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

[delay]

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

At first thought, it looks like interest rates going down is good for financial assets.

But then if I look at 1930-1940 interest rates went down too, yet stocks lost a lot of value. It looks like rates going down alone is not sufficient.

Perhaps rates going down is but one aspect of a policy to promote converting savings into financial assets? And other aspects were missing in the 1930s?

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.

Luckily for you and me, it looks like the world isn't about to run out of resources just yet.

[chenda]

Perhaps one could plan for deliberate capital depreciation ? Also, how is portfolio failure defined in these studies, total loss or partial loss ?

[Scott 2]

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)

When I suggest rebalancing, I'm assuming commitment to an asset allocation within the portfolio. Restoring it at regular intervals, based upon predetermined criteria. The personal investment strategy determines one's distribution of risk. Something like the golden butterfly looks very different than
VTI and chill. Downside can be mitigated.

No reason the portfolio must be 100% stocks. Mine is not. I don't even think about individual trades. Every decision is based on the portfolio.

That portfolio perspective can extend to one's skills, wants, relationships, etc. How does one make their personal system antifragile? IMO the energy needed to go from 33x to 50x in financial assets, is much better spent there. Resilience over robustness.

ERE folks seem to accumulate resources post retirement. Their SWR continually declines. One could argue starting at a 5% SWR with that in mind.

Last round of asset inflation at the cost of the median voter made people...

We're 100 days into an administration. Despite the media frenzy, I don't think the long term economic impact is clear. My bet is we eventually experience a reversion to the mean. This isn't the first time in history wild stuff happens.

People will get spooked, wind down their leverage, the market will make big moves. Then sentiment will shift and the opposite happens. Some of stuff goes up, some down. Provided one avoids personally irreversible risks, it generally works out.

The tariffs will probably slow the velocity of money, making things look real bad. At some point they become politically unsustainable, and cash will woosh back in. Maybe we'll spend less next year, if it's still playing out. That's cool, this year was flush anyways. I'm playing a game of decades.

Let's say the government raises taxes so that my company is now paying $1m more in corporate income taxes...

IMO this comes back to the velocity of money. If the taxes can get more transactions happening faster, people work more. That work produces value, lifting all. Historically, the wealth recenters with capital holders. Government attempts to redistribute are mitigated, because business can pivot faster than legislation. It's not clear the taxation will be destructive.

Equally important - the rules will change over time, causing asset volatility. This gives the rebalancing side of the portfolio strategy a chance to work.

On the personal side, if the government is redistributing wealth, I'm gonna get where it's going. Free healthcare for those earning $X/yr??? Well now that's how much I earn. What a coincidence.


I think it's also incredibly difficult to infer the impact of AI. What happens when everyone has essentially zero cost access to knowledge work? More disruption sure, but likely economic growth. What if AI plus robotics advancements complement one another? Capital holders could profit immensely. I'm low key expecting those running a sub 3% SWR to become ridiculously wealthy. I think that's the most likely scenario.


I'm purposefully avoiding quantitative examples here. Over a 50 year horizon, ones qualitative assumptions overwhelm any numerical details. If one believes the singularity is going to wipe out humanity, well there's no SWR. If it ushers an utopia, with universal basic income, retirement savings again become moot.


My personal sentiment seems more optimistic than average here. It's honestly a little surprising. I tend to be risk adverse among my IRL connections.

[ertyu]

I suspect the French path (picking money off the wealthy to keep the failing system alive) is more likely across the globe.

I disagree. Increased weath inequality has resulted in a billionaire class that's very powerful and that's actively seeking to limit the powers of government. For the above to hold, someone needs to vote it in. And for them to vote it in, they need to a. not be fully in rich ppls pockets, and b. there need to be institutions left that are at least somewhat free of regulatory capture. You're not looking at France. You're looking at South Africa and Latin America: ghettos and brownouts with a smattering of warlords

[Jean]

I thought i was among the pessimistic, but i have a hard time believing it will evolve all the way down to south africa level of getthoisation and raciallymotivatrd violence.
Otoh, you really have a lot in common with big south armerican countries like argentina or brazil.
You mainly have a better designed state, and a higher coruption allergy rate.

[Western Red Cedar]

I saw a couple recent interviews with Bill Bengen. He's releasing a new book this summer focused on regular investors. He mentioned he was surprised how strongly people seemed to adhere to the 4% rule, considering the original analysis is based off the worst historical scenarios.

Based on current valuations, he said 4.7% is his revised projection. When asked about 40+ year retirements for those in the FIRE community, he said 4.1-4.2% was more reasonable, but those SWRs would likely sustain beyond a 40 year drawdown window.

