Stop worrying about the 4% rule

[brooklynguy]

I agree on that danger zone of the first 5-10 years for 30-year periods.  I sure hope it's true for longer periods, but I doubt there's research to confirm it.

Jeremy @ Go Curry Cracker has a blog post in the works on how to determine if/when your portfolio has gotten "too big to fail" (which, given Jeremy's thoroughness, will, I'm sure, include a survey of any existing research) and I have high hopes that it will become the early retirement community's definitive resource on the topic (and I keep mentioning it periodically in part to keep the pressure on him to finish it up so the rest of us can freeload off of his efforts).

I guess it also means that you start a new 30-year period every year until you're in your 60s or even 70s.

It's tempting to think about the chances of portfolio success for super-long periods this way, but I don't think it's really accurate, because a 30+X year retirement period is not a rolling series of 30 year retirement periods, but a single 30+X year retirement period (and perhaps this line of thinking is what caused MMM to spread his bit of misinformation that having enough to last for 30 years is essentially equivalent to having enough to last forever).

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

http://www.gocurrycracker.com/the-go-curry-cracker-endowment-fund/

[HankERJourney]

Been trying to read it all here, especially because I am about to start Retirement at age of 49. To me, this 4% rule should all be read with some common-sense. First of all, it is just a guide, not a fixed rule, and it only focus on a certain asset class, so you should look at the big picture of your Retirement-funding. In reality you would for instance:
(1) Diversify in asset classes, for instance, my early retirement income will be partially based on Rental income (this forms a basis and not directly correlated with stock market)
(2) Vary the SWR depending on how the Market performs. I keep a variation between 2 and 4% in mind. In combination with Rental income, you should plan for variation in Retirement-spending because of this. This automatically means, you should have a buffer built into your funding of your lifestyle, and if Market turns out to be bad for 5-10 years, you should be happy with a lower funding (and still enjoy life). For me this means, I will travel less around the world if the Market is really bad, and I am happy with that. I see travel as a luxury that is not necessarily needed all the time.
(3) On top of this, I keep an emergency buffer of 3 years in Cash assets. If somehow a major crash happens, i would be willing to put some of this Cash into play of Stock market

I guess, for everyone this works out differently. My main comment is : use common sense, the 4% rule is just a guide :-)

[fattest_foot]

And what about black swan events ? Yes, they happen (and that is what Pfau's chart shows). But you can hardly do anything about that. And that's, btw, why I agree it's silly to aim for 100% success in backtestings & simulations. 100% doesn't exist.

You shouldn't worry about black swan events.

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

In a situation where the country is invaded, or anything a Doomsday prepper prepares for, it's similar in that everyone's money will be worthless anyway. So I doubt many people should be factoring that into a SWR.

[Dawg Fan]

Been trying to read it all here, especially because I am about to start Retirement at age of 49. To me, this 4% rule should all be read with some common-sense. First of all, it is just a guide, not a fixed rule, and it only focus on a certain asset class, so you should look at the big picture of your Retirement-funding. In reality you would for instance:
(1) Diversify in asset classes, for instance, my early retirement income will be partially based on Rental income (this forms a basis and not directly correlated with stock market)
(2) Vary the SWR depending on how the Market performs. I keep a variation between 2 and 4% in mind. In combination with Rental income, you should plan for variation in Retirement-spending because of this. This automatically means, you should have a buffer built into your funding of your lifestyle, and if Market turns out to be bad for 5-10 years, you should be happy with a lower funding (and still enjoy life). For me this means, I will travel less around the world if the Market is really bad, and I am happy with that. I see travel as a luxury that is not necessarily needed all the time.
(3) On top of this, I keep an emergency buffer of 3 years in Cash assets. If somehow a major crash happens, i would be willing to put some of this Cash into play of Stock market

I guess, for everyone this works out differently. My main comment is : use common sense, the 4% rule is just a guide :-)

Well, I finally had a chance to follow the chain and I think my brain is about to explode. I am in Hankers camp... It seems like the 4% rule has been vetted out as well as it can be and is probably as good of a guide as anyone can hope for in planning their ER. What I have not heard discussed which I would suggest is that there could be a strong argument for an adjustable SWR, particularly anyone doing ER under the age of 60. I would argue that while you are "younger" and in better physical health, you will naturally be able to do more certain things on your bucket list that you might not be able to do after a certain age. Many of these to dos may cost more in the early years and you stand the chance to to miss them if you stick to a ridged SWR. I think the statistics show after a certain age typically expenses start to diminish (i.e. Entertainment, travel) and while the risk of major medical costs exists, odds are you will want to spend more $$ when your 50 then when your 80. Always exceptions, but I would almost argue error on the side of taking that extra trip when your 50 even if it pushes your SWR to 5% one year. If I am 85 and need round the clock medical attention, then chances are my days are numbered and my quality of life sucks so I am not worried about my 4%, but just making sure I am not a financial burden to my kids. As stated, there is no 100% guarantee of anything here, but using common sense with a plan is the best we all have. My only point is part of the attraction to ER is to do your bucket list and if you stay to strict to your SWR, you might miss some of the good stuff.

