The 4% Rule – A Castle in the Air

[IlliniDave]

Regarding a collection of 50% plans to try to drive the union to 95% I think an important thing would be the cost of failure of the individual plans. If the 5 or so have inconsequential failure costs then it's probably a good approach.

Unfortunately I am in one of those positions where prevailing wisdom might caution me about confusing results and strategy, having largely bet on a narrow but high probability approach to the roof overhead/larder supplied family of needs.

[Jin+Guice]

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

Haha, those people are both in their late 30s and I'm not sure how self aware they are. They both stayed lazy long enough to figure out how to exit the service industry through the side door.

It's not that I don't think they'd enjoy investing, it's that they're almost culturally opposed to it. The casual viewpoint of most of my friends is that the stock market is a rigged casino where the very wealthy are the house, and the house always wins. They also think investing is boring and that the stock market/ wall street/ capitalism is evil.

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.

This is indeed a novel way of saying it and and approach I hadn't considered!

[fiby41]

Just buy an annuity and get it done with.

[classical_Liberal]

@7WB5
This goes back to the ERE indicator score concept. Or multiple legs on FI stool, which we have discussed several times before, but I can't find where.

I always liked the idea of a multi-pronged approach, but I did not like the indicator. The indicator used spending as a baseline, which meant that at very low spending rates (ie a big part of the goal) one "lost credit" for any efforts that exceed 100% of spending. This makes sense from a resilience standpoint, if what we are trying to measure is resilience at a baseline low spending level. However, when it's obvious that most are not even close to that baseline spending level, it fails to show improvement when spending is dropped, even at average wages. So using this score provides little encouragement to reduce spending in the short term, even at very low wages. Instead it encourages the "side hustle", extra legs to stool idea only on the income side. I think the priority/low hanging fruit for most below Wheaton 7 is developing a system to address the consumption side. Once that is "taken care of" the income side is almost trivial.

Edit: IOW, it seems rather easy to come up with three ways to earn 50% of 8K annually on top of "4%-rule" of liquid investments. Much harder to drop spending/consumption from 30K annual to 8K and do so in a way that is resilient enough to overcome objections like "What if I need to spend more later?".

[classical_Liberal]

Regular Startrek engineering duties seem to be Wheaton level 4-5. Battle is Wheaton level 7.

ERE as star trek! I love it! How did this not make it into the book? Side note, I'm geeking out over this new Star Trek series.

[steveo73]

Just buy an annuity and get it done with.

Simple and effective. I don't like annuities though. I just worry they will go bust and that safety comes at a cost. Then again I view social security as an annuity.

[Mister Imperceptible]

Ask Jason about annuities

[7Wannabe5]

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.

If Heads = Complete Success (n =1) then m =5. Out of 32 potential futures, only 1 results in 5 Tails=Failure. It would be easy enough to construct a contingency tree or systems model with variety of probabilities of success, proportionality of success, and even a few components of success beyond income. For instance, I might assign "creating and selling jewelry made out of pine cones and other natural materials" a 50% likelihood of generating $500 income/year over 5 years and an 80% likelihood that I would be happy devoting my life energy to this path/module. Given low expenses, it is easier to come up with list of fun possible plans with either/or low possibility of success (market my poetry-.02% chance $8000/year over 20 years) and/or low income input (gather returnable bottles the drunken frat boys left along the frisbee golf course in the park where I take my daily walk- 95% chance of $500 income/year) inclusive of barriers to entry/initial costs (work full-time flipping burgers for 20 weeks and use proceeds to start flipping vacant lots in the city- 50% chance of $5000/yr over 5 years.) etc. etc. etc.

What I observed on Tyler's site was that at least one of the portfolios had 50% chance of success over 30 years with 8% withdrawal rate. What I perceive as a lack of rationality among the members of this forum is behavior that seems more in alignment with regarding any possibility of failure as something like unto a 50% possibility because verbal and/or visual center of brain is overwhelming planning part of brain due to lack of fleshing out second order branches except for occasional resort to worst case scenarios. Given a true 95% success rate, there are 19 paths where the money just keeps coming* and only 1 where it doesn't, but if you don't give each of those 19 paths a distinct name, your brain will just keep on nudging you to devote the same amount of life energy resources to A or B.

Obviously, it is also important to write down or otherwise flesh out the assumptions or basis for likelihoods you are assigning to any given "coin"/plan/path, because otherwise you can't update with new information or check for independence or possibility of greatly improving overall resilience through tensegrity (For instance, maybe probability of success of 27 different paths improve greatly given assumption that you also devote 2 hours/day to health maintenance. Maybe this is actually twice as important as independent income to your tree of plans. Maybe it is only half as important.) IOW, you can't not do Bayes, but it's really not that difficult to actually double-check whether your own math is supporting your own gut. IOW, are you in due proportion betting your life-energy/money in alignment with your own take on reality?

