Safe Withdrawal Rates - Is the 4% rule still good?

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FinancialDave
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Safe Withdrawal Rates - Is the 4% rule still good?

Post by FinancialDave » Tue Nov 25, 2014 1:36 pm

I have done some work on Safe Withdrawal Rates, that I think says the 4% rule is still very much a good starting point for retirement planning:

http://seekingalpha.com/article/2709635 ... rcent-rule

I have given the Boglehead excellent Wiki entry on Safe Withdrawal Rates it's due in the article above:

http://www.bogleheads.org/wiki/Safe_withdrawal_rates


I have used the Jim Otar retirement calculator in the work, which I believe expands on the Trinity Study's 70 years of data and 30 year retirement, with essentially 113 years of data and 40 years of retirement. I think the one difference is that the Trinity used Corporate bond rates, while Otar uses basically what he calls a nominal bond which I explain in the article.

I plan to expand on my first article, hopefully based on constructive comments on the article. Please join in if you care. BUT, don't try to convince me that Monte Carlo simulators are better for this analysis, because I am firmly in Jim Otar's camp on this subject, much like my tag-line says.

fd
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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by SimpleGift » Tue Nov 25, 2014 2:26 pm

Why do you assume that future asset returns for retirees today will be anything like past historical returns?

For the time periods used in both the Bengen Study and the Trinity Study (the 1920s to the 1990s), the average U.S. asset returns were about 2.5% real for bonds and 8% real for stocks. Reasonable long-term global forecasts for retirees today put real bond returns in the 0%-1% range and real stock returns in the 3%-5% range (chart below). It makes little sense to me to assume that the next 40 years are going to be anything like the past 100 years. The world has changed!

Image
2013 Global Investment Returns Yearbook
Last edited by SimpleGift on Tue Nov 25, 2014 2:58 pm, edited 1 time in total.

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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by oneleaf » Tue Nov 25, 2014 2:31 pm

Yep, agree with SimpleGift here. The 4% SWR worked in the past, even on extremely low equity allocations, due to the reasonable returns on bonds. With bonds returning near 0% real, I do not see how we are in the same situation as in the past.

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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by am » Tue Nov 25, 2014 2:56 pm

It will work because most of us will not live 30 years in retirement, and if we do than we will make do with what we have like millions of non sophisticated/Boglehead retirees.

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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by FinancialDave » Tue Nov 25, 2014 3:06 pm

To all those who didn't really take the time to read the article I will post a quote here from the article:
Now some might comment, "Past performance from these historical results is no guarantee of the future." This is very much a true fact that all investors should realize. However, designing a plan based on the worst-case result in history is certainly safer than designing it based on some assumed averages or random numbers. Sometimes safer in this context can also mean we don't have to "eat Alpo" during our retirement so that we can keep our spending down to 2% of our asset base.
If you notice the table in the article, I give you "bottom decile", median, and top decile results, because even though some might like to argue that our future could be worse than anything we have seen in the last 113 years, I just tend to be a little more optimistic than that and also understand that I can make any mid course corrections, that can improve the results, just by taking a few less Hawaiian vacations!

Finally, nothing at all keeps you from using the 2% rule, as I also suggest in the article.

:sharebeer

fd
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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by BahamaMan » Tue Nov 25, 2014 3:53 pm

FinancialDave wrote:To all those who didn't really take the time to read the article I will post a quote here from the article:

Finally, nothing at all keeps you from using the 2% rule, as I also suggest in the article.

:sharebeer

fd
I did read the Article ! - Nicely written !

FD - Have you looked at VPW ? - A safer Withdrawal Rate, that probably lets you spend more money. Fixed Percent WRs are soooo yesterday. :happy

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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by FinancialDave » Tue Nov 25, 2014 6:38 pm

BahamaMan wrote:
I did read the Article ! - Nicely written !

FD - Have you looked at VPW ? - A safer Withdrawal Rate, that probably lets you spend more money. Fixed Percent WRs are soooo yesterday. :happy
I took some time studying the VPW calculations -- I found that I could withdraw even 10% from my portfolio every year and never "technically" run out of money - such a deal don't you think.

Seriously though I was thinking of comparing the two techniques in a future article and seeing which actually could deliver more total dollars in retirement -- I sort of think its not going to be that different, it's just that the fixed way is much nicer for those with a budget -- I know budgets are sooo yesterday, but that could have something to do with the majority of the population being under water in debt!

