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Learning, Sharing, and Teaching => Investor Alley => Topic started by: forummm on June 19, 2015, 05:50:26 PM

Title: Stop worrying about the 4% rule
Post by: forummm on June 19, 2015, 05:50:26 PM
A collection of posts about why you should not worry about the 4% rule. Please add others that you find useful.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on June 19, 2015, 05:51:06 PM
From Nords:  http://forum.mrmoneymustache.com/post-fire/what-has-workednot-worked-for-you-guys-who-have-been-fire-for-10-yrs/msg700740/#msg700740
(worth reading more in the thread)


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...
- Understand your risk temperment and don't kid yourself if your a 60/40 guy and going with a 100% stock portfolio
Absolutely.  It's the investor behavioral psychology aspect of investing, where you have to be able to sleep comfortably at night.

- After taking into account any other income sources, 3 - 3.5% may be a safer withdrawal rate
Um, 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)
- 1 - 2 yr cash/CD/short term bond acct not a bad way to cushion a heavier stock portfolio mix
Yep, as mentioned in my previous paragraphs.

- Be sensitive to stock valuations when you launch and adjust your SWR accordingly if needed
Whatever 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.

Title: Re: Stop worrying about the 4% rule
Post by: forummm on June 19, 2015, 05:51:59 PM
From Sol: http://forum.mrmoneymustache.com/investor-alley/bogle-projects-'nominal-to-zero'-real-returns-over-the-next-decade/msg702331/#msg702331
(worth reading more in the thread)

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.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on June 19, 2015, 05:52:40 PM
From Eric:

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).
Title: Re: Stop worrying about the 4% rule
Post by: forummm on June 19, 2015, 05:53:28 PM
From Brooklynguy:

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!
Title: Re: Stop worrying about the 4% rule
Post by: forummm on June 19, 2015, 05:55:39 PM
From Skyrefuge:

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.
Title: Re: Stop worrying about the 4% rule
Post by: a1smith on June 19, 2015, 06:14:40 PM
Well, let's not make this a totally one-sided discussion.  Here is a post from clifp; I'll also add an old post of mine that discusses a similar concern I have:  While the 4% SWR seems fine for someone that is close to a 30-35 year retirement period it seems to be non-conservative for someone that is trying to retire early in their 30's, for example, and have up to a 60-65 year retirement.

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.
Title: Re: Stop worrying about the 4% rule
Post by: a1smith on June 19, 2015, 06:29:41 PM
Here is my old post where I did cFIREsim simulations for longer retirement periods.  In The 4% Rule: The Easy Answer to “How Much Do I Need for Retirement?” (http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/), MMM says that "In other words, above 30 years, the length of your retirement barely affects the safe withdrawal rate calculations." (his emphasis, not mine.)  Looking at the cFIREsim calculations you can see that is not the case.  Upthread there is some discussion about 1% fee being high and that you can increase your SWR if you have lower fees -- note that the % success calculations below are for 0% fees.

So, to look at one data point, let's say someone retires at 30 and plans on living till 95.  With 50/50 AA cFIREsim predicts 55.0% chance of success and 80.0% chance of success at 70/30 AA.  So, at the very least, you have to adjust your AA to make sure you have an AA that guarantees a reasonable chance of success but is still an AA you are comfortable with given no income to invest.

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 Retired50/50 Success70/30 Success
3090.4%93.9%
3582.7%90.9%
4067.6%84.8%
4565.0%80.0%
5063.2%81.1%
5560.0%82.2%
6060.0%82.4%
6555.0%80.0%
7053.3%78.7%
7550.0%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.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on June 19, 2015, 06:31:32 PM
Good. All viewpoints welcome. This is intended to be a repository of information on the subject. Thanks for contributing!
Title: Re: Stop worrying about the 4% rule
Post by: MDM on June 19, 2015, 09:22:53 PM
A related thread is http://forum.mrmoneymustache.com/welcome-to-the-forum/50-60-year-retirement-timeframes-anyone-have-the-numbers/.

There is a comment in the MMM blog post referenced by a1smith: "It’s much like a 30-year mortgage, where almost all of your payment is interest. Drop your payment by just $199 per month, and suddenly you’ve got a thousand-year mortgage that will literally take you 1000 years to pay off."  Unfortunately that is not a generic truth - as the interest rate changes, so does the principal required.  E.g.,
Code: [Select]
Rate/yr Principal
0% $73,900
1% $83,500
2% $98,100
3% $116,000
4% $138,100
5% $165,600
10% $449,800

Much as MMM likely had a specific set of assumptions in mind for the "$199 rule", there are specific assumptions that lead to the "4% Safe Withdrawal Rate rule".  In either case, when different assumptions apply, different conclusions become valid.



ETA:If one wants to skip ~1000 posts, the one below provides a good summary of what is discussed in them:
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.
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on June 19, 2015, 09:55:41 PM
I'd just like to point out that the 4% SWR also assumes:
-That you live for 30+ years. You might not.
-That no cataclysmic natural disaster befalls the earth in that time. One might.
-That no social upheaval/revolution/political change makes your earnings and savings valueless.

So, when you say you want a 2% withdrawal rate because it's safer, you're ignoring the fact that it's arguably impossible to be "safer" than, say, 85-90% with any long term plan, because the world may have other plans for you and running out of money in a future that looks just like the present isn't the biggest concern anymore.

-W
Title: Re: Stop worrying about the 4% rule
Post by: deborah on June 19, 2015, 10:50:28 PM
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%. In fact, of all the SWRs I have seen, the one for the USA is the highest. Obviously the hyperinflation of Germany in the 30s (which has a similarly low SWR) and the economic problems that Japan has experienced more recently mean that these countries have much worse SWRs than just about every other country, but we just don't know what is around the corner for our own economies (and as a result for their SWRs) - especially as we are considering the next 50 years.

Throughout the majority of the 20th Century the USA was the largest world economy, so it could be argued that other economies "jerked" twice as much - with their own problems as well as when the global economy (the USA) "jerked". This possibly gave the USA SWR its advantage. However, the Chinese economy (in global terms, not per person) is now, or just about, larger. Over the next 50 years (for the SWR we are postulating), we should consider that other economies (perhaps also India) will probably play leading roles globally, and that the USA economy may become a much smaller component of the global economy. Maybe people should be looking at the SWR of the UK rather than the USA when they are doing their calculations. (The UK "ruled the waves" at the beginning of the 20th century, but gradually decreased over the timeframe used to calculate SWRs).
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on June 19, 2015, 10:52:54 PM

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.
Title: Re: Stop worrying about the 4% rule
Post by: Kwill on June 19, 2015, 11:29:55 PM
I am disappointed. I thought I was going to learn that I could do a 50% withdrawal rate and be OK. Then I could actually retire soon. Too bad. ;)
Title: Re: Stop worrying about the 4% rule
Post by: Jeremy on June 20, 2015, 12:46:04 AM

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



Title: Re: Stop worrying about the 4% rule
Post by: clifp on June 20, 2015, 01:28:21 AM


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 Retired50/50 Success70/30 Success
3090.4%93.9%
3582.7%90.9%
4067.6%84.8%
4565.0%80.0%
5063.2%81.1%
5560.0%82.2%
6060.0%82.4%
6555.0%80.0%
7053.3%78.7%
7550.0%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.


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.

Now if we step back and think about this logically, going forward is is mathematically impossible for a longer retirement to be a safer than a shorter one with the same AA and withdrawal.  A 40 year old who retired in 2000 with a 4% SWR, like I did  is in far worse shape financially than a 65 year. The 65 year now 80 probably only has 10-15 years left to live. The 55 year like myself has 25-35 left. 

Now while it true in a solid majority cases after 30 years you end up with a more and often a lot more money than you start, in a roughly a 1/3 of the cases you end up dipping into your principal, so it is pretty important to understand the limitation of this calculators for early retirements.

I also noticed while playing around with longevity calculators that being retired is probably added a couple of years to my life, much lower stress, more exercise, more sleep.
Title: Re: Stop worrying about the 4% rule
Post by: deborah on June 20, 2015, 04:01:33 AM

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
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).
Title: Re: Stop worrying about the 4% rule
Post by: zataks on June 20, 2015, 09:21:38 AM
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?
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on June 20, 2015, 09:23:04 AM
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.

If the 4% rule (or 3% for another country, whatever) was based on the average withdrawal allowed to have success (i.e. 50% success rate), I'd share your skepticism, and say the future might be worse than the past (by average).  But to say that the future will be worse than the worst period in our past and all the other countries, too, so one should go sub-3%, or sub-1%, or whatever number you want to argue, seems just way too pessimistic.

I can buy that we'll be worse than average.  But the worst ever?  Seems unlikely. And even if it happened, there's lots you can do in that case.  Seems as good of a reason as any to not worry about the 4% rule.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on June 20, 2015, 09:23:40 AM
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?

Huh? There's these arguments all the time.  That's why this thread was started, to compile together the posts arguing why you don't need to worry about it.
Title: Re: Stop worrying about the 4% rule
Post by: a1smith on June 20, 2015, 09:57:33 AM
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%.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on June 20, 2015, 10:03:42 AM
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%.

Yeah, that was another good one. That's where I learned about the difference in the tools. Thanks for adding.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on June 20, 2015, 10:06:57 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Tyler on June 20, 2015, 10:51:22 AM
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.

The 4% rule was not arrived at using a globally diversified portfolio, so this may be a false assumption.

One other thing to remember is that the studies the 4% rule were based on did not settle on stocks and bonds in the US as the best investment options after evaluating everything else.  They studied them at the exclusion of everything else.  Portfolios that use things like international stocks, REITs, TIPS, and other assets may in fact perform better (or may not!), but most retirement calculators do not even offer them as options.  Retirement investing is more diverse and complex than the simple 4% rule of thumb may indicate. 
Title: Re: Stop worrying about the 4% rule
Post by: zataks on June 20, 2015, 11:54:46 AM
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?
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on June 20, 2015, 11:57:47 AM
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 don't understand what you're looking for.  What sort of data would disprove it?  It's a narrow study based on certain premises.  The data supports the conclusion because the conclusion was drawn from the data.

Some attack the premises, or say they should be different, but given the same assumptions, you should draw the same conclusions.  You just may not buy the premises.
Title: Re: Stop worrying about the 4% rule
Post by: Tyler on June 20, 2015, 12:02:07 PM
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
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on June 20, 2015, 12:05:06 PM
By none other than Wade Pfau, the guy who made the 4% rule popular.

Not sure how Pfau made it popular?

And most of his current ideas on why the 4% rule may not work is based on future projected yields.  I don't buy the premise that we can predict future yields, so I don't buy his arguments about why he doesn't trust it going forward.

Pfau writes some awesome retirement stuff, but he's too pessimistic for me.
Title: Re: Stop worrying about the 4% rule
Post by: Tyler on June 20, 2015, 12:25:31 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on June 20, 2015, 12:31:43 PM
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).
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on June 20, 2015, 12:55:54 PM
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.

I've been reading Pfau's blog for years; you don't have to convince me of his credentials.  I'm not sure what part of what I said translated to "who is this guy?"  :)
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on June 20, 2015, 12:59:26 PM
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).

You're right, this sort of has that for the ones that have around a 50% success rate of 5% after 30 years:
https://1.bp.blogspot.com/_7pcnNDkYOFE/TJLpRdCn9uI/AAAAAAAAAOI/e4WRVdW-D4U/s1600/Capture2.JPG

So that indicates to me that maybe a 4.5-5% success rate worked about half the time, even in other countries.  So 4% and flexibility should be fine, even assuming the US is worse than it's worst period, and is more like some of the other countries worse (but not worst) times.
Title: Re: Stop worrying about the 4% rule
Post by: Tyler on June 20, 2015, 01:01:53 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on June 20, 2015, 01:04:46 PM
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.

Gotcha.  :)
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on June 21, 2015, 06:22:29 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on June 21, 2015, 06:48:36 AM
From Brooklynguy:

Quote
ignoring 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? :)
Title: Re: Stop worrying about the 4% rule
Post by: forummm on June 21, 2015, 06:52:33 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on June 21, 2015, 07:52:41 AM
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.

They're certainly getting him headlines in the financial press (End of the 4% Rule!!!!!!) who use the titles as clickbait -  and this also feeds the frenzy over at Bogleheads with their "race to the lowest SWR."   Ignore Social Security. Ignore pensions. You cannot ever earn or recieve any other money (such as an inheritance. Or hobby income. Or churning credit cards for travel points. Or just Craigslisting your junk) You cannot vary your spending due to market conditions. Start with 3% as your SWR and you get a bunch of people arguing that it's too risky. You need 2.5%. No, you need 2%. No, I'm targeting 1.7%!

4% actually still seems pretty damn safe. Most of the risk is starting your retirement with a few bad years ("sequence of returns risk") - which can be planned for or solved pretty readily by a variety of methods:

1) I personally plan to have some "fun money" in the budget - primarily money for extended traveling.  The traveling can be postponed for a year or two in a market crash, or just made very cheap (ie National Park Camping Tour instead of European River Cruise)

2) In the first few years of retirement, you should be pretty darn employable or otherwise make some money. If the market crashes, work some for a year! (Yes, it's harder to get a job in a recession. Noted.)

3) I've got a lot of stuff around that I want to sell off. Don't have the time at the moment to do more than stay steady with selling off infant junk while acquiring toddler junk.

4) I'm gonna plan on Social Security. I plan to push it out to Age 70 (at the moment) - but if the market crashes hard, I can pull that in by 8 years. Frankly, being married there are a lot of middle ground options. Too complex for this post.

5) Personally, I have a pension.

6) I can have a HELOC in place shortly before I retire that I can draw on if need arises.

7) I am likely to inherit mid 6-figures within 15 years of retirement. (Perhaps morbid, but I am realistic here. The 15 years presumes one parent lives to 5 years older than any ancestor)
Title: Re: Stop worrying about the 4% rule
Post by: Jeremy on June 21, 2015, 08:07:24 AM
I'll give some props to Mr Pfau for highlighting one important (albeit somewhat obvious) point

The chart for Maximum Sustainable Withdrawal Rate shows a wide range.  4% was worst case.  But if you were lucky with your timing, it could be 12%

(http://3a05ty2ohkvc1zboze4eczal.wpengine.netdna-cdn.com/wp-content/uploads/2011/04/trinity11-1200x839.jpg)

When we retired, were we on the 4% path or the 12% path?  No idea.  But we can get a pretty strong indicator early on

From Pfau, bullet point 3c, http://retirementresearcher.com/trinity-study-updates/
"Retirement success is more dependent on what happens early in retirement than late in retirement. In fact, 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 years."

If the sequence of returns in your first 10 years is favorable, and inflation hasn't gone crazy, then you are sitting pretty.  If returns aren't favorable, then you need to keep the portfolio large enough to benefit from the next bull market. 

How many people would retire with a planned 4% withdrawal rate, watch the market lay waste to their portfolio or their country plunge into a massive inflationary recession, and say, "No worries, the Trinity Study said 4% was perfectly safe, keep the champagne flowing!"  Probably not many

Small amounts of flexibility in spending (or earning) in the early years is probably worth a percentage point on withdrawal rate (+/-)


Title: Re: Stop worrying about the 4% rule
Post by: a1smith on June 21, 2015, 08:09:01 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on June 21, 2015, 08:29:54 AM
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.

Your 401k fee is not relevant for the SWR calculation. It does reduce your NW as long as you keep the money there. But once you've RE, you obviously won't be working anymore, so there's no reason to keep the money in that high-fee 401k. Roll it over to a Vanguard IRA at 0.05% and increase your SWR back to 4%.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on June 21, 2015, 08:41:37 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: a1smith on June 21, 2015, 09:29:09 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on June 21, 2015, 09:50:24 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Nords on June 21, 2015, 02:06:42 PM
This reminds me of the saying "Everybody has a plan until they get punched in the face."

I think that people talk a pretty brave game about reducing their SWR below 4%... until they realize how long they'd actually have to work, or how much they'd actually have to save, or how much less they'd actually have to spend to live within their excessively-conservative artificial constraints.

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.

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.
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.
Title: Re: Stop worrying about the 4% rule
Post by: a1smith on June 21, 2015, 04:07:30 PM
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.

Nice enumeration of options.

I had a similar, but less detailed, comment about people with long retirements (start at 30, 65 year retirement)

So, the safety factors MMM mentions in article listed above are not safety factors; they are an absolute requirement.

My main motivation in posting the cFIREsim data above was to show that the safety factors MMM mentioned are required, especially for long retirements, and not necessarily to reduce SWR.

For my own plan, I have pension and SS as annuitized income and potentially some inheritance funds.  Unfortunately, my pension won't have COLA like yours does.  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.

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.

EDIT - I meant to say I arrived at Pearl Harbor around the same time you started in the Navy, but you got the idea.

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/)
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on June 21, 2015, 05:04:05 PM
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.

There is a MUCH better way.

"Fund expenses, management fees, advisor fees, etc count as part of your withdrawal"


Might get more of the general public to wake up that their advisors are taking perhaps 50% of their spendable money every year.

Yep. Skimming off half for usually doing worse than the indexes.
Title: Re: Stop worrying about the 4% rule
Post by: Nords on June 21, 2015, 05:24:13 PM
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.

I did my diving in ballast tanks and occasionally sanitary tanks.  In retrospect I wish I'd started my career in Pearl Harbor and on SSNs, but coming to that community after Holy Loch and SSBNs made me appreciate Hawaii Navy ever so much more.
Title: Re: Stop worrying about the 4% rule
Post by: ender on June 21, 2015, 05:30:13 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on June 21, 2015, 07:11:12 PM
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.

There's no difference between selling appreciated stock and spending the dividends. Real estate is imperfectly correlated to stocks, so it's one way to decrease volatility. But so are bonds. REITs are another way to own real estate with a diversified portfolio, no liability, be highly liquid, etc.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on June 22, 2015, 01:26:49 PM
To add to the link collection, here's a thread from a couple of months ago that generated some good discussion on this topic:

http://forum.mrmoneymustache.com/investor-alley/are-safe-withdrawal-rates-really-safe/
Title: Re: Stop worrying about the 4% rule
Post by: Livewell on June 26, 2015, 12:54:51 PM
Great thread, thanks for starting.   

Regarding the worse case scenario, GCC had a good article on this not too long ago - what would happen if you had retired in 1965?  http://www.gocurrycracker.com/the-worst-retirement-ever/

Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on July 02, 2015, 11:38:36 PM

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.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on July 03, 2015, 05:35:13 AM

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.

This is off topic. And the Laffer Curve is not relevant to modern day taxation in the US. The US economy did great in the 50s when the top marginal rate was 90%. It's nowhere near that now.
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on July 06, 2015, 03:25:09 PM
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. 

Here is another thread to add to the list:

http://forum.mrmoneymustache.com/investor-alley/what-warren-buffett-said-in-1999/msg720887/#msg720887 (http://forum.mrmoneymustache.com/investor-alley/what-warren-buffett-said-in-1999/msg720887/#msg720887)
Title: Re: Stop worrying about the 4% rule
Post by: Nords on July 06, 2015, 03:34:30 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: MDM on July 06, 2015, 03:46:33 PM
Nothing about the Trinity Study is predictive....its just many many iterations of potential outcomes using randomized historical data sets.

One can delete the word "randomized" from the quote above.  The Trinity Study (see http://www.aaii.com/journal/article/retirement-savings-choosing-a-withdrawal-rate-that-is-sustainable for the original paper) simply used historical data sets to backtest portfolio withdrawal success rates.
Title: Re: Stop worrying about the 4% rule
Post by: johnny847 on July 06, 2015, 04:25:32 PM
I didn't read all the posts in this thread in detail, but I think variable spending rates have not been discussed before.

Strictly speaking, a variable spending rate does not follow the 4% rule. But I think it's pretty dumb to stick your head in the ground and always withdraw an inflation adjusted 4% from your portfolio, no matter how the market is doing.
Furthermore, this isn't the way people spend money. At least, I don't think. I don't think people plan on spending the same amount of money every year.
Finally, the 4% rule was never tested on retirements longer than 30 years. It does not logically follow that the 4% rule to work for 50 year retirements just because it works for 30 year retirements.

So here's a portion of the post I wrote earlier: http://forum.mrmoneymustache.com/investor-alley/'your-age-in-bonds'-a-bad-choice-for-early-retirement/msg719856/#msg719856 (http://forum.mrmoneymustache.com/investor-alley/'your-age-in-bonds'-a-bad-choice-for-early-retirement/msg719856/#msg719856)

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%

Notice the nice increases in success rate by adopting a variable spending rate. For 40 year retirements, only 70/30 allocations and above survived 80%+ of the time with the rigid 4% withdrawals, but after applying a variable spending rate, all allocations 50/50 and higher survived 87.6%+ of the time (I consider anything above about 85% to be all the same, but w/e).
For 50 year retirements, only 80/20 allocations and above survived 80% of the time with the rigid 4% rule, but after adopting a variable spending rate, all allocations 60/40 and higher survived 87.4%+ of the time.

And as Jeremy at Go Curry Cracker (http://www.gocurrycracker.com) points out,
Quote from: GCC
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 years
In 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
So another approach to strengthen the 4% rule is to lower your spending for the first ten years.


Again, the strategies talked about above are not actually following the 4% rule. But I think that's okay - the point is that the 4% rule gives us a rough guideline, and we can make it even better.
Title: Re: Stop worrying about the 4% rule
Post by: a1smith on July 06, 2015, 10:45:08 PM
And as Jeremy at Go Curry Cracker (http://www.gocurrycracker.com) points out,
Quote from: GCC
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 years
In 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
So another approach to strengthen the 4% rule is to lower your spending for the first ten years.

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?
Title: Re: Stop worrying about the 4% rule
Post by: johnny847 on July 06, 2015, 11:09:41 PM
And as Jeremy at Go Curry Cracker (http://www.gocurrycracker.com) points out,
Quote from: GCC
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 years
In 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
So another approach to strengthen the 4% rule is to lower your spending for the first ten years.

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?
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on July 07, 2015, 05:28:32 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on July 07, 2015, 09:23:39 AM
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.

Hear, hear.

Ideally one would run the numbers without pessimistic inputs, and let readers decide for themselves what their ER is, expected future market valuations, etc.

Of course, one might feel justified treating their readers like idiots, if they're worried about the reader taking results from a study using a 0.1% ER, and saying that is their SWR, when they have a 1.5% ER.

You can see the dilemma one is in.  I'd rather run it without the assumptions, and add the caveats, but if you know most people won't read them, the financial headlines will just have the bottom line number, etc., it's a tough spot.
Title: Re: Stop worrying about the 4% rule
Post by: sol on July 07, 2015, 10:15:49 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on July 07, 2015, 11:16:26 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on July 07, 2015, 12:21:56 PM
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%.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on July 07, 2015, 12:59:16 PM

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%.


Should we really count successes in the 19th century and early 20th century?  How did people even trade stocks and bonds back then?  So along this line of reasoning, I'd say 9.25% is unrealistic.  I would also say a retiree staying in 100% equities indefinitely is only realistic if you retire at the beginning of a bull market or have an alternate income source (blog revenue, rents, etc.), but unrealistic if you retire early and experience a bear market correction within 10 years.  Retired people with 20+ years to go generally cannot withstand a 20% loss without converting some equity to cash or bonds at what are typically in hindsight 'poorly market timed moves', this is just human nature.  I'd have more faith in the 75/25 allocation results, as there is a higher probability that people can maintain this allocation, or spend down the bonds during a bear market.

Quote
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.

With that said, I do agree that flexibility in SWR means that you will have years slightly above 4% and most likely will have years below, either by choice or circumstance, without triggering imminent failure.  The 4% rule is a planning tool, that's all, and relying on spending above 4% exposes you to needing to adjust spending down further and/or earlier than if you start at 4%...
Title: Re: Stop worrying about the 4% rule
Post by: forummm on July 07, 2015, 01:16:31 PM
I don't think anyone is advocating a 9.25% SWR. I agree that older data is less useful. The stock market was basically railroads for a lot of that time.
Title: Re: Stop worrying about the 4% rule
Post by: sol on July 07, 2015, 04:09:06 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on July 07, 2015, 09:05:26 PM
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.
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 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%. 

It's a unique moment in human history, so who am I to say that you need a 4% SWR when people are paid for doing things that they would do anyways if they were retired (posting their game-play videos to YouTube, having a 'paleo/health/special interest blog', publishing eBooks, participating in pot where it is legalized, or craft brewing, and of course the sex industry (we are talking about the internet and human beings here) - the 'long tail' of ways to make at least a bit of income is becoming endless...). 
Title: Re: Stop worrying about the 4% rule
Post by: johnny847 on July 07, 2015, 09:32:31 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on July 07, 2015, 09:44:36 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on July 07, 2015, 10:06:19 PM
Someone's a Bayesian.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on July 07, 2015, 10:20:08 PM
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)
Title: Re: Stop worrying about the 4% rule
Post by: johnny847 on July 07, 2015, 10:21:16 PM
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."
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on July 07, 2015, 10:32:58 PM
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)

No, no, I just meant you aren't (as far as I can tell) into the "future will look like the past" sort of assumptions of traditional statistics that underly the usual 4% SWR sort of stuff.

It was not intended to be an insult at all. I just thought it was funny that nobody had mentioned it yet, since this sort of basic debate is common in statistics in all sorts of disparate fields.

-W
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on July 07, 2015, 10:59:20 PM
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.

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. 
Title: Re: Stop worrying about the 4% rule
Post by: johnny847 on July 07, 2015, 11:22:29 PM
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.

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.

You did not say "pretty much bulletproof" before. You said "100% bulletproof success." Not just "bulletproof," but you purposely qualified it to say "100% bulletproof." Maybe if you had just said "bulletproof" I could have given you the benefit of the doubt and said sure, he actually meant "pretty much bulletproof." But to qualify bulletproof with "100%"? Nope.

I don't think ANY withdrawal rate is bulletproof (and by bulletproof I mean 100% guaranteed) (aside from zero - because you've actually got a job or other income stream not from your investments that's sustaining your expenses). Even if you adapt. Nothing is guaranteed. Is a 1% withdrawal rate massively likely to succeed? Yea. That's still not a guarantee.

The whole notion of a safe withdrawal rate is that with high probability, your portfolio will not be depleted before you die. We do our best to establish this probability with past performance, but as we all know, past performance does not indicate future returns.

So what's conclusion if I don't have a bulletproof withdrawal rate? The 4% rule is good enough almost all the time. Use it as a benchmark for when you can retire. Use it as a guideline for how much you can withdraw from your portfolio each year. But as you say, be ready to adapt if the winds change. Particularly in the first approximately one third (I left this ambiguous earlier in this thread - it's 10 years for a 30 year retirement, but you can't just simply extrapolate that to say 1/3 of any retirement) where the sequences of returns risk can hit you hard.
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on July 07, 2015, 11:23:46 PM

Why not just respect the intent of people's posts and internalize their intent, instead of nit-picking? 

Are you new to this whole 'anonymous on the Internet' thing?
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on July 07, 2015, 11:34:32 PM
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'.
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on July 08, 2015, 01:59:12 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on July 08, 2015, 02:12:20 PM
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.
Whoa, thanks for sharing, but I guess we are going off piste.
Title: Re: Stop worrying about the 4% rule
Post by: ender on July 08, 2015, 09:02:04 PM
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).
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on July 08, 2015, 09:17:03 PM
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).

Well said. A more eloquent explanation of Diane's catchphrase.
Title: Re: Stop worrying about the 4% rule
Post by: Nords on July 09, 2015, 10:56:24 AM
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).
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.

When I was working, I didn't appreciate the significance of a military pension.  Now that I'm retired, every year I'm more appreciative of its value as insurance against portfolio failure.

If you're confident that a 6% SWR is an acceptable risk of portfolio failure, then I'd still annuitize a bare-bones income as part of your asset allocation.  Maybe you'll depend on Social Security (yeah, I understand that plan has potential flaws) or maybe you'll buy a single-premium insured annuity.  (Yeah, I understand those flaws too.)  You'd also have to devote some thought to long-term care, because the SWR analyses do not account for end-of-life medical expenses.  (More flaws.  Right.  Let's get back to the main point.)  All of these concepts have drawbacks, but the drawbacks are less catastrophic than the prospect of running out of money in your late 70s.

If you're reluctant to annuitize a portion of your investments, then perhaps it's better to "self insure" by working an extra year or two in your 40s than to go back to work for five years in your 70s.

As for "lowering expenses", you should pick a number now and then try surviving on it for a few months.  I'm talking a Jacob Lund Fisker class of low expenses, not just cutting back on the entertainment spending.  It's better to have the extreme frugality experience now (when it's "optional") rather than later (when it's mandatory). 

My parents-in-law are just starting their 80s.  Their investments are 100% CDs & Treasuries (don't get me started on their logic) and they're receiving Social Security.  However inflation has ravaged their portfolio to the point where they're cutting back on utilities and even groceries, not just entertainment and transportation.  They've gone way past their Depression-era frugality and they're deep into deprivation, but the options of "part-time work" and "side businesses" are off the table.  By the way, all four of their parents were Ashkenazi centenarians so my PILs may be living like this for another two decades... with or without their cognition.

Yes, many retirees are surviving on their Social Security income today.  (That's their portfolio & longevity insurance.)  Yes, there may be other types of assistance-- we have supported some of my PIL's expenses.  My brother-in-law is a tax CPA (who just FIREd) and he's doing a great job of keeping an eye on their finances, but we expect "the call" for more support any year now.  Don't get me started on that issue either. 

However it's worth considering whether your portfolio failure might transfer your living expenses to your family or relatives.  Would you rather work an extra year in your 40s to avoid this potential imposition in your 70s?

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.  After the test drive you may decide that it's better to work a little longer for the insurance (or the extra margin of assets) after all.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on July 09, 2015, 11:12:42 AM
I think a good example relating to Nords' cautions is Sol. Sol has talked before about how he is thinking about a SWR higher than 4%. But he and his spouse have small pensions that kick in as early as <20 years from RE, and then SS later. And he has a lot of fat in his budget that he could cut out if things went south. It's important to have levels of safety, and more important if you are doing something more risky (like taking a 50% chance your portfolio runs out).
Title: Re: Stop worrying about the 4% rule
Post by: sol on July 09, 2015, 11:21:36 AM
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. 

Nords playing the part of voice of reason, as always.

A 6% withdrawal rate fails over a 30 year period half of the time.  Just because it is the statistically correct SWR for society as a whole doesn't make it the correct SWR for you or me or anyone else.

I also think it's important to recognize that very few folks here are looking at 30 year retirement funding periods.  Almost none of us.  I expect mine to be more like 21 years, and a 35 year old early retiree with good genes might reasonably expect to need 60 years out of her portfolio.  Don't believe that mmm line about how 30 years is the same as forever, it totally makes a difference.  You really do have to do your own math.

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.
Title: Re: Stop worrying about the 4% rule
Post by: ender on July 09, 2015, 11:30:09 AM
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
Title: Re: Stop worrying about the 4% rule
Post by: Nords on July 09, 2015, 11:53:57 AM
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.
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.

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.

However we forum members might also be surrounded by high-performance overachievers who are simply turning their FI periods into extended bridge careers.  I'd really like to see some academic research on how much retirees earn after FI during their 50s, 60s, and 70s.  The good news is that while $10K of earnings won't help a portfolio very much, it's still a significant chunk of annual spending that can help preserve a portfolio.

But I'd still like to know whether the earnings reality of FI matches the fantasy.  For example my brother-in-law the FI tax CPA is really enjoying his retirement (he started last month).  He's finding plenty of things to do all day and I'm pretty sure he'll stay responsible for his own entertainment for the rest of his life.

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.

Again, if turning skills growth into money is part of the FI plan, then it's probably best to put that plan into action while you're still working for a paycheck.
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on July 09, 2015, 01:53:21 PM

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.
Title: Re: Stop worrying about the 4% rule
Post by: Cheddar Stacker on July 09, 2015, 02:20:04 PM

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.

This was a worthy read, and given all the annuity and SS discussion, viola:
http://www.gocurrycracker.com/social-security-and-early-retirement/
Title: Re: Stop worrying about the 4% rule
Post by: clifp on July 09, 2015, 02:56:22 PM
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

+2 on Social Security.  When I first retired I didn't really think about 15 years.  I am realizing that it is my longevity insurance since I plan to take it at 70

In hindsight yes you can spot the bad retirement in five years. When you are actually living the dream not so easy.
It seems very likely that a Y2K retiree is going to be one of the 5% that fail after 30 years.  Raddr long running post show this http://www.raddr-pages.com/forums/viewtopic.php?f=2&t=1208&sid=613efc43b73aa1960cf59252b172407e&start=390 (http://www.raddr-pages.com/forums/viewtopic.php?f=2&t=1208&sid=613efc43b73aa1960cf59252b172407e&start=390).  The post will make more sense in looking at this link.   Now I retired in 99/2000 with more money and more fat to cut from my budget than most, but also without the benefit of lots research on SWRs.


I fully expect a big market correction in 2000, and was prepared for it. I wasn't shocked when it continued in 2001, but 2002 was a shock. 2003 was good rally, but it was short lived. After 5 years the Y2K was $729K (now it real terms its 639K) but people don't actually do a good job mental adjust for inflation when it is modest.  (Back in the 70s and early 80 inflation was top of mind so you factored it in).  So after 5 years your portfolio has drop 1/4 and you are 5 years older. You really going to start looking for a job now. Retirement is nice man.   Maybe you cut back a bit instead. 2005 was another bad but not awful year. (My net worth increased 5% in 2005). So maybe you continue tightening the belt a bit. 2006 was a good year you nudge up spending. 2007 an ok year.

And than the great recession hits. In Raddr spreadsheet the portfolio ends 2008 at $502 and than bounce back in 2009. In reality the 1st quarter of 2009 was really ugly. I distinctly remember Feb 17, 2009. Cause that was the day my portfolio dropped below 2 million (I know still a lot of money) 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.". Now if had only started with 1 million and hadn't cut back spending, the real retirement failure would have come in 2009, 9 year into your retirement.
Title: Re: Stop worrying about the 4% rule
Post by: Nords on July 09, 2015, 05:02:54 PM
... 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.

I think our Great Recession actual peak-to-trough drop was 56%.  It was from a ludicrously high peak to a ridiculously undervalued trough, from five standard deviations on the right side of the bell curve to six standard deviations on the left side, but the emotional impact was not mitigated by logical analysis.
Title: Re: Stop worrying about the 4% rule
Post by: a1smith on July 09, 2015, 08:39:56 PM
And as Jeremy at Go Curry Cracker (http://www.gocurrycracker.com) points out,
Quote from: GCC
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 years
In 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
So another approach to strengthen the 4% rule is to lower your spending for the first ten years.

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?

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.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on July 10, 2015, 06:45:30 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: johnny847 on July 10, 2015, 06:48:28 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Nords on July 10, 2015, 03:22:39 PM
Here's Wade Pfau's overview of the 4% SWR and other withdrawal plans:
"Making Sense Out of Variable Spending Strategies for Retirees"
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2579123
(This link gets you to SSRN's abstract page, and then you can pick your preferred PDF.)

18 pages (large text, big margins) of review & analysis boils down to this 10-item table:

Decision Rule Methods:
[1] & [2] Bengen's Constant Inflation-Adjusted Spending (1994) (the 4% SWR)
[3] Bengen's Fixed-Percentage Withdrawals (2001)
[4] Bengen's Floor-and-Ceiling Withdrawals (2001)
[5] Guyton and Klinger's Decision Rules (2006)
[6] David Zolt's Target Percentage Adjustment (2013)

Actuarial Methods:
[7] & [8] RMD Spending Rules
[9] PMT Formula (ex. Waring and Siegel (2015); Steiner (2014); Bogleheads)
Monte-Carlo PMT Formulas: Frank, Mitchell, and Blanchett Age-Based 3D
Model (2011, 2012a, 2012b); Blanchett, Maciej, and Chen Mortality-Updating
Constant Probability of Failure (2012); David Blanchett's Simple Formula (2013)
[10] Annuitize the Floor & Invest for Discretionary

He concludes:
"Choosing a retirement income strategy is complicated by the fact that there is no single number which can summarize all of the characteristics of the strategy. The failure rate is not sufficient. The tables in this article provide 13 numbers to summarize the performance of a strategy, and all 13 numbers are important. These numbers include the initial spending rate, the evolution of real spending over 30 years at different points in the distribution of outcomes, and the distribution of remaining real wealth after 30 years.

How should a client choose a spending method and parameterize the initial spending rate?  This article provides a framework to think about the important issues, such as spending flexibility, feelings about upside spending growth vs. downside spending risks and a minimum spending threshold to be protected, desired direction of spending (for instance, whether to decrease spending over time), the appropriate planning horizon, and any legacy goals.

With decisions made about these issues, clients can decide on an appropriate XYZ formula and then compare the distributions of spending and wealth created by variable spending rules."
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on July 11, 2015, 04:58:37 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on July 11, 2015, 06:01:03 AM
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.

This is my take on it as well. It's *much* easier to put in OMY when we have worked so hard to have everything setup to be saving so much money (and the jobs are not terrible, just not what we're really interested in) and accruing a little bump in eventual SS payout, than it is to work for, say, 6 years at a lower income because we pulled the cord a year too early. And with valuations so high right now, we're much more likely to be on the failure side of things for a 6%WR than if PEs were 15 and the 10 year Treasuries were 5%.

Now, if you're thinking about pulling the cord a year early, and you know that there's some chance you'll be OK, and some chance you'll need to go back and do your old job for 2-3 years to make up the ground you lost (you may need to discount from your old salary, you've burned through a lot of cash that would have been working for you, etc), then you'll have to figure out your own risk tolerance.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on July 11, 2015, 08:32:50 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: ender on July 11, 2015, 10:27:19 AM
Also keep in mind that depending on where your you might want to earn at least $1 of earned income if you want to ridiculously game take 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 about gaming err 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!
Title: Re: Stop worrying about the 4% rule
Post by: johnny847 on July 11, 2015, 10:54:56 AM
Also keep in mind that depending on where your you might want to earn at least $1 of earned income if you want to ridiculously game take 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 about gaming err 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!

Nice write up ender.

For the bolded part, you can even do this after the fact when you file taxes if there's any uncertainty in your income.   Convert more than necessary during the year and retroactively recharacterize the correct amount during tax season. You can even rechar by October 15.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on July 11, 2015, 02:34:52 PM
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).

Quote
I 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).

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 got the opposite takeaway from "Voice of Reason" Nords' latest posts in this thread -- that is, reliance on the often-invoked level of safety margin that "I can always return to work" may be misplaced, because (i) running out of money in old age is a catastrophic enough scenario to necessitate insuring against in one form or another and (ii) the reality of earning income during retirement could, to some extent, end up defeating the purpose of retiring (as in the tale of Nords' brother-in-law).
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on July 11, 2015, 02:46:26 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: ender on July 11, 2015, 03:26:42 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: johnny847 on July 11, 2015, 03:28:04 PM


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.

If the moral aspects of claiming those credits when you don't need it bother you... then just don't claim them.
This isn't a real problem.
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on July 12, 2015, 04:59:58 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on July 12, 2015, 07:05:03 AM
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.

Similarly, we have a good situation setup where we're saving a lot of money mostly due to VLCOL. But I would prefer to take a different job that pays less, maybe requires DW to get paid less/be unemployed for awhile to find something, and has a VHCOL. So we would probably not save anything, or very little. Figuring out the timing of how long to keep the status quo (which is fine, but not interesting to me beyond money) vs FIRE vs job more in line with my passion (but still a job I might not like) vs a job which would pay me a lot more but is still something I'm not interested in (status quo but with more money and more stress). The last one is the only one I've ruled out. I'm stuck with the status quo for at least 8 months (half of it on leave) due to impending parenthood.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on July 12, 2015, 08:00:31 AM
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.

This is starting to get a bit off topic, but this isn't really accurate.  If you choose to retain a mortgage in retirement instead of paying it off, then the pile of investments that you have in lieu of paying off the mortgage (which can be mentally accounted for as the portion of your portfolio that is "earmarked" for servicing the mortgage) will "cover" the monthly mortgage expense and the decision to retain the mortgage therefore has no effect on your overall cashflow (putting aside tax considerations, transaction costs, and impact on eligibility for means-based financial incentives, if any (but, generally speaking, if the math favors keeping a mortgage before consideration of these factors, it will continue to do so even after consideration of these factors)).  It is true that retaining a mortgage can increase your "risk," but if the mortgage rate is low enough and the remaining life to maturity is high enough to justify the strategy of retaining it instead of paying it off, then that risk is probably lower than the equivalent risk of early retiring on a SWR-based retirement strategy in the first place (plus, retaining the mortgage can actually decrease certain risks in retirement, such as the risk of inflation eating away at your portfolio).  There's lots more discussion and detail on all of this in the various "to prepay or not to prepay" mortgage threads.
Title: Re: Stop worrying about the 4% rule
Post by: sol on July 15, 2015, 11:13:17 PM
I did a little FIREcalc meta-analysis to get a better feel for Safe Withdrawal Rates.

For each specified time period, I just recorded the success probabilities for each SWR.  I used the default 75/25 stock-bond split and a million dollar portfolio with 30k/year for 3%, 40k/yr for 4%, etc. 

The data are a little lumpy because I only did integer SWRs and the results are based on historic records, where random chance plays some role in distorting these lines from nice smooth curves.

Title: Re: Stop worrying about the 4% rule
Post by: sol on July 15, 2015, 11:14:01 PM
Some things to note on this graph:

1.  3% is 100% safe for all periods.  There are no periods in the historical record where a 3% SWR has ever failed, regardless of timing or duration. 

2.  Periods longer than 40 years are basically statistically identical.  Lasting 40 and 60 are a basically equally likely.  This may just be a result of there being so few 50 to 60 year periods in the historical record that they are largely identical.  Most of the 60 year periods are going to contain most of the same years as all of the 50 year periods, so these lines are mostly the same.

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.

4.  The 50% success rate line on the vertical line gives you the average expected value for any time period.  For example, for a 30 year period the average safe withdrawal rate that has historically been about right is about 6%.  For periods longer than 40 years it's been closer to 5%.

5.  For periods 30 years or longer, this line gets steeper as you lower your SWR up to 4%.  This means you continue to see increasing large benefits from your continued savings up until you reach about 4%, but working to lower your SWR below 4% suddenly gets much harder.   The odds just don't move very much for your efforts beyond that.

6.  One way to look at this graph is to randomly sample it by printing it out and and throwing darts at it.  The first dart that lands anywhere between the red and orange lines is your retirement lifespan lasting between 20 and 60 years.  In order for a 4% SWR to fail you, your dart would have to land between the red and orange lines in the top left corner of the graph, to the left of the 4% line, AND you'd still have to live at least 20 more years to deplete it.
Title: Re: Stop worrying about the 4% rule
Post by: MDM on July 15, 2015, 11:22:22 PM
I did a little FIREcalc meta-analysis to get a better feel for Safe Withdrawal Rates....

Nicely done!
Title: Re: Stop worrying about the 4% rule
Post by: sol on July 15, 2015, 11:41:15 PM
Another way to look at this same information is to ask how long, on average, a given SWR should last.  I did this by iteratively seeking the number of years that FIREcalc needed to give me a 50% success rate for each specified SWR.

So by comparison with the above graph, the statistically "correct" average SWR for a 30 year period is about 6%, which is where the green line (for 30 years) is at 50% on the above graph.  This new graph below flips that relationship around to find the average time for each specified SWR, rather than the average SWR for each specified time, but it gives the same value: a 6% SWR should last about 30 years before being depleted to zero.

This plot reports an infinity value for 4% SWR or less, because these low SWRs never fall to 50% success rates over any time period.  On average, SWRs below 5% will last forever.  Most of you already know this, because you already know that the average ending portfolio value for a 4% SWR plan is roughly twice the starting value.

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.
Title: Re: Stop worrying about the 4% rule
Post by: PowerMustache on July 16, 2015, 01:42:05 AM
Sol, I really like that last graph. In addition to illustrating the safety of 4% from yet another angle, it also provides an encouraging metric to show the big impact of those dollars saved in the final years leading up to FI (for those of us who think 4% is a good SWR). Before seeing this chart, I was thinking those years building up the net worth to achieve 4% rather than 6% WR might become a bit boring from a tracking perspective -- it's not as exciting to watch the portfolio grow that last 30% as it is to watch it grow the first 30%. Now, I plan to visualize this chart for inspiration during that final 30% of net worth growth before FI.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on July 16, 2015, 08:10:52 AM
I did a little FIREcalc meta-analysis to get a better feel for Safe Withdrawal Rates....

Nicely done!

I agree, great work!  But I'm curious why you used FIREcalc instead of cFIREsim, given the known flaw in [EDIT] cFIREsim's FIREcalc's bond data (http://forum.mrmoneymustache.com/investor-alley/rick-ferri-3070-portfolio-for-retirees/msg555914/#msg555914)?  However, I just ran a few comparison simulations to spot check the differences in the outputs between the two alternatives, and, with the default allocation of only 25% bonds, the discrepancy in the bond return calculation method does not appear to have a material impact on the outputs for purposes of your analysis.

In addition, I have a quibble with this portion of your analysis:

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.

This analysis assigns no value to having a positive terminal portfolio value at the end of the retirement period (which may be a valid assumption for some people, but, all else being equal, I think most people would prefer to have something instead of nothing at retirement end (i.e., death) in order to pass on to their heirs, give to charity, throw themselves a Great Gatsby level party of a funeral, or whatever).

In your example, spending half of your portfolio to purchase the supplemental annuity (which would have no impact on your success probability and almost no impact on your withdrawals in absolute dollars) would cost you a historically median amount of $258K in terminal portfolio value for every $100K of your portfolio that was spent on the annuity.  That is, if your portfolio was $1 million at age 52, and you spent half of it ($500k) on an annuity, then, at the projected end of the retirement period (age 82, in your example), you would be left with a portfolio of $0 (but, of course, you would still have the entitlement to continue collecting the annuity payments if you continue to live beyond that point), whereas, had you not purchased the annuity, you would at that point have had a terminal portfolio having a historical median amount of $1,290,000.  Given that all else is practically equal between the two scenarios, I'd rather have a $1,290,000 portfolio when I turn 82 than have zero dollars and the right to collect $40K per year for the remainder of my life.
Title: Re: Stop worrying about the 4% rule
Post by: Cheddar Stacker on July 16, 2015, 08:18:35 AM
Sol, You are awesome. Thank you.
Title: Re: Stop worrying about the 4% rule
Post by: SuperSecretName on July 16, 2015, 08:35:24 AM
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.

Great write-up, and I agree on the tax code.  It is not meant for people like us.  Given how badly big business cheats optimizes their taxes, I don't feel bad about doing the same with mine.
Title: Re: Stop worrying about the 4% rule
Post by: Clean Shaven on July 16, 2015, 08:43:09 AM
Sol, You are awesome. Thank you.
X2. Thanks!
Title: Re: Stop worrying about the 4% rule
Post by: forummm on July 16, 2015, 10:55:28 AM
(http://www.freedomtwentyfive.com/wp-content/uploads/2012/02/slowclap.jpg)

Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on July 16, 2015, 11:09:57 AM
In recognition of sol's extraordinary efforts towards examining SWRs from new angles, I propose that we rename this thread "Dr. Sol or:  How I Learned to Stop Worrying and Love the 4% Rule."
Title: Re: Stop worrying about the 4% rule
Post by: Cheddar Stacker on July 16, 2015, 02:35:05 PM
This article is nothing new for anyone around here:
http://www.marketwatch.com/story/how-traditional-retirement-formulas-fall-short-2015-07-15?dist=afterbell

I linked to it here because I think it highlights just one more reason to stop worrying about the 4% rule even though that's not really his conclusion.

It sort of reminded me of this GCC post: http://www.gocurrycracker.com/the-worst-retirement-ever/ because he cherry picked an awful year to retire (1970) and still showed ways to succeed.

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.

My conclusion: So draw 4%, or invest more aggressively than 50/50. Or don't be so rigid with spending exactly 4/5% plus inflation. Pretty simple.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on July 16, 2015, 03:19:51 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on July 16, 2015, 03:41:58 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on July 16, 2015, 03:48:44 PM
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.

Where does it say that?  Doesn't the article say the "100% stock" portfolio is the S&P 500?

EDIT:  Oh I see now - I misread the reference to the "column at the right" to mean the "100% stock" column and didn't notice the separate S&P 500 column.
Title: Re: Stop worrying about the 4% rule
Post by: Cheddar Stacker on July 16, 2015, 05:34:56 PM
Ok then. I didn't verify anything. Disregard.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on July 18, 2015, 08:10:03 AM
I'll be interested to see that analysis, Ender. I assume you'll also include the differences that result from longer or shorter remaining mortgage terms, and higher and lower interest rates. With only 5 years left on the term, perhaps the WR can be really high since you'll have the huge drop in spending in 5 years. With the typical 6% interest rates historically, paying off your mortgage seems like a no-brainer. It's with the historically low 3% rates now that make us wonder.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on July 18, 2015, 08:17:42 AM
Ender, your analysis in the above post is flawed for the same reason I described in post # 107 above.  I'm reluctant to go into too much detail because it seems off topic for this thread and has already been extensively discussed in several of the "to pay off or not to pay off" mortgage threads (like this one (http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/)), but in my view the proper way to think about it once you have a sufficient portfolio balance to pay off the mortgage in full is to mentally divide your portfolio into two buckets:  one devoted to servicing the mortgage principal + interest, and another devoted to servicing all of your non-mortgage related expenses.  So, if your mortgage rate is low enough and remaining life to maturity high enough to justify retaining the mortgage, then paying it off does not result in increased chances of history-based portfolio success (instead, it can result in decreased chances of history-based portfolio success, in addition to leaving you with a lower historical terminal portfolio value).  When you run your cFIREsim/FIREcalc analyses, don't forget to set the principal + interest payments to "not inflation adjusted" (while all the non-mortgage related expenses, including property taxes and insurance, should be adjusted for inflation).

EDIT:  For the sanity of anyone reading this in posterity, this post was made in response to a post by ender that was apparently subsequently deleted (as was the post that post # 107 was responsive to, but in that one I had quoted the portion I was responding to so that one should be easier for future readers to make sense out of).
Title: Re: Stop worrying about the 4% rule
Post by: a1smith on July 18, 2015, 09:15:05 AM
^^  I agree.  My mortgage is 2.97% and there is no way I'm paying it off early.  Easy math problem.
Title: Re: Stop worrying about the 4% rule
Post by: makincaid on July 18, 2015, 11:04:12 AM
Awesome graph Sol!

I would love to see it for 80% survival as well.
Title: Re: Stop worrying about the 4% rule
Post by: a1smith on July 18, 2015, 12:41:35 PM
. . . . .

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.
Title: Re: Stop worrying about the 4% rule
Post by: MDM on July 18, 2015, 01:14:47 PM
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 RateWR4%
Annual Savings InvestedS50000$/yr
Annual Retirement ExpensesE40000$/yr
Current Assets InvestedA100000$
Investment returnr_6%
Time to FIt11.6yr
Sensitivity of Time to FI for each input
E/WR, stash neededG1000000$
dt/dr_-0.6yr/%
dt/dS-0.2yr/$K
dt/dG0.9yr/$100K
dt/dA-1.8yr/$100K
dt/dE2.3yr/$10K
dt/dWR-2.3yr/%
Calculate Savings needed based on time
Desired time to FIt10.00yr
Annual Savings NeededS62281$/yr
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on July 20, 2015, 07:40:15 AM
Sensitivity of Time to FI for each input
E/WR, stash neededG1000000$
dt/dr_-0.6yr/%
dt/dS-0.2yr/$K
dt/dG0.9yr/$100K
dt/dA-1.8yr/$100K
dt/dE2.3yr/$10K
dt/dWR-2.3yr/%

Interesting summary, but why compare dt/dS in yr/$k vs. dt/dE in yr/$10k?  For most Mustachians, I would think it is just as likely to be able to save an extra 10k/yr for the earnings years as it would be to permanently lower annual expense from 40k to 30k.  This would then make both sensitivities about equal, I think...
Title: Re: Stop worrying about the 4% rule
Post by: MDM on July 20, 2015, 07:54:18 AM
Interesting summary, but why compare dt/dS in yr/$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.

Quote
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.
Title: Re: Stop worrying about the 4% rule
Post by: ysette9 on July 24, 2015, 07:59:19 PM

... 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! :)
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on July 24, 2015, 08:05:55 PM

... 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! :)

https://www.youtube.com/watch?v=BdB0P9fx7Es

See what you made me do!
Title: Re: Stop worrying about the 4% rule
Post by: a1smith on July 24, 2015, 09:17:27 PM
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?
Title: Re: Stop worrying about the 4% rule
Post by: MDM on July 24, 2015, 09:49:59 PM
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?
Yes, those are the "first five numbers" in question.  The equations are in the linked spreadsheet mentioned a few posts back.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on July 29, 2015, 01:48:54 PM
https://www.kitces.com/blog/how-has-the-4-rule-held-up-since-the-tech-bubble-and-the-2008-financial-crisis/

Quote
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.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on July 29, 2015, 01:54:27 PM
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/)).

Also, I wish he would have included an equivalent chart to the first "historical worst year comparison" chart using real instead of nominal data (and it seems odd that he didn't).
Title: Re: Stop worrying about the 4% rule
Post by: Nords on July 29, 2015, 02:14:25 PM
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.

Raddr's been tracking this on his forum for over a decade.  Here's the initial setup:  http://raddr-pages.com/forums/viewtopic.php?f=2&t=1208
"I've finally gotten around to calculating the 2004 year end balance of the portfolio of a hypothetical investor who retired at the end of 1999 with a 75:25 mix of S&P500 stocks and 6 mo. commercial paper."
Here's the 2014 update, at a withdrawal rate of over 10%:  http://raddr-pages.com/forums/viewtopic.php?f=2&t=1208&start=390#p52998

Here's a more in-depth discussion of various asset allocations:
http://www.early-retirement.org/forums/f28/firecalc-and-the-hapless-y2k-retiree-69942.html

Yet the Hapless Y2K Retiree still might make it.  And if his portfolio can survive this mindless spending, then I think every human starting with a 4% SWR can make it to at least Social Security.
Title: Re: Stop worrying about the 4% rule
Post by: k9 on August 04, 2015, 04:15:17 PM
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.

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.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on August 04, 2015, 04:36:24 PM
You cut off the rest of my post, taking that out of context.  Read the rest of it.

If you want to argue for a sub-1% SWR (or .25%, or whatever number you pick), like I said, you're essentially saying 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.

That seems pretty pessimistic.

In other words, yes, your post of needing a sub-0.25% SWR is saying the future will be much worse than ever, anywhere, in the last several hundred years.

I just don't see it, and if that is the case, I don't think any SWR will help, even if it's 0.01% as we'll be in total economic collapse.
Title: Re: Stop worrying about the 4% rule
Post by: k9 on August 04, 2015, 05:15:00 PM
Oh, anyway, I'm not really scared about that SWR stuff. As mentioned a lot of times even in this topic, there are many options beside SWR. As a French citizen, I have a substantial pension waiting for me starting from my 60s, and I can work more if needed until that. I will probably inherit from my parents before I am not able to work anymore. Health insurance is quite cheap here. And I could well be dead before I retire, anyway, so...

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.

4% is the worst case scenario for the best case scenario. I think it is a reasonable overall tradeoff (and I'm aiming for that), but it cannot just be considered an outlier.
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on August 04, 2015, 05:36:25 PM
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.

There are a great many of us here that would argue that was not simply luck, and many others that would argue that we've had quite a few close calls on all of that.
Title: Re: Stop worrying about the 4% rule
Post by: Nords on August 04, 2015, 11:30:51 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on August 04, 2015, 11:38:20 PM

No war.
Speaking as a military veteran, I find this statement incomprehensible as written.  Feel free to elaborate.

No warfare within our national borders.  On our soil.

You have to remember, he is speaking from the perspective of a French citizen.  When you are born French, war comes to you.
Title: Re: Stop worrying about the 4% rule
Post by: k9 on August 05, 2015, 04:10:45 AM
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.

Yeah, I agree with that. But the point was raised at some point that the 4% SWR was a worse case scenario, and that at no point in history the situation could have been worse. This is somewhat biased.

Quote
No war.
Speaking as a military veteran, I find this statement incomprehensible as written.  Feel free to elaborate.

Yeah, sorry. MoonShadow explained. No war *on your soil*. Your country has never been invaded, your cities being destroyed, your country being ruled by a foreign army, etc. Except for military men like you, this makes a huge difference. Even if you end up winning the war, you have a whole country to build back. This has a huge impact on the economy, obviously. Your REITS portfolio kinda suffers, for instance ;)
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on August 05, 2015, 08:33:47 AM
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).

Quote
As 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)).

Quote
A 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).
Title: Re: Stop worrying about the 4% rule
Post by: forummm on August 05, 2015, 09:06:00 AM
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).

Quote
As 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)).

Quote
A 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.
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on August 06, 2015, 04:29:00 AM
Just buy the whole world. Why increase your risk by concentrating in one country? Even US investors shouldn't do that.

Yep: http://www.schwab.com/public/schwab/nn/articles/Global-Perspective-the-Right-International-Stock-Allocation-May-Be-More-Than-You-Think?cmp=em-QYB
 (http://www.schwab.com/public/schwab/nn/articles/Global-Perspective-the-Right-International-Stock-Allocation-May-Be-More-Than-You-Think?cmp=em-QYB)
See the graph in item number 3.  All the upside of the U.S. market with less downside.
Title: Re: Stop worrying about the 4% rule
Post by: k9 on August 07, 2015, 06:16:51 AM
Quote
As 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 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.

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.

Oh, for the record, just to show why I think it's kinda wrong anyway to worry about that 0.95% SWR. That outlier happened because of WWII. But a French citizen retiring just after WWII was actually in a very good situation. They were the very first ones to access social security pensions (they are more substantial than in the US), and didn't have to pay for that. So, whatever got crushed during the war was somewhat given back afterwards. Pretty cool for an all-time worst.

TLDR : don't suppose 4% is ultra-safe. Don't worry about it either. Nothing is ultra-safe.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on August 24, 2015, 09:31:56 AM
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).

Quote
I 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).

Further to the above, Go Curry Cracker posted a great article today (part 1 of 3, it seems) on portfolio survivability.  He introduced the concept of "withdrawal rate in perpetuity", or the withdrawal rate that leaves a portfolio's inflation-adjusted value unchanged from its initial value at the 30-year mark.  He found that a 4% WR met this standard in roughly 65% of the 30-year periods commencing between 1926 and 1985 using a 75/25 stock/bond split (higher equity allocations produced even higher historical rates of achieving the "withdrawal in perpetuity" standard).

http://www.gocurrycracker.com/the-go-curry-cracker-endowment-fund/
Title: Re: Stop worrying about the 4% rule
Post by: HankERJourney on August 24, 2015, 10:46:34 AM
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:
(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 :-)
Title: Re: Stop worrying about the 4% rule
Post by: fattest_foot on August 24, 2015, 03:35:25 PM
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.

You shouldn't worry about black swan events.

In a hypothetical where something like WWII breaks out again, a cushy office job is probably going to disappear anyway. You'll be no worse off being unemployed when the war kicks off versus having your portfolio collapse. Really, the only difference being that you'll have had hopefully a decent amount of time to enjoy your life before humanity ruined it.

In a situation where the country is invaded, or anything a Doomsday prepper prepares for, it's similar in that everyone's money will be worthless anyway. So I doubt many people should be factoring that into a SWR.
Title: Re: Stop worrying about the 4% rule
Post by: Dawg Fan on August 27, 2015, 04:59:01 PM
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:
(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 :-)
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.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on August 27, 2015, 06:04:50 PM
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:
(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 :-)
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.

The point of the thread is that you shouldn't worry much about a 4% SWR failing. But the reality is that you can probably spend more than that, especially if you're 5 or 10 years into RE and you can tell from the past market returns that you have avoided one of those disastrous retirement dates. So you could certainly spend more at times and be OK. Personally, I have multiple funds that I'm working with. I have a base 4% WR fund that will take care of basic minimum expenses. Then I have another fund for fun stuff that I don't need to last forever. And then another fund for paying off the house, some college expense, etc. So do whatever works for you and your spending interests.
Title: Re: Stop worrying about the 4% rule
Post by: 2lazy2retire on September 03, 2015, 10:43:07 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on September 03, 2015, 12:21:28 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on September 11, 2015, 06:04:59 AM
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.

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.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on September 11, 2015, 07:48:25 AM
A bit of a new thought, for those that are open to such things, what is most interesting about a young person living on '4%' of their net worth is how poor they are relative to their earning potential.  Even more interesting, the earlier you retire, the more income you forego.  MMM pulled this off nicely in the 'fat times' of the internet because he has plenty of income.  Notice how he never talks about living off market or dividend returns, and even mentioned going back to work (at one point).

Anyway, what I'm getting at is, in order to save up that portfolio at an early age, you were making much more than the 4% SWR (in order to have a 50% or greater saving rate).  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).

So, 'stop worrying about 4%' might actually just mean 'find work that you enjoy that provides the 4%'.  I think that is where most PF bloggers are, whether they admit it or not.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on September 11, 2015, 08:08:21 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on September 11, 2015, 08:50:54 AM
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. 

The whole 'enough' idea is very gray (grey?), which will always come up, and will keep coming up now that the market might go down YoY for the first time in a looooong time.  For example, is 'enough' just when you hit 4% on your 100% NASDAQ fund at 3940 at the end of 1999.  Doing a simple simulation of 4% non-inflation adjusted withdrawals (1M went to zero in 2013) vs. savers (20k/yr savers had 1.3M in 2014) might shock you as to how different accumulators have it from those in the withdrawal phase.

 
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on September 11, 2015, 08:59:11 AM
But, to make my point clearer in my 'simple simulation', the NASDAQ withdrawal guy would currently be fine if he started with 2 million (e.g. a 2% SWR, ending 2014 at about 1.1M).  But who would've known that 1 million was 'not enough' in 1999 and 2 million was (and maybe these are similarly heady times as to today)? 

Who knows if 1 million is 'enough' for a 30 year 4% SWR going forward (yeah, the simulators all tell us it was fine in the past, blah, blah, blah), that's all I'm trying to point out...
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on September 11, 2015, 09:12:06 AM
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. 

Yes, I must have missed the point, and I still don't quite see it.  This thread is a repository of all the reasons we have to believe in the safety of relying on the 4% rule (including the all the various external levels of safety it intentionally ignores, over some of which you do have control).

If your point is that reliance on a sinking fund investment portfolio to cover your living expenses is inherently less safe than reliance on an investment portfolio plus an accumulator's income stream, then of course that point is correct, but the goal in examining the safety of the 4% rule is to determine whether it is sufficiently safe to allow one to rely on it without an accumulator's income stream.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on September 11, 2015, 09:29:59 AM
Well, what I was actually trying to say, not quite as simplified as what you reduced it down to, is that 4% is a far cry from where you were when you had income and built a portfolio that provided the passive 4%. 

So maybe a better simplification of what I intended to say is that a better strategy to 'stop worrying about 4%', instead of running simulations, is if you put that effort toward how to turn some of your 100+% SWR into some of that 4% SWR...  Sounds pretty ridiculous when I say it like that, but that is why Mustachianism is niche.  For example, MMM easily made 6x his SWR (150k avg. family salary, 25k spending), so of course he retired after working 10 years.  But then he went on to make money on his blog (probably more than he intended), which was the 'belt and suspenders' approach to feeling truly FI.  An 'easier' path would've been to establish stable income while working, and both shorten his career AND have more SWR safety factor.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on September 15, 2015, 03:59:33 PM
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 ?
Title: Re: Stop worrying about the 4% rule
Post by: sol on September 15, 2015, 04:10:26 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: MDM on September 15, 2015, 04:14:23 PM
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 ?
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.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on September 16, 2015, 02:56:41 AM
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.

This is interesting. I probably read that within this thread but forgot it. If on average it can last 50 years then what if you can tighten your budget a bit at the start or not withdraw for say 5 years and work part time. I'm just throwing some options out there but I figure you could increase the odds of success over and above how a WR is modelled.

That isn't including any form of inheritance or social security or downsizing your house.

Basically this makes me feel that a 5% WR should be fine for me.

Title: Re: Stop worrying about the 4% rule
Post by: steveo on September 16, 2015, 03:03:48 AM
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 ?
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.

That is a good article which is in my opinion pretty optimistic. I'm also optimistic that a 5% WR would be fine.
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on September 16, 2015, 04:27:44 AM
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 ?
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.

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?
Title: Re: Stop worrying about the 4% rule
Post by: forummm on September 16, 2015, 06:35:15 AM
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 ?
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.

That is a good article which is in my opinion pretty optimistic. I'm also optimistic that a 5% WR would be fine.
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?
Title: Re: Stop worrying about the 4% rule
Post by: MDM on September 16, 2015, 08:10:41 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on September 16, 2015, 09:04:41 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on September 16, 2015, 02:57:27 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on September 16, 2015, 03:29:51 PM
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.

I disagree, because in a world without advisor fees (assume 1%) all that money would be invested thereby increasing the markets by 1% right away and then going forward you would be able to take advantage of the advisor arbitrage and therefore the real SWR is only 4% SWR (this is based purely on the premise that the trinity study assumes a 1% fee).  So the more people that move to vanguard or other low cost funds/ETF/etc the less arbitrage there is to take advantage of and in that case it would be 4%-1% = 3% SWR. 

Good news is that low cost funds still only account for a about a third of the investment world - so may be more like a 3.65% SWR now.



Title: Re: Stop worrying about the 4% rule
Post by: sol on September 16, 2015, 03:38:50 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on September 16, 2015, 03:47:04 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on September 16, 2015, 03:54:21 PM
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.

Agreed. The point is though that my target becomes 5% rather than 4%. Its an easier target to hit.
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on September 16, 2015, 04:04:03 PM
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.

Slip on my part as the comment was about Pfau stuff.
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on September 17, 2015, 04:29:53 AM
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.

I totally get that SWRs assume that the future will be no worse than the worst of the past.  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, what justification do we have for maintaining the assumption that the worst will still be no worse than the worst times of the past?  An average is composed of a range of data points.  If one is going to assume that the range of data points will contract on the high end, one needs to provide some justification for assuming that the range will not expand on the low end.  In other words, why do we think that dispersion about the mean is going to contract, and only on one end of the distribution?
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on September 17, 2015, 06:27:10 AM
The other 'worst' assumption that isn't discussed is that we are talking finances, not social events.  Economists have argued that WWII was 'good' for the economy and brought about the end to the Great Depression, so I actually don't worry financially about social events.  On the other hand, we are in uncharted territory with what the Fed and globalization have left us.  Both first world countries and emerging markets have benefited from globalization and the US has benefited from the Fed keeping rates at zero and implementing QE.  These tail winds, IMHO, are closer to the end than the beginning.  Even gains in productivity now seem to come with a tradeoff to unemployment or underemployment. 

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. 
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on September 17, 2015, 07:26:08 AM
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.

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.

I'm not sure why you think this isn't discussed.  It's discussed so much by so many that this thread was created with the express purpose of reminding people why, in spite of that, there are still reasons to believe in the safety of retiring in reliance on the 4% rule.  Many (maybe most?) financial prognosticators argue that we are potentially poised for some of the worst market returns ever.  Even so, to cause the failure of a withdrawal plan strictly adhering to the 4% rule, market performance would have to be worse than history's 5th percentile.  To cause the failure of most any actual retiree's actual retirement (which will never robotically adhere to the rigid parameters of the 4% rule, and which will benefit from at least some of the copious layers of external safety margin deliberately ignored by the 4% rule), market performance would have to be catastrophically worse than history's 0th percentile.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on September 17, 2015, 07:37:24 AM
Who makes that assumption?  The 4% rule certainly doesn't.

Agreed.  The nice thing now is that we have free tools that we can use to test our specific RE situations against historical data or whatever monte carlo simulation parameters we feel best model the worst case scenarios that concern us.

Nobody knows what is going to happen, but if you want to simulate some bad stuff you can and see how your investment/spending plan handles it.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on September 17, 2015, 08:22:23 AM
I'm not sure why you think this isn't discussed. 

I get the impression folks conflate social events with market performance, I haven't seen comments about how the current economic landscape compares with history.  But that is a much more difficult evaluation to make, very few people are still around that could raise awareness of the economic backdrop (ignoring the social events) of the past vs. present.  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.  And the correlation between market performance and the economy is stronger than market performance and social events.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on September 17, 2015, 08:35:33 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on September 18, 2015, 04:40:39 AM
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.


Those nameless "retirees and planners" who are "adjusting to the new normal."  And the article in question appears to buy into that assumption:

Quote
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.

I think the big fallacy in all of this is the presumption that mid-single digit returns for long periods of time are unprecedented.  They're not (see: the 1970s).  So if what we're really looking at is a repeat of the worst decade in history, the 4% rule should be fine.  Such conditions are already baked into it. 

Yes, I realize I'm agreeing with you, brooklynguy.  I don't really buy into the anxiety about the adequacy of the 4% rule; I was just trying to point out a logical problem in the argument that is being offered in support of the rule.  A better defense would be refusing to grant the assumption of a "new normal" in the first place.

Of course, no one knows what the real future will hold.  Personally, I have a bit of anxiety about assuming that US market returns from 1871 to 1960 have any predictive value for the future, given the tremendous changes in demographics and the economy since then.  Perhaps we would be better served by basing our modeling on post-war western Europe, which probably resembles the current state of the US more closely than the US history that was used to build the 4% rule.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on September 18, 2015, 05:14:09 AM
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%).
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on September 19, 2015, 04:42:57 AM
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%).

I think we're getting close to tomato/tomaahto-land.  What got me was that the author appeared to buy into the "this is unprecedented" tone of the new normal argument.  If he had simply stated from the outset that long-term single digit returns are not unprecedented and are already accounted for by the 4% rule, his argument would have been much clearer.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on September 20, 2015, 03:42:20 PM
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.

Which results in sub-4% SWR's...

http://time.com/money/2795168/forget-the-4-withdrawal-rule/?iid=EL

Quote
(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.”
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on September 21, 2015, 07:18:00 AM
Which results in sub-4% SWR's...

http://time.com/money/2795168/forget-the-4-withdrawal-rule/?iid=EL

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.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on September 21, 2015, 09:18:02 AM
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.

I'm not trying to be argumentative here, but a lot of folks are buying in to 4% SWR as a natural law which does not need to be examined.  Folks are running simulators without any regard for the assumptions behind the model, and feel confident that an 90% chance of success is 'the answer' (or hopefully at least close).  But the smart people that came up with the 4% 'rule' are telling us that we are most likely headed toward a period of low or no stock market growth, lower than historic bond yield, stagflation, an inability for the Fed to raise rates; basically any number of things that are now worrying them about trusting a 30-year 4% SWR going forward.

The worry for people that RE isn't to suddenly find their portfolio flashing warning signs a year or two in (although that would suck), but it is to be retired for a decade or two and then find yourself facing a declining or uncomfortably low standard of living and pathetic job prospects.  But then again, most 'true Mustachians' can live well on Social Security alone, so I'll end by saying that I'm probably just projecting my own fears when I say that I don't want to have to depend solely on SS 24 years from now. 

My strategy, with these fears in mind, was to take my FU money (not 4% SWR), find a job I like, and extend my accumulation phase.  It's remarkably similar to what many of these bloggers have done, except I am not bashful about calling what I do for income to be a job.     
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on September 21, 2015, 09:56:57 AM
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.

I don't mean to brush this concern under the rug.  I share this concern myself.  I don't profess to be able to accurately predict the future, but I personally believe there are very good reasons to think we are poised to encounter below-average returns over the next several decades.  Maybe the thirty-year period starting today will resemble one of history's bottom fifth percentile cases.  Maybe it will be worse than any we've seen before.

I'm just trying to point out the flaws in the reasoning of using predictions about the future to attack the validity of the 4% rule, which is merely an observation about the past.  Anyone who treats the 4% rule as a natural law has not been paying enough attention.  It is an observation about what worked in the past--no more, no less.  When we extrapolate and use it as a guide for what will work in the future, we are necessarily making assumptions about the range of possibilities the future will bring.  If you assume that history contains the entire universe of possible outcomes, then past safe withdrawal rates tell you future chances of success.  If you build pessimistic capital market expectations into your assumptions about the future (as Pfau has been doing with his Monte Carlo simulations), then your conclusions about the future will necessarily be pessimistic.  The results of any forecasting exercise are only as good as the assumptions used in the model.  Garbage in, garbage out.

In addition, as you alluded to, whenever one examines the litany of real-world exogenous risk factors surrounding reliance on the 4% rule (high current market valuations, strong likelihood of your retirement period outlasting 30 years, etc.), one should not forget to stack against it the litany of real-world exogenous levels of safety margin (flexibility to lower spending or seek supplemental income, possibility of receiving social security or inheritances, etc.).  And, to your point, vice versa.

As always, given the unknowability of the future, it boils down to a trade-off between your retirement's length and your retirement's likelihood of unmitigated success.
Title: Re: Stop worrying about the 4% rule
Post by: sol on September 21, 2015, 09:58:15 AM
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.

That's all well and good, but it's economic forecasting and has nothing to do with historical SWRs. 

If you see a global economic catastrophe coming and lay odds on the collapse of civilization, don't pretend you're still talking about analyzing historic stock market returns.  You're suggesting you can predict the future based on something other than the past, which may be true but it doesn't tell you anything useful about future market returns or supportable withdrawal rates.

Your SWR will be zero if an asteroid hits the earth.  Not 4%, or 3.2%, or 1.8%.  The key is that the odds of that happening have nothing to do with past market performance.  You're trying to predict fuel economy based on the assumption of crashing the car.

Assuming you don't crash, your mpg is pretty predictable and based on your past mpg.  If you do crash, it won't really matter anymore so why are you worrying about false security?
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on September 21, 2015, 11:11:58 AM
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?  1965-1995 doesn't look all that bad in the history books, but it was a terrible time to be a retiree.  But I'd even go so far as to say that the economic landscape in 1965 looked better than what we currently face (high equity valuations, low bond yields, etc.). 

Per GoCurryCracker (http://www.gocurrycracker.com/the-worst-retirement-ever):

Quote
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.

I'm just putting this out there to provoke thought and discussion.  I thought Jeremy's article was a fantastic thought experiment, but didn't go far enough in discussing remedies, or how painful the remedies could be.  He mentions 'flexibility' (which sounds suspiciously like, "if things go pear shaped, I'll just pop on a tie and go back to work until things get better") and using a 3% SWR (which requires 33% more years of work!), both of which are easy to say when you have all the data.  It's also easy to say when you already have a 3% or lower SWR, which I suspect is the case based on his latest blog post...

Anyway, I'm getting tired of thinking pessimistically, so I'll let it go at that.
Title: Re: Stop worrying about the 4% rule
Post by: MDM on September 21, 2015, 11:45:16 AM
Per GoCurryCracker (http://www.gocurrycracker.com/the-worst-retirement-ever):
Quote
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.

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"?

(http://www.mrmoneymustache.com/wp-content/uploads/2012/05/SWR-by-year.jpg)
Title: Stop worrying about the 4% rule
Post by: Seppia on September 21, 2015, 12:01:51 PM
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.

Yeah, plus I'm not super sure I would trust 100% someone who isn't even able to depict the German flag correctly :)
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on September 21, 2015, 12:44:53 PM

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"?


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/)

Quote
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.
Title: Re: Stop worrying about the 4% rule
Post by: MDM on September 21, 2015, 01:02:36 PM

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"?
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/)
Quote
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.

Ok, now I remember - and if I'd reread better the Pfau article I linked...:
Quote
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).
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on September 21, 2015, 01:57:30 PM
Ok, now I remember - and if I'd reread better the Pfau article I linked...

We had discussed this particular discrepancy in the thread about the variations between Kitces' SWR conclusions and those of most other studies (which expanded into a discussion about discrepancies across the various SWR backtest studies in general, and which was alluded to, but not specifically cross-referenced, upthread, so here's the link for anyone interested:  SWR data discrepancies (primarily re: Kitces studies) (http://forum.mrmoneymustache.com/investor-alley/kitces-article-ratcheting-swr-data-discrepancy/)).

But all this hashing over the details of the various backtests' inputs and outputs just reinforces the larger point that SWR analysis is, by its nature, backward (and not forward) looking.

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?

I have little faith in anyone's ability to predict what the next 30 year period will look like (at least without some massive error bands around their prediction).  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.  If you'd like to hear what gives me that confidence, scroll up and reread this thread ;)
Title: Re: Stop worrying about the 4% rule
Post by: sol on September 21, 2015, 03:57:39 PM
If you'd like to hear what gives me that confidence, scroll up and reread this thread ;)

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.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on September 21, 2015, 05:06:30 PM
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.

This is where I have an issue. If I worry so much about 4% not being safe (I am honestly at this point going to go for 5%) then I have to keep working longer and longer. I don't want to do that. I may have to think about jobs that can pay me a small income with little effort because that is all that I need to live happily on and it would delay my drawdown phase.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on September 21, 2015, 05:11:39 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on September 21, 2015, 09:47:14 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on September 22, 2015, 08:56:56 AM
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.

A Japan like scenario for the US is probably a more likely one of the possible bad scenarios as there are a lot of similarities - high debt levels, aging population, focused on consumerism, etc. 

However, the Japan had a true demographic cliff whereas ours starts at the after the Millenials which have yet to really play a role in the economy - once this demographic gets going in their careers and household formation (assuming it stops being all about me me me and YOLO mentality) they will drive the economy and backfill the aging/retiring boomers.  GenX gets stuck again but as they say timing is everything.

Additionally, the US still has relatively friendly immigration policies that has and will continue to offset our decling birthrates. 

So full blown Japan scenario shouldn't occur.
Title: Re: Stop worrying about the 4% rule
Post by: P4J on September 28, 2015, 11:42:38 AM
Looking back at the historical data (with a nod to the idea that things could always be different going forward):

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/).

The 4% SWR is, as you recall, the "worst case" SWR found in the historical data for 30-year retirements. As it turns out, the Shiller PE in that year was 25, the same as it is today. For all PEs lower than 25, the SWR was higher, with roughly power-law dependence. See Figure 3 in the post linked above. It is pretty amazing how well the data follows the curve.

Historically speaking, 4% is the correct SWR for the market valuations we are seeing today. If the curve fits are to be believed when extrapolated (grain of salt required), a 3% SWR isn't needed until the PE hits 35—which it has only ever done leading up to the peak in the dot-com bubble.

(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.
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on September 28, 2015, 01:10:16 PM
(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.)

Yeah but it also includes the inflated earnings leading up to the crash and the earnings recovery right after the crash so it balances out....that is the logic behind the the rolling 10 year period

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.

Makes sense that if the Shiller PE is 4% (1/25) and interest rates are 4% (about what they were then) that a 4% SWR would work....but it is not clear to me from you or the link that this is coincedence or not.  It does look like today from a PE and Shiller PE, but interest rates are lower today (both nominal and real) and dividend yields are lower today.....divi yield being lower matters because it is not cash in your pocket, sure it stays with the company to reinvest or buyback stock so it should be neutral on a total return basis but history has demonstrated that companies having excess capital to play with generally results in inferior returns.
Title: Re: Stop worrying about the 4% rule
Post by: seattlecyclone on October 01, 2015, 10:50:36 AM
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/).

That is an amazing correlation. Thanks for plotting it!
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on October 01, 2015, 11:41:15 AM
Nice work, P4J. 

I haven't seen anyone run the analysis before, so I did it.

FYI, Kitces actually did a similar analysis (see: Kitces on Shiller CAPE for Retirement Planning (https://www.kitces.com/blog/shiller-cape-market-valuation-terrible-for-market-timing-but-valuable-for-long-term-retirement-planning/)).  Citing research he conducted in 2008, he found an "astonishingly strong -0.74 correlation" between CAPE and SWRs.

That is an amazing correlation. Thanks for plotting it!

Note, however, that CAPE seems to have lost much of its predictive power with respect to SWRs in periods subsequent to 1985, for which we don't yet have fully-elapsed 30-year periods but for which we do have long enough periods to suggest that the relationship between starting-year CAPE and SWR has broken down (unless the future brings some truly catastrophic market performance over the unelapsed portions of those 30-year periods) (see the discussions in these threads: (i) Using market valuations to affect SWR? (http://forum.mrmoneymustache.com/investor-alley/using-market-valuation-measurements-to-affect-swr/) and (ii) SWR discussion (http://forum.mrmoneymustache.com/post-fire/if-(swrinflation-lt-4-of-stash-reset-to-4-spend-swrinflation)/50/) (the portion of the discussion starting at post # 84 in particular).
Title: Re: Stop worrying about the 4% rule
Post by: k9 on October 01, 2015, 01:16:08 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on October 01, 2015, 05:00:07 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Tyler on October 01, 2015, 05:30:28 PM
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/).
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on October 01, 2015, 07:27:16 PM
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/).

Thank you for this.  I might just consider altering my portfolio based upon this information.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on October 01, 2015, 07:44:45 PM
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.

I don't have a whole lot of confidence in this analysis. I'm reading a bunch of William Bernstein's books now and I think he nails a lot of really good points that I think are not encompassed within that analysis.

Some factors such as:-

1. Hidden costs. Just taking into account indexes does not cater for index fees, buying and selling costs and capital gains costs (tax). This is especially true with small cap value and emerging market indexes. Small cap and emerging markets sound great in theory but the costs may eat up all of the supposed increased returns.
2. Gold doesn't perform well in most situations. Gold performs well in times of deflation however deflation is not a high probability event.
3. Past returns do not equal future returns. Its easy to put together an optimised portfolio based on historical data however that does not mean that this will continue into the future.

I do agree that portfolio theory is a really important component of managing your investments but I think taking into account the various assets available to the investor and the returns that you can expect from those assets over time is probably more important that optimising a portfolio. I also think you will never get a perfect portfolio.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on October 01, 2015, 08:17:09 PM
The most simple and convincing case I have for stocks being over valued is that their main (risk adjusted) competitor, long term bonds, are at all time historic lows.  People who need total return have been forced to buy equities (or other 'riskier' instruments).  If the Fed successfully raises interest rates to a more normalized 2% or positive real return of 4% nominal, equities become less attractive (on a risk adjusted basis).  And this is all assuming that inflation remains constant ~2%.  If we experience deflation or an increase in inflation, all bets are off with earnings staying high as consumers tend to move to the sidelines.
(http://www.valueexplorer.com/fileadmin/_migrated/RTE/RTEmagicC_Shiller_PE_Jan_13.png.png)
Title: Re: Stop worrying about the 4% rule
Post by: steveo on October 01, 2015, 08:42:11 PM
^^^^
This is the type of analysis that I think is important when trying to judge a portfolio including WR's. I think the best portfolio would be pretty simple in theory - put 90%-100% into stocks when they are at all time lows. The problem is that its not going to happen.
Title: Re: Stop worrying about the 4% rule
Post by: Tyler on October 01, 2015, 08:47:05 PM
@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!
Title: Re: Stop worrying about the 4% rule
Post by: steveo on October 02, 2015, 02:50:36 AM
@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!

I agree with your comments regarding different portfolios not being considered by the Trinity study. I am working through what is the best option to take for me personally with regards to my portfolio however I get the impression it will never be perfect.

That Bernstein portfolio is interesting. I think Bernstein is very risk averse and yet that portfolio over 40 years had a 5% SWR. I'm not sure exactly what option I will take however I also want to keep it relatively simple.
Title: Re: Stop worrying about the 4% rule
Post by: Seppia on October 03, 2015, 07:31:54 AM
This thread is simply amazing, sorry for the pretty pointless post but I just wanted to thank all contributors
Title: Re: Stop worrying about the 4% rule
Post by: k9 on October 05, 2015, 05:21:17 AM
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.
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.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on October 25, 2015, 10:39:01 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on October 25, 2015, 10:22:46 PM
Gold performs well during periods of high uncertainty, but that is not the only influencing factor.  Other things do well under similar conditions, but are not universally effective or available.  There is no perfect hedge investment, but gold (and silver) is a well established hedge investment.  And one with a huge history.  Don't just automatically discount it because it doesn't earn a return, there will be times that preservation of wealth already accumulated is more important for your portfolio than growth.
Title: Re: Stop worrying about the 4% rule
Post by: Tyler on October 25, 2015, 11:56:54 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on October 26, 2015, 05:00:31 AM
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 did some more poking around, and PortfolioCharts only uses data starting in 1972. Basically, a falling interest rate environment and exactly starting when gold was no longer price controlled.

That data set is too limited for me to trust the siren call of higher WRs. It's certainly interesting, but we're missing the traditionally worst starting years for portfolios in the 1960s... 

...and OF COURSE gold does well. No shit. The price had been kept artificially low by the government and it was unlocked. Gold was fixed at $35 before it was unlocked.

The argument is that not all the data sets go back that far - but the effect is to cherry pick your start dates.
Title: Re: Stop worrying about the 4% rule
Post by: Tyler on October 26, 2015, 09:25:23 AM
FYI - The starting date for the data, its effect on calculated SWRs, and the reason why more data doesn't necessarily help unless it reflects how you actually invest are addressed at length here:  http://forum.mrmoneymustache.com/investor-alley/asset-allocation-and-safe-withdrawal-rates/
Title: Re: Stop worrying about the 4% rule
Post by: dabears847 on November 30, 2015, 09:05:39 AM


The point of the thread is that you shouldn't worry much about a 4% SWR failing. But the reality is that you can probably spend more than that, especially if you're 5 or 10 years into RE and you can tell from the past market returns that you have avoided one of those disastrous retirement dates. So you could certainly spend more at times and be OK. Personally, I have multiple funds that I'm working with. I have a base 4% WR fund that will take care of basic minimum expenses. Then I have another fund for fun stuff that I don't need to last forever. And then another fund for paying off the house, some college expense, etc. So do whatever works for you and your spending interests.
[/quote]
So much to read, multiple days getting through this post... I posted another thread a few weeks ago looking for some of this information. There would be huge value to me and others alike if you made the "Playbook of the 4% plan, best ideas from the group, with portfolio mix, rentals, swr, flexibility, triggers, taxes, 72t, 401k conversion, low cost funds, college costs, kids, re-balancing portfolio, etc. Similar to the communication thread.
Title: Re: Stop worrying about the 4% rule
Post by: thinkinahead on December 09, 2015, 10:17:47 AM
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?
Title: Re: Stop worrying about the 4% rule
Post by: Telecaster on December 09, 2015, 10:30:01 AM
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. 
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on December 13, 2015, 07:23:17 AM
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.

Here's how I'm going to handle it: in 11.5 years, I qualify for a (partial) pension. With a paid off house, the pension will cover all base living expenses. The plan is to use 2% of the stash for travel/extras, with the ability to tap up to 5% for unusual expenses (HVAC blew up, whatever) on an occasional basis with no worries.

My pension isn't COLA adjusted, so its value will decline over time (or looked at another way, my property taxes, insurance, etc will continue to climb!! - we'll slowly ramp up the draw from the stash until we hit Social Security. Conveniently, the dividend yield on VTSAX is around 2%, so we'll just stop dividend reinvestment and figure that cash is "fun money".

Frankly, I'm probably being too conservative with the spending plans. However, I have to plan for "what if I die" and leave my wife - the pension is significantly reduced if it lasts until the last of us dies instead of until I die. There is only a tiny hit for a guaranteed 10 year payout, so we'll probably do that option. Plus, social security will be reduced notably when one of us dies.
Title: Re: Stop worrying about the 4% rule
Post by: dividendman on January 04, 2016, 12:14:19 AM

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. The fact is that globally all indicators on lifestyle are increasing. Life expectancy,  real income/purchasing power, worker productivity, crime is decreasing, people killed/impacted by global warfare/strife is decreasing, etc. All of these are trends that have been occurring for centuries (it would have been for thousands of years but the dark ages set us back). Not only that, but they have been accelerating in the positive direction.

Now we can argue whether or not our invested assets will grow at the same rate as a result of the overwhelmingly postive trends but the world being "better" is pretty much a lock (unless we really fucked up bad with global warming - but then your portfolio won't save you anyway).

I like the 5 or 4% rule for the simple reason that the pace of change is accelerating so rapidly it's  silly to think about the world more than 20-25 years out. Hey, we might all get a basic income from the government by then due to magnificent productivity gains of technology and then all of this worrying will have been for naught and we would have all overworked!
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on January 14, 2016, 06:50:44 PM

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.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on January 15, 2016, 07:37:09 AM
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.)
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on January 15, 2016, 02:29:48 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on January 15, 2016, 02:43:32 PM
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).
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on January 15, 2016, 03:02:22 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on January 15, 2016, 08:56:26 PM
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).
Title: Re: Stop worrying about the 4% rule
Post by: Tyler on January 16, 2016, 11:17:52 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Eucalyptus on January 18, 2016, 06:04:20 AM
Maybe getting off topic, but with a diversified portfolio Tyler, what would be a simple rule based mechanism for the pre and post retirement stages? My thoughts were:

PRE.
1. Choose your fund allocations as %es.
2. Set regular date (eg 1st Monday each month) to invest savings (invest whatever you get to. Have your own personal rules for this but NOT based on the market if possible...eg rules could be to maintain a certain slush fund for emergencies, day to day, etc).
3. On that 1st Monday, look at your funds, determine which has lost the most (% wise) since last look (previous month).
4. Invest in that to get you back up to your pre determined fund allocation scenario.
5. Invest in next worse performing fund (if still have savings left).
6. Etc

(or could just dispense of 5, 6 and keep it simple by sticking it all in the worst fund each time. Maybe more likely to get out of whack. Maybe not. This might save brokerage fees depending on your situation (Eg for Aussies, everyone pays fees at the moment as far as I can tell).
Rarely (eg once per year, depending on your countries and your personal tax situation)...sell some of highest performing over the previous period (year if choosing year), to rebalance other funds, if required (assuming savings input during year wasn't enough to maintain balance).

POST (keeping it simple, I'm avoiding the issues of pensions, super, social security, etc).
1. Choose your SWR (however you want. Putting that debate aside for the moment).
2. Determine your frequency of withdrawal (eg month, eg six months-put cash aside).
3. Look at % performance change of portfolio since last withdrawal. Choose worst(s) performing ETFs.
4. Withdraw progressively from worst ETF until withdrawn required funds.

Rarely, perform fund rebalancing same as for PRE retirement.

Does that make sense?

I've also simplified by ignoring dividends particularly in the POST environment...different tax and other implications depending on country.
Title: Re: Stop worrying about the 4% rule
Post by: Tyler on January 18, 2016, 01:26:24 PM
Your pre-fire plan is exactly what I did. 

For post-fire, here's what I've done (YMMV).

1) Calculate your budget for the year based on your initial SWR and inflation.
2) Withdraw expenses once a year, coinciding with your annual rebalance.
3) Set dividends and interest to go to cash rather than automatically reinvest.  Use these for expenses first.
4) Sell the assets above your target AA (winners) to make up the difference.  That will also accomplish a partial rebalance.
5) After that, reevaluate what's left and rebalance as needed.  Always be smart about taxes.

It's a good topic.  If you have any more questions, perhaps we can start a new thread. 

Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on January 19, 2016, 06:42:15 PM
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. 

Sure. All good. However, we can look at current valuations and yields, and make informed guesses about future returns for each asset class. The total portfolio return will not be the simple average of the various asset classes, but will it be *that* far away from it? Depends on volatility, rebalance timing and other factors. No way to know. To my mind it's better to reduce assets that are all but guaranteed to return a lot less than what is required to sustain our required withdrawal rate. So long term treasuries are out, for a start. Short term treasuries (cash) is needed, of course.

Quote
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.

Absolutely. Withdrawal rate flexibility is key. A 4% rate may be doable on average, but the early retiree needs to be able to ride through periods of lower withdrawals. Aiming for 3% isn't a bad idea.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on January 22, 2016, 08:12:39 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on January 22, 2016, 11:00:41 PM
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, and don't reflect upon the P/E ratio over generations.  Therefore, the primary (perhaps not the only) long term effect of a generational decrease of earnings yield would be to suppress dividends anyway.  So I don't know how the fact that some companies choose to retain more earnings during one decade over another affects my argument.  In the long run, the dividend yield must still go down proportional to the decrease in the earnings yield; because earnings beget dividends.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on January 23, 2016, 06:28:05 AM
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).

Quote
In 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.
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on January 23, 2016, 08:10:18 AM
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).

Quote
In 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.

Perhaps, but I think even Berkshire Hathaway will eventually pay out dividends. Warren Buffet won't live forever.  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.  But at the trendline rate, it's unlikely that any of us will have to be too concerned.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on January 23, 2016, 08:53:01 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: ender on January 23, 2016, 09:36:52 AM
It might be interesting to include in this thread a comprehensive list of "things that could go wrong" and "things you could do to improve chances of FIRE" on the same SWR?

I wrote this post (http://forum.mrmoneymustache.com/welcome-to-the-forum/removing-success-bias-from-safe-withdrawal-rate/msg949380/#msg949380) and it occurred to me it might be interesting to have a large list of reasons why FIRE could be easier or harder than expected.

Title: Re: Stop worrying about the 4% rule
Post by: Ursus Major on January 23, 2016, 10:08:00 AM
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, but there is one aspect where it would make a difference, whether a company pays dividends or retains them and that is volatility. I believe that on average dividend payouts are much less volatile than stock prices, so downward volatility is going to be much more problematic, if an investor relies on stock sales (and thus stock prices) for most or all of their income generation compared to an investor who gets a decent percentage of their returns as dividend. To the extent that companies now pay less in dividends, this means you have to sell comparatively more of them at low prices during an adverse market event.

This might very well lower the SWR compared to the past.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on January 23, 2016, 01:44:12 PM
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).
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on January 23, 2016, 05:33:34 PM
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).

As I have said before, the backtesting used here is bullshit. Not only is it too short - It's since 1972. That's when we went off the gold standard, and gold had a huge runup. Bonds were paying unusually well, rates got higher for a bit - then anyone holding long bonds from 1980 forward made an absolute killing due to the long decline in interest rates (interest rates fall, value of your bonds goes up.) 1972 was also a pretty poor year to start in stocks.

With today's rates, you simply cannot get that to happen. 30 year treasuries are below 3% (!)
Title: Re: Stop worrying about the 4% rule
Post by: Tyler on January 23, 2016, 08:54:35 PM
The fact that portfolios using assets not included in the Trinity study had different withdrawal rates than the very specific portfolios used in the Trinity study really shouldn't be too surprising.  When you deviate from the assumptions, you change the conclusions.  All we can do is look at the best data available and come to our own conclusions about where to invest our life savings.   

One is free to dislike particular assets for whatever reason they choose and still find value in the interesting results for other portfolios with assets that make them more comfortable.  They can also choose to distrust those results and only invest in things where they have many more decades of data, or they can choose to distrust all SWR studies and take a completely different path to retirement (rentals, income investing, saving more, etc).  All of those methods are perfectly fine, and reasonable people may disagree on the preferable approach.

IMHO, the only unreasonable approach is to blindly follow a SWR calculated for a specific set of assets you do not yourself own. 
Title: Re: Stop worrying about the 4% rule
Post by: Ursus Major on January 24, 2016, 03:24:59 PM
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).

Hi brooklynguy,

I've decided to "go down the rabbit hole" and start a new thread on this: http://forum.mrmoneymustache.com/investor-alley/dividends-vs-capital-gains-once-again/ (http://forum.mrmoneymustache.com/investor-alley/dividends-vs-capital-gains-once-again/)

My calculations show a different result and I'd be delighted to have this resolved for myself.
Title: Re: Stop worrying about the 4% rule
Post by: dude on January 25, 2016, 11:26:52 AM
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
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on January 25, 2016, 12:27:44 PM

How about sneaking in a 1.67% management fee?

http://www.retireearlyhomepage.com/wadepfau_2016.html

Our research determines that a safe withdrawal rate for the retirement class of 2014, 2015 and perhaps 2016 and 2017 is abysmal. This generation has picked a poor time to retire, no doubt about it. Their safe retirement rate is 1.7%, assuming they retire on January 1, 2015. We used U.S. 10-year bond yields and stock valuations for the same date.

