Author Topic: Why retirees outside of the US should not blindly follow the 4% rule  (Read 7049 times)

Tyler

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Since the MMM tent is truly global and there are lots of FIRE hopefuls here from around the world, I thought this topic might spark some conversation.  Long story short -- the popular 4% rule only really applies to retirees in the United States, and international retirees need to account for how their home country affects their withdrawal rate.  Different markets, inflation rates, exchange rates, and asset allocations all affect withdrawal rates.  But these important factors are not accounted for in the famous retirement studies we all like to quote, so be careful not to assume that there's a single one-size-fits-all investment answer that works in every country. 

For a full explanation, read this:  https://portfoliocharts.com/2017/06/09/your-home-country-is-inseparable-from-your-withdrawal-rate/

Luckily, this doesn't mean that appropriate SWRs are a mystery in other countries.  While the math is kinda complicated, it's still solvable with the right data.  I've been working really hard to assemble that data and crunch the numbers, and I hope you find it useful.

boarder42

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Re: Why retirees outside of the US should not blindly follow the 4% rule
« Reply #1 on: June 15, 2017, 11:31:33 AM »
this is really interesting analysis.

Jamese20

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Re: Why retirees outside of the US should not blindly follow the 4% rule
« Reply #2 on: June 15, 2017, 12:03:13 PM »
Slight differences but the 4 % is always something that is not a robotic straight 4%every year it always needs flexibility

4% is also worse case sort of scenario anyhow.. I still. Think it's a good general rule of thumb with added flexibility.

One or two safety margins in place and you should be fine anyhow

daverobev

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Re: Why retirees outside of the US should not blindly follow the 4% rule
« Reply #3 on: June 15, 2017, 12:49:24 PM »
Per the other thread, I disagree with the premise of that article because it is making some poor assumptions; namely that someone living in Australia is likely to follow the same home-country allocation that an American might. America has a large, globally diversified set of companies making up a large chunk of its stock markets.

"Your Home Country Is Inseparable From Your Withdrawal Rate"

Bullshit; it's affected by where you invest. On balance, being globally diversified should increase the performance - over time - of a model portfolio, assuming rebalancing is mechanical not emotional. Currency fluctuations make less difference than you'd think - when a currency drops, the stocks in that currency tend to go up, and vice versa.

Nobody should blindly follow anything. There is also an argument that people outside the US should have a lower cost of living in early retirement because healthcare in the developed world is usually free at point of use. So it's impossible to compare.

Nobody should be 80% home country/20% bonds. There are enough cheap ETFs that are globally diverse that ignoring companies outside your borders is foolhardy.

Jamese20

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Re: Why retirees outside of the US should not blindly follow the 4% rule
« Reply #4 on: June 15, 2017, 01:34:30 PM »
Per the other thread, I disagree with the premise of that article because it is making some poor assumptions; namely that someone living in Australia is likely to follow the same home-country allocation that an American might. America has a large, globally diversified set of companies making up a large chunk of its stock markets.

"Your Home Country Is Inseparable From Your Withdrawal Rate"

Bullshit; it's affected by where you invest. On balance, being globally diversified should increase the performance - over time - of a model portfolio, assuming rebalancing is mechanical not emotional. Currency fluctuations make less difference than you'd think - when a currency drops, the stocks in that currency tend to go up, and vice versa.

Nobody should blindly follow anything. There is also an argument that people outside the US should have a lower cost of living in early retirement because healthcare in the developed world is usually free at point of use. So it's impossible to compare.

Nobody should be 80% home country/20% bonds. There are enough cheap ETFs that are globally diverse that ignoring companies outside your borders is foolhardy.

Can't disagree with any of thst in fairness... I was unsure about the currency bit but not overly concerned on the long run but would be interesting on where your research is regarding currency via investing globally and what the effects or lack of effects it will have overtime

Tyler

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Re: Why retirees outside of the US should not blindly follow the 4% rule
« Reply #5 on: June 15, 2017, 01:36:07 PM »
Nobody should be 80% home country/20% bonds. There are enough cheap ETFs that are globally diverse that ignoring companies outside your borders is foolhardy.

