SWR / 4% rule

[Huskie87]

Thought I'd share.  We know the 4% rule is what has historically prevented a complete drain of assets over a 30 year retirement (using US data).  If you update that analysis using the spending data research from this Michael Kitces article, that number rises to 4.75%.

https://www.kitces.com/blog/age-banding-by-basu-to-model-retirement-spending-needs-by-category/

[SugarMountain]

Thought I'd share.  We know the 4% rule is what has historically prevented a complete drain of assets over a 30 year retirement (using US data).  If you update that analysis using the spending data research from this Michael Kitces article, that number rises to 4.75%.

https://www.kitces.com/blog/age-banding-by-basu-to-model-retirement-spending-needs-by-category/

I think I'd be careful with that if you're looking at a FIRE SWR at say 40.  Yes, while studies show that people spend less in later retirement, it's because they're old and can do less.  If you retire at 60 and live to 90, for example, your spending drops in your 70s & 80s.  If you retire at 40, those savings don't come until after you've exceeded the 30 years of the trinity study.  You can play with this some in firecalc and cfiresim.

[Huskie87]

Yup, I'm not making any comment on early retirement, just the effect on the 30 year study.

[SeattleCPA]

Thought I'd share.  We know the 4% rule is what has historically prevented a complete drain of assets over a 30 year retirement (using US data).  If you update that analysis using the spending data research from this Michael Kitces article, that number rises to 4.75%.

https://www.kitces.com/blog/age-banding-by-basu-to-model-retirement-spending-needs-by-category/

@Huskie87  I don't think this is true but you can easily check yourself. Run your scenario using firecalc or cfiresim. What you want to look at is the 1966 scenario. When I do this, 4% fails because of the high inflation through the 1970s.

The other part of this is, you want to combine the portfolio failure rate with life expectancy. E.g. maybe 4% fails with a 30 year retirement 5% of the time but traditional retirees (say starting at age 60) usually don't live until age 90.

E.g., my retirement plan has a 7% chance of failing at roughly age 90... but if I only have a 20% chance of living until age 90, the chance of experiencing that combination of events--a bad sequence of returns early in retirement and then a really long retirement--run, like 1.4%. Which is a percentage that is low enough I am not going to worry about that.

BTW, I think blog post at "Early Retirement Now" digs into the details of the Kitces blog post you reference:

https://earlyretirementnow.com/2017/01/18/the-ultimate-guide-to-safe-withdrawal-rates-part-6-a-2000-2016-case-study/

[Huskie87]

Thought I'd share.  We know the 4% rule is what has historically prevented a complete drain of assets over a 30 year retirement (using US data).  If you update that analysis using the spending data research from this Michael Kitces article, that number rises to 4.75%.

https://www.kitces.com/blog/age-banding-by-basu-to-model-retirement-spending-needs-by-category/

@Huskie87  I don't think this is true but you can easily check yourself. Run your scenario using firecalc or cfiresim. What you want to look at is the 1966 scenario. When I do this, 4% fails because of the high inflation through the 1970s.

The other part of this is, you want to combine the portfolio failure rate with life expectancy. E.g. maybe 4% fails with a 30 year retirement 5% of the time but traditional retirees (say starting at age 60) usually don't live until age 90.

E.g., my retirement plan has a 7% chance of failing at roughly age 90... but if I only have a 20% chance of living until age 90, the chance of experiencing that combination of events--a bad sequence of returns early in retirement and then a really long retirement--run, like 1.4%. Which is a percentage that is low enough I am not going to worry about that.

BTW, I think blog post at "Early Retirement Now" digs into the details of the Kitces blog post you reference:

https://earlyretirementnow.com/2017/01/18/the-ultimate-guide-to-safe-withdrawal-rates-part-6-a-2000-2016-case-study/

It's true using the analysis I referenced and the spending path I outlined.  You're likely using a different set of assumptions than what I've outlined.

[FIREstache]

Bengen later revised the 4% rule to the 4.5% rule by incorporating small caps into the portfolio.

[SwordGuy]

We know the 4% rule is what has historically prevented a complete drain of assets over a 30 year retirement (using US data). 

The Trinity Study, which first reported the 4% "rule", found a 5% failure rate at a 4% WR.

So, no, the 4% rule has not historically prevented a complete drain of assets over a 30 year retirement (using US data).

Not only that, but the word "rule" is really inappropriate.  It should be referred to as the "4% observation".  We've observed this behavior on a 4% inflation-adjusted withdrawal rate, but it's not like the Law of Gravity.

