Is 4% dead?

[unemployable]

I really doubt that, in 15 years, ML/NLP will be in any way as hot a market as it is now.

Nefarious Limited Partnership? Nobody's Little Pony? C'mon, bud. It was hard enough to figure out ML = Machine Learning. I guess I'm illustrating the problem of being out of the workhorse for so long.

Anyway, on the topic of avoiding portfolio failure once you have been retired for some time, this site mentions a Wade Pfau study that states:

…the wealth remaining 10 years after retirement, combined with the cumulative inflation during those 10 years, can explain 80 percent of the variation in a retiree’s maximum sustainable withdrawal rate after 30 years

I'd love to see the specifics of this but the link is dead and I can't find this particular study by googling. Presumably he ran some sort of regression of years 1-10 of one's retirement portfolio against years 11-30(?) at a 4% withdrawal rate and came up with r^2 = 0.8. I suspect there's a percentage of your original portfolio which, at the 10-year mark, falling below implies a high likelihood of failure. Well I'm 11 years in so this would be hella useful to know.

[Qazwer]

Pfua’s analysis - he does a lot on SORR (sequence of return risk) and Monte Carlo

https://poseidon01.ssrn.com/delivery.ph ... INDEX=TRUE

[unemployable]

Thanks.

The 10-year r^2 on a 30-year retirement is in fact 0.77. It exceeds 0.5 after the fifth year. This seems to be in relation to calculating a maximum safe withdrawal rate given a set of 530 simulated returns and 500 30-year starting points. He uses a Monte Carlo simulation with a mean of 7% and stdev of 20%. I have in my head that the SPX has a mean of 10-11% and a stdev of 16%, which would allow for higher WRs than 7/20 does.

This is not the same as a assessing a pass/fail grade to 4% or any other strictly observed WR. It's not that useful to know, because past years' WRs really don't matter in the here and now.

[zbigi]

Nefarious Limited Partnership? Nobody's Little Pony? C'mon, bud. It was hard enough to figure out ML = Machine Learning. I guess I'm illustrating the problem of being out of the workhorse for so long.

NLP is Natural Language Processing, basically ML done on text.

[steveo73]

The 4% rule has been dead for ages. It just means you've overworked. I went for 5% and it is working out great. The trick is that it's all completely dodgy in that your expenses are completely dodgy.

It's a guide. Don't let people tell you it's a mathematical formula that works like clock work.

A 3% rate with restrictive expenses is in my opinion significantly worse than a 5% rate with realistic expenses.

You are only fooling yourself if you think your retirement success is about micro managing your WR.

[Bankai]

I'm happy 5% is working out for you so far. However, historically it had at best 70% success rate for 60 years retirement, and that's with 100% in equities and based on SP500 which has been the econd best stock market in the world over the last century. For 50/50 portfolio 5% WR has a mere 36% success rate. As much as I'm in favour of taking some risks and not working for an extra decade just to reach some ridiculously low WR like 2%, 5% is way too high for me. But then WR on its own never tells full story as it's very individual; if you have a fixed income coming in at some point (private or state pension for example), you might be OK with even higher than 5% depending on when that income kicks in. Having a large %age of expenses as optional and being open to reducing them is another lever one can pull. And having a paid off property makes the whole endevour much less risky.

Should also add that the below table doesn't consider valuations at start of retirement; with today's valuations success rate for 5% is much lower than shown below.

[2Birds1Stone]

@Bankai, I recommend his live SWR Toolbox Google sheet. You can see historical success rate for various AA's based on different CAPE10 levels, market peak vs. drawdown from peak, impact of supplemental income or temporarily increased spending, etc.

You're right though, our ~55 stocks, 20% bonds, 20% cash, 5% PM's portfolio has only a 3.3% "failsafe" (0% historical failure) withdrawal rate at current CAPE. That's with some conservative social security assumptions to boot!

Luckily at our spending levels, a PT job for a few months out of the year provides a 20-30% buffer. I agree with Steveo73 though, being flexible is key. If you're adjusting with good market performance, best be ready to adjust the other way and cut back or earn for a bit if things go south in the first 10 years.

Another thing to consider is a variable drawdown strategy, you will likely adjust something in your plan before blindly spending down to failure.

[unemployable]

EarlyRetirementNow has written a lot about adjusting one's WR for portfolio performance; the articles are indexed at

https://earlyretirementnow.com/safe-wit ... te-series/

The takeaway I got from reading it all is that retiring at 4% right before either the Great Depression or the 70s stagflation required a necessary and LONG period of compromises and adjustments to stay afloat, like 20+ years. Perhaps simply dropping one's WR to 3% or whatever would be sufficient, but if you're starting at 5% you'd naturally have to do more.

