The 4% Rule – A Castle in the Air

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zbigi
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Re: The 4% Rule – A Castle in the Air

Post by zbigi »

slsdly wrote:
Mon Sep 19, 2022 8:52 am
But the truth is if CPP/OAS are gone
I don't think it will ever happen. They will just more or less normalize the payments first (meaning - everybody gets the same minimum per year of contributing, no matter how much they put it - or, at best, differences will not be large) and will make the normalized payments small. Paying out sat $500 per month to everyone on SS (who contributed for the full duration) generates much less social unrest than not paying out at all, and is not that expensive.

Salathor
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Location: California, USA

Re: The 4% Rule – A Castle in the Air

Post by Salathor »

steveo73 wrote:
Sun Sep 18, 2022 11:11 pm
I don't know if his plan has failed but he was recently asking about going back to work. I used this guy as an example previously of someone who really pushed it and had up until that point been okay.
I'm retired with a dividend-heavy (VYM/VYMI) portfolio and am considering going back to work as well. Everything has succeeded as well as I could have hoped in a downturn (have yet to have to sell a single share of stock, still saving some money every month for reinvestment, etc.), but the lower valuations now are really tempting me and make me want to get my hands on some extra income to invest while prices are down.

That said, I was not using a 6% WR or any odd options strategies.

steveo73
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Re: The 4% Rule – A Castle in the Air

Post by steveo73 »

slsdly wrote:
Mon Sep 19, 2022 8:52 am
I just work with the assumption that society/civilization will decline over my life.
....
I will have bigger problems on my hands, such as lack of food, water, and/or energy.
This is what I call extreme pessimism but at least you recognize WR's are the least of your problem.

My take is the world keeps getting better and better. Sure there are bad things happening but the quality of life I can have on a low relative spend astounds me.

steveo73
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Re: The 4% Rule – A Castle in the Air

Post by steveo73 »

M wrote:
Mon Sep 19, 2022 8:56 am
Financial Velociraptor....I suspect he will update that thread eventually with more information. There has been too much discussion in that thread for him to simply leave as is. Or maybe quitting job with 6% withdrawal rate and custom portfolio then coming back years later drunk posting about failing at FIRE and looking for a job is what retirement failure looks like in MMM world? Idk. It still doesn't seem so bad. He took off work for a long time I think - many many many years. I would imagine in that sort of situation you could tell years in advance that you will run out of money.
It's not that bad is it. I wish more people would get this point. There are different kinds of failures as well. I may want to spend more money and I might work to do that. The truth is I probably can't be bothered but I do think about this.
M wrote:
Mon Sep 19, 2022 8:56 am
But yes - completely different levels of risk aversion. Completely different forums. Completely different people. I stay away from MMM forums these days because - frankly - it seems to have turned into a bunch of 250k income people saving 4 million dollars to retire on 100k expenses with blind faith in 4% rule and no investing knowledge all while bragging that they are more frugal than the average American because they did not get heated seats in their escalade. I have high numbers but only because of family of six. My per person expenses are JAFI level.
I view the forums differently. I view the MMM forum as having significantly better investment knowledge in general along with a significant better understanding of WR's in general. I've learnt a lot there on WR's. It could also be that there is a much greater diversity of opinions on WR's on that forum.

Some good examples are:-

1. Your expenses are such a huge part of the whole calculation of WR's and your expenses are not set in stone for the lifecycle of your retirement.
2. Seeing charts depicting your likelihood of your portfolio running out of money compared to your likelihood of dying. The going broke area is significantly smaller than the dying area.
3. Viewing a low WR as an ER failure.
4. Viewing WR's compared to how long your portfolio should last. The interesting point is that a 6% WR should last 30 years. Interestingly once you get below 6% you gain a lot of additional theoretical time that your portfolio lasts. So 6% could be considered the statistically correct WR. On average, SWRs below 5% will last forever. You have to change your perspective from failure to expected results.

I mentioned earlier that my impression is that there are a lot more people who are retired on that forum than here and I think that is due to the increased investment and WR knowledge. I feel they've solved early retirement for the relatively wealthy person living in developed countries.