:sharebeer

fd
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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by BahamaMan » Tue Nov 25, 2014 6:47 pm

FinancialDave wrote: I sort of think its not going to be that different, it's just that the fixed way is much nicer for those with a budget -- I know budgets are sooo yesterday, but that could have something to do with the majority of the population being under water in debt!

:sharebeer

fd
Yes, I have a Budget, but about 2/3 of my Budget is Discretionary items. So I recommend that anyone starting VPW would only have about 1/2 of the initial Withdrawal Amount in Non Discretionary Expenses. This way they could cut back if necessary. And if they are 'Lucky' as your article suggests, they may never have to cut back!

BTW - People in Debt, don't hang out here too much or even have a clue about Withdrawal Rates (They have nothing to Withdraw from)

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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by mkatz » Tue Nov 25, 2014 7:33 pm

FinancialDave:

First, nice article. Thank you for writing and posting it.

Second, though I am relying on "instinct" alone, it appears obvious to me that stock market returns are of course influenced by previous year(s) returns as a byproduct of the "reversion to the mean" concept of equity valuations. Thus, Otar's preference for relying on historical sequence(s) of returns seems to me to be wiser than relying on Monte Carlo type projections. I do not understand the reluctance of some to appreciate this... though Monte Carlo type calculators are "sexier".

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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by midareff » Tue Nov 25, 2014 7:45 pm

BahamaMan wrote:
FinancialDave wrote:I did read the Article ! - Nicely written !

FD - Have you looked at VPW ? - A safer Withdrawal Rate, that probably lets you spend more money. Fixed Percent WRs are soooo yesterday. :happy


+1 on the nicely written. I'm 2.5 years retired and I guess I'm more of a ceiling and floor kind of guy, although heavily influenced by Otar. Can't imagine waking up and going it's year 27 so 12.6% of my remaining money is to be withdrawn from my portfolio this year. After all, in year 27 it's past a wild axx guess how much will be there anyway. I started near 2% and have raised it to 3% recently, calculating a 50% drop in equities would take me all the way to 3.85%. Undoubtedly, the sequence of return risks have smiled upon my life so far, and should that continue increases may be in store for the future. ... or greater charitable donations, or many things. Personally, I'm not a fan of VPW since a few years of fixed amount high withdrawals and a spiking inflation rate with a declining market will have you eating Alpo under the bridge. Don't both coming back at me BahamaMan, I'm entitled to my opinion just like you are.

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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by ourbrooks » Tue Nov 25, 2014 7:56 pm

Suppose that future returns are, in fact, lower but they're also less volatile. Could be. How do I go about calculating a reasonable withdrawal rate? Clearly, I can't use sequences of historical returns. I've got no choice but to use Monte Carlo simulators. Further, there are known methods for producing sequence of random numbers with a particular correlation, so a good Monte Carlo simulator could even model changes in the year over year correlation of returns. The only advantage I can see to using historical sequences of returns is that using them doesn't require as much software development sophistication as would be needed to write a good Monte Carlo simulator.

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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by longinvest » Tue Nov 25, 2014 8:00 pm

FinancialDave wrote: I took some time studying the VPW calculations -- I found that I could withdraw even 10% from my portfolio every year and never "technically" run out of money - such a deal don't you think.
FinancialDave,

I am very interested to know what values you gave as parameters to the VPW spreadsheet to get 10% as a starting withdrawal rate.
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by longinvest » Tue Nov 25, 2014 8:07 pm

midareff wrote:Personally, I'm not a fan of VPW since a few years of fixed amount high withdrawals and a spiking inflation rate with a declining market will have you eating Alpo under the bridge.
midareff,

Are you talking about the Bogleheads Wiki's Variable percentage withdrawal? If yes, what parameters did you give it to end up with Alpo under the bridge, in a backtesting simulation?
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by Watty » Tue Nov 25, 2014 8:27 pm

I grimace when I see posts suggesting that the current environment is different so that you should go with a 3.5% or even 3% withdrawal rate.

If your investments just keep up with inflation then for a 30 year retirement a 3.33% (1/30) withdraw rate would work.

In a retirement account where taxes are not an issue then a 30 year ladder of TIPS would generate a fraction of a percent in interest each year which would bring you above 3.5%.

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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by BahamaMan » Tue Nov 25, 2014 8:38 pm

Watty wrote:I grimace when I see posts suggesting that the current environment is different so that you should go with a 3.5% or even 3% withdrawal rate.
I completely agree. There is almost a 'competition' for a race to the bottom. I see 2.5% mentioned a lot on this forum. Heck, in the article highlighted in this very thread 2% was suggested.

