The 4% rule DOES fail but still makes sense!

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

Post by sambb » Sun Nov 19, 2017 9:54 am

doesnt any rule depend on inflation rates? 4% may not be adequate if inflation goes to 4%?

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

Post by dbr » Sun Nov 19, 2017 9:57 am

sambb wrote:
Sun Nov 19, 2017 9:54 am
doesnt any rule depend on inflation rates? 4% may not be adequate if inflation goes to 4%?
The amount withdrawn is indexed for inflation and the portfolio value is tracked in real dollars. That does not mean inflation cannot cause problems for a retiree. The historical worst year to retire, 1966, is partially so due to high inflation in the second decade of retirement combined with poor real returns for investments. The bull market in stocks starting in 1981 was fifteen years too late. 1982, however, seems to have been a really good year to retire.

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

Post by jefmafnl » Wed Nov 22, 2017 8:05 am

Many thanks to ArtsDoctor for this:

In order to answer your own questions, you'll need to understand the 1994 study on which the 4% SWR was originally calculated. Once you've actually looked into that study and subsequent studies, you'll see that there are many caveats. You can start with a variety of synopses but Michael Kitces does a reasonable job:

https://www.aicpa.org/interestareas/per ... ch2012.pdf

This is a great paper! Does anyone here know about an update, for instance, further work on whether "stacking" the adjustments to the "SWR" is valid?

J

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

Post by flyingaway » Wed Nov 22, 2017 9:20 am

jefmafnl wrote:
Wed Nov 22, 2017 8:05 am
Many thanks to ArtsDoctor for this:

In order to answer your own questions, you'll need to understand the 1994 study on which the 4% SWR was originally calculated. Once you've actually looked into that study and subsequent studies, you'll see that there are many caveats. You can start with a variety of synopses but Michael Kitces does a reasonable job:

https://www.aicpa.org/interestareas/per ... ch2012.pdf

This is a great paper! Does anyone here know about an update, for instance, further work on whether "stacking" the adjustments to the "SWR" is valid?

J
Michael Kitces recently had a conversation on reddit, in which he claimed that slightly higher than 4% withdrawal rate is safe.

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1210sda
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Re: The 4% rule DOES fail but still makes sense!

Post by 1210sda » Wed Nov 22, 2017 9:42 am

jefmafnl wrote:
Wed Nov 22, 2017 8:05 am
Many thanks to ArtsDoctor for this:

In order to answer your own questions, you'll need to understand the 1994 study on which the 4% SWR was originally calculated. Once you've actually looked into that study and subsequent studies, you'll see that there are many caveats. You can start with a variety of synopses but Michael Kitces does a reasonable job:

https://www.aicpa.org/interestareas/per ... ch2012.pdf

This is a great paper! Does anyone here know about an update, for instance, further work on whether "stacking" the adjustments to the "SWR" is valid?

J
When I click on the link., it takes me to "page not found" "We’re sorry. The page you requested cannot be found or was moved".. Huh??

1210

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

Post by OldSport » Wed Nov 22, 2017 10:03 am

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?
What asset allocation is this based on (%stocks/%bonds)? Are there index fund asset allocations where the 4% rule is less likely to fail?

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

Post by itstoomuch » Wed Nov 22, 2017 10:25 am

wrong thread
Last edited by itstoomuch on Wed Nov 22, 2017 12:34 pm, edited 1 time in total.
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dbr
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Re: The 4% rule DOES fail but still makes sense!

Post by dbr » Wed Nov 22, 2017 10:29 am

OldSport wrote:
Wed Nov 22, 2017 10:03 am


What asset allocation is this based on (%stocks/%bonds)? Are there index fund asset allocations where the 4% rule is less likely to fail?
The general answer to that is the rule does fail if there are not enough stocks. The cutoff normally observed is a falloff at and under about 30% stocks. There doesn't seem to be a clear maximum and it isn't horribly harmful to have all stocks. The case of an all TIPS ladder is interesting. At 0% real, as has been the case in some recent years, the withdrawal rate is 3.3%. This increases to 3.8% at 1.0% real interest. My guess is that at low enough interest rates you can't find an inflation indexed annuity that pays better than about 4%, but I don't know what is available now if one can even find a company that offers such a thing.

