The 4% Rule – A Castle in the Air

[Bankai]

Playing devils advocate here, as I'm pulling the plug this month.

Woo hoo!

[Jin+Guice]

Right, so when a person is initially exposed to mainstream FIRE, who is not making six figures, they tend to dismiss it. Although these people are the exact types of people who may benefit from ERE. Some of the lifestyle components are already ingrained, but they lack the big picture, systems wise. For many of them FI many years from now is just too much, too far away as a goal. Still, adopting a systems approach to an already frugal lifestyle can release them from the need for half of their income immediately. Save some, and cut back on the crappy job in six months from now, then to learn better ways to generate a lower cashflow. This may be a very appealing concept. This would still generate the positive environmental impacts, and provide for a more resilient lifestyle going forward for any participants.

It's really hard to convince service industry hipsters to do ERE, which is funny because they are already doing all of the hardest parts. I think it's partially a negative attitude towards the stock market* (wallstreet is evil), partially because they all consider themselves communists, partially because they see themselves as poor, partially because saving money just isn't cool, and largely because they too are attached to the narrative of working your entire life and that spending = happiness. I'm always quietly saddened when one of them "gets serious," which usually means aspiring to middle class values such as finishing their degrees or buying a home (with heavy debt financing).

*The stock market and housing market crashed when I was graduating college, which didn't make a great case for investing either...

There is also the general pleasure in such a lifestyle. Again though, this is a hard sell without anecdotal experience, IMO.

Look no further than these same hipsters. They all already live the lives of leisure that we all aspire to. My more lazy/ outside the box thinking friends are actually starting to do ERE (but not they money saving part) by accident. Small-time entrepreneurial activities and cottage industry is very much en vogue. One dude is a musician/ drug dealer/ pop-up-restaurant owner/ urban farmer. He also runs a very small non-profit. My other friend sets his own hours making ice cream (for someone else's business)/ is a musician/ builds guitars (for his own business). I saw him yesterday and he was complaining about how he has to go "all the way across town" (~30 minute bike ride) to make ice cream. These are sincerely the laziest people I know!

A change in circumstances such as health issues, family needs, or simply a desire to increase consumption could wipe me out very quickly with such a low baseline spending. Sometimes returning to FT work is not an option. My situation already relies on geographical arbitrage, healthcare subsidies, and the current favorable tax code for low income individuals.

All of these things are also true with a full-time job and a bunch of savings though. Also, it's sort of hard to not earn money as an able-bodied, intelligent, successful, clearly (at least) middle class man of under 60. I do wish you the best of luck trying though!

[IlliniDave]

https://retirementresearcher.com/4-rule ... s-markets/

For those interested, came across this today.

[2Birds1Stone]

Sure, but it's easier to go from $1,500/month burn rate to $3,000/month when you're earning $5,000 a month. Employer health insurance, DI insurance, FMLA, etc mitigate many of these potential scenarios wherein someone who is living on a shoestring budget and doesn't have these could be SOL. I'm not saying it's a reason to keep working, but having a FT job and/or tons of money can certainly ease the pain a bit.

If I suddenly/indefinitely needed medicine that was $2k/month and I am employed. If my insurance doesn't cover it, I have the income to do so. If I am fired/Semi-ERE'd and living on $18k/yr, my WR suddenly goes from 4% to 9-10%, and I'll be broke in no time.

[jacob]

It's always easier when there's slack in the system. This is just a debate about different kinds of slack and which circumstances make certain kinds of slack easier, like high income, high savings rate, high savings, ...

ERE unlike E-ER or FIRE is about deliberately creating multi-dimensional slack. IIRC, that was chapter 3 in the ERE book. Also a bit in the beginning of chapter 7 about the ratio between wants and needs.

[jacob]

https://retirementresearcher.com/4-rule ... s-markets/

Thank you! This is my main objection to MC-backtesting. This interest rate chart does not look stationary to me no matter how much I squint at it. Rather, it either looks like a linearly decreasing line with a big anomaly in 1980 or it looks like a wavy-thing with a 60 year period (Kondratieff?) with increasingly bigger peaks.

[classical_Liberal]

If I suddenly/indefinitely needed medicine that was $2k/month and I am employed. If my insurance doesn't cover it, I have the income to do so. If I am fired/Semi-ERE'd and living on $18k/yr, my WR suddenly goes from 4% to 9-10%, and I'll be broke in no time.

