make equity valuations more attractive and thus raise the CAPE-based withdrawal rate again.
Need I mention that the headline "The 4% Rule Works Again!" suggests that it did not work for a while.Quote
I also like to highlight the extreme sensitivity of failure rates as a function of the withdrawal rate. And the sensitivity is more extreme if equity valuations are elevated. For example, shifting withdrawal rates from 3.50% to 3.75% and then 4.00%, when the CAPE is below 20, the failure rates go from essentially 0% to 1.7% and then 5%. But when the CAPE was above 20, the failure rates go from 2% to 24% and then over 37%.
A small caveat here: This CAPE-based dynamic withdrawal rate is not a one-time, set-it-and-forget-it kind of deal. The CAPE-based withdrawal amounts are still subject to portfolio risk over time. If the market were to tank another 20% you’ll certainly start reducing your withdrawals as well. But the nice feature of the CAPE-based withdrawal amounts is that even if your portfolio drops you may not have to reduce your withdrawals one-for-one by the same percentage. That’s because a further drop in the equity market will also make equity valuations more attractive and thus raise the CAPE-based withdrawal rate again.
I'm not trying to be all doom-and-gloom here. I think that there will be good buying opportunities in the stock market once inflation and the risk of interest rate increases subsides. But anyone who "stopped worrying about the 4% rule" during the loftiest market valuations may live to regret it.
Nobody is getting a real return of ZERO this year. Year-to-date the major stock indices are -20%, Treasuries got you 2-4%, while inflation worsened things by an additional 8.5%? That puts the real return on the stock market closer to -27%, and -6% for treasuries.At 9.62% (and better for an old bond) - my I-bonds are yielding a positive real return this year.
Need I mention that the headline "The 4% Rule Works Again!" suggests that it did not work for a while.Quote
I also like to highlight the extreme sensitivity of failure rates as a function of the withdrawal rate. And the sensitivity is more extreme if equity valuations are elevated. For example, shifting withdrawal rates from 3.50% to 3.75% and then 4.00%, when the CAPE is below 20, the failure rates go from essentially 0% to 1.7% and then 5%. But when the CAPE was above 20, the failure rates go from 2% to 24% and then over 37%.
A small caveat here: This CAPE-based dynamic withdrawal rate is not a one-time, set-it-and-forget-it kind of deal. The CAPE-based withdrawal amounts are still subject to portfolio risk over time. If the market were to tank another 20% you’ll certainly start reducing your withdrawals as well. But the nice feature of the CAPE-based withdrawal amounts is that even if your portfolio drops you may not have to reduce your withdrawals one-for-one by the same percentage. That’s because a further drop in the equity market will also make equity valuations more attractive and thus raise the CAPE-based withdrawal rate again.
I'm not trying to be all doom-and-gloom here. I think that there will be good buying opportunities in the stock market once inflation and the risk of interest rate increases subsides. But anyone who "stopped worrying about the 4% rule" during the loftiest market valuations may live to regret it.
Depending on what index you consider gospel, US accounts for about 62-65% of a global cap weighted index.
US is dominant now, but it hasn't always been this way - at its peak the Japanese market accounted for about 47% and is down to around 6% now. You may think the US will always maintain a dominant position and be happy to keep your portfolio US based, but this itself is a form of extreme cherry picking. If you run the numbers with a global stocks, global bonds, then 4% begins to look rather shaky.
Depending on what index you consider gospel, US accounts for about 62-65% of a global cap weighted index.
US is dominant now, but it hasn't always been this way - at its peak the Japanese market accounted for about 47% and is down to around 6% now. You may think the US will always maintain a dominant position and be happy to keep your portfolio US based, but this itself is a form of extreme cherry picking. If you run the numbers with a global stocks, global bonds, then 4% begins to look rather shaky.
Who cares about global cap weighted index?
They may live to regret it, but they'll probably die before they regret it.
They may live to regret it, but they'll probably die before they regret it.