So, take the 1.7%, add back the 1.6% fee, subtract (say) 0.2% for low cost funds and we get 3.1%.

Seems reasonable going forward.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on January 25, 2016, 12:44:12 PM
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).
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on January 25, 2016, 07:38:05 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on January 26, 2016, 06:24:08 AM
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.

It's a more-or-less reasonable first approximation if you're not spending down the portfolio. In Pfau's examples the portfolio is being spent down.

Pfau says a 1% fee takes 0.5-0.6% off the SWR for a 30 year retirement. Taking the 1.7%, add an estimated 0.8% to compensate for the fee difference (1.6% vs 0.2%) and we get 2.5% for Pfau's 40 year 60/40 retirement using low cost funds. Coincidentally, 2.5% is what Betterment advises for a "likely chance" of my portfolio outlasting me.

It would be interesting to see what Pfau would get if he used low cost funds, but I guess he doesn't do that because he's marketing to financial advisors with their 1% fees.
Title: Re: Stop worrying about the 4% rule
Post by: Telecaster on January 26, 2016, 02:26:56 PM
Wade Pfau sure gets a lot of press for offering such marginal advice.   There are two basic solutions to the "future will be worse than the past" problem, one is downgrade your lifestyle by taking a lower WR.  The other is to use low-cost funds.   He of course recommends down grading your lifestyle.   
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on January 26, 2016, 02:44:55 PM
Wade Pfau sure gets a lot of press for offering such marginal advice.   

His analysis is pretty good.

His target audience is.. not us.  So the advice is marginal, for us.  But that doesn't mean we can't glean wisdom from the research.  :)
Title: Re: Stop worrying about the 4% rule
Post by: dude on February 03, 2016, 11:17:09 AM
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
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on February 03, 2016, 01:02:09 PM
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

This link works.

https://assetbuilder.com/knowledge-center/articles/how-we-live%E2%80%A6-and-how-long-our-money-lasts
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on February 03, 2016, 01:06:18 PM
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

I share ^^^ this perspective. Flexibility in many different ways is the key to my FIRE plans.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on February 03, 2016, 02:06:02 PM
That article is good but it also reflects something interesting in that we can't in my opinion resort back to math as the only factor within determining our withdrawal rates within retirement. I'm sure you can come up with some complex rule that produces an increased WR however I think the key is to simply be flexible and use some common sense because those rules only worked in the past.

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.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on February 03, 2016, 10:10:01 PM
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)
Title: Re: Stop worrying about the 4% rule
Post by: steveo on February 03, 2016, 11:18:34 PM
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. 4-5% with some flexibility in spending and you are probably also completely fine.

I'm trying to get my wife to see our FI target as a range now because I figure 4% on base level expenses and then 5% on the cream on top is pretty freaken safe. Once you reach base level expenses you can really FIRE. I figure some buffer for excessive items is fine but there is no need for buffer on those excessive items. For instance just stop going to restaurants or go once a month when you FIRE if the markets aren't performing.

I don't reckon that you can pre-plan for this even though I'm sure you can backtest some system but why bother.

I'm honestly more worried now about FIRE'ing with too much money and hence too little time doing whatever I want to do.
Title: Re: Stop worrying about the 4% rule
Post by: AZryan on February 04, 2016, 05:07:03 PM
Quote from: steveo
5% 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?

If you're pulling $50K offa' a Million invested, that's 5% and a higher risk of failure than 4%. If you also did some part time work to make an extra say ~$10K a year, that sounds nice... but it doesn't actually count towards anything unless you explain what you're counting it towards?

Are you saying you're really only pulling ~4% from investments, but can get an easy extra 1% from part time work, for a total of 5%? 'Cuz that's not saying anything more than that you think 'the 4% rule won't fail'. The extra job/money don't matter to that point.
Very unclear what you're getting at.
Title: Re: Stop worrying about the 4% rule
Post by: matchewed on February 04, 2016, 06:15:54 PM
Because people who believe in inflexibility in their particular SWR number fail to see that you don't have to actually pull that 5% plus inflation every year. Things go shitty you can cut back or earn more.

The investments may not care but cash flow does. Which if you draw down less during bad years you extend your portfolio's viability.
Title: Re: Stop worrying about the 4% rule
Post by: sol on February 04, 2016, 08:52:11 PM
If you're pulling $50K offa' a Million invested, that's 5% and a higher risk of failure than 4%.

That all depends on how you define "failure" doesn't it?  A 4% SWR lasts, on average, forever.  By which I mean that in more than 50% of the historical periods of all lengths, the portfolio survives without being depleted or requiring any spending reductions.  A 5% SWR, by contrast, only lasts an average of 49 years (http://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/msg732843/#msg732843).  If your life expectancy is less than 49 years, then shooting for 4% actually means you have worked too long.  That's also a failure, isn't it?

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. 

The closest way I can figure to finding that financially optimal retirement date is to look at the 50% success probabilities for each SWR (http://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/msg732843/#msg732843) in the past.  That analysis suggests that someone like me, who is only planning to fund 23 years of retirement, should use a SWR of around 7% per year, and that someone planning a 30 year retirement should use about 6%.  Those are the statistically correct SWRs to use, if you believe that the future market will look like the past market, recessions and 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.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on February 04, 2016, 11:48:38 PM
Quote from: steveo
5% and some part time work and that is 100% correct.
Are you sure you're getting those percentages right??

That wasn't meant to be a statistical or mathematical figure. I was just agreeing with arebelspy.

My take is pretty simple. If you have a 4% WR you are probably safe. If you have a 5% WR with some buffer or ability to spend less and be a little flexible you are probably safe. If you have a 5% WR but are prepared to work part time in certain situations you are more than likely completely safe.

I don't believe that you can model this to the nitty gritty detail because the future will be different to the past and so any rules like the ones already listed within the linked article above are probably providing a false sense of security.

I'm assuming that you have a simple asset allocation say 70/30 in index funds.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on February 04, 2016, 11:52:38 PM
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. 

Yep. Its not so simple is it. Like I just posted at this point I'm more concerned with working too long.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on February 05, 2016, 12:01:44 AM
Quote from: steveo
5% 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?"
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on February 05, 2016, 12:09:14 PM
Quote from: steveo
5% 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?"

While I agree with this, as it's been explained, I'm not sure if it matches the idea of the safe withdrawal rate concept; since most of the time it refers to a initial year withdrawal rate than then rises with inflation.  If one were to add extra rules, such as, "in a down market year, I get a job and earn $20K and then quit", your SWR (with inflation increases) can be a lot higher; but are we really still talking about the same thing?  If your decisions about how much to withdraw from your savings are based upon as-you-go rules, that's great, but that seems like it would be something different than (initial) safe withdrawal rates (plus inflation).  For example, If $50K per year is more than what I projected my annual expenses would be, I could FIRE with $500K and a rule such as, "97% of the previous year's capital gains, up to a maximum of 10% of total capital at the start of last year" and "if that withdrawal amount is less than $30K, get a job and earn $15K" and "if total capital drops below $440K at any point, freeze withdrawals and get a job."  Rules like those, that change each year or so based upon recent conditions, are great rules to FIRE by; but still seem different to me than what we are talking about in this thread.
Title: Re: Stop worrying about the 4% rule
Post by: AZryan on February 05, 2016, 12:51:22 PM
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.

Like I think MoonShadow was also getting at... the point of this thread is about whether the 4% rule is still safe to follow, or if it's a simplistic, outdated starting point and instead, we should be focused on these highly flexible/random tactics to keep failure away.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on February 05, 2016, 01:07:58 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on February 05, 2016, 02:22:34 PM
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.

This is the point. The 4% rule as stated is a rigid rule defined as withdrawing 4% the first year and increasing that by inflation each year thereafter. Personally I can't see myself spending like that and I will have a range to spend within. I'm flexible with my spending and I may also choose to work part time for some time after becoming FI. All of these points make the 4% or 5% rule pretty safe for me.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on February 05, 2016, 02:34:13 PM
But if you put caveats and asterisks on how to define your retirement number, then how do you know when to retire?  Are you saying that 4% SWR is way too conservative and are putting in votes for 5% or higher?  There has been a lot of good discussion in this thread (like Sol's definition of 'retirement failure' and why he thinks 6 or 7% are better SWRs), but it's getting buried. 

I still think 4% is the best starting point for defining FI.  All of the extra fluff (how to react to good/bad series of returns in the first 5-10 years) is a totally different, endless discussion and speculation.  Just my 2 cents, but we really do seem to be going in circles as opposed to introducing new ideas.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on February 05, 2016, 02:57:55 PM

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.
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on February 05, 2016, 03:01:46 PM

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.

True, but there is also the consideration about ability to return to work.  Those of use who retire early, and not for medical reasons, can expect to be able to fall back on returning to work for a period of time.  However, it may not be wise for us to assume that we can continue to do this after a certain age.  I think it's reasonable to assume that just about any of us could return to work, at pretty much anything, and expect to make at least $20K in a year until 55 or 60 years old.  I wonder if there is a way to run that scenario through a monte carlo simulator and find out how many times our expenses we would need, at minimum to FIRE, if we could tell it that to reduce the absolute withdrawal rate by $20K (plus inflation) following any year with a year-over-year decline in the stock market; up to age 60 or so.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on February 05, 2016, 03:10:37 PM
But if you put caveats and asterisks on how to define your retirement number, then how do you know when to retire? 

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.
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on February 05, 2016, 03:14:26 PM

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.

I agree with this, but the real reason people want to know the SWR that considers inflation, is they are looking for the inverse number; how many times over their expenses do they need to retire.  That is why it's a rigid rule, because we are really trying to predict the amount of money required to retire.  For just about anyone who retires at 60+, the 4% rule is going to be very conservative, but that is what most people are looking for; near certainty.

Notably, we here on this forum are not looking for certainty, but what we are also looking at retirement time periods much longer than the average, so we still need to favor conservatively.  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.  Because while we know we can do so for many years, and that odds are high that we will be earning income external to our savings gains anyway, we want to know what that "May the odds be ever in your favor" point should be.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on February 05, 2016, 04:09:07 PM
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.

That answer is easy to find--just plug your desired inputs into cFIREsim and ask it to tell you what size stash generates a 50% historical success rate (using cFIREsim's default input settings, 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 (as evidenced by the pervasive worrying that occurs even over plans with historical safety records in excess of 95%, which is what led to the creation of this thread in the first place).

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.
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on February 05, 2016, 05:00:56 PM
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

Well, I would except that I have two additional conditions; that my home is paid for (or I can pay for the remainder of the mortgage without dropping below the above number) and that my youngest child is 18 and a high school graduate.  For me, this means May or June of 2030, just after my 55th birthday; which also works well for taking 401k withdrawals.  I would reasonably expect to have quite a bit more than 17x my expenses in savings by the time I'm 55, but I'm looking at the above target number as a minimum trigger condition, but not the only necessary condition.  For myself, the above 17x expenses number would be right around $600K, based upon my guesstimate about how much my expenses will drop once all my kids are ready to fly the nest.  But it's also a 'just enough' kind of estimate, so anything that I can stash away above that number till my 55th would be welcome; but if I can't make that number for whatever reason, I can't reasonably retire at 55.

EDIT:  If I can double that number before 55, I'm FIRE'd that very day.
Title: Re: Stop worrying about the 4% rule
Post by: sol on February 05, 2016, 05:05:37 PM
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

That's my plan, and I assure you that my cojones are very normal sized.

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.  Going back to work isn't really in the picture, except as a last resort in case of true catastrophe. 

So I plan my expenses with some nice safety buffer that could be cut, and stop worrying about ever working again.  If you are the rare type to retire on a true bare bones budget (under $10k/yr maybe?) then cutting expenses might not work for you.  But I live in a big fancy house and drive a big fancy car and eat abundant big fancy meals, and all of those things could take a 50% reduction without really impacting my overall life happiness level.  More likely, a 5% SWR means I'll have to find some way to spend even more money on those things, but in the off chance I have to spend less because the US economy has collapsed, that's easy too.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on February 05, 2016, 05:13:44 PM
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.

I feel that this is a better way to look at the situation. The 4% guideline is basically across the top 3 points that you make. Do I have some buffer ? Am I going to work part time for a couple of years ? What happens if the market drops ?

I have a 5% target to hit and then its about moving towards the RE part. That will probably include working part time to possibly buy some extra stuff (for instance money to get the house painted or a fancy new e-bike) or save for some holidays or something or just to add some years of not actually withdrawing. Once I hit the 5% target though if I feel like quitting work I will.

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.
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on February 05, 2016, 07:02:24 PM

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.

I have 5 kids, and my youngest is 3.  I have 55 as my target age because; she will turn 18 a month after I turn 55, all my older children will either be through college, or paid for by the state, and the "55 and out" ER rule with a 401k.  However, as I said above, that is just my target at present; because I really do love my job.  If conditions here suddenly change, and I start hating my work or they start hating me, I can see FIREing before 55; or taking a sabbatical before finding new work.  But if I succeed at significantly reducing my expenses, or significantly increasing my income; so that my relative savings rate shoots up & I can double my 'bare minimum' FIRE target (let's say it's 17x) before 55, I'm out.  That would be 34x my expenses, or a SWR of about 3%, so it truly would be a stupid waste of lifespan for me to continue working, no matter how much I love my job. This is really doable once I turn 55, because I believe that I can reduce my expenses significantly once all my kids are out of the house, by downsizing to a small condo or just selling the house & moving into an RV or a small yacht.  (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.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on February 05, 2016, 09:35:57 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on February 06, 2016, 07:42:56 AM
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.

Intellectually I know this, but it's easy to forget or let it get buried under the FUD that gets thrown around on these forums. Thanks for reminding me! :)

I'm currently at ~7% WR and shooting for ~5.5% WR with a flexible WR plan. Shooting for $40K, but okay with $30K - $50K/yr.

I am trying to stay focused on all the reasons to be optimistic as I don't want to keep working full-time for extra years in the prime of my life while my portfolio goes from 5.5% to 4% WR.

I have no kids so I really have no use for accumulating a fortune.
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on February 06, 2016, 11:53:06 AM
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.

Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on February 06, 2016, 12:29:40 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on February 06, 2016, 12:54:52 PM
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. 

But isn't it kind of arbitrary to use the historical 50% success rate as your trigger point?  As we've discussed before, a given WR's historical success rate can only serve as a proxy for your own probability of success if you assume (among other assumptions) that every retirement commencement date has an equal likelihood of success regardless of then-existing market conditions, which we know to be false.  I suppose it's no different than the sense of false precision inherent in any historical SWR-based strategy, though.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on February 06, 2016, 03:46:50 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on February 07, 2016, 06:25:03 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Eric on February 08, 2016, 06:20:23 PM
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, and your income is within 400% of poverty level, then you can reliably predict your insurance expenses to stay the same.  The actual premiums increase with age, but so do the subsidies, leaving you paying the same rate every year.

http://www.gocurrycracker.com/obamacare-optimization-early-retirement/
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on February 08, 2016, 08:36:34 PM
As long as we have the ACA

Maybe a 50/50 chance, probably less (Repugs will repeal, or it might death spiral). And even if it does stay, as I already said, our premiums went up 18% last year to this, under (because of) the ACA (we don't get any subsidies).

Point being, some expenses are hard to predict, so a margin of safety is needed when estimating expenses (or when deciding on a withdrawal rate - amounts to the same thing).
Title: Re: Stop worrying about the 4% rule
Post by: Eric on February 09, 2016, 10:45:19 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on February 10, 2016, 08:05:07 AM
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.

Good info for when our income matches spending, thanks. Assuming the ACA survives, which is in serious doubt, of course.

We don't currently qualify for subsidies due to excess income, not excess spending (well, we do have excess spending, but that's another issue). I'm semi-RE. Winding down slowly.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on February 13, 2016, 11:46:11 AM
(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?

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.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on February 13, 2016, 12:43:26 PM
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.

You don't even need to rent a room. Just a friend who will receive your mail. Hopefully they like you enough not to charge you for that service. ;)
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on February 13, 2016, 03:01:49 PM
(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.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on February 13, 2016, 04:34:11 PM
(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.

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.
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on February 13, 2016, 11:14:41 PM

Make some friends.

But, Dude, they keep dying.

Hey, Tom; would you be my friend.  It's probably all just coincidence.
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on February 13, 2016, 11:17:46 PM

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.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on February 14, 2016, 07:12:55 AM

Make some friends.

But, Dude, they keep dying.

Hey, Tom; would you be my friend.  It's probably all just coincidence.

Well, stop picking friends based on how quickly they get to the front of the line at the ER!
Title: Re: Stop worrying about the 4% rule
Post by: lauren_knows on February 17, 2016, 01:38:48 PM
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.

I'll look into this.  It SHOULD be giving ALL of the data.

I admittedly have not been paying attention to cFIREsim as of late.  I made a big push at the end of last year to get a new job, and the last month I've been ramping up to learn more at this new job.

I'll report back when I can.
Title: Re: Stop worrying about the 4% rule
Post by: 2lazy2retire on March 09, 2016, 10:01:18 AM

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?
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on March 09, 2016, 11:33:49 AM

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?

That's was hyperbole, but they do have the authority to go to some rather great lengths to make certain that the child actually does live in the district.  It is a very good school district, and there have been cases of some people claiming that their grandchildren live in their home, while the parents live in another district.  They pretty much accept this on faith; but if they are never riding the bus, but always dropped off at the school by their parents instead of the grandparents, they will grow suspicious.  More than one family has been caught doing this kind of nonsense.  The practical consequences are low, however, as they usually just end up with a court order to transfer their kid at the end of the school year.  I'm not sure if some kind of fine has ever been imposed.
Title: Re: Stop worrying about the 4% rule
Post by: retiringearly on March 09, 2016, 11:36:40 AM
in
Title: Re: Stop worrying about the 4% rule
Post by: AZryan on March 09, 2016, 11:42:21 PM
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
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on March 10, 2016, 01:01:11 PM
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

http://www.zillow.com/ky/districts/oldham-county-school-district-441396/#/ky/districts/oldham-county-school-district-441396/level=elem%2Cmid%2Chigh&type=public

This is the school district ranking page on Zillow.  The overall average ranking (1 to 10) is a 9, I don't know why the box on the upper right displays a 1.  All of the surrounding districts, except Anchorage, are lower.  Most are much lower.  I think that it would be pretty cool to find out what Zillow thinks of other member's school districts around the country.  If you lived in nearby Jefferson County (where the city of Louisville is identical to the county in size & borders; so this averages both the inner city & suburban schools) is a 5, you can see why there is some motivation to fake an Oldham county residence.
Title: Re: Stop worrying about the 4% rule
Post by: 2lazy2retire on March 11, 2016, 07:21:02 AM
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 ;)
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on March 11, 2016, 11:43:55 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: 2lazy2retire on March 14, 2016, 11:57:01 AM
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.

:) :)
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on June 01, 2016, 04:20:32 PM
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

Title: Re: Stop worrying about the 4% rule
Post by: Livewell on June 05, 2016, 11:16:35 AM
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

Thanks for posting! 

I think the answer remains aim for 4% and keep yourself flexible (especially in the first 10 years) and everything will work out.  It's good to read this type of data to back up that hypothesis!
Title: Re: Stop worrying about the 4% rule
Post by: thinkinahead on June 16, 2016, 01:35:56 PM
How does 4% withdrawal rule hold up with someone who retire in Japan around 1990ish?
Title: Re: Stop worrying about the 4% rule
Post by: DrF on June 16, 2016, 01:50:07 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: MoonShadow on June 16, 2016, 01:54:21 PM
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.

Don't assume that.  Japan is the the only country on Earth that has a 3 generation mortgage period. (100 years)  If such a term is required, then the odds are high that rent wouldn't cover a 30 year note payment.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on June 16, 2016, 03:08:45 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: k9 on June 24, 2016, 04:04:47 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on June 24, 2016, 10:42:37 AM
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.

Do you mean 100% US stocks? Yes, I think that's foolish if you have a decent NW (if you are just starting out, it's totally fine). The US is the only market where that's more forgivable because we are pretty interlinked with much of the rest of the world. But I wouldn't be too reliant on long term performance of any one country. If you live in the US you will already have so much of your life reliant on the economy here anyway (SS, MC, availability of jobs, cost of goods, cost of healthcare, inflation, growth, etc). Why throw 100% of your savings into that mix as well? I'm ~50/50 US/Intl (like the market cap).
Title: Re: Stop worrying about the 4% rule
Post by: k9 on June 24, 2016, 10:58:22 AM
So we pretty much agree. Thanks for your answer.
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on June 28, 2016, 07:47:43 AM
Reading Bill Bernstein's "The Investor's Manifesto" - great book BTW - page 45:

"When all is said and done, I still know of no better risk analysis tool for retirees under the age of 70 than this simple arithmetic: At a 2% withdrawal rate, your nest egg will survive all but catastrophic institutional and military collapse; at 3%, you are probably safe; at 4%, you are taking real chances; and at 5% and beyond, you should consider annuitizing most, if not all, of your nest egg".

Bernstein is on the pessimistic side of future return forecasting:
https://www.bogleheads.org/wiki/Historical_and_expected_returns#William_Bernstein

U.S. Large-Cap Stocks 2% real
Treasury Bills, Notes, and Bonds -1% real
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on June 28, 2016, 08:00:27 AM
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"

Title: Re: Stop worrying about the 4% rule
Post by: Systems101 on June 29, 2016, 08:38:14 PM
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%)
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on June 29, 2016, 09:04:32 PM
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%)

Making up numbers is fun, but pretty pointless.

His range is take your age, divide by 10-20, and that's your range of spending, in percent.  So a 70 year old can spend between 70/20 = 3.5% and 70/10 = 7%.

A 40 year old?  Between 2 and 4%. 

And he really harps on the "feel free" part of it (see, for example, the conclusion).  Having a 40 year old spend 2%, a 60 year-old spend 3%, and a 70 year old 3.5% is quite low. This method leaves one to over-save, and work longer than necessary, IMO.  It's overly simplistic, which makes it mostly useless.

If you want more precise than a broad rule you try to apply to everyone, regardless of age, circumstance, etc., run cFIREsim calcs with variable spending and floors/ceilings.

This whole thread gives reasons why you can stop worrying about the 4% rule, and go with it.  Taking this more conservative "divide by 20" idea is the opposite of what this thread is advocating.  :)
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on June 30, 2016, 08:45:54 AM
These 'retirement age' comments remind me of an article I read the other day - https://assetbuilder.com/knowledge-center/articles/to-live-well-you-need-lots-of-money

Basically, you can retire whenever you want and live very well with no possiblity of running out of money (living on today's ~2% dividend and bond yield) if you have 4 - 5 MM.  You can use a 4% SWR to bring that requirement down to $2MM (if you believe high CAPE + low yield environment will not influence the 4% rule eligibility going forward).  And finally, as you get closer to SS eligibilty, savings required come down dramatically due to having a new source of supplemental COLA'ed lifetime income.

For Mustachians, you can also live on less than the 'life of Riley' top 25th percentile income ($77,824) which reduces all of the figures proportionately. Even if you don't agree with the numbers per se, the anaylsis is interesting and can be tailored to fit your own scenario if you play with the table at the end of the article.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on June 30, 2016, 05:08:30 PM
That article basically confirms our numbers.

His premise is to live what he calls the Life of Riley, you need ~$77,824/yr.  IMO, a Mustachian can easily live just as well as most people spending that much, but while spending half that, simply due to optimization and efficiency.

His article notes:
Quote
Suppose you take a regular safe withdrawal rate of 4 percent from your portfolio? You’d need ... $1,945,600

Now cut that in half, and you're just under 1MM.  Seems like what many here are shooting for.  Perfect.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on June 30, 2016, 07:55:47 PM
Which is exactly how I'd expect you to comment ARS.  I re-wrote my initial post about 10x so that it wasn't too easily dismissed as having flawed assumptions, so I'm glad you made it sound acceptable.  Glad to have the real IRP back commenting on everything :) 
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on June 30, 2016, 08:47:49 PM
I read that twice, and have no idea what you're talking about. :)

Sent from my Nexus 5X using Tapatalk

Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on June 30, 2016, 09:15:31 PM
https://www.youtube.com/watch?v=u7Mi6N5ZoN0 :)
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on June 30, 2016, 11:53:33 PM
Admittedly, I skipped around after about 20 seconds, but that didn't clarify anything. :)
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on July 01, 2016, 09:10:14 PM
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"

The problem is that the calculation of  "earnings" shifted quite significantly with Sarbanes Oxley, likely in a pessimistic direction.  This makes Shiller CAPE likely too pessimistic as well.
Title: Re: Stop worrying about the 4% rule
Post by: k9 on July 08, 2016, 07:24:45 AM
Hey, I read a very interesting (and very old) post on Bogleheads yesterday, and wanted to share it with you, but I can't find it anymore :(, so apologies to author but I can't link to it. However, here's the general idea.

We have 2 mustachians (let's call them M1 and M2) on their path to FIRE. They have the very same age (they can even be twins, if you like). M1 had a huge downfall, and suddenly owns $ 1 million. Cool, that's even more than he needs, so he retires, and SWR states he can spend $ 40 000 (4%) per year. $ 30 000 (3%) would be quite conservative, and $ 50 000 (5%) would be quite risky. M1 is conservative, and he didn't expect having so much money in the first place, so he goes for 3%.

Five years later, the market fell and M1's portfolio is now worth $ 700k, but that's okay, the rule states he can still spend inflation-adjusted $ 30 000 (let's say 35 000 in today's dollars) and it was a conservative choice in the first place, so let's keep on tracks. Well, it happens M2 saved agressively these last 5 years, and now owns 700k, too, which allows him to FIRE. The 4% SWR rule states he can spend $ 28 000 per year, with $21k (3%) being very conservative and $35k (5%) being quite risky. M2 loves risk (after all, he has a lot of safety margins), so he goes for 5%.

No, here's the question. 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.
Title: Re: Stop worrying about the 4% rule
Post by: MDM on July 08, 2016, 07:46:11 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: 2Birds1Stone on July 08, 2016, 08:00:12 AM
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.

Great answer MDM

Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on July 08, 2016, 08:00:57 AM
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.

That has no bearing on this as both have a current portfolio of $700k.  The answer is in the sequence of returns risk/benefit.   While there is no way to predict what the markets will do with any certainty it is fairly easy and reasonable to assume that after a 30% drop in the market from $1mil to $700k (or much much more if it was a balanced portfolio) you can be more aggressive.  The opposite (Risk) is also true, after a long/large run up that there is more risk of the portfolio declining than climbing at least in the near to intermediate term.

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. 
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on July 08, 2016, 08:02:55 AM
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.

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.  In characterizing one as conservative and the other as aggressive, you're just ignoring all of the context that serves as a frame of reference.

Here's a similar story:  M1 lives on a remote, isolated island where the average height of the population is 5 feet, and the tallest individual on the island is 5 feet 8 inches.  M1 is 5 feet 6 inches tall, and consequently considers himself quite tall.  M2 lives on a different remote, isolated island where the average height of the population is 6 feet, and the shortest individual on the island is 5 feet 4 inches.  M2 is 5 feet 6 inches tall, and consequently considers himself quite short.

Now, here's the question.  M1 and M2 are both exactly the same height.   How on earth can a given height be quite short and quite tall at the same time???

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.  In your example, an X% spending plan using a $700k portfolio is necessarily more likely to succeed starting on M2's retirement start date (after the market dropped) than on M1's start date (before the market dropped).
Title: Re: Stop worrying about the 4% rule
Post by: MDM on July 08, 2016, 08:34:08 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on July 08, 2016, 08:52:10 AM
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.

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.  As Brooklynguy said:

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.   
Title: Re: Stop worrying about the 4% rule
Post by: k9 on July 08, 2016, 08:54:20 AM
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.

Anyway, I'm pretty sure nobody on earth ever used this rule unmodified from the day they retired until their death. So, stop worrying about the 4% rule: it's not even a rule, it's just a raw indication of how much net worth you should target before you can retire.
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on July 08, 2016, 09:33:39 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on July 08, 2016, 09:43:16 AM
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.

Reason, logic, risk calibration are terrible things....much better to be a lemming and follow the masses blindly. 
Title: Re: Stop worrying about the 4% rule
Post by: fattest_foot on July 08, 2016, 09:49:02 AM
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?
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on July 08, 2016, 09:49:51 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on July 08, 2016, 10:14:10 AM
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?

That would work as well but you need to have the flex to spend less, and most people assume more than bare bones spending for FIRE by including travel, good food, etc so therefore have that flex. 
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on July 08, 2016, 10:18:07 AM
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%.   
Title: Re: Stop worrying about the 4% rule
Post by: MDM on July 08, 2016, 01:36:15 PM
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.
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 actual question (http://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/msg1145680/#msg1145680) included
Quote
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 ???

One is free to interpret whether the question (let alone the thread) is in the context of the "4% rule" - but that's how I interpreted it.
Title: Re: Stop worrying about the 4% rule
Post by: k9 on July 08, 2016, 03:20:14 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on July 09, 2016, 04:18:58 AM
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 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.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on July 09, 2016, 06:30:53 AM
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.

This ^^^ is the part that bothers me about the 4% freak out as I'll call it. Going to a 3% WR is a huge difference in time at the prime of your life spent working. That opportunity cost rarely gets mentioned because it's not a dollar figure.

Practical example:

- I have $550K saved invested
- I would like to FIRE with $40K/yr
- I can save $40K/yr
- over the short-term my returns are 5% after inflation
- to hit 4% WR [$1M] takes me ~6yrs
- to hit 3% WR [$1.33M] takes me ~9.5yrs

I could spend that extra 3.5yrs working FT saving/investing or I could stop working that much earlier and enjoy my freedom while I was younger.

Add in the fact nobody knows how long they'll live and it seems to me 3.5yrs at prime health is pretty valuable. Therefore the cost of working the additional time because you think the next 30yrs will be worse than the years covered by the Trinity study is not insignificant.

In reality I wouldn't even work the 6yrs FT to hit 4% WR. I'd downshift to PT by $600K after ~1yr and take a bunch of freedom now while I am healthy and let my 'stach grow on its own to the desired size.

I'm with the posters above who note that flexibility is a powerful tool in the FIRE toolbox to deal with risks. A tool that is much better in my opinion than simply working more for a huge 'stach. It's not like we are loading up a spaceship and heading to colonize Mars with no shot at resupply.
Title: Re: Stop worrying about the 4% rule
Post by: Telecaster on July 09, 2016, 08:58:29 AM
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.

Interesting article from Kitces this week (emphasis original:).


Quote from: Kitces
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!


https://www.kitces.com/blog/consumption-gap-in-retirement-why-most-retirees-will-never-spend-down-their-portfolio/


Title: Re: Stop worrying about the 4% rule
Post by: Telecaster on July 09, 2016, 11:27:07 AM
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.   




Title: Re: Stop worrying about the 4% rule
Post by: Clean Shaven on July 09, 2016, 11:47:06 AM
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.
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.

The question is when and how to reevaluate spending as the retirement stash grows.  It's a good "problem" to have.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on July 09, 2016, 05:12:06 PM
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
Title: Re: Stop worrying about the 4% rule
Post by: k9 on July 10, 2016, 05:24:50 AM
the 4% rule (including the fact that people will adjust)
... meaning it's not really a rule ;)
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on July 10, 2016, 05:41:40 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on July 10, 2016, 02:20:52 PM
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.

-Walt
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on July 10, 2016, 02:35:15 PM
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.

Well said.
Title: Re: Stop worrying about the 4% rule
Post by: dude on July 14, 2016, 11:43:15 AM
Another 4% rule article, sorta.

http://www.marketwatch.com/story/how-saving-too-much-can-make-your-retirement-less-satisfying-2016-07-13
Title: Re: Stop worrying about the 4% rule
Post by: dougules on July 14, 2016, 12:15:53 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: ender on July 14, 2016, 12:27:50 PM
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).
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on July 14, 2016, 02:14:55 PM
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).

Yup....especially for those that are high earners with low spend and high savings rates, as the time value is much less.
Title: Re: Stop worrying about the 4% rule
Post by: forummm on July 14, 2016, 02:16:08 PM
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).

I wouldn't say "tangible". I'm definitely experiencing the risks of overworking very tangibly today. I'd say it's more the opposite (which is what you get at). Fear of the uncertain is frequently much more strongly weighed than the negatives of the known.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on July 14, 2016, 04:21:41 PM
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).

Well said.
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on July 20, 2016, 04:38:26 AM
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.

it is like miles per gallon in a laboratory .

it is a basis for comparison  which rules out human interaction and spending patterns since they are so variable . .

it rules out life expectancy too as part of the equation . it simply lets you  know what it what have taken to not run out of money before you ran out of time under the worst the past has thrown at us .

while i retired at a 100% success rate even 90% would have been acceptable once you thrown in the odds of even living in retirement for 30 years . so how old you are when you retire is a big factor . retiring at 65 may have very small odds of needing your money to last 30 years . retiring at 55 is another story .
in the real world we are delaying ss as long as we can . right now we are at about a 3.50% draw from our portfolio . at 70 the 70% larger checks will drop our draw forever down to about 2% .

that is a whole lot less dependency  on markets for decades .   that is our main reason for delaying .  we can actually spend more now early on  because the higher checks later on will refill us but ss has no sequence risk .

unlike our own investing which limits what we can spend because so much powder has to be kept dry for sequence risk , ss has zero sequence risk .

90% of every rolling 30 year period ended with more then you started with drawing 4% inflation adjusted . but to allow for the worst case scenario's that is about max so the end result is you usually die with to much money .

if we eliminated the 5 worst time frames , 1907 , 1929,1937 ,1965/1966 the safe withdrawal rate could have actually been 6.50% . but to allow for those dates it has to drop to about 4% .

the zero sequence risk of ss lets you spend that difference since sequence risk is off the table on that chunk of dough unlike if that difference had to come from our own investing .

that is a major point folks miss when looking at delaying ss and the 4% swr .  they get to wrapped up in what if i die , when the real issue is what if i live .

 .

Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on July 20, 2016, 06:12:18 AM
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).

I think there's also an element of "how badly do I want out?"

How much risk am I willing to take to get out of this barely tolerable situation?

Or, how much risk am I willing to take to do something different, when I enjoy my work for the most part and have been very successful at it?
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on July 20, 2016, 06:34:55 AM
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).

I agree with your point.

I'd also add that fear is pretty much unlimited so if you give people a reason to be worried they can generate a huge amount of angst around the topic. This gets compounded the less certainty there is in terms of the details of the situation. Peering into what will happen 2 decades into FIRE is pretty uncertain.

People have been trained by society to work, value work and value themselves because of their work. Having to stop that process and break through the decades of conditioning is tough. Give them a reason to fear the outcome [however slight the risk] and it's not surprising that so many people's solution to the "problem" of the 4% SWR is to work more.
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on July 21, 2016, 04:48:25 AM
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.
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.

The question is when and how to reevaluate spending as the retirement stash grows.  It's a good "problem" to have.

In light of the last several posts, I still think an annual reassessment is probably the most reasonable way to reconcile the fear of spending too much with the probability that you're going to die with a buttload of unspent assets.  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.  If my modeling tells me I'm not spending enough, I don't necessarily have to spend all the excess immediately.  I could earmark some or all of the excess for a charitable trust or an estate for my heirs.  If times get tough later on, I can raid the extra if I need to.  But I also wouldn't feel too bad about using $10k on a European vacation that I wouldn't otherwise have taken if I were blindly following a set withdrawal rate that was calculated based on a smaller stash a decade ago.

The point about too much belt tightening is valid, but I think most rational people would conclude that it's time for a PT job or other supplemental income source before they get too far down that road.  And again, that is just as likely to happen to our FIREee who just took the plunge.

The 4% rule is a good tool for determining when you're ready to take the plunge.  But that doesn't mean you quit keeping track of your situation after you take the plunge.
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on July 21, 2016, 05:12:02 AM
we use bob clyatts  dynamic method of setting our goal posts each year .

it does not mean we spend that much but we know what our limits are .

it is a very easy dynamic method that has never failed out to 40 years .

just take your balance each year on jan 1  and you can take 4% of that balance or if markets are down you take 5% less  or 4% which ever is higher .

that gives you more latitude for spending more when markets are up and mentally you will be able to do that and if down you take a 5% cut which really will not upset your lifestyle .

Title: Re: Stop worrying about the 4% rule
Post by: k9 on July 21, 2016, 06:38:21 AM
Mathjak, what if you experience a very good year, where, say, the market goes up 20% ? I mean, you could spend the 4% of this year, but that means spending 20% more than previous year and you don't necessarily want to do that (not for the whole sum, at least). What do you do then ? Keep them in the portfolio (which is equivalent to buying expensive stocks) or transform them into cash/ST bonds (which means "I don't spend you this year, but I might need/want you in the next 2/3 years") ?
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on July 21, 2016, 07:01:47 AM
because the system is dynamic and the inflation adjusting is built in spending more in up years is fine .   if you don't need it then leave it allocated as you see fit .  this july is our first year retired and we came in 20k under budget . so we leave it invested .  our portfolio allocations have nothing to do with whether we spend or leave the money .

a series of years that happen to the down side would each get a 5% cut . so taking more when up is not a big problem like a fixed draw would be .  reality is most folks are never on  a fixed system and  do not spend the same in up and down markets regardless
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on July 21, 2016, 08:44:38 AM
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?

Your right its not as long as you are still basing the analysis on 30 years and 4% of the portfolio at that time ($40k) - with that premise it is the exact same going forward as someone who FIREs now.

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. 

This is the difference - if you only are looking at the next 20 years (30-10) as there is less time needed for the portfolio to survive. Or if your initial $1mil and $40k spend has now inflated to $54k (assumes 3% inflation for 10 years) then your WR would now be 5.4% on the current $1mil portfolio, which might be fine for 20 years but what would the success factor be if applied back to 30 year period?
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on July 21, 2016, 08:54:16 AM
you beat me to it , time left is the difference . as well as odds are if  quite  a few years elapsed because of poor markets , odds are pretty good you are closer to a turn around

higher valuations at retirement lead to worse market returns as opposed to lower valuations at retirement .
Title: Re: Stop worrying about the 4% rule
Post by: CanuckExpat on August 03, 2016, 02:04:41 AM
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?

Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on August 03, 2016, 02:07:46 AM
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
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on August 03, 2016, 02:16:21 AM
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 .

monte carlo simulations attempt to find worst matches so not all outcomes have to have actually happened

Title: Re: Stop worrying about the 4% rule
Post by: CanuckExpat on August 03, 2016, 02:56:27 PM
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

I wasn't sure if Kitces had or not, or if he always relied on US results. I did know about Pfau and his less optimistic take (which is perhaps reasonable based on the data he looked at). I wanted another perspective, and I like Kitces writing: thorough and accessible, was hoping someone knew of an article from him I had missed where looks at the international data.

If I had to quibble about 4% as a safe withdrawal rate, it would be that it starts to look less bullet-proof when you consider the international data. That won't make me worry or start jumping ship, we have much more flexibility built into our lives to decrease spending or make income.

However, it bothers me from an analysis point of view to ignore the international data :)
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on August 03, 2016, 03:53:15 PM
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?

i believe it was dr wade pfau who looked at that not kitces
Title: Re: Stop worrying about the 4% rule
Post by: Eucalyptus on August 03, 2016, 07:25:46 PM
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 .


That's really interesting and one of the big questions I had! It would be great to be able to work out with some kind of calculator, what kind of indicators in Early FIRE that your portfolio might fail the 30yr test (or insert whatever time frame you require).

What happens in the first say, 5 years of those bad scenarios? The first few years of FIRE is perhaps the best period for a FIREd person to go back to work at some level or another (as they are younger and less out of touch of their former industry). What would be a good trigger?

Personally I'm thinking more and more I would be happy with a starting Portfolio at FIRE that has an ~80% chance of success. I'd FIRE at a much lower value, eg down to 50%, if I had a good handle on potential trigger conditions of a bad scenario in the first ~5 years and could thus more aggresively implement moustachian protections (eg spending a few months here and there on contract work to ride out a period).

I reckon if someone could come up with a Post FIRE Calculator to help people work this out, then a lot of people would be more comfortable with going FIRE with a higher initial WR.
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on August 04, 2016, 02:20:58 AM
the best look at this in my opinion is  when michael kitces actually broke it out for us .

https://www.kitces.com/blog/what-returns-are-safe-withdrawal-rates-really-based-upon/
Title: Re: Stop worrying about the 4% rule
Post by: Eucalyptus on August 07, 2016, 07:31:50 AM
Yeah thanks Mathjak

I actually read a bunch of Kitces' articles right after I wrote that post, he has some really useful analyses with regard to SWRs and early trigger conditions!

Another good one of his that I found useful (prob a follow up to yours) is this one:

https://www.kitces.com/blog/understanding-sequence-of-return-risk-safe-withdrawal-rates-bear-market-crashes-and-bad-decades/

Its worth reading through the whole article (don't stop after the first couple of graphs...there is more to the story).

But yeah, perhaps a careful look at that P/E Schiller ratio in the first few years of FIRE, and also, real returns in the first few years. If you look at this graph of his:
https://www.kitces.com/wp-content/uploads/2014/10/Chart_Correlation-Graph.png

You can see that the best correlations with real returns (ignore nominal returns as he explains prior to that graph) is around the 8-10 year mark. However, you probably don't want to wait until the 8 year mark to make changes, if you happen to be in one of those bad runs! Otherwise you would have missed 7 years of correctional opportunity and it might be too late to really do anything about it (or at least, harder)!

Clearly, first year of FIRE, there is little correlation, so its worth just ignoring a bad real returns year then. Though the correlation gets much stronger in the second and subsequent years.

Kitces talks in many places (inc on that article) about how a diversified portfolio (he mainly keeps it simple with bonds/shares) helps to get a portfolio through these bad periods, particularly the first couple of years. I'm betting that, as well as having a well diversified portfolio (with international sharemarket diversification in different ETFs), if you just threw in a year of no withdrawals somewhere in the first few years, you would significantly reduce the chance of portfolio failure, at any WR above 4%. A "no withdrawal" year doesn't mean going back to work full time, it could just mean some part time work combined with some other moustachian way of reducing spending (eg maybe its working for an aid agency somewhere for a year on low pay). Essentially, having a no withdrawal year, would be akin to adding another factor of diversification to your portfolio.

It would be interesting to see the effect on SWRs, if a "non withdrawal year" is added somewhere in the first ten-fifteen years of draw down. Or 1.5 years, or two years. Given the many, many moustachian ways of doing such a period, its not outside the realms of FIRE possibility for most people on MMM.

The main way I can think of analysing this is by going through a TON of simulations on cfiresim or Firecalc. But there is probably a smarter way to model it by using a script. If going the cfiresim/firecalc route, you would have to do runs for different lengths of fire (I would suggest 30, 40, 50 years...being thus realistic for early FIRErs), various withdrawal rates (eg 4, 4.5, 5, 5.5,.....9%), and then insert a year of zero spending (probably by adding a years income) in each year from 1 up to R where R = years of retirement. It could then all be repeated again with a second and third year of zero spending (but using all possible combos, eg, your zero spending could be consecutive ie FIRE years 3,4,5, or non, eg years 1,4,6)...and it could be repeated with some different portfolio allocations (to the limits of what those two tools provide...).

(As you can see that's a lot of simulations, really, would be easier with a script).

Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on August 07, 2016, 07:40:25 AM
in practice we tend to automatically kind of adjust when things are not going well . i think we all pretty much have a hard time doing any extra spending when markets are not doing well . i know the last two years have not been great  since i retired and even though the budget says we can , we did not do as many trips as  we planned .

we just naturally tend to cut back or spend more in real life based on how we feel mentally . we actually came in 20k less than what we allocated for  the year  , since aug 1 is an anniversary .




Title: Re: Stop worrying about the 4% rule
Post by: Eucalyptus on August 07, 2016, 07:50:56 PM
Yeah, I'm a long time pre FIRE but I could imagine myself cutting back whenever the market isn't doing so well...if I'm not prior armed with appropriate knowledge to allay my fears.

After I posted last night I did some quick playing around in cfiresim with what I expect will be roughly my target portfolio of 80% equities, 15% bonds, 5% Gold. Results are interesting. With including some years in the first ten that are no withdrawal.

Interestingly it seems that replacing the 5% gold with an extra 5% bonds is a bad idea in all those scenarios I tested, reduces success a few percent. That bit of extra diversification and inflation protection that a small bit of Gold provides is worth it in the historical worst case scenarios. Given that 5% gold is not massive (not like what's suggested in say the permanent portfolio) I think its worth it.

Interestingly, at least with my AA, having a no withdrawal year in the first year has less effect than ones in years 2-10 of FIRE. This goes along with what Kitces says. For me the difference was only slight (about 1% success), probably because as well as bonds I have gold in there. It would be more pronounced if you only had one equity ETF and one bonds ETF.

The data in cfiresim doesn't give you the options we have today of investing one's equities in a very diverse range of different markets that aren't highly correlated. Doing this might help increase SWR a little more.

I think I'll carefully run a load of scenarios in cfiresim like this and start recording the results to plot. I think this kind of way of looking at things is very useful for people on this forum who are quite Moustachian in outlook; so many on here either do or plan to do significant things in FIRE that would result in reducing their WR for various years (eg working as a low paid tour guide somewhere, working in an orphanage, spending a year overseas with the Red Cross, etc), thus potentially increasing their SWR dramatically.
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on August 08, 2016, 02:42:21 AM
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 .
Title: Re: Stop worrying about the 4% rule
Post by: Telecaster on August 08, 2016, 12:22:54 PM
Preach it brother. 
Title: Re: Stop worrying about the 4% rule
Post by: tonysemail on August 08, 2016, 01:05:51 PM
this reply has a great illustration of why gold back-tests well.
http://forum.mrmoneymustache.com/investor-alley/portfolio-charts-the-golden-butterfly/msg1048589/#msg1048589
Title: Re: Stop worrying about the 4% rule
Post by: steveo on August 08, 2016, 03:59:03 PM
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 .

I think the key point on Gold is that getting robust data isn't easy.
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on August 08, 2016, 04:13:09 PM
this reply has a great illustration of why gold back-tests well.
http://forum.mrmoneymustache.com/investor-alley/portfolio-charts-the-golden-butterfly/msg1048589/#msg1048589
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 .

 there is no data on gold in the pre 1975 years since except for collectible coins gold was not legal to own .

it also had once  in a lifetime events applied to the price at the same time as it was taken off the standard . .

you cannot use the years the safe withdrawal rates are stressed tested against .

while index's and stocks change constantly  and nothing is as it was , the fact is gold here was not a viable asset class for the most part until after 1975 and to try to predict what might have been is silly .

you can't  even guess at it from what silver did . look at 2008 when gold went up while silver plunged . .


Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on August 09, 2016, 01:13:22 AM
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...
Title: Re: Stop worrying about the 4% rule
Post by: Eucalyptus on August 09, 2016, 04:44:15 AM
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...

Also interested in that scenario; what performs well in a credit bubble crash? What about a Real Estate bubble crash (obviously not REITs, haha). I guess the idea with gold is its a potential help in high inflation or negative real interest scenarios. If you don't ever experience one of those, then its a waste compared to most other things, of course.
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on August 09, 2016, 06:21:17 PM
1965/ 1966 as a starting point was not bad for stocks over that 30 year time frame  at all. in fact  they saw a 10.23% average return . , it was inflation that did them in . inflation soared in the first few years from 1% to double digits .

in every failure it was the first 15 years out of 30 that caused the failure .

in fact here are the results for the 1966 group

this is how you did over 30 years


1966 stocks 10.23 - -bonds 7.85 -- rebalanced portfolio 9.56- - inflation 5.38

this is the first 15 years .

1966-stocks minus .13%--bonds 1.08%--rebalanced .64%-- inflation 5.38%






Title: Re: Stop worrying about the 4% rule
Post by: Tyler on August 09, 2016, 06:28:07 PM
Many of the concerns around the years covered by the SWR calculators are discussed in the FAQ (https://portfoliocharts.com/withdrawal-rates-faq/). 
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on August 09, 2016, 06:34:06 PM
tyler , where is the post i replied to ?    deleted ?  my post is standing alone now,  lol
Title: Re: Stop worrying about the 4% rule
Post by: Tyler on August 09, 2016, 07:02:31 PM
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. 
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on August 09, 2016, 11:35:43 PM
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"?
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on August 10, 2016, 02:13:40 AM
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.

yep , there has not been one single worst case scenario that didn't have the failure happen because of the first 15 years .
think about it , the 1965/1966 group were part of the 1982 greatest bull market in history . but even that could not help them . great gains on to little money is to little to late when things get spent down to far early on .

it isn't just about the money lasting x-amount of years as well , it is about the balance left at the end . portfolio's can show they passed fine but live 1 more year and you are broke .

if it wasn't for 1907,1929,1937 and 1965/1966 the safe withdrawal rate for a 60/40 mix would be 6.50% . so if stress testing without those years your results being compared would be quite different and not apples to apples . anytime gold is in the mix you really can not predict what those years would have been like had it actually traded here freely .

the once in lifetime event of coming off the gold standard would certainly skew things earlier as well ,  showing performance that likely was a pricing error like nasdaq at 5000 or real estate was getting before the plunge in many areas .

pricing errors that correct because they were temporary  errors do not make good benchmarks forever

so i am not keen on calling any portfolio with gold a safe withdrawal rate since that term really means it was stress tested against those dates above . 1907 being the only outcast since firecalc uses it but bengan and the trinity only go back to 1926
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on September 07, 2016, 06:16:59 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: ender on September 07, 2016, 06:21:47 AM
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.

That article is based on fairly rubbish assumptions.

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.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on September 07, 2016, 08:41:45 AM
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.

Yes. Insecurity, fear and retail therapy all add up to many years of extra work in your life. You really have to ask yourself "Is it worth it?"
Title: Re: Stop worrying about the 4% rule
Post by: chasesfish on September 08, 2016, 11:22:49 AM
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...

I'm buying small and mid cap stocks that have very little debt on their balance sheet.  I'm also only long on one (non employer) Bank stock.

I'm also not sure what "credit bubble" means and I'm in banking.  I'm assuming we're talking about how companies will see their interest expense double with small interest rate movements, thus shrinking earnings or causing defaults.
Title: Re: Stop worrying about the 4% rule
Post by: Telecaster on September 08, 2016, 11:46:20 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on September 10, 2016, 08:57:19 AM
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!"
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on September 10, 2016, 09:45:55 AM
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....
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on September 10, 2016, 12:48:28 PM
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....

By the time you get old enough to require hiring young people, your 4% withdrawal would generally be supplemented by Social Security.  Unless you get to the point of needing help to get to the bathroom, SS should be more than enough to cover a lawn guy, grocery delivery, uber rides and the occasional visit from a fixit guy around the house.
Title: Re: Stop worrying about the 4% rule
Post by: Telecaster on September 10, 2016, 01:13:57 PM

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-counter-point, deciding you want to do more international travel is an example of adding fat. 

Here's the thing:  The headline "4% SWR Still Safe!" is boring.   The headline "I Found a Flaw with the 4% Rule!" is exciting and sexy!  It implies the author discovered new insights that no one else thought of.   "4% Rule Fails!" gets page clicks.   In this case, the author came up with the following bombshells:

1.  If you add discretionary spending to your budget, you need more money.

2.  If the future is worse than the past, the 4% rule fails.

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.   

So if the 4% rule fails--as he suggests could happen--it must be because we are now experiencing, or about to experience, worse market conditions than have ever existed in the past!   Yet he provided zero evidence this is the case, or even why it might be a likely scenario. 

TL;DR.  We can all stop worrying about the 4% rule. 



Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on September 10, 2016, 07:20:28 PM
As a counter-point, if you are already living a frugal life, you have no fat to cut when you get older. 

Having read a metric shit ton of retirement stories/plans only a handful have been really bare bones where no cuts were possible. Add to that all the data I've seen points to a reduction in spending as people get older not an increase.
Title: Re: Stop worrying about the 4% rule
Post by: deborah on September 10, 2016, 08:55:09 PM
In Australia, we have superannuation, which is broadly similar to a 401k. A study has recently been published about long term withdrawal rates from superannuation in retirement - http://www.finsia.com/docs/default-source/jassa-current-issue/JASSA-2016-issue-2/superannnuation-drawdown-behaviour.pdf?sfvrsn=0

There are several interesting outcomes from the study. Firstly, the withdrawal amount doesn't increase as people age, although you would expect otherwise.

Secondly, people are withdrawing less than expected. In Australia there are two standardised retirement expenditures - modest (the expected requirements of a couple who live a modest lifestyle in retirement) and comfortable (those who have a more inflated lifestyle) - that were worked out by a bank by looking at the costs of various things. Couples on a modest lifestyle are supposed to require $34,216AUD, and $34,598AUD when they reach 85. However, the longitudinal study finds that people are actually living an even more modest lifestyle in retirement (the median expenditure) - about 20% less.

Thirdly, from the standardised retirement expenditures, people (on average) need about the same whether they are 65 or 85 - with the study noting that the 65 year olds tend to be spending more.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on September 11, 2016, 12:57:31 PM
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.

Well that was just.. bad.

He underestimated his ER expenses, and then complained that saving 25x (or 30, in his case) his underestimated expenses wasn't enough to pay for his new, higher expenses.

The problem there is not the 4% rule, it's in your poor ability to plan for the future.

His title "25x Expenses Isn’t Enough for Early Retirement" is totally wrong--it would be enough, if you actually had saved up 25x actual expenses, not a made up, lower number.  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.  ;)
Title: Re: Stop worrying about the 4% rule
Post by: Radagast on September 11, 2016, 03:19:51 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on September 11, 2016, 05:22:00 PM
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.

If that's your point, say that.

Say that "here's what to watch out for when setting future expenses, and thus determining your number."  But "4% rule doesn't work" bullshit is just clickbait, and misguided.  In his example, he is the problem (way underestimating FIRE expenses), not the 4% rule.

He could have written a beautiful article with the premise you provide that almost everyone here would have agreed with.  Instead, he put that up.  (https://dl.dropboxusercontent.com/u/9743562/icon_rolleyes.gif)
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on September 11, 2016, 07:45:03 PM
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%.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on September 11, 2016, 08:01:20 PM
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%.

Probably a typo--it's missing a single letter.  It's the worst case scenarios.

;)

Yes, 4% WR was designed to have 95% success rate (being defined as having money left) after 30 years, historically, when withdrawing an initial 4% and then adjusting it up for inflation yearly.
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on September 12, 2016, 03:57:07 AM
actually the grand pappy of the 4% safe withdrawal rate bill bengen  found his   SAFEMAX  was actually  4.15% for   a 50/50 allocation for stocks and bonds and was 100% succesful  based on 1966 as  the worst case scenario .

it was only later on when the trinity study  used longer term corporate bonds rather  than bill's 5 year gov't bonds that they got poorer results so 4% dropped to only a 95% success rate . it took a 3.60% draw rate  or so to get a full 100% success rate under the trinity parameters  . bill also took his withdrawals the end of each year vs others which took it at the beginning .

so at worst there is about a 12% difference in pay checks between the two .

note: none count any fees at all in the equation .
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on September 12, 2016, 07:26:48 AM
I don't see why we keep harping on about Bengen and the Trinity studies. Sure, they did ground-breaking work. Now we can all do our own studies using cFIREsim or FIREcalc.

Unless someone thinks that these tools are inferior?

http://www.firecalc.com/


Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on September 12, 2016, 07:32:01 AM
the math at the end of the day is what it is , at least for a 30 year time frame .  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  .

going out longer i am not aware of anyone who actually broke out the math needed  so all you get is a statistic and nothing to really monitor going forward .

i know if 5 years in or so if i am not seeing at least a 2% real return i may want to cut back spending .  but if i had a 40 or 50 year retirement i don't know what the math is i would have to achieve  to have it hold . kitces only did the study on the math for a 30 year time frame .
Title: Re: Stop worrying about the 4% rule
Post by: ender on September 12, 2016, 08:52:26 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on September 12, 2016, 09:19:50 AM
here you go

https://www.kitces.com/blog/what-returns-are-safe-withdrawal-rates-really-based-upon/
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on September 12, 2016, 09:21:52 AM
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.

here are the actual numbers for the worst time frames we have had in history


suppose you were so unlucky to retire in one of those worst time framess ,what would your 30 year results look like :

1907 stocks returned 7.77% -- bonds 4.250-- rebalanced portfolio 7.02- - inflation 1.64--

1929 stocks 8.19% - - bonds 1.74%-- rebalanced portfolio 6.28-- inflation 1.69--

1937 stocks 10.12 - - bonds 2.13 - rebalanced portfolio -- 7.24 inflation-- 2.82

1966 stocks 10.23 - -bonds 7.85 -- rebalanced portfolio 9.56- - inflation 5.38

for comparison the 140 year average's were:

stocks 8.39--bonds 2.85%--rebalanced portfolio 6.17% inflation 2.23%

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.

so lets look at the first 15 years in those time frames determined to be the worst we ever had.

1907--- stocks minus 1.47%---- bonds minus .39%-- rebalanced minus .70% ---inflation 1.64%

1929---stocks 1.07%---bonds 1.79%---rebalanced 2.29%--inflation 1.69%

1937---stocks -- 3.45%---bonds minus 3.07%-- rebalanced 1.23%--inflation 2.82%

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.


Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on September 12, 2016, 11:03:39 AM
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.

Sure, excepting 1966, of course. 4% did not work from 1964 through 1969 (according to cFIREsim).
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on September 12, 2016, 11:48:38 AM
depends on the portfolio . bill bengan's model passed 1966 at 4.16%  . the trinity did not . the types of bonds held matter . but the 2% real return gives you extra leeway

Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on September 13, 2016, 02:59:50 AM
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.

as you see 2% real returns the first 15 years never failed . every worst case was less than 2% 
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on September 13, 2016, 06:34:27 AM
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.

I tried 6.5% in FIREcalc just for fun:
50/50 FIRECalc found that 77 cycles failed, for a success rate of 33.6%.
75/25 FIRECalc found that 64 cycles failed, for a success rate of 44.8%.

6.1%:
75/25 FIRECalc found that 58 cycles failed, for a success rate of 50.0%.



Title: Re: Stop worrying about the 4% rule
Post by: k9 on September 14, 2016, 02:37:46 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: ender on September 14, 2016, 06:29:42 AM
as you see 2% real returns the first 15 years never failed . every worst case was less than 2%

That is a very different statement than:

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 barely need over 0% real return to support a 4% withdrawal rate. If your portfolio keeps up with inflation and otherwise does exactly 0% return, you will still last 25 years with a 4% withdrawal. Mathematically you need your overall return to be only slightly over 0% real every year to support 30 years (or more).
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on September 16, 2016, 03:18:04 AM
25 years is not long enough and sequences of returns makes it even worse once you try to get enough return not to have any money left at all.

That draw down figures not having a penny left for a longer life or unexpected spending beyond the budget.

2% real returns is about the min i would consider safe enough for  a 30 year or longer retirement not zero
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on September 16, 2016, 03:42:37 AM
2% real returns, huh?

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.
Title: Re: Stop worrying about the 4% rule
Post by: Frs1661 on September 16, 2016, 04:08:07 AM
2% real returns, huh?

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.
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.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on September 16, 2016, 05:24:33 AM
2% real returns, huh?

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.
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.

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.
Title: Re: Stop worrying about the 4% rule
Post by: dougules on September 16, 2016, 11:17:55 AM
2% real returns, huh?

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.
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.

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. 
Title: Re: Stop worrying about the 4% rule
Post by: ender on September 16, 2016, 12:37:06 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: dougules on September 16, 2016, 02:25:55 PM
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. 
Title: Re: Stop worrying about the 4% rule
Post by: ender on September 16, 2016, 03:56:00 PM
Notice the spikes that happened when the market went south.

What spikes?

The only "spike" there was during the great depression. Everywhere else dividend yield stays fairly flat (2008/2009 is a good example, the market dropped much more than dividends increased).
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on September 16, 2016, 03:59:22 PM
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.

Doesn't matter, at a 2%WR you are immune to everything with the exception of collapse of western civilization.  Unless someone is concerned about a legacy, with a WR that low, the vast majority of assets can invested conservatively so that sequence risk goes away.
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on September 17, 2016, 03:48:26 AM
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
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on September 17, 2016, 03:53:18 AM
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.

sequence odf return risk can take those same average total returns and throw them off as much as a 15 year difference in how long that money lasts .

same exact total returns can see a huge difference
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on September 17, 2016, 04:21:46 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on September 17, 2016, 05:29:54 AM
got it , if that is the case .
Title: Re: Stop worrying about the 4% rule
Post by: dougules on September 19, 2016, 03:48:55 PM
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.

I'm not saying dividends don't go down in a recession.  They definitely do, but they're way less volatile than prices.  Spikes may not have been the best term for the graphic, but you'll notice that the dividend yield rose in most of the worst economic periods.  That illustrates that the dividends did a lot better than prices through the trouble. 

Anyway my point is that a WR that is purely dividends is very conservative.  Yes dividends can and do go down, but if they cover your expenses now it would take a pretty bad economy to make you dip into any principal.  Even then probably not much. 
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on September 19, 2016, 05:14:05 PM


[quote author=dougules link=topic=39064.msg1233781#msg1233781 date=1474321735. 
Anyway my point is that a WR that is purely dividends is very conservative.  Yes dividends can and do go down, but if they cover your expenses now it would take a pretty bad economy to make you dip into any principal.  Even then probably not much.
[/quote]

I agree with you, a dividend approach is much too conservative (and subpar for other reasons as well).

Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on September 20, 2016, 02:29:46 AM
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
Title: Re: Stop worrying about the 4% rule
Post by: dude on September 20, 2016, 07:16:36 AM
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
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on September 20, 2016, 09:42:48 AM
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

Thanks for the link, this is very interesting! 

Corporate issued bonds tend to have more correlation with stock prices. Both are driven by earnings.  In an earnings recession, the chance for default on corporate bonds increases which drives up rates and can hurt the face values of existing bonds.  Whereas the opposite is true for Tbills.  In a recessionary period treasury yields tend to decrease, both from the free market "safety" end and from a macroeconomic policy standpoint. This has the effect of increasing face values of previously owned treasuries.  The idea that Tbill allocation outperforms total bonds from a WR standpoint makes sense, theoretically anyway. 

If the point of a portfolio in the initial 10-15 years of drawdown is to minimize sequence risk, Tbills seem to be the best choice.  Decrease sequence risk= Minimized volatility = noncorrelated assets (even if total returns are lower).  The problem with this theory; Treasury yields are yet to recover from the last, rather extreme, economic cycle.  This back testing may not hold true for the near future.
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on September 20, 2016, 02:05:19 PM
the relationship between bonds and stock  is all over the place . above 3% they  correlate one way , under 3% they have correlated another and at the transition line flip a coin .

(https://photos.smugmug.com/photos/i-kQtSMJV/0/O/i-kQtSMJV.png)
Title: Re: Stop worrying about the 4% rule
Post by: index on September 20, 2016, 02:20:41 PM
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.   
Title: Re: Stop worrying about the 4% rule
Post by: Telecaster on September 20, 2016, 02:46:05 PM
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! 
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on September 20, 2016, 03:03:10 PM
that is the hardest concept for folks to get in to their heads . it is so misunderstood .
Title: Re: Stop worrying about the 4% rule
Post by: dougules on September 21, 2016, 11:32:30 AM
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!

I completely agree.  Earnings are earnings whether they're retained or distributed as dividends.  I was more just trying to make the point that a WR is really conservative when it's covered by dividends.  You're not even taking retained earnings into account at all except as a SHTF back-up. 


that is the hardest concept for folks to get in to their heads . it is so misunderstood .

Honestly it took me a while to wrap my head around this.  It does take some thought to understand the fact there is almost always some way to reinvest to earn more or cut costs. 
Title: Re: Stop worrying about the 4% rule
Post by: dougules on September 21, 2016, 03:03:24 PM
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.

Well, yeah, dividends vs reinvested retained earnings do pan out differently in the real world.  I personally like it when companies retain earnings right now since I'm still working.  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.  Plus reinvestment is the high risk, high reward option which is good when you're not relying on your stash.  I'm not going to get involved in the companies' business, so it's all the same to me owning fewer shares of a bigger company vs more shares of a smaller company (autoreinvest dividends). 

I think my least favorite is companies sitting on piles of cash.  It seems to be popular right now (like your LinkedIn example). 

At the end of the day, though, earnings are still earnings.  I'm trusting that the market is more efficient than me at valuing what companies do with them. 
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on September 21, 2016, 04:53:41 PM
stocks pay dividends even when they lose money . dividends are just an amount of money paid out decided by the board . right now there are quite a few major stocks that are paying out more than they even earned .
Title: Re: Stop worrying about the 4% rule
Post by: k9 on September 22, 2016, 03:56:53 AM
EDIT: read too fast.
Title: Re: Stop worrying about the 4% rule
Post by: markbike528CBX on September 25, 2016, 01:19:54 PM
  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%. 
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on September 25, 2016, 03:02:23 PM
the issue ,especially with funds is what is a qualified dividend .there are many years a lot of  our dividends are not qualified .

dividends are not based on a 1 year holding period . you have special holding requirements personally and then the fund has it's own set of requirements .

Holding periods

Although the holding period requirement is the same whether you received a dividend for shares you hold directly or in a mutual fund during the tax year, how you determine the holding period may vary, as outlined below.
Note: When counting the number of days the fund was held, include the day the fund was disposed of, but not the day it was acquired.

Mutual funds
All of the following requirements must be met:
The fund must have held the security unhedged for at least 61 days out of the 121-day period that began 60 days before the security’s ex-dividend date. (The ex-dividend date is the date after the dividend has been paid and processed and any new buyers would be eligible for future dividends.)
For certain preferred stock, the security must be held for 91 days out of the 181-day period, beginning 90 days before the ex-dividend date. The amount received by the fund from that dividend-generating security must have been subsequently distributed to you.
You must have held the applicable share of the fund for at least 61 days out of the 121-day period that began 60 days before the fund’s ex-dividend date.
Stock
You must have held those shares of stock unhedged for at least 61 days out of the 121-day period that began 60 days before the ex-dividend date.
For certain preferred stock, the security must be held for 91 days out of the 181-day period beginning 90 days before the ex-dividend date.
Title: Re: Stop worrying about the 4% rule
Post by: dougules on September 26, 2016, 10:18:46 AM
  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. 
Title: Re: Stop worrying about the 4% rule
Post by: sol on September 26, 2016, 08:20:14 PM
Yep.  0% is pretty nice.  We're definitely not in that bracket at the moment.

More importantly for this community, most of us WILL be in that bracket in retirement, with low expenses and a significant amount of income coming from nontaxable sources like savings, capital return on stocks, and Roth IRAs.
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on September 27, 2016, 01:43:34 AM
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 .
Title: Re: Stop worrying about the 4% rule
Post by: ender on September 27, 2016, 07:03:37 AM
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 .

Honestly, you are not the target audience of this forum.

You retired way later than most people here plan on retiring here.
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on September 27, 2016, 07:29:42 AM
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 .
Title: Re: Stop worrying about the 4% rule
Post by: dougules on September 27, 2016, 10:20:35 AM
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 .

I think I would file the >0% tax bracket under "First World Problems."
Title: Re: Stop worrying about the 4% rule
Post by: ender on September 27, 2016, 07:10:37 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on September 28, 2016, 06:53:14 AM
It's important to remember that.

Good, generalized ER advice is often different than "planning on retiring at 65" advice.

And also worth mentioning in threads as the casual reader may not have that backstory to add context to the advice/comments.
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on October 06, 2016, 06:24:48 PM
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%?
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on October 07, 2016, 03:09:06 AM
we all use a variable spending plan  in retirement . it eventually self adjusts . no  one spends and inflation adjusts like a robot
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on October 07, 2016, 10:30:59 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on October 07, 2016, 12:49:57 PM
One interesting take-away is that retiring near the 2008 downturn resulted in the worst 10-yr SWR's.  I'm betting that the 10-yr rolling periods continue to get worse as we move in to 2017 and 2018.  I wonder if they will update this study?  And I wonder how the 30 year SWR will look from 2007 - 2037?  Obviously we are limited to the data we have, but we still don't really know what the long term impact of the 2008/9 downturn and the subsequent ZIRP (if you allocate some retirement funds to bonds) has been on SWR since it is too recent.  And the worst 30 year rolling period started in 1986?  I'd rate this article 'meh' on being an improvement on the Trinity Study, more like a sales pitch for DFA (IFA).
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on October 07, 2016, 01:23:21 PM
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



Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on October 07, 2016, 01:31:25 PM
The 2000 retiree has seen two large, but relatively short lived, "V's" in the first ten years.  Likely not fairing as well.

Edit: note to self, read article cited before comment.  Apparently the 2000 retire is doing OK.
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on October 07, 2016, 01:40:24 PM
according to kices the 2000 retiree is doing worse than 2008 . the y2k retiree is on par with the 1929 retiree . on track to be a worst case scenario .
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on October 07, 2016, 02:28:05 PM
2000 is at a 6.2% WR, halfway through, similar to 1929 start which survived 4%WR.  1966 was over a 10% WR rate at 15 yrs, which did not.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on October 07, 2016, 02:38:18 PM

https://www.kitces.com/blog/how-has-the-4-rule-held-up-since-the-tech-bubble-and-the-2008-financial-crisis/#more-7856

I wonder why the Kitces and IFA papers disagree?  Kitces seems to imply that 2000 - 2010 is worse than IFA's worst 10-yr period cited, 2006 - 2016.  Kitces didn't explain his work (like if he used 50/50 allocation) and his 2008 drop seems to indicate -20% as opposed to the actual 37% S&P drop...
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on October 07, 2016, 02:53:40 PM
Kitces was using 60/40.  Not sure which exact stocks or bonds though.

The other article was examining max WR maintaining principal balance on different allocations via their particular "target date" type funds.  They dont specify what stocks & bonds are in those funds.   The worst rolling 10 year returns with more than 60 percent stocks was 1999 in that article (2000 retiree).
Title: Re: Stop worrying about the 4% rule
Post by: deborah on October 07, 2016, 11:51:51 PM
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?
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on October 08, 2016, 09:45:28 AM
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?

I'm very sorry to hear about your parents Deborah, I wish them the best of luck!  Obviously they raised a smart daughter and hopefully they can draw on that social capital to help!

I would sincerely argue though, the 4% rule didn't fail them as 1986 retirees.  Other things were obviously amiss from an investment choice standpoint and maybe a spending side as well.  A simple 50/50 split of S&P 500 and LTT (both of which were readily available in 1986) would have blown away the 4% rule over the past 30 years. 
Title: Re: Stop worrying about the 4% rule
Post by: tonysemail on October 11, 2016, 10:57:49 AM
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?

If you've already "won" the game, then why would you want to change strategies and adopt new products?
I agree with the philosophy of investing in what you can understand.
At least, that's how I rationalize NOT chasing higher returns through complicated products that already exist today..

But in general, I agree that a big vulnerability of FIRE is the assumption that we remain perfectly rational and flexible as we age 50+ years.
I only have to look at my parents and grandparents generation to know that things sometimes go sideways.
Unfortunately, I can't think of a way to insure against your own decision making.
Maybe an annuity or irrevocable trust would mitigate somewhat.
Title: Re: Stop worrying about the 4% rule
Post by: frugal_c on November 13, 2016, 09:44:59 AM
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.

EDIT : Okay, it does say in the article that the numbers are based on 60/40 split.  Using that I get about a $670k inflation adjusted portfolio, or a 6% WDR going forward.  That is based on using cfiresim.

Given that most people are advocating for high stock allocations, I think the likely failure of the 99-00 timeframe is important.  We now have 3 fails, 1929, 1966-67 and 99-00.  There are also many near fails in between.   It appears that the 4% while likely to work is dangerous to hang your hat on.  I just don't see why you wouldn't save up just a few more years to greatly increase your likelihood of success.
Title: Re: Stop worrying about the 4% rule
Post by: MDM on November 13, 2016, 10:10:36 AM
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.

If you want to disagree with the article's conclusions, you might also use the same assumptions (e.g., asset allocation of 60/40 not 100/0) as the article.  Otherwise it seems a disagreement about assumptions, not conclusions.
Title: Re: Stop worrying about the 4% rule
Post by: frugal_c on November 13, 2016, 10:42:59 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: MDM on November 13, 2016, 10:57:06 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: frugal_c on November 13, 2016, 11:21:17 AM
The point is that the article has the portfolio as just fine with similar to starting assets, I am not seeing that.

For the time horizon, I guess it's open to debate what to use.  For people retiring 40 and under I think you need to be running things with a much longer window.  I consider it a fail if at 30 years the assets are mostly gone.   I generally run things with a 40 year time horizon and even then I want the assets to mostly still be there.  It seems dangerous to allow your stash to just run out and be completely reliant on government benefits.  That just isn't what I consider FI, it sounds very stressful to me.  I could understand if you disagree on that assumption.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on November 13, 2016, 12:07:53 PM
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.

So, an 18% chance that I would need to go back to work for a year. Or do some part time consulting. Or crank up the CC churning. Or get some other side-gig income.

Meh.
Title: Re: Stop worrying about the 4% rule
Post by: frugal_c on November 13, 2016, 12:30:45 PM
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.

Title: Re: Stop worrying about the 4% rule
Post by: TomTX on November 13, 2016, 12:49:27 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: MDM on November 13, 2016, 12:50:47 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: frugal_c on November 13, 2016, 01:04:03 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: MDM on November 13, 2016, 01:08:16 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: frugal_c on November 13, 2016, 01:10:40 PM
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.

It is worse than you make it out to be.   

I also think i misspoke saying you have to go back full-time, it is more like part-time.   

I just see where you would have to go back for 5-10 years or maybe longer without touching the principal.  The problem with the 30's and the 70's was it wasn't just a drop down and then a return 2 years later where everything was fine again.  Things just kept dragging on.  In the 70's inflation just kept going up and the stocks were going essentially nowhere.  So you might have gone back for part-time work in 74/75 and then I don't know when you would be comfortable retiring again.  It probably wouldn't have been until the mid 80's.
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on November 13, 2016, 01:25:24 PM

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.
Title: Re: Stop worrying about the 4% rule
Post by: frugal_c on November 13, 2016, 01:47:20 PM

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.

Thanks for clearing it up.   It is roughly the same withdrawal rate, so your explanation makes sense.  Either way, if I retired young I would not be comfortable right now.
Title: Re: Stop worrying about the 4% rule
Post by: dude on December 06, 2016, 01:34:26 PM
Relevant to the 4% discussion:

https://assetbuilder.com/knowledge-center/articles/how-to-spend-the-kids-inheritance
Title: Re: Stop worrying about the 4% rule
Post by: ImCheap on December 09, 2016, 11:59:13 AM
Relevant to the 4% discussion:

https://assetbuilder.com/knowledge-center/articles/how-to-spend-the-kids-inheritance

Quote
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.”

I love the last part.
Title: Re: Stop worrying about the 4% rule
Post by: sol on December 09, 2016, 12:13:13 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on December 09, 2016, 03:02:27 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on December 10, 2016, 08:24:03 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Ursus Major on December 11, 2016, 08:56:43 AM
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 the effect of that initial period of good returns is to lower your actual (then current) withdrawal rate. If your portfolio value increases by 33.3%, a 3% withdrawal is the same amount as a 4% withdrawal from your original amount. 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).
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on December 11, 2016, 09:10:53 AM
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.  :)
Title: Re: Stop worrying about the 4% rule
Post by: steveo on December 11, 2016, 01:47:26 PM
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.  :)

I'm not a fan of the lower WR for this reason. I prefer to look at my other options such as social security, downsizing the house, returning to work, working a different job and for me personally inheritance.
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on December 11, 2016, 02:01:56 PM
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?

Crazy irrational, there. C'est la vie.

-W
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on December 11, 2016, 02:05:36 PM
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.)
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on December 11, 2016, 02:09:35 PM
That is a great way of looking at it. Without trying to quantify total life satisfaction (IMO years not worked when younger are more valuable than years not worked when very old, but opinions could vary on that) it's just about total life vs total amount of work. If you spend a ton of time/effort making money to "guarantee" a successful RE, I would agree that what you've really done is decide to fail.

-W
Title: Re: Stop worrying about the 4% rule
Post by: sol on December 11, 2016, 02:11:08 PM
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.

Title: Re: Stop worrying about the 4% rule
Post by: waltworks on December 11, 2016, 02:16:30 PM
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.

Good point Sol. I should have been more clear - *for folks who wish to stop paid work ASAP*, extra working to lower SWR beyond 5% or so (I don't want to sit down and calculate it out, probably actually higher) is irrational.

I doubt I'll ever quit working, because I like doing useful stuff. I was trying to say something a little more subtle than what I ended up saying, my apologies.

-W
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on December 11, 2016, 02:19:45 PM
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.

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.
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on December 11, 2016, 02:57:15 PM

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.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on December 11, 2016, 03:40:14 PM

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.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on December 11, 2016, 03:47:04 PM
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.

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.

I am though being theoretical here. At this point as soon as my chances look good enough to me I will RE. I see myself as now being past work and I want to embark on a different phase of my life. I don't have any grand plans either.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on December 11, 2016, 03:59:12 PM

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.
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.

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.
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on December 11, 2016, 04:56:53 PM
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 think Arebelspy answered that for me.
 
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.

I understand the idea that one is concerned that they may want something more or different down the road.  The thing is, the 4% rule covers that.  Just go into Cfiresim and run the default scenario.  In most cases you end up with more money than you started with 20 or 30 years into retirement.  Most of the anecdotal evidence of those who have FIRE'd on this forum shows that spending usually does not go up AND many accidently make more money anyway. I think it's fear driven. 

Honestly, anyone who was smart and motivated enough to FIRE young and wants a luxury bike or vacation in 10 years he/she will figure out how to make it happen easily. If someone doesn't like their job and works past 4% because of PE/10's or whatever nightmare scenario they have in their head, it's virtually a guaranteed failure as Arebelspy points out so eloquently upthread.

Edit: To harp on the subject a little more, here are the SS actuarial numbers:
https://www.ssa.gov/oact/STATS/table4c6.html

If you retire at 30 with the 4 percent rule; which is more likely to have happened 30 years later, running out of money or death?  It just gets worse the older you get (as I am becoming more acutely aware).  Is working two more years for a 3.5% WR looking a bit more irrational yet?

Title: Re: Stop worrying about the 4% rule
Post by: steveo on December 11, 2016, 11:39:02 PM
Classical_Liberal - I intend to retire on a 5% WR probably on a best case scenario. I still agree with what you are stating. I can't see myself bothering to get to a 4% WR. I think for me it's much more likely to get to 5% and then work to save up some extra spending money.

We intend to do what you state though - i.e. see how our spending goes once we retire and save to splurge if we choose too.
Title: Re: Stop worrying about the 4% rule
Post by: Telecaster on December 11, 2016, 11:50:31 PM
By 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. 
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on December 12, 2016, 01:06:09 AM
By 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.  :D

And here I've been feeling so old lately.

Thanks for the double compliment!
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on December 12, 2016, 06:38:29 AM
By 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.  :D

And here I've been feeling so old lately.

Thanks for the double compliment!

I would think you ER's would feel like children.  I ran 14 miles on Sunday and am here at the office before 7am.  I love how fast life is, still feel like I'm in my 20's!  Maybe ER makes you feel old ;)
Title: Re: Stop worrying about the 4% rule
Post by: ImCheap on December 12, 2016, 08:21:21 AM
One stat in the back of mind is:

http://firecalc.com/
Quote
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.

After seeing first hand parents and In-Laws, most of who have passed on, one left out of 4. The above seems to be true with one exception, healthcare!  Those final years can be crazy expensive, think 3-4 years of assisted living plus some memory care.

Most of the time an SWR assumes a constant increase in spending, not so sure that is true from what I see, the one living parent I have left has a tough time spending a SS check, thank goodness for good health at 90 years young!
Title: Re: Stop worrying about the 4% rule
Post by: mizzourah2006 on December 14, 2016, 09:28:37 AM
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. 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.
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on December 14, 2016, 09:36:56 AM
Sure, that's not a useful response to Arebelspy, though. "Retirement" does not have to mean not working for money, or even not working full time if that's your thing. It's your life and you can do whatever you feel is most satisfying *without being concerned with money*.

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".

So if you're still working and you NEVER WITHDRAW A DIME from any of your retirement accounts in your life, that's fine if it's what you want to do. If you are working because you are trying to lower your WR below 4% (or even lower) because it makes you feel safe, you are being irrational - you are doing something you hate and not getting a commensurate return in years of doing what you love.

Does that make more sense?

-W
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on December 14, 2016, 12:19:23 PM
This automatically assumes you literally hate what you do.

No, it merely assumes you have something else you'd rather do.

if you don't, you love your job and will keep doing it forever, then you're not worried about the 4% rule anyways.

But if you want to ER, then working down to 4%, or past it, is ER failure as much as someone FIREing at 5% WR and going back for a bit to bolster the stache.

Quote
I could say that I see owning real estate as an automatic failure because I would literally hate dealing with it.

Sure, I agree with that.  If you don't want to have real estate in ER, if you were forced to have some and deal with it for years of your retirement, I'd consider an ER failure.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on December 14, 2016, 01:02:52 PM

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.

There's a couple of things that jumped out at me with your post I'd like to respond to.

1) From a purely medical standpoint this notion about increasing lifespans is wildly misunderstood.  Ignoring for a moment the recent dip in life expectancies (mostly due to an increase in drug overdoses and suicides among otherwise young, healthy individuals), the increase in life expectancies is because fewer people are dying earlier. When fewer adults die in their 50s or 60s the median life expectancy increases.  Put another way, while the life expectancy of a healthy 60 year old has increased by roughly 3 years in the last two decades, the probability that they will reach 90 has barely budged.  As a species our average (median) life span has increased, but our maximum lifespan is essentially unchanged.
There is no evidence that the life expectancy (by definition a 50% probability of surviving) of someone in their 60s will be their 'mid 90s'.  Sorry, but the likelihood that either person in a marriage will live to see 100 is very small. Not today and not projected for our generation (you and I are about the same age).  Currently a healthy 60yo white male has a life expectancy of 81.5.  I'd love to think my wife and I will live to see 95, but the odds are heavily against it.

this doesn't mean that financially you shouldn't plan for your money to last as long as your maximum life span - you should. On that note...

2) While it is true that the available sample size (or 'number of unique combinations' as you call them) does decrease as you increase time periods, this doesn't mean that its not possible to test longer time periods.  The most common way to do this is with Monte Carlo simulations where you re-sample (sampling with replacement) different time periods, which allows you to have very large and equal sample sizes even when the time periods are very long.  Most people seem to use yearly time periods for MC simulations, but there's logic to sampling at 7 or 10 year time periods as well (cyclical markets and all...) An even simpler method is instead of viewing how many simulated portfolios 'failed' is to view what percentage ended with a higher real balance than they started with. There's a far greater probability that you will end your first 30 years of ER with substantially more then there is that you will have less money (in real terms) than when you first retired.

All of this assumes that the next few decades will be no worse than the worst time periods of the last 100+ years, which brings us to...

3) The idea that the lost of the US as the largest GDP somehow equates with the eminent failure of the 4% 'rule'. There's several different facets illustrating why this need not be the case.  For example, the ratio of US GDP to global GDP has been falling since its peak in 1952. There's the fact that only ~55% of profits from SP500 companies come domestically (a number that's also been steadily declining), and the idea that 'emerging markets' are better long term investments (historically they have not). Lower growth won't even limit the efficacy of a 4% WR per se. For that to happen we would need more periods that were as bad or worse than what we've seen over the last several decades.  Despite the 'great recession' and lots of articles published over the last 4 decades claiming 'the good times are over' there's little evidence showing that this is actually happening.
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on December 14, 2016, 01:04:06 PM
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!
Title: Re: Stop worrying about the 4% rule
Post by: deborah on December 14, 2016, 01:06:36 PM
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?
Title: Re: Stop worrying about the 4% rule
Post by: nereo on December 14, 2016, 01:15:40 PM
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.
Just sayin'...
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on December 14, 2016, 01:30:29 PM
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
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on December 14, 2016, 01:35:06 PM
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 fully expect there will be a point in my life where doing an easy PT job at a camping store, bike shop or surf shop will be very appealing even if I don't need the $$. Once I can no longer be super active staying in touch with those communities while having a reason to get out for a bicycle ride will be nice. But while I am still fit an extra year to camp, ride or surf is far more important.
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on December 14, 2016, 04:54:11 PM
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

In some ways, I'm an extraordinarily conservative person.  Belts and suspenders plus fashionable boxers behind a fence, if you don't mind a tortured analogy.

Overall, I think the WR discussion, while a great rule of thumb, is really just a first cut measurement.  Like knowing your BMI for health - it is a good number to know, it's just a first piece of data.  A safe WR depends on a person's disposition, risk tolerance, asset allocation, age, life expectancy, work history, backup plans, other sources of income, family size, children's ages, opinions about mortages and college costs, and probably half a dozen other factors.

For me personally, I declared myself FI when I reached a 4.08% pro forma WR about age 45.  My job wasn't bad at that point, so I kept with it and watched my WR drop while knowing I could quit any time.  About two years later, things got bad at work, and my Mom was sick, so I RE'd just before age 47 - I think I was at an estimated 2.5-3.0% WR then.

Nowadays I spend a little more freely and am at about 3.5%, which is where I personally feel comfortable.

As far as the perennial time versus money issue you allude to in your last sentence, yes, I keep that in mind.  I like what people have said elsewhere...you rolls your dice and you takes your chances.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on December 14, 2016, 09:17:34 PM
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!

Definitely.

This becomes more true the higher the amount you make, and the lower the probability of being able to make anything close to it, later.

You're still trading off guaranteed years for unlikely future years, especially when you're trying to go from a 95% success rate to a 100% one.

That was my point. We don't count these traded off years as ER failure, because you haven't ER'd yet.  But I think there's a reasonable case to consider it an ER failure (if not imagination failure).  :)
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on December 14, 2016, 11:07:02 PM
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.

The point about 95% vs. 100% is one I didn't realize until after the fact.  I just plugged in 100%, got 4.08% back out (older data from retireearlyhomepage.com) and worked to grow my assets to hit FI.  It wasn't until after FIRE that I looked and realized that if one is willing to take the bet that one is not starting in a period like the mid-1960's, one can raise one's WR quite a bit.  Personally I am of the opinion that the future will be better than the past, at least to be able to avoid the stagflation that affected those start years, so in retrospect I should have gone more with a 95% success rate (which is what you get for a 40-year planning period if you toss out or ignore four or five of those 1960's start dates).
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on December 15, 2016, 01:51:04 AM
what you get for a 40-year planning period if you toss out or ignore four or five of those 1960's start dates.

This is my preferred "safe" method. Then you're basically saying "It'll be worse than average.  Worse than almost every other year, in fact, but not literally the worst."  I think that's probably about as safe as you can get, barring a catastrophe, without just trading away MANY years chasing an illusive and uncatchable "guarantee."
Title: Re: Stop worrying about the 4% rule
Post by: ender on December 15, 2016, 06:25:23 AM
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.

Keep in mind that all of us with even a remotely large stash are already taking the bet.

We're assuming:


The last one is one I see interesting in these discussions as it's often overlooked. 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.

It's entirely possible you could FIRE on 5%. Or higher. The risk is having to work again in the future. The benefit is not having to work for the immediate short term.

Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on December 15, 2016, 06:43:21 AM
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.

(https://static.spiceworks.com/shared/post/0017/5294/quiteindeed.jpg)

I was trying to say something similar recently, but much more rambling, and much less eloquently.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on December 15, 2016, 07:07:33 AM
And if you have the flexibility to vary your annual spending WR 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.
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on December 15, 2016, 07:14:43 AM
Right, I get the argument.  I think it actually is discussed (vs. being overlooked) in many of the OMY posts that crop up on FIRE forums - does the person work longer for extra safety or quit now and start enjoying retirement.  Although I guess as an explicit strategy ("I'll stop at 5% knowing that I might have to but probably won't have to go back to work.") it isn't often discussed in that way.

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.  We ignore the fact that we might not last that long - I'm not sure what the numbers are exactly, but they're pretty grim; I plan for age 87 (47+40) but there's only a 50% chance or thereabouts that I'll be around.  Since living or dying and the stash surviving are mostly independent events, one can calculate P(failure)=P(me dying)*P(stash going to zero).  Doing the math that way leads to the 4% rule being very very safe.

Here's a page that intercst wrote on the subject (I believe after reading a post of mine from the old Motley Fool REHP forum).  He deserves credit for extending the math to account for year-by-year failure:

http://www.retireearlyhomepage.com/swrlife.html
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on December 15, 2016, 07:18:44 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on December 15, 2016, 07:20:47 AM
Wow 2ndCor, you've been in the ER community awhile.
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on December 15, 2016, 07:23:53 AM
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.

Very good. And in the 3-5% case your average spend is higher than a straight 4%.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on December 15, 2016, 07:37:50 AM

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]

My opinion on the matter is that if one is considering a retirement of >>30 years, there's really no point in worrying about whether you will live to be 85 or 100, because difference in 'failures' is miniscule between these two options, and the most likely outcome for either is that you die with more money than you started.  Since all of the risk is tied to the initial sequence of returns your response would be the same (reduce spending or earn some income, or both).

For example - using numbers similar to your own lets assume you were planning for either a 37 year retirement (median life expectancy) or a 50 year retirement; "success" slides from 90 to 81%, but in both accounts troubled portfolios can be identified within the first 7 years. In both cases >50% of scenarios end with substantially more $ than they began with.  Tack on SS and the numbers get much closer.  Use a slightly reduced WR (e.g. 3.7) and the numbers essentially converge.

Following this logic I don't worry that my retirement could be 65 years if I wind up winning the life-expectancy lottery and living well past 100.  My plan doesn't change from an estimated 40 years of retirement.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on December 15, 2016, 08:30:55 AM
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.

Good catch. I edited my post.

Personally I could take a 25% pay cut in any year or for a few years as long as it was likely I could increase my spending later. I have a number of expenses that are either nice to have or are for longer term issues that could be deferred a year or 3 if needed without any harm. Heck with an easy PT job I could drop my portfolio spending by 50%/yr for a while without feeling hard done by. That's the beauty of spending [relatively less] than is typical for your peer group.

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.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on December 15, 2016, 08:41:34 AM

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.

I agree with you on this, but the point where the risk is "small enough" is different among people.  Personally I'd be content anywhere north of 50%, knowing that we have every intention of adjusting spending and picking up random sources of income as they become available.  Others think this approach is crazy and would be terrified by it. 
So where does your comfort level lie regarding portfolio success rates?  80%?  95%?
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on December 15, 2016, 09:06:54 AM
So where does your comfort level lie regarding portfolio success rates?  80%?  95%?

I don't know for sure yet. I am behind the 8 ball in terms of time because I didn't start this process as early as I would have liked. I am also very active and my FIRE dreams are camping, mtn biking, surfing, fly fishing, etc... So that predisposes me to value my health and mobility.

My current FIRE numbers look roughly like this:

- spending ~$40K/yr so with taxes I need ~$47K/yr
- at 4%WR that's ~$1.2M
- I currently have ~$650K saved/invested
- I'm 47
- at my usual income/spending levels I can save $30K-$40K/yr

As you can see those number don't work out so great for an early FIRE...assuming you even think you can have an early FIRE once you are closing in on 50. So my plan is to save what I can in 2017. I'm luckily [sort off] working two contracts and earning more than typical so I may be able to sock away $80K next year. In 2018 I will shift to PT work with the goal to carve out months of free time and do the stuff I love while not drawing down the portfolio. That will allow it to continue to grow.

Now to your question. My expectation is that one of the things I will do with my additional free time in the downshift period is to see if I can reduce my FIRE budget comfortably and also to explore what variable WR rate plan I am comfortable with and what WR range I am comfortable with. Obviously by moving those variables around I can significantly reduce the $$ value I need to hit and shave years off my need to even do PT work. Also as obvious is that great or poor market performance will dramatically impact my motivation to optimize my FIRE plans.

I can say I am 100% comfortable with the standard 4%WR. And I think ~5yrs of PT work is something I feel good with. My simple simulations say that will give me ~$1M. I figure that I'll be able to make anything approaching that work. So that's the direction I am heading.

I will keep evaluating my situation and if I hate the PT work or my health changes or something else drastic occurs I'll be ready to stop working entirely on less than $1M. I'm also open to the notion that at some level/type of PT work I will actually prefer working to not working at all, which makes the shift to PT sooner than later sensible to me as with an income of $10K/yr my FIRE $ target shifts down significantly. I've spend 6 months+ doing outdoors store retail in my adult life and it was fun, but poorly paid.

Sorry that's not a concise answer. I really don't have one. I do know I am ready to be done working FT though and I do know that 6months/yr of free time now is worth more to me than 12 months/yr of free time in a decade.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on December 15, 2016, 11:00:11 AM
It's an interesting side alley, taking the unconventional view that working at all beyond a 4%SWR is an ER failure, but I don't see a good way to nudge the mainstream view.  To most folks, being unhappy in retirement is their only criteria for ER failure.  This current bull market nonwithstanding, you will have a negative return at some point before traditional retirement age if you retire in your 30's or 40's which most people feel uncomfortable about, even though the 4% literature still gives them some 95% success rate.  It's probably just human nature, but erring on the side of safety, especially when it's a 'bird in hand vs. two in the bush' decision just feels better.  I do hope that people don't work jobs they hate plugging through their OMY, or at least that they feel like a tremendous weight has been lifted by hitting FI (I have seen this light bulb go on, and it's a great feeling), but I don't think I could convince any FI'ed people I know that by working they are retirement failures.  They would look at me like I've lost my mind! 

TL;DR  I guess what I've noticed is that people really want to be FI, and ER is a distant second.  So if you tell them to ER but they think it might compromise their FI, the answer is going to be no.  It could be because of health insurance, or sequence of returns, or a zombie apocalypse, but FI 'trumps' ER.  (see what I did there :)
Title: Re: Stop worrying about the 4% rule
Post by: Telecaster on December 15, 2016, 03:37:26 PM
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  :) 
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on December 15, 2016, 03:46:53 PM
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  :)

True.  I come from an extremely blunt and practical lineage.  :-)
Title: Re: Stop worrying about the 4% rule
Post by: deborah on December 15, 2016, 03:54:59 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Mr. Green on December 15, 2016, 04:19:35 PM
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.

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.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on December 15, 2016, 04:21:06 PM
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 (based on US data, but I bet Australia is quite similar, though perhaps slightly longer--within the margin of error though).

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.

Right now, at 31, wife is 30, our 50% chance of making it is: 54 more years (to 85) for me, 58 more years (to 88) for her.  Our joint 50% probability (i.e. 50/50 chance at least one of us will be left) is 62 years from now, when I'm 93 and she's 92.

We have a 10% chance of at least one of us lasting 70 more years, until I'm 101 and she's 100.  If you want the same odds as many want for cFIREsim runs, 95% chance of covering you, we look at the 5% chance one of us will be alive... 72 years, when I'll be 103, her 102.

I don't care about covering myself past 100 (though I think it'll happen naturally via the way net worth raises in FIRE), but some might.

Have fun playing with your own numbers, everyone!

:)
Title: Re: Stop worrying about the 4% rule
Post by: Cheddar Stacker on December 15, 2016, 06:23:49 PM

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.
Title: Re: Stop worrying about the 4% rule
Post by: deborah on December 15, 2016, 06:58:53 PM
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.

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.
Ah dear! There are a few things here that I need to comment on.

