The Money Mustache Community
General Discussion => Welcome and General Discussion => Topic started by: acemanhattan on November 30, 2014, 02:17:22 PM
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For the sake of simplicity let's assume the following
Cost of Living: $40,000/year
Savings: $1,000,000
Real rate of Return: 4%
Inflation: 3%
So, since we should theoretically be able to withdraw $40,000 per year every year without ever running out of money, MMM would have us believe we can safely retire and adhere to the 4% rule.
But what happens in our second year of retirement when a $40,000 lifestyle now costs $40,000(1.03)=$41,200 because of inflation? Isn't it true that we either have to withdraw more than 4% in order to maintain the same standard of living we chose to retire at?
I don't see how this gets accounted for in the 4% rule.
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But the 4% rule is that you start at 4% and raise the distribution at the rate of inflation. In your example what you would really have:
Rate of Return: 7%
Inflation: 3%
Real Rate of Return: 4%
Distribution: 4% the first year
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The 4% rule doesn't state you'll maintain your portfolio it states you won't exhaust your portfolio over a 30 year period. If you retire at 65 die and 95 with $12 left in your portfolio it considers it a success.
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The 4% rule doesn't state you'll maintain your portfolio it states you won't exhaust your portfolio over a 30 year period. If you retire at 65 die and 95 with $12 left in your portfolio it considers it a success.
I'm not worried about maintaining a portfolio.
I'm worried about simultaneously maintaining a withdrawal rate of 4% AND maintaining the standard of living we retired at. With inflation it is mathematically impossible since each year we'll have to withdraw a greater amount in order to maintain our standard of living in the first retirement year.
Mary seems to account for the mathematical impossibility by suggesting we actually only withdraw 4% in the first year. I'm exploring that now.
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we'll have to withdraw a greater amount in order to maintain our standard of living in the first retirement year.
Yes, you will have to draw a greater amount in every subsequent year. That's the intention behind the analysis that led to the 4% rule.
You withdraw 4% in the first year only, in your example $40k. Then next year you inflate that amount by the inflation percentage, so if inflation ran 3% last year then this year you withdraw 1.03*40k, or $41,200 regardless of what your portfolio balance is. The whole point of the Trinity study that first proposed the 4% rule was to compare market returns with inflation over the entire history of both, to show that in cases where both are high or low, you're still fine.
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The 4% rule doesn't state you'll maintain your portfolio it states you won't exhaust your portfolio over a 30 year period. If you retire at 65 die and 95 with $12 left in your portfolio it considers it a success.
I'm not worried about maintaining a portfolio.
I'm worried about simultaneously maintaining a withdrawal rate of 4% AND maintaining the standard of living we retired at. With inflation it is mathematically impossible since each year we'll have to withdraw a greater amount in order to maintain our standard of living in the first retirement year.
Mary seems to account for the mathematical impossibility by suggesting we actually only withdraw 4% in the first year. I'm exploring that now.
Yes--if you run the calculation with your numbers after 30 years your 30th year would have a portfolio with $155,600 in it and a withdrawal of $94,362. So you make it but barely. To last 30+ years you really need to be withdrawing 2-3%. That also assumes you never make another dime/get social security.
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Yes--if you run the calculation with your numbers after 30 years your 30th year would have a portfolio with $155,600 in it and a withdrawal of $94,362. So you make it but barely. To last 30+ years you really need to be withdrawing 2-3%. That also assumes you never make another dime/get social security.
What calculation is that?
I just ran his scenario through cFIREsim (http://www.cfiresim.com/input.php). 1mil portfolio, 4% out the first year adjusted up 3% per year, and I get an average ending balance of 1.8 million dollars.
It also dropped below zero 8 times out of the 115 possible 30 year historical periods it simulated, which means his original plan has a 93% success rate over 30 years.
Or an 82.3% success rate over 60 years, if 30 isn't long enough for you. Still pretty good, if you ask me, once you consider that you're likely to get SS eventually.
Whenever I see people recommending a 2% SWR I get slightly angry. You're asking people to work three times as long in order to improve their safety margin like 10%. It's almost like you're a force of evil in the world, trying your hardest to keep people from finding happiness by suffering extra decades in soul-crushing jobs. Stop it.
Or at least don't lie about the math.
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Sol,
1) relax
2) if you increase 40k a year by 3% the withdrawal is more than 4% of 1 million except for year 1 so every year you're using principal. So you don't end up with 1.8 million using the OPs numbers,
1 mil portfolio
4% initial withdrawal
3% yearly increase in withdrawal
4% return
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Sol,
1) relax
2) if you increase 40k a year by 3% the withdrawal is more than 4% of 1 million except for year 1 so every year you're using principal. So you don't end up with 1.8 million using the OPs numbers,
1 mil portfolio
4% initial withdrawal
3% yearly increase in withdrawal
4% return
You don't expect a 4% return, you expect a 4% when accounting for inflation return aka a 7% return.