The life expectancy for 40-year-old woman is 40.8 years longer if you are college educated. I'd say if you did a lean retirement this year this and are withdrawing 4%, there is a good chance you'll be down to basically Social Security by the time you pass.
They may live to regret it, but they'll probably die before they regret it.
The life expectancy for 40-year-old woman is 40.8 years longer if you are college educated. I'd say if you did a lean retirement this year this and are withdrawing 4%, there is a good chance you'll be down to basically Social Security by the time you pass.
Yes, if you somehow never earn another dime, pick up a $20 bill on the sidewalk, or inherit anything, ever, from your Boomer parents/aunts/uncles, and also social security gets canceled completely, you might be in real trouble. Oh yeah and no spending flexibility allowed of any kind.
Keep that nose to the grindstone.
-W
They may live to regret it, but they'll probably die before they regret it.
The life expectancy for 40-year-old woman is 40.8 years longer if you are college educated. I'd say if you did a lean retirement this year this and are withdrawing 4%, there is a good chance you'll be down to basically Social Security by the time you pass.
Yes, if you somehow never earn another dime, pick up a $20 bill on the sidewalk, or inherit anything, ever, from your Boomer parents/aunts/uncles, and also social security gets canceled completely, you might be in real trouble. Oh yeah and no spending flexibility allowed of any kind.
Keep that nose to the grindstone.
-W
In 'normal times', rooting and hoping for a market pullback to buy and laughing at people that continue to work past their 25x magic number is fair game. I contend that 2022 is well down the road of being an 'abnormal time' (https://forum.mrmoneymustache.com/investor-alley/rare-event-with-stocks-and-bonds-both-highly-negative/msg3069725/#msg3069725), and similarly rooting for the market to fall or laughing at people that have to work for a little more security on their 25x looks out of place.
In 'normal times', rooting and hoping for a market pullback to buy and laughing at people that continue to work past their 25x magic number is fair game. I contend that 2022 is well down the road of being an 'abnormal time' (https://forum.mrmoneymustache.com/investor-alley/rare-event-with-stocks-and-bonds-both-highly-negative/msg3069725/#msg3069725), and similarly rooting for the market to fall or laughing at people that have to work for a little more security on their 25x looks out of place.
What are these 'normal times'? When were they? As I've said before, I can't recall any point in history where people proclaimed: "We are in normal times!"
In 'normal times', rooting and hoping for a market pullback to buy and laughing at people that continue to work past their 25x magic number is fair game. I contend that 2022 is well down the road of being an 'abnormal time' (https://forum.mrmoneymustache.com/investor-alley/rare-event-with-stocks-and-bonds-both-highly-negative/msg3069725/#msg3069725), and similarly rooting for the market to fall or laughing at people that have to work for a little more security on their 25x looks out of place.
What are these 'normal times'? When were they? As I've said before, I can't recall any point in history where people proclaimed: "We are in normal times!"
Yes, I’m not sure what’s meant by “in normal times” either. There’s a saying which is repeated so often it’s become he’s own financial meme: “…but this time it’s different!”
And that's the thing, eventually something *might* be different enough to permanently change the system. But those things are BIG deals. You know you're in the middle of a BIG deal when it's happening.
Like no one in the world has been walking around clueless that a BIG thing has been happening since early 2020, and that shit might be a little less predictable at this time.
(https://pbs.twimg.com/media/Fe9eOcUXkAA6v55?format=png&name=medium)That crazy chart shows that 2022 was a once-in-a-lifetime shit year. Stock losses greater than -20% have happened only six other times since 1926 (3 of which were during the Great Depression):
... That crazy chart shows that 2022 was a once-in-a-lifetime shit year. ...
