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

[thai_tong]

IMO the tragic path for someone into this stuff isn't outliving their money. It's wasting their life waiting for a magic number, when everything will be different. Moving that bar even further out feels like a mistake.

Acknowledging - these are my qualitative observations. They have little to do with the math of the study. I spent a bunch of time on the portfolio charts website, chasing my anxiety, before learning it was the wrong set of questions.

Could you share what you think are the right questions to ask?

I'm asking as someone who is trying to do less analysis because it stresses me out.

[Western Red Cedar]

I think the generally accepted "upgrade" to the 4% rule should be gaining a comprehension of how/why it works/worked mathematically. Because, for example, if you add just a tiny bit of intelligently dispersed earned income to your plan, the "rule" becomes much more resilient/robust. And, if your spending is also very low, maybe approaching 1.5 jacobs/year, you might discover that you can safely semi-retire much earlier. In fact, you can make the rule any proper % you prefer if you simply add the rule that you will cover your current expenses with earned income during any defined period your balance falls below your initial balance. And the shorter you are able to make your time periods, because the components of your model are flexible/modular, the more efficient your plan will become.

People in the mainstream FIRE community have made this point for years (see: https://www.madfientist.com/michael-kitces-interview/). I'm still a bit baffled why so many here target 3% SWR even though they have a number of opportunities to produce income or reduce expenses, even if only for a brief period of time.

Perhaps there is something buried in the moat between WL 5 and WL 6 that I don't fully grok. It seems to me if one is honest about developing a resilient system that extends beyond financial capital, they should realize your point much earlier in the journey and not focus so much on SWR.

[IlliniDave]

People in the mainstream FIRE community have made this point for years (see: https://www.madfientist.com/michael-kitces-interview/). I'm still a bit baffled why so many here target 3% SWR even though they have a number of opportunities to produce income or reduce expenses, even if only for a brief period of time.

Perhaps there is something buried in the moat between WL 5 and WL 6 that I don't fully grok. It seems to me if one is honest about developing a resilient system that extends beyond financial capital, they should realize your point much earlier in the journey and not focus so much on SWR.

The reasons I'm aware of that people in the standard FIRE community began pushing the 4% rule downward are things like:

-The Trinity study looked at a 30-year window, iirc. An "optimistic" early retiree might feel they or their spouse could live 40-50 years or longer as a retiree
-The Trinity study is arguably based on a unicorn of a period of returns for financial assets in the US. I think the "rule of thumb" before it was 8% based on historic 12% returns less 4% historic inflation.
-At the time I was in the heart of my planning, stock valuations were at/near historic highs and bond yields were at historic lows which point to a high likelihood of future returns that would be lower than what was implicit in the Trinity study.
-Inflation was at/near historic lows and for myriad reasons people didn't feel that would continue
-Many were hesitant to count on SS and Medicare
-Many were worried about the spiraling costs of LTC

It's been a long time since I checked into that world so I don't know what they are saying now.

On more of a temperament level, many just wanted to to have the wherewithal to maintain their current lifestyle insofar as spending defined it, rather than dial it back.

Even though I didn't plan around any x% strategy per se, I gave a lot of consideration to those concerns (aside from the dialing back of lifestyle). I'm a little unusual among the group here in that I also had legacy goals, so as I was scoring outcomes of different scenarios my terminal assets being below a certain threshold counted as a fail.

Another thing that sets me apart from many here is that for whatever reason I have the quirk that if I had to seek employment or get involved in some sort of hustle simply to make ends meet as an old man, I'd consider it a major fail. That's not to say I wouldn't do it in a pinch, but it would blow up the SWAN factor, and is just a distasteful ingredient to bake into the plan. In the calculus of my quirkiness, it was much better to work an extra year or two and sock away 10-15 years of part-time earnings.

In the world of anecdotes I just have to look at my dad. Going back 7-8 years when he was in his upper 70s, he was maintaining a small vineyard as well as keeping up his home and yard. Within 2-3 years he'd fallen off a cliff and could no longer keep up with things. Fast forward another 4-5 years and he's now completely dependent on others. He's fortunate to have something very few people have: an extremely generous COLA-adjusted pension, and 2 conscientious children looking out for him on a constant basis. There's zero chance he could be out there making money to make ends meet, even though some of his contemporaries still could. And his living expenses have gone up appreciably, nearly 3X what they were. And aside from his cognitive and increasing mobility issues, he's remarkably healthy. The future is unknowable.

