The 4% Rule – A Castle in the Air

[steveo73]

It's possible that 1871-2019 US stock market has been an exceptional period in comparison to rest of human history.
What has worked out longer is having atleast 1 child who can take care of an ailing you in old age.

I got 3 but I wouldn't trust any of them.

[steveo73]

Its not been that hard really with an ERE lifestyle. My spending would only require an additional 0.2-0.3% withdrawal as compared to last year. Maybe less as I think I'm in credit with the power company.

I'm in Australia and we are probably better off than most other countries because that is how we've rolled for years. The world has a recession and not much happens to us. It's because we are a blip on the backside of the world and China is a big boy who buy stuff of us. They even screw us over and we still go okay.

Our lifestyle is frugal compared to the average person.

Anyway inflation is rampant and energy prices are up and it's all bad but we are fine. That is after retiring with a 5% WR. What will be interesting is if we spend more money come the end of the financial year. I doubt we get over a 5% WR but we won't know until June 30 next year.

[steveo73]

Im not suggesting one leave top 1% paying job with 98% saving rate because assets too costly. Sure just get your 1% SWR.

But for rest of us ...

This is so much wisdom in this post. It's gold.

[M]

Why don't people who don't trust the 4% rule - at least in USA - simply rely solely on social security like millions of other normal retirees do?

Like 30 million people (I completely made up this number) or something already do this today - and they aren't even ere people. They are just normal people living on $1,500 A month or so. Certainly an ere person can live on this amount.

Simply work 10-15 years or until you have 25 years left to social security and have 4% withdrawal rate, put everything into TIPS and IBonds, and forget about money.

What could go wrong?

[ertyu]

Why don't people who don't trust the 4% rule - at least in USA - simply rely solely on social security like millions of other normal retirees do?

Because if you've done your research and can understand the issues with the 4% rule, you have also probably done your research and can understand the issues with what's euphemistically termed "entitlements" across the majority of podcasts?

I'm not from the US, but that's my take at least

[chenda]

Anyway inflation is rampant and energy prices are up and it's all bad but we are fine.

I'm guessing summertime currently is the time of peak energy use in Australia, air conditioning over heating?

[jacob]

I'm guessing summertime currently is the time of peak energy use in Australia, air conditioning over heating?

Well, except, it's more like winter->spring in the southern hemisphere right now.

[chenda]

Well, except, it's more like winter->spring in the southern hemisphere right now.

Getting ahead of myself...

[Ego]

What has worked out longer is having at least 1 child who can take care of an ailing you in old age.

While this is true in much of the world, things have changed very quickly here.

In the past I wrote about how adult children were dropping off their senior parents at Soylent Towers. Well, now I am experiencing something similar here with their kids. Parents co-sign for their unemployed or underemployed adult children and drop them off here. The parents move them in, furnish the apartment, ask the important questions, set up the autopayment of rent from their accounts and contact us whenever there is an issue. The children are incredibly nice and stress free.

Another thing I hadn't noticed until @Jacob mentioned it here is that the children frequently abandon their pets to their parents care when they no longer enjoy having them around, which may be indicative of how they will treat the parent in the future.

I do not know the entire financial situations of the parents but I would imagine that maintaining the 4% rule is challenging when you are maintaining three households.

[WFJ]

Some points from above.

Sampling = Does the S&P 500 over the last 100 years contain all possible asset returns? This is an assumption of the 4% rule and is 100% false.

Price subsidies = These are INCREDIBLY inflationary and only create the need for more subsidies and never increase supply. The money for power has to come from some capital and assuming "Daddy War Bucks" will always pay your you heat to come on is not a robust strategy.

In my non-academic simulations, 1% never fails, unless returns are not normally distributed (they are not) experience higher volatility and returns are below the historical 7%. Over a 50-year time period, 4% fails roughly 20% of the time and it's not due to one bad year early on, but a run of mundane returns at any time in the sequence. This is what makes the 4% so devious and dangerous as it is likely to leave one penniless after 30 years when work will be difficult.

There are about 10 assumptions that must be true for 4% SWR to hold and all assumptions have been violated in all markets except the US and a few other Western nations over the past 100 years. "Guru's" who recommend over 4% SWR (I've heard several "gurus" make this insane suggestion) should be ignored, they are just selling what people want to hear in hopes they will buy their book, attend seminars, use affiliate links, profit from naivety (or stupidity). BTW, my new book "The 3 hour and 58-minute workweek" will be coming out shortly, will have a seminar in some remote tropical location for "Platinum subscribers" and I will show up at any speaking event for the right price, if you want to read/hear more feel-good mindless advice.

