Bill Sharpe on the 4% SWR rule (he thinks it's silly)

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Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by Browser »

The extreme case is the 4% rule or, more generally, the X% rule in which there are no adjustments. Two things are self evident and shouldn’t require much discussion. What you spend should depend upon (1) how much you’ve got and (2) how long you think you might live, or the range of possible lengths of life. The 4% rule is fine on both fronts on day one.

After the initial year, however, what you spend with this rule has nothing to do with how much you have, or for that matter, how long you expect to live. Most importantly, it doesn’t depend how much you have at the moment. Any rational person would say, “What you spend ought to depend upon how much money you have.” Isn’t that self evident? A rule that doesn’t do that after year one doesn’t make any sense. And this should be the end of the discussion. But we see such an approach advocated in many places.

One possible argument for such approaches is that markets tend to “mean revert.” Personally, I don’t believe that it makes sense to assume that there is sufficient mean reversion in the markets to just say, “I’m going to spend that $40,000 increased for inflation, and it matters not whether I have $200,000 or $3 million left.”
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by longinvest »

Makes sense to me. That's why I much prefer VPW as a spending model during retirement. But, I do think that SWR is very useful for planning (e.g. 1/SWR = Target).
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by Austintatious »

text deleted because it was presented out of context and wasn't worthy of your consideration
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by cfs »

Thanks.

Thanks for the link, I found the answer to this question interesting (Are there any particular publications that you like to read, particularly with respect to your focus and research now in the retirement phase?).
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Safe Withdrawal Rates (SWR)

Post by Taylor Larimore »

Browser:

Thank you for sharing the thoughts of Nobel Laureate, Wm Sharpe.

I retired 33 years ago so I have some experience about safe withdrawal rates. This earlier post explains my own simple plan:
Bogleheads:

One of the great mysteries to me are the Great Debates over Safe Withdrawal Rates (SWR).

I put Safe Withdrawal Rates into Google and it came up with more than 16,000 hits. One wonders how people managed to retire without knowing their "SWR."

Mathematicians love numbers. Fortunately for them, the stock and bond markets spew-out millions of numbers every day which are carefully preserved and available for them to analyze. Unfortunately for us, past performance numbers do not predict future performance.

I retired in June of 1982 at the age of 57. We had about a $1 million dollar portfolio to last us the rest of our lives. I didn't know about safe withdrawal rates (the Trinity Study wasn't published until 1998). We had no computers, Internet, Monte Carlo, or sophisticated calculators. We only knew that we had to be careful to make our money last ($1M at 4% = $40,000/year before tax).

So what happened? We simply withdrew what we needed and kept an eye on our portfolio balance. Most years our balance went up and we spent the money on vacations, luxuries and charity. When our balance went down we tightened our belt and economized.

This is what most people do and it works.
"There seems to be some perverse human characteristic that likes to make easy things difficult."--Warren Buffet

Best wishes.
Taylor
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by avalpert »

I think he is being silly - or at least pedantic.

Yes, of course people can and will adjust if reality throws a curveball but people prefer their spending to not be as volatile as the equity markets make their assets so having general guidance that has been tested that they can use to maintain a more stable spending pattern without panicking in regards to their asset base is a very useful tool. Does that mean they should never revisit their situation - of course not and I have never seen anyone actually advocate that, but it also doesn't mean that they can't use the 4% rule as starting guidance to use within a broad risk tolerance band.
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by randomguy »

I don't think even the trinty authors suggest following 4% religiously. But whiplashing your retirement spending (spend 20k more this year because the market is up, spend 40k less this year because it is down) is very poor way to go through retirement. If you retire and the great depression (or the bull market of the 80s) starts up right afterwards, sure adjust your spending. On the other hand cutting spending because the markets happen to be down 10% one year is an overreaction. In reality I am betting most people who have saved 25-30x pretty much just keep spending what they have always spent and don't spend much time worrying about it. Assuming your like 50/50 when you retire, market gyrations just aren't big enough to lose sleep over (exceptions for the great depression and the 70s)

But as Taylor points out the key is retiring in the early 80s. Retiring at the start of 15+ years of 17% gains solves most retirement problems:)
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by Workinghard »

randomguy wrote: But as Taylor points out the key is retiring in the early 80s. Retiring at the start of 15+ years of 17% gains solves most retirement problems:)
Since market timing is against the rules, just tell me when I can retire, okay? :mrgreen:
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by staythecourse »

Oh dear god. Does it take a genius to figure this out?