My parents are quite elderly, as are some of their relatives, and I have been looking at multilevel accommodation in Australia (some of them are in multilevel accommodation). Obviously, we are a different country, with different laws BUT although many people go into multilevel accommodation because they think that if one of them gets worse, he will go into a higher level of care while she stays in the lower level accommodation, it just doesn't work that way here, and there is no guarantee that this can happen. These places are perennially full, so if they have the room, it can be done, but, generally, it can't.

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.

My parents loved travel. They traveled to many places, and gradually traveled more as they got older. Cruises replaced tours which had replaced independent travel as they got older. Their last cruise was from London to Sydney through the Panama Canal. So, as 60 became 70 became 80 became 85, their travel gradually increased in price. As they became less able to visit local towns or sites on the weekend, their overseas travel became longer and more often.

That said, it is normal here for expenses to go down slightly between 65 and 85 - see the comfortable standard of living developed by the banks https://www.superannuation.asn.au/resources/retirement-standard - but this is marginal. However, are mustachians more like my parents? There seem to be a lot of people in the forum who adore travel. The other thing is that the 85 year olds in Australia have MUCH cheaper pills and medical care than even our general populace - I have forgotten the exact cutoff, but if an elderly person spends more than (say) $5000 in a year on pharmaceuticals, they don't have to pay any more.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on December 15, 2016, 09:38:48 PM

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.

It was one of the ER resources I accumulated at some point, so was no big deal to share.  :)

Our plan is definitely different, so it is much less relevant to me personally, but very interesting, still.

I love your plan; I think everyone should do something similar, IMO, and gain years of life, unless they love their job and aren't doing it for the money..
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on December 16, 2016, 06:20:18 AM

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.
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.

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.
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on December 16, 2016, 07:11:32 AM
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.

It seems to me that some here are taking serious risks of failure in their FIRE plans, then I remember what many of you actually do on a daily basis. I'd hate that. I'd take some serious risks to get out of that too. Though I guess I did when I quit a salaried job and became a self-employed consultant years ago.

If you can swing it, a self-employed consulting gig can be sweet. Work from home, no commute, travel to clients' sites is paid by the mile and minute, tax-deductions, no set schedule, high pay/hour...you get the idea. It worked for me.

I'm still working some. More than I want to. I considered myself semi-RE at the start of 2016, but still managed an average of 30h/week (in chunks). I gave one project inquiry this week to a competitor. I'm trying to do more of that. Then again, I just completed a project for an old client and it was immensely satisfying. I don't get that same satisfaction from riding my bike, hiking or messing with my cars. I need a new hobby.
Title: Re: Stop worrying about the 4% rule
Post by: Mr. Green on December 16, 2016, 09:07:49 AM
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).

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 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.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on December 16, 2016, 09:13:14 AM
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).

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 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.

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.
Title: Re: Stop worrying about the 4% rule
Post by: dandarc on December 16, 2016, 09:17:17 AM
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).

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 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.
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.
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on December 16, 2016, 09:52:09 AM
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).

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 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.

These numbers do not seem to match up with the SS actuarial data I had posted up thread.  They are more optimistic. Another safety margin if you use them.

...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.

This is not supported from data in the US, even including rising medical expenses.
https://www.kitces.com/blog/do-your-clients-spend-more-or-less-in-their-later-retirement-years/
Title: Re: Stop worrying about the 4% rule
Post by: Mr. Green on December 16, 2016, 10:35:27 AM
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).

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 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.

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.
Ah! Totally makes more sense now. I knew I had to be missing something.
Title: Re: Stop worrying about the 4% rule
Post by: deborah on December 16, 2016, 04:09:12 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on December 16, 2016, 06:24:47 PM
Canada is modernizing its assisted dying laws, which I applaud. Given the high cost of health care in the very last years  I'm confident that process will continue and I plan to put into place legal instructions to avoid spending a prolonged period in care when my situation is not worth [in my opinion] extending my life.

If my portfolio won't support it I am okay with using Government funded care if I can no longer live at home yet don't meet the requirements of my assisted dying protocol.

In any case it seems a poor trade off to work extra years now to try and head of some potential scenario that will be an issue in my old age. I think a far more effective way to mitigate such concerns is to stop working after hitting something like a 4%WR, being flexible and keep my mind and body strong. If you give me a choice between more money or better health I'll take better health every time. Despite having a [relatively] high level of movement and low stress for a desk job it's pretty clear to me more full time work is not as beneficial to my health as more free time to pursue my interests...most of which involve significant exercise and low stress levels.
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on December 16, 2016, 06:55:09 PM
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.

I absolutely agree with end of life care costs are very high as I work in the medical field and see anecdotal evidence of this daily.  This particular study is only over the last year of life. The kites article shows total spending is reduced later in life despite the increasing health care costs.  As people age other reduced costs offset the increases, albeit over a period longer than the last year.
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on January 20, 2017, 06:27:32 AM
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!

Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on January 20, 2017, 06:31:44 AM
i trust michael kitce's studies and looks at things far more than 90% of these financial writer jerks out there .

as michael found:

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.


https://www.kitces.com/blog/how-has-the-4-rule-held-up-since-the-tech-bubble-and-the-2008-financial-crisis/
Title: Re: Stop worrying about the 4% rule
Post by: Gunny on January 20, 2017, 07:18:46 AM
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've been reading this series with much interest.  Overall, the author is not saying the 4% rule is no longer viable, he simply states that if you are looking at a much longer time horizon and wish to leave an inheritance, then lower withdrawal rates provide higher chances of success.  I particularly like the article on withdrawal rates based on current market valuations.  His research is in line with what I've read on MadFientist.  His research is of interest to me since my DW will loose my pension if I precede her in death and she will have only SS and our stash to live on.  A little smaller WR now to provide her a higher amount later on would let me fall asleep faster at night.  This is an academic exercise at this juncture as I have yet to start tapping the stash. 
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on January 20, 2017, 07:46:21 AM
i trust michael kitce's studies and looks at things far more than 90% of these financial writer jerks out there .

Any comment on the criticism of Kites in the article?

The article claims a 2000 retiree is doing very badly with 40% in short-term treasuries, OK with 10-year treasuries. The author accuses Kites of hindsight bias when he uses the 10-year in 2000-onwards studies.
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on January 20, 2017, 09:02:30 AM
we can all cherry pick assets that work or don't work , same with time frames  . i only  go by what i show and my mix . hypothetical means nothing . through 2000 i held intermediate term bonds and equity's and did okay .
Title: Re: Stop worrying about the 4% rule
Post by: Maschinist on January 31, 2017, 09:24:51 AM
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!

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.

- The KITCES study does not account for any inflation on the portfolio level. (which after a decade of more makes all the difference in optical portfolio valuation and with that also withdrawal rate)
- The ERN study does and on top of that is also looking for longer retirement periods aka what everybody here should be interested in. This part is the most important in my opinion and should open the eyes of early retires in their 30's-40's
https://earlyretirementnow.com/2016/12/21/the-ultimate-guide-to-safe-withdrawal-rates-part-3-equity-valuation/

Going from 4% to 3% withdrawal rate makes all the difference in the world at current market valuations and guarantees 50+ years peace of mind.

Im not connected in any way to the author but when you read the article you know that its pure gold.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on January 31, 2017, 10:06:57 AM
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).
Title: Re: Stop worrying about the 4% rule
Post by: Maschinist on January 31, 2017, 10:25:29 AM
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).
KITCES inflation is only calculated for the withdrawal but not for the portfolio value.
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.
Title: Re: Stop worrying about the 4% rule
Post by: dandarc on January 31, 2017, 10:29:12 AM
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).
KITCES inflation is only calculated for the withdrawal but not for the portfolio value.
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?
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on January 31, 2017, 10:35:06 AM
KITCES inflation is only calculated for the withdrawal but not for the portfolio value.

Yes, the Kitces article recognizes this, discusses it, and accounts for it in the analysis.

Quote
Starting year 2000 with a 60/40 portfolio with 0.1% fees leaves you with ~$700k adjusted now.

Run the same numbers for the comparable period starting in 1966 and the remaining inflation-adjusted portfolio value is even lower, which was Kitces' point.
Title: Re: Stop worrying about the 4% rule
Post by: Maschinist on January 31, 2017, 10:52:57 AM
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).
KITCES inflation is only calculated for the withdrawal but not for the portfolio value.
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?

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.
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on January 31, 2017, 01:02:41 PM
the 1965/1966  group had really good 30 year stock returns . over 10% .  however inflation , stock returns and bond returns killed them in  the first 15 years . it was really inflation that put the nail in the coffin .
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on January 31, 2017, 01:20:09 PM
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).
KITCES inflation is only calculated for the withdrawal but not for the portfolio value.
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?

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.

The very next graphic in the article shows the WR's after 15 years.  This is not at all deceiving. (https://www.kitces.com/wp-content/uploads/2015/08/Graphics_3.png)
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on January 31, 2017, 02:20:38 PM
here are the results of the 30 year time frames that failed .

they all had pretty good results  with a 60/40 mix

1907 stocks returned 7.77% -- bonds 4.250-- rebalanced portfolio 7.02- - inflation 1.64--

1929 stocks 8.19% - - bonds 1.74%-- rebalanced portfolio 6.28-- inflation 1.69--

1937 stocks 10.12 - - bonds 2.13 - rebalanced portfolio -- 7.24 inflation-- 2.82

1966 stocks 10.23 - -bonds 7.85 -- rebalanced portfolio 9.56- - inflation 5.38

for comparison the 140 year average's were:

stocks 8.39--bonds 2.85%--rebalanced portfolio 6.17% inflation 2.23%

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.

so lets look at the first 15 years in those time frames determined to be the worst we ever had.

1907--- stocks minus 1.47%---- bonds minus .39%-- rebalanced minus .70% ---inflation 1.64%

1929---stocks 1.07%---bonds 1.79%---rebalanced 2.29%--inflation 1.69%

1937---stocks -- 3.45%---bonds minus 3.07%-- rebalanced 1.23%--inflation 2.82%

1966-stocks minus .13%--bonds 1.08%--rebalanced .64%-- inflation 5.38%

Title: Re: Stop worrying about the 4% rule
Post by: Maschinist on January 31, 2017, 04:40:33 PM
...
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).
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.
Title: Re: Stop worrying about the 4% rule
Post by: Eric on January 31, 2017, 06:47:07 PM
...
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).
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.

CAPE is an okay comparison, but it's definitely not a be all end all number.  It fails to take into account changes in GAAP over time, changes in company attitudes towards dividends, and the underlying factors that drive investments (like interest rates).

I'm not completely dismissing it as a metric, but at the same time, expecting CAPE to simply revert back to its historical mean or assuming that a "high" CAPE is a signal of an impending crash is completely ignoring the context of the measure.

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/
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on February 01, 2017, 06:42:20 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: dandarc on February 01, 2017, 09:39:29 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on February 01, 2017, 10:10:39 AM
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.

Note that the Philosophical Economics author put out a few subsequent articles where he or she continued to refine his or her thinking on CAPE, including this one (in which he or she constructed a new-and-improved version of CAPE and ultimately concluded that future market returns are likely to be below the historical average):

http://www.philosophicaleconomics.com/2015/03/payout/
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on February 01, 2017, 10:47:24 AM
http://www.philosophicaleconomics.com/2015/03/payout/

Super interesting, thankyou! While the entire article should be read, some interesting conclusions.

Quote
"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."

Yes, the market may be inflated due to policies and interests rates.  If these factors change, lower returns will likely result in the medium term.  Not great for very recent early retirees, if it happens.  OTOH, reduced long term expected returns via a loss of equity premium (ie knowledge of buy and hold) may not necessarily be a bad thing for early retirees.  Since we all know that sequence of returns is far more important than mean real returns; reduced mean equity returns from loss of equity premium will equate to decrease length and breadth of market downturns.  This could actually increase portfolio survivability over the long run.
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on February 12, 2017, 07:44:49 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on February 12, 2017, 07:57:00 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Ursus Major on February 12, 2017, 08:08:39 PM
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.
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.
Title: Re: Stop worrying about the 4% rule
Post by: Ursus Major on February 12, 2017, 08:16:00 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on February 12, 2017, 08:17:49 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on February 12, 2017, 08:18:41 PM
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.

)

Which ones don't take out large fees and profit for themselves?
Title: Re: Stop worrying about the 4% rule
Post by: Ursus Major on February 12, 2017, 08:21:08 PM
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.

But on the downside it will may give those in the pre-FIRE stage a false sense of security. A double-edged sword...
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on February 12, 2017, 09:09:55 PM
Sorry I'm late to the game, but I had this out with Nords.  I expressed my being disenfranchised about not having surety in my early retirement (by buying an annuity) as compared to his government sponsored retirement...  I'll try to find the link.  He basically said that the annuity is not a good proxy because he would never buy one, but didn't have any other similar measure.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on February 13, 2017, 12:43:36 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on February 13, 2017, 03:55:49 AM
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.

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.

Just playing devil's advocate...I still think 4% is probably fine for a 30 year retirement.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on February 13, 2017, 05:11:28 AM
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.

If you can get an annuity that pays 3.86% with annual inflation adjustment from CPI and 30 years of expected life left - more power to you.

Then you just have to worry about the insurance company going under or otherwise failing to pay you.
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on February 13, 2017, 07:30:03 AM
I'm not in the least bit interested in buying an annuity. Just thought it an interesting idea. A feel-good double-check, if you like.

Good points raised above. I don't mistrust my own withdrawal rate so I'm not going to pursue the idea further. I already done goofed and worked too long :-)
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on February 13, 2017, 08:05:13 AM
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).

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.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on February 13, 2017, 08:11:48 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on February 13, 2017, 08:19:39 AM
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:
Quote
This 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.
Title: Re: Stop worrying about the 4% rule
Post by: MDM on February 13, 2017, 08:24:53 AM
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.
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.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on February 13, 2017, 08:31:14 AM
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:
Quote
This 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.

As usual, we can agree to disagree, I took my own message.  You seem to think spending 60% more to get the same thing (an annuity costs 60% more than a 4% SWR for the same income) then I guess it's fine to ignore the cost.

And it is worth reading his post (http://forum.mrmoneymustache.com/post-fire/fire-on-4/msg995516/#msg995516) in its entirety and not trying to summarize, so thanks for that.
Title: Re: Stop worrying about the 4% rule
Post by: sol on February 13, 2017, 08:38:39 AM
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. 
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on February 13, 2017, 08:44:52 AM
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).

Using  cFIREsim and extending the FIRE period to 40yrs I need to start with $1.5M to get to 100% success with 25/75 stocks/bonds. So your annuity costs an extra $100K for management and profit. I'm assuming the insurance company asset allocation is conservative. That could be wrong. They can also gamble with lower success rates to make more money.

When doing FIRE calculations having a bit of spending flexibility and being willing to take something less than 100% success against historical data can save you tons of money. It just depends how much "insurance" you need.

Using cFIREsim for 40yrs starting with $950K 75/25 stocks/bonds variable WR between $35K - $45K/yr gets you ~93% success. Median annual WR is over $40K/yr.

So you need to decide how much security you need and how much are you willing to pay for it. Personally I'm not even going to get to 4%WR as my time is too precious to me for that. I'm sure as heck not paying 60%+ more for an annuity.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on February 13, 2017, 08:51:08 AM
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.

Presumably the insurance company is selling annuities every year so they can average over the decades between years that are profitable and those they lose money on. If the cFIREsim math is right most starting years they'll end up with a big old pile of client money and in a few starting years they'll lose some.

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.
Title: Re: Stop worrying about the 4% rule
Post by: The Happy Philosopher on February 13, 2017, 09:02:35 AM
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.

But an annuity contract cannot go bankrupt, it just becomes unprofitable. With the ability to pool risk the insurance company makes up for this with contracts that are more profitable than expected. Annuities are an interesting way to address retirement, but seem to be useless for most early retirees as the payout rate is so low. They are great for older people that want to simultaneously hedge sequence of return and longevity risk though.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on February 13, 2017, 09:12:31 AM
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.

One comforting thing about this reality is that if you do start in a bad FIRE year you'll have lots of support to get through it because all your other MMM forum buddies in the same cohort will be going through the same shit.
Title: Re: Stop worrying about the 4% rule
Post by: sol on February 13, 2017, 10:01:01 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on February 13, 2017, 10:08:57 AM
We call that annuity program "social security" and it already does exactly what you describe.

In Canada it's called CPP and maxes out at $11K/yr you pay for it directly. The Gov't gives you an additional ~$7K/yr paid by taxes. The problem is this starts at 65yrs old and you can't voluntarily pay more to get a bigger benefit.

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.
Title: Re: Stop worrying about the 4% rule
Post by: sol on February 13, 2017, 10:25:47 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on February 13, 2017, 10:31:33 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: sol on February 13, 2017, 11:11:01 AM
You failed at a key point I highlighted.

Costs are determined by what the market will bear.  I've opened the bidding, you are free to do one better. 

If not, why not?  We're not asking for a free lunch, are we?

My product is significantly different from the fixed term annuities we've been talking about.  I'll open a retirement/lifetime-income account for your newborn baby and I will pay out to your family descendents forever.  I won't ask you about your health history.  I won't require ongoing premium payments.  I don't care what your tax rate is.  I'm not sure a comparable product is even currently available, so I don't know if you can criticize the plan based on cost.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on February 13, 2017, 05:01:56 PM
1.1%, minimum 300k.

(Probably should take this to another thread, if it'll continue.)
Title: Re: Stop worrying about the 4% rule
Post by: CanuckExpat on February 13, 2017, 07:10:40 PM
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):

1) The insurance company probably invests more conservatively

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.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on February 13, 2017, 07:17:53 PM
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.

Agree with all of this.
Title: Re: Stop worrying about the 4% rule
Post by: Telecaster on February 13, 2017, 11:45:51 PM
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.   
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on February 14, 2017, 01:17:31 AM
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.

Definitely. It's suboptimal from a math perspective. But perhaps still okay from a psychological perspective.

The insurance company gets rich. But they may be better capable of riding out the lows than you are (then again, maybe not, if they go BK).

Reminds me of the pay off mortgage debate, whereby you have more money not doing it, but some people get more peace of mind out of doing it. Ditto SPIA.
Title: Re: Stop worrying about the 4% rule
Post by: Mr Mark on February 14, 2017, 01:56:03 AM
...

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.

+1

The forum debated this extensively some time ago I recall... As you get older (>65? >75?) there may be real value to buying an inflation adjusted annuity to secure a minimum income because of the 'death effect' (if your concern is 100% sustainable SWR, not leaving money to heirs), especially if you don't get (or don't trust) social security payments. This enables an insurance company to pay a higher than market WR + still make money, because some of their clients will die and never even get their principal back, and they can probably get re-insurance on any residual risk they are taking.

If you knew you only have 9 years to live a 10% SWR is gonna be just fine.
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on February 14, 2017, 04:23:32 AM
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.

No, I totally get all that.  As Retire-Canada pointed out, I was referring to the fact that an early retiree is stuck with the success or failure of his/her chosen year, whereas an insurance company gets to play all of the years.
Title: Re: Stop worrying about the 4% rule
Post by: teamzissou00 on February 17, 2017, 09:55:15 AM
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? 
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on February 17, 2017, 09:59:33 AM
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?

There is no perfect portfolio. There are some common ones that would be reasonable choices for most people. Have a look below in the investing section asset allocation gets talked about a lot.

On the ETF vs. MF there are also several threads in investing that cover this. The take away is that although there are some smaller differences you can choose either without it materially affecting your retirement.
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on February 18, 2017, 12:09:38 AM
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?

https://portfoliocharts.com/

Data is only back to 1972, but it's a great resource created by a forum contributor. 
Title: Re: Stop worrying about the 4% rule
Post by: Nords on February 18, 2017, 05:52:14 PM
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.
Well, I could complicate it.  It's frustrating to be quoted without context.

I don't remember that discussion, but the annuity topic generally comes up two ways. 

The first is when someone expresses a desire to have a cushy military pension with all of its benefits.  The financial response boils down to getting a quote from an annuity seller like the Thrift Savings Plan or an employer or Berkshire Hathaway or whoever else offers them.  (Does Vanguard still do that?)  It'd be for a lifetime inflation-adjusted annuity, perhaps with a survivor benefit. 

As others have pointed out several times that's also the description of Social Security, which might be enough for any American concerned about the 4% SWR failure rate.  SS is not considered in the original 4% SWR Trinity Study or Bengen's analysis, and even someone in their 30s could have a struggling portfolio bailed out in its final years by SS.  As others have pointed out, 19 times out of 20 the retiree will live their entire remaining life with "enough", and in a few cases with "way more than enough".

[I'm in the camp of "way more than enough" because anyone with the motivation and persistence to achieve FI before a traditional age-65 retirement will probably also find ways to cut their ER expenses even more, or to earn money having fun with their ER.]

The second context is when someone is generally concerned about the 4% SWR failure rate and suffering from the "Just One More Year" syndrome.  Again the answer is to buy an annuity to cover the period of vulnerability.  Maybe that's a SPIA for a bare-bones budget, or maybe it's a short-term annuity during the early part of financial independence (before SS) to address sequence-of-returns risk.  Or maybe it's a deferred annuity as longevity insurance for someone who won't get SS.  It wouldn't even have to have an inflation adjustment.

The insurance companies tend to sell the simple annuities more cheaply because they make their profit margin from the mortality credits, not so much from the individual buying the annuity.  Unless, of course, you happen to become one of those mortality credits.

I'm not a big fan of indexed annuities or variable annuities because they're too expensive and too heavily weighted in the favor of the insurer (and the sales staff).  I'm also not a fan of whole or universal life insurance, but that's a whole 'nother thread.

Three relevant digressions:
Last December I lost a shipmate who had become a good friend.  He went into the hospital for complications with pneumonia, he was on social media that night, and suddenly the next day he was dead.  He was three years younger than me and he was larger than life.  He was happily retired from the military but he also left behind his fourth-grade class.  I still miss him every time someone brings up Harley-Davidson motorcycles or when I see vets with goatees & ponytails or hear Metallica.  I miss him a lot.

You know those thought experiments like "What if you found out that you only have a month left to live?"
Well, a couple of weeks ago one of my friends passed away in hospice.  He was diagnosed a month before he died, and it was too late for anything but palliative care. 
He was 76 years old and he was widowed three years ago-- yet he's survived by several siblings and his mother.   

Finally, yesterday I spent seven hours in the emergency room helping an acquaintance.  I broke a few speed records getting her there because we were both convinced that she was dying of a heart attack.  (I even managed to dial 911 along the way and ask them to have the ER crew stand by.)  After numerous scans & samples they determined that it wasn't cardiac or bleeding or ulcers, but that her body is breaking down from osteoporosis.  She's already healed a cracked pelvis, and for the last five months she's been dealing with two cracked vertebrae.  She was going through tremendous pain and nausea that was only eased by a Vicodin with a chaser of 8 mg of morphine.  She's 51 years old but looks 10 years older due to lifestyle choices (and perhaps genetics).  She's spending the weekend with more Vicodin and anti-nausea meds and muscle relaxants... and hopefully finding the time to decide what she wants to do next.

If you're concerned about the 5% failure rate of the 95% success rate, or if you're suffering from JOMY Syndrome, then maybe you have bigger issues to worry about. 

Set a budget, save up 25x, declare financial independence, and live your best life.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on February 18, 2017, 06:00:10 PM
Couldn't agree more.

Love to hear it from someone who's approaching a decade and a half ER'd.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on February 18, 2017, 08:12:35 PM
Set a budget, save up 25x, declare financial independence, and live your best life.

Amen.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on February 18, 2017, 10:45:07 PM
Thanks for the reply Nords, except I don't know specifically why Rebs agreed with you (he probably just didn't make himself clear).  In my comments, I was referring back to your original statements (which I linked to, repeatedly).  You began to discuss your original comment that you have a cushy military pension (which is enviable, but sadly increasingly unattainable for non-military unless willing to commit a significant premium to the 4% SWR equivalent).  At the time of the original comments, I found there to be a 60% cash premium for someone in their 40's to get the same COLA 'pension/annuity' as relying on a 60/40 and 4% SWR.

I do agree with the rest of the comments that people do die young and we should enjoy our youth and our health (whether through good fortune, hard work, or lifestyle choices).  I've never disagreed with that.  I guess I'll just make an aside that folks in their 30's and 40's probably get pretty depressed working and also reading blogs and forums about how much getting old sucks and not being retired sucks.  A better framing should be that getting older doing what you love to do, either still working a little longer until you can retire, or FI and then finding a better avocation like pastor or blogger or just kick-ass in your own original field (chemical engineer for me, which used to suck as contractor but now rocks as part of Norwegian International Oil Company).

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%).
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on February 18, 2017, 11:03:18 PM
All trends point the other direction.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on February 18, 2017, 11:12:29 PM
All trends point the other direction.

I really don't understand what you are saying and I think you have something important that you want to say.  So stop being so enigmatic! 
Title: Re: Stop worrying about the 4% rule
Post by: nereo on February 19, 2017, 08:08:16 AM
...
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'll comment on the bolded sections in order.  Perhaps this is what 'rebs was getting at
1) Medicare has been expanded multiple times since its inception in 1966, and each time it has included more people and a broader slice of the population

2) EVen the most conservative (pessimistic) projects on SSI show that it will be able to meet 70% of current obligations with no changes to the program. Other models indicate we might not have shortfalls at all should we maintain low unemployement and decent growth. It is currently still running a surplus. SSI has faced projected shortfalls before, and after LOTS of political bickering each time it has been tweaked to remain solvent. Also worth noting that other projected shortfalls in the conservative models never panned out (i.e. reality was better than the pessimistic model).

3) Overwhelmingly the trend for QOL has been upwards.  Despite all the press about 'stagnant' wages and how the "1% are seeing all the gains, this hasn't changed.  On a real-adjusted basis, the middle class today are doing better today then they were 20 years ago. What's changed is that we *feel* poorer, because our expectations have outpaced our growth. We see HUGE gains at the top of the income spectrum, and feel bad because we've made only modest gains around the middle.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on February 19, 2017, 03:16:46 PM
I hope you are right and the next generation enjoys continued prosperity and social guarantees in a nice, neat extrapolation of the gains of the 1960s to 2000, but I'm just not so sure after the near collapse in 2008, with no real changes instituted to stop it from happening again.  And if people were satisfied with the status quo and where the future was taking them, why the self destructive votes for Brexit and Trump?  And plenty of evidence that the world is becoming more desperate to shake things up and vote for change agents.

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).

But these are just opinions.  The more one tries to understand facts around things like climate change and inflation adjusted household income and the economic issues in Greece, the more confused one gets around if it is better to just ignore trends.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on February 19, 2017, 03:34:44 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on February 19, 2017, 07:05:54 PM
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.

I second that.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on February 19, 2017, 07:49:27 PM
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.

I didn't think I was being pessimistic, just an open-eyed pragmatist and a realist.  Being a pessimist would imply that I think all hope is lost and things will definitely continue to get worse.  I do think that, in order for things to improve, sometimes they do need to get worse, and 2008 to now has been an unusually unbroken string of economic prosperity (seemingly built on the back of financial manipulations like zero interest rate policy and quantitative easing).  But I don't think I've suffered any financial, mental, or opportunity costs these last 9 years, so maybe this comment wasn't directed at me?
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on February 20, 2017, 02:30:06 AM
Your posts seem to indicate otherwise.

And everyone thinks they're a realist. The optimists have data for why they should be optimistic, and the pessimists have data for why they're pessimistic.

If you think things will get better, you're an optimist. If you think they'll get worse, you're a pessimist.

Whether or not you think that can change is irrelevant. You say a pessimist thinks nothing can get better, but plenty of pessimists think it can, it just likely won't. Similarly, plenty of optimists think it could get worse, it just likely won't. A fatalism about one's viewpoint is separate from the viewpoint itself.
Title: Re: Stop worrying about the 4% rule
Post by: Mr Mark on February 20, 2017, 05:02:39 AM
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.

+2
Time to deploy the MMM optimism gun!
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on February 20, 2017, 08:27:11 AM
Thanks for the comment Rebs.  Of course, what I post is different from my day to day life.  Most people who know me would probably call me an optimistic person, unless talking about the latest Trump fiasco.  Even on that I try to be open minded and hopeful.  Probably one reason I seem pessimistic is that I've hit FI and market losses would impact me more than further outsize gains.  And this Forum is so full of optimists too!  I'm not one to join the chorus.  I don't foresee any imminent collapse or anything, I just like to point out the things others seem to either be unaware of or not talking about.  For instance,  2008/9 was probably tougher mentally on an ER than worker because the worker was still (hopefully) buying in through their 401k and living off income vs potentially living off shrinking investments and suffering dividend cuts.  Not saying this to make people pessimistic, just thought things like this are worth being reminded of (that we've had it incredibly good) or informing younger investors so they are better prepared.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on February 20, 2017, 09:41:55 AM
...
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).

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.

*agree that "advancements" are often in the eye of the beholder and how they are used. Computers can be used to increase productivity and interact with more people, or they can be used to isolate ones-self from neighbors and ruin your health.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on February 20, 2017, 12:03:30 PM
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).

Quote
“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”
 
Title: Re: Stop worrying about the 4% rule
Post by: nereo on February 20, 2017, 01:40:24 PM
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.

Well don't forget the fear and distrust that came with the nuclear bomb and the launch of sputnik.  Who knows how close humanity came to a global halocaust, but the hysteria was very real on both continents. Then there were things like the "horseless carriage"  - perhaps THE biggest gamechanger to cities, and originally seen as noisy, unreliable, useless, and expensive.  Many cities banned them at first.

Quote
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...
Title: Re: Stop worrying about the 4% rule
Post by: chasesfish on February 20, 2017, 02:02:31 PM
When I get pessimistic about the world, this usually puts it into perspective:

http://www.humanprogress.org/
Title: Re: Stop worrying about the 4% rule
Post by: nereo on February 20, 2017, 02:32:08 PM
When I get pessimistic about the world, this usually puts it into perspective:

http://www.humanprogress.org/
^^ :-)
That gave me a nice warm fuzzy feeling.  Thanks.
Title: Re: Stop worrying about the 4% rule
Post by: Mr. Green on February 21, 2017, 02:51:17 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on February 22, 2017, 08:18:11 PM
@Green - I have the utmost respect for Mr. Buffet and agree that his is a case where bullish optimism has worked out through thick and thin.  However, I'd argue that nowadays he can win the game with one hand tied behind his back.  Companies throw themselves at him in the form of 'one off deals' to give him a stake in their company for below market rates, just to say that Buffet has taken a position in them (yikes, almost sounds sexual, except he is not Tumpy-creepy).

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.
Title: Re: Stop worrying about the 4% rule
Post by: Nords on February 22, 2017, 09:11:19 PM
In the theme of "good things about the 4% SWR", here's a post from Michael Kitces' site about why the 4% SWR might be too low. 

Yes, l-o-w, not a typo, too low.  The original research makes simplifying assumptions about spending, and those assumptions don't accurately model the way that humans actually spend. 

https://www.kitces.com/blog/safe-withdrawal-rates-with-decreasing-retirement-spending/

It reminds me of the quote "All models are wrong, some are just more useful than others."  25x annual expenses might be close enough for other defensive techniques to overcome adverse events, and "just one more year" syndrome might keep people in the workforce far longer than required.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on February 22, 2017, 09:51:43 PM
@Nords - thanks for the link.  I appreciate the idea that due to decreased spending in later years, SWR could creep up 'at least 0.32%, and as much as 0.75%'.

But how has your early retirement jived with this assumed dip in spending?:
 (https://www.kitces.com/wp-content/uploads/2017/02/Graphics_3-2.png)

And that's fine if we all want to assume that we ER to a life of less spending (that eventually is forced upward by declining health).  But that's the clear-eyed choice that people should make, that they are going to take a dip in spending if 4% faces some short term headwinds, not that they can be confident in or up their 4% SWR because people at 60 usually spend less historically when they are 70 - 80.  We are talking to people retiring at 4% in their 30's and 40's here
Title: Re: Stop worrying about the 4% rule
Post by: Mr. Green on February 22, 2017, 10:05:59 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on February 22, 2017, 11:49:09 PM
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?
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on February 23, 2017, 06:52:03 AM
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?

But there's also the strong possiblity that my life isn't even half over, and I'm making really good money at 43.  Much better than I made in my 20's, although it was somewhat easier back then.  Once I made it over the hump in my 30's (doing what the 'man' told me because I had to) now at FI in my 40's, I feel heistant to hang it up early just because I might only live 40 more years....
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on February 23, 2017, 07:05:16 AM
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 agree with you, but let's not forget that 30yr old retiree is in great shape to deal with a sequence of returns risk should he be in a poor start year. He/she can hedge against that with tactical portfolio choices, variable spending and as a last resort PT work. If they are in one of many happy start years where there portfolio gets several solid returns one after another they are set for life.

As someone who will FIRE around 50 at above 4%WR I'd 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.

I definitely agree with you that working extra years FT in order to mitigate the small chance you might have to do something in FIRE to prevent a portfolio failure. As I have posted before I think it's more about fear of change than a real assessment of that risk and determining extra years of work are the best mitigation strategy. People trained to work all their life will fight pretty hard to keep going in many cases. Clutching at small % FIRE risks is just a rationalization.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on February 23, 2017, 07:09:40 AM
I feel heistant to hang it up early just because I might only live 40 more years....

Then work. It's your life. Just be aware of the opportunity cost trade you are making and why you are really making it.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on February 23, 2017, 07:15:47 AM
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.

RC, great post!  It's a nice reminder that folks should try to find work they enjoy or a side hustle the whole time that they are beholden to 'the man'.  For me, I do regret sticking it out in a crap job in my 30's (when my kids were being born and doing the 'family nest' bit).  But hey, maybe the struggle made me appreciate my situation now.
Title: Re: Stop worrying about the 4% rule
Post by: Nords on February 23, 2017, 12:47:08 PM
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).

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?
There's a couple of tweetables in those thoughts.

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.
Title: Re: Stop worrying about the 4% rule
Post by: The Happy Philosopher on February 23, 2017, 11:16:18 PM
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).

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?
There's a couple of tweetables in those thoughts.

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.

You are my hero Nords!

The things that scare me most about retiring early at 4% is health insurance, and more importantly a chronic health disaster or long term care. In my mind I can hedge against or deal with just about anything else.

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. 
Title: Re: Stop worrying about the 4% rule
Post by: Nords on February 24, 2017, 04:52:36 PM
Thanks!  I'm trying to set a good example of what early retirees do all day...

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.

Very few of my readers are older than me (56) so it hasn't come up.  They used to be overpriced and over-sold with high fees, but HUD has cracked down on the abuses and they're a much better deal today.  I think Wade Pfau (again) has been writing about the best ways to use them.

I'm especially enamored of the line-of-credit aspect of a HECM, where you only write a check when you want the money, but otherwise I haven't researched the benefits & pitfalls.



I'm a big fan of paying off a long-term fixed-rate mortgage with the income from a reliable inflation-adjusted annuity (like a military pension).  We've used this tactic since 2004, we've invested most of the money in the stock market, and we're handily ahead of the mortgage interest rate.  This time we may be able to lock in 3.25% for 30 years on a Hawaii VA loan for a very large amount of equity.  We'll bleed a little cash for a nearly five years, but then my spouse will start her Reserve pension and our cash flow will turn positive again.

We started the analysis with trying to reduce the interest rate on our rental property mortgage (4.625%), then it turned into analyzing a bigger loan with the mortgage on our home (3.625%), and then it turned into paying points for an even bigger VA loan.  The key is having enough income to make the payments, and once that hurdle is achieved then the rest is good enough to turn the spreadsheet green.  We also benefited from the math and the advice in Casey Fleming's book "The Loan Guide".

We tend to take outsize risks with our money that we don't need, but in this case the loan repayment is offset by military pension income.  Although the mortgage broker is making some very encouraging noises, nobody has yet given us a loan amount or an interest rate.
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on February 25, 2017, 03:10:57 AM
the two biggest pitfalls with reverse mortgages are seniors are finding that as their health changes so do the requirements  they have for living .

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
Title: Re: Stop worrying about the 4% rule
Post by: The Happy Philosopher on February 25, 2017, 08:41:22 AM
the two biggest pitfalls with reverse mortgages are seniors are finding that as their health changes so do the requirements  they have for living .

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
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?

As Nords mentioned I think the best use of these is as a line of credit. Essentially you open up a line at age 62 (only pay initial setup costs, which can be quite expensive) and only take out equity in the event of a bad initial sequence of returns, or to control taxable income if most of your money is coming from IRAs/pension or other ordinary income. My guess is most mustachians have a big enough taxable pile and are living frugally enough this doesn't matter, but for a retired physician living off of 130 or something the tax savings could be substantial. In a low interest rate environment like we are in now you borrow the money at 4ish% (and use it like tax free income since it is a loan) and let the IRAs keep growing at 7ish% (and not have to realize taxable income). And when you pay back the interest (if ever) you get to deduct it.

I'm trying to get someone to do a relatively non biased financial analysis of these (good luck right?) because I'm fascinated by them. What really intrigues me is from my reading of the program, the loan never has to be paid back while you are alive and living in the property. The loan is non recourse which means that can't come after other assets even in the balance of the loan become much higher than the house value. You transfer all that risk to he FHA.

Worse case scenario, things get out of hand and you owe much more than the house is worth as interest rates climb and you keep pulling money out. You lose all that home equity (which was worthless to you from a cash flow perspective anyways), but you have potentially delayed taking social security (higher payment) and you have not depleted your other assets as much (IRAs, taxable, etc).

There is a thread I started over on WCI if anyone has interest in this topic as I  don't want to get too far into the weeds here. Perhaps I will start a new thread here if there is interest.

http://whitecoatinvestor.com/forums/topic/using-a-reverse-mortgage-in-retirement-as-a-strategic-planning-tool/
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on February 25, 2017, 09:13:12 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: The Happy Philosopher on February 25, 2017, 09:32:23 AM
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.

Yes, similar to HELOC, although the lender cannot change the terms of a HECM and the line of credit grows at some rate determined by the FHA. 20 years after a HECM is established your line of credit may be more than your house value, and they cannot take it away from you. Just imagine if you took out a HECM 15 years ago on a huge house in downtown Detroit. Morality and ethics aside one could have stripped out all the 'equity' (which keeps growing even if the house value goes to zero) and handed the keys to the FHA at the end. The bank would have shut down a HELOC very early in the process.

Additionally a HECM doesn't need to be paid back until you move or dies. HELOC must be paid back immediately (at least the interest) and you are at the mercy of the bank. They can change terms or reduce/eliminate your line of credit.

The biggest advantage of a HELOC is that they are significantly cheaper.
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on February 25, 2017, 01:09:11 PM
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
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on February 25, 2017, 03:27:00 PM
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)
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on February 25, 2017, 03:40:40 PM
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).
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on February 25, 2017, 05:15:56 PM
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).

Emotionally scary, I suppose - but should I sell 100% more stock shares than I normally would (presuming 50% downturn) or pay maybe 10% in interest on the HELOC before the market likely comes back by year 3?
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on February 25, 2017, 06:32:10 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on February 25, 2017, 07:11:37 PM
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.

And in a situation like 2009, you only need like $40k from the HELOC.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on February 25, 2017, 08:06:39 PM


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 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.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on February 25, 2017, 08:41:53 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on February 25, 2017, 09:09:51 PM
What percent it happens to, I don't know, but it exists as more than a rumor (i.e. people saying it happened to them).

Besides that person you mentioned here, you can easily find anecdotes:
Quote
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)

Quote
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.

The point being cash or equivalents is cash; HELOC is not reliable.
https://www.bogleheads.org/forum/viewtopic.php?p=722602&sid=2fed613e7ad856e9e7b06f84033a0f71#p722602 (https://www.bogleheads.org/forum/viewtopic.php?p=722602&sid=2fed613e7ad856e9e7b06f84033a0f71#p722602)

Enough reports exist of it happening that I wouldn't make it my primary plan.

I'd have one open, sure, I just wouldn't count on it.  It'd be like counting on an ARM interest rate to stay low in a recession.  Typically the fed won't raise rates at that time, because of how bad that would be for the economy, so you're probably safe counting on it... but I wouldn't make my primary plan relying on my ARM mortgage to stay low, or being in trouble if it didn't. Ditto a HELOC--I wouldn't make my primary plan based on being able to tap it.
Title: Re: Stop worrying about the 4% rule
Post by: deborah on February 25, 2017, 09:10:53 PM
I suspect that the people who it happened to didn't see the thread you posted, or didn't answer. Certainly, in the meetups I have attended of MMM people (around 200 people in 3 continents), I have talked to about 5 that it occurred to (the topic was not brought up at any of these meetups, so this was just in random conversation), so I would say that it was much more common than you think.
Title: Re: Stop worrying about the 4% rule
Post by: Nords on February 25, 2017, 09:19:04 PM
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.
I have two anecdotes. 

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.

A local Hawaii startup, Pipeline Micro, experienced a similar problem with their seed funds (several hundred thousand dollars).  They had them parked at a brokerage in auction-rate CDs.  When that market locked up in 2008, they were cut off from "their" money.  (The brokerage generously offered to let them borrow on margin against the balance... but at margin lending rates.)  That lack of liquidity led directly to financial decisions which cost the firm some hires, some revenue, and some advantages.  It led to a downward spiral.  They're no longer in business. 

I was a brand-new angel investor then, and I was impressed by their business model (as well as their accomplishments to that point).  Luckily I had not yet whipped out my checkbook.  It was a powerful example of a startup where one meteor strike killed them. 

From then on I favored startups where everything had to go wrong for them to fail, instead of everything going right for them to succeed.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on February 26, 2017, 05:24:44 AM
Thanks for the links. I wouldn't have any emergency plan that didn't have several layers of depth to it. I don't have a HELOC at the moment as my home equity is low. I do have a LOC with no tie to my home equity I use as an emergency fund. My bank didn't do anything to my LOC  during 2008, but say they did I have access to all my investment accounts at any time without any penalties.

Before I FIRE I'll get a HELOC in place with a different institution than the one I have the LOC with for added redundancy.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on February 26, 2017, 08:36:18 AM
A HELOC is just one of many, many "fallback" options if the market goes sour. NONE of them are guaranteed.

So what? We're not Bogleheads who consider 2% a SWR adequate, plus paid off house, plus 1 year in the E-fund, plus 5 years of laddered CDs. Plus that stash of bullion in the safe, that doesn't count, or the vacation house, or the "angel investing"....

As a more practical person, I am talking more about a HELOC as one option in a "defense in depth" to protect a portfolio during a market crash during the critical first few years of ER.

What could be done if the HELOC is frozen/closed and you don't want to draw on your equities in a 50% market crash?

Open a HELOC somewhere else. There are thousands of banks and credit unions which offer them. There were ALWAYS banks willing to issue HELOCs to people with good credit. Maybe the limit is lower, but we only need $25k.
Open a CC with 0% interest for an extended period - I get offers of 15-21 months of 0% interest all the time.
Use a CC with low interest.*
Get a part time job
Craigslist stuff
Do side-gig stuff.
Etc

*I have an old card that's 8.9% fixed. Not as low as a HELOC, but better than selling stocks at half price. But if my spend is $25k, it will cost me about a thousand bucks in interest to live on the credit card for a year. I would wait until just after the statement closes to make my initial purchase so that I get 60 days of "float" before interest accrues, and the balance will slowly grow through the year. Spending $1k extra in interest is a hell of a lot better than selling $50k in stocks at $25k. Admittedly, I could only get 11 months of expenses on this example card - I've got a dozen cards. I have over $200k in available credit - not even counting the substantial amount my wife has available.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on February 26, 2017, 01:23:27 PM


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.  :)
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on February 27, 2017, 04:15:34 AM
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.
I have two anecdotes. 

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>

I had a HELOC from USAA that they froze in about that same time frame.  I took it personally at first, but then was told that there was no problem with me; it was a risk management move on USAA's part to reduce their exposure to the housing downturn.  I had opened it just as a cheap precautionary measure so had a zero balance on it at the time and no intent to use it, so I didn't mind very much.

(Eventually I refinanced my first mortgage and at that point the new mortgage company required that either USAA subordinate my HELOC to the new mortgage, or that I cancel it.  For whatever reason USAA wouldn't subordinate, so I canceled it.  Haven't had one since.)
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on February 27, 2017, 06:51:59 AM
we sold  investment property's in 2008-2009 . two banks at closing cancelled the closings because they had no money to give out when the dates were approaching  . finally a 3rd bank followed up with the money . what should have been less than a 1 month closing took almost  5 months
Title: Re: Stop worrying about the 4% rule
Post by: The Happy Philosopher on February 27, 2017, 08:23:00 AM


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.  :)

Which is why the HECM seems so interesting as an alternative. Although expensive, it is irrevocable and essentially allows you to strip out all the equity in your house and pay it back when you die. Unlike a HELOC you don't have to make payments. If someone gets to 62, has something like a 5 or 6% swr (either through bad planning or they retired earlier and hit a bad sequence of returns) and lots of home equity this would allow them to retire with more confidence.



Title: Re: Stop worrying about the 4% rule
Post by: Nords on February 27, 2017, 04:49:04 PM
Wade Pfau chimed in today on HECMs:
https://retirementresearcher.com/using-reverse-mortgages-responsible-retirement-income-plan/

Quote
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.
Title: Re: Stop worrying about the 4% rule
Post by: deborah on February 27, 2017, 05:00:15 PM
Very interesting article Nords. Thanks for pointing it out.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on February 27, 2017, 07:03:02 PM
Interesting, but I can no longer take anything Pfau says at face value.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on February 27, 2017, 07:11:02 PM
Interesting, but I can no longer take anything Pfau says at face value.

Why not?
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on February 28, 2017, 04:30:07 AM
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.

Whats next?  Financial products to borrow against your SS or your kids future SS?  At a very low fees and rate, of course!
Title: Re: Stop worrying about the 4% rule
Post by: Dicey on February 28, 2017, 05:08:36 AM


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.
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.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on February 28, 2017, 05:16:58 AM
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.

Whats next?  Financial products to borrow against your SS or your kids future SS?  At a very low fees and rate, of course!
Meh.
I see them as a tool.  Like a hammer or a saw, they can be used in constructive ways or destructive ones.  For individuals or couples with no obvious heirs (or children that have no desire to be saddled with M&D's old home) they can make a crap-ton of sense OR they can be just another method for increasing consumption now at the expense of tomorrow.

I'm thinking now specifically of my parents home; it's way bigger and in completely the wrong location for any of us children to utilize. I'm not really looking forward to the process of selling it when they pass on.  Thankfully my parents have more than 'enough' for retirement, but I'd be completely OK if they took our a reverse mortgage to preserve investment capital.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on February 28, 2017, 05:30:48 AM
Interesting, but I can no longer take anything Pfau says at face value.

Why not?

He's to some extent beholden to the professional money managers.

In recent years he has had a habit of finding different ways to unfairly handicap calculations of SWR for sensational headlines. 4% rule unsafe! paper (bunches of calculations, have to dig down to see that he wasn't counting the 1% advisor fee in the 4%, it was being used to handicap returns) - another 4% rule unsafe! paper (bunches of calculations, you have to dig down to see that he took the historical data, and presumed every year would be 25% worse, so you get a 25% worse Great Depression, 25% worse stagflation in the 70s, etc)

Stuff like that.
Title: Re: Stop worrying about the 4% rule
Post by: Mr. Green on February 28, 2017, 06:14:39 AM
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.

Whats next?  Financial products to borrow against your SS or your kids future SS?  At a very low fees and rate, of course!
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.

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.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on February 28, 2017, 06:47:45 AM
None of which persuaded R-C to reconsider their position,

Diane my position has not changed to date. I use a LOC as my EF. I hold no cash. When I have enough equity in my house I'll take out a HELOC with a different institution for some redundancy at a limit well below by total potential credit limit.

In the thread you referenced I stated that I did not deny/doubt HELOC impacts had happened, but given all the doom and gloom about the topic it was hard to find first person accounts. A few more have bubbled up in this thread and that's great. I'm not against taking onboard new information, but I am not going to base my decisions on what happened to "my cousin", "my neighbour", etc... at best those anecdotes are only marginally helpful as they lack the detail needed for a proper analysis and at worst they are misleading if they do not represent the actual situation.

Risk management assessments are formed by two main factors 1) likelihood of the risk and 2) potential impact should the risk manifest. I still feel pretty confident in the robustness of my line of credit and the HELOC I plan to get and will use them as my first line of defence. I don't see a big risk that they will be affected in a way that causes me huge problems, but as noted above it's not like the HELOC is my whole plan and should it fail Rome falls.

What's different about the discussion here was the context. Looking at an older retiree without enough savings and comparing the HELOC to the HEMC I can see why the later would be preferable. Again going back to the risk assessment in this case the likelihood of a HELOC failing is the same, but the impact is much much more severe because this retiree does not have a properly funded retirement and may not be able to work due to their age.

In my own case it's just a choice between using a low cost credit facility like a LOC/HELOC or selling investments at a lower price than I would prefer or doing some PT work.

So don't worry it's not that THE GREAT ARS spoke to me from heaven that's different in this thread. It's just the details of the situation being discussed are materially different. ;)

BTW - Ars you should use that THE GREAR ARS has a nice ring to it. :)
Title: Re: Stop worrying about the 4% rule
Post by: The Happy Philosopher on February 28, 2017, 08:11:36 AM
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.

Whats next?  Financial products to borrow against your SS or your kids future SS?  At a very low fees and rate, of course!
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.

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.
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).

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.
Title: Re: Stop worrying about the 4% rule
Post by: Mr. Green on February 28, 2017, 08:25:49 AM
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.

Whats next?  Financial products to borrow against your SS or your kids future SS?  At a very low fees and rate, of course!
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.

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.
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).

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.
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.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on February 28, 2017, 08:52:38 AM

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.
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.
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on February 28, 2017, 08:53:43 AM
I'm not familiar with the HECM. I may be a superior tool to a reverse mortgage.

HECM is the latest term of art for a reverse mortgage.  It sounds fancier to some I think, and tries to distance the idea from the bad rap that some gave to reverse mortgages when they first came out.
Title: Re: Stop worrying about the 4% rule
Post by: dabears847 on March 01, 2017, 01:06:44 PM
I'll jump in as a fan of the home equity line of credit (heloc). I've worked in banking all my career and have used mortgages as a vehicle to grow wealth.

I've mentioned this topic before and got slammed looking for some strategy discussion on using a heloc as a tool for down years. Basically, if portfolios dip one to two years on average then a heloc should be able to help combat those short years.

Yes, I was one of the people who had their home equity lines of credit reduced, I had three different ones at the time 2008, for three different properties. All three were reduced access to bring in line with current market value of the properties.

Now My house is paid off, and I'd like to access funds versus pulling required floor $30,000 from my portfolio. I've got the 4% portfolio, but the heloc is just cushioning. $40,000 target annual spending

Home value $300,000, 80%ltv, home equity line is available credit of $240,000 or eight years of yearly floor spending. This assumes no pull from the portfolio at all,no side hustle, no other options. Ok, so housing tanks again and now I only have access to $200,000. If most markets return in two years, wouldn't I generate a greater return and reduce portfolio failure? I believe so.

Example:
So market tanks in 2018 greater than 15-20%, I pull $40,000 from heloc.
2019 market comes back, payoff heloc, and draw $40,000 stocks to replenish cash
2020 Markets are good, normal course.

or
Supplement with heloc part two






Title: Re: Stop worrying about the 4% rule
Post by: dabears847 on March 01, 2017, 01:20:45 PM
Part two,

Supplement Income
We need or want to spend $40,000 yearly, but the market tanks and we can only pull 4% or hypothetically a reduced portion. My million dollar portfolio drops to $750,000 4% is $30,000. I can pull $10,000 from the home equity line in the first few years without stressing my reduced portfolio value.

Or since portfolio is down 25% maybe I pull more via the home equity because I cant swallow selling at a 25% discount.

So say first year I pull $10,000 to combat a bad year, my first year in retirement. year two comes and market is down another 10 percent, so I pull $30,000 from the home equity and start considering re-employment, portfolio is down 35%. Year three and market is still down, I find part time work generating $10,000 yearly, my wife finds the same or we go back to work. However, with supplemental income, portfolio is down but barely due to our withdrawals, we pull $10,000 out year three. Year four is the portfolio still down 35%?

With the first ten years of early retirement considered the riskiest point of failure, the heloc seems to be a great tool.





Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on March 01, 2017, 01:28:48 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on March 01, 2017, 01:29:17 PM
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.

Whats next?  Financial products to borrow against your SS or your kids future SS?  At a very low fees and rate, of course!
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.

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.
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).

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.

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)

The median family has put themselves in this situation, likely due to high consumption.  So now they "need" money from their only major asset to make ends meet with SS.  Option "A" get a reverse mortgage, PAY interest and fees to a bank, slowly eating away any gains to your undiversified asset and continue to overconsume via your living situation.  Option "B", admit you are overconsuming & sell the damn thing; downsize, rent or find a more affordable living situation, invest proceeds and EARN interest & dividends on diversified assets.  The current low-rate environment only makes option A less unappealing.  With recency bias we forget, rates will likely not remain this low forever.

I'm really not suggesting kids or any sort of legacy is really "owed" anything.  I would assume though, most people would rather provided a legacy than pay interest to Wells Fargo.  Lets face it, this tool is developed to enrich banks and drain the middle class. Without reverse mortgages those who stay in a family home are forced to reduce consumption due to the illiquidity, this wealth would end up in the hands of heirs, not banks.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on March 01, 2017, 03:07:44 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: AZryan on March 02, 2017, 05:32:09 PM
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.

Costs me $50 a year (is that unusual??), but I have it as a mostly free pile of cash to weather a big drop in a bad market. This allows a 100% stock portfolio to be much lower risk, with the long-term expectations pre and post retirement of far higher returns. I also intend a variable withdrawal based on a fixed percent with ceilings and floors rather than the standard 4% rule (that no one actually follows anyway)

Quote from: Classical_Liberal
I agree they (HELOCs)are tools and can be used for good, but they were developed for evil...

-The median family has put themselves in this situation, likely due to high consumption.
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 frugal, low (or no) debt, early retiree should be able to put a HELOC to good use in the rare case they actually ever need it in the first decade or so of retirement. Pull a few grand during some lousy years, pay it off when the market comes back, probably never need it again after that. No need to cut back expenses, get a side job, or rely on weak bonds as a permanent crutch.
Title: Re: Stop worrying about the 4% rule
Post by: AZryan on March 02, 2017, 05:38:41 PM
dabears847,

Sorry, I pretty much just repeated what you wrote. I didn't catch it. We're pretty much doing the exact same thing for the exact same reasons.
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on March 02, 2017, 06:40:43 PM

Quote from: Classical_Liberal
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.

You added the bolded portion to my response. My comments were specifically regarding reverse mortgages, a product which is not repaid.  Sorry if I was unclear.
Title: Re: Stop worrying about the 4% rule
Post by: AZryan on March 03, 2017, 10:26:36 PM
Quote from: Classical_Liberal
Sorry if I was unclear.

No. My fault. Shit gets cluttered in quotes within quotes within quotes. WFT was this thread about again? heh
Title: Re: Stop worrying about the 4% rule
Post by: Mr Mark on March 05, 2017, 12:01:09 AM
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...
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on March 05, 2017, 12:13:24 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on March 05, 2017, 12:37:46 AM
That chart is amazing.
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on March 05, 2017, 08:39:38 AM
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!
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on March 05, 2017, 08:41:35 AM
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.

I agree the illiquidity is scary, but if you examine the median person or couple from a mustachian standpoint, it's totally doable... If they liquidate their home.

An overly simplex analysis of a median dual income couple retiring at 67:  Sell home and end with about 200K in total liquid assets.  Assuming a 25 year retirement, death at age 92, which is a very generous (https://www.ssa.gov/oact/STATS/table4c6.html) lifespan.  4% is FAR too conservative for a 25 year time horizon and could be sustained with 0% real returns, but this is the 4% thread, so we'll use it as a low end.  6%WR could be sustained with about 4% real returns, so I'll use it as a high end. 200k @ 4%WR is $667 a month, at 6%WR is $1000 a month. With median retirement SS payouts per person at $1317 a month (https://www.ssa.gov/policy/docs/quickfacts/stat_snapshot/), our couple has 2600 a month in SS income.

In total, our median couple has between $3250 and $3600 a month of todays $'s for retirement, depending on how conservative they withdraw.  Same math for a single person with median net worth & SS is $1975 to $2300. 

Conclusion: At least the upper half of households shouldn't have to eat cat food. I'm single and live on the above single range now.  Edit:  It's never too late to start!  Just adopting a mustachian lifestyle in one's 60's with a median net worth leads to a super awesome, happy, fulfilling, and plentiful retirement!

Note: Yes to rounding. Yes this makes assumptions, but has some value as a general analysis of the generic "median" American family.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on March 05, 2017, 11:09:18 AM
The average single person is in trouble, is your conclusion?  ;)
Title: Re: Stop worrying about the 4% rule
Post by: dude on March 07, 2017, 09:31:56 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: dougules on March 08, 2017, 10:26:52 AM
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. 
Title: Re: Stop worrying about the 4% rule
Post by: Mr. Green on March 08, 2017, 10:29:57 AM
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.
And as old people become an even greater % of the overall population, thanks to science and medicine, their influence will grow.
Title: Re: Stop worrying about the 4% rule
Post by: Mr Mark on March 08, 2017, 12:52:10 PM
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.

Quite a few SS oldies in our condo. They've paid the mortgage off and condo fees cover heat and electricity, maintenance, etc etc. Cost about 12000 a year. Rest is just something for food and they are totally ok.
Title: Re: Stop worrying about the 4% rule
Post by: Dicey on March 09, 2017, 08:50:52 AM
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.

Noooooo! The Wizard was revealed to be an imposter. You are the read deal. Your natural voice is pitch-perfect.
Title: Re: Stop worrying about the 4% rule
Post by: Much Fishing to Do on March 12, 2017, 01:45:24 PM
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?

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.
Title: Re: Stop worrying about the 4% rule
Post by: farfromfire on March 12, 2017, 06:17:48 PM
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?

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.
That's a pretty novel idea for a forum focused on early retirement. Please, enlighten us further...


On another note, this thread converted me to mustachianism - many thanks to all of the contributors!
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on March 13, 2017, 02:38:44 AM
tips track a price index not your personal cost of living . the difference you see and what the cpi see's are as different as night and day and tips can leave you well off the mark .

in fact right now inflation expectations are high and tips are doing worse than conventional bonds because raising rates can reign in inflation and diminish your return which you may actually need more of .

the cpi is not really a cost of living index . it is a price change index on a basket of goods and services representing the 1500 mini economy's that make up this country and may have little in common with what you see  personally  in your personal cost of living index .

a personal cost of living index is unique to you , your age ,your location , spending patterns  and lifestyle . not what tips are linked to .

equity's have beaten inflation since the 1970's by over 7%  on average and continue to beat it over the longer term . .
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on March 13, 2017, 04:27:52 AM
I think you guys missed Strick's last sentence.
Title: Re: Stop worrying about the 4% rule
Post by: farfromfire on March 13, 2017, 05:01:47 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on March 14, 2017, 04:41:46 AM
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.

Well, I guess Strick can chime in to defend him/herself, but I believe you are still missing the point of his/her post.  The entire point of the post is contained in the last sentence.  He's "seen the light," and is now saying he no longer subscribes to the ideas detailed in the first paragraph.
Title: Helocs again
Post by: JoJoP on March 29, 2017, 08:59:53 AM
I'm going to chime in about HELOC's.  We had 2 Helocs, and both were frozen. We got them both about 10 years ago, when the banks were lending to anything that fogged a mirror.   Both were for 150K CL's, and attached to paid off properties at less than 50% loan to value, and  used to buy investment property.

They were frozen for different reasons.  One was frozen after our banker suggested a credit line increase on it, and the Underwriting Department reviewed our income (self employed, sporadic), and froze it.  We had just paid it down by $40K, with the thought that we'd pull that 40K back out later in the year, when we needed it, but in the meantime it would effectively reduce our mortgage debt until then.  We did eventually get the $40K back out, but had to jump through numerous hoops to do so. 

The second Heloc was frozen when Washington Mutual was bought out by Chase.   We'd just gone through the episode above, and had no desire to use those helocs as the financial tools we had hoped for.  I still have it... it 's a 30 year pay off, at an under par interest rate.  It's still one of my lowest interest loans. 

All in all, though, as a means to acquire more rental properties, it was hugely successful, and I'd do it again if I had confidence that a bank would loan to us.  I think my point is that our financial picture, with self employment, no pensions, etc, hugely benefited from the access to easy money when it was available.  For us, it was a moment to be seized.    I think that opportunities for successful retirement are dotted along everybody's path.  Helocs at a cheap rate, the chance to buy a property at a discount, 401K matching, a wildly successful stock investment, a rental, an inheritance... these chances come in all shapes and sizes.   Don't squander them, no matter what form they take.  I'm in my mid-50's, so FI without RE,  with a 'stache in the mid 7 figures and growing.  I read MMM because I always learn something here, and, because like the chart shows,  hardly anyone of any age, including a big swath of my friends,   has enough money to last them. 
Title: Re: Stop worrying about the 4% rule
Post by: TFR on April 01, 2017, 09:24:08 PM
Long time reader of the forums but commenting for first time.  This thread has seen of the most exhaustive discussions of the 4% rule, it was very interesting to read different perspectives.  While the fees issue is clear, there is a fundamental difference between the earlier Trinity study and recent times.  The supreme over-valuation of stocks in 1999-2000 followed by yield compression in bonds didn't have parallels even among the worst case 1996 retiree cohort, who at least had nice interest coming in from bonds at that time.  This case needs to be studied in depth, though it's only been 17 years of retirement for the 2000 retiree. 

On a broader level, using convervative tweaks to arrive at the 'worse case' failure edge in SWR using historical data, I did a small study as described here: http://tenfactorialrocks.com/hacking-the-retirement-calculators/

I find that 3.27% to be the real safe withdrawal rate from this exercise, even considering current historically low bond yields. I would appreciate your views on it.   



Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on April 02, 2017, 03:54:28 AM
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/
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on April 02, 2017, 04:22:35 AM
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/

I'm generally a believer in the adequacy of the 4% rule, but I have to point out that if you go by the default cFiresim inputs, 1966 failed pretty badly (as did all the other years between 1965 and 1969).  So saying that 2000 and 2008 were no worse than the worst years of the past is not necessarily comforting.  What would be more comforting is saying that the late '60s, as well as 2000 and 2008, were anomalously bad, and as long as things don't get that bad again near the beginning of your retirement, you'll probably be o.k.
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on April 02, 2017, 05:02:47 AM
a 95% success rate  counts on 1965/1966 failing along with a few others .

but what you have to remember is conventional planning usually has us planning until 90 or 95 .

statistically that is  low odds any of us will see those ages so in reality if playing statistics we really are running a much higher success rate portfolio wise since odds are we are planning for more years than we will likely need .

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%  . we have not even fiigured in human spending patterns in our older years changing . much of what we do and buy earlier in life we stop later on and that pays for increases in what we do continue on with . so study after study shows comes the later years we need a lot less inflation adjusting than calculating an adjustment yearly .

we have not needed a raise  yet going in to our 3rd year in retirement .  been the same budget the last 2 years . this year two big expenses will drop as i go on medicare and my supplement picks up the 480 a year gym membership too . that is a savings of thousands a year from what i pay now in health insurance on my own .

so it is likely we may get to go 4 years with no inflation adjustment so far .

we don't use a fixed 4% anyway as a spending guide . our withdrawal system is dynamic and changes yearly  . we just have found even though we could spend more we ended up not .
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on April 02, 2017, 06:33:27 AM
Yes, I agree with all of that, which is why I said that I'm basically a believer in the adequacy of the 4% rule.  What I was taking issue with is Kitces' assurance that 2000 and 2008 retirees will be o.k. because those years were no worse than 1966. 
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on April 02, 2017, 07:38:08 AM
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. ;)
Title: Re: Stop worrying about the 4% rule
Post by: moof on April 03, 2017, 04:59:35 PM
*snip*
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.
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.
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on April 04, 2017, 02:48:46 AM
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."
Title: Re: Stop worrying about the 4% rule
Post by: matchewed on April 04, 2017, 05:06:11 AM
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."

It's for a person aged thirty. Maizeman has previously explained these charts in another thread.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on April 04, 2017, 05:42:19 AM

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."

The proportion of the graph that is in the "dead" category is calculated using the cumulative probability of death from social security actuarial tables (https://www.ssa.gov/oact/STATS/table4c6.html) starting from the risk of death between your 30th and 31st birthday and moving on from there. The reason to do this in graphical form is that is does actually calculate the distribution of risks of death instead of trying to reduce it to a single number. So the simulations above do calculate the left hand skew of the distribution of death risk.

There certainly are lots of other factors that influence how long someone might expect the live. Starting with gender. The chart above is for a 30 year old man, for a 30 year old woman there would be a bit less gray space. Also all sorts of things like family histories of cancer and/or heart disease. So it's definitely a rough approximation. But I can at least assure you that the way the data is analyzed does take into account the shape of the distribution for death rates by age, not just a summary statistic like mean/median/mode.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on April 08, 2017, 09:10:43 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on April 08, 2017, 11:55:59 PM
The graph simply represents data that is easily accessible to you on CfireSim and the SS actuarial tables.  Im sure the SS administration and the creators of Cfiresim have 1000's of pages of data from which those conclusions are being drawn.  I can't imagine that source data is off limits to you either. If you don't believe it look here (https://www.ssa.gov/oact/STATS/table4c6.html) and here (http://www.cfiresim.com/).  Personally I love the graphic art!  But I also love a dose of healthy skepticism.
Title: Re: Stop worrying about the 4% rule
Post by: farfromfire on April 09, 2017, 02:06:32 AM
...
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.
How, exactly?
Seems like these graphs are shining a great deal of light, even if you do not like the somewhat whimsical graphical format. Whether the light they shed was "hard-won" is a question of how much effort was expended by their creator; while I have no direct knowledge of that, I am quite sure you do not either.

ETA:
maizeman, would you feel comfortable posting your source code? I would love to play around with the different parameters without bugging you,
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on April 09, 2017, 07:52:42 AM
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.

First off the blame for lack of context is my fault. 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.

Second shake your head if you expect a deep explanation of the details behind everything that's shared on this site that could potentially have a dramatic effect on a reader's life. That's a ridiculous expectation of a forum like this.

Third what I would expect from a reader's reaction to viewing this chart is simply that they put into perspective the risks of going broke vs. dying when they think about FIRE planning. That would be the launching off point for examining their current assumptions and validating them. None of financial information or life expectancy information around FIRE is secret and cannot be looked at independently.

People casually talk about the 4% rule without mention of the Trinity Study or any of the assumptions behind it on this site. Often they take liberties with the assumptions and leave out key details. We don't freak out about that. Why? Because we expect that anyone who is going to make a major course change on their life will not do so based on a random post from a stranger on an internet forum. But, they may get inspired to look into a topic they wouldn't have know about previously and that may lead to something life altering, which is great.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on April 09, 2017, 08:48:40 AM
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.

I think it is a perfectly splendid set of graphs, and the style makes it very accessible.

You must also be turning up your nose at XKCD which has some extremely insightful pages.
Title: Re: Stop worrying about the 4% rule
Post by: matchewed on April 09, 2017, 09:33:36 AM
So your posts will contain all the necessary background research it took to reach whatever conclusion or point you're trying to illustrate? And of course will look far more professional, whatever that means.

Was there ever such an era?
Title: Re: Stop worrying about the 4% rule
Post by: sol on April 09, 2017, 09:42:25 AM
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.

That discussion was in this thread (https://forum.mrmoneymustache.com/post-fire/for-those-who-follow-the-4-rule/), with maizeman making his seminal contribution on page 2.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on April 09, 2017, 10:58:07 AM
Edit (4/23/17): I've continued to clean up the code and push out more of my "helper scripts." More recent and generally easier to read versions of the code posted below are now on github: https://github.com/maizeman/dead_broke/tree/master/DAB_graphs

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.

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.

In response to a previous question from ARS, I also posted the portfolio mortality rates for 100% stock portfolios between 3.5% and 6.0% (https://forum.mrmoneymustache.com/journals/maizeman-races-against-the-machines/msg1445263/#msg1445263) in a more standard excel sheet.

This code was definitely written as an exoskeloton, not a robot,* so if you run into bugs running it on your computer, let me know.

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.

(https://i4.imgpile.com/i/ZqEJE.png) (https://imgpile.com/i/ZqEJE)

I feel like it loses something in the translation though.

My personal convention is that, the more conceptual the idea I'm trying to get across, the more informal the style of the graph (so people don't try to extract exact values from it). The more quantitative the actual analysis, the more formalized the style.

*Professional programmers tend to design code that's like a robot, knowing that it will have to go out into the world and interact with people on its own (without the programmers' help if something goes wrong). Folks like me are much more likely to treat our code like exoskeletons. It increases our strength and abilities, but we're still there in the middle of it all with the ability to troubleshoot errors the code throws in real time.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on April 09, 2017, 11:12:16 AM
Edit: EV2020, I do agree with you that having detailed and auditable methods and clear pointers to the raw data used for a given analysis is essential for both research and when people are making major life decisions. I didn't realize how many people would be interested in this form of data visualization when I ran a couple of quick models in the thread sol linked to above. Writing actual papers complete with cited sources and clearly defined introductions/methods/results/discussion is something I do in my day job, and the thought of doing the same thing for what I consider one of my fun hobbies that lets me decompress at the end of the day fills me with a feeling of exhaustion.  However, I have always been open about the datasets I used, and I have tried to be clear about methodology and assumptions (see below). Posting the python code actually used to generate the figures is another step in the right direction. (I'm still cleaning up the code used to generate the portfolio life expectancy table itself but hope to post that soon too.)

Gathered from various places around the forum.

Quote
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.

Quote
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.

Title: Re: Stop worrying about the 4% rule
Post by: farfromfire on April 09, 2017, 11:24:01 AM
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.

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.
Thanks! I'll be playing with it soon enough.

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.

Oh sweet summer child:
Quote from: IEEE, https://www.ieee.org/publications_standards/publications/authors/publications_faq.html
The following are the basic charges for color:

    $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)
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.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on April 09, 2017, 01:24:38 PM
Yup, I think publication fees are evolving at different rates in different fields. I collaborate with a couple of folks in CS and they took the very idea of publication charges as a sign I wanted to publish in some sort of predatory fly by night journal. In my own field, the trend seems to be towards lumping per figure and per page charges into the overall publication fee. But my very first job in the lab I landed in from grad school was recreating a color bar chart in shades and patterns of gray, because, in the word of my PI at the time "either we can pay for a color figure, or I can buy another student a laptop."

Quote
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.
Title: Re: Stop worrying about the 4% rule
Post by: farfromfire on April 09, 2017, 01:48:23 PM
"either we can pay for a color figure, or I can by another student a laptop."
Lol, that's a great line.

Good on PNAS for moving to the 21st century and waiving color fees. OA fees don't affect me personally but hopefully that too will be gone one day.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on April 09, 2017, 02:05:22 PM
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.

Sorry for the freak out, but comments like this (and surely others that didn't comment) worry me that something as complicated and nuanced is being taken as 'there is a simple answer'. 

By 'hard-won', I was referring to the original Trinity study as well as the pile of follow on work from Pfau, Kitces, and many others.

Thanks for the measured response Maizeman, I wasn't meaning to call you out and I'm sure more work went on behind the scenes that might defeat the purpose of making the 4% rule easy to visualize.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on April 19, 2017, 09:58:11 AM
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.

Kitces' site just published an outstanding article on "dynamic programming" (a/k/a "dynamic optimization") in the context of retirement planning, representing the convergence of financial-planning-practioner-oriented research and economist-oriented research as well as, in my view, an omen that the prediction expressed by Nords in the (nearly two-year-old) quote above (or, at the very least, the prediction that research (and computer simulations) will catch up to reality, whatever that reality may in fact be) is coming closer to fulfillment.

https://www.kitces.com/blog/dynamic-programing-irlam-tomlinson-methods-for-financial-planning-optimization/
Title: Re: Stop worrying about the 4% rule
Post by: Jamese20 on April 19, 2017, 12:33:29 PM
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! :)
Title: Re: Stop worrying about the 4% rule
Post by: matchewed on April 19, 2017, 12:45:18 PM
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! :)

... it's like you've never even heard of the internet before. ;)

In all seriousness though, and this will go for any subject, it is up to you to keep educating yourself and use that knowledge to revisit this subject and come to your own conclusion. The conflicting viewpoints are actually rather regardless of you coming to a decision on a SWR.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on April 19, 2017, 01:38:37 PM
Thanks for posting BG. We used to use dynamic programming (things like Needleman-Wunsch) for sequence alignments way back in the day. Things like identifying an ideal solution by starting with the endpoint and working backwards made sense. At that time the biggest point was that these actually reduced runtime complexity significantly compared to more naive approaches.

I'm still struggling to wrap my head around how you'd utilize a similar model when dealing with uncertain end points (unknown age at death, even though you'd have a probability distribution for it). Maybe that's where the stochastic dynamic programming models come in, which I'm not yet familiar with. Definitely calls for further reading.

This point was particularly well taken though:

Quote
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.

The difficulty of building accurate utility functions that reflect the choices individuals actually make in the real world and the tendency of economists to eventually throw up their hands and say "okay we're going to model this as if people made logistically consistent decisions" is what finally got me to give up on economics back in school.
Title: Re: Stop worrying about the 4% rule
Post by: Jamese20 on April 19, 2017, 03:48:14 PM
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.

i think during my saving decade i will just lump it all in my LS100 account and see what returns it did as a starting point
Title: Re: Stop worrying about the 4% rule
Post by: Telecaster on April 19, 2017, 04:37:18 PM
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. 
Title: Re: Stop worrying about the 4% rule
Post by: Eric on April 20, 2017, 11:21:03 AM
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?
Title: Re: Stop worrying about the 4% rule
Post by: dandarc on April 20, 2017, 12:34:51 PM
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?
(http://i.imgur.com/TaJYTn1.jpg)
Title: Re: Stop worrying about the 4% rule
Post by: cerat0n1a on April 20, 2017, 03:03:08 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: dandarc on April 20, 2017, 03:06:51 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: clumlee on April 20, 2017, 05:20:50 PM
So with a 70/30 split what's the breakdown of the 70 between domestic/international and cap sizes?
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on April 20, 2017, 06:36:10 PM
So with a 70/30 split what's the breakdown of the 70 between domestic/international and cap sizes?

That could fill a whole 'nother thread without reaching any kind of consensus.  But most folks will say that you should have at least some diversification across countries and capitalizations.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on April 20, 2017, 10:48:05 PM
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.  The most important assumption is that history repeats itself or remains stagnant - lifetimes don't become longer, the worst 30-year rolling period for investors is behind us, etc.  At the very least, I encourage folks on this thread to visit FIREcalc (http://www.firecalc.com/), cFIREsim (http://www.cfiresim.com/), and maybe i-ORP (https://www.i-orp.com/) and Retirement Research (http://Retirement Research).  Hopefully none of these links are spammy, but the internet seems to be turning in to a cash machine as opposed to free exchange of ideas it used to be...  alas, how can your fault a site owner that gets tens or hundreds of thousands of hits a day for monetizing it.  Just sucks that these resources are getting harder for the next generations to enjoy freely.
Title: Re: Stop worrying about the 4% rule
Post by: cerat0n1a on April 21, 2017, 12:59:04 AM
And again, I'll just point out that the graphs are a gross oversimplification of reality. 

Indeed, there can be no guarantees in future investment returns, or anything else, and the approach of using past years' data can have only limited predictive ability. Actuarial charts give death rates for the population, not for me. I expect to live longer than average, to be healthier than average and to avoid divorce, and I have some ability to influence those things, but the statistics suggest those are all more likely than running out of money.

At least on the finance side, there is also upside risk. My investments may do better than the worse case. The UK may continue to make good on its promise of a state pension in 20 years time for me and my wife. We may inherit money. Either of us might work for money at some point.

When looking several decades ahead, I do believe that technology, demographics (age profile of people in Europe for example) and climate change will have significant, difficult to predict impacts. Those are out of my control, but it's hard to see how an extra year of paid employment now helps with those.
Title: Re: Stop worrying about the 4% rule
Post by: CanuckExpat on April 21, 2017, 09:56:10 AM
So with a 70/30 split what's the breakdown of the 70 between domestic/international and cap sizes?

Complicated and controversial. No real way to tell you what will work best in the future without a crystal ball.

Take a look at this chart of the relative perfomance of various asset classes, taken from Callan Investment Returns Ranked by Asset Class 1997-2017 (http://www.mymoneyblog.com/callan-investment-returns-chart-2017.html), you can see the high performers vary a lot:
(http://cdn.mymoneyblog.com/wordpress/wp-content/uploads/2017/04/callan2016.gif)

Then you have to take your personal situation into account regarding tax situation (if any advantage of domestic vs international), and also currency concerns.
When in doubt, going with roughly the market capitalization of each is cheap and easy and probably good enough. Most people tend to heavily overweight their home country. For US investors this might have worked out nicely in the last few years with the relative under-performance of international stocks, but whether that will carry on into the future, or is just an example of luck instead of home country bias will wait to be seen.

For what it's worth, I roughly split my stock allocation between US and "international" (I put international in quotes, since to other investors US is presumably international). I also tilt towards size and value, I have a slight over allocation to small cap and value stocks, as represented by whatever cheap indices are available to me.
Title: Re: Stop worrying about the 4% rule
Post by: RapmasterD on April 21, 2017, 12:56:14 PM
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 is a worthy question. Depending on sequence of returns in one's early years, she/he could drink a few bottles of Stone IPA with a grassfed boneless rib eye (good times) or a can or three of Keystone with an unadorned baked potato (not so good times). And then the money will last....oh it will last. Fear not. Drink. A lot.
Title: Re: Stop worrying about the 4% rule
Post by: G. Thomas on April 25, 2017, 07:55:58 PM
If you're interested in a cringe worthy Northwestern Mutual ad that makes some strong "what if" statements...

https://youtu.be/WBN_3sVWyUw
Title: Re: Stop worrying about the 4% rule
Post by: PizzaSteve on April 30, 2017, 11:51:12 AM
If you're interested in a cringe worthy Northwestern Mutual ad that makes some strong "what if" statements...

https://youtu.be/WBN_3sVWyUw
OMG those assumptions.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on April 30, 2017, 01:02:16 PM
If you're interested in a cringe worthy Northwestern Mutual ad that makes some strong "what if" statements...

https://youtu.be/WBN_3sVWyUw
OMG those assumptions.
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.
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'.

Kind of bizarre that he prefaces his argument by saying "things have changed in the last 22 years".  All told we've avoided the kind of multi-year bear markets he's talking about.
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.
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on April 30, 2017, 01:24:01 PM
If you're interested in a cringe worthy Northwestern Mutual ad that makes some strong "what if" statements...

https://youtu.be/WBN_3sVWyUw
OMG those assumptions.
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'.

Also realize that accompanying these astounding losses was a substantial amount of DEflation during those years.  So withdrawal amounts would have decreased to maintain standard of living.  $100 in January of 1930, was the same as $77 in December 1932.  His "scenario" was assuming massive year over year losses like that time period, but with inflationary spending increases.  Like taking a Monte Carlo calculator and using all the historical worse case economic inputs, even if they are reverse correlated, and creating a very low probability event to use as a baseline for predicting the future. 
Title: Re: Stop worrying about the 4% rule
Post by: PizzaSteve on May 01, 2017, 12:18:59 PM
Agreed.  And the irony is that after 3-4 years of 20% plus market losses, corporate defaults on debt, and a likely govt induced monetary system response, it is highly likely that the insurance company that sold you their 'guaranteed returns' structured product is belly up or using their wiggle room contract performance clauses to pay pennies on your dollar anyway.
Title: Re: Stop worrying about the 4% rule
Post by: mathjak107 on May 08, 2017, 03:08:47 AM
the recovery from the great depression in dollar terms was less than 5 years .

the cpi fell 18% , dividends which hit 18% were not included and many very popular stocks like ibm were doing very well but not in any index yet .

in fact by the time the markets hit the same nominal levels many years later they were very very far ahead in dollar terms .

so just like comparing interest rates in times of higher inflation ,deflation has the reverse effect and makes recovery sooner

Title: Re: Stop worrying about the 4% rule
Post by: Tyson on May 08, 2017, 02:24:04 PM
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.

YES!  And not just with money, either.  If you ask people how safe are we (from violence), the answer is usually "not very" and often "Things are getting worse". 

Except the data shows that internal violence is down (ie, homcides), way, way down actually.  And death from wars (external violence) is way, way down too.  We live in just about the safest country in the world and the safest time in all of history. 

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. 
Title: Re: Stop worrying about the 4% rule
Post by: nereo on May 08, 2017, 02:53:08 PM
...
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.
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.

One of my guiding principles has been to never root against collective achievements. I don't want one country to fail just so that we're 'better' in comparison.
 ... rising tide floats all boats and whatnot.
Title: Re: Stop worrying about the 4% rule
Post by: Clean Shaven on May 10, 2017, 10:59:37 AM
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% (!)

See the comments here:  (not my blog, just one that I read)
https://ournextlife.com/2017/05/10/conservative-projections/

Weird.  Maybe they're all 20 years old and planning to retire at 22, so are trying to plan a 70-year retirement. 
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on May 10, 2017, 11:01:26 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on May 10, 2017, 11:29:32 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on May 10, 2017, 12:28:01 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Eric on May 10, 2017, 12:32:14 PM
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...
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on May 10, 2017, 12:40:16 PM
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...

Agreed that's why blogger and talking heads post that stuff and FEAR is why it works on the readers.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on May 10, 2017, 12:41:43 PM

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. 
Well I feel like a chump - I've been in school for no less than 26 years.  Kindergarden through my PhD.
Put another way, I"m in 25th grade!

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% (!)
...
Weird.  Maybe they're all 20 years old and planning to retire at 22, so are trying to plan a 70-year retirement. 
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...
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on May 10, 2017, 12:43:29 PM
Yup. Controversial statements are a great way for blogs to get both clicks and links. This creates two issues.

The first what Eric mentioned, is one of incentives. People to try to come up with ways to claim the 4% rule doesn't work to drive traffic.

The second is one of ascertainment bias. Because the stories that claim the 4% rule don't work get more discussion and more links, any given person is more likely to come across links to those stories than stories talking about how the 4% rule continues to work fine for most scenarios in most starting years. So a sample of what you, or I, or anyone else read is probably skewed relative to the underlying ratio of stories written presenting these two different results.
Title: Re: Stop worrying about the 4% rule
Post by: Mr Mark on May 11, 2017, 12:12:05 AM
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 manager con 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.'
Title: Re: Stop worrying about the 4% rule
Post by: PizzaSteve on May 11, 2017, 08:26:30 AM

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 manager con 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 among 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 think Vanguard competition alone 'forced this strategy,' but understand the sentiment.  We should reward both VG and 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.
Title: Re: Stop worrying about the 4% rule
Post by: chasesfish on May 14, 2017, 07:13:37 PM
Agree with PizzaSteve - ITOT purchased through Fidelity is the cheapest ETF out there for purchases under $20,000.  Commission free on the front end and 0.03% expense ratio.  They reserve the right to charge $0.01 to $0.03 per share at the sale, but I've never sold. 
Title: Re: Stop worrying about the 4% rule
Post by: nereo on May 15, 2017, 05:33:23 AM
...nothing can beat the government's rates on their funds.  Course you have to be military or similar to invest, but I think it's 0.02%...
Title: Re: Stop worrying about the 4% rule
Post by: Mr Mark on May 15, 2017, 07:02:33 AM

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 manager con 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.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on June 18, 2017, 09:32:07 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on June 19, 2017, 12:33:02 AM
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 :) 
Title: Re: Stop worrying about the 4% rule
Post by: deborah on June 19, 2017, 01:16:27 AM
What is USE?
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on June 19, 2017, 01:34:18 AM
What is USE?

From context I'd guess US Equities.
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on June 19, 2017, 10:17:50 AM
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 :)

That's pretty much the same statement that could be made at every point throughout the history of the market.  It might go up, might go down, might stagnate, for a while.  But eventually it always goes up.  Just have enough cushion to weather a few bad years early on and you'll be fine. 
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on June 19, 2017, 07:32:03 PM
I like my cushion..:)
Title: Re: Stop worrying about the 4% rule
Post by: Mr Mark on June 22, 2017, 07:41:05 AM

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 manager con 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.
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.  😉

If only Vanguard had an afilliate deal I'd set up as a financial advisor tomorrow and put them in a VTSAX plus bond %

Title: Re: Stop worrying about the 4% rule
Post by: chasesfish on June 23, 2017, 08:14:15 AM
Vanguard has done a great job of getting investors focused on costs.   

At the institution I work for, their side of active money management has gone to a much smaller wrap fee and utilizing Vanguard/iShares ETFs.  The feedback I get is all of the clients are focused on costs.
Title: Re: Stop worrying about the 4% rule
Post by: Mr Mark on June 24, 2017, 08:39:58 AM
Amazing quote from this week's Financial Times mag (pg 42)

"The average all-in fee charged by the UK's wealth managers is approximately 2.24 per cent..."

Nice work if you can get it eh?

"Wealth managers are feeling downward pressure on their fee margins from the raise of lower-cost passive investment... "

Oh how sad.
Title: Re: Stop worrying about the 4% rule
Post by: chasesfish on June 24, 2017, 02:13:40 PM
2.24%, amazing!!

Was looking at making some more conservative moves, Vangaurd proved two nice active options with the Wellington and Wellesly Fund, 0.15% and 0.16% expense ratios on the admiral shares
Title: Re: Stop worrying about the 4% rule
Post by: crimwell on July 02, 2017, 08:24:18 AM
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.

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/

Quote
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.

https://www.bloomberg.com/view/articles/2017-06-05/tackling-the-nastiest-hardest-problem-in-finance
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on July 02, 2017, 09:47:21 PM
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/

Quote
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.

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.   
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on July 02, 2017, 09:58:56 PM
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.   

Do you mean folks getting scared by market declines and jumping back into the labor force? Or literal "I ER'ed and then ran out of money" stories? Assuming folks have been retiring on 4% (25 years expenses), and most folks are either break even or way ahead since they FIREd given the recent run up in the market, I'm not sure 4 years would be enough to start generating failures.

If the market crashes 80% tomorrow and stays flat for the next four years, someone who started with 25 years worth of expenses wouldn't be (quite) broke yet after 4 years, though it'd be clear they weren't going to recover.
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on July 02, 2017, 10:04:31 PM
Well the way the 4% is written is that you decide which day you are FIRED on then take 4% of your stash. Then next year 4% + the rate of inflation.

Wait a minute.. What if the market tanks 50% the day after you retire? The 4% as rule as I understand it has you blindly spending 4% of the market top peak stash.

I doubt if anyone would really do this.. In fact it would make much more sense to only take 4% (max) of the stash at the time of withdrawal. Mustacians are masters of belt tightening after all.

Now if you add to that the fact you retired knowing what your spend needs to be, one would assume that if the market goes on a runaway tear one is likely to spend less than 4% by definition.

I wonder if this effect will be enough to save the 4% "rule"?
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on July 02, 2017, 10:36:42 PM
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...
[Edit to add - I did a quick run using S&P total returns and the "wait for recovery 2008 4% SWR ER" was underwater until 2013.  "Invest during the downturn" folks were back to even by 2010 due to 2009 ultimately being a 26% gain, and are way ahead by 2013...] 

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.
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on July 03, 2017, 04:21:20 AM
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?
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on July 03, 2017, 08:50:27 AM
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?

Well maybe, I think the construction business was a flop, but from what I understand, his wife was working and they rented out a house they couldn't sell.  He wrote about 2008/9 from hindsight (http://www.mrmoneymustache.com/2012/04/12/early-retirement-its-not-as-risky-as-you-think/), which is entirely different than writing during the crisis.  I quoted a bit of the article and added in some commentary in (paranthesis).

Quote
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).

So in hindsight, everything worked out peachy and he continues to write from this perspective today.  He probably didn't need to work and dial back savings those couple years, knowing what we know now, but I'd hardly say he was relaxed and confident.  His actions speak louder than his words, at least to me.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on July 03, 2017, 09:56:10 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on July 03, 2017, 11:24:23 AM
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.

Kinda, except I'd phrase it more as 'Don't work at something you dislike any longer than you absolutely must.  Work, in and of itself, is fine.' (paraphrasing many MMM posts).  He construed his working during 2008/9 as being involuntary (that he enjoyed getting back to focus on raising his son in 2010), which is why I characterized that period as an ER fail - that he ER'ed in 2005 then worked a couple years when things got bad. 
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on July 03, 2017, 01:54:11 PM
It seems people go through phases regarding the 4% rule. 

Phase One: Just learned of the possibility of FIRE and are "on board". Did some compounding interest math & Cfiresim, 4% rule seems legit. Plus all these internet people are saying its cool, so how can it be wrong? Unknown, Unknowns.

Phase Two:  Middle to late accumulation and has been more exposed to the details of investing/cashflow, ect.  Now sees the risk in a straight 4% rule, but not too concerned.  Draw-down is down the road, plus even part time work seems better than what she's doing now. Known, Unknowns, but not immediately concerning.

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

Phase Four:  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.

I'm sitting squarely in the phase two camp, trying to learn from the phase four folks so I can partially avoid phase three.
 
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on July 03, 2017, 04:53:05 PM

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.

"Disproving" the 4% rule is clickbait - the purpose of these articles is to get people to click on them and generate ad revenue. It's more sensational to say "WAIT! YOUR PLANS ARE NOT AS SAFE AS YOU THINK! CLICK HERE TO FIND OUT MORE!!!!" than to say "Yep, 4% rule. Works 95% of the time with a reasonable asset allocation. Ho hum. You already knew this."

Which gets more clicks, and more ad revenue?
Title: Re: Stop worrying about the 4% rule
Post by: Eric on July 03, 2017, 06:00:52 PM
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.
 

Phase 3 isn't so bad, if you're using 4% for planning purposes instead of robotic withdrawal.  Anyone retiring within the next year or two should be concerned about market valuations and second guessing whether their current balances are sustainable. 

As a personal example, at the beginning of the this year, I determined that at my current saving level, I'd be FI in 2 years with 0% market returns.  Markets were (and are) at high valuations, so I decided to work for these 2 years that would make me FI with 0% returns, since at the time 0% seemed entirely reasonable. 

What happened?  A mere 6 months in, I've already hit my FI number.  I still have 18 months to go though, since I'm sticking to my plan.  Does this mean that I will have worked for too long?  That remains to be seen, but I think it's entirely rational to expect to lose some of these recent gains.  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.  Do I no longer believe in the 4% rule?  Oh no, I still believe it's very robust and would work almost every time.  I just also believe that it's ludicrous to not factor current market conditions into my planning.  In fact, I could still end up drawing 4%, if markets go down over the next 18 months, and at that time, I would be perfectly fine retiring at a 4% spend rate.  However, assuming that I end up with more than my FI number, then that's simply a cushion to be able to weather the next crash.  It would be nice to be able to take a 20% hit without flinching.  Especially because I didn't have to do any extra work to get there.  All I have to do is stick to my plan.
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on July 03, 2017, 06:23:06 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Eric on July 03, 2017, 06:38:28 PM
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.

I know it's phase 3, but I'm saying it's not so bad.  At least not the way I've set it up, since I have clearly defined expectations.  I was just trying to explain the juxtaposition of believing in a 4% WR and deciding that maybe right at this exact moment is not the proper time to execute it without considering other factors.  After all, it is a planning tool, nothing more.

Also, I could still end up at a 4% WR.  All we need is a reasonable correction in the next handful of months.  Wouldn't that be something?!
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on July 04, 2017, 04:31:58 AM
Despite my baiting of EscapeVelocity's pessimism, I'm also in Phase 3.  According to my cFiresim runs, I should have bailed a year ago.  But I wanted to have about a $5k/yr spending buffer to cover infrequent large expenses and account for the possibility that future sequence of return risk might be worse than anything that has occurred in the past.  Also, I'm including expected SS and pension benefits in my calculations, so I feel like that calls for a safety buffer since I would only be a little more than halfway to my number if I ignored those income sources.  And I'm sitting tight until the US health care mess gets sorted out one way or another.  Put all that together and I'm looking at a projected FIRE date at the end of 2017/beginning of 2018, with potentially a $12k/year spending buffer.  Yeah, phase 3.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on July 04, 2017, 08:56:03 AM
Hey, bait away guys, I don't mind challenging my preconceived perception that status quo in Phase 3 is pretty awesome.  And I think the 4% rule is the best starting point / ER planning tool available, just that maybe there is more to  it once you've ridden an 8 year bull market to your number and beyond... 

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.

On the flip side, phase 4 sounds kinda boring to me.  I'm pretty cheap, so having to pay for my own travel and not having a paycheck to give me warm fuzzies about break even cash flow probably means I'll do less novel stuff.  Like scuba diving, I don't think  I'd be getting certified if money were on my mind but the opportunity came up with my son's Boy Scout troop, so why not?  I want to see as much of this beautiful planet as I can!

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.
Title: Re: Stop worrying about the 4% rule
Post by: CanuckExpat on July 04, 2017, 09:27:46 AM
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.

Good contributions. Emphasis mine on some particularly salient points.

We retired (or was it sabbatical, or just quitting, terminology) with a lot of unknowns in our budgets. And I would say I still have reservations about a robotic application of a 4% withdrawal rule going forward, BUT over the first year at least, it appears we've made a bit of extra money, mainly from freedom of time and location (still no W2 income), spent a bit lesss than planned also from freedom of time and location, and our effective withdrawal rate over six months was 1.5%, and we've had a booming stock market to help a bit with psychological worries (this could change any time).

So in theory I have concerns, in practice nothing to worry about so far.
Future will tell how long all of that lasts
Title: Re: Stop worrying about the 4% rule
Post by: deborah on July 04, 2017, 11:35:37 AM
I retired with most of my money in superannuation - Australian - similar to 401k, but you can get control of it at somewhere between 55 and 60, AND you have to take out a certain percentage each year - initially 4%. So after the first years (before 55), I was living by the 4% rule. This has not been an issue. Of course the reason you have to take out a certain amount each year is that it is tax free - but it is still growing.
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on July 04, 2017, 11:56:36 AM
Do you have to pay taxes on your Super when you take it out as income?
Title: Re: Stop worrying about the 4% rule
Post by: deborah on July 04, 2017, 12:14:55 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on July 04, 2017, 01:28:19 PM
Nice.. Thats the big difference to a 401k as its taxed when you take it out.
Title: Re: Stop worrying about the 4% rule
Post by: Livewell on July 08, 2017, 09:49:23 AM

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.

I think this is where I'm headed and agree it's not a bad place to be.  Sometimes I think about no work, and other times I think one more year for a period, as long as work life balance is there, would be great.  Have your cake and eat it too.  What's missing is now I'm still working towards FI, and it means I'm still stressing about work, however well into FU money.  Call it phase 2.5.
Title: Re: Stop worrying about the 4% rule
Post by: runewell on July 17, 2017, 10:51:21 AM
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.


Title: Re: Stop worrying about the 4% rule
Post by: Tyson on July 17, 2017, 11:03:48 AM
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.

So then just save up 30x expenses instead of 25x expenses, if you are worried about that.
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on July 17, 2017, 05:05:07 PM
They are only expecting 3.1%-3.5% returns on US investments going forward.

Even if that were the case (I do not concede that point, there are many reasons CAPE is high) , CAGR is not the only factor to consider when looking at the 4% rule.  Volatility is at least as important, particularly in early withdrawal.  If I got 3.5% above inflation, without any volatility, a 4% WR would last about 70 years.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on July 17, 2017, 06:08:43 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on July 17, 2017, 07:07:04 PM
How much of that high CAPE is due to changes in GAAP accounting?

"Earnings" today are pretty different than "Earnings" 30 years ago.

