Changes to the 4% rule

[Redo]

https://www.marketwatch.com/story/the-i ... 1603380557

The rule has been updated to 5% due to low inflation.
What are your opinions on this? Are you still sticking with 3-4%/other %?

[Alphaville]

the update i read is that if you do it right it works at 0%

see: viewtopic.php?p=227810#p227810

[Flurry]

Well, the main reason for low inflation is globalization. As more and more countries are becoming protectionistic, especially the USA, I would not count on inflation staying low. The supply of goods will be lower, these goods will be more expensive. At the same time the central banks around the globe are printing money like crazy to fight the economic impacts of Covid. I am very sure that inflation will return this decade.

[ertyu]

The rule has been updated to 5% due to low inflation.

F

that is my opinion

[tonyedgecombe]

The rule has been updated to 5% due to low inflation.

Surely a portion of the expected return is due to inflation, without inflation you should expect a smaller return.

[IlliniDave]

I still think even 3-4% for a significantly early retiree is too sporty for my tastes. My baseline will be < 1% , 0% achievable with luck, so I don't pay much attention to withdrawal rates anymore and my opinion is rooted in assessments I was making 5+ years ago.

[ertyu]

So.

First, the 4% in the 4% rule are real, not nominal.

Second, the % safe to withdraw depends first and foremost on current CAPEs, not on inflation. "The average" might be 7%, but your probability of going bust is conditional on where in the market cycle you retire. A 5% swr in march 2009 isn't identical to a 5% swr now.

Third, 4% is not a "worst-case scenario." It is a best case scenario, capturing the benefits of America's rise as an economic superpower post 1945 + a secular downtrend in interest rates starting in the 1980s and ending, you guessed it, now(-ish). In other historical periods, and for other countries, swrs are much lower.

Fourth, the 4% rule is tested on 60/40 and 25/75 portfolios. Usually, the stock/bond % varies. What doesn't vary is the assumption that bonds provide a meaningful hedge for stocks. This worked while interest rates were coming down, and stopped working, you guessed it, now(-ish). If interest rates ever rise, stocks and bonds tank together

Fifth, demographics and its impact on passive flows.

Sixth, when you say "safe," safe over what number of years (usually these studies assume traditional retirees and take "early" retirement to mean 50 or 55).

Seventh, do you assume steady access to social security? At what age, and in what size? What makes you so sure social security in its current form will be around forever?

Tl;dr: as a depressed fuck who can't stay off bullshit spending on sweets and junk food and thus has a hard time sticking to the withdrawal rate he should, I would be very glad if even 4% turns out to be "safe." However, I'm not holding out hope.

[Lucky C]

Sounds like a good "low inflation forever" sentiment indicator, signaling from a contrarian perspective that inflation is likely to be higher in the coming years/decades than it has been recently...


He bases his calculations on a portfolio that's 50% US stocks and 50% intermediate US Treasuries. Let's see, current US stock valuations are correlated with a future 10-15 year return of around zero and IEF's (7-10 year bond ETF) average yield to maturity is 0.7%. Let's say (too) optimistically that inflation stays around 2% such that a 50/50 stock/bond portfolio returns -1% real per year over the next decade, very smoothly without any drawdowns (no sequence of returns risk). Withdrawing at a starting value of 5%, with the portfolio losing 1% real per year, after 10 years you are left with 42.6% of your starting value in real dollars, and a withdrawal rate of nearly 12%. You would then need REAL returns to be 10%+ per year for years 11-30 just to end up with a little bit more than $0 at the end of year 30. Again this is a best case and does not allow for any major drawdowns from a rapid mean reversion is stock prices or a bond bear market.

If instead you stuck to a 4% withdrawal rate with the same math above (again lacking drawdown risk), after 10 years you have a bit more than half your portfolio left in real dollars with over a 7% withdrawal rate. You can then survive years 11-30 with 5%+ real portfolio returns. Plausible 4% could still work with such a portfolio, but the odds are not great with today's valuations.

With a 3% withdrawal rate, after year 10 you'll have about 62% of your portfolio intact and close to a 5% withdrawal rate. Then you only need a 0.5%+ real rate of return for years 11-30 to survive. Your odds go from plausible to likely to succeed, but again this is only for 30 years. For a 50-year retirement, you need 3.8%+ real returns from years 11-50 to survive. You need 5.4%+ real returns years 11-50 to end up with more money than when you had at the start of retirement.