[forummm]

Been trying to read it all here, especially because I am about to start Retirement at age of 49. To me, this 4% rule should all be read with some common-sense. First of all, it is just a guide, not a fixed rule, and it only focus on a certain asset class, so you should look at the big picture of your Retirement-funding. In reality you would for instance:
(1) Diversify in asset classes, for instance, my early retirement income will be partially based on Rental income (this forms a basis and not directly correlated with stock market)
(2) Vary the SWR depending on how the Market performs. I keep a variation between 2 and 4% in mind. In combination with Rental income, you should plan for variation in Retirement-spending because of this. This automatically means, you should have a buffer built into your funding of your lifestyle, and if Market turns out to be bad for 5-10 years, you should be happy with a lower funding (and still enjoy life). For me this means, I will travel less around the world if the Market is really bad, and I am happy with that. I see travel as a luxury that is not necessarily needed all the time.
(3) On top of this, I keep an emergency buffer of 3 years in Cash assets. If somehow a major crash happens, i would be willing to put some of this Cash into play of Stock market

I guess, for everyone this works out differently. My main comment is : use common sense, the 4% rule is just a guide :-)

Well, I finally had a chance to follow the chain and I think my brain is about to explode. I am in Hankers camp... It seems like the 4% rule has been vetted out as well as it can be and is probably as good of a guide as anyone can hope for in planning their ER. What I have not heard discussed which I would suggest is that there could be a strong argument for an adjustable SWR, particularly anyone doing ER under the age of 60. I would argue that while you are "younger" and in better physical health, you will naturally be able to do more certain things on your bucket list that you might not be able to do after a certain age. Many of these to dos may cost more in the early years and you stand the chance to to miss them if you stick to a ridged SWR. I think the statistics show after a certain age typically expenses start to diminish (i.e. Entertainment, travel) and while the risk of major medical costs exists, odds are you will want to spend more $$ when your 50 then when your 80. Always exceptions, but I would almost argue error on the side of taking that extra trip when your 50 even if it pushes your SWR to 5% one year. If I am 85 and need round the clock medical attention, then chances are my days are numbered and my quality of life sucks so I am not worried about my 4%, but just making sure I am not a financial burden to my kids. As stated, there is no 100% guarantee of anything here, but using common sense with a plan is the best we all have. My only point is part of the attraction to ER is to do your bucket list and if you stay to strict to your SWR, you might miss some of the good stuff.

The point of the thread is that you shouldn't worry much about a 4% SWR failing. But the reality is that you can probably spend more than that, especially if you're 5 or 10 years into RE and you can tell from the past market returns that you have avoided one of those disastrous retirement dates. So you could certainly spend more at times and be OK. Personally, I have multiple funds that I'm working with. I have a base 4% WR fund that will take care of basic minimum expenses. Then I have another fund for fun stuff that I don't need to last forever. And then another fund for paying off the house, some college expense, etc. So do whatever works for you and your spending interests.

[2lazy2retire]

I too have found these methods by Pfau to be suspect. You could argue that he's aiming these studies at financial advisors, so the 1% is actually going to the advisor's pockets.

A more charitable view is that Pfau (and financial planners in general), like the 4% rule itself, are simply overcautious by nature -- they err on the side of caution because the consequences of being proven wrong are worse if their predictions are too aggressive than if they are too conservative.

I agree.  Most people absolutely, positively don't want to run out of money but don't mind having more left over to pass on to heirs, charities, etc.  Hence, the skewing towards conservatism.

Funny, I actually I thought I was being charitable. Providing a reasonable justification why 1% fees could be baked into his analysis, when no DIY investor should have anything close to that. I assume that Pfau's target audience is financial planners, and they do tend to charge 1%--rightly or wrongly. For those advisor's clients, the SWR would be appropriately substantially lowered. For people like most of us here, we can happily increase our SWR by 25% since we aren't burning that money on fees.

I agree there's a skew towards conservatism in general. But a more informed approach would be to say the SWR is X% minus whatever fees your portfolio management has. That way if the advisor is actually charging 1% plus putting them in funds also charging 1%, the correct amount to let the clients live off of is only 2%. In this example, Pfau is actually not being conservative enough.

+1 , no better way to show how much the "advisors" are creaming than to illustrate it with withdrawal rate, how many clients who would not notice that 1% fee during accumulation but when shown the effect on SWR would go WTF - I have 1 million saved so I can pull down 40k and give 10K to the friendly advisor, suddenly 1% comes 25% and shit gets real.

[tooqk4u22]

I too have found these methods by Pfau to be suspect. You could argue that he's aiming these studies at financial advisors, so the 1% is actually going to the advisor's pockets.

A more charitable view is that Pfau (and financial planners in general), like the 4% rule itself, are simply overcautious by nature -- they err on the side of caution because the consequences of being proven wrong are worse if their predictions are too aggressive than if they are too conservative.

