The 4% rule DOES fail but still makes sense!

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itstoomuch
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Re: The 4% rule DOES fail but still makes sense!

Post by itstoomuch » Wed Nov 15, 2017 11:28 am

flyingaway wrote:
Tue Nov 14, 2017 10:53 am

I also play on the MMM forum and use the same screen name.
So what is MMM? 8-)
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David Jay
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Re: The 4% rule DOES fail but still makes sense!

Post by David Jay » Wed Nov 15, 2017 11:37 am

itstoomuch wrote:
Wed Nov 15, 2017 11:28 am
flyingaway wrote:
Tue Nov 14, 2017 10:53 am

I also play on the MMM forum and use the same screen name.
So what is MMM? 8-)
Mister Money Mustache website: https://www.mrmoneymustache.com/

What I have gleaned from a few visits there, it focuses on very early (i.e. 20s and 30s) "retirement" through ultra high saving percentages (while employed) and living a minimalist lifestyle (after employment).

YMMV :happy
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

latesaver
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Re: The 4% rule DOES fail but still makes sense!

Post by latesaver » Wed Nov 15, 2017 11:41 am

[/quote]

99% works too. All kidding aside I think most folks on this board will use some sort of variable spending percentage and error on the side of spending too little.
[/quote]

I am fairly new to the forums but i wonder, do most people really plan to use a complicated (or semi-complicated) rule to guide their withdrawals? Personally, i'll track my nest egg in retirement as i do now, but i don't see myself calculating and making withdrawals on the first day of each month or year based on some fixed or variable %. Particularly if i don't need the money.

my simplistic plan is to retire with more than i would ever need - say, a 2.5-3% withdrawal rate based on a moderately exaggerated budget - and just prudently draw down as i go...

wrongfunds
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Re: The 4% rule DOES fail but still makes sense!

Post by wrongfunds » Wed Nov 15, 2017 11:53 am

my simplistic plan is to retire with more than i would ever need - say, a 2.5-3% withdrawal rate based on a moderately exaggerated budget - and just prudently draw down as i go...
That works too but understand you are now essentially applying 2% guideline to your realistic expense budget. You can ask yourself question as to why you feel 2% is not a risk for you? Why not wait until you can afford 1%? If you can honestly answer that question, then you might understand why 4% guideline makes sense.

flyingaway
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Re: The 4% rule DOES fail but still makes sense!

Post by flyingaway » Wed Nov 15, 2017 11:54 am

latesaver wrote:
Wed Nov 15, 2017 11:41 am
99% works too. All kidding aside I think most folks on this board will use some sort of variable spending percentage and error on the side of spending too little.
[/quote]

I am fairly new to the forums but i wonder, do most people really plan to use a complicated (or semi-complicated) rule to guide their withdrawals? Personally, i'll track my nest egg in retirement as i do now, but i don't see myself calculating and making withdrawals on the first day of each month or year based on some fixed or variable %. Particularly if i don't need the money.

my simplistic plan is to retire with more than i would ever need - say, a 2.5-3% withdrawal rate based on a moderately exaggerated budget - and just prudently draw down as i go...
[/quote]

No matter how much money you saved, you still need to know how much you can spend and how much you want to withdraw each year.

smitcat
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Re: The 4% rule DOES fail but still makes sense!

Post by smitcat » Wed Nov 15, 2017 12:02 pm

David Jay wrote:
Wed Nov 15, 2017 11:37 am
itstoomuch wrote:
Wed Nov 15, 2017 11:28 am
flyingaway wrote:
Tue Nov 14, 2017 10:53 am

I also play on the MMM forum and use the same screen name.
So what is MMM? 8-)
Mister Money Mustache website: https://www.mrmoneymustache.com/

What I have gleaned from a few visits there, it focuses on very early (i.e. 20s and 30s) "retirement" through ultra high saving percentages (while employed) and living a minimalist lifestyle (after employment).

YMMV :happy

Yes- kinda like watching the hippie generation initially say they were not going to follow the established past and rely on a much simpler and easier life. Plenty of reading on the actual paths and results after the initial headlines if you care to read about them.
IMHO - MMM is a marketing thrust similar to a number of others out there to capture a following and clients.

flyingaway
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Re: The 4% rule DOES fail but still makes sense!

Post by flyingaway » Wed Nov 15, 2017 12:17 pm

wrongfunds wrote:
Wed Nov 15, 2017 9:32 am
I still don't get why you guys are stuck up on annual numbers. Given the available data and the unlimited compute power, run the various scenario with monthly or twice weekly or quarterly payout. I do see an issue that the real inflation numbers are only computed annually but we can probably make some changes to the computation to account for that.

What you will most likely find is that the calculations do NOT converge. This is only my hunch and I have not done the necessary calculations to prove it. However, since the underlying numbers are not based upon natural aka physical or chemical world, I see no reason one should expect convergence. It is a mathematical concept and applies to continuous functions.

My claim is that if you were to run exact same study on Apr 1 annual date vs Jan 1 as annual date, the resultant number will be way different than the 4%. I expect the number would be off by 0.5% or more.

If you don't understand that, you will be always get dazzled by some academics who will spin bunch of numerical analysis and take them as gospel vs taking them as just a rough guideline.
Yes. You are right. Even the original number is not exactly 4.0%, it is slightly bigger. But who care? I am just interested in having some convenient number to get me an estimate what I need at retirement for planning purpose. (Otherwise, like many of my friends, they have no idea how much money they need, they just plan to work until they don't want to work).

Da5id
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Re: The 4% rule DOES fail but still makes sense!

Post by Da5id » Wed Nov 15, 2017 12:57 pm

wrongfunds wrote:
Wed Nov 15, 2017 11:53 am
my simplistic plan is to retire with more than i would ever need - say, a 2.5-3% withdrawal rate based on a moderately exaggerated budget - and just prudently draw down as i go...
That works too but understand you are now essentially applying 2% guideline to your realistic expense budget. You can ask yourself question as to why you feel 2% is not a risk for you? Why not wait until you can afford 1%? If you can honestly answer that question, then you might understand why 4% guideline makes sense.
I'm personally a fan of more conservative than 4% for following reasons:

1) many bogleheads have > 30 years left, while 30 years is the period covered by the Trinity study
2) many bogleheads aren't comfortable with having exactly $0 left on the day they die, which is "success" in the Trinity study
3) 4% is very US centric. While most of us (including me) are in the US, I think the issues in other countries are instructive. 4% is far from normal in the world. Yes we're unlikely to have conventional war on our territory in the USA (which causes the worst results), but the table in https://retirementresearcher.com/4-rule ... und-world/ is interesting. e.g. in that Pfau produced table SWR in Switzerland is 3.14%, and in that country the 4% rule fails 32% of the time.
4) The faith that the past US data sets covers all range of future circumstances seems to me to be shaky

I think this series of posts is a good read on the SWR topic for those interested: https://earlyretirementnow.com/category ... wal-rates/

Do I think 4% SWR followed literally will work for a 65 year old retiree? Very likely yes. But it is only IMHO "safe" if there is some fluff in the budget and/or an option to earn some additional income if circumstances warrant, e.g. if there is awful initial sequence of returns. Note that even if "the plan" and "history" say that we'll recover if you have a huge market drop your first year or two of retirement, there are no guarantees for the future and furthermore one must be temperamentally able to deal with the sharp decline in ones balance. That said, 25x annual living expenses (the 4% rule) represents VASTLY more money than an overwhelming majority will ever have, so of course retirement is workable with that amount or less.

