The continued viability of the 4% rule in the US in the 21st century

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Dragline
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Re: The continued viability of the 4% rule in the US in the 21st century

Post by Dragline » Thu Jun 23, 2016 5:49 am

Tyler9000 wrote:
Dragline wrote:This sounds more like an argument to purchase a single premium immediate annuity.
That's probably not an accident. Wade Pfau promotes annuities pretty often.
If you want a lot of gory details and analysis on SWR, read this WF article:

https://www.onefpa.org/journal/Pages/Ca ... Rates.aspx

IlliniDave
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Re: The continued viability of the 4% rule in the US in the 21st century

Post by IlliniDave » Thu Jun 23, 2016 6:32 am

Dragline wrote:
If you want a lot of gory details and analysis on SWR, read this WF article:

https://www.onefpa.org/journal/Pages/Ca ... Rates.aspx
I skimmed through that. Once things start getting expressed in terms of efficient frontiers I have trouble following. But I was happy to see that I'm in the right spot on Figure 3 given my investment return assumptions.

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Re: The continued viability of the 4% rule in the US in the 21st century

Post by jennypenny » Thu Jun 23, 2016 6:46 am

If the point of the 4% was to cover inflation, then doesn't the math still hold in the current low inflation/deflationary environment? I was making a joke before, but savings will get seniors through 25 years at 4%. As ID said, spending naturally declines. I think as long as housing is secured before retirement it's still acceptable advice, especially with reverse mortgages as a potential source of additional income.

Does it work for EREs? No. I wouldn't be comfortable drawing down until age 70, so income needs to be churned out somehow until then. I would live off of whatever my return rate was. Better yet, set a spending floor and accept that it will take a combination of ROI and income generation to reach it. The years that ROI is good, you can work less, and when work goes well you can choose to invest more conservatively. Personally, I would sweep excess into a separate GAP fund to cover the short years.

Only the individual can determine the magic number based on an honest assessment of spending habits and income opportunities. Don't measure potential, only actual results. I include ROI as well as income generation in that. Don't measure what people have historically gotten, measure the results you get. You can always choose to spend more later if you consistently beat your target, but never count on it.

ERE is a different goal than traditional retirement and I don't thinks it's wise, or fair, to apply the 4% rule to it.

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Re: The continued viability of the 4% rule in the US in the 21st century

Post by jennypenny » Thu Jun 23, 2016 6:55 am

I should add that the size of the kitty is an important factor as well. If you have more than you need, you can invest some money more aggressively and tuck some under the mattress. If your plan blows up, you still have money left to devise a new approach to ERE.

If you're margins are razor thin, you have no room for error so you have to make sure your assumptions are accurate (before pulling the plug IMO). Or accept that you might need to return to work and make sure you stay in the loop in your field so that's possible.

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Re: The continued viability of the 4% rule in the US in the 21st century

Post by ThisDinosaur » Thu Jun 23, 2016 7:38 am

I first encountered FIRE through MMM's site. But the blind optimism there never felt comfortable. Jacob's pessimism/realism sits better with my way of thinking. I did, at one point, look at the trinity study as a comfortable bottom floor for returns with a stock-focused strategy. Currently, I am as skeptical of future returns from financial investments as I am of forecasts for them. I have most of my savings in stocks right now, with a broad aim of saving for a 3% SWR. But, I'm becoming more interested now in a permaculture + means of production + antifragile type approach for my long term plan. Diversification of strategies, as well as assets.

What seems to set ERE apart from other FIRE communities I've found is that ERE is about Independence FROM the money economy rather than independence through it. This seems more realistic, grounded, and consistently useful historically than relying on what would have worked for 20th century American retirees with perfect foresight.

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Re: The continued viability of the 4% rule in the US in the 21st century

Post by Tyler9000 » Thu Jun 23, 2016 8:30 am

Dragline wrote:
If you want a lot of gory details and analysis on SWR, read this WF article:

https://www.onefpa.org/journal/Pages/Ca ... Rates.aspx
Thanks. Nothing I'm surprised by, but I appreciate seeing a different approach. He's basically talking about a combination of the Withdrawal Rates calculator and Portfolio Finder.
jennypenny wrote: ERE is a different goal than traditional retirement and I don't thinks it's wise, or fair, to apply the 4% rule to it.
Yeah, I agree that using the traditional 30-year definition of retirement may be a poor assumption for a very early retiree. That's why my definition of a "sustainable" withdrawal rate differs from Pfau's. You can run the exact same calculations using the assumption that "success" is maintaining your original inflation-adjusted principal and calculate the truly sustainable WR. That's what I personally focus on. And FWIW, there are portfolios that have supported a Sustainable WR over 4%.
IlliniDave wrote: The withdrawal methodology of Trinity is fine in concept, is good for framing the problem, provides a trajectory from a bird's eye view, etc. I don't think the Trinity study intended to put forth a prescription for retirement portfolio draw down. This isn't intended as a criticism of it, but I don't think very many people make it through multiple decades with spending that is that smooth and consistent, even starting at traditional retirement age.
Agreed. The point of retirement studies is to illustrate what not to do, not to provide a strict roadmap to success. There are many ways for flexible people to improve upon a SWR. It's when people substitute an over-simplified percentage (often with absolutely no understanding of the assumptions involved) for their own personal responsibility to manage their retirement money that they tend to get into trouble.
Last edited by Tyler9000 on Thu Jun 23, 2016 10:23 am, edited 1 time in total.

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Re: The continued viability of the 4% rule in the US in the 21st century

Post by ether » Thu Jun 23, 2016 9:24 am

People always ignore SS with these studies.

Honestly the problem with projecting 40 years into the future is we literally have no idea
what it's going to be like! The reason there has been so much investment growth in 40 years is global
population doubled, globalization, and communism collapsed.

We are in a brave new world for investing, stocks are at all time highs, inflation is negligible, and bonds are negative.
No one knows that the future is going to be like, but as long as you got a house, health, and your sanity everyone here is gonna be fine!

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Re: The continued viability of the 4% rule in the US in the 21st century

Post by vezkor » Thu Jun 23, 2016 1:29 pm

ThisDinosaur wrote:I first encountered FIRE through MMM's site. But the blind optimism there never felt comfortable. Jacob's pessimism/realism sits better with my way of thinking. I did, at one point, look at the trinity study as a comfortable bottom floor for returns with a stock-focused strategy. Currently, I am as skeptical of future returns from financial investments as I am of forecasts for them. I have most of my savings in stocks right now, with a broad aim of saving for a 3% SWR. But, I'm becoming more interested now in a permaculture + means of production + antifragile type approach for my long term plan. Diversification of strategies, as well as assets.

What seems to set ERE apart from other FIRE communities I've found is that ERE is about Independence FROM the money economy rather than independence through it. This seems more realistic, grounded, and consistently useful historically than relying on what would have worked for 20th century American retirees with perfect foresight.
http://www.mrmoneymustache.com/2012/05/ ... etirement/

This is the article in question
MrMoneyMustache wrote: So far, we’re liking the 4% rule quite a bit, right? But yet whenever I mention it, I get complaints. Let’s review a few of them:
•The trinity study is based on a prosperity anomaly: the United States during its boom years. You can’t project good times like that into the future, because we’re just about to enter the Doom Years!
•Economic growth and stock appreciation was all based on cheap fossil fuels. How will this all look after Peak Oil hits us!?
•You can’t take a one-size-fits-all rule and apply it to something as varied as an economy and an individual’s life! My health care costs could go up! Hyperinflation could strike!
•Even at a 4% withdrawal rate, there’s still a chance of portfolio failure. That means I’ll be flat broke and out on the street in my old age. I recommend doubling your savings, and going for a 2% SWR instead because there’s never been a failure in that scenario!
•This is all wrong! Waaah, waaah!

That’s all well and good. While there are solid economic analyses that I believe can out-argue the points above, I’m not patient or clever enough to re-create them here. Pessimists are free to enjoy their pessimism and even write about it on their own blogs.

Instead of debating unprovable points like those above, we can completely squash them with our own much more powerful list of points:

The trinity study assumes a retiree will:
•never earn any more money through part-time work or self-employment projects
•never collect a single dollar from social security or any other pension plan
•never adjust spending to account for economic reality like a huge recession
•never substitute goods to compensate for inflation or price fluctuation (vacation in a closer place one year during an oil price spike, or switch to almond milk in the event of a dairy milk embargo).
•never collect any inheritance from the passing of parents or other family members
•and never do what most old people tend to do according to studies – spend less as they age