I agree.  Most people absolutely, positively don't want to run out of money but don't mind having more left over to pass on to heirs, charities, etc.  Hence, the skewing towards conservatism.

Funny, I actually I thought I was being charitable. Providing a reasonable justification why 1% fees could be baked into his analysis, when no DIY investor should have anything close to that. I assume that Pfau's target audience is financial planners, and they do tend to charge 1%--rightly or wrongly. For those advisor's clients, the SWR would be appropriately substantially lowered. For people like most of us here, we can happily increase our SWR by 25% since we aren't burning that money on fees.

I agree there's a skew towards conservatism in general. But a more informed approach would be to say the SWR is X% minus whatever fees your portfolio management has. That way if the advisor is actually charging 1% plus putting them in funds also charging 1%, the correct amount to let the clients live off of is only 2%. In this example, Pfau is actually not being conservative enough.

+1 , no better way to show how much the "advisors" are creaming than to illustrate it with withdrawal rate, how many clients who would not notice that 1% fee during accumulation but when shown the effect on SWR would go WTF - I have 1 million saved so I can pull down 40k and give 10K to the friendly advisor, suddenly 1% comes 25% and shit gets real.

A contrarian view would be that if markets are efficient then the 1% that is NOT flowing to the advisors (or ultimately shifts to low cost funds) would be invested and therefore bring the returns forward, thereby reducing future returns by similar amount - therefore 4% doesn't work or more likely the 1% being taken out doesn't matter.

[TomTX]

I too have found these methods by Pfau to be suspect. You could argue that he's aiming these studies at financial advisors, so the 1% is actually going to the advisor's pockets.

A more charitable view is that Pfau (and financial planners in general), like the 4% rule itself, are simply overcautious by nature -- they err on the side of caution because the consequences of being proven wrong are worse if their predictions are too aggressive than if they are too conservative.

I agree.  Most people absolutely, positively don't want to run out of money but don't mind having more left over to pass on to heirs, charities, etc.  Hence, the skewing towards conservatism.

Funny, I actually I thought I was being charitable. Providing a reasonable justification why 1% fees could be baked into his analysis, when no DIY investor should have anything close to that. I assume that Pfau's target audience is financial planners, and they do tend to charge 1%--rightly or wrongly. For those advisor's clients, the SWR would be appropriately substantially lowered. For people like most of us here, we can happily increase our SWR by 25% since we aren't burning that money on fees.

I agree there's a skew towards conservatism in general. But a more informed approach would be to say the SWR is X% minus whatever fees your portfolio management has. That way if the advisor is actually charging 1% plus putting them in funds also charging 1%, the correct amount to let the clients live off of is only 2%. In this example, Pfau is actually not being conservative enough.

+1 , no better way to show how much the "advisors" are creaming than to illustrate it with withdrawal rate, how many clients who would not notice that 1% fee during accumulation but when shown the effect on SWR would go WTF - I have 1 million saved so I can pull down 40k and give 10K to the friendly advisor, suddenly 1% comes 25% and shit gets real.

A contrarian view would be that if markets are efficient then the 1% that is NOT flowing to the advisors (or ultimately shifts to low cost funds) would be invested and therefore bring the returns forward, thereby reducing future returns by similar amount - therefore 4% doesn't work or more likely the 1% being taken out doesn't matter.

No. That 1% is being drawn. It either goes to the investor for living expenses, or it goes to the parasite advisor almost certainly for living expenses/business expenses. Gotta pay rent on that EJ storefront every month ya know.

With the $1MM portfolio, the choice* is draw $40k to live on, or draw $30k to live on while handing over $10k for the advisor to live on.

Handing over 25% of my spending money every year certainly does matter.

*For the topic at hand: a 4% WR.

[EscapeVelocity2020]

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

Anyway, what I'm getting at is, in order to save up that portfolio at an early age, you were making much more than the 4% SWR (in order to have a 50% or greater saving rate).  And that is the conundrum for most people, even the amazing savers, that to be truly 'free', you must leave behind income (that you had some control over) and depend on your investments (that you have no influence on).

So, 'stop worrying about 4%' might actually just mean 'find work that you enjoy that provides the 4%'.  I think that is where most PF bloggers are, whether they admit it or not.

[brooklynguy]

And that is the conundrum for most people, even the amazing savers, that to be truly 'free', you must leave behind income (that you had some control over) and depend on your investments (that you have no influence on).

It's only a conundrum if that income provides some value, and the entire point behind this site is that any amount beyond "enough" does not.  The trick is how to know what constitutes "enough," and we have no bright lines to guide us, but as long as one does have enough there is no reason to regret what more one could have had.

[EscapeVelocity2020]

And that is the conundrum for most people, even the amazing savers, that to be truly 'free', you must leave behind income (that you had some control over) and depend on your investments (that you have no influence on).

It's only a conundrum if that income provides some value, and the entire point behind this site is that any amount beyond "enough" does not.  The trick is how to know what constitutes "enough," and we have no bright lines to guide us, but as long as one does have enough there is no reason to regret what more one could have had.

