Firecalc now shows a 5.1% failure rate for the 4% rule

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Firecalc now shows a 5.1% failure rate for the 4% rule

Post by jacob » Sat Jun 09, 2018 12:45 pm

(For the standard 30 year period, which obviously is way too short for extreme early retirement.)

They must have added the last two decades of the 21st century.

For a 60 year period, SWR=4% now results in 17.2% failures.

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Re: Firecalc now shows a 5.1% failure rate for the 4% rule

Post by 2Birds1Stone » Sat Jun 09, 2018 12:48 pm

What was the failure rate previously @ 30 years?

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Re: Firecalc now shows a 5.1% failure rate for the 4% rule

Post by jacob » Sat Jun 09, 2018 12:51 pm

IIRC it was 0%

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FBeyer
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Re: Firecalc now shows a 5.1% failure rate for the 4% rule

Post by FBeyer » Sat Jun 09, 2018 1:05 pm

The last two decades of the 21st century? Is that 2080 and 2090? Are small cap stocks still the place to be ;)

I take it your lesson is still: Learn to invest, learn to think for yourself, and be flexible?

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Re: Firecalc now shows a 5.1% failure rate for the 4% rule

Post by BRUTE » Sat Jun 09, 2018 1:47 pm

maybe "latest two decades" ;)

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Re: Firecalc now shows a 5.1% failure rate for the 4% rule

Post by jacob » Sat Jun 09, 2018 2:31 pm

:P

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Re: Firecalc now shows a 5.1% failure rate for the 4% rule

Post by Fish » Sun Jun 10, 2018 1:51 am

@jacob - At first I thought it was the 0.18% expense ratio, but the Wayback Machine confirms that Firecalc has always used the same default assumptions: 750k portfolio, 30k annual spend, 30 years, 75/25 portfolio, 0.18% ER. Reading some PF forums shows that the failure rate has consistently hovered around 5% in recent history:

October 2006: 6 of 106 cycles failed (5.6% failure rate, inferred)
July 2012: 6 of 111 cycles failed (5.4% failure rate)
October 2015: 6 of 115 cycles failed (5.2% failure rate)
June 2018: 6 of 117 cycles failed (5.1% failure rate)

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Re: Firecalc now shows a 5.1% failure rate for the 4% rule

Post by jacob » Sun Jun 10, 2018 9:09 am

@Fish - Thanks! Then I recalled incorrectly; probably because I've mostly run it with 3% WR at 60 years.

So a better title would be: Firecalc has shown a ~5% failure rate for the 4% rule since 2006.

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Re: Firecalc now shows a 5.1% failure rate for the 4% rule

Post by BlueNote » Thu Jun 14, 2018 6:42 am

It looks like cFireSim is reporting close to the same 5% result too.

As part of my own due diligence I look for an alternate tool in these types of data heavy simulations to see if they produce similar output. In this case the results look substantially the same in both tools.

Other tools that do things like MVO and NPV can produce significantly different outputs when there is only minor changes to inputs and these monte carlo/historical-driven-simulation models are no different. A couple of bad recessions in a row can mean you need to save for a few more years to be safe.

I've always thought 3.5% was closer to the safe mark because that's around where the SWR is , historically, for a cap weighted world portfolio which is what I lean towards.

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Re: Firecalc now shows a 5.1% failure rate for the 4% rule

Post by NPV » Sat Jun 16, 2018 7:11 am

It is very interesting that 3% SWR results in 0% failure rate over both 30 and 60 year period (and over longer periods as well, however much less data is available for longer periods). Seems like 3% is the "magic number" - at least empirically speaking, to a degree that one exists.

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Re: Firecalc now shows a 5.1% failure rate for the 4% rule

Post by jacob » Sat Jun 16, 2018 7:50 am

One does exist. ~3% has been the real rate of economic return in various civilizations over thousands of years. See e.g. Homer's History of Interest Rates.

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Re: Firecalc now shows a 5.1% failure rate for the 4% rule

Post by Augustus » Wed Jun 20, 2018 8:59 pm

Couldn't you just work a couple years to offset the bad ones? Seems like a problem that's easy to mitigate, just don't draw down on principal, get a part time job instead.

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Re: Firecalc now shows a 5.1% failure rate for the 4% rule

Post by BlueNote » Wed Jun 20, 2018 9:14 pm

Augustus wrote:
Wed Jun 20, 2018 8:59 pm
Couldn't you just work a couple years to offset the bad ones? Seems like a problem that's easy to mitigate, just don't draw down on principal, get a part time job instead.
Yes but it's a good robustness check to see if you can get by without ever having to do a lick of paid work again. Part of ERE is using other types of capital to diversify away from the pure financial approach. The most commonly cited pure financial approach to FIRE is, IMHO, Save 50+% of your earnings until you have 25x your annual expenses saved and invested in a total market stock index fund (maybe throw some bonds in there too, but mostly stock index funds) then 'retire' and withdraw 4% adjusted for inflation each year until death.In an ERE mindset you might develop better skills at living in more affordable places, get better at procuring food and get good at transporting yourself around inexpensively. You do this in a state of contentment because all your goals are linked in a robust web so that they are self reinforcing and your retirement isn't destroyed by some unexpected calamity. Maybe you make some money on the side doing something you would have enjoyed doing anyways, it's probably hard not to given all the free time.