ETA: This group is so err on the side of pessimistic/conservative, there is actually more lip service given to the varieties of flavors of the 1/20 path of Failure than the much more likely scenario of many more paths leading to rolling in money like a pig in mud. Therefore, I have long held the theory that this is the secret plan of many members of the forum.

[George the original one]

ETA: This group is so err on the side of pessimistic/conservative, there is actually more lip service given to the varieties of flavors of the 1/20 path of Failure than the much more likely scenario of many more paths leading to rolling in money like a pig in mud. Therefore, I have long held the theory that this is the secret plan of many members of the forum.

Ding! Ding! Ding!
There are many different failure scenarios, but vastly more overwhelmingly successful scenarios. This was evident even when playing with FireCalc. Even an early death is far more likely than running out of money for most of us.

[7Wannabe5]

@Gtoo:

lol- I will pretend like I am playing my professional dancer niece getting paid $50/hour to get the party started at a 13 year old kid's bar mitzva. What are your plans for world domination when your stash hits stinkin'?

OTOH, you do have to accept the assumptions in terms of future resembles something like the past within this realm/model, but even extremely pessimistic rejection of these assumptions does NOT recommend doubling or quadrupling down. It recommends making completely different alternate plans.

[classical_Liberal]

This group is so err on the side of pessimistic/conservative, there is actually more lip service given to the varieties of flavors of the 1/20 path of Failure than the much more likely scenario of many more paths leading to rolling in money like a pig in mud. Therefore, I have long held the theory that this is the secret plan of many members of the forum.

For some it may be partially the above, but I think it's more of this

"What if I need to spend more later?".

We do want more money, but for reasons other than being rich. Put another way, it is a lack of confidence in the resilience of our current situation, coupled with the concern we may just decide ERE lifestyle is for the birds later in life. Though, maybe I'm just projecting my own thoughts onto others.

I think it's hard for those on the forum to fathom a more consumer based lifestyle when they have been living in their own personal ERE for so long. Those who are newer to it, may still be weighing options.

[7Wannabe5]

@classical_Liberal:

Gotcha. I should note that I am definitely not judging. It's more that I am curious about alternate plans. Since I am The Explorer, beyond bare survival plus sugar cookies for myself and loved ones, I am mostly interested in access. Like when my multi-millionaire friend mentions that he has access to IPOs, implying that I don't, it makes me a little bit grouchy until I add up all the other keys I can buy with the life-energy I would have to expend to achieve multi-millionaire status.

I should also note that my lifestyle spending is more of a rough mix of poor/affluent as opposed to steady state lowest rung middle class which I am sure I would eventually find boring.

[2Birds1Stone]

Put another way, it is a lack of confidence in the resilience of our current situation, coupled with the concern we may just decide ERE lifestyle is for the birds later in life. Though, maybe I'm just projecting my own thoughts onto others.

Bingo. But then again, that is the whole reason for implementing a multi pronged approach and many other concepts in the ERE book. I like to play devils advocate sometimes, especially when I battle between logic and emotions.

[classical_Liberal]

@7WB5
I'm definitely not judging either. I think poor aristocrat or bohemian creative are great choices for an ERE lifestyle. I've been spending time recently trying to understand different mental frameworks and circumstances that lead to ERE/semi-ERE. In particular, I'm trying to understand the barriers to reaching higher Wheaton levels. Whether mental, cultural, economic, personal psychology (ie what causes advancement anxiety) or other, there are obviously quite a few. I believe some of the problem also comes from a messengers/teachers bias. As in, if the barriers the messenger overcame to reach a higher wheaton level were different to the ones a learner is trying to overcome or if the reasons for choosing to advance Wheaton levels are differing, there are problems communicating effective paths forward.

[Bankai]

What I perceive as a lack of rationality among the members of this forum is behavior that seems more in alignment with regarding any possibility of failure as something like unto a 50% possibility because verbal and/or visual center of brain is overwhelming planning part of brain due to lack of fleshing out second order branches except for occasional resort to worst case scenarios.

+1, fear is strong:

- never start a business as 90% fail
- never active invest as 90% fail
- 2.5% SWR might be too conservative going forward
etc.

Interestingly, initially, ERE was 'save extremely (75%+) for 5 years', while current consensus appears to be '3% or better 2.5% SWR'... meaning 11 or 13.3 years at 75% SR... am I the only one this sounds rather unappealing to? Are people industrious enough to retire very early also not smart enough to reduce spending or generate some income when they see portfolio dwindling?

[The Old Man]

Interestingly, initially, ERE was 'save extremely (75%+) for 5 years', while current consensus appears to be '3% or better 2.5% SWR'... meaning 11 or 13.3 years at 75% SR... am I the only one this sounds rather unappealing to? Are people industrious enough to retire very early also not smart enough to reduce spending or generate some income when they see portfolio dwindling?

Remember that this is an analysis, not a plan of action. 3% is "the 4% Rule and 4% Portfolio" answer for early retirement extreme beyond the conventional 30 years. Now, if that is too low, then you have to figure something out to make up the difference. The SWR's are just for providing an imperfect assessment of the likelihood of investments ALONE to support your goal. To simplify the analysis it omits many details that may be unique to individuals (social security, social capital, part-time/casual work, downshifting work, etc.) The individual needs to further develop a unique plan of action.