I think 3-3.5% is a good target for conservatively minded people who can reasonably reach it without delaying their retirement unacceptably long. I'm shooting for 3% myself, and am already over that so am in the position that anything additional is gravy. May try out retirement for a while next year when my current gig winds down to see if it agrees with me...

flyingaway
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Re: The 4% rule DOES fail but still makes sense!

Post by flyingaway » Wed Nov 15, 2017 1:20 pm

Da5id wrote:
Wed Nov 15, 2017 12:57 pm
wrongfunds wrote:
Wed Nov 15, 2017 11:53 am
my simplistic plan is to retire with more than i would ever need - say, a 2.5-3% withdrawal rate based on a moderately exaggerated budget - and just prudently draw down as i go...
That works too but understand you are now essentially applying 2% guideline to your realistic expense budget. You can ask yourself question as to why you feel 2% is not a risk for you? Why not wait until you can afford 1%? If you can honestly answer that question, then you might understand why 4% guideline makes sense.
I'm personally a fan of more conservative than 4% for following reasons:

1) many bogleheads have > 30 years left, while 30 years is the period covered by the Trinity study
2) many bogleheads aren't comfortable with having exactly $0 left on the day they die, which is "success" in the Trinity study
3) 4% is very US centric. While most of us (including me) are in the US, I think the issues in other countries are instructive. 4% is far from normal in the world. Yes we're unlikely to have conventional war on our territory in the USA (which causes the worst results), but the table in https://retirementresearcher.com/4-rule ... und-world/ is interesting. e.g. in that Pfau produced table SWR in Switzerland is 3.14%, and in that country the 4% rule fails 32% of the time.
4) The faith that the past US data sets covers all range of future circumstances seems to me to be shaky

I think this series of posts is a good read on the SWR topic for those interested: https://earlyretirementnow.com/category ... wal-rates/

Do I think 4% SWR followed literally will work for a 65 year old retiree? Very likely yes. But it is only IMHO "safe" if there is some fluff in the budget and/or an option to earn some additional income if circumstances warrant, e.g. if there is awful initial sequence of returns. Note that even if "the plan" and "history" say that we'll recover if you have a huge market drop your first year or two of retirement, there are no guarantees for the future and furthermore one must be temperamentally able to deal with the sharp decline in ones balance. That said, 25x annual living expenses (the 4% rule) represents VASTLY more money than an overwhelming majority will ever have, so of course retirement is workable with that amount or less.

I think 3-3.5% is a good target for conservatively minded people who can reasonably reach it without delaying their retirement unacceptably long. I'm shooting for 3% myself, and am already over that so am in the position that anything additional is gravy. May try out retirement for a while next year when my current gig winds down to see if it agrees with me...
For me, after satisfying the 4% rule, I can really slow down. I am not retiring immediately, but I tell myself that I don't have to work that hard and I can spend more money loosely (my wife certainly likes that).

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midareff
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Re: The 4% rule DOES fail but still makes sense!

Post by midareff » Wed Nov 15, 2017 1:31 pm

There are soooo many ways to look at this.

Is the 4% implemented for year one and then inflation adjusted to the annual $ amount yearly?

Is the 4% implemented for year one and then inflation adjusted to the annual % amount yearly?

Is the 4% implemented for year one and then re-calculated yearly for each year's final dollar balance? ... with or without an inflation adjustment?

Overall... if you retire the day you reach a financial goal that meets your minimum needs sequence of return risk can be real.

wrongfunds
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Re: The 4% rule DOES fail but still makes sense!

Post by wrongfunds » Wed Nov 15, 2017 1:31 pm

If 25x is "VASTLY more money than overwhelming majority will ever have", what does 3% imply?

One credible reason that I can put with needing lot more than 25x is the coming inflection point in technological improvement to life longevity itself. The technology curve plotted on logarithmic scale is now exponential! Some interesting research going on today would most likely bear fruit and our current actuarial data will become invalid. Initially, the cost will be very high. Would you be willing to give half of your portfolio to avail yourself very expensive and untried miracle treatment for extra 30 years of healthy retirement?

flyingaway
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Re: The 4% rule DOES fail but still makes sense!

Post by flyingaway » Wed Nov 15, 2017 1:38 pm

wrongfunds wrote:
Wed Nov 15, 2017 1:31 pm
If 25x is "VASTLY more money than overwhelming majority will ever have", what does 3% imply?

One credible reason that I can put with needing lot more than 25x is the coming inflection point in technological improvement to life longevity itself. The technology curve plotted on logarithmic scale is now exponential! Some interesting research going on today would most likely bear fruit and our current actuarial data will become invalid. Initially, the cost will be very high. Would you be willing to give half of your portfolio to avail yourself very expensive and untried miracle treatment for extra 30 years of healthy retirement?
Yes, the cost of that $10k/pill per day has to be added to your expenses to calculate whatever the rate you will use.

wrongfunds
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Re: The 4% rule DOES fail but still makes sense!

Post by wrongfunds » Wed Nov 15, 2017 1:41 pm

How about purchasing "insurance" for that treatment instead of purchasing LTC? :-)

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tadamsmar
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Re: The 4% rule DOES fail but still makes sense!

Post by tadamsmar » Wed Nov 15, 2017 1:42 pm

wrongfunds wrote:
Wed Nov 15, 2017 9:32 am
I still don't get why you guys are stuck up on annual numbers. Given the available data and the unlimited compute power, run the various scenario with monthly or twice weekly or quarterly payout. I do see an issue that the real inflation numbers are only computed annually but we can probably make some changes to the computation to account for that.

