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 »

Salathor wrote:
Thu Sep 22, 2022 7:02 pm
I would say that the idea of creating the Noble House (see James Clavell--one of my favorite authors, and probably my favorite book) is not inherently ridiculous. There's something powerful about building something great, a Rothschild like legacy.
Rotschild was a cold, work-obsessed asshole (his letters attest to that) - an Elon Musk or Steve Jobs, but without the charisma. Not really the best person to emulate, as are I'm affraid most of of the uber-billionaires. Not to mention that breaking into the uber-billionaire club requires so much luck that planning for it is a non-sequitur.

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

Post by steveo73 »

xmj wrote:
Fri Sep 23, 2022 1:48 am
To be able to justify a position, and to justify it to others, are two rather different things.
Maybe but you can't even make an attempt. It's your decision but your position sounds the most fragile and extreme plan I've ever heard. I think that is why you can't justify it.
xmj wrote:
Fri Sep 23, 2022 1:48 am
Let's not forget we're on a forum styling itself "Early Retirement Extreme" where the benchmark is living on 7k/yr (requiring assets of 175k ish).
This is just gaming the system. You take the risk of a higher WR and move that risk to your expenses but there is no real benefit. I think that your expenses are the most vulnerable part of your plan so if anything it's just making the most vulnerable part of your plan even more vulnerable. It's a really poor solution to the problem of early retirement.

You should read Dr Doom's retirement failure and that will explain the flaws in an approach where expenses are multiple times higher than 7k. As I stated above he retired on 30k expenses and it was too tight. He had about a 3% WR.

There are no free lunches and don't believe anyone telling you there is.

Your approach though is multiple times worse than just gaming your future expenses. You are talking about leaving a legacy and you are gaming future generations expenses. If you think your position through logically you surely have to see that 7k expenses for future generations is highly unlikely to be sustainable. You'll have to aim for at least 50k expenses adjusted to inflation (people need to live somewhere) per person and then get that mostly in dividends. You can't seriously expect everyone to live off 7k per year.

Dependent on how many people you will leave this legacy too you are going to need a lot of money.

Do the figures:-

1. 50k per person. You can drop this if you want too but I really doubt this will sustain the vast majority of people. What if they get married and have kids ? What if they go to college ? I think 50k is conservative. They won't be marrying each other or at least I hope not.
2. A 2% WR. This WR may even be too high based on the investing advice offered within that paper.

--> You'll need 2.5 million dollars and this is utilizing two conservative figures for each person you'll bequest this too. Just to be clear this is a conservative figure based on your investment paper and goals.

I assume you want to leave money to all your grand kids. My in-laws have about 14 grand kids so far but it could get worse. They are great grandparents now and what if the grand kids have 8 kids like my SIL. My SIL married into a Muslim family.

How do you budget for these types of situations. I reckon best case you'd be looking at 25 million. That is ridiculously conservative and by that I mean with that amount of money it's highly unlikely your plan will be successful. You'll be dead though so I suppose that doesn't matter.

On the positive side though what do you get out of it ? If you get to that level of wealth people will try and screw you over, your kids may end up bums spending multiple times more than that money etc.

Your plan is the most extreme plan on an early retirement site I've ever seen and I think it leaves you working forever.

You need to reassess your plan.

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

Post by ertyu »

steveo73 wrote:
Thu Sep 22, 2022 5:46 pm
@xmj can't even justify why anyone would want to do this.
I think "because they want to" is enough of a reason. Not everyone has to measure their decisions by your metrics. You're applying your decision criteria to other people, and other people might optimize for different things.

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

Post by steveo73 »

zbigi wrote:
Fri Sep 23, 2022 2:41 am
Not to mention that breaking into the uber-billionaire club requires so much luck that planning for it is a non-sequitur.
Do you know how hard it is to get to say 10 million let alone 50 million. My manager at work would have been earning 250k-500k and he would have had a net worth of a million or two.

My dad was a specialist doctor and he probably has a net worth now (retired) of say 5 million.

I know people who have generational wealthy. It's extremely rare and typically a bunch of it is gifted from previous generations.