It's really a matter of temperament. I don't see any of getting out of a "career" ASAP and accepting a little more future risk versus hanging in there a little longer to mitigate some of the risk a priori versus just going with a semi-retirement type strategy and never letting earned income be $0, or any of the ways to blend them as morally or intellectually superior to the others. Maybe that's because even though I wouldn't call it fun, I did not feel I was suffering as a corporate minion and found many reasons to enjoy my work and colleagues. Retirement to me was always a "journey to" something rather than an "escape from" something, which made navigating a trade where I'd just work another 1-2 years and take care of all my potential future part-time work/hustle up front easy. Never having to actively seek to move someone else's money into their pocket is a strong motivator to some of us.

All that said, I still agree that SWR shouldn't be a top focus in the decision space. It's too crude a tool.

I found this out there. I can't speak to the accuracy of the work, but assuming it's reasonably accurate it looks like the 4% rule-of-thumb expanding the Trinity data set out to 2024 still isn't bad. The more interesting thing is what happens to the Trinity methodology when applied to Swiss stocks which don't have the mid-20th century boom in the US baked in. (there's a link to it towards the bottom of the page)

https://thepoorswiss.com/updated-trinity-study/

[jacob]

People in the mainstream FIRE community have made this point for years (see: https://www.madfientist.com/michael-kitces-interview/). I'm still a bit baffled why so many here target 3% SWR even though they have a number of opportunities to produce income or reduce expenses, even if only for a brief period of time.

The 3% level is effectively a perpetuity that is based on biology (fundamentals) and not just market history (statistics). As such, the entire concern about withdrawal rates as well has having to think about reducing expenses or staying engaged with income-production goes away. It becomes a permanently solved problem.

Now, there's been a ton of debate as to whether it's a good idea to solve this permanently or whether it's better to stay hungry. The "hungry"-argument also works for higher percentages: Why not RE at 5% instead of 4% for the same reasons? Why not 10%? Indeed, why bother save at all given how resilient we are and how able we should be to find a job. If we follow the "hungry"-argument all the way, we get to the point of "mini-retirements" wherein one works for a couple of years and then spends it all down only to start the process again.

Mentally, I think the difference between the two situations can be found in the tap-water argument. At the 3% level or below, money becomes like tap water. It's just there when you want it and you don't have to think about it. That doesn't mean it's there in infinite amounts, but it's always there at the flow rate determined by the size of whatever faucet you installed. Whereas, at the 4% level, it's more like you have a finite amount of water in the tank. Although you know you most likely have enough, you still have to think about running out and allocate some mental resources to keeping track of potential replacement water sources just in case. Of course, most people live without any metaphorical tap-water at all and so each day they have to schlep their bucket down to the well and back again to get their fill.

In practice though, I think a lot of people here target 4% and then through a combination of subsequent income/expense reduction market-growth eventually find themselves at 3%. 3% is, after all, only 33% larger than 4%.

[Ego]

Early retirement's freedom to do nothing can subtly erode the ability to do anything.

[jacob]

Early retirement's freedom to do nothing can subtly erode the ability to do anything.

I've been out of the earned/active-income game for 10 years now. The biggest mental change has been in completely removing the idea of making money from my mental space. In the ERE book I talked about how should look at activities in terms of whether they cost money, earn money, or are net neutral. This mindset becomes a specific lens through which one views the world: How much would it cost to do this? How much do I earn from doing that? I don't see the world like that anymore but it took a while to get here.

What is being eroded is not the "ability to do anything". What is being eroded is the constraint (both physical and mental) of always doing [some] things for money.

Not being FI and having to habitually use the money-flow lens makes it harder to see activities where money-flow doesn't matter or is non-existent. Money is basically a chain that ties one to the money-making/spending part of the universe for good or bad. As such the lack of FI freedom excludes one from experiences where money is never a factor. This happens in two ways. Both in the sense of not being able to imagine doing something for 10-20-30 years that doesn't touch money. But also in the sense of experiencing a world w/o putting a dollar-tag on one's work or mission. Only children below the age of 5 or 10 and the truly FI get to experience that.