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It's a 4% real rate of return in the op' s scenario, so with inflation at 3 the nominal return is 7. Under that scenario he dies with a portfolio valued at a 1,000,000 of today's dollars. I'm too lazy to do the math but it would be over 2,000,000 in 2044 dollars after 30 years at 3% inflation. This of course assumes consistent returns which never happens.
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The nominal rate is 7.12% if the real rate is 4%.
If we never made any withdrawals we'd have $1,000,000(1.0712)^30=$7,872,577 at the end of 30 years.
But we made withdrawals of $40,000, $40,000(1.03), ... , $40,000(1.03)^29 in years 1,2,...,30.
The accumulated value of that series of withdrawals is
40,000( (1.0712)^29 + (1.0712)^28(1.03) + (1.0712)^27(1.03)^2+...+(1.03)^29)
=40,000(1.0712)^29(1+(1.03/1.0712)+(1.03/1.0712)^2+...+(1.03/1.0712)^29)=$5,286,708
So the value of the account at the end of 30 years would be
$7,872,577-$5,286,708=$2,585,868
In fact you can pick any number of years you want and we'd never run out of money given these assumptions.
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So at the end of 30 years we went from having:
"it doesn't matter if you end up at $12 after 30 years" to
$155,600 to
$1,800,000 to
$2,000,000+ to
$2,585,868.
Kind of confused here. Hope I'm not alone.
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The nominal rate is 7.12% if the real rate is 4%.
If we never made any withdrawals we'd have $1,000,000(1.0712)^30=$7,872,577 at the end of 30 years.
But we made withdrawals of $40,000, $40,000(1.03), ... , $40,000(1.03)^29 in years 1,2,...,30.
The accumulated value of that series of withdrawals is
40,000( (1.0712)^29 + (1.0712)^28(1.03) + (1.0712)^27(1.03)^2+...+(1.03)^29)
=40,000(1.0712)^29(1+(1.03/1.0712)+(1.03/1.0712)^2+...+(1.03/1.0712)^29)=$5,286,708
So the value of the account at the end of 30 years would be
$7,872,577-$5,286,708=$2,585,868
In fact you can pick any number of years you want and we'd never run out of money given these assumptions.
It doesn't quite work that way, since you don't continue earning compound growth on your withdrawals.
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So at the end of 30 years we went from having:
"it doesn't matter if you end up at $12 after 30 years" to
$155,600 to
$1,800,000 to
$2,000,000+ to
$2,585,868.
Kind of confused here. Hope I'm not alone.
The $12 was a made up number to illustrate that as long as you die in the positive ER was a success.
The 155,600 I think assumed a real rate of return of 1% (4 nominal minus 3 inflation)
1,800,000 used actual historical data from the cfiresim app to say how many of today's dollars the average retiree would have. It assumed the 4% inflation adjusted withdrawal but used historical returns rather than the 4% real returns in the op.
The last two numbers are saying the same thing- that you'll retire with 1,000,000 of today's dollars after adjusting for inflation, it's just that the poster that said 2MM plus (me) was too lazy to do the math.
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So at the end of 30 years we went from having:
"it doesn't matter if you end up at $12 after 30 years" to
$155,600 to
$1,800,000 to
$2,000,000+ to
$2,585,868.
Kind of confused here. Hope I'm not alone.
I recommend going to cfiresim.com and running the numbers yourself. You'll see it supports Sol's assertion.
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Cecil, you're right, we don't earn interest on the withdrawals.
My calculation takes that into account though.
If you agree that we end up with $1,000,000(1.0712)^30=$7,872,577 after 30 years if we never made any withdrawals, then you'll have to agree that to account for a $40,000 withdrawal at the end of year 1 we have to subtract 40,000(1.0712)^29=$293,972 from $7,872,577 in order to tell us what we have at year 30 if we actually made that withdrawal. To account for the second withdrawal we'd have to subtract 40000(1.03)(1.0712)^28. Proceeding in that fashion for all 30 years gives the answer in my calculation.
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Thanks fellas (stuckinmm and Dodge), I should've stuck my brain out there and critically thought about this. That's a damn fine site Sol, very useful.
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The other thing to keep in mind is the need for flexibility. If you find that your portfolio is unable to sustain the 4% rule, adjust the situation. Either earn some money or reduce your spending. I personally am not planning on 4% withdrawal, but I am risk averse. Nobody is telling me to do that. I just feel that it is the right thing to do for me.
The 4% "rule" is not really a rule. It is a guideline but it is your job to monitor your portfolio, withdrawals and expenses regularly. Not to time the market or trade constantly, but to make sure you remain on target. The 4% guideline may work for someone who has some wiggle room in their budget, but someone who is at 4% on a very tight budget may not want to retire just yet. Running out of money when you are 85 years old would not be fun.
One of the contingencies to plan for is a risk in a major bear market right after you retire. You know historically how big a bear market can be and how long it takes to rebound. Plan ahead and make sure that you can cover such an event.
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Yes, the 4% rule DOES ignore the possible impact of inflation. Thing is, as long as inflation remains low, the 4% rule is fine . . . but sometimes inflation outpaces 4%, and that's when this rule-guideline gets itself into trouble.
