The 4% Rule – A Castle in the Air

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ertyu
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Re: The 4% Rule – A Castle in the Air

Post by ertyu »

steveo73 wrote:
Fri Sep 16, 2022 5:49 pm
Who is retiring for 50 years and why is this is the case ?
I am. I'm not eligible for social security from any country due to my international work history. Serves to prove the point that there's no hard and fast rule separate from a person's circumstances.

The number of years you're planning for also depends on your faith in the stability of your entitlements.

steveo73
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Re: The 4% Rule – A Castle in the Air

Post by steveo73 »

ertyu wrote:
Fri Sep 16, 2022 6:13 pm
I am. I'm not eligible for social security from any country due to my international work history. Serves to prove the point that there's no hard and fast rule separate from a person's circumstances.
Spot on. I don't want to come across as stating you need to do blah or taking path x is correct. You need to look at and understand the data. Then you need to use that as a guide to your specific circumstances.

I should have rephrased my point about retiring for 50 years. To be more specific it should be who is retiring for 50 years with no social security being possible for the length of your retirement.

M
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Re: The 4% Rule – A Castle in the Air

Post by M »

steveo73 wrote:
Fri Sep 16, 2022 5:38 pm
There has to be something else going on here.

It's extreme pessimism or something else like:-

1. Your expenses are so tight they are unrealistic.
2. You are investing in some sort of customized portfolio.

I other words you aren't arguing against the 4% rule you are arguing against your implementation of the data.

It'd be good to get to the real issue here because it ain't the data surrounding the 4% rule.
It is extreme pessimism plus personal circumstances plus a custom portfolio.

Pessimism: 4% rule has no dataset that includes 12 years of zero interest rate policies combined with shiller PE ratio of 38 like it was at last year. Stock return comes from return of the underlying asset in the form of dividends and share buybacks combined with PE expansion and contraction i.e. how much investors are willing to pay for certain valuations of asset. I have no faith that investors will continue to pay sky high valuations like we have seen for past 20 years and would rather depend on appreciation from underlying assets i.e. dividends and stock buybacks. Current shiller PE ratio is around 30 so I have more faith in the rule now than last year. When shiller PE ratio hits 25 I will have faith in the 4% rule again. This is a pessimistic viewpoint so please correct my thinking here if you want.

Personal circumstances: I have four kids and a wife who has never worked. Oldest kid is 13. I know kids are anti-ere and I am probably only person on forums with 4 kids. We are done having kids now but not sure how expensive this will be. Of course, my wife has also said she will go to work if needed or if she gets bored. So this might also work out favorably. Not sure. Who knows.

Custom portfolio: I sold all my bonds after the crash of 2008 and when interest rates went to 0%. I was 100% stock for several years then slowly added reits and I bonds as I got closer to retirement. Now it is roughly 1.2 million liquid divided like:

35% VTI
35% VXUS
5% IBonds
25% various REIT stocks.

Our expenses are around 30k a year but this includes some fat we could trim...

There is no study for this kind of portfolio.

But mostly - extreme pessimism.

steveo73
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Re: The 4% Rule – A Castle in the Air

Post by steveo73 »

M wrote:
Fri Sep 16, 2022 7:02 pm
But mostly - extreme pessimism.
I love this.

I'll give some feedback.

1. The 4% data-set doesn't have the conditions you mentioned but I think it has worse conditions.
2. Kids. Yep this is really really tough. How old are your kids ? We live in a consumerist society and dependent on your kids this can be real tough. We had a hell of a time with our now 21 yo daughter. My 19 yo son had some issues but he wasn't as difficult. They are both fantastic now. We also have an 11 yo and he is perfect but not a teenager just yet.
3. Your portfolio to me is fine for comparison purposes. The further you stray from indexing the riskier your investments are over a longer time frame and the less relevant the 4% rule is. Your portfolio sounds fine. We own our house. This works for our specific situation but maybe not for you.
4. Your expenses sound low to me but I'm from a different country. I think your kids ages are potentially important here and even then I can't state how your spending on them will change over time. My two oldest kids go to uni (college for Americans) but we don't pay a cent. We now just give them presents which is typically money for their birthday and Christmas and free board.

You can see how this goes now though can't you. Your specific situation is unique. You have to come up with a plan you are comfortable with.

