Author Topic: Stop worrying about the 4% rule  (Read 1151808 times)

secondcor521

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Re: Stop worrying about the 4% rule
« Reply #2150 on: October 23, 2022, 10:08:47 AM »
If that's not true, please explain where it's not, and what is true in place of that.  Am I wrong about the relative cash flow in bond fund shares in a major stock downturn?

It's possible that in a major downturn, many people get afraid and sell their stocks and buy bonds.  That could provide enough inflows into bond funds where there are net fund inflows.  For people like you who are selling $100 of the fund, they just make an accounting entry and take $100 from the $500 that a scared investor paid into the fund, give it to you, and take the remaining $400 and buy more bonds, not selling any.

I don't know the relative magnitude of the flows.  It could depend on the overall market trend and what is happening on a weekly or daily basis.  There are companies that track fund flows, but I don't think they can do it on an individual fund basis.  The mutual fund company knows of course.

Agreed.  Then again, what are we supposed to do at least once a year?   Rebalance our portfolio!   And if stocks are down, that means rebalancers sell bonds to buy stocks.  That could lead to some big flows out of bonds.  Anytime that a bond holder sells a low interest rate bond early, they lose value off of their bond holding because the bond face value is discounted due to the low rate.  If those bonds were owned by a fund, the fund loses value.  If the person purchasing the bonds is purchasing the bonds IN THE FUND, it's a cash flow wash.  But if the entity purchasing the bonds isn't doing it as a bond fund shareholder, but instead is purchasing the entire bond to hold in their own right, it's a loss for the bond fund value.

Does that make sense?

Sure.

The other thing you might not be considering in your analysis is mark to market.  I am fairly certain that mutual funds, including bond funds, have to price their assets at market value every day and reflect that in the NAV.  So in the example you're talking about here, the loss of value in that low interest bond due to rising market interest rates gets reflected gradually in the NAV as interest rates rise.  When it actually gets sold (perhaps to meet redemptions), it's just an exchange of cash for a bond, and the NAV doesn't drop as a result of the sale.

So in the end, that loss of value happens gradually over time as the worth of the fund's assets declines due to rising rates.  It isn't due to the sales of any bonds to meet redemptions.

There is another effect which could happen, which is if a bond fund has to meet an extremely large and extremely quick amount of redemptions.  If they have to sell so many bonds at once, that would flood the market and they wouldn't be able to get what they thought they could.  I don't know if that has ever happened to a bond fund, but it could.  I would think this would happen only if there were some sort of scandal or market shock, like if the Fed chair died or something.  In the normal course of ebbs and flows, I think this would be a non-issue.

Must_ache

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Re: Stop worrying about the 4% rule
« Reply #2151 on: October 24, 2022, 06:49:32 AM »
So, about the bond returns being separated from stock returns.

If I buy an individual bond, and I hold it to maturity, it will pay exactly what it is supposed to.  (Assuming the company doesn't go out of business, etc.)

So, if my bond holdings are in individual bonds, my returns should be largely independent of the stock market.  If I needed to sell a bond early, the price should go up or down based on the relative interest rates that the bond pays versus newly issued bonds offered.

That's how I understand it.

But putting lots of money into buying a single bond has its own risk.  The company could go belly up and make the bond worth much less.   Plus, it takes a lot of money at one time to buy the bond.   So, people buy into a bond fund to solve those two problems.

And that's where I think it defeats the purpose of bond results being separated from stock results.
....
Do y'all think I've got it right?  If not, what did I miss?

I don't think you're not talking about why stocks are different from bonds, you're just talking about diversification.  People also can buy funds rather than put all their eggs in a few baskets.

Bonds and stocks are entirely different securities.  A bond provides a steady, relatively known return, except for the probability of impairment.  If things go south for the company you could lose half or all of your principal.  If you get an AA bond, the default rate is 0.38%.  If you get a BBB bond, the default rate is 1.02%.  Stocks are part ownership in a company.

Another reason they are kept separately is because they have very different expected returns and standard deviations.  The risk (std dev) and reward (expected return) for stocks are higher.  You can look on a 20-yr chart and see the different between stocks and bonds.  The theory is that you should have some combination of the two depending on your risk appetite.  If you are 20 years old you want 100% stocks.  If you are 60 you might want 25%-40% bonds because you have accumulated your wealth and don't want to put your nest egg through as much risk.

vand

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Re: Stop worrying about the 4% rule
« Reply #2152 on: December 23, 2022, 12:49:08 AM »
Ben Felix is not usually known for sprouting bullshit numbers - he says (citing a far more rigorous study) 2.7% may be the true SWR at the 5% failure rate when you account for:

Cherry picked US dataset the Bengen study was done on and how things could have unfolded in alternate reality, as well as life expectancy distributions.