You can insulate yourself against this by having a house that's paid for, which means your expenses can be very low . . . but, yes, inflation can be a real problem for retirees.
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Mrs Pete- the 4% rule does account for inflation. In periods of high inflation, stocks usually keep up with inflation so you still get a positive real return. Not always, of course, and these are the few times when a 4% withdrawal fails historically. But as sol pointed out, are you willing to work an extra 10 years to get to that ironclad 2% WR?
I will say that I've run cfiresim numbers at a 3.5 WR and it gets the success rate up in the high 90s. That plus the flexibility that fa mentioned should make anyone feel pretty good.
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Man, it's like almost no one here (excpept Sol and a few others) actually ever investigated what the 4% SWR and Trinity study is all about -- i.e., that it includes adjusting your yearly withdrawals for inflation, that it included simulations over periods in history where inflation was high, that it can't predict the future, that having a "paid off house" is a preferred strategy to hedge against inflation (vs., say, having a 30-year fixed mortgage at 3.5% and earning a nominal 7% investing). I honestly can't understand anyone contemplating quitting their gainful employment at age 30, 40, or 50 without having read and understood these concepts.
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Thanks fellas (stuckinmm and Dodge), I should've stuck my brain out there and critically thought about this. That's a damn fine site Sol, very useful.
The cFIREsim author (bo_knows) used to hang around here a bunch, but I haven't seen him in a while. He's the mastermind behind that imminently useful webpage, I'm just a fan of his work.
Yes, the 4% rule DOES ignore the possible impact of inflation.
NO IT DOES NOT. Did you even bother to read this thread before posting?
To be clear, everyone, the 4% rule was designed to include inflation. The OP's question and half of this thread betray a serious misunderstanding of how retirement withdrawals work. Read up (http://www.bogleheads.org/wiki/Trinity_study_update), y'all.
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Mrs Pete- the 4% rule does account for inflation. In periods of high inflation, stocks usually keep up with inflation so you still get a positive real return. Not always, of course, and these are the few times when a 4% withdrawal fails historically. But as sol pointed out, are you willing to work an extra 10 years to get to that ironclad 2% WR?
I will say that I've run cfiresim numbers at a 3.5 WR and it gets the success rate up in the high 90s. That plus the flexibility that fa mentioned should make anyone feel pretty good.
Having watched my great-grandmother, whose husband left her with a PILE of money, die broke because of inflation, I'm not buying it.
My plan involves about 7 years more to provide an iron clad buffer.
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I read it the way Sol's saying as well. When I first heard about the 4% rule I had exactly the same reaction as a lot of people - "but I can't live on $40k for the rest of my life! What about inflation?"
If you read the underlying assumptions behind every retirement calculator I've ever seen that's why they ask you to put in an estimate of inflation. The withdrawal is 4% the first year, then 4% plus inflation the second year, and so on. I have never seen a calculator (though I'm sure they exist) that doesn't include inflation in it's assumptions.
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Thanks fellas (stuckinmm and Dodge), I should've stuck my brain out there and critically thought about this. That's a damn fine site Sol, very useful.
The cFIREsim author (bo_knows) used to hang around here a bunch, but I haven't seen him in a while. He's the mastermind behind that imminently useful webpage, I'm just a fan of his work.
Yes, the 4% rule DOES ignore the possible impact of inflation.
NO IT DOES NOT. Did you even bother to read this thread before posting?
To be clear, everyone, the 4% rule was designed to include inflation. The OP's question and half of this thread betray a serious misunderstanding of how retirement withdrawals work. Read up (http://www.bogleheads.org/wiki/Trinity_study_update), y'all.
+1
And if that's not enough reading, see http://www.bogleheads.org/wiki/Safe_withdrawal_rates and http://www.bogleheads.org/forum/viewtopic.php?f=10&t=102601 (among others...).
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Having watched my great-grandmother, whose husband left her with a PILE of money, die broke because of inflation, I'm not buying it.
We are all influenced by our experiences - fair point on what inflation can do, particularly to investments that do poorly in an inflating economy. MrsPete, any idea of the asset allocation for that pile?
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The study would be fairly worthless if it did not factor in inflation. That would be like studying traffic patterns, but ignoring highways.
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Man, it's like almost no one here (excpept Sol and a few others) actually ever investigated what the 4% SWR and Trinity study is all about -- i.e., that it includes adjusting your yearly withdrawals for inflation, that it included simulations over periods in history where inflation was high, that it can't predict the future, that having a "paid off house" is a preferred strategy to hedge against inflation (vs., say, having a 30-year fixed mortgage at 3.5% and earning a nominal 7% investing). I honestly can't understand anyone contemplating quitting their gainful employment at age 30, 40, or 50 without having read and understood these concepts.
Well said. Another point on the financial calculators, most of them keep the money in today's dollars so it will look like $40,000 through out the length of retirement, but in reality that number is going up each year with your projected inflation.
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The 4% rule has some rules behind it: 3% inflation rate and 7% return rate.