My take is ERE is more about customizing your approach rather than actually successfully retiring. It's more the tinkerer approach to life. I also think too many people on here get caught out trying to brag that they have it right rather than solving the retirement problem for themselves. This thread is a classic example. It's the idea that my path is better because your path is wrong.

I find the ERE forum though much more interesting and the decreased spending is much more my style. I'm more of a tinkerer in my life.
Last edited by steveo73 on Mon Sep 19, 2022 6:47 pm, edited 2 times in total.

steveo73
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Re: The 4% Rule – A Castle in the Air

Post by steveo73 »

Salathor wrote:
Mon Sep 19, 2022 1:41 pm
I'm retired with a dividend-heavy (VYM/VYMI) portfolio and am considering going back to work as well. Everything has succeeded as well as I could have hoped in a downturn (have yet to have to sell a single share of stock, still saving some money every month for reinvestment, etc.), but the lower valuations now are really tempting me and make me want to get my hands on some extra income to invest while prices are down.

That said, I was not using a 6% WR or any odd options strategies.
Awesome. I've done really well as well. I also haven't sold a single stock and won't have to for another couple of years. Since I've had a couple of years off I wouldn't mind padding my portfolio and returning to work part time. My wife doesn't want to go back to work and doesn't want me going back to work as well.

Once you've reached a decent level I also think you don't have to earn that much to pad your portfolio. If I worked 1 day a week and earned 20k it's huge for my portfolio and it's not much work. It's just that going back to my old job to earn that money is hard to go back 1 day per week.

Salathor
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Location: California, USA

Re: The 4% Rule – A Castle in the Air

Post by Salathor »

steveo73 wrote:
Mon Sep 19, 2022 5:41 pm
My wife doesn't want to go back to work and doesn't want me going back to work as well.
Ha, that sounds familiar. My wife also doesn't want me going back full time.

I'm considering two options now: substitute teaching, which pays about $30/hr here and I can just do it any day I choose, and getting my real estate license. Two very different paths, and I could maybe even do both. Both have very different strengths.

I love the flexibility of subbing, but it's of limited reward. RE, however, matches up with my love of capitalism and big business and has the potential to be something I really enjoy and could make me a lot of money. I'm really torn.

EDIT: just to be clear, I don't mean to imply that I have done super well. My portfolio is down! But I think it's doing as well as I could hope given the current situation, and I'm not unduly worried.

steveo73
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Re: The 4% Rule – A Castle in the Air

Post by steveo73 »

Salathor wrote:
Mon Sep 19, 2022 6:44 pm
Ha, that sounds familiar. My wife also doesn't want me going back full time.

I'm considering two options now: substitute teaching, which pays about $30/hr here and I can just do it any day I choose, and getting my real estate license. Two very different paths, and I could maybe even do both. Both have very different strengths.

I love the flexibility of subbing, but it's of limited reward. RE, however, matches up with my love of capitalism and big business and has the potential to be something I really enjoy and could make me a lot of money. I'm really torn.
I like it. Sometimes I teach jiu-jitsu. It pays $50 per hour but I never charge. I just can't be bothered. I turn up anyway. If I started teaching regularly that might be an option.

To really earn good money though I have to go back to my old IT job and I know that they will want me there long freaken hours.

steveo73
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Re: The 4% Rule – A Castle in the Air

Post by steveo73 »

Salathor wrote:
Mon Sep 19, 2022 6:44 pm
EDIT: just to be clear, I don't mean to imply that I have done super well. My portfolio is down! But I think it's doing as well as I could hope given the current situation, and I'm not unduly worried.
Just to respond on this point, My portfolio has actually gone up a little but I was paid out from my job a lot more than what I initially thought I would be. The key point though is the point that you make in that I'm not worried about running out of money if I keep my expenses the same as what they are now.

I'm more concerned about increasing my spending without going into my no 1 buffer which is sell my house. My wife just says we can sell the house so don't worry about it. Just to be clear my increased spending would be really spendy pants stuff. There is a wave pool opening near my house and it'd cost say 5k per year at least to use. That is a greater than 10% increase in our spending and it's all on stuff for me.

We also have 2 adult children living at home and we don't charge them any board. My wife figures that we can just sell and stuff them and I suppose she is right but I like my house and my garden.