My own experience, which I claim jibes with the ethos of ERE, is I've gotten consistently better at not only reducing my expenses over time but introducing resiliency and flexibility into my lifestyle. Combined with the performance of my investments this has served to greatly reduce my WR. I started close to 6% 11 years ago (not really being ERE or planning not to have a real job again) and am now running in the low 2's. One of my points of flexibility is to increase my spending, for example in case my living arrangements quickly become more expensive. Improving my social capital in particular has helped. So, work on moving up the Wheaton scale, rather than just worrying about numerator and denominator.

[Western Red Cedar]

I went for 5% and it is working out great. The trick is that it's all completely dodgy in that your expenses are completely dodgy.

It's a guide. Don't let people tell you it's a mathematical formula that works like clock work.

This is the direction I'm heading as well. It's a guide, and a fairly conservative one at that. It assumes no additional income through social security, pensions, inheritance, or paid work. You can add a small bit of resilience by diversifying your portfolio (small cap, global, emerging markets,etc.).

If one is even mildly adhering to ERE principles and developing a broad range of skills, they will probably either reduce expenses or generate income after stepping away from their profession. ERE is about flexibility and resiliency, which helps protect against SORR.

[WFJ]

@WFJ from a purely mathematical/statistical standpoint that may be true, but the flexibility one has with a 50 year horizon is tremendous. As Lemur also pointed out, even a relatively (by normal standards) small supplemental income changes the math drastically. I doubt anyone is going to sit there for 50 years and draw down an inflation adjusted 4% while SORR or some other factors slowly erode their purchasing power.

ERN did an extensive series on SWR, and has a great sheet that can show the impact of AA, timelines, etc to provide a historical failsafe WR. (https://earlyretirementnow.com/2018/08/ ... s-part-28/)

DW and my current asset allocation has a 0% historical failure chance using a 3% WR, but a 4% WR fails 51% of the time in our current CAPE10 environment. This is using a 60 year model.

One can easily prevent catastrophic failure by having some resiliency built into their plan.....but something as simple as renting out a spare bedroom or picking up easy PT work 1-2 days a week for a spell can have a tremendous impact vs. just relying on some fixed % WR for half a century.

All good points as generating small amounts of capital when returns slump will save almost any ERE plan. But I suspect generating income when equities under-perform is easier said than done. I am old enough and have lived in wide range of areas where intelligent/capable/motivated people were doing menial labor, clearing less than minimum wage after job related expenses. The internet has largely allowed skilled labor to be highly mobile but this expansion of tech based labor has also been associated with a massive economic boom and not sure if the demand for skilled labor will withstand an economic disruption? These variables may be floating on the same rising seas or be uncorrelated in the long run.

When I first started looking at taxes and ERE about 6 months ago (too late), I came across ERN estimates. My opinion is ERN has correctly identified the issue of uncertainty in estimating a SWR but has the incorrect solution of providing precise estimates. This would be like estimating the high temperature at LAX on October 20th 2022 will be 79.4321. The correct solution is to provide accuracy, which could be done by constructing a range of estimates with associated confidence intervals. There is a 90% chance that the high temperature at LAX on October 20th will be between 75 and 83. It is easy for most to understand this with temperature which has many unpredictable and significant variables while there are more unpredictable variables with wider ranges of outcomes when estimating at SWR, but more individuals accept the precise SWR.

[WFJ]

@WFJ

Risky is subjective and dependent on what options strategy you're employing.

Boring is in the eye of the beholder...I mean it is kinda boring. Especially if you do it through Vanguard lol.

And also will disagree with relative value...Just this month I made $1.4k on premiums selling far out of the money 21 DTE naked puts. Will be $700 after all buy-to-close points trigger. Management is easy in this way; it can be very set it and forget it. Maybe once every Friday one could check on there options to determine if anything should be rolled and also open any new positions once previous contracts have closed.

My point is there is a lot of value created here. On a 1 JAFI budget, that alone covers all expenses for the month. No 7 figures required. On higher budgets, employing these strategies can have an significant impact on your SWR.

There is time and labor required - sure. But I'd rather spend 30 minutes to an hour once every few weeks or so then a part-time job so...totally worth it. Even doing so keeps you plugged into what the latest economics/financial news is...which I've to imagine most are going to be reading about periodically anyhow if they're maintaining a financial portfolio to live off of.

Perhaps it could definitely make sense to sell puts during down years (when market likely reverses) and you may not have to do anything while market is gaining. Your other option is to get part-time work if you need additional funds...I choose the former

Be careful with options. One of my previous assignments was as a margin clerk and had to liquidate 100's of short option traders who assumed they were being conservative. When one has enough money to make this strategy worthwhile, they will also most likely have enough money to live a simple ERE lifestyle.