Personally, I find that dying with unspent millions is a 'portfolio failure' also. It demonstrates the retiree had no sense of planning or was so fearful of the future that they forgot to live.

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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by john94549 » Tue Nov 25, 2014 9:16 pm

For those of us who plan to start withdrawals when otherwise compelled (think RMDs), the "rule" is less complicated. Of course, as others have noted, just 'cuz you withdraw it, doesn't mean you have to spend it all. Though, I'm surely tempted.

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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by FreeAtLast » Tue Nov 25, 2014 9:57 pm

I recommend that you run through a bunch of withdrawal scenarios using the Monte Carlo simulator on Vanguard's web site.....aim for 95% success over 30 years.....of course, you have to find the simulator first......it's buried about 4-5 layers deep.
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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by FinancialDave » Tue Nov 25, 2014 11:42 pm

FreeAtLast wrote:I recommend that you run through a bunch of withdrawal scenarios using the Monte Carlo simulator on Vanguard's web site.....aim for 95% success over 30 years.....of course, you have to find the simulator first......it's buried about 4-5 layers deep.
To what end may I ask? To compare random numbers to physical data? Is that so if you run 16,000 simulations 15,000 of them can give you back useless data based on the "randomness" of a Gaussian distribution. In fact somewhere in the ballpark of 1 in 16 of them will contain real data.

:oops:
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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by obgyn65 » Wed Nov 26, 2014 3:37 am

To the OP: I believe the 4% SWR rule is dead for those planning for a 40-year retirement. I am 49 and planning on 2.5% SWR.
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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by Chan_va » Wed Nov 26, 2014 7:10 am

obgyn65 wrote:To the OP: I believe the 4% SWR rule is dead for those planning for a 40-year retirement. I am 49 and planning on 2.5% SWR.
2.5% over 40 years would work even with a 0% real return. I think that's overly conservative.

Remember that the 4 most dangerous words are 'this time it's different'. People are using it to justify an overly conservative Swr. To me that's no different than using it to buy the next overhyped growth stock.

I like the suggestion upthread of defining a portfolio with too much left as a failure too.

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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by richard » Wed Nov 26, 2014 8:02 am

Chan_va wrote:
obgyn65 wrote:To the OP: I believe the 4% SWR rule is dead for those planning for a 40-year retirement. I am 49 and planning on 2.5% SWR.
2.5% over 40 years would work even with a 0% real return. I think that's overly conservative.

Remember that the 4 most dangerous words are 'this time it's different'. People are using it to justify an overly conservative Swr. To me that's no different than using it to buy the next overhyped growth stock.

I like the suggestion upthread of defining a portfolio with too much left as a failure too.
2.5% will not necessarily work for 40 years with a 0% real return. If you get 0% every year, it will work. If you get higher numbers some years and lower numbers other years, you are vulnerable to sequence of returns risk and it might not work.

"This time it's different" raises the question, different from what? Different from average US returns for the past 80 or 90 year? Different from a starting point with real bond returns around 0% to 1% and a market p/e around 20x?

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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by nisiprius » Wed Nov 26, 2014 8:28 am

In 'Savings: Choosing a Withdrawal Rate That Is Sustainable', Cooley, Hubbard and Walz wrote:The word planning is emphasized because of the great uncertainties in the stock and bond markets. Mid-course corrections likely will be required, with the actual dollar amounts withdrawn adjusted downward or upward relative to the plan. The investor needs to keep in mind that selection of a withdrawal rate is not a matter of contract but rather a matter of planning.
I don't know what's so hard to understand about that. The 4% rule just means you shouldn't feel a need to cut your spending sharply and instantly in a stock market crash, and it doesn't mean 4.000000%, it means "probably more than 3% unless you're really unlucky, probably less than 5% unless you're really lucky, and absolutely positively definitely not the 7% some 'experts' were talking about back then."

