Author Topic: 4% Rule Rant (with some comic relief)  (Read 4063 times)

tooqk4u22

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4% Rule Rant (with some comic relief)
« on: March 11, 2016, 01:21:35 PM »
Everybody defends the 4% rule all the time so blindly, I know its because we all have a vested interested in it being right otherwise we would have to keep working.  I do it to....well maybe I hedge with the 3% rule. But the reality is that it may not be right in a dramatic way to the good or bad, maybe its 10% SWR or a minus 10% SWR. We should question it, if for no other reason to have a better understanding or a thought process of how to react.  Some of my thoughts on why to question (some have been discussed before):

1.  The data is US centric from a period of explosive growth and innovation - this may or may not continue, but if you look at other more mature economies a 4% SWR would not have faired well.  Some of this has been attributed to economic/social policies that crippled economies or stunted innovation and some of it is population trends (aging/shrinking) - both of which in play in the US right now.
2.  There is no reasonable similarity between the markets in the early 1900's, mid-1900's, and now.  The technology, democratization and leveraging (debt) of the markets today almost renders any prior data almost pointless. 
3.  The last 50-100 years or so that the trinity study relies upon is a mere blip on the timeline of human existence, so who knows what will change.  It's funny though that when people discuss climate change, it too results in very strong opinions with data that is based on an infinitesimal time as relates to global climate....so small in fact that a single grain of sand on a beach would represent a more meaningful time.
4. I could think of more, but I lost interest...

Some parting positives....
1.  So many innovations that can occur to drive growth....come on, the next great thing is the one that has been thought of yet or developed to a point of being marketable and profitable (although not sure that matters as much - Amazon anyone). There could be game changers out there - How about:
    -  artificial intelligence
    -  colonization of other planets to sustain population growth
    -  creation of an artificial planet (death star anyone?)
    -  Gurpolskomunz......you don't know what is now, but you will in 10 years. 

2.  The economy implodes, so what we are humans.....so very resilient, big deal we have to go back to farming, hunting, making our own food/clothes, bartering, fixing our own shit.....oh wait most of here are trying to FIRE so we can do all of this stuff.....oh wait we already are!

3.  Fuck it, I only need my money to last 30, 40, 50 years......this is fucking infinitesimal amount of time in the grand scheme of things and all the time you have left and you are worried about the 4% rule.....get a life before you don't have one.



« Last Edit: March 11, 2016, 01:47:24 PM by tooqk4u22 »

2lazy2retire

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Re: 4% Rule Rant
« Reply #1 on: March 11, 2016, 01:46:06 PM »
Ah Jaysus not another 4% rule post ;)

To sum up your post - sh1t loads of bad stuff could happen in the future but 4% has worked in the past,  its all we got so might as well run with it.
« Last Edit: March 11, 2016, 01:49:39 PM by 2lazy2retire »

Louisville

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Re: 4% Rule Rant (with some comic relief)
« Reply #2 on: March 11, 2016, 01:58:42 PM »
Everybody defends the 4% rule all the time so blindly...
They do? That's not been my observation.

mxt0133

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Re: 4% Rule Rant (with some comic relief)
« Reply #3 on: March 11, 2016, 02:20:50 PM »
It is simply a rule of thumb for people that want to retire and not run out of money in a 30 year time period.  Just like saving 10-15% of your income until you are 65 is the rule of thumb to have a 20 year retirement and not run out of money.

It is not future proof and no one ever claimed that once you reach 4% you stop working or don't have to worry about money ever again.

Eric

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Re: 4% Rule Rant (with some comic relief)
« Reply #4 on: March 11, 2016, 02:40:14 PM »
Rather than re-invent the wheel:

http://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/


You're also aware that it wasn't just one study from Trinity University, right?  I mean, this subject has been studied tirelessly by multiple scholars over the past 20+ years.