[ertyu]

I guess telling people what they want to hear sells books, but I'd rather assume the post-2008 run-up to be the freak exception. It's my reason for distrusting analyses based on it: how can we reasonably assume this situation will persist? It's the result of QE combined with the US sucking in money from trade surplus countries combined with overinvestment in the US from the world as a whole simply bc US stocks had outperformed in the recent past.

[delay]

Good point. Overinvestment means the world sends goods to the US and the US sends dollars back. There is an involuntary aspect to this imbalance. And it's locked in because government debt denoted in dollars has to be repaid with interest.

One wonders what will happen if people start to withdraw investments from the US. I can't imagine Americans sending goods to the rest of the world in return for dollars.

[ertyu]

Correct: on the one hand, the US trade deficit will be incredibly hard to reverse, on the other hand, it cannot last forever. Or can it? US equities outperform because of QE, because of the US trade deficit, and because outperformance breeds outperformance as more money flows in what has recently done well due to momentum trades and recency bias. Now that I think about it, also bc of how culturally normalized and institutionally mainstreamed it is to invest one's retirement savings in the stock market. But how can we assume this situation will hold forever?

[7Wannabe5]

I would think the trending reality that businesses are having to make hard fork between producing luxury goods or goods for the increasingly immiserated might have some effect. The top 10% of households in the U.S. are now doing more than 50% of current consumer spending on top of whatever they are investing in the companies from which they may purchase their luxury goods. As AI eliminates entry level white collar jobs, the moat may deepen and the heavy top may plop right off.

[Henry]

The top 10% of households in the U.S. are now doing more than 50% of current consumer spending on top of whatever they are investing in the companies from which they may purchase their luxury goods.

I've been wrangling with this issue recently. Statistics vary, and measurements of net worth vary, but I've been working off this template: In 2024, the US minted approximately 379K millionaires, about 1000 per day. Approximately 18% of US households have net worths over 1M. The top 10% of US households have 1.94M. In 2024, the number that US citizens gave in order to "feel wealthy" was net worth of $2.5M. So that seems to me that based on consumer spending, $1M is middle class, $2M is high middle/low upper class and $2.5M is upper middle class. As I can personally attest, these benchmarks are extremely fluid. During the past four years, we were on the verge of falling out of the top 18% only to find ourselves in the top 10%. I don't see how any rules apply based on NW. I would say only those basing 4% on SWR can comfortably speak in terms of rules. If you are going to use rules, you have to play the game from the bottom, not the top.

[jacob]

One wonders what will happen if people start to withdraw investments from the US. I can't imagine Americans sending goods to the rest of the world in return for dollars.

US exports is about 11% of GDP while US imports is about 14% of GDP which makes for a net trade deficit of 3% relative to GDP but ~30% in terms of trade in vs trade out.

A 3% boost to GDP as measured in stuff is nothing to sneeze at and comes on top of the economic growth in terms of stuff-wealth. Insofar those dollars return to boost the stock market, that's a twoofer. If they return to the bond market it's more of a zero-effect since they flow out again as interest that's generally strongly correlated with the long term growth rate.

What would happen if foreigners started to withdraw investments from the US?

For stocks, what matters is foreigners selling stocks to Americans for USD (foreigners selling to each other or Americans selling to each other is first-order net zero). This would put downward pressure on stocks and foreigners would end up with dollars. They can either spend those on bonds or exported US stuff or they can sell the USD on the currency exchange. If so, the value of the USD relative to other currencies with drop. (This will make US imports more expensive. OTOH, it will make US goods more competitive as exports while making the same amount of dollars---one problem here is if those goods are made out of imported components, in that case, profits will decrease and this in turn will further pressure stock prices downwards. However, if the dollars are spent on US exports, it would increase the revenue of US companies (those who export), perhaps making up for the lower profit margins.

For bonds, what matters, again, is foreigners selling bonds to Americans. Downward pressure again which means higher interest rates. This generally means that the value of stuff that is financed (real estate, cars, ...) will fall as fewer will be able to afford the same price at the higher interest rate. Higher interest rates will attract foreign-held USD back to the US though putting a bit of a brake on how high these rates can go.

What really matters here is the 3% above, not the 30%. The 3% is like bonus stuff that the US enjoys without having to work for it. Compare that to the typical 3%/year GDP growth rate that comes from general increases in efficiency and size of the economy. Basically, Americans gets to enjoy 106% relative to the stuff they enjoyed last year for only 100% of the work.

What's the cost? Foreigners get a claim on US assets which generally means a claim on earnings, dollars, or tangible goods. At some point, they'll probably want to cash in on that and reverse the free-riding. If that flood reverses, then Americans get to enjoy 103%-3%=100% of the stuff they enjoyed last year. What's the problem with that? Well, it has to be shared between more people working more efficiently (those were the assumptions of the 3% growth rate), so that means a slight decline in standard of living overall. Obviously more for some---some will still enjoy more. I'm talking the whole pie here, not parts of it.

