Author Topic: Stop worrying about the 4% rule  (Read 811298 times)

nereo

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Re: Stop worrying about the 4% rule
« Reply #1800 on: February 23, 2020, 01:42:46 PM »
And indeed, that's the interesting flip side of the coin, GenX!

Are you eating lots of red meat? Do you get moderate to intense cardio exercise for at least 4 or 5 hours a week (so, really, almost an hour a day)? How about weight bearing/strength exercise? Balance work/yoga (go google how likely a fall is to kill you when you're old)? Do you spend excessive amounts of time sitting down at work/in traffic? Do you sleep 7 or 8 good hours a night?

Tons of us here are obsessed with getting that WR down - but it won't mean anything if you're not alive. And there are easy things you can do to improve your odds. They take planning (which you should already be good at if you're reading this thread) and effort (natch, stop eating shitty food) and sometimes stepping out of your comfort zone (hire a personal trainer, buy some workout clothes, be that weirdo who doesn't watch any TV so they can get good sleep, use lots of titanium-dioxide sunscreen that makes you look like a weirdo outdoors, etc).

-W

Reminds me of an observation my father (a physician) has made:  Tell people there's a drug that will lower their cholesteral and reduce the chance of a heart attack by 25% , but it costs $150/week, has to be taken 3 times a day and has a bunch of unpleasant side effects and patients will demand they get an Rx and will take it religiously for decades.

Tell them they can get the same results with no side effects and no cost just by walking briskly 30 minutes a day and they say: "I'm too busy".


waltworks

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Re: Stop worrying about the 4% rule
« Reply #1801 on: February 23, 2020, 01:50:30 PM »
As an FYI - sun exposure (especially sunburns) may increase the chance of skin cancer, but sunbathing seems to reduce all-cause mortality noticeably. Large, 20 year study:

https://www.ncbi.nlm.nih.gov/pubmed/24697969

Yes, if you live near the Arctic circle, getting enough sun can be a problem!

-W

DavidAnnArbor

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Re: Stop worrying about the 4% rule
« Reply #1802 on: February 24, 2020, 07:29:52 AM »
As an FYI - sun exposure (especially sunburns) may increase the chance of skin cancer, but sunbathing seems to reduce all-cause mortality noticeably. Large, 20 year study:

https://www.ncbi.nlm.nih.gov/pubmed/24697969

though I'm inclined to believe the conclusion of this study, do keep in mind this study shows a correlation but does not prove causation.

Malcat

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Re: Stop worrying about the 4% rule
« Reply #1803 on: February 24, 2020, 07:45:06 AM »
As an FYI - sun exposure (especially sunburns) may increase the chance of skin cancer, but sunbathing seems to reduce all-cause mortality noticeably. Large, 20 year study:

https://www.ncbi.nlm.nih.gov/pubmed/24697969

though I'm inclined to believe the conclusion of this study, do keep in mind this study shows a correlation but does not prove causation.

Skin cancer also really sucks for the individual who does get it. DH and I have both had it.

pecunia

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Re: Stop worrying about the 4% rule
« Reply #1804 on: March 21, 2020, 12:33:27 PM »
MY belief in the 4 percent rule has been under some strain lately.  Any good words to help some of us along?  How does the Corona Virus fit with the study?  Can it be considered an anomaly?

SwordGuy

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Re: Stop worrying about the 4% rule
« Reply #1805 on: March 21, 2020, 12:52:35 PM »
MY belief in the 4 percent rule has been under some strain lately.  Any good words to help some of us along?  How does the Corona Virus fit with the study?  Can it be considered an anomaly?
  The "Spanish Flu" pandemic of 1918 is within the 4% rule historical time period.

This too shall pass.

It may pass like a kidney stone, but it will pass.

maizefolk

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Re: Stop worrying about the 4% rule
« Reply #1806 on: March 21, 2020, 01:10:19 PM »
MY belief in the 4 percent rule has been under some strain lately.  Any good words to help some of us along?  How does the Corona Virus fit with the study?  Can it be considered an anomaly?

Sudden sharp crashes really have never been a problem for the 4% rule. It's markets that go down and stay down for a long time, and/or long term inflation combined with a stagnant stock market which result for the occasional failure year.

In some decades time it may turn out that 2020 was a bad year to retire, like 1966. But the stock market will have to stay down for a long time for that to happen, not just a year or two. The longest estimates for lockdown to "flatten the curve" are on the order of 18-24 months. The x-factor will be whether or not the economy is able to restart smoothly after going into such a broad shutdown. So really it's a wait and see situation.

However the current crash does seem likely to tip a hypothetical 2000 retiree into a failure state.

A hypothetical retiree who retired at the peak of the 2000 stock bubble with 25x living expenses and who had continued to adjust their spending with inflation ever year was down to a new worth of about 10 years living expenses as of late 2019. After the recent drops they probably have a net worth of only ~7 years worth of living expenses left to support their annual expenses.

SwordGuy

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Re: Stop worrying about the 4% rule
« Reply #1807 on: March 21, 2020, 02:17:31 PM »
MY belief in the 4 percent rule has been under some strain lately.  Any good words to help some of us along?  How does the Corona Virus fit with the study?  Can it be considered an anomaly?

Sudden sharp crashes really have never been a problem for the 4% rule. It's markets that go down and stay down for a long time, and/or long term inflation combined with a stagnant stock market which result for the occasional failure year.

