Either you misunderstood what I said, or you're the world's worst analogy writer. I'll guess it's the former. I'm saying that you need to be flexible. Planning for 3% is going to leave you pretty unhappy if inflation is 8% for a decade. Why plan for a static number at all? Plan for the actual inflation rate instead. This is how the Trinity Study (among others) do it for backtesting. They don't just plug in a single number, they use the actual inflation rates.
As quoted from the "Trinity Study":
"If history is any guide for the future, then withdrawal rates of 3% and 4% are extremely unlikely to exhaust any portfolio of stocks and bonds during any of the payout periods shown in Table 1. In those cases, portfolio success seems close to being assured."
Weird. It completely agrees with what everyone else is saying. Perhaps everyone came to the 4% number because of things such as backtesting and 'back-of-the-napkin' averages of inflation and stock returns.
https://en.wikipedia.org/wiki/Trinity_studyI wrote my previous response on my cellphone. I will try to write something here that is a bit more clear. "Using the averages" works because of a thing known as "regression towards the mean".
You posit the situation of the inflation rate being 8% for a decade. That would be unprecedented. We did have some really bad inflation in the 70s though.
http://www.multpl.com/inflation/tableJan 1, 1983 3.71% Jan 1, 1982 8.39% Jan 1, 1981 11.83% Jan 1, 1980 13.91% Jan 1, 1979 9.28% Jan 1, 1978 6.84% |
So, let us imagine you were retired during that period. You would have been screwed right?
If you had purchased an index fund of the S&P 500 on Jan 1, 1978 it would have cost you $95
On Jan 1, 1983, that same item would have inflated to $145.12
http://www.usinflationcalculator.com/The value of that stock on Jan 1, 1983? $140.64
The market kept up with inflation pretty closely.(It has to keep up. No one would invest money if they didn't think it would beat inflation. This is economics 101 and why the Fed is so concerned with controlling inflation rates)So, imagine you were using the 4% rule.
Stock Holding Withdraw New Balance Price 96.11 96.11 3.8444 92.2656 106.52 102.2592 4.2608 97.9984 136.34 125.4328 5.4536 119.9792 119.55 105.204 4.782 100.422 140.64 118.1376 5.6256 112.512
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Well, looks like you only have about $112.51 of your original $95. That is the equivalent of about a 34.5% loss in purchasing power. During the highest rate of inflation in history.
I wonder what happens next? Imagine we keep your money in that account?
By 1987, you will have $157 in your account, only $10 less than inflation. You are also paying yourself 4% a year.
You paid yourself $9.86 in 1987, which is CONSIDERABLY more than you paid yourself in 1978($3.85 or $6.71 adjusted for inflation)
Let us think about this. You just weathered the highest inflation in US history. Your fixed income is now MORE lavish than you probably need and you still have plenty of money in the bank.
That is good. You could reduce your withdrawal to 3%. We are about to drop the economy off a cliff(Oct 1987), but your nest egg will recover from that too if you just behave patiently.
ConclusionThe only problem with the 4% rule is that you should really withdraw what you need. 4% is a good rule for determining the size of your retirement account. However, once you retire 4% will likely be an unrealistic number. If you would have adjusted your withdraw to 3% in my example you would have maintained the same purchasing power each year while growing a larger retirement account to prepare for some eventual stock market crash.