[prudentelo]

If it's right that you need 1% WR to be S (or even low!) then early retirement on the financial wealth is always imprudent, also plan does not work.

80% savings rate for 1% WR need 25 years of work. Long time to work to live on only 1/5 of produce for HOPE! that you may be able to spend perhaps fifteen more years retired (plenty of "normal" people retire on 60, since reduce time horizon reduces money requirement)

SOunds like a better idea to just find a part time gig that you like and fits with your lifestyle, mini retirement vacations, etc. etc. Hop jobs you like without worrying about the pay. But basically the FI-ERE "live as you choose forever now" does not work, stash can only be treated as "big emergency fund", longer stash (in withdrawal-years) higher chance it will hit "failure event" within those years and present value should be discounted accordingly etc etc

If you are right

I do have suspicion you withdraw 4% of present fund in each year, not 4% of real value of starting fund. Can confirm?

[steveo73]

I'm guessing summertime currently is the time of peak energy use in Australia, air conditioning over heating?

It depends where you live. I live in Sydney. I think you'd be right but I'm giving you gut feel rather than reality so I checked my bills. Typically we spend more in winter due to gas heating. People are moving away from gas heating though because electricity is cheaper.

[steveo73]

Well, except, it's more like winter->spring in the southern hemisphere right now.

It's the start of spring now. It's beautiful. There are a bunch of cherry blossom trees in my area. They bloom for about 2 weeks to a month and then they look dead the rest of the year. They look good now though.

[steveo73]

While this is true in much of the world, things have changed very quickly here.

In the past I wrote about how adult children were dropping off their senior parents at Soylent Towers. Well, now I am experiencing something similar here with their kids. Parents co-sign for their unemployed or underemployed adult children and drop them off here. The parents move them in, furnish the apartment, ask the important questions, set up the autopayment of rent from their accounts and contact us whenever there is an issue. The children are incredibly nice and stress free.

Another thing I hadn't noticed until @Jacob mentioned it here is that the children frequently abandon their pets to their parents care when they no longer enjoy having them around, which may be indicative of how they will treat the parent in the future.

I do not know the entire financial situations of the parents but I would imagine that maintaining the 4% rule is challenging when you are maintaining three households.

This here sums up why arguing about SWR's is stupid when it comes to the reality of your life. You have kids, you have parents, people get dogs etc. Your expenses are not set in stone. It's a guesstimate.

Our roof for instance has had a bunch of leaks. I think it's poorly designed with solar panels build into a cut out section of the roof and 3 sun roofs. It's really hard to get someone to fix the leaks and it's expensive plus with the roof we have we think it might be better to replace the roof. We recently received a quote for 30k and that doesn't include solar panels which I would add. I'd budget another 10k for that. We spend around 42k per year. The roof is an unforeseen (maybe it should have been) cost.

The counter argument that you don't do all of those things is fine but there will be other costs and sometimes it's worth spending the money anyway. You gotta live and be happy and this is from someone who is frugal.

[steveo73]

Over a 50-year time period, 4% fails roughly 20% of the time and it's not due to one bad year early on, but a run of mundane returns at any time in the sequence. This is what makes the 4% so devious and dangerous as it is likely to leave one penniless after 30 years when work will be difficult.

Maybe but working to get to a 3% guarantees more work. If you like that it's cool. It's a judgement call though.

Do these calculations take into account social security, death, health and inheritance ? Do these calculations take into account your expenses today as well as your expenses in 5, 10 and 20 years time ?

They don't right.

Does Prince Harry need to worry about getting to a 3% WR. What about my 80+ yo dad ?

"Guru's" who recommend over 4% SWR (I've heard several "gurus" make this insane suggestion) should be ignored,

I'm no guru and I'm not making or intend to make any money from selling some trollop but we've retired at a 5% WR in tough circumstances. I'm pretty confident we'll be safe because the WR doesn't encapsulate the reality of our specific situation.

It's not insane at all. I think it's insane to get your expenses down to ridiculous levels and then get to a 3% WR and expect that to hold. It might but a 5% WR will also hold in lots of situations.

The old comment lies, damned lies and statistics needs to be a qualifier when it comes to discussing these WR's.

Has anyone here ever been involved in Agile development. There is a concept called story points. My team's version of story point may mean 3 points = 1 man days effort whereas bob's team's story points mean 3 points = 5 man days effort.

Sure all things being equal a 3% WR is safer than a 5% WR but when it comes to your financial plan all things aren't equal.