We spend most of our lives adjusting to fluctuating personal financial circumstances by a combination of intuition and planning. People are always telling us that our human capital is just like stocks or bonds. Yet nobody tells a 20-year-old "You are making $40,000 a year now, so based on our Monte Carlo simulations of average future earnings patterns you can safely spend $X with inflation adjustments every year for the rest of your life, and don't worry because in backtesting to 1870 it has never failed even when people were unemployed during the Great Depression." Why would we expect it to be different in retirement?
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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by Cosmo » Wed Nov 26, 2014 8:36 am

FinancialDave wrote:I have done some work on Safe Withdrawal Rates, that I think says the 4% rule is still very much a good starting point for retirement planning:

http://seekingalpha.com/article/2709635 ... rcent-rule

I have given the Boglehead excellent Wiki entry on Safe Withdrawal Rates it's due in the article above:

http://www.bogleheads.org/wiki/Safe_withdrawal_rates


I have used the Jim Otar retirement calculator in the work, which I believe expands on the Trinity Study's 70 years of data and 30 year retirement, with essentially 113 years of data and 40 years of retirement. I think the one difference is that the Trinity used Corporate bond rates, while Otar uses basically what he calls a nominal bond which I explain in the article.

I plan to expand on my first article, hopefully based on constructive comments on the article. Please join in if you care. BUT, don't try to convince me that Monte Carlo simulators are better for this analysis, because I am firmly in Jim Otar's camp on this subject, much like my tag-line says.

fd
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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by MnD » Wed Nov 26, 2014 9:37 am

Watty wrote:I grimace when I see posts suggesting that the current environment is different so that you should go with a 3.5% or even 3% withdrawal rate.
If your investments just keep up with inflation then for a 30 year retirement a 3.33% (1/30) withdraw rate would work.
In a retirement account where taxes are not an issue then a 30 year ladder of TIPS would generate a fraction of a percent in interest each year which would bring you above 3.5%.
4% is my starting point and I expect that with a partial or fully dynamic approach I'll do better as far as income than what 4% plus inflation increases will provide.
I've always ignored the "it's different this time in a bad way" crowd since I started investing in the mid-80's and it's served me very well. I would consider a 2.5% SWR to constitute retirement planning failure from day 1 of retirement. No interest in being the richest couple in the graveyard.

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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by TomTX » Wed Nov 26, 2014 9:43 am

midareff wrote: +1 on the nicely written. I'm 2.5 years retired and I guess I'm more of a ceiling and floor kind of guy, although heavily influenced by Otar. Can't imagine waking up and going it's year 27 so 12.6% of my remaining money is to be withdrawn from my portfolio this year. After all, in year 27 it's past a wild axx guess how much will be there anyway.
It looks like you are misinterpreting how the inflation adjustment works on withdrawal rate for SWR models. It is always based on your original dollar amount never on the remaining balance. If your inflated withdrawal is up to 12.6%, it should be 12.6% of the original portfolio dollar amount, not 12.6% of the remaining portfolio.

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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by dbr » Wed Nov 26, 2014 10:14 am

TomTX wrote:
midareff wrote: +1 on the nicely written. I'm 2.5 years retired and I guess I'm more of a ceiling and floor kind of guy, although heavily influenced by Otar. Can't imagine waking up and going it's year 27 so 12.6% of my remaining money is to be withdrawn from my portfolio this year. After all, in year 27 it's past a wild axx guess how much will be there anyway.
It looks like you are misinterpreting how the inflation adjustment works on withdrawal rate for SWR models. It is always based on your original dollar amount never on the remaining balance. If your inflated withdrawal is up to 12.6%, it should be 12.6% of the original portfolio dollar amount, not 12.6% of the remaining portfolio.
Yes, and in most scenarios even the real value of the portfolio, let alone the nominal value, will be greater 27 years later than the starting amount. If one has had the bad luck to be on one of the few trajectories where the portfolio is headed to zero, hopefully one will have done some hard thinking about what to do sooner than 27 years out. Better yet, one will have arranged for more of one's income to come from something other than portfolio withdrawals. It might be useful to run some data in Firecalc and take a look at the graph that shows the portfolio values over time of the different years at retirement that the program runs. That is real value also. This whole fact of the mismatch between how a portfolio works in drawdown and what an investor would really want as a means to supply retirement income is part of the infamous "annuity puzzle."

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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by jstrazzere » Wed Nov 26, 2014 10:40 am

am wrote:It will work because most of us will not live 30 years in retirement
Because most of us will work longer? Or die sooner?
Clearly life expectancy is increasing every year, and shows no sign of stopping.

I'm planning more than 30 years of retirement...

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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by jstrazzere » Wed Nov 26, 2014 10:46 am

BahamaMan wrote:Personally, I find that dying with unspent millions is a 'portfolio failure' also. It demonstrates the retiree had no sense of planning or was so fearful of the future that they forgot to live.
Or lived life fully, had a terrific sense of planning, and made the conscious choice to leave the millions to others.