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

Post by steveo73 »

ertyu wrote:
Fri Sep 23, 2022 2:55 am
Not everyone has to measure their decisions by your metrics. You're applying your decision criteria to other people, and other people might optimize for different things.
I 100% agree with this. I didn't think we were talking about my metrics though. I'm only applying my decision making on one point and that is a key point of this forum which is early retirement.

I am stating working forever isn't for me. If people want to work forever good luck to them. I'm all for it. If they want to retire at some point though and their plan means they have to work forever I think they should reassess their plan.

Personally to be clear about my bias I think the goal should be to lead the best possible life while managing your finances well and work has a negative impact on your life. Work also provides the means to purchase stuff and experiences. It's a balancing act not working and still being able to afford those activities.
ertyu wrote:
Fri Sep 23, 2022 2:55 am
I think "because they want to" is enough of a reason.
It depends. You can say whatever you want. If you can't explain your situation or justify your position your position is probably pretty weak. If I say I can fly like Superman do you believe it ? That plan I critiqued has as much chance of success as I do of being Superman. It's funny but that is the reality of the situation. I stated that was the most extreme position I've ever seen on any early retirement forum. It's not in the realm of having realistic expenses and a 3% WR. It's ratcheting up your expenses to ridiculous levels and then stating a ridiculously low WR is the only thing that will work.

No one has to justify themselves to me but when there is a plan on a retirement forum that dooms (my connotation) that person to working forever and still failing in their goals it'd be good to hear why they want to do that. It might help them as well.

Maybe I've missed some of the plan but I don't think so.

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

Post by M »

ertyu wrote:
Fri Sep 23, 2022 2:55 am
I think "because they want to" is enough of a reason. Not everyone has to measure their decisions by your metrics. You're applying your decision criteria to other people, and other people might optimize for different things.
While this is true, it sounds like your argument is we should work our entire lives and never retire just to give the money to our children someday in an attempt to ensure generational wealth. I thought the original goal of this site was to retire in five years and pursue other activities?

It seems like, at a certain point it's no longer about determining a safe withdrawal rate. It seems like some people are seeking some sort of feeling of psychological safety through money, which is illusionary at best. Working for this goal using only money is counter productive since you are guaranteed to waste your life working and have no guarantee that subsequent generations won't waste the money from your work getting high and street racing BMWs.

There is no asset, financial or otherwise, that is 100% guaranteed against loss in any period of time. None. If you believe otherwise, please name one asset you are guaranteed to not lose tomorrow. Even the US government has only been in existence for roughly 250 years. During that time we have had multiple wars, including a civil war, that could have easily wiped out the savings of everyone in the US. Other countries and people experienced even worse devastation. If there is a third world war this would be worse than the first two.

The future could be extremely different from the past, because we now have a much greater ability to blow shit up. None of these studies seem to take this into account because they are all based on history. Just think of what has changed in the past 50 years. Now imagine what could change in the next 50 years. I'm typing this on a $30 dollar kindle fire tablet. 15 years ago I could not even imagine a world where something like this would exist at this price point. Technical progress in the modern age makes a lot of these studies looking at 50-100 year time periods just about worthless anyway.

Look at the profit margin difference of, say, Facebook vs Wal-Mart. Actually just look at the top ten highest market cap companies in the S&P 500. How many of them even had the technical ability to exist 100 years ago? How many of these tech companies also have profit margins way above much older companies?

None of the studies take into account the rapidly evolving pace of technical change, nor do they take into account resource depletion, population growth stopping, etc. It's hard for me to look at any sort of 50-100 year study of withdrawal rates and assume any sort of concrete 100% path forward into the future.

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

Post by jacob »

IlliniDave wrote:
Thu Sep 22, 2022 6:13 am
I too find the idea of living solely off dividends/interest an attractive one.
For starters, note how dividend/interest-investors are not partaking in this conversation. (I'll make an exception.) During a downturn, threads about the S in SWR appear shortly after the "stocks are on sale"/"buy the dip"-cheers die down. Some doubt sets in and people try to regain or confirm their beliefs in their strategy.