So on a $1m portfolio:
Yr 1:
Portfolio is at $1,000,000
You withdraw $40,000
Portfolio returns 7% over this year and is now at $1,027,200
Yr 2
Portfolio is at $1,027,200
You withdraw $41,088 (nearly a 3% increase over last year to account for inflation)
Portfolio returns 7% over the year and is now at $1,055,139
4% is very rough and will need adjusting throughout the years as the markets fluctuate. There's also no guarantee in a 7% return every year and ideally the return will be > 7% (it historically has been) since this a return of 7% after you've withdrew your lump sump for a year will not yield an exact 3% premium over the previous year's withdrawal. Monthly withdrawals would help this balance out.
The idea is to not touch principle with the 4% rule, so that your principle can grow to adjust for inflation and you could theoretically live of your portfolio forever.
Most people here I doubt fully buy into the 4% rule and lean closer to 3% or lower and plan on having other income streams such as a rentals and maybe even part time work.
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The 4% rule has some rules behind it: 3% inflation rate and 7% return rate.
That may be true of Ricky's 4% rule, but not the 4% Safe Withdrawal Rate determined by the Trinity study.
4% is very rough and will need adjusting throughout the years as the markets fluctuate.
Yes. To paraphrase, the 4% "rule" is not a suicide pact.
The idea is to not touch principle with the 4% rule, so that your principle can grow to adjust for inflation and you could theoretically live of your portfolio forever.
Again, that may be true of Ricky's 4% rule, but not the 4% Safe Withdrawal Rate determined by the Trinity study.
See the links sol & I posted above for more details.
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The 4% rule has some rules behind it: 3% inflation rate and 7% return rate.
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The idea is to not touch principle with the 4% rule, so that your principle can grow to adjust for inflation and you could theoretically live of your portfolio forever.
Would anyone else who has no idea what they're talking about like to join in? We kind of have a theme going here.
Ricky, you're confused. You've completely misconstrued the entire point of the 4% rule. Please don't ever retire. Please stop visiting internet forums and repeating your misunderstandings as if they were facts.
The links above will set you straight, if you're interested.
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The 4% rule has some rules behind it: 3% inflation rate and 7% return rate.
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The idea is to not touch principle with the 4% rule, so that your principle can grow to adjust for inflation and you could theoretically live of your portfolio forever.
Would anyone else who has no idea what they're talking about like to join in? We kind of have a theme going here.
Ricky, you're confused. You've completely misconstrued the entire point of the 4% rule. Please don't ever retire. Please stop visiting internet forums and repeating your misunderstandings as if they were facts.
The links above will set you straight, if you're interested.
Straight from MMM:
So where does this magic number come from? At the most basic level, you can think of it like this: imagine you have your ‘stash of retirement savings invested in stocks or other assets. They pay dividends and appreciate in price at a total rate of 7% per year, before inflation. Inflation eats 3% on average, leaving you with 4% to spend reliably, forever.
So please, email him and tell him how wrong he is and how he is preaching facts that just aren't true.
I'm sure many more people will read his "facts" than mine, so no need to worry about me reaching an audience in meaningful numbers, even though I said the exact same thing he did in his post.
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Straight from MMM:
So where does this magic number come from? At the most basic level, you can think of it like this: imagine you have your ‘stash of retirement savings invested in stocks or other assets. They pay dividends and appreciate in price at a total rate of 7% per year, before inflation. Inflation eats 3% on average, leaving you with 4% to spend reliably, forever.
So please, email him and tell him how wrong he is and how he is preaching facts that just aren't true.
I'm sure many more people will read his "facts" than mine, so no need to worry about me reaching an audience in meaningful numbers, even though I said the exact same thing he did in his post.
Fair point.
In the rest of the blog post (http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/) where he said that, however, he notes that the above quote isn't really correct, and does a good job explaining assumptions and providing links.
See also this thread, http://forum.mrmoneymustache.com/ask-a-mustachian/how-do-you-decide-just-how-much-money-it-will-take-to-reitire, for a similar discussion.
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Straight from MMM:
So where does this magic number come from? At the most basic level, you can think of it like this: imagine you have your ‘stash of retirement savings invested in stocks or other assets. They pay dividends and appreciate in price at a total rate of 7% per year, before inflation. Inflation eats 3% on average, leaving you with 4% to spend reliably, forever.
So please, email him and tell him how wrong he is and how he is preaching facts that just aren't true.
I'm sure many more people will read his "facts" than mine, so no need to worry about me reaching an audience in meaningful numbers, even though I said the exact same thing he did in his post.
Fair point.
In the rest of the blog post (http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/) where he said that, however, he notes that the above quote isn't really correct, and does a good job explaining assumptions and providing links.
See also this thread, http://forum.mrmoneymustache.com/ask-a-mustachian/how-do-you-decide-just-how-much-money-it-will-take-to-reitire, for a similar discussion.
And I didn't note that 4% is "very rough" and will "need adjusting"? You implied that I didn't do my due diligence and I just pulled all of that out of my ass. If anything, I was creating a scenario that answered OP's question, not preaching that 3%, 4%, and 7% are absolute numbers that can be trusted.
