You need way less than the 4% rule

Ask your investment, budget, and other money related questions here
Post Reply
Adamski
Posts: 18
Joined: Wed May 29, 2019 8:35 am

You need way less than the 4% rule

Post by Adamski » Thu Oct 31, 2019 6:36 am

I have been mulling over these thoughts for a while.

Standard FIRE belief is the 4% rule is simple and safe e.g. you save a million and can withdraw 4% $40,000 per year. However reading some FIRE blogs they say its not enough and 3% is a safer SWR when taking account of taxes, investment costs and longer retirements.

A blog I follow the early retirees recommends a 2.5% withdraw rate and calculates / specifies you need at least £1m ($1.3m) before you can retire. Spending £25k x multiple 40 = £1 million. This appears a common line of thought in the Fire blogosphere.

I think this is way, way too conservative for a number reasons.

I am late 40s, and have various workplace pensions, and personal pensions, plus the state pension. These are coming off at different ages 55/57/60/65/67. My issue is really to fund the gap from 50 to 60-67. I think this is not uncommon. So the Fire fund really only needs to cover this gap (if you have government work and personal pensions after then).

The SWR method assumes you want to leave a legacy when you die. In the above example you save $1m, draw $40k p.a., and are left with $1m at the end. To me this is not essential. If you don't have children, there is no need to leave an estate. If you have children, you can help them on the way (housing) and then there is no *need* to leave them an inheritance. This is extra.

In your fire drawdown you can take the principal as well as the interest with the intention of leaving £nil at the end point.

At some point, the majority of people will receive a windfall or two in their lifetimes from inheritance. This could be taken account of in any Fire planning. Or as an unknown treated as an extra, a safety factor.

Fun employment, hobby jobs. Early retirees usually have some kind of income coming in at some point. This can also be factored in. I think very few people earn nothing at all after an early retirement.

So I have been thinking this is another way at looking at it. Funding required for period from aged 50 to say 65, 15 years. A reasonable amount for an individual to live on £15k ($19.5k) p.a. Spending forecast 15 years = £225k ($292.5k).

Income from part-time fun/hobby job £7.9k ($10.3k) p.a. x 15 years = £118.5k ($154k)

Fire fund target number £106.5k ($138.5k)

Assumptions - assumes home mortgage paid off, or minimal rent within living costs, state pension / employer pensions can be taken from ages under current legislation. Excludes inheritance windfall. Excludes any other passive income you may make post Fire.

The pensions industry and the Fire blogosphere makes you believe that you need millions to retire, or at least a million plus. The emphasis is often on not having enough, or never having enough. The pensions news is always the message that we are not saving enough and are in crisis giving the impression that only the very rich (1%) can ever retire early.

What if you have enough already or are nearly there already. It is just your thinking hasn't adjusted and you haven't accepted how good your situation is already. Your thoughts?

Riggerjack
Posts: 2697
Joined: Thu Jul 14, 2011 3:09 am

Re: You need way less than the 4% rule

Post by Riggerjack » Thu Oct 31, 2019 8:34 am

My issue is really to fund the gap from 50 to 60-67. I think this is not uncommon. So the Fire fund really only needs to cover this gap (if you have government work and personal pensions after then).
But not exactly common, either. That's why bloggers work with the 4% rule. Simple, and easily related to by the widest audience.

But the good news is Akratic already came up with a chart for this, the math is done, and maybe today is the right day for you to retire.

I'm on my phone, or I would link it for you, but it's in his journal. Maybe another member will post it here for you. If not, his journal is a good read, and certainly worth your time.

George the original one
Posts: 4810
Joined: Wed Jul 28, 2010 3:28 am
Location: Wettest corner of Orygun

Re: You need way less than the 4% rule

Post by George the original one » Thu Oct 31, 2019 8:45 am

Bridging the gap is what I've done. My classic defined benefit pension from government work begins a year from now, when I'm age 58 and I'll be able to quit using savings to cover expenses. It is, however, not typical for people in the USA these days to have access to a defined benefit pension and pensions from private employers usually don't pay out until age 63-65, thus the emphasis on SWR.

There is also the political and economic risk that pensions will be reduced or go away. General Electric, for instance, has frozen their pension and hasn't seen new enrollees since 2012 (https://www.marketwatch.com/story/ge-fr ... 2019-10-07).

My own pension has had changes, such that the assumed rate was reduced, estimated longevity has increased, and COLA is capped at 2% (the promise when I was hired was that the COLA would match the CPI). My original pension plan was also closed to additional enrollments in about the year 2004 and we were switched to an undefined benefit without guaranteed returns... this plan currently has a 0.49% management expense, so I'm quite eager to get my money out of it next year and into a self-directed IRA!