The analogous discussions in the dividend-investor space would be "is a high/particular yield safe" and "what is the risk of a dividend cut". These discussions happen less frequently than the SWR discussions. Since dividend-cut threads happen less frequently than the SWR threads, it should indicate that dividend-investors at least "sleep better at night."

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

Post by WFJ »

Didn't read all responses.

50 year was used as the assumption is a 35-year-old who had a salary that was well above average for 10 years would also be intelligent enough to understand diet, exercise, healthcare and live longer than "Average". Given that one is 35, the average life expectancy of a male/female is 43/47 years (but includes ALL, BMI 100+ and those with IQ<50). 50 years is just an estimate, I can use a different estimate if there is some justification for an ERE individual.

https://www.annuityadvantage.com/resour ... %20rows%20

Just a few articles from a "guru" who advocates a SWR of higher than 4%. These are completely faulty estimates and leading people into potential ruin. In economics there is something called a "Path Dependent Error" where once you make it, you can never return to a point that has the same utility. Prematurely leaving the workforce at a young age is one such error.

https://www.kitces.com/blog/what-return ... ased-upon/
https://www.kitces.com/blog/the-ratchet ... he-4-rule/
https://www.moneycrashers.com/safe-with ... cent-rule/

Unfortunately, over long time periods, dividends can be volatile and precisely when Dividends are needed (market selloff) they are more likely to be cut. Pensions (outside of Federal) are also not as secure as everyone assumes. My family has unfortunate firsthand experience with failures of dividends (Bank) and pensions (former US monopoly break-up) during the GFC and dotcom bust.

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

Post by IlliniDave »

jacob wrote:
Fri Sep 23, 2022 8:52 am
...
The analogous discussions in the dividend-investor space would be "is a high/particular yield safe" and "what is the risk of a dividend cut". These discussions happen less frequently than the SWR discussions. Since dividend-cut threads happen less frequently than the SWR threads, it should indicate that dividend-investors at least "sleep better at night."
I've never witnessed that type of discussion from the dividend investing crowd, but it makes sense it happens. Caveat being I'm sort of used the bogleheads environment where dividend investors tend to get shouted down by the TR guys all the time, so my nature is to "defend" the dividend guys, and the dividend guys being being on the defensive tend to emphasize the positives. And the TR guys beat the multi-decade trend of falling dividends and possibilities of cuts/suspension/elimination to death in those arguments. Those also tend not to be discussions of particular payers.

When push comes to shove I'm agnostic when it comes to believing one is better than the other. Since I expect a WR (as I mentioned S ~= "safe" in my mind) below the aggregate dividend yield of my holdings it comes down to the fungibility of money philosophical debate :) If I reinvest $X in dividends this year and sell assets of <$X to live on this year, am I a total return guy or a dividend investor guy? But I do have a psychological aversion to selling money-making assets to pay the light bill.

Point noted regarding SWAN. Interesting--perhaps that's why I have an intuitive attraction to making cash flow > withdrawals.

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

Post by steveo73 »

WFJ wrote:
Fri Sep 23, 2022 1:19 pm
Didn't read all responses.
I don't think you are responding to the points being made probably because you didn't read the responses. You are responding to a simplistic argument that focuses highly on WR's without context. This simplistic argument is on the low tier of understanding of WR's. It's very basic and simplistic and is not a very good basis for individual's assessing their retirement plans.

There are a couple of themes:-

Theme 1:-
The failure of Doom was a clear example of a failure of incorrectly assessing your future expenses. This is a massive risk. Doom failed on expenses of about 30k with a WR a little over 3%. It wasn't his WR that was the issue but his expenses.

It's very very hard to accurately assess your expenses correct over long time periods. If you are really frugal you are taking on considerable future expense risk.

I retired with a 5% WR and it's safe apart from increasing future expenses.

Theme 2:-
I'm not sure if this is related to theme 1 but let's say it isn't. If you have realistic estimates of future expenses and you get down to a ridiculously low WR you will be working forever.

This is a retirement failure.