What you will most likely find is that the calculations do NOT converge. This is only my hunch and I have not done the necessary calculations to prove it. However, since the underlying numbers are not based upon natural aka physical or chemical world, I see no reason one should expect convergence. It is a mathematical concept and applies to continuous functions.

My claim is that if you were to run exact same study on Apr 1 annual date vs Jan 1 as annual date, the resultant number will be way different than the 4%. I expect the number would be off by 0.5% or more.

If you don't understand that, you will be always get dazzled by some academics who will spin bunch of numerical analysis and take them as gospel vs taking them as just a rough guideline.
Inflation, the CPI, is available monthly.

I personally doubt that using something other than yearly data would make much difference in this horseshoe game.

wrongfunds
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Re: The 4% rule DOES fail but still makes sense!

Post by wrongfunds » Wed Nov 15, 2017 1:46 pm

If you run the numbers monthly, you never have to worry about 20% annual drop, do you?

Now we need some of the Excel warriors to find out if you are right or I am right about the hypothesis. May be we should tell Bill B. himself to see what happens if he uses monthly numbers? It is time that he come up with new edition of his old study :-)

Da5id
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Re: The 4% rule DOES fail but still makes sense!

Post by Da5id » Wed Nov 15, 2017 1:52 pm

wrongfunds wrote:
Wed Nov 15, 2017 1:31 pm
If 25x is "VASTLY more money than overwhelming majority will ever have", what does 3% imply?
What is your point? 10x annual expenses is also VASTLY more savings than the overwhelming majority will have in the US (not talking Bogleheads here). Most retire on their social security and not a ton of additional liquid assets. If one looks at the median (not mean) retirement savings in the US, it is shockingly low.

Each to their own. Some depends on temperament. I'm a fairly cautious person, and once I'm actually retired don't want doubts about potentially being forced to un-retire in a bad market. Or change my plans or lower my standard of living. Others have different temperaments and stronger faith in the absolute safety of the 4% rule. I moreover enjoy my job well enough right now and I'm at less than 3%. If I hated my job, or were older (I'm early 50s) I might be more inclined to roll the dice.
Last edited by Da5id on Wed Nov 15, 2017 1:53 pm, edited 1 time in total.

David Scubadiver
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Re: The 4% rule DOES fail but still makes sense!

Post by David Scubadiver » Wed Nov 15, 2017 1:53 pm

For me it comes down to want versus need.
I want to be able to safely withdraw $125,000 a year, so I need $3,125,000 in starting assets.
When I hit my number, the market may tank and my starting assets at the end of day 1 are now $3,000,000.
Do I adjust my "want" to be a withdrawal of $120,000?
Answer: Yes, if I want to be conservative and do not have an actual need of $125,000.
Answer: No, if I have a need for $125,000.

wrongfunds
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Re: The 4% rule DOES fail but still makes sense!

Post by wrongfunds » Wed Nov 15, 2017 2:16 pm

Do people actually take their annual withdrawal in single chunk before actually needing the amount? Or they do it just do it to avoid having to take it later if the market went down? I think in my case, I would more likely take the money as "needed basis" assuming I keep reasonable balance in the checking account.

My issue with all this is that difference between 125K vs 120K or for that matter between $3.000M and $3.125M is just market noise aka those numbers are pretty much the same with each other. The Heisenberg principle is in play here. There is uncertainty in the measurement itself. We are trying to assign precision to the data when their is no realistic way to do that. If you need that kind of precision you will have to take annuity where a third party such as insurance company gets to keep the spoils but in return you get that precision that you are carving for.

randomguy
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Re: The 4% rule DOES fail but still makes sense!

Post by randomguy » Wed Nov 15, 2017 2:36 pm

flyingaway wrote:
Tue Nov 14, 2017 8:34 pm
randomguy wrote:
Tue Nov 14, 2017 4:02 pm
flyingaway wrote:
Tue Nov 14, 2017 3:46 pm
CaliJim wrote:
Tue Nov 14, 2017 3:42 pm
The reason the probabilities for success change in the two scenarios is that in the first 30 year simulation, a 20% drop in year one has only a fractional probability of happening.

In the second 29 year scenario, that 20% chance of a drop in year one has now gone to 100%.
In fact, for the portfolio of 25X to support 30 years of retirement, the average yearly return must be positive, possibly around 2.5% without inflation adjustment.
What about if we have 2% deflation for 30 years. Should be able to make thing work with a negative nominal return:)

Note the portfolio is expected to survive the 20% drop so the fact the odds go to 100% isn't the big issue. What the 4% rule and the like don't do is factor in the changes of odds of having a 20% drop followed by another 20% drop and so on. The valuation argument simplifies to something like after a 20% drop, the SWR goes from 4% to 5% because of higher expected returns. But these type of estimates are always pretty bad. Go back and look at the 10 year stock market predications for the past 20 years and see how accurate they have been.
I don't understand why the SWR goes from 4% to 5% after a 20% drop, does the portfolio becomes smaller and thus SWR becomes smaller also?
The arguement is along the lines of
If PE10s are 20, the expected return for next 30 years is 5%
If PE10s are 16, the expected return for the next 30 years is 7%

So with the higher expected returns, you can take out more money. It is the reverse logic that people use to say that 3% SWR are risky these days because our valuations are so high.

WanderingDoc
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Re: The 4% rule DOES fail but still makes sense!

Post by WanderingDoc » Wed Nov 15, 2017 2:51 pm

flyingaway wrote:
Tue Nov 14, 2017 9:23 am
Here is a case written by sambb in one of my other threads. Similar examples have appeared in other places. I don't know if anyone had good answers.
*****************************
What about the following:
Need 100k/year, so desire to have 2.5M (4%) withdrawal.
Lets say right now in 2017, i hit 2.5M,so I could retire. Great.
Instead, lets say that i didn't check my balance. And we hit a bear market. And my 2.5M is now 2.0M
at 2.0 M in 2018 (after bear market) - my 4% won't give me 100k/year
So therefore, in one case I could retire in 2017, and in another, i couldn't.
******************************

First, many MMM people's claim is: the 4% rule never fails. They did not understand the statistics. The original 4% rule calculation had a success rate of about 96%, so it did fail in about 4% of the tested cases.

Let's come back to the sambb's example. Since FIRECalc is an approximation of the 4% rule, I use it to illustrate my points. Use 2.5M and 100K/year for 30 years, FIRECalc calculated 117 cycles with 6 failures and a success rate of 94.9%. (This is Test A.)
Use 2.0M and 100K/year for 29 years, FIRECalc calculated 118 cycles with 32 failures and a success rate of 72.9%. (This is Test B.)

