Is 4% dead?

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IlliniDave
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Re: Is 4% dead?

Post by IlliniDave »

steveo73 wrote:
Thu Aug 12, 2021 9:03 pm
... The problem I have with getting a really low WR is that you are working too long...
That assumes employment is a net negative and/or financial resources have no use other than meeting living expenses. I think a group like this one here at ere sort of self-selects for the former being true, almost by definition.

I think SWAN is the most important consideration, and afaik there is no good model for it. Models of the nature we are discussing here can be supportive of SWAN, although I agree with you that they are too simplistic to truly bound the space, and that an adaptive human is a powerful weapon the models neglect.

Western Red Cedar
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Re: Is 4% dead?

Post by Western Red Cedar »

steveo73 wrote:
Thu Aug 12, 2021 9:03 pm
Does that make sense ?
It makes total sense to me. I'm pretty comfortable with a 5% (or even 6%?) SWR because I have a lot of different safety mechanisms in my system. I think it is really important to be flexible and adjust my plans as circumstances change.

steveo73
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Re: Is 4% dead?

Post by steveo73 »

IlliniDave wrote:
Fri Aug 13, 2021 5:07 am
That assumes employment is a net negative and/or financial resources have no use other than meeting living expenses. I think a group like this one here at ere sort of self-selects for the former being true, almost by definition.

I think SWAN is the most important consideration, and afaik there is no good model for it. Models of the nature we are discussing here can be supportive of SWAN, although I agree with you that they are too simplistic to truly bound the space, and that an adaptive human is a powerful weapon the models neglect.
I think I agree with you but I have no idea what SWAN means. Help me out.

Some people do love work. It must be some sort of mental health issue and it must be really really bad.

Added - I assume you mean a black swan event. I agree you can't do anything about that. You don't know where it is coming from. My index funds have killed it though during the pandemic which is as big a swan event as what we will get.
Last edited by steveo73 on Sun Aug 15, 2021 3:51 am, edited 1 time in total.

steveo73
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Re: Is 4% dead?

Post by steveo73 »

Western Red Cedar wrote:
Fri Aug 13, 2021 11:21 am
It makes total sense to me. I'm pretty comfortable with a 5% (or even 6%?) SWR because I have a lot of different safety mechanisms in my system. I think it is really important to be flexible and adjust my plans as circumstances change.
I couldn't go to 6% but some guy on the MMM forum has done it and he seems to be doing okay. I remember one guy doing flipping the idea of a SWR and he made it based on 50% chance of success. When you think about it anything above a 50% chance of success means you've probably worked too long.

The point is that your system has to work for you. You can't model something perfectly.

I'm Australian and we are I'll call it behind in the pandemic. We are now in strict lockdowns where I live but if you look at our experience so far we've been really lucky. Anyway I was reading the model (put out by a big think tank and the government) on rolling out vaccines and moving past the vaccine phase into the I suppose normalizing COVID phase. Anyway there are all these numbers that are so detailed for example 623 deaths to unvaccinated people and 203 vaccinated deaths. The numbers are silly because it's not going to work out to the tiniest little detail within the model. The model though provides good enough information to form policy decisions.

So you use models as a guide to base your decisions on but you don't expect to get the exact same numbers detailed within the model.

I suppose you can also get guardrails or boundaries. You can use these going forward to adjust.

IlliniDave
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Re: Is 4% dead?

Post by IlliniDave »

steveo73 wrote:
Fri Aug 13, 2021 5:08 pm
I think I agree with you but I have no idea what SWAN means. Help me out.
Sorry, thought I responded several days back. SWAN = sleep well at night. The principle is that if you are deploying/allocating your resources in a way that causes enough ongoing fretting to undermine well being, then whatever plan you've enacted is probably not a good plan for you.

WFJ
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Re: Is 4% dead?

Post by WFJ »

I'm probably too risk averse to ever go much above 2% with an over 30 year retirement horizon. 6%+ works when we are in a raging bull market, but is not a long term solution (without pensions or inheritance coming) As one gets closer to the end, a higher WR is logical and also when SS or other pension programs kick in as these are almost impossible to reduce. Only time will tell how these long term estimates pan out, but it is usually dangerous to use estimates outside the relevant range of the original analysis. I hope the bull market grinds higher and there isn't a long slow grind lower during my lifetime (Japan) and will look back and say something like "I wish I would have wasted more money on plastic stuff" with too much money when I pass.

steveo73
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Re: Is 4% dead?

Post by steveo73 »

IlliniDave wrote:
Wed Aug 18, 2021 6:35 am
Sorry, thought I responded several days back. SWAN = sleep well at night. The principle is that if you are deploying/allocating your resources in a way that causes enough ongoing fretting to undermine well being, then whatever plan you've enacted is probably not a good plan for you.
I agree with this but you have to be careful as well. It's not good sleeping well at night and being 100% allocated to bonds. You do need to do exactly what you state but you need to have decent chunk in equities mainly because they hold up long term. I'd always recommend Index funds. That way you know you've made the right choices and it's even better than that. You don't spend any time on it.