I remember at valuations a bit less extreme than we have currently, Jacob has recommended a 2% withdrawal rate to ensure survival through a 50 or so year retirement. Of course this all assumes average market returns using a traditional US based portfolio.

Finally I have to state once again my math above is based on historical stock market valuation to future return relationships, combined with current bond yields, and doesn't deal with sequence of returns risk in any way. A bear market in stocks, bonds, or both, could force you into a much higher withdrawal rate at a much sooner year, at which point you would need a very steep recovery (back to extremely high valuations) to survive so you aren't dealing with high withdrawal rates for more than a couple years.


What would be better than my back of the envelope calculations would be to setup a Monte Carlo simulation of a probabilistic distribution of future returns that factors in current valuations. Firecalc has a simple Monte Carlo where you can enter expected average return and volatility, combined with your starting portfolio and withdrawal, to get you a survival rate. But it doesn't do a series of depressed returns (like you would expect starting with today's valuations) followed by a series of more average returns. For a 5% starting withdrawal rate and 10% volatility, you need to enter real returns of 4% to get 30-year survival rates of around 36-79% (a bit above 50% on average) after running it several times. Based on that, a 5% withdrawal rate has a 50/50 chance of surviving only 30 years with average returns of 4% real - and I expect average real returns to be well under 4% real for the next decade or two.

[nomadscientist]

It's not consistent with historical survival rates, which for a stock-heavy portfolio is below even 4% for success at every 30 year retirement start point. With current valuations, around the historical peak, 3.x% withdrawal rate isn't just a hedge against the worst case but a likely outcome.

He chooses a very bond heavy portfolio. That reduces the impact of lower expected stock returns but I cannot see bonds returning 5% real over the long term with this starting point either.

[Crusader]

I understand that 4% was based off of historic returns, but as the global economy matures, I would expect the rate to go down, not up.

[7Wannabe5]

It’s basically irrelevant for me since I can collect early withdrawal S.S. in a bit over 6 years at projected monthly rate somewhat greater than 1 Jacob. So, all I need until then given that my actual spending has been more like $800/month for decades is around 6 X 12 X $800 = $57,600 at 0%. However, I also intend to keep working approximately 50 days/year for as long as I am even semi-functional so approximately 8 X 50 X $15 = $6000/year, so almost double coverage.

My only open issue is whether to throw some of my liquid assets at home base real estate.

[Lucky C]

Yeah you need growth in (number of employees * productivity per employee) to get earnings growth assuming a constant profit margin. Hard for earnings growth to keep up with history with population growth and productivity growth slowing vs. history. You'd need robots/automation to pick up the slack to effectively increase productivity per employee. Otherwise if earnings is growing slowly you need faster growth of P/E ratio for your price to grow quickly. Obviously P/E ratios never keep expanding indefinitely.

[classical_Liberal]

...

[2Birds1Stone]

^ bingo!

Even over the shorter timeframe, my experience has been that spending and desired lifestyle spending can vary wildly even from year to year.

I'm not sure if this is allowed, but here is a great blog post by MMM re: the interchangeability of money and courage when it comes to living your best life. (If not, please let me know)

https://www.mrmoneymustache.com/2018/03 ... hangeable/

[IlliniDave]

... The correct SWR is any amount which allows one to live the life they want to lead today, without feeling money (in capital reserves or cashflow) as a hard constraint to that lifestyle. Or any predicted future lifestyles. Not because I think we will accurately predict our future, but because a feeling of a secure future is important to a good life in the present.

Part of the problem I think lies with the "S". My memory is not as sharp as it once was, but I seem to recall my first introduction to the topic used SWR for "systematic withdrawal rate" (i.e., based on a formula, more-or-less). With the Trinity Study and others people concluded that systematic withdrawal rates of ~4% were reasonably "safe". In other words, based on the documented assumptions, 4% was a safe SWR (maybe you could say SSWR). In the US our culture is currently obsessed with "safe" so when SWR became "safe withdrawal rate" it became sort of a talisman. It isn't all bad, it's a decent enough first order approximation for people to understand that it takes a lot of accumulated capital for a long stretch of lofty passive "income". But it is not 42 for FIRE.