I have been saying the same things for YEARS (many times on this same site) and now that Bill Sharpe says it folks start thinking, "I guess that makes sense".

This is a perfect example of what I wrote on another thread. Folks need to stop listening to experts and start thinking for themselves and use some common sense.

Good luck.
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by Phineas J. Whoopee »

If it were a rule it would be silly, but it isn't a rule. It's a rough starting point for planning purposes only.

If we call a tail a leg, how many legs does a dog have?

Four. Calling a tail a leg doesn't make it one.

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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by randomguy »

Workinghard wrote:
randomguy wrote: But as Taylor points out the key is retiring in the early 80s. Retiring at the start of 15+ years of 17% gains solves most retirement problems:)
Since market timing is against the rules, just tell me when I can retire, okay? :mrgreen:
If the markets have returned 0% real for like 17 years, you should be good to go. I am sure that will happen again sometime in the next 500 years or so:)
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by Sidney »

I know quite a few retired folks and not one of them uses a mathematical system for withdrawal from their portfolio. They tend to use either judgement or "dividends only" methods (some don't have significant assets and live off SS+Pension).
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by tadamsmar »

4% is just something that can be modeled and tested. The vague specifications that Sharpe gave don't meet that criteria. The only reason Sharpe's vague spec. sounds sensible is because someone took something similar that could be modeled and modeled it and showed it worked pretty well, so we know that Sharpe's approach should work at least as well as long as you don't overspend to much in the good years. That was obviously the whole point in testing the 4% rule.
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by protagonist »

tadamsmar wrote:4% is just something that can be modeled and tested.
"Modeling and testing" projections 30 years into the future based on 90 years of data (somewhat hypothetical numbers) is the statistical equivalent of "modeling and testing" the market one day into the future based on three days of data. In other words, it is nearly meaningless.

My approach is similar to Taylor's approach. It makes a lot more sense, and it works. If you want or need firm numbers to discipline your behavior, perhaps 4% is not a bad place to start. But realize the shaky ground upon which it stands.
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by larryswedroe »

Browser
Sharpe is clearly correct, it's not set it and forget it. That's why one IMO should on regular basis rerun MCS to help you determine the right withdrawal rate based on current valuations
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by Browser »

People like to spin the 4% rule by commenting that it's not a "rule" -- it's a suggestion. But it is almost universally called the "4% Rule". To set the record straight, Bengen very clearly outlines a process to be followed by financial advisors, in which they are instructed to advise clients to withdraw approximately 4% annually from their portfolio, adjusted for inflation, throughout retirement assuming a retirement horizon of 30 years and an allocation that is in the neighborhood of 50% stocks and 50% bonds. He advises that investors should maintain a fixed stock/bond allocation for as long as possible.

He describes three different types of clients: stars, black-hole, and asteroid. Stars are clients who earn very high returns in the early years of their retirement. For them, Bengen offers that the advisor should counsel them to show restraint and not deviate much above the 4% rule. Black-hole clients are ones who suffer major unpleasant financial events early in retirement. They should be advised to reduce their withdrawal rate only slightly. Asteroids are those who experience average results during the first 10 years of retirement. Their withdrawal rate and asset allocation should remain untouched.

http://www.retailinvestor.org/pdf/Bengen1.pdf

So, quite clearly, this is a formulaic approach to managing portfolio withdrawals during retirement. Sharpe is critical of such an approach because it amounts to navigating without a feedback loop. If you're aiming for a static target and the parameters haven't changed, that might work; but not for a moving target with changing parameters. And financial success in retirement is such a target.
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by IlliniDave »

I've never thought of any X% SWR as a prescription, just as a way to get a ballpark estimate. As someone mentioned it is a simplified approach that is straightforward to analyze ala the Trinity Study. One could always just go with something like 4% of their beginning balance each year and make the withdrawals self-adjusting if they can tolerate variable income. I think of the "S" as "systematic" rather than "safe", too.