Good point....

http://www.philosophicaleconomics.com/2013/12/shiller/
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on July 17, 2017, 10:16:49 PM
So should I be reassured or worried if 'this time it's different'?
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on July 17, 2017, 10:37:45 PM
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!...;)
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on July 18, 2017, 12:10:09 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on July 18, 2017, 01:21:34 AM
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.

You'll be wrong. The problem that you have is that you could be right in that you are retire in a year where the 4% rule fails but the assumptions in the trinity study are going to work against your pessimism. For instance if it fails you will end up getting some social security or inherit money or go back to work because you are bored or something like that.

I also have all those character based factors that you mention in spades. I just come to a different conclusion to you. The odds though are massively on my side.

We should catch-up in 30 years time and see how it all turns out.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on July 18, 2017, 11:14:00 AM
That's what keeps it all interesting, even with all this data we don't really know much about the next 30 years.  If I had retired early in 1987 with a 4% SWR, no one would bat an eye that it had worked out just fine.  Inflation on healthcare and college might've been a challenge depending on circumstances, but people weren't retiring early and blogging back then so we don't have a lot of good data points (other than simulators and assumptions).  Nowadays, it seems like everyone plans on retiring early.  Doesn't help that I'm in oil & gas which is still limping through a rough downturn, but a lot of folks that were laid off are finding that riding it out isn't so bad, as long as the stock market and housing market keep going up 5 - 10% yoy.  The overwhelming source of data points we are getting now are from folks that early retired during a bull market.  I'm just trying to offset that a bit, I was quite stressed out in 2008/9 even though my financial situation was great (on an expat assignment, gainfully employed and making regular investments).  Had I been ER, I would've definitely questioned the robustness of theories like CAPE having a new plateau vs.  reverting to its historic mean.  But to each their own, as you said, you are aware of all of this and arrive at a different conclusion.   
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on July 18, 2017, 12:39:40 PM
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.

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.

Others have different comfort levels.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on July 18, 2017, 01:14:48 PM
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.

Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on July 18, 2017, 03:16:08 PM
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.

Your're absolutely right and my reply was unintentionally flippant.

I did not intend this to be read as a strategy, just that in our case our liquid networth has more than doubled since my first attempt at retirement 3.5 years ago (partly because I had forgotten that my UK pension might have some value.. It actually has quite a lot of value, our WR was $zero during that time and the fact the market has done pretty well).

So I ended up with more than 2X of what is required by accident pretty much.

Now it could have gone the other way and we might have been tightening our belt at this point just as easily... Sequence of return risk.

But you're right, if I had been working into my 60's and suddenly got cancer like my buddy did (he is almost grasping at straws at this point) then clearly such a strategy would have been a very bad idea.
Title: Re: Stop worrying about the 4% rule
Post by: DavidAnnArbor on July 18, 2017, 08:34:56 PM
I like this down to earth humble pie conversation.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on July 18, 2017, 08:49:41 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on July 18, 2017, 09:06:42 PM
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.

(https://farm3.staticflickr.com/2555/32137492394_f092c80db8_b.jpg)

What I am saying is having the money you planned to spend each year in FIRE is only one element to being successful at retiring. There are lots of ways you can fail at FIRE that don't involve running out of money.

- poor health [physical and/or mental]
- dying early
- damaging important relationships
- not developing any other interests outside of work to transition to in retirement
- etc...

Not only are these ^^^ types of issues not mitigated by a low WR, but if you work extra years you are likely to exacerbate them. People focus on money because it's easy to calculate, spreadsheet and there is a lot of fear in our society around money, but it's far from the most important risk FIRE success. I'd put your health and time ahead of money if I was prioritizing FIRE risks, but that's not what I read about on MMM much.

Awesome chart thanks to Maizeman. It always helps me put things in perspective.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on July 19, 2017, 12:43:43 AM
Retire-Canada - I get your point. I think the more money that you have should increase your chances of financial success in relation to RE.

The issue is that there are so many other factors that lead to a successful life which should include retirement. I'm not sure if working longer will necessarily make those other factors  easier or harder to achieve. Some people have to work to be happy. My mum is in her early 70's and can't help herself. She just loves to work. Dad is retired and is happy for her to keep working so that he gets some peace.

I do understand where you are coming from though. Your health and your relationships are easily just as important as your finances.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on July 19, 2017, 09:35:51 AM
This may get a little philosphical, but I wrote a post on my (now defunct) blog about how someone with 1M might be better prepared for a sharp downturn (50% market decline) than someone with 2M, if both are using a 4% SWR.  Some of the reasoning was that the 1M are watching closely and more prepared to tighten the belt.  The 2M folks see a greater numerical decline, are paying more tax at the higher WR, and may feel that cutting back is less palatable (especially if they have higher fixed costs).  Now that I have seen the 1M and 2M+ persons recover, I don't think that my premise was entirely right, especially as I saw those with higher net worth come back after 2008/9.  Fixed costs can be managed and belt tightening is the same if not easier.  Sure, they may groan a bit about having to keep the car an extra year before trading up, but having more money at the outset seems to give you more options to optimize during the recovery.
Title: Re: Stop worrying about the 4% rule
Post by: runewell on July 19, 2017, 09:36:34 AM
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.

http://www.starcapital.de/files/publikationen/Research_2016-01_Predicting_Stock_Market_Returns_Shiller_CAPE_Keimling.pdf

If you read the newer study, I just think we should be skeptical of the 4% rule given that we are in an expensive market and proceed cautiously.  With valuations at a relative historical high, it's more likely that the returns assumed in the 4% study will not be achieved.

2. My other concern is that the 4% rule is a bit overpromoted and that we should find other research to supplement it.  Like the link that is attached.  My concern is that clinging to a single ideology brings similar dangers to not having a diversified investment portfolio - if you adhere to one strategy that doesn't work out, it could hurt your retirement.  Thread titles like "Stop worrying about the 4% rule" don't really help.
Title: Re: Stop worrying about the 4% rule
Post by: runewell on July 19, 2017, 10:11:16 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on July 19, 2017, 10:24:15 AM
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.

No adding extra $$ to say a 4%WR as a safety margin was totally not what I was saying. The last couple posts between Steveo and I capture what I was getting at pretty well.
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on July 19, 2017, 10:32:59 AM
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.

So like I said in a previous post - just save up 30x expenses instead of 25x expenses, if you are worried that 4% is not enough. 
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on July 19, 2017, 10:34:46 AM
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.   

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?

Quote
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.

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. For example I'm writing this reply on a computer that was designed based on a model of electricity which is literally centuries old. Recently published papers have described a reaction-less form of propulsion, which, if it proves to really exist,* could open up the stars to humanity. Guess which of those idea I have more confidence in right now.

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

*Google em drive. I'm not holding by breath though.
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on July 19, 2017, 11:28:36 AM
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).
Title: Re: Stop worrying about the 4% rule
Post by: runewell on July 19, 2017, 11:59:44 AM
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.

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?

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". 
[/quote]

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.

Yes, the returns are predicted based on a formula, but based on a structire with intuitive appeal.  Although variance numbers are not provided, they do provide minimum, 25th percentile, 75th percentile, and maximum returns.

A CAPE of 15-20 can be expected to generate an 8.7% return, with a 25th %ile of +7 and a 75th %ile of +12 over the next 10-15 years
A CAPE of 30+ can be expected to generate a +0.5% return with a 25th %ile of -1 and a 75th %ile of +3 over the next 10-15 years

If you wanted to try mixing both studies, in this CAPE 30 environment, you might try simulating a portfolio which experiences a 0.5% return for 10 years and then returns to normal and see how that might change the simulation.

Also, you're falling into a bit of a fallacy by trying to correlate the comparative recentness or antiquity of an idea with accuracy.

In this case, I don't see any fallacy.  I think the study remains useful and insightful but can be very much improved upon when the assumptions regarding investment returns are updated with modern information.  I have done actuarial work and spreadsheets since 1996.  Even though there was innovation going on in 1996, the world did not implement credit scoring to insurance, decided it had a better model, and stopped improving it.  There have been been many more changes in first 20 years of my career, and I am reluctant to take 20-yr research at face value without considering how much better than study could look today.

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

Star Research took the idea of CAPE (assuming that 1988 article actually refers to CAPE) and was able to show that there is a relationship between CAPE and future investment returns across the globe, giving further credence to an idea that was good in the first place.
Title: Re: Stop worrying about the 4% rule
Post by: runewell on July 19, 2017, 12:05:18 PM
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%.
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on July 19, 2017, 12:19:54 PM
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. 

The whole point is neither do you. 

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%.

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.

As I've been saying, if high CAPE bothers you, AND you're retiring within the next few years, just save up a bit more. 
Title: Re: Stop worrying about the 4% rule
Post by: seattlecyclone on July 19, 2017, 12:34:32 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: runewell on July 19, 2017, 12:42:56 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on July 19, 2017, 12:46:57 PM
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.

Exactly. The 4%WR plan is thrown around so commonly we lose sight of how damn conservative the assumptions are that are baked into it. Including poor sequence of risk, high inflation, world wars and numerous financial meltdowns. Not to mention robotic fixed inflation adjusted withdrawals vs. adjusting spending to market performance. Never earning another penny. No government retirement benefits.
Title: Re: Stop worrying about the 4% rule
Post by: dividendman on July 19, 2017, 12:49:51 PM
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?
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on July 19, 2017, 12:51:43 PM
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.


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?


Quote
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". 

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?

They get referenced a fair bit. For example take a look at the couple of dozen papers cited here: (from a review that is, itself already five years old): https://www.aicpa.org/interestareas/personalfinancialplanning/resources/retirementplanning/downloadabledocuments/kitcesreport-march2012.pdf

I think you'll find very few discussions on this forum reference the original Cooley, Hubbard and Walz paper directly, (rather the general body of work that's developed around the concept of safe withdrawal rates defined using historical backtesting). For example, that original Cooley at al paper takes a much more favorable view of bonds than pretty much anyone in the FIRE community argues for today.
Title: Re: Stop worrying about the 4% rule
Post by: DavidAnnArbor on July 19, 2017, 12:59:44 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: runewell on July 19, 2017, 01:04:07 PM

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.

No, the 4% test failed for 20+ years during a 1929 start.  I know you're going to tell me that I'm grasping at straws picking the year of the great depression, but the author not only pointed out this instance but went to all the trouble to do a second chart showing everything after WW2.  The great depression was a CAPE of 30 and caused turmoil.  Now I'm going to be point out the obvious and note that the CAPE ratios were closer to 15 +/- 5 back then and noticeably higher since 1990.

The update to the trinity study says that even in light of the financial crises the 4% rule was OK.  There's just one problem with that, a 15+ year time frame using 2000 as the start has yet to be accounted for.  If the study is performed again ten years from now, there isn't going to be a spotless record because those people who retired at a CAPE of 44 with lots of stock exposure were about to get a big shock.  A quick survey of the chart suggests that the 12-pt drop in the CAPE during the financial crisis is the third worst drop ever.

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.

Title: Re: Stop worrying about the 4% rule
Post by: runewell on July 19, 2017, 01:07:11 PM
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?

Exactly how is this strategy going to help when the expected return is a low negative or low positive?

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%
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on July 19, 2017, 01:15:12 PM
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.

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? 

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%

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. 
Title: Re: Stop worrying about the 4% rule
Post by: runewell on July 19, 2017, 01:18:03 PM
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?

I picked 20 because it was in the middle of the range, and hopefully to demonstrate that there are results for different time horizons.  But my point was only to talk about what the study measured. 

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).

But there are only two years that have ever had CAPE ratios as high as today (1929 and 2000).  1929 failed the 20+ year test and 2000 probably will when it can finally register as a starting point.  So isn't your generalization above very misleading?

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?

They get referenced a fair bit. For example take a look at the couple of dozen papers cited here: (from a review that is, itself already five years old): https://www.aicpa.org/interestareas/personalfinancialplanning/resources/retirementplanning/downloadabledocuments/kitcesreport-march2012.pdf

I think you'll find very few discussions on this forum reference the original Cooley, Hubbard and Walz paper directly, (rather the general body of work that's developed around the concept of safe withdrawal rates defined using historical backtesting). For example, that original Cooley at al paper takes a much more favorable view of bonds than pretty much anyone in the FIRE community argues for today.
[/quote]

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?
Title: Re: Stop worrying about the 4% rule
Post by: runewell on July 19, 2017, 01:19:48 PM
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.

More Europe for and Asia I think.  I think that the CAPE ratio maps are very enlightening:
http://www.starcapital.de/research/stockmarketvaluation

I would load up on Russia too the moment oil makes a comeback (if only we knew when that would happen)
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on July 19, 2017, 01:22:37 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: DavidAnnArbor on July 19, 2017, 01:33:10 PM
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.

I think you should stick with a % of international exposure right from the beginning rather than using CAPE to decide your international exposure, otherwise you're just essentially doing market timing. CAPE could actually go down in the US just because profits of S&P 500 could go higher than the market price. You make assumptions about the future that may turn out wrong. Best to get out of the crystal ball/prediction business.

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.
Title: Re: Stop worrying about the 4% rule
Post by: runewell on July 19, 2017, 01:33:39 PM
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? 

I'm just reallocating my portfolio to equities that are not so overpriced.   

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.

I disagree.  Proper asset allocation considers both expected value and variance of portfolio returns.  I would still own ETFs containing thousands of stocks for proper diversification because I want to lower the variance of my return.  But, I still want to get a good return.  I would much rather hold a low-CAPE ETF that will generate a return of 8.7% and a standard deviation of 12% rather than a high-CAPE ETF that will generate a 0.5% return with a standard deviation of 10%.  Simulate a 10-yr average of those two distributions and the low-CAPE scenario will run circles around the high-CAPE scenario.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on July 19, 2017, 01:36:56 PM
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?

I suspect the response you're getting is a combination of three primary factors:

1) People pop up talking about how the 4% rule is broken and doesn't apply ALL THE TIME. That's why this thread exists in the first place. Way way back in the day, it used to be about half the threads on the Investor Alley subforum were devoted to this topic.

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.
Title: Re: Stop worrying about the 4% rule
Post by: runewell on July 19, 2017, 01:43:24 PM

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.

Yes I know this.  Meb Faber (good site) often talks about how countries have home-country bias when it comes to investing.

As for the whole market timing - you have to make some assumptions.  Why are we investing at all?  Because we want to get a good return?  What assurance do we have of that?  None really, we just look back at the past and usually there has been money to be made.  Why are different asset allocations promulgated for different ages?  Because risk tolerance changes.  Why shouldn't it stand to reason that there are metrics that like P/E or CAPE or P/B that can improve our investment choices without ending up in left field.

Even Vanguard has this to say:

We 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).
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on July 19, 2017, 01:44:27 PM
It might also be informative to compare the way you're presenting your argument to the way gerardc presenting his or her position in the other thread you're using to discuss your new study. He or she also came forward and said basically "hey guys, here's an error in the assumptions used for trinity-style studies that may make the results a bit too optimistic" and received a very positive response from the community rather than sustained pushback.
Title: Re: Stop worrying about the 4% rule
Post by: runewell on July 19, 2017, 01:46:50 PM

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.
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on July 19, 2017, 01:49:48 PM
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!
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on July 19, 2017, 02:19:28 PM
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.

Hi runewell!

I'm just watching this conversation mostly from the sidelines but I started a train of thought based on the above and it led me in a pretty strange place, so I thought I'd share it with you and ask you to help me understand where I've gone wrong.

I'll take your data at face value that the CAPE is at 30, and that is historically very high.  I understand that the CAPE ratio is based on the current price divided by the previous 10 years of earnings.

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.

Reading between the lines, the CAPE has been rising lately, and this concerns you based on what it "predicts" for future returns.

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.  That is to say, the PE's in 2006 were something pretty low (like maybe 10, just a SWAG) and they were keeping CAPE low in 2016, but now that we're in 2017, those low PE's from 2006 are being replaced by the approximately average PE ratios of 2017, which is causing CAPE to rise.

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.
Title: Re: Stop worrying about the 4% rule
Post by: runewell on July 19, 2017, 02:19:36 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on July 19, 2017, 02:38:45 PM
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.

OK, then explain what it means. 

Here's the chart I'm looking at:

(https://www.lynalden.com/wp-content/uploads/Shiller-PE-Ratio.jpg)

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. 

If you are retiring in the next 3 to 5 years, then maybe CAPE has more value.  I'm not, so I'll keep buying, every month, regardless.  I'm also saving up 30x expenses and will have a paid off home before pulling the plug.  My yearly budget will also have at least $10 to $20k that I could easily cut without any issues.  Again, more hedges.  But then again, I'm really very conservative when it comes to this stuff.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on July 19, 2017, 02:45:27 PM

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.

That makes sense. The great thing about insurance datasets (health, auto, life, or other) is that you likely have access to 100k's of largely independent datapoints to test the correlation between a given potential explanatory variable or combination of variables and outcomes (car crashes, premature deaths, what have you). That gives plenty of data to subdivide, use a portion of your data to develop a model and another portion to validate the model.

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.
Title: Re: Stop worrying about the 4% rule
Post by: runewell on July 19, 2017, 02:48:01 PM

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.

Hi there! 
Have a look at this graph.
http://www.multpl.com/shiller-pe/
Because the CAPE was above 30 from 1997-2002, the formula predicts that the average annual return for the next 10-15 years would be 0.5% (or at least below average).  So let's look at the ETF SPY and see how 15-yr returns fared during that time:

15 Years staring / Begin Price / End Price / Return / Annualized
Jan1998 / 98.31 / 149.70 / 52.3% / 2.8%
Jan1999 / 127.66 / 178.18 / 39.6% / 2.2%
Jan2000 / 139.56 / 199.45 / 42.9% / 2.4%
Jan2001 / 137.02 / 193.72 / 41.4% / 2.3%
Jan2002 / 113.18 / 227.53 / 101.0% / 4.8%

During this 5-yr period of 30+ CAPE ratios the 15-yr investment return was pathetic.  I remember the dot-com boom and bust, for a while stocks went up and up, but at ridiculous valuations and eventually everything came crashing down again.  Money kept going into the 401k, but the 401k didn't seem to go up for awhile.

Personally I don't think our CAPE 30 situation today is nearly as dangerous.  But the historical returns for 30+ CAPE investments are so bad that I am ready to tilt my portfolio to more international.  The UK only has a CAPE ratio of 15.  China is 15, Australia is 17.  That's where my money is going.

I know you had more to say (why the ginormous gap between CAPE and forward P/E?)  That I do not know right now, not sure I will even find out.  It is possible to download a spreadsheet with Robert Shiller's calculations, I did that once.  That might be a good place to start.  He doesn't do other countries though like this Star Research site.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on July 19, 2017, 02:51:19 PM
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.

Another thing that can cause this is rapid growth in the absolute value of corporate earnings.

If corporate earnings are growing quickly (as they have since 2009) and the PE ratio stays the same, that means the overall valuation of the stock market also increases rapidly.

However, because the PE10/CAPE looks back at earnings over the last decade the 10 year average earnings lag behind current year earnings, so the P10/CAPE can increase at the same time.
Title: Re: Stop worrying about the 4% rule
Post by: runewell on July 19, 2017, 02:53:16 PM

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.

Yes I understand this.  But I don't think Monte Carlo simulations are involved in the research presented here, so.... 
Title: Re: Stop worrying about the 4% rule
Post by: sol on July 19, 2017, 03:01:52 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: runewell on July 19, 2017, 03:03:40 PM

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. 

High returns occur with high CAPE because prices get bid up too high or earnings finally collapse.  After the CAPE maxes out the stock goes through a sideways period until valuations get reasonable again, then the returns can go up.

The CAPE is high enough that I think we will see a lot more sideways return in the future 10-15 years. 

Now you told me VTSAX but you're showing me a chart of the S&P.  Mainly because you can't easily get CAPE graphs.  You're content to own the whole universe of stocks: US & non-US.  The point is, if you had a graph of Europe up there the CAPE ratios would look much more attractive.  So why worry about how many months/years the S&P has left in it when you can just allocate more $$ to non-US funds where the stocks have a lot more potential to rise.

Any 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 and the yields are way too low to get me interested)
Title: Re: Stop worrying about the 4% rule
Post by: sol on July 19, 2017, 03:06:04 PM
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

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.
Title: Re: Stop worrying about the 4% rule
Post by: CanuckExpat on July 19, 2017, 03:48:16 PM
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.

I agree with diversifying internationally, I am 50% US, 50% non-US. This is a good time to point out though, that most of the idea that 4% is rock solid is based on historical US data, with only few developed countries being safer. If US or global market returns going forward look more "international" and less "US" like, the safety of a 4% withdrawal rate can be called into question:
(http://i.imgur.com/9uXBoov.png)
From An International Perspective on Safe Withdrawal Rates from Retirement Savings (https://ideas.repec.org/p/ngi/dpaper/10-12.html)

Note, many of the worst years for advance economies correspond to retirement starting in or around either WW1 or WW2. We forgot too easily how the US and North America was relatively spared the worst of the last century. (Or don't retire at the period that essentially marked the end of a global Empire,  UK retirees in the 1900, looking at you).

This dataset is more pessimistic than I choose to be, but it's helpful to remember the international experience.

And I don't want bonds (those hurt your long-term portfolio survival and the yields are way too low to get me interested)

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.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on July 19, 2017, 05:16:11 PM
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.

Exactly. The stock market is too high is not a valid argument. This has happened in the past and it will happen again. You can also utilise different portfolios although there is no free lunch in this regard.

You are also not even really looking at the assumptions within the 4% rule. The 4% states you never receive another cent outside of your portfolio. This is bordering on ridiculous.

In stating all of that if you are risk averse or you want to get rich (some people may actually like to have a large bank balance) then maybe you should keep working until you get to 3% or less or just keep working forever.

None of these arguments though are rational statements against saving up to 25 times your expenses (assuming you judge your expenses accurately), investing in a sensible portfolio and being able to retire if you want too at that point. Personally I think 20 times your expenses will typically be fine depending on how old you are.
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on July 19, 2017, 05:22:00 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on July 19, 2017, 05:44:06 PM
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.

I think people that get it wrong try and do too much analysis on micro level details and miss the big picture. The trick to doing well is to figure out a decent asset allocation/investment approach and stick to that consistently.

All the micro data analysis misses the big picture and that big picture is that a diversified portfolio utilising the lowest possible fees in tandem with saving somewhere from 20-30 times your expenses should enable you to retire from a financial perspective and be relatively safe. You can't time the market and you can't develop better models than the trinity study based on some special factor that only you or other special people know.

This whole field is about accepting that you aren't a special snowflake. You don't have special inside information. You are simply smart enough or humble enough to recognise that you will put the odds in your favour and accept the inherent risks within your approach because this is the best that anyone can do.
Title: Re: Stop worrying about the 4% rule
Post by: runewell on July 19, 2017, 10:49:52 PM
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.

hahaha that was pretty terrible on my part.  Definitely need to rephrase that one, sorry:

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 :)
Title: Re: Stop worrying about the 4% rule
Post by: runewell on July 19, 2017, 11:11:23 PM
Quote

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.

Disgree.  I'm not just talking about overvalued stocks, I am specifically noting that the CAPE ratio has only been over 30 three times in history: the great depression, and the rise and fall of the dot-com period.  The rise of the dot-com period happened after the original 4% study and was too recent to be included in the 2009 update.  As for the great depression, it was the single year where the 4% rule FAILED.  Other than the great depression, the 4% withdrawal rate study has not experienced stocks at these valuation metrics, so I don't think it's safe to assume "business as usual"
Title: Re: Stop worrying about the 4% rule
Post by: sol on July 19, 2017, 11:11:59 PM
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 :)

How do you figure?  Cfiresim seems to disagree with you.  The 75/25 portfolio starting in 1929 and withdrawing 4% per year adjusted for inflation never depletes to zero.  It is cut in half by 1933 but then starts growing again.  Feel free to check my math, or provide a different data source.  The 30 year CAGR starting in 1929 was over 11%.  The 20 year CAGR was much worse, but still about 3.7%. 

Maybe you're confusing "portfolio failure" with "earns less than 4%"?  Remember that your retirement account balances can always go down in any year, but as long as they don't go down to zero then your retirement hasn't failed because you can continue to draw your 4% inflation adjusted expenses every year.

Quote from: cfiresim

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

Title: Re: Stop worrying about the 4% rule
Post by: sol on July 19, 2017, 11:13:42 PM
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?
Title: Re: Stop worrying about the 4% rule
Post by: runewell on July 19, 2017, 11:15:10 PM

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.

Yes I'm aware of this (I know my flagrant comment about bonds is under fire) although I believe the utility curves of some investors could prevent them from having any bonds in their portfolio at all.  This is an asset allocation question.  I do have a tiny amount of bonds in my portfolio.
Title: Re: Stop worrying about the 4% rule
Post by: runewell on July 19, 2017, 11:19:12 PM
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?

Sorry I looked back at the article and realized I also needed to specify the 100% equity selection is where things failed.  Things held together for a bond allocation of 25% or more.
Title: Re: Stop worrying about the 4% rule
Post by: runewell on July 19, 2017, 11:24:50 PM
Some good news from the study; from 1946-1995 (when the CAPE never exceeded 25) it showed a 100% success rate for a 6% withdrawal rate for scenarios with at least a 25% equity allocation.  That sort of blows my mind.  A 6% withdrawal rate suggests that only 17x expenses might be needed for a 30-yr time frame, although to be fair I would have to have a lower CAPE before I started off on that journey.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on July 19, 2017, 11:51:41 PM
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...
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on July 20, 2017, 01:01:24 AM
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. 
Title: Re: Stop worrying about the 4% rule
Post by: steveo on July 20, 2017, 01:07:29 AM
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...

This is where we can agree. The best analysis that we can utilise is the 4% rule when it comes to estimating how much you need to retire. The biggest risk area is if you have inaccurately estimated your expenses. Estimating expenses is something that is also really hard because it's an individual thing. Do you use current expenses ? What if you intend to spend more via travelling if you RE ? What if you get bored and want to do a lot of stuff ?

We use our current expenses but we have 3 kids with the 2 oldest finishing school soon (college/university will be free as we live in Australia) and we expect costs to go down over time. We won't travel unless we work or our portfolio allows us to travel. We also own our house in a HCOL area and we could easily downsize. Our buffers also include inheritance and social security. If you have 3 kids who are young and you intend to pay for them to go to an expensive college than your situation may be different. You may be single and retire but get married and have kids post retirement.

This though doesn't invalidate the 4% rule. It just focuses on the area of highest risk.
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on July 20, 2017, 01:23:29 AM
Dw and I are fortunate (financially speaking) to not have kids.

We currently make $20k/year in rent from properties co-located with our house. While I love living in the USA, should healthcare costs start eating up all of our $20k in rent I think we will simply sell the house and move to a lower cost country.

Lets face it, there are LOTs of choices in that regard (like all of them!).

Of course the US will tax us on worldwide income so we are not completely off the hook, but tax treaties mean we can avoid double taxation fairly easily and we can keep all our Vanguard accounts in place to draw our chosen 3%.

After moving here from the UK 20 years ago its sad to me to even feel the need to think this way...:(
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on July 20, 2017, 10:35:04 AM
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 :).
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on July 20, 2017, 11:31:52 AM
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 :).

I definitely agree with you that different folks personal inflation rates aren't always going to line up well with the CPI. In addition to the assumptions it makes that you brought up above, it also makes assumptions about how much of your spending is in different subcategories, each of which are experiencing dramatically different rates of inflation (for example education and healthcare prices are going up much faster than overall CPI inflation, while apparel and recreation prices are going much more slowly than the overall CPI).

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.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on July 20, 2017, 12:04:41 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on July 20, 2017, 12:06:41 PM
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%.

Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on July 20, 2017, 12:09:39 PM
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.

Title: Re: Stop worrying about the 4% rule
Post by: Tyson on July 20, 2017, 12:15:22 PM
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%.

That's part of the reason I'm saving up 30x expenses, and will have a paid off house before retiring - I want to have some cushion and flexibility if returns are depressed for an extended period. 

Right now, during saving/accumulation, we live a fairly frugal life on about $30k per year (not counting mortgage).  I plan to save up enough to allow $60k per year during retirement.  That's a very nice life, and we have the ability to cut back significantly if we need to.  I like having that flexibility built in.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on July 20, 2017, 01:46:30 PM
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.

Brooklynguy, good point. And I agree with you about the perils of the argument described in your second paragraph. Generally it seems that "luxury" items (electronics, entertainment, etc) are the items which have small or negative levels of inflation, while items that are necessities even to FIRE folks (like healthcare) show higher rates of inflation. Since folks who RE with budgets at or below the median household income are going to see their spending biased towards the second category of expenses, I agree that -- putting aside whatever is spend on having a place to live -- the average mustachian's expenses are more likely to inflate at or above the overall CPI rather than below it.
Title: Re: Stop worrying about the 4% rule
Post by: runewell on July 20, 2017, 01:58:12 PM
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%.

Another reason why the 4% withdrawal rule seems dated.  I would think that causing 1/3 of your portfolio to be international stocks would improve diversification.  Some areas that had 100% success rates might change to 95% if the return is lower, but other instances of a 50% failure rate would probably go up significantly.  I think the upside would be more attractive than the downside.  But without a long history of international stock returns, it's going to be difficult finding an answer.
Title: Re: Stop worrying about the 4% rule
Post by: runewell on July 20, 2017, 02:22:50 PM
There's no difference between selling appreciated stock and spending the dividends.

Except taxation.
Title: Re: Stop worrying about the 4% rule
Post by: dividendman on July 20, 2017, 02:26:43 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on July 20, 2017, 02:45:04 PM
With selling stock that's appreciated you have less of an ownership stake in the company, that's another difference.

Unless your stash is pretty huge your % ownership stake will not change in a meaningful way since it will be tiny to begin with.
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on July 20, 2017, 05:42:25 PM
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.

Ah, thanks for the clarification.  The 26 number would help explain runewell's CAPE number of 30 better.  I don't pay all that much attention, obviously.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on July 20, 2017, 05:55:32 PM
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%.

This is exactly what I think people do wrong when discussing the 4% rule. It's micro analysis of the data and missing the key points. The trinity study is simply a study based upon historical data within the US market. It's a guideline not something that should be followed blindly.

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.
Title: Re: Stop worrying about the 4% rule
Post by: runewell on July 20, 2017, 10:43:21 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: runewell on July 20, 2017, 10:50:00 PM
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. 
Title: Re: Stop worrying about the 4% rule
Post by: deborah on July 20, 2017, 11:12:04 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: runewell on July 20, 2017, 11:46:16 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: sol on July 21, 2017, 12:17:20 AM

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.

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. 
Title: Re: Stop worrying about the 4% rule
Post by: steveo on July 21, 2017, 01:42:41 AM
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.

The statement that I made is broad because that is the best way to draw conclusions from historical analysis. It's like coming up with a detailed trading plan that analyses micro point to the nth degree. Those nth degree details will more than likely not hold in the future. When you start drawing down to much into the detail unless you have the ability to recognise that the future will be different to the past you will probably miss the key points.


 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.

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.
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on July 21, 2017, 04:45:03 AM
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.

We can run a 20 year simulation at a 5% withdrawal rate starting in 1997 (the year after Greenspan's "irrational exuberance" comment).  Using $1MM starting portfolio, a $50k spend, and leaving everything else at the default values, the 1997 start year simulation ends with about $1.1MM.  Granted, US stocks still had three banner years ahead of them at the beginning of 1997, so I would expect a sim starting in 1999 to have very different results.  But the point is, while high valuations may indicate higher risk, they don't necessarily indicate impending failure.

What's interesting about this simulation is that we get "only" a 92% success rate, with almost all of the failure years starting in the late 1960s (1906 being the odd exception).  So once again, it appears that very high inflation/low growth environment seems to be the most toxic scenario.  1929 and 1937 came close to running out, but not quite.
Title: Re: Stop worrying about the 4% rule
Post by: runewell on July 21, 2017, 06:49:06 AM
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. 
Title: Re: Stop worrying about the 4% rule
Post by: runewell on July 21, 2017, 07:09:05 AM

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.

An inheritance or returning to work and probably not scenarios the majority of people want to rely on upon retirement.  If you plan on a work-free retirement and later find yourself working, you might as well consider the 4% rule a failure.  Social Security could probably be treated as a monthly certainly which could be subtracted from your monthly retirement needs.  It could be troublesome to factor in SS inflation or viability.

For 20+ years at a 5% withdrawal rate adjusted for inflation, the Trinity study recorded:
12-15% failure rates with 100% stocks,
10-17% failure rates with 75% stocks,
10-24% failure rates with 50% stocks,
18-73% failure rates with 25% stocks, and
53-83% failure rates with 0% stocks.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on July 21, 2017, 07:13:01 AM
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.

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.

Quote
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%!

https://www.kitces.com/blog/how-has-the-4-rule-held-up-since-the-tech-bubble-and-the-2008-financial-crisis/

Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on July 21, 2017, 07:21:59 AM
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.

I've previously pointed out a number of reasons why you're getting a much less receptive response than other folks (with lower post counts than you) who have also discussed potential issues or oversights in the 4% rule, but who have received much more positive feedback from the forum generally and many of the same posters.

Similarly to how you're trying to get feedback without then seriously considering the flaws people are identifying with the CAPE analysis approach, you are also continuing to complain about receiving a hostile/condescending response despite having a clear explanation of why it is happening, and positive models for how to engage in discussion of the same topic without eliciting such a response.
Title: Re: Stop worrying about the 4% rule
Post by: runewell on July 21, 2017, 07:28:20 AM
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.

Thanks for directing me to that.  I scanned it but shall have to revisit it again.  He concluded that today's high valuations are a concern and hopes that since under normal valuations a ton of scenarios leave zillions unspent, that this safety margin will prevent a lackluster return period from wreaking havoc.  My point all along is to recognize the high valuations and introduce other research that shows we would be wise to project gloomy investment returns going forward. 

Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on July 21, 2017, 07:37:48 AM
No, we don't all know who Wade is.  I didn't know who Wade was.

You might find it instructive to take a spin through the previous pages of this very thread.  Wade's research has come up a number of times, not to mention the broader topic of today's high stock market valuation/low interest rate environment's possible implications for future safe withdrawal rates.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on July 21, 2017, 10:39:39 AM
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.

*yawn*

I've debunked Pfau's bullshit so many times around here....
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on July 21, 2017, 10:42:53 AM
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.

Oh, that "hostility" is the reaction to your cocky-ignorant-know-it-all attitude.

We've tread all this ground before, it's all available to you to get up to speed - and there is even a search function.
Title: Re: Stop worrying about the 4% rule
Post by: sol on July 21, 2017, 11:32:30 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: dividendman on July 21, 2017, 11:49:52 AM
Hrm... I don't think the current line of conversation will result in anything constructive.
Title: Re: Stop worrying about the 4% rule
Post by: sol on July 21, 2017, 11:53:51 AM
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

Yes, you've caught me.  I am a brand new to the internet.  Please, oh wise and benevolent mustachian OG, set me straight.
Title: Re: Stop worrying about the 4% rule
Post by: sol on July 21, 2017, 12:07:04 PM
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.

Dude, just read the thread already.  All of your questions will be answered.  It was created specifically for people like you.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on July 21, 2017, 12:11:50 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on July 21, 2017, 12:12:35 PM
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.

I'll play, at least until I decide whether or not you're a troll.  (You haven't answered my previous question and you've pivoted topics now, you've acted hurt, and you're not really taking any feedback.  So far it's not looking good for you, but I'm usually more patient with trolls because they're fun to play with for a bit.)

My international allocation is zero.  I am 90%/10% VTSAX/VBTLX with about a year of expenses in cash.  I understand the arguments for international diversification and choose not to follow those recommendations.

The simulations I rely on (the ones at retireearlyhomepage.com, firecalc.com, and cfiresim.com) are based on US returns and all indicate a 4% historical SWR.  I've looked at many other methods to arrive at a withdrawal rate, and personally I think the historical approach is the best.

Because:


I sleep very well at night.  Feel free to comment/criticize; I like to learn.

Cheers!
Title: Re: Stop worrying about the 4% rule
Post by: CanuckExpat on July 21, 2017, 12:17:00 PM
Regarding CAPE values and affect on sustainable withdrawal rates, Kitces has done some good research and has several interesting articles on the topic, including Shiller CAPE Market Valuation: Terrible For Market Timing, But Valuable For Long-Term Retirement Planning (https://www.kitces.com/blog/shiller-cape-market-valuation-terrible-for-market-timing-but-valuable-for-long-term-retirement-planning/). Mad Fientist I believe attempts to distill much of those articles, including the affect of valuations on his page Safe Withdrawal Rate for Early Retirees (http://www.madfientist.com/safe-withdrawal-rate/). The latter is a good article, but I think it is worth digging into the original Kitces work, though it is time consuming. This thread is long and I don't remember the contents, so sorry if this has been posted already.

It has been sometime since I read Kitces work on CAPE and withdrawal rates, but from what I recall, they have some predictive value over moderate (10 year  time periods) but neither short nor long time periods. The MadFI page has a tool (sign in required) that lets you estimate an updated withdrawal rate based on current CAPE values.

It's interesting work, but I didn't see anything that would make me immediately change my plans. The time periods are too removed for me to think of it having immediate actionable consequences, but you can draw your own conclusion. I think it comes to the advice mentioned earlier:

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.

If it brings you joy to save 20x your expenses and retire, do it.
If it brings you joy to save 30x your expenses and retire, do it.
(Similar for anywhere between 20x-30x)
If it brings you joy to save less and retire, I would say be cautious and hesitant, but it's your life.
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.

The cautions about your personal rate of inflation, or misunderstanding your long term expenses are good ones and worth noting, but they fall out of the realm of what can be answered with historical stock and bond returns.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on July 21, 2017, 12:47:13 PM
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

Dude, I've been caught in the September that Never Ended since AOL first connected to the actual internet.

Read.
The.
Thread.

https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/
Title: Re: Stop worrying about the 4% rule
Post by: DavidAnnArbor on July 21, 2017, 01:18:25 PM
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/

Wow that's encouraging to read. Thank you for posting that.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on July 21, 2017, 06:04:03 PM
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!
Title: Re: Stop worrying about the 4% rule
Post by: steveo on July 21, 2017, 06:21:50 PM
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.

All of these discussions again miss the point. Runewell still seems to think that he can utilise the data that we currently have (historical data) to somehow optimise his future portfolio. I suggest Runewell read a bunch of stuff from William Bernstein.

https://www.amazon.com/Deep-Risk-History-Portfolio-Investing/dp/0988780313/ref=sr_1_3?s=books&ie=UTF8&qid=1500682456&sr=1-3&keywords=william+bernstein+investing
https://www.amazon.com/Skating-Where-Puck-Was-Correlation/dp/0988780305/ref=sr_1_8?s=books&ie=UTF8&qid=1500682456&sr=1-8&keywords=william+bernstein+investing

I got these books for free based on a recommendation on this board and they are really good.

You need to stop looking at the available data as somehow more predictive of the future than what it is. For instance as I think has already been mentioned gold based on the historical data-set looks and sounds like a great asset class to increase your potential SWR. The problem is that in the past you probably couldn't have actually bought gold to add that to your portfolio and now it will probably work completely differently than what it did in the past.

Markets are now also much more integrated as you state. So international stocks may have been less correlated in the past compared to what they are now.

It honestly comes down to not being able to make perfect decisions because you can't predict the future. You need to look at the broad principles coupled with some rational reasoning and then make smart informed decisions on the size of your stash and your portfolio. The good thing is that you also don't have to be perfect.

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.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on July 21, 2017, 06:30:59 PM
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) ?
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on July 21, 2017, 07:02:00 PM
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. :)
Title: Re: Stop worrying about the 4% rule
Post by: DavidAnnArbor on July 23, 2017, 07:37:06 PM
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. :)

Me too I'm in the same boat.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on July 23, 2017, 10:48:52 PM
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?

Which people have argued that the US market has changed over time? (I'm assuming you're referring to systematic changes, not "in some years stock prices go up, but in other years stock prices do down.)

The 4% rule is certainly imperfect. For example, if the USA (or whatever country you're FIRE-ing in) is in a war and loses, with significant destruction of infrastructure and loss of life, the 4% rule probably will not allow you to maintain your lifestyle without adjustment. Predicting whether or not such a war will occur in the next 50 years isn't something anyone can do with any degree of certainty.

The advantage of the 4% rule (and historical backtesting generally) is that it requires fewer assumptions* and uses few variables which means that while predictions may not be precise there is less risk of systematic errors which would produce extremely misleading results. Complex models are much more prone to overfitting, which DOES produce systematic errors, combined with misleadingly high precision of prediction.

Quote
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.

To put the above quote in context, historical stock market data goes back ~150 years at this point. That means we have only something like 5 datapoints from non-overlapping 30 year retirements to examine.

*Essentially just that the future is more likely to be similar to the past than to be completely and totally different from the past.
Title: Re: Stop worrying about the 4% rule
Post by: Telecaster on July 23, 2017, 11:29:37 PM

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.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on July 24, 2017, 12:13:15 AM
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?

You are missing the big picture if you are doing this type of analysis. That is why I suggested you read up on portfolio theory a bit. Trying to predict the right portfolio for the future based on historical data is doomed to failure.

The big picture in relation to how much money you will need will never be completely accurate. If you though take a statistically valid and rational position and utilise the 4% rule that is probably the best that you will do. Just don't retire and think that everything is fine from this point on. You are living in the real world and you will probably need to adjust. One thing I feel confident stating is that the larger your stash the less chance you have of running out of money assuming you are using a valid portfolio.

I think trying to predict exactly future WR's or portfolio's shows the same lack of bigger picture understanding.
Title: Re: Stop worrying about the 4% rule
Post by: dividendman on July 24, 2017, 09:15:13 AM
Yeah, it generally comes down the absurdity of trying to predict the world 20 years out.

20 years ago - no smartphones
Today - smartphones are a massive industry that has spun off even more industries worth trillions of dollars, everyone has a device on their person that probably equals the computing power of all computers 20 years ago

20 years ago - no social media
today - social media is a massive industry, blah blah

20 years ago - no 9/11
today - repercussions of 9/11 are still impacting the planet

20 years ago - everyone is scared of peak oil and the world running out of oil
today - oil glut, so much oil everywhere! shale, etc.

There are many more examples.

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.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on July 24, 2017, 09:24:03 AM
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. ;)
Title: Re: Stop worrying about the 4% rule
Post by: dandarc on July 24, 2017, 09:37:46 AM
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. ;)
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".
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on July 24, 2017, 09:54:32 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on July 24, 2017, 11:04:16 AM

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.

Go have a chat with some retirees who were working in the 1970s.  Annual raises were double digits and home mortgages/rent/staples similarly so.  Compounding double digit inflation, especially for an ER, would be no joke.  You should run a few scenarios on cFiresim where you switch from historic inflation to having 'extra spending' with constant inflation at 5% and above.  Even 3% starting SWR has failures.  Interestingly, since the 1980's markets have been as buoyant as they were during the high inflation 70's but without the high inflation this time around.  It's no wonder retirees are feeling good these days.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on July 24, 2017, 03:48:46 PM
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 can understand going lower but it's not really going lower from my perspective. It's more stating I'm going to retire and spend a lot more money. So prior to retiring I'll save up enough to go on some fancy overseas holidays or something like that. It's more a play on expenses.

Truthfully though I don't really care about fancy holidays. I'm happy just reading books and going for walks every day. 5% has always been my uncle point but I may choose to go to 4%. I really don't think though this is required. I think I'm contemplating this now just to get to a million dollars in investable assets. I wonder if for a lot of people it's more about keeping score than it is about a safety net.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on July 24, 2017, 03:55:03 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on July 24, 2017, 08:19:27 PM
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.

I think it'll be interesting in a generation or two, when FIRE community folks prove that early retirement at 4% (for 30 - 40 yo's) is a great lifestyle, if this kicks off a 'new normal'.  There's already a lot of upheaval toward a 'gig economy' / informal-employment like Uber, Etsy, AirBnB, blogging...  I wholly believe that the vast majority of the American workforce feels overworked, under-compensated, and unfulfilled.  I wish there were a quick solution, but not everyone can get the traditional employment opportunity I got just like not everyone will get a FIRE like Pete's.  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...
Title: Re: Stop worrying about the 4% rule
Post by: bob22 on July 25, 2017, 06:18:11 AM
I think you will see FIRE become even bigger. By phasing out "traditional" defined benefit pensions, companies are helping this transition. I actually think that I'm one of the few at my company that likes the fact that they've phased it out in favor of higher levels of defined contribution to 401(k) type plans. It really means that my financial ability to retire is (even more) de-coupled from my age.
Title: Re: Stop worrying about the 4% rule
Post by: dividendman on July 25, 2017, 08:02:53 AM

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.

Yes, there will probably (and maybe not even that high of a probability) be retirement savings needed far down in the future (assuming tech gains, etc. don't allow us to have a UBI).

That's not my point. My point is, since we can't predict these massive changes, why do we think we can predict market returns? Any static plan assuming any variables is necessarily inadequate over long time frames because we just don't know what is going to happen.

As has been said many times, the likelihood of any retirement plan succeeding depends more on the agility of the retiree to adapt to changing conditions rather than the size of the portfolio (after some sizable amount) precisely because conditions change so frequently.

Let's say someone saves up 20x their yearly earnings and then says "fuckit, i'm putting this into TIPS and not working". It'll probably last at least 20 years. If it turns out in year 10 that this person realizes they aren't likely to die in 10 more years, do we expect they'll just continue to draw down the remaining 10 years of savings until they're eating cat food? I don't think anyone on these forums would do that. They would adapt.

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).
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on July 25, 2017, 08:23:00 AM
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).

As conservative as I am even I know that anything about 2% is silly talk.  4% to 3%...ok...and given the point in the cycle, really understandable 3% only takes 33% more money and depending on your earning status and SR this might not be a big deal or take that long.  But 2% - the reason why that is ridiculous is because it takes 100% more money than 4% (and 67% more money than 3%) to accomplish, that's why it is so safe, and that doesn't factor in that even in this low rate environment divis & interest (for intermediate term or longer) are 2% or better and PE or CAPE are also higher than 2%.  S

Title: Re: Stop worrying about the 4% rule
Post by: sol on July 25, 2017, 08:58:53 AM
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.

You keep quoting these ridiculous scenarios without any supporting evidence or citations.  If you had actually read this thread, which we all know you have not and will not, you would know that the 60, 50, and 40 year times frame are barely different from the 30 year time frame in terms of success rates, for the asset allocations this community uses. 

You can of course find higher failure rates if you choose stupid asset allocations, which seems to be what you're doing here. 

How many times do I have to repost this image before you go back and read this thread explaining it?

(https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/?action=dlattach;attach=11290;image)

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. 
Title: Re: Stop worrying about the 4% rule
Post by: MDM on July 25, 2017, 10:18:55 AM
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.
If your time period is 60 years, 19% = 1 - ~81% seems consistent with the chart, does it not?
Title: Re: Stop worrying about the 4% rule
Post by: onewayfamily on July 25, 2017, 10:47:05 AM
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'm definitely seeing more and more of those 3-minute, simplified (usually too simplified) snippets on different news and morning shows profiling someone who has or is planning on retiring early...if that's any measure.
Title: Re: Stop worrying about the 4% rule
Post by: dougules on July 26, 2017, 10:16:09 AM
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.

I think delaying gratification is hard enough for those of us that can.

The people that impulse purchase are bad for the economy in the long run.  They go crazy in the good times, then have nothing left in the bad times, so they make the economy more unstable. 
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on July 26, 2017, 05:53:42 PM
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 are waiting for perfect information, you will work unt you die.

Congratulations. You didn't have a portfolio failure.

But you guaranteed a life failure.

Look at the big picture. Every year you keep working, you have sacrificed a significant fraction of healthy, active retirement.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on July 26, 2017, 05:54:46 PM
Look at the big picture. Every year you keep working, you have sacrificed a significant fraction of healthy, active retirement.

+1 - Years at the prime of your life. You can make more money, but you can't get more time.
Title: Re: Stop worrying about the 4% rule
Post by: dividendman on July 27, 2017, 09:17:06 AM
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).

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.
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on July 27, 2017, 09:40:24 AM
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 once a year, re-balance your portfolio so you maintain your 80/20 (or 60/40 or whatever) stocks/bonds ratio.
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on July 27, 2017, 10:39:30 AM
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).

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.
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?
Title: Re: Stop worrying about the 4% rule
Post by: dividendman on July 27, 2017, 10:43:47 AM
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).

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.
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?

Yeah, i'm also not going to achieve it due to bonds :(

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.
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on July 27, 2017, 11:56:07 AM
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.pdf

Quote
We 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. 

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. 

The approach your taking (removing $$ from high CAPE investments and moving them to a low CAPE investment) involves both trying to time the market AND pick winners.  That's going to end badly.  That type of thinking is exactly why "active" investors don't beat passive investors over time. 

You might wish it weren't true.  You might wish that your magic CAPE numbers give you an edge and insight over all the dumb indexing schlubs.  But you're wrong.  And it's gonna cost you money. 

But I can see that what I'm saying isn't even making a dent with you, so I'll just stop. 
Title: Re: Stop worrying about the 4% rule
Post by: runewell on July 27, 2017, 02:46:09 PM
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?   

Title: Re: Stop worrying about the 4% rule
Post by: dividendman on July 27, 2017, 02:57:45 PM
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 the whole point is the rebalancing occurs on an arbitrary timeline that is independent of what's going on in the world, so it's not timing the market.

Let's just define timing the market since there appears to be confusion.

"timing the market" means using trends in GDP, stock valuations, geo-political events or other data to buy or sell positions in the market in an attempt to beat the market average.

Saying on Feb 28th I will re-balance is precisely NOT timing the market because you're going to rebalance regardless of what happens from now until then.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on July 27, 2017, 05:59:06 PM
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. 

This is exactly the approach to take. My asset allocation isn't perfect. I also recognise that it will probably turn out just fine so I stupidly don't look at any indicators and invest whenever I save up 10 grand.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on July 27, 2017, 06:00:30 PM
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?   

No it's not. Timing the market like you are suggesting is utilising leading indicators or opinions or whatever. Re-balancing is simply adjusting to market conditions post some market event.
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on July 27, 2017, 06:16:01 PM
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.

This is one of the few things I can "sort-of" agree with runewell. BUT (big but),  not based on market valuations (too unpredictable in the short term); rather based on what someone's personal financial goals are presently and in the medium term (next five years or so).  Sometimes it makes sense to adjust portfolio composition to meet specific goals.  Maybe to decrease volatility for a period, increase liquidity, cash flow, or to hedge against certain risks at particular points in life. In this sense, I think a "set it and forget it" mindset can be counterproductive.
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on July 27, 2017, 06:58:06 PM
Yeah, i'm also not going to achieve it due to bonds :(

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.
Yeah. I was just ribbing a little.

This year I increased our international and decreased US. Why? Well, I've been thinking for a while that I should be closer to the world market. The valuation disparity certainly helped me to make the decision. So far I'm a market-timing genius...

But we're getting off topic. I do have an on topic point/question - next post.
Title: Re: Stop worrying about the 4% rule
Post by: CanuckExpat on July 27, 2017, 10:42:09 PM

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.

Historically, 5% withdrawal hasn't done that bad for the US market, barring great depressions and stagflation:
(http://i.imgur.com/TyPpaqY.png)

from here (https://www.kitces.com/wp-content/uploads/2014/11/Kitces-Report-May-2008.pdf)

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. ..

I take your point, and I think it's a good one. I'm optimistic in that I think people will choose what works best for their personal situation and risk tolerance. It's like an asset allocation question. Should be selected based on your willingness and ability to take risks.

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.

I'm only posting the most interesting tables, but read the whole thing
(http://i.imgur.com/fEqydGc.png)
(http://i.imgur.com/UIB3T45.png)
His suggested "rules" (or at least the ones studied more in depth) based on those results:
(http://i.imgur.com/lgzeOmZ.png)

And as a follow up from same author: Dynamic Asset Allocation and Safe Withdrawal Rates (https://www.kitces.com/wp-content/uploads/2014/11/Kitces-Report-April-2009.pdf) looks at effect of reducing/increasing equity allocation by 20% in rule based fashion based on valuations at top/bottom third of historical range. It's not as easily summarized just from the results tables.

The work is interesting, I'm curious about the dynamic asset allocation stuff. Not curious enough to change my own strategy yet, but keeping an open mind. Based on your like for valuations, thought you might find that work interesting.
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on July 28, 2017, 08:24:50 AM
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.

I've read this before and its a good article.  While I like CAPE because it's really the only measure shown to have any predictive value at all.  It's value is only in long term average return predictive power.  Even then, there are a lot of assumptions.  The main being that CAPE mean remains unchanged, all of which was discussed up thread.

I see no major issue with slightly adjusting a WR based on CAPE, but starting at 4% is on the very conservative edge. 

As far as adjusting an entire portfolio based on a single valuation indicator whose predictive power is, at best, limited to average returns over a decade? ...  Not a great idea, IMO.  The same issues arise as in any attempts to time the market.  Even if an investor manages to accurately predict lower equity returns in the next decade, how will that sequence bear out?  How is that actionable from an allocations standpoint for an investor that is passively world indexed?  Even with the chart provided WR was only slightly optimized with higher bond (ie not 100% equities, which I would argue against in almost every case anyway) allocations in high CAPE situations and those situations didn't start with ZIRP.
Title: Re: Stop worrying about the 4% rule
Post by: fuzzhead1506 on July 28, 2017, 11:04:46 AM
While I like CAPE because it's really the only measure shown to have any predictive value at all. 

That is actually false.  There are prolly a dozen or more that do a pretty predictive job, and it has been argued that CAPE is not even the best.  You could even also make up your own silly measure that has some predictive power over past results.  If you dare to go down the rabbit hole of looking further into this, I suggest you start here and read the BOTH of the author's articles!

http://www.philosophicaleconomics.com/2013/12/the-single-greatest-predictor-of-future-stock-market-returns/
http://www.philosophicaleconomics.com/2013/12/valuation-and-returns-adventures-in-curve-fitting/

runewell,

I think that there is a large cohort of people that think if you so dare to time the market, you might be harming the value of the 4% rule. I think otherwise.

I think that you prolly could time the market a little.  And even if you failed to do well, I'd actually argue you could take as much as 6% or 7% and prolly be ok in pretty much any environment - but that could just be my optimism gun talking. 

The 4% rule works - get over it.  ;)

Edited: for clarifications
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on July 28, 2017, 02:50:28 PM
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.

You have still failed to properly address how "Earnings" today are defined quite differently than "Earnings" 30 years ago, let alone 50 or 100 years ago, with the trend being generally more restrictive on how you report "Earnings" - thus adding an upward forcing of "P/E" over time.

A "higher P/E" is oversimplified to the point of being wrong. CAPE is even worse.

You've already been given links on the topic.
Title: Re: Stop worrying about the 4% rule
Post by: bob22 on July 28, 2017, 03:40:27 PM
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?
Title: Re: Stop worrying about the 4% rule
Post by: MDM on July 28, 2017, 03:44:54 PM
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).
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on July 28, 2017, 03:47:34 PM
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?

I did some simulations before that suggested if you spend 4% of your starting portfolio balance when your 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
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on July 31, 2017, 07:58:53 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: matchewed on August 01, 2017, 06:29:32 AM
https://web.stanford.edu/~wfsharpe/art/active/active.htm

In short they have to under-perform because of math and logic. All things being equal on average the performance of passive and active investors is equal. The costs for the active investor is greater therefore after cost performance is lower for the active investor.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on August 01, 2017, 07:43:25 AM
This is why it's so hard to beat the market: https://www.bloomberg.com/news/articles/2017-04-09/lopsided-stocks-and-the-math-explaining-active-manager-futility

Trading costs and taxes also provide additional headwinds.
Title: Re: Stop worrying about the 4% rule
Post by: Le Barbu on August 01, 2017, 11:02:48 AM
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.

Maizeman, is this interesting graph available for anyone to enter self situation or scenario? I would like to compare ER @ 45 with a 5% WR vs a later retirement @ 50-55 with a lower WR (3.5-4%) without splitting hairs. Your graph talks so much!
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on August 01, 2017, 01:06:05 PM
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) (https://imgpile.com/i/nRsJwk)

Risk of bankruptcy before death was 15.5%

4% WR, starting at age 50.

(https://i.imgpile.com/nRsPsM.png) (https://imgpile.com/i/nRsPsM)

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%
Title: Re: Stop worrying about the 4% rule
Post by: Le Barbu on August 01, 2017, 01:22:55 PM
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%

Thank you so much! I will try to run the experiment version but the 2 graphs above are amaising.

I am 45 now, fairly well paid but with not so much options to come back into business when I quit. My expenses actually represent 5-6% of portfolio on average. So maybe another 5MY worth but 10MY would be an upfront fail as Arebelspy already mentioned.
Title: Re: Stop worrying about the 4% rule
Post by: DavidAnnArbor on August 01, 2017, 08:33:45 PM
Great graphs Maizeman
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on August 01, 2017, 09:26:59 PM
1: This isn't an active vs. passive investing thread.
2: Oh, just go to cash when things crash and get back in when they're significantly lower? My god! Why didn't I think of that?

Derp. Go throw your own money away trying to do that if you want to, you'll certainly stand a nice high chance of FIRE failure that way, 4% SWR or otherwise.

-W
Title: Re: Stop worrying about the 4% rule
Post by: dividendman on August 02, 2017, 08:35:59 AM
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, you're correct if by unilateral you mean the person who created the thread. The 4% rule is based on a passive index approach, hence the conversation is around that and why it's a feasible rate of withdrawal.

With active investing, you could have a SWR of 100% per year if you're good (lucky) enough.
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on August 02, 2017, 08:55:42 AM
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
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on August 02, 2017, 09:56:34 AM

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 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?
Title: Re: Stop worrying about the 4% rule
Post by: markbike528CBX on August 02, 2017, 10:00:56 AM
The 4% rule (per Trinity study and others) is "designed" to fail 5% of the time (95% success).   
It does NOT assume 100% certain, locked in success.   It does NOT blindly assume (mean, average) historical market returns, it fails only in worst case scenarios.

Sure the 4% rule might fail in the future for 5% of the scenarios.   

Do we know now that FIREing now will be certain of failure. No.

We (runewell et al) might suspect it.   

With any sort of flexibility (lowering withdrawals a bit or even simply not incrementing withdrawals for inflation), one can mitigate those risks.

Some comments are foamy.  So be it.  Black foam box or Orange foam box (from the Overheard at Work thread page 200 or so).
Title: Re: Stop worrying about the 4% rule
Post by: sol on August 02, 2017, 10:48:27 AM
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 the market WILL.  I will literally wager a million dollars that a 4% SWR will survive for 30 years, on the exact day I retire.  I have no hesitation about this bet.

But you're not an aspiring early retiree, and you don't believe in (or even understand, apparently) the historical analysis this decision is based on.  In fact, I'm not even sure why you're here.

Please go away.  Work just as long as you like.  Bet against the stock market all you like.  Wallow in pessimism and doom as much as you like.  Just stop doing it here.

Because frankly I'm sick and tired of all these folks showing up in carefully researched and referenced threads they have not read and loudly shouting the opposite conclusion without any evidence, forethought, or credibility.  You degrade the quality of this conversation and you look like an ignorant rube.  Just read the thread already, and you'll see that all of your questions and naive criticisms have already been answered thoughtfully by caring people with professional expertise.

But we all know I'm fooling myself.  You won't read it.  You don't want real answers because you're not asking real questions.  You're regurgitating cable show talking points without any understanding of context or motivation.  You've been duped, and it shows.  Your consistent and total refusal to accept the education offered to you here is, I suppose, a clear explanation as to why you were so easily duped in the first place, so maybe I shouldn't be surprised.

So to reiterate: please go somewhere else.  The internet is full of forums targeted at people just like you, places where you will be welcomed with open arms.  Here, you do not fit in.  Here, you are obviously out of place, a single black rose in a field of yellow daylilies.  Go away, and leave us in peace to spread our message of hope and optimism to others eager to escape their 9-5 treadmill of oppression and despair.  You are clearly happy with that life, but it has no place here and neither do you.
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on August 02, 2017, 10:52:22 AM
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?
Title: Re: Stop worrying about the 4% rule
Post by: dividendman on August 02, 2017, 10:58:47 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: runewell on August 02, 2017, 11:17:32 AM

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.   
Title: Re: Stop worrying about the 4% rule
Post by: sol on August 02, 2017, 11:34:46 AM
I'm here to stay, and there's no way you're going to bully me to leave. 

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.  C'mon, I know you have it in you.

Quote
I think diversity of opinion is important, and if you disagree than I guess I look forward to irritating you. 

You are not expressing diversity of opinion, you are contradicting pages and pages of mathematical analysis without offering any evidence at all, and it makes you look silly.

And you're doing so with such undeserved conviction that I fear new readers will come here, read your silly nonsense and not the overwhelming bulk of evidence presented in this thread, and become confused.  You have single handedly destroyed this previously helpful thread, by tacking on a bunch of idiotic contradictory drivel at the end.  What used to be a citable resource for new people like you has instead become just another Fox news style "fair and balanced" discussion where one side just makes stuff up and the preponderance of evidence and logic is totally overruled by being presented side by side with nonsensical deceptive lies.

Quote
You are quite arrogant, aren't you?

Yes, very.  Part of it is my natural personality deficiencies, but part of it is too many years of education and too many words contributed to this forum arguing with dummies.

But I'm not the only one, now am I?  Why are you so arrogant as to think your totally unresearched criticisms haven't already been addressed in this very thread, that you still refuse to read?  What gives you the authority to so confidently dispute the conclusions of all of the smart folks who have contributed to this discussion before you?

Seriously dude, just go read the thread already.  Your eyes will be opened, and you can either quit revisiting old questions or move on to some new ones.
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on August 02, 2017, 11:43:57 AM
I'm definitely not furious. Ok cool, your opinion has been stated many many times. Now what? What do we do with that opinion?

To be fair, opinions are like assholes....everyone has one and because of that opinions don't carry much value....you could quite possibly use one to wipe the other. 

My opinion is that I am the fairest one of all....mirror mirror do thou agree.  However when I asked that I got a different opinion (based more on facts).   The mirror replied "In the land of the ugly the fairest you shall be"  G'damn facts messing with my opinions!
Title: Re: Stop worrying about the 4% rule
Post by: Clean Shaven on August 02, 2017, 11:54:14 AM
This blog has been discussed on MMM forum (and within this very thread, around post #554), but this guy argues that 4% isn't safe enough when extrapolated out beyond 30 years, and argues for something more like 3.5% for longer periods like 40-50 year retirements:

https://earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro/

Prior MMM thread (see post #13 and onward):
https://forum.mrmoneymustache.com/post-fire/a-swr-fort-today/?nowap

Personally, I'm using 4% as a general rule, with some flexibility planned into it.  My wife and I are actually going to semi-FIRE next spring at around a 4.5% WR, with several flexibility factors that will change the actual WR lower:  (1) she's going to stay working on a very P/T basis for another year or two, (2) we'll both get Soc Sec (she could collect as early as 9 years from now -- we're not as young as many here), (3) our WR provides for a good margin of fluff on which we can scale back if the market tanks, (4) we will sell our house in another 10-15 years and extract a good chunk of equity, (5) if the market severely tanks in the first 5 years of FIRE, or I get bored, I'll go back to work, and finally, (6) I'll get an inheritance of some amount -- possibly well into 6 figures -- though we aren't planning on this at all as part of the #s.
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on August 02, 2017, 11:57:49 AM

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.   

Please read the very first post of this thread.  It indeed talks about the 4% rule being a starting point, and that there are other safety measures.  FIRST POST!

But of course, your real issue is fear.  Fear that 4% won't be enough.  Fear that the market is overvalued.  That's your core belief, and no amount of math or logic will change that for you.  But that's fine.  If you're happier with a 3.5% withdrawal rate, have at it.  It's your life. 

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.
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on August 02, 2017, 12:07:00 PM
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 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.

And possibly not for 20 years - I get the CAPE argument if you are close to pulling the trigger but not so much if 10-20 years.  There is no denying that when markets are more highly valued there is more risk to the downside but that doesn't invalidate the 4% rule and doesn't mean markets will go down or earnings won't grow into the valuations.
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on August 02, 2017, 02:31:46 PM
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. 

Quote
Like 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.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on August 02, 2017, 04:12:59 PM
I think the future could be significantly better than the past. I think the world is generally safer (excluding terrorism) and there are a bunch of countries (China and India are the big ones) expanding economically which I think will continue. We also aren't living in a pro inflationary environment at this point.

It's guesswork but I think we may end up with less bad periods that what we've had in the past 100 years.
Title: Re: Stop worrying about the 4% rule
Post by: matchewed on August 02, 2017, 04:32:06 PM
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. 

Quote
Like 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". :)
Title: Re: Stop worrying about the 4% rule
Post by: Clean Shaven on August 02, 2017, 05:15:00 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: matchewed on August 02, 2017, 06:15:58 PM
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.

The Billboard charts started in July of 1940. That's about 4022 weeks.

.65% of the Billboard charts is Bobby Mcferrin.

Pink Floyd's Dark Side of the Moon spent 861 weeks on the Billboard.   21%

:D
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on August 02, 2017, 07:50:43 PM
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.

"Maybe" means you haven't actually read it.

Nothing but a fear troll.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on August 02, 2017, 08:24:19 PM
Actually I think it is you that is afraid.  Fear that modern research will debunk the 4% rule and threaten early retirement.

Runewell, as some others have commented above, it's not clear what your motivation in this discussion is. It is very clear that you don't like the 4% rule, as you've used very charged language to try to disparage it for as long as I've seen you be active in various SWR threads. I don't really understand why it carries so much emotional weight for you given that, as you point out, you're decades away from having to make decisions about your own spending plans for retirement. But let's put that aside. Maybe a vocal advocate for the 4% rule ran over your dog, or stole your spouse, or something.

If you really thing there is evidence that falsifies the 4% rule, put it out there. We've already been over the previous study you brought up and the problems with how they are using CAPE ratios and how other evidence suggests that the market may be somewhat overvalued right now but not nearly to the same extreme level suggested by CAPE. We've gone over the fact that the 4% rule doesn't assume average market returns, but in fact assumes some of the worst returns that have ever been seen. We've been over the fact that despite retiring in an extremely overvalued market even the 2000 FIRE retiree doesn't appear to be in too much trouble 17 years in.

Is there other evidence or are there studies you think "debunk" the 4% rule that you'd like to bring up for discussion? Or are there other points you've made previously that you feel debunk the 4% rule that I've missed in my summary above?

In addition, would you be willing to briefly summarize what would you like people to be doing differently as a result of your posts? Do you, for example, want everyone to save up enough money that they can live on only 3.5% of their savings (or some other number)?
Or move most of their stocks to international index funds?
Or just not FIRE until either profit growth or a market correction brings the market to a valuation that you don't think in overvalued?
Or something else entirely?
Title: Re: Stop worrying about the 4% rule
Post by: Clean Shaven on August 02, 2017, 08:28:05 PM


Maybe a vocal advocate for the 4% rule ran over your dog

^^^ Plot of 2018 summer blockbuster John Wick 3?
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on August 02, 2017, 08:50:46 PM
DFTT.
Title: Re: Stop worrying about the 4% rule
Post by: markbike528CBX on August 03, 2017, 12:26:11 AM
.... big snip.....
. Maybe a vocal advocate for the 4% rule ran over your dog, or stole your spouse, or something.
.....snip....

And if the 4% rule doesn't work out for maizeman, I see a bright future for him as a country song writer. :-)
Title: Re: Stop worrying about the 4% rule
Post by: cerat0n1a on August 03, 2017, 07:13:28 AM
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.

1965 and 1966 were two of the four years when a 4% withdrawal rate left a portfolio which was smaller after thirty years than it was at the start. Nevertheless, the 4% rule did not fail for retirees between 1965 and 1972 and doesn't currently look likely to for 1997-2001 either.
Title: Re: Stop worrying about the 4% rule
Post by: Le Barbu on August 03, 2017, 07:48:48 AM
Considering the actual CAPE, p/e, p/b, public and personal debt, political instability, energy scarcity, global warming, pollution, markets could tank 80% for 2 years in a row anytime soon. This makes the 4% rule provide only 1 year of living!

Unless some smart people already figured out some of these issues and actual pricing is not out of wack that much?
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on August 03, 2017, 08:02:16 AM
Did it occur to you that trying to further reduce risk below what the 4% rule offers will generally *greatly decrease* your time retired?

As Arebelspy once noted, if you hold out forever for  1% SWR, your retirement has already failed - because you didn't take it.

-W
Title: Re: Stop worrying about the 4% rule
Post by: Le Barbu on August 03, 2017, 08:39:45 AM
Some of the best shit ever typed by MMM was posted years before he became famous. Back in time, hooked readers use to go through every single post within few days. Comparing registration date vs comments and general attitude, I suspect that the newer crowd dont do this anymore...

As an exemple below, this is a post written in early 2014 wich title could have been "Stop worrying about the 4% rule". Whenever I feel insecure about money (job loss 1 year ago, urge feeling to repay mortgage, etc) I read this again and feel better.

"Give Yourself the Gift of Not Worrying About Money"

We are already masters at reducing expenses and investing. Why are we so anxious while the other 99% of population who sucks with money dont give a fuck and still manage to live their life anyway?
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on August 03, 2017, 09:42:49 AM
Sigh, can we just concede to runewell that 3.5% is safer than 4% and maybe then he'll shut up and go away?
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on August 03, 2017, 09:46:00 AM
Well, it's probably not "safer" if your goal is to maximize non-working lifetime.

It's "safer" if your goal is to never run out of money. But that's a different goal than maximizing your enjoyment of life.

-W
Title: Re: Stop worrying about the 4% rule
Post by: Le Barbu on August 03, 2017, 09:52:09 AM
As stated back in february 2013:

The “internet retirement police” (IRP), which you’ll meet in various online forums, have established five main directives:
In principle you can only participate in certain pre-approved retirement activities such as beach-sitting, staring out the window, and receiving visits from your grandchildren.

Traveling is also okay, as is eating “delicious food”, just make sure you don’t cook it yourself, see below. Think twice before doing anything that’s not on this list! The IRP is watching you.

The IRP does grant one exemption should you become bored with the activities above. You can work for a nonprofit organization. Make sure you’re not getting paid though even if you have to plead your case with the CEO to put in special exemptions. Accepting money obviously means you didn’t do your retirement-math and that you ran out of money a couple of years after retiring. After all, what other obvious explanation could there be? (Besides the obvious ones) If you can’t find a way to work without pay, it’s best to head back to the beach towel and sit on that.

Just to be clear: You’re most definitely NOT allowed to be a kayak-instructor in your retirement. While it may sound like a fun job that you picked yourself even if you didn’t have to, the keyword is J-O-B. You can, however, spend a Saturday morning dressed up as an elephant handing out fliers and free lemonade at the entrance. And if you really must instruct in kayaking, please avoid doing something more engaging than blogging about kayaks (and if you do blog, try not to make the blog popular… because … then the blog would be a job!).

Next, I feel like I should warn MMM readers lest they stumble into the retirement pitfall of saving money by living frugally. You can’t do that! According to the IRP saving money IS a full time job and—try to follow this—since you can’t have a job and be retired, you are not allowed to save money in retirement. You see, if you save money by doing your own cooking, you’re now WORKING as a cook, thus no longer retired.

The IRP would like you to take this to its extreme logical conclusions, e.g. you’re working as a money manager if you handle your own investments, you’re working as a gardener if you mow your own lawn, you’re working as a chauffeur if you don’t hire a driver, you’re a pro-blogger if you have a blog, and so on.

Disclaimer: All examples are taken from real world cases as presented to me by the IRP. They’re not kidding!
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on August 03, 2017, 10:54:25 AM
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.  You're saying it will be worse because of CAPE.  Prove it.
Title: Re: Stop worrying about the 4% rule
Post by: matchewed on August 03, 2017, 11:03:25 AM
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.

Because the rule is based on the past that is the inherent assumption. The statement is just stating that assumption.

You seem to be saying that assumption is false because of CAPE.

You're just being asked to provide evidence of that.

So your counter is to ask for evidence that the 4% rule uses past data as an assumption?

/bogle
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on August 03, 2017, 11:09:29 AM
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.

Look at the data and all of history.  The assumption of the 4% rule is that the future won't be worse than that. 

Now, if I came in here and said "Wait, the future is gonna be WAY BETTER than the past and we can all start doing a 6% withdrawal", no one would believe me and it would be up to me to prove that 6% was actually correct. 

Same thing going the other way.  You say the future withdrawal rate should be less than 4%.  Prove it.

But I suspect you won't even try - I think you're more vested in trying to win the argument rather than get at the truth.  I started to suspect it back when it was pointed out to you that CAPE was only mildly elevated, taking in to considerations the modern changes in accounting rules.  An at no point is a mildly elevated CAPE even semi-associated with poor sequence of returns. 

That's not even bringing up the fact that NO ONE here is advocating robotic 4% withdrawal regardless of market conditions.  We talk a lot about flexibility in retirement as a hedge against poor sequence of returns, especially during the first decade when portfolios are the most vulnerable. 

So, either you haven't read, don't care, or don't understand these things.  I'm not sure which.  But you keep posting the same things over and over and over and over again, and it seems like nothing will change your mind, because you don't want to change your mind. 

Or, put another way, what would convince you that the 4% rule is safe?  I'll hazard a guess and say your answer is "nothing".
Title: Re: Stop worrying about the 4% rule
Post by: Le Barbu on August 03, 2017, 11:17:46 AM
Being 45yo now, I started few years ago to show up quite regularly at relatives funerals. Many of them died in their 60s (FIL @ 64, mother's cousin @ 66, etc) the later being one of my sweetest aunt who just turned 60yo and never retired. She was eating well, do not drink alcool, not overweigth etc but got cancer anyway. Changed my mindset about ER and SWR. Death is for real and this is what stats are made of. Why in Hell one choose to bother challenging a rule of thumb called "the 4% rule" while most of our relatives enjoy retirement for <10 years on average?
Title: Re: Stop worrying about the 4% rule
Post by: sol on August 03, 2017, 11:44:36 AM
If your horizon is instead 40-50 years Now you need a 2.0%-2.5% SWR. 

You are (acting like) an idiot who keeps repeating the same idiotic claim despite it being disproven to you over and over again.

I'll just quietly reiterate that a 3% SWR of an ordinary US asset allocation has never failed, for any length of time.  Not during global wars, the great depression, stagflation, currency crises, oil embargoes, real estate bubbles popping, savings and loan scandals, stupid presidents with counterproductive foreign policies, crippling natural disasters, none of it has ever caused an inflation adjusted 3% to fail.  Not over 30 years or 100 years.

If you're shooting for anything under 3%, then you are basically betting that America is over.  You think our future will be significantly worse than our worst times ever?
Title: Re: Stop worrying about the 4% rule
Post by: matchewed on August 03, 2017, 11:45:45 AM
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.

Um isn't that accounted for? In the past a person retired when the market was low or high.
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on August 03, 2017, 11:58:49 AM
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 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. 
Title: Re: Stop worrying about the 4% rule
Post by: sol on August 03, 2017, 12:02:31 PM
I think that the ideal starting SWR could be anywhere between 3.25%-4.75%

Great, then please stop writing things like "you need a 2% SWR".  You're only confusing the good people who come here looking for advice, by providing bad advice without context.

And you just keep doing it over and over again.  Please stop, you look like a troll.
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on August 03, 2017, 12:11:04 PM

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.

Historical return is over 9%, assuming you re-invest dividends.  If you assume a long term 6% return then that is already really, really low.  I think 6% is going to be very easy to hit going forward because it's already way below historical returns.
Title: Re: Stop worrying about the 4% rule
Post by: MDM on August 03, 2017, 02:03:35 PM
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.
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?

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?
Title: Re: Stop worrying about the 4% rule
Post by: MDM on August 03, 2017, 03:00:26 PM
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.
Not trying to eliminate your suggestions, just trying to understand them.

What is your hypothesis (or suggestions), and what information would falsify it (or them)?
Title: Re: Stop worrying about the 4% rule
Post by: matchewed on August 03, 2017, 03:01:31 PM
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.

Quote
Okay, 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.

So you posted the Vanguard paper earlier as evidence that CAPE is predictive and therefore the 4% rule is questionable when the paper concludes that at best CAPE is only predictive of 40% of the variance and even utilizing such predictions Vanguard concluded that the future returns may well be in line with historical returns within a probablistic framework. Given this why do you deviate from that end conclusion? Why is this time different?
Title: Re: Stop worrying about the 4% rule
Post by: DavidAnnArbor on August 03, 2017, 03:55:42 PM
I feel like there's an effort to try to predict the future with the claim that CAPE or other metrics are high and therefore future stock returns are going to be lower.

I think predictions are just that, predictions.

Here's what some economists are predicting.

The weak dollar, the recovery in Europe, and really good corporate earnings is propelling the market right now.

But there is not a lot of confidence in the market right now. So it's possible we'll have a market correction that has nothing to do with corporate profits.

Jeremy Siegel predicts a 7% nominal rate of return of the stock market over the next several years (2% inflation built into that).

Robert Shiller agrees the market is highly valued right now.

http://www.wbur.org/onpoint/2017/08/03/where-the-booming-stock-market-goes-from-here
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on August 03, 2017, 04:19:34 PM
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.

So, why exactly are you here?

White Knighting us poor deluded believers in the 4% rule? While refusing to actually read the background material on the site?
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on August 03, 2017, 04:22:15 PM
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.

Why do you keep mis-stating the 4% rule?

Is it because your own position is so weak that it basically doesn't really exist?
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on August 03, 2017, 04:24:37 PM
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 just want you to stop regurgitating your own crap that was already disproven.
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on August 03, 2017, 06:10:32 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on August 03, 2017, 07:47:36 PM
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.   

Ah so we are finally getting at your motivations and goals. I will point out that many people on this thread have indeed agreed with you that markets are more expensive than average at the moment, just not as expensive as you were trying to argue with your CAPE number. So you have already achieved 1/2 of your stated objective.

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.

Given that you just said that you want to change other people's minds,* why is it hard to understand why other people might also want to change yours?

*Okay, technically you said you wanted to change what other people say, but let's assume you also want them to believe what they're saying.

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.

This does not seem like an effective way to achieve your stated goal, does 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.

Given that by my count approx. a dozen people (myself included) have been trying to talk to you and understand and address any evidence you might have, if you don't think anyone understands what your point is, perhaps you should try to come up with some different strategies for communicating your point? Obviously just repeating the same idea in the same way over and over again is not proving to be effective.

Alternatively you can continue as you are now. You can complain about how people don't understand you. Other people will complain you're not making any sense. Ultimately either you or everyone else will get tired and stop posting. If everyone else were to get tired before you were, maybe you'd get to have the last word. But that approach won't get you any closer to having people say that they agree with you. *shrug*

“Arguing with anonymous strangers on the Internet is a sucker's game because they almost always turn out to be—or to be indistinguishable from—self-righteous sixteen-year-olds possessing infinite amounts of free time.”
Title: Re: Stop worrying about the 4% rule
Post by: matchewed on August 04, 2017, 07:10:57 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on August 04, 2017, 08:27:10 AM
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.

I think I understand what you are suggesting, which is that highly or overly valued market conditions is the main factor of the  5% of the time that the 4% rule doesn't work.  It sounds like a logical conclusion however you are simply stating it without actually providing any analysis or back testing.  In fact, I think the more predominant contributor to failure was high inflation. 

So if you want to support your point you need to isolate those 5% of the times scenarios and analyze them for thematic variables (cape, inflation, PE, PB, interest rates, gdp, and on and on and on) otherwise you are just pissing in the wind so to speak.

Read this from Kitces which may have been posted already. Some key tidbits.   
https://www.kitces.com/blog/how-has-the-4-rule-held-up-since-the-tech-bubble-and-the-2008-financial-crisis/ (https://www.kitces.com/blog/how-has-the-4-rule-held-up-since-the-tech-bubble-and-the-2008-financial-crisis/)

1. Only 10% of the time would a retiree ended with LESS than their starting principal (which in real terms over 30 years and 3% inflation is about 40% value - still only 10% the time you end up having less 40% real terms of your original portfolio after not working and drawing down for 30 years - not bad.

2.  Failure only occurred in 4 years:
                    CAPE             PE           10 Yr Rate         
1929             27                 18             3.6%
1937             21                 17             2.68%
1965             23                 19             4.19%
1966.            24                 18             4.61%

Following excludes last thirty years (ie 1987 and older) to reflect that for sooner periods can't yet be tested for 4% rule.
CAPE - 10% of history was higher than 21
PE - 25% of history was 17 or higher
10yr - 15% of history is lower than 2.68%

The above rudimentary look suggests there may be correlation (not necessarily causation) with higher cape, lower rates but there are also periods with these metrics or higher/lower that 4% was safe.

This analysis suggest low interest rates might be the risk, not CAPE.
http://www.retirementestateplan.com/wp-content/uploads/2015/07/the-four-percentage-rule-may-not-work.pdf (http://www.retirementestateplan.com/wp-content/uploads/2015/07/the-four-percentage-rule-may-not-work.pdf)

There - I have gotten you started on the path to actually doing some analysis to support you point beyond the all powerful and winning view of your opinion. Who knows, maybe with some work you will prove it out and make the FIRE world safer for all.
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on August 04, 2017, 08:28:20 AM
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.

I think this (and any other expense inflation) is a more real risk to FIRE - but it doesn't affect the 4% rule.
Title: Re: Stop worrying about the 4% rule
Post by: matchewed on August 04, 2017, 08:41:41 AM
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.

Cutting those expenses inherently is a reduction of your withdrawal rate. It's not a cop out. For many of us here it is a well considered subject. Most of the individuals you've been interacting with have given this subject a great deal of thought and aren't walking into the statements or the attempt to FIRE blindly.

Why don't those individuals deserve that credit? If you've read this thread (a common refrain I'm sure you've heard) you'll find all sorts of people talking about how to mitigate the inherent risks associated with the 4% rule. Which is why it is called stop worrying about the 4% rule. It's not about blindly following it, it is about mitigating and accepting that unless we're in unprecedented US economic catastrophe right around the corner we're all going to be probably ok.
Title: Re: Stop worrying about the 4% rule
Post by: MDM on August 04, 2017, 11:34:25 AM
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.

The reduction in SWR discussed in that paper (199802retire - 6794_retirement-savings-choosing-a-withdrawal-rate-that-is-sustainable.pdf (http://www.aaii.com/files/pdf/6794_retirement-savings-choosing-a-withdrawal-rate-that-is-sustainable.pdf)) comes from a much higher percentage (see tables 1 & 2).  The ~4% comes from the "Inflation-Adjusted Portfolio Success Rate" in table 3.


Back to the general question: What is your hypothesis (or suggestions), and what information would falsify it (or them)?
Title: Re: Stop worrying about the 4% rule
Post by: DavidAnnArbor on August 04, 2017, 12:26:34 PM
Future healthcare cost issues definitely has to be factored in, in advance. Good point.
Obamacare/ACA was a step in the right direction toward helping to reign those costs in for early retiree.
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on August 04, 2017, 08:10:40 PM
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.

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.

Right.

I just spent some time in cFIREsim, which allows additional expenses to be inflated at a set rate.
- Assume no subsidies for health insurance premiums (currently $14K/year).
- Premiums increase at 13% per year to age 66 (this is the rate they have increased over the last 6 years), then end.
- Max out of pocket each year (currently $14.25K).
- Max out of pocket increases at 13% per year to age 66, then end.
- Qualify for Medicare at age 67.
- Assume social security is enough to cover healthcare expenses from age 67 onwards (i.e. I didn't bother putting SS into cFIREsim).

30 years, 95% success, Initial Withdrawal Rate 3.5%
40 years, 95% success, Initial Withdrawal Rate 3.3%

That's fine for me. YMMV.

Edit:
Another way of looking at it, say I thought we could live on $40K/year, and also say I'm optimistic we won't have much in the way of out of pocket health costs, so I include the insurance premium of $14K and just $1K more for health costs. I inflate that at 13%.

Our initial spending = $40K + $14K + $1K = $55K. Using 4% rule we need 25x55= $1.375M

Now run it through cFIREsim (using my age inputs, YMMV) with $15K as extra spending inflated at 13%.

30 years, 95% success, Maximum initial spending $29,774. That's $10K less than I needed.
Title: Re: Stop worrying about the 4% rule
Post by: Mr. Green on August 05, 2017, 06:00:38 PM
I must say the last several pages of this thread have baffled me. The general argument has seemed to be over the very general statement that the 4% withdrawal rate is safe, taken completely at face value. A deeper analysis of the 4% withdrawal rate requires a look at sequence of returns risk, which is a sub-component of the 4% argument. It's a bit obvious that a high CAPE and a prolonged bull market means that, statistically, lower returns in the next few years are more likely but we won't know that until it happens. Since we know things about sequence of returns risk, and how strongly the first 10-year return in retirement affects the trajectory of a retirement portfolio we can make some educated observations about the near future and keep an eye out for additional red flags.

The historical 30-year periods that have been analyzed represent a sliding scale. The low end is the riskiest time to retire and the high end is the safest time based on immediate returns after retirement. However, we have enough 30-year periods to analyze that we know a bad first couple years doesn't necessarily spell disaster. It's just another metric that allows us to continue looking for additional red flags. It doesn't, however, give us the ability to declare the 4% rule isn't safe simply because it might appear like returns over the next decade could be lower than the norm.

Look at 1970 as an example. The first 10 years after that yielded an average return of -1.45%. People here are saying returns might only be 2-4% on average so we should all run for the hills right? Well the second 10-year interval averaged 11.97%, and the third interval averaged 14.94%, and after 30 years the portfolio ended with 10% more money in it than what it started with. That's just one example in history, but for that specific case we would say the 4% rule was successful. Looking at that, I don't understand how someone can look at some experts claiming lower returns in the next decade are likely and immediately jump to the conclusion that the 4% rule isn't safe anymore.

Up thread there was mention of it being too early to tell for the years 1997-2001. Again, sequence of returns allows us to forward project and we can indeed confidently answer how those years will fare. For 1997 the game has already been won. No historical scenario has put up first and second 10-year periods like it has and failed. Essentially, a collapse of the US economy would be required for that portfolio to fail. As you move toward 2001 the outcomes are much grimmer. Those years have put up numbers that make it much riskier that their portfolios will go the distance.

The whole thing is a sliding scale and requires the use of brain power to make good decisions. All of the examples mentioned above fall within that sliding scale. If you retire and see negative returns for the next 5 years you might want to consider going back to work, but as I've clearly shown above that doesn't mean the original plan might not still work. You just wouldn't want to wait that many years to find out you're safe.

A statistician would tell you that lower returns over the next decade increase the purely statistical chances that the 4% rule may fail simply because we're lower on that sliding scale, but people continue to use the blanket statement that it's safe because of all the historical data that shows success. By all means, use the threat of lower future returns to keep a watchful eye on your portfolio if you're planning to retire imminently but it by no means extends to saying the 4% rule is more worrisome now than in the past. To claim that would require one to know the future.

Also, if you analyze sequence of returns risk you'd understand better just how low the returns can be and still yield success at a 4% WR. The historical average of a 6-7% return, after inflation, leaves you with disgusting amounts of money after 30 years. Returns can be points lower and still go the distance.

Edit: typos
Title: Re: Stop worrying about the 4% rule
Post by: DavidAnnArbor on August 05, 2017, 08:54:07 PM
Really well said Mr. Green !
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on August 06, 2017, 03:49:19 AM
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.

According to this logic if one retires in a year with CAPE<21, you should only use those data sets, in all of which the 4% rule worked, hence 100%/guaranteed success rate?  This is cherry picking data with a single metric to validate your hypothesis. 

Correlation does not equal causation.  Elevated CAPE does not cause lower returns, which does not in itself cause a 4% rule failure.  They are single metrics with some correlation to each other. I think the disconnect here is you are an actuarial expert and have an anchoring personal bias (https://en.wikipedia.org/wiki/Anchoring), coupled with very limited economic/market knowledge. Statistics, market metrics, historical trends, ect only provide some insight into market behavior, they are not causative factors. 

Please don't insult me with by saying I do not understand what you mean... I get it.  You are concerned about this correlation and think success rates for a 4% WR retirement are lower in 2017 than the statistical average.  If you are correct, this only applies to someone beginning drawdown in an elevated PE10 environment (ie retiring now), not in accumulation(everyone not retiring today can relax).

The thing is, I don't think you are right.  There's too much complexity to market forces to trust a single metric as predictive, particularly with limited data sets and even more so if you cherry pick those data sets.  As argued in this thread and others before, CAPE mean may have been altered by these complex forces.

If you personally would like to cherry pick data to look at risk of >21 CAPE only, use this (http://www.firecalc.com/) calculator, under the investigate tab you can run simulations on individual years (ie you could pick the years only with CAPE >21).  If it makes you feel better, feel free to pick only the years of known 4% rule failure.  Prove to yourself that with cherry picked data the 4% rule always fails and come back to tell us about your study.

Title: Re: Stop worrying about the 4% rule
Post by: TomTX on August 06, 2017, 06:18:22 AM

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.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on August 06, 2017, 07:36:23 AM
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. ;)
 
http://www.philosophicaleconomics.com/2013/12/shiller/
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on August 06, 2017, 08:47:49 AM
Yes. It's like switching from C to F in how you report temperatures and complaining that it's far hotter since the change. ;)

That's a great way of putting it. If you don't mind I might borrow that, as these CAPE discussions seem doomed to continue to come up.

Looking before and after 1997, the modal CAPE value has gone from ~18 to ~25.

(https://i.imgpile.com/nRZeHM.png) (https://imgpile.com/i/nRZeHM)

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.


It'll make a lot simpler for all of us if we use CAGR instead of average returns. Ideally also inflation adjusted, but if you'd rather correct for that separately it can be made to work. "Average" returns are incredibly misleading.* The long term inflation adjusted CAGR of the stock market is about 6.9% (or 9.1% without inflation).

*Year 1: -50%, year 2: 100%. Average return 25%/year, actual return over two years 0%.

Quote
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.

I think this might be one of the fundamental points that you're misunderstanding about historical backtesting and withdrawal rate strategies generally: volatility and sequence of return risk is the major driver of portfolio failures, not lower overall returns. This may also be why you're essentially talking past a lot of folks on the board.

I'm going to illustrate this, but I want to preface this with the disclaimer that what I am about to do is NOT a good way to go about calculating the risk of retirement strategies and I'm only doing it to illustrate some properties of the math involved in these calculations.

Let's consider two scenarios: 1) regular historical backtesting, starting with a $1.2M portfolio invested entirely in stocks, and taking out $4k every month (equivalent to a 4% withdrawal rate). 2) same as above, but investments earn a flat (and low) rate of return for the first 10 years, then switch over to historical data.

(https://i.imgpile.com/nRa4b2.png) (https://imgpile.com/i/nRa4b2)

So you'll notice a couple of things. First of all failures are still associated with the same two historical time frames (although the actual FIRE dates that fail are 10 years earlier than they were under normal historical scenarios). Second, a decade of low returns reduces the best case outcomes by tens of millions of dollars. Finally, I played with what the fixed low rate was going to be in the second scenario. The first scenario with monthly data gave a failure rate of 2.2%. To get close to the same failure rate (2.0%) in the second scenario, I set the fixed return rate of investment return of the first decade at 2.8%/year.

Taking this to its logical extreme, as I believe someone else already pointed out above, if we keep a fixed low rate of return for 30 years, you only need 1.3% per year to avoid running out of cash.

Also, because this also comes up a lot when people start thinking about this: No, it also doesn't work to just subtract a fixed percentage of annual return from each year for the first ten years. If you'd like to discuss why that is we can, but this post is already quite long.

TL;DR: Hard coding low fixed returns early in retirement actually skew predictions of FIRE successes to be more optimistic than the real historical return data suggests. This produces misleadingly optimistic forecasts, which is why anyone reading this thread for its intended purpose and not as part of the current mess should should skip over this whole post.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on August 06, 2017, 09:05:25 AM
If your concern is a poor sequence of returns risk the efficient solution to my mind is to choose an asset allocation/FIRE withdrawal plan that mitigates this risk as opposed to just shooting for a lower WR, which translates to more money and more time chained to a desk.

https://www.kitces.com/blog/should-equity-exposure-decrease-in-retirement-or-is-a-rising-equity-glidepath-actually-better/

I'm going to FIRE with a WR rate between 4% & 5%, but I'll use a fixed $ value of bonds equal to a few years minimal cost of living and a bit of spending flexibility to mitigate a poor sequence of returns and then as my equities outrun my bonds I'll be set to deal with the risk of high inflation as my FIRE duration increases.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on August 06, 2017, 04:05:11 PM
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.

Title: Re: Stop worrying about the 4% rule
Post by: Al1961 on August 06, 2017, 04:10:04 PM

--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.

^^Yes. This.

If worried, work longer. Many do, and don't resent the extra time.

Time to unpin and close this train wreck.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on August 07, 2017, 01:53:01 AM
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 agree. There are so many ways to mitigate the risk if that is required. The point is that some people though for whatever reason don't trust the 4% level. Those people can just save up more money until they are happy. Their decisions don't invalidate the 4% rule.

I can see people working forever because the 1% rule just isn't safe. It's a psychological issue rather than a cape or whatever else issue.
Title: Re: Stop worrying about the 4% rule
Post by: marty998 on August 08, 2017, 05:10:46 AM

I get it. Things could be worse in future. So what. If you don't take corrective action to save your own ass over the THIRTY YEARS that you can see the slow moving train wreck heading towards you then you deserve to run out of money and starve.

Whilst this argument rages on, I believe the market has simply kept marching upwards.
Title: Re: Stop worrying about the 4% rule
Post by: CanuckExpat on August 08, 2017, 09:46:51 AM
"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.
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on August 08, 2017, 09:59:38 AM
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)?
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on August 08, 2017, 10:26:16 AM
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.

This is especially true if one has a low savings rate.  I had a high savings rate and kept my job for a while after hitting FI just because of my own situation.

While I went ahead and waited for 100% cfiresim and then some before retiring, after I retired I started looking at the cases that were close to failure and doing some sensitivity analysis.  After a while, I noticed what everyone else does who tries this:  the late 1960s are the worst-case scenarios, and if you assume that the future is going to be better than the past at least to the degree that that period of stagflation won't happen again, you can spend quite a bit more money.

I don't spend that extra money right now, but it was nice to have done the exercise.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on August 08, 2017, 10:55:31 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on August 08, 2017, 11:54:06 AM
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!!
Title: Re: Stop worrying about the 4% rule
Post by: steveo on August 08, 2017, 12:14:55 PM
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.

I don't think that it's easy to consider market conditions. No one does this well. I agree though that a 6% WR typically succeeds over 30 years. I also agree that all those other factors you mention provide buffers to your retirement but so does inheritance, downsizing etc. The success rates that you have stated do not include any flexibility in retirement. To me that is the biggest flaw in the 4% WR being listed as a SWR. It's probably too high a WR. People don't seem to consider the other side of the equation though.
Title: Re: Stop worrying about the 4% rule
Post by: CanuckExpat on August 08, 2017, 12:20:25 PM
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!!

Thanks maizeman.
I created a thread in Forum FAQ section with your instructions and added screenshots. The placement seems counter intuitive https://forum.mrmoneymustache.com/forum-information-faqs/how-to-ignore-specific-users/
Title: Re: Stop worrying about the 4% rule
Post by: Mr. Green on August 08, 2017, 01:28:56 PM
My questions whether the 4% withdrawal rate is truly 95% safe as people assume. 
It very well could be, especially starting out with a market that is average or below-average price, I would guess that it is.
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 sounds like what you really mean to ask is "Might we be looking at a period in the near future where we fall within that 5% failure rate?" To answer that question you have to go beyond the simply withdrawal rate and look at sequence of returns, etc. This question doesn't change the fact that the 4% withdrawal rate is successful 95% of the time over historical 30-year periods.
Title: Re: Stop worrying about the 4% rule
Post by: matchewed on August 08, 2017, 01:34:39 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: matchewed on August 08, 2017, 02:20:59 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on August 08, 2017, 03:41:45 PM
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.