[flipboard]

We know the 4% rule is what has historically prevented a complete drain of assets over a 30 year retirement (using US data). 

The Trinity Study, which first reported the 4% "rule", found a 5% failure rate at a 4% WR.

So, no, the 4% rule has not historically prevented a complete drain of assets over a 30 year retirement (using US data).

Not only that, but the word "rule" is really inappropriate.  It should be referred to as the "4% observation".  We've observed this behavior on a 4% inflation-adjusted withdrawal rate, but it's not like the Law of Gravity.

It's also worth taking into account that US stocks have had an unprecedentedly good run. Past results don't guarantee future performance, so personally if I were a US-only investor I'd be hugely more conservative than 4%. (I'm hugely more conservative than 4% anyway for common sense reasons, but this is just another reason.)

[Buffaloski Boris]

I’m not a fan of the 4% rule for younger folks. I’m even less of a fan of a 4.75% rule. Here’s the thing; the Trinity Study assumed a 30 year horizon and “success” meant you didn’t run out of assets. If you had $100 left at year 30, it was a success. Obviously success at 30 years is OK for someone with a life expectancy of less than 30 years and who doesn’t intend to leave any assets behind. But what about the person who is 35 with a life expectancy of 50 or 60 years? The Trinity Study did not envision that sort of scenario. Nor did it envision a scenario with large withdrawals for nonrecurring expenses. Such as assisted care. Oh, and what about the current timing when equities are very inflated?

I find it concerning that there are FI bloggers selling the 4% snake oil that someone who is 30 or 35 can simply save 25X their annual spending, put it in VTSAX and retire on a beach somewhere and it’ll all be fine. It’s a setup for failure, and the tragic part is any failures will likely occur relatively far into the future when the retiree has far fewer options with regard to employment.

[Metalcat]

The 4% rule also assumes that you blindly spend exactly the same amount (+ inflation) every single year with absolutely no reduction in spending under any circumstances whatsoever.

That doesn't exactly sound like reality to me.

Based on what I read here, I expect that the vast, overwhelming majority of posters here will not only not run out of money, but will end up with huge gains over their retirements.

I see more plans with sub-4% WR, plus a hefty cash store in case of recession, plus fat in the budget, plus paid off housing, than I see lean plans with no ability to modify spending and no option to generate income.

I've seen A LOT of posts from post-FIRE people talking about how they almost never spend their entire yearly allotment, effectively lowering their average WR even more.

I'm not criticizing, DH and I will likely end up functionally somewhere near a 1.5-2% WR at the end of all of this unless we learn to start spending a lot more. Lol
It's not intentional, we just like our jobs and don't spend much.

My point is that you can do all of the math you want, but the inputs are fundamentally inaccurate and vague because it's all just guessing roughly what you will spend in the future.

The math stops being even remotely accurate unless you literally think that you will spend the exact predicted amount every year.

That presumption is nonsense, which means all outputs are nonsense.

I'm all for assessing risk, but pretending like there's some actual accuracy in specific withdrawal rates and simulations is an illusion when the inputs are fundamentally imaginary.

Simulations help a lot with gauging the relative magnitudes of different risks, but they simply cannot apply to a specific situation and outcome, and they completely ignore the risk factors/mitigations that are already baked into the input data.

Nothing is guaranteed.
Save approximately 25X what you expect to need yearly in retirement, save more if you want to be more conservative, save less if you want to be less conservative.

That's pretty much as reliably detailed as you can get in predicting your success.

[Metalcat]

I’m not a fan of the 4% rule for younger folks. I’m even less of a fan of a 4.75% rule. Here’s the thing; the Trinity Study assumed a 30 year horizon and “success” meant you didn’t run out of assets. If you had $100 left at year 30, it was a success. Obviously success at 30 years is OK for someone with a life expectancy of less than 30 years and who doesn’t intend to leave any assets behind. But what about the person who is 35 with a life expectancy of 50 or 60 years? The Trinity Study did not envision that sort of scenario. Nor did it envision a scenario with large withdrawals for nonrecurring expenses. Such as assisted care. Oh, and what about the current timing when equities are very inflated?

I find it concerning that there are FI bloggers selling the 4% snake oil that someone who is 30 or 35 can simply save 25X their annual spending, put it in VTSAX and retire on a beach somewhere and it’ll all be fine. It’s a setup for failure, and the tragic part is any failures will likely occur relatively far into the future when the retiree has far fewer options with regard to employment.