In this case, I think you missed the point I tried to make, which was having control (e.g. the accumulation phase) vs. 'depending on returns' (withdrawal), which is what 'worrying about the 4% rule' entails. 

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

 

[EscapeVelocity2020]

But, to make my point clearer in my 'simple simulation', the NASDAQ withdrawal guy would currently be fine if he started with 2 million (e.g. a 2% SWR, ending 2014 at about 1.1M).  But who would've known that 1 million was 'not enough' in 1999 and 2 million was (and maybe these are similarly heady times as to today)? 

Who knows if 1 million is 'enough' for a 30 year 4% SWR going forward (yeah, the simulators all tell us it was fine in the past, blah, blah, blah), that's all I'm trying to point out...

[brooklynguy]

In this case, I think you missed the point I tried to make, which was having control (e.g. the accumulation phase) vs. 'depending on returns' (withdrawal), which is what 'worrying about the 4% rule' entails. 

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

If your point is that reliance on a sinking fund investment portfolio to cover your living expenses is inherently less safe than reliance on an investment portfolio plus an accumulator's income stream, then of course that point is correct, but the goal in examining the safety of the 4% rule is to determine whether it is sufficiently safe to allow one to rely on it without an accumulator's income stream.

[EscapeVelocity2020]

Well, what I was actually trying to say, not quite as simplified as what you reduced it down to, is that 4% is a far cry from where you were when you had income and built a portfolio that provided the passive 4%. 

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

[steveo]

I might be making this topic a little tougher however if a 4% WR is considered safe at what level is a WR still considered safe.

At this point I am intending to retire on a 5% WR. Is this too risky ?

[sol]

I might be making this topic a little tougher however if a 4% WR is considered safe at what level is a WR still considered safe.

At this point I am intending to retire on a 5% WR. Is this too risky ?

If you re-read this thread, you'll see some charts I posted showing success percentages for other withdrawal rates and other time periods.

5% has historically been totally safe (100% success) for periods less than 17 years.  At 19 years it's about as safe as 4% is at 30 years.  On average (50% success) it should last 50 years.

[MDM]

I might be making this topic a little tougher however if a 4% WR is considered safe at what level is a WR still considered safe.

At this point I am intending to retire on a 5% WR. Is this too risky ?

The value of that two-sided coin, Safety and Risk, is in the eye of the beholder.  See https://www.kitces.com/blog/what-returns-are-safe-withdrawal-rates-really-based-upon/ for more background.

[steveo]

I might be making this topic a little tougher however if a 4% WR is considered safe at what level is a WR still considered safe.

At this point I am intending to retire on a 5% WR. Is this too risky ?

If you re-read this thread, you'll see some charts I posted showing success percentages for other withdrawal rates and other time periods.

5% has historically been totally safe (100% success) for periods less than 17 years.  At 19 years it's about as safe as 4% is at 30 years.  On average (50% success) it should last 50 years.

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

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

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

[steveo]

I might be making this topic a little tougher however if a 4% WR is considered safe at what level is a WR still considered safe.

At this point I am intending to retire on a 5% WR. Is this too risky ?

The value of that two-sided coin, Safety and Risk, is in the eye of the beholder.  See https://www.kitces.com/blog/what-returns-are-safe-withdrawal-rates-really-based-upon/ for more background.

That is a good article which is in my opinion pretty optimistic. I'm also optimistic that a 5% WR would be fine.

[Monkey Uncle]

I might be making this topic a little tougher however if a 4% WR is considered safe at what level is a WR still considered safe.

At this point I am intending to retire on a 5% WR. Is this too risky ?

The value of that two-sided coin, Safety and Risk, is in the eye of the beholder.  See https://www.kitces.com/blog/what-returns-are-safe-withdrawal-rates-really-based-upon/ for more background.

One obvious point that the article failed to address: if average returns going forward are expected to be below historical levels, wouldn't one also expect the worst case scenario to be worse than historical worst case scenarios?

[forummm]

I might be making this topic a little tougher however if a 4% WR is considered safe at what level is a WR still considered safe.

At this point I am intending to retire on a 5% WR. Is this too risky ?

The value of that two-sided coin, Safety and Risk, is in the eye of the beholder.  See https://www.kitces.com/blog/what-returns-are-safe-withdrawal-rates-really-based-upon/ for more background.

That is a good article which is in my opinion pretty optimistic. I'm also optimistic that a 5% WR would be fine.

There have been discussions on this forum about how Kitces' results do not match up with cFIREsim or FIREcalc's simulations. Forum members have been unable to get Kitces to explain the difference in outcomes. cFIREsim is created using public data. Kitces normally seems to know what he's taking about, so who knows what's going on here. Maybe someone can get him to share his data and methods?

[MDM]

One obvious point that the article failed to address: if average returns going forward are expected to be below historical levels, wouldn't one also expect the worst case scenario to be worse than historical worst case scenarios?

Not necessarily.  It depends on the specific sequence of returns.  E.g., an average real return of ~1.2-1.3% is sufficient to make a 4% WR work for 30 years - if that return is constant.

