Stop worrying about the 4% rule

[maizefolk]

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.

[nereo]

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.

[sol]

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.

[DavidAnnArbor]

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.

[Bernard]

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.

[MDM]

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"....

[sol]

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. 

[nereo]

Oh what the hell... time to repost this again


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

[EscapeVelocity2020]

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.

[Metalcat]

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.

[SwordGuy]

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.

[neonlight]

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.

[sol]

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.

[nereo]

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. 

[neonlight]

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.”

[TempusFugit]

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. 

[FIREstache]

TempusFugit is correct.  The MMM info is misleading.  If you want to be more certain of preserving wealth, use a lower WR.

[SwordGuy]

@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.

[neonlight]

@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).

[chevy1956]

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

[chevy1956]

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.

[pecunia]

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.

[sol]

I will also add a common observation that the only thing permanent is change.

The buddha approves.

[robartsd]

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.

[sol]

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.

[robartsd]

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.

[nereo]

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.

[pecunia]

- 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.

[sol]

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.

[Monkey Uncle]

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

Yes, it's the end of the beginning...

[FIREstache]

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.

[nereo]

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 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.

[pecunia]

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 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.

[sol]

Nereo / Sol - I am disappointed in both of you. 

Meh.  I already gave several serious answers 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 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.

[pecunia]

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.

[SwordGuy]

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!  :)

[nereo]

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. 

[SwordGuy]

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.

[neonlight]

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.

[Monkey Uncle]

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.

[pecunia]

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.

[nereo]

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.

[Exflyboy]

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.

[SwordGuy]

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.

[Exflyboy]

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.

[pecunia]

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.

[Exflyboy]

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"...:)

[dougules]

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. 

[Exflyboy]

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..:)

[lutorm]

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.