An interesting question: Would it be possible to go back to having to make money after a good number of years of being money-concern-free? I don't think it's impossible. However, I think it would be weird. The toughest part is probably all the ways humans are subtly trained to respect money and those who have it (take orders/provide services for money) through "growing up" or through "schooling". I personally find it weird to pay someone to do something for me when me doing something for them would always come down to reasons other than money, e.g. because it was helpful, interesting, fun, right, necessary... to do. Not because it paid the bills or is somehow valuable in the market place.

(I had a short conversation with an FI guy who had to find a job for visa reasons even if he didn't need the paycheck. His experience was bizarre. Like a Martian being told that there's a rule that one must perform a job for the sole reason of getting little pieces of papers with numbers on them ... because that's what the immigration law says. Only to go home and use the paper pieces as tinder in the fire place because other uses are hard to conceive.)

[7Wannabe5]

The 3% level is effectively a perpetuity that is based on biology (fundamentals) and not just market history (statistics).

Yes, but isn't it also the case that even the 3% growth rate of timber is dependent upon a market for timber in order to convert it into that which Caesar deigns to accept as payment? The growth rate of the stock market is essentially the growth rate of (consumerism * #consumers) bounded by labor's share of productivity (wages.) OTOH, I suppose as the radius of the timber forest you own which surrounds you increases, the greater the difficulty Caesar's tax collectors might experience in reaching you, but the growing circumference of the boundary of your timber forest would also eventually create a de facto "fence maintenance against the unlanded hordes" tax. Hmmm...seems to me that any individualistic solution is eventually going to have to default to Feudal Lord if biological fundamental within framework of private property is assumed as backstop.

[J_]

@jacob: “An interesting question: Would it be possible to go back to having to make money after a good number of years of being money-concern-free?”

I am more than two decades money concern free. I do think that I can go back and make money again if I have to. I have kept my practical, knowledge and commercial skills in tact. It helps of course a lot living an active life and beeing fit and healthy.

[IlliniDave]

...An interesting question: Would it be possible to go back to having to make money after a good number of years of being money-concern-free?...

At 3.5 years away, I think weird is a pretty good way of putting it, especially if I had to go back to something essentially like my old salaryman gig. In my planning I thought it might be fun to sign up with some sort of temporary employment agency and get short stints doing random things that were substantially different. But that was an option to alleviate boredom which never came.

I think at some point it would begin to become impossible or at least prohibitively undesirable. Some of the unhappiest people I've encountered are approximately octogenarians working in checkout lanes or similar. Each year that goes by I feel like returning to work is less of an option. IN my former field, only an outfit in dire straits would consider hiring me in an engineering or similar role.

To Ego's point above, I suppose it depends on the person. I feel like I'm more knowledgeable, in better physical health, more helpful to my family writ large, have a higher degree of contentedness overall, which adds up to being a happier person internally which in turn feeds back and bolsters those first things. It is certainly in the realm of leisure, and many would see it as me being mostly idle and doing nothing. But so far it's a good life.

I ran into the same thing as the person you mentioned when I looked into relocating to Canada. Canada does not want a self sufficient retiree just spending money within its borders. They want workers and entrepreneurs.

[7Wannabe5]

Some of the unhappiest people I've encountered are approximately octogenarians working in checkout lanes or similar.

Yes, but the octogenarians who are just sitting home watching TV aren't all that happy either (with possible exception of 94 year old woman I was chatting with recently who seemed kind of intrigued about the quantity of soft-porn readily available to her on Netflix.) Whereas, the octogenarian I know who is still making money tutoring kids in reading doesn't seem all that unhappy about her fate.

I feel like my recent bout with Crohn's Disease gave me some insight into what might be reasonable expectations within reasonable occupations to be continued well into old age. Working at a checkout lane is actually a pretty brutally demanding job for an older human to fulfill. One much better option for anybody who is also fit enough to still work at a checkout would be to get paid to provide light housekeeping and companionship for another senior with mobility issues or mild dementia and this is likely to be a hugely growing occupation as the Boomers age into decrepitude.

[zbigi]

Yes, but isn't it also the case that even the 3% growth rate of timber is dependent upon a market for timber in order to convert it into that which Caesar deigns to accept as payment?