[brooklynguy]

One obvious point that the article failed to address: if average returns going forward are expected to be below historical levels, wouldn't one also expect the worst case scenario to be worse than historical worst case scenarios?

It's not really that the article failed to address that point, but that the assumption that the future will be no worse than the worst of the past (among other assumptions) implicitly underlies any SWR-based attempt to use historical success rates to predict the likelihood of future success.

In other words, the "obvious point" that you said the article failed to address is actually another way of stating its conclusion.  The comfort to be had from historical SWR analysis is precisely the fact that the future would need to be worse than the worst of the past in order for a historically-100%-successful withdrawal rate to fail.

[steveo]

The comfort to be had from historical SWR analysis is precisely the fact that the future would need to be worse than the worst of the past in order for a historically-100%-successful withdrawal rate to fail.

There a couple of points that gives me some comfort that a 5% WR should be okay in my situation:-

1. The point quoted here is pretty critical. Its probably unlikely that when I retire the results will be worse than they have ever been.
2. I intend to retire but not draw down for a couple of years and then draw down less than the amount I will at a later point in time.
3. I do not include my house value in my FIRE assets. I can downsize my house.
4. I have 3 kids and the costs associated with them should continually decrease.
5. I am not including any inheritance or social security in my calculations.
6. I can live off less than 5% and intend to in the first say 5-10 years. I could always continue living off less.
7. My wife may continue to work part time. I could as well although I don't want too.

If I live for 50 years post retirement I still think I should have my money last that long although I think its unlikely I will live 50 years post retirement.

[tooqk4u22]

A contrarian view would be that if markets are efficient then the 1% that is NOT flowing to the advisors (or ultimately shifts to low cost funds) would be invested and therefore bring the returns forward, thereby reducing future returns by similar amount - therefore 4% doesn't work or more likely the 1% being taken out doesn't matter.

No. That 1% is being drawn. It either goes to the investor for living expenses, or it goes to the parasite advisor almost certainly for living expenses/business expenses. Gotta pay rent on that EJ storefront every month ya know.

With the $1MM portfolio, the choice* is draw $40k to live on, or draw $30k to live on while handing over $10k for the advisor to live on.

Handing over 25% of my spending money every year certainly does matter.

*For the topic at hand: a 4% WR.

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

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

[sol]

this is based purely on the premise that the trinity study assumes a 1% fee

That assumption is incorrect; the Trinity study assumed 0% fees. 

Subsequent research by people like Pfau typically includes a 1% fee, which is why their recommendations are typically about 1% lower.

[Retire-Canada]

The comfort to be had from historical SWR analysis is precisely the fact that the future would need to be worse than the worst of the past in order for a historically-100%-successful withdrawal rate to fail.

There a couple of points that gives me some comfort that a 5% WR should be okay in my situation:-

1. The point quoted here is pretty critical. Its probably unlikely that when I retire the results will be worse than they have ever been.
2. I intend to retire but not draw down for a couple of years and then draw down less than the amount I will at a later point in time.
3. I do not include my house value in my FIRE assets. I can downsize my house.
4. I have 3 kids and the costs associated with them should continually decrease.
5. I am not including any inheritance or social security in my calculations.
6. I can live off less than 5% and intend to in the first say 5-10 years. I could always continue living off less.
7. My wife may continue to work part time. I could as well although I don't want too.

If I live for 50 years post retirement I still think I should have my money last that long although I think its unlikely I will live 50 years post retirement.

With all those caveats you aren't really talking about a 5% WR any more. cFIREsim has quite a few variable spending options that you can use to model your scenario with and see what happens vs. historical data.

[steveo]

The comfort to be had from historical SWR analysis is precisely the fact that the future would need to be worse than the worst of the past in order for a historically-100%-successful withdrawal rate to fail.

There a couple of points that gives me some comfort that a 5% WR should be okay in my situation:-

1. The point quoted here is pretty critical. Its probably unlikely that when I retire the results will be worse than they have ever been.
2. I intend to retire but not draw down for a couple of years and then draw down less than the amount I will at a later point in time.
3. I do not include my house value in my FIRE assets. I can downsize my house.
4. I have 3 kids and the costs associated with them should continually decrease.
5. I am not including any inheritance or social security in my calculations.
6. I can live off less than 5% and intend to in the first say 5-10 years. I could always continue living off less.
7. My wife may continue to work part time. I could as well although I don't want too.

If I live for 50 years post retirement I still think I should have my money last that long although I think its unlikely I will live 50 years post retirement.

With all those caveats you aren't really talking about a 5% WR any more. cFIREsim has quite a few variable spending options that you can use to model your scenario with and see what happens vs. historical data.

Agreed. The point is though that my target becomes 5% rather than 4%. Its an easier target to hit.

[tooqk4u22]

this is based purely on the premise that the trinity study assumes a 1% fee

That assumption is incorrect; the Trinity study assumed 0% fees. 

Subsequent research by people like Pfau typically includes a 1% fee, which is why their recommendations are typically about 1% lower.

