Rethinking 4% withdrawal article thoughts ?

[coachz]

http://www.today.com/money/outdated-ret ... 6C10825034

What say you !

[Call_Me_Op]

Without having to read it, I say that 4% is not a good number and never really was.

[PacNorWest]

. . .a retiree's nest egg should last a lifetime as long as they withdrawal 4 percent a year.

Gee. . .don't they even bother to read their content for grammatical error?
Sloppy work = sloppy thinking.

[MnD]

That's what I'll use starting out and some sort of dynamic system for subsequent years that will reward better portfolio results with higher take-outs and vice-versa.
I have no interest in being the richest guy in the graveyard or dementia ward.

[Sheepdog]

It may seem like a fairly safe bet. Withdraw no more than 4 percent from your retirement savings each year, and you'll have enough money to last the rest of your life.

That's how the article starts. If that is all there is to it, "withdraw no more than 4 percent from your retirement savings each year", you will not run out.
Take out 4%, and no more, you can't run out. Have more, you can spend more. Have less, you must spend less. If you can do that and ignore inflation, you will do just fine. I doubt if that's what she meant to say, however.

As most know here, I have taken out an average of 4.5% every year of my year end balance for 15 years and live well. I can do that (spend more in good years and less in bad years) and do just fine. I can't run out if I keep that up and leave a balance. Evidently most can't do that.

[MathWizard]

From the article:

The "4 percent rule" was calculated back in the 1990s and was based on a model portfolio that contained a certain mix of stocks and bonds - 60 percent large-cap stocks and 40 percent intermediate-term government bonds.

I would say that it originated from the Trinity study, which
included everthing from 100 stocks to 100 bonds,
and gave probablities of failure for inflation adjusted withdrawals
differening percentages based
for different lengths of withdrawals,
and was based on historical evidence.

The above statement suggests a conection to the sky high return rates in the 1990's, states a very specific AA, and does
not describe what was calculated.

This is misleading and the whole article suffers from recency bias, and the need to make news.

[rixer]

I'm going to start taking 4% and adding inflation to that figure each year after. If I run out, I'll sell the house and rent an apt. I didn't save all my life to give it away.

[EternalOptimist]

Isn't 4% more or less saying you need the money to last 25 years (100%/4%=25 years). I'm OK with that rule-of-thumb if I look at it simply that way.

[masteraleph]

Isn't 4% more or less saying you need the money to last 25 years (100%/4%=25 years). I'm OK with that rule-of-thumb if I look at it simply that way.

4% was actually the number for 30 years- the idea is/was that a combined stock and bond portfolio over the years that the Trinity study looked at always grew somewhat faster than inflation. The question now is whether that will be true going forward.

Of course, at 4%, depending on when you retired, there was always the distinct possibility that the portfolio grew well beyond its initial value. The big difference seems to be in the first 10 or so years after retirement- if there's significant growth for that period, then your portfolio will grow and grow to the extent that even 20 years of mediocre growth wouldn't affect it much. If stocks tank in the 10 or so years after you retire, you'll have drawn down the principal and there's a lot less to work with as any sort of recovery takes place. If you were unlucky enough to retire in 1966, you did quite poorly, despite the growth of the 1980s and 1990s. If you had enough to retire on towards the end of the Great Depression, you could pass a lot of money on to your heirs.

[pkcrafter]

It probably did originate from the Trinity study, but the author didn't get it right. She clearly says 4% withdrawal rate and as Sheepdog notes, you can't run out of money, but it isn't the Trinity study conclusion either. The Trinity study includes an inflation adjustment each year, which the author never mentions.