Another good post.

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.

If you want > 95% historical success then save up more. That doesn't invalidate the 4% SWR.
Title: Re: Stop worrying about the 4% rule
Post by: matchewed on August 09, 2017, 06:37:16 AM
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.
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.

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.

Try using all of what I stated instead of only some. Then provide any discussion. Until then you're being dishonest in your portrayal of my position.

It is not logically inconsistent to state that the 4% SWR is a springboard, that I understand risks are there, that I plan to mitigate those risks, and to also state that I'm optimistic of the future. None of those are inherently conflicting.
Title: Re: Stop worrying about the 4% rule
Post by: MDM on August 09, 2017, 07:35:09 AM
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?
Title: Re: Stop worrying about the 4% rule
Post by: PizzaSteve on August 09, 2017, 08:09:36 AM
There are a lot of fundamental economics and business research topics and theories that suggest organized institutions can sustainably create value via products and services that society will reward with a profit margin.  These fundamental human behviors fuel equity valuations at a fundmental level and would need to fail or change for stock markets and return rates to shift in a dramatic way.

I guess i would answer the quuestion by saying governments and capital markets have been fairly stable for the last 100 years or so, relatively speaking, so the assumption that shareholder returns can sustain 4% (assuming a gradual withdraw of capital) is reasonable.
Title: Re: Stop worrying about the 4% rule
Post by: matchewed on August 09, 2017, 08:28:48 AM
Again what's the worst that can reasonably happen if one were to use the 4% SWR with some measures of conservative risk management?

Be fabulously wealthy and have taken time off of work to do whatever for a significant portion of your life?

So what if you can't predict the future? It doesn't mean you shouldn't determine what reasonably may happen and work towards it.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on August 09, 2017, 08:36:15 AM
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.

You are right. The future is unknowable, all we can do is make our best efforts to forecast which futures are more likely than others.

Your chance (or mine) of dying in an asteroid impact is somewhere between 1:75,000 and 1:700,000. More personally, sudden cardiac arrest is a threat we all live with every day of our lives. Basically every time you or I go to sleep, there is a chance we're never going to wake up for one reason or another. So we triage what we're going to worry about every day based both on (1) our estimates of how likely a particular issue is to occur, and (2) our ability to do anything to effectively avoid it or prepare for it. 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. I'm about equally likely to die from heart disease, but there I can reduce the risk somewhat through diet and exercise, so I spend a bit more time thinking about that one. I could also do things to reduce my risk of death by mountain lion (avoid their habitat, carry a weapon when hiking), but I've chosen not to because my estimate of the overall risk is so low to begin with.

Now if I die in a mountain lion attack, or FIRE on 4% of my stash and run out of money, I'll feel a bit foolish (though obviously not for very long in the case of the mountain lion). But that's the price of being alive. We spend our lives making the best choices we can with the data we have at the time and we don't really know if they were the right choices or not until our lives are over.
Title: Re: Stop worrying about the 4% rule
Post by: sw1tch on August 09, 2017, 08:39:49 AM
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.

Isn't this what we (humans) do?  We extrapolate the future based on our past experiences and the data that is available to us - what else do we have to go off of?  I don't know about you, but there aint no damn crystal ball; and if there is, it's always wrong.  I'd rather be optimistic about what can happen in the world of tomorrow.  No, I'm not a hippy singing kum ba yah around the campfire and expecting world peace and everyone holding hands, but seriously, what's the use of fretting bout something outside of my control?  Not to say that we don't prepare ourselves, but you already said: "we can't predict the future."

Quote from: runewell
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?

I personally have seen doomsday guessers even within my own life.  And, guess what?  Humans are still around.  Until the day that we all die off (if that even happens), we'll still be optimistic about the future.  I believe that optimism is what garners the creativity that has allowed our species to overcome obstacles in the past.

Let's do a quick exercise, shall we?  You, yourself, were around just 20 years ago (as was I at 12).  Would you have accurately been able to describe what the world of today would look like?  How about the folks around you?

The world in 1997 involved cheap gas, mostly VCR's, DVD's were a new thing, video rental stores on weekends.  Much more that I can't quite recall as I was in the 6th grade and my world involved sitting in a elementary school classroom and trying to fit in.  Now, think about the things that were prevalent in your life 20 years ago.

For further exercise, let's go back to the halfway point of your 150 years to 75 years ago.  The world of 1942 was WAYYY different than the world of 1867.  Just like the world of 2017 is WAYYY different than the world of 1942 or 1867.  You get my point.

I'm pretty certain people living during those eras would have said the EXACT same thing(s) that you said about how the world that they called "today" was sooooo different from the last 75, 80, 90, 100, 150, 2000, 40000, etc years.  And, I guarantee no one knew what exactly the future was going to look like; however, here we are.  On a forum, discussing how NO ONE knows the future (some things haven't changed that much have they).

To close, your own signature reads: "All models are wrong; but some are useful."  Why don't you just approach the 4% rule as a "useful" model?  Because, that's pretty much what it is.. NOT a magical crystal ball.
Title: Re: Stop worrying about the 4% rule
Post by: MDM on August 09, 2017, 08:42:33 AM
runewell, what is your suggestion and why?
No particular suggestion....
Ok, thanks, that makes things clearer.
Title: Re: Stop worrying about the 4% rule
Post by: dividendman on August 09, 2017, 08:48:52 AM
This thread now:

1. runewell: the 4% rule SWR isn't as safe as it appears because PE ratios are high
2. others: yeah, PE ratios are high and future returns might be lower but the 4% rule takes that into account
3. runewell: so it IS overstating the it's safety!
4. others: not quite, even in the vast majority of the cases where historical PE ratios are high the 4% rule succeeds, also PE ratios are calculated differently now
5. runewell: well, it's not as safe as we think and it might fail - you never know about the future!
6. others: yes, it might fail, that's why we won't just blindly follow it but will monitor what's going on and take action if appropriate - 4% is a guide that based on historical observation looks to be pretty safe and people are willing to take the risk (5% or whatever failure rate) for the reward (doing what you want for many years of useful life)
7. GOTO 1.
Title: Re: Stop worrying about the 4% rule
Post by: Mr. Green on August 09, 2017, 08:52:59 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on August 09, 2017, 09:38:08 AM
My argument is that the 4% rule does not sufficiently take this account the likelihood that future returns will be lower.

Again, at its core, the 4% rule is nothing more and nothing less than a backwards-looking observation of how a specific spending plan under specific parameters would have fared historically.  It takes into account everything that is relevant, which does not include anything about the future or market conditions in existence today.  But, given that a 4% WR succeeded in ~95% of all historical cases, it will not fail over the next 30 years unless market returns over that period are worse than ~95% of all historical 30-year periods.

As matchewed and others keep reiterating, many of us feel comfortable using a 4%-rule-derived trigger for the self-declaration of financial independence in reliance on this historical performance coupled with our retirement plans' built-in levels of safety margin.  We do not need to, and do not, handicap the specific odds that robotic annual inflation-adjusted withdrawals equal to 4% of our portfolio commencing on our retirement date will deplete our portfolio over the course of the following three decades in order to use the 4% rule as a springboard for FIRE decision-making.

As forum denizen skyrefuge once wryly observed (https://forum.mrmoneymustache.com/investor-alley/why-would-i-be-in-anything-other-than-100-stocks/msg542526/#msg542526), paraphrasing Churchill, "The 4% SWR is the worst form of retirement-readiness predictor, except for all the rest."
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on August 09, 2017, 03:36:02 PM
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."

Yes.  As a general rule, when trying to choose from among a set of available options, I like to pick the one that is best.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on August 09, 2017, 05:29:08 PM
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."

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 but I'll do that in context of where I am at in relation to my retirement, how the markets have performed and my personal feelings regarding spending. Sometimes for instance I may simply not want to spend money because sometimes I just don't like spending money. At other times I may choose to go on a fancy holiday.

I will also be eligible for social security. I'll also be able to downsize my house and collect money. I'll also likely inherit millions. I may also get a part time job. I may also go back to work if I'm bored. It's really unlikely I'll go back to work but it is an option.

Do all of these adjustments make the 4% rule safer or less safe.

MMM actually has an article on this. I think it's someone like first retire and then get rich. I honestly don't care about getting rich but the point is that I'm more likely to end up with more money than less over the course of a retirement assuming that I utilise a reasonable target to retire on.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on August 09, 2017, 07:19:00 PM
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 the 4% rule (Edit: predictions based on the CAPE ratio, equity allocations, etc) will work at all?

Runewell, it appears to me that you're actively arguing with yourself at this point.

The 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've known a lot of people who have taken personal hatreds to a lot of ideas, but I really am stumped about how a rule of thumb for how much money retirees can spend could end up provoking such antipathy in a human being. I am just trying to point out that at this point it is really harming your ability to argue effectively because you're trying to attack the idea from both sides "I can predict things better than the 4% rule" and "the future is different from the past so we cannot predict it at all."
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on August 09, 2017, 07:23:00 PM
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)

Quote
Looking 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.

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!
Title: Re: Stop worrying about the 4% rule
Post by: GenXbiker on August 09, 2017, 07:50:16 PM
That value is 42.05% and corresponds to a future 10-yr return of about 4%.

That looks like nominal return, NOT real return - important distinction.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on August 09, 2017, 11:09:24 PM
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 honestly don't think it's as easy as what you state. Maybe a better way to look at this is how often do people correctly predict significant market inflection points - i.e. when the market turns. This is so so so rare.

There are also holes in your argument. I'll try and explain this,

1. You state that the market is high now. The problem is that we don't know when the market will drop. That is basically a factual comment. You may be different but these different people are extremely rare. I think they don't exist. So you can't trade off this indicator now as it's not good enough to be used for short term predictions.
2. If you look at the medium term it's also really really hard to pick. What if the market goes on a tear for the next 5 years and then drops significantly. What if the market drops tomorrow and then goes on a 10 year bull market. We can't pick this as well.
3. The long term returns tend to be about 5%. It might be 5% per year for the next 30 years but there will probably be ups and downs.

None of these factors invalidate the 4% rule. It's a guideline.

You may be right and people retiring in the next 10 years may if they follow the assumptions underlying the Trinity study to the letter may all fail in relation to their 30 retirements but I think the odds are really against you being right here.

Maybe a better way to phrase your feelings on this discussion is to state that you believe that you can pick when the 4% fail rule will fail today. So you have the ability to predict the next 30 years returns based on CAPE or PE or whatever indicator you choose to use. I really doubt that this is the case and I'll be betting against you.

My take is to use the 4% rule (in my case 5%) as a guideline to the amount of money I need to retire. I then manage that money within an asset allocation that I am comfortable with. I then will adjust my spending or withdrawals based upon market and personal conditions. The buffers that I have are enough for me.
Title: Re: Stop worrying about the 4% rule
Post by: cerat0n1a on August 10, 2017, 01:54:46 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on August 10, 2017, 04:59:34 AM
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.

Sorry, at first glance I failed to notice that the right Y-axis is inverted.  So yes, for the time period pictured, there appears to be a pretty strong predictive relationship between % equity allocation and subsequent 10-yr return.  But what to do with that in a SWR context?  The only 4% rule failure years (so far) included within that data set are 1965 through 1969 (using cfiresim defaults).  Those years had subsequent 10 year returns in the 4 - 6% range.  Not great, but not the worst years on the chart, either.  The worst years for 10-yr return were 1999 - 2001, when returns were in the -3 to 3% range.  Of course we don't know how those 30-yr retirements will turn out yet, but so far they are doing demonstrably better than the late '60s years were doing this far in.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on August 10, 2017, 06:31:54 AM

Quote
Runewell, 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.

Quote
The 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.

There is lots of better research which has come since the trinity study, which people have linked to. However, just because research is more recent than the trinity study doesn't make it better. The onus is always on new ideas to convince people that they represent an improvement on the current state of the art. Sometimes new ideas succeed and the entire field moves forward. Sometimes new ideas fail and, like Thomas Edison, the field can still move forward by adding one more approach to the long list of ideas that DON'T work. 

But talking out of both sides of your mouth (as you put it) is an actively counterproductive tactic if your goal is to convince people to change their minds, or even just trying convince people you're arguing in good faith and not just for the sake of arguing.


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.

Now we're getting into arguing about the definition of the words used to argue, again, something I got enough of freshman year to last a lifetime. I remember one girl who had decided to read through the bible and quran, and then went around telling anyone who would listen how christians weren't real christians and muslims weren't really muslims because their actions and beliefs didn't match her interpretation of their holy texts. Needless to say this didn't go over well at all and certainly didn't change any hearts or minds.

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? Otherwise you're going to have to try to first convince everyone to stop using the phrase "the 4% rule" to describe what they've been using it to describe for years, and then convince them that the new definition you've convinced them to adopt is wrong. 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.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on August 10, 2017, 06:54:34 AM
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.

Hmmm, it seems you're right. I certainly knew about avoiding taking up smoking, excessive alcohol, excessive UV (a bit of a hazard in my field, but I at least apply broad spectrum sunblocks religiously during the field season), but assumed those represented a relatively small fraction of total lifetime cancer risk. Your comment lead me down a bit of a google rabbit hole that suggested 40-90% of cancers can be linked to changeable lifestyle factors. So I guess I have to start worrying about cancer after all. Thanks though! (And at least FIRE should help with the too much stress and relative wealth issues pretty much automatically.)

I think we're going to have to wait for this argument to ultimately burn itself out before doing anything. When people start completely switching their positions in order to continue to argue it is usually a sign the discussion is moving into its end stages. Once it 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).
Title: Re: Stop worrying about the 4% rule
Post by: MDM on August 10, 2017, 06:59:28 AM
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?
...
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.
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....
Title: Re: Stop worrying about the 4% rule
Post by: DavidAnnArbor on August 10, 2017, 07:35:41 AM
I think the 4% rule is as studied as it can be.  The 4% rule is likely to survive the 2000 crash while the % equity graph seems to suggest it might not, and it is this contradiction that makes me question the usefulness of the predictability of the % equity asset allocation graph.

How you're feeling psychologically when the market tanks is a bigger hurdle to the 4% rule.

Who here is going to keep up the good fight when we have a correction ?  Who will crack ? When the world seems like it is coming to an end or capitalism seems like it is failing ? When Donald Trump starts a war with North Korea, or the Congress refuses to raise the debt ceiling in October ?

Then Maizeman's amazing graphs that show death is a bigger issue to deal with than failure of the 4% rule should be a wake up call.

Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on August 10, 2017, 08:31:40 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on August 10, 2017, 08:51:26 AM
This looks rather predictive.  If you go on clinging to the Trinity study without adjusting for this, then (from EarlyRetirementNow)

Quote
Looking 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.

Retiring on the basis of the 4% rule in the manner described in this thread is more akin to dressing for the top 95th percentile of low temperatures in Minneapolis' historical record in addition to making back-up arrangements to obtain even more extreme cold-weather clothing should that prove necessary after you arrive.  If you follow that approach, it would be rational to follow the advice contained in this thread's title and "stop worrying" about it, though, in reality, given that we possess the ability to make near-term weather forecasts with a reasonable degree of accuracy, that backwards-looking approach is not necessarily the best one to use for making travel-related sartorial decisions.  Our ability to predict future market returns, on the other hand, is (at least arguably) decidedly less accurate than our ability to predict tomorrow's weather, so the "build your plan on the basis of historical performance and make it flexible enough to adapt as necessary" approach is (at least arguably) the best one to use for retirement planning.

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).

All the good stuff in this thread is still there, located where newcomers are most likely to come across it first, because (runewell:  take note) the logical place to start reading a new-to-you thread (especially if you intend to actively participate in the discussion) is the beginning.
Title: Re: Stop worrying about the 4% rule
Post by: PizzaSteve on August 10, 2017, 10:59:16 AM
What i get as a summary of this thread.

1) Historical data supports a conclusion that a 4% withdraw rate would be X% successful in the past, under various assumptions.  This data is helpful for planning.

2) Since historical data has limits, in terms of its reliability for predicting the future, the X% success rate should not be treated as a `true probability' (such as in a dice roll).   Rather it is an estimate based on many assumptions, the most important one being the assumption that the future will behave similarly to the past.

3) Since various other factors come into play for overall retirement `success', each person should make their own plan based on their own comfort level with assumptions and safety margins, based on what the data seems to suggest and what it means for them personally.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on August 10, 2017, 03:44:31 PM
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.

100% correct.
Title: Re: Stop worrying about the 4% rule
Post by: GenXbiker on August 10, 2017, 08:44:10 PM
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/
Title: Re: Stop worrying about the 4% rule
Post by: sol on August 10, 2017, 11:32:19 PM
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.  Thinking his naive observations are somehow novel, and not just a clear demonstration of how little he understands, while he struts around making bold pronouncements about his own intellectual superiority.  I know the type, I may have been the same way when I was 19.

Basically, Runewell is one of those people who just revels in the attention.  He can't learn anything without personalized hand-holding, and demands that his questions be personally answered again, as he thinks of them, and thinks everyone else will somehow benefit from his input.  He doesn't realize he's had a net negative impact on this thread and this community. 

Please, mods, unsticky this thread.  It's just misleading garbage now, and we do the community of future knowledge seekers a disservice by keeping it pegged at the top of the subforum with a sticky icon.
Title: Re: Stop worrying about the 4% rule
Post by: Dicey on August 11, 2017, 01:53:12 AM
Sincere question:

Runewell is a well educated TROLL, but he is still a troll.  Why are you all feeding the troll?
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.
Title: Re: Stop worrying about the 4% rule
Post by: Goldielocks on August 11, 2017, 10:31:35 AM
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.

That is the very definition of "Sequence of Returns" risk... and why, although most plan to use the 4% rule model, also build in a "WTH" backup plan if the near term performance is poor.  Also why the 4% rule uses such a long historical trend.   The peaks / valleys smooth out when you take the long view.
--------------
I do love that the answer to "the future can't be predicted by a 4% rule / CAPE, historical performance, etc" is to provide an article with a  graph showing correlations on 10 year cycles from the (recent) the past.   Those types of correlations work great -- until they don't, and often change after about 3 cycles...   At least the 4% rule takes the long view as a starting point.



-----------
Boy, am I now glad that my DD who will be starting a Fine Arts major, of all things, has chosen to take a course in logic from the Philosophy department.  May I recommend the same to runewell?   Specifically...

Introduction to Formal Logic

Students will study the basic techniques of formal deductive logic. They will learn the semantics and syntax of two artificial languages-sentential logic ( SL ) and predicate logic ( PL )-with emphasis given to the former. With the aid of the formal techniques learned in this course, students will gain insight into the nature of rational argument and sound reasoning.
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on August 11, 2017, 10:57:37 AM
I think the thread should stay stickied.  Knowledge that is true is resilient.  It can stand challenges.  Which is what we see here.  Far from undermining the 4% rule, runewell has merely helped to re-enforce it's validity. 
Title: Re: Stop worrying about the 4% rule
Post by: Eric on August 11, 2017, 12:02:22 PM
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. 

I don't think that's really fair.  Now, I'm not defending him specifically, especially because he went from asking good questions to the most annoying poster on the planet very quickly, but this is a discussion board, so claiming that all questions have already been answered doesn't really fit the format.

When this thread was started over 2 years ago, I was not worried about the 4% rule.  I'm sure I have many posts in the first handful of pages defending it from the naysayers.  However, at current valuations, I actually am worried about it.  I think comparing where we are now with where we were 2 years ago has made some of the answers from 2 years ago less relevant.

Valuations matter, despite some of the flippant dismissals made by posters in the last ~7 pages or so.  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.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on August 11, 2017, 05:37:54 PM
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 do agree though that discussing the 4% rule is cool.
Title: Re: Stop worrying about the 4% rule
Post by: Eric on August 11, 2017, 06:37:59 PM
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%.
Title: Re: Stop worrying about the 4% rule
Post by: PizzaSteve on August 11, 2017, 07:21:20 PM
...

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%.

I would qualify this by narrowing my caution to the longer-term retirements based on optimistic assumptions, like a 30 year old who ' drunk on 12% returns,' thinks they can really push the envelope of lean living and still must withdraw the full 4% ( or more) with limited skill based safety nets. 

Those of us who have followed disciplined savings plans for the last 20 years or so should have an extra safety margin built in from our smazing returns of the last 10 years.  We should be comfortably over funded and grateful the SS Trust funds has remained solvant.  We should be well positioned to be able to absorb some losses or have bonds/RE to sell if needed.

That said, my personal opinion is that structural changes to our economy and productivity gains with respect to capital goods production (less resources needed) are reasons for optimism that even an aggressive young FIREee could very well succeed, even at 5-7% withdraw rates (as long as the bull keeps charging and they are growing wealth in real terms).  If they want to take that gamble and go for it, i would only advise them to keep their eyes open for adjustment opportunities, should we hit a bear market.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on August 11, 2017, 07:40:26 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on August 11, 2017, 10:08:55 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: deborah on August 11, 2017, 10:26:06 PM
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.
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.
Title: Re: Stop worrying about the 4% rule
Post by: retiringearly on August 12, 2017, 01:57:13 PM
Sincere question:

Runewell is a well educated TROLL, but he is still a troll.  Why are you all feeding the troll?
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.

Honest, answer, I thin he is well educated because he is able to keep an argument up.  Wrong as it might be.
Title: Re: Stop worrying about the 4% rule
Post by: GenXbiker on August 12, 2017, 02:41:24 PM
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%.

Well said, and as noted earlier, you, Runewell, and some others here are in good company.

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/
Title: Re: Stop worrying about the 4% rule
Post by: Dicey on August 13, 2017, 04:30:47 AM
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.

https://forum.mrmoneymustache.com/investor-alley/start-worrying-about-the-4-rule/
Title: Re: Stop worrying about the 4% rule
Post by: FrugalToque on August 14, 2017, 05:34:26 PM

MOD NOTE:

I just waded through 6 pages of people patiently and impatiently answering questions that had already been asked and answered pages before.

6 pages of nonsense, bullshit and bickering.

I do not want to do it again.

This thread is valuable as a resource on the 4% rule.  The other mods and I agree on this.  The rule's frailties are known and clearly stated.  There is no need to restate them as if some magical conspiracy is being revealed.

Keep this thread on topic.

Thank you,
Toque.

P.S.  I tried to keep the best of the posts around, even over these last few pages, but I apologize if, in the cleansing sweep through all the pointlessness, I deleted something clever you may have said.
Title: Re: Stop worrying about the 4% rule
Post by: FrugalToque on August 15, 2017, 05:35:20 PM
The thread is unlocked.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on August 15, 2017, 07:44:35 PM
I just waded through 6 pages of people patiently and impatiently answering questions that had already been asked and answered pages before.

Thank you.
Title: Re: Stop worrying about the 4% rule
Post by: Mr Mark on August 16, 2017, 12:05:02 AM
I just waded through 6 pages of people patiently and impatiently answering questions that had already been asked and answered pages before.

Thank you.
+1
Title: Re: Stop worrying about the 4% rule
Post by: FrugalToque on August 16, 2017, 08:35:12 PM
I just waded through 6 pages of people patiently and impatiently answering questions that had already been asked and answered pages before.

Thank you.
+1

I do what I can.

Cheers.
Title: Re: Stop worrying about the 4% rule
Post by: CanuckExpat on August 21, 2017, 02:53:06 PM
Might be of interest to people on this thread:

William Bengen, author of the 1994 paper "Determining Withdrawal Rates Using Historical Data" (http://www.retailinvestor.org/pdf/Bengen1.pdf) will be doing an "Ask Me Anything" tomorrow Tuesday, August 22 at 12:00 noon eastern daylight time on the Financial Independence Subreddit (https://www.reddit.com/r/financialindependence/) if you want to ask him any questions directly. Here is a link to the reminder (https://www.reddit.com/r/financialindependence/comments/6v2tve/reminder_ask_me_anything_with_willam_bengen/) with more information
Title: Re: Stop worrying about the 4% rule
Post by: CanuckExpat on August 22, 2017, 10:19:46 AM
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/)
Title: Re: Stop worrying about the 4% rule
Post by: PizzaSteve on August 22, 2017, 12:22:16 PM
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.

Title: Re: Stop worrying about the 4% rule
Post by: MDM on August 22, 2017, 04:43:41 PM
Reposting without comment, as it is of general interest to forum participants:
PizzaSteve, thanks for posting this.

Hope you don't mind that I took advantage of having a post on the first page of this thread to copy it.  See https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/msg702893/#msg702893.
Title: Re: Stop worrying about the 4% rule
Post by: MDM on August 22, 2017, 06:08:24 PM
I did a bit of further clean up and additions.  Feel free to repost.
Done.  Editing is easy. :)
Title: Re: Stop worrying about the 4% rule
Post by: DavidAnnArbor on August 22, 2017, 08:23:45 PM
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. 
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on August 22, 2017, 09:26:03 PM
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.

cFIREsim success rates with default values except for % stocks/bonds:

100/0 = 95%
90/10 = 97%
75/25 = 96%
60/40 = 95%
50/50 = 93%
Title: Re: Stop worrying about the 4% rule
Post by: steveo on August 23, 2017, 03:44:00 AM
It's interesting that he states it's a 4.5 % rule but typically a 7% rule should be good to go. He also states that equity valuations aren't really the issue.

Quote
Two things count: if you encounter a major bear market early in retirement, and/or if you experience high inflation during retirement.

So an early bear market might not even be an issue. The big concern is an early bear market and high inflation.

Basically he is stating "Stop worrying about the 4% rule".
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on August 23, 2017, 04:42:13 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: CanuckExpat on August 23, 2017, 08:08:39 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on August 23, 2017, 08:17:10 AM
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.

There are clearly discrepancies in the inputs that lead to discrepancies in the outputs across the various sources for SWR information (or else there are outright mistakes, but that seems like a less likely explanation for presumably reliable sources like Bengen and cFIREsim).  The following thread had a good discussion about these types of discrepancies between cFIREsim and Kitces and, by extension, Bengen and other SWR information sources, and it attempted to pinpoint the reason(s) for the discrepancies:

"Kitces Article - Ratcheting SWR - Data Discrepancy?" (https://forum.mrmoneymustache.com/investor-alley/kitces-article-ratcheting-swr-data-discrepancy/)

Based on the conclusions reached in that thread, it appears that at least part of the explanation is differences in bond asset class selections.

Edit:  I see CanuckExpat identified the specific asset allocation Bengen probably used above, which would explain why his results differ so drastically from cFIREsim's.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on August 23, 2017, 10:47:49 AM
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
Title: Re: Stop worrying about the 4% rule
Post by: GenXbiker on August 23, 2017, 01:17:10 PM
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 liked the part about the opportunity cost of not investing and the chances of a correction happening as well as the average benefit of waiting vs. investing right away.

quote:  "Looking back at 115 years of data, Elm asked: “During times when the market has been ‘expensive,’ what has been the average cost or benefit of waiting for a correction of 10% from the starting price level, rather than investing right away?” "
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on August 23, 2017, 07:16:51 PM
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.

Ah, o.k.  Sounds like Mr. Bengen is engaging in some data mining.  In which case I would take his SWRs with a grain of salt.
Title: Re: Stop worrying about the 4% rule
Post by: DavidAnnArbor on August 24, 2017, 12:53:28 PM
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

Great article that really deconstructs the Schiller CAPE 10. I like the explanation of the impairment of intangible assets rule impacting CAPE comparisons from before when the rule was started (just after the dotcom collapse). My masters in accounting training including testing for impairment so it's nice to see how this applies to CAPE comparisons in the real world.
Title: Re: Stop worrying about the 4% rule
Post by: kenmoremmm on September 07, 2017, 12:32:44 PM
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?
Title: Re: Stop worrying about the 4% rule
Post by: DavidAnnArbor on September 07, 2017, 12:43:05 PM
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 think it's the latter, but keep in mind that in today's dollars you'd likely have more medical care/dental care issues if you were 64 years old.
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on September 07, 2017, 12:43:41 PM
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?

Yes, the 4% rule factors in inflation, so you are covered when things increase in price over time due to inflation.

This is why you don't keep everything in cash - cash doesn't grow and inflation will eat away at it. 

Put another way - historically the stock market grows at just over 9% (with dividends re-invested).  Inflation is between 2 and 3 percent.  If you do the math:

9-3= 6%

Theoretically you could withdraw 6% on average and be fine, but you only take out 4% to give yourself a buffer for things like market fluctuations, etc....

Most of the time you end up with more money when you die than you had when you retired, because inflation has already been accounted for. 
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on September 07, 2017, 12:47:52 PM
The 4% Rule factors in inflation once you FIRE, but if you are 10yrs out like Kenmoremmm mentions it does not account for inflation from your current spending to the date of your FIRE. That's the question he was asking.
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on September 07, 2017, 12:50:57 PM
The 4% Rule factors in inflation once you FIRE, but if you are 10yrs out like Kenmoremmm mentions it does not account for inflation from your current spending to the date of your FIRE. That's the question he was asking.

Oh yes, quite right.  Sorry, my mistake - I should red more carefully.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on September 07, 2017, 01:00:03 PM
The 4% Rule factors in inflation once you FIRE, but if you are 10yrs out like Kenmoremmm mentions it does not account for inflation from your current spending to the date of your FIRE. That's the question he was asking.

Oh yes, quite right.  Sorry, my mistake - I should red more carefully.
don't feel blue, it happens to everyone once in a while...
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on September 07, 2017, 03:38:16 PM
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?

I started with drafting a FIRE budget based on my current spending, but adjusted using the assumptions I have regarding FIRE. For example the amount of gas I plan to spend while traveling to do things I love, campground fees, etc... This has some of my guesses around inflated costs baked in, but not in a rigorous way. Two other considerations are that I am still optimizing my spending and my FIRE budget includes a healthy dose of luxuries. The continued optimization process reduces my costs and fights inflation while the luxury portion of my budget is a shock absorber against sudden cost spikes that I might need time to mitigate.

As I get closer to FIRE I revisit my budget. I just noticed that my truck insurance this year is higher than listed in my budget so I updated that number.

If you are 10yrs out just take the best stab at a FIRE budget as you can. This will let you set a savings/investment target and you have a while to adjust as you go. Whether you implicitly calculate inflation in, guess or just leave a decent chunk of contingency in your budget doesn't really matter as far as I am concerned as love as you continue to monitor and refine your numbers as you go.
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on September 07, 2017, 04:11:06 PM
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?

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

IMO the best you can do is take a roiling 12 mo average of expenses, add in savings for anything you are glaringly missing, like expected intermittent expenses (replace car, roof on house, ect).  Subtract any work related costs multiply by 25... BAM, "your number".  If this calculation changes over time due inflation or lifestyle inflation adjust accordingly.  Don't waste time on the minutia, spend time learning to invest or cutting consumption instead. Then you wont have to wait a decade to FIRE.
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on September 07, 2017, 04:36:13 PM

[/quote]

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

[/quote]

Awesome..:)
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on September 07, 2017, 04:48:33 PM
The 4% Rule factors in inflation once you FIRE, but if you are 10yrs out like Kenmoremmm mentions it does not account for inflation from your current spending to the date of your FIRE. That's the question he was asking.

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

I'm green with envy over your cleverness.
Title: Re: Stop worrying about the 4% rule
Post by: CanuckExpat on September 07, 2017, 06:31:45 PM
If anyone likes very early reminders:

Wade Pfau, author of many Trinity Study Updates (https://retirementresearcher.com/trinity-study-updates/) will be doing an "Ask Me Anything" Tuesday, 10/31/2017, at noon EDT on the Financial Independence Subreddit (https://www.reddit.com/r/financialindependence/) if you want to ask him any questions directly. Here is a link to the reminder (https://www.reddit.com/r/financialindependence/comments/6wr5it/early_announcement_ama_scheduled_with_wade_pfau/) with more information
Title: Re: Stop worrying about the 4% rule
Post by: Le Barbu on October 07, 2017, 06:06:49 AM
1 month since the last post here...

Where is Runewell? His profile disapeared and many of his post to...
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on October 07, 2017, 06:40:16 AM
1 month since the last post here...

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

Banned and his posts cleaned up a mod.
Title: Re: Stop worrying about the 4% rule
Post by: Dicey on October 08, 2017, 10:38:23 PM
1 month since the last post here...

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

Banned and his posts cleaned up a mod.
Yes, and his mysterious twin, Mr. "Steed" has disappeared too.
Title: Re: Stop worrying about the 4% rule
Post by: Eucalyptus on October 13, 2017, 05:42:09 PM
The 4% Rule factors in inflation once you FIRE, but if you are 10yrs out like Kenmoremmm mentions it does not account for inflation from your current spending to the date of your FIRE. That's the question he was asking.

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

I'm green with envy over your cleverness.

I think you are all dealing in shades of grey to be honest
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on October 13, 2017, 09:39:31 PM
The 4% Rule factors in inflation once you FIRE, but if you are 10yrs out like Kenmoremmm mentions it does not account for inflation from your current spending to the date of your FIRE. That's the question he was asking.

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

I'm green with envy over your cleverness.

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

I think there is an article on the Frugal Cyan-tist about that.
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on October 14, 2017, 04:50:04 PM
Question..

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

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

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

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

Clearly this is nonsense.

Explain..:)
Title: Re: Stop worrying about the 4% rule
Post by: sol on October 14, 2017, 05:12:04 PM
Question..

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

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

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

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

Clearly this is nonsense.

Explain..:)

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

But to summarize,

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

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

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

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

Just go back to page 1 of this thread and start reading, and all of your questions will be answered.  Follow the links for extra credit.
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on October 14, 2017, 07:09:22 PM
Question..

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

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

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

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

Clearly this is nonsense.

Explain..:)

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

But to summarize,

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

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

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

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

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

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

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

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

Title: Re: Stop worrying about the 4% rule
Post by: Telecaster on October 14, 2017, 08:53:51 PM

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

That's true, but instead of retiring with 25x expenses, you need 33x expenses.  That means a number of extra years working, with no extra safety.
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on October 14, 2017, 10:02:46 PM

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

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

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

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

I guess this is a good problem to have and we intend to spend more in retirement.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on October 14, 2017, 11:09:12 PM

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

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

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

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

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

Where the actual line is where you stop gaining extra safety from money is a sorites paradox (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.

Title: Re: Stop worrying about the 4% rule
Post by: PizzaSteve on October 14, 2017, 11:31:32 PM

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

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

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

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

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

Where the actual line is where you stop gaining extra safety from money is a sorites paradox (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.
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.
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on October 14, 2017, 11:40:01 PM

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

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

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

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

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

Where the actual line is where you stop gaining extra safety from money is a sorites paradox (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.

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

And for me 3% is because I'm there already and, well, its gives me warm and fuzzy feelings all over..:)
Title: Re: Stop worrying about the 4% rule
Post by: Mr Mark on October 15, 2017, 12:10:43 AM

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

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

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

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

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

Where the actual line is where you stop gaining extra safety from money is a sorites paradox (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.

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

Lets say you are 40 yrs old, with a paid off mortgage, and have anticipated spending of $40k/yr. You are earning $100k/yr net. Your stache is $1 million, so 4% rule says you can FIRE away. But you decide to use a 3% SWR because you assume 'it's safer'. Thus you would need an equiv of a an extra $333,000 saved, so you work about an extra 3 years to get this (how long that will take depends on how quickly your $1million 'stache grows in the meantime). If your life expectancy is 90, you have chosen to lose 6% of your retirement time. If you actually end up dying at 70, you lost 10%. That's a pretty big decision IMHO.
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on October 15, 2017, 12:38:03 AM
Each to their own of course but retiring at 43 instead of 40 but with 33% more money sounds like a good deal to me. I mean what will be different say 10 years from now.. Will we have doubled healthcare costs or will we have a well run single payer system for example?

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

But then if you die at 50.. Maybe not such a great deal..
Title: Re: Stop worrying about the 4% rule
Post by: nereo on October 15, 2017, 03:32:56 AM
Each to their own of course but retiring at 43 instead of 40 but with 33% more money sounds like a good deal to me. I mean what will be different say 10 years from now.. Will we have doubled healthcare costs or will we have a well run single payer system for example?


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

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


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

It's a different choice for everyone of course.

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

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

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

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

These are just things that come to mind immediately.
Title: Re: Stop worrying about the 4% rule
Post by: CanuckExpat on October 15, 2017, 08:58:08 AM
Each to their own of course but retiring at 43 instead of 40 but with 33% more money sounds like a good deal to me. I mean what will be different say 10 years from now.. Will we have doubled healthcare costs or will we have a well run single payer system for example?


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

It's a different choice for everyone of course.

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

Most people's situations probably lie more in the middle
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on October 15, 2017, 10:10:21 AM
One would hope most peoples choices lie somewhere in the middle..:)
Title: Re: Stop worrying about the 4% rule
Post by: nereo on October 15, 2017, 03:04:48 PM
...what exactly did/do you do, CanuckExpat?
Title: Re: Stop worrying about the 4% rule
Post by: Telecaster on October 15, 2017, 04:51:55 PM
Think about it.  When we use statistics to suggest having more money is meaningless, we are crossing over a line of what a statistical model is meant to represent in terms of guidance value.

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

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

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

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

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

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

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

Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on October 17, 2017, 09:04:05 AM

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

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

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

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

These are just things that come to mind immediately.

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

Aside from that, I think about it too - I would hate waste more of my life to only having it be short.  Although I take comfort that my family would be fine.
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on October 17, 2017, 09:05:36 AM
Each to their own of course but retiring at 43 instead of 40 but with 33% more money sounds like a good deal to me. I mean what will be different say 10 years from now.. Will we have doubled healthcare costs or will we have a well run single payer system for example?


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

It's a different choice for everyone of course.

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

Most people's situations probably lie more in the middle

Be a demand creator.....plant the mines then get paid to clear them....sure fire way to FIRE (or getting blown up).
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on October 17, 2017, 09:07:45 AM
Better yet, pretend to the mines and still get paid to clean them up. Lower Cost of Goods, and reduced risk of getting blown up.
Title: Re: Stop worrying about the 4% rule
Post by: cerat0n1a on October 17, 2017, 01:49:08 PM
Better yet, pretend to the mines and still get paid to clean them up. Lower Cost of Goods, and reduced risk of getting blown up.

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

http://www.bbc.co.uk/news/uk-22266051
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on October 17, 2017, 04:54:39 PM
Be a demand creator.....plant the mines then get paid to clear them....sure fire way to FIRE (or getting blown up).

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

Better yet, pretend to the mines and still get paid to clean them up. Lower Cost of Goods, and reduced risk of getting blown up.
UBI?
Title: Re: Stop worrying about the 4% rule
Post by: OurTown on October 27, 2017, 01:05:12 PM
This is a fantastic thread.  I encourage everyone to read all the way from the beginning.
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on October 27, 2017, 01:12:33 PM
Question..

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

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

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

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

Clearly this is nonsense.

Explain..:)

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

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

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

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

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

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

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

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

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

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

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

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

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

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



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

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

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

I just see a lot of people posting with this idea that "I can withdraw $40k per year when I retire and can only withdraw $40k per year, every year, until I die.  And that's simply not true.  As the stash grows, the total dollars you can withdraw every year goes up too. 
Title: Re: Stop worrying about the 4% rule
Post by: sol on October 27, 2017, 01:32:47 PM
The point is, that your income from your stash goes up when the stash grows.  Even if you just stick with 4% withdrawals.  It seems like some people don't get this.

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

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

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

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

The size of your stash today has nothing to do with today's withdrawal rate, under the Trinity assumptions.  All that matters is the size of your stash on the day you retired. 
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on October 27, 2017, 01:39:19 PM
Ah, I did not realize that.  Thanks for correcting me, seriously.

Isn't inflation like 2%?  So shouldn't they call it the 6% withdrawal rate?  Of course I know inflation varies, so maybe call it the 4% plus inflation rule? 
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on October 27, 2017, 01:42:02 PM
Ah, I did not realize that.  Thanks for correcting me, seriously.

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

If you started with $1M taking out $40K and inflation was 2% the next year you could take out $40K +$800 [2% of $40K] = $40.8K.
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on October 27, 2017, 01:47:55 PM
Ah, I did not realize that.  Thanks for correcting me, seriously.

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

its just understood that is what it is.  the 4% rule means you can withdraw 4% of your beginning stache adjusted for inflation every year.  The trinity study said it wouldnt fail over any 30 year period.  so in reality its much much safer b/c it was designed for worst case. 
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on October 27, 2017, 01:51:27 PM
Ah, I did not realize that.  Thanks for correcting me, seriously.

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

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

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

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

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

Yes, I see that now.  Holy shit, the 4% rule is even MORE conservative/safe than I originally thought it was.  Which is, I guess, the whole point of this thread :D
Title: Re: Stop worrying about the 4% rule
Post by: sol on October 27, 2017, 02:03:48 PM
The trinity study said it wouldnt fail over any 30 year period.  so in reality its much much safer b/c it was designed for worst case.

Well that's not quite true either.  Depending on the asset allocation you use, there have been some years where an initial 4% SWR adjusted up for inflation was depleted before 30 years.  All of those scenarios include very low market returns, and a few of them also include crazy high inflation adjustments.  If you retire with a million dollars and withdraw $40k in your first year, then the next year the market tanks 20% and inflation is up 10%, then withdrawing the proscribed $44k out of your remaining $760k has effectively turned what used to be a 4% rate into a 5.8% rate, and some of those scenarios didn't recover in time to survive 30 years.  Most did, though.
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on October 27, 2017, 02:17:39 PM
The trinity study said it wouldnt fail over any 30 year period.  so in reality its much much safer b/c it was designed for worst case.

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

As a real person, if there was a drop of 20% and a big jump in inflation, why in the world would I stupidly spend $44k during that year?  I'd cut down on my spending.  Wouldn't anyone?
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on October 27, 2017, 02:24:48 PM
Holy shit, the 4% rule is even MORE conservative/safe than I originally thought it was.

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

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

That is indeed one of the myriad reasons to stop worrying about the 4% rule.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on October 27, 2017, 03:49:52 PM
Yes, I see that now.  Holy shit, the 4% rule is even MORE conservative/safe than I originally thought it was.  Which is, I guess, the whole point of this thread :D

Yup. Most of us have some safety margin built into our FIRE budgets as well. My annual spend is $40K + taxes, but $10K of that is not essential and could be deferred if my portfolio was doing terribly. I could also make $10K in a year without breaking a sweat. So that very conservative 4%WR rule got even safer.
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on October 27, 2017, 03:56:46 PM
Yes, I see that now.  Holy shit, the 4% rule is even MORE conservative/safe than I originally thought it was.  Which is, I guess, the whole point of this thread :D

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

Yep the ability to make a little extra cash instead of cutting spending is often overlooked as well
Title: Re: Stop worrying about the 4% rule
Post by: CanuckExpat on October 31, 2017, 11:03:56 AM
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/)
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on October 31, 2017, 12:02:07 PM
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. 
Quote
I'm a big fan of global diversification. Even if it doesn't increase the returns, if it helps to reduce volatility then this is a way to increase the safe withdrawal rate (SWR). It's hard to say the specific improvement because it requires assumptions about returns, volatilities, and correlations between all the asset classes. But as an example, for a case I looked at in my book, broader diversification increased the SWR estimate from 3.34% to 3.61%. WW1 & WW2 created some really bad SAFEMAX outcomes around the world, but even without that there are plenty of cases of withdrawal rates internationally falling well below 4%.

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

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

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

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

Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on October 31, 2017, 12:07:53 PM
Everyone who has followed this thread, or 4% rule ideology in general, should be aware the Pfau tends to be more conservative in his assumptions than most. 

(https://farm5.staticflickr.com/4483/26293670359_a385930ea0_b.jpg)

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

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

It's true. Frugality really is the most important aspect to early retirement, in my opinion. If you had a greater need for money it would be harder to fulfill.
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on October 31, 2017, 12:21:50 PM
@Retire-Canada
I read that as well and feel it actually supports my logic.  Using data sets that include things (like wholesale destruction of infrastructure due to years of war with massive civilian casualties) that haven't happened in the North America, during the period we have investment data for, is a bad idea.  Mainly because if such events occur here, we won't care about SWR, rather we will be focused on survival. 

Edit:  Put another way.  Life expectancy in the US around 1900 was under 50.  However, if you made it to the ripe old age of 1, suddenly it increased to mid 60's.  Obviously, there is something happen here to skew the data.  In this case high infant mortality rates.  In the case of SWR, in Pfau's apparent view, world wars fought on home soil, revolutions, hyper inflation, etc.   If you take out the extreme circumstances (situations in which SWR is meaningless anyway), 4% WR looks better.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on October 31, 2017, 12:26:12 PM
@Retire-Canada
I read that as well and feel it actually supports my logic.  Using data sets that include things (like wholesale destruction of infrastructure due to years of war with massive civilian casualties) that haven't happened in the US, during the period we have investment data for, is a bad idea.  Mainly because if such events occur here, we won't care about SWR, rather we will be focused on survival.

Sure. I'm not arguing with you. I think he's pessimistic. I'll be FIREing with a WR between 4% and 5% most likely so you can see where I stand on the issue.
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on October 31, 2017, 12:26:44 PM
Quote from: Wade Pfau
Thanks for organizing today, and two great questions! 1) I am concerned about 4% being too high at the present for someone without much flexibility to reduce spending after market downturns. Reasons include: our extremely low interest rates plus high stock valuations have not been tested in the US historical data; the 4% rule has not worked internationally -- only in the US and Canada but not in 18 other countries with data back to 1900; 30 years may not be long enough any more, especially for early retirees; it is hard for investors to earn the underlying index market returns net of fees

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

A more interesting way to phrase the question - what's his view of safe withdrawal rate for people savvy enough to pay very low fees (ala Vanguard VTSAX)?
Title: Re: Stop worrying about the 4% rule
Post by: Telecaster on October 31, 2017, 07:03:22 PM
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.

Bravo.  At some point, things beyond market forces start to dominate.  Being hit by a bus. Revolution. Alien invasion.  Pfau is literally trying to plan for the Nazis taking over.  Yes, it could happen.  But if it does, that will be the least of our worries. 
Title: Re: Stop worrying about the 4% rule
Post by: DavidAnnArbor on October 31, 2017, 08:33:50 PM
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
Title: Re: Stop worrying about the 4% rule
Post by: dougules on November 01, 2017, 11:54:59 AM
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

3-5 million for a single guy?  You could have a swimming pool full of cash to swim in during your retirement. 
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on November 01, 2017, 12:42:11 PM
(https://i.kinja-img.com/gawker-media/image/upload/s--XfaiISIb--/c_scale,f_auto,fl_progressive,q_80,w_800/17kdjxvdqvygyjpg.jpg)
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on November 01, 2017, 12:59:54 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: dougules on November 01, 2017, 03:26:33 PM
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.

If the average person in Nicaragua or India had $30k/year they would see it as luxurious, and that's even if you adjusted down for cost of living. 
Title: Re: Stop worrying about the 4% rule
Post by: Eric on November 01, 2017, 04:00:21 PM
Quote
I'm a big fan of global diversification. Even if it doesn't increase the returns, if it helps to reduce volatility then this is a way to increase the safe withdrawal rate (SWR). It's hard to say the specific improvement because it requires assumptions about returns, volatilities, and correlations between all the asset classes. But as an example, for a case I looked at in my book, broader diversification increased the SWR estimate from 3.34% to 3.61%. WW1 & WW2 created some really bad SAFEMAX outcomes around the world, but even without that there are plenty of cases of withdrawal rates internationally falling well below 4%.

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

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

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

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

I think you're mis-reading his answer.  The SAFEMAX in countries involved in the World Wars was somewhere in the neighborhood of .5% or lower.  He's saying that he's excluding those scenarios.  As such, I think this criticism is misplaced.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on November 01, 2017, 06:53:17 PM
Quote from: Wade Pfau
Thanks for organizing today, and two great questions! 1) I am concerned about 4% being too high at the present for someone without much flexibility to reduce spending after market downturns. Reasons include: our extremely low interest rates plus high stock valuations have not been tested in the US historical data; the 4% rule has not worked internationally -- only in the US and Canada but not in 18 other countries with data back to 1900; 30 years may not be long enough any more, especially for early retirees; it is hard for investors to earn the underlying index market returns net of fees

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

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

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.
Title: Re: Stop worrying about the 4% rule
Post by: sol on November 01, 2017, 07:07:47 PM
Quote from: Wade Pfau
Thanks for organizing today, and two great questions! 1) I am concerned about 4% being too high at the present for someone without much flexibility to reduce spending after market downturns. Reasons include: our extremely low interest rates plus high stock valuations have not been tested in the US historical data; the 4% rule has not worked internationally -- only in the US and Canada but not in 18 other countries with data back to 1900; 30 years may not be long enough any more, especially for early retirees; it is hard for investors to earn the underlying index market returns net of fees

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

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

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.

Sure, Wade's a raging pessimist.  By his own admission he didn't understand this topic very well when he first staked out the doomsayer position that has made his career.  I've long assumed that the collective wisdom of this forum knows twice as much about retirement planning as Wade Pfau does, and we're more responsive to individual questions too.
Title: Re: Stop worrying about the 4% rule
Post by: CanuckExpat on November 01, 2017, 08:09:22 PM
Even with noted pessimism, I'll note something in his response (emphasis mine), as ever, flexibility is key.

"For someone with flexibility and capacity to reduce spending as necessary, 4% isn't too high."

"I am concerned about 4% being too high at the present for someone without much flexibility to reduce spending after market downturns...."

"The idea that you can spend consistently from an investment portfolio for 40-50 years is pretty tough to reconcile. The only thing I can really say is to be flexible, either with the idea of cutting expenses as necessary, or of earning more income as necessary, with how things evolve over the next 40-50 years."

"everything I've done points to the idea that flexibility is a lot more important than asset allocation tweaks"

And just a general good reply, to the question advice for young adults planning for retirement:

"-Focus on Financial independence. You may or may not want to retire when the time comes, but with financial independence you will have the freedom to do what you want.
-Make sure you have a plan for how you will spend your time. Wanting to be retired is more important then just not wanting to work. You've got to do something.
-Nothing beats the old: save early and often. The needed savings rate doubles for each 10 years you wait to get started."
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on November 01, 2017, 08:20:34 PM
I think he puts that in because there's no plausible pessimistic answer for flexibility. So you have to have that caveat.

Flexibility adds so much resiliency to FIRE, it's ridiculous.
Title: Re: Stop worrying about the 4% rule
Post by: TempusFugit on November 01, 2017, 08:26:11 PM
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

Well, I'm sure their heirs will be really rich.    They evidently have retire rich as a goal, not retire young.  To each his own,  suppose. 
Title: Re: Stop worrying about the 4% rule
Post by: cerat0n1a on November 01, 2017, 10:31:36 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on November 02, 2017, 07:02:35 AM
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 &amp; housing requirements as an adult at least for a couple of years.
And couldn't you go earn more money at that point?

It seems blatantly obvious to me that if you prepare for one level of spending, and you decide in the future to drastically up that level, you may not be able to support that new, higher level.

There's a bunch of future possibilities I could oversave for.

Maybe I'll want to become a pilot and buy a plane. Maybe I'll get divorced, split half my assets, then fall in love with a broke single mother with six kids.

Should I keep working until I can cover pretty much every contingency? (Let's call it, oh, 100MM or so.)

Or should I understand that I'm quitting now at a certain level and if things change, they change?

I wouldn't assume anyone who figures FIRE out is too dumb to realise expenses in the future might change. Likely they've considered that and are saving for it anyways.

See: Herbert Derp, the most frugal Mustachian, who spends ~5k/yr, but is saving to be able to spend 50k+.

Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on November 02, 2017, 07:05:11 AM
...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. ;)
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on November 02, 2017, 07:06:46 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on November 02, 2017, 07:26:47 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: dandarc on November 02, 2017, 08:30:57 AM
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)

Title: Re: Stop worrying about the 4% rule
Post by: cerat0n1a on November 02, 2017, 08:37:00 AM
There's a bunch of future possibilities I could oversave for.

Maybe I'll get divorced, split half my assets

I think the statistics say that is a much higher probability event for the average westerner than failure of the 4% rule would be - and probably with worse financial implications.

...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. ;)

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?
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on November 02, 2017, 10:35:50 AM
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...

Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on November 02, 2017, 11:13:48 AM
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)

My point was we never talk about it from a risk to fire standpoint. People always talk about risk of failure due to running out of money but rarely do we discuss risk of failure to fire due to not retiring.
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on November 02, 2017, 04:20:55 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on November 02, 2017, 05:03:28 PM
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?
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on November 02, 2017, 05:13:26 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on November 02, 2017, 06:26:46 PM
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.

I shared a bedroom with my older brother until he left home around age 20.  Why do parents nowadays think each kid has to have his/her own room?*

*Disclosure: my kid had his own room, but he was an only child.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on November 02, 2017, 06:34:27 PM
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!   
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on November 02, 2017, 06:55:08 PM
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?

Yes, but most folks even here do not want to rely on drawing down their assets in order to generate income.  At $30k/yr, your 4% rule means you start with $750k.  It could've been a close call, even starting at 55, if you have a 2008-style sequence of returns...  of course, you made it to 65 by now and the current healthcare shenanigans are no big deal.  Still, your portfolio did dip to ~415k in that first year (before recovering to 470k) if you stayed in equities.  I know some retired folks that freaked out near the bottom and moved extra to bonds and cash, which got them to 65 but also missed out on some of the bull market.

I'm just pointing out that these are the kinds of things older folks are more likely to have experienced and are commenting from than a younger MMM crowd.  Not saying that they either group are more right or wrong.
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on November 02, 2017, 07:03:51 PM
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!

Yes I should have noted that was for a bronze plan with a $6,500 deductible (and max OOP) each (so it pays nothing up to $6500 then covers everything at 100% in theory)  So yes so far our HC needs have been pretty low even with DW's outrageously priced asthma inhalers.

So yes, pretty much a catastrophic plan, only the two of us and no dental coverage.
Title: Re: Stop worrying about the 4% rule
Post by: MrMoneySaver on November 02, 2017, 07:06:13 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on November 02, 2017, 08:32:24 PM
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. ;)

Only $100k/year? You poor fellow! How do you keep up with the latest couples Benz purchases? Do you skip Monaco every other year?
Title: Re: Stop worrying about the 4% rule
Post by: sol on November 02, 2017, 10:09:25 PM
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. 
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on November 02, 2017, 10:16:04 PM
Your points are valid, Sol, but I agree with PS. We can be better.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on November 02, 2017, 10:40:31 PM
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 :)
Title: Re: Stop worrying about the 4% rule
Post by: MrMoneySaver on November 03, 2017, 06:24:09 AM
Quote
comments sound like sour grapes

Quote
I am in a home wine making club

I see what you did there.

Anyway, my comment about the Bogleheads at parties wasn't to imply that they're boring, necessarily. It had to do with the way they threw cold water on the 35-year-old's early-retirement plans in the referenced thread.

It boils down to the very low risk tolerance of the BHs. (Which some may see as incompatible with rockin' parties.)
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on November 03, 2017, 06:53:07 AM
And that's a great forum too, but Jacob at ERExtreme beat you to the bottom on that :)

I read a thread at ERE Forums this week where Jacob posted that the 4%WR Folks were wildly optimistic and they'd be smart to shoot for 2%WR. As someone shooting for higher than 4%WR that comes off as crazy talk, but I've hung around there enough as a lurker to appreciate they are thoughtful and well intentioned folks even if we don't come to the same conclusions about FIRE. Although I am not interested in achieving ERE levels of spending despite the fact I'd be FIRE like a couple years ago. It's great to see how people live a low spend because I know I could do it as well if necessary and that adds another layer of defence to my FIRE plans.

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.

If you are thinking what about ERE shouldn't those people challenge the typical MMM types who are spending pants long-working in comparison? My answer would be hell yes! I am regularly questioning my assumptions and analyzing their impacts on myself and the people around me. One of the reasons I lurk over at ERE is to gather inputs that not the same as what I already have so that I can consider them and adjust my plans. That has been helpful for me to make changes, which have taken years off my FIRE journey.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on November 03, 2017, 07:40:54 AM
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. :)
Title: Re: Stop worrying about the 4% rule
Post by: PizzaSteve on November 03, 2017, 08:28:19 AM
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.
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).

Thank your stars for the excellent volunteer mods.  But its all good.  I accept the explanation of intent as sincere, and BH members who bash us with their own sophomoric comments will deserve the bad Karma they get.  I genuinely appretiate those who 'go for it.'

Namaste.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on November 03, 2017, 12:26:26 PM
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?
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on November 03, 2017, 12:46:35 PM
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?

Its a fluid situation .  even as retiree A i'd be cutting my spending back or trying to earn a couple extra bucks here and there.  as Retiree B i'd probably end up working an extra couple years. 

As has been talked about many many times in all of these discussions the ability to be flexible is an early retirees greatest asset be it the day after he retires or the day before he retires.

you can consistenly present both sides of this equations with a 2013 fromula too
Title: Re: Stop worrying about the 4% rule
Post by: MDM on November 03, 2017, 12:51:05 PM
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?
Based on the 4% "rule", 4% of $630K.

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.
Title: Re: Stop worrying about the 4% rule
Post by: DavidAnnArbor on November 03, 2017, 01:20:31 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on November 03, 2017, 01:28:21 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on November 03, 2017, 01:29:05 PM
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.

I must have missed it... who proposed banning anyone over anything related to this?

I'm not sure what you are talking about.
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on November 03, 2017, 01:36:58 PM
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?
Based on the 4% "rule", 4% of $630K.

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.

Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on November 03, 2017, 01:41:08 PM
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).
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on November 03, 2017, 02:13:14 PM
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?
Based on the 4% "rule", 4% of $630K.

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.

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!
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on November 03, 2017, 02:43:39 PM
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. 
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on November 03, 2017, 02:53:34 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on November 03, 2017, 03:46:11 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on November 03, 2017, 04:12:53 PM
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?
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on November 03, 2017, 04:16:45 PM
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?

Sure.  Personally since I don't have absolute control on when I die, my preferred definition is that my money lasted longer than I did.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on November 03, 2017, 04:17:32 PM
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. 

The answer is that in reality there is no inconsistency that needs to be reconciled--in reality, Retiree B's withdrawal plan clearly has better odds of succeeding than does Retiree A's.  The issue you point out arises only because of our tendency to use SWR terminology too loosely.  A given withdrawal rate (under given portfolio parameters) has a known rate of historical success, but not a known probability of future success.  You can't use the former as a proxy for the latter unless you make both of the following assumptions (neither of which is true in reality):  (i) the entire universe of possible outcomes in the future is perfectly reflected in the distribution of outcomes that have actually occurred in the past and (ii) at any given time, each of these possible outcomes has an equal likelihood of occurring.  We tend to use shorthand language (such as "success probability" in your post quoted above) that on its face appears to use historical success rates as a proxy for likelihood of future success without explicitly spelling out this caveat, but it always applies.
Title: Re: Stop worrying about the 4% rule
Post by: Eucalyptus on November 03, 2017, 04:42:56 PM
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.

I've already gone through my divorce, so at 33, my Stash will only go up from here ;-)
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on November 03, 2017, 04:56:41 PM

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.
Title: Re: Stop worrying about the 4% rule
Post by: honeyfill on November 03, 2017, 04:59:43 PM
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!!
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on November 03, 2017, 05:07:41 PM
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!

If you try and use a hammer as screwdriver you are bound to be disappointed in its effectiveness as a tool. Despite it being pretty great at banging nails into wood. The 4% Rule tells you what would have happened based on various starting dates throughout history. With only 1 input [starting portfolio value] it can by design not factor in recent market events that happen in your pre or post retirement. Your retirement will succeed or fail the 4% Rule doesn't tell you what will happen in your case.

Retiree A is aware that his poor early returns are potentially putting his FIRE success at risk. He can ride it out as planned and see where he's at after a few years or he can take corrective action early just in case he's in a starting year that fails. Retiree B knows that he's either got to FIRE into a crash and ride the upswing out or put off full retirement for a bit until the recovery is complete.

The 4% Rule did its job which was to get them both to a point where they had $1M saved after probably 10-20yrs of effort shooting for that target. Expecting the 4% Rule to solve all their problems around how to deal with the 2008 crash would be expecting too much from a simple tool. 





Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on November 03, 2017, 06:01:24 PM
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..:)
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on November 03, 2017, 06:40:32 PM
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..:)

Actually, just continuing to work a high-stress job would probably be the most dangerous thing you could do...
Title: Re: Stop worrying about the 4% rule
Post by: steveo on November 03, 2017, 06:53:18 PM

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.

I think that this is the issue. There is no evidence supporting a really low WR other than being extremely risk averse or wanting to somehow become rich in a monetary/bank balance sense.

I can understand both points of view in that I would hate for my retirement to fail and I don't really want to go back to work plus I suppose at some point I'd like to think I've got enough money to be fine forever or just to have a bank balance and go "woah".

In stating that these are psychological issues and not statistical/math based issues in relation to safe WR's.

I still think a 4% or higher WR should be really safe especially if you have some flexibility. If you are really worried about your WR I also think focussing on having some buffer in your expenses is probably a safer approach. I think the ERE approach of getting really low expenses is less robust than a MMM approach of having what I consider reasonable expenses. If your expenses are really tight and you get hit by a big expense that could throw you I think a lot more than having reasonable expenses and being able to scrimp and save on those expenses. For instance go without a car or buying some new clothes for a year or two.
Title: Re: Stop worrying about the 4% rule
Post by: Padonak on November 03, 2017, 08:07:31 PM
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?
Based on the 4% "rule", 4% of $630K.

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. The church of the 4% would set you on fire as a heretic if we lived in the middle ages.

On a serious note, I came across a spreadsheet (could have been earlier in this thread) with different safe withdrawal rate estimates for different PE10 bands. It's pretty common in science and analytics to split the population into bands or buckets based on important parameters (cyclically adjusted PE in this case). For example, the expected safe withdrawal rate for a person retiring when PE10 is in the 5-10X bucket is much higher than for somebody who retires when PE10 is in the 25-30X bucket. I'll post the spreadsheet if i find it. It's not perfect, and we can argue about the cutoff points and whether we should use PE or perhaps a combination of PE, Price to Book, Price to Sales and other metrics, but I think this approach is much more accurate than just blindly using the 4% rule regardless of where we are in the economic cycle.

Edit: found the spreadsheet and related post. I didn't check it's accuracy. I'm not affiliated with this blog.
https://earlyretirementnow.com/2017/01/25/the-ultimate-guide-to-safe-withdrawal-rates-part-7-toolbox/
Title: Re: Stop worrying about the 4% rule
Post by: sol on November 03, 2017, 08:38:21 PM
The bolded part is profound.

It's not profound, it's just math.  Math that has been discussed for pages and pages in this very thread, and a bunch of others on this forum.

If this issue is still confusing to anyone, or if it seems paradoxical or confusing, I suggest you go back to page one of this thread and start following all of the links posted here.  You've misunderstood what the 4% SWR is if it doesn't make perfect sense to you why these two retirees have different dollar amounts based on the 4% rule.

If you need more guidance than "please read the thread you're currently posting in" then allow me to suggest you spend an hour or two googling "sequence of return risk" and trying to understand why the worst year in market history never seems to happen immediately after the second worst year in market history.
Title: Re: Stop worrying about the 4% rule
Post by: Goldielocks on November 05, 2017, 04:26:43 PM
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. :)

haven't followed Ere recently,  but there is a huge difference between planning to retire early on a bare minimum expenses with no SS likely to come in future,  and no way to cut out 30% of your costs to hold out a series of bad return tears.... And planning to retire on 50k plus per year with SS part of that.
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on November 06, 2017, 04:40:07 AM
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?
Based on the 4% "rule", 4% of $630K.

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.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on November 06, 2017, 07:18:58 AM
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?
Based on the 4% "rule", 4% of $630K.

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.

This is getting a bit convoluted, but I think it was clear that the 96% probability was for 2007 with the hope that the trajectory was overwhelmingly poised for success.  With this in mind, Retiree A can decide if they want to continue with 40k + inflation, or maybe trim it back a little for a year or two to maybe 30k.  I disagree though, for Retiree A, that they would want to re-run the probabilistic outcome based on the new WR.  What could possibly be gained by adding another % probability that isn't telling you what the 4% rule was intended for anyway?

The question was more for Retiree B - do they really take such a massive haircut vs. Retiree A, or have to put in OMY(s)?
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on November 06, 2017, 07:34:25 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on November 06, 2017, 07:39:40 AM
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.

How can this be consistent with the 4% rule if Retiree B is embarking on a 30 year retirement at the end of 2008?  Also, Retiree A has the benefit of one less year of retirement to fund over Retiree B and they took out money before the decline.  The 4% rule was not designed to calculate the probability of a 6% WR that starts after a 37% decline lasting 29 years...

But if Retiree B takes a 6%WR, FIRECalc argues that Retiree B now has a 45.3% probability of sucess.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on November 06, 2017, 07:45:49 AM
If retiree B wants to spend 4% of their current stash for 30 years they have a 96% chance of success.

If retiree B wants to spend ~6.7% for 29 years (the same spending plan at retiree A at that point) they have the same odds of success as retiree A. And given the availability of an extra year of data which wasn't know to retiree A when they started on their retirement, those odds are now less than 96% for either A or B.

If retiree B wants to spend ~6.7% for 30 years (a more ambitious plan than retiree A), then B's odds of success are presumably slightly lower than A's, although likely not by a measurable amount.

Edit: based on the update, yes I agree with you, just plugging the numbers of retiree after one year of retirement have passed isn't going to provide an ideal estimate of success rate. This starts to get complex, so I'm going to start with four statements, I think we can all agree to (but let me know if you don't).

#1: I'm not sure if we have a good way to quantify the amount of change in success rate based on the new information, but we know most failures of a 4% WR strategy do result from sequence of withdrawal risk early in the retirement, so a 1/3 decline increases the likelihood that we are in one of those failure scenarios relative to the odds of being in a failure scenario when retiree A pulled the trigger.

#2: Similarly, we know that if retiree A and retiree B spend the same inflation adjusted amount as a percentage of their starting portfolio for the same number of years, their odds of success are identical.

#3: We know that adding additional years to a FIRE scenario will never increase success rates, and sometimes decrease it. (So retiree B retiring for 30 years rather than 29 assumes some, unmeasured, additional quantity of risk).

#4: We know that spending a smaller proportion of your stash (especially at high withdrawal rates like 6-7%) decreases risk. (So if retiree B retires spending the same amount as retiree A -- and hence a slightly smaller percent of assets -- they reduce their risk by some, unmeasured, additional amount).

What we don't know is the size of any of these effects. If the size of effect #3 is greater than the size of effect #4, then retiree B has slightly more risk than retiree A. If #4 is greater than #3, retiree B has slightly less risk than retiree A.

But I think points #1 and #2 explain the parts of the original scenario that people were considering someone paradoxical, or representing a flaw in the logic of the 4% rule.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on November 06, 2017, 08:06:51 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on November 06, 2017, 08:07:11 AM
If retiree B wants to spend 4% of their current stash for 30 years they have a 96% chance of success.

Although I believe it is already implicit in this shorthand statement intended for an audience well-versed in SWR methodology, in order to avoid the type of confusion that steered this thread down this path to begin with, I would explicitly note that in order for this statement to be technically correct it needs the following caveat:  "assuming that such spending plan's historical success rate is a perfect proxy for its present probability of success (which, incidentally, is not an accurate assumption)."

(Maizeman, you hung an asterisk on the 96% figure in your post two posts up but then didn't insert any footnote language, so maybe you intended to make a similar point?)

Edit:  I see Retire-Canada beat me to it and just made the same point.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on November 06, 2017, 08:16:53 AM
Big edit to my last post based on EV's update (thanks for the PM to let me know you'd added extra text).

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.
Title: Re: Stop worrying about the 4% rule
Post by: Mr Mark on November 06, 2017, 09:42:34 AM
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.

+1

I like to invoke the power of the optimism gun.
Title: Re: Stop worrying about the 4% rule
Post by: PizzaSteve on November 06, 2017, 09:49:41 AM
Big edit to my last post based on EV's update (thanks for the PM to let me know you'd added extra text).

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.
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.

In the hypothetical scenario, each retiree should evaluate their situation and either accept failure risk or decline failure risk by deciding how much to spend.  What the model may have stated as a probability years earlier is not relevant. The stock returns are in a sense memoryless, though one might make assumptions that clustered bad years raise the liklihood of recovery (which assumes good management of the economy, by the way...the steady returns are highly related to our nations good governance model...so all bets are off if we kill off our govt.).

Anyway, just my opinion.  The hypothetical A vs B example is not very useful, mathematically, because it is over reaching about what the model tells us. If does seem useful for starting a dialog about the behavior aspects of spend and withdraw  rate.  Should we stick with the stready amount throughout retirement?  If we luck out with high returns in our early years, should we spend more ? Should we rerun the numbers every year and adjust our lifestyle or hedge more and possibly over save?  Etc.  All good questions, but it is up to each person to save, spend or worry to their own level of comfort.
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on November 06, 2017, 11:43:22 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: arebelspy on November 06, 2017, 01:09:04 PM
Plenty of people believe in a WR based on market conditions. MF has a whole post on this, IIRC.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on November 06, 2017, 01:49:50 PM
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.

Quote
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. 

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.
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on November 06, 2017, 02:02:14 PM
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.

Thick but possibly useful reading for people:

https://en.wikipedia.org/wiki/Conditional_probability
Title: Re: Stop worrying about the 4% rule
Post by: Mr Mark on November 07, 2017, 02:39:23 AM
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.

I guess what you are asking is: Is there a correlation between maximum 30 year SWR and the stock market performance the year before FIRE?
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on November 07, 2017, 04:04:26 AM
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.

Quote
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. 

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.

Thanks for that, Maizeman.  The concept that "more data changes the prediction" is what I was trying to get at, but you did it much more eloquently.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on November 07, 2017, 06:55:22 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on November 07, 2017, 06:59:22 AM
So is there a consensus on how much Retiree B can spend? 

You'd have to define can more precisely to get a specific answer most people agree on.
Title: Re: Stop worrying about the 4% rule
Post by: TempusFugit on November 07, 2017, 07:53:29 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on November 07, 2017, 08:19:36 AM
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.

in the given scenario if 100% of assets were invested in VTSAX both could have withdrawn 40k per year adjsuted up at 3% per year for much higher than inflation withdrawals and been left today sitting with 1.3MM and 1.4MM ... so with the added data that has been proposed from the future in this situation it is currently further proving the safety of the 4% swr regardless of the huge hit you took in year one.  when a normal human would likely cut some spending or earn some extra income.
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on November 07, 2017, 10:52:43 AM
It is interesting to me that as a group we tend to worry about the "running out of money" type of failure. I think we see this kind of thinking because to savers are are wired that way.

Now I have family members who are broke, will never retire and the thought of ROM failure doesn't even enter their heads.... "Oh retirement, that's what that Social Security thing is for right?". Of course they are head directly for a ROM type of failure BEFORE they FIRE. A path I don't want to be on.

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.

Its a disease I tell ya..:)
Title: Re: Stop worrying about the 4% rule
Post by: Anon in Alaska on December 25, 2017, 09:18:41 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: matchewed on December 26, 2017, 07:25:24 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: TempusFugit on December 26, 2017, 08:17:47 AM
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. 

As a practical matter, monthly withdrawals would probably be difficult, since things like dividend payments are quarterly or annual.  It would depend upon the investment vehicle in which your money was stashed. 
Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on December 26, 2017, 09:26:17 AM
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.

You are correct.  You will get a difference.  If the market is going up, it will be in your favor.  If down, then not. 

The thing that would gum it up would be transaction costs.   So as long as they aren't odious, all should be well.

Dividends, that someone else mentioned, aren't a problem.  You'll get more of them by having more money in the market longer.
Title: Re: Stop worrying about the 4% rule
Post by: Anon in Alaska on December 27, 2017, 06:19:25 AM
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.

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.

Flexible is good. Earning money for me until I need it is also good.
Title: Re: Stop worrying about the 4% rule
Post by: Anon in Alaska on December 27, 2017, 06:32:07 AM
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. 


Lets say I'm earning 7% per year. If I keep my money invested for an extra 0-12 (mean 6) months than I'm going to earn an extra 3.5% on that 4% a year I'm spending. (The market isn't that smooth of course, I'm simplifying.) Suppose I had $500,000. I retire, withdraw the $20,000 I need for the first year, and at the end of that year I have $513,600 (480,000 x 1.07). If I keep that $20,000 invested until I need it, and draw it out once a month, I'm going to have an extra $700 at the end of the year (0.07/2 x 20,000)). My investments will have earned $34,300, not $33,600. Why wouldn't I want this?

Oh sure if the market is going down I'll be a little worse off but you can't time the market and it goes up more than it goes down, so this should work most of the time, right?

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.

Title: Re: Stop worrying about the 4% rule
Post by: matchewed on December 27, 2017, 06:42:46 AM
Because a $400 difference in investment return over the course of a year is indistinguishable from noise. It's not about wanting it, the statement was that you probably wouldn't notice a difference. So more effort for an indistinguishable from normal fluctuation gain doesn't seem like something that is a large enough impact to chase.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on December 27, 2017, 10:07:58 AM
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.

Yeah, I don't see why transaction cost should be a barrier. Example:

If you have $100k (trailing 3 month average) combined between Merrill Edge and Bank of America - you get 100 free stock or ETF trades every month and zero fees.  Put your money in VTI (or whatever ETFs you want).

Withdrawing monthly costs nothing.

Hell, I could make my withdrawals 3 times a DAY and pay nothing for transaction costs.
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on December 27, 2017, 10:52:39 AM
It's not the transaction costs, it's the hassle factor.  FIRE people get lazy quickly.  But if it's worth the hassle to you, knock yourself out.

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.
Title: Re: Stop worrying about the 4% rule
Post by: Livewell on December 27, 2017, 03:27:56 PM
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.


I look at this as an experiment to prove out your risk profile.  Conservative and you’ll want to bake in every possibility  and spend as little as possible.  I think there is a danger in doing this.  Not that saving and planning is bad, they are required, but at some point you have to trust that things will work out. 

For my journey, first it was accepting that my target needed to be higher because I preferred to be married and I needed to compromise with my wife!  That was tough because it’s added years to my career.  However those years have been much better than I thought and after much thought I’m fine with 4.5% because we do spend a decent amount (which could be cut back) and we do live in a HCOL area (and can relocate if needed).

The point is all my initial worrying has proven unnecessary, and while I am not yet FIRE, I can see why it’s likely to be just fine later.  There is a point of over engineering with this stuff, and it’s a good thing to challenge yourself around that every so often.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on December 27, 2017, 11:19:49 PM
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.

OK, I cannot resist.  If your strategy hinges on such a negligible advantage, then you are working way too hard.

Honestly, on a forum like Bogleheads or ER.org, you'd be laughed at for needing to sit in front of your computer so much to squeeze out such a small gain.  And, as others have pointed out, it is not always a straightforward win - it's not like the market is linear and you just do this for the first few years.  In order to benefit from the market average, you need to put in 30 years...  So yes, if it is worth it to you to try to make more transactions and ultimately benefit from the added tax paperwork and playing this game, then go for it.  It neither sounds fun nor educational, so I'll stick to annual withdrawals and enjoy the added free time to peruse optimal health or business opportunities.

Ultimately, as human beings, time is the final limiting factor.  Don't trade it away for vanishing gains.
Title: Re: Stop worrying about the 4% rule
Post by: Roothy on December 28, 2017, 03:47:01 PM
Most places will let you automatically withdraw a fixed amount every month, so no need for it to be a hassle.  For an extra few hundred bucks a year, absolutely worth it.  I certainly plan to do this. 
Title: Re: Stop worrying about the 4% rule
Post by: Roothy on December 28, 2017, 03:53:38 PM
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.

And as for whether anyone has done this math, earlyretirementnow has: https://earlyretirementnow.com/2017/01/25/the-ultimate-guide-to-safe-withdrawal-rates-part-7-toolbox/

Their version of the Trinity Study not only has withdrawals happening monthly,  but their historical returns are also monthly.
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on December 28, 2017, 07:17:25 PM
Regarding monthly withdrawals.

There are entire threads on this forum devoted to making a few hundred a year on CC bonuses.  Some people here enjoy this type of thing, its what differentiates MMM from Bogleheads.  So I see no reason to criticize this approach for that particular reason.

Essentially its the same as lump sum vs dollar cost averaging.  Lump sum is better, because equities go up more often than they go down.  I can see this strategy increasing wealth in the "good times", maybe working OK in period of high inflation, but likely working in reverse for periods of fast, temporary, 1-3 year, down turns. 

I think its important to ask a question though.  Is the rate of portfolio failures the most important thing to consider in withdrawal strategy.  Example(s), a strategy with a 10% failure rate, in which half of those failures occur more than 10 years before predicted life expectancy.  A withdraw strategy with 15% failure, but there are no failures before 2 years of projected life expectancy.  Which is the stronger strategy? 

IMO It's just as important to see how (and by how much) a portfolio & WR fails, as it is to see how often is fails.
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on December 28, 2017, 07:31:23 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on December 28, 2017, 07:39:22 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on December 28, 2017, 08:02:53 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on December 28, 2017, 08:25:02 PM
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.

Good question!

If all of my historical failures are only coming up short 10-50K, I'm much more confident in my ability to make minor course corrections to rectify minor short falls as I see them materializing.  If I have several failures coming up multiple hundreds of thousands short, it becomes more difficult to correct. I would also argue that it becomes increasingly difficult to correct for shortfalls(at least through income) after a certain age.

There is a notable difference between 30-40 years and perpetual, almost nonexistent at 80 years vs perpetual.

And I think it's shortsighted to plan based on current life expectancy. They keep rising at least for the healthy non drug users.

Touche.  However, keep in mind, making it to 80-90 is lucky (or skilled) enough.  Making to that age and still enjoying a reasonable active and healthy life, much less likely.  Everyone has an anecdote of their great aunt who is 100 and still walks miles to the grocery store every day; but that is a far, far outlier.  I hope its you and I, but it probably wont be, so I'm not willing to risk quality life now on that assumption.  Much like the likelihood of dying vs running out of money graphs up thread show.
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on December 29, 2017, 05:39:17 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Daisy on December 29, 2017, 10:17:56 AM
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".
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on December 29, 2017, 10:28:25 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Anon in Alaska on December 30, 2017, 05:44:05 AM

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.

If I'm earning 7%, then I'm already in stocks. I'm 51, I don't have time to take the non-risky strategy. If it fails, it fails and I get a part time job or start collecting Social Security early. If it doesn't fail then I get to retire before I'm dead.
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on December 30, 2017, 05:55:31 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on December 30, 2017, 08:41:52 AM
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?
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on December 30, 2017, 09:38:10 AM
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?

Oh yeah I know we're going to have way more than we need. We aren't counting the govt or inheritances. So we could likely quit a couple years earlier if we could quantify these 2 things and know around what we could expect. But I can see ssa and Medicare being done away with for the wealthy or those like around here who have large staches.

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.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on December 30, 2017, 09:54:40 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on December 30, 2017, 10:22:07 AM
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!
Title: Re: Stop worrying about the 4% rule
Post by: PizzaSteve on January 01, 2018, 09:19:55 AM
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!
Its all a philosophical perspective.

If we sincerely believe that working and living your life under our current circumstances is 'losing/wasting a year of your life' (regardless of our financial status) then we should actually consider quitting immediately IMHO. 

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. 

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. 

Dismissing all those choices as wasted time makes me somewhat sad for that person.  It comes accross as a person who would be dissatisfied with their life regardless of net worth.  Anything short of some imagined perfect FIRD life is wasted...sort of like the 'princess syndrome' likeon those Bridezilla TV shows.  These brides so obsessed with planning the perfect wedding that they forget to enjoy the moment, love their spouse, contemplate married life, appretiate their guests, etc.

Working a job should be what you chose to do and the income should be appretiated for what it is.  I think it is disrespectful to criticize those who work past 4% as wasting time.

PS, that point is meant to encourge gratitude in rhetoric, not to encourge over saving.  The encouragement to FIRE once one has enough is good work.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on January 01, 2018, 09:55:36 AM
I think it is disrespectful to criticize thise who work past 4% as wasting time.

(https://farm4.staticflickr.com/3712/32600486490_6e61a470fb_b.jpg)

I think calling out OMY syndrome is one of the great public services of this site along with the simple math behind the 4% rule, etc... People are programmed almost from birth to take their place on the pointy end of the economic plow and generate financial value for society. To even think a person subjected to decades of what is effectively mind control and programming is making a rational choice to keep working is a suspect proposition in my mind. At the very least pointing out the opportunity to stop working at very safe levels of risk and potentially saving someone from giving up some of their precious remaining time on the planet to work is not unreasonable on this site where face punches are given for all sorts of things.

It's like the prisoner who can't leave their cell despite the door being unlocked and ajar. If you've been at the coal face for many decades do you even have the perspective to appreciate what you are giving up?

For those of us who are not retiring in their 30's it's even more important to actually take the leap to FIRE and see what's on the other side. Let's just assume there is some awesome stuff to do beyond working trading those next few years for more money past a certain point makes less and less sense.

We basically only talk about the risk of running out of money in retirement, but there a bunch more likely risks that working longer does not mitigate and in most cases exacerbates:

- poor health [sedentary computer work is the cigarette of our generation]
- damage relationships [the journal section highlights the impact of a divorce just as you are reaching the finish line]
- dying earlier than you expected [I love Maizeman's charts for illustrating the risk of dying vs. running out of money]

Ultimately as long as it's not mean spirited or cruel having your spending/investing/retirement plan choices critiqued is a primary focus of this forum and one that I appreciate a lot.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on January 01, 2018, 02:39:01 PM
  I think it is disrespectful to criticize those who work past 4% as wasting time.

And I think it's incredibly disrespectful to try to stop honest debate and criticism of your positions when participating in a public discussion forum. It's also intellectually dishonest.

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 )
Title: Re: Stop worrying about the 4% rule
Post by: sol on January 01, 2018, 02:55:40 PM
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. 
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on January 01, 2018, 02:58:22 PM
A happiness/fulfillment thread may be best to continue this particular discussion.  However, from a 4% rule standpoint, it's important for a causal or new reader to understand; working past 25% expenses has sigmoid function (https://en.wikipedia.org/wiki/Sigmoid_function) diminishing returns from a monetary standpoint.

From a happiness, personal fulfillment, or even "keeping score" standpoint, arguments can be made to continue work.  Heck, many people thrive in more controlled daily environments, there is nothing inherently wrong with that personality.  I would caution though, if you have 25X expenses (I would even argue basic necessity expenses), ask this question.  Would you go to work for free?  Not some modified form of your job, exactly what you do now. 

If the answer to that question is "no"; my (nondebating) opinion... I think making some changes in life are in order.  That may mean trying to change your current job, getting a new one, or venturing into something more self-directed.   Life is short, time on earth is scarce, your money(at this level) is not. 

I also wholeheartedly agree this forum needs to provide a counterpoint to the fear based conditioning @ Retire-Canada has pointed out above.



Title: Re: Stop worrying about the 4% rule
Post by: nereo on January 02, 2018, 10:33:12 AM
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.
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.

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.

@ PizzaSteve -
I think what's left me scratching my head is where you say that you don't even want to debate or discuss points being made. Debate is a prime reason I post here and I suspect that's true for many others. I'm not afraid to admit that I've altered my initial opinion and on occasion even had my initial 'facts' been proven wrong by a few posters here.  It reduces my confirmation bias and has helped me learn a great deal. Other times I've learned a great deal about how others outside my field of science are misinterpreting information, which is valuable information to have because it shows where communication has broken down.

I speak of course of this portion of your signature:
Quote
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.

Sure, if someone calls me an asshat* I do my best to ignore and move on. But if they're giving me a well reasoned and researched counter-opinion, i'm far more likely to pay attention.

*interestingly, one person who call me an asshat in one thread has also provided me with several detailed responses to questions in other threads.  Just one of many reasons why I try not to use the "ignore" function unless the person is a troll thru-and-thru.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on January 02, 2018, 10:34:08 AM
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.

So either participate in the discussion or just lurk. Nobody is forcing you to post and run. You seem to want your cake and eat it too. That's bad manners.

As an example there is a FI forum that I read, but for various reasons don't want to get into shit with people there so I don't sign in to an account there and I just read content that interests me. When I see something I don't agree with or want to comment on there is no post/reply button since I am not signed in and that reminds I am just a lurker.

Title: Re: Stop worrying about the 4% rule
Post by: sol on January 02, 2018, 10:38:45 AM
Here you are talking about me in public, yet again, after i asked you not to, I thought somewhat politely.

I talk to you because I want you to be an active and involved member of the community.  You clearly have a lot to say.  Please say it!

But with that privilege comes the responsibility to weather criticism of your ideas.  When I post the forum I fully expect someone out there will think me a moron, and post a rebuttal.  Great!  I can ignore it, or I can defend my ideas.  What I cannot do is try to belittle and shame anyone in an attempt to prevent them from doing the same thing that I am doing.  Because I can post, you can post.  Because I express opinions, I have to accept that other people are allowed (encouraged!) to express their differing opinions.

Consider adopting this same kind of reciprocity.  By virtue of your very participation in the forum, I don't think you get to tell anyone else what they can or cannot say.  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." 
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on January 02, 2018, 10:44:46 AM
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."

Agreed it's fucking ludicrous to say "I'm going post why you are wrong or I disagree, but please don't quote me or reply with why you disagree. My post is that last damn word on the topic." ;)

Title: Re: Stop worrying about the 4% rule
Post by: PizzaSteve on January 02, 2018, 10:52:55 AM
removed as off topic...feel free to clean up thread of off topic posts.  i feel it is for the best of the thread in general.
Title: Re: Stop worrying about the 4% rule
Post by: brooklynguy on January 02, 2018, 10:56:36 AM
But I get it...you successfully shut me up.  I will go away.

I don't think you do get it, because this is the polar opposite of the point that was made.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on January 02, 2018, 10:58:23 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on January 02, 2018, 11:29:55 AM
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.

yep dont know how you can read everything posted above and get that you should shutup.  Maybe i should post some of the PM's i've received that go deeply into personal attacks.  often followed by a PM stating to ignore it b/c you're leaving the site.

Participate and have fun conversations with very intelligent people who see the world differently and be open to changing your view - i'm very hard headed but have changed many of my views on countless things here. 

As @nereo said debate is one of the reasons many choose to frequent these forums.  B/c it may alter our view points, or allow us to defend a view the common cattle think in the US cant grasp without more indepth and thought out data.   
Title: Re: Stop worrying about the 4% rule
Post by: sol on January 02, 2018, 12:22:37 PM
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.

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.

Please elaborate!  I welcome the scrutiny.

Technically, I think it was TomTX who called you out, this time.  I responded to him, not you, and then you jumped on me.  Which is your right, but I think it's inaccurate to label me as the instigator this time.

(Please note this is also not an attempt to shut you up, nor a personal attack.)
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on January 02, 2018, 12:24:42 PM
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.

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.

yet again you completely missed the point.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on January 02, 2018, 12:25:35 PM
To say I started the drama is false.

I didn't say you started this particular incident in the longer saga that is your odd relationship with participating in this forum. I said you are creating the drama...in other words you are the root cause of the stuff that seems to make you unhappy. That also means you can change the situation.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on January 05, 2018, 04:44:34 PM
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.

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.

Nope.  Not sol.

I made a comment based on your opinion expressed, using the style you expressed it in - and aiming at your ridiculous "I get the last word!!!1111" signature block.

Your response was disingenuous and inaccurate. Your .sig doesn't ask people to avoid personal attacks, it tells people not to argue the substance you put forth.

Even biblical scripture gets debated, PizzaSteve.

If you didn't want to debate, you would let others' opinions stand when they respond to something you post. You get your say, they get theirs. But (as demonstrated in this thread) you seem incapable of doing so. Which is hypocritical. Which is what I pointed out.

Deleting all your posts in a huff post-facto doesn't count, btw.
Title: Re: Stop worrying about the 4% rule
Post by: Mr. Green on January 10, 2018, 08:10:39 AM
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. 

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. 
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."
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on January 11, 2018, 08:26:10 AM
"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.

Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on January 11, 2018, 08:39:01 AM
"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. 
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on January 11, 2018, 08:33:55 PM
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.

So... This article comments 4.2% is a historical safemax; then states WR can be increased by diversifying asset classes.  It also states 5-5.5% probably wont work in a high CAPE environment.  This information leads you to believe OMY is needed at a 4% WR?   

Would you care to share your logic regarding 4% not being enough based on this information? 
Title: Re: Stop worrying about the 4% rule
Post by: ysette9 on January 11, 2018, 08:59:38 PM
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/
Title: Re: Stop worrying about the 4% rule
Post by: steveo on January 11, 2018, 11:05:40 PM
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 also think that it's a good idea to have a decent amount of bonds in your portfolio to draw down from if the stock market crashes. If you have say a 1 million portfolio and you live off 40k per year. Just say the market crashes but you have 300k in bonds. Just say you also adjust and live off 30k worth of bonds + any dividends or interest that you obtain each year from your portfolio. That gives you a staying power of 10 years to wait until the market goes back up. That all also assumes that you don't go and get a part time job or whatever.

I get wanting to have more money and feel safer but there are alternatives and stating that you need greater than 25 times your expenses is to me not rational.
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on January 12, 2018, 04:22:53 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on January 12, 2018, 04:34:21 AM
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 don't think that this is true. I think it's correct if you are maintaining a 70/30 allocation over the course or your retirement but not if you are using a withdrawal plan based off McClung's analysis. I intend to drawdown as per McClung's analysis with a higher equity allocation than he recommends.

Even ignoring that analysis I think having the bonds and using them to get you through the first 10 years will give you a higher chance of portfolio success.

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.
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on January 12, 2018, 05:03:18 AM
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/

The calculator is based on Kitces' 0.77 correlation between earnings yield (inverse of CAPE 10) and forward 10-year returns.  It's been 25+ years since I knew anything about statistics, but I think I remember that to calculate a valid correlation coefficient, you need independent data samples.  It seems very likely that there is quite a bit of autocorrelation between all of the data points within one business cycle.  Someone who remembers statistics better than I do can correct me if I'm wrong, but if Kitces used a time interval that is any shorter than a complete business cycle, I'm thinking the 0.77 number is suspect.

The Kitces graph in the mad Fientist article only covers somewhere between four and six business cycles, depending on how you count the peaks, thus it is based on a pretty small sample size.  And the article doesn't address all the questions that have been raised about whether CAPE still works the same way it did 30+ years ago.  There is no denying a relationship between CAPE earnings yield and SWR, at least up through the 1980s, but it has been pretty loose at times, it's based on fairly scant data (from a statistical point of view), and by predicting the future we are extrapolating beyond the data set that was used to construct the model.  So I would be inclined to take the calculator results with a grain of salt.

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.  Within the modern history of US financial markets, there have been four secular bull markets (1920s, 1940s-1960s, 1980s-1990s, 2009-?) and three secular bear markets (1930s, 1970s, and 2000s).  While these cycles share some broad common themes, they have many substantial differences also (e.g., high inflation was the hallmark of the 1970s secular bear, whereas the 2000's featured low inflation and the Great Depression actually had deflation).  I don't think we can take this data set and say "CAPE is 32, therefore your SWR should be 3.5."  What I think we can say is something like: "Markets have been going up for a while, we've been making new highs for the last few years, and valuations are lofty by historical standards, therefore you probably should build in a few safety buffers.  You'll have to decide for yourself how big that buffer should be, and you won't know whether it was enough (or too much) for at least a decade.  Sorry, but that's the best we can do."

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.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on January 12, 2018, 05:09:34 AM
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.

Agreed. 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)
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on January 12, 2018, 05:12:58 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on January 12, 2018, 05:54:31 AM
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%.
Title: Re: Stop worrying about the 4% rule
Post by: cerat0n1a on January 12, 2018, 06:07:42 AM
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. 

Exactly right. That's why these discussions sometimes seem a bit like arguing about how any angels can dance on the head of a pin. The reality is that that no-one is going to withdraw exactly a certain percentage per year - there's always going to be some one-off costs that have to budgeted for - house repairs, replacement of cars, computers, household items etc. and always a certain amount of flexibility in the timing of some spending. Even if your initial carefully calculated 3.497% (or whatever) rate is 100% safe through the historical record, that doesn't give you a cast iron guarantee about the future.
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on January 12, 2018, 06:08:05 AM
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%.

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 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.
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on January 12, 2018, 06:29:08 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on January 12, 2018, 06:41:06 AM
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.

there is good small cap data all the way back - i know about tylers' but it doesnt test far enough.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on January 12, 2018, 07:48:55 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: ysette9 on January 12, 2018, 08:24:35 AM
I personally think the CAPE calculator on the Mad Fientist site is too pessimistic for us crowd, as we have multiple layers of safety such as the ability to do part-time work, cut back spending, and SS later on. I really like the ideas of the reverse glide path asset allocation and plan on doing that for my own safety. Like he said, it is really the first ten years we need to worry about for sequence of returns. If I can have a successful first decade by hook or by crook (or by part-time work or more bonds or whatever), then I am home free.
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on January 12, 2018, 09:59:22 AM
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%

Yes, in cFIREsim 100% over 40 years gives 3.3%
Title: Re: Stop worrying about the 4% rule
Post by: CanuckExpat on January 12, 2018, 01:29:46 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on January 12, 2018, 02:16:22 PM
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.

yep like i said its a good indicator - but doesnt mean you have to work longer - if i was 50 and hit it today i'd probably be more likely to quit than hitting it at 25 - i may work OMY even with CAPE today - there is alot of differences in those 2 scenarios. 
Title: Re: Stop worrying about the 4% rule
Post by: steveo on January 12, 2018, 03:09:19 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on January 12, 2018, 03:11:51 PM
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.

I agree with this as well. I am not sure when I'm retiring but 5% is my initial first point. I may go to 4% but I don't feel it's essential as I have buffers.
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on January 12, 2018, 04:46:01 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on January 12, 2018, 05:16:31 PM
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.

No, you missed my point.

Most people here are willing to make a little cash on the side during retirement via a side gig or part time job if the market crashes.  Heck, many won't be able to help themselves from earning money and gaining the wrath of the IRP.

Mustachians are resilient. They take control of their money. They're not going to sit passively by for a decade watching their portfolio melt away and do nothing.

Even $5k a year during down years solves almost all the (tiny, rare) issues with a 4% SWR.

Last year we made over $5k (net) in credit card and bank account signups. The library walking distance from my house always has part-time job openings - either shelving books or working the circulation desk. Did both in High School. NBD.  I can do handyman stuff via Craigslist or whatever. I can write - better than some of this drek I see sold as Amazon e-books.

There are so many opportunities, that a Badass Mustachian will be fine even in the stagflation era with a 4% SWR.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on January 12, 2018, 07:19:05 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on January 12, 2018, 07:22:21 PM
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?
Title: Re: Stop worrying about the 4% rule
Post by: ysette9 on January 12, 2018, 08:45:50 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on January 12, 2018, 08:49:13 PM
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.

I said it and I completely understand what you are stating. I am getting closer to that figure and I am still not sure what to do. I've also hit or pretty close to hit our FI number if we sell the house and relocate. My wife is also now okay with moving however she wants to live where we are for 10 years prior to moving and that means I probably have to get to that 5% figure without selling the house.
Title: Re: Stop worrying about the 4% rule
Post by: ysette9 on January 12, 2018, 08:51:18 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: CanuckExpat on January 12, 2018, 08:58:49 PM
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.

