4% rule in countries with a welfare state

[thrifty++]

The 4% rule does seem in some ways quite tailored to the USA which has more of a user pays society than some other countries.

I live in a country with a welfare state, where there is free public healthcare, non-asset non--income tested pensions form the age of 65 and even a generous welfare net from any age if you are unemployed. In exchange The downside is that living costs are much higher here -- whether this is a consequence or not who knows. It would tend to make a bit of sense though, that the costs of things inflate because people have more money to spend on things when they get pensions, welfare payments when unemployed, free and subsidised housing in some cases, and free healthcare and dont have to pay for private healthcare insurance.

But, it does make me think - is the 4% rule too conservative in countries where you have a generous welfare state. And when you are just going off your expenses, where your non healthcare expenses are higher because of that welfare state.

Do others who live in countries with a welfare state somehow factor this into their FI calculations? If so how do you do it?

[chenda]

Well the US does have social security and, as I understand it, subsidised healthcare after a certain age. So there is a welfare state, perhaps less expansive than other developed countries.

But yes I do factor in state pensions as a supplement when I'm older, and free healthcare is just budgetary item you don't need to pay for. The 4% is based to avoid portfolio failure, i.e. it purports to pay 4% plus inflation in perpetuity. Additional income sources are essentially irrelevant to that specific consideration.

I suspect NZ COL is primarily driven by it's very small size and geographic isolation. Which also brings benefits as well as costs.

[Jean]

i don't know if switzerland count as a welfare state.
But i don't use the 4% rule. I have asset that produce income, and i try to find thing that i would like to do if i had more cash, in order to motivate me to earn some money to diversify my assets.
I see it like preparing to sustain an assault. Once your fort is built, you maintain the fort, and improve its weakness.
Maybe a welfare state covers some of those weakness.

[jacob]

The 4% rule does seem in some ways quite tailored to the USA which has more of a user pays society than some other countries.

The widespread adoption of the 4%-rule is the result of either naive (applies everywhere "because the internet")or techno-optimistic data-dredging of the 20th century. For other countries, see https://retirementresearcher.com/the-sh ... he-4-rule/ or many many others. TL;DR - Go to any other country, and 4% drops to 3% or even worse, historically, financially.

We no longer live in the 20th century. (Read chapter 7 of the ERE book, again.)

There are very few "advanced countries" that currently lets anyone die for lack of capital (of all kinds). It's just bad optics if nothing less; humane concern insofar you have a higher opinion of humanity.

However, the various governments of so-called "advanced countries" have differing opinions of how they deal with individuals, who choose to not work for a living. This depends on who they are.

Most include legacy rulings that still allow people to live off of capital even if it is socially "judged".

[classical_Liberal]

These % rule conversations grow tiresome. Can't people just figure it out on their own?

Everyone's goal is different (do you have kids and want to leave some legacy?). Everyone's situation is different (how much old age pension does you govt offer? how stable is that govt?).

How old are you? How do you invest?

I mean, come'on people. These conversations boil down to one thing:

Do I have enough?

The answer is, I don't know, but YOU should.

[Scott 2]

The US offers limited welfare:

Social Security: Pulling the plug at 40, I found my expected social security moved the max SWR by about 25 basis points. It's a lot at 70, but making it there from 40 requires most of the same money anyways.

Medicare: Yes it's health insurance, but it's far from comprehensive. Currently it kicks in at 65. But you need a supplemental policy. And a drug policy. And dental. And eye care. Hearing aids are out of pocket too. Long term care - you don't want to stay at a government facility. So at least $5k per year is still a reasonable estimate, even after Medicare kicks in. Pre-medicare, optimizing healthcare against the affordable care act leads to a similar aggregate expense.

Both of these factors can be individually accounted for in calculating your personal maximum safe withdrawal rate. Like any other inflow or outflow, you model when it starts and stops. Should a legislative change decimate subsidized healthcare, one might be screwed. It depends how much of the inflated healthcare prices are a result of those subsidies. Planning for a worst case scenario dramatically raises the required net worth.

As an example - the US introduced a $30/month low income subsidy for internet. The cheapest internet I can buy increased in price, from $20/month to $30/month. If I can get the subsidy, I have free internet. If it went away, would internet be $30 a month? Or would it return to $20? Wealth redistribution via welfare introduces inefficiencies. It's hard to estimate what happens when they go away.


Rather than blindly use a 4% rule, I account for current market valuations. The formula I use (accounting for age, social security, simple investing):

0.0175+0.5*(1/CAPE10)

So if CAPE is 36, my max SWR is 3.14%. If it's 28, the number is 3.54%. I was heavily influenced by the ERN series, articles like this one:

https://earlyretirementnow.com/2016/12/ ... valuation/

In practice - after watching CAPE10 go from 36 to 28, raising my SWR by 40 basis points doesn't feel very smart. My net worth dropped by years of living expenses. Money feels like a scarce and rapidly depleting resource. Parting with even more of my portfolio seems unwise. If anything, I want to reduce reliance upon my portfolio. Semi-retirement looks far more appealing.