Year Loss Subsequent Year TR
2008 -37.0% +26.46%
2002 -22.1% +28.68
1974 -26.47% +37.2%
1937 -35.03% +31.12%
1931 -43.34% -8.19%
1930 -24.9% -43.34%
(https://pbs.twimg.com/media/Fe9eOcUXkAA6v55?format=png&name=medium)That crazy chart shows that 2022 was a once-in-a-lifetime shit year. Stock losses greater than -20% have happened only six other times since 1926 (3 of which were during the Great Depression):
Year Loss Subsequent Year TR
2008 -37.0% +26.46%
2002 -22.1% +28.68
1974 -26.47% +37.2%
1937 -35.03% +31.12%
1931 -43.34% -8.19%
1930 -24.9% -43.34%
Source: https://www.slickcharts.com/sp500/returns
So basically, from naive historian's perspective, we should expect total returns from the S&P500 to be in the +25% to +30% range in 2023 unless another Great Depression happens.
The case for another GD would at this point probably rely on 2 of the following happening: a Chinese invasion of Taiwan, a Russian invasion of a NATO country, or another real estate crisis in the US. Hedge accordingly.
Years with returns worse than -20% are not once-in-a-lifetime events, but years where both stocks and bonds fall could be. I was looking at '31, '69, and '22.... That crazy chart shows that 2022 was a once-in-a-lifetime shit year. ...
Year Loss Subsequent Year TR
2008 -37.0% +26.46%
2002 -22.1% +28.68
1974 -26.47% +37.2%
1937 -35.03% +31.12%
1931 -43.34% -8.19%
1930 -24.9% -43.34%
Just for the record, I've been alive for FOUR of those "ONCE" in a lifetime years. 1974, 2002, 2008 and 2022.
So maybe it happens a tad more often than you think... :)
(https://pbs.twimg.com/media/Fe9eOcUXkAA6v55?format=png&name=medium)
So, about the bond returns being separated from stock returns.
If I buy an individual bond, and I hold it to maturity, it will pay exactly what it is supposed to. (Assuming the company doesn't go out of business, etc.)
So, if my bond holdings are in individual bonds, my returns should be largely independent of the stock market. If I needed to sell a bond early, the price should go up or down based on the relative interest rates that the bond pays versus newly issued bonds offered.
That's how I understand it.
But putting lots of money into buying a single bond has its own risk. The company could go belly up and make the bond worth much less. Plus, it takes a lot of money at one time to buy the bond. So, people buy into a bond fund to solve those two problems.
And that's where I think it defeats the purpose of bond results being separated from stock results.
First of all, when stock values go down and people need cash, they sell their bonds instead. If I held an individual bond, this would have no effect on me while I choose to hold it. But in a bond fund, the fund managers have to come up with the cash to pay it out. So they have to sell some bonds. The more people who need cash, the more bonds get sold. Bonds with higher interest rates get better prices. So either the fund loses proportionally more of its high interest bonds or it has to sell more of its lower interest bond holdings to raise the cash. Either way, those in the bond fund lose out.
That's what I think happens when the stock market goes way down.
Do y'all think I've got it right? If not, what did I miss?
So, about the bond returns being separated from stock returns.
If I buy an individual bond, and I hold it to maturity, it will pay exactly what it is supposed to. (Assuming the company doesn't go out of business, etc.)
So, if my bond holdings are in individual bonds, my returns should be largely independent of the stock market. If I needed to sell a bond early, the price should go up or down based on the relative interest rates that the bond pays versus newly issued bonds offered.
That's how I understand it.
But putting lots of money into buying a single bond has its own risk. The company could go belly up and make the bond worth much less. Plus, it takes a lot of money at one time to buy the bond. So, people buy into a bond fund to solve those two problems.
And that's where I think it defeats the purpose of bond results being separated from stock results.
First of all, when stock values go down and people need cash, they sell their bonds instead. If I held an individual bond, this would have no effect on me while I choose to hold it. But in a bond fund, the fund managers have to come up with the cash to pay it out. So they have to sell some bonds. The more people who need cash, the more bonds get sold. Bonds with higher interest rates get better prices. So either the fund loses proportionally more of its high interest bonds or it has to sell more of its lower interest bond holdings to raise the cash. Either way, those in the bond fund lose out.
