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

[delay]

Assuming a 0% real return, a 2% SWR still lasts 50 years. That strikes me as an over correction.

What about inflation?

[loutfard]

What about inflation?

Real return means inflation corrected return.

[zbigi]

Assuming a 0% real return, a 2% SWR still lasts 50 years. That strikes me as an over correction.

That was always my plan. Assume I'm gonna live to roughly 90 y.o., save up around 50 years worth of and expenses, and retire around fourty. I don't get what is the over correction?

[Jean]

Since inflation is mentionned, is the inflation number really relevant to measure the inflation experienced by an ere person?
For me, biggest expenses are head taxes like compulsory health and liability insurance. Then it's healthcare. Then it's food. Eremite are very likely to don't pay for housing. And all that come after that is discretionary.
Is there an inflation index that focus on those?

[loutfard]

Since inflation is mentionned, is the inflation number really relevant to measure the inflation experienced by an ere person?
For me, biggest expenses are head taxes like compulsory health and liability insurance. Then it's healthcare. Then it's food. Eremite are very likely to don't pay for housing. And all that come after that is discretionary.
Is there an inflation index that focus on those?

There is little point to a generalised eremite inflation index. Eremite spending patterns deviate too much from the average and are very individual. Also, personal circumstances are subject to change.

[Scott 2]

I don't get what is the over correction?

Assuming a 0% real return. That's like leaving the money in a high yield savings account.

If the 50 year return on a diversified portfolio cannot beat inflation, we're talking catastrophic global economic collapse. The retirement savings are likely irrelevant.

[7Wannabe5]

Inflation data and predictions broken down into many specific sub-categories of consumer spending are currently still available on government and world organization websites, including the U.S. One of my classmates in IT/Data M.S. designed his final project to sequester government data in the event public access was discontinued. Generally, it would be very difficult for the world of finance to smoothly function without access to this data. Instead of asking, "What to do in event of 8% inflation?" , the question would become, "What to do if rate of inflation is unknown or simply estimated in a manner discontinuous from prior methods?"

In "The Five Stages of Collapse: Survivor's Toolkit", Dmitry Orlov suggests that the order of collapse is Financial -> Commercial-> Political->Social->Cultural. However, that is not to imply that a structural weakening at any given level would not have rippling consequences. Even safe drivers with well-maintained vehicles, and adequate insurance coverage will suffer consequences when the bridge beneath their wheels collapses.

[jacob]

For a basic statistical reality check on the 4% rule, look up what that number is on a country by country basis. For example, here but also in many other places: https://www.financialplanningassociatio ... %20PDF.pdf

Then realize that 4% or more only delivered on its promises in a few places, specifically 20th century US, Denmark, Sweden, or Canada. In the 20th century, a 4% WR would have had failures in most other countries.

And now the million dollar question is: Will the US markets also be in the top 5 for this century? And will that top 5 once again exceed 4%? Or if not, will you be able to pick a winning country or set of countries? Because diversifying globally will not work for 4%.

[zbigi]

If the 50 year return on a diversified portfolio cannot beat inflation, we're talking catastrophic global economic collapse.

I'd say it's merely stagnation? If GDP stops rising, companies (real) revenues will also stop rising and, assuming constant margin, real net income will stay in place. That should mean that stock prices would only grow with inflation.

Additionally, we could have companies' net income stagnation (in real terms) even with growing real GDP - it's enough for government to increase taxes on business profits, and get more aggressive with closing loopholes. The economy will keep growing, but a smaller portion of that growth will go to stock owners. It's not some theoretical scenario BTW - just a couple months ago French government announced 8% corporate tax hike in order to help pay for its numerous obligations. As the demographic structure changes towards the worse, I suspect politicians will see corporate profits as one of the easy sources of extra revenue, and what happens in France today will happen in many other countries in a decade or three.

[jacob]

Additionally, we could have companies' net income stagnation (in real terms) even with growing real GDP - it's enough for government to increase taxes on business profits, and get more aggressive with closing loopholes. The economy will keep growing, but a smaller portion of that growth will go to stock owners. It's not some theoretical scenario BTW - just a couple months ago French government announced 8% corporate tax hike in order to help pay for its numerous obligations. As the demographic structure changes towards the worse, I suspect politicians will see corporate profits as one of the easy sources of extra revenue, and what happens in France today will happen in many other countries in a decade or three.

