Author Topic: 3 serious problems with the 4% retirement rule-- From USA Today..  (Read 10244 times)

MonkeyJenga

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Re: 3 serious problems with the 4% retirement rule-- From USA Today..
« Reply #50 on: March 25, 2017, 10:15:41 AM »
]I will say this is one area where MMM is very hypocritical. He literally spouts "save up 25X and you're golden" as gospel when he himself knows that's far from the truth. It's not like that advice is not coming from a good place. It's not that he's been proven wrong. It's not like you won't "probably" be okay following the advice. It's the simple fact that he himself is diversified far beyond the 25X aka 4% rule. He went into "retirement" having learned an in-demand skill, along with his wife, and continues to build new skills. But that's what smart people do. I don't know why he tries to cover the fact that you should still be diversifying your skills and money even during retirement.

He has advocated for having diverse income streams and a flexible lifestyle. This piece from 2011 lays out all of his safety margins, include part-time work and cutting expenses: http://www.mrmoneymustache.com/2011/10/17/its-all-about-the-safety-margin/

This post from 2012 about the 4% SWR is very positive about its safety, precisely because anyone shooting for it will understand the need for safety margins and flexibility: http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/

undercover

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Re: 3 serious problems with the 4% retirement rule-- From USA Today..
« Reply #51 on: March 25, 2017, 10:27:23 AM »
I don't take issue with the fact that he doesn't share his entire story, it's statements like these that make me cringe:

"If you can get 25 times your annual spending saved up and working for you, that is enough to live off forever" http://www.mrmoneymustache.com/2013/02/22/getting-rich-from-zero-to-hero-in-one-blog-post/

Recent tweet: "Regardless of income, mathematically you can retire FOREVER on 25-30x your annual expenses, due to stock dividends+appreciation."

Sure he backs up and talks about, but he shouldn't be stating these broad generalizations without any upfront caveats.

MonkeyJenga

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Re: 3 serious problems with the 4% retirement rule-- From USA Today..
« Reply #52 on: March 25, 2017, 11:25:41 AM »
I understand your viewpoint. That first link is a way to gently introduce new people to the basic MMM ideas without getting too complicated. It's designed to be a summary and collection of links for further research. That specific line you quoted links to the 2012 4% article, which goes into the details about why he thinks 4% is safe and the need for flexibility. The next sentence links to the 2011 post about safety margins.

That tweet is responding to someone asserting it's impossible to save enough to live off for 30 years. It's trying to get attention, but it also states a more conservative view. 25-30x your expenses means 3.3-4% WR. Even many doubters of the 4% SWR would be okay with 3.3%. Also... it's a tweet? You don't have room for a ton of caveats.

His persona is aggressive and optimistic, and it worked well for him. People don't build a following like he has by caveating themselves to death. People who see that tweet might be intrigued and hop onto the site to do further research. Anybody who sees it, sets 25x their expenses as their retirement goal, and does no other research is silly.

Tyson

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Re: 3 serious problems with the 4% retirement rule-- From USA Today..
« Reply #53 on: March 25, 2017, 01:45:14 PM »
... but he shouldn't be stating these broad generalizations without any upfront caveats.

Why not?  He's trying to reach as many people as possible.  Simple, direct, and to the point wins every time over long, complicated and caveated. 

undercover

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Re: 3 serious problems with the 4% retirement rule-- From USA Today..
« Reply #54 on: March 25, 2017, 02:10:01 PM »
Anybody who sees it, sets 25x their expenses as their retirement goal, and does no other research is silly.

Some obviously do think like that, hence this post and my observation. Not everyone has 500+ posts on this forum in much the same way not everyone reads more than a few of MMM's article. This is OP's first post. People get hooked on the clickbaity type stuff like "retire on 25x expenses" and then try to argue against it or find reasons why it won't work instead of coming to the realization that it doesn't matter if it does or doesn't work since it's only one component to a long and successful "retirement"/life. OP is lowkey one of those "doubters" instead of being more enlightened to the broader picture.

Why not?  He's trying to reach as many people as possible.  Simple, direct, and to the point wins every time over long, complicated and caveated.

That works for clickbait I guess but the truth is that the path to anything that's actually worth it in life is long, complicated, and caveated.

All I'm saying is a lot of people gloss over the details and do hone in on the 4% rule.

Tyson

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Re: 3 serious problems with the 4% retirement rule-- From USA Today..
« Reply #55 on: March 25, 2017, 02:15:46 PM »
Well, you can lead people to the 4% rule but you can't make them think.  :-D

MonkeyJenga

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Re: 3 serious problems with the 4% retirement rule-- From USA Today..
« Reply #56 on: March 25, 2017, 03:10:52 PM »
Anybody who sees it, sets 25x their expenses as their retirement goal, and does no other research is silly.

Some obviously do think like that, hence this post and my observation. Not everyone has 500+ posts on this forum in much the same way not everyone reads more than a few of MMM's article. This is OP's first post. People get hooked on the clickbaity type stuff like "retire on 25x expenses" and then try to argue against it or find reasons why it won't work instead of coming to the realization that it doesn't matter if it does or doesn't work since it's only one component to a long and successful "retirement"/life. OP is lowkey one of those "doubters" instead of being more enlightened to the broader picture.