First congrats. Secondly, If I read another contrived argument about healthcare being the obstacle to retirement I'm gonna scream. MMM and other FIRE sites are fear mongering health care to push a political agenda, that's it. Here are the scenarios you fear:

1)Urgent onset of emergency medical need. Acute injury like an accident, emergency surgery, heart attack. A high cost deductible plan or healthshare can be had for less than $100 a month to cover this. It'll cost to you, maybe a 5-7K deductible plus any follow up care you chose to take.

2)Cancer or similar. This is in it's own class because it can be semi-chronic (ie requiring several months of acute treatment and a few years of follow up) or chronic. Generally chronic cancers falls into my last two categorie below and are often fatal. Options for the semi-chronic are two fold. Since treatment is generally not an emergency, you can use medical tourism to cuts costs to 1/10th the horror stories you read in the US. Or you can pick up an ACA policy. Remember, all you have to do to qualify mid-year is move. So, worst case here is that you are not set up to max subsidies and you have to pay for a gold-plated silver plan out of pocket for a few months, plus the deductible. Again, we are talking in the thousands, not hundreds of thousands to get you through the acute phase of treatment.

3)Lifestyle related chronic diseases. This is the vast majority of health care spending in the US. So, prevention, prevention, prevention! Do not life the lifestyle that causes these diseases! ie retire for god's sake! If you fall into this category you are stuck in the traditional healthcare system and will need ACA or employer sponsored plan. Also chronic disease sucks, see below. Edit: FYI this is where the majority of the "$2000 a month, for the rest of your life" medications are needed.

4)Random, non lifestyle related chronic disease. OK, this is a problem, because there is little you can do to hedge against this. Luckily, it is also rather rare for this to develop after early adulthood, and prior to old age and medicare. Here I will tell you that anyone who gets sick like this is not super worried about money. Long term illness sucks, it sucks really, really bad. Virtually anyone suffering will tell you they would trade all of their money just to be healthy again. So if you are fated for this, for gods sake, please live your life exactly how you want before it happens! You will not regret it.

tl;dr: Yes healthcare in the US sucks, it's complicated and requires significant effort and brain power to navigate on the cheap. However, even as it is today, it's completely navigable by a currently healthy ERE'er with some slack in their system.

[classical_Liberal]

It's really hard to convince service industry hipsters to do ERE, which is funny because they are already doing all of the hardest parts. \

Funny, I thought you were gonna tell me it's hard for a completely different reason. Most of my friends in the 20K a year income category grew up pretty poor. Although they have zero problems living off <1K/month, their version of it is the poverty version. So they can't get the trailer park version of that lifestyle, which they grew up in, out of their heads. They also try to "get serious" and join the middle class ranks, but because they view the better job and mortgage/car payment as social mobility. I've tried to sell them on the hipster version of social mobility with little success. The main response is "Why would I want to live off 1K a month if I can do better?"

Maybe a thread that addresses sticking points of certain classes of people, and specific wheaton level sticking points, would be helpful? Kind of a "how to" guide to overcome common issues in personal progress and common objections in spreading the message as a whole.

[jacob]

Maybe a thread that addresses sticking points of certain classes of people, and specific wheaton level sticking points, would be helpful? Kind of a "how to" guide to overcome common issues in personal progress and common objections in spreading the message as a whole.

It probably would.

ERE is a syncretic philosophy that requires the user to be able to understand and combine the ingredients (lego blocks ... that's chapter 4 or 5) in novel ways. However, what the average human rather does is to copy personal examples and fit them into an existing value-based framework.

To put it more concretely, ERE combines the consumer side of voluntary simplicity with the producer side of investing. Humans who are not capable of merging conflicting ideals get stuck. VS humans typically hate anything to do with money. Money is downright evil. Investing is exploiting the oppressed. They do understand the idea of lowering their consumption to save money though. Conversely, investing humans typically hate anything to do with frugality. They perceive it as poverty. Uncouth. Just make more money.

ERE requires the ability to unpack the functional aspects of a lifestyle from its values and recombine it. This is operating at the Coordinating and Creating levels (also see ERE book) that most humans generally never engage in. But in order to do this, one has to master the first four CCCC ... and generally, humans are stuck in the copying stage for their own framework.

Basically, the average human keeps staring at the shadows of the wall in Plato's cave (chapter 1).

In terms of personal development, things typically progress in a long-step wise fashion. One spends a lot of time on a given Wheaton level making seemingly no progress. Then suddenly one jumps. The objection to higher levels can often be found within the framework of one's current level: It just doesn't seem important/worth the effort to graduate to the next level.