To be fair, his post doesn't go on to disprove the paragraph I quoted, it simply goes into more detail of success rates and nuances of the Trinity Study, both of which I implied in my own post. He article is under the premise that you will make changes during retirement and won't solely rely on 4% every year, much as I had insinuated as well.
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And I didn't note that 4% is "very rough" and will "need adjusting"? You implied that I didn't do my due diligence and I just pulled all of that out of my ass.
Some people can't take yes for an answer :). As in the part below where I agreed with you (bolding added):
4% is very rough and will need adjusting throughout the years as the markets fluctuate.
Yes. To paraphrase, the 4% "rule" is not a suicide pact.
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And I didn't note that 4% is "very rough" and will "need adjusting"? You implied that I didn't do my due diligence and I just pulled all of that out of my ass.
Some people can't take yes for an answer :). As in the part below where I agreed with you (bolding added):
4% is very rough and will need adjusting throughout the years as the markets fluctuate.
Yes. To paraphrase, the 4% "rule" is not a suicide pact.
I was more or less trying to make it clear that it isn't my rule, aka "Ricky's rule", given that people have been interpreting the 4% SWR as such long before I chimed in on this thread or before this forum was even created for that matter. I myself get frustrated when people associate the word "rule" with any retirement calculator, so I'll admit I don't normally preach "4%" myself.
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I think the answer is to invest real estate. It appreciates with inflation (usually) and also pays a monthly return.
Skyhigh
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I'm planning on using a 3% withdrawl rate because, I find it has according to the FIRECal website a 0% chance of failure for a 40 year retirement. While a 4% withdrawl has ONLY a 85% chance of success for 40 years.
My goal is 50k per year and that equates to 1.5M. We are knocking on the door right now. It's a personal choice to work a few more years. My wife and I are money making machines right now and it's going to be hard to wind down.
Once I pull the plug I don't want to ever have to worry about money again. It's a personal choice. That's what MMM is all about to me persoal choice and freedom. You get that at FU Money. Working past their is a choice and not a need.
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I've seen mortgage rates of 19%. Yes, investments keep up, but there is often a lag. So my present financial goal is to get the debt down (last bit of 0% car loan, mortgage, no other consumer debt) instead of increasing income. I'm getting closish to the next income tax bracket, so I will have more actual cash in hand by reducing expenses, plus be more secure if rates rise.
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The 4% rule has some rules behind it: 3% inflation rate and 7% return rate.
No. That's completely incorrect. And just because you misinterpreted MMM's post on the 4% rule (http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/), that doesn't mean MMM supports your incorrect belief. Apparently when you read his post, you ignored his prelude "At the most basic level, you can think of it like this", and then you immediately stopped reading the next 80% of the post. In the very next paragraph, he explains how the actual source of the "4% rule" has nothing to do with that idealized version.
4% is very rough and will need adjusting throughout the years as the markets fluctuate.
No. As long as you assume that your 30-year retirement period is no worse than the worst 30-year period in the past, the 4% rule requires no adjustments. Yes, in reality, no retired person's spending will ever strictly follow the 4% numbers, but if it did, they would be fine; adjustments are not "needed".
There's also no guarantee in a 7% return every year
Duh, of course not. Neither the Trinity study nor MMM ever made this assumption, and in fact the main basis for the Trinity study was the recognition that even assuming an "average" return (much less an actual unvarying return) is an inadequate way to analyze the longevity of a nest-egg.
The idea is to not touch principle with the 4% rule
Wrong again. "Touching principal" happens in many (most?) of the "successful" scenarios that the Trinity study used to determine the "4% rule".
I'm with sol here, this a a remarkably weird thread filled with confusion and misinformation on what I thought was a well-understood topic. For the record, sol, MDM, and DoubleDown know what they're talking about, so listen to them.
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I've seen mortgage rates of 19%. .
But only if you have a variable mortgage at the wrong time.
Pay off the mortgage or get a fixed rate and that issue goes away.
I intend retiring with no debt and a couple of years of living expenses in the bank - that way a sudden market drop has no impact on me - I can live for 2 years without relying on market returns. I'd like to be able to gradualy add to the 2 year stash as the year goes along (so its a rolling 2 year fund) but I recognise that I can't time the market or predict it.
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Seems appropriate to drop this here...the headline sums up this thread perfectly:
http://www.cnbc.com/id/102165628 (http://www.cnbc.com/id/102165628)
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Canadian mortgages are not like U.S. mortgages, they are for a set term (your choice, but no more than 5 years). People who want to be safe tend to take out a 5 year fixed rate renewal, 25 year mortgage, even though interest rates are lower on shorter terms. So people who had those fixed rate 9-10% mortgages were suddenly looking at doubled interest rates as their terms came to an end.
People with variable rates (at least here in Canada) can usually switch to a fixed rate at short notice. This simply means they have to keep a closer eye on mortgage rates.