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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by tennisplyr » Wed Nov 26, 2014 11:07 am

What did we do before computers and simulations, perhaps we used some common sense and relaxed :wink:
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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by FinancialDave » Wed Nov 26, 2014 11:42 am

dbr wrote:
Yes, and in most scenarios even the real value of the portfolio, let alone the nominal value, will be greater 27 years later than the starting amount. If one has had the bad luck to be on one of the few trajectories where the portfolio is headed to zero, hopefully one will have done some hard thinking about what to do sooner than 27 years out. Better yet, one will have arranged for more of one's income to come from something other than portfolio withdrawals. It might be useful to run some data in Firecalc and take a look at the graph that shows the portfolio values over time of the different years at retirement that the program runs. That is real value also. This whole fact of the mismatch between how a portfolio works in drawdown and what an investor would really want as a means to supply retirement income is part of the infamous "annuity puzzle."
dbr,
This is exactly what my article and the 3 graphs showed, though I admit with over a hundred lines on the chart it's a little hard to see - but you can easily follow the trajectory of the unlucky, median, and lucky investor. I could have also shown some actual table data from any particular start year, but I thought that was a bit much as the chart basically shows where the money ends up being concentrated. and whether the balance grows or not.

fd
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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by midareff » Wed Nov 26, 2014 12:50 pm

longinvest wrote:
midareff wrote:Personally, I'm not a fan of VPW since a few years of fixed amount high withdrawals and a spiking inflation rate with a declining market will have you eating Alpo under the bridge.
midareff,

Are you talking about the Bogleheads Wiki's Variable percentage withdrawal? If yes, what parameters did you give it to end up with Alpo under the bridge, in a backtesting simulation?

Thankfully you have done the research, have a crystal ball so clear, and are so assured you have it nailed, so without adjustments over the portfolio's life you have nailed the perfect withdrawal system regardless of what an individuals expenses, market conditions, interest rates, war, inflation and famine price into the world. A finite numerical withdrawal system may work well on paper longinvest, and I certainly have respect for the hours or work and the effort you have put forth, but the real world is not mathematically finite, nor are the circumstances and needs of an individual's life. If it works for you, great. I've found that one size fits all philosophy's are best used to sell a product that generally fits few properly. .. and yes, I know you are not selling anything.

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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by BahamaMan » Wed Nov 26, 2014 3:34 pm

midareff wrote: Thankfully you have done the research, have a crystal ball so clear, and are so assured you have it nailed, so without adjustments over the portfolio's life you have nailed the perfect withdrawal system regardless of what an individuals expenses, market conditions, interest rates, war, inflation and famine price into the world. A finite numerical withdrawal system may work well on paper longinvest, and I certainly have respect for the hours or work and the effort you have put forth, but the real world is not mathematically finite, nor are the circumstances and needs of an individual's life. If it works for you, great. I've found that one size fits all philosophy's are best used to sell a product that generally fits few properly. .. and yes, I know you are not selling anything.
Reading your posts, it looks to me like you don't understand what VPW does or Doesn't do. To critique something, you first have to fully understand it.

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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by investorguy1 » Wed Nov 26, 2014 8:51 pm

Lets say you expect stocks to go up 7% per year over the next 10 years (5% earnings growth 2% dividend) then lets say you get (3% out of your bonds) Now figure out your personal return based on your asset allocation. subtract inflation (maybe 2%). If you return is 4% or higher you are good to go for the next 10 years. That is assuming you get the returns you expect.

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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by midareff » Thu Nov 27, 2014 8:49 am

TomTX wrote:
midareff wrote: +1 on the nicely written. I'm 2.5 years retired and I guess I'm more of a ceiling and floor kind of guy, although heavily influenced by Otar. Can't imagine waking up and going it's year 27 so 12.6% of my remaining money is to be withdrawn from my portfolio this year. After all, in year 27 it's past a wild axx guess how much will be there anyway.
It looks like you are misinterpreting how the inflation adjustment works on withdrawal rate for SWR models. It is always based on your original dollar amount never on the remaining balance. If your inflated withdrawal is up to 12.6%, it should be 12.6% of the original portfolio dollar amount, not 12.6% of the remaining portfolio.

and if the market has had a 50% decline and a stubborn recovery 12.6% of whatever is left, after whatever inflation rate has happened, may not be near enough.

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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by zaboomafoozarg » Thu Nov 27, 2014 9:10 am

BahamaMan wrote:
Watty wrote:I grimace when I see posts suggesting that the current environment is different so that you should go with a 3.5% or even 3% withdrawal rate.
I completely agree. There is almost a 'competition' for a race to the bottom. I see 2.5% mentioned a lot on this forum. Heck, in the article highlighted in this very thread 2% was suggested.