[WFJ]

Those that identify the sequence of return (ERN/Pfau) risk seem to focus on early negative returns, while this is a risk, it is not the primary reason for failure of a long duration retirement. The primary cause of failure is a long sequence (5 years seems to bust accounts in my simple simulations) of negative returns which geometrically increases with an increase in time. A negative 50% return and then a return to normal market returns does not bust ERE, but a sequence, at any time of ERE, of negative 7% returns for 5-6 years in a row, will bust almost all ERE plans. Early negative returns can also be more easily offset with a return to work, but this is dependent on one's specific skills while later return to work plans usually result in diminished relative value of labor (obviously some exceptions).

Many commenters have provided the best antidote of this is to remain skilled and also identified that this is not always easy. I am a job hoper as I've primarily worked in right to work states and this ethos is hard-wired into my work ethics. I can't even count how many times myself or friends have been fired/replaced/move-fired (if you want to keep your job, move across the country next week) without cause based on a decision 1,000 miles away. Getting jobs for above average skilled workers is easier today than all but the late 1990's and not always the case.

The only solution that comes to mind is to add "labor" to the assets of "Stocks" and "Bonds" to an ERE plan where "labor" will be triggered when some level is reached. The only other solution is counter-intuitive, but would be to double SWR after after each negative return year as the number one cause of failure is a long string (tail risk but not 0%) of negative returns.

[steveo73]

This is the direction I'm heading as well. It's a guide, and a fairly conservative one at that. It assumes no additional income through social security, pensions, inheritance, or paid work. You can add a small bit of resilience by diversifying your portfolio (small cap, global, emerging markets,etc.).

If one is even mildly adhering to ERE principles and developing a broad range of skills, they will probably either reduce expenses or generate income after stepping away from their profession. ERE is about flexibility and resiliency, which helps protect against SORR.

I don't like the ERE approach. To me it's gaming the math. The problem is your expenses are not set in stone. I think it's significantly worse than that actually because one key idea of ERE is to get your expenses really really low. That doesn't give you much room to move.

I have 3 kids. I may have additional expenses coming up. I can't control my expenses perfectly. I don't think anyone really can.

The math matters as a guideline but when you realize you can't fix your expenses in stone then gaming the math is in my opinion really silly.

I track my expenses. I set a budget. That budget though is updated via reality. If I spend more money my budget is increased. I track my assets as well. The math basically just provides me with guidelines. Am I spending too much ? Do I need to go back to work ? Do I need to cut back ?

I've retired with a 5% WR and now it's closer to 4% in about a years time. I have buffers in place. I expect my expenses to increase at times. I also have some leeway in my expenses. So I can spend more in one category or cut back in another.

People try and game the math but it's like asking the wrong question. The right question is how do I personally create a system that I feel comfortable with and you need to use solid principles based on math as your guide.

[steveo73]

Be careful with options.

If you aren't using index funds the math becomes increasingly irrelevant. You are taking on increased risk which makes the WR far less a reliable indicator. The best case approach like this is when you come up with some special portfolio but past performance will not be replicated in relation to future returns. The counter argument is that is the case with index funds but you miss a massive point here. The point being that results will tend to converge into the middle. Your edge case won't necessarily converge to the middle. It could be a disaster or it could be a resounding success. Either way you can't have your special edge case and talk about WR's because you have no idea how your portfolio will function going forward.

It's cool to take these approaches but it's a personal approach. One guy on the MMM forum uses options with a really high WR. I couldn't do that. He does and I think it's working so far. The question is will it continue to work. It's silly stating well my WR of 6% is fine because I use options or my WR of 2% makes me safe but I use a customized stock portfolio. The math is much less reliable.

[steveo73]

Should also add that the below table doesn't consider valuations at start of retirement; with today's valuations success rate for 5% is much lower than shown below.

I understand your point here but it doesn't really matter.

Key points:-
1. No one knows what future returns will be. Your point is valid but you can't time the market. You may be right but you may be wrong.
2. Expenses are a key driver of your WR. Expenses can change over time. The big problem with ERE is that if your expenses are really low you have no buffer. If your expenses increase your WR can increase significantly,
3. The more reliable the instruments that you are investing in the more you can rely on your projections. Once you start getting into customized portfolios the math becomes less and less reliable.

I'm really confident. I think I'm as close to 100% success guaranteed as you can get but I know my risks and my buffers.

I'll give a clear example of why I'm pretty safe. I'm Australian. We have social security that is a little below my current living expenses available to me at 67. I'm 48. I have 3 kids to house and feed right now. My expenses should go down so our pension should be more than sufficient.

