Stop worrying about the 4% rule

[maizefolk]

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be my last choice just because this thread contains a lot of important contributions from awesome forum members who are no longer active).

[MDM]

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....

[DavidAnnArbor]

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.

[Retire-Canada]

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.

[brooklynguy]

This looks rather predictive.  If you go on clinging to the Trinity study without adjusting for this, then (from EarlyRetirementNow)

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.

[PizzaSteve]

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.

[steveo]

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.

[GenXbiker]

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.

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/

[sol]

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.

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.

[Dicey]

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.

[Goldielocks]

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.

[Tyson]

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. 

[Eric]

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.

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.

[steveo]

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.

[Eric]

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.  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.

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. 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%.

[PizzaSteve]

...

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. 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.

[Retire-Canada]

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.

[steveo]

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.

[deborah]

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.

[retiringearly]

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.

[GenXbiker]

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.  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.

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. 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.

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/

[Dicey]

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/

[FrugalToque]

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.

[FrugalToque]

The thread is unlocked.

[Retire-Canada]

I just waded through 6 pages of people patiently and impatiently answering questions that had already been asked and answered pages before.

Thank you.

[Mr Mark]

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

[FrugalToque]

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.

[CanuckExpat]

Might be of interest to people on this thread:

William Bengen, author of the 1994 paper "Determining Withdrawal Rates Using Historical Data" will be doing an "Ask Me Anything" tomorrow Tuesday, August 22 at 12:00 noon eastern daylight time on the Financial Independence Subreddit if you want to ask him any questions directly. Here is a link to the reminder with more information

[CanuckExpat]

Here is the live thread: I'm Bill Bengen, and I first proposed the 4% safe withdrawal rate in 1994. Ask me anything!

[PizzaSteve]

Here is the live thread: I'm Bill Bengen, and I first proposed the 4% safe withdrawal rate in 1994. Ask me anything!

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.

[MDM]

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.

[MDM]

I did a bit of further clean up and additions.  Feel free to repost.

Done.  Editing is easy. :)

[DavidAnnArbor]

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. 

[Retire-Canada]

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%

[steveo]

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.

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".

[Monkey Uncle]

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.

[CanuckExpat]

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, 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.

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 seen with the The 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.

[brooklynguy]

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?"

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.

[Retire-Canada]

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

[GenXbiker]

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?” "

[Monkey Uncle]

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, 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.

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 seen with the The 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.

[DavidAnnArbor]

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.

[kenmoremmm]

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?

[DavidAnnArbor]

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.

[Tyson]

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. 

[Retire-Canada]

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.

[Tyson]

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.

[nereo]

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...

[Retire-Canada]

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.

[Classical_Liberal]

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.