[steveo73]

Is it as simple as adding some 'spending flexibility' for a portfolio to 'never fail' (at least looking back)?

Spending flexibility thresholds for some popular asset allocations 'guaranteeing' 100% success rate (historically):

70/30 - 14%
60/40 - 17%
50/50 - 19%

This looks almost too simple - is cutting travel or eating out or clothing for a few years really enough?

Having some buffer in your spending does give you the "guarantee" of 100% success based on historical data. So for me I get 100% success if I add in a 10% decrease in spending if my portfolio is below the starting portfolio amount.

There are problems with this though. Can you decrease spending by 10% at that point in time. Can you maintain that decrease for a number of years.

[steveo73]

> I think you can't do that much to increase your chances of success without working longer

Imagine that by combination of lifestyle change, learning to produce some and learning to cultivate and rely on capitals other than monetary, you decrease your expenses in half. Maybe even geo-arbitrage. Do you think that wouldn't make a difference in your chances of success?

Of course it does. The point is that this becomes baked into your chance of success anyway. You can't take away the maths. All your poinst are great but they simply just decrease your expenses. The math doesn't care if you retire on a budget of $200k spending per year or $10k per year.

If anything pushing it to far lowers your chance of success because you don't have anywhere to go. Estimating your expenses accurately is a key factor in your long term success. If you push your expenses really low and you can't maintain that year on year for the duration of your retirement and the returns you obtain aren't great then your chances of success are going to be lower. If you estimate your expenses with some buffer and things go against you but you can decrease your expenses you may be okay.

[steveo73]

A big risk we are ignoring here is the desire/ability to keep your expenses as low as they are when you stop accumulating/pull the plug to ERE on assets alone.

Take myself for example. I've demonstrated that I can live on $16-18k/yr, and the FIRE calculators show a 90% success rate for a 60 year period any way I slice the data. A change in circumstances such as health issues, family needs, or simply a desire to increase consumption could wipe me out very quickly with such a low baseline spending. Sometimes returning to FT work is not an option. My situation already relies on geographical arbitrage, healthcare subsidies, and the current favorable tax code for low income individuals.

Additionally, accumulating 8 years of additional expenses does not equal to working an additional 8 years when you have a 75% savings rate, it's more like 2 years with average market returns. Not the worst tradeoff

Playing devils advocate here, as I'm pulling the plug this month.

Exactly.

[daylen]

The point is that this becomes baked into your chance of success anyway. You can't take away the maths.

You can reject it, though. It appears that you are operating under the assumption that success is synonymous with having money to afford the optimal lifestyle (based on individual). That is fine if money can be converted into all desirable things, but many people [especially on this forum] find value in alternative dimensions that cannot be bought (like health, socialization, wisdom, etc.). This is a deeply seeded idea in the ERE philosophy (web of goals) where wining at your own personal game is not entirely dependent on a single number. Inter-independence allows for parts to fail without ruining the whole.

Ironically, this attitude also seems to be intimately linked to mental health (another dimension that cannot be bought).

[steveo73]

There are a couple of points here:-

1. The math of FIRE.
2. The idea that money is only one component of your life.
3. The idea that the ERE philosophy provides some inter-dependence and allows part to fail without ruining the whole.

Point 3 cannot counter point 1. A good example is someone living well on 20k per year but they develop cancer and they have to spend 40k per year on health care. The point is really about slack in the system (as per Jacob's words). Financially there are limits. I'd even suggest people wanting to retire as quickly as possible who lower their expenses as much as possible have a much higher chance of financial failure. The failure might not be that bad in that you can return to work on a low paid job and be just fine but the system is limited via an upper spending limit.

I actually agree with CL earlier in this thread when they stated that ERE leads to financial independence and then retirement if you choose. You set up a life/system that leads to spending less. The spending less enables savings which you turn into investments. Your investments lead to becoming financially independent. If you do this really well you can retire very quickly. I'm though pretty happy with my slower retirement. Myself and my wife have a system in place (a lifestyle) where we spend less than the vast majority of people in our situation (3 kids). We don't have any gimmicks ala Tim Ferris or other blogging types. Our approach is just save and invest but it's a robust approach in that it works.

When it comes to point 2 I agree with you. More money does not equal an optimal lifestyle. I definitely don't believe spending more money or saving more money or having more money equates to being happier.

I spend a tonne of my time working on other aspects of my life but those aspects aren't relevant to a discussion of the maths of the 4% rule. I'm happy to discuss happiness for instance but it's a much more subjective subject than the 4% rule.