[ertyu]

I calculate a bit differently. I divide liquid nw by 600, and I say, cool, these are your monthly expenses now. Most calculations like these determine a desired amount to live on then keep its real value constant throughout the retirement period. I think, however, that most are likely to adjust their withdrawal rate depending on what's happening to their liquid net worth (LNW). Who wouldn't aim to live on less if they discover their stocks have fallen? I think most people would automatically go more frugal if their net worth has decreased.

Ditto with framing my financial goals. I don't aim to accumulate X amount, rather, my goal is to be able to live on whatever LNW / 600 is. If LNW/600 gives me too much anxiety, I return to work (as I am currently doing). Right now, if all goes well, LNW/600 is projected to be 416 euro at the end of next year's employment (right now if we count all the cash in all accounts across various countries, LNW/600 is 373 euro). This number is the only thing that matters. This is what I need to fit into: what my budget is. Right now, 373 euro is just livable, but as @steveo73 said, it's tight. Thus, I work more.

[frommi]

Who wouldn't aim to live on less if they discover their stocks have fallen? I think most people would automatically go more frugal if their net worth has decreased.

But this assumes you can do that. If you are calculating to retire on 400 €/month in europe i doubt that you can reduce that spending further. And thats where i can agree on what steve has written, if your expenses are so high that you can easily reduce them, a 5% WR might be very safe, but for someone retiring on a very low expense calculation even a 3% WR can be unsafe.

[steveo73]

if your expenses are so high that you can easily reduce them, a 5% WR might be very safe, but for someone retiring on a very low expense calculation even a 3% WR can be unsafe.

This is just one reason why comparing WR's between people or arguing about what is safe isn't really possible. It's a really good reason but it's only one reason.

You could have a 1% WR via investing in Turtle futures for instance and easily go belly up.
You could be married (like myself) and get divorced (hopefully not like myself) and lose everything to lawyers (I really hope this doesn't happen to me).
You can have wealthy in-laws and parents and expect to inherit millions.
You could have a good social security system and be fine if you last to that point.
You could have a life expectancy of 1 year.

If you are talking WR's and comparing between people you need to have the exact same expenses and the exact same investments and the exact same life expectancy etc.

[prudentelo]

I dont think the WR is irrelevant at all but central. It's an historical fact (not speculations) what worked before. In finance, typical attractors for portfolio value are zero and infinity. WR historical fact gives an idea where you lie, whether your finances are going to infinity or zero.

Historically line is 3-4% so let's say use 3% to be ""safe"".

Caveat you can always get unlucky. Caveat total-wipeout events are "not normally distributed" (that mean theyre much more likely to happen than just "random" drawdown of market of 100% in one year which is ~impossible).

5% WR in bad conditions (low yields) like now sound unsafe. Of course I dont know your details.

2% in bad conditions sounds safe. 3-4%, maybe should consider possibility of working again.

[steveo73]

@prudentelo - you are right. It does matter. All other things being equal a 1% WR is safer than a 4% WR.

There is though a lot more to the picture especially when it comes to individual comparisons. The details do matter and they matter a lot. You can't argue that your specific plan is now valid and you can't argue that Bob with his 6% WR is going to fail. You don't have enough information to do this. Bob might have a life expectancy of 2 years and he has way too much saved up. He might live really large paying for private school fees and fancy overseas holidays and intends to retire and become a Buddhist monk and leave his money in index funds to grow and give it all away to charity when he dies.

So for argument sake we can do the (I think this is stupid) good old argument about now you have to get to 3% or whatever figure you feel you need to get too. So we aren't arguing for a specific individual's plan. We are stating that the 4% rule isn't valid anymore because it won't hold under the same assumptions that held during the initial study.

The only way to prove this is get another 100 years or so of data and run the calculations again. Can someone do this now - no they can't.

It might be true. It might not be. We could go through a period of 10 years when only a WR of 1% holds but then 10% holds for the next 20 years. You don't get that certainty today.

No one knows. It's all conjecture. It also doesn't really matter to your individual plan unless it really does matter to you. That is though a subjective feeling. You may be really risk averse in relation to cutting back on any spending or going back to work or whatever. You might love your job now.

Look at the data. Understand the data. Make your plan. Be careful.

I'd personally highlight a couple of points:-

1. Recognize there are opportunity costs to every decision that you make.
2. Dwell on the reality that your expenses are not set in stone over your retirement. Cutting your expenses back to a really low level and thinking you are now at a 3% WR is just deluding yourself. Having buffer in your expenses is just the same as having a low WR.