Personally, I find that dying with unspent millions is a 'portfolio failure' also. It demonstrates the retiree had no sense of planning or was so fearful of the future that they forgot to live.
However, forgetting to live and leaving money behind is preferable to running out of money.

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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by BahamaMan » Thu Nov 27, 2014 9:20 am

zaboomafoozarg wrote:
BahamaMan wrote: Personally, I find that dying with unspent millions is a 'portfolio failure' also. It demonstrates the retiree had no sense of planning or was so fearful of the future that they forgot to live.
However, forgetting to live and leaving money behind is preferable to running out of money.
This is the Fear, that I referred to!

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William Million
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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by William Million » Thu Nov 27, 2014 9:44 am

Good debate here. Bogleheads tend to be instinctive savers and cautious spenders. For that reason, have a lot of extremely low SWRs on this board. I personally consider anything under 3% ridiculously conservative. As a previous poster mentioned, for many of us there are two types of SWR failures - a) running out of funds due to a too high SWR or b) not fully enjoying the retirement you've earned due to a too low SWR. Again, everyone's situation is different, and some want to leave money to heirs.

Even with low bond interest rates, many of us are still investing our fixed income at 2.5% in CDs. The low bond interest rates might be short-lived, might accompany larger equity gains or might mean lower inflation. We don't know. To assert that lower interest rates now mean it is irresponsible to withdraw 3-4% from a balanced portfolio is another form of market timing.

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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by dbr » Thu Nov 27, 2014 10:15 am

William Million wrote:Good debate here. Bogleheads tend to be instinctive savers and cautious spenders. For that reason, have a lot of extremely low SWRs on this board. I personally consider anything under 3% ridiculously conservative. As a previous poster mentioned, for many of us there are two types of SWR failures - a) running out of funds due to a too high SWR or b) not fully enjoying the retirement you've earned due to a too low SWR. Again, everyone's situation is different, and some want to leave money to heirs.
The dilemma is for those who might feel they are seriously missing out because of some cock-eyed mathematical model they feel they have to follow. If you are withdrawing 3% and everything is copacetic, there is no dilemma. If your are withdrawing 4% without fear or at least an acceptable Plan B, there is also no dilemma. If you are withdrawing 3% and can't sleep at night because life is passing you by, then rethinking is in order.

The same thing happens with the when to take SS decision. Some people take it early because they have to. Some people postpone because some cock-eyed model says that is the best thing to do. But there is also the question of what is one missing if one postpones, maybe nothing and maybe a lot.

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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by midareff » Thu Nov 27, 2014 10:23 am

dbr wrote: The dilemma is for those who might feel they are seriously missing out because of some cock-eyed mathematical model they feel they have to follow. If you are withdrawing 3% and everything is copacetic, there is no dilemma. If your are withdrawing 4% without fear or at least an acceptable Plan B, there is also no dilemma. If you are withdrawing 3% and can't sleep at night because life is passing you by, then rethinking is in order.

The same thing happens with the when to take SS decision. Some people take it early because they have to. Some people postpone because some cock-eyed model says that is the best thing to do. But there is also the question of what is one missing if one postpones, maybe nothing and maybe a lot.
AFAIK.. you "GET IT" dbr.

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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by DFAMAN » Thu Nov 27, 2014 10:48 am

nisiprius wrote:
In 'Savings: Choosing a Withdrawal Rate That Is Sustainable', Cooley, Hubbard and Walz wrote:The word planning is emphasized because of the great uncertainties in the stock and bond markets. Mid-course corrections likely will be required, with the actual dollar amounts withdrawn adjusted downward or upward relative to the plan. The investor needs to keep in mind that selection of a withdrawal rate is not a matter of contract but rather a matter of planning.
I don't know what's so hard to understand about that. The 4% rule just means you shouldn't feel a need to cut your spending sharply and instantly in a stock market crash, and it doesn't mean 4.000000%, it means "probably more than 3% unless you're really unlucky, probably less than 5% unless you're really lucky, and absolutely positively definitely not the 7% some 'experts' were talking about back then."