+1 generally for your thoughts on the topic. Funding a life I consider a support function (I work to live rather than live to work). I started earnest pursuit of FI out of fear basically, while facing a probability of extended unemployment that was much higher than my SWAN threshold at the time. That was about 9 years ago and looking back that far I barely recognize myself. Now that I've had a few years to observe and think from a perspective where I'm pretty comfortable with the prospect of a future without employment, the real focus is figuring out who I want to be. That has some implications for finances, but not a lot I've found. Anyway, I'm starting to ramble. What I was getting at is when people ask me, "How does a person do that?", I almost always suggest they start by taking a very deep and detailed look at their life and envision what they would like for a future. "Picking a number" is not really a great way to chart a future, although a lot of people do it.

Of course option paralysis can come into it too. Often I catch myself selling myself on what I could do with an extra $50K or whatever when comparing different launch date candidates. Well documented in my past posting history.

[Laura Ingalls]

Can I agree with classical liberal and 2birds1stone’s premise and be anxious for 7wannabe5’s plan? I get her bucketing strategy. The though of buckets that small would cause me to have a panic attack. Despite spending per person at about the same rate.

I cringe when I hear people say they are going to work til they die or that there retirement plan is an inheritance. I feel like hollering that is not a plan. I try not to worry to much about end of life care because I believe that we will continue to have some social safety nets but I think some of the “surprises” that happen should not be that surprising.

[CS]

One thing to keep in mind is that medicare is not free, at least not outpatient services. It will cut into the amount you take home from social security, even without the supplemental coverage.

[IlliniDave]

That's something I should probably learn more about, but it's 8.5 years down the road and I'm trying to be less of a worrier/planner. What I do know is my mom's 4-5 year battle with cancer didn't cost all that much OOP. What I don't know is what she was paying in supplemental and other premiums. From my aunt I learned the same was basically true for my grandparents, but there again I don't know what else they were paying for. Based on the advertising on the few TV stations I watch (mostly old sick people must watch Nat Geo, Discovery, History Channel and such) selling Medicare supplements is a pretty big business. I plan on getting into my employer's retiree medical plan (will cost a bit over $800/mo next year). Hopefully that will cover at least a big chunk of whatever I have pay to supplement Medicare. If they don't change it, my employer does have a medicare supplement plan but I don't know much about it. I think no matter how it's sliced, most of us will want something more than today's basic Medicare when the time comes.

[The Old Man]

I think no matter how it's sliced, most of us will want something more than today's basic Medicare when the time comes.

Basic Medicare does not provide a ceiling on medical costs. This is what Medicare Advantage/Medicare Supplement does.

[7Wannabe5]

@Laura Ingalls:

If you would like to do some fretting for me, feel free
I simply do not possess any active “I will wind up a bag lady dying alone in a Medicaid slum hospital” type anxiety. Partially this is due to the fact that, unlike most INTJs, my rational calculations tend towards pure expectation rather than avoidance of negative outcome. Partially this is due to the fact that I have suffered negative outcomes and bounced back, and I actually kind of enjoy the clean slate of failure.

That said, I have already noted in myself that I am developing the tendency shared by most members of this forum NOT to spend down my nest egg. So, it’s quite possible that I will work more than 50 days/year or strive for more than $15/hr. I would also note that 50 days/year is really not very much work at all. When I visualize myself still doing it at 80, I am just toddling down the street to be the baby rocker at the head start nursery 2 mornings/week or sitting in a comfy chair at the Farmers Market dealing huckleberry jam with a youthful assistant.

Also, it is my goal to further reduce my spending from $800/month to closer to 1 Jacob. If I am able to do that, I can wait until 67 to take SS ( although calculator for some reason suggests that I should withdraw early in either case.)

And, since as I noted above, I am more of a straight up expectation calculator, I predict that it is more likely than not that some not insignificant portion of my remaining lifespan will be spent in some level of financial/domestic partnership with a man who is wealthier than me. It is also possible, has happened before, that I will also make some money doing something that is just fun. Who knows, maybe my novel will even sell a few copies?! Also, worst case scenario, I do have 3 younger sisters and two adult children who are all quite reasonably fond of me, and would likely keep me stuffed up in a chair in a corner drooling for a year or three.