Yup! The most likely danger to equity is rewriting the financial laws to favor some other asset like e.g. bonds, housing, ... or crypto?!

Also demographics + present ownership rate. Just like these factors can be tailwinds, they can also be headwinds.

Japan['s equity] comes to mind.

[zbigi]

For example, here but also in many other places: https://www.financialplanningassociatio ... %20PDF.pdf

A fantastic snippet from the abovementioned article:

Their hope was to eliminate the widespread belief that the stock market will always provide a positive real return over a 20-year period, as while
this was true in the United States, it was also true only in 3 of the remaining 15 countries they investigate.

EDIT: I finished reading the paper. What I don't like about it, and in similar approaches in general, is completely disregarding taxes. Of course, including taxes would be very hard, because they change over time, and also depend heavily on country-specific personal circumstances (deductions, joint filings etc.). But, taxes can have heavy impact on real returns - for example, assuming 3% inflation, 2% real return and 20% cap gains taxes, the real return after taxes is just 1% (=(5+2)*0.8), so 50% of real return goes to taxes. It's less of a problem for the US as far as I understand, since you guys are only paying cap gains tax above certain treshold, but in many other countries (e.g. Poland) there's no tax-free amount. It also means that elimination of tax-free band in US cap gains taxes would turn many Americans' FIRE plans upside down.

[bookworm]

Inflation data and predictions broken down into many specific sub-categories of consumer spending are currently still available on government and world organization websites, including the U.S. One of my classmates in IT/Data M.S. designed his final project to sequester government data in the event public access was discontinued.

Is that project available to the public? One of the things I've thought about doing is a calculation of my own CPI using the Bureau of Labor Statistics categories (US).

https://www.bls.gov/news.release/cpi.t01.htm

There are some limitations to this, one being that this is not directly tied to my particular part of the country. Would be curious what is to be done here if this data source becomes unavailable or unreliable, outside of direct observation and/or tracking (e.g. a log of grocery store staples).

[7Wannabe5]

@bookworm:

To the best of my knowledge the project was not made public. I think for personal usage, the Bureau of Labor statistics are most useful for observing trends such as "food at home" being pretty consistent with overall inflation rate, but "food away from home" being significantly higher. This might lead one to theorizing that at least in the U.S., human wage slaves are becoming more expensive at a faster rate than energy/resources, because barring fresh produce that still requires human-picking, agriculture in the U.S. is not very labor intensive (approximately 1 farmer per 80 humans fed), but restaurants certainly are (maybe 1 staff person per 10 humans fed?)

What effect on market returns would raising minimum wage in the U.S. to $25/hour have? To what extent does limiting immigration and/or early retirement automagically accomplish the task of raising minimum wage? Which industries will become completely unviable given $25/hour minimum wage? There are some zip-codes in the U.S. where it is already extremely difficult to find workers at fast-food wage, and this leads to downward cycle where, for example, customer is unhappy because 20 minutes in drive-thru and one of the two 14 year old kids listening to music on his ear-buds while working that day hands her an untoasted bagel rather than the toasted one she ordered, wash-rinse-repeat, and eventually she is forced to toast her own bagel before leaving for work.

Amy Dacyszyn, in "The Tightwad Gazette" did recommend the practice of keeping a personal price book, so you know when to stock up on chicken breast in your freezer or when to start substituting soy flour for eggs in your baking. It's so funny to me that humans feel like they are stuck paying high prices for eggs or toilet paper when there are substitutions galore. OTOH, it's not funny when humans have to start stripping the bark off of trees to chew on the softer woody tissue, because otherwise empty belly (note to self: limit reading of novels set in 20th century North Korea.)

[delay]

For a basic statistical reality check on the 4% rule, look up what that number is on a country by country basis. For example, here but also in many other places: https://www.financialplanningassociatio ... %20PDF.pdf

That's a good read, thanks for sharing! The table says US inflation was 3% and the ideal, cost-free, untaxed portfolio return is 6%. That's a real return of 3%. The past 45 years were unusually good for investors.

The study also shows that there were many years where 12% was a safe withdrawal rate.

To me this says, you may as well try at 4%.

To what extent does limiting immigration and/or early retirement automagically accomplish the task of raising minimum wage?

AFAIK both hurt the economy. So there will be fewer goods to distribute among the population. Resulting in a lower minimum wage.

[jacob]

The past 45 years were unusually good for investors.