In some decades time it may turn out that 2020 was a bad year to retire, like 1966. But the stock market will have to stay down for a long time for that to happen, not just a year or two. The longest estimates for lockdown to "flatten the curve" are on the order of 18-24 months. The x-factor will be whether or not the economy is able to restart smoothly after going into such a broad shutdown. So really it's a wait and see situation.

However the current crash does seem likely to tip a hypothetical 2000 retiree into a failure state.

A hypothetical retiree who retired at the peak of the 2000 stock bubble with 25x living expenses and who had continued to adjust their spending with inflation ever year was down to a new worth of about 10 years living expenses as of late 2019. After the recent drops they probably have a net worth of only ~7 years worth of living expenses left to support their annual expenses.

If I remember correctly, the 4% rule formulated by the Trinity study assumed a 30 year retirement.   Running out after 27 years would be a failure.     

maizefolk

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Re: Stop worrying about the 4% rule
« Reply #1808 on: March 21, 2020, 03:51:54 PM »
A hypothetical retiree who retired at the peak of the 2000 stock bubble with 25x living expenses and who had continued to adjust their spending with inflation ever year was down to a new worth of about 10 years living expenses as of late 2019. After the recent drops they probably have a net worth of only ~7 years worth of living expenses left to support their annual expenses.

If I remember correctly, the 4% rule formulated by the Trinity study assumed a 30 year retirement.   Running out after 27 years would be a failure.   

Yup. Like the failures you see around 1966 +/- a year. The 2000 retiree isn't necessarily going to fail by the Trinity study's standards. If we return to the long run post inflation CAGR of the US stock market 7 years of living expenses would last about 9.75 years. If our retiree is a little lucky they may make it the full 30 years running on autopilot taking inflation adjusted withdrawals even as their portfolio shrinks. But if they do make it across the 30 year line they will be running on empty.

These things happen at a low but non-zero rate. It is good to be a bit flexible about reduced spending during major recessions, just like most people still earning a paycheck also do.

EscapeVelocity2020

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Re: Stop worrying about the 4% rule
« Reply #1809 on: March 21, 2020, 04:10:59 PM »
This forum would be really great if it had a whiteboard so I could draw as I write, but basically, the higher the current market is vs. historical CAPE, the lower you should expect your future returns.

Current Shiller PE Ratio: 31.77 -0.12 (-0.39%)
4:00 PM EST, Thu Feb 20
Mean:   16.70   
Median:   15.76   
Min:   4.78   (Dec 1920)
Max:   44.19   (Dec 1999)

The 4% rule is great based on being at or below the historical average Shiller/CAPE...  So yeah, we are not on solid ground relying upon the historical 4% inflation adjusted return for our 30 year rolling period.

Current Shiller PE Ratio: 21.76 -1.20 (-5.22%)
4:00 PM EDT, Fri Mar 20

Wow, in just one month, you're probably back on track with relying on the 4% rule if you ER now.  Too bad the market had to go from ~3400 to 2300 to get back to reasonable valuation.  Feel bad for folks that were investing at inflated prices these last 4 years (myself included), but we are back to a period where investments should produce historical average returns (or only slightly below) going forward.

Unless society and the market collapses, of course.   

dividendman

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Re: Stop worrying about the 4% rule
« Reply #1810 on: March 21, 2020, 04:44:15 PM »
Unless society and the market collapses, of course.

Then we'll get even better deals on stocks :P

kenmoremmm

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Re: Stop worrying about the 4% rule
« Reply #1811 on: March 21, 2020, 09:07:05 PM »
This forum would be really great if it had a whiteboard so I could draw as I write, but basically, the higher the current market is vs. historical CAPE, the lower you should expect your future returns.

Current Shiller PE Ratio: 31.77 -0.12 (-0.39%)
4:00 PM EST, Thu Feb 20
Mean:   16.70   
Median:   15.76   
Min:   4.78   (Dec 1920)
Max:   44.19   (Dec 1999)

The 4% rule is great based on being at or below the historical average Shiller/CAPE...  So yeah, we are not on solid ground relying upon the historical 4% inflation adjusted return for our 30 year rolling period.

Current Shiller PE Ratio: 21.76 -1.20 (-5.22%)
4:00 PM EDT, Fri Mar 20

Wow, in just one month, you're probably back on track with relying on the 4% rule if you ER now.  Too bad the market had to go from ~3400 to 2300 to get back to reasonable valuation.  Feel bad for folks that were investing at inflated prices these last 4 years (myself included), but we are back to a period where investments should produce historical average returns (or only slightly below) going forward.

Unless society and the market collapses, of course.
pretty sure CAPE will go back to out of whack after Q1 earnings are reported. and Q2. in fact, it might even be more skewed given the immense slowdown.

waltworks

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Re: Stop worrying about the 4% rule
« Reply #1812 on: March 21, 2020, 09:09:34 PM »
Yeah, I wouldn't rely too much on CAPE for a while, given the context.

If you think the world economy will eventually recover, stocks are a pretty good deal right now. They might be an even better deal in the interim, of course, but as of now they're a good deal.

If you think the world is f'd, then might as well put some money (what you have left over after buying TP and ammo) in stocks in case you're wrong, since you can't eat green paper or ones and zeros on a computer somewhere.

-W
« Last Edit: March 21, 2020, 09:12:29 PM by waltworks »

EscapeVelocity2020

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Re: Stop worrying about the 4% rule
« Reply #1813 on: March 21, 2020, 09:27:51 PM »
Yeah, I wouldn't rely too much on CAPE for a while, given the context.