M
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Re: The 4% Rule – A Castle in the Air

Post by M »

steveo73 wrote:
Mon Sep 19, 2022 7:42 pm
There is a wave pool opening near my house and it'd cost say 5k per year at least to use. That is a greater than 10% increase in our spending and it's all on stuff for me.
That sounds absurdly expensive.

There is an amusement park within driving distance of my house that has multiple wave pools, slides, lazy rivers, roller coasters, for $100/ year or so. Unlimited visits.

If I ever actually quit my job I'm going to spend my days there and at the gym. The gym actually costs more than the wave pools. :lol:

steveo73
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Re: The 4% Rule – A Castle in the Air

Post by steveo73 »

M wrote:
Mon Sep 19, 2022 9:55 pm
That sounds absurdly expensive.
It's crazy. Loony tunes stuff. This is what retirement is like though. Do I spend a whole bunch of money on something stupid. Do I need too ? There is always something to spend money on.

Do I go on overseas holidays ? Get a dog ? Go to a fancy restaurant. Do we repair the roof ? Do we get additional solar panels ?

My expenses are already fairly low so it's easy to spend more.
M wrote:
Mon Sep 19, 2022 9:55 pm
There is an amusement park within driving distance of my house that has multiple wave pools, slides, lazy rivers, roller coasters, for $100/ year or so. Unlimited visits.

If I ever actually quit my job I'm going to spend my days there and at the gym. The gym actually costs more than the wave pools. :lol:
These are surfing wave pools like this.

https://www.youtube.com/watch?v=Nq1rcND7_Fw

I know some in America are really expensive as well.

M
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Re: The 4% Rule – A Castle in the Air

Post by M »

steveo73 wrote:
Mon Sep 19, 2022 10:22 pm
These are surfing wave pools like this.

https://www.youtube.com/watch?v=Nq1rcND7_Fw

I know some in America are really expensive as well.
Ohhh - ok. That makes sense now. Yeah that is way different than the wave pools at the amusement parks. :lol:

I did not even know wave pools that size existed. Or that wave pools generated waves large enough to surf on.

If you have the extra money then by all means, go for it. That is the whole reason you saved the money to begin with, no?

WFJ
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Re: The 4% Rule – A Castle in the Air

Post by WFJ »

ERE is a 50-year or longer time period. 4% is semi-robust in a 30-year time period. Using an estimate for 50 years from a study that only lasted 30 years is called extrapolation. This violation is covered in the first few chapters of any intro to stats book and not mental gymnastics, just following one of the most basic rules in statistics.

I would watch below several times to understand the risk of any WR for longer and longer time periods.
https://www.youtube.com/watch?v=91IOwS0gf3g&t=6s

The primary reason for the failure of any WR is a run of small negative returns, longer runs are more devastating than some kind of short-term extreme event. I'd have to think about this for a while, but a simple model is to define 4 states of the market, -5%, 0%, +5% and +10%, use some kind of sequence with repetition permutation (I struggle with permutations) to determine how many possibilities there are in a 30-year time period vs a 50-year time period to understand the significantly higher risk of the WR for longer time periods. The reason why a 50-year time period fails exponentially more than a 30-year time period is the probability of having a run of negative returns is exponentially higher (not linear) in a 50-year time period than a 30-year time period. This is why a 1% WR for 50 years fails about as many times as a 4% WR for 30 years. I suspect even 1% WR will fail in a 100-to-500-year time period due to this dynamic (similar to above video analysis).

There is no right or wrong in this, there are probabilities and math vs. beliefs, feelings and emotions. One can believe anything, but when something is offered as "Science", it must be robust or rejected.

steveo73
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Re: The 4% Rule – A Castle in the Air

Post by steveo73 »

M wrote:
Tue Sep 20, 2022 4:42 am
If you have the extra money then by all means, go for it. That is the whole reason you saved the money to begin with, no?
It's a tough issue. The short answer is yes I can afford it. The long answer is it's excessive and it could potentially lead to me going back to work or selling our house to downsize etc.

This is how I manage money and I bet most people do as well post retirement. There are points where you save too much. My dad was a specialist doctor who was relatively frugal for specialist doctors and retired at 60. He has way too much money to spend compared to his desires. At that point money isn't an issue.