I certainly wouldn't call the approach silly either, just not necessarily optimal. In my own case the goal is not to spend every penny before I die, so I use a smaller number, 3%, as a planning cap, and only intend to spend what I need to spend to stay content, not an amount dictated by a formula. I don't think it takes a great leap of intellectual prowess to understand that things may need to be adjusted on the fly, but I believe the X% "rule" is a pretty good starting point for someone looking at whether they are ready to retire. When I can survive reasonably on 2% (on top of outside fixed income), maintain equivalent consumption as today on about 3%, and feel comfortable with the margin I'd have at 4%, I'll consider myself financially ready with sufficient flexibility to adjust to most circumstances.
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by midareff »

I have some issues with the way the whole SWR issue is walked up to. Let's suppose you have a $1M portfolio split 50/50. Equities @ 2% produce $10K in dividends, which you take to your bank to spend. Since you have sold nothing do you have a WR? Let's further suppose FI produces $25K of dividends of which you take $5K to your bank and reinvest the other $20K. You have now taken out $15K and added $20K to your investments without selling anything. Do you have a WR when more money has gone into your portfolio than has been taken out?
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by dbr »

midareff wrote:I have some issues with the way the whole SWR issue is walked up to. Let's suppose you have a $1M portfolio split 50/50. Equities @ 2% produce $10K in dividends, which you take to your bank to spend. Since you have sold nothing do you have a WR? Let's further suppose FI produces $25K of dividends of which you take $5K to your bank and reinvest the other $20K. You have now taken out $15K and added $20K to your investments without selling anything. Do you have a WR when more money has gone into your portfolio than has been taken out?
This one is easy. Spending dividends, or part of the dividends, is certainly a withdrawal. The reason is that the analysis behind SWR studies tracks return (total return, that is) of which dividends are a part. Also, there is no question that there can be a withdrawal and also an increase in value of the portfolio. That would happen constantly as there are many periods where return is greater than withdrawal.

The driving formulation in all SWR studies is

new_portfolio_value = old_portfolio_value + return + contributions - withdrawals

If one wants, one can also say

return = dividends + capital_return

but the latter is not necessary.

There is nothing going on here beyond the simple and correct by definition arithmetic in the above equations.
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by Rodc »

People like to spin the 4% rule by commenting that it's not a "rule" -- it's a suggestion. But it is almost universally called the "4% Rule". To set the record straight, Bengen very clearly outlines a process ...
This was never intended to be a "rule" and Bengen in other writings has made that clear. Even in the paper you present he discusses that the need may arise for those unfortunate enough to have poor returns early in retirement to reduce their withdrawal rate.

It is a ballpark planning estimate; that is all it has ever been. As such it is not a bad back of the envelop estimate.

The "spin" is that this is intended to be an honest to goodness set it and walk away 30 year plan. This is simply a strawman.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by Dandy »

There is no set it and forget it approach. Every few years you need to assess your expenses, health and portfolio and see if adjustments need to be made. Many times I'm sure you could let it ride. But, if expenses, health and/or portfolio size are going the wrong way in a meaningful way - prudent adjustments to your withdrawal plan and/or discretionary expenditures are usually in order. Modest adjustments made early can make a big difference.

In retirement I'm not much of a fan of VPW or formulas for withdrawal. I am a fan, if you have more than enough to fund retirement, of Bernstein's keep 20 to 25 years of your yearly drawdown in "safe" investments/savings ( I would modify that to # or yrs to age 90). Putting the focus on securing retirement rather than overall allocation or formula rules for withdrawals seems a better approach to me.
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by Browser »

Rodc wrote:
People like to spin the 4% rule by commenting that it's not a "rule" -- it's a suggestion. But it is almost universally called the "4% Rule". To set the record straight, Bengen very clearly outlines a process ...
This was never intended to be a "rule" and Bengen in other writings has made that clear. Even in the paper you present he discusses that the need may arise for those unfortunate enough to have poor returns early in retirement to reduce their withdrawal rate.

It is a ballpark planning estimate; that is all it has ever been. As such it is not a bad back of the envelop estimate.