I think anyone who can manage to actually retire in their 30s is probably smart enough and resourceful enough to figure out their own risk tolerances.

I literally don't worry about these people.

Only someone completely ridiculous would blindly retire with no options on a lean FIRE budget with no flexibility just because some blogger told them to.

If someone is that foolish and impressionable, then getting sucked in by Pete convincing them to save 25X their savings is the best thing that could happen to them, because the alternative is Scientology.

[erutio]

There's a whole 35 page long thread about this already:
https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/

Specifically in the first post, my thoughts in bold:

Consider the assumptions in the 4% SWR studies: 
no annuitized income (not even Social Security), some people are worried about SS, but it may get reduced, but will not disappear
1% account expense ratios, !!!, this is crazy, especially for us here.  Reducing ER from 1% to VG rates, the SWR goes to~5%
constant withdrawals (adjusted for inflation), If you're smart enough to save 25x, your smart enough to not do this
no extra cash beyond one year of expenses (just stocks/bonds). 


Also, the study has a very conservative 50/50 asset allocation, which is probably way too conservative for everyone.

[FIREstache]

Nor did it envision a scenario with large withdrawals for nonrecurring expenses.

That's not a problem with the 4% rule, that's a problem with someone estimating long term expenses.  I'm not going to replace my roof every year, but I have long term expenses like that figured in.  To get an idea, see:
https://forum.mrmoneymustache.com/welcome-to-the-forum/budgeting-home-maintenance-costs/

Oh, and what about the current timing when equities are very inflated?

The 4% rule is based on time periods with low returns and/or high inflation, the worst of the past.  So if the future is no worse than the worst we've had, it will still work out.  And with the correct balance and allocation of funds, you can probably draw more than 4% per year over 30 years.  And don't forget, there's SS, and possible pensions and side gigs, to help fund expenses, lowering the WR required when those other income sources become available.

[FIREstache]

Also, the study has a very conservative 50/50 asset allocation, which is probably way too conservative for everyone.

The study used a few different allocations.  Over 30 years, 75% did best.  Over 40 years, higher allocations of stocks did better.

For a much shorter retirement horizon, the lower equity allocation is better for SWR and is also applicable to begin retirement if you're going to use a rising equity glide path, where you increase your equities during early retirement.

[MDM]

There's a whole 35 page long thread about this already:
https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/

Specifically in the first post, my thoughts in bold:

Consider the assumptions in the 4% SWR studies: 
...
1% account expense ratios, !!!, this is crazy, especially for us here.  Reducing ER from 1% to VG rates, the SWR goes to~5%
...

The error is in the statement that the original studies included a 1% account expense ratio.  They did not.

See http://www.aaii.com/files/pdf/6794_retirement-savings-choosing-a-withdrawal-rate-that-is-sustainable.pdf:

• The study did not adjust for taxes or transaction costs.
  An investor’s own experience would differ depending
  on how much of his assets were in tax-deferred accounts,
  and the extent to which transaction costs could be held
  to a minimum using low-cost index funds.

[Buffaloski Boris]

I’m not a fan of the 4% rule for younger folks. I’m even less of a fan of a 4.75% rule. Here’s the thing; the Trinity Study assumed a 30 year horizon and “success” meant you didn’t run out of assets. If you had $100 left at year 30, it was a success. Obviously success at 30 years is OK for someone with a life expectancy of less than 30 years and who doesn’t intend to leave any assets behind. But what about the person who is 35 with a life expectancy of 50 or 60 years? The Trinity Study did not envision that sort of scenario. Nor did it envision a scenario with large withdrawals for nonrecurring expenses. Such as assisted care. Oh, and what about the current timing when equities are very inflated?

I find it concerning that there are FI bloggers selling the 4% snake oil that someone who is 30 or 35 can simply save 25X their annual spending, put it in VTSAX and retire on a beach somewhere and it’ll all be fine. It’s a setup for failure, and the tragic part is any failures will likely occur relatively far into the future when the retiree has far fewer options with regard to employment.

I think anyone who can manage to actually retire in their 30s is probably smart enough and resourceful enough to figure out their own risk tolerances.

I literally don't worry about these people.

Only someone completely ridiculous would blindly retire with no options on a lean FIRE budget with no flexibility just because some blogger told them to.

If someone is that foolish and impressionable, then getting sucked in by Pete convincing them to save 25X their savings is the best thing that could happen to them, because the alternative is Scientology.