Maybe posters should look at this idea... This is not an endorsement.

http://www.bogleheads.org/forum/viewtop ... 1&t=121138

Paul

[Bob.Beeman]

The Trinity study does appear to be the origin of the "4% rule", but the first time I heard of something like it was in William Bernstein's excellent series of articles on his "Efficient Frontier" site titled "The Retirement Calculator from Hell". These are still worth a read.
The Retirement Calculator From Hell
The Retirement Calculator From Hell - Part II
The Retirement Calculator From Hell, Part III

It seems to me that this is the best and clearest explanation of how the "4% rule" was obtained.

- Bob Beeman.

[JoMoney]

I never liked the idea of the "4% at start +inflation" withdrawl to begin with.

Not necessarily a horrible goal or rule of thumb you'd like to shoot for though, looking at it from the other end, i.e. The idea that you need at least 25x your desired income to live off that portfolio isn't a bad goal or "rule of thumb". But to take it on faith that no matter what comes you can safely take that 4% + inflation, and expect your porfolio to last a lifetime... It's taking a possibly good "rule of thumb" to far.

I like withdrawl plans that take into account factors as they are today. How much do you have today? How long do you expect the money to last from today ( 1/n withdrawl)?

[sperry8]

I've used the 4% withdrawal rate as a general rule of thumb (I try to make sure I never exceed this amount). I retired 6 years ago (some would say the worst time, since stocks were a their highs in 2007 and I had no more income to invest at the lows in 09). I withdrew 3.85% including taxes over the past 6 years - and I have more money than I started with. This of course includes all the spending from the withdrawals. So it appears the 4% rule is pretty good (at least it was from 07-13).

I watch it of course and if things were going differently, I would modify my withdrawal rate up/down. Based on my learnings from the last 6 years, I feel like I could withdraw more than 4% if need be (it isn't needed because I don't need anything else at the moment, but it's nice to know I could - or that stocks could drop a bit and I'd still be shielded).

[EternalOptimist]

I've used the 4% withdrawal rate as a general rule of thumb (I try to make sure I never exceed this amount). I retired 6 years ago (some would say the worst time, since stocks were a their highs in 2007 and I had no more income to invest at the lows in 09). I withdrew 3.85% including taxes over the past 6 years - and I have more money than I started with. This of course includes all the spending from the withdrawals. So it appears the 4% rule is pretty good (at least it was from 07-13).

I watch it of course and if things were going differently, I would modify my withdrawal rate up/down. Based on my learnings from the last 6 years, I feel like I could withdraw more than 4% if need be (it isn't needed because I don't need anything else at the moment, but it's nice to know I could - or that stocks could drop a bit and I'd still be shielded).

I've had a similar experience after 2 1/2 years of retirement.

[HomerJ]

Without having to read it, I say that 4% is not a good number and never really was.

Without having read it, I say that 4% has worked nearly 100% of the time over the last 100 years, so I think it's a great number.

0% real over 30 years lets you withdraw 3.33%... Not that much of a stretch to get to 4%...

I mean even during the 30 years that include the Great Depression or World War II, or stagflation, investments returned more than 0% real, and 4% worked.

But it may indeed be different during the next 30 years.

[HomerJ]

But to take it on faith that no matter what comes you can safely take that 4% + inflation, and expect your porfolio to last a lifetime... It's taking a possibly good "rule of thumb" to far.

Oh, I agree with that. No one should just blindly take out 4% plus inflation for 30 years... It's just a guideline, but it's a very solid guideline...

Note that 4% is the number that worked in the WORST 30 year periods

MOST 30 year periods, you could take out 5% or 6%.... So starting at 4% seems pretty conservative to me... There's a very good chance that 10 years in, your nest-egg will have grown quite a bit, and you'll bump that to 5% and start taking a few more vacations. But even if you retire right into one of the WORST 30 year periods, 4% won't destroy you... You'll have plenty of time to make adjustments if needed.

[rixer]

I've used the 4% withdrawal rate as a general rule of thumb (I try to make sure I never exceed this amount). I retired 6 years ago (some would say the worst time, since stocks were a their highs in 2007 and I had no more income to invest at the lows in 09). I withdrew 3.85% including taxes over the past 6 years - and I have more money than I started with. This of course includes all the spending from the withdrawals. So it appears the 4% rule is pretty good (at least it was from 07-13).