The Old Man
Posts: 398
Joined: Sat Jun 30, 2012 5:55 pm

Re: You need way less than the 4% rule

Post by The Old Man » Thu Oct 31, 2019 8:57 am

Adamski wrote:
Thu Oct 31, 2019 6:36 am
Standard FIRE belief is the 4% rule is simple and safe … I think this is way, way too conservative for a number reasons.
The 4% Rule is an analysis and not a plan. People need to develop their own unique plan that takes into consideration their own personal circumstances. The 4% Rule just pertains to the expected returns of a stock/bond portfolio over the long run and should be one element of an overall plan.

Further, the standard formulation of the 4% Rule yields a 95% success rate. People need to develop a contingency plan for the remaining 5%. Remember, people do not live their life as a probability distribution. If the contingency plan is to go with a SWR of 3% (versus 4%) or lower, then remember that no amount of financial resources will provide a 100% success rate, so alternative forms of capital will need to be deployed.

jacob
Site Admin
Posts: 11395
Joined: Fri Jun 28, 2013 8:38 pm
Location: USA, Zone 5b, Koppen Dfa, Elev. 620ft, Walkscore 73
Contact:

Re: You need way less than the 4% rule

Post by jacob » Thu Oct 31, 2019 9:18 am

The 4%-rule in its original incarnation (the Trinity study from AAII) definitely doesn't assume leaving an estate. The point of the original study was that a 50/50 stocks/bonds portfolio in which one withdrew 4% of the initial amount and adjusted for inflation would have a 95% chance of not running out within 30 years. It used 20th century US historical returns as its data set input presuming that the future return distribution would be stationary.

This calculation has since been repeated for other portfolio combinations, other countries, and the historical data runs have been extended. Some researchers even calculate SWRs based on future (21st cent.) expected returns. Turned out that the original 4% result was a bit in the high range of the overall results. This is also why it's crucial that anyone investing outside the US use another number than 4%.

As Riggerjack notes, the 4% rule is just a handy ballpark estimate. It was important at the time (the 1990s) because back then people approached retirement savings from the other way around, e.g. "My annual expenses are 50,000 and my savings are 600,000, so I need a return of 8.3% and so what should I invest in to get that?"---this approach burned a lot of people and the 4%-rule was meant as a reality check on that type of planning.

However, even the 4%-rule is by no means a substitute for a real plan. However, very many people has indeed punted on plan-making and have come to think of the "4% rule + buy&hold stocks for the long run" as the equivalent of a 4% interest bearing savings account. This attitude/lack of understanding is certainly pervasive these days and eventually these guys will get their own reality check.

I know there's pervasive tendency in much of the FIRE-sphere to rely on a combination of exuberant optimism and "the internet says..."-thinking instead of planning or fundamental knowledge, but ideally, everybody should make a spreadsheet for their expected income and expenses going from the present point to the end of their life. Even better, do this for several scenarios. E.g. also include the scenarios where the windfalls and inheritances don't materialize; the ones were the pension rules get rewritten (many Gen-X or Millennials are not counting on any government pension) making the payouts lower or later; that one might fail to pick up side-incomes or new incomes; and that the growth rates of the 20th century will not carry into the 21st century.

Either way, like all humans, people with a particular interest in retiring early also run the full range between Eloi and Morlocks :-D

Mister Imperceptible
Posts: 1020
Joined: Fri Nov 10, 2017 4:18 pm

Re: You need way less than the 4% rule

Post by Mister Imperceptible » Thu Oct 31, 2019 9:43 am

:twisted:

Ice Cream Man
Posts: 2
Joined: Thu Oct 24, 2019 12:16 pm

Re: You need way less than the 4% rule

Post by Ice Cream Man » Thu Oct 31, 2019 10:07 am

If you can estimate how much you will receive in pension & social security, you can use something like the rich, broke, dead calculator (https://engaging-data.com/will-money-last-retire-early/). It has a spot where you can put in additional annual income that begins at a later date. Or, you can do your own calculations in Excel.

I agree that the 4% rule is overly conservative for someone who will receive a pension and social security (though risk of reduced payments should be considered).

Adamski
Posts: 18
Joined: Wed May 29, 2019 8:35 am

Re: You need way less than the 4% rule

Post by Adamski » Thu Oct 31, 2019 11:14 am

@Riggerjack - thanks, I'll check out akratic's journal. Looks like a good read.

@George the original - yes its a shame defined benefit schemes have largely ended, same in the UK. I caught the tail end of a DB scheme which was sweet before they closed it.

@The Old Man, @Ice Cream Man- agree with you there

@jacob - I have done a spreadsheet of income and expenditure from now to expected end of life. I though it was just me! Although mine is very high level. Morlocks :D The Time Machine was a classic!

Plenty to think about. I am doubting my original post now, but useful nonetheless to think this through. My position may not be typical. I guess each of us has different circumstances to take account of based on the savings and investments we have made to date, our age, early retirement plans, and different rules and taxes where we live.