If you think the world economy will eventually recover, stocks are a pretty good deal right now. They might be an even better deal in the interim, of course, but as of now they're a good deal.

If you think the world is f'd, then might as well put some money (what you have left over after buying TP and ammo) in stocks in case you're wrong, since you can't eat green paper or ones and zeros on a computer somewhere.

-W

That's why I use CAPE (the Shiller PE which relies on a 10 year cyclically adjusted PE).  I've seen folks just talk about plain vanilla PE which will certainly be misleading.  CAPE is not perfect, but it has the best track record so far.  https://www.gurufocus.com/shiller-PE.php

waltworks

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Re: Stop worrying about the 4% rule
« Reply #1814 on: March 21, 2020, 09:33:20 PM »

That's why I use CAPE (the Shiller PE which relies on a 10 year cyclically adjusted PE).  I've seen folks just talk about plain vanilla PE which will certainly be misleading.  CAPE is not perfect, but it has the best track record so far.  https://www.gurufocus.com/shiller-PE.php

That's also what I was talking about. A few quarters of basically zero earnings will skew CAPE too, albeit not as badly as vanilla P/E.

-W

EscapeVelocity2020

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Re: Stop worrying about the 4% rule
« Reply #1815 on: March 21, 2020, 10:51:36 PM »

That's why I use CAPE (the Shiller PE which relies on a 10 year cyclically adjusted PE).  I've seen folks just talk about plain vanilla PE which will certainly be misleading.  CAPE is not perfect, but it has the best track record so far.  https://www.gurufocus.com/shiller-PE.php

That's also what I was talking about. A few quarters of basically zero earnings will skew CAPE too, albeit not as badly as vanilla P/E.

-W

@waltworks Thanks for clarifying, it's an interesting side discussion for sure.  Vanilla P/E is gonna be a mess since earnings are still too high and prices are meh.  I think CAPE S&P earnings will be a mix of some companies possibly getting a boost and walking dead companies falling out of the index.  Averaged over 10 years, earnings should not be too skewed.

pecunia

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Re: Stop worrying about the 4% rule
« Reply #1816 on: March 22, 2020, 10:20:43 AM »
This forum would be really great if it had a whiteboard so I could draw as I write, but basically, the higher the current market is vs. historical CAPE, the lower you should expect your future returns.

Current Shiller PE Ratio: 31.77 -0.12 (-0.39%)
4:00 PM EST, Thu Feb 20
Mean:   16.70   
Median:   15.76   
Min:   4.78   (Dec 1920)
Max:   44.19   (Dec 1999)

The 4% rule is great based on being at or below the historical average Shiller/CAPE...  So yeah, we are not on solid ground relying upon the historical 4% inflation adjusted return for our 30 year rolling period.

Current Shiller PE Ratio: 21.76 -1.20 (-5.22%)
4:00 PM EDT, Fri Mar 20

Wow, in just one month, you're probably back on track with relying on the 4% rule if you ER now.  Too bad the market had to go from ~3400 to 2300 to get back to reasonable valuation.  Feel bad for folks that were investing at inflated prices these last 4 years (myself included), but we are back to a period where investments should produce historical average returns (or only slightly below) going forward.

Unless society and the market collapses, of course.

Thanks - It just so happens that I hope to retire in a month.  However, I will live on cash for a bit and give it some time to bounce back.  Average recession is 18 months, but this one is probably not average due to the prolonged rise before the crash.

I don't see much choice other than riding that tiger.

vand

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Re: Stop worrying about the 4% rule
« Reply #1817 on: March 22, 2020, 10:51:26 AM »
This forum would be really great if it had a whiteboard so I could draw as I write, but basically, the higher the current market is vs. historical CAPE, the lower you should expect your future returns.

Current Shiller PE Ratio: 31.77 -0.12 (-0.39%)
4:00 PM EST, Thu Feb 20
Mean:   16.70   
Median:   15.76   
Min:   4.78   (Dec 1920)
Max:   44.19   (Dec 1999)

The 4% rule is great based on being at or below the historical average Shiller/CAPE...  So yeah, we are not on solid ground relying upon the historical 4% inflation adjusted return for our 30 year rolling period.

Current Shiller PE Ratio: 21.76 -1.20 (-5.22%)
4:00 PM EDT, Fri Mar 20

Wow, in just one month, you're probably back on track with relying on the 4% rule if you ER now.  Too bad the market had to go from ~3400 to 2300 to get back to reasonable valuation.  Feel bad for folks that were investing at inflated prices these last 4 years (myself included), but we are back to a period where investments should produce historical average returns (or only slightly below) going forward.

Unless society and the market collapses, of course.
pretty sure CAPE will go back to out of whack after Q1 earnings are reported. and Q2. in fact, it might even be more skewed given the immense slowdown.

You do actually understand that CAPE is a 10yr average, right? that's 40 individual quarters'. Knock off the last couple of quarters from Q1/Q2 2010 to make space for the Q1/Q2 2020 numbers and it still isn't going to budge much. That's the whole point of CAPE - it shows you what you can reasonably expect stocks to earn over a long time period.

pecunia

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Re: Stop worrying about the 4% rule
« Reply #1818 on: March 22, 2020, 03:55:52 PM »


- SNIP -

You do actually understand that CAPE is a 10yr average, right? that's 40 individual quarters'. Knock off the last couple of quarters from Q1/Q2 2010 to make space for the Q1/Q2 2020 numbers and it still isn't going to budge much. That's the whole point of CAPE - it shows you what you can reasonably expect stocks to earn over a long time period.