Plus the key kicker is your plan (and most plans) are built on quicksand because your expenses over the course of your retirement are not set in stone.

zbigi
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Re: The 4% Rule – A Castle in the Air

Post by zbigi »

steveo73 wrote:
Fri Sep 16, 2022 5:49 pm
Who is retiring for 50 years and why is this is the case ?
This is a forum called Early Retirement Extreme, so probably a lot of people :)

Saw this later on:
steveo73 wrote: I should have rephrased my point about retiring for 50 years. To be more specific it should be who is retiring for 50 years with no social security being possible for the length of your retirement.
I suspect, most people from "developing" countries? We can't count on the state helping us in old age. Also, maybe a lot of Western Europe? The demographic trends over there don't instill a lot of confidence in states still being able to pay out decent pensions in 2040 or 2050.
Also, I suppose even people from countries with high state pensions, if they go the ERE route and work less than 10 years, won't get that much out of the system...

ertyu
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Re: The 4% Rule – A Castle in the Air

Post by ertyu »

zbigi wrote:
Sat Sep 17, 2022 2:21 am
maybe a lot of Western Europe? The demographic trends over there don't instill a lot of confidence in states still being able to pay out decent pensions in 2040 or 2050.
Correct, the guardian had a piece on the retirement age going up to 73 in the UK ca. 2038. Japan has discussed a retirement age of 75. Also, do not discount the scenario where the retirement age doesn't change but pensions end up significantly lagging inflation. The situation will stay stable as long as the boomers, currently the largest voting generation in the west, remain of decent size, but I would not be surprised to see cost of living increases to entitlements lag once the size of the voting boomer generation falls.
Also, I suppose even people from countries with high state pensions, if they go the ERE route and work less than 10 years, won't get that much out of the system...
Also correct.

For these reasons, I do not plan to rely on social security.

M
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Re: The 4% Rule – A Castle in the Air

Post by M »

zbigi wrote:
Sat Sep 17, 2022 2:21 am
Also, I suppose even people from countries with high state pensions, if they go the ERE route and work less than 10 years, won't get that much out of the system...
Correct - at least in America. If I would have worked for 5 years then retired like traditional ere path I would have gotten nothing in old age. Social security is based on a credit system. 4 credits per year and you need 40 credits to qualify for traditional retirement social security. Once you qualify payout is based on formula based on lifetime income, but it is EXTREMELY progressive to ensure most everyone gets at least $1,000 /month.

Likewise with spousal credit. Have to be married at least ten years. If I would have divorced my wife after 9 years and she never bothered to work she would have gotten nothing from social security in old age.

On the plus side - these credits are absurdly easy to get. You need $1,500 /year in income per credit. So to get all four credits you need 6k. Around here anyone with a pulse can get paid $15 /HR to flip burgers. So this is 400 hours of basic work per year, or 10 weeks of full time burger flipping. It makes a ton of sense in America to slowly spread out income over 10 years to make sure you are covered in old age instead of retiring after 5 years.

If you have no income or assets or job after the age of 65 Medicaid will put you in a nursing home. Some of these are good, others not so much. I have heard some great stories and bad stories. It isn't bad around here they have group exercise classes, decent meals, daily games like bingo and card games. Most importantly, they have free wifi. It is way better than our prison system. :lol:

zbigi
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Re: The 4% Rule – A Castle in the Air

Post by zbigi »

M wrote:
Sat Sep 17, 2022 6:08 am
All that sounds pretty great. I mean, work 4 months per year for 10 years, and you've got $1000/m guaranteed income from 67 onwards? Wow. Also, the economic future of the US looks relatively safe (unlike many other developed countries), so it's not unlikely that the state will be able to pay up when the time comes.

M
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Re: The 4% Rule – A Castle in the Air

Post by M »

zbigi wrote:
Sat Sep 17, 2022 6:21 am
All that sounds pretty great. I mean, work 4 months per year for 10 years, and you've got $1000/m guaranteed income from 67 onwards? Wow. Also, the economic future of the US looks relatively safe (unlike many other developed countries), so it's not unlikely that the state will be able to pay up when the time comes.
No - most everyone gets this because most normal people work at least 35 years. This is what lowest income workers get for 25-35 years of work.

If you only work part time for ten years like my example you would not get much...It is like 90% of average of 35 years of income up to first $1,000 /month then drops to like 30% or something for next 3k etc.

If you actually wanted 1k/month you would need something like 1,300 /month of average income for 35 years. Or like 4,000 /month of income for ten years to average out. All the years of no work reduces the average.

Even in America there are often no free lunches.