The "spin" is that this is intended to be an honest to goodness set it and walk away 30 year plan. This is simply a strawman.
I did a Google search on "4% Rule" and there are thousands of hits. I did one on "4% ballpark estimate." Not so much.
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by Austintatious »

Browser wrote:
Rodc wrote:
People like to spin the 4% rule by commenting that it's not a "rule" -- it's a suggestion. But it is almost universally called the "4% Rule". To set the record straight, Bengen very clearly outlines a process ...
This was never intended to be a "rule" and Bengen in other writings has made that clear. Even in the paper you present he discusses that the need may arise for those unfortunate enough to have poor returns early in retirement to reduce their withdrawal rate.

It is a ballpark planning estimate; that is all it has ever been. As such it is not a bad back of the envelop estimate.

The "spin" is that this is intended to be an honest to goodness set it and walk away 30 year plan. This is simply a strawman.
I did a Google search on "4% Rule" and there are thousands of hits. I did one on "4% ballpark estimate." Not so much.
perhaps it's best considered as the "4% rule of thumb"
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by BahamaMan »

randomguy wrote:I don't think even the trinty authors suggest following 4% religiously. But whiplashing your retirement spending (spend 20k more this year because the market is up, spend 40k less this year because it is down) is very poor way to go through retirement. If you retire and the great depression (or the bull market of the 80s) starts up right afterwards, sure adjust your spending. On the other hand cutting spending because the markets happen to be down 10% one year is an overreaction. In reality I am betting most people who have saved 25-30x pretty much just keep spending what they have always spent and don't spend much time worrying about it. Assuming your like 50/50 when you retire, market gyrations just aren't big enough to lose sleep over (exceptions for the great depression and the 70s)

But as Taylor points out the key is retiring in the early 80s. Retiring at the start of 15+ years of 17% gains solves most retirement problems:)
Don't confuse annual Spending with Withdrawal Amount. They are 2 different things to me. Withdrawing less in a down market year and more in an up market year is the reverse of buying low and selling high. You don't have to spend it. Also if your asset allocation is Conservative and only 30% equities, The biggest swing in any one year may be only 15%. Such as 2008-2009 provided during the financial crisis. Adjusting your withdrawal amount or even spending by 15% is not that much of a Whiplash.
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by Browser »

Here's the $64 question. What approach should replace the 4% Rule? Obviously, it should not be a constant withdrawal strategy such as the 4% rule. But just as obviously, it shouldn't be just a seat-of-the-pants approach either. One of the objectives of the 4% solution was to replace hunches and intuition with something a little less vulnerable to emotion and subjectivity. That should still be the objective, IMO.
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by protagonist »

Browser wrote:Here's the $64 question. What approach should replace the 4% Rule? Obviously, it should not be a constant withdrawal strategy such as the 4% rule. But just as obviously, it shouldn't be just a seat-of-the-pants approach either. One of the objectives of the 4% solution was to replace hunches and intuition with something a little less vulnerable to emotion and subjectivity. That should still be the objective, IMO.
To set the record straight, Bengen very clearly outlines a process to be followed by financial advisors, in which they are instructed to advise clients to withdraw approximately 4% annually from their portfolio, adjusted for inflation, throughout retirement
Since this is not science, a "seat of the pants approach" is, IMHO, just as good (or maybe even better) and much less nerve-wracking, if you are a disciplined individual who understands basic concepts of financial management with good intuition for when you are overspending. I prefer it. I like to keep life simple and fun. If you don't have a weight problem, you don't need to count calories.

I would guess most people who seek out financial advisors need more hand-holding and "rules" to maintain good financial discipline. For such people, a 4% rule is probably good advice, regardless of its scientific merit, since it forces discipline.