I though don't have any crypto for instance. I use it to buy pot but I don't invest in stuff like that.

steveo73
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Re: Is 4% dead?

Post by steveo73 »

WFJ wrote:
Wed Aug 18, 2021 11:29 am
I'm probably too risk averse to ever go much above 2% with an over 30 year retirement horizon. 6%+ works when we are in a raging bull market, but is not a long term solution (without pensions or inheritance coming)
You are going to be working way way way too long assuming you are actually sticking to a 2% WR but this is again dependent on your expenses. If you have really low expenses I still think a 2% WR is likely to blow up. It won't if you invest wisely and stick with it for a time period but micro managing your expenses to a really low level to me is an indicator of a plan that has flaws. I don't know how you get to 2% without having really low expenses (hence you are more prone to a external hit to your expenses) or loving your job.

I agree with your 6% comment but the catch is pensions or inheritance or other stuff. I think there is a sweet spot between say 3% and 5% dependent on your investment time frame and other factors.

Still your expenses are not comparable. Someone can be really right and state they have a 2% WR whereas another person has a 5% WR but has some flexibility and back up plans.

I should add I think the vast majority of people who RE will have lower expenses. It's just the secret millionaire approach with ER. You don't get rich by spending too much money.

white belt
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Re: Is 4% dead?

Post by white belt »

At what point does more money not equal more security?

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Lemur
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Re: Is 4% dead?

Post by Lemur »

@White Belt

The point where there is diminishing returns from time wasted vs better things you could be doing with said time instead of primarily focusing on income.

Western Red Cedar
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Re: Is 4% dead?

Post by Western Red Cedar »

Elaborating a bit on my last post - if I pulled the trigger at 5-6% I would be mentally prepared to pick up some kind of paid work in the future. I suspect I'll want to do that regardless of my SWR. DW and I are also open to opportunities, such as the Peace Corps, that could dramatically reduce our costs and give our investments time to grow without really touching them.

I'm actually close to 3.5% with my half of the expenses for a personal SWR, but our household SWR is closer to 6%. I really just use a 4% SWR as a guideline. Our lifestyle is going to look quite different after leaving work, and will probably change dramatically again a few years down the road. Some of our current expenses are the result of needing to hold down my current job. I'd probably be quite a bit more conservative (3-4%) if I had kids.

I think a lot of the traditional FIRE blogs are based on really high incomes, so it makes sense to keep plugging away and building the stash quickly. When you are at ERE spending levels (1-2 JAFI) there are a lot of opportunities to pick up interesting jobs to cover most or all of your expenses.

IlliniDave
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Re: Is 4% dead?

Post by IlliniDave »

steveo73 wrote:
Wed Aug 18, 2021 4:27 pm
I agree with this but you have to be careful as well. It's not good sleeping well at night and being 100% allocated to bonds. You do need to do exactly what you state but you need to have decent chunk in equities mainly because they hold up long term. I'd always recommend Index funds. That way you know you've made the right choices and it's even better than that. You don't spend any time on it.

I though don't have any crypto for instance. I use it to buy pot but I don't invest in stuff like that.
Yes, if a person truly had a temperament that would not tolerate any stock exposure then they would need to account for that in their planning, and aim for a higher relative accumulation target. Otherwise it's a matter of deciding how much is too much and managing with that knowledge. In my own case I desired some sort of 'rationale' for my AA set point, so I came up with a estimate of my total lifetime withdrawals, doubled it, and said, "Okay, I'll keep at least that much in bonds/stable value assets". That's tempered a little by both my current susceptibility to sequence-of-return risk and by high valuations, so I'm actually sitting more conservatively than the formula would call for, a little under 60/40 last time I checked. That's not to say I think it's a superior strategy to any other, just one that by my estimation allows me a decent shot at meeting all my goals without having to continually fret over short- or medium-term stock market gyrations.

No crypto here either, but I am looking at increasing my real estate holdings as a % of net worth as a way of diversifying.

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Bankai
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Re: Is 4% dead?

Post by Bankai »

IlliniDave wrote:
Thu Aug 19, 2021 5:12 am
Yes, if a person truly had a temperament that would not tolerate any stock exposure then they would need to account for that in their planning, and aim for a higher relative accumulation target.
I don't think it's even possible to retire on bonds alone at today's valuations, other than maybe for top 1% of earners. Even 'modest' expenses at 30k require many millions to support 60-year retirement with between -2% to -4% real yields.

Stocks are risky* in short term but bonds are very risky in long term. Stocks are still looking good value compared to bonds. It's easier to learn to live with volatility than accumulate 3x as much (or more) in hope of avoiding it.

*when defining risk as volatility; if defining risk as chance for permanent or very long term loss of capital, stocks are not risky, barring betting everything on one horse and finding that horse on a loosing side of a major war or revolution. I don't see holding an equity world tracker as risky in the long term.

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Bankai
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Re: Is 4% dead?