I watch it of course and if things were going differently, I would modify my withdrawal rate up/down. Based on my learnings from the last 6 years, I feel like I could withdraw more than 4% if need be (it isn't needed because I don't need anything else at the moment, but it's nice to know I could - or that stocks could drop a bit and I'd still be shielded).

Sperry8, thanks for sharing that. Can I as if you are taking a straight 4% each year from the ending balance or are you using "4% at start +inflation" ? ( I realize you said it was actually 3.85% but I mean the withdraw method )

[tadamsmar]

From the article:

The "4 percent rule" was calculated back in the 1990s and was based on a model portfolio that contained a certain mix of stocks and bonds - 60 percent large-cap stocks and 40 percent intermediate-term government bonds.

I would say that it originated from the Trinity study, which
included everthing from 100 stocks to 100 bonds,
and gave probablities of failure for inflation adjusted withdrawals
differening percentages based
for different lengths of withdrawals,
and was based on historical evidence.

The above statement suggests a conection to the sky high return rates in the 1990's, states a very specific AA, and does
not describe what was calculated.

This is misleading and the whole article suffers from recency bias, and the need to make news.

I think it's OK to say that Trinity supports the idea that a 4% rule is reliable for 60/40. And it seems fairly robust, so I am not sure it's in trouble due to current conditions.

But of course, the rule is 4% of initial nest egg at retirement inflation adjusted going forward, so they botched the details of the rule and that is important.

The rule assumes consumption smoothing. Sharpe has a paper saying that variable consumption based on nest egg performance during retirement is more efficient in that it tends to attenuate that smile on the face of your heirs after you kick - more of your resources go toward your retirement. But if you estimate for a comfortable life at 4% of initial nest egg inflation adjusted, then you have some wiggle room.

Also, I bet lots of Bogleheads nearing retirement are now ahead in the game if they stayed the course in 2008-2009.

[Tim_in_GA]

Note that 4% is the number that worked in the WORST 30 year periods

That's what always gets me about SWR talk. Everyone is basing it off the worst possible scenario, right? Seems like you could take out more most of the time. It's not really relevant to me anyway - with my SS, wife's SS, and a small pension all coming in at different times, my withdrawal rate will never be constant. Plus I have a few years prior to SS where I have no other income streams coming in and my rate will be much more than 4%. I would think that is a fairly common scenario.

[CyberBob]

I would say that it originated from the Trinity study...

The Trinity Study seems to be what everyone quotes for the 4% rule, but it actually got started four years earlier with a paper by William Bengen, entitled Determining Withdrawal Rates Using Historical Data (PDF). It is, I think, a more informational read than the Trinity Study.

Bob

[tadamsmar]

Note that 4% is the number that worked in the WORST 30 year periods

The 4% number always failed for the worst 30 year period when inflation was taken into account:

http://www.bogleheads.org/wiki/File:TrinityTable3.jpg

You can see that it was never 100% for 30 years and 4%, so there was at least one failure for all the tested allocations from 100% stocks to 100% bonds.

And, of course, inflation must be taken into account.

[nisiprius]

Rule of thumb: one cup of uncooked rice will feed four people.

Q: Well, but what if it's basmati rice? Shouldn't the rule be different?
A: No, because it's just a rule of thumb.

Q: Well, what if you like it firm and don't cook it as long and it doesn't fluff up as much? Shouldn't the rule be different?
A: No, because it's just a rule of thumb.

Q: What, are you saying everyone likes rice? Shouldn't the rule be different?
A: No, because it's just a rule of thumb. If you know your friends hate rice, cook less. If they love it, cook more.