That's what I think happens when the stock market goes way down.
Do y'all think I've got it right? If not, what did I miss?
The only people “forced” to sell are the ones who set their own stop limits. When you buy a share of a fund, you are generally buying it from another owner, not causing the fund to issue a new share and buy assets.
The only people “forced” to sell are the ones who set their own stop limits. When you buy a share of a fund, you are generally buying it from another owner, not causing the fund to issue a new share and buy assets.
I don't think I communicated it clearly.
I'm not being forced to sell my bond fund SHARES. But my bond fund is worth something, not because I own shares, but because the bond fund owns actual bonds. When other share holders of the bond fund sell their bond holdings to live on (because stocks are so low), the bond fund managers have to sell bonds in order to make the necessary cash payments.
So, they either have to lower the bond fund's holdings by selling the good bonds first (meaning the longer term valuation of the bond fund will drop because the remaining assets aren't as good) or they have to sell off more of the lower interest rate bonds first (at much worse prices), meaning they've lowered the value of the bond fund even more.
Either way, the VALUE of my bond fund shares drops.
That's how I see it.
The only people “forced” to sell are the ones who set their own stop limits. When you buy a share of a fund, you are generally buying it from another owner, not causing the fund to issue a new share and buy assets.
I don't think I communicated it clearly.
I'm not being forced to sell my bond fund SHARES. But my bond fund is worth something, not because I own shares, but because the bond fund owns actual bonds. When other share holders of the bond fund sell their bond holdings to live on (because stocks are so low), the bond fund managers have to sell bonds in order to make the necessary cash payments.
So, they either have to lower the bond fund's holdings by selling the good bonds first (meaning the longer term valuation of the bond fund will drop because the remaining assets aren't as good) or they have to sell off more of the lower interest rate bonds first (at much worse prices), meaning they've lowered the value of the bond fund even more.
Either way, the VALUE of my bond fund shares drops.
That's how I see it.
The people selling their shares of bond funds are selling to other investors. The fund itself is not doing a buyback. The fund’s value will go up and down with the price of the assets, and if the fund’s value ever goes below the value of the assets there will be an arbitrage opportunity that someone will jump on.
So basically the fund never has to sell assets, no matter how its shares are being traded in the open market and no matter what the assets are worth at any given time.
If that's not true, please explain where it's not, and what is true in place of that. Am I wrong about the relative cash flow in bond fund shares in a major stock downturn?
If that's not true, please explain where it's not, and what is true in place of that. Am I wrong about the relative cash flow in bond fund shares in a major stock downturn?
It's possible that in a major downturn, many people get afraid and sell their stocks and buy bonds. That could provide enough inflows into bond funds where there are net fund inflows. For people like you who are selling $100 of the fund, they just make an accounting entry and take $100 from the $500 that a scared investor paid into the fund, give it to you, and take the remaining $400 and buy more bonds, not selling any.
I don't know the relative magnitude of the flows. It could depend on the overall market trend and what is happening on a weekly or daily basis. There are companies that track fund flows, but I don't think they can do it on an individual fund basis. The mutual fund company knows of course.
If that's not true, please explain where it's not, and what is true in place of that. Am I wrong about the relative cash flow in bond fund shares in a major stock downturn?
It's possible that in a major downturn, many people get afraid and sell their stocks and buy bonds. That could provide enough inflows into bond funds where there are net fund inflows. For people like you who are selling $100 of the fund, they just make an accounting entry and take $100 from the $500 that a scared investor paid into the fund, give it to you, and take the remaining $400 and buy more bonds, not selling any.
I don't know the relative magnitude of the flows. It could depend on the overall market trend and what is happening on a weekly or daily basis. There are companies that track fund flows, but I don't think they can do it on an individual fund basis. The mutual fund company knows of course.