It seems that we can view Test A as a success, and Test B as a failure. However, things are not so simple.

Note that in Test A, with the known situation of Test B, in the first year, the portfolio dropped from 2.5M to 2.0M, a 20% drop, which makes many tested cases (with first year return better than -20%) in Test A invalid. I guess if one could fix the first year return to be -20% in Test A, both Test A and Test B would have similar success rates. In this case, we say Test A suffered a Sequence of Return Risk.

Since I could not do FIRECalc with the first year return fixed, I just say without proof but with huge confidence that the 4% rules DOES fail but still makes sense.

To answer sambb's original question: Either you retire in 2017 (with 2.5M) or 2018 (with 2.0M), your success rate may be only around 73%.

Comments?
I think the solution is to accumulate $8K/mo. in rental income. In my experience and that of all my colleagues, your rental income will only grow over time (as rent growth tends to outpace expenses in good areas), also I legally pay $0 tax on rental real estate income.

You also have the bonus of that $8K/mo. jumping to $15-20K/mo. in 15-30 years when mortgages are paid off. And, people still need a place to live in a recession. So when your total real estate portfolio value drops, you still have INCOME coming in. You don't have to worry about what the U.S. economy does, you have selected specific properties in specific submarkets with solid fundamentals.
I'm not looking to get rich quick (crypto), I'm not looking to get rich slow (index funds).. I'm looking to get rich, for sure (real estate).

randomguy
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Re: The 4% rule DOES fail but still makes sense!

Post by randomguy » Wed Nov 15, 2017 2:58 pm

wrongfunds wrote:
Wed Nov 15, 2017 9:32 am
I still don't get why you guys are stuck up on annual numbers. Given the available data and the unlimited compute power, run the various scenario with monthly or twice weekly or quarterly payout. I do see an issue that the real inflation numbers are only computed annually but we can probably make some changes to the computation to account for that.
Why do you think you will get noticeably different numbers with monthly or weekly distributions versus yearly? Yes the numbers will be slightly different but why would you expect drastically different results? You are looking at a small percentage of the portfolio (4-10%) and the results will be similiar. Sometimes you will be selling a bit higher. Sometimes a bit lower. You would expect the over trend to give you slightly more money (i.e. markets go up) but you could run into problems in the worst cases where you are taking out money at lower average values when the market is dropping and those cases tend to be the rate limiting cases.

I think the fact that the portfolio (US only. No TIPs) not matching yours is a lot bigger issues than worrying about when you take the money out. In the end the past does not dictate the future. Trying to get too exact just isn't possible.

flyingaway
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Re: The 4% rule DOES fail but still makes sense!

Post by flyingaway » Wed Nov 15, 2017 3:00 pm

WanderingDoc wrote:
Wed Nov 15, 2017 2:51 pm
I think the solution is to accumulate $8K/mo. in rental income. In my experience and that of all my colleagues, your rental income will only grow over time (as rent growth tends to outpace expenses in good areas), also I legally pay $0 tax on rental real estate income.

You also have the bonus of that $8K/mo. jumping to $15-20K/mo. in 15-30 years when mortgages are paid off. And, people still need a place to live in a recession. So when your total real estate portfolio value drops, you still have INCOME coming in. You don't have to worry about what the U.S. economy does, you have selected specific properties in specific submarkets with solid fundamentals.
I also have a few friends who have rentals and I agree that it might be a good income source in retirement.

But I consider managing rentals as a part-time job and I don't want to do that. I still remember one of my friends asked me to help him
rent a truck and move a new refrigerator into his rental house to replace the broken one.

randomguy
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Re: The 4% rule DOES fail but still makes sense!

Post by randomguy » Wed Nov 15, 2017 3:05 pm

WanderingDoc wrote:
Wed Nov 15, 2017 2:51 pm
I think the solution is to accumulate $8K/mo. in rental income. In my experience and that of all my colleagues, your rental income will only grow over time (as rent growth tends to outpace expenses in good areas), also I legally pay $0 tax on rental real estate income.

You also have the bonus of that $8K/mo. jumping to $15-20K/mo. in 15-30 years when mortgages are paid off. And, people still need a place to live in a recession. So when your total real estate portfolio value drops, you still have INCOME coming in. You don't have to worry about what the U.S. economy does, you have selected specific properties in specific submarkets with solid fundamentals.
They need a place to live but can't afford it. So they double or triple up with friends/move in with relatives which reduces the demand and the price. Or they just stop paying and it takes you 6 months to evict them. Or your good area sees the 3 big employers leave and your town shrinks and property values collapse.

In general I will agree that real estate can work out very well. Figuring out the risks though is a lot harder and they tend to be very concentrated in one local. The odds of the risks showing up is low but when they do, they can be really bad. And of course you are running a bussiness which might not be something you want to be doing at 80.

Da5id
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Re: The 4% rule DOES fail but still makes sense!

Post by Da5id » Wed Nov 15, 2017 3:06 pm

flyingaway wrote:
Wed Nov 15, 2017 3:00 pm
I also have a few friends who have rentals and I agree that it might be a good income source in retirement.

But I consider managing rentals as a part-time job and I don't want to do that. I still remember one of my friends asked me to help him
rent a truck and move a new refrigerator into his rental house to replace the broken one.
Not to mention the possible joy of having to evict non-paying tenants in a state where the tenants have lots of lots of rights (if one lives in such a state). Direct ownership of rentals can indeed be quite lucrative, but it is a part time job where you are always on call unless you use a management company or such...

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tadamsmar
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Re: The 4% rule DOES fail but still makes sense!

Post by tadamsmar » Wed Nov 15, 2017 3:23 pm

randomguy wrote:
Tue Nov 14, 2017 4:02 pm
Note the portfolio is expected to survive the 20% drop so the fact the odds go to 100% isn't the big issue. What the 4% rule and the like don't do is factor in the changes of odds of having a 20% drop followed by another 20% drop and so on. The valuation argument simplifies to something like after a 20% drop, the SWR goes from 4% to 5% because of higher expected returns. But these type of estimates are always pretty bad. Go back and look at the 10 year stock market predications for the past 20 years and see how accurate they have been.
I don't think that is the proper analysis.

In the Trinity Study, 4% of your initial nest egg at retirement inflation adjusted could be "safely" withdrawn each year (safely in that this had a low failure rate). This is base on a back-test that included market drops right after retirement.

So, after the first year, the withdrawal rate was an inflation-adjusted dollar value, not a percentage of your current remaining nest egg.

Now if you rethought the whole thing after a large initial drop, the safe withdrawal rate would not be as safe as it was a year ago.