Thanks for the response. I was laughing out loud at your last paragraph, and I appreciate the chuckle.

I will follow up with an observation; the Church of the Blessed 4% is becoming very cult like in its application. The 4% doesn’t extrapolate well to a very long time period even at relatively high equity allocations in a scenario where equities are highly priced. Like they are now.

You have a really good point that we probably shouldn’t worry too much about the fates of millionaires. Very first world problems.  I suppose they’ll muddle through. Although I don’t agree that ability to earn and save translates into ability to invest and retain wealth. I’ve known a lot of people in my life who have been very good at earning and saving a lot, but done very poorly investing and retain it.

[Metalcat]

I’m not a fan of the 4% rule for younger folks. I’m even less of a fan of a 4.75% rule. Here’s the thing; the Trinity Study assumed a 30 year horizon and “success” meant you didn’t run out of assets. If you had $100 left at year 30, it was a success. Obviously success at 30 years is OK for someone with a life expectancy of less than 30 years and who doesn’t intend to leave any assets behind. But what about the person who is 35 with a life expectancy of 50 or 60 years? The Trinity Study did not envision that sort of scenario. Nor did it envision a scenario with large withdrawals for nonrecurring expenses. Such as assisted care. Oh, and what about the current timing when equities are very inflated?

I find it concerning that there are FI bloggers selling the 4% snake oil that someone who is 30 or 35 can simply save 25X their annual spending, put it in VTSAX and retire on a beach somewhere and it’ll all be fine. It’s a setup for failure, and the tragic part is any failures will likely occur relatively far into the future when the retiree has far fewer options with regard to employment.

I think anyone who can manage to actually retire in their 30s is probably smart enough and resourceful enough to figure out their own risk tolerances.

I literally don't worry about these people.

Only someone completely ridiculous would blindly retire with no options on a lean FIRE budget with no flexibility just because some blogger told them to.

If someone is that foolish and impressionable, then getting sucked in by Pete convincing them to save 25X their savings is the best thing that could happen to them, because the alternative is Scientology.

Thanks for the response. I was laughing out loud at your last paragraph, and I appreciate the chuckle.

I will follow up with an observation; the Church of the Blessed 4% is becoming very cult like in its application. The 4% doesn’t extrapolate well to a very long time period even at relatively high equity allocations in a scenario where equities are highly priced. Like they are now.

You have a really good point that we probably shouldn’t worry too much about the fates of millionaires. Very first world problems.  I suppose they’ll muddle through. Although I don’t agree that ability to earn and save translates into ability to invest and retain wealth. I’ve known a lot of people in my life who have been very good at earning and saving a lot, but done very poorly investing and retain it.

Then you clearly have a lot of space in your heart to worry about strangers, because if you are worrying about very young people who have already saved massive sums of money, then you must be apoplectic worrying about all of those who aren't good with money.

The world is a dark and scary place.
I simply refuse to worry about people who are younger than I am and have a higher net worth than I do.

It seems absurd to me.

[Telecaster]

I will follow up with an observation; the Church of the Blessed 4% is becoming very cult like in its application. The 4% doesn’t extrapolate well to a very long time period even at relatively high equity allocations in a scenario where equities are highly priced. Like they are now.

Congratulations!  Only about 4.5 million people have made the exact same observation. 

[Buffaloski Boris]

I will follow up with an observation; the Church of the Blessed 4% is becoming very cult like in its application. The 4% doesn’t extrapolate well to a very long time period even at relatively high equity allocations in a scenario where equities are highly priced. Like they are now.

Congratulations!  Only about 4.5 million people have made the exact same observation.

Cool! I always wanted to be the 4,500,001st person at something. Check one more off the ol’ bucket list. 😁

[FIRE 20/20]

I find it concerning that there are FI bloggers selling the 4% snake oil that someone who is 30 or 35 can simply save 25X their annual spending, put it in VTSAX and retire on a beach somewhere and it’ll all be fine. It’s a setup for failure, and the tragic part is any failures will likely occur relatively far into the future when the retiree has far fewer options with regard to employment.

Can you point me to a single example of this?  Every 4% rule post I remember seeing points out that it's not a 100% guarantee and that people who follow the 4% "rule" should have back-up plans that can include side hustles, pensions or 401(k)s, an ability to cut expenses, or the possibility of returning to work full-time.  It's definitely possible that I missed it, but I really can't think of any blogger who says that once you have 25x expenses saved up you can "retire on a beach somewhere and it’ll all be fine."