Post by Bankai »

@steveo: you make good points and in your particular situation a high SWR makes sense since it only needs to sustain you for 20 years before your pension kicks in. In a way, I'm plannig something similar - c. 20 years of expenses to last c. 18 years until I can access another 10 years (hopefully much more by then after 2 decades of compounding) in my private pension, before finally accessing state pension in another 10.

I agree with having enough slack in the budget to be able to trim if needed. Ideally I'd like 50% needs & 50% wants, which would give enough room for a fairly substantial cut without feeling deprived. Stretching 3 years' worth of cash & gold to 4-5 years (or even more with even a tiny stream of other income) should be enough to withstand almost any bear market. I'd not feel comfortable if my budget only covered essentials with no room to trim.

IlliniDave
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Re: Is 4% dead?

Post by IlliniDave »

Bankai wrote:
Thu Aug 19, 2021 5:52 am
I don't think it's even possible to retire on bonds alone at today's valuations, other than maybe for top 1% of earners. Even 'modest' expenses at 30k require many millions to support 60-year retirement with between -2% to -4% real yields.
That's probably true, for a person that is extremely highly risk averse and intolerant of volatility, a 60-yr retirement is not doable without a large stash and given the age involved (someone in the US with average life expectancy would have to retire around age 20 to have a median outcome of a 60-yr retirement), it would require a big windfall or an extremely unusual income situation.

I don't think many extremely risk averse individuals can just learn to live with it. They would be well advised to tailor a plan to their own temperament rather than follow an uber-aggressive cookie-cutter formula. Just retiring in one's 30s or 40s is a risky proposition that would probably weed out the extreme end of the risk spectrum. Once a person starts advancing into their 50s and beyond, 100% stable value solutions become increasingly viable.

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Re: Is 4% dead?

Post by jacob »

Based on who's commenting, this issue seems mainly to be within the concern-sphere of the ~50% savings-rate crowd. Higher savings rates are likely to put themselves into runaway-mode, which is a different problem, but not this [4%] one.

For example, my WR is now <0.66% so I've allocated some 10-15% to short-term TIPS which is enough to carry me for 15+ years until SS kicks in; the other 85% invested is just bonus. Different risk-profile entirely. All I have to worry about in terms of "liquidity" is a collapse of the US government as a going concern.

This is not investment advice. It is, however, advising to consider where you sit in the parameter space of savings rates, needs/wants ratio, absolute spending, ... in terms of whether whatever rule is dead or alive. IOW, you don't have to have this problem---it is not a given problem, it is a chosen one based on which financial terrain you're fighting in (see Sun Tzu, chapter 9 IIRC).

It is chosen by the variables you're willing or capable of considering.

Hristo Botev
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Re: Is 4% dead?

Post by Hristo Botev »

jacob wrote:
Thu Aug 19, 2021 12:57 pm
But that would result in the least click-baity "news" headline of all time.

The Old Man
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Re: Is 4% dead?

Post by The Old Man »

Lets understand that there is difference between a "Plan" and an "Analysis".

A savings rate large enough to yield runaway-mode is not an analysis, but closer to a plan to avoid the problems of relying on the 4% rule.

The 4% Rule is an analysis of the expected returns of a USA stock-bond portfolio which has the crucial assumption of assuming past performance continues. Given the subpar performance of the economy for the last two decades (relative to the previous century) assuming this crucial assumption is questionable.

steveo73
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Re: Is 4% dead?

Post by steveo73 »

IlliniDave wrote:
Thu Aug 19, 2021 5:12 am
No crypto here either, but I am looking at increasing my real estate holdings as a % of net worth as a way of diversifying.
I own my house as well. My house is worth a small fortune. It ain't a big house. I live in Sydney. The average price is about 1 million dollars.

The details matter. I can also downsize my house and get more money but the key point is that your house worth doesn't impact your pension. I also don't include my house in my assets when calculating my WR.

steveo73
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Re: Is 4% dead?

Post by steveo73 »

The Old Man wrote:
Thu Aug 19, 2021 4:21 pm
A savings rate large enough to yield runaway-mode is not an analysis, but closer to a plan to avoid the problems of relying on the 4% rule.
With a massive cost. I have a family of 5 and I want to live my life. Put it this way you can't have the tail wagging the dog. The goal is happiness. The goal isn't to get to an extremely low WR.
The Old Man wrote:
Thu Aug 19, 2021 4:21 pm
Given the subpar performance of the economy for the last two decades (relative to the previous century) assuming this crucial assumption is questionable.
Maybe. It ain't that simple. I am really confident that my 5% WR is the correct option to me. The only proof is time but let's be honest happiness is what matters. If you get off on bragging about a low WR well that may suit you. I have a different approach to life. I don't think being rich is that important. Living a good life which means staying healthy, eating well, smoking some pot, playing guitar, trying to have good relationships with my wife, kids, mum dad and brother and friends.

It's up to everyone to come up with their plan and you should assess your portfolio, risk profile and lifestyle. There is no need though to get to a 3% WR.

Lastly your WR is a funny number. You can't pay forward your future expenses. You just can't.

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