It's just a planning tool. All you know is your initial nest egg when you retire, you have to make decisions based on that.

The whole thing is not based on the idea of higher expected returns after a drop. It's based on the idea that market drops were baked into the cake in the first place, if you believe the back-test is a good projection for the future.

PS: The Trinity Study used the US stocks which just happen to be one of the best performing national markets of the Twentieth Century. The results might be different if they had not picked such a plump cherry.

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Re: The 4% rule DOES fail but still makes sense!

Post by randomguy » Wed Nov 15, 2017 3:46 pm

tadamsmar wrote:
Wed Nov 15, 2017 3:23 pm
randomguy wrote:
Tue Nov 14, 2017 4:02 pm
Note the portfolio is expected to survive the 20% drop so the fact the odds go to 100% isn't the big issue. What the 4% rule and the like don't do is factor in the changes of odds of having a 20% drop followed by another 20% drop and so on. The valuation argument simplifies to something like after a 20% drop, the SWR goes from 4% to 5% because of higher expected returns. But these type of estimates are always pretty bad. Go back and look at the 10 year stock market predications for the past 20 years and see how accurate they have been.
I don't think that is the proper analysis.

In the Trinity Study, 4% of your initial nest egg at retirement inflation adjusted could be "safely" withdrawn each year (safely in that this had a low failure rate). This is base on a back-test that included market drops right after retirement.

So, after the first year, the withdrawal rate was an inflation-adjusted dollar value, not a percentage of your current remaining nest egg.

Now if you rethought the whole thing after a large initial drop, the safe withdrawal rate would not be as safe as it was a year ago.

It's just a planning tool. All you know is your initial nest egg when you retire, you have to make decisions based on that.

The whole thing is not based on the idea of higher expected returns after a drop. It's based on the idea that market drops were baked into the cake in the first place, if you believe the back-test is a good projection for the future.

PS: The Trinity Study used the US stocks which just happen to be one of the best performing national markets of the Twentieth Century. The results might be different if they had not picked such a plump cherry.
Look at the valuation papers that have come out since then. The 4% rule ignores prior conditions (i.e. 1929 and 1981 are the same as far as it is concerned when predicting results) but there have been studies since then that try to factor them in. Part of the reason for those papers is because of the absurd case of having significantly less money to spend after market drop. Now we can debate forever how much valuations affect future performance. A lot of people here are fine with the idea that high valuations now will give lower returns going forward. A lot fewer (and I include my self in that group) are willing to take the next step and say with lower valuations, you should expect higher returns.

And yes the trinity is US only. If you use a diversified portfolio (I think the data only goes back to 1950), the SWR goes up to about 4.5% due to internationals outperformance in the 70s. Throw in TIPs, SV, gold, and whatever else you like, you get different results also.

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Re: The 4% rule DOES fail but still makes sense!

Post by snackdog » Wed Nov 15, 2017 4:16 pm

The good news is that nobody, even in the US, is likely to *need* $100,000 or more every year for 30+ years. If things get rough, you will cut back. Nobody will run out of money. There is a huge discretionary portion in $100,000/yr. My grandfather started his retirement flying first class. He later cut back, in his mid 80s, to economy. He still had plenty of money considering how little he spent from ages 85-99. It gets harder to spend money on travel, toys, fine dining after age 85 or so because one tends to lose interest in such things.

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Re: The 4% rule DOES fail but still makes sense!

Post by WanderingDoc » Wed Nov 15, 2017 4:50 pm

flyingaway wrote:
Wed Nov 15, 2017 3:00 pm
WanderingDoc wrote:
Wed Nov 15, 2017 2:51 pm
I think the solution is to accumulate $8K/mo. in rental income. In my experience and that of all my colleagues, your rental income will only grow over time (as rent growth tends to outpace expenses in good areas), also I legally pay $0 tax on rental real estate income.

You also have the bonus of that $8K/mo. jumping to $15-20K/mo. in 15-30 years when mortgages are paid off. And, people still need a place to live in a recession. So when your total real estate portfolio value drops, you still have INCOME coming in. You don't have to worry about what the U.S. economy does, you have selected specific properties in specific submarkets with solid fundamentals.
I also have a few friends who have rentals and I agree that it might be a good income source in retirement.

But I consider managing rentals as a part-time job and I don't want to do that. I still remember one of my friends asked me to help him
rent a truck and move a new refrigerator into his rental house to replace the broken one.
Well, your friends are just dabbling in real estate then. I own properties which are professionally managed and some are self-managed. Even in the self managed ones, if an appliance goes its just a single phone call to Lowe's or Home Depot. I spend 2-3 hours per month across my entire RE portfolio. I spend more time than that on this forum 8-) To this day I have never picked up a hammer or moved an appliance. I don't even do that in my own house, let alone a rental.

Until your friend realizes what his time is worth, he will continue to spend time on tasks that are easily outsourced.
I'm not looking to get rich quick (crypto), I'm not looking to get rich slow (index funds).. I'm looking to get rich, for sure (real estate).

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Re: The 4% rule DOES fail but still makes sense!

Post by latesaver » Wed Nov 15, 2017 5:16 pm


No matter how much money you saved, you still need to know how much you can spend and how much you want to withdraw each year.
To take this to the extreme, are you saying that Bill Gates or Warren Buffet "needs" to know how much he can spend/withdraw each year?

my point is that for a family that spends $80-100K/year; earns $500K+ per year; and pulls the trigger at a $5M nest egg (for example), i don't think they need to multiply $5M by x% and pull that $ out of the market/bank.

unless they decide to get into luxury yachting i suppose.

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Re: The 4% rule DOES fail but still makes sense!

Post by flyingaway » Wed Nov 15, 2017 11:50 pm

WanderingDoc wrote:
Wed Nov 15, 2017 4:50 pm
flyingaway wrote:
Wed Nov 15, 2017 3:00 pm
WanderingDoc wrote:
Wed Nov 15, 2017 2:51 pm
I think the solution is to accumulate $8K/mo. in rental income. In my experience and that of all my colleagues, your rental income will only grow over time (as rent growth tends to outpace expenses in good areas), also I legally pay $0 tax on rental real estate income.

You also have the bonus of that $8K/mo. jumping to $15-20K/mo. in 15-30 years when mortgages are paid off. And, people still need a place to live in a recession. So when your total real estate portfolio value drops, you still have INCOME coming in. You don't have to worry about what the U.S. economy does, you have selected specific properties in specific submarkets with solid fundamentals.
I also have a few friends who have rentals and I agree that it might be a good income source in retirement.

