The 4 Percent Rule is Not Safe in a Low-Yield World

[Tyler9000]

Agreed. Macroeconomic trends that ultimately change the 4% historical norm are a big deal.

The only truly "safe" withdrawal rate is <=0, and there are other ways to achieve that than a full time salary job. So I do believe those with a Renaissance mindset are far better positioned to survive long term than traditional consumer junkies hooked on ther portfolio income allowance. Also, I personally have found value in assets outside of stock and bond index funds alone, so while the Pfau study has always been a good benchmark for me, it's an incomplete analysis lacking in the myriad of financial opportunities available to an educated investor.

[jacob]

@Felix, Tyler9000 - As far as I know Joe Dominguez was 100% in long treasury bonds all the way to the end (he died of cancer at 58). The Trinity study (equities) does not apply to bonds and thus the 4% does not apply. By living off of interest and rolling the bonds over when due, the income is more or less preserved regardless of what the interest rate does. This constant-over-time income approach, however, is subject to inflation. I guess this is why YMOYL makes a big deal out of inflation not being a big deal.

@jennypenny - Just wait for it: IBlameTheOtherPartyPension! A government mandate that you must purchase annuities at 2% annual fees from the insurance-industrial complex, or else! It's the free market solution to unfunded SS which everybody can enjoy. Free, as in, you'll pay a fine if you don't buy one freely.

[thebbqguy]

I've been reading this blog for more than a year now. He spends a lot of time analyzing the safe withdrawal rate and writes about it extensively. I read it with a great deal of interest because who better to learn from than someone who is actually doing it? His lifestyle depends on the ability to anlyze these scenarios. He's retired and derives most of his income from his investments.

http://investingforaliving.wordpress.co ... etirement/

[Tyler9000]

FWIW, I'm a Permanent Portfolio investor and have done quite a bit of study on how it works in retirement. Based on my own research, the inclusion of the gold component (to help in high-inflation times) and the cash component (that you can live on for years without needing to sell the other assets when they're down) make for a very sturdy retirement portfolio with fewer swings than the traditional stock/bond blends* covered in the Trinity study. 3-4% WRs seem quite reasonable as a baseline.

*(@Jacob -- the Trinity study looked at a variety of stock/bond blends, with the 4% conclusion covering the aggregate data. But you're absolutely right that a 100% long-term treasury portfolio is a totally different animal.)

That said, I still stick by my belief that there's no perfect solution to live off the income alone while keeping your eyes closed and never adjusting along the way. If/when my portfolio ever breaks in the short term, I'm happy to take personal action to mitigate the shortage rather than simply ride it into the ground. So the SWR is better seen as a guard rail in the good times rather than a foolproof safe zone in the bad times.

[Felix]

But doesn't the death of the 4% rule(-of-thumb) kill the Early Retirement Extreme idea of working for 5-10 years to then retire on 25% of income? Going down to 2% means working 10-20 years, going down to 1% means 20-40 years. So basically it means that everyone who doesn't live the ERE way is screwed and those who do will merely manage to get a small pension.

[akratic]

Regarding the initial post:

I share the fears about basing our assumptions about the future on the most prosperous period for the most prosperous country the world has ever seen.

Regarding the followup discussion:

And at some point you don't need a real return from your investments: you just need a non-negative one to last the number of years you have left.

Consider retiring with 1.0 million and living on $10k/yr (1%). If you continued to live on an inflation adjusted $10k for the rest of your life while getting ZERO real returns on your investments, the initial 1.0 million still wouldn't run out for 100 years.

Once you hit the 4% crossover, you have 25 years in the bank with ZERO real returns. 3% == 33 years. In 33 years I could easily be dead, and I could make it there making absolutely nothing but inflation from my portfolio. More realistically let's say I spend based on a 3% assumption but actually get a 2% real return... that would still last me over fifty years, which are all the years I can really expect.

In over 500 posts to the ERE forums, the only post of my own that I regularly go back and reference is this table I made with data on what real returns you actually need to last certain numbers of years with various starting levels of wealth: viewtopic.php?p=28301#p28301

[workathome]

I don't think Jacob is saying ERE is no longer feasible, but that simply trusting an index-fund to guarantee a comfortable retirement is an extremely risky assumption.

[jacob]

@Felix - Instead of looking at the time variable, look at the 25% variable. And as always, diversify away from consumerism---it's a risky dependence. The ones that are truly screwed are those who save 15% hoping it will compound at 10% APR for the next 40 years and make them a millionaire.

[Felix]

@akratic: That's a great table!

@jacob: Yes, driving money dependence down is the better approach to deal with this.

[steveo73]

I don't think Jacob is saying ERE is no longer feasible, but that simply trusting an index-fund to guarantee a comfortable retirement is an extremely risky assumption.

I think the counter-point to this though is risky in itself. Do you trust your ability to consistently beat the markets or derive above average returns without taking above average risk.

[Tyler9000]

Let's not forget that "it's different this time" is a common warning that fizzles more often than not. It's usually accompanied by a sales pitch (notice the reference to "clients" in the conclusion of the original link). One should pay attention to their investments, but IMHO it's too early to kill the 4% rule just yet.

@akratic - great post. Thanks for the link.

[BobLandish]

Wait a second, you're telling me that if I buy a 30 year bond that yields less than 4% , that I can't spend 4% per year for 30 years??!!

[jacob]

@ffj - Yes it is.

[Riggerjack]

So am I the only one here who heeled out on firecalc.com, playing with the numbers and watching the projections?

I mean, tuning your portfolio to match the best past performance is not a great idea for success, but you can do your own Monte Carlo projections using all the historical data.
Why worry about a 30 year study, when you can do better, with a simple calculator?

[George the original one]

Oh, yes, playing with Firecalc is always educational!

Plug in some numbers for having an annuity and you quickly find that going for broke with stocks is a good idea. Bonds can easily be reduced to 20% or less.

[thebbqguy]

I can't see any reason to own any bonds right now. A guy on CNBC the other day said it would be foolish to buy bonds right now.

[Dragline]

Must be why Faber bought the 10-year at 2.9% a month or two ago and is making another killing. He predicts it will go to around 2.2%. The reason to own the long government bonds is not so much the rate of interest but because they are as volatile as the stock market, but inversely so.

Now I'm just waiting for CNBC to tell me that IBM and CAT are the worst stocks to hold for the next couple years. Just like HPQ was this time last year.

[Chad]

Now I'm just waiting for CNBC to tell me that IBM and CAT are the worst stocks to hold for the next couple years. Just like HPQ was this time last year.

They have already started on IBM, as they are dropping in profitability. Of course, they are dropping because they are investing a ton of money in "Watson" technology.

http://money.cnn.com/2013/09/19/technol ... r.fortune/

I must say, I applaud IBM's CEO for pushing the envelope. If they can make Watson work it could be really helpful and really cool.

[jacob]

Bloomberg was negative on CAT yesterday ;-P

[Dragline]

Patience. We have to wait until there is solid refrain of "everyone knows this company has a lousy strategy and is going nowhere" for a few months and virtually no dissenters. A nice tanking of 20%+ would help too.