If you are worried about unexpected inflation and want to hold bonds, you can do that with inflation protected bonds (TIPS etc in the USA).
Title: Re: Stop worrying about the 4% rule
Post by: CanuckExpat on January 12, 2018, 09:03:09 PM
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!
"

?
Title: Re: Stop worrying about the 4% rule
Post by: steveo on January 12, 2018, 09:05:36 PM
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?

These are McClung's rules which he validated as increasing your chances of retirement success if we define success as your portfolio sustaining a withdrawal rate for 30 years (or more):-

1. Calculate your withdrawal rate and withdraw that amount. This is a complex figure but has a default starting rate of 5%. It is calculated by a band around the 5% mark so you don't go too high if the portfolio goes nuts but also decreases your withdrawals early in retirement. It also takes into account your mortality rate so it increases your WR as you age. Truthfully I haven't gone into this in too much detail.
2. Withdraw from your portfolio enough cash to sustain you for 1 year. This comes from your bonds if you have them.
3. Sell your stocks by 20% (I think) if your stocks go to 120% including inflation of their initial value. Don't sell your stocks at any other time.

=> This actually increases your chances of portfolio success much more than retaining your existing portfolio allocation. I think all the comments on 100% stocks do not take this into account as McClung proved increasing your stock allocation decreases your chance of portfolio success. I think for 30 years McClung stated a 50/50 bond/stock allocation was the best bet.

My plan is different to McClung's and I'm still working through it. Assuming I get to 5% then I intend to work till the end of the financial year to hopefully get my full bonus and then possibly go part time until I get to 4% or I just can't be stuffed.

1. If I'm working part time I won't need to withdraw so I won't.
2. Assuming I'm not working I intend to withdraw probably 5%.
3. I'll draw down my bonds at whatever rate is required taking into account dividends/interest payments that won't be reinvested throughout the year.
4. If I have a run-up of 20% of stock valuation I will probably sell 10% of my stocks and put that into cash or bonds.
5. If all my bonds/cash run out I'll sell stocks or sell the house. This is my big buffer. I honestly think I am aiming for 800k but selling the house could net about 500k. The only issue is moving location.

This also shows how stupid a 4% rate is and how conservative I am really being because I will also collect social security to bail me out of a disaster situation. I also expect I will inherit a lot of money.

Everytime I work through the figures or discuss this for me personally going below a 5% WR is overkill.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on January 12, 2018, 09:07:51 PM
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.

This is the interesting point because rationally I think I'm good to go and I have problems understanding the internet argument to get below 4%. In stating that I'm not doing this in reality. It's the psychological part that is tougher. I also 3 kids one of who is 7 but that is still an excuse and me being soft.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on January 12, 2018, 09:08:52 PM
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!
"

?

That is it.
Title: Re: Stop worrying about the 4% rule
Post by: ysette9 on January 12, 2018, 09:11:16 PM
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
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on January 12, 2018, 09:45:51 PM
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.

No. My plan is to get to 5%WR and then start the process of FIREing.

1. I'm 100% stocks currently
2. start buying bonds
3. I do contract work so talk to my clients and figure out a transition plan with them
4. during the time I'm working out how to end my current work obligations I'm guessing I'll get closer to 4.5%WR
5. pull the plug somewhere between 4% - 4.5%WR

Note that I am currently only working 24hrs over 3 days a week so I've already begun winding down towards FIRE. My GF/SO has to work FT another 8-9yrs at this point before she can FIRE so while I don't want work a ton extra - no OMYing! I'm also not trying to stop working at my absolute upper max.....which is probably 5%WR.

By downshifting to PT work I've taken a lot of pressure/stress of working off.

I haven't figured out my WR plan yet, but I am thinking about it. I don't like the idea of holding a fixed % of bonds. I'd prefer to say be 100% stocks + $200K bonds. The bonds would be used to deal with an early sequence of returns risk and if that doesn't materialize they can just be out run by stocks and become a smaller and smaller part of my portfolio. I don't need a constant inflation adjusted income from my portfolio so I can incorporate some sort of variable WR mechanism. I need to work out the details further.

The recent acceleration in my portfolio has made me put this issue on the front burner as I may hit 5%WR faster than I thought and I need to determine how/when I'll start buying bonds and how I will WR my money.

Coming back to this thread's topic I would consider it a personal FIRE failure if I was working a significant amount [more than 25% FT] once I hit 4%WR. I see OMYing as one of the more insidious risks of FIRE because decades of societal programming make it very to justify one of many fears to keep us at our desks. There is always a reason you can give for not quitting. I'm excited to FIRE and start the decompression/healing process.
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on January 13, 2018, 07:56:05 AM
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.

Yes I've read it.  It's interesting, and Prime harvesting will back test well considering the types of secular bears we've seen in the past.  I'm a firm believer of NOT having a static portfolio and have preached that ideology on multiple threads in this forum for awhile now.   I think phase of life (ie personal goals, where you are at in FIRE process, etc) and macro economic conditions should cause one to modify portfolios over time.

Prime harvesting takes both of these factors into consideration, so I like the idea, but he also limits assets classes to a standard stock/bond; which I do not like.  I wasn't referring to stocks in my previous statement.
Title: Re: Stop worrying about the 4% rule
Post by: Eric on January 15, 2018, 04:02:16 PM
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.

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.  Merry Christmas, btw.

Quote from: Trinity Study Authors
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.

Title: Re: Stop worrying about the 4% rule
Post by: Eric on January 15, 2018, 04:03:53 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: DavidAnnArbor on January 15, 2018, 04:33:49 PM
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.

Yes me too.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on January 15, 2018, 10:24:35 PM
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.

Quote
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.
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on January 16, 2018, 04:51:19 AM
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.

Quote
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.

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.
Title: Re: Stop worrying about the 4% rule
Post by: Eric on January 16, 2018, 12:30:03 PM
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.

Quote
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.

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.
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on January 16, 2018, 01:28:15 PM
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.

Quote
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.

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.
Title: Re: Stop worrying about the 4% rule
Post by: Eric on January 16, 2018, 03:37:03 PM
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.

And that's why we have a person asking about how it would look if they did monthly withdrawals, and multiple people replying without even realizing that the Trinity Study is already monthly.  Because everyone is planning their retirement around it, but no one reads it.  That alone is fucking insane. 

So while yes, cFIREsim does the same thing, if you don't understand what that thing is, then it's not helpful.  You'll notice there's no explanation of the withdrawal methods on cFIREsim.  You have to look up that information separately.  Might as well actually read about why that withdrawal method exists on cFIREsim.
Title: Re: Stop worrying about the 4% rule
Post by: dougules on January 19, 2018, 10:54:11 AM
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

Interesting idea.  That almost deserves its own thread.
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on January 19, 2018, 06:08:06 PM
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

The diving board analogy is good...but it does seem like you're worrying about the 4% rule.

The 4% rule is good, as long as:
1. You are invested largely in productive assets.
2. You can be flexible if need be.
3. Your expense estimate is good.

1 and 2 are easy to get right. I personally find 3 to be the tricky one. Such a large part of our expenses is somewhat out of our control. For example:

http://www.mrmoneymustache.com/2017/11/05/when-your-shitty-health-insurance-doubles-in-price/

The Trinity study had expenses rising by inflation. I know that my own expenses have risen substantially more than inflation over the last ten years. I believe I must include for that same rate of increase in my plan, at least up to Medicare/Social Security age. I modeled my more-than-inflation expense increase in cFIREsim using a 95% success rate, the same success rate as the Trinity study. This gives me my number, which is now a bit more than 25 times current expenses. Am I still following the 4% rule? Don’t care. This exercise gave me the confidence I needed to pull the plug. And I did.
Title: Re: Stop worrying about the 4% rule
Post by: Padonak on January 19, 2018, 07:14:38 PM
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.

Examples of safety nets:

Bonds and other fixed income assets in your portfolio. By definition, you start with 25X your annual expenses if you use the 4% rule. If you have 20% in Bonds + CDs + Cash, you can just keep spending that part of your portfolio if tomorrow the stock market crashes 50% or more. E.g. your fixed income part becomes 40% in this case, keep spending it until it goes back to 20%. By that time chances are the stocks will have recovered from the crash. This assumes that bond and stock prices don't fall at the same time which is unlikely over longer time periods.

Cutting discretionary expenses. For example, 1/4 of your planned expenses include travel, luxuries and other discretionary expenses. If the market drops significantly, you just cut back that 1/4 for as long as you have to and boom, your are spending at 3% of the initial retirement amount. The 3% rule is pretty much bullet proof. OK, you won't be flying to Ibiza popping bottles or whatever, just hike for free locally and go to Planet Fitness instead, it's better for your health anyway.

Being able to go back to work or do temporary jobs or start a little business, e.g teach English online for $20 per hour. This option has been discussed a lot on the forum. The main point here is that you don't actually need that much money to beef up your savings and get back on track. Therefore, it doesn't have to be a high paying job or even a full time job. It's not that hard to find either.

Healthcare costs safety nets: there's Obamacare, Medicaid etc. at least for now. There is Medicare for those over 65. There are more liberal states which are likely to offer free or affordable health care options to lower income people regardless of federal rules. There are countries with free or cheaper health care where you may qualify for citizenship by ancestry, or your spouse may be from one of those countries. Nobody is 100% safe when it comes to health care and its costs, but my point is it's not as scary as it seems if you are willing to explore different options.

Your pensions, social security etc. While I wouldn't include social security or small pensions in retirement calculations, especially for younger retirees who may have their benefits reduced by the time they are old enough to use them, It's something that will likely provide some extra safety when you are older.

Worst case scenarios and additional safety nets

Let's say your portfolio fails and all those previous safety nets somehow fail as well which is very, very unlikely. Two additional options which may be somewhat unethical for those who have money, but if you are broke they are sill available for you.
-Government benefits. It sucks having to rely on them, but they are available and a lot of people use them. It's not like people starve to death out there, at least not in the US. Google videos and blog posts about cooking at home on food stamps budget, for example.
-Credit cards and other loans. What's your total credit limit? If you, like many Mustachians, have been opening cards to get sign up bonuses, it's probably in the high 5 - low 6 figures. That's your last safety net, my friend. Of course, it's unethical to borrow money you can't pay back, but if you are broke there is that option. You'll pay them back if you get back on your feet.

I would never use the last options unless I really had to. I think it would be unethical to do so. The point I am trying to make is that even if you somehow completely screw up your retirement, you are not going to die on the street. There are always options.



Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on January 19, 2018, 07:20:28 PM
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.

People need to remember there are lots of FIRE failure modes that are not mitigated by more and more money. In fact a number of these failure modes are exacerbated by working more to hit a sub-4%WR, which ends up being self-defeating. You won't run out of money, but you'll die earlier than you expected or end up without a spouse or family to spend time with in FIRE.
Title: Re: Stop worrying about the 4% rule
Post by: dandarc on January 22, 2018, 06:23:09 AM
For even more discussion on Margin of Safety - MMM himself:

http://www.mrmoneymustache.com/2011/10/17/its-all-about-the-safety-margin/ (http://www.mrmoneymustache.com/2011/10/17/its-all-about-the-safety-margin/)
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on January 22, 2018, 09:27:03 AM

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?

A true anti-fragile plan would have income and/or spending reduction abilities coming  from a source unrelated to stash. Like hobby income, or housing for labor situations available, growing your own food as a hobby, ect. It's better because these other plans would be wholey or partially non-correlated to stash income AND you haven't hit a point of seriously diminishing returns on the other options.

Personally, I'd rather have a 5%WR, + 25% of spending covered with scalable hobby income + ability to cut spending 10% with a garden and chickens, + 25% of spending for taking on a tenant if  wanted, + ability to cut spending by 25% for a couple of years (ie luxuries or deffer replacement or large ticket items).  This is far superior to a 3.5% WR, IMO
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on January 28, 2018, 07:08:25 PM
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?

The bolded portion of your post is the critical question we have to ask ourselves. I deleted the rest because it goes right back to, what I think is a misguided notion, that money beyond a reasonable point is the main risk of FIRE failure. Once you are down to optimizing a percent here or there with your money and historical success rates I would suggest it's time to admit that you've won as far as money is concerned so congrats, but to also realize that money is just a small portion of what a successful FIRE is built from. Your mental and physical health as well as the health of your personal relationships are key to that success and far more important to your FIRE than going from 96% cFIREsim success rate to 97%. Some folks will say they can work 40-60hrs a week and still prioritize their health and their personal relationships. I would say that's wishful thinking.

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. It's also damn hard to acknowledge the toll those decades of work have had on your health and relationships. But, that's the challenge of FIRE. Not the saving and investing, but dealing with breaking the patterns of your work life and figuring out what's beyond it and what you'll do with the time you have left.
Title: Re: Stop worrying about the 4% rule
Post by: CanuckExpat on January 28, 2018, 08:11:47 PM
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"
(https://www.smbc-comics.com/comics/20120902.gif)
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on January 28, 2018, 10:07:20 PM
A great and always relevant comic (https://www.smbc-comics.com/comic/2012-09-02), see panel six, "Most people never let themselves die"

Totally on point CE.
Title: Re: Stop worrying about the 4% rule
Post by: privatefarmer on February 23, 2018, 07:47:09 AM
Not sure if this has been discussed, but if you use a variable-withdrawal strategy you can actually take out upwards of 6-7%/year, depending on how much equities you're comfortable with. This requires you to take less out during bear markets, however, so would not be feasible for someone who must have 4% each year to live off of. For someone who is flexible, who can go a few years w/ very low withdrawals, a variable-withdrawal strategy should allow you to ultimately take out far more $$$ over the course of decades while never exhausting your portfolio. Paul Merriman goes into great detail about it and on his website shows how taking out 6% variable w/d each year using a 100% global equity portfolio would've done (spoiler alert : from 1970-present your portfolio would've kept its original value, inflation adjusted).
Title: Re: Stop worrying about the 4% rule
Post by: privatefarmer on February 23, 2018, 07:55:42 AM
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.

what people need to remember is that CAPE is high bc inflation is LOW. thus, your w/d's will not be increasing that much year-to-year. As inflation increases, bond yields should increase, earnings should increase, P/Es should decrease, CAPE should decrease... It's all relative. Stocks only seem "expensive" if you're not comparing them to any other investable asset (ie bonds or real estate). When you realize that bonds and real estate are also "expensive", it makes more sense. Ultimately, the risk premium of equities should be there and if treasury bills return roughly the rate of inflation equities should maintain their real return.
Title: Re: Stop worrying about the 4% rule
Post by: rxmurphy on February 24, 2018, 06:36:50 AM
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!
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on February 24, 2018, 06:48:03 AM
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!

It's as safe as you are flexible
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on February 24, 2018, 08:26:09 AM
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.

Quote
Safer 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.)

(https://i1.imgpile.com/i/prywk.png) (https://imgpile.com/i/prywk)

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.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on February 24, 2018, 08:18:33 PM
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.

Quote
Safer 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.

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).
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on February 24, 2018, 09:47:07 PM
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. 

I don't know if it's a question of tone over the internet, but using words like "omissions" sounds like you're accusing me of misrepresenting something. Is that a correct interpretation?

Anyway, I don't disagree with you that if a person ends up needing to spend more than 4% of their starting portfolio, that simulations which assume that they will spend 4% of their starting portfolio aren't going to be particularly informative.
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on February 24, 2018, 10:05:17 PM
https://xkcd.com/386/

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.

Inflation, including 1970s-style inflation, is accounted for in the studies that lead to the 4% rule.

Higher wages are only inflationary to the extent that they exceed productivity growth.  Higher wages exceeding productivity growth are a very recent phenomenon, like in the last few months, aren't they?

If low tax rates and low borrowing rates lead to high inflation, where were the low tax rates and low borrowing rates that lead to the 1970s-style inflation?

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. 

Agreed.  Personally I inflate college expenses separately at 6%.  For health care I currently use an ACA plan with subsidies, where my OOP is tied to increases in the federal poverty level levels, not health care inflation rates.

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.

I would say it does mean that.  Assuming the future is no worse than the past, it means that you have a 1-in-20 chance of CPI-adjusted expenses over 30 years at 4%.  Of course, most people don't really suggest spending blindly until the end of one's retirement and then realizing that they're in trouble in the unlucky scenario.  Most people will adjust as they go along (which actually makes the 4% rule even safer).

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...

Adverse sequence of returns are already accounted for in the studies that lead to the 4% rule.  I don't know why people think this is a new thing.

It will be interesting to see what happens with the ACA.

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).

No worries.

I have no idea where you got 3% from except that it is less than 4%.  It sounds like a number you pulled out of your ear without any data or analysis.  (Unlike the 4% rule, by the way.)  Certainly lower is safer in general in terms of not running out of money in retirement, but as has been stated by others elsewhere on this board, you may have to work more of your healthiest years to gain that additional margin of safety which may not ultimately be needed.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on February 24, 2018, 10:43:10 PM
@maizeman certainly not intending 'misrepresentation', much more the idea of oversimplification.  When people stop thinking for themselves, especially when equities are riding high and politicians are handing out candy, maybe it's not the best time to expect to be on the good side of P50.

@2ndCor - hey, I like your positivism.  I think I heard you on ER.org and Bogleheads, so you know what you are talkin' about.  No worries there and I appreciate your well structured comment.  Inevitably, we are all subject to both the 'system' which is human engineered (and effects our interest rate (which ultimately affects inflation, but we will see), taxation, and future returns on equities and fixed income) and natural (which is almost wholly unpredictable). 

Sadly, if you are a true businessman like Gates or Buffet, you crush the successful unknowns.  You buy them out for more than their emergent business could imagine in one lifetime.  Buffet and Gates have more money than several lifetimes could imagine spending.  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.
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on February 24, 2018, 10:52:45 PM
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.

Although I've been reading about and studying FIRE for about 25 years, at the end of the day I'm just SGOTI.
Title: Re: Stop worrying about the 4% rule
Post by: cerat0n1a on February 25, 2018, 02:28:50 AM
You might enjoy reading the book "The Rational Optimist" for a well-reasoned counterpoint to the above.

Although it pays to remember that its author was the chairman of the first UK bank to have a run on it in 150+ years, with over £1 billion withdrawn a single day and police called to branches to restore order. It then had to be taken into public ownership and bailed out by the government, adding approx £100 billion to the UK national debt - taking it from 38% of GDP at the time to 45% of GDP. A little less optimism and a little more attention to his bank's ridiculous business model...
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on February 25, 2018, 04:31:50 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on February 25, 2018, 07:32:01 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: matchewed on February 25, 2018, 08:17:40 AM
So this is yet another if we throw away or break the assumptions the math no longer works questions eh?
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on February 25, 2018, 08:29:50 AM
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.

Well I know EV has read at least a good chunk of the thread and seen those same graphs before because I remember making a special "more serious research article style" formatted version for him or her back on page 15 (https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/msg1508261/#msg1508261).

For anyone just joining the conversation at this point, this is a reference to a style of graph I put together last year that displays the risk of death and the risk of going bankrupt at the same time, which some people have found very helpful for putting concerns about running out of money in their old age into perspective.

Here is an example using the life expectancy for an american male who pushed the big red button and FIRED at 45 with 25x his (actual) annual spending in stocks.
(https://raw.githubusercontent.com/maizeman/dead_broke/master/DAB_graphs/Example_Output.png)
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on February 25, 2018, 12:50:16 PM
Looks like the probability of being dead between the ages of 70 and 100 is unacceptably high...:)
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on February 25, 2018, 05:15:12 PM
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.

I am thankful for 1) the ACA subsidies and 2) we are both in excellent health so far.

As to college costs, while I have sympathy, funding your kids college is at least a choice whereas realistically HC is not.
Title: Re: Stop worrying about the 4% rule
Post by: desk_jockey on February 25, 2018, 09:37:13 PM
Looks like the probability of being dead between the ages of 70 and 100 is unacceptably high...:)
 
Looking for suggestions to mitigate the risk. 
Title: Re: Stop worrying about the 4% rule
Post by: cerat0n1a on February 26, 2018, 01:18:20 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on February 26, 2018, 06:06:02 AM
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.

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.
Title: Re: Stop worrying about the 4% rule
Post by: DavidAnnArbor on February 26, 2018, 06:35:54 AM
"more pot pies!"

- Sweeney Todd
Title: Re: Stop worrying about the 4% rule
Post by: nereo on February 26, 2018, 08:09:18 AM
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.

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...
Title: Re: Stop worrying about the 4% rule
Post by: sol on February 26, 2018, 08:34:36 AM
...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. 
Title: Re: Stop worrying about the 4% rule
Post by: MasterStache on February 26, 2018, 09:05:27 AM
Looks like the probability of being dead between the ages of 70 and 100 is unacceptably high...:)
 
Looking for suggestions to mitigate the risk.

Retire and enjoy life!
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on February 26, 2018, 09:36:35 AM
We could all be brains in a jar in any case... The brain only knows about its surroundings (i.e outside the skull) because of electrical impulses provided by sensors.

If a computer is providing all that stimulation it would be indistinguishable from the "real" world.

So maybe we already are immortal...:)
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on February 26, 2018, 09:48:34 AM
...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.

Maybe the computer super AI only allows the top 4% of humanity to upload to singularity status.  Then we'll have a whole 'nother 4% rule to worry about! 
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on February 26, 2018, 10:34:39 AM
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.

Title: Re: Stop worrying about the 4% rule
Post by: nereo on February 26, 2018, 10:47:30 AM
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 get what you are saying, but the SWR doesn't change - only your expenses do. On one hand that may seem like splitting grapes, but 4% doesn't stop working and lead to increased portfolio failures, rather more of your budget will go towards health insurance/care.  Ultimately this may require you have a larger portfolio to provide for bigger annual withdraws, but how you plug the numbers in matters when planning.
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on February 26, 2018, 11:19:04 AM
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.

Sounds like a reasonable guesstimate. This would have HC costs doubling every 4 to 5 years.. So roughly $80k by the time I get to Medicare in 8 years time (assuming its $20k today).

Of course one would hope (hahaha) that as that rate of growth will make HC simply un-affordable for the majority of Americans, that those of kind of price increases will have to subside to something that at least half the population can afford.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on February 26, 2018, 01:11:01 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on February 26, 2018, 01:35:33 PM
But @maizeman, I thought you were an anxious individual like me.. What is this "don't worry because its double counting pessimism" stuff..:)

I have saved to the point of ridiculousness, with a WR of about 0.4%.. Just to make sure I have some cushion you see!

You are right of course this does not invalidate the math of the 4% rule one bit.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on February 26, 2018, 01:42:29 PM
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."
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on February 26, 2018, 11:51:21 PM
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.

   
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on February 27, 2018, 12:36:43 AM
Not at all..

In fact I am very skeptical of the "religion of 4%" or any other doctrine we hold to be true, especially as its all based on historical data which may or may not hold true going forwards.

Heck I did mention my 0.4% WR right?..:).. That mostly happened by happy accident.

2008 for me was a valuable learning experience.. I'd lost so much I figured I'd just keep buying. I mean what else did i have to lose?

Now in retirement I have enough bond funds to last roughly 10 years plus pensions to draw on if things got really bad.

So pessimism is not a bad thing to me, if I end up with a huge pile o money that I can't possibly spend before I die.. Well then I was over pessimistic.. so bite me..:)

Title: Re: Stop worrying about the 4% rule
Post by: matchewed on February 27, 2018, 05:17:35 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on February 27, 2018, 05:46:31 AM
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.

Also, most ER bloggers have around 2M and 30k or more blog income (Root of Good, Rb40, MrTako, MMM, 1500days) so it's not unreasonable to say many folks that ER intentionally do so very conservatively.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on February 27, 2018, 05:55:26 AM
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.

I don't think its just @matchewed - inflation and CPI has been discussed at length over this thread and others.  Bottom line - yes the CPI is factored into the 4% guideline, and yes an individual's inflationary risks may differ from that.  Each person needs to do their due diligence and determine where their risks lie.
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on February 27, 2018, 06:06:10 AM
regardless of inflation of one service or another in ones life one can blindly follow the 4% rule with a larger equity stake and assuming the future is like the past - which no matter what your plan is if you're going to stop earning money and live off your assets you have to assume this to some level.  that person is very likely to live a long happy retirement and never worry about money - infact they are more likely to die with multiple millions more than they started with than to have to worry about running out of money. 

But around here there is mostly an understanding that flexiblity is key the larger the withdrawal rate becomes.  and thru cutting spending or earning some money hustling in FIRE a retiree can make themselves extremely safe. 

you can continue to try to put out random what ifs and site some data that its been increasing faster but to that end you should never FIRE b/c what if capitalism falls apart and all the markets tank or we're stuck in hyper inflation for 50 years.  We dont know what the future will bring but we can be optimistic it will be like the past and choose to not do the one guaranteed thing that working longer brings you - you're closer to dieing than you were the day before.
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on February 27, 2018, 06:49:18 AM
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.

Fair enough. 25 times 'X' is a fine rule of thumb.

Quote
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'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.

I thought the CFIREsim extra expenses method was a good one. You could do a present value calculation, but whatever method you use, it's going to result in a higher starting 'X'. Unless you just ignore healthcare inflation.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on February 27, 2018, 07:30:15 AM
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.

Quote
It's going to be more than CPI, simply because each year we're one year older.

I've never though of this as part of inflation, but you're certainly right that every year you're statistically more likely to need more healthcare than the year before. I haven't tried to put a number on that before. I found this paper* which claims the average 20 year old will consume $1,448 in healthcare spending, while the average 85 year old will consume $17,071 dollars.** That works out to a CAGR in healthcare spending of 3.86% independent of (and on top of) overall healthcare cost inflation.

Now that's a bit pessimistic because it is looking at total medical expenditures, not out of pocket spending. The ACA has a lot of wealth transfers from healthy young people to less healthy older people built into it, which slow down the rate of out of pocket spending growth relative to total healthcare expenditure growth by raising your total spending when you're young, and lowering it when you're old. And of course after one ages out of ACA and into medicare, a big chunk of the total costs are picked up by the taxpayer (or by your own previous medicare tax payments if you prefer), but either way aren't being paid out of your stash.

Now regular healthcare cost inflation has been running 2-5% in recent years when regular inflation was 0.5-2%. So I think one could make a reasonably convincing case for inflating the cost of healthcare in your simulation by as much as 7% above base inflation (up to 3% inflation premium for healthcare above regular inflation, plus up to 4% annual healthcare spending growth from being a year older each year).

* https://www.ncbi.nlm.nih.gov/pmc/articles/PMC1361028/

** I should also mention these are inflation adjusted 2000 dollars, so the numbers would be higher today, but the ratio between the two is the same.

Quote
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.

I think this statement is a good example of the root cause of many disagreements about the 4% rule. You've got more than enough money given regular assumptions, so when you do the math you're trying to to figure out how crazy things can get and you'd still be okay. In your shoes I'd probably do the same thing, because it seems like it would help a person sleep better at night. Others who are still in the accumulation phase are often just trying to figure out what a good set of regular assumptions to use are.

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).
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on February 27, 2018, 08:07:29 AM
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.

Adrian is right to be thinking about it though and the numbers seem about right without subsidies.

a lot of the items can be mitigated with substitutes, cutting back, moving, etc but health care is completely unknown, unpredictable, and CAN be a significant part of ones budget especially for the lower spending FIREe....I mean an extra $10k on a $40k budget would be crippling or massive deterioration in desired lifestyle.  So there are three FIRE issues for HC - (1) real inflation of it that typically exceeds CPI, (2) inflation due to aging/becoming less healthy, and (3) loss of subsidies.  HC is certainly one of my fears.   

Title: Re: Stop worrying about the 4% rule
Post by: nereo on February 27, 2018, 08:48:08 AM
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.


No.
You can read about the CPI here:
https://www.bls.gov/cpi/#

Note that the data they collect is publicly available  (https://www.bls.gov/cpi/data.htm)and broken down into individual categories and by region. As everyone's situation in retirement may be different, you can look at which categories and regions matter most to you and use that to adjust your WR and strategy.

The BLS calculates inflation both with and without food and energy prices, and there's good reason for doing so.  It also distinguishes between urban and rural consumers. There is no 'made up' information un-grounded in 'current information'.

here's a good article (https://www.fool.com/investing/general/2012/03/13/the-cpi-is-a-conspiracy-or-maybe-you-just-dont-un.aspx) which goes into detail the misperceptions people have about the CPI.
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on February 27, 2018, 09:56:19 AM
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).

Thanks for the post, Maizeman. Very good.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on February 27, 2018, 10:16:36 AM
...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.
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on February 27, 2018, 10:22:01 AM
...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.

having a pile of money you can live off of in the bank that allows you to FIRE i would say your situation linked describes exactly what a FIREe at 4% SWR would be on the wealthy not poor side of that equation.  the chance of ending up in poverty are greatly over blown in most of your statements and its not really mitigated too well by just accruing more assets.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on February 27, 2018, 12:23:29 PM
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.

I couldn't find the study in the Lancet that that article is talking about. Based on the effect sizes reported though it sounds like the conclusions were a lot like those from this JAMA paper* which found at "The gap in life expectancy between the richest 1% and poorest 1% of individuals [based on household income not net worth] was 14.6 years (95% CI, 14.4 to 14.8 years) for men and 10.1 years (95% CI, 9.9 to 10.3 years) for women." One thing you have to keep in mind though is that causality potentially runs in both directions. The JAMA study at least is looking at income and risk of death in the same year using anonymized tax return data. Generally very sick people who are the most likely to die in the next year are going to have extremely low incomes because they are sick and therefore cannot work.

In addition, being wealthy can be a double edged sword in the modern american healthcare system. Wealthy patents tends to correlate with receiving more medical procedures because people who experience more medical procedures report higher levels of patient satisfaction, and hospitals want to nurture potential donors (see "Red Blanket Patients"). But 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.**

Now that said, I don't doubt that being wealthy -- or at least not poor -- also does some good things for your lifespan by reducing stress and make sure you do have access to healthcare if and when you need it so my estimates of how fast people are likely to die, taken from the SSAs mortality tables, are likely to be a bit optimistic for the average FIREee who will have a lower stress lifestyle (if optimistic is the right word for thinking people will die faster and hence be less likely to live long enough to have to worry about having enough money). I remain on the look out for a data source on mortality/life expectancy that would be even more representative of the folks on this forum.

* Source: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4866586/

** Source: https://jamanetwork.com/journals/jamainternalmedicine/fullarticle/1108766
Title: Re: Stop worrying about the 4% rule
Post by: TempusFugit on February 27, 2018, 01:40:33 PM
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.**


I heard a story on Radiolab, I believe that referenced a study done that compared outcomes on patients who went to the emergency room for heart attacks / symptoms of, and the comparison was related to the seniority of the doctors at the hospital during those days.  I can't recall the details of why it was less experienced doctors, perhaps something about holidays or conference season when so many senior cardiologists are travelling.  In any regard, the conclusion was that you had a better chance of a good outcome if you had the rookie doctors rather than the senior doctors because the less experienced doctors were less likely to use more invasive treatments.  In other words, just as you say, oftentimes the best treatment is no treatment or very mild treatments such as meds rather than procedures.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on February 27, 2018, 01:56:22 PM
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.

Quote
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.

News article: https://hms.harvard.edu/news/startling-benefit-cardiology-meetings
Original article: https://jamanetwork.com/journals/jamainternalmedicine/fullarticle/2038979
Title: Re: Stop worrying about the 4% rule
Post by: TempusFugit on February 27, 2018, 02:14:48 PM
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.

Quote
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.

News article: https://hms.harvard.edu/news/startling-benefit-cardiology-meetings
Original article: https://jamanetwork.com/journals/jamainternalmedicine/fullarticle/2038979

Yep, that's the one. 
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on February 27, 2018, 02:15:49 PM
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.

Quote
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.

News article: https://hms.harvard.edu/news/startling-benefit-cardiology-meetings
Original article: https://jamanetwork.com/journals/jamainternalmedicine/fullarticle/2038979

this all sounds like data that needs to be dumped into a computer and run against algorithms to determine what optimal treatment is. i hope they are recording everything in a easily manageable way so it can be processed by machines later
Title: Re: Stop worrying about the 4% rule
Post by: PizzaSteve on April 03, 2018, 06:41:50 PM
...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.
Great post! 

Our personality bots can simulate retirement and safely make 4.5% fewer posts per year until we fade away into the obscurity.
Title: Re: Stop worrying about the 4% rule
Post by: 2lazy2retire on April 09, 2018, 08:27:11 AM
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 :)
Title: Re: Stop worrying about the 4% rule
Post by: honeyfill on April 09, 2018, 11:12:39 AM
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.   
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on April 09, 2018, 12:36:25 PM
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.

AND it makes the time you are alive, more interesting.  Maybe not better, but definitely more interesting.
Title: Re: Stop worrying about the 4% rule
Post by: PizzaSteve on April 14, 2018, 09:44:58 AM
Some useful discussion here:

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=247050&newpost=3880684 (https://www.bogleheads.org/forum/viewtopic.php?f=10&t=247050&newpost=3880684)

Will not comment, but good points on understanding conclusions and limitations of Trinity study(basis for most SWR assumptions).
Title: Re: Stop worrying about the 4% rule
Post by: sol on April 14, 2018, 10:54:52 AM
Noted is that study us for a 30 yr retirement, not longer and assumptions should be adjusted accordingly for longer plans (like mine :-)).

Have you read this thread?  There are thousands of words of analysis on the impacts of changing the SWR vs changing the withdrawal period, with charts and graphs, contained in the earlier pages of this very thread. Including second order analysis of the analyses.

I've found the BH forums to be incredibly helpful for people who are just starting out and trying to wrap their heads around basic concepts, but the depth of the analysis there is sometimes lacking.  There are some incredibly smart people over there, who unfortunately don't write very clearly and often muddle their insights and so the most complex analyses goes unrecognized.  Many of the nuances discussed in this thread, for example, are things I have never seen openly discussed on bogleheads.
Title: Re: Stop worrying about the 4% rule
Post by: MissNancyPryor on April 24, 2018, 06:49:25 PM
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!)
Title: Re: Stop worrying about the 4% rule
Post by: MDM on April 24, 2018, 07:14:47 PM
1. Do you consider the value of your paid-for house in the net worth upon which your initial SWR is calculated?

2. Which is the traditional way to calculate things?
1. No, because
2. The studies from which the 4% number comes considered only stocks and bonds.

See Determining withdrawal rates using historical data (http://www.retailinvestor.org/pdf/Bengen1.pdf) and
Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable (http://www.aaii.com/files/pdf/6794_retirement-savings-choosing-a-withdrawal-rate-that-is-sustainable.pdf).
The latter article is often called the "Trinity study" because the authors were professors of finance at Trinity University.
Title: Re: Stop worrying about the 4% rule
Post by: MissNancyPryor on April 24, 2018, 09:20:26 PM
Perfect, thanks! 
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on April 25, 2018, 10:46:25 AM
I don't count it either. You have to live somewhere and no doubt if we chose to live somewhere else we would either buy or rent (duh!), so the proceeds of selling would ultimately be used to pay for the new digs.

I also assume that when we are old we might live in a nursing home.. well, once again thats where the proceeds of the house sale would go.

Bottom line is it really isn't "real money" in the sense that it doesn't provides income upon which you can live.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on April 25, 2018, 11:28:45 AM
ditto - with the caveat that one may consider the value of their house IF they are planning on selling it and moving (e.g. downsizing, relocating) early on in FI.  If rented out (partially or in full) that income would go into your calculations.

Thankfully simulators like cFIREsim allow you to estimate the effects of a lump-sum input (in this case the sale of a home) at any point during your retirement.  Obviously the uncertainty of how much a home might sell for should be considered.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on April 25, 2018, 05:24:10 PM
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.

Title: Re: Stop worrying about the 4% rule
Post by: Le Barbu on April 25, 2018, 06:32:27 PM
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
Title: Re: Stop worrying about the 4% rule
Post by: steveo on April 25, 2018, 09:14:51 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: seattlecyclone on April 26, 2018, 02:12:34 PM
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.

I don't think there's such a thing as "just semantics." Words have meanings. "Net worth" is the sum of everything you own minus everything you owe. You may decide for whatever reason to exclude a portion of your assets from the part you expect to provide your retirement spending, in which case the "stash" is clearly a different thing from the "net worth."
Title: Re: Stop worrying about the 4% rule
Post by: bluebelle on April 26, 2018, 03:34:20 PM
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). 
Title: Re: Stop worrying about the 4% rule
Post by: Eucalyptus on April 27, 2018, 07:17:56 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on April 28, 2018, 06:32:06 PM
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.

Yep. I think 5% is fine for me to retire one but atm I am aiming a little lower than that but only because I want to have a high probability of making it to Super. So my plan is to get to Super which will mean that I have a 5% or lower WR and be prepared to sell the house.
Title: Re: Stop worrying about the 4% rule
Post by: Mr Mark on April 29, 2018, 02:02:37 AM
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!)

It's all about your required cashflow. Take whatever annual expenses you need (and that includes somewhere to live, either rent or mortgage/taxes/maintenance or airbnb/hotels).
You then target 25x that annual cash as your required 'stache, and a portfolio of mostly equities and some bonds should be able to supply that amount every year inflated for ever.

It's a lot easier in the USA because (1) you can get a low cost portfolio very easily via Vanguard, (2) US equities have proven in the past to be a great long term investment, and (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.

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!



Title: Re: Stop worrying about the 4% rule
Post by: DreamFIRE on April 29, 2018, 08:28:05 PM
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.

That's usually not the case, certainly not for a single person (I assume "Miss" implies single.)  For a single person, the 0% capital gains bracket is $0-38,600

If you had no other taxable income, you could add a $12,000 additional gains due to the standard deduction.

So, then you're up to $50600 of long term capital gains that you would pay 0% federal tax on, but ONLY if you had no other taxable income.   So $90K in capital gains would trigger taxes at the federal level.

Myself, I have to pay 15% on all my long term capital gains because I earn over $100K/yr of other income, well above the 0% capital gains tax level.

Of course, normally when selling shares that realize capital gains as opposed to dividends, the gain is only part of the amount you are pulling from the investment.  So a $30K gain, for example, from selling shares will mean you're actually pulling much more from your investment than $30K.
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on April 30, 2018, 04:51:36 AM
Dream this is a discussion during the withdrawal phase. 50.6k is more than enough for a single person as is 90k for a couple.
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on May 07, 2018, 07:20:36 AM
Intercst (aka John Greaney):

"Adding rigor to the 4% rule"

http://www.retireearlyhomepage.com/intercstinsights.html


(Just for fun. I'm completely convinced that N = 25 x E will work just fine for us).

Title: Re: Stop worrying about the 4% rule
Post by: ysette9 on May 07, 2018, 09:42:00 AM
Haha
Title: Re: Stop worrying about the 4% rule
Post by: hykue on May 09, 2018, 12:10:18 AM
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!
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on May 09, 2018, 06:27:42 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Mr Mark on May 09, 2018, 07:32:15 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: hykue on May 15, 2018, 11:38:56 PM
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."

Literally loled :)
Title: Re: Stop worrying about the 4% rule
Post by: hykue on May 16, 2018, 02:20:16 AM
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.

Yes, thank you! I won't run out and set a portfolio based on this alone, I just had never managed follow my doubts about volatlity to any logical conclusion. This helped!
Title: Re: Stop worrying about the 4% rule
Post by: PizzaSteve on May 24, 2018, 06:07:39 PM
I find it is better to keep all studies in perspective and think of the 4% rule not as " a scientific principle", but rather the best wisdom of our elder shaman economists, based on recent history.

Even though it is derived statistically via excellent models, it cant predict the future by definition.  We could all be screwed or golden, we just dont know.  So what do we do in that situation?  We look at history and plan a prudent course, but also we must stay mentally flexible.  If someone starts calling a group of people animals and suggests herding them into cattle cars somewhere, we need to be prepared to take action with more than just a portfolio allocation.

The portfolio is only a minor note in the symphony of FIRE.  What is more important is the 'live within your means' mindset, the 'invest to get your free dollars working' mindset, and the 'be mindful with spending' mindset.  The combo of these is 99% successful.  The other 1% requires mindful observing and action within the world of politics and human governance.

Namaste.
Title: Re: Stop worrying about the 4% rule
Post by: DavidAnnArbor on May 24, 2018, 07:12:28 PM
Thank you PizzaSteve I liked the prudent and mindful presentation of that big picture.
Title: Re: Stop worrying about the 4% rule
Post by: Jamese20 on June 07, 2018, 02:10:25 PM
hi all,

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





Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on June 07, 2018, 03:24:10 PM
Well, two things you can use to calibrate on.  1) I agree that needing additional income or else you run out of money constitutes a failure.  Not that young folks remember, but the absolute hardest time to sufficiently supplement income is when everyone else is in the same boat.  2) at least healthcare and retirement provisions are more clearly defined, in the US, prior to 65, you get reduced Social Security and no public medical coverage (once Affordable Care Act collapses).

Other than that, you need to adjust the 4% rule based on your investments.  US outperformed UK over the last century or so, but there's no guarantee UK won't outperform US next century (given our ability to elect Trump).
Title: Re: Stop worrying about the 4% rule
Post by: cerat0n1a on June 07, 2018, 04:17:24 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: TempusFugit on June 07, 2018, 04:48:41 PM
...US outperformed UK over the last century or so, but there's no guarantee UK won't outperform US next century...

Government policy issues aside, clearly the historical data over the past century favors the US because of the effects of 2 world wars.

The US was the winner on both sides of that equation in the sense that we didn't suffer the negative impact to our infrastructure and workforce, and then we reaped the benefits of supplying all the materials for rebuilding Europe after the wars. 
 
One would expect the future returns to move toward each other absent another hugely destabilizing event affecting our countries disproportionately.  That's all other things being 'equal' in terms of free trade, etc. 

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'.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on June 07, 2018, 05:23:04 PM
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'.

What bothers me is how often I see presentations of the "SWR for other countries" without people pointing out that essentially the differences between countries are showing is how badly individual country were destroyed during the two world wars (and the civil war in Spain).

@Jamese20 The reason we don't see more literature and studies on the 4% rule and similar outside the US boils down to data availability. The studies of SWR in ~20 countries all use the Dimson, Marsh, & Staunton dataset on stock market and bond returns which isn't publicly available, but is included in some subscription data services which cost huge amounts of money. So what comes out is primarily from employees at big banks or financial advisory firms. In contrast, in the USA, a professor named Robert Shiller released data on US stock and bond returns each month from 1871-present on his website. So any interested blogger or random guy with a python script (like me) can try out all sorts of different approaches to investment and withdrawal rate strategies.
Title: Re: Stop worrying about the 4% rule
Post by: Radagast on June 07, 2018, 10:23:57 PM
hi all,

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
https://portfoliocharts.com/calculators/
Tyler's calculators include UK and include data as far as 1970, which I understand was one of the worse starting periods for SWR.
Title: Re: Stop worrying about the 4% rule
Post by: Jamese20 on June 07, 2018, 11:42:06 PM
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 agree and that's why I mentioned even from a global perspective there isn't much detail regarding the 4% rule with a global portfolio

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.

Maybe I will find something once I have the free time to sit and think about how I can earn some spare cash but I don't really expect to retire to then have to work

Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on June 08, 2018, 08:00:25 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Jamese20 on June 08, 2018, 10:52:42 AM
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?
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on June 08, 2018, 11:03:46 AM
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 your logic.
Title: Re: Stop worrying about the 4% rule
Post by: Jamese20 on June 08, 2018, 11:45:50 AM
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.

Of course I agree with you on the last point, I just wish it felt like part time work was an option for me , my current job is kind of an all or nothing thing really

I hope I never had to do it and I don't think I would have to really, simply ignoring inflation for 5 years gives enough margin of safety that I think I'll be fine

Plus I'll have a sizeable pension coming up afterwards I can fall back on...

In 10 years time I'll be ready to go I think
Title: Re: Stop worrying about the 4% rule
Post by: ysette9 on June 08, 2018, 12:55:32 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Tyler on June 08, 2018, 01:21:16 PM
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're welcome!  I'm glad you find it useful.  Withdrawal rates certainly aren't the be-all-end-all with retirement planning and there's a lot more to a good strategy than a backtested withdrawal rate, but I do think it pays to understand how they work and plan accordingly.  BTW, since I first wrote that post I've done a lot more work on the same subject.  You can find a collection here: https://portfoliocharts.com/portfolio/retirement-income/


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.
https://portfoliocharts.com/calculators/
Tyler's calculators include UK and include data as far as 1970, which I understand was one of the worse starting periods for SWR.

Yep.  :) 

The frustration of non-US investors about US-centric investing analysis is definitely warranted, and I'm doing my best to help.  All of the calculators on the site (including Withdrawal Rates) are able to directly model UK portfolios using UK securities, inflation, and exchange rates.

And you may also find these links interesting:

Explanation of how your home country affects withdrawal rates (https://portfoliocharts.com/2017/06/09/your-home-country-is-inseparable-from-your-withdrawal-rate/)

Collection of British portfolios with accompanying stats (https://portfoliocharts.com/british-portfolios/)
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on June 08, 2018, 03:53:48 PM
I see the S&P500 is a mere 3.2% down from the Feb all time high...:)
Title: Re: Stop worrying about the 4% rule
Post by: TempusFugit on June 08, 2018, 04:27:06 PM
I see the S&P500 is a mere 3.2% down from the Feb all time high...:)

I prefer to think in positive terms:  The S&P is UP 3.1% since Jan 2.     

Title: Re: Stop worrying about the 4% rule
Post by: Jamese20 on June 09, 2018, 03:39:21 AM
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.

Mowing lawns ? I think you are kind of proving my point - 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

If I can find a side hussle of sorts that give me some decent income then that's brilliant, the hard part is finding what that is

I don't buy mmm just stumbling onto a 6 figure paying website, I know how much effort and commitment it takes to run any site let alone a fantastic one like this.

It really is easy to say "find some enjoyable part time work" when 90% of people hate even their full time work let alone trying to find part time work.

Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on June 09, 2018, 06:05:14 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Jamese20 on June 09, 2018, 08:58:55 AM
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.

not quite :) neither are really the answer i would ideally want :)
Title: Re: Stop worrying about the 4% rule
Post by: DreamFIRE on June 09, 2018, 09:33:15 PM
Good points made.  That said, work suckage is a relative thing.

I was tempted to reply earlier on that topic and about enjoying life.  I agree about working, and I actually like the majority of a given work week on my job.  But there was also a comment about FIREing and enjoying life.  People should be able to enjoy life while working as well, not hanging onto FIRE to finally enjoy life.

Quote
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.

Exactly.  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.
Title: Re: Stop worrying about the 4% rule
Post by: Jamese20 on June 10, 2018, 03:33:45 AM
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.
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 think the things you have posted mostly start to get realised when you actually dont need the money - until then, i think most would find it difficult in most circumstances to see the benefits.

after all, they wouldn't call it "work" if it was in reality, some really wonderful thing to do :) having said that I would probably start to feel that trigger day myself you are describing - I really do think work becomes so much more enjoyable when you do not need the money and until you get there, you never fully realise its benefits?
Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on June 10, 2018, 08:41:01 AM
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.

We calculated 2 numbers.

An FI number, which meant we could survive indefinitely without jobs. 

A FIRE number, which meant we could fund the life we choose to live indefinitely without jobs.

You can shed a lot of stress when you reach the first number, and shed your jobs without worry when you reach the second number. 

(Well, mathmatically without worry, but in reality, there may well be some worry, because we're people not calculators.)

Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on June 10, 2018, 08:45:17 AM
after all, they wouldn't call it "work" if it was in reality, some really wonderful thing to do :)

Extremely low effort post below:

(https://seanwes.com/wp-content/uploads/2014/10/red-forman-work-800.jpg)
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on June 10, 2018, 05:32:22 PM
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 wouldn't argue there were positives to some aspects of working. After 33yrs of work [in my case] if I haven't gotten the benefit/appreciation from them yet another decade chained to a desk isn't going to make that happen.  If I was one of these lucky bastards ERing after 5yrs at some magical software engineering gig maybe I'd feel I missed out.

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.

Reading these forums I don't come across any instances where I think "Boy this guy/gal is really going to suffer because they didn't work enough and get to enjoy enough of those work experience benefits."
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on June 10, 2018, 05:42:01 PM
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...

Nobody is saying you or anyone else has to stop working if you don't want to. Retirement [at least in most cases] is voluntary. I would argue a doctor can be chained to a desk as a wage salve just like anyone else. The difference is his/her cage is just more nicely decorated. ;)

I would also argue a lot of people that don't stop working are staying the course not because it's amazing, but because stopping is scary as hell.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on June 10, 2018, 06:14:43 PM
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.

(https://i.pinimg.com/originals/40/3d/82/403d828e65f566ed135fe22546e4bd79.jpg)

Agreed you can't speak for other people. Although I think it would be the rare high powered professional who would admit they were scared to stop working. If people were 100% honest with themselves and others....and able to work out accurately what is motivating their responses to major life events like FIRE psychiatrists/psychologists would be out of business. Luckily [for the psychiatrists] that's not the case.

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. ;)
Title: Re: Stop worrying about the 4% rule
Post by: steveo on June 10, 2018, 07:51:54 PM
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. ;)

Myself and my wife are spending a lot of time discussing the big change that FIRE will bring onto us. I wouldn't say I'm scared but I think it will be a big change and it's something that I'm at least nervous about.
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on June 11, 2018, 10:04:26 AM
It is a big change without a doubt.. But it falls into the "good problem to have" category...:)
Title: Re: Stop worrying about the 4% rule
Post by: OurTown on June 14, 2018, 02:44:42 PM
https://www.getrichslowly.org/four-percent-rule/

A few thoughts from J.D. Roth.  Enjoy.
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on June 14, 2018, 03:25:23 PM
https://www.getrichslowly.org/four-percent-rule/

From the article
Quote
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
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on June 14, 2018, 05:38:03 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on June 14, 2018, 05:44:52 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on June 16, 2018, 08:49:51 AM
bored of 42:
Quote
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.

Good point - I think that more people are becoming aware that they are being ripped off rather than just blindly paying the ferryman.  I think businesses are being aware that they are being ripped off.  I think insurance companies while ripping us off are becoming aware that they too are becoming ripped off.

Retire - Canada:

Quote
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.

I used to think that way until I learned about the 1 percent.  Some of my work goes towards Society and some goes to those guys and I don't like it.  They don't care about me so why should I care about keepin' on workin' and helping them.  I guess you are right.  The smart thing is to get out.

Hey - If I moved a few miles North to Ontario, could I get the health care?

Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on June 16, 2018, 09:19:23 AM
As time goes on I see more and more employers acting abusively towards their employees. Seems to me the faster you are done working for people who see you more as a commodity rather than a human being the better!

Once you are FI you don't HAVE to quit but having the option is priceless.
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on June 17, 2018, 12:39:10 AM
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.  Closed systems only have so many resources.  How cost increases start to drop is the only real question (ie will we just have less services?)

Think of it as investing, we will never see CAPE 100 (at least not for the long term), who'd pay a dollar to get 50 cents of earnings? 
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on June 18, 2018, 03:34:31 PM
Classical_Liberal:
Quote
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.

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?
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on June 19, 2018, 07:52:08 AM
Classical_Liberal:
Quote
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.

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?

they are already working on this.  cameras that can determine if moles need to be biopsied.  eventually that could just be an app on your phone take a picture tells you if it fits the pattern that would need a biopsy - doctors over precribe biopsies for fear of being wrong.  AI helps the medical industry and actually is more efficient than a doctor if symptoms are entered into a system in the not too distant future it should be much better than a doctor at diagnosis - esp. in fringe cases where a doctor may just not have the knowledge. a machine can have all the knowledge.
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on June 19, 2018, 08:10:18 AM
Boarder42:
Quote
a machine can have all the knowledge.

You know a lot of us let things go too far before we see a doctor as they are expensive.  I could see a machine inexpensively checking you out more often, trending changes in your body and letting you know.  This would be great preventive medicine.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on June 19, 2018, 08:26:28 AM
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.

Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on June 19, 2018, 09:24:36 AM
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.

yep teladoc is now offered by my insurance company and our company encourages us to use it b/c it lowers costs taht they directly pass on to the rates we pay.
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on June 19, 2018, 07:44:04 PM
Quote
We 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.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on June 19, 2018, 07:48:06 PM
Quote
We 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. The 4% Rule says if you take 4% inflation adjusted out of your initial stash historical data provides a success rate looking backwards to help assess your plan. The 4% Rule never considered the fact your budget estimate may be incorrect and you spend more than you planned.
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on June 19, 2018, 07:54:30 PM
Retire-Canada:
Quote
Not really. It's a budgeting issue.

Says he who has the better and cheaper health care.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on June 19, 2018, 08:05:30 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on June 20, 2018, 09:33:21 AM
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.


Title: Re: Stop worrying about the 4% rule
Post by: Mr. Green on June 26, 2018, 03:19:39 PM
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.
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.
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on June 26, 2018, 05:16:21 PM
Mr. Green:
Quote
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.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on June 26, 2018, 05:29:40 PM
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.

That's hard to believe. My GF is in health care and they need every dollar they have plus a few more so they won't be giving away health care to folks without insurance for free. I mean they will of course treat you in an emergency, but they will also bill you for everything.
Title: Re: Stop worrying about the 4% rule
Post by: Mr. Green on June 26, 2018, 05:43:58 PM
Mr. Green:
Quote
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.
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.
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on June 27, 2018, 12:09:44 AM
The UK will treat visitors for emergency care for free.
Title: Re: Stop worrying about the 4% rule
Post by: Mr. Green on June 27, 2018, 11:06:06 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on June 27, 2018, 09:12:23 PM
Most Walk-in clinics/urgent cares have Xray capabilities. If it wasn't broken I'd be well under $700 for a single view Xray and an ace wrap. ER's are expensive because they are for emergencies.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on June 27, 2018, 10:43:29 PM
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?
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on June 27, 2018, 10:54:04 PM
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?

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)
Title: Re: Stop worrying about the 4% rule
Post by: matchewed on June 28, 2018, 05:27:00 AM
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
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on June 28, 2018, 06:37:36 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on June 28, 2018, 06:43:44 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: matchewed on June 28, 2018, 06:56:23 AM
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.

?? Bolded for emphasis.

Wha?

Regardless of that statement people are using it as a guideline and not a hard scientific fact. That is evidenced in this long thread that is stickied. I think it's somewhere over here - https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on June 28, 2018, 06:57:03 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: MissNancyPryor on June 28, 2018, 07:28:10 AM
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.

I notice they are missing a few items.  Brexit is a divot in there somewhere, end of June 2016.  A one day, huge divot.  And Monica Lewinsky and presidential impeachment is not a thing here, that was good for a dive... ahem. 
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on June 28, 2018, 08:02:04 AM
Brexit may be just off the end of the graph (I noticed that there were tick marks for 2004, 2008, 2012 but not 2016, which may indicate the figure was put together in late 2015).

I'd say '16 '17 '18 have been a reversion to the mean in terms of how much evidence we're presented with about how we're all going to die and/or be living in the world of Mad Max. It may also be an over correction well past the mean. I struggle to make the comparison since in the '90s and early '00s I just assumed that was the way the world always was.
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on June 28, 2018, 09:50:49 AM
I made a fair bit of money during the Brexit Vote.. We were on our way to Thailand and I saw the vote and in the airport terminal dumped the remainder of my cash into VTSAX.. Then didn't see the market for another 3 days.. I think I paid for the entire 8 week vacation by that point..:).

Disclaimer.. I have never logged onto to my financial accounts again from a public WIFI an I changed all my passwords..:)
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on June 28, 2018, 10:04:48 AM
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).     
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on June 28, 2018, 10:56:56 AM
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).

The problem is that one of the biggest things historical stock market data teaches us is that whenever people have tried to make predictions about changes in the long term trends of the stock market through reasoning based on existing factors and projecting current trends into the future, they've had extremely limited success.

Projections from historical data could certainly be wrong about what the stock market will do. I don't disagree with that.

What I do disagree with is that I don't we're any more likely to make accuracy predictions by putting out fingers on the scale to push things in one direction or another than all the people who have tried to do so in the past.
Title: Re: Stop worrying about the 4% rule
Post by: Mr. Green on June 28, 2018, 11:17:17 AM
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?
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on June 28, 2018, 11:55:15 AM
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).   

Yes, and?  What is your actionable item that you're putting forth as a result of this analysis?  What should people put their money in if not the S&P500?
Title: Re: Stop worrying about the 4% rule
Post by: matchewed on June 28, 2018, 11:57:34 AM
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?

That can't be so bad... I can invest in pillow keys to soften the blow as my head hits the desk.


In other news two years of one president's policies and the world is going to never be the same. Queue shocking reveal music.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on June 28, 2018, 11:59:37 AM
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! ;)
Title: Re: Stop worrying about the 4% rule
Post by: Mr. Green on June 28, 2018, 12:38:17 PM
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?

Coworker B: I swear I heard him say, "Hash tag winning!"
Title: Re: Stop worrying about the 4% rule
Post by: matchewed on June 28, 2018, 01:09:35 PM
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?

Coworker B: I swear I heard him say, "Hash tag winning!"

Now I know what to put on my gravestone. Thanks Mr. Green.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on June 28, 2018, 01:19:38 PM
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/).
Title: Re: Stop worrying about the 4% rule
Post by: Mr. Green on June 28, 2018, 02:41:28 PM
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/).
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.

This is one of the big reasons why I'm keeping a year or two of my living expenses in cash. I don't want to be looking at the markets quarterly or monthly during a recession and having that mental battle about not wanting to sell assets in a down market. If you can put your head in the sand for two years while the market is down, you've missed all the panic and fear. You can just keep on rocking. 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. So I think it is completely reasonable to think you can go through a recession as a FIRE'ee with little to no mental anguish if you have a good plan that allows you to tune out the noise.

This is (attached picture) my view, and has been for the last couple hours. As for what day or the week it is? I'll quote another retiree I once knew. "I don't care!"
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on June 29, 2018, 09:42:53 AM
Mr. Green:
Quote
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.

That sounds good and the picture looks good.  I guess if I wasn't working we would have the freedom to hike for an extended period in some place with magnificent vistas.  It would be a place 4% closer to heaven.
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on June 29, 2018, 10:52:20 AM
I'm not saying that it's actionable for everyone (like if you are just getting started building a portfolio), and certainly not the same action for everyone, but when you are ahead of the game it is prudent to dial back exposure to risk and volatility.  Given the exceptional returns we have experienced since 2009, high stock exposure and 4% SWR is not my best bet.  Everyone here seems to think they have high risk tolerance, but I'll be interested to see how they feel in the middle of a bear market, especially if they are retired.  Fortunately I only need 2 - 3% WR currently, but that assumes inflation stays tame until I get to Medicare and SS.  I will probably ER in a year or two depending mostly on circumstances outside my finances (other than healthcare, I might still work to have access to my company plan).

Anyway, Financial Samurai has posted a bit about this recently (https://www.financialsamurai.com/ideal-retirement-scenario-conservative-returns-and-a-steady-income/).

So the answer to the possibility of stocks "maybe" having a low return is to shift your assets to something that's guaranteed to have a low return (bonds)?  Uhm, what?

BUT, having said that, my take is that during accumulation you generally are able to deal with market dips a lot more easily.  In retirement that changes.  But I have a few hedges that I'm going to use to deal with what I believe is the biggest threat to FIRE: low or negative returns during the first 10 years of FIRE. 

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. 
Title: Re: Stop worrying about the 4% rule
Post by: Eric on June 29, 2018, 01:13:23 PM
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?)
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on June 29, 2018, 01:32:59 PM
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. 
Title: Re: Stop worrying about the 4% rule
Post by: Mr. Green on June 29, 2018, 03:34:40 PM
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.
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.

We had planned to spend 40k in FIRE, or 4% of $1 million, and this year our spending is on target for 36k. Though a true 4% WR for us has now become 58k with the unplanned income events.
Title: Re: Stop worrying about the 4% rule
Post by: Roadrunner53 on June 29, 2018, 04:36:26 PM
What do you all think of this:

https://www.msn.com/en-us/money/savingandinvesting/this-is-how-much-to-withdraw-from-your-retirement-savings/ar-AAzkdSm?li=BBnbfcN#image=1
Title: Re: Stop worrying about the 4% rule
Post by: PizzaSteve on June 29, 2018, 04:43:46 PM
What do you all think of this:

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 bit simplistic and not aimed at early retirees.

Main points.

1.  Tax advantaged retirement accounts have Minimum Distribution requirements.
2.  The minimum distributions are required, but might not be the best amount to take.
      2a.  Retirees might consider taking more than the minimum out, if they need it, since the minimum rate is very conservative
      2b.  Retirees might consider what rates of return they can expect, in their withdrawl assumptions, so their income is sustainable,
      2c.  Retirees might consider a flexible withdraw strategy that adjusts based on actual returns (less if returns are bad, more if returns are good and not just a fixed amount)
3.  You might want to consider developing an investment plan and budget to know what is best for you.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on June 29, 2018, 07:31:21 PM
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).

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.
Title: Re: Stop worrying about the 4% rule
Post by: Mr. Green on June 29, 2018, 09:04:38 PM
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).

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.
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.
Title: Re: Stop worrying about the 4% rule
Post by: DreamFIRE on June 29, 2018, 10:11:27 PM
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.

Yes, the added SS benefits definitely help.  Full retirement age is 67, so you would take a cut in benefits if you started taking them early at 65.  Also, I wouldn't want to live on SS alone even starting benefits at FRA, so I want my stash to last past 65 and 67, although I have calculated I will be able to reduce my WR to 2% or less since SS will cover at least half.  So, with SS after 15 years of FIRE, cFireSIM gives me a 100% success rate based on expected expenses and desired discretionary spending.  Only real concern for me is ACA / healthcare.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on June 30, 2018, 11:15:29 AM
Fortunately I only need 2 - 3% WR currently, but that assumes inflation stays tame until I get to Medicare and SS.

So I've been thinking a lot about why this topic generates so much sturm und drang. And I'd like to propose the following model:

1) Some disagreements about withdrawal rates are caused by lack of knowledge on one or both sides, and these discussions then to be highly productive.

2) Some differences in withdrawal rates are caused by differences in tolerance for risk or (perhaps more importantly) tolerance for uncertainty. These discussions are perhaps not as productive, but still seem to be interesting to both sides.

3) Some differences are caused by the sunk cost fallacy and tend to generate the most heated discussion for the least potential benefit.

With both the posters I've had the least productive interactions with on this forum (and EV I certainly don't put you in that camp!), it later emerged that both had worked many many years past when they could have retired and now had assets equal to 40-60x annual spending. When a person has put in those extra years of work, I'd imagine it really feels much better to be able to tell themselves that those extra years of work bought them additional safety and freedom from uncertainty.

So in these conversations, one side felt attacked by people who think they wasted years of their life, and the other side felt attacked by people who are trying to talk them into wasting years of their lives.

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.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on June 30, 2018, 11:42:38 AM
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.

Good points MM. The bolded text is why I continue to post in this thread. I'm not trying to convince someone already at 2% WR they made poor choices. As you note those decisions are made. But, I do think it's valuable to point out the opportunity costs and the other potential FIRE failure modes beyond going broke to folks who are still a ways away from a 4%WR. It's important to see beyond money and realize that at some point trading more of your life and your health for $$ you don't need increases your risk for FIRE failure.

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.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on June 30, 2018, 12:02:51 PM
Yup, and I agree that is important work, RC. Keep fighting the good fight.
Title: Re: Stop worrying about the 4% rule
Post by: Mr. Green on June 30, 2018, 03:05:21 PM
I can totally understand how someone with 40-60x annual expenses learning that 25x annual expenses is likely all they'd ever need could take it personally, like an attack. Like Retire-Canada, my participation is directed toward those still learning, or undecided. No good comes from telling someone they could have retired sooner. Hopefully those folks are able to let that go as the past being what it is. We could have retired years ago, easily in our mid-20s if we knew what we knew now but I'm not going to get hung up on that. Instead, I'm going to be grateful that we're in the position to enjoy many years of not working, and try to always take maximum advantage of the time I've been given. Knowing that statistically I have about a 1 in 5 chance of being dead by 65 helps keep things in perspective. Carpe diem, baby!
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on June 30, 2018, 06:44:39 PM
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 probably could have pulled the plug somewhere between 12 and 18 months sooner than I did, but at the time all I could think about was "what if I don't really have enough?"  I mean, I'm glad I have the buffer that I built up, what with all the health care uncertainty in the U.S., but if I would have known just how much easier it is to stay healthy without the daily grind at the desk, I might have reconsidered that extra O and a half MY.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on June 30, 2018, 07:11:35 PM
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.

Yes you've hit the nail on the head. Having been programmed to work and consume your whole life how can you even rationally decide if working more is a good idea? You really don't have a basis to make the decision on and frankly it's always easier to stick with your programming than fight against it. So people will grasp for any number of OMY reasons even if the real reason is it's just scary to face a huge life change.

Let's look at it another way if I told you someone you cared about had a compulsive habit they were having difficulty stopping and that was harming them you'd be worried and want to support them to make the change. If it was drugs/smoking/gambling/overeating/etc... there would be no controversy and just about everyone here would agree that that person needed to change.

OTOH if the problem was work...particularly sedentary work suddenly there are all sorts of justifications for it to continue well past the point where an enormous amount of wealth has been accumulated. We look back and see smoking as the scourge of one generation, then sugar and I am fairly confident sedentary computer work will be the smoking of the current generation.

Just like smoking or sugar...work is not something that's easily given up...especially by the typical MMMer who is a professional and has so much of their personal identity wrapped up in the career. Just like smoking or sugar in any one moment the health risks are not obvious. We could all go smoke one pack of cigarettes or eat a dozen donuts and have no serious health impacts. Just like picturing one more day at our desks seems so trivial. But in all these cases decades of abuse takes a huge toll on our lives.

In the case of work it's worse than just our health that's being impacted it's also our personal relationships. If you ask a typical OMYer what's the most important thing in their lives hearing their wife/husband and kids would be a pretty common response. But, you have to wonder if you voluntarily choose to continue working 40-60hrs a week for money you don't need and once chores/sleep/non-quality time is accounted for only have maybe 20-30hrs for the family can you really say they are your priority? Personally I don't think so.

You can do the same calculations around your health and come to similar conclusions. After all time is the most precious resource any of us has so when you really want to know what some one cares about or prioritizes you can just look at where they allocate their time.
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on July 01, 2018, 04:54:24 AM
That's a great analogy, Retire-Canada.  I hadn't thought of it that way, but it makes sense to think of OMY as a detrimental habit that needs to be broken.
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on July 01, 2018, 08:24:11 AM
Quote
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'm keeping this one in the back of my mind for reference.  I had thoughts of letting it go this year, but this little voice kept telling me just a little bit more.  They say when you hear voices, something is wrong.
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on July 01, 2018, 08:27:10 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: DreamFIRE on July 01, 2018, 02:29:30 PM
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.

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.
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on July 01, 2018, 02:59:23 PM
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
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on July 01, 2018, 03:00:43 PM
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 
Title: Re: Stop worrying about the 4% rule
Post by: DreamFIRE on July 01, 2018, 04:30:12 PM
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

Yes, and I plan to have that conversation in the spring if all goes well, at the same time I state my intentions that I will retire otherwise.  At that point, I know without a doubt they would have me start training someone and possibly ask if I would continue working part time for a while until I can get someone up to speed, and that's OK at that point.  I just don't want to have to deal with training someone while working full time as early as October through next spring.  That would totally suck for my last 8 months of work, even more so if I don't FIRE on schedule for some reason.  Things are pretty nice at work the way they are now, so I want things to continue that way for now.

The job is critical requiring 24/7 availability in that what I do much of the time, no other staff in my dept. can do, but that's not to say that I personally can't be replaced.  But someone has to do it, and there is a lot to learn, even for experienced people, as I know from working with the last co-worker with the same job title for over a year before he quit, he still had a lot to learn and wasn't nearly as efficient in accomplishing tasks and projects.  I've been working this position for over 17 years, which has of course advanced with more complexities over the years, and it's not something someone can just step in and take over in an instant with the same efficiency.  So, I think I would have a good shot of staying on part time, although maybe only a day or two instead of 24 hr/wk with benefits, and who knows for what duration, due to labor budget.  There's no guarantee they'll keep me on part time if I offer in October or afterwards, so I'm playing it close to the vest until next spring when the alternative will be to go ahead and FIRE completely.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on July 01, 2018, 05:42:51 PM
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.

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?
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on July 01, 2018, 06:17:35 PM
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

Congrats to both of you. Getting a handle on what's important and finding a balance between money and health/happiness is a pretty key skill for a successful life. Boarder the baby is a great time to get the ball rolling. Both because it's important in and of itself for you and to support your wife, but also because it gives you a reason to make the switch at work without having to justify your choice.

To Mailkynn's point...I find that I am at least twice as efficient people expect on average. In some areas I am far more efficient and in some not quite so much. It does mean that I can bill a client 10hrs and actually do 3-5hrs of work to earn that money. So structuring my work for minimum visibility into my processes and maximum flexibility is awesome for me. I can ramp up my $/hr worked so that it's not all that hard to make money and work a reasonable amount of hours.

I don't find I get more efficient with a downshifted schedule, but each hour of work is less unpleasant for sure. I also feel much better since the rest of my life gets most of my time and attention...not my job. That lets me focus on my health, happiness and personal relationships.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on July 01, 2018, 07:49:56 PM
Anyway, Financial Samurai has posted a bit about this recently (https://www.financialsamurai.com/ideal-retirement-scenario-conservative-returns-and-a-steady-income/).

That is a good article.

Quote
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.

This is exactly what I am intending to do. The trick is getting to a 5% WR and then you can add some buffer or just retire. The point is that extra money is really only to keep score and even though I can understand this it's also in my opinion dumb. I'm not trying to be the wealthiest. I'm trying to live the best life that I can on my terms. Money is just a tool to enable that.

I suppose another point about money is that one of the reasons I save money is because I want the risk of having to support myself from a job to disappear. Some people may think they need to reach 20x expenses plus another buffer of 20x expenses in cash or bonds whereas to me you are in a really good situation once you get to 20x expenses. I view my current requirement/goal of getting to 20x expenses plus a buffer (albeit it a relatively small buffer) as being pessimistic but I suppose everyone has to work out that level for themselves.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on July 01, 2018, 08:15:34 PM
I agree with your approach Steveo. I think 5%WR is a reasonable point to pull the trigger if you have a flexible FIRE plan and are prepared to take some action in the unlikely situation that you run into an issue. There is a solid case to be made for the opportunity cost benefit of retiring earlier than later.

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.

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.

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%

I posted this ^^ in another thread. Trying to find "safety" with a high bond allocation is actually more risky for your portfolio than sticking with something more aggressive. We worry a lot about the big crashes, but inflation is a serious threat as well and deserves as much of our attention.

If the article at the link addresses inflation risk in a sensible way I missed it so please point it out to me.
Title: Re: Stop worrying about the 4% rule
Post by: DreamFIRE on July 01, 2018, 08:35:39 PM
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 could do the majority of my work from home, although not all of it, and along with office politics, it's a non-starter.  That discussion has come up with staff in my dept. in the past and was rejected.  A couple years back, I would have loved to work from home, but the good news is that with having my own quiet office for over a year, it makes for a pretty efficient working environment as it is, since I'm not currently having to spend time training someone and work independently most of the time.  I'm not chained to my desk and have a lot of flexibility as well.

I could handle all routine work and pressing issues in 24hr/wk as I will be doing most of the summer while using vacation days, but long term, it would be difficult to make much progress on projects with a continued shortened schedule.  I would also have about 25 days of benefit time to squeeze in during the year.  I always have some backlog as it is working 40+ hr/wk.  I'm doing what two of us used to do while working less hours, albeit the other guy wasn't carrying much of the workload.

So rather than expecting me to handle everything at 24hr/week, I think they would either hire a replacement full timer and have me work part time for training, or they would have one of the other guys in the dept. cross-train with me while I work part time.  But if either of those occurred, my part time work may only be on a temporary basis due to labor budget.  I can't see anyone else getting near my efficiency level anytime soon, so it could last for months or as long as I want, hard to say.  Although excellent healthcare benefits are available working 24+hr/week, I would settle for an even more reduced schedule.  I think I would really like working that schedule for a while, although it most likely would not be out of need.  After a year or so of that, I may be ready to move on, completely FIRE, and possibly relocate.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on July 01, 2018, 08:48:40 PM
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.

Yup, at least for me this represents my motivation for staying extremely light on bonds (and hence heavier on stocks). Over the long term, a prolonged increase inflation seems like a much bigger risk than a stock market crash.

This is especially true for early retirees who, as you always do a great job of pointing out, have a bunch of options to reducing spending or bring in extra income during a stock market crash in the early years when we're vulnerable to SORR, while a portfolio eroded by inflation tends to creep up on you in your later years when it's harder to make course corrections.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on July 01, 2018, 09:04:45 PM
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.

I agree with this. You won't get a guaranteed 5% return excluding inflation year on year. You need returns of 20% every so often to counteract small/negative returns that will occur. You are only going to get those returns if you have a decent equity allocation.

The most likely failure in your portfolio is due to inflation. Equities are the best (someone might have a better option but I doubt it) hedge against inflation. On the flip side once you get to a 5% WR and you have a reasonable equity allocation you should be okay assuming you get past SORR.
Title: Re: Stop worrying about the 4% rule
Post by: matchewed on July 02, 2018, 07:52:00 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on July 02, 2018, 07:59:45 AM
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.

I'm a fan of keeping a mortgage even up here in The Great White North where we don't get to lock in a low 30yr rate. 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.

I can see the sense in the idea of a rising equity glide path. I plan to do something along those lines
Title: Re: Stop worrying about the 4% rule
Post by: sol on July 02, 2018, 08:08:00 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on July 02, 2018, 08:13:50 AM
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. 
Title: Re: Stop worrying about the 4% rule
Post by: sol on July 02, 2018, 08:33:01 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: DreamFIRE on July 02, 2018, 05:48:57 PM
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.

Yep.  I was posting the same thing a couple weeks ago about losing ACA subsidies with the increased income required to make mortgage payments:

https://forum.mrmoneymustache.com/post-fire/retire-with-just-$620-000/msg2040707/#msg2040707
Title: Re: Stop worrying about the 4% rule
Post by: steveo on July 02, 2018, 06:49:21 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on July 02, 2018, 08:31:54 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on July 02, 2018, 09:30:06 PM
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.

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 realise that this is an extremely simplistic example but the idea that a mortgage is so good for you is not as simple as it appears. If you have a mortgage you are betting on everything continuing to go up and leverage works for you. That is presumably a positive over the course of 20-30 years because over that period you should have better returns. You are though exposing yourself to increased SORR.

I view having a mortgage as increasing your SORR but decreasing your longevity risk. You can choose whatever option you want but it's not a free trade off.
Title: Re: Stop worrying about the 4% rule
Post by: matchewed on July 03, 2018, 02:22:15 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: cerat0n1a on July 03, 2018, 02:54:16 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on July 03, 2018, 04:16:46 AM
To be clear. Historically it does not increase your risk for SORR killing your portfolio. Everytime SORR killed a portfolio it killed it with or without a mortgage. Those with a mortgage run out of money sooner but you still fail in both cases. I think this is often overlooked when we discuss this.
Title: Re: Stop worrying about the 4% rule
Post by: matchewed on July 03, 2018, 05:48:57 AM
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 guess you could argue that the non housing expenses as a percentage of expenses is higher and that makes it higher. But let's try to quantify that risk a bit. Does it make some 96% chance to fail move to 75%? That's a big drop. Or does it move 96% to 95% which...meh
Title: Re: Stop worrying about the 4% rule
Post by: cerat0n1a on July 03, 2018, 06:12:54 AM
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.)
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on July 03, 2018, 06:47:26 AM
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.

If you were choosing between a paid off house worth $1M or getting a mortgage for $1M and investing it then your choice would be between:

- $1M invested and a $40K/yr spend at 4%WR with a paid off house
- $1M +$1M invested and a $40K/yr spend + the mortgage payments

Additionally if your portfolio started at $2M and you are following a 4%WR plan you don't change the WR amount downwards so that it's 4% of the current amount invested should the portfolio drop.

You can look at it like two separate investment accounts. One the standard FIRE account and one the home equity investment account. Since the FIRE account is the same as it would be with a paid off house the SORR is the same as it would be with a paid off house.

So then you are left with the SORR on the home equity account. At the start you have very little equity in the house so the risk is losing a small amount of equity. The mitigation plan would be the same as for FIRE in that a few years worth of bonds could be held to provide protection against a SORR and then either spent or left to be outrun by the equity portion of that account if early returns were not poor.

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.

I'll be FIREing with a mortgage and will likely see that mortgage stay in place for the first 15-30yrs of FIRE depending on what happens when we relocate.
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on July 03, 2018, 06:53:43 AM
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.  Which is why i'll never understand the SORR arguement.  b/c if you're trying to prevent FIRE failure not having a low fixed rate mortgage is not beneficial.

also you could add an income event to cfiresim and end the first mortgage and start a new mortgage with new parameters to simulate a perpetual mortgage like you're discussing.
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on July 03, 2018, 07:00:09 AM
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.

Title: Re: Stop worrying about the 4% rule
Post by: cerat0n1a on July 03, 2018, 07:51:19 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on July 03, 2018, 07:55:56 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on July 03, 2018, 08:04:46 AM
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.

I'm in Canada and we don't have the locked in 30yr mortgages like the US. Typically we do 5yr mortgages. They can be fixed for the 5yrs or variable.  I like variable rate mortgages due to the low lending rate. My mortgage rate after inflation is ~0.7%. I'm still pro-mortgage.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on July 03, 2018, 08:14:35 AM
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.

Another option...particularly with an expensive $1M home is to get a $500K mortgage and leave $500K equity in the home.  By year 10 you'll have ~$641K equity +/- any appreciation change + the balance of the mortgage investment account.

Thanks for the various points of view on the issue. It's good to hear what people are thinking.
Title: Re: Stop worrying about the 4% rule
Post by: cerat0n1a on July 03, 2018, 10:20:42 AM
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."
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on July 03, 2018, 11:11:01 AM
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."

again this isnt an issue in america for most people we can all mostly get to our stache's due to most pension systems going away and with the advent of the tax advantaged accounts these can be accessed quite easily.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on July 03, 2018, 05:56:55 PM
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.

This sounds extremely suspect to me. You fail quicker but total failure rates don't increase ? 5- 10 years later is a significant amount of time and lots can happen in that time period.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on July 03, 2018, 06:11:35 PM
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.)

I think people should read this. ERN is pessimistic but his analysis is pretty good.


Quote
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!

Quote
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!

This point below is the key point that I'd make. It's a risk to return call if you want to keep a mortgage in retirement. The potential benefit is more money but if you don't need more money to me it comes across as a very poor trade off however other people may view the risk differently.

Quote
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.

Quote
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.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on July 03, 2018, 06:25:44 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on July 03, 2018, 06:52:18 PM
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.

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.

I don't think that this is an issue here at all. You are still going to get to whatever WR you are going to get too. It's just with a mortgage you are more exposed to SORR.

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 that this is a different discussion. The discussion is really about is it worth buying a house. I suppose taxes and maintenance may play a role in this decision as well. These decisions are in my opinion going to be specific to the individual person.

If we are talking about retiring with or without a mortgage and the pros and cons of this to me the discussion is pretty clear cut. If you choose to have a mortgage you presumably increase your chance of ending up with more money over the course of your retirement at a cost of increasing your risk when it comes to SORR.

I think it's a personal decision about what you want to do based on your risk profile.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on July 03, 2018, 06:58:31 PM
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.

Then please point out the error in the results I posted above. I'm happy to be wrong and learn from it.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on July 03, 2018, 07:41:56 PM
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.

So I ran the cFIREsim simulation again and added in a $60K income event after 10yrs and then extended the mortgage run 10 more years for 40 total. I kept everything else the same. $60K happens to be the built up equity on that mortgage after 10yrs.

The result was 99.1% success against historical data.

If you wanted to get to 100% success against historical data you could take out a $900K mortgage and then at 10yrs you'd have $160K equity you could reinvest if you wanted to. It takes ~$80K to roll over to 100% success on cFIResim.

Let's recall the following [all using 80/20 AA] with cFIREsim:

- 4%WR success after 30yrs = 96.6%
- 4%WR success after 40yrs = 91.7%
- 5%WR success after 30yrs = 73.7%
- 5%WR success after 40yrs = 64.8%

So if these ^^ are risk levels we are comfortable with [Steveo you are pro 5%WR correct?] the mortgage risk is less.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on July 03, 2018, 08:20:46 PM
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.

I can understand your initial analysis of a non-inflation adjusted payment but we should mention the potential downside risk here as well. The risk is that interest rates increase. The US is not a good example to use here for mortgage analysis as it isn't a free market for mortgages. There is a high amount of government intervention but even then I think you can increase your SORR via taking on a mortgage and there may also be various tax/benefits implications from holding the mortgage.

I think your second analysis is really pushing the boundaries of what could occur in reality and avoiding any discussion on the risk of that approach.

I'm confident that the idea of having a mortgage being definitely the right idea is far from removed from a nuanced discussion on withdrawal rates. Maybe in reality by having a mortgage you should also target a lower WR until you get past the SORR stage but again I think why bother. My goal is to reach financial independence not to be the richest.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on July 04, 2018, 08:40:14 AM
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. ;)
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on July 04, 2018, 10:28:06 AM
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. 
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on July 04, 2018, 10:49:30 AM
Yup and whether to pay down the mortgage or not is one of those fuzzy math deals where the numbers say never pay down a mortgage.

Emotions can tell us exactly the opposite though.

Disclaimer.. I paid mine off before starting to invest.. It worked out great but I would have had more $$ if I had not.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on July 04, 2018, 03:51:46 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on July 04, 2018, 04:00:07 PM
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.

The house appreciates in value regardless of how much (or how little) the mortgage is paid off. 

I have no idea about SORR so I'll stay out of that discussion.  Fun to watch you guys hash though it, though.
Title: Re: Stop worrying about the 4% rule
Post by: Roadrunner53 on July 05, 2018, 05:49:47 AM
Sorry, but what is SORR?
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on July 05, 2018, 06:20:58 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Roadrunner53 on July 05, 2018, 06:44:02 AM
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!
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on July 05, 2018, 07:48:09 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on July 05, 2018, 06:53:05 PM
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.

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.

So we have different analysis stating that a mortgage is safer or less safe specifically when it comes to SORR. I suppose we have to leave it there until we know statistically the correct option based on this issue which may not occur. We also have to recognise that this is just betting with probabilities. The future may be different to the past.

We shouldn't though state that there is no impact in relation to SORR because the evidence says so. The evidence is at this point unclear however I'm erring on the side that a mortgage increases your SORR.

I agree it's good to dig into these issues and come up with good guidelines for people to use.

Personally there is no way in hell that I am leveraging into any market at this point in time but that is a subjective personal decision.
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on July 05, 2018, 08:11:04 PM
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. 
Title: Re: Stop worrying about the 4% rule
Post by: PizzaSteve on July 05, 2018, 08:32:42 PM
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!
Good explanation, though it is not a relatively new term.  It is an old concept. 

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.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on July 05, 2018, 11:00:25 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on July 06, 2018, 12:01:04 AM
also suggest the time to run out of money does matter.

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.
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on July 06, 2018, 06:09:15 AM
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.

i've read his info ... as was said above he used fixed inflation - inflation was never fixed in our history.  Run the scenarios thru cFIREsim and you'll find the conclusion i've drawn and Retire canada drew. 

also see my analysis above showing perpetual mortgages and their great hedge against SORR.  you know based on historical data not some fixed conditions that have never occured.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on July 06, 2018, 08:01:37 AM
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.

That's a good point. What do the failures look like and how hard is it to mitigate them?

I added in an $150K income event after 10yrs in my invest the mortgage simulation and pushed the 30yr success rate in cFIREsim to 100%. So in the example we've been playing with instead of taking out a $1M mortgage on your home and investing it all you could only invest $800K and keep $200K in some secure vehicle that matched inflation as closely as possible. Then deploy the $200K after 10yrs to get an investment plan that is far less risky than the standard 4%WR and definitely does not have higher SORR as Steveo claims.

The key with the mortgage as we've pointed out and ERN's analysis failed to take into account is the inflation protection. Once you get past the early years in FIRE inflation is the big risk and a mortgage is a great inflation hedge. Even excluding the equity in the property itself investing the mortgage as discussed in the paragraph above will make your overall FIRE less risky at a 4-5%WR since in some failure years for the 4-5%WR FIRE person their mortgage investment account has a surplus of funds they can draw on.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on July 06, 2018, 08:17:47 AM
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.



Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on July 06, 2018, 02:25:59 PM
"...SORR has played out."

When would you know that sequence of returns risk has played out?
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on July 06, 2018, 02:32:24 PM
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!
Good explanation, though it is not a relatively new term.  It is an old concept. 

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.

Emphasis added by me.

As to the first bolded statement, as I said in my previous post that you quoted, it is a relatively new phrase - at least it's relatively new to me and I've been studying FIRE since the late 1990's.  I agree it's an old concept; in fact I think I've complained somewhere that recent bloggers think they've discovered something new which they haven't, and presenting it as such is just silly.

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.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on July 06, 2018, 08:42:05 PM
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 think you are missing the point of PizzaSteve's comment, if you read the entire thing.  Basically, by using the Trinity study, you assume that the rolling 30 year periods in the past capture then 30 rolling year period in the future.

FIRE simulators do the Trinity study one better by showing you all of the outcomes of 30 year periods for different asset allocations, income events, etc., but these still have limitations like we can't adjust the periods to start with a "post Fed bank bail-out, persistent low inflation, low unemployment, protectionist trade war, giant corporate tax cut, persistent high-PE, etc." year... 

What unworried 4%-ER'ers bet is that this is no worse than one of the 30 year rolling periods in the past.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on July 06, 2018, 08:44:07 PM
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.

I definitely agree with you in relation to doing my own analysis. I don't agree with your points here though and I think you are underestimating the potential risk of taking on additional leverage. It's your call though. 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.

Yes ERN's analysis might have some holes in it but I guess your analysis does as well.

Maybe we just have to accept that some things are not completely black and white and individual preference is going to play a role. A good example is asset allocation. There are many different asset allocations that have led to higher SWR's in the past but that does not mean they will retain that edge now and in the future.

At this point I have no interest in obtaining additional leverage to invest more into the stock market or whatever market I choose to invest in. I'm also extremely confident that you and no one else can prove categorically that having a mortgage is some easy path to increasing your WR with no potential negative side effects.

A good rule to remember is that there are no free lunches. So long as you aren't blind to potential downside risks and you accept those risks then make your own personal decision.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on July 06, 2018, 08:55:10 PM
"...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.
Title: Re: Stop worrying about the 4% rule
Post by: PizzaSteve on July 07, 2018, 09:37:19 AM
"...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.
Good point.

Another scenario is that your plan targets a certain age, for personal, benefit or professional accomplishment reasons (say 40 or 50), but your income and MMM inspired consumption levels has you saving in excess of your retirement needs.

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.

Sure they could retire earlier with equities, but not without some SOR risk, and assuming they are an MD or something, enjoying performing heart surgeries to save lives or something rather than spending on a mercedes every year, they may want a zero stress, 100% win plan.  This is one reason why treasuries and the like sell so well.

In other words, a bond allocation shortens the SOR window in exchange for less top side wealth, with the extreme example being 100% cash, 0% SOR risk.
Title: Re: Stop worrying about the 4% rule
Post by: sol on July 07, 2018, 09:53:10 AM
with the extreme example being 100% cash, 0% SOR risk.

Also known as "100% inflation risk".
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on July 07, 2018, 07:46:12 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on July 07, 2018, 08:45:15 PM
with the extreme example being 100% cash, 0% SOR risk.

Also known as "100% inflation risk".

But if inflation is fixed at 2% (prices double in 36 years) then even cash can be OK for risk averse folks!  This is the Goldilocks scenario that we are currently making 30 year decisions from.
Title: Re: Stop worrying about the 4% rule
Post by: sol on July 07, 2018, 08:55:33 PM
But if inflation is fixed at 2%

I feel like assuming 2% long term inflation is like assuming 9% long term stock returns.  Sure, that could totally happen, but that's not the scenario we're trying to guard against when balancing the different types of portfolio failure risks.
Title: Re: Stop worrying about the 4% rule
Post by: DreamFIRE on July 07, 2018, 09:37:12 PM
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.

Yeah, he was predicting "nominal to zero" REAL returns three years ago:

https://forum.mrmoneymustache.com/investor-alley/bogle-projects-'nominal-to-zero'-real-returns-over-the-next-decade/
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on July 08, 2018, 08:36:31 AM
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.

Just out of interest I ran some numbers in cFIREsim.

50yr FIRE @ 4%WR with 90/10 Portfolio - so $40K/yr off $1M = ~85% success

Holding 100% cash at 0% return for 50yrs spending $40K/yr you get the following success rates:

- $1M = 0%
- $2M = 7%
- $3M = 27%
- $4M = 49%
- $5M = 63%
- $6M = 69%
- $7M = 84%

Starting at $1M invested and adding $100K savings per year at 6% return after inflation it takes ~19.5yrs to get to $7M.
Starting at $1M invested and adding $200K savings per year at 6% return after inflation it takes ~14.5yrs to get to $7M.

Of course you can argue the person working on a cash FIRE will die sooner so they don't need to fund their retirement for the same duration. They might even die at their desk in the extra 14-19 years it takes to save up the required cash...that approach has a 0% chance of not running out of money that's independent of portfolio value.
Title: Re: Stop worrying about the 4% rule
Post by: DreamFIRE on July 08, 2018, 09:01:53 AM
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%.
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on July 08, 2018, 10:52:52 AM
"...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.

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?
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on July 08, 2018, 11:21:28 AM
It could be 4% it also could be a shorter life expectancy than when you started. But yes when cfiresim says 100% and you don't have any borderline for a 40 year time line youve surpassed it basically if you get to a 3.5% wr after you've FIREd you're safe
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on July 08, 2018, 11:26:09 AM
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%.

I have a relative who is 70 and he claims he is making about 5% just using CD products though Raymond James I believe.

Of course he got a bit cagey when I started asking him about fees and I pointed that interest rates are currently rising. Depending on how long the CD are locked in for and how fast rates rise he may get and effective sending growth that barely matches inflation.

Interesting concept for a "zero risk" portfolio though.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on July 08, 2018, 12:05:23 PM
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?

If you accept the premise that the future will be no worse than the past a 100% success rate in cFIREsim means you can be pretty confident that you have mitigated both the SORR and inflation risk. So I'd be pretty happy with that.  You could select a different criteria that wasn't quite as high to decide if you wanted. 

But as I noted in the example we've been talking about if making the call is not something you are willing or comfortable doing you can take that requirement off the table and just invest 80% of the mortgage and keep 20% in reserve in an inflation mitigated vehicle. You lose out on some of the potential returns, but you push your success rate against historical data to 100% and your mortgage investment is less risky than the typical 4%WR FIRE plan and much less risky than a 5%WR FIRE plan.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on July 08, 2018, 12:38:30 PM
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.

I would never suggest that ^^^ in fact I'll go further and say it's definitive that there are all sorts of situations we can conceive of where having a mortgage and investing the proceeds is not a good idea. My comments were only referring to the case we were examining which you presented along with the ERN blog post.
Title: Re: Stop worrying about the 4% rule
Post by: MissNancyPryor on August 05, 2018, 10:52:57 AM
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.   
Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on August 05, 2018, 11:15:18 AM
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.   

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).


If Nords said 80% and 100% are really about the same thing (sounds familiar, but I didn't check), he probably meant the above plus he's willing to adapt to circumstances by cutting spending, working part time, etc.


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

Some would argue I have over saved just a smidge though..;)
Title: Re: Stop worrying about the 4% rule
Post by: DreamFIRE on August 05, 2018, 12:54:46 PM

95% is better than 80%, and there are good arguments that both are likely over estimated in today's environment:

https://forum.mrmoneymustache.com/welcome-to-the-forum/cfiresim-severely-overestimates-success-rates-for-mustachians/

https://forum.mrmoneymustache.com/investor-alley/cape-and-safe-withdrawal-rates/

https://forum.mrmoneymustache.com/investor-alley/start-worrying-about-the-4-rule/

And I think all of this was actually mentioned earlier in this thread.
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on August 05, 2018, 04:55:30 PM
Swordguy - I like the way you posted this;


SNIP

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

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

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

SNIP

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


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


Can you cut spending to cover the gap?

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


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


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

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




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

Dude. You won. Seriously. If you like to keep working, that's fine. Otherwise, enjoy ER.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on September 30, 2018, 09:19:49 AM
The equity in your house does count as a part of your net worth [assets minus liabilities], but does not count as a part of your 'stache for 4% purposes. It may reduce your required expenses (if you own the house, hey, no mortgage! Somewhere to live!), but it doesn't generate income, so you can't use it for your 4% calculation. If you want to downsize and thus turn some home equity equity into extra 'stache, great!

I also consider home equity as a hedge against SORR. Before I retire, I intend to open a HELOC as a "just in case" measure. This will both allow a source of ready cash if the market takes a dump, and will keep variety in my credit report for longer.
Title: Re: Stop worrying about the 4% rule
Post by: sol on October 10, 2018, 07:06:12 PM
For anyone worried about SWRs of 3% or lower, and there have been several of you in this thread, please note that today the rate on 10 year US Treasuries (https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield) went to 3.24%.  That's about as close to a risk-free guaranteed return as you can find, and it is higher than the SWR targeted by some folks here.
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on October 10, 2018, 07:33:22 PM
A half a percent real return isn’t going to do it.

“The current inflation rate for the United States is 2.7% for the 12 months ended August 2018, as published on September 13, 2018 by the U.S. Labor Department.“
Title: Re: Stop worrying about the 4% rule
Post by: sol on October 10, 2018, 11:42:00 PM
A half a percent real return isn’t going to do it.

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

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

If only there were some other asset class we could invest in to close that gap!
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on October 11, 2018, 09:53:17 AM
A half a percent real return isn’t going to do it.

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

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

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

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

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

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

As a reminder, a 3.22% inflation-adjusted withdrawal rate of a mixed US stock/bond portfolio has never failed, at any point in history, for any length of retirement. 
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on October 11, 2018, 03:45:50 PM
You're right, if you were to put 100% of your portfolio into ultra-secure US treasury bonds today with real returns only half a percent above inflation, you would only be guaranteed 28 years of inflation adjusted withdrawals before you would have to find another source of income.  What's your life expectancy?  When can you draw social security?

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

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

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

We can't compare a nominal return to an SWR. It's not a meaningful comparison. Real returns are what counts.
Title: Re: Stop worrying about the 4% rule
Post by: PizzaSteve on October 17, 2018, 10:28:33 PM
At the risk of sounding like Suze Orman... If you're going to go a sarcastically suggested 'all bond' route, at least allocate some amount to something like VAIPX -a TIPS fund currently yielding 3.3%.

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

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

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

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

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

My point is that 3% is the right number for some (including Suzi, perhaps, who is certainly far from typical 😉).
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on October 18, 2018, 03:14:24 AM
Also a lot of FIREe's will end up with a ridiculously low WR simply because their portfolios will grow faster than they will spend it. Right now we are are running at somewhere slightly below 1.5% due to the fact that we have rental income and our pensions when they kick in will make our WR even more conservative.

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

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

I suspect MMM himself with his $27k annual spend has a barley measurable WR!
Title: Re: Stop worrying about the 4% rule
Post by: nereo on October 18, 2018, 05:55:31 AM
Also a lot of FIREe's will end up with a ridiculously low WR simply because their portfolios will grow faster than they will spend it. Right now we are are running at somewhere slightly below 1.5% due to the fact that we have rental income and our pensions when they kick in will make our WR even more conservative.