Since the downward turn in our economy effects everyone, there's also talk of cutting welfare programs. In other words - the worst case scenarios that a SWR guards against, also threaten the welfare state. Maybe counting on it isn't so smart.


Ultimately, one needs to calculate their personal SWR. I don't think presence of a welfare state dramatically impacts the mechanics. The 4% rule is a nice hook, but when the time comes to execute, it's too simplistic.

One of the biggest curve balls we've experienced, is what happens when supply constraints increase the price of physical goods and services. As the population grows and the environment depletes, this will happen with increasing frequency. The cost to maintain one's standard of living, if it's not built around virtual goods like video games and streaming movies, could dramatically outstrip the stated rate of inflation. That's scary.

[steveo73]

These % rule conversations grow tiresome. Can't people just figure it out on their own?

Everyone's goal is different (do you have kids and want to leave some legacy?). Everyone's situation is different (how much old age pension does you govt offer? how stable is that govt?).

How old are you? How do you invest?

I mean, come'on people. These conversations boil down to one thing:

Do I have enough?

The answer is, I don't know, but YOU should.

Nailed it.

The question is why do I respond and can I be honest with myself ?

I respond sometimes because I think people just don't understand the concept in relation to actually retiring. You have to figure out if you have enough for yourself and it's only partially about your WR. There are so many other factors significantly more important such as your age, your health, your expenses, your investments etc.

I respond sometimes because when people make these grand statements like they can predict the next 100 years it irritates me. This is the same way debates happen all too often today. You create an extremist viewpoint and argue so confidently from that viewpoint people react either against that or for it. It's a tribal response. I don't know why I still interact with these viewpoints. It's dumb on both sides.

[prudentelo]

USA is more of welfare state that people think. Most useful "ERE welfare" is SS which is good benefit by world standards.

Anyway "Welfare state" is not usually "free money". There are attached string like must first spend down NW, or have made employment contributions for a long time, etc.

Countries like Germany, you may lose half of salary to "welfare contributions" then qualify for little/nothing if you worked 5-10 years, because system designed for "normal" person who works 30-35 years.

[DutchGirl]

The 4% rule was an awesome, awesome eye opener for me at age 27 or so. I had never thought about little old me being able to save up enough to live off of and never work again; that was something for rich people. Doing 25 times my low expenses and arriving at a number that was way less than a million showed me that perhaps being financially free was possible for me.

But yes, since then I've come to understand way more about the financial options in my country. I have those safety nets of a guaranteed (low) income if I were to lose all of my own money, I have the safety net of being able to obtain all necessary health care for roughly 1700 euros per year (independent of employment or wealth status), I have the safety net of social security after age 68 and 27 year old me already had put some money into a pension without actually realizing it, because it was mandatory. So I will also have a nice pension waiting for me at 68.

So I've let go of the 4% rule and instead have looked at how much money I needed to save up to have a reasonable chance to make it to age 68 or so without needing to apply for that government assistance before that age. And hey, that number is even lower than what the 4% rule predicted.

[zbigi]

Medicare: Yes it's health insurance, but it's far from comprehensive. Currently it kicks in at 65. But you need a supplemental policy. And a drug policy. And dental. And eye care. Hearing aids are out of pocket too. Long term care - you don't want to stay at a government facility. So at least $5k per year is still a reasonable estimate, even after Medicare kicks in. Pre-medicare, optimizing healthcare against the affordable care act leads to a similar aggregate expense.

Interestingly, Polish government is currently considering introducing a condition of having to work for at least 25 years (20 for women) to be egligible for state medical care in retirement age. This is to incentivize people to work "above board" (i.e. pay their taxes). If something like this gets introduced (here in Poland or in the US for that matter), the math for old age stage of ERE changes.

EDIT:

Should a legislative change decimate subsidized healthcare, one might be screwed.

Oh, I see you've already addressed that

[bostonimproper]

Two thoughts:

One, I agree with everyone else saying that 4% is not a hard and fast rule and that you need to take into account your own situation (alternate income streams, asset allocation, expected macro performance etc) to figure out your own “number.”

Two, I think young folks looking to FIRE should consider pensioner/elderly entitlements as suspect. There’s a huge demographic shift coming in the US/Europe/East Asia and at least for me (early thirties), I think it very likely that benefits are cut (either explicitly or effectively through the grind of not keeping up with inflation) before I have the opportunity to use Social Security, Medicare, etc.

[jacob]

US social security is actually easy to calculate. Here's the simple version that people between the 10% and 90% percentile fall into.