Agreed. Then again, what are we supposed to do at least once a year? Rebalance our portfolio! And if stocks are down, that means rebalancers sell bonds to buy stocks. That could lead to some big flows out of bonds. Anytime that a bond holder sells a low interest rate bond early, they lose value off of their bond holding because the bond face value is discounted due to the low rate. If those bonds were owned by a fund, the fund loses value. If the person purchasing the bonds is purchasing the bonds IN THE FUND, it's a cash flow wash. But if the entity purchasing the bonds isn't doing it as a bond fund shareholder, but instead is purchasing the entire bond to hold in their own right, it's a loss for the bond fund value.
Does that make sense?
So, about the bond returns being separated from stock returns.
If I buy an individual bond, and I hold it to maturity, it will pay exactly what it is supposed to. (Assuming the company doesn't go out of business, etc.)
So, if my bond holdings are in individual bonds, my returns should be largely independent of the stock market. If I needed to sell a bond early, the price should go up or down based on the relative interest rates that the bond pays versus newly issued bonds offered.
That's how I understand it.
But putting lots of money into buying a single bond has its own risk. The company could go belly up and make the bond worth much less. Plus, it takes a lot of money at one time to buy the bond. So, people buy into a bond fund to solve those two problems.
And that's where I think it defeats the purpose of bond results being separated from stock results.
....
Do y'all think I've got it right? If not, what did I miss?
...how things could have unfolded in alternate reality....Once we move from historical reality to alternate reality, anything is possible.
...how things could have unfolded in alternate reality....Once we move from historical reality to alternate reality, anything is possible.
But in terms of the reward delivered for the amount of risk implied (the equity risk premium), the US has outperformed - that could easily have not happened had more of the risk been realised. The other reality is just one where the US performs in line with expectation.That would depend on expectations, and those can be subjective things. As has been said, predictions are difficult, especially about the future.
A globally diversified stock/bond portfolio would do fine. The problem is people don't test that. They test the 4% rule using stock/bond data from specific non-USA countries and see that it fails when countries lose world wars or experience major civil wars and conclude "the USA is an outlier because it experienced unusually good stock returns in the last century" instead of the "USA is an outlier because our country wasn't destroyed by one or more wars in the last century". Results from other countries that weren't invaded/occupied and didn't experience major civil wars in the 20th century but still have 100+ years of investment return data (Canada, UK, South Africa, Australia, etc) come up with safe withdrawal rates that are much more consistent with the results we're all so familiar with from the USA.
A globally diversified stock/bond portfolio backtested across the 20th century would be expected to do worse than a US-only portfolio, because on top of the risk events experienced by US stocks, you'd have added all the risk from the countries wiped out in wars or economic crises. I.e. if the global SWR is lower than the US-only SWR, adding historical global returns to the historical US-only portfolio is not going to increase the SWR. E.g. US-only investors avoided the collapse of various markets during the world wars, the devaluations of the British pound, Communist nationalizations, multiple defaults by Argentina, etc.
Unless, of course, the fascists who support Trump and his ilk succeed in starting a Race War or a Civil War -- as many of them very much wish to do -- and the US suffers thru the devastation that would cause. And I'll fight them tooth and nail, too.
Always good to see calm, rational, objective perspectives from both sides of an issue. ;)Unless, of course, the fascists who support Trump and his ilk succeed in starting a Race War or a Civil War -- as many of them very much wish to do -- and the US suffers thru the devastation that would cause. And I'll fight them tooth and nail, too.You sir are freak - through and through. Just a complete and utter moron in every way. Keep supporting those career political hacks that leach off the tax payers their entire life, like Brandon and "his ilk" - let's see where that gets you nimrod. Pelosi, Brandon, Chucky and the bunch - leaches one and all.