In short, they are assuming a bunch of drooling Complete Antimustachians. You and I are Mustachians, meaning we have far more flexibility in our lifestyles. In short, we have designed a Safety Margin into our lives that is wider than the average person’s entire retirement plan.
I think most people who embrace ERE for the sake of financial independence also embrace the renaissance man ideal that Jacob encourages. We tend to seek out ways to enhance our "skill of living" and thus we become more "Mustachian". Because we're so naturally conservative, flexible and adaptable... I personally view 4% as the absolute lowest SWR I'm striving for from a purely financial standpoint. I will let skills and constant learning take my "real" SWR to 2.5-3% because, for example, certain vehicle repairs are a part of my budget right now because I lack the time to learn to do them myself. Certain foods are a part of my budget because I lack the time to grow them (and store/save them) myself. With retirement, I'll have much more time to pursue interests and focus on hobbies/skills that have either a neutral or positive ROI. Getting more necessities from Craigslist rather than the supermarket especially comes to mind.

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Re: The continued viability of the 4% rule in the US in the 21st century

Post by BRUTE » Thu Jun 23, 2016 2:21 pm

vezkor wrote:I think most people who embrace ERE for the sake of financial independence also embrace the renaissance man ideal that Jacob encourages. We tend to seek out ways to enhance our "skill of living" and thus we become more "Mustachian". Because we're so naturally conservative, flexible and adaptable... I personally view 4% as the absolute lowest SWR I'm striving for from a purely financial standpoint. I will let skills and constant learning take my "real" SWR to 2.5-3% because, for example, certain vehicle repairs are a part of my budget right now because I lack the time to learn to do them myself.
this. brute thinks "renaissance human" is what differentiates ERE (and MMM, too) from the typical retiree more than the retirement age/total net worth.

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Re: The continued viability of the 4% rule in the US in the 21st century

Post by BRUTE » Thu Jun 23, 2016 2:22 pm

ThisDinosaur wrote:I first encountered FIRE through MMM's site. But the blind optimism there never felt comfortable. Jacob's pessimism/realism sits better with my way of thinking.
brute wants to highlight this.

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Re: The continued viability of the 4% rule in the US in the 21st century

Post by jacob » Thu Jun 23, 2016 3:31 pm

@vezkor - Over the past 9 years, I have read thousands of comments on people's goals and situations and I have seen quite a variety of attitudes and strategies wrt FIRE. I think I have quite a good grasp on the statistical distribution of people. There are certainly many people out there who

* Only ever earn a piddling, i.e. 2-3 digits total, ever, from their various attempts at self-employment, e.g. blogging, selling crafts on etsy, paid guest posting, mechanical turk work. They're simply not as skilled or inherently driven when it comes to value-generation which is partially why some are looking for retirement in the first place. Many are quite content to watch TV or play computer games all day long. Only a few are innately exuberant enough to throw up project after project to eventually guarantee that one of them will almost surely pay off.

* Don't work the 10 years required to get the 40 points to collect SS because they retired extremely early. At a 50% savings rate, you'll have enough points before being FI because you had to work long enough. At 70%+ you won't ... then you'd have to find work that pays enough to collect points later on. Work pension plans typically require even more years to vest.

* FIRE'd on a minimum of expenses and a maximum of optimism and consequently aren't able to adjust downwards because they're already spending under $8k/year. This can be people desperate to leave work and thus presuming 4% SWRs and higher... and they pulled the plug as soon as they learned that cost of living could be lowered if they became expats. --- In particular, they were looking for a quick hack trying to push the envelope as much as possible.

* Already use the most efficient solution, e.g. eating bread instead of cake, drinking water instead of almond milk, living with room mates, riding bicycles, ... because they're minimalists, etc.

* Don't stand to collect inheritances. Not that many people stand to inherit six-figures which would be required to make a material impact.

* Already spend so little that cost of living will be pushed up by health insurance/care costs as they get older.

Point being ... while it appears that it's very unlikely that anyone would fall through the cracks of the 4% rule given all the "safe guards", I can easily imagine a very representative archetype who will do exactly that.

This is because THESE FACTORS ARE NOT INDEPENDENT. In fact, they tend to cluster. A few people, particularly successful bloggers, will have all of them filled. Many others will have almost none of them filled!