I don't think there is a "one size fits all" approach.
Last edited by protagonist on Tue Oct 14, 2014 10:54 am, edited 5 times in total.
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by BahamaMan »

Browser wrote:Here's the $64 question. What approach should replace the 4% Rule? Obviously, it should not be a constant withdrawal strategy such as the 4% rule. But just as obviously, it shouldn't be just a seat-of-the-pants approach either. One of the objectives of the 4% solution was to replace hunches and intuition with something a little less vulnerable to emotion and subjectivity. That should still be the objective, IMO.
I think the 4% "Rule of Thumb" works just fine. But I don't think anyone in retirement actually employs it (e.g. Withdraws the initial 4% plus Inflation every year)
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by jebmke »

BahamaMan wrote:Don't confuse annual Spending with Withdrawal Amount. They are 2 different things to me.
IMO it is the opposite. If it isn't spent, it is still part of the portfolio (not withdrawn) -- where else would it go??
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by bhsince87 »

jebmke wrote:
BahamaMan wrote:Don't confuse annual Spending with Withdrawal Amount. They are 2 different things to me.
IMO it is the opposite. If it isn't spent, it is still part of the portfolio (not withdrawn) -- where else would it go??
I'm actually considering 4% of total value each year. If/when we don't spend it all in a particular year, it would go into cash or possibly short term bonds. And that would be a "buffer" for down years or emergencies.
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by munemaker »

Here is what I see as the benefit to the 4% rule of thumb:
Prior to the 4% rule, people thought of their retirement spending in terms of average market returns. Commercially available retirement calculators of the day (including Quicken as I recall) would assume the average market return every year and figure what you could afford to withdraw based on that. The 4% rule work everyone up to the fact that due to variations in returns every year, one cannot spend the average return every year and expect one's money to last for 30 years.

It was a very significant step forward in how people think. As pointed out, it is really a guideline and deserves to be monitored annually. If for no other reason, the future may not be like the past.
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by BahamaMan »

jebmke wrote:
BahamaMan wrote:Don't confuse annual Spending with Withdrawal Amount. They are 2 different things to me.
IMO it is the opposite. If it isn't spent, it is still part of the portfolio (not withdrawn) -- where else would it go??
It's out of the Market, it's in the Spending Account which is Cash and no longer subject to fluctuations in the Market. (Not invested in Stocks and Bonds any more).
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by staythecourse »

larryswedroe wrote:Browser
Sharpe is clearly correct, it's not set it and forget it. That's why one IMO should on regular basis rerun MCS to help you determine the right withdrawal rate based on current valuations
Larry
I am not sure that is the best way either.

Not sure why folks are having a hard problem with withdrawal in retirement. Just imagine your withdrawal is a paycheck you are writing yourself from a company you own in retirement (Company of Me). As any other self employed business owner you decide how much to pay themselves based on the current profits. If they are having a banner year you give yourself more money to take home and if the company lost a major client then you take home less. It isn't like a self employed owner of a small company goes "I will pay myself 4% each year from the profits I made 10 years ago". Each year varies as one's spending income in retirement should vary.

I think the older generation is having trouble because many of them spent their lives working as a W2 and had a steady paycheck everyday without thinking about how the Company of Me is doing. Then many had pensions and SS which again requires no brain cells. Wondering if any self employed folks during their working days is having problems knowing how much to pay themselves in retirement?

I would say the ONLY logical approach is to see how the market is doing the current year and incorporate any guaranteed liabilities that must be paid of this year into the decision on how much to pay oneself. That determines if your paycheck for the year is GREAT or BAD. Just like real life in the working world for many self employed or heavily bonus compensated employees.

Good luck.

p.s. For the experts out there on the studies I am sure someone would have done similar studies as Trinity to find the % of a current portfolio that could be taken out every year based on the last years market returns and not end up broke after 30 or 40 year retirement. I think that would be more useful of a % to know.
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by jebmke »

BahamaMan wrote:It's out of the Market, it's in the Spending Account which is Cash and no longer subject to fluctuations in the Market. (Not invested in Stocks and Bonds any more).
That is just an allocation change. In your model, if I was a market timer and went all cash, that would be a 100% withdrawal. I don't think that is the way the studies would treat it. Cash is part of the market -- it just has no nominal volatility.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by tadamsmar »

From the Trinity Study:
the purpose of withdrawal rate analysis is to provide investors with a planning tool that can be used to evaluate the
sustainability of various withdrawal rates
For example, Peter Lynch argues in a 1995 Worth Magazine article that based on his professional experience and
knowledge of markets, a retirement portfolio with at least a 50% equity allocation would generally be able to sustain a 7% annual withdrawal rate
http://afcpe.org/assets/pdf/vol1014.pdf