I retired late 40's without saving up excessive money and I have to be careful with my spending.

I think your personal retirement spending and this discussion is a good example is completely different to a theoretical discussion of SWR's.

Another concept to I suppose understand is that money is just a tool. You don't get any medals for being the most frugal or leaving the most amount of money to charity. Just say I choose to spend 50k over 10 years surfing in a wave pool because I end up loving it. That may be money well spent. Alternatively I could try it and think it's not worth the money.

steveo73
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Re: The 4% Rule – A Castle in the Air

Post by steveo73 »

WFJ wrote:
Tue Sep 20, 2022 12:53 pm
ERE is a 50-year or longer time period.
I'm really struggling understanding with this idea. Assuming you live in a developed country that is a retirement at 20. It seems ridiculous.

Who really cares what ERE is ? What is the point ? Is it too tell other people on this forum that you are the best ERE person ? Does that make you happy at night lying in bed ?

I'm not trying to be harsh. The question is what is the payoff because I don't get it. You are basically stating work for a lot longer for no appreciable benefit to your standard of living on a forum where people look to retire as early as possible and are really frugal.
WFJ wrote:
Tue Sep 20, 2022 12:53 pm
4% is semi-robust in a 30-year time period. Using an estimate for 50 years from a study that only lasted 30 years is called extrapolation. This violation is covered in the first few chapters of any intro to stats book and not mental gymnastics, just following one of the most basic rules in statistics.

You appear to be stating the following points:-

1. We can only discuss a 50 year retirement.
2. Anyone stating that a 4% retirement is safe is comparing a 30 year rule to a 50 year timeframe is extrapolating a result from one time period to another and this is wrong statistically. Does anyone really not know this ?
3, The assumptions must be set in stone ??? You didn't state this but it's a very rigid model you appear to be using.

Funnily enough you aren't even looking at what I think from experience is the no 1 flaw in any sort of WR analysis which is your expenses are not set in stone. So your expenses at year 40 may be different to your expenses at year 1.

My take is much broader. The question to me is do you understand the data-set and can you use that data-set to help your tailor the assets you invest in and the amount you require for your retirement.
WFJ wrote:
Tue Sep 20, 2022 12:53 pm
There is no right or wrong in this, there are probabilities and math vs. beliefs, feelings and emotions. One can believe anything, but when something is offered as "Science", it must be robust or rejected.
I'm really struggling understanding this as well.

I understand that is no right or wrong for everyone when it comes to WR's. I understand there are probabilities and math and statistics and a data-set. I understand people can have different assumptions and different risk profiles and different situations.

I fail to understand how beliefs offered as science have any relevance at all to this discussion. If you are stating that you need to be a bit more scientific and analyze a specific use case. This is where your 50 retirement plan may be of benefit. I personally feel a 5% WR under those conditions would be risky and I personally wouldn't do it.

As stated above though I figure a 50 year retirement is an anomaly. I doubt it's relevant for 99.9% of the population at least in developed countries.

Assuming I've understood you correctly I'll try and respond to your point:-

1. Everyone will have different retirement situations. You can run multiple use cases against the data. I personally did this heaps of times but now I've retired I don't care. I suppose I have similar questions like should I spend that money (for instance on a wave pool) but I have to remember that spending could lead to going back to work.
2. The data can only provide a guideline to your decision making. Now for instance I track my spending like a hawk. I only did this pedantically about a year prior to retirement. I measure my WR and assets and have probabilities attached of success and all sorts of stuff. I got this from running different scenarios. My spending is way above my never go broke level but I don't think it's likely for that level to ever be a problem due to social security and other back-ups.
3. The data is not a guarantee. It's just the data. This is why investment advice typically states past returns are no guarantee of future returns.
4. The further you stray from assumptions that are baked into the data the standard deviation of results probably increases.

I've probably missed heaps of points but I think the big problem is you are discussing a specific use case that is probably completely irrelevant to the vast majority of people living in a developed country whereas I'm looking at the problem from the specific of myself and I think a lot more people.

In some ways I think it's bad to have threads like this because it promotes extreme pessimism which can actually impact your life significantly. I might work for another 5-10 years to retire and I might hate my job. Everyone has to judge this situation for themselves but the idea that you to plan for a 50 year retirement with the same assumptions underlying the Trinity study to me is going to do a lot of people a massive disservice. I accept being too risky could be bad as well. It's just that 50 year use case as a basis for everyone to me is really missing the point.