Further, in comments made in this thread, I consider the "4% Rule Portfolio" to be inadequate and any SWR's calculated based upon it for "The 4% Rule" to be a statistical artifact. Finally, I consider any practical SWR based upon the "4% Rule Portfolio" to be impossible to calculate. The 4% Rule is a statistical analysis and thus descriptive only. It is NOT a model and thus lacks predictive capability.

[7Wannabe5]

As in, if the barriers the messenger overcame to reach a higher wheaton level were different to the ones a learner is trying to overcome or if the reasons for choosing to advance Wheaton levels are differing, there are problems communicating effective paths forward.

I am sure this is true. Another difficulty would be that as you advance to next level, you actually experience worse performance. You pick up the 5th ball and drop the other 4. So, for a couple weeks, you just think "F*ck it" and go back to 3 balls, but you can't stay there for any longer than you can console yourself on your grammar school swing set after a rough day in junior high. It's frustrating.

- never start a business as 90% fail
- never active invest as 90% fail

So, if you believe these statistics, in order to reach approximate 95% likelihood of starting a successful business, you will have to plan on starting around 30 businesses, given that A) you are not the underlying reason for failure and B) you learn nothing from your previous attempts, etc, etc. So, if the goal is , for example, $20,000 year profit, and this = SW on approximately 2/3 of a cool million, then that does only give you around 20-25,000 on average to invest in each attempt. It might make sense to shoot for the moon on first go, just to get yourself used to the feeling of failure. Hmmm....let me think. What would be a really terrible business idea in which to invest $20,000? Maybe drive around in a van and pick up 10 derelicts off of the street and give each of them some equipment and a short course on how to pan for gold, and then buy them bus tickets to 10 sites you pre-determined to be likely (on the basis of 15 minute internet search) with instructions to mail you back any gold they find while earning set wage of $400/week.


Seriously, it might seem like I am advising "Be less conservative", but really I am advising (based on my own big loser experiences) "Never kid yourself that you can go passive!!!" Don't be the little piggy who got gobbled when the Big Bad Wolf finally figured out how to break stone as easy as straw or wood.

[7Wannabe5]

Further, in comments made in this thread, I consider the "4% Rule Portfolio" to be inadequate and any SWR's calculated based upon it for "The 4% Rule" to be a statistical artifact. Finally, I consider any practical SWR based upon the "4% Rule Portfolio" to be impossible to calculate. The 4% Rule is a statistical analysis and thus descriptive only. It is NOT a model and thus lacks predictive capability.

I think you are overstating the matter a bit. The 4% rule or 3% rule are perfectly suited for any model based on assumption that the future will be much like the past in terms of results in this realm. If your belief is that the future will significantly vary from the past due to change in demographics, it would also be easy enough to construct alternate model based on this assumption. Due to the fact that I just read an excellent novel,"Happy Dreams" with early 21st century Chinese trash-picker as protagonist, I am inclined towards somewhat more optimistic outlook on economic growth today then I was on the day after I read "Age of Stagnation."

[steveo73]

Remember that this is an analysis, not a plan of action. 3% is "the 4% Rule and 4% Portfolio" answer for early retirement extreme beyond the conventional 30 years.

This is a fair point. You need to look at the data in relation to your specific scenario. An ERE plan of a retirement with a long time frame may require a 3% WR. This is though what people need to do with the data. Then you need to state to yourself what confidence level you are comfortable with.

I think CL made the point about maybe spending more money later. This isn't a WR issue. It's an expenses estimation issue. This point is critical though. My take on this though is to estimate your future expenses as best as you can and then overlay your current situation on top of this. Why will spending increase or decrease. How do you pick a conservative annual spending amount. This isn't an easy problem.

All the points about the 3% being too conservative are valid though. My take on when people state they need to get to a lower than 4% rule is that they want a >95% success rate in their situation. That may require working a lot longer. Is that worth it to you ?

[steveo73]

I think you are overstating the matter a bit. The 4% rule or 3% rule are perfectly suited for any model based on assumption that the future will be much like the past in terms of results in this realm. If your belief is that the future will significantly vary from the past due to change in demographics, it would also be easy enough to construct alternate model based on this assumption. Due to the fact that I just read an excellent novel,"Happy Dreams" with early 21st century Chinese trash-picker as protagonist, I am inclined towards somewhat more optimistic outlook on economic growth today then I was on the day after I read "Age of Stagnation."

Exactly. We know that human beings are really bad at predicting the future of market returns. We also know that people lap up theories of doom. It sells. Maybe it all even makes sense. It also doesn't mean it's going to happen. I can predict we are due for the greatest stock market bull market in history. We have a huge rising middle class in India and China that dwarves all our economic growth of the past 100 years. I don't know what is going to happen and neither does anyone else.

https://www.smartcompany.com.au/industr ... ill-crash/