So CAPE is a long run thing.

This explained it pretty well.

https://www.investopedia.com/terms/c/cape-ratio.asp

"In the long run we are all dead," John Maynard Keynes

Classical_Liberal

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Re: Stop worrying about the 4% rule
« Reply #1819 on: March 22, 2020, 06:55:16 PM »
Another similarly (to CAPE) accurate long term measurement is total market cap to GDP.  It's looking much better as well.

TomTX

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Re: Stop worrying about the 4% rule
« Reply #1820 on: March 22, 2020, 08:12:23 PM »
Another similarly (to CAPE) accurate long term measurement is total market cap to GDP.  It's looking much better as well.

Until the 2Q GDP numbers come in...

vand

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Re: Stop worrying about the 4% rule
« Reply #1821 on: March 23, 2020, 06:21:34 AM »


- SNIP -

You do actually understand that CAPE is a 10yr average, right? that's 40 individual quarters'. Knock off the last couple of quarters from Q1/Q2 2010 to make space for the Q1/Q2 2020 numbers and it still isn't going to budge much. That's the whole point of CAPE - it shows you what you can reasonably expect stocks to earn over a long time period.

So CAPE is a long run thing.

This explained it pretty well.

https://www.investopedia.com/terms/c/cape-ratio.asp

"In the long run we are all dead," John Maynard Keynes

Why bother living at all then. Duh.

desk_jockey

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Re: Stop worrying about the 4% rule
« Reply #1822 on: March 24, 2020, 11:39:05 AM »
You do actually understand that CAPE is a 10yr average, right? that's 40 individual quarters'. Knock off the last couple of quarters from Q1/Q2 2010 to make space for the Q1/Q2 2020 numbers and it still isn't going to budge much. That's the whole point of CAPE - it shows you what you can reasonably expect stocks to earn over a long time period.

Exactly.   The CAPE was created as a 10 year average precisely because business cycles showed in every 10 year period there were some down years.  It was only a short time ago when companyís financial losses of 2H07-1H09 began to roll off the PE10.   For a brief time, the PE10 reflected a period of 40 financial quarters with good financial results. To be a truer reflection of the markets and all the historical studies that we reference, it should be expected that the CAPE includes at least 4 bad quarters. 

HotTubes

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Re: Stop worrying about the 4% rule
« Reply #1823 on: April 14, 2020, 05:04:25 PM »
I did throw in 10% spending flexibility, which means the ability to avoid spending a mere $4k in a year when the markets are down. I didn't even remove the overly high investing fees. Taking investing fees down from 0.3% to 0.1% improves portfolio success rate from 95% to 98%. No effect on the death rate. If you have 15% spending flexibility and 0.1% fees, portfolio success goes to 100%. This means the ability to avoid spending (or generate income) of a mere $500 per month.

For those unfamiliar with this chart, the tiny red sliver is "portfolio failed" and the rising massive grey curve is "died".

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


My dear mother ran out of money at age 46 and lived to be 91 - not sure where on the chart that would put her. 

Her asset allocation for her Soc Sec check was 30% tobacco, 30% scotch, and 40% good humor and zest for life

pecunia

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Re: Stop worrying about the 4% rule
« Reply #1824 on: April 14, 2020, 06:00:47 PM »
For a few years now, it appears that the US and other nations have been creating money to quell the vile disruptions in nation's economies.  As we have not dove into the dark recesses of another great depression, it looks like the policy has worked to some extent.

I wonder if there is a down side.  Old Milton Friedman used to talk about governments and the money supply.  I think he won a Nobel prize so he was probably on to something.  I'd guess when they create more money out of thin air that it is an increase in the money supply.  A good supply of most anything usually means that the unit cost of that something goes down in price.

An example is the current price of gasoline.  The world is awash in oil so my fill up costs make me smile as the cost per gallon is low.

So, I figure all this new money is like the cost of oil.  Lots of oil means a low price for gasoline.  Lots of dollars mean a low price for dollars which means you will be able to buy less with each one.

If you have invested in index funds will your investment get buoyed up as the dollars become worth less?  Will this then compensate for the expected rise in the cost of living?  Inflation has been low for quite a long time and I wonder how it and the 4 percent rule actually interact.  If I retire with a pot of money invested per the 4 percent rule at 25X my expected annual living costs, will I just ride with inflation and float on top of that sea of new currency?

matchewed

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Re: Stop worrying about the 4% rule
« Reply #1825 on: April 14, 2020, 06:30:40 PM »
For a few years now, it appears that the US and other nations have been creating money to quell the vile disruptions in nation's economies.  As we have not dove into the dark recesses of another great depression, it looks like the policy has worked to some extent.

I wonder if there is a down side.  Old Milton Friedman used to talk about governments and the money supply.  I think he won a Nobel prize so he was probably on to something.  I'd guess when they create more money out of thin air that it is an increase in the money supply.  A good supply of most anything usually means that the unit cost of that something goes down in price.

An example is the current price of gasoline.  The world is awash in oil so my fill up costs make me smile as the cost per gallon is low.

So, I figure all this new money is like the cost of oil.  Lots of oil means a low price for gasoline.  Lots of dollars mean a low price for dollars which means you will be able to buy less with each one.

If you have invested in index funds will your investment get buoyed up as the dollars become worth less?  Will this then compensate for the expected rise in the cost of living?  Inflation has been low for quite a long time and I wonder how it and the 4 percent rule actually interact.  If I retire with a pot of money invested per the 4 percent rule at 25X my expected annual living costs, will I just ride with inflation and float on top of that sea of new currency?