TLDR:- that was a massive post - sorry. The short response is I don't believe a 50 year use case with the same assumptions underlying the Trinity study is a good use case for the vast majority of people in a developed country to consider when it comes to planning their personal WR's. I think this could lead to increased time working which may negatively impact your happiness over the course of your life because you could work a lot longer than you have too.

xmj
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Re: The 4% Rule – A Castle in the Air

Post by xmj »

Please note that life expectancy at age 30 is different from life expectancy at birth.

In Switzerland, life expectancy at birth is 81 years for men and 85.1 years for women. Once you make it to age 30, your additional life expectancy changes to a further 51.8 years for men, and 55.7 years for women.

So it's not quite absurd to expect a fifty year "retirement" period, especially if you expect to never ever contribute any substantial funds to your retirement portfolio.


As for extending thirty-year fail-safes to fifty-year fail-safes, I think the best way to improve this discussion is to look at permanent endowments (family trusts, foundations, etc). Because as opposed to fifty-year retirements, *that* branch of investment advice has millions of beneficiaries behind it, and thus, a rather large investment advisory interest.

Have a look at the Memo to the Darcy Family and other publications from the Jeffrey Company, which discuss this at length.

zbigi
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Re: The 4% Rule – A Castle in the Air

Post by zbigi »

xmj wrote:
Tue Sep 20, 2022 11:57 pm
Please note that life expectancy at age 30 is different from life expectancy at birth.

In Switzerland, life expectancy at birth is 81 years for men and 85.1 years for women. Once you make it to age 30, your additional life expectancy changes to a further 51.8 years for men, and 55.7 years for women.
Yep. I'm 41 and am currently assuming a 49 year-long retirement. True, I will not live as long on average, but I want to cover vast majority of the right side of the curve as well (otherwise, I guess I'd be rooting for myself to die around 80, which is kind of bizzare). While my approach also assumes money may run out, but I've set this point at 90 yo, where I assume I'll most likely be so decrepit that suicide won't seem that bad of an option.

steveo73
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Re: The 4% Rule – A Castle in the Air

Post by steveo73 »

xmj wrote:
Tue Sep 20, 2022 11:57 pm
So it's not quite absurd to expect a fifty year "retirement" period, especially if you expect to never ever contribute any substantial funds to your retirement portfolio.
I suppose you could phrase the question to be should you plan for an extremely low probability event that might not even be relevant to you when determining your WR ?

Alternatively are you stating everyone should plan for a 50 year retirement with no social security buffers (or other buffers) available at all no matter how old you are ?

I'm cool with whatever is required for everyone's specific situation. I'm not cool with putting up a strawman and stating 4% isn't valid for every person ever again.

Maybe a better approach when discussing this is to look at the charts here that include the option of using social security, spending a little less when required and include mortality data.

https://engaging-data.com/will-money-last-retire-early/

When I use a 5% WR at my age with 10% spending flexibility if my portfolio gets down to 60% of it's initial size I can't see any possibility of running out of money. The line might be there but I can't see it.

IlliniDave
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Re: The 4% Rule – A Castle in the Air

Post by IlliniDave »

steveo73 wrote:
Tue Sep 20, 2022 8:50 pm
It's a tough issue. The short answer is yes I can afford it. The long answer is it's excessive and it could potentially lead to me going back to work or selling our house to downsize etc.

This is how I manage money and I bet most people do as well post retirement. ...
(TL;DR -Same old, same old from iDave)

This general topic came up over in my journal thread recently so It's something I've thought about over the last couple months. Planning is over for me, pulled the plug last year in my latter mid-50s. Didn't really get an early retirement mindset until my latter 40s and didn't find ere until the cusp of 50. So I don't have to give too much worry to time horizons beyond 30 years. I pretty much knew that I didn't have the luxury of giving retirement a spin for 20 years then going back to my old line of work. On top of that, being retired rather than just thinking about being retired affects me in the sense that the options I have to compensate for a setback (external or self-induced) are diminished in number and seriously diminished in efficacy. So if possible my financial temperament is even a little bit more conservative now.