It's not a new point but has always been glossed over. Yes, 4% is based around a bad-outcome scenario but in historical context it is a bad outcome from an already very favourable dataset.

https://youtu.be/1FwgCRIS0Wg

« Last Edit: December 23, 2022, 12:56:34 AM by vand »

MDM

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Re: Stop worrying about the 4% rule
« Reply #2153 on: December 23, 2022, 03:08:23 AM »
...how things could have unfolded in alternate reality....
Once we move from historical reality to alternate reality, anything is possible.

vand

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Re: Stop worrying about the 4% rule
« Reply #2154 on: December 23, 2022, 03:32:42 AM »
...how things could have unfolded in alternate reality....
Once we move from historical reality to alternate reality, anything is possible.

But in terms of the reward delivered for the amount of risk implied (the equity risk premium), the US has outperformed - that could easily have not happened had more of the risk been realised.  The other reality is just one where the US performs in line with expectation.
« Last Edit: December 23, 2022, 03:35:04 AM by vand »

MDM

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Re: Stop worrying about the 4% rule
« Reply #2155 on: December 23, 2022, 03:41:22 AM »
But in terms of the reward delivered for the amount of risk implied (the equity risk premium), the US has outperformed - that could easily have not happened had more of the risk been realised.  The other reality is just one where the US performs in line with expectation.
That would depend on expectations, and those can be subjective things.  As has been said, predictions are difficult, especially about the future.

If one believes the future will be worse than the worst of the past - as measured by the datasets used - then one is of course free to act on those beliefs.

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Re: Stop worrying about the 4% rule
« Reply #2156 on: May 17, 2023, 02:26:13 PM »
A globally diversified stock/bond portfolio would do fine. The problem is people don't test that. They test the 4% rule using stock/bond data from specific non-USA countries and see that it fails when countries lose world wars or experience major civil wars and conclude "the USA is an outlier because it experienced unusually good stock returns in the last century" instead of the "USA is an outlier because our country wasn't destroyed by one or more wars in the last century". Results from other countries that weren't invaded/occupied and didn't experience major civil wars in the 20th century but still have 100+ years of investment return data (Canada, UK, South Africa, Australia, etc) come up with safe withdrawal rates that are much more consistent with the results we're all so familiar with from the USA.

A globally diversified stock/bond portfolio backtested across the 20th century would be expected to do worse than a US-only portfolio, because on top of the risk events experienced by US stocks, you'd have added all the risk from the countries wiped out in wars or economic crises. I.e. if the global SWR is lower than the US-only SWR, adding historical global returns to the historical US-only portfolio is not going to increase the SWR. E.g. US-only investors avoided the collapse of various markets during the world wars, the devaluations of the British pound, Communist nationalizations, multiple defaults by Argentina, etc.

Unless, of course, the fascists who support Trump and his ilk succeed in starting a Race War or a Civil War -- as many of them very much wish to do -- and the US suffers thru the devastation that would cause.  And I'll fight them tooth and nail, too.

You sir are freak - through and through.  Just a complete and utter moron in every way.  Keep supporting those career political hacks that leach off the tax payers their entire life, like Brandon and "his ilk" - let's see where that gets you nimrod. Pelosi, Brandon, Chucky and the bunch - leaches one and all.[BANNED]
« Last Edit: May 17, 2023, 09:12:27 PM by FrugalToque »

MDM

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Re: Stop worrying about the 4% rule
« Reply #2157 on: May 17, 2023, 02:31:37 PM »
Unless, of course, the fascists who support Trump and his ilk succeed in starting a Race War or a Civil War -- as many of them very much wish to do -- and the US suffers thru the devastation that would cause.  And I'll fight them tooth and nail, too.
You sir are freak - through and through.  Just a complete and utter moron in every way.  Keep supporting those career political hacks that leach off the tax payers their entire life, like Brandon and "his ilk" - let's see where that gets you nimrod. Pelosi, Brandon, Chucky and the bunch - leaches one and all.
Always good to see calm, rational, objective perspectives from both sides of an issue. ;)

Monkey Uncle

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Re: Stop worrying about the 4% rule
« Reply #2158 on: May 17, 2023, 05:38:21 PM »
This is a good example of a sticky that should have been closed to additional comments at least 20 pages ago.  Lots of good stuff in the early parts of this thread, but not much of value has been added in the last 5+ years.