For stock prices, 3% growth in earnings will first-order cancel the 3% outflow. If P/E stays the same, then the stock market will simply start going sideways instead of going up at TWICE the normal rate as it currently is. Many countries actually have stock markets that have been going sideways for decades. This is not an unusual phenomena.

Disclaimer: I've only been taking "pressures" and their potential magnitude. I have not mentioned all pressures including pressures with equally sized significance such as the demographic transition OR the risk that the public might change their preferences from stocks to something else (e.g. commodities or crypto).

[zbigi]

As AI eliminates entry level white collar jobs

I'm very dubious about this. Even assuming AI is actually good for something at scale that's significant, we've had at least a couple such revolutions before, and unemployment is still near record low. For example, look at pre-computer times shown in Mad Men to see how many entry level jobs were eliminated by introduction of computers - all those typists, messengers, secretaries are completely gone now. And yet more people work in offices than ever. I think the amount of work for people to do is basically endless, because human wants are endless. Only singularity-level AI will change that.

[IlliniDave]

... One wonders what will happen if people start to withdraw investments from the US. I can't imagine Americans sending goods to the rest of the world in return for dollars.

I think the US is the second largest exporter in the world right now, and the largest exporter of services. So a lot of US goods/services are being exchanged for dollars as it is. The US imports more than it exports goods and services together. Hopefully barriers to US service exports are quietly being lowered because I don't think the US will ever become an old school mercantile economy again, but with some effort could probably retain solvency primarily through services and information.

I'm bullish on the uS still, but when it comes to my personal finance planning, I don't allow myself to plug that optimism in my calculator.

[7Wannabe5]

I'm very dubious about this.

Yes, I agree that whether or not AI will take human jobs may already be a question as out-of-date as fretting about the 4% rule or whether New York City will drown in horse manure. If the singularity is going to occur, it will likely occur before humans have time to pack the stuff in their cubicles into banker boxes. OTOH, if humans survive beyond/outside of the singularity and/or any of the other aspects of the meta-crisis, it is likely that something like debt/investment will also survive or quickly be reinvented and it will still have some basis in the fact that timber grows at 3% per year. Unless, of course, the post-singularity humans live on a planet with only trees that have been genetically modified by AI to grow at a different rate. The possibilities are pretty much endless, and I think the thing to notice is that we are now at a juncture where most of us are feeling compelled to at least consider the possibilities.

[ertyu]

An argument I encountered browsing fintwit all morning and half-listening to a podcast is that going forward, the US is likely too see an income redistribution away from the top 10% and towards the botommost cohort. Because the share of national income retained by labor will rise (and the share of capital correspondingly decline), PE ratios will drop to their 60s and 70s levels and US stocks will drop; indexing and the 60/40 will be the worst investment strategy in this environment, etc.

I am not sure how much I buy the idea that such redistribution will indeed occur (for various reasons, it seems to me that income inequality in the United States will continue to rise, rather than vice versa), but this is another thesis that joins the chorus of, "remove the last 40 years from the data you use to estimate withdrawal rates going forward." Thoughts? Are the American poor suddenly going to thrive and prosper? Doesn't seem like it from within my info bubble, but fintwit, which is mostly rightly leaning, seems to think so (reasons: reshoring and labor force shrinkage through deportations will drive up wages and at the same time, an increase in transfer payments will cushion any "pain"). Thoughts? Are the American poor suddenly thriving? What are people actually seeing and observing?

[sky]

Did they explain why income redistribution would happen?

What I see is that the poor in the US are experiencing cost of living increases with no wage increases at the moment.

[ertyu]

Did they explain why income redistribution would happen?

Deportations would reduce the size of the labor force and at the same time there will be an increase in demand for work with reshoring; also trump is a populist and these are his constituents so he will shower them with transfer payments. I'm just parroting, I am aware that there are multiple issues with each of these statements. But they seemed common in the echo chamber I eavesdropped on and were then used to build on -- e.g., when the poor get a greater share of the national income, they have a greater propensity to consume, therefore-- etc.

[jacob]

No politics reminder: viewtopic.php?p=301175#p301175

[ertyu]

To bring the discussion back on topic, what I was interested in was the likelihood that going forward, PE ratios will truly decline because a meaningful income distribution from capital to labor is expected.

..going forward, the US is likely too see an income redistribution away from the top 10% and towards the botommost cohort. Because the share of national income retained by labor will rise (and the share of capital correspondingly decline), PE ratios will drop to their 60s and 70s levels and US stocks will drop; indexing and the 60/40 will be the worst investment strategy in this environment, etc.