Theme 3:-
What is a failure ? Are failures really failures ? Life is complex. I don't believe Doom failed. He had changing life circumstances.

To sum up just stating my WR is 3% or whatever and I'm safe is potentially a false assumption. There are lots of other factors in your retirement plan.
Last edited by steveo73 on Fri Sep 23, 2022 6:06 pm, edited 1 time in total.

I(E)reland
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Re: The 4% Rule – A Castle in the Air

Post by I(E)reland »

I'm a bit surprised at some of the analysis on this thread. Surely SWR relates to the amount that can be withdrawn from a certain portfolio over a certain period. It can't obviously be determined but can be estimated using analysis of past returns and/or potential future scenarios.

Having other assets or liabilities is totally irrelevant to how much can be 'safely' withdrawn from portfolio X over period Y with a Z% confidence.

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

Post by steveo73 »

I(E)reland wrote:
Fri Sep 23, 2022 6:05 pm
I'm a bit surprised at some of the analysis on this thread. Surely SWR relates to the amount that can be withdrawn from a certain portfolio over a certain period. It can't obviously be determined but can be estimated using analysis of past returns and/or potential future scenarios.

Having other assets or liabilities is totally irrelevant to how much can be 'safely' withdrawn from portfolio X over period Y with a Z% confidence.
Even if this was solely an academic exercise you are incorrect. People will define safety in different ways.

The thing is it isn't an academic exercise. It's a guide for your retirement plans which will be customized to your specific situation.

Another way to look at this is that there are multiple use cases that can be run against the data that will produce different acceptable risk scenarios with different consequences to different people.

This is actually a complex issue and people want to oversimplify it.

Your post is basically stating all the matters is if a SWR is considered safe. Other assets and liabilities don't matter.

I'll try and explain the flaws in this outlook:-

1. You are utilizing assumed expenses. It's really hard to predict your expenses 5, 10, 20 and so on years into the future. This fact makes the whole discussion about what is a SWR very opaque for an individual.
2. You will die. Hence there are calculators that determine your risk of running out of money or dying.
3. There are opportunity costs to obtaining lower WR's. I'm sure everyone wants a WR of 0.2% but there is a massive cost of getting to that position. This of course isn't relevant if you love your job and want to keep doing it.
4. Most people in developed countries will have a social security system to back them up.
5. Most people won't retire at 20.
6/ People have different risk appetites.

=> There are probably even more factors that make defining your WR for your retirement much more complex than just stating a WR of x% is defined as safe.
Last edited by steveo73 on Fri Sep 23, 2022 7:06 pm, edited 2 times in total.

I(E)reland
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Re: The 4% Rule – A Castle in the Air

Post by I(E)reland »

No. The definition relates to a specific amount that can be withdrawn. Other changes to either the asset or expense amount is irrelevant to the core issue.

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

Post by steveo73 »

I(E)reland wrote:
Fri Sep 23, 2022 6:25 pm
No. The definition relates to a specific amount that can be withdrawn. Other changes to either the asset or expense amount is irrelevant to the core issue.
So Doom failing on a 3% WR means a 3% WR is incorrect ?

I've retired on a 5% WR and I'm confident it will be successful. Is 5% therefore a safe WR.

Financial planners often use a WR of 6%.

Some people retire without any financial assets. Let's say they have a WR of 50%.

Can you please explain which WR is considered safe ? If you believe a 4% WR is safe why do people retire with a significantly higher WR than 4% and they don't go back to work ?
Last edited by steveo73 on Fri Sep 23, 2022 6:46 pm, edited 1 time in total.

I(E)reland
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Re: The 4% Rule – A Castle in the Air

Post by I(E)reland »

The qs is how much can be withdrawn from X for y years with z confidence. If I win the lotto tomorrow I obviously won't care. But it doesn't change the original qs.

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

Post by steveo73 »

I(E)reland wrote:
Fri Sep 23, 2022 6:46 pm
The qs is how much can be withdrawn from X for y years with z confidence. If I win the lotto tomorrow I obviously won't care. But it doesn't change the original qs.
What was the original question ? Who was the original question for ? How come you can't define one applicable SWR for everyone ?