Why not?  He's trying to reach as many people as possible.  Simple, direct, and to the point wins every time over long, complicated and caveated.

That works for clickbait I guess but the truth is that the path to anything that's actually worth it in life is long, complicated, and caveated.

All I'm saying is a lot of people gloss over the details and do hone in on the 4% rule.

I don't see how OP's reaction is due to MMM. OP responded to an article in USA Today about the need for flexibility when following the 4% guideline. The article says nothing about MMM. MMM did not create the 4% SWR. The article itself is clear that 4% WR is useful, but there are some caveats.

So Pete casually tweeted something that was designed to bring more people to the site, where they can be educated on the caveats and be motivated to cut their consumption. I don't have a problem with this. If you think he can more effectively reach a wider audience with a different tone, you can offer to manage his social media platform for him.

frugal_c

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Re: 3 serious problems with the 4% retirement rule-- From USA Today..
« Reply #57 on: March 25, 2017, 06:24:17 PM »
I don't have much to say that hasn't already been said.  I think the sequence of returns risk is quite high right now on a 4% withdrawal rate.  Something to think about for those in their 30's & 40's FIREing.  The shiller pe does correlate to future returns, so it would be foolish to ignore that.  Stocks will still likely beat bonds and you are unlikely to beat stocks by market timing but nevertheless stocks are only supposed to do 1-2% over the next 10 to 15 years.

With that aside, I agree that it's just about being flexible and having a backup plan.  I also personally would shoot for a bit lower withdrawal.   If the market performs well you can just crank up your spending a bit in a decade. 

maizefolk

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Re: 3 serious problems with the 4% retirement rule-- From USA Today..
« Reply #58 on: March 25, 2017, 06:42:10 PM »
The problem right now with looking at the correlation between Shiller P/E and stock returns is that you cannot compare pre-1990s data to post 1990 data.

Quote
One of the key flaws in the Shiller P/E was no fault of Shiller. In 1990, Standard & Poor's, following the Financial Accounting Standards Board, changed the definition of GAAP (generally accepted accounting principles) earnings to require mark-to-market accounting.

But the change in criteria only required that companies mark down their assets when they have a loss. When an asset increased in value, it could only be marked up when it was sold.

That said, I'd agree stock market valuations are high, partially because the next best alternative (bonds) have such ridiculously low interest rates, which is driving more money into stocks, which pushes down expected returns there too. The problem is that the change in GAAP means we cannot use historical data from the shiller PE10 to estimate HOW high valuations are, or what that should mean for future returns.

frugal_c

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Re: 3 serious problems with the 4% retirement rule-- From USA Today..
« Reply #59 on: March 26, 2017, 10:06:24 AM »
Maizeman,

This is true and there are other problems.  Since early 80's companies have been paying out less of earnings as dividends and have corresponding higher earnings growth.  So the early years in the PE10 tend to be much lower than previous which unfairly pushes the PE10 up.  You also are including the great recession in current PE10 which is unfair since pre 08/09 we had nothing close to that.

Nevertheless, whether the PE10 is 30 or 25 or 22, it is high, higher than historic.  Maybe the future return is 3% REAL instead of 2% because we are miscalcuating PE10 but it is still weak.   When you use something like cfiresim and get 90% success rate most of the 90% is with much lower valuations, even with mentioned issues.

I still think stocks are the better bet than bonds, so much better than  bonds, but I would just be careful about your expectations.  If you have a 30 year horizon things will be great but much less than that I would be cautious.
« Last Edit: March 26, 2017, 10:09:33 AM by frugal_c »

maizefolk

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Re: 3 serious problems with the 4% retirement rule-- From USA Today..
« Reply #60 on: March 26, 2017, 11:24:33 AM »
Hi Frugal_c,

I hadn't thought about the issues caused by decreased dividend payouts driving faster earnings growth (more profit invested in growing the company), which would naturally drive PE a bit higher, thanks!

I am in complete agreement with you that, even with all the considerations we can throw in (GAAP changes, dividend policy changes, great recession still being on the books for another couple of years), valuations are high right now, suggesting we're unlikely to end up at the rosy end of the range of scenarios that can be produced by simulations picking random start years back through US history.

Livingthedream55

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Re: 3 serious problems with the 4% retirement rule-- From USA Today..
« Reply #61 on: March 29, 2017, 08:41:20 AM »
I think I'd be a bit nervous on a 4% plan if I was planning for a fairly barebones retirement.  We plan to be pretty spendypants, which means there is a lot of fat to trim in bad years.  Market is down?  This year we do a 1 week national parks vacation instead of two weeks in Spain and Portugal.  We cut a few more coupons, and eat meatless an extra night each week.  Maybe we even cancel Netflix for a year, and I only read library books, rather than picking up things for my Kindle as well. 

If our plan already included doing those things, the steps we'd need to take to come up with $5000 per year would feel much more extreme and painful.

This

I run "worst case scenarios" in my head - even with a market crash of 50%, I would not have to return to work. I would use my common sense, go to these boards for ideas, find ways to save on discretionary spending for a time, while still having a life.