Always good to see calm, rational, objective perspectives from both sides of an issue. ;)Unless, of course, the fascists who support Trump and his ilk succeed in starting a Race War or a Civil War -- as many of them very much wish to do -- and the US suffers thru the devastation that would cause. And I'll fight them tooth and nail, too.You sir are freak - through and through. Just a complete and utter moron in every way. Keep supporting those career political hacks that leach off the tax payers their entire life, like Brandon and "his ilk" - let's see where that gets you nimrod. Pelosi, Brandon, Chucky and the bunch - leaches one and all.
I checked this thread hoping to find some new insights about the 4% rule and found some BS political commentary.How about https://forum.mrmoneymustache.com/investor-alley/buy-bank-stocks-on-the-dip/msg3148169/#msg3148169 (https://forum.mrmoneymustache.com/investor-alley/buy-bank-stocks-on-the-dip/msg3148169/#msg3148169)?
I checked this thread hoping to find some new insights about the 4% rule and found some BS political commentary.
I checked this thread hoping to find some new insights about the 4% rule and found some BS political commentary.
44 pages in this thread, 25 years from the original Trinity study; one major follow up by its authors and dozens by other academics… what “new insight” are you hoping to glean?
I checked this thread hoping to find some new insights about the 4% rule and found some BS political commentary.
44 pages in this thread, 25 years from the original Trinity study; one major follow up by its authors and dozens by other academics… what “new insight” are you hoping to glean?
In a way - It's kind of an insight that it's a consistent rule that has worked historically and can be relied upon. I'm not a financial guy. It appears to me that financial and economic ideas are more often than not a bunch of fluff. Reality is hard to see through all the marketing smoke and mirrors. The 4 percent rule is like an old comfortable pair of worn shoes that make walking a pleasure.
New Article by Mad FIentist on WR as it applies to early retirement
I don't think this has been posted here yet:
https://www.madfientist.com/discretionary-withdrawal-strategy/?ck_subscriber_id=63359041&utm_source=convertkit&utm_medium=email&utm_campaign=The+Problem+with+the+4%25+Rule+%28and+Why+You+Could+Retire+Even+Sooner%29%20-%2010861788 (https://www.madfientist.com/discretionary-withdrawal-strategy/?ck_subscriber_id=63359041&utm_source=convertkit&utm_medium=email&utm_campaign=The+Problem+with+the+4%25+Rule+%28and+Why+You+Could+Retire+Even+Sooner%29%20-%2010861788)
I note the S&P 500 is ust shy of 4200 again.
If you think about all the scary things going (debt ceiling, war in Ukraine, China sabre rattling, inflation sky high) on thats pretty amazing.
Wonder if we might see new highs in the next year or so?
I note the S&P 500 is ust shy of 4200 again.
If you think about all the scary things going (debt ceiling, war in Ukraine, China sabre rattling, inflation sky high) on thats pretty amazing.
Wonder if we might see new highs in the next year or so?
Driven mostly by a handful of stocks, the rest are still in the doghouse.
If forward earnings estimates are 220 that's a 19 PE....pretty rich, especially in a higher interest rate environment
Like a lot of forum members this has got us to the point where significant pullbacks have an almost zero effect on our long term financial wellbeing. I hope I never become smug because this was purely down to luck and maybe an ability to blindly keep doing something which at the time seemed insane!
One thing I've considered is how crazy your age and when you are born is with respect to how things like this.
One thing I've considered is how crazy your age and when you are born is with respect to how things like this.
Yes! It is fascinating to consider how we are influenced not only in our actual results, but also in the way that we "think" about it- my grandparents deeply influenced by the Great Depression, my wife's by the effects of being children in London during WWII, my parents children of the 60's-(get a job, work hard, collect your pension) and our own experiences: coming of age right as the dot-com bubble burst; etc.
It's so good not only to consider the theoretical results (i.e. what if they/I had done x,y,z) but also how and why we think and act and WHY we think and act that way.
New Article by Mad FIentist on WR as it applies to early retirementThe word "flexibility" is so overused in FI discussion that I cringe just seeing it.