SwordGuy

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Re: Stop worrying about the 4% rule
« Reply #2159 on: May 17, 2023, 07:51:47 PM »
Unless, of course, the fascists who support Trump and his ilk succeed in starting a Race War or a Civil War -- as many of them very much wish to do -- and the US suffers thru the devastation that would cause.  And I'll fight them tooth and nail, too.
You sir are freak - through and through.  Just a complete and utter moron in every way.  Keep supporting those career political hacks that leach off the tax payers their entire life, like Brandon and "his ilk" - let's see where that gets you nimrod. Pelosi, Brandon, Chucky and the bunch - leaches one and all.
Always good to see calm, rational, objective perspectives from both sides of an issue. ;)

Actual video footage of fascist Trump supporters marching.  Those blue flags with the fasces on them, that's a fascist flag.  It's where the name fascist comes from.  There have been a number of these marches, not to mention a coup attempt.

https://www.cnn.com/videos/us/2021/12/06/white-nationalists-march-lincoln-memorial-newday-jarrett-avlon-vpx.cnn

A number of the white nationalist groups want to start a race war.  Some members have gone out on shooting sprees in hopes to do just that. 

And even mainstream Republicans have threatened secession of their states.

I wish I was crazy and these people aren't like this.  But they are.

Padonak

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Re: Stop worrying about the 4% rule
« Reply #2160 on: May 19, 2023, 12:39:43 PM »
I checked this thread hoping to find some new insights about the 4% rule and found some BS political commentary.

ChpBstrd

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Re: Stop worrying about the 4% rule
« Reply #2161 on: May 19, 2023, 12:46:12 PM »
I checked this thread hoping to find some new insights about the 4% rule and found some BS political commentary.
How about https://forum.mrmoneymustache.com/investor-alley/buy-bank-stocks-on-the-dip/msg3148169/#msg3148169?

nereo

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Re: Stop worrying about the 4% rule
« Reply #2162 on: May 19, 2023, 06:30:51 PM »
I checked this thread hoping to find some new insights about the 4% rule and found some BS political commentary.

44 pages in this thread, 25 years from the original Trinity study; one major follow up by its authors and dozens by other academics… what “new insight” are you hoping to glean?

pecunia

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Re: Stop worrying about the 4% rule
« Reply #2163 on: May 19, 2023, 07:35:52 PM »
I checked this thread hoping to find some new insights about the 4% rule and found some BS political commentary.

44 pages in this thread, 25 years from the original Trinity study; one major follow up by its authors and dozens by other academics… what “new insight” are you hoping to glean?

In a way - It's kind of an insight that it's a consistent rule that has worked historically and can be relied upon.  I'm not a financial guy.  It appears to me that financial and economic ideas are more often than not a bunch of fluff.  Reality is hard to see through all the marketing smoke and mirrors.  The 4 percent rule is like an old comfortable pair of worn shoes that make walking a pleasure.

nereo

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Re: Stop worrying about the 4% rule
« Reply #2164 on: May 20, 2023, 04:35:27 AM »
I checked this thread hoping to find some new insights about the 4% rule and found some BS political commentary.

44 pages in this thread, 25 years from the original Trinity study; one major follow up by its authors and dozens by other academics… what “new insight” are you hoping to glean?

In a way - It's kind of an insight that it's a consistent rule that has worked historically and can be relied upon.  I'm not a financial guy.  It appears to me that financial and economic ideas are more often than not a bunch of fluff.  Reality is hard to see through all the marketing smoke and mirrors.  The 4 percent rule is like an old comfortable pair of worn shoes that make walking a pleasure.

That echos my thoughts. “This time it’s different!!” Is a financial meme, yet it’s also repeated with all seriousness every cycle.

nereo

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EscapeVelocity2020

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Re: Stop worrying about the 4% rule
« Reply #2166 on: May 26, 2023, 08:28:40 AM »
New Article by Mad FIentist on WR as it applies to early retirement

I don't think this has been posted here yet:
https://www.madfientist.com/discretionary-withdrawal-strategy/?ck_subscriber_id=63359041&utm_source=convertkit&utm_medium=email&utm_campaign=The+Problem+with+the+4%25+Rule+%28and+Why+You+Could+Retire+Even+Sooner%29%20-%2010861788

It'll be interesting to see the comments on that one.  On one hand, it advocates a 4% or 5.5% WR most of the time, but would've had you at 2.75% WR for some of 2022...

Also have to realize that a lot of these OG FIRE bloggers (and pre-2019 FIRE cohorts) are 'way ahead of the game'.  That FIRE NW has almost doubled for many of them.  That 4% WR became 2%, so many of them are looking now at justifications to increase spending.