So go read up on the trinity study and learn how inflation is treated with regards to the 4% rule.

maizefolk

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Re: Stop worrying about the 4% rule
« Reply #1826 on: April 14, 2020, 08:38:15 PM »
Also important to read up about the velocity of money.

The deflation during the great depression wasn't because the supply of money shrunk. It was because the supply of money was constant but the velocity of money slowed down (a given dollar might have changed hands every two months now changed hands every three months).

Of course the velocity of money cuts both ways. In recessions people tend to hold on to their money longer because who knows that the future might bring. Slower velocity of money and, in the absence of increases in the money supply, deflation. Once inflation kicks in, people start working hard to spend money as soon as they receive it, because a month from now it'll be worth less. Faster velocity of money, which means even more inflation.

EscapeVelocity2020

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Re: Stop worrying about the 4% rule
« Reply #1827 on: April 14, 2020, 08:53:51 PM »
Also important to read up about the velocity of money.

The deflation during the great depression wasn't because the supply of money shrunk. It was because the supply of money was constant but the velocity of money slowed down (a given dollar might have changed hands every two months now changed hands every three months).

Of course the velocity of money cuts both ways. In recessions people tend to hold on to their money longer because who knows that the future might bring. Slower velocity of money and, in the absence of increases in the money supply, deflation. Once inflation kicks in, people start working hard to spend money as soon as they receive it, because a month from now it'll be worth less. Faster velocity of money, which means even more inflation.

For all we know, we might be into a new terminology - not stagflation, but more like stag-not-inflation-nor-deflation.  Or worse yet, an unimaginable stag-deflation while inflating the money supply and taking on insurmountable debt.  There is no doubt in my mind that we are in uncharted economic territory and treating this like a cavalier situation, that things will be brought back in line summarily once we shake off this moment in time.  Russia might just emerge from this era looking like Rome ascendant - actually economically strong while the US and Europe fiddle with ways to issue more debt.

waltworks

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Re: Stop worrying about the 4% rule
« Reply #1828 on: April 14, 2020, 09:45:01 PM »
We're always in uncharted territory. So what?

I don't think Russia is going to come out of all this any better off than anyone else. Given their demographics and relatively crap medical system, they actually might end up much worse off.

-W

waltworks

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Re: Stop worrying about the 4% rule
« Reply #1829 on: April 14, 2020, 10:23:28 PM »
How has Russia positioned itself for anything? It's almost a failed state that is 100% dependent on oil revenue.

I mean, per capita GDP is like 1/5 that of the US. We have all sorts of problems, sure, but Russia has plenty of it's own (death rate 20% higher than birthrate, negligible immigration/negative population growth, life expectancy for men 12 *years* less than in the US, etc, etc).

They do have nukes, so there's that.

-W

matchewed

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Re: Stop worrying about the 4% rule
« Reply #1830 on: April 15, 2020, 07:33:46 AM »
Also important to read up about the velocity of money.

The deflation during the great depression wasn't because the supply of money shrunk. It was because the supply of money was constant but the velocity of money slowed down (a given dollar might have changed hands every two months now changed hands every three months).

Of course the velocity of money cuts both ways. In recessions people tend to hold on to their money longer because who knows that the future might bring. Slower velocity of money and, in the absence of increases in the money supply, deflation. Once inflation kicks in, people start working hard to spend money as soon as they receive it, because a month from now it'll be worth less. Faster velocity of money, which means even more inflation.

For all we know, we might be into a new terminology - not stagflation, but more like stag-not-inflation-nor-deflation.  Or worse yet, an unimaginable stag-deflation while inflating the money supply and taking on insurmountable debt.  There is no doubt in my mind that we are in uncharted economic territory and treating this like a cavalier situation, that things will be brought back in line summarily once we shake off this moment in time.  Russia might just emerge from this era looking like Rome ascendant - actually economically strong while the US and Europe fiddle with ways to issue more debt.

Sorry but other than the Russia statement what does any of that even mean?

nereo

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Re: Stop worrying about the 4% rule
« Reply #1831 on: April 15, 2020, 07:50:05 AM »
For all we know, we might be into a new terminology - not stagflation, but more like stag-not-inflation-nor-deflation.

This would seem to describe much of the last two decades - stagnant wages, inflation that is well below the Fed's "target" of 2%. It's not the economic ideal but it's far from a disaster.
It also corresponded to the largest economic expansion of any economy in modern times.


EscapeVelocity2020

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Re: Stop worrying about the 4% rule
« Reply #1832 on: April 15, 2020, 07:57:38 AM »
Also important to read up about the velocity of money.

The deflation during the great depression wasn't because the supply of money shrunk. It was because the supply of money was constant but the velocity of money slowed down (a given dollar might have changed hands every two months now changed hands every three months).

Of course the velocity of money cuts both ways. In recessions people tend to hold on to their money longer because who knows that the future might bring. Slower velocity of money and, in the absence of increases in the money supply, deflation. Once inflation kicks in, people start working hard to spend money as soon as they receive it, because a month from now it'll be worth less. Faster velocity of money, which means even more inflation.

For all we know, we might be into a new terminology - not stagflation, but more like stag-not-inflation-nor-deflation.  Or worse yet, an unimaginable stag-deflation while inflating the money supply and taking on insurmountable debt.  There is no doubt in my mind that we are in uncharted economic territory and treating this like a cavalier situation, that things will be brought back in line summarily once we shake off this moment in time.  Russia might just emerge from this era looking like Rome ascendant - actually economically strong while the US and Europe fiddle with ways to issue more debt.