I don't think this has been posted here yet:
https://www.madfientist.com/discretionary-withdrawal-strategy/?ck_subscriber_id=63359041&utm_source=convertkit&utm_medium=email&utm_campaign=The+Problem+with+the+4%25+Rule+%28and+Why+You+Could+Retire+Even+Sooner%29%20-%2010861788 (https://www.madfientist.com/discretionary-withdrawal-strategy/?ck_subscriber_id=63359041&utm_source=convertkit&utm_medium=email&utm_campaign=The+Problem+with+the+4%25+Rule+%28and+Why+You+Could+Retire+Even+Sooner%29%20-%2010861788)
“After 30 years, the 4% safe withdrawal rate actually has a 96% probability of leaving more than all of your original starting principle.”And he's right, but that's in nominal numbers. In real numbers it's a lot less rosy (about 80% chance of ending a 30 year retirement with 100% of original capital, going off ERN numbers).
If you have a 30-year-fixed mortgage, for example, your biggest expense may not be impacted by inflation at all!
In the end, this article just seems sloppy. It convolves an intent of a rigorous mathematic analysis with squishier human factors.
In the end, this article just seems sloppy. It convolves an intent of a rigorous mathematic analysis with squishier human factors.
@VanillaGorilla
That's why you have to stay flexible ;-)
For example, if you retired in 2000 (a year excluded by the Fientist/Maggiulli analysis), you'll have spent 10 out of 12 years of your retirement with low or no discretionary spending. If that's ok with you, great, but it's not my idea of a good time.
That's a fair point!For example, if you retired in 2000 (a year excluded by the Fientist/Maggiulli analysis), you'll have spent 10 out of 12 years of your retirement with low or no discretionary spending. If that's ok with you, great, but it's not my idea of a good time.
It sounds like you just consider some of your "discretionary" spending as non-discretionary. That's okay, put it in your non-discretionary budget.
That's a fair point!For example, if you retired in 2000 (a year excluded by the Fientist/Maggiulli analysis), you'll have spent 10 out of 12 years of your retirement with low or no discretionary spending. If that's ok with you, great, but it's not my idea of a good time.
It sounds like you just consider some of your "discretionary" spending as non-discretionary. That's okay, put it in your non-discretionary budget.
I'll counter that there's an important difference between short term and long term non-discretionary spending. It's one thing to really tighten the budget to the absolute bare bones for a year and another to do so for 25% to 50% of the rest of your life. (10 years is about 25% of the rest of one's life for a 40 year old and 50% for a 60 year old.)
That's a fair point!For example, if you retired in 2000 (a year excluded by the Fientist/Maggiulli analysis), you'll have spent 10 out of 12 years of your retirement with low or no discretionary spending. If that's ok with you, great, but it's not my idea of a good time.
It sounds like you just consider some of your "discretionary" spending as non-discretionary. That's okay, put it in your non-discretionary budget.
I'll counter that there's an important difference between short term and long term non-discretionary spending. It's one thing to really tighten the budget to the absolute bare bones for a year and another to do so for 25% to 50% of the rest of your life. (10 years is about 25% of the rest of one's life for a 40 year old and 50% for a 60 year old.)
Man I'm depressed!..:)
@pecunia I would but I threw my back out Saturday night, jut reaching down. The resulting spasms means I can barely get off the couch right now..:(
but they gloss over the fact that simply having a mortgage increases sequence of returns risk.No it doesn't. SORR is the risk that more unfavorable returns occur earlier in retirement. Having a mortgage does not affect market returns, so you must be talking about some other type of risk.
but they gloss over the fact that simply having a mortgage increases sequence of returns risk.No it doesn't. SORR is the risk that more unfavorable returns occur earlier in retirement. Having a mortgage does not affect market returns, so you must be talking about some other type of risk.
but they gloss over the fact that simply having a mortgage increases sequence of returns risk.No it doesn't. SORR is the risk that more unfavorable returns occur earlier in retirement. Having a mortgage does not affect market returns, so you must be talking about some other type of risk.