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Re: Firecalc now shows a 5.1% failure rate for the 4% rule

Post by Augustus » Thu Jun 21, 2018 12:14 am

BlueNote wrote:
Wed Jun 20, 2018 9:14 pm
Getting from 4% to 3% is a significant amount of effort and time. I'd rather take my chances, knowing that if I had to I could go pick up some random job like librarian or bike fixer or something else you find interesting in a worst case scenario. As far as worst case scenarios that's a pretty good one. Oh no I have to go learn to make pizza for a couple years! Or whatever... But then I'm planning to work a little anyways, so it doesn't bother me at all that 4% doesn't have a 100% success rate. I'm basing mine on the ROI I'm averaging on my rentals, which is currently running around 5-6%. I have more control over that rate though, I can renovate it, do better marketing, etc. Not an option with stocks.

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Re: Firecalc now shows a 5.1% failure rate for the 4% rule

Post by prognastat » Thu Jun 21, 2018 9:50 am

That's pretty close to what I'm interested in doing, get to the 4% then switch to trying some things that pay much less, but teach me useful skills such as trying to find a carpenter that will take on an apprentice.

This way I could improve a useful skills(carpentry) while at the same time getting paid enough to cover bills and allowing time for my stash to grow closer towards a 3% SWR.

This is just one example of something one could do that could be interesting and useful to learn and getting paid to do it.

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Re: Firecalc now shows a 5.1% failure rate for the 4% rule

Post by arcyallen » Fri Jun 22, 2018 8:02 am

Augustus wrote:
Thu Jun 21, 2018 12:14 am

Getting from 4% to 3% is a significant amount of effort and time.
Augustus, I think you'll find it takes surprisingly little effort and time to go from 4% to 3%. As an example:

-You want $40,000 a year income
-You have $1,000,000 saved up, so you've satisfied your 4%
-You'll need $1,333,333 to reach 3%

If your investments grew by 8%/yr you'd be there within 3.5 years, not including your own contributions which would likely push it to less than three years. You could also quit your regular job at that point and work a job you LOVE which pays the basics while your nest egg builds up. Lots of options, but none of them require significant effort and time.

I'll gladly do a job for 3 years extra if it means I'm EXTRAORDINARILY safe in my withdrawals. But if you hate your job, maybe not. If that's the case, I'd find a job you don't hate - life's too short to do work that sucks!

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Re: Firecalc now shows a 5.1% failure rate for the 4% rule

Post by Augustus » Sat Jun 23, 2018 9:27 am

arcyallen wrote:
Fri Jun 22, 2018 8:02 am
If your investments grew by 8%/yr you'd be there within 3.5 years, not including your own contributions which would likely push it to less than three years.
That's what I mean though, 3 years is a long time! Every early retiree I've read about has had assets increase after retiring anyways, it seems likely I will eventually hit 3% regardless, but I am cutting the cord before then. I am planning to work temporary contracts once a year when I "retire", so for me there is even more reason to not overshoot. I want to enjoy as much of my time as I can, as soon as possible.

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Re: Firecalc now shows a 5.1% failure rate for the 4% rule

Post by arcyallen » Tue Jun 26, 2018 9:14 am

Augustus wrote:
Sat Jun 23, 2018 9:27 am
Every early retiree I've read about has had assets increase after retiring anyways
That's been the case for the past 10 or so years - a very long bull market. I promise you if you're taking 4% a year out, especially a decade into a bull market, there will be many years your assets will decrease. Not necessarily spelling doom, but decreases are normally more common than they have been recently.

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Re: Firecalc now shows a 5.1% failure rate for the 4% rule

Post by Augustus » Tue Jun 26, 2018 12:11 pm

arcyallen wrote:
Tue Jun 26, 2018 9:14 am
Good point, but I am thinking more along the lines of JLF going back to work with a 100% savings rate, or MMM starting his blog cult thing, etc. Given that I am planning to take contracts once a year, the chances of my not accumulating more than I need and getting to 3% SWR seem slim. Even if the markets tank, as long as I don't draw on principle, then my overall net worth will go up given enough time. I am also doing rentals, so rent may decrease, but I'll never take out a second mortgage or anything, I'll just go pick up some contract work to cover any short falls.

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