Is 4% dead?

[steveo73]

I think this is really a discussion about implementation of an idea which is living off your investment portfolio rather than earning money via work and how to do that.

So we have a set of facts which is the data and then we have interpretations of the data. How you view the data/facts is important. We all have biases.

My bias is to maximize my happiness. To me that means working as little as possible to get to a level where I can live a lifestyle that provides me maximum happiness. My job is a negative input into my happiness so I want to minimize this over the course of my life. I need to feel financially secure which means being really comfortable with my numbers and being open to my situation. I have to take some risk because 100% safety isn't possible and it's not the right mindset to view the problem from.

There is also a flip side. You can't remove the work longer variable out of the equation completely.

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.

Maybe. It depends. That approach is not a guarantee. This is an important point because you have to try not to let your bias impact your interpretation of the facts. The key problem with this approach is defining your expenses over your life. It's impossible. If you save a relative small stash external hits can impact you more.

A portfolio worth 1 million handles an increased expense of 10 thousand dollars a lot better than a portfolio of 500k.

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.

Agreed to a point. You have to think a whole bunch of parameters through. I suppose the 4% rule is the wrong question. The question should be how do you define your safety level in relation to your financial situation. You have to consider everything including the cost of working.

You can't though hide the work/life balance trade off unless that isn't a factor to you which doesn't make sense to me. Why ever quit ? It becomes a non financial decision.

The thing is if I don't run out of money I have worked too long. I've done that on a 5% WR. I reckon this is going to be the case. From my perspective getting lower than 5% is definitely a non optimal approach. I don't actually believe that to be the case because how other people implement their learnings from the data (or facts) will be completely different and unique. It's sort of the wrong question when you put it down to an individual level of detail.

Form a future prediction perspective who really knows. It might be. It might not be.

[IlliniDave]

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.

In terms of the value of my primary residence, I'm looking at "downsizing" to somewhere between a half and 2/3rds the value of my present home (although the home itself and the property are larger). That'll put me in the realm of 15-17% of net worth in real estate. I'd like it to be about twice that. I look at it as a way to park wealth that might be expected to roughly track inflation, less taxes.

I'm the same in that I don't consider real estate in any sort of WR calculation. Because of some unusual circumstances, my WR projects to be very small, < 1%. I do have a tab on my mega spreadsheet that calculates WR, but to me it is not a real valuable metric because, to borrow the terminology Jacob used, I have >2X what I conservatively think I'll have to pull out bucketed separately. The rest is available if needed in a pinch (push-comes-to-shove all assets combine into a giant emergency fund), but is being deployed with an eye towards preservation beyond my lifespan. So, my own situation is not a very good example for ere or for using WR the way it is typically employed in retirement math. My own $0.02 is that rules-of-thumb like the 4% rule have their greatest utility in setting targets for long-range planning. When the rubber meets the road as the withdrawal phase arrives, as you said, the details matter, and there are a number of reasonably prudent ways to manage the situation besides x% rule formulas, which are easy to implement in simulations but don't really reflect real life.

[steveo73]

My own $0.02 is that rules-of-thumb like the 4% rule have their greatest utility in setting targets for long-range planning. When the rubber meets the road as the withdrawal phase arrives, as you said, the details matter, and there are a number of reasonably prudent ways to manage the situation besides x% rule formulas, which are easy to implement in simulations but don't really reflect real life.

Exactly. The 4% rule is a good broad target. Your individual plan is probably going to be unique.

[chicago81]

... All I have to worry about in terms of "liquidity" is a collapse of the US government as a going concern. ...

Sorry to cherry-pick one phrase out of a much larger discussion -- but this really got me thinking a bit.
The United States is a pretty young country. In it's short lifespan, there have already been few instances where "collapse" was a real possibility. The two most obvious examples that come to mind was the Civil War in the 1860s and WWII in the 1940s. Perhaps an argument could even be made for recent events of political tribalism that lead up to the January 6th Capitol insurrection.

Is it possible that we all (as a society) may be under-weighting the chances of this happening in one's lifetime?

[2Birds1Stone]

Sure, it's never gonna happen to us.....till it does.