Imagine Joe-lifestyle/pf-blog reader who just graduated college. He still lives in a house with 3 room-mates while eating Ramen at home and restaurant food, paying $700/month in living costs. After using his degree in biology to get a job paying $40000/year as a lab tech, he reads a few FIRE articles. From this he concludes that if he sells his car, rides a bike, and downgrades to Republic Wireless he'll only spends $400/month. Not bad! However, he also gets the idea that he can retire once he has $400*12/0.04 = $120,000. Indeed, he learns that $400/month goes pretty far in Thailand or Ecuador, so that becomes THE plan. Based on success stories from the internet, he figures that he can make up for any shortcomings by starting a location-independent travel blog, copy-writing service, or dropshipping stuff via eBay. No original ideas or special talents here. Just lots of competition. A fact(*) he's yet to learn.

So 6 years later, he quits, packs a minimalist carry-on and heads off to expat land. The market tanks (see above) ... and after 5 years his broker account (with Vanguard, of course, who else) says "only $60000 left", so now he needs to sell $200+ worth of "guest posts" each month to keep going because he already minimized/"efficiencized" his expenses as much as possible. Well, eventually he does return because making $200/month consistently didn't work out due to the strong level of competition... and now he's competing with new grads for those techie jobs.

(*) I hit the delete button for 3-5 [desperate?] guest post writers for ERE once a day.

This type is much more common than a FIRE blogger making 5+ figures per year.

Why? Because there are a lot more people who can/will put together a simple plan based on a few ingredients---4% rule, expat-living, guest post blogging---than there are people who can/will put together all the factors required for FIRE blogging rockstardom. Maybe I "misunderstimate" people, but maybe I don't?

I don't think the Renaissance ideal has fully penetrated/been adopted on ERE and even less so on MMM. Many are still focusing primarily on a financial/consumer/lifehack solution to early retirement. This is my main concern!!

There's no dominant "Emergent Renaissance Ecology" to be found (yet?)

The question I struggle with is exactly how stupid people have to be before I refuse to, metaphorically speaking, hand over an assault rifle or the keys to a Ninja 650 or the 4% rule? Is there any kind of fiduciary duty towards potential readers or is it all on them if anyone proceeds to screw up their life?

I don't know the exact answer to that. I have, however, lived by this mantra for the past two decades:
The Master said: "I never try to make people open up [to the world of learning] unless they already have a pent up excitement about it. Then if I give them one corner [of a problem or point of study], if they do not come back to me with the other three corners I will not involve myself with them again."
This is also why I'm mostly being intentionally vague when it comes to dangerous stuff like specific numbers or investment strategies.

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Re: The continued viability of the 4% rule in the US in the 21st century

Post by ThisDinosaur » Thu Jun 23, 2016 3:59 pm

In defense of MMM, he is a renaissance man who can fix anything in his home with no help and little money, or build a new one from the ground up. If you can do all that with housing, you're >50% there IMO. Furthermore, his site is where I first learned about the 4% rule, which made escape from a lifetime of working for money seem quantifiably attainable to me. Once I started investing, I had skin in the game, so I was much more motivated to actually learn about it.

It just bothered me how, in that article above, he lists all the objections to the 4% rule, states a 45% success rate (!) , and then just glosses over that. That's a pretty important part of the story, man!

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Re: The continued viability of the 4% rule in the US in the 21st century

Post by jacob » Thu Jun 23, 2016 4:28 pm

To get an idea of how "bad" the problem is, see https://nces.ed.gov/pubs2014/2014008.pdf ...

Look at 2-A,B,C on pages 20-22 (and 3-A,B,C on the following pages for details by age) ... and compare to B-1,3,5 on pages 41-50 for the keys.

I note that the 4% rule and similar "quick and easy" advice is often presented at level 2 whereas in reality, it requires level 4+ comprehension for successful implementation. This is THE problem of popularizing extreme FIRE as far as I'm concerned. It's all too easy to underestimate just how incapable large numbers of viewers might be. This is why I deliberately put up "comprehension moats of obscurity" for ERE.

Maybe I worry too much ... hummm ...

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Re: The continued viability of the 4% rule in the US in the 21st century

Post by jennypenny » Thu Jun 23, 2016 4:49 pm

Did Pfau ever suggest the 4% rule was appropriate for people below traditional retirement age? I'm on my phone so it's hard to check, but I thought his research and advice was directed at traditional American retirees. I didn't think it was designed to apply to anyone in the ER crowd, especially since it assumed a drawdown. If that's the case, any analysis like MMM's, while informative, seems unfair since applying the 4% rule to ER/E is an off-label use of the rule.

Methods designed for traditional retirees assume a <30 year timeframe, complete reliance on financial assets, an inability to generate income and declining expenses, none of which apply to EREs. Even the assumption of steadily rising healthcare costs is probably inaccurate for most hardcore EREs.