User avatar
unemployable
Posts: 465
Joined: Mon Jan 08, 2018 11:36 am
Location: Homeless

Re: You need way less than the 4% rule

Post by unemployable » Thu Oct 31, 2019 12:01 pm

I put my first "life retirement spreadsheet" together in 2012 I think. I know I have files money_2013.xls, money_2014.xls and so on and of course I'm on money_2019.xls now.

Anyway, 4% comes with a lot of nice coincidences. The math is easy, and easy is always preferable. It embodies a good sense of long-term viability while still approximating the remaining life expectancy of the typical ERer. It is comfortably under the real long-term return of the US stock market and above that of the bond market. It fails, or comes close to failure, in the same scenarios that WRs in the same general neighborhood do -- it's not cherry-picked to survive a specific environment in which say 4.2% fails. It has become the yardstick in ER-land, the Coca-Cola or Heinz Ketchup that everyone is familiar with and all discussions start from and relate back to. Like P/E ratios for stocks, we don't have to explain it going in and already know the benefits and limitations of using it.

I think its best feature, though, it that's it's the perfect pivot point. At rates above 4% you're taking a bet that markets will be favorable to you, or that you'll be able to time them, or that you'll be able to make lifestyle accommodations if things stagnate or crash. Below 4% arguments get raised that might not justify any withdrawal rate over a 30-year period, or require lugubrious accommodations such as working much longer than you'd like or giving up too many nice things, only to end up with way too much money when you're too old to enjoy it.

I mean here we are, more than 20 years after the original Trinity study, after two 50% drawdowns in the stock market and all sorts of asset bubbles people claimed couldn't possibly happen in the first place, and page after page after page of blogs and bulletin boards debating it, and it's still here. Well of course it is, because it shows no signs of failing. Show it some respect.

Jin+Guice
Posts: 461
Joined: Sat Jun 30, 2018 8:15 am

Re: You need way less than the 4% rule

Post by Jin+Guice » Thu Oct 31, 2019 12:43 pm

@Adamski:

It looks like you're relatively new so, welcome!

One of my favorite things about this forum, and the thing that first got me here is the doubt in the 4% rule as an absolute truth of the universe. This forum considers a much wider range of situations and ideas than are covered by the trinity study or other FIREspaces that say "everyone do this one thing."

This forum is conservative in that its blanket SWR only focused recommendation is 3% SWR or less, but it gets less conservative as you add some nuance. I've personally argued that working to save up 33x expenses is too much work and that an alternative route is to work part-time for a longer time period, while enjoying some of the benefits of "early retirement" today. Others have described other alternative paths. If there is a unifying belief to the forum, I'd say it's in the benefits of extreme frugality, though there are still a certainly more than a few "high-spenders" who frequently contribute.

I don't mean this as an insult, but retiring at 50 isn't what most FIRE people consider early retirement. If you only need to cover a 15 year gap than you obviously don't need 25 years of expenses. You need a maximum of 15 (assuming you can keep up with inflation and you have faith in your pensions). Many people here are trying to fund 60+ years of retirement, in which case the math obviously changes.


As everyone else has said, the 4% rule is useful in that we all know what it means, but most of us hold different ideas about what it means to us.

What I'm really trying to say is, I don't think your ideas about FIRE at large are as opposed to this forum as you may have originally thought. This is the best place I know of to get high-level FIRE based commentary on unique/ non-mainstream FIRE ideas.

Tl;DR:
Mister Imperceptible wrote:
Thu Oct 31, 2019 9:43 am
:twisted:

Scott 2
Posts: 1343
Joined: Sun Feb 12, 2012 10:34 pm

Re: You need way less than the 4% rule

Post by Scott 2 » Thu Oct 31, 2019 12:44 pm

Any percent based rule is an intentionally simplified starting point, with risk of over or under estimating what your optimal spend is. Its value is in setting an initial target while you are starting.

Eventually, you need to model the real structure of your individual life. That gets into positive risks like the OP mentions, but also negative risks like long term care or desire to leave a legacy.

The challenge there, is deciding how to deal with uncertainty - market returns, inflation, life span, health span, etc. Estimator tools attempt this, but the duration is too long for cut once planning. So optimal spending in your individual strategy depends on a regular feedback loop - say replanning annually.

Effective replanning requires your strategy to include responses for realized risks, both positive and negative. Here your are designing possible lifestyles. Maybe when you get sick, you cut travel. Or when the market tanks, you stop eating out. If spending is under projections, you might take up boating.

The people taking an X% rule as a hard line are avoiding all this complexity. To the extent that their overall strategy is head in the sand, I think sub 4% recommendations are reasonable.