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

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

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

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

with a low annual spend its pretty easy to meet that through a variety of independent measures. Earning enough to cover an $80k lifestyle can be tough without a FT job or several rental properties you have to manage-- earning $27k is easy.  One of the reasons we feel comfortable with you plan to use the 'glide-path' into FI/RE and go part time in our 40s. 
Title: Re: Stop worrying about the 4% rule
Post by: matchewed on October 18, 2018, 07:58:33 AM
Also a lot of FIREe's will end up with a ridiculously low WR simply because their portfolios will grow faster than they will spend it. Right now we are are running at somewhere slightly below 1.5% due to the fact that we have rental income and our pensions when they kick in will make our WR even more conservative.

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

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

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

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

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

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

It is another way of showing that all those issues that people have with the 4% rule can just easily be mitigated for a ridiculous success rate. And many of those things don't require OMY at some time/stress demanding job.
Title: Re: Stop worrying about the 4% rule
Post by: PizzaSteve on October 18, 2018, 06:44:40 PM
Agreed.  Thats why I get so annoyed about the mortgage debates.  It's really all about spending management, with investment returns really secondary.  Any decent investment strategy will do, ETFs, being debt free, individual stocks, rentals, even bonds or CDs are fine, assuming you live honestly and without that need to consume.

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

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

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

Investment optimization threads are all fine, but secondary IMHO.

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

Especially at 8%WR.The folks that FIRE at 2%WR at 65yrs with short lived family members in their gene pool probably can relax. ;-)
Title: Re: Stop worrying about the 4% rule
Post by: TempusFugit on October 19, 2018, 08:34:51 AM
Well the underlying what you're invested in still matters a great deal. There are probably more unsuccessful investment to SWR mixes than successful ones.

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

Except for the spectre of approaching death. 
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on October 19, 2018, 08:39:10 AM
Except for the spectre of approaching death.

Let's face it people shooting for 2%WR or lower a secretly using the "if I die at my desk" strategy as a way to ensure they never have to worry about running out of money and perhaps even better "if I die at my desk I never have to face the scary possibility of actually having to stop working!" So I don't think death holds the same concern for them as it does for folks who are eager to retire and get off the hamster wheel. ;-)
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on October 19, 2018, 09:18:19 AM
The other item people forget to think about is the spending aspect of a WR. Spending is not a constant over 50 years.

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

Before you bother working out a withdrawal rate you need to determine how much annual budget you need for your retirement. If you fail at that step nothing you do further down the planning process is going to be reliable.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on October 19, 2018, 09:32:04 AM
This is an over generalization and not true for everyone.

Nothing is true for everyone. People are very creative and will come up with all manner of reasons to OMY.
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on October 19, 2018, 09:36:11 AM
Yeah the budgeting step is interesting. We went from $30k/year prior to RE to something more like $45k after RE. Why? Well we are not exactly sure yet (this is the first year of no real employment for either of us), nor are we sure of what our actual spend is yet.

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

Part of the issue is that 2% WR is about $60k for us so in some ways the extra spend really doesn't matter.. Good problem to have/hedonistic adaption perhaps?
Title: Re: Stop worrying about the 4% rule
Post by: PizzaSteve on October 19, 2018, 09:57:39 AM
Agreed.  Thats why I get so annoyed about the mortgage debates.  It's really all about spending management, with investment returns really secondary.  Any decent investment strategy will do, ETFs, being debt free, individual stocks, rentals, even bonds or CDs are fine, assuming you live honestly and without that need to consume.

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

Investment optimization threads are all fine, but secondary IMHO.

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

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

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

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

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

@Exflyboy We struggle a bit with giving ourselves permission to spend, having also saved to 2%ish.  A life of frugal habits is good, but can get in the way.  Nothing is wrong with the occasional deck or fancy fridge, well deserved. Better to get it when you will enjoy it for decades than hoard money.
Title: Re: Stop worrying about the 4% rule
Post by: steveo on October 19, 2018, 05:31:52 PM
Before you bother working out a withdrawal rate you need to determine how much annual budget you need for your retirement. If you fail at that step nothing you do further down the planning process is going to be reliable.

This is the most important point and it gets missed in these maths type debates. Unless you get your estimated spending right it's going to be shot in the dark. That in all reality is probably a variable spending idea. You need to have an idea though of what you can live off but it's probably going to be I'd like to live on x but I can live off y for a period of time if things go bad so that I can quit earlier.
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on November 03, 2018, 11:01:16 AM

-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?

2 % is a 50 X multiplier.

$60,000 X 50 = $3,000,000

It would take 30 years to spend that down at 100 K a year without any return.  You are definitely in a position where you do not have to worry about the 4 per cent rule.

Is health care a valid reason for OMY?  It seems rather unpredictable.  The 4 percent is fine other than that.
Title: Re: Stop worrying about the 4% rule
Post by: dude on December 04, 2018, 09:48:49 AM
 This may have been posted here before (hell, I might have posted it previously!), but it gives me great comfort every time I read it:

https://www.kitces.com/blog/consumption-gap-in-retirement-why-most-retirees-will-never-spend-down-their-portfolio/
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on December 23, 2018, 12:13:27 PM
Yes - I'm a worrier.  I was brought up to be a worrier.

With the recent blip in the stock market, my worries arise anew.  I try to figure things out.  Sometimes, me and this financial stuff just do not agree. 

Just take a quick look at this overview of the S&P 500 for the past 90 years.  Observe the pattern.

https://www.macrotrends.net/2324/sp-500-historical-chart-data (https://www.macrotrends.net/2324/sp-500-historical-chart-data)

Look at say 1965.  See the pattern.  It's a nice climb to a peak about 772 in 1968.  Nice, huh?  Maybe your grandfather made money on this market.  The overall curve of the stock market is going up.  If you draw a line through it the 4 percent rule ought to do just fine.

When did it hit 772 again?  It was about 1993.  This was about 25 years later.

Explain to me.  If you let your money sit in the stock market, did it take 25 years to get this value back?

I saw a very similar pattern looking at the Dow Jones curves.

There is a similar pattern after 1929 to 1958 or so.

Now look at 2010 to now.  The slope and general pattern look like the rise from 1950 to the mid 1960s.  Now it is starting to fall at the end of 2018.  Hey! I could easily be dead in 25 years if we have a repeat of the same pattern.  That delta under the curve which represents the toil and sweat of my lifetime could have gone into some Wall Street fat cats pocket.

Is my worry invalid or is it, "You pay yoo money yoo taka yoo chances" 

Educate me and let me sleep easy at night.


Title: Re: Stop worrying about the 4% rule
Post by: Roadrunner53 on December 23, 2018, 12:40:02 PM
I am worried too! I need to make a substantial withdrawal 3.5-4% in January.

This will be my first time withdrawing this type of percentage. I had to dip into regular savings for the last few years due to Obamacare and not to increase my income level to lose the subsidy. I am off Obamacare and starting January I need to take from retirement money and cringe since the stock market is going nuts every day!
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on December 23, 2018, 12:40:32 PM
1929 and 1966 were probably the absolute worst times to retire and use the 4% rule (even though it hadn't been described at those points in history).  Note that a 4% withdrawal rate historically succeeded over a 30 year retirement in both of those absolute worst years.(*)

This also assumes that the hapless retiree doesn't notice the problem for 30 years and refuses to go back to work or tighten their belt and continues to adjust upward for inflation.  A reasonable retiree would (a) probably notice sooner, and (b) probably do something about it.

Your chart also includes price changes but likely does not account for dividends.  The dividend yield in the 1960's was probably (guessing) 3%, so after 25 years of waiting you'd have all of your money back (less inflation) plus 75% of your money in dividends.

Finally, you seem to imply that the person saved up cash for a lifetime, then bought 100% stocks in 1966 (or 1929).  Nearly everyone works for 20 years at a career and buys in with each paycheck over that long period of time.  At least that's what I did.  So a typical investor trying to retire in 1966 would have started buying in 1946 or so and benefited from the 1946 to 1966 market performance.

2010 as a starting year could be worse than ever before, in which case the 4% rule could fail.  2019-2020 could rhyme with 1973-1974 (albeit probably with lower inflation), or it could rhyme with 2010-2011.  Nobody knows, so in this case of trying to predict the future, yes, you do pays your money and takes your chances.

Personally I think we've learned some things about economics since 1929 and 1966, and I think that the world economy is overall trending positively, not negatively.  I admit I may be wrong, but I'm pretty much a relentless optimist.

As the market drops - and it may drop further; I believe bear markets average about 9 months in length - you will find me likely rebalancing my portfolio from bonds to stocks.  As it bottoms out, I will probably be nervous.  If it isn't different this time and the recovery follows, I will be at 95% stocks, riding the next wave up, and probably buying a first class plane ticket to my favorite Caribbean island.  I fully and completely expect this.

If it is different this time, I'll be grubby from not having showered to minimize my water bill, and riding my ten-speed bicycle to my greeter job at Walmart, if my resume printed on the back side of a recycled piece of paper manages to catch the eye of HR over the thousands of my fellow unemployed citizens.  But for a few pretty enjoyable years between 2016 and then, I will have not had to work.

(*) More or less, depending on what you were invested in.  1966 and 1967 might have been failure years, but they were still close.
Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on December 23, 2018, 12:59:45 PM
https://www.cnbc.com/2015/08/27/the-inspiring-story-of-the-worst-market-timer-ever.html (https://www.cnbc.com/2015/08/27/the-inspiring-story-of-the-worst-market-timer-ever.html)

Title: Re: Stop worrying about the 4% rule
Post by: mjr on December 23, 2018, 01:02:26 PM
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.

Title: Re: Stop worrying about the 4% rule
Post by: pecunia on December 23, 2018, 10:06:17 PM
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.



Certainly is a much prettier picture.  I didn't think J L Collins was lying to me.

I couldn't understand it.  The late 1960s was a good time for the United States.  There were good paying union jobs, we were still on a science kick going to the moon and we had enough money too support LBJs war on poverty.  The Vietnam War probably dragged the economy down a bit, but this was the time when all of those shuttered factories in the rust belt were still going strong.  Like, we sold stuff to the world.

Ok - So they issued dividends and shared the wealth.  That's cool.

So, unless I hear about them continuing to do layoffs like GM, I would think American Industry will keep this stock thing going.  I'll hang in there.  Once they get this government thing solved, get a good trade deal with the Chinese and possibly revalue over-valued stocks, we should get back to a slow rise in maybe a year. 
Title: Re: Stop worrying about the 4% rule
Post by: mjr on December 23, 2018, 11:29:49 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on December 24, 2018, 06:52:04 AM
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.

That's right.  It was a time of high inflation, stagflation.  Not such a pretty picture with the inflation.  That all makes it make sense.  High inflation can drag you down.  OPEC was king back then.  Having a monopoly was very good for the monopoly.  It kind of gives one an appreciation for the new oil production technologies that get oil from tar sands and shale.  It is starting to make sense why the curve was kept from growth. 

From the web:

September 2018

"The United States likely surpassed Russia and Saudi Arabia to become the world's largest crude oil producer earlier this year, based on preliminary estimates in EIA's Short-Term Energy Outlook (STEO). In February, U.S. crude oil production exceeded that of Saudi Arabia for the first time in more than two decades."

If the money stays in North America, it should help recovery from the upcoming bear market.

I'm starting to feel better.  I've not known J. L. Collins to lie about this stuff.
Title: Re: Stop worrying about the 4% rule
Post by: DreamFIRE on December 25, 2018, 10:00:50 AM
Here's a much more recent timeline of 13 years with negative real returns with dividend reinvestment and adjusted for inflation.

That's April 1999 to June 2012 with a real annualized return of -0.699%.

http://i65.tinypic.com/e02y3c.jpg
(http://i65.tinypic.com/e02y3c.jpg)

There have been longer time periods as well:

https://forum.mrmoneymustache.com/investor-alley/10-years-of-negative-returns/msg2100467/#msg2100467
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on December 25, 2018, 10:40:56 AM
Here's a pretty good summary of what it's been like being in the drawdown phase from 2000 - 2017 for several asset allocations, example is scaled using $100,000 starting NW and $4,000 inflation adjusted withdrawals -

https://youtu.be/opNohVglLX0?t=183
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on December 25, 2018, 07:01:39 PM
@EscapeVelocity2020

Nice presentation in the link.  Although a high inflationary environment (1965-1982 for example) would make the higher bond allocation look pretty risky. 

In general, this is why I have always thought that circumstances should dictate AA.  It doesn't make you a market timer to adjust AA based on your needs.  The idea of bond tent or reverse glidepath has become rather popular, but I prefer a "buckets" approach with noncorrelating asset classes.  IOW one bucket is for longer term were I will not draw down, the other for nearer term that will be drawn down.

To stick with the thread topic; further perfecting personal AA increases the resiliency of the 4% rule.  Making it more robust than the original trinity study predicts
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on December 26, 2018, 07:46:52 AM
I certainly have not enjoyed this December, but I really am thankful for my assessment of my risk tolerance and managing to a 3.0-3.25% SWR and a conservative AA.  My year end rebalancing will get things back in order. 
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on January 29, 2019, 07:44:36 PM
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?
Title: Re: Stop worrying about the 4% rule
Post by: Telecaster on January 29, 2019, 08:52:48 PM
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?

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. 
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on January 30, 2019, 05:34:41 AM

-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.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on January 30, 2019, 07:28:13 AM

-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.

It's not the average rate of return which dictates portfolio failures, it's the very bad years that do them in, particularly at or near the start of the withdraw-phase (aka 'sequence of return risk).  Consider that a guaranteed 3% return and 4% WR would still last 44 years, and 30 year periods with 4% annual returns have yielded a larger ending portfolio provided the big down markets occurred later on.

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.  If you believe bear markets will be more severe in the future, what strategies will you use to address such a large down market. If you are worried about 'sequence of returns' risk - what can you do to mitigate that.
Title: Re: Stop worrying about the 4% rule
Post by: 2Birds1Stone on January 30, 2019, 07:53:40 AM
You can hedge with social capital, skills, and passive/entrepreneurial income streams.

The first one is very often underestimated and overlooked on personal finance boards. 
Title: Re: Stop worrying about the 4% rule
Post by: sol on January 30, 2019, 09:29:58 AM
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. 
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on January 30, 2019, 09:47:28 AM
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.

Excellent points, @sol.

The magnitude of the relative risks is quite amazing to me.  At almost 50 years old and with a ~1.5% WR, I ran the Rich/Broke/Dead tool developed by @CCCA.  With my particular numbers, I have zero risk of running out of money, but a 20% chance of being dead in 20 years.  *Of course* I'll be in the 80% that makes it past that age, but one of my friends growing up died at 49 the other day, so the risk is real.

I won't bore you with what I do, but more of my time and effort is focused on my health and reducing those mortality factors.  On a related note, being middle-aged, rich, and feeling well is a thousand times better than being middle-aged, rich, and sick.

I'd also add that in my opinion the ways to gaining and preserving wealth are fairly well documented and the ways to gain and preserve health are also fairly well documented.  (Yes, there is considerable disagreement in both areas about the ideal way to do things, but the broad outlines in the middle seem to me to be mostly consistent.)
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on January 30, 2019, 10:04:28 AM

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.

You wouldn't be just lying with statistics would you?  And - You went back to work yourself, so,.........

Jack Bogle was just one smart man.  A lot of other smart men like Sol give credibility to the 4 percent rule, so maybe I don't have to back down to 3 percent.  Evidence is made readily available using historical data for anyone to study the statistics and check it out for themselves.  It may not be 100 percent, but as was pointed out the odds are both small and manageable.

I guess it's similar to climate change.  A few smart men don't believe it.  Many more smart men do.  And,...the facts point at it being correct.

Given the odds,.......more veggies.
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on January 30, 2019, 06:33:24 PM
We "blindly" hit 1.5% WR last year.. We should be able to cut that back when our pensions kick in though.. oops!
Title: Re: Stop worrying about the 4% rule
Post by: Metalcat on January 31, 2019, 06:04:27 AM
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?

If you like your job and have a good work/life balance and can continue to make money while living a great life, then sure, why not save to 33.34X, why not save to 50X?

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.

It's the subjective factor of how much they enjoy their lives while working that defines if that conservativism is a significant risk or not. I mean, if the whole point of FIRE is to be happy, then whether or not you are happy while working is kind of a big deal in the equation.

If you have fat in your annual retirement budget, which most of us do, a willingness and capability of making money if needed, a possibility of geo arbitrage particularly in early retirement, and even a vague inclination to monitor what the markets are doing, then you could very very conservatively get away with saving well under 25X.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on January 31, 2019, 06:55:39 AM
Some posters have a history of deleting their entire journals for reasons that are entirely personal. IT can be a bummer for those of us who have followed along and started our own mini-discussions with them, because as the journal goes so do those posts. 

Also a little-known fact; you can change your user name along with the title of any threads you have started (including journals). This appears to be what has happened with at least one frequent poster.
Title: Re: Stop worrying about the 4% rule
Post by: Metalcat on January 31, 2019, 06:58:34 AM

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.

I had my entire post history deleted from 3 different forums for personal reasons.

I'm back now, but only on this forum.
Title: Re: Stop worrying about the 4% rule
Post by: MissNancyPryor on January 31, 2019, 07:13:32 AM
Thanks for the reply, I totally get it.  And thanks for the frequently brilliant posts.
Title: Re: Stop worrying about the 4% rule
Post by: Metalcat on January 31, 2019, 07:56:18 AM
Thanks for the reply, I totally get it.  And thanks for the frequently brilliant posts.

Thanks for the compliment.
I think I just come at things from a very different perspective than most people here because I'm not an engineer/math person and I don't actually care for FIRE, and really don't give the numbers much thought.

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.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on January 31, 2019, 09:33:39 AM
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?
Title: Re: Stop worrying about the 4% rule
Post by: nereo on January 31, 2019, 09:48:50 AM
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.
You mean like a personal description?  Spartana: White, 1'8", fluffy.  Often sports a monocle and top hat.
Oops, was that an overshare?
Title: Re: Stop worrying about the 4% rule
Post by: nereo on January 31, 2019, 10:59:40 AM
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...

Title: Re: Stop worrying about the 4% rule
Post by: DavidAnnArbor on February 01, 2019, 12:08:45 PM
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."
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on February 01, 2019, 01:50:19 PM
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."

Why do people seem to have problems with that?  If things are down, just cut your spending during those years.  A couple years living on slightly less seems like a very good trade off vs. spending an additional 5 or 10 years working. 
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on February 04, 2019, 01:18:05 AM
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?
Title: Re: Stop worrying about the 4% rule
Post by: nereo on February 04, 2019, 05:24:34 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on February 04, 2019, 06:21:25 AM
Quote
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.

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).
Title: Re: Stop worrying about the 4% rule
Post by: Metalcat on February 04, 2019, 07:06:10 AM
Quote
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.

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.
Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on February 04, 2019, 08:47:31 AM
We ended up going two more years than we possibly needed to.   But we have a mentally handicapped daughter who can't provide for herself and we don't trust Uncle Sam to do a good job for her, so we decided that being extra cautious was the way to go.  She would be the one penalized for our mistake and that wasn't fair to her or her brother, who would be saddled with her upkeep.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on February 04, 2019, 11:51:39 AM
Quote
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.

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.
Title: Re: Stop worrying about the 4% rule
Post by: ixtap on February 04, 2019, 11:58:20 AM
Quote
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.

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 think of it as a continuum:
ERE
MMM
ER
Bogleheads
Title: Re: Stop worrying about the 4% rule
Post by: Metalcat on February 04, 2019, 12:04:15 PM
Quote
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.

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.

Lol, oops
Title: Re: Stop worrying about the 4% rule
Post by: nereo on February 04, 2019, 01:47:57 PM
reposting because it's relevant:
(https://moneydotcomvip.files.wordpress.com/2016/12/161201_limrachart.png)

Only 5% of Americans 'retire' before age 55.
Following that logic, in the eyes of most Americans anyone who retires before than are outliers... extreme.  Even pulling the plug at 59 beats out most Americans.

Compared to the folks at ere.org someone retiring in their mid 40s would be fairly late - so it all comes down to the perspective of the person.
Title: Re: Stop worrying about the 4% rule
Post by: MrThatsDifferent on February 11, 2019, 08:26:35 PM
Why are there two 50-54?
Title: Re: Stop worrying about the 4% rule
Post by: 2Birds1Stone on February 11, 2019, 09:37:17 PM
I bet it's supposed to be 45-49 and 40-44
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on February 12, 2019, 11:25:19 AM
I bet it's supposed to be 45-49 and 40-44
Snort! 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!

Yes but you OBVIOUSLY were born with a silver spoon in your mouth and got a YUGE inheritance.. Simply can't be done otherwise..:)
Title: Re: Stop worrying about the 4% rule
Post by: Brother Esau on March 04, 2019, 04:35:48 PM
Just heard Dave Ramsey tell a caller to go with 8% withdrawal rate
Title: Re: Stop worrying about the 4% rule
Post by: RWD on March 04, 2019, 05:11:19 PM
Just heard Dave Ramsey tell a caller to go with 8% withdrawal rate

Of course that'll work! The funds he shills recommends give 12% returns!
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on March 05, 2019, 03:08:04 AM
Just heard Dave Ramsey tell a caller to go with 8% withdrawal rate

Of course that'll work! The funds he shills recommends 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.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on March 05, 2019, 05:10:42 AM
Just heard Dave Ramsey tell a caller to go with 8% withdrawal rate

Of course that'll work! The funds he shills recommends 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.

well, according to his website, he recommends front-end load growth funds that have 'done well' in recent years.  Having trouble finding one?  DR's website has a handly link to "investing pros* in your area", right after the link to buy his book.

*these 'investing pros' are not fiduciaries.  Now I need a shower.
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on March 05, 2019, 07:13:01 AM
Just heard Dave Ramsey tell a caller to go with 8% withdrawal rate

Of course that'll work! The funds he shills recommends 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.
Title: Re: Stop worrying about the 4% rule
Post by: RWD on March 05, 2019, 07:24:08 AM
Just heard Dave Ramsey tell a caller to go with 8% withdrawal rate

Of course that'll work! The funds he shills recommends 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 sure, but in that case they could be invested entirely in CDs and wouldn't run out of money.
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on March 05, 2019, 05:12:49 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on March 05, 2019, 10:12:20 PM
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?..:)
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on March 06, 2019, 04:52:45 AM
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?..:)

Does he sell Dr. Dave Ramsey's patent medicine too?
Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on March 06, 2019, 07:16:23 AM
As for DR and the amazing 12% mutual fund, given that the information is public knowledge and no one can figure out what fund it is, I think it's likely that we'll find El Dorado first.
Title: Re: Stop worrying about the 4% rule
Post by: sol on March 06, 2019, 08:14:06 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on March 06, 2019, 08:41:30 AM
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. 

Title: Re: Stop worrying about the 4% rule
Post by: Metalcat on March 06, 2019, 08:42:46 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on March 06, 2019, 10:17:29 AM
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.

Not there yet - still working (somewhat).  The 3.5 percent was for planning.
Title: Re: Stop worrying about the 4% rule
Post by: John Galt incarnate! on March 09, 2019, 05:23:45 PM


Does he sell Dr. Dave Ramsey's patent medicine too?

He does.

I happen to know that it's main ingredient is a rare snake venom.

Ha!
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on March 10, 2019, 03:05:35 AM
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..:)
Title: Re: Stop worrying about the 4% rule
Post by: Metalcat on March 10, 2019, 06:10:30 AM
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..:)

Lol, that's like my family member who is worth several tens of millions who says she's not "rich" because she doesn't have a private plane.
...not sure what that has to do with withdrawal rates though...

Regardless of what anyone considers "rich", you need a higher withdrawal rate not to end up dead with a pile of money if that's not what you want.
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on March 10, 2019, 07:50:45 AM
@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...:)
Title: Re: Stop worrying about the 4% rule
Post by: RWD on March 10, 2019, 08:04:18 AM
@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.
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on March 10, 2019, 08:09:37 AM
@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..:)
Title: Re: Stop worrying about the 4% rule
Post by: nereo on March 10, 2019, 08:40:38 AM
@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?
Genuinely curious...
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on March 10, 2019, 11:17:48 AM
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?
Genuinely curious...
Think about having another highway located 3 miles above the main highway - except with far less traffic and zero of those big semi trucks.

At least that's how I picture it.
Title: Re: Stop worrying about the 4% rule
Post by: sol on March 10, 2019, 11:33:00 AM
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. 
Title: Re: Stop worrying about the 4% rule
Post by: nereo on March 10, 2019, 11:49:22 AM
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?
Genuinely curious...
Think about having another highway located 3 miles above the main highway - except with far less traffic and zero of those big semi trucks.

At least that's how I picture it.
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. 
I'm not a pilot, so I'm happy to be corrected on this assumption...
Title: Re: Stop worrying about the 4% rule
Post by: markbike528CBX on March 10, 2019, 12:47:07 PM
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.

Example: SR-71 speed check
https://m.youtube.com/watch?v=8AyHH9G9et0
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on March 10, 2019, 04:36:41 PM
@ Nero.. My airplane cruised at 18,000 ft.

@sol.. what ego?..;)

Hehe, yeah the primary reason for flying higher in a jet is that you can fly at the same speed for less fuel burn.. I.e the airplane becomes more fuel efficient.

secondly, we pilots (hah.. I sold my airplane in 2013) like to find the altitude with the best tailwinds.. Having more altitudes to choose from helps.

Yes less congestion, although any flight above 18,000ft is automatically flown by instrument flight rules, basically means Air traffic control is navigating for you. But flying higher does give them more options to avoid congestion.

I think the Phenom flys a little slower than most airliners so having it fly higher means less chance of them having to vector airplanes of different speeds around one another.

Its also cool..:)
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on March 12, 2019, 02:30:46 PM
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).
Title: Re: Stop worrying about the 4% rule
Post by: nereo on March 12, 2019, 02:43:48 PM
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).

The problem with these sorts of articles is that people (often very financially educated people) have been saying similar things for over a century.  Pick a decade and start reading OpEds in the WSJ or the NYT and you'll find lots of opinions detailing how we aren't likely to see robust future market growth going forward.  I listed a whole bunch of them oh, 10-15 pages back (but am too lazy to find again). These predictions were particularly abundant in 2009-2010, just *before* one of the longest economic expansions in US (and global) history. The dot-com bust (2001) was supposed to have sucked all the wind from the tech sector. In the 1970s we'd reached the end of 'cheap fuel' and entered a world of chronic high inflation.  The 1950s could not possibly do well because so much of the infrastructure had been destroyed.  The 1930s exposed the underbelly of the industrial revolution - it would never get better! etc. etc.

Title: Re: Stop worrying about the 4% rule
Post by: MDM on March 12, 2019, 02:58:25 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: robartsd on March 12, 2019, 05:33:24 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: rab-bit on March 12, 2019, 06:32:38 PM
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.

The 8% WR would also work well for someone who only needs their stash to fund 8-12 years of retirement until other income streams (e.g. SS, pensions, paid off rentals) become available that would fully cover expenses. That's basically our plan.
Title: Re: Stop worrying about the 4% rule
Post by: MustacheAndaHalf on March 15, 2019, 08:04:28 PM
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%
...
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on March 16, 2019, 01:21:30 AM
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%
...

Clearly thats why you need to invest in DR's mutual funds that average 12%.. Clearly...:(
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on March 16, 2019, 10:03:40 AM
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)

Sure, he predicted the 2008 crash. And the 2012 crash (oops). And the 2013 crash (oops). And the 2017 crash (oops). Probably others, but I can't be bothered to search more.

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.
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on March 16, 2019, 03:17:21 PM

- 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.

Got it - Even a broken clock is right twice a day.
Title: Re: Stop worrying about the 4% rule
Post by: OurTown on March 21, 2019, 03:30:19 PM
Just heard Dave Ramsey tell a caller to go with 8% withdrawal rate


He has been confronted about this many times.  He just yells louder.  Sad.
Title: Re: Stop worrying about the 4% rule
Post by: lowroller4111 on April 01, 2019, 10:42:19 AM
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...
Title: Re: Stop worrying about the 4% rule
Post by: lowroller4111 on April 01, 2019, 10:53:06 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on April 01, 2019, 11:47:47 AM
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.

CAGR - Compound Annual Growth Rate

Far from me to argue vehemently, but I've been told again and again by the guys on this site that you can't time the market.   Statement -  "no, it hasn't.  2000-2013 had a negative CAGR so obviously we have to have a re-adjustment upward."  The whole 4 percent thing is based on probability.  We have a high probability that 4 percent will be OK.  I don't think it will be ever that cut and dry that we can "obviously" bump from 3.5 % to 4% or 4% to 4.5%

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.  I think the best thing you can say is that based on current conditions and past experience, there is a good chance that using 4 percent as your withdrawal rate is still a good bet.

The manure can hit the blower at any time.  The United Nations has given bad information on global warming.  Flooding many coastal cities may affect that 4 percent.  There are crazy leaders out there with nuclear and biological weapons.  If they start World War 3, it may affect the 4 percent return.  There is a supervolcano beneath Yellowstone park that could wipe out a lot of life on North America as it has done before.  This could affect that 4 percent return.  There could be an asteroid with your name on it ready to strike the Earth and wipe out your 4 percent return as it did to the Dinosaur's stock market.

The stock market is a creation of man built upon a stack of cards.  The volatile and capricious manner of nature's reality will always be the master of the stock market.

I still think this 4 percent thing is the best thing we've got going.  It seems like there are a lot of guys out there always giving reasons why the returns will crash.  It's pretty easy to be a pessimist.
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on April 01, 2019, 02:40:16 PM
Don't forget the massive earthquake and tsunami thats going to happen on the left coast! Right where my house and rental property happens to be.. Oh and Seattle will be a pile of rubble!
Title: Re: Stop worrying about the 4% rule
Post by: lowroller4111 on April 02, 2019, 03:08:43 PM
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.

True, I am not trying to predict what is inherently unpredictable...which is the point.  So many say oh because we have gone up then it must mean the next decade should be a bust, i'm just pointing out that we could have another blockbuster decade, we have virtually no idea what is in store.  Also the fact that we have gone up recently does not take into account the significant past.  Post 2009 isn't the full picture even if you were to make some kind of prediction... but I concur that predicting the future is essentially a pointless exercise.
Title: Re: Stop worrying about the 4% rule
Post by: matchewed on April 03, 2019, 10:21:56 AM
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.

From a previous thread about taxes I wanted to continue this discussion in a more appropriate thread.

@MustacheAndaHalf

You made the claim in the other thread that a simplistic Vanguard tool was giving a 80% success rate for a 60/40 split. I think you need to state the time frame you are working with. At a thirty year time frame I'm seeing 91%, at 50 years I see the 80% you're talking about.

As for cfiresim at 30 years the success rate is 94.87 while the 50 year is 71.13%.

Regardless of those actual numbers this is entirely ignoring the actionable things. Over the course of 30-50 years as has been covered previously the opportunity for income, social security, or skill in being a person who does not need to spend money in order to solve a thing happens. Not to mention adding spending flexibility which the Vanguard tool doesn't do extends.

I'd recommend not relying on the simple tools to determine what constitutes a success or a failure as it is a bad model.

Rather than move to a 3% SWR just to make a simple calculator happy you can build resiliency in your plan via other methods.
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on April 03, 2019, 11:07:56 AM
^ 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.  (Neither, of course, predict the future.)  Monte Carlo simulators also often produce different results from run to run, whereas cfiresim and it's ilk are deterministic.
Title: Re: Stop worrying about the 4% rule
Post by: sol on April 03, 2019, 12:20:57 PM
^ 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.
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on April 03, 2019, 02:19:22 PM
^ 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
Title: Re: Stop worrying about the 4% rule
Post by: honeyfill on April 03, 2019, 10:33:41 PM
^ 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.
Title: Re: Stop worrying about the 4% rule
Post by: Tyler on April 03, 2019, 10:52:27 PM
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.

There are different approaches to Monte Carlo simulations.  Some use statistical models like you describe, while others use randomized historical returns in varying size chunks (called bootstrapping).  Frankly, I don't care for either method for all the reasons Sol explains.  When studying investments I personally believe it's important to stick to actual history and sequence of returns while varying the start and end dates to avoid timeframe bias.  The classic retirement studies from Bengen, Trinity, Firecalc, etc. all did that very well.
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on April 03, 2019, 11:16:17 PM
As long as I don't run out o' money I don't care what they do.

Of course not of the calculators factor in the whack job proposals that Ron Wyden of Oregon .. Who just lost my vote! What a dumbass.. Apparently he wants to tax all after tax investments on a yearly basis whether you sell them or not!

So no point in investing anymore.. just stick your money under the mattress..

I thought AOC was off the rails!
Title: Re: Stop worrying about the 4% rule
Post by: sol on April 03, 2019, 11:19:51 PM
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.

Monte Carlo simulations are, by definition, reshuffled resamplings of existing data pools.  They are not randomly generated data based on statistical descriptions.

If you see someone talk about Markov Chain Monte Carlo simulations, then your interpretation is much closer to what they're doing.  Markov Chains sample defined probability distributions, rather than data pools.  Despite often seeing them billed as an "advancement" on Monte Carlo sims they're really a much simplified version, designed to answer a different sort of question.  You commonly see Markov Chains MC sims used when the ordering of the results is less interesting than just generating an answer space, for example in purely theoretical math problems where people really have no clue what's going on behind the scenes.

I'm a physical scientist, and I spent many years learning about and then implementing various types of models about the physical world.  I rarely used Monte Carlo simulations because they're numerically inefficient if your goal is to find the right answer, rather than understand why the answers look a certain way, and I never once had to implement a Markov Chain MC simulation as part of my professional modeling career.  In my world, if you already know the probability distribution required to set up a Markov Chain, then you either already have an answer you believe in or you're using circular logic to pretend the answer you want is the correct one.

For government work, subsampling your parameter space never flies.  You churn through them all and publish the giant matrices, or if you can't get the computer time for that then you find a way to reparameterize your problem into something you CAN solve completely.  We usually considered Monte Carlo sims a toy for people who like to poke around interesting problems, rather than a tool for setting policy.  I'm sure I just offended an academic somewhere.

In the context of Vanguard's market simulations, Monte Carlo is a gimmick used to fabricate false credence.  The entire data pool of stock market history is less than 100k days long and all they're doing is shuffling those days (or months or years) into a few thousand other possible orders to see what they look like.  But market histories are a well linearized problem, so it's not like it matters all that much whether your hypothetical history goes 4%, 8%, 10% or 10%, 8%, 4%.  Over the entire history of the market, the answer is not going to be off by a million percent at the end.  As we've previously discussed in this thread, there are much larger uncertainties about the future of our stock market than can possibly be captured by just shuffling the historical monthly returns to see how they might have added up differently.  Their Monte Carlo simulations don't account for the 2057 robot uprising, or the 2083 asteroid impact that wipes out Earth and leaves only Mars to shoulder the burden of paying your dividends.

 
Title: Re: Stop worrying about the 4% rule
Post by: lowroller4111 on April 04, 2019, 04:01:19 PM
The Monte Carlo simulations in tools such as PV are taken from historical data re-arranged in many permutations and combinations.  Obviously "generated" data would be quite crazy as you could essentially generate anything you wish outside the parameters of reality - imagine the stock market dropping 80% and then have a 2nd year after that when it dropped 70% - that would really have little value as it's never happened in history!

Using history as a base is quite sufficient for the vast majority as we've had some pretty horrible things that have happened to the markets in the past.  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.
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on April 05, 2019, 01:03:06 PM

- 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.

You don't need the entire world.  The fallout can get the rest of us and lead to slow lingering deaths.  The bright side is that we won't be worrying about global warming any more.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on April 08, 2019, 08:39:32 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on April 08, 2019, 08:57:36 AM
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.

Interesting thought puzzle indeed.  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.  In other words, if we got much worse than those periods its unlikely that money (or ownership of stocks or bonds) would be useful for buying goods and services.  Individuals would have to worry about things like forced-conscription (in the event of massive war) or self-protection of tangible assets (in the case of a breakdown of governmental services like Police).

 say this as a child of WWII refugees that lost everything they had (including property) not because it no longer held value, but because they could no longer retain possession of their possessions.

tl;dr - Stop worrying about the 4% Rule - if things get worse than we've had in the last 150 years monetary assets won't matter much anyway.
Title: Re: Stop worrying about the 4% rule
Post by: sol on April 08, 2019, 09:53:22 AM
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.

I was thinking the exact opposite, that things could have gotten much much worse.

I think the US benefited for several decades after WW2 by being the only industrialized nation with a fully intact manufacturing base.  Everyone else got bombed.  The economies of places like German and France got rebuilt eventually, but their market returns were much worse than US returns for basically an entire human lifespan.

And Russia's economy remained intact, but has spent pretty much the entirety of history since WW2 underperforming the US economy, because it was woefully mismanaged.  They adopted an entire economic system that incentivized corruption and graft, they mismanaged their resources and their technological progress, and they ran themselves into the ground.  Even though they technically won the war, their economy didn't grow the way ours did.  So it's not like the stellar US market returns were ever a sure thing.  These concerns are essentially political, though, not mathematical.

International SWRs from other individual national stock market exchanges are uniformly lower than America's.  Virtually all of those countries are still around and technically functional, and there are people living there who have retained possession of their assets, but would be bankrupt if they were only invested locally and tried to use 4%.  Despite 4% being far too conservative for basically all of US history, the same has not been true for investors in Australia, or Poland, or South Africa.

The threats to the 4% SWR plan are not really about "catastrophic events", they're about multi-decadal trends in economic output.  Even the Great Depression was a speed bump, in the rise of the American stock market.  The market histories in places like Venezuela or North Korea aren't terrible because they lost a war or had a currency crisis, they're terrible because those economies were poorly managed and failed to increase their economic output and worker engagement in economic turnover.  Economic growth requires that you not only make lots of stuff (food, widgets, art), but also that you have lots of people who get paid to make the things that people want to buy AND lots of people who eagerly spend the money they have made to buy those things from each other.
Title: Re: Stop worrying about the 4% rule
Post by: DavidAnnArbor on April 10, 2019, 08:26:40 PM


The threats to the 4% SWR plan are not really about "catastrophic events", they're about multi-decadal trends in economic output. 

Sadly, the European Union has followed a very strict regime of budgetary austerity that stifles growth and makes their stock market weak, with a common currency that doesn't allow for weaker nations to export their way out of a recession.
Title: Re: Stop worrying about the 4% rule
Post by: Bernard on May 03, 2019, 05:09:17 PM
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...

I'm new here, so "Hi!" to ya'll!

For years I've listened to Suze, and for years I've been listening to Dave while slaving away on my desk. I read too many FIRE blogs to remember, and I find truth in many sources, as well as nonsense, MMM as well.

Now . . . Dave Ramsey told his listeners the requirements for his funds. Returns above the DOW was one of them, a positive, decades-long track record another one. They were easy to identify for me when I decided to get slowly but steadily out of individual stocks and invest in MFs.

I'm banking with ETrade, simply because I'm with them forever and also because I can now buy all of my Vanguard ETFs . . . FREE!
I own VTI, VOO, and VGT, and that's where the majority of my MF money now is. But I also own what you could call Ramsey funds, and they are:

TRBCX
PRGFX
FSPTX

Fire up your comparison tool, and you'll see that any of those outperforms VTI. Especially TRBCX with a 10-year return of 18.91% stands out.
Title: Re: Stop worrying about the 4% rule
Post by: MDM on May 03, 2019, 06:25:10 PM
Fire up your comparison tool, and you'll see that any of those outperforms VTI.
The defensible tense is "outperformed."

Would that we could know a fund that "will outperform"....
Title: Re: Stop worrying about the 4% rule
Post by: sol on May 03, 2019, 08:51:02 PM
Fire up your comparison tool, and you'll see that any of those outperforms VTI.

Dig a little deeper, and you often find that these funds that have outperformed VTI have not outperformed a comparable index.  If you like TRBCX, you should be comparing to another blue chip growth fund, not the market as a whole.  VWUSX, for example, offers you comparable performance in the same sector at half the cost, with fewer fees and restrictions.

Sometimes international small cap outperforms VTI.  Sometimes healthcare or utilities.  Sometimes bonds!  That does not mean any of them are "better" than VTI and the sooner you learn why the sooner you will be able to retire.

Also, Dave Ramsey is a charlatan when it comes to investing.  He's taking a cut to refer his listeners to high-load funds sold on commission.  He makes money off of the funds he recommends, every time a listener takes his advice.  It's the very worst of conflict of interest and it undermines everything he does on his show. 
Title: Re: Stop worrying about the 4% rule
Post by: nereo on May 04, 2019, 08:07:49 AM
Oh what the hell... time to repost this again
(https://i2.wp.com/fourpillarfreedom.com/wp-content/uploads/2018/10/asset_returns1.png?resize=667%2C589)

What does it mean?  There's no pattern which asset classes have done 'the best' (or the worst) in the past, and no one can say for certain which ones will do the best in the future
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on June 16, 2019, 01:58:43 AM
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?  I love all the arguments of 'what can be worse that the Great Depression' and WWII, and yet we almost saw an unprecedented economic collapse in 2008 until the Fed and Congress threw 800B of balance sheet at it.  One big domino fell (Lehman) and the government bailed this smaller system out by selling out.  And that was pretty much the last firewall.

So yeah, I'm watching what the Fed does and they are not only unable to reduce their balance sheet, they are also unable to raise rates and get the economy off of cheap credit.

Oh yeah, and we have a President that thinks banks can regulate themselves, so toxic loans are making a resurgence in a big way.  But no-one is rewaded to learn from the recent mistakes, else they get fired.
Title: Re: Stop worrying about the 4% rule
Post by: Metalcat on June 16, 2019, 05:05:46 AM
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.

Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on June 16, 2019, 06:31:13 AM
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.

One thing remains constant throughout all of recorded history.

No matter how bad it's ever gotten, someone figured out how to make a profit out of it.

Own enough companies and you'll get a share of that.  That's why I do index funds.

Because if it's so bad that people can't make money off of it, nobody's retirement plan will work and 80% of us will be starving to death or dead from radiation or chemical or biological weapons.
Title: Re: Stop worrying about the 4% rule
Post by: neonlight on June 16, 2019, 07:04:53 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: sol on June 16, 2019, 07:57:44 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on June 16, 2019, 08:07:17 AM
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 original study and most of the subsequent analysis which has given us the "4% rule" is based on the SP500.
It includes inflation, typically in the form of the Consumer Price Index (CPI).  In other words, you take 4% each year adjusted for CPI.  For example, if you start with $1MM and plan to take out $40k your first year (4%) but there is 5% inflation each year, you would take out $40k the first year, $42,000 in year two, $44,100 in year three, 46,305 in year four (etc).

As many people have noted in this thread and elsewhere, the 4% rule has NOT held up when applied to the index funds of much smaller countries/markets.  This is largely due to the smaller size and greater volatilty of these smaller markets.  You do not need to be a US citizen of course to invest in the SP500 or other large-cap stocks, but of course you will need to take into account your country's tax laws and inflation tendencies. 
Title: Re: Stop worrying about the 4% rule
Post by: neonlight on June 16, 2019, 09:29:12 AM
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.”
Title: Re: Stop worrying about the 4% rule
Post by: TempusFugit on June 16, 2019, 09:52:26 AM
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.”


MMM was intentionally simplifying (over simplifying perhaps).   The 4% rule is based on a study - and subsequent research - about how much one can safely withdraw from your nest egg over a 30 year retirement.  It used historical data about asset prices and interest rates and inflation to determine what would have happened over all the various 30 year periods had someone withdrawn a percentage of their assets each year.  The criteria for success in that research was a scenario in which you did not run out of money before the 30 years had passed.

While it was true in many cases that the end balance after 30 years was actuall equal or greater than the original balance, that was not the criteria for success.  Simply having more than zero at the end was a success. 

MMM's description you have above is more about averages.  On average the market returns 7% after inflation.  But the trinity study wasnt about averages, it was about actual real historical data. 

using averages does give you much rosier picture, as is what was described, showing capital preserved.  But that isnt real world.  The trinity study and the 4% withdrawal rate account for the vagaries of market behavior that deviate from average, sometimes for many years, whcih can dramatically impact your assets. 

And it needs always be restated that no one can predict the future.  The 4% rule doesn't guarantee anything.  Its just the best we can do to extrapolate from the past in an attempt to inform our decisions that are by their nature going to be subject to an unknowable future. 
Title: Re: Stop worrying about the 4% rule
Post by: FIREstache on June 16, 2019, 10:00:04 AM
TempusFugit is correct.  The MMM info is misleading.  If you want to be more certain of preserving wealth, use a lower WR.
Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on June 16, 2019, 12:42:21 PM
@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.
Title: Re: Stop worrying about the 4% rule
Post by: neonlight on June 16, 2019, 06:28:26 PM
@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.

“Sequence of return risk” which means that the unlikeliest time 4% SWR will fail is when we are at economy rock bottom.

Thank you Swordguy.

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).

Title: Re: Stop worrying about the 4% rule
Post by: chevy1956 on June 17, 2019, 03:38:59 AM
TempusFugit is correct.  The MMM info is misleading.  If you want to be more certain of preserving wealth, use a lower WR.

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 situation
Title: Re: Stop worrying about the 4% rule
Post by: chevy1956 on June 17, 2019, 03:41:58 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on June 17, 2019, 04:52:37 AM
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.

In one of his writings J R Collins tells us that American companies are quite inter-meshed internationally.   He says you are pretty well covered investing in US companies.  It certainly seems true as a lot of US company stuff is made abroad.

Based on the previous discussions regarding the absolutism of the "4 percent rule." I've become more of a believer in Ben Franklin.  there is nothing certain but death and taxes.  I will also add a common observation that the only thing permanent is change.
Title: Re: Stop worrying about the 4% rule
Post by: sol on June 17, 2019, 10:05:55 AM
I will also add a common observation that the only thing permanent is change.

The buddha approves.
Title: Re: Stop worrying about the 4% rule
Post by: robartsd on June 17, 2019, 10:07:56 AM
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 situation
If 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.
Title: Re: Stop worrying about the 4% rule
Post by: sol on June 17, 2019, 10:19:07 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: robartsd on June 17, 2019, 10:46:27 AM
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.
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.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on June 17, 2019, 02:32:54 PM
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.
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.
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.
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on June 17, 2019, 03:18:59 PM

- 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.

I don't want to throw a wet blanket on your brief historical argument, but the statement has been said that the United States is "eating it's own seed corn."  Some say the country is resting on it's laurels.  I had a conversation today with an old salesman who sells machine tools and such.  I asked him about the business and he related to me the familiar story of the great collapse of American manufacturing.  Oh some of it has come back and is coming back, but other countries are becoming dominant.  Manufacturing used to provide the backbone for the economy of this nation.  When I was a kid, we supplied the world.

The salesmen also added that he now has to deal with buyers in India and other lands as even this task has been outsourced.

After the first rant, which I agreed with, the man launched into a rant about today's youth and how they do not want to take jobs to get their hands dirty despite the opportunity to make very good money.  Again, I didn't argue with him as I've heard this same argument many times before.  I've also talked to a lot of younger people working two or three jobs to "get by."  These people aren't lazy.  Maybe, the country doesn't want to spend money on non college training.  Both of these things lead me to think something is wrong.

You know they've been finding a lot of oil in North America the past few years.  So, don't you wonder a bit about keeping these wars going in the Middle East?  Something just seems wrong there and I'm sure many will be willing to enlighten me.  If we are fighting for world justice, well, there's lots of places to pick that fight.  Wars drain the wealth of an empire.  The spoils of war may be good in the short term, but the longer term can bankrupt a nation.  And,....I kinda wonder when we weren't nation building.  Keeping all those bases overseas ain't cheap.

Yes - Things have been good throughout a lot of bad stuff, but the fine print on all those Mutual Funds says past performance does not guarantee future favorable returns.  Now simply refer to the earlier Ben Franklin quote.

And,......I'm still oddly optimistic about that 4 percent rule holding up for me.

Title: Re: Stop worrying about the 4% rule
Post by: sol on June 17, 2019, 03:23:52 PM
the statement has been said that the United States is "eating it's own seed corn." 

People have been betting against us since before the US was the US.  Go ahead and short the US economy.  I dare you.

Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on June 17, 2019, 06:27:19 PM
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.
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.
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.

https://www.youtube.com/watch?v=o0W91FrTlYk (https://www.youtube.com/watch?v=o0W91FrTlYk)

Yes, it's the end of the beginning...
Title: Re: Stop worrying about the 4% rule
Post by: FIREstache on June 18, 2019, 05:17:43 AM
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.

3.5% is where I'm at for the next decade, and I'll cut back under 2.5% when SS kicks in.  I expect the long term future to be worse than the worst of the past.  How much worse - it's hard to say.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on June 18, 2019, 05:27:21 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on June 18, 2019, 02:40:02 PM
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. 

Sol, in particular, usually makes particularly brilliant rebuttals to the things he doesn't agree with.  So, what's he come up with this time, "People have been betting against us since before the US was the US.  Go ahead and short the US economy.  I dare you."  It could be a like a scene out of the Christmas Story movie.  He could escalate it and double dog dare me. 

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.

If we want to prosper as a nation, we need to sell goods and services to the rest of the world.  We must not drain the coffers of the nation in unnecessary wars designed to enrich the Military Industrial complex.  History teaches us these things.  We must pay the bills of the nation with a portion of the fruits of the labors of our citizens.  We must not pay our bills by incurring massive debt to other nations.  It will bite us in the keester.  Countries where there citizens work those long hours are countries for which their citizens can be considered akin to slaves.  One should be able to choose to work those long hours and not be forced to.  Those long hours are indicative of the country hurtling towards third world status.  A healthy economy will be like a tide lifting all boats and not just a few.

Will these trends cause damage to the validity of the 4 percent rule?  Yes and No.  Prudent investors are still going to be OK.  There's going to be people making money somewhere.  Will it be in the stock market of the US?  It's not certain.  Am I losing sleep?  Not yet.
Title: Re: Stop worrying about the 4% rule
Post by: sol on June 18, 2019, 03:11:32 PM
Nereo / Sol - I am disappointed in both of you. 

Meh.  I already gave (https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/msg2396408/#msg2396408) several serious answers (https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/msg2397065/#msg2397065) to this particular query, and the poster argued that I was mistaken because of a misleading MMM post that has been misinterpreted.  Okay, my advice is worth exactly what you paid for it.  Take it or leave it, I guess. 

But there is LOTS more advice in this thread about why the 4% rule is a rule.  Including some of my own mathematical analyses (https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/msg732828/#msg732828) and links to like ten other threads in the first few pages of this thread, for anyone who's actually serious about learning something.

It's not my job to save everyone from themselves.  I'm retired, I don't like having a job.  It just leads to disappointing people.




Title: Re: Stop worrying about the 4% rule
Post by: pecunia on June 18, 2019, 06:29:03 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on June 18, 2019, 06:59:21 PM
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!  :)

Title: Re: Stop worrying about the 4% rule
Post by: nereo on June 18, 2019, 07:07:33 PM

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.

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.
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. 
Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on June 18, 2019, 07:29:39 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: neonlight on June 19, 2019, 04:08:24 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on June 19, 2019, 04:40:48 AM
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!  :)

Yes.  And the thread would be much more helpful in that regard if it had been locked about 25 pages ago.
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on June 19, 2019, 04:51:10 AM

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.

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.
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.

I did miss that point.  So whether it is structured good or bad for the common guy, the 4 percent thing marches on.  Good times or bad people are looking to make money and it looks like the percentages aren't going to change all that much.  Maybe technological changes aren't going to change it that much either, maybe it's more of a human nature thing.

So, I should head over 25 pages back and read the good stuff.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on June 19, 2019, 05:42:19 AM
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.

One of the great ironies of the United States is that - while a great deal of innovation occurs here, as a society we're characteristically conservative and slow to adopt a lot of these things.  As examples, high-speed internet and smart phones had much greater penetration in western Europe than in the US for years, even as the US is home to many of the worlds tech companies. Germany and Denmark have much better renewables even though many of the PV breakthroughs came from US companies, and we have some of the best conditions for solar in the SW desert and wind off of our shallow east coast. High-speed mass transit is better in almost every developed country but ours.  The soviets were the first to build jet aircraft and spacecraft, and the Germans had the best ships and tanks going into WWII.  Henry Ford may have created a way to make affordable cars, but the country lagged several (notably germany) in building out roads for them to drive on.  While most of the rest of the world has come up with ways to make universal healthcare accessible to all its citizens, for some reason we're still debating whether it's even possible.  And those are just some examples off the topof my head.

Point is, the US has this habit of innovating, but being very late to the party when it comes to implementation.  For reasons I don't entirely understand that approach winds up working for US companies more often than not. Maybe there are inherent advantages of waiting to see what works and doesn't in other countries.

Oh - and just because it's relevant here, keep in mind that most of the profits from the largest SP500 companies comes from foreign markets.
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on July 08, 2019, 11:36:28 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on July 08, 2019, 01:19:21 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on July 08, 2019, 01:30:42 PM
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.

True, what I meant was they all came from the same team.. i.e they all worked on the V2 rocket program. Von Braun was also the leader of that team.
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on July 08, 2019, 02:42:51 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on July 08, 2019, 04:47:33 PM
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"...:)
Title: Re: Stop worrying about the 4% rule
Post by: dougules on July 09, 2019, 11:12:18 AM
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. 
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on July 09, 2019, 12:28:22 PM
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.

Yes it did.. There was a great program on last night about the space race. They said that Von Braun was a bit of a PITA to the US Government.. A bit of an attention seeking prima donna with a VERY sketchy past. He might not have actually beaten the prisoners to death himself but he sure as hell knew it was happening.

Personally I would have strapped him to a metal chair under the first Saturn V rocket and had the local Rabbi press the launch button.. But thats just me..:)
Title: Re: Stop worrying about the 4% rule
Post by: lutorm on September 08, 2019, 02:13:42 AM
Having plowed through 1750 posts in this thread over the last week, I now have a much better understanding of the "4% rule". Thanks everyone who's contributed!

My personal reflection on the questions and misunderstandings around the rule is that when you're dealing with probability and statistics, it's very important to be very clear about what question you are asking. A while back someone asked about the apparent contradiction about retiree A and B where A started one year and B started the year after when the market had dropped and why retiree A could withdraw more money than B.

The way I like to think about it is that you don't have a 95% chance of a 4% withdrawal rate succeeding. What the analysis said is that out of all starting years, 95% of the years succeeded. So, assuming the future is substantially the same as the past, if you retire at a random year in the future you have a 95% chance of picking a year that succeeds. But you retire in a single, specific year, and your retirement either will or will not succeed. It's not random, you just don't know which the outcome is going to be yet.

But, when you start saying things like "retiree B retires after a 20% market drop", you've explicitly conditioned your question and the answer is no longer that 95% of the years would succeed, because most of those years didn't start with a 20% drop. You'll have to restrict yourself to the situations in the past that match your condition (if there are any, there's not much data and I suspect you'll quickly run out of data if you start matching on other variables.)  The same applies to any other present-day knowledge you are attempting to condition on, like the CAPE someone mentioned, inflation rate, whatever.

So when people are saying "I'm going to go with a 3% WR because valuations are so high", or whatever, it seems they should calculate what the SWR for the years in history that match that condition. Or, "I'm going to go with 6% because I can lower my expenses by 25% if (condition is fulfilled)", or "because I'm getting x$ in SS in 15 years." Those hypotheses are all testable against the historical data. I agree that flexibility in expenses and income are crucial for peace of mind, but assuming that the data exists it seems much better to actually calculate what the expected results are than to just handwave and assert that it should be fine.

Anyway, just my impressions from all this reading. Thanks again everyone.
Title: Re: Stop worrying about the 4% rule
Post by: 2Birds1Stone on September 08, 2019, 05:07:13 AM
I would recommend this post by big ERN.

https://earlyretirementnow.com/2018/07/25/why-is-retirement-harder-than-saving-for-retirement-swr-series-part-27/

It's not all rainbows and unicorns like some people would like you to believe.
Title: Re: Stop worrying about the 4% rule
Post by: kenmoremmm on November 06, 2019, 01:49:23 PM
broken system:
https://www.linkedin.com/pulse/world-has-gone-mad-system-broken-ray-dalio/
Title: Re: Stop worrying about the 4% rule
Post by: DadJokes on November 06, 2019, 02:12:03 PM
broken system:
https://www.linkedin.com/pulse/world-has-gone-mad-system-broken-ray-dalio/

I don't trust any article that has 30+ line paragraphs.
Title: Re: Stop worrying about the 4% rule
Post by: markbike528CBX on February 15, 2020, 04:22:22 PM
From https://forum.mrmoneymustache.com/investor-alley/the-4-vs-5-withdrawal-rate/

Reposted here to provide the links to the ORIGINAL documents that people swat about, ie The Trinity Study and Bengen's paper.

@reeshau   Thanks for the links!  I don't remember them being posted in clear (and live links) before.

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.
Title: Re: Stop worrying about the 4% rule
Post by: American GenX on February 15, 2020, 05:19:33 PM
Reposted here to provide the links to the ORIGINAL documents that people swat about, ie The Trinity Study and Bengen's paper.

Bengen later changed it to the 4 1/2% rule by including small caps in the allocation.

https://www.reddit.com/r/financialindependence/comments/6vazih/im_bill_bengen_and_i_first_proposed_the_4_safe/dlz1l6r/

Bill Bengen: "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."

https://www.fa-mag.com/news/small-cap-withdrawal-magic-28553.html?issue=268

Bill Bengen: "When I introduced small-company stocks into this mix in 2006, it significantly improved the SAFEMAX (which was able to rise to about 4.5%)"
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on February 21, 2020, 12:15:50 AM
This forum would be really great if it had a whiteboard so I could draw as I write, but basically, the higher the current market is vs. historical CAPE, the lower you should expect your future returns.

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

The 4% rule is great based on being at or below the historical average Shiller/CAPE (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.
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on February 21, 2020, 03:58:15 AM
Current - 31.77
Mean - 16.70

31.77 / 16.7 is about 2.

Does this mean we are OK on a 2% withdrawal rate?
Title: Re: Stop worrying about the 4% rule
Post by: nereo on February 21, 2020, 07:34:24 AM
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]
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on February 21, 2020, 07:49:37 AM
Better make it 1%. You know, “to be safe” [/sarcasm]

But, is that really safe? I mean I'm not sure I could sleep at night without a 0.5%WR and paid off house and that doesn't include SS or any Gov't benefits...because you know paranoia. ;-)
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on February 21, 2020, 07:51:02 AM
Better make it 1%. You know, “to be safe” [/sarcasm]

I don't know. Sure a 0% withdrawal rate has never failed in the US, but our history up till now has been exceptionally positive.

A 0% withdrawal rate hasn't always been safe internationally. Look at 1916 Russia or 1946 China. (Or 146 BC Carthage.)
Title: Re: Stop worrying about the 4% rule
Post by: American GenX on February 21, 2020, 08:29:07 AM
This forum would be really great if it had a whiteboard so I could draw as I write, but basically, the higher the current market is vs. historical CAPE, the lower you should expect your future returns.

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.

This brings back memories of these two older threads:
https://forum.mrmoneymustache.com/investor-alley/cape-and-safe-withdrawal-rates/
https://forum.mrmoneymustache.com/welcome-to-the-forum/cfiresim-severely-overestimates-success-rates-for-mustachians/
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on February 21, 2020, 08:53:11 AM
I always post this, but here goes again.

Aiming for a super low withdrawal rate is just a way to front-load your FIRE "failure" in most cases, by working much, much longer than you need to.

Remember that the Trinity study assumes you won't make any further income (almost certainly not true for people on this forum), ever, and that you have very little flexibility about spending (again, not true for all but the most extreme cases who are living on $6k a year or whatever).

Your odds of running out of money as a person who has actual useful skills and likes to do things anyway and is willing to sell their car and take the bus if needed are insanely low. Stupidly low. Even if you're FIRE at 30 and will live to 95.

With a normal 4% withdrawal rate (million bucks invested, $40k spend), at 80/20 stocks/bonds that 65 year retirement succeeds 80% of the time.

Pretty damn good!

Add just 10% spending flexibility and you're at 90% success - and that's without making a dime, ever again.

Make just a measly $2000 a year from ages 30-50 (my wife earned about that much last year substitute teaching for about 2 weeks) and you're at 98% success.

Social security is not included in that.

I could go on and on.

Your failure risks have to do with lifestyle inflation/changes (get married and have 8 special needs kids, decide your dream is yachting, not thru-hiking), death from a variety of reasons (95% of male 30 year olds won't survive to 95 anyway), and black swan political/natural disaster stuff (Yellowstone erupts, nuclear war, your ethnic group becomes persecuted, etc). Not running out of money.

-W

Title: Re: Stop worrying about the 4% rule
Post by: Padonak on February 21, 2020, 09:01:43 AM
This is a great reminder waltworks. Thanks for posting this. Puts things in perspective.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on February 21, 2020, 09:07:59 AM
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%.
Title: Re: Stop worrying about the 4% rule
Post by: dandarc on February 21, 2020, 09:15:53 AM
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.

In any event, "Broke vs. Dead" charts really gave a good perspective on this issue for me. 5% is the new 4% in my plan. Spreadsheet says $3500 / month at 5% . . . like that totally should work if wife and I put any effort at all into the budget. Hmm.

https://engaging-data.com/will-money-last-retire-early/ (https://engaging-data.com/will-money-last-retire-early/)
Title: Re: Stop worrying about the 4% rule
Post by: American GenX on February 21, 2020, 09:31:08 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: dandarc on February 21, 2020, 09:36:23 AM
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.
"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".
Title: Re: Stop worrying about the 4% rule
Post by: 2Birds1Stone on February 21, 2020, 09:39:56 AM
Earned income, not investment income.
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on February 21, 2020, 09:56:00 AM
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?

-W
Title: Re: Stop worrying about the 4% rule
Post by: American GenX on February 21, 2020, 10:48:11 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on February 21, 2020, 10:50:54 AM
(https://imgs.xkcd.com/comics/picking_bad_stocks_2x.png)

source: www.xkcd.com
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on February 21, 2020, 10:55:41 AM
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.

Ok, dude. The post says "make any further income". I suppose I could have said "earn" instead but "make" is pretty clear. Then, in case you didn't get it, the rest of it goes on to talk about what happens if you do earn a little money/work. If you couldn't figure that out after all that, I guess I don't know what to say.

-W
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on February 21, 2020, 11:03:44 AM
...the higher the current market is vs. historical CAPE, the lower you should expect your future returns.

Bogle’s formula:
[Long Term] Future Market Returns = Dividend Yield + Earnings Growth +/- Change in P/E Ratio = 2 + 3 + 0 = 5% Real.

If you think growth will go back to what it was decades ago plug in 2%. International yields a bit more, but has slower growth. Either way, 4% or 5%, it's enough. Just don't mix many bonds in there (1-2%?), or cash (0%), or gold (0%).
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on February 21, 2020, 11:06:47 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on February 21, 2020, 11:16:40 AM
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 wonder how frequent inheritances of any significance (>$50K-ish) are.  I think they're fairly uncommon.

Not a challenge or a criticism, just a tangent about which your post led me to wonder.
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on February 21, 2020, 11:46:59 AM
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
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on February 21, 2020, 12:26:00 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on February 21, 2020, 12:39:05 PM
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.

We should do a poll!

I bothered to google the inheritance question, and found this from https://blog.massmutual.com/post/why-millennials-should-not-rely-on-an-inheritance:
"According to Federal Reserve research conducted in 2013, the average inheritance for the wealthiest 5 percent of U.S. households was $1.1 million, while the bottom 50 percent received just $68,000 and the middle 45 percent received $183,000."

That's a LOT more than I thought for the "middle" and bottom portions of the distribution.

-W
Title: Re: Stop worrying about the 4% rule
Post by: nereo on February 21, 2020, 12:42:38 PM
I tend to agree with Walt on this one.

Also, just asked Mr Google and here's what it turned up:
Quote
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).

So there you go.  To be frank we anticipate receiving somewhat more than the median inheritance of $69k given both sets of parents have substantial assets, but ironically as we also hope to be FI long before either set of parents expire it probably won't make a huge difference in our lives. YMMV.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on February 21, 2020, 12:52:00 PM
It's a good question. While I was typing this I got distracted by something else so nereo and waltworks pulled up other and perhaps even more useful data but what I fould was that a net worth of $50k (including home equity) would put someone in the 20th percentile for people age 75-79. Obviously in many cases there might be multiple inheritors, and/or end of life care could eat up a lot of the net worth.

But to me that would seem to suggest it's likely that a modest majority of people to live long enough may receive at least a five figure inheritance at some point in their lifetime.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on February 21, 2020, 01:05:03 PM
What struck me was the gap between median ($69k) and mean ($707k) inheritances, which means a very small minority of people are receiving incredibly large sums.... 8, 9, 10 figure inheritances.
I mean... I know it happens among the uber-rich, but it's just such a different world it's hard to relate.
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on February 21, 2020, 05:13:26 PM
“Let me tell you about the very rich. They are different from you and me. They possess and enjoy early, and it does something to them, makes them soft where we are hard, and cynical where we are trustful, in a way that, unless you were born rich, it is very difficult to understand. They think, deep in their hearts, that they are better than we are because we had to discover the compensations and refuges of life for ourselves. Even when they enter deep into our world or sink below us, they still think that they are better than we
are. They are different. ”  - F. Scott Fitzgerald

Having a 1 or 2 percent withdrawal rate must be very easy for them.  Because they make money faster than they spend it, maybe you could even say they have the zero withdrawal rate if you don't quibble about the earning definition.
Title: Re: Stop worrying about the 4% rule
Post by: chevy1956 on February 21, 2020, 10:46:15 PM
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.

The doom and gloom posts completely forget about these points. The 4% rule fails with really tight assumptions 5% of the time over 30 years. Even with high valuations from an arbitrary measurement of value a 4% WR will work more than likely last 30 years the vast majority of times. That is without any of those tight assumptions being broken.

I suppose everyone has to look at their particular situation. If you are 30 with no kids and really tight expenses maybe the 4% rule isn't right for you. If you are 50 with social security coming in at 70 that will meet all your needs maybe a 6% WR is fine.
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on February 22, 2020, 12:16:47 AM
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/
Title: Re: Stop worrying about the 4% rule
Post by: chevy1956 on February 22, 2020, 12:45:29 AM
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/

I hadn't read that one. It was good. ERN's conclusion is interesting.

Quote
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.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on February 22, 2020, 06:28:15 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on February 22, 2020, 06:33:42 AM
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.
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.

Um...   If'n it's such a great investment in bad economic times and we're entering bad economic times, why are they literally paying money to sell it?

Title: Re: Stop worrying about the 4% rule
Post by: chevy1956 on February 22, 2020, 03:43:07 PM
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.

I have no gold and that article definitely confirmed to me that my decision was the right one. Interestingly all the portfolios that were assessed that are popular that contain gold (the golden butterfly/the permanent portfolio etc) to me appear much more fragile than a simple stocks/bonds/cash portfolios.

From ERN:-
Quote
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!

To me if you are going down the path of tweaking your portfolio in exotic ways (ERN's words) then you should be saving up more. You want a simple robust portfolio to minimize your risk.

I think this initial discussion stated to only have a small percentage of bonds however ERN's analysis states a rising equity glide path is the best approach to alleviate sequence of returns risk. So having a larger percentage of bonds close to and when you retire is a smart idea.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on February 22, 2020, 06:10:08 PM
In the interest of full disclosure, I'm not technically zero gold in practice. Less than an ounce, so not really material to the portfolio. It's pretty and purchased many years ago. I don't pretend it's an investment. It is on the net worth spreadsheet.

I was about to say that my car's worth less, but I checked and that's not true. Shockingly my (used) car purchased 3 years ago from state surplus is selling the same model/year for the exact same dollar amount, and KBB agrees with that for a trade-in price (with private party actually being higher).
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on February 23, 2020, 10:08:34 AM
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.

Its a good problem to have of course but its becoming obvious that DW and I need to re-write our wills. Her fam is full of drug addicts and partiers.. If we left them this kind of money it would most likely ruin their pathetic lives, so we can't do that.

If 6% really is a safe WR for us (me at 58.5 and DW at 55), that translates into a level of spend I simply couldn't imagine.

Really must start doing our international travel in business class..:)
Title: Re: Stop worrying about the 4% rule
Post by: nereo on February 23, 2020, 10:18:38 AM
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. 
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on February 23, 2020, 10:56:20 AM
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 see the new 2020 model of the new Corvette is quite the piece of engineering.. I'm almost thinking "why not just buy one?"
Title: Re: Stop worrying about the 4% rule
Post by: dividendman on February 23, 2020, 11:26:07 AM
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. 

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.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on February 23, 2020, 11:42:30 AM
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/

Title: Re: Stop worrying about the 4% rule
Post by: American GenX on February 23, 2020, 12:28:42 PM
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. 

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.
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.
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on February 23, 2020, 01:21:03 PM
And indeed, that's the interesting flip side of the coin, GenX!

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

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

-W
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on February 23, 2020, 01:40:11 PM
As an FYI - sun exposure (especially sunburns) may increase the chance of skin cancer, but sunbathing seems to reduce all-cause mortality noticeably. Large, 20 year study:

https://www.ncbi.nlm.nih.gov/pubmed/24697969
Title: Re: Stop worrying about the 4% rule
Post by: nereo on February 23, 2020, 01:42:46 PM
And indeed, that's the interesting flip side of the coin, GenX!

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

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

-W

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

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

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

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

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

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

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

though I'm inclined to believe the conclusion of this study, do keep in mind this study shows a correlation but does not prove causation.
Title: Re: Stop worrying about the 4% rule
Post by: Metalcat on February 24, 2020, 07:45:06 AM
As an FYI - sun exposure (especially sunburns) may increase the chance of skin cancer, but sunbathing seems to reduce all-cause mortality noticeably. Large, 20 year study:

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

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

Skin cancer also really sucks for the individual who does get it. DH and I have both had it.
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on March 21, 2020, 12:33:27 PM
MY belief in the 4 percent rule has been under some strain lately.  Any good words to help some of us along?  How does the Corona Virus fit with the study?  Can it be considered an anomaly?
Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on March 21, 2020, 12:52:35 PM
MY belief in the 4 percent rule has been under some strain lately.  Any good words to help some of us along?  How does the Corona Virus fit with the study?  Can it be considered an anomaly?
  The "Spanish Flu" pandemic of 1918 is within the 4% rule historical time period.

This too shall pass.

It may pass like a kidney stone, but it will pass.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on March 21, 2020, 01:10:19 PM
MY belief in the 4 percent rule has been under some strain lately.  Any good words to help some of us along?  How does the Corona Virus fit with the study?  Can it be considered an anomaly?

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

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

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

A hypothetical retiree who retired at the peak of the 2000 stock bubble with 25x living expenses and who had continued to adjust their spending with inflation ever year was down to a new worth of about 10 years living expenses as of late 2019. After the recent drops they probably have a net worth of only ~7 years worth of living expenses left to support their annual expenses.
Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on March 21, 2020, 02:17:31 PM
MY belief in the 4 percent rule has been under some strain lately.  Any good words to help some of us along?  How does the Corona Virus fit with the study?  Can it be considered an anomaly?

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

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

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

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

If I remember correctly, the 4% rule formulated by the Trinity study assumed a 30 year retirement.   Running out after 27 years would be a failure.     
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on March 21, 2020, 03:51:54 PM
A hypothetical retiree who retired at the peak of the 2000 stock bubble with 25x living expenses and who had continued to adjust their spending with inflation ever year was down to a new worth of about 10 years living expenses as of late 2019. After the recent drops they probably have a net worth of only ~7 years worth of living expenses left to support their annual expenses.

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

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

These things happen at a low but non-zero rate. It is good to be a bit flexible about reduced spending during major recessions, just like most people still earning a paycheck also do.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on March 21, 2020, 04:10:59 PM
This forum would be really great if it had a whiteboard so I could draw as I write, but basically, the higher the current market is vs. historical CAPE, the lower you should expect your future returns.

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

The 4% rule is great based on being at or below the historical average Shiller/CAPE (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.   
Title: Re: Stop worrying about the 4% rule
Post by: dividendman on March 21, 2020, 04:44:15 PM
Unless society and the market collapses, of course.

Then we'll get even better deals on stocks :P
Title: Re: Stop worrying about the 4% rule
Post by: kenmoremmm on March 21, 2020, 09:07:05 PM
This forum would be really great if it had a whiteboard so I could draw as I write, but basically, the higher the current market is vs. historical CAPE, the lower you should expect your future returns.

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

The 4% rule is great based on being at or below the historical average Shiller/CAPE (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.
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on March 21, 2020, 09:09:34 PM
Yeah, I wouldn't rely too much on CAPE for a while, given the context.

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

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

-W
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on March 21, 2020, 09:27:51 PM
Yeah, I wouldn't rely too much on CAPE for a while, given the context.

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

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

-W

That's why I use CAPE (the Shiller PE which relies on a 10 year cyclically adjusted PE).  I've seen folks just talk about plain vanilla PE which will certainly be misleading.  CAPE is not perfect, but it has the best track record so far.  https://www.gurufocus.com/shiller-PE.php
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on March 21, 2020, 09:33:20 PM

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

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

-W
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on March 21, 2020, 10:51:36 PM

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

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

-W

@waltworks Thanks for clarifying, it's an interesting side discussion for sure.  Vanilla P/E is gonna be a mess since earnings are still too high and prices are meh.  I think CAPE S&P earnings will be a mix of some companies possibly getting a boost and walking dead companies falling out of the index.  Averaged over 10 years, earnings should not be too skewed.
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on March 22, 2020, 10:20:43 AM
This forum would be really great if it had a whiteboard so I could draw as I write, but basically, the higher the current market is vs. historical CAPE, the lower you should expect your future returns.

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

The 4% rule is great based on being at or below the historical average Shiller/CAPE (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.

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

I don't see much choice other than riding that tiger.
Title: Re: Stop worrying about the 4% rule
Post by: vand on March 22, 2020, 10:51:26 AM
This forum would be really great if it had a whiteboard so I could draw as I write, but basically, the higher the current market is vs. historical CAPE, the lower you should expect your future returns.

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

The 4% rule is great based on being at or below the historical average Shiller/CAPE (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.

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.
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on March 22, 2020, 03:55:52 PM


- SNIP -

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

So CAPE is a long run thing.

This explained it pretty well.

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

"In the long run we are all dead," John Maynard Keynes
Title: Re: Stop worrying about the 4% rule
Post by: Classical_Liberal on March 22, 2020, 06:55:16 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on March 22, 2020, 08:12:23 PM
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.

Until the 2Q GDP numbers come in...
Title: Re: Stop worrying about the 4% rule
Post by: vand on March 23, 2020, 06:21:34 AM


- SNIP -

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

So CAPE is a long run thing.

This explained it pretty well.

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

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

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

Exactly.   The CAPE was created as a 10 year average precisely because business cycles showed in every 10 year period there were some down years.  It was only a short time ago when company’s financial losses of 2H07-1H09 began to roll off the PE10.   For a brief time, the PE10 reflected a period of 40 financial quarters with good financial results. To be a truer reflection of the markets and all the historical studies that we reference, it should be expected that the CAPE includes at least 4 bad quarters. 
Title: Re: Stop worrying about the 4% rule
Post by: HotTubes on April 14, 2020, 05:04:25 PM
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/


My dear mother ran out of money at age 46 and lived to be 91 - not sure where on the chart that would put her. 

Her asset allocation for her Soc Sec check was 30% tobacco, 30% scotch, and 40% good humor and zest for life
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on April 14, 2020, 06:00:47 PM
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?
Title: Re: Stop worrying about the 4% rule
Post by: matchewed on April 14, 2020, 06:30:40 PM
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?

So go read up on the trinity study and learn how inflation is treated with regards to the 4% rule.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on April 14, 2020, 08:38:15 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on April 14, 2020, 08:53:51 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on April 14, 2020, 09:45:01 PM
We're always in uncharted territory. So what?

I don't think Russia is going to come out of all this any better off than anyone else. Given their demographics and relatively crap medical system, they actually might end up much worse off.

-W
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on April 14, 2020, 10:23:28 PM
How has Russia positioned itself for anything? It's almost a failed state that is 100% dependent on oil revenue.

I mean, per capita GDP is like 1/5 that of the US. We have all sorts of problems, sure, but Russia has plenty of it's own (death rate 20% higher than birthrate, negligible immigration/negative population growth, life expectancy for men 12 *years* less than in the US, etc, etc).

They do have nukes, so there's that.

-W
Title: Re: Stop worrying about the 4% rule
Post by: matchewed on April 15, 2020, 07:33:46 AM
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?
Title: Re: Stop worrying about the 4% rule
Post by: nereo on April 15, 2020, 07:50:05 AM
For all we know, we might be into a new terminology - not stagflation, but more like stag-not-inflation-nor-deflation.

This would seem to describe much of the last two decades - stagnant wages, inflation that is well below the Fed's "target" of 2%. It's not the economic ideal but it's far from a disaster.
It also corresponded to the largest economic expansion of any economy in modern times.

Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on April 15, 2020, 07:57:38 AM
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?

Went a little into a political sidetrack so I deleted that post about Russia, just in a very bad mood about what's going on in the US and that it did not have to be this way.  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.
Title: Re: Stop worrying about the 4% rule
Post by: dandarc on April 15, 2020, 08:02:21 AM
Hasn't really been any inflation from when we did this 12 years ago. Maybe this time will be different, maybe not.

Suppose this is relevant to the thread - the past failure scenarios for the 4% rule did have to do more with high inflation than low returns.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on April 15, 2020, 08:09:59 AM
Hasn't really been any inflation from when we did this 12 years ago. Maybe this time will be different, maybe not.


Not directly comparable, but in addition to the QE programs during the "Great Recession" we also had at least two other times when the US undertook a massive amount of debt - during both world wars.  Curiously, the following decade each time had below-average (sub 3%) inflation.  (though note that the US was under teh Gold Standard, and the economy was fundamentally different - still, interesting to think about).
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on April 15, 2020, 08:27:12 AM
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.

Maybe we should move this to a separate thread because not directly relevant to the 4% rule, but it is a fascinating set of questions.

Without saying this WILL happen, I could make a case for the CARES act actually having a (short term) deflationary impact rather than inflationary.

Right now consumer demand has dropped dramatically for two reasons. People have lost their jobs and people with jobs (still the majority of the population) are saving rather than spending because they don't know what the future will hold. CARES helped fewer people lose their jobs, but that has less impact on consumer demand because even people who keep their jobs are mostly saving cash, except for vital expenses (rent/mortgage, food).

At the same time, the CARES act allows a lot of businesses that would otherwise go out of business stay open, and it does this by subsidizing a large proportion of their costs (labor). In the absence of CARES these businesses would have gone under, reducing supply for a lot of the things people spend their money on other than rent/mortgage and food. With CARES in place these businesses stay alive, and -- because their operating costs are already covered for the next several months, allowing them to turn a profit from sales a much lower prices than usual -- will continue to cut their prices to compete for the small number of discretionary consumer dollars still floating around in the economy.

TL;DR By staving off bankruptcy driven decreases in supply, CARES may prolong the imbalance between supply and demand for nonessential goods and services and drive down market prices.

Not saying this will happen, just that there is a plausible argument* which could be made for it.

*At least it seems plausible to me. Please feel free to poke holes it in.
Title: Re: Stop worrying about the 4% rule
Post by: robartsd on April 17, 2020, 10:25:18 AM
If I were not in accumulation, I would be somewhat concerned if my current annual spend rate exceeded 4% of my current portfolio value. We're currently at about 80% of the last peak value, so someone who retired using the 4% rule at the last peak would need a 5% withdraw rate starting now to be successful. Plenty of historical start dates would be successful on a 5% withdraw rate, so it's not yet looking like a failure scenario. It is hard to say how COVID-19 will continue to affect the economy over the next few years - slower than typical growth due to ongoing social distancing certainly is possible. Within a few months I'm sure some of the current restrictions will be relaxed (at minimum I expect that soon all activities where 6 foot social distancing can be maintained will be allowed); but some changes will likely persist into 2021 and the economic impact to those hardest hit could be much longer.

Since I'm still in accumulation and not worried about my own income security, I bought some extra VTSAX in our Roth IRA accounts (using funds available from the CARES act check, 2019 income tax refunds, and a bit of other savings).
Title: Re: Stop worrying about the 4% rule
Post by: vand on April 26, 2020, 09:29:23 AM
A great read: https://movement.capital/one-portfolio-risk-to-rule-them-all/

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)
Title: Re: Stop worrying about the 4% rule
Post by: mrmoonymartian on May 06, 2020, 03:35:51 AM
A great read: https://movement.capital/one-portfolio-risk-to-rule-them-all/

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)
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.
Title: Re: Stop worrying about the 4% rule
Post by: dividendman on May 21, 2020, 12:21:15 AM
A great read: https://movement.capital/one-portfolio-risk-to-rule-them-all/

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)
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.

I think you're joking, but "using up your good returns first" is exactly what a reverse equity glide-path does.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on August 18, 2020, 10:58:47 PM
And just when you thought this thread was all done and dusted...

Early-Retirement.org started a thread on Financial Samurai's latest post (https://www.early-retirement.org/forums/f28/samurai-says-1-2-swr-105135.html) about the 4% SWR being more like a 0.5% SWR...

And here is the article, if you want the source material - (Edited to remove the link)

It certainly has an air of click-baityness, to go to such an extremely low SWR, but there are some ideas in there that are worth thinking about, like -
Quote
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.

With yields so low, the government has floated the idea of issuing 50 year bonds (https://www.bloomberg.com/news/articles/2020-03-03/mnuchin-says-50-year-bonds-shelved-after-little-market-interest)...  But for the meantime, the max risk-free fixed income yield (30yr) is ~1.4%.

Quote
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.
Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on August 18, 2020, 11:01:57 PM
@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.

Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on August 18, 2020, 11:04:29 PM
Stocks are quite frequently at or near all time highs.    It's pretty much why we buy them, so giving that as an example of why not to buy stocks is pretty damn foolish.   
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on August 19, 2020, 12:12:50 AM
@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.

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.
Title: Re: Stop worrying about the 4% rule
Post by: RWD on August 19, 2020, 07:16:55 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on August 19, 2020, 11:57:18 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on August 19, 2020, 12:31:49 PM
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.

I removed the link already, in case you hadn't noticed, after it was pointed out that linking helps the SEO rating and visibility of the article.  Hopefully no on else is linking it from the Antimustachian Shame and Comedy section (or elsewhere in the forum), since that would also help FS.  Thing is, the article is getting tons of traffic and comments, so it's worth being aware of.  But I'll follow it on E-R.org instead of here.  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.
Title: Re: Stop worrying about the 4% rule
Post by: Telecaster on August 19, 2020, 06:35:55 PM
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.

Thus far only about 3.6 billion people have pointed out that the central assumption of the Trinity Study is that the future will be no worse than the past, and the future might indeed be worse than the past.  Congratulations to Financial Samurai for finally realizing this concept. 

However, there are a number of other financial concepts that still elude his tiny brain.   One is that the Trinity Study didn't just use bond rates in 1998 to complete the study.  They also used stock market returns and inflation from 1926-1995.   So only a complete idiot or Financial Samurai--but I repeat myself--would look at just the bond rates from 1998 to project forward returns from 2020 onward.  Financial Illiterate also neglected inflation, which was a couple percent back then so the risk free rate was more like 2-3%.  Since 2-3% is less than 4% his whole point comes crumbling down around him.   The way he defines it 4% wouldn't have been safe back then either.  And he wasn't comparing apples to apples anyway. 

Let me put it a different way:  Financial Dipshit was only looking at the risk-free return rate (instead of a balanced portfolio) to calculate SWR, and then assumed that today's interest rates would last forever (stupid assumption!), and also ignore ignored inflation (stupid assumption!), and did not include stock returns (fine if that's what you want), and didn't include any principle draw down (fine, if that's what you want).

But those aren't the same assumptions that are traditionally made when discussing the 4% rule.  I happy stipulate I do not know what the future holds, but at this point I don't see any particular reason why the 4% rule, as traditionally defined, wouldn't hold up in the future.  Financial Samurai being financially illiterate doesn't change my mind. 





 

Title: Re: Stop worrying about the 4% rule
Post by: dividendman on August 19, 2020, 07:07:56 PM
...  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...?
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on August 19, 2020, 08:17:22 PM
...  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...?

Yes, mentally difficult - as in, you are so used to accumulation where down markets allow you to buy more and up markets turbocharge your NW vs. distribution where you don't want your principal to fall and you also don't want to take too much out during good times either, 'just in case'.

Getting back to the article, it got picked up by MarketWatch (which I won't link to) so definitely made Financial Samurai some 'passive income'.  But the thread in E-R.org and comments to the article absolutely scorch the guy - very much like a long form choir reaching consensus of what Telecaster said.

Most telling, a lot of folks suspect FS doesn't even believe his own post.  Credibility is really all you have when you blog online and he's lost it fully and completely.   
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on August 19, 2020, 09:48:15 PM
FS is to Clickbait as Me taking a dump is to toilet paper.

He is so awful now, and I will admit that i felt earlier on that he did provide a good and reasonable alternative view point, sort of the anti-MMM (I think I may have posted something along these lines many many years ago), and still I think his earlier stuff wasn't bad.....it decidedly wasn't MMM but it still had merit for those that wanted to have a more spendy lifestyle.   The math is the math regardless of if you live on $40k or $400k so early on I felt he was a counterpoint to frugal but still required accountability to "hey if you want to spend this, then you need this."   

Also, if I recall he put forth his market expectations for the next year and then at the end of the year recapped them....and a lot of the times they were fairly in line.  But that was awhile ago, I haven't read his blog in years because it got so off base, ad generating, and clickbaity.  MMM has gotten off base, ad generating and clickbaity too but at least his posts are month(s) apart!

Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on August 19, 2020, 10:20:44 PM
I agree @tooqk4u22, I used to read a bit of Financial Samurai but I'm not making that mistake again to think he's still posting anything insightful. 
Title: Re: Stop worrying about the 4% rule
Post by: nereo on August 21, 2020, 05:10:07 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Metalcat on August 21, 2020, 05:47:17 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on August 21, 2020, 07:24:12 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Metalcat on August 21, 2020, 07:29:02 AM
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.

Agreed, what he's resorted to is really tragic, since he's decided in his rejection of FIRE, to also reject his own usefulness to others and absolutely destroy his own legacy.

Truly fascinating.
Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on August 21, 2020, 07:55:38 AM
I thought it was bad when FS turned into a clickbait whore of an author.

But getting all WHINY about it was the last straw for me.   

I can't abide whiny people -- they bring out my inner Lizzie Borden -- and especially whiny rich people who whine about how poor they are.

It's pretty clear he wants to hang out with "the VIPs" and can't pull it off on his budget.

Everyone has an ego and everyone attaches that ego to something that makes them feel good about themselves.    It's real important to learn what your ego is attached to and move it to something else if that location isn't good for you.
Title: Re: Stop worrying about the 4% rule
Post by: vand on August 24, 2020, 05:00:38 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on August 24, 2020, 10:22:01 AM
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.

A rare moment when I'm in full agreement with you @vand
:-)
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on September 30, 2020, 11:02:24 AM
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."
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on September 30, 2020, 06:40:27 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on October 01, 2020, 04:58:15 AM
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.

Modern GAAP accounting has noticeably tightened down in recent decades - with the likely effect of pushing down reported earnings compared to how they were reported historically.  "Earnings" reported today are significantly different than how the same exact operation would have reported earnings in 1985.

Unless these changes are accounted for, CAPE is questionable and would tend to report higher values in more recent years.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on October 01, 2020, 08:22:23 AM
Unless these changes are accounted for, CAPE is questionable and would tend to report higher values in more recent years.


Yes. This article is worth a read if the topic interests you. It discusses CAPE, the change in accounting methods and the likelihood of reversion to historical mean levels.

http://www.philosophicaleconomics.com/2013/12/shiller/
Title: Re: Stop worrying about the 4% rule
Post by: AdrianC on October 06, 2020, 09:43:13 AM
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.
On the flip side, half his example portfolio is intermediate treasuries. Good luck with that.

The Bogleheads thread on it is quite interesting:
https://www.bogleheads.org/forum/viewtopic.php?f=10&t=326680

I especially liked the contributions by "vineviz"

If the the expectation of real yield from half the portfolio is -1.5%...
Title: Re: Stop worrying about the 4% rule
Post by: kenmoremmm on December 17, 2020, 01:17:25 AM
https://www.nytimes.com/interactive/2020/12/16/magazine/russia-climate-migration-crisis.html
notable quote and food for thought:
Quote
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.
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on December 17, 2020, 07:33:25 AM
https://www.nytimes.com/interactive/2020/12/16/magazine/russia-climate-migration-crisis.html
notable quote and food for thought:
Quote
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.

This is the sort of odd mixing/misuse of percentages that statisticians *hate*.

Russia's per capital GDP is about $11,000. The US is $62,000. So just off the bat, you're comparing a developing country with a developed one, and growth rates for GDP are generally much lower for developed economies.

Next, we've got that 36 percent number hanging out in space. Annual GDP growth in the US in recent times (say, past 20-30 years) has averaged in the ballpark of 3%, which means in 80 years the US economy (absent climate change issues) will be roughly 10 times the size it is now (per capita GDP around $650k).

Knock 36 percent off and you're at $416k, so a bit less than 7 times as big as today.

So here's your new headline: With climate change, US GDP will only septuple, while Russia's will quadruple.

I'll also note that quadrupling Russia's GDP over 80 years implies a growth rate of 1.75 percent, which is AWFUL when starting from their low base.

Now, the authors might not be communicating well, but they're *journalists*. It's their *job* to make this understandable and either they don't get it themselves, or they can't accurately communicate it.

Note that none of this means I disagree about climate change being a big, big problem.

-W
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on December 17, 2020, 09:40:57 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on December 17, 2020, 10:02:36 AM
80 year timelines are tough. Imagine trying to predict what our current world and it's problems would be like in 1940.

-W
Title: Re: Stop worrying about the 4% rule
Post by: nereo on December 17, 2020, 10:54:19 AM
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.

We have that now.  Arguably we’ve had that for decades at commercial scale.  The challenge that remains is that these methods have substantial costs when you are talking about irrigating millions of acres or supplying millions of acres, whereas rainfall costs nothing. 

There are technological gains to be made, for certain - but I don’t ever see desalination or pumping water thousands of water to have a negligible cost either.
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on December 17, 2020, 01:04:17 PM
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
Title: Re: Stop worrying about the 4% rule
Post by: Metalcat on December 17, 2020, 01:45:35 PM
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

Or efficient synthetized meat production. All sorts of possibilities.
Title: Re: Stop worrying about the 4% rule
Post by: mjr on December 17, 2020, 04:07:20 PM

*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.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on December 17, 2020, 04:51:33 PM

*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.

...and I snort everytime some foreigner uses the term ‘yank’ to describe someone from the US - particularly someone from the Midwest.  WTF?
Title: Re: Stop worrying about the 4% rule
Post by: mjr on December 17, 2020, 05:01:07 PM
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'.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on December 17, 2020, 05:21:15 PM
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'.

‘Septoic’?  Please explain...

And no - even people from the “tri-state area’ are not referred to as ‘yanks’ (or even yankees).  Members and fans of that particular sports franchise, but that’s about it.  Half of my family is from NYC, and I”ve never heard them be called nor call anyone from their area ‘yanks’ before. 

It’s a word we stopped using over a century ago. Every time I hear it I think “can we call someone from England a ‘Red-Coat’ now??”
Title: Re: Stop worrying about the 4% rule
Post by: MDM on December 17, 2020, 05:42:06 PM
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/)
Title: Re: Stop worrying about the 4% rule
Post by: nereo on December 17, 2020, 05:57:16 PM
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/)

That is awesome.  And well said.  And now I want pie.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on December 17, 2020, 10:26:02 PM
80 year timelines are tough. Imagine trying to predict what our current world and it's problems would be like in 1940.

-W

On top of that, the Pandemic should be considered a Black Swan event (an unpredictable occurrence in which investors typically fear losing 50%-ish value of risk-exposed diversified investments).  And yet here we are, about 1 year later from the beginning of the infection spread and subsequent crises (unemployment, morbidity, bunkruptcy/evictions, supply chain disruptions...), with the S&P500 Index up 10 - 20%. (https://www.slickcharts.com/sp500/returns/ytd)  This is either the "Final Bubble" (The US Fed will hit the limit on printing money), or else capitalism is broken and risk is dead.  Right now, the 'risk is dead theory' seems to be working out pretty well for those buying and holding TSLA :)
Title: Re: Stop worrying about the 4% rule
Post by: mjr on December 18, 2020, 01:44:41 AM
‘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.

Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on December 18, 2020, 03:54:04 AM
‘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.

Don't go getting all uppity and thinking you're the special target of our collective ignorance  -- we're totally ignorant about gobs of things in our own country, too.   Like history, how our government is supposed to work, arithmetic, reading, logic, philosophy, oh, heck, pretty much anything but (other people playing) sports, celebrity sleaze and when the next sale is.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on December 18, 2020, 06:51:59 AM
‘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.

Interesting.  At the same time, it’s notable how many treat ‘Americans’ as some monolithic group with universally-accepted opinions and values.  There’s some 330 million of us, and we’re among the more diverse countries on the planet. We can’t even have a consensus who amongst us should be considered “American”. 

I’ve no objections to the metric system and use it in my own work (as does every other person I work with). The imperial system has certain areas where it’s still useful, like maritime navigation.
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on December 18, 2020, 07:41:04 AM
To be fair (I say this as a metric partisan) the whole point of metric was to make arithmetic easier. In the era when basically nobody does any calculations by hand, the advantage is gone.

-W
Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on December 18, 2020, 07:50:45 AM
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'm an American.  Do American children really learn two sets of units instead of one?

I'll stipulate the following:

1) Most American students have a teacher attempt to teach both Metric and Imperial units.

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.

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?
Title: Re: Stop worrying about the 4% rule
Post by: Metalcat on December 18, 2020, 08:14:31 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on December 18, 2020, 08:32:15 AM
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.
Wait... aren’t you Canadian?
Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on December 18, 2020, 08:37:54 AM
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.
Correct on the depth of the hole.

I don't think our education system is terrible so much as too many Americans pride themselves on not learning what they are taught.
Title: Re: Stop worrying about the 4% rule
Post by: solon on December 18, 2020, 08:50:18 AM
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?
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on December 18, 2020, 09:03:59 AM
I'm sticking with the British Imperial system for electricity.  I will not give up my watts, amps and volts.  I will never even look at a meter that measures Metric VARS.

Here's something else.  These are bad times.  The world is having a pandemic.  Yet the market returns are good.  Is this an anomaly or proof of the validity of the 4 percent rule?
Title: Re: Stop worrying about the 4% rule
Post by: Metalcat on December 18, 2020, 09:09:21 AM
I was just joking that metric is way easier and in a shitty educational system, wouldn't it be better to teach a much, much easier system?

I mean, it really is stupidly easy.

As for the pandemic proving the 4% rule, doesn't it also prove how irrational the markets are?

It doesn't make me more confident in the predictability of the markets, but I also don't give the 4% rule all that much consideration to begin with.
Title: Re: Stop worrying about the 4% rule
Post by: solon on December 18, 2020, 09:17:51 AM
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.

Oh, "rod", not, "rod"! Got it.
Title: Re: Stop worrying about the 4% rule
Post by: Metalcat on December 18, 2020, 10:06:59 AM
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.

Being take things as a personal affront because people find it satisfying. There's no logic behind it, it's just a predictable human reaction to things that are different.

The metric system is just a very rare case of that system being frankly superior, so they feel super justified and can be comfortable in the zero risk of having their righteous indignation met with a reasonable counter argument.

The main thing that holds people back from know-it-all ranting is the risk that they might be humiliated by being proven wrong.

Simply put, people like to be arrogant dicks, even over the stupidest shit.

We learn and use both here in Canada, which is really the worst of both worlds. I have no idea what I weigh in kilos, but I can't estimate how far a mile is.