My point is not at all that 80/20 is the way to go or to discourage global diversification.  In fact, I'm critical of popular US-based research for leading people to those conclusions and I offer a tool to help you find the right mix for your particular situation.  So you don't have to simply take the Trinity study's word for it -- or mine.  ;)

The withdrawal rates calculator can study any asset allocation you like in different countries including local bonds, local and foreign stocks, and even real assets like commodities and gold.  Everything is adjusted for local currency and inflation.  That's way more variety than the Trinity study considered, and you can explore for yourself whether your assumptions about global diversification and the relative unimportance of exchange rates hold up in every country.  Play around for a while, and I'm confident you'll gain a new appreciation for just how narrowly the traditional 4% rule applies around the world. 
« Last Edit: June 15, 2017, 02:33:42 PM by Tyler »

daverobev

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Re: Why retirees outside of the US should not blindly follow the 4% rule
« Reply #6 on: June 15, 2017, 02:02:36 PM »
Nobody should be 80% home country/20% bonds. There are enough cheap ETFs that are globally diverse that ignoring companies outside your borders is foolhardy.

My point is not at all that 80/20 is the way to go or to discourage global diversification.  In fact, I argue the opposite and offer a tool to help you find the right mix for your particular situation.  So you don't have to simply take the Trinity study's word for it -- or mine.  ;)

The withdrawal rates calculator can study any asset allocation you like in different countries including local bonds, local and foreign stocks, and even real assets like commodities and gold.  Everything is adjusted for local currency and inflation.  That's way more variety than the Trinity study considered, and you can explore for yourself whether your assumptions about global diversification and the relative unimportance of exchange rates hold up in every country.  Play around for a while, and I'm confident you'll gain a new appreciation for just how narrowly the traditional 4% rule applies around the world.

Oh I'm sorry, I hadn't even clicked that the blog you linked to was your own work.

All the different scenarios I put in seemed to come up at just over 4%.

I'll go back to blindly following the 4% rule, I guess.

steveo

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Re: Why retirees outside of the US should not blindly follow the 4% rule
« Reply #7 on: June 15, 2017, 05:46:42 PM »
I'm Australian and I always hear that we have a lower SWR than 4% but I don't really believe it. Yes the data probably maps that way however I think it comes down to market conditions at a particular time.

To me the 4% WR and even all different portfolios ala Tyler's site are just statistical anomalies with in sample data. Out of sample data - i.e. your withdrawal plan will be very different.

You have to cater a withdrawal plan for yourself based upon your situation.
« Last Edit: June 15, 2017, 05:48:39 PM by steveo »

mjr

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Re: Why retirees outside of the US should not blindly follow the 4% rule
« Reply #8 on: June 15, 2017, 06:01:54 PM »
Agreed.  The Australian SWR is nominally lower due to 1 or 2 statistical outliers which suffered very bad sequencing losses.  It's bad practice to base a withdrawal rate for people retiring in the future off rare adverse events in the past.

GuitarStv

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Re: Why retirees outside of the US should not blindly follow the 4% rule
« Reply #9 on: June 15, 2017, 06:41:35 PM »
Huh.  Interesting that the article says that people in Canada who are 60/40 stocks/bonds do better than those who are higher in stocks.

human

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Re: Why retirees outside of the US should not blindly follow the 4% rule
« Reply #10 on: June 15, 2017, 07:18:44 PM »
Not sure exactly how to use the calculator 15% CDN, 50% US 30% INT 5% emerge.

No bonds,

someone feel like running that for me?

I'm surprised such a high weighting of domestic stocks for Canada (since 1970) does so well. However not sure I feel comfortable going 80% domestic equities.
« Last Edit: June 15, 2017, 07:21:16 PM by human »

Tyler

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Re: Why retirees outside of the US should not blindly follow the 4% rule
« Reply #11 on: June 15, 2017, 07:53:10 PM »
Not sure exactly how to use the calculator 15% CDN, 50% US 30% INT 5% emerge.

You can modify all of the fields in black.  For this portfolio, the proper settings look like this:




Note that North America includes both the US and Canada, but it's over 90% US so you can pretty much think of it as a US fund.  If you like, you can back off the pure Canadian allocation to compensate.  And if you want to use a single world fund like VTWSX instead of splitting it between US and international (World ex-US), simply change the bottom right setting from "xUS" to "All" and put all 80% in "World".