Q: I think one cup of rice is risky. I think the rule should be 1.137 cups of uncooked rice to feed four people. Maybe 1.486.
A: Do as you think best, but the rule of thumb doesn't need to change, because it's just a rule of thumb.

Q; You don't need a whole cup of uncooked rice to feed four people, that's crazy talk. I feed five people with a cup of rice because I cook it extra long so it absorbs more water. And I serve it in tiny dishes so it looks like more. I'm willing to take the risk they'll want more because if we run out of rice I always have potatoes I can serve. I think the rule should be 3/4 of a cup of rice to feed four people.
A: Do as you think best, but the rule of thumb doesn't need to change, because it's just a rule of thumb.

Q: This expert says we eat too much rice because it isn't complete protein and thinks the number should be revised down and that there should be an allocation to beans.
A: The rule of thumb doesn't need to change, because it's just a rule of thumb.

Q: What if it's risotto?
A: Oh. That's different.

[sperry8]

I've used the 4% withdrawal rate as a general rule of thumb (I try to make sure I never exceed this amount). I retired 6 years ago (some would say the worst time, since stocks were a their highs in 2007 and I had no more income to invest at the lows in 09). I withdrew 3.85% including taxes over the past 6 years - and I have more money than I started with. This of course includes all the spending from the withdrawals. So it appears the 4% rule is pretty good (at least it was from 07-13).

I watch it of course and if things were going differently, I would modify my withdrawal rate up/down. Based on my learnings from the last 6 years, I feel like I could withdraw more than 4% if need be (it isn't needed because I don't need anything else at the moment, but it's nice to know I could - or that stocks could drop a bit and I'd still be shielded).

Sperry8, thanks for sharing that. Can I as if you are taking a straight 4% each year from the ending balance or are you using "4% at start +inflation" ? ( I realize you said it was actually 3.85% but I mean the withdraw method )

My withdrawals have been from the ending balance and not increased for inflation (yet). I would likely increase my spend over 3.85% if I saw significant inflation in my spend (such as healthcare or rent). Over the prior 6 years, I haven't.

I should also note the 3.85% withdrawal is the average I've taken each year over the past 6 years. It fluctuates 50bps up/down depending on the year (although my annual spend is very close - generally the reason for the fluctuation in % was actually my ending balance). It's been a volatile 6 years from a total asset base perspective.

[Leesbro63]

Just how many times are we going to rehash the same issue of "might 4% be too much"? This is getting old.

[MnD]

Just how many times are we going to rehash the same issue of "might 4% be too much"? This is getting old.

It will never go away because I think the real concern is that many life-long accumulators are very uncomfortable with the idea of switching gears and digging in to their big pile of money with any approach that would involve deaccumulation, especially in years with low/negative investment returns where their money pile might get noticeably smaller.

Instead of relentless technical attacks on the 4% guideline, it might be more honest to say "I just don't support any SWR approach that might shrink my money pile".
Old school was NEVER SPEND PRINCIPAL and I don't think that mindset has gone away - not by a long shot.
So with stock dividends and TBM yield around 2%, you're going to find significant pockets of unhappiness with any SWR over 2%.

[Leesbro63]

Just how many times are we going to rehash the same issue of "might 4% be too much"? This is getting old.

It will never go away because I think the real concern is that many life-long accumulators are very uncomfortable with the idea of switching gears and digging in to their big pile of money with any approach that would involve deaccumulation, especially in years with low/negative investment returns where their money pile might get noticeably smaller.

Instead of relentless technical attacks on the 4% guideline, it might be more honest to say "I just don't support any SWR approach that might shrink my money pile".
Old school was NEVER SPEND PRINCIPAL and I don't think that mindset has gone away - not by a long shot.
So with stock dividends and TBM yield around 2%, you're going to find significant pockets of unhappiness with any SWR over 2%.