You are technically correct.
This is what I think is being considered by the OP. I'm sure they'll correct me if I'm wrong!
Having a mortgage increases your minimum monthly costs. It's typically one of the bigger monthly costs. A higher minimum monthly cost means it's harder to cut costs, and therefore it's more likely you'll need to withdraw while the market is low. So it didn't increase the odds of having a SORR problem, it just increased the odds of that problem causing financial issues.
Absolutely!!!but they gloss over the fact that simply having a mortgage increases sequence of returns risk.No it doesn't. SORR is the risk that more unfavorable returns occur earlier in retirement. Having a mortgage does not affect market returns, so you must be talking about some other type of risk.
You are technically correct.
This is what I think is being considered by the OP. I'm sure they'll correct me if I'm wrong!
Having a mortgage increases your minimum monthly costs. It's typically one of the bigger monthly costs. A higher minimum monthly cost means it's harder to cut costs, and therefore it's more likely you'll need to withdraw while the market is low. So it didn't increase the odds of having a SORR problem, it just increased the odds of that problem causing financial issues.
He is technically correct... the best kind of correct. But you also have to factor in paying off a house vs having more liquid cash in investments/emergency funds etc. which may be more beneficial in case of "financial issues" than a paid off house.
This issue was definitively answered by the following:He is technically correct... the best kind of correct. But you also have to factor in paying off a house vs having more liquid cash in investments/emergency funds etc. which may be more beneficial in case of "financial issues" than a paid off house.You are technically correct.but they gloss over the fact that simply having a mortgage increases sequence of returns risk.No it doesn't. SORR is the risk that more unfavorable returns occur earlier in retirement. Having a mortgage does not affect market returns, so you must be talking about some other type of risk.
This is what I think is being considered by the OP. I'm sure they'll correct me if I'm wrong!
Having a mortgage increases your minimum monthly costs. It's typically one of the bigger monthly costs. A higher minimum monthly cost means it's harder to cut costs, and therefore it's more likely you'll need to withdraw while the market is low. So it didn't increase the odds of having a SORR problem, it just increased the odds of that problem causing financial issues.
This issue was definitively answered by the following:
https://earlyretirementnow.com/2017/10/11/the-ultimate-guide-to-safe-withdrawal-rates-part-21-mortgage-in-retirement/ (https://earlyretirementnow.com/2017/10/11/the-ultimate-guide-to-safe-withdrawal-rates-part-21-mortgage-in-retirement/)
Of course, there is nothing to argue about math-wise that having a 3.25% mortgage for 20 more years and collecting 4% bond yield makes sense. But this isn't some insta-FIRE strat either. The underlying assumption is that you are choosing to take your mortgage cash sitting in a bank account and put it in Treasuries instead of paying off the mortgage. Most people are carrying a mortgage because they don't have the cash readily available.
The only real insight is that you shouldn't pull money from investments to pay off your mortgage - not exactly a groundbreaking revelation.
I have enough investments to kill my 3.25% mortgage if I wanted to. It's invested in SGOV at the moment earning 5.45%. It's true that 95% of people don't have this option.Of course, there is nothing to argue about math-wise that having a 3.25% mortgage for 20 more years and collecting 4% bond yield makes sense. But this isn't some insta-FIRE strat either. The underlying assumption is that you are choosing to take your mortgage cash sitting in a bank account and put it in Treasuries instead of paying off the mortgage. Most people are carrying a mortgage because they don't have the cash readily available.Most mustachians have the cash available, actually, at least the people who tend to be discussing this issue.
The only real insight is that you shouldn't pull money from investments to pay off your mortgage - not exactly a groundbreaking revelation.
I have zero interest in using my pile of 5% money market funds to pay off my 3% mortgage.
-W