You can read about how to interpret the chart here.

« Last Edit: June 15, 2017, 08:18:33 PM by Tyler »

human

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Re: Why retirees outside of the US should not blindly follow the 4% rule
« Reply #12 on: June 15, 2017, 08:05:18 PM »
Thanks I didn't know how much CDN was in North America . . .

maizefolk

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Re: Why retirees outside of the US should not blindly follow the 4% rule
« Reply #13 on: June 15, 2017, 08:41:06 PM »
So is it that different countries have different SWRs and ideal stock/bond ratios, or that for each individual country, 1970-present doesn't have enough historical intervals to accurately ID consistent SWRs and ideal stock/bond ratios?

And to be fair I realize that latter question could be asked whether one was looking at 50 years of data, 150 years, or even 500 years.

Either way kudos on assembling such a nice multi-country historical return dataset. These seem to be incredibly hard to come by, but there are so many interesting questions they are essential for investigating.

steveo

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Re: Why retirees outside of the US should not blindly follow the 4% rule
« Reply #14 on: June 15, 2017, 09:22:35 PM »
Huh.  Interesting that the article says that people in Canada who are 60/40 stocks/bonds do better than those who are higher in stocks.

This is what is wrong with following any portfolio analysis blindly. It's the one thing I have an issue with when people use Tyler's site. It's drawing the wrong conclusions from the available data-set.

We have some broad principles from the data that we can utilise:-

1. A WR of about 6% gives you about a 50% chance of your financial assets lasting 30 years.
2. A WR of about 4% gives you about a 95% chance of your financial assets lasting 30 years and typically you will be left with more money.
3. Diversifying within asset classes should reduce your risk exposure to statistical anomalies within that asset class.
4. Diversifying across asset classes should reduce your risk exposure to statistical anomalies within specific asset classes.
5. A stock heavy portfolio will tend to outperform most other portfolios.
6. Having some flexibility in your withdrawal rate is a great way to increase the chance of portfolio success.

People don't though view the analysis in this way. They state well I need to have a golden butterfly portfolio and therefore I can definitely have a WR of 5%.

Tyler

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Re: Why retirees outside of the US should not blindly follow the 4% rule
« Reply #15 on: June 15, 2017, 09:41:16 PM »
So is it that different countries have different SWRs and ideal stock/bond ratios, or that for each individual country, 1970-present doesn't have enough historical intervals to accurately ID consistent SWRs and ideal stock/bond ratios?

Different countries absolutely have different SWRs and ideal asset allocations (requiring what the studies refer to as "perfect foresight").  And it's true that if you use longer datasets the numbers can be lower and the curves can change shape a bit as new worst-case scenarios arise.  For example, Germany or Japan after WW2 were not really the places to retire early. 

If you're looking for more research, Wade Pfau has written some good papers on the topic and he has access to data dating back to 1900 (but many fewer assets and no investing outside of your home country).  Looking at 17 countries, he found that the ideal percentage of stocks ranged from 20% to 100% and SWRs ranged from 0.5% to 4.4% depending on the country.  Only Canada, Sweden, and the US were as high as 4%.  One could argue they're the 20th century outliers. 

itchyfeet

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Re: Why retirees outside of the US should not blindly follow the 4% rule
« Reply #16 on: June 15, 2017, 09:49:50 PM »
I think this thread could better be titled "Why Americans shouldn't blindly follow the 4% rule".

Surely if bad outcomes could happen in other countries they could happen in the US too.

However, for me personally, I won't be seeking out the worst case outcome in the history of the world in any country to set my retirement strategy.

4% plus flexibility on withdrawals for me and I think things will be fine. I'll know in 20 years time.

I don't care to look at anymore history, as whilst it might be a guide, it is certainly not a predictor.

thriftyc

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Re: Why retirees outside of the US should not blindly follow the 4% rule
« Reply #17 on: June 15, 2017, 09:58:21 PM »
Huh.  Interesting that the article says that people in Canada who are 60/40 stocks/bonds do better than those who are higher in stocks.