I don't expect to require or receive the age pension because I expect my portfolio to increase over time but if I'm wrong I'll be fine.

My key risk is getting divorced. I can't really mitigate against this but I recognize it's my key risk.

You have to try and look at your individual situation and WR's are only a guide. If you think differently you don't understand the problem or maybe better put you are looking at the wrong risks in relation to your approach.

The problem with getting so concerned about you WR is that you are fooling yourself. Your expenses are not completely stable over time. People also use customized portfolios and the math is at that point meaningless.

Invest predominantly in stock indexes. Have some buffer in your expenses. Work through your specific buffers and scenarios. Don't think getting to a false 3% is safe. If you are doing a real 3% than the cost of that is working too long.

There is no free lunch.

[matchewed]

I think this is the purpose behind the whole income robustness score right? That the 4% rule isn't dead or alive, that it just may be inadequate to capture the complexity. Which is fine because that's how models work.

[IlliniDave]

I think the math is fine as long as you don't extrapolate it too far. Happens I anticipate a very low SWR based on an anticipated ongoing expense level that is neither miserly nor extravagant. What that means is that I can adjust either way. In my way of thinking having that built in adaptability is probably the most important part of my plan. It's certainly at the top of the list of things I sunk energy into understanding/crafting.

When it comes to the so-called 4% rule, my first thought is that it really shouldn't be thought of as a rule. steveo73's points are good ones. Not many people are going to be able to structure their lives in accordance with the ground rules and assumptions of the academic work. No one knows what investments are going to return in the future. And as Tyler9000 mentioned, there are number of alternate ways to invest money that might extend the life of a portfolio.

I think the 4% rule is a decent tool for an everyday accumulator's long-range planning. But I think we all owe it to ourselves to sharpen up the old pencil and really think through some of the outlying possibilities as part of designing a plan.

[steveo73]

That the 4% rule isn't dead or alive, that it just may be inadequate to capture the complexity. Which is fine because that's how models work.

I think the math is fine as long as you don't extrapolate it too far.

Exactly. No approach is right or wrong unless you have clear criteria to judge this but you can't judge it now. You gotta wait and see what happens. There are trade offs. The idea is to use the math and interpret the math with rational thought dependent on your specific criteria.

I reckon in the vast majority of situations my 5% is safer than anyone with a 3% WR who has a customized portfolio and has cut their expenses to the bone. The point being you aren't comparing apples to apples.

I love ERN's stuff as well. I read it all and I agree with most of his premises. It's great stuff. It's just that you/me and everyone has to use these models to guide their decisions. Don't buy into anyone who says you aren't safe because you are using whatever approach you choose.

The math is fantastic. The math doesn't predict the future. It just provides guidelines.

[Western Red Cedar]

I don't like the ERE approach. To me it's gaming the math.

@Steveo73 - I agree with much of what you are saying, but I think a core feature of ERE is to think about these things differently. Perhaps it is gaming the math because it is playing a different game . From the ERE Wiki on Yields and Flows:

"How can expenses get even lower when efficiency is already maximized? By playing a different game altogether. This might mean breaking the rules and not automatically accepting what everyone else perceives to be necessary."

[steveo73]

@Steveo73 - I agree with much of what you are saying, but I think a core feature of ERE is to think about these things differently. Perhaps it is gaming the math because it is playing a different game . From the ERE Wiki on Yields and Flows:

"How can expenses get even lower when efficiency is already maximized? By playing a different game altogether. This might mean breaking the rules and not automatically accepting what everyone else perceives to be necessary."

I agree with the concept of thinking differently. It's a really good point. You just need to do that for yourself and your situation. You also have to be careful when you are thinking this stuff through because the math doesn't predict the future.

I'll botch the quote but it's from William Blake and it is you must create your system or be enslaved via another system. One thing I like about ERE philosophy is to learn to think. You have to come up with your own approach.

I'm not stating my approach will work for you but I'm cognizant of my risks and I understand the flaws in my approach.

The problem I have with getting a really low WR is that you are working too long. If you are getting your expenses really low that may not be sustainable and it's easier to get hit with a cost that hurts you. For instance if I have 1 million dollars saved up whereas Bob has 500k saved up if we both get the same expense I can handle that expense a lot better all other things being equal. It might make my WR 5.5% whereas that same expense could make Bob's WR 6%.

None of that even considers if you have a customized portfolio and your returns may trend more to edge cases rather than the centre.

Does that make sense ?

It's not about the one perfect way for everyone. It's about thinking for yourself and using the models to see the flaws or strengths in your approach. Don't kid yourself and think a 3% WR is definitely safer than a 4% WR. It definitely is all things being equal but that isn't how it will play out in reality.