But I consider managing rentals as a part-time job and I don't want to do that. I still remember one of my friends asked me to help him
rent a truck and move a new refrigerator into his rental house to replace the broken one.
Well, your friends are just dabbling in real estate then. I own properties which are professionally managed and some are self-managed. Even in the self managed ones, if an appliance goes its just a single phone call to Lowe's or Home Depot. I spend 2-3 hours per month across my entire RE portfolio. I spend more time than that on this forum 8-) To this day I have never picked up a hammer or moved an appliance. I don't even do that in my own house, let alone a rental.

Until your friend realizes what his time is worth, he will continue to spend time on tasks that are easily outsourced.
He solde his rental house after 4 years.

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Re: The 4% rule DOES fail but still makes sense!

Post by flyingaway » Wed Nov 15, 2017 11:52 pm

latesaver wrote:
Wed Nov 15, 2017 5:16 pm

No matter how much money you saved, you still need to know how much you can spend and how much you want to withdraw each year.
To take this to the extreme, are you saying that Bill Gates or Warren Buffet "needs" to know how much he can spend/withdraw each year?

my point is that for a family that spends $80-100K/year; earns $500K+ per year; and pulls the trigger at a $5M nest egg (for example), i don't think they need to multiply $5M by x% and pull that $ out of the market/bank.

unless they decide to get into luxury yachting i suppose.
I think different people with different portfolios play different games.

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Re: The 4% rule DOES fail but still makes sense!

Post by willthrill81 » Wed Nov 15, 2017 11:55 pm

Bengen now says that 4.5% is the "new" safe withdrawal rate because he advocates tilting somewhat toward small caps.

I might be mistaken, but I recall that Bengen originally called 4% the "safe withdrawal rate" because it never failed with the data he analyzed. I believe he used corporate bonds for the fixed income component, which is why some other backtesting done by others has indicated that 4% would have failed in a very few instances.

Regardless, a 4% plus CPI withdrawal plan is very conservative. Trying to get to 100% guaranteed success with no possibility of changes to your plan for the future is folly because it is impossible. Flexibility, to some extent, must be incorporated into any retirement income plan.
David Jay wrote:
Tue Nov 14, 2017 12:38 pm
TonyDAntonio wrote:
Tue Nov 14, 2017 11:48 am
I plan on the 4% never failing. I take 4% of whatever is left every year. 😀
Merriman's work suggests that 6% is a realistic withdrawal rate for a variable withdrawal strategy. I am planning on a 5% variable withdrawal strategy.
That's my plan as well. If you run into a bad sequence of returns, your withdrawals might get a bit small toward the end of a 30 year retirement, but when you consider that real spending drops 1-2% annually for retirees beginning at age 65, that's a perfectly acceptable compromise.

My biggest problem with the variable percentage withdrawal (VPW) plan espoused by many is that it increases your spending as you age. But the reality of the situation is that, at least on average, retirees' spending is the greatest early in their retirement and fairly steadily decreases until death.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: The 4% rule DOES fail but still makes sense!

Post by jalbert » Thu Nov 16, 2017 12:19 am

What about the following:
Need 100k/year, so desire to have 2.5M (4%) withdrawal.
Lets say right now in 2017, i hit 2.5M,so I could retire. Great.
Instead, lets say that i didn't check my balance. And we hit a bear market. And my 2.5M is now 2.0M
at 2.0 M in 2018 (after bear market) - my 4% won't give me 100k/year
So therefore, in one case I could retire in 2017, and in another, i couldn't.
That isn’t how the 4% rule works. The 4% withdrawal only applies to year 1. Subsequent year’s withdrawals are calculated as the previous year’s withdrawal amount, corrected for inflation (or deflation).

It is true that if you get unlucky and experience a steep decline in portfolio value in the first year of retirement, the probability of success of the withdrawal strategy from that point forward will be substantially lower than it was at the start of retirement, given the sharp drop in value. Retirees would do well to make adjustments if that happened, whether reducing spending or finding compensated work to reduce withdrawals.

Another shortcoming of the 4% rule is it assumes that spending needs and taxes on withdrawals are constant in real terms from year to year. Untargeted expenses, say the 10% or higher deductible on an earthquake insurance claim might require larger withdrawals.
Risk is not a guarantor of return.

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Re: The 4% rule DOES fail but still makes sense!

Post by David Scubadiver » Thu Nov 16, 2017 7:44 am

Da5id wrote:
Tue Nov 14, 2017 3:39 pm
TheTimeLord wrote:
Tue Nov 14, 2017 3:25 pm
Still waiting for the first Boglehead thread to claim an negative withdrawal rate is unsafe because it causes an increase in taxes.

Distracting animated gif removed by Mod Mel. (They're not allowed.)
If it weren't for beating dead horses (4% rule, international or not, home ownership, etc) what would there be to talk about :) Truly nothing is new under the sun.
That is because the forum rules only permit discussing about actionable ideas and not the theoretical outcomes of proposed legislation.

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Re: The 4% rule DOES fail but still makes sense!

Post by tennisplyr » Thu Nov 16, 2017 7:48 am

Have common sense and judgement been totally taken off the table?
Those who move forward with a happy spirit will find that things always work out.

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Re: The 4% rule DOES fail but still makes sense!

Post by latesaver » Thu Nov 16, 2017 7:54 am

tennisplyr wrote:
Thu Nov 16, 2017 7:48 am
Have common sense and judgement been totally taken off the table?
Affirmative

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Re: The 4% rule DOES fail but still makes sense!

Post by Da5id » Thu Nov 16, 2017 8:06 am

David Scubadiver wrote:
Thu Nov 16, 2017 7:44 am
Da5id wrote:
Tue Nov 14, 2017 3:39 pm
TheTimeLord wrote:
Tue Nov 14, 2017 3:25 pm
Still waiting for the first Boglehead thread to claim an negative withdrawal rate is unsafe because it causes an increase in taxes.

Distracting animated gif removed by Mod Mel. (They're not allowed.)
If it weren't for beating dead horses (4% rule, international or not, home ownership, etc) what would there be to talk about :) Truly nothing is new under the sun.
That is because the forum rules only permit discussing about actionable ideas and not the theoretical outcomes of proposed legislation.
I wasn't actually objecting to that, I quite like the forum rules myself. And within the constraints there are still new takes on things occasionally. Some topics do get repetitive though.

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Re: The 4% rule DOES fail but still makes sense!