I have done exceptionally well with a 60/40 split.  Unemotional/mechanical rebalancing twice a year has allowed me to sell when shares are higher, and buy whats on sale - creating greater returns.   No other way in my book.

maizefolk

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Re: Why retirees outside of the US should not blindly follow the 4% rule
« Reply #18 on: June 15, 2017, 10:18:13 PM »
Perhaps we're talking past each other, but my question was whether you hold to the view that there are inherent differences in the forward looking SWRs and ideal asset allocations between different countries, or whether you believe that the wide range of variation in ideal asset ratios and SWRs between different countries represents essentially statistical noise (or luck if you prefer) around a single underlying SWR/asset allocation? Or put another way, is the fact that Australia's historical SWR has been lower than the SWR in the USA a sign that Australians need to accumulate more than Americans to FIRE with equivalent risk, or is it a sign that Americans may need to accumulate more to FIRE than one would forecast based on historical data from US-based markets alone?

The distinction between those two ways of interpreting the same results feels important to me, but I may be a bit of an outlier myself.

An interesting thing in the paper you linked to -- which you also touched on yourself -- is that almost all the countries with SWR < 3.5% had their worst year during world war I or world war II (listed in Table 3). So I would argue countries with higher SWRs in the 20th and 21st centuries are outliers in that they haven't had land wars fought on their soil over that time period, destroying industry and real estate, killing people, and either wiping out the government that was supposed to repay bonds, or at least triggering enough hyper inflation to make those bonds largely worthless.

The DMS dataset (what that paper is based on) would be really fun if it ever leaked into the public sphere. I've been tempted to try to reconstruct it from scanning the graphs in my copy of "Triumph of the Optimists" but I figure there'd be so much noise in trying to get annual economic measurements from individual by quantifying the number of pixels in bar graphs I'd never have confidence in the results.

Tyler

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Re: Why retirees outside of the US should not blindly follow the 4% rule
« Reply #19 on: June 15, 2017, 11:24:56 PM »
Perhaps we're talking past each other, but my question was whether you hold to the view that there are inherent differences in the forward looking SWRs and ideal asset allocations between different countries, or whether you believe that the wide range of variation in ideal asset ratios and SWRs between different countries represents essentially statistical noise (or luck if you prefer) around a single underlying SWR/asset allocation? Or put another way, is the fact that Australia's historical SWR has been lower than the SWR in the USA a sign that Australians need to accumulate more than Americans to FIRE with equivalent risk, or is it a sign that Americans may need to accumulate more to FIRE than one would forecast based on historical data from US-based markets alone?

That's a good question.

I lean towards the opinion that there are definitely differences in ideal portfolios and SWRs based on fundamental characteristics of different countries, although it's impossible to know the single best option with perfect foresight.  However, by studying how a portfolio has performed in more than one country one can identify options that have been remarkably robust even in conditions that the US has been blessed not to experience.  For example, the 40-year SWR for the Permanent Portfolio has been a pretty consistent 4.6% (+/- 0.3%) across the 5 countries I have data for.  Look for that level of consistency across borders, and the country-specific differences are no longer so important. 

So maybe the fact that Australian and American SWRs are so different is a sign that investors need to step back and look for asset allocations that aren't so sensitive to home country bias. 
« Last Edit: June 16, 2017, 12:38:33 AM by Tyler »

steveo

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Re: Why retirees outside of the US should not blindly follow the 4% rule
« Reply #20 on: June 16, 2017, 12:58:54 AM »
My take is that analysis like this proves that you can't trust something like the permanent portfolio. I think it's a mirage and the results were specific to that period of time. All you can do is build up a sensible portfolio and use some common sense. The data might hold up now but I bet it doesn't hold up in the future.

The conclusion from this analysis shouldn't be that there is an ideal portfolio but that you require some flexibility to make your retirement plan work. Stated more practically you can use the most rational portfolio which to me is the simple 2 fund portfolio. The lowest cost international index tracker and the lowest cost bond fund domiciled in your own country. Size this to your risk profile. Then the question is at what point do you state enough is enough. I state 5% however plenty of people will state 3%.

deborah

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Re: Why retirees outside of the US should not blindly follow the 4% rule
« Reply #21 on: June 16, 2017, 02:09:52 AM »
The conclusion that AUSTRALIA of all places has a lower SWR (and that Australians should follow it) just goes to show that people have not read the papers and thoughtfully LOOKED AT THE FIGURES.