[unemployable]

That falls into the category beyond withdrawal rates, where no rate will protect you, and arguably you should've spent all your money when you had the chance.

The Federal government has confiscated gold in the past, or at least ordered it to be surrendered, and various political revolutions around the world have vitiated private ownership of real estate. Even right now in putative Freedomland the government is screwing landlords out of their Fifth Amendment rights. So I'm not sure what the fail-safe solution is. Hell, ethnic genocide. Good luck weaseling out of the disfavored group on that one.

Life is never risk-free.

[Hristo Botev]

I used to work for an Armenian-American family. In just 2 generations they'd fled Armenia during the genocide and Beirut during the civil war. They were very financially well off in both Beirut and in the US, even though they had to leave a lot behind in Beirut and in some ways start over in the US. And as far as I could tell, their successful resilience was due to "investing" in: (1) transferable skills/education (he was an architect/structural engineer/builder); (2) an international diasporan community that seemed, at least to this outsider, to be very strong; (3) their culture, I suspect in the way that "my people" still have their kids go to Irish dancing classes; and (4) funny enough, having a pretty large art collection that was on loan to museums and in private collections around the world.

So not your typical 4% strategy, but one that's proven successful notwithstanding 2 actual collapses.

[unemployable]

So not your typical 4% strategy, but one that's proven successful notwithstanding 2 actual collapses.

Fair point, but you're saying the answer is basically to go back to work (or keep working). Which is the same option available to someone whose withdrawal strategy failed any other way.

used to work for an Armenian-American family. In just 2 generations they'd fled Armenia during the genocide and Beirut during the civil war.

Apropos of nothing, but....

Spouse 1: It sucks here in Armenia. We need to get out while we can to a place with more respect for basic human rights. One with much better political stability and economic opportunity while we're at it.

Spouse 2: I know the perfect place! Beirut!

[Hristo Botev]

Fair point, but you're saying the answer is basically to go back to work (or keep working).

That's not what I'm saying. True, the patriarch continued to work until the day he died, and the matriarch is still working. But they certainly didn't need to work in a HD Thoreau sense of meeting their basic shelter/food/comfort needs. Their art collection alone could have sustained that kind of living into the next generation.

I'd say they continued to work because that's just who they are/were; but that's not quite right. They continued to work because of what they saw their purpose and calling to be. They were providers and givers; they had/have a vast art collection not as a possible back-up plan, but because they see themselves as having an obligation to support Armenian artists and culture. He continued to work because he'd built a family business, and although his son had long since taken over the day-to-day, the patriarch could still add value, so he did. She continues to work because she runs a humanitarian organization; it's not a "job" that she relies on for income--she's never made a dime from running the organization.

In the John Michael Greer sense of how to prepare for collapse, they'd pretty much figured it out. What I'm saying is that if you're looking at how to protect yourself in a scenario where societal collapse is a possibility, maybe if not quite probable in the short term, there's a lot that we can learn from diasporan communities. And while it is likely very anti-ERE to do things like spend $500K on your daughter's wedding, my old bosses would have seen that as an investment in their community and culture, and as an opportunity to spread the wealth around their many, many entrepreneur friends and acquaintances.

[Hristo Botev]

Apropos of nothing, but....

Spouse 1: It sucks here in Armenia. We need to get out while we can to a place with more respect for basic human rights. One with much better political stability and economic opportunity while we're at it.

Spouse 2: I know the perfect place! Beirut!

I get it's a joke, but it was more like years as refugees waiting for some place that would take them.

[unemployable]

I understand what you're saying, and it may be a noble and virtutous way to live and instructive for those pursuing ER. But it doesn't sound like any kind of early-retirement lifestyle or mindset. As in a period of asset accumulation via work followed by a period of living off said accumulated assets without the need to work. Which is the framework 4% lives in (getting back to the original topic).

[Hristo Botev]

If you're betting with the Fed, seems like 4% invested in VTSAX will probably serve you well. If you're betting on (or hedging against) the Fed and/or societal collapse, see John Michael Greer for investing in skills, people, communities, (institutions).