People like Sharpe have to vary around some number. The purpose of analyzing fixed rates it to ensure that you don't vary around 7%!
Last edited by tadamsmar on Tue Oct 14, 2014 11:38 am, edited 3 times in total.
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by BahamaMan »

jebmke wrote:
BahamaMan wrote:It's out of the Market, it's in the Spending Account which is Cash and no longer subject to fluctuations in the Market. (Not invested in Stocks and Bonds any more).
That is just an allocation change. In your model, if I was a market timer and went all cash, that would be a 100% withdrawal. I don't think that is the way the studies would treat it. Cash is part of the market -- it just has no nominal volatility.
And yes, if you changed your asset allocation to Cash, you might Invest it again someday in Stocks or Bonds. I don't do that at all! I have 2 accounts at Ally. One Account is actually called "Spending Account". I Withdraw Money once a year from my Investment Portfolio and Move it to my Spending Account. It will always remain in Cash and Will be spent. It will never be invested in Stock and Bonds again!

This is just not that hard of a concept to understand. When I run VPW for the next year, the Spending Account is not Part of the Portfolio that I withdraw from.
heyyou
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by heyyou »

Spent enough time composing that some or all of this post may now be irrelevant.

Improved knowledge is often progressive. The 4% study was a big step away from dividends plus interest-only spending, including Peter Lynch's single period, previous 20 year study that concluded with buying dividend stocks from a list and 7% withdrawals because that was the return for the last two decades.

Somewhere Pfau mentions three generations of SWR evolution. Bengen was first iteration using segments of the historical return sequence. I suppose the second was Monte Carlo but still seeking a single SWR for 30 years. The third is now, with research on various fixed income sources, and dynamic WDs and dynamic equity allocations (including buckets) for various markets to account for known sequence of return risk.

Some here, and many advisor customers are seeking certainty so there is a push in that industry for optimal, stable WD planning that is of no consequence to those who acknowledge market volatility with adaptable spending. That contributes to posters talking past each other.

Pfau has shown that a fixed rate, inflation adjusted SWR set on retirement day, is the riskiest SWR method when compared to other WD methods that consider portfolio values during retirement. Note that not spending enough of your assets in retirement is also a risk if your specific sequence of returns is good. To some, that is not considered a risk. Again, people talking past each other.
Rodc
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by Rodc »

Browser wrote:
Rodc wrote:
People like to spin the 4% rule by commenting that it's not a "rule" -- it's a suggestion. But it is almost universally called the "4% Rule". To set the record straight, Bengen very clearly outlines a process ...
This was never intended to be a "rule" and Bengen in other writings has made that clear. Even in the paper you present he discusses that the need may arise for those unfortunate enough to have poor returns early in retirement to reduce their withdrawal rate.

It is a ballpark planning estimate; that is all it has ever been. As such it is not a bad back of the envelop estimate.

The "spin" is that this is intended to be an honest to goodness set it and walk away 30 year plan. This is simply a strawman.
I did a Google search on "4% Rule" and there are thousands of hits. I did one on "4% ballpark estimate." Not so much.
Yes, it has been grabbed by the semi-literate and twisted into something the author never intended and the misinformation has spread like a cancer. It is unfortunate.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
jackholloway
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by jackholloway »

You have to decide what you are comparing against before calling a rule of thumb silly.

A financially literate audience is going to work out their asset mix, their spending needs, and their spending wants in real terms. Concluding from that the LMP or inflation protection makes sense is reasonable, and comes from data. I have no less than four spreadsheets trying to figure out at what point I could walk away from a job without harm, and have had variants of them since the last crash. I did not have them when I was in my twenties, and it would have been instructive to have firecalc back then. Sure - after all that, 4% is pretty lame.

A less literate audience will hear the financial advisor noise: "if you make the median household income of $50k, or married median of $65k, or the married with child and both parents in the workforce of $85, and you do not have at least $3M saved, you will end your days living in a box under a bridge. That does not count the $500k you will need for college based on recent cost trends, as otherwise, your offspring will move back into your box from their own." After selling the fear, they do not then sell the training in knowing what safety looks like.

They also may hear "All you need to do is [buy houses][buy stocks][buy insurance products][buy hedge funds] and you can support your lifestyle forever, regardless of how much money you have.