General comment - Different countries have different situations, and they need to be taken into account for financial planning. Florida = U.S. =/= here, or Australia, or the various other places Mustachians live. This is why we see posts about ER in Europe, for example, or housing moans and groans from Aussies (whose situation is more like Canadians than Americans). So before any of us raise a disagreement (as shown below) we should check the country of the poster we are disagreeing with.
I've seen mortgage rates of 19%. .
But only if you have a variable mortgage at the wrong time.
Pay off the mortgage or get a fixed rate and that issue goes away.
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As long as you assume that your 30-year retirement period is no worse than the worst 30-year period in the past, the 4% rule requires no adjustments.
Because a 4% withdrawal rate has a sub-100% historical success rate, this isn't quite accurate. The assumption really needs to be that your 30-year retirement period is no worse than the overwhelming majority (with the exact percentage dependent upon your specific choice of asset allocation and other applicable variables) of all 30-year periods in the past.
I know I'm nitpicking, but I think we should strive for absolute precision in language in this thread's campaign against the spread of misinformation.
And for the record, add skyrefuge to the list of posters who know what they're talking about, so listen to him too.
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Canadian mortgages are not like U.S. mortgages, they are for a set term (your choice, but no more than 5 years). People who want to be safe tend to take out a 5 year fixed rate renewal, 25 year mortgage, even though interest rates are lower on shorter terms. So people who had those fixed rate 9-10% mortgages were suddenly looking at doubled interest rates as their terms came to an end.
People with variable rates (at least here in Canada) can usually switch to a fixed rate at short notice. This simply means they have to keep a closer eye on mortgage rates.
General comment - Different countries have different situations, and they need to be taken into account for financial planning. Florida = U.S. =/= here, or Australia, or the various other places Mustachians live. This is why we see posts about ER in Europe, for example, or housing moans and groans from Aussies (whose situation is more like Canadians than Americans). So before any of us raise a disagreement (as shown below) we should check the country of the poster we are disagreeing with.
I've seen mortgage rates of 19%. .
But only if you have a variable mortgage at the wrong time.
Pay off the mortgage or get a fixed rate and that issue goes away.
So only if you have a variable rate mortgage at the wrong time then. Like I already said.
Good job I have lived in a couple of different countries in order to understand this!
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My point was that people had fixed rate mortgages and still got caught. Because their term ended just as rates were climbing. So fixed rate does not always help. People still need to pay attention to rates as they fluctuate, and sometime they can change really really fast. And banks are notorious for charging rates that make refinancing costly in most cases.
But only if you have a variable mortgage at the wrong time.
Pay off the mortgage or get a fixed rate and that issue goes away.
So only if you have a variable rate mortgage at the wrong time then. Like I already said.
Good job I have lived in a couple of different countries in order to understand this!
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My point was that people had fixed rate mortgages and still got caught. Because their term ended just as rates were climbing. So fixed rate does not always help. People still need to pay attention to rates as they fluctuate, and sometime they can change really really fast. And banks are notorious for charging rates that make refinancing costly in most cases.
But only if you have a variable mortgage at the wrong time.
Pay off the mortgage or get a fixed rate and that issue goes away.
So only if you have a variable rate mortgage at the wrong time then. Like I already said.
Good job I have lived in a couple of different countries in order to understand this!
I think this is a Canadian vs. US semantic difference. In the US, if you have a "fixed rate mortgage" the rate doesn't change over the life of the mortgage, and at the end of the term (15 or 30 yrs) your house is paid off. There is no need to refinance or renew as you describe with the 5-year max mortgages. So if you have a fixed rate mortgage, there's no real risk of getting stung by interest rate increases unless you're entering into a new mortgage on a different house.
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My point was that people had fixed rate mortgages and still got caught. Because their term ended just as rates were climbing. So fixed rate does not always help. People still need to pay attention to rates as they fluctuate, and sometime they can change really really fast. And banks are notorious for charging rates that make refinancing costly in most cases.
But only if you have a variable mortgage at the wrong time.
Pay off the mortgage or get a fixed rate and that issue goes away.
So only if you have a variable rate mortgage at the wrong time then. Like I already said.
Good job I have lived in a couple of different countries in order to understand this!
So that would be like having to be on a variable rate mortgage at the wrong time.
you are saying exactly the same thing I am.
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Because a 4% withdrawal rate has a sub-100% historical success rate, this isn't quite accurate. The assumption really needs to be that your 30-year retirement period is no worse than the overwhelming majority (with the exact percentage dependent upon your specific choice of asset allocation and other applicable variables) of all 30-year periods in the past.
Good catch, I completely accept the nitpick! But as a nitpick on your nitpick, I will note that the original research apparently found a 100% success rate for a 50/50 portfolio (http://wpfau.blogspot.com/2012/02/trinity-study-and-portfolio-success.html) (which is a better result than cFIREsim/FIRECalc show). So I would modify your statement to say "Because a 4% withdrawal rate only reaches a 100% historical success rate under certain asset allocations and calculations..."
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Seems appropriate to drop this here...the headline sums up this thread perfectly:
http://www.cnbc.com/id/102165628 (http://www.cnbc.com/id/102165628)
Good article, thanks for posting.