Now THAT was a FABULOUS point...very much on the mark. I fall into that category by the way and have concluded that Rick Ferri's approach (that he says he generally uses with this clients) to "only spend the income (dividends and interest)" is where I want to be when I turn 65 in 12 years. But I agree that just because I desire to keep my portfolio growing in retirement, this does not negate the value of the 4% rule for others. Meaning that a 4% plus inflation SWR will probably last for 30 years. Dr. Bernstein has concluded that "2% is bulletproof"...which generally says the same thing Rick Ferri says. But this, too, is generally just a caution for people retiring early and requiring more than 30 years. For most investors, if they accumulate 25x what they spend at age 65, they'll be OK if they're comfortable knowing the pile may shrink as they age.

[sperry8]

Just how many times are we going to rehash the same issue of "might 4% be too much"? This is getting old.

It will never go away because I think the real concern is that many life-long accumulators are very uncomfortable with the idea of switching gears and digging in to their big pile of money with any approach that would involve deaccumulation, especially in years with low/negative investment returns where their money pile might get noticeably smaller.

Instead of relentless technical attacks on the 4% guideline, it might be more honest to say "I just don't support any SWR approach that might shrink my money pile".
Old school was NEVER SPEND PRINCIPAL and I don't think that mindset has gone away - not by a long shot.
So with stock dividends and TBM yield around 2%, you're going to find significant pockets of unhappiness with any SWR over 2%.

Agreed, this is exactly how I feel - and why I "only" spend 3.85% of my base - even though at this pace it will outlive me. I have trouble spending down principal with all the unknowns - and especially since I retired in 07 (and then saw my principal cut in half). Thought I had to go back to work in 09... but luckily things turned around rather quick. But eventually as I gain more learnings (spend through good years and bad) and as I have less years left to spend it, I anticipate being able to increase the 4% rule to something higher even if it starts spending down principal. Old habits/lessons die hard - even in the face of good data!

[Leesbro63]

I guess the interesting point might be that many people motivated and disciplined enough to be able to accumulate 25x (or more) what they spend, probably won't be comfortable seeing it drawn down. And adapt to an SWR that is closer to the 2% "bulletproof forever" number.

[JoMoney]

I think it's interesting that the IRS RMD method of withdrawal from an IRA would put a 30 year old around 2%, a 50 year old around 3%, and a 60 year old around 4%
The years beyond that start growing aggressively, but you're pretty much guaranteed there will be something remaining when you pass.

[YDNAL]

http://www.today.com/money/outdated-ret ... 6C10825034

What say you !

I say.... sure, beat this dead horse until it is dead-er !!!

. . .a retiree's nest egg should last a lifetime as long as they withdrawal 4 percent a year. (my emphasis)

I also say both the article's author and "I" need an editor (or two).

[HomerJ]

I guess the interesting point might be that many people motivated and disciplined enough to be able to accumulate 25x (or more) what they spend, probably won't be comfortable seeing it drawn down. And adapt to an SWR that is closer to the 2% "bulletproof forever" number.

This is a very good point. I hadn't thought of it that way.

[Phineas J. Whoopee]

...
Old school was NEVER SPEND PRINCIPAL and I don't think that mindset has gone away - not by a long shot.
So with stock dividends and TBM yield around 2%, you're going to find significant pockets of unhappiness with any SWR over 2%.

Old school was incorrect; it's just that for a couple of decades in the mid-20th century there wasn't very much inflation so the loss of real value in the "principal" wasn't apparent. I remember older relatives telling me, in the 70s, that it wasn't easy living on a fixed income, but I didn't fully understand at the time. Now I do.

They were beginning to feel the effects of high nominal rates but negative real ones. I'm not sure it occurred to them that in effect, they were earning a negative return on a declining base of value.

Nothing since the end of WWII, when they started to have money to save, had shown them otherwise.

"I would have killed for boghleheads.org" -- Imaginary quote from my great aunt Annabel, had she lived long enough to find out (lived into her mid 80s, so not too bad, "I've survived four fatal illnesses" - a real quote from her - but still, gone is gone).