[unemployable]

BTW, I'm beginning to think you housesit for the Kardashians.

[Hristo Botev]

I've shared too much.

[WFJ]

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.

Good point, plan and analysis are not the same thing and often treated as synonyms. Academic papers and stats all into analysis, but each person must plan for their own ERE.

[WFJ]

This point was mentioned in several posts, but my analysis revealed that a 1% WR never failed (assuming normally distributed returns) and thus, the level at which working does nothing to increase one's ERE utility. As covered in ERE, a decrease of 25% in spending is much easier to achieve than a 25% increase in income (for all but the highest earning individuals) and one can make any plan more robust by reducing spending. One issue that is not widely addressed in ERE is the assumption that one can care for themselves until death, thus having control of expenses (partially motivating me to stay engaged in an employment relationship).

And yes, this is assuming the US and Western cultures continue to function as capitalist-democracies for the remainder of our lifetimes and don't devolve into some kind of madness similar to ______, ________, __________ any number of failed alternative government/economic systems. No WR rate will survive an alternative government/economic system adoption scenario.

[Qazwer]

‘As covered in ERE, a decrease of 25% in spending is much easier to achieve than a 25% increase in income’
Please clarify - it would seem that in the US at least going from 1 Jacob to 1.25 Jacob in income would be far simpler that going from 1 Jacob to 0.75 Jacob in spending or 1.25 to 1 in spending if that is a more fair comparison

[7Wannabe5]

@Qazwer:

It’s counter-intuitive, but at lowest income levels arbitrary expenses may be greater percentage of spending. For instance, giving up $5/day coffee out habit won’t do much for individual earning/spending $200,000, but amounts to 9% (!!!) for somebody earning/spending $20,000. Fish made a great graph illustrating this which is posted somewhere.

OTOH, as your common sense note implies, it becomes more difficult to view any expense as arbitrary the lower your spending level goes, perhaps especially to the extent that you must pay head/hearth taxes and purchase insurances to maintain assets.

[jacob]

‘As covered in ERE, a decrease of 25% in spending is much easier to achieve than a 25% increase in income’

The full quote is as follows:

Which of the two you prefer depends on individual circumstances. If you're easily capable of producing more, you'll frame freedom as the opportunity to produce more. If producing more requires significant effort, you'll frame freedom as not having to produce more.
In an affluent and wealthy society, the latter is much more easily achieved by most, including myself. There was and is no way I could increase my income by a factor of four, but it was certainly possible to reduce my expenses to a quarter of their former level.
I think this holds for the greater part of the bell curve of incomes. Unless you're very poor (income<$4,000/year) or very rich (income > $400,000 / year), boosting income is very difficult.
If done intelligently, a little money will go a long way. Unfortunately, in this age money is rarely spent intelligently. So by practicing intelligent asset management, it's possible to live wealthily without spending nearly as much as the average.

The 4000 vs 400000 range was chosen arbitrarily but reasonably. As 7wb5 said, the problem is that under $5k/year you begin to run into mandatory hard limits like "head taxes" lest you live outside society.

It is conceivable that it's just a matter of skill. Show me a budget beyond $40,000/year and I'll show you how to take it down to $10,000 in 5 minutes. I would not similarly be able to raise your income from, say, $40k to 160k by telling you what to do in 5 minutes.

[Qazwer]

I might be misremembering the reference but ‘Scarcity:Why having too little means so much’ I think was where I got the following economic story. A business on the lower end of the economic hierarchy might be a money looser and not scale well. Yet, counterintuitively, a small direct transfer can improve people’s lives. The fixed goods of keeping the store with little goods open make it hard to rationalize keeping it open all the time. A transfer of a little money might increase the goods for sale and therefore increase income. But a large transfer might not make as much of a difference as the business is simply not scalable.
I think I could increase any ERE income by 25% quite quickly - whether it would be worth it would be another issue. I could not increase it by 400% easily. Spending and income have discontinuities and non-linearity. I am having trouble picturing the shapes of the curves in my head. I did not remember the reference to 400% change in the book. I wonder with 25% change whether income and spending are likewise situated. (4% vs 3% withdrawal rate)