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It wasn't specifically mentioned above, as we seemed to get de-railed by the massive amount of misinformation presented as fact, but to the OP, the Trinity Study also included results from non-inflation adjusted withdrawals. If you foresee decreasing (real) expenses or have an inflation adjusted pension that kicks in or something similar, it could be interesting to look at.
Again, these are non-inflation adjusted withdrawals. This is directly from the Trinity Study authors:
(http://resource.fpanet.org/resource/FDBB107D-1D09-67A1-AC1A61924F8CAAF5/Cooley-Table-1.jpg)
As you can see, you can reasonably plan to withdrawal more than 4% if you don't plan to adjust for inflation. Up to 7% really. However, that's not what most people refer to when referencing the Trinity Study (or the resulting 4% rule), because as you mentioned, it'd be a special case for you to be able to endure 30 years of decreasing spending power. Most people refer to the inflation adjusted withdrawals, because it makes sense to attempt to maintain your standard of living. Since inflation adjusted withdrawals are higher, they require a lower withdrawal rate.
So when anyone mentions the 4% rule, they are referring to this chart:
(http://resource.fpanet.org/resource/FDBB93B6-1D09-67A1-AC372ACFA85F761B/Cooley-Table-2.jpg)
/\ that's where the "4% rule" comes from. At a 50/50 stock/bond ratio or higher, you have an outstanding chance to have your money last 30 years. This is how it became a "rule". However, looking at charts is no substitute for reading and understanding the actual study (http://www.onefpa.org/journal/Pages/Portfolio%20Success%20Rates%20Where%20to%20Draw%20the%20Line.aspx) and it's methodology.
On a general note, I fully agree with DoubleDown above that every single one of you needs to understand the how and why of the safe withdrawal rate testing and how it will apply to your own situation before you stop working. If you have questions at all, I'd highly recommend that you read the actual study (http://www.onefpa.org/journal/Pages/Portfolio%20Success%20Rates%20Where%20to%20Draw%20the%20Line.aspx). Many of you missed this apparently, plus as you can tell from some of the curt responses, we (in general) can get a little testy when someone starts claiming things that simply aren't true, especially when it comes to withdrawal rates.
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Mrs Pete- the 4% rule does account for inflation. In periods of high inflation, stocks usually keep up with inflation so you still get a positive real return. Not always, of course, and these are the few times when a 4% withdrawal fails historically. But as sol pointed out, are you willing to work an extra 10 years to get to that ironclad 2% WR?
I will say that I've run cfiresim numbers at a 3.5 WR and it gets the success rate up in the high 90s. That plus the flexibility that fa mentioned should make anyone feel pretty good.
Having watched my great-grandmother, whose husband left her with a PILE of money, die broke because of inflation, I'm not buying it.
My plan involves about 7 years more to provide an iron clad buffer.
Did she keep it in a savings account or CDs or something? Not sure what is really meant by a pile. 20 years expenses? 50 years expenses?
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"you are saying exactly the same thing I am."
Not quite, because we do have open "variable" rate mortgages as well. Depending on the terms, you may or may not be able to switch to a locked in rate whenever you want. But we don't have any mortgage where the rate is locked in for the whole amortization period (unless of course you are down to 5 years or less in total), so we just don't think in those terms. But yes, a mortgage could come up for renewal at a really bad time.
As well, principal residences are treated differently tax-wise - the mortgage interest is not tax-deductible, and the gain/loss when selling a principal residence is not taxable (or a tax deduction in case of a loss). Primary residences are sort of outside the tax system. What this means is no-one talks about the effect of their house on their taxes, or makes housing decisions based on taxes, because there is no relevance. It also means that the decision on where to allocate money (mortgage or other debt or investments) has different parameters. [Of course municipal taxes are a separate issue, they are directly based on the house valuation and the mill rate.] Same thing for other categories, for example we do not file differently based on marital status (except a really low income spouse can be a deduction as a dependent).
What this means in practice is that a lot of general personal finance books available in Canada are written for U.S. conditions, and the specific advice is not applicable to us. But naive readers may not realize this, any more than they realize that the law they learn from watching TV is usually American law (assuming it is accurate, which is often not the case) and Canadian law is different. Even more so for civil law, because it is a provincial jurisdiction and varies (especially Quebec, for historical reasons).
So that would be like having to be on a variable rate mortgage at the wrong time.
you are saying exactly the same thing I am.
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To last 30+ years you really need to be withdrawing 2-3%. That also assumes you never make another dime/get social security.
I had originally written a huge, long message with a ton of math and case studies as well as personal accounts. Instead I'll just say this: If you delay retirement until you can pay all your expenses on 2% of savings and assume zero from Social Security then you are saying you want to work more years for no reason at all. If you like working, then work, but if you value your time then it's foolish to pretend Social Security doesn't exist or will pay $0 in benefits in the future. All you're doing is working more years that you don't need to work. Sure, you'll have more economic security, but you do so at the expense of working through prime healthy years of your life.