Slip on my part as the comment was about Pfau stuff.

[Monkey Uncle]

One obvious point that the article failed to address: if average returns going forward are expected to be below historical levels, wouldn't one also expect the worst case scenario to be worse than historical worst case scenarios?

It's not really that the article failed to address that point, but that the assumption that the future will be no worse than the worst of the past (among other assumptions) implicitly underlies any SWR-based attempt to use historical success rates to predict the likelihood of future success.

In other words, the "obvious point" that you said the article failed to address is actually another way of stating its conclusion.  The comfort to be had from historical SWR analysis is precisely the fact that the future would need to be worse than the worst of the past in order for a historically-100%-successful withdrawal rate to fail.

I totally get that SWRs assume that the future will be no worse than the worst of the past.  But if we are going to make the assumption that the best of the good times going forward will not be as good as the best times in the past, what justification do we have for maintaining the assumption that the worst will still be no worse than the worst times of the past?  An average is composed of a range of data points.  If one is going to assume that the range of data points will contract on the high end, one needs to provide some justification for assuming that the range will not expand on the low end.  In other words, why do we think that dispersion about the mean is going to contract, and only on one end of the distribution?

[EscapeVelocity2020]

The other 'worst' assumption that isn't discussed is that we are talking finances, not social events.  Economists have argued that WWII was 'good' for the economy and brought about the end to the Great Depression, so I actually don't worry financially about social events.  On the other hand, we are in uncharted territory with what the Fed and globalization have left us.  Both first world countries and emerging markets have benefited from globalization and the US has benefited from the Fed keeping rates at zero and implementing QE.  These tail winds, IMHO, are closer to the end than the beginning.  Even gains in productivity now seem to come with a tradeoff to unemployment or underemployment. 

So with a long stretch of social calm and an inability to 'jump start' the global economy in the future, it is conceivable to me that the next 30 years may contain some of the worst times to rely on 4% SWR. 

[brooklynguy]

But if we are going to make the assumption that the best of the good times going forward will not be as good as the best times in the past...

Who makes that assumption?  The 4% rule certainly doesn't.

So with a long stretch of social calm and an inability to 'jump start' the global economy in the future, it is conceivable to me that the next 30 years may contain some of the worst times to rely on 4% SWR.

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

[Retire-Canada]

Who makes that assumption?  The 4% rule certainly doesn't.

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

Nobody knows what is going to happen, but if you want to simulate some bad stuff you can and see how your investment/spending plan handles it.

[EscapeVelocity2020]

I'm not sure why you think this isn't discussed. 

I get the impression folks conflate social events with market performance, I haven't seen comments about how the current economic landscape compares with history.  But that is a much more difficult evaluation to make, very few people are still around that could raise awareness of the economic backdrop (ignoring the social events) of the past vs. present.  All I know is, the Fed has never expanded its balance sheet, kept near zero fund rates, all while having at the same time no increase in inflation.  And the correlation between market performance and the economy is stronger than market performance and social events.

[brooklynguy]

All I know is, the Fed has never expanded its balance sheet, kept near zero fund rates, all while having at the same time no increase in inflation.

It's explicitly for this reason (the historically unprecedented combination of economic conditions in which we currently find ourselves) that Pfau argues we shouldn't rely on actual historical market performance and why some of his latest research uses Monte Carlo simulations with built-in capital market expectations instead of actual historical data.

[Monkey Uncle]

But if we are going to make the assumption that the best of the good times going forward will not be as good as the best times in the past...

Who makes that assumption?  The 4% rule certainly doesn't.

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

As retirees and their planners adjust to the 'new normal' - a world of lower-than-average returns for the foreseeable future, many have questioned whether the historical safe withdrawal rate research is still valid. After all, if returns will be below average in the coming years, doesn't that imply safe withdrawal rates must be below average as well? In point of fact, though, safe withdrawal rates do not depend on average returns in the first place; the worst safe withdrawal rates in history that we rely upon are actually associated with 15-year real returns of less than 1%/year from a balanced portfolio! Accordingly, given current bond yields, dividend yields, and inflation, if the current environment for today's retirees will result in a "new record low" safe withdrawal rate, the S&P 500 would still have to be no higher in 2027 than it was in 2007 or even 2000! On the other hand, merely projecting equities to recover to new highs by the end of the decade or generating a mid-single-digits return would actually represent an upside surprise, allowing for higher retirement spending than 4.5% safe withdrawal rates!

The author grants that average returns will be below average for the foreseeable future, and then suggests that the downside will be no worse than the worst in history.  So, by default, he has assumed that the potential upside in the future will be reduced relative to history.

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

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

Of course, no one knows what the real future will hold.  Personally, I have a bit of anxiety about assuming that US market returns from 1871 to 1960 have any predictive value for the future, given the tremendous changes in demographics and the economy since then.  Perhaps we would be better served by basing our modeling on post-war western Europe, which probably resembles the current state of the US more closely than the US history that was used to build the 4% rule.