Edit: Sorry after rereading my previous post I did not word things well...You would not really be 'covered' in old age in my specific example, but you would at least get something..

chenda
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Re: The 4% Rule – A Castle in the Air

Post by chenda »

steveo73 wrote:
Fri Sep 16, 2022 5:33 pm
Why the extreme pessimism then ?
Well I for one am not pessimistic, in that I expect such benefits to still exist in some form in decades to come.

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fiby41
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Re: The 4% Rule – A Castle in the Air

Post by fiby41 »

@M, thanks for explaining that. Should the decade of work be continuous? Meaning, if someone worked like say Jacob, 5 years from 2002-2007 and another 5 from 2012-2017, would they qualify?

Around here, the retirement age is coming down. Totally anecdotal but everytime my parents return from our hometown they mention the people who have taken VRS: voluntary retirement from service. Reasons include having children who work and companies finding it cheaper to hire young people who are willing to work for less.

M
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Re: The 4% Rule – A Castle in the Air

Post by M »

fiby41 wrote:
Sat Sep 17, 2022 11:50 am
@M, thanks for explaining that. Should the decade of work be continuous? Meaning, if someone worked like say Jacob, 5 years from 2002-2007 and another 5 from 2012-2017, would they qualify?

Around here, the retirement age is coming down. Totally anecdotal but everytime my parents return from our hometown they mention the people who have taken VRS: voluntary retirement from service. Reasons include having children who work and companies finding it cheaper to hire young people who are willing to work for less.
It does not need to need to be continuous. Any year you work and make 6k and pay social security taxes will give you full credits for the year. You can, for example, work from age 18-23, take 32 years off work, then work from 55-60 and qualify for social security still.

Granted - you would not get much money in this case unless those ten working years involved very high income.

steveo73
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Re: The 4% Rule – A Castle in the Air

Post by steveo73 »

chenda wrote:
Sat Sep 17, 2022 7:58 am
Well I for one am not pessimistic, in that I expect such benefits to still exist in some form in decades to come.
Well done. I think so as well.

steveo73
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Re: The 4% Rule – A Castle in the Air

Post by steveo73 »

zbigi wrote:
Sat Sep 17, 2022 2:21 am
This is a forum called Early Retirement Extreme, so probably a lot of people :)
I really doubt it.

There would have to be no or extremely low social security benefits for this to be an issue. Then you'd have to be able to generate enough wealth to retire prior to 50 and 50 is really pushing it. If your age expectancy is more like 70 then we are talking about retiring at 20.
zbigi wrote:
Sat Sep 17, 2022 2:21 am
I suspect, most people from "developing" countries? We can't count on the state helping us in old age. Also, maybe a lot of Western Europe? The demographic trends over there don't instill a lot of confidence in states still being able to pay out decent pensions in 2040 or 2050.
I agree that people in these geopolitical locations are in a completely different situation. I don't like how lucky a lot of us have it compared to a huge bunch of people. I don't think retirement would be the biggest issue in those countries though. How many people in Pakistan are planning on early retirement ?
zbigi wrote:
Sat Sep 17, 2022 2:21 am
Also, I suppose even people from countries with high state pensions, if they go the ERE route and work less than 10 years, won't get that much out of the system...
That isn't how the safety net in Australia works. I asked this question and the response sounded to me like most developed countries have just as good a safety net as we have. You'd have to look at the details.

I always get the impression a lot less people are retired on this forum than for instance on the MMM forum. It'd be interesting to know how many people are retired on this forum.
Last edited by steveo73 on Sun Sep 18, 2022 11:03 pm, edited 2 times in total.

steveo73
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Re: The 4% Rule – A Castle in the Air

Post by steveo73 »

zbigi wrote:
Sat Sep 17, 2022 6:21 am
All that sounds pretty great. I mean, work 4 months per year for 10 years, and you've got $1000/m guaranteed income from 67 onwards? Wow. Also, the economic future of the US looks relatively safe (unlike many other developed countries), so it's not unlikely that the state will be able to pay up when the time comes.
Correct. Put it in perspective. people are talking about getting their WR's to a level where they can retire at 17.

steveo73
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Re: The 4% Rule – A Castle in the Air

Post by steveo73 »

I'm going to add a perspective here that could be completely fictionalized. There is a guy on the MMM forum who did two things that made his plan in my opinion really risky. He did the following:-

1. Had a 6% or higher WR.
2. Had a customized portfolio using options as well as other financial tools to try and generate above market returns.

I don't know if his plan has failed but he was recently asking about going back to work. I used this guy as an example previously of someone who really pushed it and had up until that point been okay.