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To last 30+ years you really need to be withdrawing 2-3%. That also assumes you never make another dime/get social security.
I had originally written a huge, long message with a ton of math and case studies as well as personal accounts. Instead I'll just say this: If you delay retirement until you can pay all your expenses on 2% of savings and assume zero from Social Security then you are saying you want to work more years for no reason at all. If you like working, then work, but if you value your time then it's foolish to pretend Social Security doesn't exist or will pay $0 in benefits in the future. All you're doing is working more years that you don't need to work. Sure, you'll have more economic security, but you do so at the expense of working through prime healthy years of your life.
Nice point, I could easily live of SS alone. So my safe withdrawal rate at this point in my life is more like --- take the number of years till 62 minus my current age and divide that into total investments.
When you add SS to the equation it is a huge difference. Will it be there for my grandkids? Probably not. So that is why I will continue to work -- not for myself -- but for my grandkids. It would be entirely embarrassing to spend 50 years in retirement jerking off only to realize my grandkids were screwed.
In case anyone hasn't noticed the US and other western industrial powers years of economic dominance are quickly fading. It is nice to be optimistic about the future but some realism helps IMHO.
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To last 30+ years you really need to be withdrawing 2-3%. That also assumes you never make another dime/get social security.
I had originally written a huge, long message with a ton of math and case studies as well as personal accounts. Instead I'll just say this: If you delay retirement until you can pay all your expenses on 2% of savings and assume zero from Social Security then you are saying you want to work more years for no reason at all. If you like working, then work, but if you value your time then it's foolish to pretend Social Security doesn't exist or will pay $0 in benefits in the future. All you're doing is working more years that you don't need to work. Sure, you'll have more economic security, but you do so at the expense of working through prime healthy years of your life.
My 2 or 3% remark was based on getting a nominal return of 4% with inflation of 3%. The OP mentioned a real return of 4% and inflation of 3% which was why I was confused. You either have a real return of X and then it doesn't matter what inflation is or you have a nominal return of Y with Z inflation which you then need to back out.
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To last 30+ years you really need to be withdrawing 2-3%. That also assumes you never make another dime/get social security.
I had originally written a huge, long message with a ton of math and case studies as well as personal accounts. Instead I'll just say this: If you delay retirement until you can pay all your expenses on 2% of savings and assume zero from Social Security then you are saying you want to work more years for no reason at all. If you like working, then work, but if you value your time then it's foolish to pretend Social Security doesn't exist or will pay $0 in benefits in the future. All you're doing is working more years that you don't need to work. Sure, you'll have more economic security, but you do so at the expense of working through prime healthy years of your life.
Nice point, I could easily live of SS alone. So my safe withdrawal rate at this point in my life is more like --- take the number of years till 62 minus my current age and divide that into total investments.
When you add SS to the equation it is a huge difference. Will it be there for my grandkids? Probably not. So that is why I will continue to work -- not for myself -- but for my grandkids. It would be entirely embarrassing to spend 50 years in retirement jerking off only to realize my grandkids were screwed.
In case anyone hasn't noticed the US and other western industrial powers years of economic dominance are quickly fading. It is nice to be optimistic about the future but some realism helps IMHO.
So because western industrial powers are quickly fading, your grandkids won't have Social Security? I'm not seeing the connection. The only way Social Security is going away is if we vote to get rid of it. Considering our aging population, the voting rates of seniors, and their attachment to Social Security, I think they're pretty safe.
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So because western industrial powers are quickly fading, your grandkids won't have Social Security? I'm not seeing the connection. The only way Social Security is going away is if we vote to get rid of it. Considering our aging population, the voting rates of seniors, and their attachment to Social Security, I think they're pretty safe.
From everything I have read, the program is being bled dry by 76 different programs that are totally unrelated to retirement benefits and that the retirement benefit is the simplest to make solvent. They used to have a quick summary page on the actual SSA.gov website but I havn't been able to find it in the last year or so, so I'm not sure if they moved it somewhere unsearchable or what the deal is. The bottom line is that it basically came down to: phase in higher retirement age targets or adjust the shape of the curve to bias towards paying out more at later ages, raise the wage tax cap (currently you pay no FICA on wages above $118k/year), raise the actual tax rate, and lower the maximum benefit paid out to high income earners. Any one or some combination of all 4 will make the retirement benefit totally solvent again. It's not going to go away, there's simply too few people who save on their own.
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Seems appropriate to drop this here...the headline sums up this thread perfectly:
http://www.cnbc.com/id/102165628 (http://www.cnbc.com/id/102165628)
Good article, thanks for posting.
+1, I hadn't read that one and enjoyed it also.
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Thanks sol and Eric for dispelling myths.
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Agreed, thanks for taking the time to add so much detail in this thread. I haven't yet focused on the details of these rules and this was a nice primer that made me realize that I need to spend a bit of time reading.
On a related note, I just saw this on the Vanguard Blog and thought I'd see if the experts have a view. It's a bit of marketing, but it was interesting to read.
http://vanguardblog.com/2014/11/07/the-4-spending-rule-20-years-later/