They may get told by their employer or some article that the $5500 IRA is all they need. After all, they hit the cap, and that is a 10% savings rate on the median family income.

A 4% inflation adjusted rule may be simplistic, but it is far better than any complicated plan assuming 8% yield, and far better than having fear cause you to do foolish things.
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Browser
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by Browser »

A 4% inflation adjusted rule may be simplistic, but it is far better than any complicated plan assuming 8% yield, and far better than having fear cause you to do foolish things.
The 4% rule is just wrong, for the reasons explained by Sharpe. I don't see how something that is wrong can be better than something else that is wrong. I'd rather try to figure out what is right.
We don't know where we are, or where we're going -- but we're making good time.
BahamaMan
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by BahamaMan »

Browser wrote:The 4% rule is just wrong, for the reasons explained by Sharpe. I don't see how something that is wrong can be better than something else that is wrong. I'd rather try to figure out what is right.
Figuring out what is right involves predicting the Future. Ain't gonna happen. No one ever took a fixed SWR + Inflation from their portfolio in retirement anyway.

The 4% is an approximation 'Rule of Thumb" and gives people some idea of how much they can withdraw from their portfolio. Use VPW and Relax!
jackholloway
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by jackholloway »

Browser wrote:
A 4% inflation adjusted rule may be simplistic, but it is far better than any complicated plan assuming 8% yield, and far better than having fear cause you to do foolish things.
The 4% rule is just wrong, for the reasons explained by Sharpe. I don't see how something that is wrong can be better than something else that is wrong. I'd rather try to figure out what is right.
Hmm. You do not? Is there no difference between "burn all of your money in a bonfire" and "choose a suboptimal asset allocation that bears too much risk"? That is what we are discussing, after all - using a SWR that has more risk than it needs because one withdraws during down markets, or does not withdraw appropriately during up markets for needs and desires.

The 4% rule is not "just wrong", unless you reduce it to absurdity. Would you argue that there is actually no difference between planning around 4%, 7% or 12%?

In other words, is the 4% rule, as practiced by actual humans, generally useful, or generally toxic?
technovelist
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by technovelist »

I'm planning to withdraw 3% of the current balance every year.
I'm pretty sure I'll never run out of money with that approach. :greedy
In theory, theory and practice are identical. In practice, they often differ.
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Phineas J. Whoopee
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by Phineas J. Whoopee »

Browser wrote:
A 4% inflation adjusted rule may be simplistic, but it is far better than any complicated plan assuming 8% yield, and far better than having fear cause you to do foolish things.
The 4% rule is just wrong, for the reasons explained by Sharpe. I don't see how something that is wrong can be better than something else that is wrong. I'd rather try to figure out what is right.
See Wikipedia for Wronger than Wrong
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hoops777
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by hoops777 »

You gotta love this stuff....I think staythecourse has it right.The best way to look at it is to write yourself a paycheck based on what you can afford.Common sense is worth more than all of the academic research and expert opinion.
In my humble opinion the main problem is investing in the stock market and not knowing your future return,which really complicates matters if you are like many people who barely have enough to last long term and are hoping for the best with stocks.That old saying that you need money to make money hovers over a retiree like a sledgehammer.Unless you have reached critical mass you better save most of that extra money made in a good year.The only thing the 4 pct rule is good for is to force people to think about the subject and face financial reality.If I needed the stock mkt to return 8 pct for the next 25 years to have a decent standard of living the stress would cut my lifespan down to probably 15 years....which would actually solve the problem :happy
K.I.S.S........so easy to say so difficult to do.
MathWizard
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by MathWizard »

You can avoid the whipsaw in income if SS is a large portion of your income, or if you buy enough of
an inflation adjusted annuity such that it and SS handle the floor of your expenses, and use a variable withdrawal method
for the discretionary spending.

The 4% SWR gives you an approximation for what you would be able to use for discretionary funds when
you retire. I'd like to travel rather than sit in front of the TV all day, so I want to have some discretionary
funds, so I don't plan on retiring until I have 25x what I want for discretionary spending after buying the annuity.