[brooklynguy]

The author grants that average returns will be below average for the foreseeable future, and then suggests that the downside will be no worse than the worst in history.  So, by default, he has assumed that the potential upside in the future will be reduced relative to history.

I don't think that's a fair interpretation of what Kitces said.  What he said is simply that even if you believe the "new normal" in which we currently find ourselves will return below-average returns, it would have to do so by historically unprecedented levels (that is, be worse than the worst of the past) in order for the 4% rule to fail you.  There is no logical fallacy there.  (But keep in mind that, as forummm noted above, whatever parameters are built into Kitces' version of the 4% rule differ from other versions and produce more optimistic results; using a nominally equivalent asset allocation in cFIREsim and its default setting for all other variables, the historical success rate of a 4% WR is closer to 95% than 100%).

[Monkey Uncle]

The author grants that average returns will be below average for the foreseeable future, and then suggests that the downside will be no worse than the worst in history.  So, by default, he has assumed that the potential upside in the future will be reduced relative to history.

I don't think that's a fair interpretation of what Kitces said.  What he said is simply that even if you believe the "new normal" in which we currently find ourselves will return below-average returns, it would have to do so by historically unprecedented levels (that is, be worse than the worst of the past) in order for the 4% rule to fail you.  There is no logical fallacy there.  (But keep in mind that, as forummm noted above, whatever parameters are built into Kitces' version of the 4% rule differ from other versions and produce more optimistic results; using a nominally equivalent asset allocation in cFIREsim and its default setting for all other variables, the historical success rate of a 4% WR is closer to 95% than 100%).

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

[EscapeVelocity2020]

All I know is, the Fed has never expanded its balance sheet, kept near zero fund rates, all while having at the same time no increase in inflation.

It's explicitly for this reason (the historically unprecedented combination of economic conditions in which we currently find ourselves) that Pfau argues we shouldn't rely on actual historical market performance and why some of his latest research uses Monte Carlo simulations with built-in capital market expectations instead of actual historical data.

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

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

(Feb. 2014)  “The probability that a 4% withdrawal rate will work in the future is much lower,” he says. His new safe starting point: a 3% drawdown. That means that if you’ve saved $1 million, you’re living on $30,000 a year before Social Security and any other sources of income you might have, not $40,000. Ouch.

You may be relieved to hear that Pfau’s idea is controversial. Michael Kitces, partner and director of research, Pinnacle Advisory, who has worked with Pfau on other research (more on that later), is one of many experts who think that the long historical record is still a decent guide to the future.

Yet William Bengen, the planner who in 1994 came up with the 4% rule, says some rethinking may be in order. “I think Pfau has done a great job of looking at the issues,” he says. “Market valuations are important, and he may be right.”

[brooklynguy]

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

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

Yes, here's another example from just three weeks ago where he reached the same pessimistic conclusion:

http://www.fa-mag.com/news/why-4--could-fail-22881.html

Of course, this is just another way of saying tomaahto.  If you assume the future will be worse than the past, then you will be forced to conclude the future will be worse than the past.

[EscapeVelocity2020]

Of course, this is just another way of saying tomaahto.  If you assume the future will be worse than the past, then you will be forced to conclude the future will be worse than the past.

Personally, I think you're oversimplifying this and brushing it under the rug.  It's not that Pfau is just assuming the future will be worse than the past, he (and his colleagues) are looking at the past vs. the present and coming to the conclusion that the future will, more likely than not, look different.

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

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

My strategy, with these fears in mind, was to take my FU money (not 4% SWR), find a job I like, and extend my accumulation phase.  It's remarkably similar to what many of these bloggers have done, except I am not bashful about calling what I do for income to be a job.     

[brooklynguy]

Personally, I think you're oversimplifying this and brushing it under the rug.  It's not that Pfau is just assuming the future will be worse than the past, he (and his colleagues) are looking at the past vs. the present and coming to the conclusion that the future will, more likely than not, look different.

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

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

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

As always, given the unknowability of the future, it boils down to a trade-off between your retirement's length and your retirement's likelihood of unmitigated success.

[sol]

It's not that Pfau is just assuming the future will be worse than the past, he (and his colleagues) are looking at the past vs. the present and coming to the conclusion that the future will, more likely than not, look different.

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

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

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

Assuming you don't crash, your mpg is pretty predictable and based on your past mpg.  If you do crash, it won't really matter anymore so why are you worrying about false security?

[EscapeVelocity2020]

What I'd like to hear, instead of catastrophic scenarios which I don't tend to spend much time worrying about, is what gives you encouragement that the past IS going to repeat in the future, and especially what 30 year period you think we are headed for?  1965-1995 doesn't look all that bad in the history books, but it was a terrible time to be a retiree.  But I'd even go so far as to say that the economic landscape in 1965 looked better than what we currently face (high equity valuations, low bond yields, etc.). 

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

Pure 4% withdrawals for a retirement starting in 1965 were a disaster, with the portfolio dropping to $0 in about 25 years.  This occurred regardless of asset allocation.  A portfolio of 50% stock / 50% bonds failed just as surely as a portfolio of 100% stock.