The following is all my recollection of figures, but I believe that they are accurate enough for the current thread.

My recollection is that the Australian SWR (of about 3.8%?) is based on TWO POOR YEARS IN 1965 and 1966. Similarly, very low SWRs, such as Germany's are also based on only a FEW POOR YEARS. On the other hand, Japan, deserves its low SWR because it has had continuous (more recent) problems.

The wonderful achievement of the US to have the highest SWR should be treated as an anomaly, rather than that they currently have world's best practice. Unfortunately US practices caused the GFC. Because of our banking system and our government's response to the crisis, Australia largely avoided the GFC (and now has the world record for quarters of continuous GDP growth EVER by ANY country), so if Wade Pfau's studies were done in 10 years time, rather than almost 20 years ago, they would probably have quite different SWRs for different countries, and the US SWR would no longer be the highest.

Also, since the second world war, accounting, banking and sharemarket practices have changed radically. As such, I think that the pre-WWII figures used in long term SWR calculations are somewhat suspect. I also suspect that the technology revolution that we have all lived through, the overtaking by China of the US as the world's largest economy and other groundbreaking changes to world economies are changing things considerably. One only needs to think that in 1900, Argentina and Australia had the highest standards of living in the world, and in 2000 that had changed considerably, to realise that the world order of nations isn't stable, and that SWRs based on 1900 - 2000 will be completely different to those based on 1950 - 2050 or 2000 - 2100.

That being said, as others have commented in this thread, when you invest, you shouldn't have all your eggs in one form of investment, and you should have international exposure. The US doesn't make up the vast majority of world productivity, and US investors, like those of every other country, should have a reasonable amount of their assets invested internationally. Some home bias IS worth having, especially if you don't go overseas or buy anything produced overseas, because the majority of the goods and services you buy will be from your own country, in your own currency. In Australia, which has 5% of world productivity, people are encouraged to invest 40% at home and 60% internationally. If the US has 50% of world productivity, maybe you should be going for and 80/20 split - or getting the international exposure even greater.

Playing with Fire UK

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Re: Why retirees outside of the US should not blindly follow the 4% rule
« Reply #22 on: June 16, 2017, 01:40:03 PM »
I think this thread could better be titled "Why Americans shouldn't blindly follow the 4% rule".

Surely if bad outcomes could happen in other countries they could happen in the US too.

+1 to this. There does seem to be a belief that there is something magical and special about the US that guarantees it outperforming everywhere else.

Its size does give it a certain stability (the more large companies you have, the less any one of them failing can damage your index). I'd prefer to invest 100% in the US than 100% in Iceland, due to the size. But there is no reason in this age to limit your investments to one country. But crashes can happen in the US just as much as in any other country.

Thanks for the tool Tyler, will have a play!

GuitarStv

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Re: Why retirees outside of the US should not blindly follow the 4% rule
« Reply #23 on: June 16, 2017, 06:05:39 PM »
Huh.  Interesting that the article says that people in Canada who are 60/40 stocks/bonds do better than those who are higher in stocks.

I have done exceptionally well with a 60/40 split.  Unemotional/mechanical rebalancing twice a year has allowed me to sell when shares are higher, and buy whats on sale - creating greater returns.   No other way in my book.

It's what I've been following for the last ten years too, initially based on some early Canadian Couch Potatoe investment articles that I read.

Gremlin

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Re: Why retirees outside of the US should not blindly follow the 4% rule
« Reply #24 on: June 16, 2017, 06:15:10 PM »
Excellent post deborah!

stashgrower

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Re: Why retirees outside of the US should not blindly follow the 4% rule
« Reply #25 on: June 16, 2017, 11:19:47 PM »
Thanks, Deborah!!!!

DavidAnnArbor

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Re: Why retirees outside of the US should not blindly follow the 4% rule
« Reply #26 on: June 17, 2017, 07:23:56 PM »
I really appreciate reading all the different viewpoints. I definitely have an international component to my stock portfolio.