Also, the 3% growth is pre-tax.

[7Wannabe5]

Also, the 3% growth is pre-tax.

Yes, but as the model falls back to the biological, taxation and/or tribute also defaults to the cost of maintaining territorial boundary. IOW, you can only own and profit from that which you can physically defend. In a model in which you depend upon the law to protect your property rights, the law does not have to be designed in an egalitarian manner, but it must at least be enforced in a consistent manner to prevent simple default to "might makes right." Of course, if the model alternatively assumes an interim period of high technology combined with simple strongman moral reasoning, then the % return on acreage from solar panel installation will almost certainly be greater than that from timber.

[jacob]

Also, the 3% growth is pre-tax.

Functionally speaking, from the perspective of withdrawing/living of capital income, it's best (=least obfuscating) to think of taxes as an expense just like any other expense. The 3%-growth rate is independent of that.

[IlliniDave]

Yes, but the octogenarians who are just sitting home watching TV aren't all that happy either (with possible exception of 94 year old woman I was chatting with recently who seemed kind of intrigued about the quantity of soft-porn readily available to her on Netflix.) Whereas, the octogenarian I know who is still making money tutoring kids in reading doesn't seem all that unhappy about her fate.

I feel like my recent bout with Crohn's Disease gave me some insight into what might be reasonable expectations within reasonable occupations to be continued well into old age. Working at a checkout lane is actually a pretty brutally demanding job for an older human to fulfill. One much better option for anybody who is also fit enough to still work at a checkout would be to get paid to provide light housekeeping and companionship for another senior with mobility issues or mild dementia and this is likely to be a hugely growing occupation as the Boomers age into decrepitude.

I know three octogenarians, two of them who essentially fit the sitting home watching TV (or other sedentary past times, like crossword and jigsaw puzzles) cohort due to physiological decline. Both are pretty happy. The third works a half day a week in her home beauty shop and she seems pretty happy too. She does it primarily because her few remaining clients are decades long friends and they enjoy each others company. The difference I see in a subset of the older workers I occasionally see at a Walmart or wherever generally give the vibe of resenting being there (and at that age, they'll generally tell you that's the case, lol) and are only there because they need the money. I'm sure there are some who both enjoy being out and around people and need the money.

You're right that there's a niche in eldercare that one could probably freelance in. The woman who works with my dad is an above board licensed/insured provider but much of what she does doesn't really require that. But you'd have to be physically capable of doing the things the client is not physically capable of doing, which could make it a self limiting gig.

For people who just want to work for pay until they physically can't, more power to them. My way of doing things works for me, but I get it wouldn't be the most fulfilling life for everyone.

[Western Red Cedar]

Mentally, I think the difference between the two situations can be found in the tap-water argument. At the 3% level or below, money becomes like tap water. It's just there when you want it and you don't have to think about it. That doesn't mean it's there in infinite amounts, but it's always there at the flow rate determined by the size of whatever faucet you installed. Whereas, at the 4% level, it's more like you have a finite amount of water in the tank. Although you know you most likely have enough, you still have to think about running out and allocate some mental resources to keeping track of potential replacement water sources just in case. Of course, most people live without any metaphorical tap-water at all and so each day they have to schlep their bucket down to the well and back again to get their fill.

To riff on the analogy, let's assume we all have large water tanks and need roughly 100 gallons per year to meet our needs. Harvesting water is a lot of work, but if we put some aside then it may last us for many years, and we can focus on other tasks. At 2500 gallons it is likely one needs not worry about harvesting water and can simply rely on precipitation to refill what they use each year. At 3300 gallons, the water source is even more secure and will likely continue to expand.

My point is that if someone is developing a robust, integrated lifestyle they don't really need to think about linear withdrawals from their water tank. They may only have 1500 gallons in reserve, and decide to do something else besides harvesting water for a couple years. During that time they might even use 200 or 300 gallons from their tank, then return a couple years later to replenish that and the some. They might opt to adopt a lifestyle that doesn't even require any withdrawals from their tank for a year or more.

Having some reserves is always important as droughts are a reality, but once one recognizes how large the reserve is, and the availability of water from other sources, they don't need to abide by the linear projections.