We spend most of our lives adjusting to fluctuating personal financial circumstances by a combination of intuition and planning. People are always telling us that our human capital is just like stocks or bonds. Yet nobody tells a 20-year-old "You are making $40,000 a year now, so based on our Monte Carlo simulations of average future earnings patterns you can safely spend $X with inflation adjustments every year for the rest of your life, and don't worry because in backtesting to 1870 it has never failed even when people were unemployed during the Great Depression." Why would we expect it to be different in retirement?
I agree 100%. I love this post on another thread from EmergDoc, which I have highlighted before in similar discussions:

"Some people are more tolerant of risk and uncertainty than others. You look at a 10-20% failure rate and think...no way, I'd rather work 5 more years and spend 30% less. I look at it and say, heck, I have an 80-90% chance that this is going to work out just fine, and if it looks like it isn't, I can fix it by spending less. Life is risky. Life is uncertain. There are no guarantees. You're far more likely to die within a few years of your life expectancy than to live to 100. Remember if you retire at 65 and your life expectancy is 84 or so, then you've got a 50% chance of dying BEFORE your life expectancy. What's the SWR for a 10 year retirement? Pretty darn high. Two "bad" things have to happen for you to run out of money. First, you have to live a long time. Second, your portfolio has to perform poorly. If the chance of that happening are 10% each, then the real risk you're running is 10%*10%, or 1%. 99/100 times it's going to be fine. That's a risk I'm willing to run no problema. Does anyone actually know someone who retired, never took out more than 4 or 5% of the original portfolio each year (adjusted for inflation), and actually ran out of money before they ran out of life? Anyone? Bueller? I think Alpo Risk is a whole lot lower than many compulsive savers imagine it is. Especially with Social Security, a caring family, and maybe even a pension or a SPIA. It's just not that big of a deal. People need to know what a SWR is and that it isn't 8 or 10% and need to watch their portfolio carefully those first 5 or 10 years in retirement. But they don't need to go crazy trying to figure out if the SWR is 3.7% or 4.1%."

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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by jimmyq » Thu Nov 27, 2014 10:50 am

I think there is a lot of misunderstanding about Monte Carlo analysis. Since it's just a computer simulation method, it's only as good as the underlying assumptions, and these assumptions can be changed with a bit of programming. I tend to agree with researchers like Wade Pfau who argue that rates of return for the next 30 years will be lower than what we've seen the past 100 years, but if you disagree, then you can certainly use historical rates of return for the calculations. I think it would be eye-opening to see a Monte Carlo analysis of the VPW method, although that may be considered sacrilege by some.

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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by bobcat2 » Thu Nov 27, 2014 11:27 am

Since the 4% rule has never been good, it's hard to make much sense of the premise of this thread.

The 4% rule and all its SWR variants fail two basic principles of what constitutes a sound withdrawal rate strategy. Any rule for spending out of a retirement account should adhere to the following two principles:

1. The amount you spend in a year should depend on how big the retirement account is in that year.
2. The amount you spend in a year should depend on how many more years from now that you will need the retirement income.

An X% rule can meet both principles in the first year, but after the first year an x% rule fails both principles. The problem is that an x% rule is static and doesn't account for changes in the size of the portfolio or changes in longevity. Such a static rule cannot be rectified; it needs to be replaced by a dynamic rule that takes these changes into account.

The x% strategy also fails to reflect the prediction of the life -cycle model that households should, at least to some extent, prefer higher consumption early in retirement when they are more likely to be alive to enjoy it.
A major problem with this strategy is that the withdrawal rate does not respond to movements in stock prices. Suppose that an individual retires at age 62 and the stock market declines by 50 percent between age 62 and 63. At age 63, the household is now consuming 8 percent of the current market value of its investment, compared with 4 percent for a household that happened to retire one year later.

Four percent and 8 percent cannot both be the right answer to the same decumulation problem. Indeed, at an 8-percent withdrawal rate, the household is on track to run out of money in only a few years. The household should instead respond to the market decline by reducing consumption, adopting a formula that relates consumption to current wealth, not wealth at some arbitrary prior date.
MAKING YOUR NEST EGG LAST A LIFETIME - Anthony Webb
link - http://crr.bc.edu/wp-content/uploads/20 ... 20-508.pdf

Also see these two articles by William Sharpe.
http://www.retirementincomescenarios.bl ... -rule.html
and
https://web.stanford.edu/~wfsharpe/retecon/4percent.pdf

What can be said about the 4% rule is that it is not as bad as the 8% rule promulgated by Peter Lynch that preceded the 4% rule. I guess that's progress of a sort. :D

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by nedsaid » Thu Nov 27, 2014 11:37 am

oneleaf wrote:Yep, agree with SimpleGift here. The 4% SWR worked in the past, even on extremely low equity allocations, due to the reasonable returns on bonds. With bonds returning near 0% real, I do not see how we are in the same situation as in the past.
Well. I guess the answer is not to take anything out of retirement accounts except for what is required by law and to live on beans and weenies. I am being facetious here.