Exflyboy

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Re: Stop worrying about the 4% rule
« Reply #2167 on: May 26, 2023, 09:37:08 AM »
I note the S&P 500 is ust shy of 4200 again.

If you think about all the scary things going (debt ceiling, war in Ukraine, China sabre rattling, inflation sky high) on thats pretty amazing.

Wonder if we might see new highs in the next year or so?

tooqk4u22

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Re: Stop worrying about the 4% rule
« Reply #2168 on: May 27, 2023, 06:21:18 AM »
I note the S&P 500 is ust shy of 4200 again.

If you think about all the scary things going (debt ceiling, war in Ukraine, China sabre rattling, inflation sky high) on thats pretty amazing.

Wonder if we might see new highs in the next year or so?

Driven mostly by a handful of stocks, the rest are still in the doghouse.   

If forward earnings estimates are 220 that's a 19 PE....pretty rich, especially in a higher interest rate environment

Exflyboy

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Re: Stop worrying about the 4% rule
« Reply #2169 on: May 27, 2023, 09:30:47 AM »
I note the S&P 500 is ust shy of 4200 again.

If you think about all the scary things going (debt ceiling, war in Ukraine, China sabre rattling, inflation sky high) on thats pretty amazing.

Wonder if we might see new highs in the next year or so?

Driven mostly by a handful of stocks, the rest are still in the doghouse.   

If forward earnings estimates are 220 that's a 19 PE....pretty rich, especially in a higher interest rate environment

Although we don't time the market, it makes me grateful I went into "insane investing/saving" mode during the 2008 meltdown, the previous 8 years of "serious" investing had not done much but the "hyper save/invest" in 2008+ has earned us $millions.

Like a lot of forum members this has got us to the point where significant pullbacks have an almost zero effect on our long term financial wellbeing. I hope I never become smug because this was purely down to luck and maybe an ability to blindly keep doing something which at the time seemed insane!

ender

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Re: Stop worrying about the 4% rule
« Reply #2170 on: May 27, 2023, 10:04:42 AM »
Like a lot of forum members this has got us to the point where significant pullbacks have an almost zero effect on our long term financial wellbeing. I hope I never become smug because this was purely down to luck and maybe an ability to blindly keep doing something which at the time seemed insane!

One thing I've considered is how crazy your age and when you are born is with respect to how things like this.

I graduated undergrad in 2010 and wasn't really able to find a FT job so I did grad school. When I did find a FT job, I worked with someone who graduated and was working FT I think since 2007 -- he'd been maxing his 401k/etc and purely because he graduated a few years earlier and into the job market then, was in a position his initial savings were greatly amplified since he was able to save through the 2009 time period.

Likewise, because I started FT ~2013, I've been able to similarly save and max my 401k throughout the last 10 years, all of which has been good as well (but not as good as if I had started a few years prior). Significantly better than someone who started in 2020.

But it's not really anything we can control, either.

And for all I know it'll be better for someone starting work FT in 2023 than when I started (-:

bluecollarmusician

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Re: Stop worrying about the 4% rule
« Reply #2171 on: May 27, 2023, 10:43:56 AM »
One thing I've considered is how crazy your age and when you are born is with respect to how things like this.

Yes!  It is fascinating to consider how we are influenced not only in our actual results, but also in the way that we "think" about it- my grandparents deeply influenced by the Great Depression, my wife's by the effects of being children in London during WWII, my parents children of the 60's-(get a job, work hard, collect your pension) and our own experiences: coming of age right as the dot-com bubble burst; etc.

It's so good not only to consider the theoretical results (i.e. what if they/I had done x,y,z) but also how and why we think and act and WHY we think and act that way. 

Exflyboy

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Re: Stop worrying about the 4% rule
« Reply #2172 on: May 27, 2023, 11:15:03 AM »
One thing I've considered is how crazy your age and when you are born is with respect to how things like this.

Yes!  It is fascinating to consider how we are influenced not only in our actual results, but also in the way that we "think" about it- my grandparents deeply influenced by the Great Depression, my wife's by the effects of being children in London during WWII, my parents children of the 60's-(get a job, work hard, collect your pension) and our own experiences: coming of age right as the dot-com bubble burst; etc.

It's so good not only to consider the theoretical results (i.e. what if they/I had done x,y,z) but also how and why we think and act and WHY we think and act that way.