This would be a clue why that was: https://www.multpl.com/10-year-treasury-rate

[Scott 2]

I'd say it's merely stagnation? If GDP stops rising...

Why extrapolate this to a globally diversified portfolio, held over a 50 year time horizon? What stops rebalancing from making money off the volatility? Collapse will move in waves. Barring apocalyptic disaster, it's not a linear phenomena.

I think it's more likely if we approach a contracting GDP scenario, digital assets are used to inflate the economy. Much of how we live is built around growing GDP.

If the government raises taxes, the money gets spent somewhere else. That's opportunity for someone else to profit. While it can cause short term disruption, I think the system will self heal around it.

Even a 2% real return is dramatically different than 0%. That bumps the SWR rate close to 50%.


I push back because saving 50x spending is a tremendous opportunity cost. Outside of life expectancy factors, ecological collapse becomes relevant. If that much money is prudent, stuff you can do in the world has contracted. Better to have enjoyed it while you still could.


I wouldn't push back on a 3% SWR. I still find it pessimistic, but not unfounded. I think the tendency to get more efficient with spending over time, and to spend less when times are hard, could justify retiring at more like 33x spending.

[loutfard]

ERE has taught me to diversify the sourcing of what I want. Lower financial returns are less of a problem if they're only needed to get a fraction of what I want. The more creative sourcing, the less financial returns matter.

[zbigi]

Why extrapolate this to a globally diversified portfolio, held over a 50 year time horizon? What stops rebalancing from making money off the volatility? Collapse will move in waves.

That's basically speculation. Even assuming you're above coinflip at predicting the macro future of regions etc., there's still a lot of variance (randomness) in such trading. If you do that with your portfolio, you introduce a lot of extra risk that is arguably decreasing your SWR (as your worst case scenario has just gotten worse through all that downside risk from speculation) - even if your expected value on the trades is positive.

I think it's more likely if we approach a contracting GDP scenario, digital assets are used to inflate the economy. Much of how we live is built around growing GDP.

Last round of asset inflation at the cost of the median voter made people elect Mr Trump. I don't think it's going to be repreated, or, if it will be, the people's disconent can truly hurt the country. I suspect the French path (picking money off the wealthy to keep the failing system alive) is more likely across the globe.
Having said that, the US seem to be more resilient that most other countries (notably much more than my region of the planet), so we may all well be dead before the States are in any sort of real trouble. So, if I were you, I wouldn't be too worried as well.

If the government raises taxes, the money gets spent somewhere else. That's opportunity for someone else to profit. While it can cause short term disruption, I think the system will self heal around it.

Let's say the government raises taxes so that my company is now paying $1m more in corporate income taxes. That taxes are then redistributed to the general population via various programs. Assuming they all spend all that extra money at my company, I'm still only getting $1m * my_margin. So, for an example margin of 15%, the tax hike has costed me, the capitalist, $850k (I make back the $150k), while the general population can now enjoy an extra of $850k of goods and services. The system may heal itself, but I'll be much worse off

[zbigi]

@Scott2

Also, even in economic stagnation (no real growth), the stocks can do well. I've done a little simulation, and, assuming an investment in an index ETF with example value P/E of 17 (so 5.9% of yearly net return from investment), no real income growth for companies (just following inflation), and 3% inflation, the real (post-inflation) CAGR of ETF value is still a great 4.76% when holding the ETF for 30 years without any withdrawals, and 19% cap gains tax at the end (which seems counterintuitive, since 4.76% is greater than 5.9% minus 3%). There are of course huge optimistic assumptions behind this number (all earned income gets reinvested into the companies without any waste, the stock are always valued at fair value, the generally accepted P/E ratio stays constant), but it shows that the no-growth future doesn't need to suck for stock investors.

[7Wannabe5]

AFAIK both hurt the economy. So there will be fewer goods to distribute among the population. Resulting in a lower minimum wage.

Yeah, it could go that way too. Complexity.

If you take apart all organizational complexities and/or inter-objective infrastructure, and divvy it all up into an isolationist Robinson Crusoe model, things would currently stand at around 2 semi-arable acres and $50,000 in capital goods per human on planet. So, maybe that would constitute the "chop wood, carry water" level ERE challenge? It might be amusing to contemplate how to spend the $50,000 on your final assortment of goods/tools with which you must thence forward survive and/or thrive on your 2 acre island.