My point is only that I would caution early retirees against relying on any study or system designed for traditional retirees.

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Re: The continued viability of the 4% rule in the US in the 21st century

Post by Tyler9000 » Thu Jun 23, 2016 5:20 pm

jennypenny wrote:Did Pfau ever suggest the 4% rule was appropriate for people below traditional retirement age?
I don't think so. FWIW, he also is a proponent of active financial advisors for retirees. He's been (rightly) criticized in the past for posting research with doomsday projections for the 4% SWR that buried the fact he was including up to 2% in fees.

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Re: The continued viability of the 4% rule in the US in the 21st century

Post by ThisDinosaur » Thu Jun 23, 2016 5:37 pm

Jacob, in a blog post, you once said that your closet motive for this site was to use FI to get readers to be more frugal/self sufficient, inadvertently becoming sustainably prepared for peak oil. If that's true, then the message should be tailorable to the ~90% who can't do level 4 tasks.

People need to absorb new concepts sequentially, not all at once. I once thought investing was too risky and gardening was too boring to learn much more about either. Now I read about both daily. Obsessively even. First I had to see that FI for middle class types was possible without a million dollars. Only then was I primed for your message of systematic elimination of consumer thinking.

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Re: The continued viability of the 4% rule in the US in the 21st century

Post by 7Wannabe5 » Fri Jun 24, 2016 11:31 am

ThisDinosaur said: What seems to set ERE apart from other FIRE communities I've found is that ERE is about Independence FROM the money economy rather than independence through it.
Exactly. Money is just a form of social contract. That's why when you earn/leverage/save enough of it that you don't have to exhibit good manners around other people anymore and can growl and spit tobacco in the streets when you occasionally roam back into town from the deep woods, it is called "F*ck you money." Of course, a person can also be in possession of "F*ck you skills" or just a "F*ck you attitude." Overcoming the fear of your own death and/or complete loss of social status is how you develop the greatest "F*ck you attitude." Ergo, the people who possess the best manners, the most skills and the least anxiety require the least financial savings on which to retire, because any worst case scenario just becomes a sort of fun challenge. For instance, you wake up tomorrow in a homeless shelter and you have 3 kids under the age of 5 and you are 80 lbs. overweight and $24,000 in debt and you are covered with a very bad, yet to be identified rash. What do you do first?
Jacob said: Well, eventually he does return because making $200/month consistently didn't work out due to the strong level of competition... and now he's competing with new grads for those techie jobs.
I think this fear is a bit over-hyped. I recently easily secured a position previously occupied by a 24 year old Sri Lankan girl, on a market long renowned for its age-ism ;) Boxes within boxes within boxes...

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Re: The continued viability of the 4% rule in the US in the 21st century

Post by ThisDinosaur » Fri Jun 24, 2016 3:17 pm

Money is a social contract, but a very old one. My interest in this community is the hope to escape social contracts. Incidentally, property rights are also a social contract, so if the SHTF, and dollars become useless paper, then I don't really own my house anymore either. So, I agree that *skills* are the safest form of investment, since they aren't dependent on "the market," and other people. But they don't offer a tangible return rate without becoming employed by somebody.

I don't identify as a doomer, but I think my posts on this board are starting to read that way. I wonder what that means.

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Re: The continued viability of the 4% rule in the US in the 21st century

Post by GandK » Fri Jun 24, 2016 5:30 pm

jacob wrote:* Don't stand to collect inheritances. Not that many people stand to inherit six-figures which would be required to make a material impact.
Just wanted to add that this one has an enormous impact psychologically. I'm one of the lucky few who will someday inherit a chunk... although hopefully not for another 30 years. Inheritance doesn't explicitly affect our life today or G's ER date, and I don't look forward to it. But I have found in casual conversation that knowing it's coming has made me relatively fearless compared to other people (especially women) my age. Everything from strict adherence to the 4% rule to Medicare to Bag Lady syndrome is a nonissue in my mind. And I perceive I'm more willing to take risks (in a good way, not a reckless way) as a result. Including ER.

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Re: The continued viability of the 4% rule in the US in the 21st century

Post by BRUTE » Fri Jun 24, 2016 6:13 pm

ThisDinosaur wrote:I don't identify as a doomer, but I think my posts on this board are starting to read that way. I wonder what that means.
brute is pretty sure no human has ever "identified as a doomer" ;)

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