To get it:
You must accumulate at least 40 points. To earn one point, you must earn about $1500 in a given year. You can get a maximum of 4 points in a year. You must file your taxes in order for this to actually register (in the US a lot of people don't bother paying taxes; enforcement is lax). The tax is explicit and comes to 6.20% of your earned income. Your employer pays an additional 6.2% for a total of 12.4%. If you're self-employed you pay both... but you get a small percentage deduction.

What you get:
Payouts are indexed to https://www.ssa.gov/OACT/COLA/AWI.html You basically calculate your inflation-adjusted lifetime earnings. I have made a spreadsheet to do this for me (no you can't have it, make your own). Then divide this to get the average monthly wage over 35 years (even if you didn't work for 35 years). (If you actually work more than that, then you still divide by 35, but you discard your lowest earning years from the total sum.)

Now comes the fun part. It's easier to explain with an example. Suppose your lifetime inflation adjusted earnings for your best 35 years is $820000. Then your average monthly income is 2000/month.
You get 90% of this up to $1023 (the first bend) which would be 0.9*1023=920.7
You get 32% of this up to $6171 (the second bend) which would be 0.32*(2000-1023)=312.6
You get 15% for everything above that which here would be zero.
For a total of 920.7+312.6=1233.3 per month in 2022.
The bends inflation adjust in the same way as the wage index. These are for 2022.

Lets say your lifetime earnings are 3x that, so $6000/month. Then
90% up to 1023 + 32% up to 6000 = 0.9*1023 + 0.32*(6000-1023) = 2513.3/month

I'll leave someone making 4x as much as an exercise.

As is evident, SS is an extremely generous plan for people who can live well under or around the first bend. However, once you get much past the first bend, your payout converges on just 1/3 of your previous salary and you therefore have to save extra elsewhere (IRA, 401k, pension) to maintain your income (the goal of most normies).

SS allows you to retire early:
If you retire at 67, you get 100% of the full amount.
If you retire at 62, you get 70% of the full amount.
Years in between goes linearly in the percentage.

For a hypothetical semi-ERE situation, you could make $6000/year for 35 years and pay $372/year in taxes (technically your pension savings) for the ability to get $5400/year in SS at 67. That pot is nominally worth 5400/0.03=180000 (somewhat less since it's an annuity and not a perpetuity), despite you only have paid in 36*372=$13020.

In short, SS puts a good floor under low-spenders. It's those who spend more than $1023/month who face the bigger shortcomings.

Politics matters to this calculation since one can obviously impact different people by adjusting these percentages, ages, points, and bends, and so on.

[The Old Man]

The 4% Rule is an analysis not a plan.

It is an analysis of the expected returns of a stock/bond portfolio over a 30-year time frame with a 95% level of confidence based on USA 20th century data.

[unemployable]

These % rule conversations grow tiresome. Can't people just figure it out on their own?

Most of the discussion around 4%, here and elsewhere, seems to be a sort of signaling. People bring it up in the context of how smart they want to show others they are. "See, I've thought about it in this way and that and 4% is for ignorant idiots who have haven't considered welfare/out-of-sample economic environments/imminent collapse that's bound to occur in exactly the way I predict/yay American stonk market boo every other stonk market/people like me who have [too much/not enough] money/whatever else."

I do not claim immunity to this phenomenon. My stance has not changed from this post.

[Scott 2]

My thinking around the welfare state and retirement has evolved over the years. Especially in light of events like actually retiring, experiencing an economic down turn, watching parents retire, etc. I think it's interesting to revisit.


Social security offers embedded protections, beyond income at retirement age:

1. It's a long term disability policy - provided you have work credits in the recent past. Past age 40, you need 20 in the past 10 years. With the credits costing only $1500, there's a strong argument for earning at least $3000 per year.

2. It's an inflation adjusted annuity. Past full retirement age, one can delay the benefit up to 3 years, growing the value of that annuity by 8% annually. That growth is on top of the inflation adjusted benefit. It's a good option for hedging against longevity risk.

This comes back modeling one's personal inflows and outflows. How do you value the long term disability benefit? The inflation adjusted aspect of the income stream? The opportunity to buy 25% more annuity? The risk of benefits falling as population demographics change?


On that last one - young savers (typically high earners) sometimes take an extreme perspective. "I won't get social security". "Medicare will be gone". I am no longer of that mind. The social safety nets evolved for a reason. They may be smaller, but IMO they'll persist in some form.

I think the question of how they'll get cut becomes very interesting. In one's personal scenario, keeping full benefits is possible, despite cuts. Regressive benefit changes are unlikely. This plays to the early retiree's advantage.


As an example - Medicare has an Income Related Monthly Adjustment Amounts (IRMAA) penalty. Someone earning $114k per year in retirement pays double the Part B monthly premium of someone earning up to 91k per year.