Is that the answer you were looking for?

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

Post by technovelist » Wed Nov 22, 2017 10:46 am

dbr wrote:
Wed Nov 22, 2017 10:29 am
OldSport wrote:
Wed Nov 22, 2017 10:03 am


What asset allocation is this based on (%stocks/%bonds)? Are there index fund asset allocations where the 4% rule is less likely to fail?
The general answer to that is the rule does fail if there are not enough stocks. The cutoff normally observed is a falloff at and under about 30% stocks. There doesn't seem to be a clear maximum and it isn't horribly harmful to have all stocks. The case of an all TIPS ladder is interesting. At 0% real, as has been the case in some recent years, the withdrawal rate is 3.3%. This increases to 3.8% at 1.0% real interest. My guess is that at low enough interest rates you can't find an inflation indexed annuity that pays better than about 4%, but I don't know what is available now if one can even find a company that offers such a thing.

Is that the answer you were looking for?
I just ran a quote at immediateannuities.com for an immediate annuity (starting 1/1/2018) for a male aged 68, and it says that Principal will pay out at a starting 4.49% rate on a CPI-indexed annuity.

So it is still possible at the moment.
In theory, theory and practice are identical. In practice, they often differ.

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willthrill81
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Re: The 4% rule DOES fail but still makes sense!

Post by willthrill81 » Wed Nov 22, 2017 10:51 am

technovelist wrote:
Wed Nov 22, 2017 10:46 am
dbr wrote:
Wed Nov 22, 2017 10:29 am
OldSport wrote:
Wed Nov 22, 2017 10:03 am


What asset allocation is this based on (%stocks/%bonds)? Are there index fund asset allocations where the 4% rule is less likely to fail?
The general answer to that is the rule does fail if there are not enough stocks. The cutoff normally observed is a falloff at and under about 30% stocks. There doesn't seem to be a clear maximum and it isn't horribly harmful to have all stocks. The case of an all TIPS ladder is interesting. At 0% real, as has been the case in some recent years, the withdrawal rate is 3.3%. This increases to 3.8% at 1.0% real interest. My guess is that at low enough interest rates you can't find an inflation indexed annuity that pays better than about 4%, but I don't know what is available now if one can even find a company that offers such a thing.

Is that the answer you were looking for?
I just ran a quote at immediateannuities.com for an immediate annuity (starting 1/1/2018) for a male aged 68, and it says that Principal will pay out at a starting 4.49% rate on a CPI-indexed annuity.

So it is still possible at the moment.
I'm not seeing an option on immediateannuities.com to select a CPI adjustment. They do have some options for indexed annuities, but I'm not seeing any that are indexed to inflation.
“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

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

Post by technovelist » Wed Nov 22, 2017 11:04 am

willthrill81 wrote:
Wed Nov 22, 2017 10:51 am
technovelist wrote:
Wed Nov 22, 2017 10:46 am
dbr wrote:
Wed Nov 22, 2017 10:29 am
OldSport wrote:
Wed Nov 22, 2017 10:03 am


What asset allocation is this based on (%stocks/%bonds)? Are there index fund asset allocations where the 4% rule is less likely to fail?
The general answer to that is the rule does fail if there are not enough stocks. The cutoff normally observed is a falloff at and under about 30% stocks. There doesn't seem to be a clear maximum and it isn't horribly harmful to have all stocks. The case of an all TIPS ladder is interesting. At 0% real, as has been the case in some recent years, the withdrawal rate is 3.3%. This increases to 3.8% at 1.0% real interest. My guess is that at low enough interest rates you can't find an inflation indexed annuity that pays better than about 4%, but I don't know what is available now if one can even find a company that offers such a thing.

Is that the answer you were looking for?
I just ran a quote at immediateannuities.com for an immediate annuity (starting 1/1/2018) for a male aged 68, and it says that Principal will pay out at a starting 4.49% rate on a CPI-indexed annuity.