I still think 4% is a good starting point, it is only a pretty good rule of thumb. We have to use the Taylor Larimore method and make adjustments according to market and life conditions. There is just no magic formula that is going to guarantee success.

With lower future expected returns, many of us will be considering "pensionizing" part of our nest eggs with a single premium immediate annuity.
A fool and his money are good for business.

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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by dbr » Thu Nov 27, 2014 11:41 am

bobcat2 wrote:Since the 4% rule has never been good, it's hard to make much sense of the premise of this thread.

What can be said about the 4% rule is that it is not as bad as the 8% rule promulgated by Peter Lynch that preceded the 4% rule. I guess that's progress of a sort. :D

BobK
Of course, the whole point is that the "rule" isn't a rule. The whole thing was and is just a result published by people such as Bengen and in the Trinity study which called attention to the fact that sequence of returns results in the "safe" withdrawal rate being much less than more naive projections such as that of Mr. Lynch which relied on average expected return to tell people they could spend more than you really can.

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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by Johno » Thu Nov 27, 2014 11:57 am

Rules like 4% of initial amount are IMO reasonably useful for setting goals for retirement assets/spending when pretty far away from retirement. The average person far from retirement, and with limited knowledge of finance, is probably better off having a rough simple benchmark like 4% (or perhaps read up a bit and trim it back to some slightly lower % in view of today's low expected returns) than directly relying on a black box output like a computer simulation, even aside from a situation where the black box is operated by an adviser with a potential conflict of interest.

However as retirement actually approaches and the question shifts more to the actual way the investor will control longevity risk in retirement, then a level % 'swr' approach is a lot weaker for reasons many posts and their links point out. At that point the investor really has to consider things in a more complicated way, including the possible role of annuities for longevity risk management, their goals for leaving money to heirs, etc.

OTOH I think most people realize that if they enter retirement with a significant proportion of risky assets in their portfolio, and then the value of those assets falls dramatically, always possible by definition of 'risky asset', that they're going to have to cut spending. Is there really anyone who thinks when they actually get to retirement they can spend a level 4% and nothing bad can happen? IOW there seems some element of knocking over a straw man in criticizing 'safe withdrawal rate' when it comes to all but the most naive investors.

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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by am » Thu Nov 27, 2014 12:14 pm

Typical educated affleunt Boglehead retiree can always cut back on discretionary items or get a part time job if need be. The 4% rule is close enough.

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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by TradingPlaces » Thu Nov 27, 2014 12:18 pm

am wrote:Typical educated affleunt Boglehead retiree can always cut back on discretionary items or get a part time job if need be. The 4% rule is close enough.
I would have thought that typical educated affluent Boglehead retiree would have saved enough to be able spend all-that-she-wants, at say 2% WD rate.

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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by dbr » Thu Nov 27, 2014 12:19 pm

Johno wrote:. Is there really anyone who thinks when they actually get to retirement they can spend a level 4% and nothing bad can happen?
And, in addition, real life spending is not constant. One may spend less on some things as one ages, or one may be hit by major issues sooner or later on. There is also an interaction with other income streams. In particular if one has a fixed pension or annuity, then some other income stream has to increase faster than inflation as time goes on to compensate for loss of real income. And so on. It is perfectly reasonable, as people say, to gain a rough estimate from the 4% idea, but it is not a plan.

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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by TradingPlaces » Thu Nov 27, 2014 12:23 pm

There are a lot of reasons why a 4% WD rate won't work:

- age of death minus age at retirement. This is going up over time, and for someone who is 40 now, will be even longer at their retirement,
- lower asset returns,
- dangers to social security,
- runaway inflation.

IMO, a lot of people can semi-retire with a 4% rate. However, fully retiring can be self-defeating because long absence from labor markets can be irreversible.

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Re: Safe Withdrawal Rates - Is the 4% rule still good?

Post by TradingPlaces » Thu Nov 27, 2014 12:28 pm

nedsaid wrote:With lower future expected returns, many of us will be considering "pensionizing" part of our nest eggs with a single premium immediate annuity.
Where do you expect the returns for the immediate annuity to come from?

Especially if you buy that annuity after lower future earnings have been priced in?

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