PJW

[Edited to add] I'm not saying they would have been more successful, at least over the long term, had they spent from their CD balances; only that they didn't understand the economic situation they were in. Their actions and expectations were based on their experiences, but those experiences didn't apply to the new conditions. And they weren't alone.

[Leesbro63]

The last post sounds like grandmas, only invested in CDs and US Savings bonds thru the great inflation of 1966-81. Those who had a balanced portfolio with 50% dividend paying stocks fared much better.

[MnD]

I remember older relatives with stocks and physical engraved bonds in their safe deposit box that you clipped the coupon off twice per year.
They would bring me and let me do the clipping - very cool!

So what did they do with the clipped off coupon - could you deposit those at the bank like a check?

[Phineas J. Whoopee]

The last post sounds like grandmas, only invested in CDs and US Savings bonds thru the great inflation of 1966-81. Those who had a balanced portfolio with 50% dividend paying stocks fared much better.

My father, whose views were not atypical among my relatives on both sides, later in life when he reapproached school wrote and successfully defended a master's thesis asserting the stock market was a mechanism for robbing the poor people to give to the rich.

An unstated, and I don't doubt un-thought-of, assumption was nobody is smart enough to establish an emergency fund. He claimed anybody poor with temporary excess cash would buy stock; then sell it at a loss when inevitably there was an economic downturn and they were laid off.

I can easily believe his thesis was informed by his extended family's experiences.

PJW

[JoMoney]

I remember older relatives with stocks and physical engraved bonds in their safe deposit box that you clipped the coupon off twice per year.
They would bring me and let me do the clipping - very cool!

So what did they do with the clipped off coupon - could you deposit those at the bank like a check?

Yup...
http://www.nytimes.com/2006/02/12/busin ... print&_r=0
"Until late in the 1980's, Lou took them to his local bank and deposited them, along with his checks and cash. Nowadays, there are not enough bearer bonds around for banks to justify the expense of handling them."

[Leesbro63]

The last post sounds like grandmas, only invested in CDs and US Savings bonds thru the great inflation of 1966-81. Those who had a balanced portfolio with 50% dividend paying stocks fared much better.

My father, whose views were not atypical among my relatives on both sides, later in life when he reapproached school wrote and successfully defended a master's thesis asserting the stock market was a mechanism for robbing the poor people to give to the rich.

An unstated, and I don't doubt un-thought-of, assumption was nobody is smart enough to establish an emergency fund. He claimed anybody poor with temporary excess cash would buy stock; then sell it at a loss when inevitably there was an economic downturn and they were laid off.

I can easily believe his thesis was informed by his extended family's experiences.

PJW

An interesting point by PJW, but I'm not sure how it relates to my post that he quoted.

[Phineas J. Whoopee]

The last post sounds like grandmas, only invested in CDs and US Savings bonds thru the great inflation of 1966-81. Those who had a balanced portfolio with 50% dividend paying stocks fared much better.

My father, whose views were not atypical among my relatives on both sides, later in life when he reapproached school wrote and successfully defended a master's thesis asserting the stock market was a mechanism for robbing the poor people to give to the rich.

An unstated, and I don't doubt un-thought-of, assumption was nobody is smart enough to establish an emergency fund. He claimed anybody poor with temporary excess cash would buy stock; then sell it at a loss when inevitably there was an economic downturn and they were laid off.

I can easily believe his thesis was informed by his extended family's experiences.

PJW

An interesting point by PJW, but I'm not sure how it relates to my post that he quoted.

It relates to the willingness of individuals to utilize equities, dividend-paying or otherwise, for anything at all. Their idea was it's all a big conspiracy plotted against them, personally and collectively, by the factory owners.

Their psychology was completely different from psychology in today's economic environment, of course.

PJW

Argh. Arrgh. Work, you worthless sarcasm indicator! Work! You want me to fire you?!