A very good point and one that resonates with me. My Parents also grew up in the UK during WW2 (My Dad in London). The way they think is very much coloured by their childhood experiences. Honestly it has stunted their growth in many ways. My Wife and I were just talking about "forgiveness" and why its important etc. We realise now that my Parents have carried grudges their whole lives and even have a couple of new ones that they will most likely take to their graves.

I had to ask my Dad on our recent trip about forgiving his Sister for a pretty minor infraction.. At 90 years old he told me.. "I will never talk to her again and I wish she were dead!"... Like Holy S... Your gonna die soon and your carrying this crap around with you?

They are just very different people to me.. But are they? I suspect they are the same but their experiences (or lack thereof in the corporate world) has meant they have simply not had the opportunity to learn skills that I take for granted.

VanillaGorilla

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Re: Stop worrying about the 4% rule
« Reply #2173 on: May 28, 2023, 10:32:20 AM »
New Article by Mad FIentist on WR as it applies to early retirement

I don't think this has been posted here yet:
https://www.madfientist.com/discretionary-withdrawal-strategy/?ck_subscriber_id=63359041&utm_source=convertkit&utm_medium=email&utm_campaign=The+Problem+with+the+4%25+Rule+%28and+Why+You+Could+Retire+Even+Sooner%29%20-%2010861788
The word "flexibility" is so overused in FI discussion that I cringe just seeing it.

I've moved past the Mad Fientist content over the last many years as he tends to be fairly sloppy and imprecise with his arguments (for example, mixing real and nominal figures). He retired from his career while his wife was still working full time, so of course he can be highly optimistic with his chances of running out of money, he's got a spouse who is legally obligated to cover his liabilities.He does a good job explaining the basics of FIRE, particularly tax optimization, but suffers badly when it comes to dissecting withdrawal rates. For example, he's got some early articles that are overly enthusiastic about the terminal portfolio values for your average 4% retiree.
Quote
“After 30 years, the 4% safe withdrawal rate actually has a 96% probability of leaving more than all of your original starting principle.”
And he's right, but that's in nominal numbers. In real numbers it's a lot less rosy (about 80% chance of ending a 30 year retirement with 100% of original capital, going off ERN numbers).

So, given that bias, I would say that this article doesn't seem to be much better. I like their point that a truly early retiree (say, before 50) is in a life position where sequence of returns risk is plausibly managed by lifestyle factors, mostly by getting a job. It's easy enough to generate a plan of, say, retiring on 4%, with the guardrail of getting a job if the portfolio is negative after five years.

Quote
If you have a 30-year-fixed mortgage, for example, your biggest expense may not be impacted by inflation at all!

The argument that a mortgage is not inflation adjusted is valid, but they gloss over the fact that simply having a mortgage increases sequence of returns risk. If the assumption is that you retire with a mortgage rate lower than a long term bond, so you can buy a bond to pay the mortgage, then that assumption isn't spelled out clearly, and anyway, that's impossible to rely on because everybody has a different mortgage rate and long term bond yield at time of retirement. There's no analysis, just conjecture in a statement like the above.

As for their proposed discretionary spending guidelines, isn't that essentially the Guyton-Klinger approach that Karsen Jeske wrote about extensively? The biggest challenge with that approach is that if you retire at a challenging time, you'll spend decades living off your bare-bones budget. For example, if you retired in 2000 (a year excluded by the Fientist/Maggiulli analysis), you'll have spent 10 out of 12 years of your retirement with low or no discretionary spending. If that's ok with you, great, but it's not my idea of a good time.

In the end, this article just seems sloppy. It convolves an intent of a rigorous mathematic analysis with squishier human factors.
« Last Edit: May 29, 2023, 09:36:18 AM by VanillaGorilla »

bluecollarmusician

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Re: Stop worrying about the 4% rule
« Reply #2174 on: May 28, 2023, 11:33:55 AM »

In the end, this article just seems sloppy. It convolves an intent of a rigorous mathematic analysis with squishier human factors.

@VanillaGorilla
That's why you have to stay flexible ;-)
« Last Edit: May 28, 2023, 11:37:28 AM by bluecollarmusician »

SwordGuy

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Re: Stop worrying about the 4% rule
« Reply #2175 on: May 28, 2023, 12:00:50 PM »

In the end, this article just seems sloppy. It convolves an intent of a rigorous mathematic analysis with squishier human factors.

@VanillaGorilla
That's why you have to stay flexible ;-)

Yep, if you aren't flexible, you'll break when you get squished!  :)

Parametric Censorship

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Re: Stop worrying about the 4% rule
« Reply #2176 on: May 30, 2023, 01:17:58 PM »
For example, if you retired in 2000 (a year excluded by the Fientist/Maggiulli analysis), you'll have spent 10 out of 12 years of your retirement with low or no discretionary spending. If that's ok with you, great, but it's not my idea of a good time.