Sorry but other than the Russia statement what does any of that even mean?

Went a little into a political sidetrack so I deleted that post about Russia, just in a very bad mood about what's going on in the US and that it did not have to be this way.  I'm not an economist, so I don't know what they will call a situation where, between Congress and the Fed, the government issues 4T in stimulus to a locked down country to keep the market up and businesses alive.  Our economy is definitely in stagnation for the foreseeable future and there hasn't been a whiff of inflation for years.  Some talk about deflation as goods become cheaper, but also hard to see much of that if businesses have government money and consumers have some government money - basically all the ingredients for inflation without any need or really ability to spend...  Guess it all depends how long it takes to work our way back to normal, and what normal ends up being.

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Re: Stop worrying about the 4% rule
« Reply #1833 on: April 15, 2020, 08:02:21 AM »
Hasn't really been any inflation from when we did this 12 years ago. Maybe this time will be different, maybe not.

Suppose this is relevant to the thread - the past failure scenarios for the 4% rule did have to do more with high inflation than low returns.

nereo

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Re: Stop worrying about the 4% rule
« Reply #1834 on: April 15, 2020, 08:09:59 AM »
Hasn't really been any inflation from when we did this 12 years ago. Maybe this time will be different, maybe not.


Not directly comparable, but in addition to the QE programs during the "Great Recession" we also had at least two other times when the US undertook a massive amount of debt - during both world wars.  Curiously, the following decade each time had below-average (sub 3%) inflation.  (though note that the US was under teh Gold Standard, and the economy was fundamentally different - still, interesting to think about).

maizefolk

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Re: Stop worrying about the 4% rule
« Reply #1835 on: April 15, 2020, 08:27:12 AM »
I'm not an economist, so I don't know what they will call a situation where, between Congress and the Fed, the government issues 4T in stimulus to a locked down country to keep the market up and businesses alive.  Our economy is definitely in stagnation for the foreseeable future and there hasn't been a whiff of inflation for years.  Some talk about deflation as goods become cheaper, but also hard to see much of that if businesses have government money and consumers have some government money - basically all the ingredients for inflation without any need or really ability to spend...  Guess it all depends how long it takes to work our way back to normal, and what normal ends up being.

Maybe we should move this to a separate thread because not directly relevant to the 4% rule, but it is a fascinating set of questions.

Without saying this WILL happen, I could make a case for the CARES act actually having a (short term) deflationary impact rather than inflationary.

Right now consumer demand has dropped dramatically for two reasons. People have lost their jobs and people with jobs (still the majority of the population) are saving rather than spending because they don't know what the future will hold. CARES helped fewer people lose their jobs, but that has less impact on consumer demand because even people who keep their jobs are mostly saving cash, except for vital expenses (rent/mortgage, food).

At the same time, the CARES act allows a lot of businesses that would otherwise go out of business stay open, and it does this by subsidizing a large proportion of their costs (labor). In the absence of CARES these businesses would have gone under, reducing supply for a lot of the things people spend their money on other than rent/mortgage and food. With CARES in place these businesses stay alive, and -- because their operating costs are already covered for the next several months, allowing them to turn a profit from sales a much lower prices than usual -- will continue to cut their prices to compete for the small number of discretionary consumer dollars still floating around in the economy.

TL;DR By staving off bankruptcy driven decreases in supply, CARES may prolong the imbalance between supply and demand for nonessential goods and services and drive down market prices.

Not saying this will happen, just that there is a plausible argument* which could be made for it.

*At least it seems plausible to me. Please feel free to poke holes it in.

robartsd

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Re: Stop worrying about the 4% rule
« Reply #1836 on: April 17, 2020, 10:25:18 AM »
If I were not in accumulation, I would be somewhat concerned if my current annual spend rate exceeded 4% of my current portfolio value. We're currently at about 80% of the last peak value, so someone who retired using the 4% rule at the last peak would need a 5% withdraw rate starting now to be successful. Plenty of historical start dates would be successful on a 5% withdraw rate, so it's not yet looking like a failure scenario. It is hard to say how COVID-19 will continue to affect the economy over the next few years - slower than typical growth due to ongoing social distancing certainly is possible. Within a few months I'm sure some of the current restrictions will be relaxed (at minimum I expect that soon all activities where 6 foot social distancing can be maintained will be allowed); but some changes will likely persist into 2021 and the economic impact to those hardest hit could be much longer.

Since I'm still in accumulation and not worried about my own income security, I bought some extra VTSAX in our Roth IRA accounts (using funds available from the CARES act check, 2019 income tax refunds, and a bit of other savings).

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Re: Stop worrying about the 4% rule
« Reply #1837 on: April 26, 2020, 09:29:23 AM »
A great read: https://movement.capital/one-portfolio-risk-to-rule-them-all/

He shows that given an 80/20 portfolio at various points in history, it was possible to pick out 30yr periods that only supported 2/3rds of the income that the same portfolio could have given despite a 78% higher growth rate, all thanks to sequence risk. Mind blown.

« Last Edit: April 26, 2020, 09:34:50 AM by vand »

mrmoonymartian

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Re: Stop worrying about the 4% rule
« Reply #1838 on: May 06, 2020, 03:35:51 AM »
A great read: https://movement.capital/one-portfolio-risk-to-rule-them-all/

He shows that given an 80/20 portfolio at various points in history, it was possible to pick out 30yr periods that only supported 2/3rds of the income that the same portfolio could have given despite a 78% higher growth rate, all thanks to sequence risk. Mind blown.


