I'm also not sure how to compare those two success rates. With the 4% rule:
- 10% of the time you will have completely wiped your portfolio, $0 left. Can't feed yourself.
- The other 90% of the time, you'd be living paycheck to paycheck.
If by "living paycheck to paycheck" you mean "living on the edge of insolvency," this part is very wrong. Someone using the 4% rule will see their investment growth outpace their spending more often than not, usually by a very significant amount.
You're right. But the research behind the 4% rule doesn't have a mechanism for increasing spending past the adjustments for inflation. If you restart your calculations for the 4% rule every year, I think you're guaranteed to run out of money early. Part of the reason the 4% rule works, is because it lets your portfolio grow to create a buffer.
If you started with $1,000,000, at what point would you recalculate? $2,000,000? $6,000,000? How are you determining that?
I personally don't really plan to recalculate at all. Why would I purposely inflate my lifestyle to fit my wallet? Just because I can afford to be wasteful doesn't mean that doing so would lead to greater happiness. Instead I plan to spend as much as I need to live a happy life and donate the bulk of any surplus to charity.
If that's how you meant it, then I disagree. By "living paycheck to paycheck" I do mean "living on the edge of insolvency", as you're living without a buffer. If your expenses unexpectedly increase, your chances of permanently wiping out the portfolio are significantly increased.
Again, the 4% rule creates a huge buffer in the majority of scenarios. It has to. The worst scenario in recorded history worked fine with 4%; a more typical period in history would have seen your stash multiply severalfold over your retirement, and the best case is even better than this. In the majority of cases you could have your expenses unexpectedly increase and you would still be fine. You just start to bring your odds of success down from 95+% to a slightly smaller number, depending on how big the increase is and when during retirement it happens.
The two sentences in bold above contradict each other. If you acknowledge the base odds of success aren't 100%, then you concede the worst scenario in recorded history did
not work fine with 4%.
In any case, it seems we both agree the risk increases, we just disagree on the degree. Once you start going down the "Oh, here's another unexpected expense, but it's probably ok right? I mean, the market is doing great!", you're on a slippery slope. In other words, assuming an identical portfolio, intrinsically you'll have the same buffer either way. But VPW is honest about it, indicating there's a buffer to take advantage of during good times (and the majority of times are good), and telling you to pull back when the buffer is gone. The 4% rule hides this from you, tells you to carry on, buffer or not, and you hope it all works out.
As brooklynguy mentioned, the 4% rule is useful as a retirement-readiness indicator, but shouldn't be used to blindly withdrawal from your portfolio. Indeed, the senior author of the Trinity Study explicitly said this in an email response to a user on Bogleheads.org:
The email to Professor Philip L. Cooley:---------------------------------------------------------------------------
I recently posted this remark and I wonder if you'd care to comment on it, or if you have any papers or aticles that explain more about how you expected your study to be used.
If I've completely misinterpreted you, my apologies. Is the following remark more or less right?
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The more I read the Trinity study, the more I think people misinterpret it. The most important sentence is:
"The word planning is emphasized because of the great uncertainties in the stock and bond markets. Mid-course corrections likely will be required, with the actual dollar amounts withdrawn adjusted downward or upward relative to the plan. The investor needs to keep in mind that selection of a withdrawal rate is not a matter of contract but rather a matter of planning."
What the "4% SWR" means is not that you can treat a portfolio as if it were a guaranteed annuity. I think all the authors meant is that if it is late 2008 and your stocks halve in value, you don't need to halve your spending instantly. It's OK to cross your fingers and continue spending according to the 4%-then-COLAed plan, even though it means dipping into capital, and it's OK to go on doing that for a while. They also meant to warn people against the much higher withdrawal rates that had been formerly recommended by people using simple amortization calculations that didn't take account of the "order-of-returns" effect.
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The response:---------------------------------------------------------------------------
You have hit the nail on the head!
I've tried to explain that thought to journalists but they don't seem to get it. You've got it.
Stay flexible my friend!, which is the advice we should give to retirees.Philip L. Cooley, Ph.D.
Prassel Distinguished Professor of Business
Trinity University
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Source:
https://www.bogleheads.org/forum/viewtopic.php?t=53956