MilesTeg

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Re: 4% Rule Rant (with some comic relief)
« Reply #5 on: March 11, 2016, 03:58:10 PM »
The 4% rule is a good rule of thumb for a high level of financial health, but the idea of _actually_ being able to retire when you reach that goal is, at best, laughable. You will NEVER be able to guarantee a 4% return consistently. There WILL be years where even the safest of investments will tank (see: the great recession) and will will have to dip into your capital to cover expenses if you don't have a source of income.  There's also the (very high) possibility of major expenses that would blow the 4% rule out of the water, such as a major medical event.

Indexer

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Re: 4% Rule Rant (with some comic relief)
« Reply #6 on: March 11, 2016, 04:31:11 PM »
The 4% rule was based on a planned horizon of 30 years and wanting to have a very high success rate of not running out of money. It was seen as the safe limit. If you can do less than 4% that is a plus.

I personally prefer a 3.5% rate. It's a small difference but looking at a 40 year+ time horizon it still gives over a 95% success rate of not running out of money. If I'm going to quit working in the lucrative field I'm in and risk skill atrophy then I want to know I don't need to start from scratch in the future, but that is just me.

If you get down to 3% you can even make it through great depression style crashes at retirement so you are looking at a 99% success rate.  So unless the world ends I don't see someone with a 3% SWR ever having to worry.

Anyone can do what works for them. If you are open to going back to work then you can probably aim for a 5 or even 6% SWR. If you are ok using historical data and you want a high success rate then 4% is fine. I don't fault anyone who aims for a lower SWR because you are just covering your bases.

Eric

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Re: 4% Rule Rant (with some comic relief)
« Reply #7 on: March 11, 2016, 04:49:34 PM »
The 4% rule is a good rule of thumb for a high level of financial health, but the idea of _actually_ being able to retire when you reach that goal is, at best, laughable.

Why do you think that?  Considering that 4% is sort of a worst case scenario already, what assumptions could you possibly have that would make that not safe enough?  Let's see:

You will NEVER be able to guarantee a 4% return consistently.

Irrelevant.  Nothing about the 4% rule was based on consistent returns.

There WILL be years where even the safest of investments will tank (see: the great recession)

Unless the tank is larger and longer lasting than any we've seen in the past, this is already considered.

and will will have to dip into your capital to cover expenses if you don't have a source of income. 

Irrelevant.  Dipping into your capital doesn't matter, as long as you don't dip into all of it.  If this is a problem for you, you can combat that by working a bunch of extra years to build up a dividend payment equal to your spending.

There's also the (very high) possibility of major expenses that would blow the 4% rule out of the water, such as a major medical event.

It stands to reason that if you don't plan your expenses well, and spend more than 4% on a consistent basis, then yes, the 4% rule may not work for you.  However, one year here or there of increased expenses is hardly a death sentance to your portfolio.  The vast majority of times in the past, you would've ended up with way more than you started with after 30 years.  You can model this for yourself using www.cFIREsim.com (or www.firecalc.com).

Most of your comment shows a lack of basic understanding.  Maybe start with the updated Trinity study here.

2buttons

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Re: 4% Rule Rant (with some comic relief)
« Reply #8 on: March 11, 2016, 04:58:53 PM »
I plan to use 4.1% as my SWR, because I am a cowboy, and I like to live my life on the edge. 

Eric

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Re: 4% Rule Rant (with some comic relief)
« Reply #9 on: March 11, 2016, 05:13:26 PM »
1.  The data is US centric from a period of explosive growth and innovation - this may or may not continue, but if you look at other more mature economies a 4% SWR would not have faired well.  Some of this has been attributed to economic/social policies that crippled economies or stunted innovation and some of it is population trends (aging/shrinking) - both of which in play in the US right now.

There's been some research on this.  Wade Pfau found that a 50/50 stock/bond 50/50 US/Int'l split portfolio would've had a ~81% success rate for 30 years.  Certainly that would be higher with a higher stock allocation.

http://retirementresearcher.com/international-diversification-and-safe-withdrawal-rates/