It sounds like you just consider some of your "discretionary" spending as non-discretionary. That's okay, put it in your non-discretionary budget.

SwordGuy

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Re: Stop worrying about the 4% rule
« Reply #2177 on: May 30, 2023, 01:30:05 PM »
For example, if you retired in 2000 (a year excluded by the Fientist/Maggiulli analysis), you'll have spent 10 out of 12 years of your retirement with low or no discretionary spending. If that's ok with you, great, but it's not my idea of a good time.

It sounds like you just consider some of your "discretionary" spending as non-discretionary. That's okay, put it in your non-discretionary budget.
That's a fair point!

I'll counter that there's an important difference between short term and long term non-discretionary spending.   It's one thing to really tighten the budget to the absolute bare bones for a year and another to do so for 25% to 50% of the rest of your life.  (10 years is about 25% of the rest of one's life for a 40 year old and 50% for a 60 year old.)

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Re: Stop worrying about the 4% rule
« Reply #2178 on: May 30, 2023, 02:04:37 PM »
For example, if you retired in 2000 (a year excluded by the Fientist/Maggiulli analysis), you'll have spent 10 out of 12 years of your retirement with low or no discretionary spending. If that's ok with you, great, but it's not my idea of a good time.

It sounds like you just consider some of your "discretionary" spending as non-discretionary. That's okay, put it in your non-discretionary budget.
That's a fair point!

I'll counter that there's an important difference between short term and long term non-discretionary spending.   It's one thing to really tighten the budget to the absolute bare bones for a year and another to do so for 25% to 50% of the rest of your life.  (10 years is about 25% of the rest of one's life for a 40 year old and 50% for a 60 year old.)

Man I'm depressed!..:)

pecunia

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Re: Stop worrying about the 4% rule
« Reply #2179 on: May 30, 2023, 04:24:15 PM »
For example, if you retired in 2000 (a year excluded by the Fientist/Maggiulli analysis), you'll have spent 10 out of 12 years of your retirement with low or no discretionary spending. If that's ok with you, great, but it's not my idea of a good time.

It sounds like you just consider some of your "discretionary" spending as non-discretionary. That's okay, put it in your non-discretionary budget.
That's a fair point!

I'll counter that there's an important difference between short term and long term non-discretionary spending.   It's one thing to really tighten the budget to the absolute bare bones for a year and another to do so for 25% to 50% of the rest of your life.  (10 years is about 25% of the rest of one's life for a 40 year old and 50% for a 60 year old.)

Man I'm depressed!..:)

Internet says it's 65F and partly sunny in Corvallis.  Take a good walk.  You'll feel better.

Exflyboy

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Re: Stop worrying about the 4% rule
« Reply #2180 on: May 30, 2023, 04:34:46 PM »
@pecunia  I would but I threw my back out Saturday night, jut reaching down. The resulting spasms means I can barely get off the couch right now..:(

pecunia

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Re: Stop worrying about the 4% rule
« Reply #2181 on: May 30, 2023, 10:14:20 PM »
@pecunia  I would but I threw my back out Saturday night, jut reaching down. The resulting spasms means I can barely get off the couch right now..:(

Been there with the back sprain.  I've had that 3 times.  Hopefully, you can get some muscle relaxants.  I got that once simply twisting to get out of my pickup truck.  It usually lasts a few weeks.  The bad thing is the element of surprise.  You think you are doing well and then seemingly out of nowhere, the muscles contract and won't let go.  Good luck with that.

Must_ache

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Re: Stop worrying about the 4% rule
« Reply #2182 on: August 08, 2023, 10:07:25 AM »
but they gloss over the fact that simply having a mortgage increases sequence of returns risk.
No it doesn't.  SORR is the risk that more unfavorable returns occur earlier in retirement.  Having a mortgage does not affect market returns, so you must be talking about some other type of risk.

SwordGuy

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Re: Stop worrying about the 4% rule
« Reply #2183 on: August 08, 2023, 10:25:41 AM »
but they gloss over the fact that simply having a mortgage increases sequence of returns risk.
No it doesn't.  SORR is the risk that more unfavorable returns occur earlier in retirement.  Having a mortgage does not affect market returns, so you must be talking about some other type of risk.

You are technically correct.   

This is what I think is being considered by the OP.  I'm sure they'll correct me if I'm wrong!