[daylen]

@steveo 3 is striving towards inter-independence (not inter-dependence) or what is called modularity in the ERE book. Clearly, health and money are typically not completely independent, but the idea is to strive towards independent yet synergistic parts through deliberate lifestyle design (ignored by the 'math').

I do not agree that this point is irrelevant to this thread. My point does not serve to counter or invalidate 1, but to offer a more expansive perspective that explains partly why you are encountering tension with others in this thread.

[steveo73]

Okay. Firstly I don't see any tension. Secondly I don't see how the point you are making has any impact on the math of financial independence.

Maybe break this down into two parts. The first part if the idea to build up a system that works well and the parts of that system don't impact each other negatively. A good example is using my jiu-jitsu training to become an instructor and have my activity not cost money but earn money. I'm completely cool with this idea. I mentioned this in my previous post.

The second part is the math of the 4% rule. To me this is just still the maths. There may be some caveats in relation to this but it's not really clear and personally I wouldn't add it into the discussion.

Am I missing something ???

[daylen]

I understand that you do not see the relevance. I recommend you re-read the thread without jumping to your own conclusions, because you are talking past a lot of people above. Try to detach from your personal strategy and re-evaluate your assumptions about what ERE is.

[steveo73]

Okay - thanks for that.

[7Wannabe5]

These are sincerely the laziest people I know!

You "know" me. 50-something year old self-aware slacker can beat 20-something year old self-aware slacker without even trying

Anyways, it makes no sense to me that a drug dealing ice cream entrepreneur skateboarder wouldn't enjoy trading options on Robinhood app or attending foreclosure auctions. As Jacob once noted, saving, investing, trading, and speculating are different, frequently confused, activities. I think you have to enter at your own level of risk-tolerance, whether high or low, or you will not stick with the activity long enough to gain competence. Also, it seems to me that even on this forum, the notions of risk and rationality are sometimes confused. I finally got around to taking a look at Tyler's excellent portfolio site, because I have finally wandered back around to stock market investing, and my eye immediately went to the 50% success realm rather than the 99% realm.

How many different (reasonably independent-no Lehman Brothers style bundling allowed) plans with 50% failure rate do you need to equal one with 95% success rate based on frequentist method applied to historical results (somewhat dubious proposition if you have read history of 20th century mathematics)? Carrying a lower expense rate makes it much easier to come up with alternate ways to cover expenses, so makes the math work better at this level. All you have to do is make a very long list of acceptable alternative life paths which might generate $X net income with given probability and then link them into a contingency chart. You actually aren't limited to A) I will be able to withdraw at 4% rate forever or B) I will sit on the hot strip in front of Wal-Mart with my life goods in a shopping cart holding up a cardboard sign.

[jacob]

How many different (reasonably independent-no Lehman Brothers style bundling allowed) plans with 50% failure rate do you need to equal one with 95% success rate based on frequentist method applied to historical results (somewhat dubious proposition if you have read history of 20th century mathematics)? Carrying a lower expense rate makes it much easier to come up with alternate ways to cover expenses, so makes the math work better at this level. All you have to do is make a very long list of acceptable alternative life paths which might generate $X net income with given probability and then link them into a contingency chart. You actually aren't limited to A) I will be able to withdraw at 4% rate forever or B) I will sit on the hot strip in front of Wal-Mart with my life goods in a shopping cart holding up a cardboard sign.

I believe that's a novel way of saying it. I like it! P50 also has the benefit of adding up trivially .. which is not the case with P95.

In math terms, presuming the plans are independent, the central limit theorem holds. For a math problem,

a) Calculate the minimum number of coins, m, one needs to flip to ensure at least n heads with a 95% probability.
b) Ditto with N(0,1) distributions instead of coins.

Presuming independence, this is essentially what underlies the diversification argument of investing: "Each company has a ~% failure rate, how many companies do you need in your portfolio to eliminate the impact of a bankruptcy in your portfolio."

With the web of goals, plans are not just diversified though. They're also have tensegrity. I don't recall tensegrity EVER being discussed on the forums(?!?), but it's actually discussed in the book. Recall, when the Starship Enterprise gets in trouble, they don't jump into the shuttle. They "reroute the command pathway from the internal dampeners to the forward shield generators" essentially rewiring the ship. Otherwise, the crew spend the rest of their time optimizing and maximizing efficiency of the components. Regular Startrek engineering duties seem to be Wheaton level 4-5. Battle is Wheaton level 7.