That's easy then. I'm just going to use up my good return years first and save my bad return years till last. Problem solved.

dividendman

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Re: Stop worrying about the 4% rule
« Reply #1839 on: May 21, 2020, 12:21:15 AM »
A great read: https://movement.capital/one-portfolio-risk-to-rule-them-all/

He shows that given an 80/20 portfolio at various points in history, it was possible to pick out 30yr periods that only supported 2/3rds of the income that the same portfolio could have given despite a 78% higher growth rate, all thanks to sequence risk. Mind blown.


That's easy then. I'm just going to use up my good return years first and save my bad return years till last. Problem solved.

I think you're joking, but "using up your good returns first" is exactly what a reverse equity glide-path does.

EscapeVelocity2020

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Re: Stop worrying about the 4% rule
« Reply #1840 on: August 18, 2020, 10:58:47 PM »
And just when you thought this thread was all done and dusted...

Early-Retirement.org started a thread on Financial Samurai's latest post about the 4% SWR being more like a 0.5% SWR...

And here is the article, if you want the source material - (Edited to remove the link)

It certainly has an air of click-baityness, to go to such an extremely low SWR, but there are some ideas in there that are worth thinking about, like -
Quote
The proper safe withdrawal rate has plummeted. Maybe our government wants us to work forever to fund their massive spending!

Due to a record amount of stimulus created in a record short amount of time, interest rates have dropped faster than a cement block tied to a dead body thrown off a boat in the middle of Lake Tahoe by one of Caponeís capos.  The 10-year bond yield is at ~0.7%. It will likely stay under 1% for years to come.

With yields so low, the government has floated the idea of issuing 50 year bonds...  But for the meantime, the max risk-free fixed income yield (30yr) is ~1.4%.

Quote
The 4 percent rule was first published in the Journal Of Financial Planning in 1994 by William P Bergen. It was subsequently made popular by three Trinity University professors in 1998 called the Trinity Study. Inflation and interest rates were much higher and pensions were common. The 4 percent rule is the most common safe retirement withdrawal rate cited.

Some like to naively claim that they are financially independent once they achieve a net worth equal to 25X their annual expenses. But if you think logically, thereís a big problem with the 4 percent rule.  Letís look at where the 10-year bond yield was back when the Trinity Study was published in 1998.
 
In 1998, the 10-year bond yield was between 4.41% to 5.6%. Letís say the average 10-year yield rate was 5% in 1998.

Therefore, of course youíd likely never run out of money in retirement following the 4 percent rule. Back then, you could earn 1 percent more on average risk-free! And if you looked at the 10-year bond yield in 1994, it was even higher.  If you had a classic 60/40 stock/bond portfolio, the historical return was about 8%. You were golden. Going forward, Iím not so sure with both bonds and stocks at all-time highs.
« Last Edit: August 19, 2020, 07:54:38 AM by EscapeVelocity2020 »

SwordGuy

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Re: Stop worrying about the 4% rule
« Reply #1841 on: August 18, 2020, 11:01:57 PM »
@EscapeVelocity2020 , please remove the link to the article you referenced.  It's just click-bait trash and there's no valid reason to fund that particular click-bait-whore of a writer.      And yes, that's exactly my opinion of the fellow and his work nowadays.


SwordGuy

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Re: Stop worrying about the 4% rule
« Reply #1842 on: August 18, 2020, 11:04:29 PM »
Stocks are quite frequently at or near all time highs.    It's pretty much why we buy them, so giving that as an example of why not to buy stocks is pretty damn foolish.   

EscapeVelocity2020

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Re: Stop worrying about the 4% rule
« Reply #1843 on: August 19, 2020, 12:12:50 AM »
@EscapeVelocity2020 , please remove the link to the article you referenced.  It's just click-bait trash and there's no valid reason to fund that particular click-bait-whore of a writer.      And yes, that's exactly my opinion of the fellow and his work nowadays.

Hopefully I have given fair warning that the link is to the article and, I would expect, most people would read my post before clicking on the link.  That said, viewing the article does not cost the reader anything but their time and gives miniscule income (on the individual level) to Financial Sam.  Maybe I'm naive, but I do think that there are worse things in the world than this.

Also, yes, stocks are at all time highs which does happen often, but not typically during something like a pandemic and quarantines, especially in a country whose GDP primarily relies on the service sector.  Stocks are usually at highs when bond yields are also high, because an economic expansion is competing for investor money.  We now have a weird world where inflation can't happen (because people can't buy as much stuff) so the government can throw trillions in to the economy, keep treasury yields near zero, and the money has nowhere to go except the stock market and real estate.  Whenever the dust settles, the rich will have become richer and the poor will have become poorer faster than ever.  I'm willing to bet years like 2020 can't go on for the next 30 years.

So, in summary, I don't totally disagree with his calling attention to the idea that current times are different from the historical times that the Trinity Study used to formulate the 4% Rule.  But I've also felt this way for the last few years and things have gone along swimmingly so far.  I guess only time will tell.
« Last Edit: August 19, 2020, 12:14:41 AM by EscapeVelocity2020 »

RWD

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Re: Stop worrying about the 4% rule
« Reply #1844 on: August 19, 2020, 07:16:55 AM »
Hopefully I have given fair warning that the link is to the article and, I would expect, most people would read my post before clicking on the link.  That said, viewing the article does not cost the reader anything but their time and gives miniscule income (on the individual level) to Financial Sam.  Maybe I'm naive, but I do think that there are worse things in the world than this.
One of the metrics search engines use for ranking sites is how many outside sites have links to them so you are making it more likely that a random person searching Google for financial advice will see Financial Samurai articles.