Having a mortgage increases your minimum monthly costs.  It's typically one of the bigger monthly costs.  A higher minimum monthly cost means it's harder to cut costs, and therefore it's more likely you'll need to withdraw while the market is low.  So it didn't increase the odds of having a SORR problem, it just increased the odds of that problem causing financial issues.

dividendman

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Re: Stop worrying about the 4% rule
« Reply #2184 on: August 08, 2023, 11:07:38 AM »
but they gloss over the fact that simply having a mortgage increases sequence of returns risk.
No it doesn't.  SORR is the risk that more unfavorable returns occur earlier in retirement.  Having a mortgage does not affect market returns, so you must be talking about some other type of risk.

You are technically correct.   

This is what I think is being considered by the OP.  I'm sure they'll correct me if I'm wrong!

Having a mortgage increases your minimum monthly costs.  It's typically one of the bigger monthly costs.  A higher minimum monthly cost means it's harder to cut costs, and therefore it's more likely you'll need to withdraw while the market is low.  So it didn't increase the odds of having a SORR problem, it just increased the odds of that problem causing financial issues.

He is technically correct... the best kind of correct. But you also have to factor in paying off a house vs having more liquid cash in investments/emergency funds etc. which may be more beneficial in case of "financial issues" than a paid off house.

SwordGuy

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Re: Stop worrying about the 4% rule
« Reply #2185 on: August 08, 2023, 11:32:57 AM »
but they gloss over the fact that simply having a mortgage increases sequence of returns risk.
No it doesn't.  SORR is the risk that more unfavorable returns occur earlier in retirement.  Having a mortgage does not affect market returns, so you must be talking about some other type of risk.
Absolutely!!!
You are technically correct.   

This is what I think is being considered by the OP.  I'm sure they'll correct me if I'm wrong!

Having a mortgage increases your minimum monthly costs.  It's typically one of the bigger monthly costs.  A higher minimum monthly cost means it's harder to cut costs, and therefore it's more likely you'll need to withdraw while the market is low.  So it didn't increase the odds of having a SORR problem, it just increased the odds of that problem causing financial issues.

He is technically correct... the best kind of correct. But you also have to factor in paying off a house vs having more liquid cash in investments/emergency funds etc. which may be more beneficial in case of "financial issues" than a paid off house.

EscapeVelocity2020

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Re: Stop worrying about the 4% rule
« Reply #2186 on: August 08, 2023, 11:56:46 AM »
Always interesting to see why a dormant thread has suddenly flared back up.  Mmmmmm, another tasty nothing-burger LOL

ChpBstrd

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Re: Stop worrying about the 4% rule
« Reply #2187 on: August 08, 2023, 12:52:20 PM »
but they gloss over the fact that simply having a mortgage increases sequence of returns risk.
No it doesn't.  SORR is the risk that more unfavorable returns occur earlier in retirement.  Having a mortgage does not affect market returns, so you must be talking about some other type of risk.
You are technically correct.   

This is what I think is being considered by the OP.  I'm sure they'll correct me if I'm wrong!

Having a mortgage increases your minimum monthly costs.  It's typically one of the bigger monthly costs.  A higher minimum monthly cost means it's harder to cut costs, and therefore it's more likely you'll need to withdraw while the market is low.  So it didn't increase the odds of having a SORR problem, it just increased the odds of that problem causing financial issues.
He is technically correct... the best kind of correct. But you also have to factor in paying off a house vs having more liquid cash in investments/emergency funds etc. which may be more beneficial in case of "financial issues" than a paid off house.
This issue was definitively answered by the following:
https://earlyretirementnow.com/2017/10/11/the-ultimate-guide-to-safe-withdrawal-rates-part-21-mortgage-in-retirement/

pecunia

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Re: Stop worrying about the 4% rule
« Reply #2188 on: August 08, 2023, 01:03:29 PM »
So until recently the stock market took a dive.  If one retired just before or during the dive and you rely on equities, is there a significant sequence of returns risk as you look out from this period to 30 years?  Could this pose more risk for the 4 percent rule?

grantmeaname

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Re: Stop worrying about the 4% rule
« Reply #2189 on: August 08, 2023, 01:11:33 PM »
SORR isn't really a 30 year problem. It's like a 3-5 year problem. If you retire during the drop, like in late '22, it means you are out-saving the declines and retiring at below-peak valuations. But retiring right before the peak is the worst case scenario, and that timing is responsible for most (all?) 4% rule failures. Retiring at the top of the dotcom bubble or the GFC cliff means you're forced to sell low and you've eaten more of your principal by the time the market has recovered.