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

Anyway, I'm getting tired of thinking pessimistically, so I'll let it go at that.

[MDM]

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

Pure 4% withdrawals for a retirement starting in 1965 were a disaster, with the portfolio dropping to $0 in about 25 years.  This occurred regardless of asset allocation.  A portfolio of 50% stock / 50% bonds failed just as surely as a portfolio of 100% stock.

May be déjà vu here, but how does the above "4% would have failed in 1965" compare with the chart (as seen in http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/ and http://retirementresearcher.com/the-trinity-study-and-portfolio-success-rates/) below showing "4% would have succeeded in 1965"?

[Seppia]

Yes, here's another example from just three weeks ago where he reached the same pessimistic conclusion:

http://www.fa-mag.com/news/why-4--could-fail-22881.html

Of course, this is just another way of saying tomaahto.  If you assume the future will be worse than the past, then you will be forced to conclude the future will be worse than the past.

Yeah, plus I'm not super sure I would trust 100% someone who isn't even able to depict the German flag correctly :)

[EscapeVelocity2020]

May be déjà vu here, but how does the above "4% would have failed in 1965" compare with the chart (as seen in http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/ and http://retirementresearcher.com/the-trinity-study-and-portfolio-success-rates/) below showing "4% would have succeeded in 1965"?

I'm not sure why there would be differences, but Pfau's himself states that 4% failed in 1965 (http://retirementresearcher.com/trinity-study-retirement-withdrawal-rates-and-the-chance-for-success-updated-through-2009/)

The Trinity Study had data from 1926 to 1995.  To consider retirements lasting 30 years, this means they could only consider retirement dates from 1926 to 1966.  For anyone retiring after 1966, they couldn’t calculate the withdrawal rate sustainable over 30 years because they didn’t have the data.  1926 to 1966 represents 41 beginning retirement dates.  Of those 41 dates, the 4% inflation-adjusted withdrawal rate failed 2 times, in 1965 and 1966.  Thus, it’s success rate was 39/41 = 95.12%, or 95% when rounded down.

[MDM]

May be déjà vu here, but how does the above "4% would have failed in 1965" compare with the chart (as seen in http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/ and http://retirementresearcher.com/the-trinity-study-and-portfolio-success-rates/) below showing "4% would have succeeded in 1965"?

I'm not sure why there would be differences, but Pfau's himself states that 4% failed in 1965 (http://retirementresearcher.com/trinity-study-retirement-withdrawal-rates-and-the-chance-for-success-updated-through-2009/)

The Trinity Study had data from 1926 to 1995.  To consider retirements lasting 30 years, this means they could only consider retirement dates from 1926 to 1966.  For anyone retiring after 1966, they couldn’t calculate the withdrawal rate sustainable over 30 years because they didn’t have the data.  1926 to 1966 represents 41 beginning retirement dates.  Of those 41 dates, the 4% inflation-adjusted withdrawal rate failed 2 times, in 1965 and 1966.  Thus, it’s success rate was 39/41 = 95.12%, or 95% when rounded down.

Ok, now I remember - and if I'd reread better the Pfau article I linked...:

The only difference in assumptions between William Bengen’s work and the Trinity study regards the choice of bond indices. While Mr. Bengen’s original research combined the S&P 500 index with 5-year intermediate term government bond returns, the Trinity Study used long-term high-grade corporate bond returns instead. The different choice for bonds explains why the worst-case scenario for Mr. Bengen (his SAFEMAX) was a withdrawal rate of 4.15%, but why the original Trinity Study found that a 4% withdrawal rate only had a 95% success rate (with more volatile corporate bonds, the sustainable withdrawal rate dipped below 4% in 1965 and 1966).

[brooklynguy]

Ok, now I remember - and if I'd reread better the Pfau article I linked...

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

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

What I'd like to hear, instead of catastrophic scenarios which I don't tend to spend much time worrying about, is what gives you encouragement that the past IS going to repeat in the future, and especially what 30 year period you think we are headed for?

I have little faith in anyone's ability to predict what the next 30 year period will look like (at least without some massive error bands around their prediction).  But I do have lots of confidence that my "4%-rule-plus-safety-margin"-based early retirement's chances of success will be more than high enough to justify my decision to avoid bolstering those odds even further by deferring my early retirement even longer.  If you'd like to hear what gives me that confidence, scroll up and reread this thread ;)

[sol]

If you'd like to hear what gives me that confidence, scroll up and reread this thread ;)

But, but, but, what if there's a world war? An oil crisis?  A major nuclear meltdown?  A great depression?  Super restrictive economic policy changes?  Super aggressive economic policy changes? Stagflation?  A missile crisis that takes us to the edge of nuclear annihilation?  Another terrorist attack?

Oh wait, the 4% SWR has already survived all of that, and assumes all of those things will totally happen again, and yet it's still 95-100% safe. 

Does anyone here think the future is really going to look worse than the past the 4% rule is based on?  I'm not saying it's impossible, just that it's a pretty grim view of the future.