Are you stating the Trinity study is correct and no discussion is applicable to that study ?

Are you stating that a 99 yo person with an expected 6 months to live can't retire unless she has a 4% WR.

Why is this thread stating that a 4% WR is not safe ?

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

Post by Slevin »

Yeah, if you are going to post, but say you didn't read the comments, just don't post. Why do you think you have anything to add to the conversation if you didn't read the conversation? I'm rather a fan of this being a place where people can argue in good faith (even if some others have opinions we disagree with) and I'd prefer it to stay that way.

On an completely different note (but on the lines of spending being the largest factor that @steveo73 is talking about), I also find the estimations of SWR not changing with financial markets going down a little weird. Like if I build a yearly vacation into my budget, but markets aren't doing too hot right now, i can just skip the vacation (or other non-necessary expenses) while the assets are feeling relatively weak. I would imagine that 10+% of spending (and for people like my parents that number is >50%) for most people is "optional expenses", and thus the belt can be tightened when the belt needs tightened. Thus the "SWR" is really a dynamic number effected by a dynamic spending that can be inflated or deflated depending on need. Obviously, there is a limit to deflationary power, but it is weird that I don't see it in these arguments.

A second ability is just heading back to work part time when markets are down to cover (some) expenses. In markets where labor is more scarce (like today's market where I feel like I see a 'hiring' sign on most stores i walk into), you can pull decent pay that can ease the friction for a bit by just being a human with a pulse who is somewhat responsible. I think being a barista or a sandwich maker for a six month stint whenever the going gets rough doesn't seem like too bad of a life, especially if you are retiring in your early thirties or whatever.

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

Post by steveo73 »

@Slevin - you can make adjustments in real time in your retirement.

In my opinion it also shouldn't necessarily be defined as a failure.

Person A retires on 3% but it takes him 50 years. He retires at 65. He has on average lifetime expenses of $40k per year.
Person B retires on 5% but it takes him 20 years. He retires at 45. He has on average lifetime expenses of $40k per year.

Person B goes back to work part time for 5 years and works 1 day per work to afford a trip to Africa every year.

Who is the failure ?

To me it's Person A but to other people it might be person B.

Our retirements and working life and lifestyles are unique and we get to judge that ourselves.

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

Post by The Old Man »

I(E)reland wrote:
Fri Sep 23, 2022 6:05 pm
I'm a bit surprised at some of the analysis on this thread. Surely SWR relates to the amount that can be withdrawn from a certain portfolio over a certain period. It can't obviously be determined but can be estimated using analysis of past returns and/or potential future scenarios.
Having other assets or liabilities is totally irrelevant to how much can be 'safely' withdrawn from portfolio X over period Y with a Z% confidence.
You are correct. The 4% Rule is the expected return from a broad market stock-bond portfolio. In short, the 4% Rule is an ANALYSIS.
steveo73 wrote:
Fri Sep 23, 2022 6:08 pm
You are confusing an ANALYSIS with a PLAN. An analysis is not a plan.

I consider the 4% Rule to be a fatally flawed ANALYSIS. An individual’s PLAN should take into consideration their own unique circumstances and should include contingency plans for the possibility of plan failure.

Dr. Doom’s failure was not a failure of the 4% Rule ANALYSIS. Dr. Doom’s failure was the failure of PLAN A (retirement forever). PLAN B (I assume he had one) was to return to work and that plan is working.

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

Post by steveo73 »

The Old Man wrote:
Fri Sep 23, 2022 8:10 pm
You are confusing an ANALYSIS with a PLAN. An analysis is not a plan.
No, no and no. I'm sorry but you've gotten this wrong. I'm trying to move away from theoretical analysis into plans. I'm trying to draw out the complexity of the issue.

I'm not confusing anything at all. You haven't understood my position hence why you've incorrectly assessed my position.
The Old Man wrote:
Fri Sep 23, 2022 8:10 pm
An individual’s PLAN should take into consideration their own unique circumstances and should include contingency plans for the possibility of plan failure.
This is close but it's still missing the complexity of the issue.

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