Post by longinvest » Thu Nov 16, 2017 9:02 am

Willthrill81,
willthrill81 wrote:
Wed Nov 15, 2017 11:55 pm
My biggest problem with the variable percentage withdrawal (VPW) plan espoused by many is that it increases your spending as you age.
This is simply an artefact of looking at some (but not all) backtests. In other words, someone might get this impression of increasing withdrawals when backtesting VPW over a period of time when the portfolio's average return was higher than VPW's internal growth trend. But, if one selected a period when the portfolio's average return was lower than VPW's internal growth trend, instead, the reverse would happen.

Here's a backtest which exhibits the reverse (retirement at 65 in 1946 with a 25% stocks / 75% bonds portfolio, the yellow line adds $10K in Social Security and a $10K fixed pension):

Image

One can see how the red line, representing VPW portfolio withdrawals adjusted to inflation, get down over time, while fluctuating with inflation as well as bond and stock markets.

Unfortunately, VPW is not magic; it cannot predict future returns. Was it does, though, is provide reasonable withdrawals adapted to actual market returns so that the portfolio is never prematurely depleted. This is a pretty desirable feature (representing a 100% success rate, for those used to the SWR terminology).

VPW is best used in conjunction with guaranteed base income from Social Security, pensions, and, if necessary, inflation-indexed Single Premium Immediate Annuity (SPIA).
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Re: The 4% rule DOES fail but still makes sense!

Post by tadamsmar » Thu Nov 16, 2017 10:12 am

tennisplyr wrote:
Thu Nov 16, 2017 7:48 am
Have common sense and judgement been totally taken off the table?
The 4% rule is just a simplified model for projections. It's not common sense if you try to follow it slavishly.

It's common sense that if your plan for 4% of your initial nest egg inflation adjusted, then you will at least be able to muddle through, and probably sail through.

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Re: The 4% rule DOES fail but still makes sense!

Post by willthrill81 » Thu Nov 16, 2017 11:07 am

longinvest wrote:
Thu Nov 16, 2017 9:02 am
Willthrill81,
willthrill81 wrote:
Wed Nov 15, 2017 11:55 pm
My biggest problem with the variable percentage withdrawal (VPW) plan espoused by many is that it increases your spending as you age.
This is simply an artefact of looking at some (but not all) backtests. In other words, someone might get this impression of increasing withdrawals when backtesting VPW over a period of time when the portfolio's average return was higher than VPW's internal growth trend. But, if one selected a period when the portfolio's average return was lower than VPW's internal growth trend, instead, the reverse would happen.

Here's a backtest which exhibits the reverse (retirement at 65 in 1946 with a 25% stocks / 75% bonds portfolio, the yellow line adds $10K in Social Security and a $10K fixed pension):

Image

One can see how the red line, representing VPW portfolio withdrawals adjusted to inflation, get down over time, while fluctuating with inflation as well as bond and stock markets.
Okay, that makes sense.
longinvest wrote:
Thu Nov 16, 2017 9:02 am
Was it does, though, is provide reasonable withdrawals adapted to actual market returns so that the portfolio is never prematurely depleted. This is a pretty desirable feature (representing a 100% success rate, for those used to the SWR terminology).
I can entirely empathize with the premise behind VPW and think that some type of variability in retirement income is a needed feature. I've not heard of anyone ever strictly implementing the "4% plus CPI" because virtually everyone feels that it is necessary to adapt to market conditions, even if the historical record has shown that such adaptation is unneeded to avoid failure.

I just see little, if any, benefit of the VPW method over a more-or-less fixed percentage withdrawal plan. By definition, these also have a 100% success rate, though the withdrawals could become low in later years if the sequence of returns is very poor.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: The 4% rule DOES fail but still makes sense!

Post by Da5id » Thu Nov 16, 2017 11:35 am

willthrill81 wrote:
Thu Nov 16, 2017 11:07 am
I just see little, if any, benefit of the VPW method over a more-or-less fixed percentage withdrawal plan. By definition, these also have a 100% success rate, though the withdrawals could become low in later years if the sequence of returns is very poor.
I'm not sure what spending plan I'll be using, though the time may be coming soon. But in any case, I see some value in VPW. It gives some guidance for the question "how much should one trim spending in the face of, say, a 30% market decline". One can cut spending by seat of pants of course, or just keep spending and have faith in the 4% rule (which few would do I think). But if one does it by seat of pants and is feeling nervous, maybe having something formulaic, like VPW, can be reassuring?

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Re: The 4% rule DOES fail but still makes sense!

Post by flyingaway » Thu Nov 16, 2017 12:15 pm

If I could withdraw safely between 2% and 4%, I would focus more of my time on finding better ways of enjoying my life, i.e., spending money.

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Re: The 4% rule DOES fail but still makes sense!

Post by randomguy » Thu Nov 16, 2017 12:56 pm

willthrill81 wrote:
Thu Nov 16, 2017 11:07 am

I can entirely empathize with the premise behind VPW and think that some type of variability in retirement income is a needed feature. I've not heard of anyone ever strictly implementing the "4% plus CPI" because virtually everyone feels that it is necessary to adapt to market conditions, even if the historical record has shown that such adaptation is unneeded to avoid failure.

I just see little, if any, benefit of the VPW method over a more-or-less fixed percentage withdrawal plan. By definition, these also have a 100% success rate, though the withdrawals could become low in later years if the sequence of returns is very poor.
VPW is far too aggressive at cutting spending as a result of market conditions which is why you tend to end up with huge sums at the end. On the upside though it is equally aggressive at upping spending in good markets. There are a zillion other variable spending schemes out there so you can pick one that meets your needs. They all have pluses and minsus's. You can also take some money out and say you are going to spend that in the first 10 years of retirement (i.e. for a 65 year old, those will be the most active ones) and plan on reduced spending later in life.

The benefits of the adaptation over the strict 4% SWR is that you can start with a 5% SWR or so as long and you don't end up in the bottom 20% of cases, you will end up with more money to spend during retirement (but a smaller estate). The downside is you might end up with a 3% or so SWR if you happen to retire into one of those bad times.

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Re: The 4% rule DOES fail but still makes sense!