I think the biggest problem a retiree would have is with a huge drop right after retiring, or a huge bubble
right after retiring. Then one might underspend (or overspend) based on what happens in the first few years
of retirement.
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tennisplyr
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by tennisplyr »

We need to have more thoughts from people like Taylor who have lived life successfully. I would take their advice in a heartbeat over modeling and projections. 😛
“Those who move forward with a happy spirit will find that things always work out.” -Retired 13 years 😀
BahamaMan
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by BahamaMan »

tennisplyr wrote:We need to have more thoughts from people like Taylor who have lived life successfully. I would take their advice in a heartbeat over modeling and projections. 😛
Just remember that Taylor retired in 1982...... into the teeth of the greatest Bull Market in History.

This ain't gonna happen for you!
longinvest
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by longinvest »

Browser wrote:Here's the $64 question. What approach should replace the 4% Rule? Obviously, it should not be a constant withdrawal strategy such as the 4% rule. But just as obviously, it shouldn't be just a seat-of-the-pants approach either. One of the objectives of the 4% solution was to replace hunches and intuition with something a little less vulnerable to emotion and subjectivity. That should still be the objective, IMO.
Browser,
I think that VPW is probably one of (not the only one!) the closest replacement approaches that fit into SWR's objectives, that is: spend a portfolio over a specific time period using a relatively even withdrawal amount each year.
Unlike SWR:
1- VPW does not try to keep withdrawals even when adjusted to inflation, instead, it keeps them relatively even when adjusted to portfolio returns.
2- VPW is not limited to a fixed 30-year depletion period; users get to select whatever depletion length they need (very convenient for early retirees and for mitigating longevity risks).
3- VPW adjusts its percentages to the user's asset allocation (stocks vs bonds).

As a consequence, one can reduce the volatility of VPW withdrawals by reducing the volatility of the portfolio (adding bonds), but at the cost of reducing the average withdrawal amount.

Like SWR, VPW is not a complete retirement plan in itself. It doesn't account for one-time expenses, leaving an estate, Social Security, pensions, or inflation-adjusted SPIAs. There are retirement calculators that model complete plans; CFireSim.com has an option for using VPW as part of a complete plan model.

Low level details: VPW is, somehow, a mix of 1/N withdrawal and constant-percentage withdrawal, with a growth rate thrown in. In other words, you can get VPW to model 1/N by selecting a 0% growth rate and N as depletion length. You can also model constant percentage by selecting an infinite depletion length (or approximate it with a very long one) and using the constant percentage as growth rate. By using a reasonable depletion period and an approximate growth rate (based on asset allocation), I think that VPW is able to deliver a very good balanced withdrawal method that eliminates the risks of premature depletion and of leaving too much money unspent.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
dbr
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by dbr »

Considering that the objective of the withdrawing investor is to get ahold of whatever money he wants to spend whenever he wants to spend it, no system that simply allocates a certain amount of withdrawal whether of not it matches what you want to do is really to the point, SWR,VPW, or anything else.

What the withdrawing investor needs to do is spend what he needs/wants/does spend and then have a tool that tells him if he is going to be in trouble or not.
hoops777
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Re: Bill Sharpe on the 4% SWR rule (he thinks it's silly)

Post by hoops777 »

I believe in the year 2014 we want to be able to plug in some numbers to a computer and be told everything is going to be ok.Sometimes you need to evaluate a situation with common sense and basic math and figure out what is going to work in the real world that changes day to day,sometimes drastically.I hate to be a pessimist but I believe one is better off assuming the worst in terms of the market and unforeseen health issues and other possible events when planning for retirement.If you do the math and feel good that 4 pct should work then you better try 2.5 or 3 pct.,especially if you are "hoping" for historical stock market returns.If you are wealthy it does not matter but for most people who have x amount of dollars and expect the stock market to give them a particular return,good luck.I do not want to be in a position where my financial well being is determined by the stock market doing what we expect and "hope " it will do.
The Kansas City Royals just won 8 straight playoff games against the 3 best teams in the American League.How many baseball experts predicted that or even considered it remotely possible?How many die hard Royal fans even considered that possible?
My point is that do not expect the market to give you what it has in the past and budget your retirement like a successful small business owner would in tough times.
K.I.S.S........so easy to say so difficult to do.
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