Edited to add: to expand on this a little more, the median 4% retiree has runaway money and way more than they need. In such a scenario, you may be at a 3% or even 2% withdrawal rate in year 15 or 20 of your retirement. That lets you easily weather a dip, even a 30-40% dip, and you're 15 or 20 years older so your principal also doesn't need to last you as long.
« Last Edit: August 08, 2023, 01:13:48 PM by grantmeaname »

waltworks

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Re: Stop worrying about the 4% rule
« Reply #2190 on: August 16, 2023, 10:03:04 PM »
This issue was definitively answered by the following:
https://earlyretirementnow.com/2017/10/11/the-ultimate-guide-to-safe-withdrawal-rates-part-21-mortgage-in-retirement/

"Finally, I can see how at some point down the road interest rates could be much higher than today. If you retire in 5 years and still have 20 years left on your 3.25% fixed rate mortgage but bond interest rates are now 3.5 or 4%, then by all means, hold on to that mortgage. Now the mortgage vs. bond leverage works beautifully!"

That's the rub, really. Not paying off the mortgage looks like a pretty freaking good move right now. Equities, schmequities. I can just buy boring ultra safe stuff that yields 2% more than my mortgage costs me.

-W

EscapeVelocity2020

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Re: Stop worrying about the 4% rule
« Reply #2191 on: August 17, 2023, 07:13:08 AM »
Of course, there is nothing to argue about math-wise that having a 3.25% mortgage for 20 more years and collecting 4% bond yield makes sense.  But this isn't some insta-FIRE strat either.  The underlying assumption is that you are choosing to take your mortgage cash sitting in a bank account and put it in Treasuries instead of paying off the mortgage.  Most people are carrying a mortgage because they don't have the cash readily available. 

The only real insight is that you shouldn't pull money from investments to pay off your mortgage - not exactly a groundbreaking revelation.

waltworks

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Re: Stop worrying about the 4% rule
« Reply #2192 on: August 17, 2023, 08:05:52 AM »
Of course, there is nothing to argue about math-wise that having a 3.25% mortgage for 20 more years and collecting 4% bond yield makes sense.  But this isn't some insta-FIRE strat either.  The underlying assumption is that you are choosing to take your mortgage cash sitting in a bank account and put it in Treasuries instead of paying off the mortgage.  Most people are carrying a mortgage because they don't have the cash readily available. 

The only real insight is that you shouldn't pull money from investments to pay off your mortgage - not exactly a groundbreaking revelation.

Most mustachians have the cash available, actually, at least the people who tend to be discussing this issue.

I have zero interest in using my pile of 5% money market funds to pay off my 3% mortgage.

-W

ChpBstrd

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Re: Stop worrying about the 4% rule
« Reply #2193 on: August 17, 2023, 10:50:50 AM »
Of course, there is nothing to argue about math-wise that having a 3.25% mortgage for 20 more years and collecting 4% bond yield makes sense.  But this isn't some insta-FIRE strat either.  The underlying assumption is that you are choosing to take your mortgage cash sitting in a bank account and put it in Treasuries instead of paying off the mortgage.  Most people are carrying a mortgage because they don't have the cash readily available. 

The only real insight is that you shouldn't pull money from investments to pay off your mortgage - not exactly a groundbreaking revelation.
Most mustachians have the cash available, actually, at least the people who tend to be discussing this issue.

I have zero interest in using my pile of 5% money market funds to pay off my 3% mortgage.

-W
I have enough investments to kill my 3.25% mortgage if I wanted to. It's invested in SGOV at the moment earning 5.45%. It's true that 95% of people don't have this option.

The people signing 7% mortgages today should definitely pull money out of investments to pay down their mortgages. 7% risk-free is an excellent return given the alternatives available today in the worlds of stocks or bonds.

The author of earlyretirementnow.com was asked last year what real rate of portfolio return would support a 30y retirement at a 4% WR and full depletion. He estimated about 1.31% real. Obviously the cash flows don't line up for funding daily retirement expenses by prepaying one's mortgage. Yet those people with 7% mortgages are likely earning 3-4% real with every prepayment they make, because inflation seems to be heading to 3% or less. Their opportunity cost at the zero level of risk for putting each dollar into the mortgage is about 2.5% real!

So unless one loses money gambling on APE stock, one can currently earn well over the sort of real returns that would fund a 30y 4%-rule retirement while taking on nearly zero risk. Mustachians with a 30y life expectancy can "stop worrying about the 4% rule" by locking in the next couple of decades of returns in a highly conservative AA. Then they can start worrying about inflation :)