[Western Red Cedar]

On more of a temperament level, many just wanted to to have the wherewithal to maintain their current lifestyle insofar as spending defined it, rather than dial it back....

It's really a matter of temperament.

All that said, I still agree that SWR shouldn't be a top focus in the decision space. It's too crude a tool.

I agree that temperament is a crucial factor. I also think that family and dependents play a large role, as well as ones profession. Some jobs or fields are very challenging to return to after you leave. I think a lot of people recognize the relative level of effort needed to make six figure salaries based on where they are currently at in their profession, and would rather lean into inertia and rely on a fat bankroll that will likely keep growing than leave early and pursue an unknown patchwork of side gigs or alternative lifestyles (even if those do sound like a lot of fun).

Leaning into the safety and security of financial capital via a 3-4% SWR makes more sense to me if one is supporting a family. If one is a lone wolf, it is much easier to take risks.

The tragedy in my view is when I read about people white knuckling it. Telling themselves it is only "7 more years" until I'm free, when they could actually claim their freedom now by taking a different perspective on the math.

[jacob]

@WRC - Everybody's number is different, which is probably why we have this thread in the first place.

The normal (norm) person takes working for a living for granted and believes that they can quickly replace their job should they lose the one they have. Staying with the analogy, the average American has just about 1 gallon in their tank. It is funny how there are people in the FIRE community who are not sleeping well at night because they only have 2500 gallons while the average person who just got fired push out looking for a new job until they're down to a couple of gallons.

It really depends on one's readiness, willingness, and expectation of [ever] returning to work. Some spend part of their brain and time keeping up their skills and maintaining connections either out of interest or just in case. Others use that mental space and time elsewhere because they don't need to or because they lost interest.

In my case it's zero. I sometimes get asked whether I still follow new developments in physics. The answer is NOT AT ALL. I basically have no idea what has happened in the field since 2009. OTOH, I know professors who despite being retired still show up to sit in on seminars and who are still working on their books.

Ultimately I have no expectation of ever working for money again. As such I'm not pursuing continuing education, maintaining my resume, staying in touch with my network, or otherwise allocate any space/time towards "staying employable". I think if you don't want to end up with my attitude/perspective (or iDave's) wherein returning to work would seem strange indeed, you can't stay away from having a job mindset for too long. The longer you're out or away, the weirder the idea of working for money gets. Recall that the very idea of showing up for the same job day after day from 9 to 5 only became possible after years of careful indoctrination and training in the school system.

[Jean]

@wrc
I really don't know where this shared impression that someone will just happen to earn money after retirement comes from.
Every money I earned after i retired was from thing I wouldn't have done without bein paid.

[jacob]

The tragedy in my view is when I read about people white knuckling it. Telling themselves it is only "7 more years" until I'm free, when they could actually claim their freedom now by taking a different perspective on the math.

Ahh... also crucial to my perspective is that with a savings rate of 80%, going from 25x to 33x is only a 1.6 year difference. Even if a job has come to truly suck, grinding it out for another two years is not insurmountable.

Whereas, indeed, if one's savings rate is more like 50%, then "upgrading" from 25x to 33x is asking for 8 more years which I would agree is a big ask for the added peace of mind and the option to throw the earning-lens (see my response to @Jean below) on the trash heap.

A good reminder of the awesome (yes, I used that word because it applies here) power of very high (>75%) savings rates.

[jacob]

I really don't know where this shared impression that someone will just happen to earn money after retirement comes from.

I'm probably partially responsible for this because when I was blogging and also writing in the ERE book, I was pushing for seeing every activity in terms of how it functioned as an income stream (either negative, neutral, or positive).

However, I can definitely verify that these streams don't automagically become positive unless one makes it a specific focus to turn the activity into a money-maker. Likewise, one does not develop a robust portfolio of these positive money streams unless neutral streams and especially negative ones are discarded from the portfolio.

This is what I mean when I say that the focus on earning money changes what kind of "lifestyle-portfolio" one ends up pursuing. If one is fine with e.g. continuing education, staying up to date on one's field, taking a few contracts here or there, ... then 25x or even less is likely a solid strategy.

Conversely, once one is solidly beyond 33x, the idea of seeing every activity in terms of its potential to make money + pursuing existing activities to increase monetization begins to feel rather limiting.