Fucking stupid.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on December 18, 2020, 10:13:22 AM
(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.
Title: Re: Stop worrying about the 4% rule
Post by: Metalcat on December 18, 2020, 10:22:21 AM
(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.

Yes boss.

How about those markets eh?

Top is in?
Are we in for a decade of low returns?
Does this mean we'll all need a 1% WR/dividends only/put everything into real estate instead?

I ran my numbers through a FIRE calculator and it spit out 700% success rate, but what about Japan?!!!

WHAT DOES IT ALL MEAN?????

Ahem...okay, I'm done now.
Title: Re: Stop worrying about the 4% rule
Post by: Metalcat on December 18, 2020, 10:30:04 AM
I made a reasonable request. You don't have to be a jerk about it.

I'm being very very silly, not a jerk. And my silliness is entirely in line with my various on topic comments that I have made over the years in this very thread and many, many, many other threads that broach the same topic, so it's totally on brand for me and my typical 4% rule content.

This is the internet though, so I can see how you thought I was being an asshole. I was actually jokingly getting back on topic.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on December 18, 2020, 11:21:37 AM
(https://sayingimages.com/wp-content/uploads/im-sorry-i-suck-meme.jpg)
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on December 18, 2020, 11:53:25 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on December 18, 2020, 02:57:48 PM
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)
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on December 18, 2020, 03:33:37 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on December 18, 2020, 03:43:21 PM
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?
Title: Re: Stop worrying about the 4% rule
Post by: Metalcat on December 18, 2020, 03:56:51 PM
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?

Fucked if I know.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on December 18, 2020, 05:16:26 PM
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.

I can’t tell if you are just fucking with me or not

But no. Just no.
Title: Re: Stop worrying about the 4% rule
Post by: dandarc on December 18, 2020, 05:20:17 PM
4 percent rule is overly conservative by design. 95% success means vast majority of the time, you worked longer than you needed to, often significantly so.

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

https://engaging-data.com/will-money-last-retire-early/ (https://engaging-data.com/will-money-last-retire-early/)
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on December 18, 2020, 07:34:37 PM
4 percent rule is overly conservative by design. 95% success means vast majority of the time, you worked longer than you needed to, often significantly so.

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

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

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

Thanks for the honest answer cat.
Title: Re: Stop worrying about the 4% rule
Post by: Metalcat on December 18, 2020, 08:28:47 PM
4 percent rule is overly conservative by design. 95% success means vast majority of the time, you worked longer than you needed to, often significantly so.

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

https://engaging-data.com/will-money-last-retire-early/ (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.
Title: Re: Stop worrying about the 4% rule
Post by: markbike528CBX on December 18, 2020, 10:49:49 PM
4 percent rule is overly conservative by design. 95% success means vast majority of the time, you worked longer than you needed to, often significantly so.

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

https://engaging-data.com/will-money-last-retire-early/ (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.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on December 19, 2020, 12:18:43 PM
Once you get much below a 4% WR, “more money” has less impact on retirement safety than “more flexibility”.

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

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

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

Seems like a much harder plan to me, but to each their own.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on December 19, 2020, 12:32:46 PM
The latter is far more effective with far less money.  But some people just want to be stubborn and say “I’m going to have a WR so bulletproof that I never have to change my plan, ever!!” 

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

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

Situations where even if you DID have enough money saved to continue to spend without any changes at all in your lifestyle, it'd be pretty hard to go on living your life unchanged in the middle of a war or revolution.
Title: Re: Stop worrying about the 4% rule
Post by: Metalcat on December 19, 2020, 02:19:26 PM
The latter is far more effective with far less money.  But some people just want to be stubborn and say “I’m going to have a WR so bulletproof that I never have to change my plan, ever!!” 

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

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

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

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

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

That's not because I'm worried about SORR, that's because I need to be prepared for the not too likely but entirely possible scenario of me ending up in a wheelchair. If that happens, having fun becomes a lot more expensive.
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on December 19, 2020, 02:34:51 PM
I need to be prepared for the not too likely but entirely possible scenario of me ending up in a wheelchair. If that happens, having fun becomes a lot more expensive.

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

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

Sincerly curious what kinds of expenses you're talking about / envisioning.
Title: Re: Stop worrying about the 4% rule
Post by: Metalcat on December 19, 2020, 05:46:13 PM
I need to be prepared for the not too likely but entirely possible scenario of me ending up in a wheelchair. If that happens, having fun becomes a lot more expensive.

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

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

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

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

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

As I've said before, low withdrawal rates are only too conservative if you are trading off happiness to achieve them. I'm not, work is a huge part of my happiness.
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on December 19, 2020, 08:23:24 PM
I need to be prepared for the not too likely but entirely possible scenario of me ending up in a wheelchair. If that happens, having fun becomes a lot more expensive.

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

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

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

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

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

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

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

And as an aside, I am not a member of any retirement police, so if you want to work even if others think you're FI, then I don't care in the slightest and wouldn't criticize that either.
Title: Re: Stop worrying about the 4% rule
Post by: Metalcat on December 19, 2020, 09:37:05 PM
I need to be prepared for the not too likely but entirely possible scenario of me ending up in a wheelchair. If that happens, having fun becomes a lot more expensive.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

I still maintain quite firmly that I think that people who dislike their jobs should quit well before reaching FI. As I've said before, I think it's crazy overkill to think you need to save all the money you will ever need before you can consider changing your life for the better.
Title: Re: Stop worrying about the 4% rule
Post by: mistymoney on December 19, 2020, 10:34:14 PM
4 percent rule is overly conservative by design. 95% success means vast majority of the time, you worked longer than you needed to, often significantly so.

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

https://engaging-data.com/will-money-last-retire-early/ (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!
Title: Re: Stop worrying about the 4% rule
Post by: markbike528CBX on December 20, 2020, 12:38:17 AM
4 percent rule is overly conservative by design. 95% success means vast majority of the time, you worked longer than you needed to, often significantly so.

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

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

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

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

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

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

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

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

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

Examples on this very forum upon request.

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

https://forum.mrmoneymustache.com/throw-down-the-gauntlet/race-from-$2m-to-$3m/
Title: Re: Stop worrying about the 4% rule
Post by: American GenX on December 20, 2020, 07:42:40 PM
I expect my financial needs to change, not remain static, so I build a buffer into my 4% rule.

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

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

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

Some people calculate pretty tight budgets without factoring in much discretionary spending, let alone allowing for changes in their financial situation.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on December 21, 2020, 11:04:22 AM
I expect my financial needs to change, not remain static, so I build a buffer into my 4% rule.

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

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

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

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

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

Everyone needs to evaluate their own expectations and assumptions. It’s worth repeating that on average a person’s spending decreases throughout retirement after a slight uptick the first few years. A select few plan on spending far more
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on December 21, 2020, 11:38:00 AM
I expect my financial needs to change, not remain static, so I build a buffer into my 4% rule.

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

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

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

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

In other words, you're using a 1.2% Rule, on top of a generous budget with discretionary spending...  Not exactly sure what response you're hoping for, but 3% SWR on projected expenses is considered 'fail-proof' using FIRE calculators...  Hope you do enjoy the job because that income is not going to be used by you in your lifetime unless you increase that budget...  And if the 3% Rule fails, there will be a whole lot bigger problems than just cutting back a bit - we're talking historically bad inflation or a market worse than the Great Depression...   
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on December 21, 2020, 12:55:16 PM
Beyond the 4% rule, your failure modes have to do with:
-Personal health.
-Relationships/divorce.
-Black swan (non financial) like a meteor strike, runaway climate change, Yellowstone blows, etc.

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

-W
Title: Re: Stop worrying about the 4% rule
Post by: Metalcat on December 21, 2020, 01:50:58 PM
I expect my financial needs to change, not remain static, so I build a buffer into my 4% rule.

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

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

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

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

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

Their entire point was that they expect their spend to change, not that the market will crash and make their predicted spend not work.
Title: Re: Stop worrying about the 4% rule
Post by: chevy1956 on December 21, 2020, 02:28:03 PM
I expect my financial needs to change, not remain static, so I build a buffer into my 4% rule.

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

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

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

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

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

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

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

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

Edited to add:- my personal opinion is that 4% is a pretty conservative figure. If you look at this thread and Sol's points I think a rational WR is more like 6%.
Title: Re: Stop worrying about the 4% rule
Post by: American GenX on December 21, 2020, 04:57:03 PM
I expect my financial needs to change, not remain static, so I build a buffer into my 4% rule.

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

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

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

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

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

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

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

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

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

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

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

That depends on your risk tolerance.  We're riding high right now, so I wouldn't push it if I were retiring today.
Title: Re: Stop worrying about the 4% rule
Post by: American GenX on December 21, 2020, 05:05:22 PM
I expect my financial needs to change, not remain static, so I build a buffer into my 4% rule.

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

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

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

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

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

I made a typo in my previous post, so I edited and corrected in bold.  1.2% would only cover required expenses in early retirement, with no buffer, and no allowance for required increases beyond inflation in future years, with zero discretionary spending.  I wouldn't retire like that.  I'm planning more of a 4% rule, but I can cut back if needed since most of it will be discretionary.
Title: Re: Stop worrying about the 4% rule
Post by: chevy1956 on December 21, 2020, 05:46:22 PM
@American GenX - I didn't mean to state that you personally were worried. I actually responded stating "correct" to this comment "Their entire point was that they expect their spend to change, not that the market will crash and make their predicted spend not work.".

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

As you state I'm in the same situation. I just randomly came up with a number that I call buffer to handle unplanned future expenses such as gifts to the kids, overseas holidays, fancy events, car upgrades etc.
Title: Re: Stop worrying about the 4% rule
Post by: American GenX on December 22, 2020, 10:56:51 AM
@American GenX - I didn't mean to state that you personally were worried. I actually responded stating "correct" to this comment "Their entire point was that they expect their spend to change, not that the market will crash and make their predicted spend not work.".

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

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

Understood.  I might FIRE as early as spring, so I base my yearly FIRE spending on what my stash will allow using the 4% rule and will adjust as needed year to year.  I knew I wanted a decent amount of discretionary spending funds available to me when I FIRE so that lack of money wouldn't overly restrict my means to enjoyment during FIRE.  It's difficult to know just how much spending that will amount to.  Some people say that since I've built a life long habit of saving so much, even more so over the last decade, that I won't be able to change my ways to spend so much more on discretionary when I FIRE.  But, it's a big difference to have a lot of free time compared to when I was working 50 hours per week.  So, I can definitely see myself ramping up discretionary spending quite a bit when FIREd.  There's also a reasonable possibility that I will relocate, which would more than likely increase my expenses since I'm in a lower cost of housing area.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on December 22, 2020, 01:44:15 PM
Thanks for the clarification @American GenX , that is one problem with using multipliers vs. actual numbers.  If an individual has 83x 'required living expenses' which is $10/yr ($830k net worth), then it is a totally different conversation... 

Almost nobody here would freak out over someone continuing to work with $830k net worth and putting in a little more time.  But if your comfortable annual spend is 100k/yr ($8.3M net worth), and you put in any more time at a job that is anything less than utopian building more 'stache, then almost everyone here freaks out :)
Title: Re: Stop worrying about the 4% rule
Post by: ender on December 22, 2020, 05:03:31 PM
I'm really confused why someone would come to a thread about the 4% rule, say they have 80x their expenses and a buffer, but then also say they plan on their expenses going up a lot.

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

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

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

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

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

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

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

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

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

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

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

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

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

It's not confusing in the context of the replies before it.
At least I completely understood the logic pp was following...mostly because I'm pretty sure I started it ;)
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on December 28, 2020, 11:20:04 AM
I'm really confused why someone would come to a thread about the 4% rule, say they have 80x their expenses and a buffer, but then also say they plan on their expenses going up a lot.

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

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

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

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

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

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

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

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

In my case about half of my WR goes to basic living (house costs, food, insurance, etc.) and the other half goes to discretionary/wants (kids activities, electronics, higher quality food/eating out, travel, etc.)
Title: Re: Stop worrying about the 4% rule
Post by: vand on February 05, 2021, 07:07:58 AM
I thought Ben Carlson was going to give us some previously undiscovered insight into withdrawal rates and portfolio structure.. but nope, he's just reinterating the importance of diversification to improve portfolio stability in order to protect against SORR during drawdown.

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

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


(https://awealthofcommonsense.com/wp-content/uploads/2021/02/Screenshot-2021-02-04-120544.jpg)

I would go as far as to say that, as of today, with growth likely to be lower in the coming decade than it has been in the previous, portfolio stability will be the dominant factor in how well the portfolios of today's retirees' ultimately end up faring.
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on February 05, 2021, 07:34:55 AM
Yeah, if you kept blindly withdrawing for that first 5 years starting in 2000 and were all stocks, you did some major damage.

-W
Title: Re: Stop worrying about the 4% rule
Post by: nereo on February 05, 2021, 08:11:14 AM
Perhaps not surprisingly, had the same retiree had a small 18 month bond ladder, s/he would have a portfolio today with net-positive growth. Color me shocked!
Title: Re: Stop worrying about the 4% rule
Post by: dandarc on February 05, 2021, 08:16:46 AM
Has inflation been 2% / year since 2000? Pretty reasonable number since I see it has ranged from 0.1% to 4.1%, but it might be interesting to see if the same thing bears out to the same extent with the actual reported inflation numbers vs. a constant 2%.
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on February 05, 2021, 11:09:54 AM
Has inflation been 2% / year since 2000? Pretty reasonable number since I see it has ranged from 0.1% to 4.1%, but it might be interesting to see if the same thing bears out to the same extent with the actual reported inflation numbers vs. a constant 2%.

I've been hearing people talk lately that the inflation that the rate which the government tells us does not match to what some people consider as the "real" inflation rate.  I have noticed some price creep as of late.  The cost of medicine and the cost of education do not seem aligned with that 2 percent.  Without an accurate inflation indicator, it's a bit harder to adjust the 4 percent the proper amount upward.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on February 05, 2021, 02:52:29 PM
Has inflation been 2% / year since 2000? Pretty reasonable number since I see it has ranged from 0.1% to 4.1%, but it might be interesting to see if the same thing bears out to the same extent with the actual reported inflation numbers vs. a constant 2%.

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

There was an entire thread on this not too long ago.  Most people have a poor understanding of CPI, and a few think it’s some sort of governmental conspiracy.  It should go without saying that an individual’s exposure to inflation will not be the same as median exposure across the entire population (which is closer to what CPI measures). This is probably particularly true of dedicated mustachians, as our spending categories are often vastly different from the average Joe and Jane.
Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on February 05, 2021, 02:55:33 PM
Has inflation been 2% / year since 2000? Pretty reasonable number since I see it has ranged from 0.1% to 4.1%, but it might be interesting to see if the same thing bears out to the same extent with the actual reported inflation numbers vs. a constant 2%.

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

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

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

But that's a far cry from some kind of "conspiracy".
Title: Re: Stop worrying about the 4% rule
Post by: vand on February 07, 2021, 12:49:41 AM
CPI has been pretty much dead on 2.0% since 2000 in the US:
https://www.usinflationcalculator.com/inflation/consumer-price-index-and-annual-percent-changes-from-1913-to-2008/
Title: Re: Stop worrying about the 4% rule
Post by: robartsd on February 09, 2021, 09:51:36 AM
I've been hearing people talk lately that the inflation that the rate which the government tells us does not match to what some people consider as the "real" inflation rate.  I have noticed some price creep as of late.  The cost of medicine and the cost of education do not seem aligned with that 2 percent.  Without an accurate inflation indicator, it's a bit harder to adjust the 4 percent the proper amount upward.
Inflation for both healthcare and education have outpaced CPI for many years.

https://www.in2013dollars.com/Medical-care/price-inflation
https://www.forbes.com/sites/zengernews/2020/08/31/college-tuition-is-rising-at-twice-the-inflation-rate-while-students-learn-at-home/?sh=5eeeffc42f98
Title: Re: Stop worrying about the 4% rule
Post by: American GenX on February 11, 2021, 05:53:01 PM
Has inflation been 2% / year since 2000? Pretty reasonable number since I see it has ranged from 0.1% to 4.1%, but it might be interesting to see if the same thing bears out to the same extent with the actual reported inflation numbers vs. a constant 2%.

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

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

This is weakest part of the 4% rule (or 4.5% rule) for me because it's based on the government inflation figures in the calcuations, and you're likely looking at considerably higher inflation than CPI figures, so your money will run out faster.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on February 11, 2021, 05:57:38 PM
Has inflation been 2% / year since 2000? Pretty reasonable number since I see it has ranged from 0.1% to 4.1%, but it might be interesting to see if the same thing bears out to the same extent with the actual reported inflation numbers vs. a constant 2%.

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

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

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

Kitces took a fairly deep dive into the information about spending during various decades of retirement.  Short version, actual spending declined decade-over-decade even when adjusted for inflation (via CPI, IIRC).  In other words, the 4% shows to be more conservative, not less.
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on February 11, 2021, 07:14:13 PM
I saw this YouTube video with an economist explaining why we don't have massive inflation despite the great increase in the money supply by governments and the banks.  As some people on this site have taught me it is more than just the money supply it is the velocity of money.  All that new money has found itself into the stock market and driven up stock prices.  So that money is just sitting in stocks like gasoline in a tank.  I'm wondering what type of event will cause the stock prices to be corrected and there will be a sell off.  It seems like this may release some of that stored money.  Then we may have some larger value of inflation as that money is used for goods and services.  I can see it driving the price of real estate up.  A large amount of money chasing a limited number of goods and services intuitively would seem to drive the price of those goods and services up.

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


Title: Re: Stop worrying about the 4% rule
Post by: markbike528CBX on February 11, 2021, 09:34:13 PM
I saw this YouTube video with an economist explaining why we don't have massive inflation despite the great increase in the money supply by governments and the banks.  As some people on this site have taught me it is more than just the money supply it is the velocity of money.  All that new money has found itself into the stock market and driven up stock prices.  So that money is just sitting in stocks like gasoline in a tank.  I'm wondering what type of event will cause the stock prices to be corrected and there will be a sell off.  It seems like this may release some of that stored money.  Then we may have some larger value of inflation as that money is used for goods and services.  I can see it driving the price of real estate up.  A large amount of money chasing a limited number of goods and services intuitively would seem to drive the price of those goods and services up.

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

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

Yeh - But it still still puts that money into circulation where it can be used to buy cars and stuff.  Multiply that by billions and there will be money chasing goods that was formerly static.  Besides, it may not actually be a loss.  If your money has doubled and you begin to see a downward slide in value but still above what you've paid, is it really a loss to sell?
Title: Re: Stop worrying about the 4% rule
Post by: frugalnacho on February 12, 2021, 10:10:07 AM
It won't put any money back into play.  For every person selling there is another person on the other side of the transaction buying and putting money into it.  The net transaction of buy/sell will be $0, but a lot of paper value will be destroyed.

The total value of all the stocks isn't real money either.  I know I'm not responsible for putting in every last dollar making up my portfolio, much of it is just growth over time.    So my $600k portfolio is valued at $600k, but I've only put like $300k into it, and the rest is growth. 
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on February 12, 2021, 01:56:48 PM
It won't put any money back into play.  For every person selling there is another person on the other side of the transaction buying and putting money into it.  The net transaction of buy/sell will be $0, but a lot of paper value will be destroyed.

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

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

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

I'm just trying to make the connection about all this big money supply increase and by what mechanism it could leave the banks / stock market and begin to create inflation.  If it can't, that's cool.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on February 12, 2021, 02:17:00 PM
Very, very few companies trade at prices where the total value of shares is at or more less than the assets of the company. To do so is called trading “below book” and typically indicated a company deep in trouble (ie investors won’t touch it unless it’s cheap). Most companies would need several years of profits plus assets to equal their share price

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

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

Edit: fixed “more” to “less”
Title: Re: Stop worrying about the 4% rule
Post by: dandarc on February 12, 2021, 02:28:27 PM
Rational value of company could be thought of as "liquidation value plus present value of future earnings".  And as nereo points out, "present value of future earnings" is a lot larger than "liquidation value" for businesses with good prospects.
Title: Re: Stop worrying about the 4% rule
Post by: vand on March 22, 2021, 08:07:07 AM
Even knowing what I know about SWRs I was rather stunned at this one chart from a Kitces post:

(https://www.kitces.com/wp-content/uploads/2019/02/Graphic_5-1.png)
https://www.kitces.com/blog/url-upside-potential-sequence-of-return-risk-in-retirement-median-final-wealth/

Regarding 60/40 (which most people on MMM would consider quite cautious) over a 30yr timeframe:

It shows that a higher total rate of return over the 30yr period was not indicative of its ability to support a higher withdrawal rate during that period.

That bears repeating:

A higher total rate of return over the 30yr period was not indicative of its ability to support a higher withdrawal rate during that period


Yes, some high return periods have supported high withdrawal rates, but there have also been plenty of 30yr timeframes with high returns that were only able to support low withdrawal rates.   And likewise, periods of lower overall returns were equally likely to support high withdrawal rates as they were to support lower ones.

Clearly, the CAGR of the portfolio over each 30yr period has no positive correlation at all with the SWR it is able to support. In fact, if I was being unkind I could say that there was even a slight negative correlation! The scatterchart points certainly fall more from upper left to lower right (negative correlation) than they do from lower left to upper right (positive correlation).

Mind Blown?


The takeaway for retirement portfolio construction then is that higher portfolio growth doesn't correlate to higher SWRs, because you are likely sacrificing too much portfolio stability to make up for the higher growth that you could expect to receive.  Prioritize portfolio stability, not portfolio growth.

Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on March 22, 2021, 02:35:01 PM
Vand - guessing it is attributed to SORR and just can't recover no matter what the return.
Title: Re: Stop worrying about the 4% rule
Post by: vand on March 22, 2021, 02:53:32 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on March 22, 2021, 03:30:44 PM
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.

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.
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on March 22, 2021, 06:33:23 PM
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
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on March 22, 2021, 06:44:56 PM
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

Yes, I know.  That's part of why I pointed it out.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on March 22, 2021, 08:47:49 PM

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.

I concur. That would be a useful chart.
Title: Re: Stop worrying about the 4% rule
Post by: Must_ache on April 13, 2021, 08:46:39 PM
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/
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on May 19, 2021, 06:44:57 PM
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/

That's based on a single asset class of large growth. The ensuing decade that followed the dotcom collapse saw small cap value return over 13% annualized.
Title: Re: Stop worrying about the 4% rule
Post by: vand on August 24, 2021, 07:35:34 AM
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
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on August 24, 2021, 08:49:00 AM
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

great article "good" rule of thumb but historically it never gets worse than 3.5% so there is a bottom end to that and the CAPE ratio has changed as GAAP has changed in the last few decades.
Title: Re: Stop worrying about the 4% rule
Post by: ender on September 07, 2021, 07:35:12 AM
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.

Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on September 07, 2021, 07:42:26 AM
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.

i was just discussing this the other day with a friend. That's likely the best case scenario for most people.  You will have 50% drops  if it can double before you get it you should feel fine.  I think of it kinda like the question everyone on the path to FI asks.  "When does my savings start to snow ball"

Now the question for FI people is when does it feel like you're not nervous about the 4% rule and to me thats once your money has doubled.  b/c worst case you're back where you started like you said and going into this with eyes wide open we all know we'll lose half our money at some point.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on September 07, 2021, 07:47:35 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: ender on September 07, 2021, 07:53:21 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on September 07, 2021, 10:38:19 AM
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.

Yeh - Well - The money looks good on paper.  Here's the thing I think about.  I can't say I really worry about it.  I see these big hurricanes, fires all over the world, the ice melting thing, talk about rerouting the Gulf Stream, bugs moving further North than ever to eat trees they could never munch on, the loss of the reefs in the ocean, ocean acidification, plastic everywhere, pandemic stuff and a few other things.  Then I think of when big changes like this happened before.  I figure about 65 million years ago when the rock fell into Mexico.  You got yer big trends like extinction and you got your little trends like following the stock market.  The stock market is the small stuff.  Don't sweat the small stuff.  Three percent is fine.
Title: Re: Stop worrying about the 4% rule
Post by: MissNancyPryor on September 07, 2021, 02:10:10 PM
I am OK to reset my SWR? 

2 years retired now, and I have spent about 2.5% WR annually of the original starting stache number and lacked for nothing.   

My stache is now 89% larger than that original starting number (yes, crazy, almost doubled in 2 years). 

Should I re-set my "FIRE SWR" to a higher number?  Essentially this will be a psychological exercise because I spend what I spend regardless, and I am less than 2% WR of the current stache.  It feels like I could just formally admit that I can double my annual spend without risk and call that my new SWR.  I have listened to and read Kitces and he talks about escape velocity and ratcheting spend, but this is very soon after I retired so I am questioning it. 

I know the 4% rule is measured against that original FIRE number then increased for inflation annually and not re-calculated as 4% of whatever my stache is the next year.  Since my balance has gone up-up-up it feels like I could simply pretend I just retired yesterday and will look at my stache now and figure 3% is now my new, forever number without fear.  It will help me loosen my mental purse strings and maybe do some bigger things easily.   

Is this dumb thinking? 
Title: Re: Stop worrying about the 4% rule
Post by: ender on September 07, 2021, 02:15:41 PM
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% ;-)
Title: Re: Stop worrying about the 4% rule
Post by: MissNancyPryor on September 07, 2021, 02:35:12 PM
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% ;-)

Right, since 3% is ample.  Would an annual reset at 3% be dangerous, whether the stache has gone up or down? 

Sometimes I feel like I should set up an automatic monthly withdrawal system, moving 1/12 of my 3% number into my checking account and when I don't spend all of that, the excess becomes money to re-invest or have fun with knowing I never have to doubt it.  But I am just not an auto-pilot person though, and like avoiding the tax man by carefully choosing how to fill my rain barrel just once each December.

I think I just wrote a Mustachian People Problem entry here ;) 
Title: Re: Stop worrying about the 4% rule
Post by: ender on September 07, 2021, 02:47:33 PM
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 :-)
Title: Re: Stop worrying about the 4% rule
Post by: MissNancyPryor on September 07, 2021, 03:21:24 PM
@ender thanks!
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on September 07, 2021, 05:15:02 PM
If you are not consumed by FUD & Perma-Bearishness this podcast is a good listen. It talks about adjusting WRs for the vast majority of cases where your money grows much faster than you spend it at your initial say 4%WR.

https://www.choosefi.com/flexible-spending-rules-for-early-retirees/

Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on September 07, 2021, 05:43:56 PM
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 :-)

In theory you could always adjust to 3% of your highest balance as it's never failed. So your investments double you can effectively most to a 6% swr and never run out of cash based on the original retirement number.
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on September 07, 2021, 08:52:22 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on September 08, 2021, 05:16:20 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Metalcat on September 08, 2021, 05:37:37 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on September 08, 2021, 05:43:04 AM
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.  Nothing wrong with it or any of it.  It's how I run things i enjoy as efficiently as possible.
Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on September 08, 2021, 06:49:35 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on September 08, 2021, 06:54:43 AM
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.

more talking about the MMM HQ than a rental property.
Title: Re: Stop worrying about the 4% rule
Post by: ender on September 08, 2021, 06:58:47 AM
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?
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on September 08, 2021, 07:49:39 AM
I have expensed a lot of things to my business [vehicle, phone, internet, computers, home office, travel, eating out, etc...] it's a great tax write off, but if I didn't have a business I'd still have some/most of those costs. So if my pers/bus costs look like $30K/yr + $15K/yr if I didn't have the business my costs would not be $30K/yr....they probably be closer to $40K/yr.

If I had a pers finance blog and told my readers my annual spend was $30K/yr when I had the benefits of a $40K/yr lifestyle due to my business that's somewhat disingenuous and at a low-ish base spend the extra spend/benefit is significant.

It's also a bit disingenuous to say not bother with various types of insurance at a low annual spend to keep the numbers low without pointing out clearly that this approach is backstopped by many millions of $$ in investments and a negative WR.

If you read deeply into the MMM blog and this site you can figure all this out, but a casual visitor can leave the site with a skewed impression of what is going on.
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on September 08, 2021, 08:11:17 AM
I FIREd 2 years ago but then got a $10k country club membership but then got a part time job to cover the cost.....so it doesn't count in my expenses....and I am still FIREd!

MMM spending has been a long standing debate, and I think most would conclude that his effective personal spending is far higher than advertised.   But most would probably agree that is OK (if he was honest about it) and see that he designed a life that works for him and found a way that he enjoys to make some extra money to cover those things.   

It's the disingenuous or delusional narrative he presents is what most don't like. 
Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on September 08, 2021, 09:42:38 AM
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.   
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on September 08, 2021, 09:47:59 AM
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
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on September 08, 2021, 10:49:46 AM
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. 
Title: Re: Stop worrying about the 4% rule
Post by: Metalcat on September 08, 2021, 10:51:54 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Metalcat on September 08, 2021, 10:53:11 AM
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.

The spending side is the biggest challenge and it's the number that most people just pull out of their ass, which is why I call FIRE simulators "real math with made up numbers".

It's also why fussing about the 4% rule is nonsense.
Title: Re: Stop worrying about the 4% rule
Post by: ender on September 08, 2021, 10:57:46 AM
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.

Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on September 08, 2021, 10:58:11 AM
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.

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. 
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on September 08, 2021, 11:03:45 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on September 08, 2021, 11:04:08 AM
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.

Amusing, unless you aren't making income in retirement and run in to one of these 'spending isn't what I thought it was going to be' problems- https://thefinancebuff.com/relocating-buy-or-rent-new-rules.html

Quote
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.

We have loads of FIRE'es that are 'in between homes' / nomadic who are caught in this very situation...
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on September 08, 2021, 11:16:44 AM
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. 



Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on September 08, 2021, 12:00:35 PM
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.

This



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
Title: Re: Stop worrying about the 4% rule
Post by: Metalcat on September 08, 2021, 01:38:01 PM
]

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.
Title: Re: Stop worrying about the 4% rule
Post by: ender on September 08, 2021, 02:29:36 PM
Where's the line? I know there is a line, but I doubt everyone would agree as to where it is.

For me it's pretty simple.

If you regularly post your yearly spending as a lower number because you've manipulated some of your personal spending into a separate category, as a way to brag about your low spending, it's not ok.

If you don't brag about it and only use it as a metric you track? No one cares how you categorize it.


If I tell you "I gained 50 pounds eating lettuce products for my diet!" and then tell you I only maintained that diet for 20 hours a day, and binged on ice cream the other 4, you'd probably find it misleading too.
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on September 08, 2021, 02:47:24 PM
]

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.
Title: Re: Stop worrying about the 4% rule
Post by: Metalcat on September 08, 2021, 04:06:52 PM
]

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.

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.

I think he's such a great example of amping up life after retiring young. There's a lot of fantastic posts that could be written about the level of lifestyle engineering he's managed to do. He talks a bit about it, but if it were me, I have so many ideas for engaging blog posts I would write about how *different* my life is post-FIRE, as opposed to trying to make it sound like it's still the same.

To me it's a lost opportunity. I would love to hear more about this stuff and not just from a factual "hey I did this kind of way", but really digging into the personal philosophy and impact of it.

To bring it back on topic though, this is where it gets tricky to predict retirement spending.

It's hard to know what your activities will be once you have all the free time in the world. And there are SO MANY ways to get luxuries for cheap or free if you have free time to volunteer.

So someone might project a spend level, but then radically drop their spending in certain categories because if they're not working, they have the capacity to be much more creative.

Like someone who spends a lot on golf might get free golf access for volunteering to fundraise, or teach kids lessons, etc.

It's hard to predict what expenses will come up, it's hard to predict what savings can be found, and it's hard to predict if money making opportunities might come along.

The future is just plain hard to predict. Which means that so are projected spend amounts.
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on September 08, 2021, 04:22:08 PM

- 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 -


I kind of like that.  It's a bit of a different story.  He escaped the cubical life.  He escaped looking at the CRT of the computer for long dreary days.  (Assuming he left before flat screens)  He escaped schedules, deadlines and having his life dictated by others.  He was willing to live a marginal existence of $25,000.  But, this is America where free thinking and hard work are rewarded.  He became a vast success emulated by thousands of others who also found this freedom.

And he didn't even have to peddle his training program on real Estate on late night TV.

Read his posts and you too will understand the success you can have by living under the 4 percent rule. (or 3 percent to be really safe.)

Sometimes reality is better than the story.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on September 16, 2021, 05:42:59 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on September 16, 2021, 05:54:12 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Wolfpack Mustachian on September 16, 2021, 07:46:35 PM
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.

Dang. I thought my $1200 or so dinner for like 8 people was pretty pricey, lol.
Title: Re: Stop worrying about the 4% rule
Post by: Mr. Green on September 18, 2021, 02:43:09 AM
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?
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on September 18, 2021, 03:25:17 AM
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?

yep wine, booze, Michelin 3 star place, truffles check.  I was along for the ride.
Title: Re: Stop worrying about the 4% rule
Post by: 2Birds1Stone on September 18, 2021, 04:07:07 AM
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?

In my experience multiple bottles of Opus One.
Title: Re: Stop worrying about the 4% rule
Post by: Goanywhere on October 16, 2021, 12:12:27 PM
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 ?

Title: Re: Stop worrying about the 4% rule
Post by: 2Birds1Stone on October 16, 2021, 12:32:44 PM
Won't even click the link because Sam can eat a big ol' bag of d!cks.
Title: Re: Stop worrying about the 4% rule
Post by: Goanywhere on October 16, 2021, 12:46:24 PM
Won't even click the link because Sam can eat a big ol' bag of d!cks.

Hahaha
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on October 16, 2021, 01:08:33 PM
FS is on my Do Opposite List just like George Costanza. Whatever he says turn it around and you'll have a good game plan.
Title: Re: Stop worrying about the 4% rule
Post by: RWD on October 16, 2021, 01:39:31 PM
Has this been discussed
Yes
https://forum.mrmoneymustache.com/antimustachian-wall-of-shame-and-comedy/wow-this-is-bad-even-by-financialsamurai-standards-(0-5-swr)/
Title: Re: Stop worrying about the 4% rule
Post by: nereo on October 16, 2021, 03:05:06 PM
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 ?

In his search for clicks Sam crossed over to the disreputable side. His later posts are filled with wild and intentional inaccuracies, all seemingly contrived to push some kick-bait article.

Too bad - at one point he was worth reading.
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on October 16, 2021, 03:23:40 PM
Won't even click the link because Sam can eat a big ol' bag of d!cks.

Agreed
Title: Re: Stop worrying about the 4% rule
Post by: Metalcat on October 16, 2021, 03:43:25 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: ixtap on October 16, 2021, 04:22:43 PM
Just from the title it looks like a reprint of what was originally a guest blog. If that is the case, the original host pulled it because there was so much shoddy logic involved.
Title: Re: Stop worrying about the 4% rule
Post by: DadJokes on October 18, 2021, 09:34:56 AM
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 ?

Nothing from Financial Samurai should ever be discussed, other than to mock. However, it's probably best not to give him clicks at all, as it just encourages him.
Title: Re: Stop worrying about the 4% rule
Post by: Jamese20 on November 02, 2021, 01:05:45 PM


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
[/quote]


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
Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on November 02, 2021, 01:33:31 PM

Quote
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


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.

Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on November 02, 2021, 01:40:18 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on November 02, 2021, 02:24:17 PM
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.

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.

Title: Re: Stop worrying about the 4% rule
Post by: Jamese20 on November 02, 2021, 02:43:32 PM

Quote
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


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
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on November 02, 2021, 03:00:37 PM

Quote
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


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

thats just one of the many pitfalls that could happen to any early retiree doing something they enjoy.  Then taking a few enterprising steps once the base was established.  I do all sorts of crap for fun and to make my life more efficient that eventually turns into side income.  shame on these early retirees for making money.

the message doesnt change though and its a really good message and easy to follow and it worked for me. and guess what i'm going to make like 15-20k a year doing about 5 hours of work a year dang it i'm not retired!
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on November 02, 2021, 04:03:55 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on November 02, 2021, 05:38:36 PM
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.

Well -he's Canadian.  I have been told by Canadians that they have a greater emphasis on the use of proper English in their education system  - so maybe better writing skills should have been better expected of him.  To be honest with you, I have never heard of a Canadian hillbilly.  There are some Canadian Country & Western singers that pretend, but that's just not the same.

I've been told inflation is upon us.  The 4 percent rule is supposed to work with inflation.  Cross your fingers.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on November 02, 2021, 05:55:05 PM

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

Doesn’t seem that way to me. Shrug.
Pete’s got a very analytical brain with a pinch of OCD tossed in. For those of us that have been around since the early days it didn’t seem like there was much of a plan or a desire to create what this grew into. From a marketing/blogging perspective he pretty much didn’t do all the things one would do if they were trying to gain as many followers as possible. As his audience grew, his blog postings took a nosedive. He waited a year to launch the forum, and when he did he largely ignored it. He didn’t hire anyone to “grow the business” and the server problems were infamous for years. His social media presence remains scant and there’s never been much effort to draw people in via cross-pollinating. And he keeps turning down offers from potential buyers.

The phrase “lucky rather than good” seems an apt way of describing MMM’s (the persona) rise to fame. The timing fit and the space was still pretty empty.
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on November 02, 2021, 08:05:45 PM


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


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
[/quote]

timing is everything but the portrait mattered too (after financial crisis/ great recession written by a middle class high income white guy)  that said it can be different.  ERE was a little early and a lot exteme....Basically MMM by accident or design timed it great and caught white lightning, and put out some decent content for 3-5 years and then mailed it in or sold out after that but by that point the hook was in.   


The forum is probably what makes him the most money...suckered (apparently this guy)
Title: Re: Stop worrying about the 4% rule
Post by: ender on November 03, 2021, 09:37:33 AM
stop worrying about MMM's motivations

:-)
Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on November 03, 2021, 09:38:55 AM
stop worrying about MMM's motivations

:-)

haha exactly - show of hands who benefited from what he did in a huge way? 

alright now who has paid him a dime outside of maybe using a referral link to a tool or credit card that made you life better?

Cool so who cares what he made he made us all millionaires. some multimillionaires. 
Title: Re: Stop worrying about the 4% rule
Post by: frugalnacho on November 03, 2021, 09:40:17 AM
Some of us are very soon to be millionaires.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on November 03, 2021, 09:51:32 AM
Some of us are very soon to be millionaires.

:D

https://forum.mrmoneymustache.com/antimustachian-wall-of-shame-and-comedy/my-soon-to-be-millionaires-family-members/
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on November 03, 2021, 11:15:14 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Jamese20 on November 04, 2021, 05:29:38 AM
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
Title: Re: Stop worrying about the 4% rule
Post by: DadJokes on November 04, 2021, 06:32:02 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Jamese20 on November 04, 2021, 07:41:33 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Metalcat on November 04, 2021, 07:49:53 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on November 04, 2021, 08:05:33 AM
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
Title: Re: Stop worrying about the 4% rule
Post by: nereo on November 04, 2021, 08:24:51 AM
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.

You keep talking bout the 'ethics' of it all and suggesting this is some long drawn out plan, despite any claims.  I don't really get your ethical argument, but whatever. A far better case has been made that his annual accounting of expenses which ignore things like the Boliva trip seem to have far more legitimacy. 

If Pete had a detailed long-game with creating MMM he did a pretty crap-tastic job implementing it.  As I said, he pretty much didn't do all the things a blogger focused on generating revenue and followers normally do. As for it taking hours and hours to come up with the concept of MMM - meh; i've spent hours coming up with band names I'll never start, construction projects I'll never do and screenplays I'll never get out of my sketchbook. At the same time I've spent hundreds of hours on hobbies I don't expect to monetize (even though some occasionally do).  Spending time on something doesn't mean diddly.
Title: Re: Stop worrying about the 4% rule
Post by: Retire-Canada on November 04, 2021, 08:44:00 AM
I'm not sure why we're 'disagreeing' about all of this on the 4% Rule thread,...

Good question. The more OT posts in this thread the less useful it is for people in the future as a resource.
Title: Re: Stop worrying about the 4% rule
Post by: Jamese20 on November 04, 2021, 08:51:06 AM
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

No it is a valid point, I was just agreeing and aligning with the original claims regarding expenses. I did not mean to hi-Jack it, the 4% rule is sound you will not get any arguments from me - in fact 5% could even be a play
Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on November 04, 2021, 09:00:29 AM
The MMM website was pretty plain Jane back in 2012 when I first found it.   Even now it's not all that fancy.   He didn't interact with the blog comments all that much and only for a day or three per post.  He's pretty much ignored the forum.   In the early days he had volunteers help him with issues with the forum.

He had compelling and useful content and he added new content fairly regularly when he started out.  There really weren't that many people doing personal finance blogs and damn few from a perspective near his.  That's what it takes.
Title: Re: Stop worrying about the 4% rule
Post by: DaTrill on December 02, 2021, 04:08:23 PM
Since this has nothing to do with the 4% rule, has anyone ever seen Pete, Dorsey and Zuckerberg in the same room at the same time?  MMM forum and blog might be another CIA scheme?  What will happen to MMM when "Pete" if that's his real name, retires from the CIA?   
Title: Re: Stop worrying about the 4% rule
Post by: vand on December 07, 2021, 08:19:27 AM
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.



Title: Re: Stop worrying about the 4% rule
Post by: boarder42 on December 07, 2021, 08:24:50 AM
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.

there are so many unique scenarios - but you could back test this by just using income in the cfiresim calculation create annual income events that last 1 year each of the first few years. 

in my personal scenario i might be as low as a 1.7% SWR at this point based on my wife and i's new found hobby businesses. 
Title: Re: Stop worrying about the 4% rule
Post by: struggleism on January 24, 2022, 08:29:33 AM
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?
Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on January 24, 2022, 08:34:43 AM
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?

Some of his early stuff was quite decent.   My opinion is that he got addicted to making lots of money off his site so he started  click-bait whoring -- lots of click-bait bullshit full of half-baked ideas, suspect logic, and click-bait titles, etc.     And to top it off, he's rich and I find him whiny about it, which is simply unbearable to me.

Other people may have different opinions about him and his work.   You now know mine.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on January 24, 2022, 09:18:59 AM
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?

Just like MMM, his site is free to read and take their non-expert opinions at your own peril.  I do not think FS is a troll, he is pretty honest that he likes money and upward mobility (living his best life, as he chooses to define it), but he's not FIRE in the way MMM and ERE are, so maybe it's unfair that he's lumped in to the same crowd?
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on January 24, 2022, 09:26:12 AM
Just for fun, Wade Pfau is out again with another 4% Rule update - https://www.barrons.com/articles/retirement-4-percent-rule-downturn-strategy-51642806039
Quote
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.

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.
Title: Re: Stop worrying about the 4% rule
Post by: dividendman on January 24, 2022, 09:32:21 AM
Just for fun, Wade Pfau is out again with another 4% Rule update - https://www.barrons.com/articles/retirement-4-percent-rule-downturn-strategy-51642806039
Quote
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.

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.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on January 24, 2022, 09:51:54 AM
Just for fun, Wade Pfau is out again with another 4% Rule update - https://www.barrons.com/articles/retirement-4-percent-rule-downturn-strategy-51642806039
Quote
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.

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 agree with you on both the annuity and insurance, but if you 'know what you are doing', they can help hedge.
Title: Re: Stop worrying about the 4% rule
Post by: erp on January 24, 2022, 09:58:01 AM
...

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.

...

I think this is really the key element. Lots of people are terrible with money and spend every dime they have. The best case scenario would be helping everyone understand average market returns and spending below income, but that's a difficult thing to do (speaking as someone who's tried to have this conversation with siblings). Annuities serve a market for people who know they can't be trusted with their own money - I don't love it, but it seems like annuities are reasonably important for some folks. I only mention this because sometimes, annuities do serve a purpose - and it's exactly the one you identify in your post.

That said, annuities are definitely sold to people who they're not appropriate for, by scammy people looking for a commission. That's morally wrong, and strong regulation requiring advisors be fiduciary seems like a great idea. I don't want this to read as pro-annuity, only to highlight a different use case.
Title: Re: Stop worrying about the 4% rule
Post by: vand on January 24, 2022, 10:09:03 AM
Annuities make slightly more sense the older you get, as the variance in the number of remaining years you have left actually increases (in percentage terms).  If you are 50 then you can reasonably expect to have a 30-50yr drawdown period. In terms of picking an initial SWR it doesn't actually make that much difference.

However, if you are, say 75 then you don't know if you have 2 years or 22 years left - either is quite easily possible.  This presents a big problem in terms of judging what SWR you can continue to use from that point.
Title: Re: Stop worrying about the 4% rule
Post by: ChpBstrd on February 02, 2022, 11:15:18 AM
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.

TRV has a PE of 12 and yields 2%.
MET has a PE of 11.3 and yields 2.8%.
AFL has a PE of 10.3 and yields 2.1%.
PRU has a PE of 6.2 and yields 4%.

All are rising against the market tide in anticipation of higher interest rates, which help them earn more on their reserves.

And... hey look at that!... all yield more than an annuity!
Title: Re: Stop worrying about the 4% rule
Post by: Parametric Censorship on March 12, 2022, 12:35:30 PM
The recent Big ERN post is a well-reasoned take on a lower current withdrawal target: https://earlyretirementnow.com/2022/02/28/retirement-in-a-high-inflation-environment-swr-series-part-51/

Ignoring his forecast models (because we don't know the future) and just taking model 4 (the best of his regressions which can be done with actual, currently observable data), we get:

1.47% + 0.553 * CAEY + 0.433 * 10 year yield - 0.312 * short-term yield + 0.005 * 1 year trailing CPI = 3.83%

This is the approximate midpoint withdrawal rate, not the worst case (best fit through the sustainable withdrawal rate history). Applying a simpler subset of the model, he eyeballs the graph and cuts off 1.25% to get back to an estimate of a SAFEMAX, as can be visualized below. You may instead be moved by his later argument to cut off something closer to 0.2% by replaying the historical worst case against the predictions. These are both highly contentious approaches, IMO. In any case, the computed SAFEMAX comes out to be substantially less than 4%. I would suspect something more principled on transforming these median-SWRs to SAFEMAX could be done by using his standard error numbers, but I haven't thought about the statistical implications myself.

(https://i0.wp.com/earlyretirementnow.com/wp-content/uploads/2022/02/SWR_Part51_ScatterPlots.5.png?resize=863%2C546&ssl=1)

This model sets a final value target of 25% of the initial portfolio after 30 years. This is not the same as Trinity 4% which allowed the worst case to deplete the portfolio. I think this is a reasonable way to mathematically address that most of us have longer than 30 year horizons, but you may disagree or believe that the adjustment for SAFEMAX is effectively double-safety with this in mind.

I say well-reasoned, because the reasoning is thoughtful and data-driven, not because I think it is a reason to "worry about the 4% rule." The personal complexity of applied withdrawal rates is real and probably anyone who can get to 25x expenses saved will never have an actual concern of running out of assets for a whole range of preservational reasons. I've been trying to be semi-to-fully early retired since 2017 and have yet to make a single withdrawal from my retirement assets due to additional income "here and there" more than covering all my costs.

I definitely expect to have "failed" at early retirement by working too much and not spending enough while I'm young and healthy.
Title: Re: Stop worrying about the 4% rule
Post by: ChpBstrd on March 14, 2022, 08:34:58 AM
@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.
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on March 14, 2022, 09:16:54 AM
@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.

And,.....you didn't even mention the Ukraine thing.  We could have World War 3.  Even without it, cutting Russia's resources from the world economy is a short term bad bump.  As I read your well written paragraphs, the thought occurred to me that the US is only 5 percent of the world's population.  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.
Title: Re: Stop worrying about the 4% rule
Post by: Parametric Censorship on March 14, 2022, 09:30:55 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Tyson on March 14, 2022, 09:35:30 AM
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.

Agreed. It all reeks of trying to time the market which is of course a loser approach.  After all the time and effort by MMM to get people to 'set and forget' their investing strategy, there are still a lot of people on this board going in to panic mode at every dip in the market.  It's astonishing to watch, actually.
Title: Re: Stop worrying about the 4% rule
Post by: mistymoney on March 18, 2022, 06:56:08 PM
what's a CAEY?
Title: Re: Stop worrying about the 4% rule
Post by: MDM on March 18, 2022, 07:11:11 PM
what's a CAEY?
1/CAPE (https://earlyretirementnow.com/2017/03/22/cape-fear/)
Title: Re: Stop worrying about the 4% rule
Post by: mistymoney on March 18, 2022, 08:00:15 PM
what's a CAEY?
1/CAPE (https://earlyretirementnow.com/2017/03/22/cape-fear/)

Thank you!
Title: Re: Stop worrying about the 4% rule
Post by: Must_ache on June 27, 2022, 07:21:11 AM
https://earlyretirementnow.com/2017/12/13/the-ultimate-guide-to-safe-withdrawal-rates-part-22-endogenous-retirement-timing/

Title: Re: Stop worrying about the 4% rule
Post by: lutorm on July 10, 2022, 07:43:56 PM
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...
Title: Re: Stop worrying about the 4% rule
Post by: nereo on July 11, 2022, 04:32:15 AM
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...

If we are viewing things from that lens, there can be only ONE ‘fully independent’ 60 year period since 1903.  That doesn’t mean that we can’t infer much from using multiple, overlapping periods. Regardless of whether you are using a 20, 30, or 60 year rolling period, what stands out is how substantially different each period performs, even when they overlap by >90%.  Put another way, multi-decade periods whose start dates are just 1-2 years apart can increase in value or fail completely. Such is the power of SORR


There’s a human tendency to want “more data!” - The underlying belief being that we’d improve both our precision and accuracy for longer-term modeling. Highly variable systems don’t work like that.  Even if we had another 50 or even 100 years of highly accurate market returns we’d see much the same patterns; most portfolios do just find with sub-5% WR, while a few fail miserably. Most failures occur due to poor performance in the first decade (and typically within the first 6 years).
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on July 11, 2022, 05:37:30 PM
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...

The reality it's difficult to predict out five years let alone 30 or 60 as there is too much unknown....wars, family, tech changes, who knows.   But it stands to reason if you can make it work for 30 years then you should be able to make it work for 60.   

History from other countries would suggest that a war on our soil would be most devastating and unrecoverable for a long time
Title: Re: Stop worrying about the 4% rule
Post by: ender on July 12, 2022, 10:09:05 AM
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.

Title: Re: Stop worrying about the 4% rule
Post by: nereo on July 12, 2022, 10:32:36 AM
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?
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on July 12, 2022, 11:25:29 AM
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).
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on July 12, 2022, 02:10:47 PM
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).

Until this recession (or near recession) if your stash was larger than that required for 4 percent withdrawal, your stash would have grown even when you were retired giving you two valuable things 1) Time you will never get back 2) the margin you desire
Title: Re: Stop worrying about the 4% rule
Post by: charis on July 12, 2022, 02:51:20 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on July 12, 2022, 03:30:40 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: charis on July 12, 2022, 03:44:02 PM
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.

That's true. And if we had been retired, we could have avoided one of those expenses at least. But it opened my eyes to the possiblity that what I want spend money on, or feel is necessary, is likely to change in the future in ways that I can't fathom right now. So we'll probably build in more safety and plan to work longer or PT. It's plann-able to a certain degree but at 40, I want or need to spend $ on different things than I expected even 5 years ago at 35.
Title: Re: Stop worrying about the 4% rule
Post by: TempusFugit on July 12, 2022, 04:03:53 PM
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!’ 
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on July 12, 2022, 04:18:07 PM
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!’

Yeah, the framework is more geared toward a 30 or 40 year old.  At 50 and certainly 60, focus should be on straight up determining living expenses and using the 4% rule. 
Title: Re: Stop worrying about the 4% rule
Post by: lutorm on July 18, 2022, 01:35:34 PM
One thing to keep in mind is that minor deviations from your "planned" expenses, like having to pay extra for childcare for a few years, has very little effect over a 40-50 year retirement period. You can also, to some extent, borrow from your future self (although that's subject to sequence of return risk) and compensate by tightening the belt a few years later.

If your expected living expenses are higher than, say, the median income, you can be pretty certain that you will be able to survive even if your desired spending level at some point in the future will be higher. So it's a matter of wants, not needs.

The thing to really worry about, IMHO, are things like major illness, accidents, or children with disabilities leading to huge medical costs, needing long term care, special accommodations, etc. that blow your expenses way past what you've planned for. Those expenses can be large and can justifiably be called "needs".
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on September 23, 2022, 05:36:49 AM
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. 
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on September 23, 2022, 06:59:34 AM
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.

At least a good sense of humor is appreciating in value today.  It's unfortunate that, even at 4% nominal yield, real returns are still deeply negative.  Happy Friday!
Title: Re: Stop worrying about the 4% rule
Post by: Must_ache on October 04, 2022, 10:00:10 AM
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.

Title: Re: Stop worrying about the 4% rule
Post by: dividendman on October 04, 2022, 10:35:53 AM
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.

I'll post the same thing here as in the other thread as well:

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)?

Yeah... ok...
Title: Re: Stop worrying about the 4% rule
Post by: dandarc on October 04, 2022, 10:37:15 AM
I feel like Financial Samurai might be one of the authors
Title: Re: Stop worrying about the 4% rule
Post by: dandarc on October 04, 2022, 10:43:13 AM
Wonder what the success rate was for the 0% withdrawal rate they said they modeled?
Title: Re: Stop worrying about the 4% rule
Post by: Metalcat on October 04, 2022, 11:04:09 AM
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?
Title: Re: Stop worrying about the 4% rule
Post by: bacchi on October 04, 2022, 11:11:48 AM
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?

I can't find the paper but, given the number of developed countries, I'll make a guess about the tl;dr.


tl;dr Don't expect a 4% WR if your country has to rebuild from a major war.
Title: Re: Stop worrying about the 4% rule
Post by: 2Birds1Stone on October 04, 2022, 11:13:49 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: Must_ache on October 04, 2022, 11:29:22 AM

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.
Title: Re: Stop worrying about the 4% rule
Post by: Must_ache on October 04, 2022, 11:35:53 AM

It's just a clickbait paper. Great example of finding data to support your position.


We all do this, right? 
You find a paper you like that supports a 4% withdrawal rate, and you celebrate it. 
You find a paper that says it should be much higher, everybody loves that.
Then we find one that says maybe it should be lower - instant mockery and hatred.

And I don't understand the clickbait comment either - I don't think four professors from two universities do all of that work with the intention of writing a "clickbait paper".  i think that's just more mockery and hatred.   

Title: Re: Stop worrying about the 4% rule
Post by: Metalcat on October 04, 2022, 11:44:45 AM
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.

Oh...weird

I mean, yeah, we've always known that the 4% rule fails if the systems it's based on fail. Isn't that a given?

But as I've said in this thread an obnoxious amount of times, I'm pretty sure that people in the US are at far more risk of failing to estimate their future expenses properly than they are of having the entire US economy fail to function the way it is expected to over a long period of time.

It is *very* possible, but we'll all likely have much bigger fish to fry than our withdrawal rates.
Title: Re: Stop worrying about the 4% rule
Post by: dandarc on October 04, 2022, 11:55:35 AM
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 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.

I find the methodology a bit strange - they've got this big list with 29,000 sets of monthly real returns from all these countries (Argentina and Czechoslovakia make up about 1% of these months each). There are only 39 countries, and they've got data going back to 1890 for some of them (US, UK, Germany, other countries you'd probably expect), and then starting more recently as countries joined the ranks of "developed". So the overall set is skewed towards the long-time developed countries, but because of how they're assembling their sets of returns for simulation, the countries with less return data are going to be included at a higher rate particularly at the end of ~10 year periods. To test a given withdraw percentage and allocation, they run 1 million simulations. Each simulation is as follows:

1. Simulate lifespan based on SSA tables



Some details are easy to understand - for any given month, they take that country's returns only and blend them per the allocation.

But then rather than simply randomly selecting returns to fil the simulated lifespan, they do this:

2. Pick a block size ~10 years long "randomly from a geometric distribution with a probability parameter equal to the inverse of the desired block length (120 months)".

3. Pick a random starting point out of the whole 29,000 country-months. Then from that month they include just the one country's returns going forward until either they fill the whole block or they run out of data from that country. If they run out of data on that country before the block is over, then they pick another country randomly from the set of countries and start adding that country's returns <starting from 1 - that's what it says in the paper>.

4. Add the block of returns to the overall returns for this simulation and then go to step 2 - stop when you've got enough months of returns for the entire lifespan being simulated.


I think the "pick a random country" part of it when you don't have a whole block of data is going to lead to overweighting the early returns from the countries with less data in the dataset (a few don't even have the ~10 years of data to fill up a single block). I think this is probably a substantial part of why the global figure they found is so low - overweighting Argentina from 1947-1966 or Israel from 2010-2019 (actually all return data stops in December 2019 for this study). These are countries that came into and out of "developed" status - they might restrict the list of countries to ones that have 1000 data points to make up for this maybe?

Spending is almost a cop-out to me "we're using real returns so we just assume a constant monthly withdrawal at the initial rate". I might be wrong, but not sure handling inflation this way is all that relevant - one simulation might have 5 years of Argentina real returns and we're also assuming we got Argentina's inflation for the spending for that time. Then we switch to Italy's figures or whatever. I don't have the math skills to figure that out but it just strikes me as potentially a problem.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on October 04, 2022, 01:53:43 PM
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.

Can you provide the link to the paper?

It raises one somewhat interesting new point, which is that the 4% Rule was based on US-market equities (S&P500) and bonds (long term corporate bonds), as well as the CPI for inflation.  Returns on US assets have had a post-1890 run which isn't average for the rest of the developed world, and most international investors have enthusiastically increased exposure to the US during this time, further juicing this outperformance.  Just as US Treasuries have outperformed just recently for decades during the great moderation, until basically this year when inflation has turned their negligible nominal yields finally in to negative real yields, US equities have had a disproportionate bump.  Under a similar bond 'reversion to mean' assumption for US equity markets (vs. other developed countries), outperformance of the US could eventually give way to outperformance by another superpower in the coming decades...

I'm not going to run out and go 50 / 50 - VTI / VXUS over this possibility, but it's good to be aware of any blind-spots in why the Trinity Study had different results from this paper and it's always good to be aware of how international exposure might help or hurt your portfolio.
Title: Re: Stop worrying about the 4% rule
Post by: dandarc on October 04, 2022, 02:42:57 PM
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4227132

is the paper - I'm with the poster who thinks they went searching for data to fit the headline.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on October 04, 2022, 03:20:58 PM
The Safe Withdrawal Rate: Evidence from a Broad Sample of Developed Markets
33 Pages Posted: 28 Sep 2022

Why cross-post this particular article?
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on October 04, 2022, 03:37:12 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: dandarc on October 04, 2022, 03:52:38 PM

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.
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.
Title: Re: Stop worrying about the 4% rule
Post by: Metalcat on October 04, 2022, 04:16:26 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on October 04, 2022, 05:29:10 PM
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.

To be honest, I think the post in https://forum.mrmoneymustache.com/welcome-to-the-forum/did-the-great-resignation-class-of-21-22-just-pick-the-worst-time-to-retire/msg3065942/#msg3065942 was out of context.  With that said, it's odd that the link was provided there and not here!  @Must_ache needs to work on their posting etiquette...
Title: Re: Stop worrying about the 4% rule
Post by: ChpBstrd on October 04, 2022, 07:46:06 PM
Arguably most markets across the world are now following the model developed by the US in the 20th century, and should produce similar results in the long run. Look at what's changed since 1900:


If we compare any country outside the US - India, Brazil, Indonesia, Germany, Nigeria - to where they were at various points in the 20th century, a clear trend emerges where they're all moving in the same direction, toward a similar economic and political structure. That structure is democracy and regulated capitalism. In fact, most of these countries are legally, culturally, and economically MORE similar to the modern US than the modern US is like itself from 100 years ago. The economic growth of the US in the 20th century occurred as a few millions of people in the US got out of net-zero-productivity subsistence farming and got into positive-sum industries. Our generation gets to ride the economy up as literally billions of people worldwide do the same, and as automation gets even smarter.

Even the world's totalitarian mega-states - Russia and China - have free market economies and global trade now. As Steven Pinker notes in The Better Angels of Our Nature, warfare has declined over the centuries. Most countries and individuals seem to be realizing the gains from trade and industrial specialization are greater than whatever could be gained through war, and that alone may mean the routine currency and government collapses of the 19th and 20th centuries have become rarer. Russia's failing invasion of Ukraine is a throwback to the mentality of 100 years ago, as was the US's failed colonization of Iraq and Afghanistan.

In any case, it has only become easier for people anywhere in the world to mitigate such risks by diversifying internationally. It takes merely a few touches on a glass tablet to invest worldwide, and that was never the case during the 20th century or any time before. So if the modern chances of sudden and unforeseeable currency/government/Vanguard collapse during one's retirement is, let's say, 1 in 10, then such a massive SORR event would still only demolish those people who failed to touch the screen in the right way to diversify out of that single risk. So in addition to a less risky world, we have more tools to diversity and hedge. 
Title: Re: Stop worrying about the 4% rule
Post by: Must_ache on October 05, 2022, 11:20:42 AM
https://www.barrons.com/articles/retirement-withdrawal-strategy-4-percent-rule-51639177201

Quote
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,”


There's plenty more in there, and it's not all doom and gloom.  Their assumptions might be grounded in low returns on bonds which will inevitably be some amount higher as interest rates settle.

The paper evidently exists, but I couldn't find an easy link to it - perhaps Morningstar wants you to concede some personal info to get your hands on it.  Kitces has written an article about it here:

https://www.kitces.com/blog/4-percent-rule-bengen-morningstar-report-the-state-of-retirement-income-safe-withdrawal-rates/
Title: Re: Stop worrying about the 4% rule
Post by: nereo on October 05, 2022, 12:24:10 PM
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).
Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on October 05, 2022, 01:30:51 PM
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).

Women live, on average, many years longer than men.   So, on average, a 2 woman couple would have higher expenses and a 2 man couple would need the money for fewer years. 

That's my guess.
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on October 05, 2022, 01:40:16 PM
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
Title: Re: Stop worrying about the 4% rule
Post by: Must_ache on October 05, 2022, 02:20:28 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: RWD on October 05, 2022, 02:24:31 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on October 05, 2022, 03:15:53 PM
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.

I've read recessions last maybe a minimum of 10 months.  As was stated, there is a lot of fat to be cut this time so maybe it's a bit longer.  How long after the recession ends before stocks typically rebound?
Title: Re: Stop worrying about the 4% rule
Post by: clifp on October 05, 2022, 03:58:21 PM


Real returns of the S&P 500 have never been less than 0% for periods longer than 20 years.
[/quote]

There are many other stock exchanges and indexes in the world, I'm sure many of them have had negative real returns over 20-year periods, which I believe is the point of the paper.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on October 05, 2022, 04:42:32 PM


Real returns of the S&P 500 have never been less than 0% for periods longer than 20 years.

There are many other stock exchanges and indexes in the world, I'm sure many of them have had negative real returns over 20-year periods, which I believe is the point of the paper.
[/quote]
Most exchanges aren’t relevant comparisons. The SP500 is the benchmark precisely because it such an enormous slice of the global market. Very few others even reach a tenths of its breadth (without incorporating many of the SP’s companies in the mix) and those come close typically lack the century+ history and/or the free-and-fair(ish) market parameters (eg China)

Title: Re: Stop worrying about the 4% rule
Post by: clifp on October 05, 2022, 07:59:37 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on October 05, 2022, 08:18:50 PM
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.

I think you missed my point. Over 20 years, if you expect zero real returns, you'd still be able to withdraw much more than 2.2% or whatever per year. You'll have good and bad years (and sequence of return risks to match) but if you're that worried about running out of money that fast, all you really need is to protect yourself from inflation, you don't need volatile/risky/high return assets like stocks at all.

-W
Title: Re: Stop worrying about the 4% rule
Post by: grantmeaname on October 05, 2022, 10:07:11 PM
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?
Title: Re: Stop worrying about the 4% rule
Post by: clifp on October 05, 2022, 10:31:38 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: PDXTabs on October 06, 2022, 12:41:38 AM
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?

I usually check VT (https://investor.vanguard.com/investment-products/etfs/profile/vt) to see the US market cap vs RoW because it tracks the FTSE Global All Cap Index. VT is currently 60.5% US. But there is a catch: the FTSE Global All Cap Index doesn't actually track all countries. In particular it doesn't include "frontier markets" or "unclassified markets" so it misses places like Ukraine, Iceland, Belize, Ecuador, Lithuania, Latvia, Estonia, etc.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on October 06, 2022, 04:40:14 AM
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.

I’m not sure what point you ar3 trying to make with these figures.
Title: Re: Stop worrying about the 4% rule
Post by: vand on October 06, 2022, 05:42:37 AM
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. 
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on October 06, 2022, 07:58:53 AM
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.

The japanese stock market bubble was crazy. And it completely skewed the proportion of global stock market values.

(https://ritholtz.com/wp-content/uploads/2018/02/Screen-Shot-2018-02-22-at-9.11.22-AM.png)

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.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on October 06, 2022, 08:21:06 AM
Quote from: maizefolk link=topic=39064.msg3066819#msg3066819
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.

In other words
Title: Re: Stop worrying about the 4% rule
Post by: Metalcat on October 06, 2022, 09:04:44 AM
Quote from: maizefolk link=topic=39064.msg3066819#msg3066819
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.

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

Didn't think I could love you more.
I was wrong.
Title: Re: Stop worrying about the 4% rule
Post by: ChpBstrd on October 06, 2022, 10:32:15 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on October 06, 2022, 12:47:27 PM
Wade Pfau has actually done some of this work for us (up to 1986 at least) here (https://retirementresearcher.com/4-rule-work-around-world/).
The quick summary is:
(https://retirementresearcher.com/wp-content/uploads/2016/06/Screen-Shot-2016-06-24-at-2.56.44-PM.png)

There's also a surprising variation of optimal historical asset allocations globally -
(https://retirementresearcher.com/wp-content/uploads/2016/06/wf3.png)
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on October 06, 2022, 02:29:54 PM
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.

This may or may not be true in this specific case (it depends on how you weight different countries and the effects of the great depression in the USA hit at close to the same time as WWII wiped out a lot of european stock and bond markets).

But so long as the failure years the define the lower bounds of the safe withdrawal rates are different, you can absolutely add together two investment mixes that each have lower safe withdrawal rates and end up with a portfolio with a higher safe withdrawal rate than either of the underlying portfolios.

That's whole whole principle of why index funds provide higher SWR than investments in a single stock or why investments in stocks + gold or stocks + real estate often show higher SWR than investments in stocks alone, even though stocks have provided dramatically higher overall returns than either of those other asset classes (and a stock only portfolio has a bunch higher SWR than a gold only portfolio).
Title: Re: Stop worrying about the 4% rule
Post by: clifp on October 06, 2022, 02:38:09 PM

I’m not sure what point you ar3 trying to make with these figures.

That the S&P isn't global world stock market or even 1/2.
Title: Re: Stop worrying about the 4% rule
Post by: grantmeaname on October 06, 2022, 03:55:27 PM
It is half, though, almost exactly.
Title: Re: Stop worrying about the 4% rule
Post by: clifp on October 06, 2022, 04:23:07 PM
It is half, though, almost exactly.
The figures I linked put it at 31.9 Trillion/ 105.07 Trillion= 30.3%

Of the links I provide only the S&P was current. However the other were at least from 2022, unlike the other posted in thread that were from 2017, 2020 etc.

The trick is to find an recent and accurate link for the total world stock market.
Title: Re: Stop worrying about the 4% rule
Post by: maizefolk on October 06, 2022, 04:54:16 PM
The trick is to find an recent and accurate link for the total world stock market.

The trick is perhaps actually to define the total world stock market.

Do companies trading in China that aren't open to non-chinese citizens count?

What about Aramco? It's implied valuation is almost $2.5T (potentially a couple percent of global market cap) but only a trivial proportion of the total ownership is available for trade on public exchanges.

The USD has strengthened substantially in the last year (up perhaps 10%). Does that imply that the value of the global stock market has declined 10% in dollars terms?
Title: Re: Stop worrying about the 4% rule
Post by: grantmeaname on October 06, 2022, 04:54:48 PM
Statista is not a high quality source. At best, it blindly plagiarizes a high quality source from time to time and you can pay a lot of money and support this behavior if you want to find out what that source is.
Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on October 06, 2022, 06:03:06 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: PDXTabs on October 06, 2022, 06:41:53 PM
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.

Which, as a slight aside, is why I'm 60% US 40% RoW.
Title: Re: Stop worrying about the 4% rule
Post by: ChpBstrd on October 12, 2022, 09:25:41 PM
Holy crap! Hell froze over.

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


And he's applying that reasoning to 60 year retirement timeframes with bequests at the end.

The reasons are:
1) stocks have already fallen over 20% from a recent high, which makes it an inherently safer time to retire, and
2) ERN calculated an adjusted CAPE ratio that factors in things like buybacks and accounting adjustments, and this new adjusted CAPE offers a valuation-based milestone to estimate SWR in a dynamic withdraw retirement,
3) By using adjusted CAPE, the dynamic withdraws do not change as dramatically as if you use current values / prices.

Link:https://earlyretirementnow.com/2022/10/12/dynamic-withdrawal-rates-based-on-the-shiller-cape-swr-series-part-54/ (https://earlyretirementnow.com/2022/10/12/dynamic-withdrawal-rates-based-on-the-shiller-cape-swr-series-part-54/)
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on October 13, 2022, 07:55:57 AM
...
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
...

So basically ERN proves he can do simple math.  A 4% SWR is equivalent to 3.25% SWR if you take NW (at 4%SWR) and reduce it to 81.25% NW (3.25/4).  I don't need to read a whole article about it!
Title: Re: Stop worrying about the 4% rule
Post by: Must_ache on October 13, 2022, 08:56:40 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: dividendman on October 13, 2022, 09:01:04 AM
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.

They may live to regret it, but they'll probably die before they regret it.
Title: Re: Stop worrying about the 4% rule
Post by: TomTX on October 13, 2022, 09:56:30 AM
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.

Small fraction of the portfolio, but meaningful enough to note.
Title: Re: Stop worrying about the 4% rule
Post by: ChpBstrd on October 13, 2022, 10:17:50 AM
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.

Yes, ERN is being "data-dependent" here, and the previous few years of near-zero interest rates and a very high CAPE ratio was probably a dangerous time to retire at a 4% WR. ERN raised this alarm to anyone who would listen, based on the data. Now that the data are very different, and so is ERN's conclusion.

At ERN's level of analysis, we can see that the SWR rises as the market falls. The problem with the 4% rule is that it's static and naive to valuation. It basically says that rarely do stocks and bonds get so expensive that you cannot have a SWR of 4%. ERN's work has led us to a predictive SWR model that can help us make sense of SWR in the context of expensive markets or market crashes.

As seen below, SWR is anything but static. Most early retirement cohorts who try to hit the 4% rule are wasting years of their lives, while others are walking into a financial accident. With massive risks on either side of the OMY debate, ERN's work gets us a lot closer to confidence.

(https://i0.wp.com/earlyretirementnow.com/wp-content/uploads/2016/12/swr-part1-chart1.png?resize=806%2C660&ssl=1)
Title: Re: Stop worrying about the 4% rule
Post by: Telecaster on October 13, 2022, 03:23:23 PM
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? 
Title: Re: Stop worrying about the 4% rule
Post by: PDXTabs on October 15, 2022, 10:39:30 AM
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?

Lots of people are global cap weighted, especially people who don't live in the USA. Also, that way you didn't have a lost decade from 2000-2010.
Title: Re: Stop worrying about the 4% rule
Post by: clifp on October 15, 2022, 01:16:01 PM


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.
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on October 15, 2022, 11:09:38 PM


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
Title: Re: Stop worrying about the 4% rule
Post by: grantmeaname on October 16, 2022, 03:06:36 AM
No need to throw hands. Everyone here wants to be done as soon as possible.

Social security is already needed to get the Trinity study beyond a 30 year horizon and doesn't help much (https://earlyretirementnow.com/2017/01/04/the-ultimate-guide-to-safe-withdrawal-rates-part-4-social-security-pensions/) because it's so far down the road, especially for the extremely early retirees (it me, looking to be done at 32). ERN is the only person I know that has thought hard about spending flexibility and he came away not impressed (https://earlyretirementnow.com/2018/05/09/the-ultimate-guide-to-safe-withdrawal-rates-part-24-flexibility-myths-vs-reality/).
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on October 16, 2022, 05:24:56 AM


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

Giving the grindstone a nice kiss and compliment that she is looking really nice today…
Title: Re: Stop worrying about the 4% rule
Post by: Metalcat on October 16, 2022, 07:27:04 AM


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

My personal perspective these days is more like "holy shit, look how well the system has held up during a massive, multi years long, global deadly crisis AND some of the most volatile political times in US history!"

Anyone who had the stones to retire during a global pandemic and just expect their pre-pandemic plan/lifestyle to hold up with no exception and no adjustment needed is...well...I don't know what to call that actually.

I mean, I "retired" during the pandemic, but not by choice. I most certainly didn't think "oh, the 4% rule's got me. I have nothing to worry about during this apocalypse that's going on right now."*

But as someone who has been profoundly affected by the pandemic myself** in massively lifestyle impacting ways, I'm actually quite impressed at how relatively little it's affected our finances compared to how drastically it's affected our lifestyle.

I've said all along, if the 4% rule fails, we have bigger things to worry about, and I would have definitely described a deadly global pandemic to be one of those bigger things to worry about, and for me, it very much has been, and will be for the next several years.

If people can weather this shit storm financially though with moderate adjustment to their financial planning, that's a miracle as far as I'm concerned.

If anything, I have *more* faith in the resiliency of the system than I did before. But I also never once believed that one could just blindly follow the 4% rule through massive, years long, unprecedented global emergencies.

Did anyone??? Really??? Did anyone?????

I've always been more concerned about real life risks than market risks, period, but a global pandemic is definitely one of those things I would expect to fuck with whatever "rules" one is working with.

This is why people should have various resiliencies within their systems. You NEVER know what the future holds.

Lastly, plans have never been about the future. No one can predict what their future will look like. FIRE simulators can't predict the future. Plans are about what the best decisions are *today*. The pandemic should have people modifying their plans, and many have. Many relocated, bought larger houses for remote working, have to plan for managing long covid, etc, etc.

For me, a big change the pandemic caused was that I knew a 6 figure lump sum was coming in 2021, and I normally would have just dumped it into index funds, but instead invested in real estate for multiple pandemic-related reasons, which then changed ALL of my plans**

Big, unpredictable things can and WILL happen. That's why the 4% "rule" is and always has been just a rough starting point for life planning.

Of course it's not a magic forcefield that can guarantee someone can live the exact same lifestyle through a years long global emergency. Of course it can't do that. It never could.

"Don't worry about the 4% rule" doesn't mean "Don't worry about risk." Risk in life is very real and often unavoidable. The best you can do is try to hedge, build resiliencies into your systems, and be as flexible as possible for adjusting to new realities.

Never, EVER expect your plans or your calculations to predict your future. They just don't have that power.

As I've said before, you can't Boglehead your way to total security.

Would I retire right now with exactly 25X my estimated expenses with no back up plans and no flexibility? Fuck no. I mean, I wouldn't do that under any circumstances. But would I leave my job right now if it was hurting my quality of life and I had a massive 'stache and could take my time to pivot, adjust my plans, and figure out next steps??

Well yeah...I did.

Now is NOT the time for people to be leaving comfortable jobs they enjoy with no plans for managing risk. Now is the *perfect* time for people to be leaving jobs that are damaging their quality of life. Actually 2020 was the perfect time to leave a job you don't like, hunker down and retrain in new skills, and then hop back into the white hot job market of 2021/2022 where companies were hurting badly for staff.

I can't actually think of a better time to bail on a shitty career, regroup, and make a new plan.

In summary: if you like your job, now is not the time to retire with no contingencies for flexibility (is it ever that time??), and now is the ideal time to leave a job you don't like and start crafting a better future for yourself if you've got a nice security blanket of money.

If you don't hate your job, but don't like your job. Oof, that's always going to be a tough position to be in, because the risk analysis is less obvious. Beware of inertia and attend to the very real risk of missing out on a better lifestyle. It's very easy to fall into the trap of "It's not that bad..."

[*What actually happened was I went on the hunt for the inevitable enormous financial opportunities that present themselves during a crisis, and I found a MASSIVE one that would have made me 8 figures rich had I nutted up and seen it through, but I blew it up instead. Long story that I won't share. No regrets.

**Not important here, see my journal if you want details]
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on October 16, 2022, 12:02:39 PM
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. 
Title: Re: Stop worrying about the 4% rule
Post by: dividendman on October 16, 2022, 12:21:19 PM
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!"
Title: Re: Stop worrying about the 4% rule
Post by: nereo on October 16, 2022, 12:59:52 PM
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!”

Title: Re: Stop worrying about the 4% rule
Post by: Metalcat on October 16, 2022, 01:26:06 PM
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.
 
Certainly this whole craziness has had me doubling down on backup plans and hedges. Not so much because of what the markets will do, but because of wanting more robust, flexible options for lifestyle change for the inevitable times that shit hits the fan in life. Whether that shit be economic, global, local, or personal.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on October 16, 2022, 01:57:42 PM
(https://pbs.twimg.com/media/Fe9eOcUXkAA6v55?format=png&name=medium)
Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on October 16, 2022, 02:55:12 PM

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.


I know people who STILL don't believe there was a covid epidemic or that covid is dangerous.

I guess some of them did figure out **something** big was happening but since they either made it up or (more likely) got it from Q-Anon & friends, I'm not sure that makes your point stronger or weaker.

But setting aside the willfully ignorant, I agree with you.    It's just that a few years ago I didn't realize how VERY MANY willfully ignorant people there are.
Title: Re: Stop worrying about the 4% rule
Post by: ChpBstrd on October 17, 2022, 07:39:08 AM
(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.
Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on October 17, 2022, 08:20:55 AM
... 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... :)
Title: Re: Stop worrying about the 4% rule
Post by: StashingAway on October 17, 2022, 08:56:09 AM
(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.

How do those years account for the previous year's growth?
Title: Re: Stop worrying about the 4% rule
Post by: ChpBstrd on October 17, 2022, 09:00:08 AM
... 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... :)
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.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on October 17, 2022, 10:48:20 AM
Pretty short lifespans…
Title: Re: Stop worrying about the 4% rule
Post by: Must_ache on October 21, 2022, 12:59:50 PM
(https://pbs.twimg.com/media/Fe9eOcUXkAA6v55?format=png&name=medium)

This graph may tell you that it is very unusual for both stocks and bonds to have significant negative returns.
If you look at those other two years on the safe withdrawal rate above, you'll see those were approximately two of the times that the safe withdrawal rate went clearly below 4%.

(https://i0.wp.com/earlyretirementnow.com/wp-content/uploads/2016/12/swr-part1-chart1.png?resize=806%2C660&ssl=1)
Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on October 21, 2022, 01:48:35 PM
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?
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on October 21, 2022, 01:51:36 PM
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?

Would treasury bonds have that risk?
Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on October 21, 2022, 04:00:58 PM
Technically, yes, because governments do go broke.

That said, if the US government collapses pretty much everyone's plans will be in tatters.

And if the bond fund holds Treasury bonds, same problem with cash-flow forced sales.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on October 21, 2022, 04:18:28 PM
You are also doing pretty poorly if you bought a 10 year Treasury with 2% yield a year ago, even if you hold it to maturity.  You can get a bond with 4% yield now, so twice the payout.  Both bonds are still losing purchasing power to 8% inflation though.  And there’s no telling if yields will continue to go up.  In a perfect world, you buy bonds at their highest yield and longest duration, then you can also sell them before maturity above par value…

That’s why people have claimed we were in a bond bubble, the price paid for low nominal yields, even when inflation was low, made no sense!  Those bonds are even more worthless now!
Title: Re: Stop worrying about the 4% rule
Post by: ChpBstrd on October 21, 2022, 05:24:26 PM
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?

When stocks go down, the same thing keeps happening that happens every day. Investors scrutinize every available scrap of information looking for the best risk-adjusted return. Some decide to sell stocks and buy bonds, while others decide to sell bonds and buy stocks. Funds for either have a certain number of shares outstanding and just keep focusing on their strategy or tracking their index, unless they are issuing new shares and buying more 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.
Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on October 22, 2022, 06:57:09 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: ChpBstrd on October 22, 2022, 05:39:22 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on October 22, 2022, 07:51:31 PM
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.

I own shares in both bond and stock funds.

**I've** never sold a darn thing to another investor.   I tell the fund I want money for shares and that's what I get.    That means the FUND is selling the bonds that provide the underlying value of my investment in order to raise funds.

And you're right, THEY are selling to other investors.  And those other investors will act as I described, which means the value of the bond fund will be affected as I described.  The only reason they wouldn't do that would be if other investors want to buy enough shares in the bond fund to cover the cash they need to provide.   I posit that in a stock market crash, the need to sell bonds goes up because stock prices are so low, more than the cash inflow from investors buying bonds.

And that affects the amount of money I get for the next set of shares that I sell.

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?
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on October 22, 2022, 09:52:09 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on October 23, 2022, 07:50:39 AM
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?
Title: Re: Stop worrying about the 4% rule
Post by: secondcor521 on October 23, 2022, 10:08:47 AM
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?

Sure.

The other thing you might not be considering in your analysis is mark to market.  I am fairly certain that mutual funds, including bond funds, have to price their assets at market value every day and reflect that in the NAV.  So in the example you're talking about here, the loss of value in that low interest bond due to rising market interest rates gets reflected gradually in the NAV as interest rates rise.  When it actually gets sold (perhaps to meet redemptions), it's just an exchange of cash for a bond, and the NAV doesn't drop as a result of the sale.

So in the end, that loss of value happens gradually over time as the worth of the fund's assets declines due to rising rates.  It isn't due to the sales of any bonds to meet redemptions.

There is another effect which could happen, which is if a bond fund has to meet an extremely large and extremely quick amount of redemptions.  If they have to sell so many bonds at once, that would flood the market and they wouldn't be able to get what they thought they could.  I don't know if that has ever happened to a bond fund, but it could.  I would think this would happen only if there were some sort of scandal or market shock, like if the Fed chair died or something.  In the normal course of ebbs and flows, I think this would be a non-issue.
Title: Re: Stop worrying about the 4% rule
Post by: Must_ache on October 24, 2022, 06:49:32 AM
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?

I don't think you're not talking about why stocks are different from bonds, you're just talking about diversification.  People also can buy funds rather than put all their eggs in a few baskets.

Bonds and stocks are entirely different securities.  A bond provides a steady, relatively known return, except for the probability of impairment.  If things go south for the company you could lose half or all of your principal.  If you get an AA bond, the default rate is 0.38%.  If you get a BBB bond, the default rate is 1.02%.  Stocks are part ownership in a company.

Another reason they are kept separately is because they have very different expected returns and standard deviations.  The risk (std dev) and reward (expected return) for stocks are higher.  You can look on a 20-yr chart and see the different between stocks and bonds.  The theory is that you should have some combination of the two depending on your risk appetite.  If you are 20 years old you want 100% stocks.  If you are 60 you might want 25%-40% bonds because you have accumulated your wealth and don't want to put your nest egg through as much risk.
Title: Re: Stop worrying about the 4% rule
Post by: vand on December 23, 2022, 12:49:08 AM
Ben Felix is not usually known for sprouting bullshit numbers - he says (citing a far more rigorous study) 2.7% may be the true SWR at the 5% failure rate when you account for:

Cherry picked US dataset the Bengen study was done on and how things could have unfolded in alternate reality, as well as life expectancy distributions.

It's not a new point but has always been glossed over. Yes, 4% is based around a bad-outcome scenario but in historical context it is a bad outcome from an already very favourable dataset.

https://youtu.be/1FwgCRIS0Wg

Title: Re: Stop worrying about the 4% rule
Post by: MDM on December 23, 2022, 03:08:23 AM
...how things could have unfolded in alternate reality....
Once we move from historical reality to alternate reality, anything is possible.
Title: Re: Stop worrying about the 4% rule
Post by: vand on December 23, 2022, 03:32:42 AM
...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.
Title: Re: Stop worrying about the 4% rule
Post by: MDM on December 23, 2022, 03:41:22 AM
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.

If one believes the future will be worse than the worst of the past - as measured by the datasets used - then one is of course free to act on those beliefs.
Title: Re: Stop worrying about the 4% rule
Post by: NorcalBlue on May 17, 2023, 02:26:13 PM
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.

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.[BANNED]
Title: Re: Stop worrying about the 4% rule
Post by: MDM on May 17, 2023, 02:31:37 PM
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. ;)
Title: Re: Stop worrying about the 4% rule
Post by: Monkey Uncle on May 17, 2023, 05:38:21 PM
This is a good example of a sticky that should have been closed to additional comments at least 20 pages ago.  Lots of good stuff in the early parts of this thread, but not much of value has been added in the last 5+ years.
Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on May 17, 2023, 07:51:47 PM
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. ;)

Actual video footage of fascist Trump supporters marching.  Those blue flags with the fasces on them, that's a fascist flag.  It's where the name fascist comes from.  There have been a number of these marches, not to mention a coup attempt.

https://www.cnn.com/videos/us/2021/12/06/white-nationalists-march-lincoln-memorial-newday-jarrett-avlon-vpx.cnn

A number of the white nationalist groups want to start a race war.  Some members have gone out on shooting sprees in hopes to do just that. 

And even mainstream Republicans have threatened secession of their states.

I wish I was crazy and these people aren't like this.  But they are.
Title: Re: Stop worrying about the 4% rule
Post by: Padonak on May 19, 2023, 12:39:43 PM
I checked this thread hoping to find some new insights about the 4% rule and found some BS political commentary.
Title: Re: Stop worrying about the 4% rule
Post by: ChpBstrd on May 19, 2023, 12:46:12 PM
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)?
Title: Re: Stop worrying about the 4% rule
Post by: nereo on May 19, 2023, 06:30:51 PM
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?
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on May 19, 2023, 07:35:52 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on May 20, 2023, 04:35:27 AM
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.

That echos my thoughts. “This time it’s different!!” Is a financial meme, yet it’s also repeated with all seriousness every cycle.
Title: Re: Stop worrying about the 4% rule
Post by: nereo on May 26, 2023, 08:00:07 AM
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)
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on May 26, 2023, 08:28:40 AM
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)

It'll be interesting to see the comments on that one.  On one hand, it advocates a 4% or 5.5% WR most of the time, but would've had you at 2.75% WR for some of 2022...

Also have to realize that a lot of these OG FIRE bloggers (and pre-2019 FIRE cohorts) are 'way ahead of the game'.  That FIRE NW has almost doubled for many of them.  That 4% WR became 2%, so many of them are looking now at justifications to increase spending.
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on May 26, 2023, 09:37:08 AM
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?
Title: Re: Stop worrying about the 4% rule
Post by: tooqk4u22 on May 27, 2023, 06:21:18 AM
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
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on May 27, 2023, 09:30:47 AM
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

Although we don't time the market, it makes me grateful I went into "insane investing/saving" mode during the 2008 meltdown, the previous 8 years of "serious" investing had not done much but the "hyper save/invest" in 2008+ has earned us $millions.

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!
Title: Re: Stop worrying about the 4% rule
Post by: ender on May 27, 2023, 10:04:42 AM
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.

I graduated undergrad in 2010 and wasn't really able to find a FT job so I did grad school. When I did find a FT job, I worked with someone who graduated and was working FT I think since 2007 -- he'd been maxing his 401k/etc and purely because he graduated a few years earlier and into the job market then, was in a position his initial savings were greatly amplified since he was able to save through the 2009 time period.

Likewise, because I started FT ~2013, I've been able to similarly save and max my 401k throughout the last 10 years, all of which has been good as well (but not as good as if I had started a few years prior). Significantly better than someone who started in 2020.

But it's not really anything we can control, either.

And for all I know it'll be better for someone starting work FT in 2023 than when I started (-:
Title: Re: Stop worrying about the 4% rule
Post by: bluecollarmusician on May 27, 2023, 10:43:56 AM
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. 
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on May 27, 2023, 11:15:03 AM
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.

A very good point and one that resonates with me. My Parents also grew up in the UK during WW2 (My Dad in London). The way they think is very much coloured by their childhood experiences. Honestly it has stunted their growth in many ways. My Wife and I were just talking about "forgiveness" and why its important etc. We realise now that my Parents have carried grudges their whole lives and even have a couple of new ones that they will most likely take to their graves.

I had to ask my Dad on our recent trip about forgiving his Sister for a pretty minor infraction.. At 90 years old he told me.. "I will never talk to her again and I wish she were dead!"... Like Holy S... Your gonna die soon and your carrying this crap around with you?

They are just very different people to me.. But are they? I suspect they are the same but their experiences (or lack thereof in the corporate world) has meant they have simply not had the opportunity to learn skills that I take for granted.
Title: Re: Stop worrying about the 4% rule
Post by: VanillaGorilla on May 28, 2023, 10:32:20 AM
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)
The word "flexibility" is so overused in FI discussion that I cringe just seeing it.

I've moved past the Mad Fientist content over the last many years as he tends to be fairly sloppy and imprecise with his arguments (for example, mixing real and nominal figures). He retired from his career while his wife was still working full time, so of course he can be highly optimistic with his chances of running out of money, he's got a spouse who is legally obligated to cover his liabilities.He does a good job explaining the basics of FIRE, particularly tax optimization, but suffers badly when it comes to dissecting withdrawal rates. For example, he's got some early articles that are overly enthusiastic about the terminal portfolio values for your average 4% retiree.
Quote
“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).

So, given that bias, I would say that this article doesn't seem to be much better. I like their point that a truly early retiree (say, before 50) is in a life position where sequence of returns risk is plausibly managed by lifestyle factors, mostly by getting a job. It's easy enough to generate a plan of, say, retiring on 4%, with the guardrail of getting a job if the portfolio is negative after five years.

Quote
If you have a 30-year-fixed mortgage, for example, your biggest expense may not be impacted by inflation at all!

The argument that a mortgage is not inflation adjusted is valid, but they gloss over the fact that simply having a mortgage increases sequence of returns risk. If the assumption is that you retire with a mortgage rate lower than a long term bond, so you can buy a bond to pay the mortgage, then that assumption isn't spelled out clearly, and anyway, that's impossible to rely on because everybody has a different mortgage rate and long term bond yield at time of retirement. There's no analysis, just conjecture in a statement like the above.

As for their proposed discretionary spending guidelines, isn't that essentially the Guyton-Klinger approach that Karsen Jeske wrote about extensively? The biggest challenge with that approach is that if you retire at a challenging time, you'll spend decades living off your bare-bones budget. 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.

In the end, this article just seems sloppy. It convolves an intent of a rigorous mathematic analysis with squishier human factors.
Title: Re: Stop worrying about the 4% rule
Post by: bluecollarmusician on May 28, 2023, 11:33:55 AM

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 ;-)
Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on May 28, 2023, 12:00:50 PM

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 ;-)

Yep, if you aren't flexible, you'll break when you get squished!  :)
Title: Re: Stop worrying about the 4% rule
Post by: Parametric Censorship on May 30, 2023, 01:17:58 PM
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.
Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on May 30, 2023, 01:30:05 PM
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!

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.)
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on May 30, 2023, 02:04:37 PM
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!

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!..:)
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on May 30, 2023, 04:24:15 PM
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!

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!..:)

Internet says it's 65F and partly sunny in Corvallis.  Take a good walk.  You'll feel better.
Title: Re: Stop worrying about the 4% rule
Post by: Exflyboy on May 30, 2023, 04:34:46 PM
@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..:(
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on May 30, 2023, 10:14:20 PM
@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..:(

Been there with the back sprain.  I've had that 3 times.  Hopefully, you can get some muscle relaxants.  I got that once simply twisting to get out of my pickup truck.  It usually lasts a few weeks.  The bad thing is the element of surprise.  You think you are doing well and then seemingly out of nowhere, the muscles contract and won't let go.  Good luck with that.
Title: Re: Stop worrying about the 4% rule
Post by: Must_ache on August 08, 2023, 10:07:25 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on August 08, 2023, 10:25:41 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: dividendman on August 08, 2023, 11:07:38 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: SwordGuy on August 08, 2023, 11:32:57 AM
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.
Absolutely!!!
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.
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on August 08, 2023, 11:56:46 AM
Always interesting to see why a dormant thread has suddenly flared back up.  Mmmmmm, another tasty nothing-burger LOL
Title: Re: Stop worrying about the 4% rule
Post by: ChpBstrd on August 08, 2023, 12:52:20 PM
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:
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/)
Title: Re: Stop worrying about the 4% rule
Post by: pecunia on August 08, 2023, 01:03:29 PM
So until recently the stock market took a dive.  If one retired just before or during the dive and you rely on equities, is there a significant sequence of returns risk as you look out from this period to 30 years?  Could this pose more risk for the 4 percent rule?
Title: Re: Stop worrying about the 4% rule
Post by: grantmeaname on August 08, 2023, 01:11:33 PM
SORR isn't really a 30 year problem. It's like a 3-5 year problem. If you retire during the drop, like in late '22, it means you are out-saving the declines and retiring at below-peak valuations. But retiring right before the peak is the worst case scenario, and that timing is responsible for most (all?) 4% rule failures. Retiring at the top of the dotcom bubble or the GFC cliff means you're forced to sell low and you've eaten more of your principal by the time the market has recovered.

Edited to add: to expand on this a little more, the median 4% retiree has runaway money and way more than they need. In such a scenario, you may be at a 3% or even 2% withdrawal rate in year 15 or 20 of your retirement. That lets you easily weather a dip, even a 30-40% dip, and you're 15 or 20 years older so your principal also doesn't need to last you as long.
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on August 16, 2023, 10:03:04 PM
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/)

"Finally, I can see how at some point down the road interest rates could be much higher than today. If you retire in 5 years and still have 20 years left on your 3.25% fixed rate mortgage but bond interest rates are now 3.5 or 4%, then by all means, hold on to that mortgage. Now the mortgage vs. bond leverage works beautifully!"

That's the rub, really. Not paying off the mortgage looks like a pretty freaking good move right now. Equities, schmequities. I can just buy boring ultra safe stuff that yields 2% more than my mortgage costs me.

-W
Title: Re: Stop worrying about the 4% rule
Post by: EscapeVelocity2020 on August 17, 2023, 07:13:08 AM
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.
Title: Re: Stop worrying about the 4% rule
Post by: waltworks on August 17, 2023, 08:05:52 AM
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.

Most mustachians have the cash available, actually, at least the people who tend to be discussing this issue.

I have zero interest in using my pile of 5% money market funds to pay off my 3% mortgage.

-W
Title: Re: Stop worrying about the 4% rule
Post by: ChpBstrd on August 17, 2023, 10:50:50 AM
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.
Most mustachians have the cash available, actually, at least the people who tend to be discussing this issue.

I have zero interest in using my pile of 5% money market funds to pay off my 3% mortgage.

-W
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.

The people signing 7% mortgages today should definitely pull money out of investments to pay down their mortgages. 7% risk-free is an excellent return given the alternatives available today in the worlds of stocks or bonds.

The author of earlyretirementnow.com was asked last year (https://earlyretirementnow.com/forum/swr/what-fixed-yield-equals-instant-retirement-on-4-wr-or-5-wr/) what real rate of portfolio return would support a 30y retirement at a 4% WR and full depletion. He estimated about 1.31% real. Obviously the cash flows don't line up for funding daily retirement expenses by prepaying one's mortgage. Yet those people with 7% mortgages are likely earning 3-4% real with every prepayment they make, because inflation seems to be heading to 3% or less. Their opportunity cost at the zero level of risk for putting each dollar into the mortgage is about 2.5% real!

So unless one loses money gambling on APE stock, one can currently earn well over the sort of real returns that would fund a 30y 4%-rule retirement while taking on nearly zero risk. Mustachians with a 30y life expectancy can "stop worrying about the 4% rule" by locking in the next couple of decades of returns in a highly conservative AA. Then they can start worrying about inflation :)