TomTX

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Re: Stop worrying about the 4% rule
« Reply #1845 on: August 19, 2020, 11:57:18 AM »
Maybe I'm naive, but I do think that there are worse things in the world than this.

That's a dumb strawman unless you think it's OK to promote the second worst thing in the world.

FS is worthless clickbait and shouldn't be linked to other than from the "Antimustachian Shame And Comedy" section.

EscapeVelocity2020

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Re: Stop worrying about the 4% rule
« Reply #1846 on: August 19, 2020, 12:31:49 PM »
Maybe I'm naive, but I do think that there are worse things in the world than this.

That's a dumb strawman unless you think it's OK to promote the second worst thing in the world.

FS is worthless clickbait and shouldn't be linked to other than from the "Antimustachian Shame And Comedy" section.

I removed the link already, in case you hadn't noticed, after it was pointed out that linking helps the SEO rating and visibility of the article.  Hopefully no on else is linking it from the Antimustachian Shame and Comedy section (or elsewhere in the forum), since that would also help FS.  Thing is, the article is getting tons of traffic and comments, so it's worth being aware of.  But I'll follow it on E-R.org instead of here.  As Sam points out, many 4% SWR adherents find out that actually withdrawing 4% once retired is more difficult than you thought while you were in the accumulation phase.

Telecaster

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Re: Stop worrying about the 4% rule
« Reply #1847 on: August 19, 2020, 06:35:55 PM »
Hopefully I have given fair warning that the link is to the article and, I would expect, most people would read my post before clicking on the link.  That said, viewing the article does not cost the reader anything but their time and gives miniscule income (on the individual level) to Financial Sam.  Maybe I'm naive, but I do think that there are worse things in the world than this.

Also, yes, stocks are at all time highs which does happen often, but not typically during something like a pandemic and quarantines, especially in a country whose GDP primarily relies on the service sector.  Stocks are usually at highs when bond yields are also high, because an economic expansion is competing for investor money.  We now have a weird world where inflation can't happen (because people can't buy as much stuff) so the government can throw trillions in to the economy, keep treasury yields near zero, and the money has nowhere to go except the stock market and real estate.  Whenever the dust settles, the rich will have become richer and the poor will have become poorer faster than ever.  I'm willing to bet years like 2020 can't go on for the next 30 years.

So, in summary, I don't totally disagree with his calling attention to the idea that current times are different from the historical times that the Trinity Study used to formulate the 4% Rule.  But I've also felt this way for the last few years and things have gone along swimmingly so far.  I guess only time will tell.

Thus far only about 3.6 billion people have pointed out that the central assumption of the Trinity Study is that the future will be no worse than the past, and the future might indeed be worse than the past.  Congratulations to Financial Samurai for finally realizing this concept. 

However, there are a number of other financial concepts that still elude his tiny brain.   One is that the Trinity Study didn't just use bond rates in 1998 to complete the study.  They also used stock market returns and inflation from 1926-1995.   So only a complete idiot or Financial Samurai--but I repeat myself--would look at just the bond rates from 1998 to project forward returns from 2020 onward.  Financial Illiterate also neglected inflation, which was a couple percent back then so the risk free rate was more like 2-3%.  Since 2-3% is less than 4% his whole point comes crumbling down around him.   The way he defines it 4% wouldn't have been safe back then either.  And he wasn't comparing apples to apples anyway. 

Let me put it a different way:  Financial Dipshit was only looking at the risk-free return rate (instead of a balanced portfolio) to calculate SWR, and then assumed that today's interest rates would last forever (stupid assumption!), and also ignore ignored inflation (stupid assumption!), and did not include stock returns (fine if that's what you want), and didn't include any principle draw down (fine, if that's what you want).

But those aren't the same assumptions that are traditionally made when discussing the 4% rule.  I happy stipulate I do not know what the future holds, but at this point I don't see any particular reason why the 4% rule, as traditionally defined, wouldn't hold up in the future.  Financial Samurai being financially illiterate doesn't change my mind. 





 


dividendman

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Re: Stop worrying about the 4% rule
« Reply #1848 on: August 19, 2020, 07:07:56 PM »
...  As Sam points out, many 4% SWR adherents find out that actually withdrawing 4% once retired is more difficult than you thought while you were in the accumulation phase.

I'm curious, do you mean mentally difficult or...?

EscapeVelocity2020

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Re: Stop worrying about the 4% rule
« Reply #1849 on: August 19, 2020, 08:17:22 PM »
...  As Sam points out, many 4% SWR adherents find out that actually withdrawing 4% once retired is more difficult than you thought while you were in the accumulation phase.

I'm curious, do you mean mentally difficult or...?

Yes, mentally difficult - as in, you are so used to accumulation where down markets allow you to buy more and up markets turbocharge your NW vs. distribution where you don't want your principal to fall and you also don't want to take too much out during good times either, 'just in case'.

Getting back to the article, it got picked up by MarketWatch (which I won't link to) so definitely made Financial Samurai some 'passive income'.  But the thread in E-R.org and comments to the article absolutely scorch the guy - very much like a long form choir reaching consensus of what Telecaster said.

Most telling, a lot of folks suspect FS doesn't even believe his own post.  Credibility is really all you have when you blog online and he's lost it fully and completely.