So although I might be less risk averse than most people on this forum I think some people push it really far.

Just to be clear I could also go back to work and it might not necessarily be due to money. This actually raises a good point about your expenses. I might have judged my expenses too lowly in that I may want to spend more money now than when I was working.

zbigi
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Re: The 4% Rule – A Castle in the Air

Post by zbigi »

BTW, regarding US Social Security, The Wikipedia Page on the SS Trust Fund (https://en.wikipedia.org/wiki/Social_Se ... Trust_Fund) says that it's currently running on deficit and thus is expected to be depleted at some point in time. Once that happens, the payroll taxes will stop covering current level of expenditures and the state will either have to increase taxes, increase retirement age or lower the social security payouts (in practice, probably a combination of all of them will happen).

ertyu
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Re: The 4% Rule – A Castle in the Air

Post by ertyu »

zbigi wrote:
Mon Sep 19, 2022 5:45 am
BTW, regarding US Social Security, The Wikipedia Page on the SS Trust Fund (https://en.wikipedia.org/wiki/Social_Se ... Trust_Fund) says that it's currently running on deficit and thus is expected to be depleted at some point in time. Once that happens, the payroll taxes will stop covering current level of expenditures and the state will either have to increase taxes, increase retirement age or lower the social security payouts (in practice, probably a combination of all of them will happen).
nah, they'll print and they'll meet the entitlements in nominal terms but they'll erode them in real terms

slsdly
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Re: The 4% Rule – A Castle in the Air

Post by slsdly »

I just work with the assumption that society/civilization will decline over my life. So I already wrote off 4% as a fluke, 3% as the new 4%, and 2% as my own threshold. I'll make it in a few more years, once my share of the house is paid off. I assume I will receive nothing from the CPP or OAS pensions (Canada), and if I do, I will defer as long as possible to increase the payments (both are inflation adjusted). But the truth is if CPP/OAS are gone, then probably 2% is out the window as well; I will have bigger problems on my hands, such as lack of food, water, and/or energy. I would like to enjoy early retirement while society remains functioning, in addition to my physical/mental health.

Hard to know what I will require in my golden years. Family history suggests I won't last long once the physical/mental decline begins in earnest. I have no children, and intend none. My partner and I are putting together wills in the next year -- particularly regarding our wishes on mental decline -- if/once we have lost much of what we were, we intend to preauthorize the use of new MAID program (medical assistance in dying). A terrible mercy that may destroy the person who makes the call. Should it come to that, we certainly don't look forward to it. All the more reason to enjoy a modest life now, as best we can.
Last edited by slsdly on Mon Sep 19, 2022 8:59 am, edited 1 time in total.

M
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Re: The 4% Rule – A Castle in the Air

Post by M »

steveo73 wrote:
Sun Sep 18, 2022 11:11 pm
I'm going to add a perspective here that could be completely fictionalized. There is a guy on the MMM forum who did two things that made his plan in my opinion really risky. He did the following:-

1. Had a 6% or higher WR.
2. Had a customized portfolio using options as well as other financial tools to try and generate above market returns.

I don't know if his plan has failed but he was recently asking about going back to work. I used this guy as an example previously of someone who really pushed it and had up until that point been okay.

So although I might be less risk averse than most people on this forum I think some people push it really far.

Just to be clear I could also go back to work and it might not necessarily be due to money. This actually raises a good point about your expenses. I might have judged my expenses too lowly in that I may want to spend more money now than when I was working.
Financial Velociraptor....I suspect he will update that thread eventually with more information. There has been too much discussion in that thread for him to simply leave as is. Or maybe quitting job with 6% withdrawal rate and custom portfolio then coming back years later drunk posting about failing at FIRE and looking for a job is what retirement failure looks like in MMM world? Idk. It still doesn't seem so bad. He took off work for a long time I think - many many many years. I would imagine in that sort of situation you could tell years in advance that you will run out of money.

But yes - completely different levels of risk aversion. Completely different forums. Completely different people. I stay away from MMM forums these days because - frankly - it seems to have turned into a bunch of 250k income people saving 4 million dollars to retire on 100k expenses with blind faith in 4% rule and no investing knowledge all while bragging that they are more frugal than the average American because they did not get heated seats in their escalade. I have high numbers but only because of family of six. My per person expenses are JAFI level.

On occasion there is someone like Financial Velociraptor there and I actually learn something. We should convince him to come to ere forums and explain his 6% withdrawal rate using custom portfolio using options that generates above average market returns strategy. That would certainly be an interesting discussion, I think.

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