Someone who will do the ongoing analysis and planning likely can do better. My approach is to run multiple strategies through online estimators, focusing on variables I control with the biggest impacts.

Someone planning more individually may find invalid assumptions that were giving a number too low. That sucks, but is way better than learning it through experience.

flying_pan
Posts: 31
Joined: Fri Sep 27, 2019 4:06 am
Location: USA, Oregon

Re: You need way less than the 4% rule

Post by flying_pan » Thu Oct 31, 2019 1:02 pm

Adamski wrote:
Thu Oct 31, 2019 6:36 am
I have been mulling over these thoughts for a while.

Standard FIRE belief is the 4% rule is simple and safe e.g. you save a million and can withdraw 4% $40,000 per year. However reading some FIRE blogs they say its not enough and 3% is a safer SWR when taking account of taxes, investment costs and longer retirements.

A blog I follow the early retirees recommends a 2.5% withdraw rate and calculates / specifies you need at least £1m ($1.3m) before you can retire. Spending £25k x multiple 40 = £1 million. This appears a common line of thought in the Fire blogosphere.

I think this is way, way too conservative for a number reasons.
I agree with the general idea of your post, that blind 4% rule following is not the smartest idea. However, you are pretty sure about different pensions at your age 65. I am 28 and plan to work full-time for ~8 years more (it is an estimate, of course), and honestly, I have no idea what will be in the future for pensions for me, and I don't really count on it at all. If something, I can expect taxation of assets/reducing of pensions to "well enough" people. Yes, pessimistic, but it does not look like govenment retirement funds are getting better in the future.

Everybody has a different situation, like housing, part-time job prospects (and desire), etc. 4% is good that it covers most of the people. I do agree people treat it like a Bible in FIRE community, and in general, not healthy approach to that number and their post-retirement life.

Tyler9000
Posts: 1572
Joined: Fri Jun 01, 2012 11:45 pm
Location: Austin, TX

Re: You need way less than the 4% rule

Post by Tyler9000 » Thu Oct 31, 2019 2:44 pm

unemployable wrote:
Thu Oct 31, 2019 12:01 pm
At rates above 4% you're taking a bet that markets will be favorable to you, or that you'll be able to time them, or that you'll be able to make lifestyle accommodations if things stagnate or crash.
Or even without timing the market, you can often top 4% withdrawals if your asset allocation is only slightly more sophisticated than the rudimentary stock/bond assumption built into the Trinity study. ;) The methodology can be applied in many exciting new ways if you think for yourself and use it as a tool rather than treat the 4% number as a law of nature.

In any case, one of the many things I appreciate about ERE is the willingness of its supporters to think in terms of self-built systems rather than simply follow the easy-bake recipe on the box. That creative, adaptive, and self-reinforcing mindset allows them to succeed even when their best-laid plans fall apart. ERE is a mindset, not a quick fix.

Hazel-is-ok
Posts: 3
Joined: Tue Oct 15, 2019 6:30 am

Re: You need way less than the 4% rule

Post by Hazel-is-ok » Thu Oct 31, 2019 3:36 pm

Hi,
First post here. I'm in a similar situation, and came to similar figures after working out what we need to live on from age 55-67, assuming the UK state pension doesn't change before then. I left a stressful job 3 years ago, and don't work now. I love the freedom to do whatever I like with my time.
Reading ERE recently has inspired me to live even more frugally than before, we're saving more, and and my husband is starting to come onboard with the ERE outlook too. He assumed he needed to keep working (wage slave) for another 12 years, now we're planning for him to stop in 2 years. We want to downsize to a smaller house then, and as there are no guarantees, part time work is an option in the future too.
I'm a late starter. I find it hard to believe that I never came across these ideas before now. Oh well, better late than never!

Adamski
Posts: 18
Joined: Wed May 29, 2019 8:35 am

Re: You need way less than the 4% rule

Post by Adamski » Fri Nov 01, 2019 5:47 am

@Hazel is ok, welcome to the Board. Good to hear from someone in a similar situation. I am looking fwd to stopping work, but at the same time am wary of such a big life change, so am phasing in an early retirement. ERE has inspired me too, even though I as well, have left it late.

I also started saving and investing late and in retrospect could have been there by 40 instead of 50. I realise to the ERE community a target of 50 is not early retirement, but when I raised this issue with family members it still gained quizzical looks (of what are you on) and "you are too young to retire" responses.

This thread has proven a useful read and clarified some thoughts. I take on board the comments and think the 4% is a helpful guide, however I still think that my general point is valid that for ERE people you may need less than you think you do.

I have noticed fire bloggers who have reached FI have carried on increasing net worth in drawdown (applies to Jacob too?) and therefore "over-accumulate" when their net worth should be dropping in drawdown phase. I think the thrifty habits can be difficult to change once set and other income sources will partly offset earned income lost through retiring.

Post Reply