What if government freezes those bands to control costs? And when retirement age comes, the inflation adjusted income thresholds are halved?

Sucks to be the guy earning $91k per year. The early retiree who learned to live on $34k per year? There's no loss at all. If anything, competition for medical resources has just been lowered, improving benefit quality. Doctors still need work, after all.


As another example - when time comes to cut social security - what if they drop benefits of the 3rd bend from 15% to 5%? In Jacob's example above, the early retiree experiences zero loss. Because they were getting no benefit from the 3rd bend anyways.

However - middle earners who got bend 3, now have less wealth that can be used to compete for resources. Bingo gets a little cheaper. The change could again improve benefit quality for the early retiree.


The genius of using skill to operate at a low income threshold, is it places one deep within safety nets offered by the welfare state. Eroding protections to that level, becomes very destructive to society. The early retiree's benefits may be more secure, than for someone following a traditional retirement path. Substituting skills for cash reduces legislative risk to one's benefits.

[zbigi]

As another example - when time comes to cut social security - what if they drop benefits of the 3rd bend from 15% to 5%? In Jacob's example above, the early retiree experiences zero loss. Because they were getting no benefit from the 3rd bend anyways.

However - middle earners who got bend 3, now have less wealth that can be used to compete for resources. Bingo gets a little cheaper. The change could again improve benefit quality for the early retiree.

I imagine that whatever change is introduced in the future, it has to help balance to budget, i.e. it has to increase inflows and decrease outflows. Hence, it will almost surely encourage working longer and thus punish early retirees.

[jacob]

I imagine that whatever change is introduced in the future, it has to help balance to budget, i.e. it has to increase inflows and decrease outflows. Hence, it will almost surely encourage working longer and thus punish early retirees.

Basically, the loops always need to remain closed within reason (see WL8) on a societal level. Therein lies the challenge for individual strategies. The demographic tension was mentioned already. So you gotta look at your access to the capital flows and the rules that govern where they're coming from; whether they're coming to you.

[Ego]

... young savers (typically high earners) sometimes take an extreme perspective. "I won't get social security". "Medicare will be gone". I am no longer of that mind. The social safety nets evolved for a reason. They may be smaller, but IMO they'll persist in some form.

The antifragile mindset wrt these programs - especially for young people - would be to live life as if the programs will not exist. More broadly, it would be wise to assume that no matter how much is saved - 4%, 3% .002% - it will fail to provide enough to live on for the duration of an early non-income retirement.

Spending those years finding interesting, engaging hobbies that throw off incidental income is time well spent. Starting early and doing everything possible to maintain health and extend lifespan can make one less likely to need the programs at all.

[unemployable]

The most mutually agreeable answer to keeping SS solvent is probably to raise the retirement (full benefit) age. This change would be neutral to those near or past retirement age* and affect the rest more or less equally (men slightly hit harder than women, so what else is new). And it functions as both a tax increase and a benefit cut without it being called either of those nominally.

A lot of people bring up lifting or eliminating the cap on the SS part of FICA taxes. Problem is eliminating it would raise taxes on those affected by more than seven percentage points — and the rich are the ones with the money to lobby against that severe a tax bite. Also, there's a cap on how much your benefits can be, a virtual fourth bendpoint of 0 if you will, so those same people would have a second argument. I could see a reverse bracketing scheme with a lower tax than the current 7.whatever% on higher incomes. I don't envision a wealth test as few other government benefit programs have one.

I agree broadly with what @Scott 2 wrote. SS isn't going to zero. I may see a 20% cut to benefits all-in and the generations behind me may see 30-40%. From an ERE standpoint the most important thing is to get your 40 quarters in and your lifetime income over the first (90%) bendpoint. Both of which I have done, not that anyone cares. Getting over the 32% bendpoint would be literally too much work to lose the benefits (again literally) of looking "poor" to the system.

*If it's done the way Reagan did it, gradually and not affecting older folks

[steveo73]

The antifragile mindset wrt these programs - especially for young people - would be to live life as if the programs will not exist. More broadly, it would be wise to assume that no matter how much is saved - 4%, 3% .002% - it will fail to provide enough to live on for the duration of an early non-income retirement.

The problem with this approach is the opportunity cost. There is no retirement. I'm retired and I really enjoy it.

Another point is that it might be antifragile but it might not be. You won't know and you are working for a lot longer. I'm not working. The world could change is so many different ways.

Spending those years finding interesting, engaging hobbies that throw off incidental income is time well spent.

I pick my hobbies for myself to engage in without any thought of additional income.

Starting early and doing everything possible to maintain health and extend lifespan can make one less likely to need the programs at all.

These are critical points to me and I assume to you but we all get old.

it's not that your points are bad. It's more a matter of articulating the opportunity cost of this approach and that these ideas can only take you so far.