Post by longinvest » Thu Nov 16, 2017 2:30 pm

randomguy wrote:
Thu Nov 16, 2017 12:56 pm
VPW is far too aggressive at cutting spending as a result of market conditions which is why you tend to end up with huge sums at the end.
(I'll comment the underlined statement later in this post)

I don't share this opinion. If I look again at the 1946 25/75 stocks/bonds bactest, I have trouble seeing how the retiree would have fared better by significantly increasing nominal withdrawals (to keep inflation-adjusted withdrawals afloat) during the 1946-1955 period and further increasing nominal withdrawals after 1974 (to avoid reducing inflation-adjusted withdrawals), without prematurely depleting the portfolio:
longinvest wrote:
Thu Nov 16, 2017 9:02 am
Here's a backtest which exhibits the reverse (retirement at 65 in 1946 with a 25% stocks / 75% bonds portfolio, the yellow line adds $10K in Social Security and a $10K fixed pension):

Image

One can see how the red line, representing VPW portfolio withdrawals adjusted to inflation, get down over time, while fluctuating with inflation as well as bond and stock markets.
It is interesting to see how nominal withdrawals (the blue line) kept increasing in most years of the backtest, even though this increase was sometimes slower than inflation. This is the amount that the retiree would have see deposited yearly into his bank account, in addition to Social Security and his pension. By shifting some spending to later years, one would probably have fared quite well, even in the 1946-1955 period, without suffering much anxiety thanks to the soothing behavior of nominal withdrawals. I think that it is a mistake to look solely at inflation-adjusted backtests. I think that both nominal and inflation-adjusted backtests are important. Nominal backtests give a good idea of withdrawals volatility. Inflation-adjusted backtests give a good idea of withdrawals sustainability.

I don't know what the "huge sums at the end" refers to. As I've explained in my previous post, VPW delivers withdrawals which fluctuate with markets. If markets deliver higher average returns over one's retirement than its internal growth trend, there will be an overall increasing slope. If markets deliver lower average returns over one's retirement than its internal growth trend, there will be an overall decreasing slope (as illustrated with the above 1946 backtest).

Also, VPW actually depletes the portfolio with the last withdrawal at age 99. That's why VPW is best combined with lifelong non-portfolio income. It's also why our wiki's VPW page recommends revisiting one's retirement plan at age 80, if one is still alive. At that age, the payout rate of an inflation-indexed SPIA* is competitive with the VPW percentage; it is thus an appropriate age to convert part of the residual portfolio into lifelong inflation-indexed income allowing one to live well regardless of portfolio withdrawals.

* Single Premium Immediate Annuity.

I don't see the "huge sums at the end" with VPW. On the other hand, the vast majority of 4% SWR backtests do effectively deliver a huge portfolio at the end of the 30th year. In other words, in most 4% SWR backtests, a retiree would have died with an unspent fortune.
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Re: The 4% rule DOES fail but still makes sense!

Post by grok87 » Thu Nov 16, 2017 3:16 pm

I'm curious what folks think about this article.

https://www.manning-napier.com/Corporat ... Rules.aspx

It's more geared to endowments. But it shows that the standard 4% rule (the article uses 5%) may perform poorly in a stagflationary environment.
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Re: The 4% rule DOES fail but still makes sense!

Post by 1210sda » Thu Nov 16, 2017 3:21 pm

According to MC Retire, a monte carlo program by David Wilkinson (a colleague of Dr Bill Bernstein, I believe):

If you use a 95% success probability, 5% of the portfolios will fail.

The other 95% will succeed.

The 95th percentile (or the 6th percentile if you count the opposite way) will just make it.

The median portfolio will have about three times the initial amount at the end of the time horizon.

The top 5 portfolios will have about 10 times the initial amount at the end of the time horizon.

Even though all of them spent the same amount throughout their retirement.

1210

P.S. The amounts will vary based on the actual inputs that are used. But, the concept is the same.

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Re: The 4% rule DOES fail but still makes sense!

Post by longinvest » Thu Nov 16, 2017 3:32 pm

Grok,
grok87 wrote:
Thu Nov 16, 2017 3:16 pm
I'm curious what folks think about this article.

https://www.manning-napier.com/Corporat ... Rules.aspx

It's more geared to endowments. But it shows that the standard 4% rule (the article uses 5%) may perform poorly in a stagflationary environment.
About perpetual withdrawal methods, there was this thread:
Smooth perpetual withdrawal from risky assets [endowment fd].
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

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Re: The 4% rule DOES fail but still makes sense!

Post by randomguy » Thu Nov 16, 2017 4:36 pm

longinvest wrote:
Thu Nov 16, 2017 2:30 pm
randomguy wrote:
Thu Nov 16, 2017 12:56 pm
VPW is far too aggressive at cutting spending as a result of market conditions which is why you tend to end up with huge sums at the end.
(I'll comment the underlined statement later in this post)

I don't share this opinion. If I look again at the 1946 25/75 stocks/bonds bactest, I have trouble seeing how the retiree would have fared better by significantly increasing nominal withdrawals (to keep inflation-adjusted withdrawals afloat) during the 1946-1955 period and further increasing nominal withdrawals after 1974 (to avoid reducing inflation-adjusted withdrawals), without prematurely depleting the portfolio:

Run the numbers using 1972 and you will see a much different pattern.
Income at ages
75 28k
85 51k
95 70k

Don't you think that most retiree's would rather be spending 40k up to age 75 and only have say 50k at age 90? note the SWR for this period is above 4%. Now to some extent you need to be conservative to handle risk. VPW just goes way too far for my taste. And yes 1972 is about the worst for this scheme in the cuts all happen early in retirement and last a while. But the worst years are the ones we care about when planning. The good ones don't require any hard choices.

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Re: The 4% rule DOES fail but still makes sense!

Post by 1210sda » Thu Nov 16, 2017 4:58 pm

If someone could handle a low portfolio success probability say, 50% your SWR could be 6%. At a 33% success probability, SWR could be 7%.

The likelihood of having a large portfolio at the end and leaving too much money on the table is greatly reduced.

But many folks (most?) don't want to take that high a risk of running out of money.

1210

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Re: The 4% rule DOES fail but still makes sense!

Post by longinvest » Thu Nov 16, 2017 5:03 pm

Randomguy,

The main difference between the 1946 25/75 and the spreadsheet default 1972 50/50 backtest withdrawal stream shapes is the ending. 1946 ends up low while 1972 ends up high. I call this "the luck of the draw".

Knowing in advance how the portfolio will fare over the next 35 years requires a crystal ball which I don't possess, nor does VPW, unfortunately.

How could a withdrawal method distinguish between the necessity to cut withdrawals in inflation-adjusted terms, in 1948 but not in 1974, without a crystal ball? I just don't see how that could be done.

But, the nice thing is that one can actually go and buy lifelong stable inflation-indexed income. Inflation-indexed SPIAs exist and can be bought. Social Security (SS) exists and can be maximized by delaying it to age 70.

And, best of all, one can mostly address the need for relatively stable income and the need for enough liquidity by combining VPW withdrawals from a balanced portfolio with lifelong stable income (SS, pension if any, and inflation-indexed SPIA if necessary).
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

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