So aside from spending within my planned living expense allowance, any additional spending comes with that internal debate you mention: I can, but should I? It came up in the journal in the context of a non-recurring purchase that I had bucketed an amount of money for in pre-retirement planning (the actual outlay exceeded the 'budget' modestly). Even though it was planned, coinciding with the apparent return of so-called stagflation made it a difficult choice. Been a long time since I read the Trinity Study or any of the follow-up work, but my recollection that the limiting periods using historic US data included the stagflation years in the 1970s. Along with the consideration of whether spending the money was prudent, someone also brought up the idea of whether I should just loosen up and spend more because the numbers suggest I can. No crisp answers there--it's something I'll just have to evaluate on an ongoing basis.

I do think there is a connection between someone's personal situation/retirement spending and theoretical consideration of SWRs. To be fair, I only considered projected systematic withdrawals (to me SWR=systematic withdrawal rate, not safe because safe is an illusion) as a secondary measure of readiness. The connection I see is something you've pointed out--for anyone practicing more than token financial stewardship spending rates aren't very systematic. So it speaks to the practical limits of the theory and arguably it's chief weakness, maybe even more so than investment returns.

Even with the luxury I had of only having to grapple with a shorter retirement period I baked in conservative assumptions one atop the other until my risk tolerance was overcome. I even got some snarky reactions over on bogleheads.org while discussing readiness for either being too much of an oversaver or spending too little. As you'd expect those came from the YOLO/FOMO mindset.

If asked (although no one has), my advice regarding SWR, especially for those considering a very long retirement horizon, is to use it as a long range planning tool to get an estimate of the order of magnitude of what you'll want to accumulate. But the more important ingredient is understanding yourself--what it takes as a threshold for you to have a lifestyle of contentment, how hard you're willing to work to avoid spending a dollar, how well you deal with financial risk, an understanding of the viability of returning to the workforce, how flexible you can be with regard to spending year-to-year, things like that. If all that adds up to somewhat rigid requirements, then the lower you'd probably want to drive SWR because that will increase your ability to achieve systematic spending without derailing the train. There are other factors to heap on top: length of intended retirement and the importance of legacy and such.

There isn't a precise formula I know of to convert those human factors into numbers. My approach was to build in a lot of flexibility to pare back outflow (e.g., I plan for annual spending well above what I determined my contentment threshold to be) which led to a fairly small anticipated SWR. But that number wasn't the plan, just fallout from the plan. Atypical aspects of my accumulation situation allowed me to achieve that without spending too many additional years in the workforce. That the current economic direction of the US makes me more concerned for the fate of others than for myself is an indication the few years sacrifice might have been worth it.

xmj
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Re: The 4% Rule – A Castle in the Air

Post by xmj »

I do recommend you take a look at the paper I linked. It bases the entire discussion about withdrawal rates for *perpetuities* on empiric grounds.

As a perpetuity, the central aspect to focus on isn't "will it last" but "how will it be equitable across generations?" - and that paper provides both an approach, and data on it.

IlliniDave
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Re: The 4% Rule – A Castle in the Air

Post by IlliniDave »

xmj wrote:
Wed Sep 21, 2022 6:50 am
I do recommend you take a look at the paper I linked. It bases the entire discussion about withdrawal rates for *perpetuities* on empiric grounds.

As a perpetuity, the central aspect to focus on isn't "will it last" but "how will it be equitable across generations?" - and that paper provides both an approach, and data on it.
I'd given it a glance and saw some parallels with stuff I'd picked up reading John Bogle's writing. Worth the read, if for no other reason than to get exposed to the idea that until sometime in the early 20th century investment portfolios were measured by their yield not their market value, and that there's an alternative approach to the "modern" one.

In my case the heart of my accumulation came during a time when yields of all asset classes were low and trending downward, so the initial stake required for someone to fund themselves in perpetuity based on yields alone was quite high--pretty much in the ball park of a 1%-2% withdrawal rate anyway, assuming inflation remained low, unless maybe they felt like they could navigate picking good dividend stocks over the long haul, or maybe lower WRs if based in significant measure on inflation-protected bonds. Saw somewhere recently that 5-year TIPS real returns were negative at this time.

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