So it is still possible at the moment.
I'm not seeing an option on immediateannuities.com to select a CPI adjustment. They do have some options for indexed annuities, but I'm not seeing any that are indexed to inflation.
You have to fill out the form that says "Calculate My FREE Annuity Quote Now!", then hit "get my quote". On the next page, there is a dropdown that says "Select cost of living adjustment". One of the options on that dropdown is "CPI".
In theory, theory and practice are identical. In practice, they often differ.

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willthrill81
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Re: The 4% rule DOES fail but still makes sense!

Post by willthrill81 » Wed Nov 22, 2017 11:17 am

technovelist wrote:
Wed Nov 22, 2017 11:04 am
willthrill81 wrote:
Wed Nov 22, 2017 10:51 am
technovelist wrote:
Wed Nov 22, 2017 10:46 am
dbr wrote:
Wed Nov 22, 2017 10:29 am
OldSport wrote:
Wed Nov 22, 2017 10:03 am


What asset allocation is this based on (%stocks/%bonds)? Are there index fund asset allocations where the 4% rule is less likely to fail?
The general answer to that is the rule does fail if there are not enough stocks. The cutoff normally observed is a falloff at and under about 30% stocks. There doesn't seem to be a clear maximum and it isn't horribly harmful to have all stocks. The case of an all TIPS ladder is interesting. At 0% real, as has been the case in some recent years, the withdrawal rate is 3.3%. This increases to 3.8% at 1.0% real interest. My guess is that at low enough interest rates you can't find an inflation indexed annuity that pays better than about 4%, but I don't know what is available now if one can even find a company that offers such a thing.

Is that the answer you were looking for?
I just ran a quote at immediateannuities.com for an immediate annuity (starting 1/1/2018) for a male aged 68, and it says that Principal will pay out at a starting 4.49% rate on a CPI-indexed annuity.

So it is still possible at the moment.
I'm not seeing an option on immediateannuities.com to select a CPI adjustment. They do have some options for indexed annuities, but I'm not seeing any that are indexed to inflation.
You have to fill out the form that says "Calculate My FREE Annuity Quote Now!", then hit "get my quote". On the next page, there is a dropdown that says "Select cost of living adjustment". One of the options on that dropdown is "CPI".
Thanks!

Those considering a withdrawal rate less than 3% would probably be well served to floor their income with a SPIA paying 4.5%, in addition to SS, and then implementing a higher withdrawal rate for the remainder of their portfolio.
“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

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

Post by KSActuary » Wed Nov 22, 2017 11:19 am

Using supposed random number streams to create scenarios using historical returns/relationships from which someone can deduce a "success" rate is a stretch. People look at the Nest Egg calculator at Vanguard and try to "improve" their odds by changing withdrawals and/or allocations like its some kind of college psych study. I always point to the possible success streams used in a calculator like that and suggest that someone starting with $2.5 million and ending up with $10.0 million will most likely change their behavior during the life period and invalidate the study itself.

Simplicity and conservatism are what make retirement enjoyable.

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

Post by technovelist » Wed Nov 22, 2017 11:34 am

willthrill81 wrote:
Wed Nov 22, 2017 11:17 am
technovelist wrote:
Wed Nov 22, 2017 11:04 am
willthrill81 wrote:
Wed Nov 22, 2017 10:51 am
technovelist wrote:
Wed Nov 22, 2017 10:46 am
dbr wrote:
Wed Nov 22, 2017 10:29 am


The general answer to that is the rule does fail if there are not enough stocks. The cutoff normally observed is a falloff at and under about 30% stocks. There doesn't seem to be a clear maximum and it isn't horribly harmful to have all stocks. The case of an all TIPS ladder is interesting. At 0% real, as has been the case in some recent years, the withdrawal rate is 3.3%. This increases to 3.8% at 1.0% real interest. My guess is that at low enough interest rates you can't find an inflation indexed annuity that pays better than about 4%, but I don't know what is available now if one can even find a company that offers such a thing.

Is that the answer you were looking for?
I just ran a quote at immediateannuities.com for an immediate annuity (starting 1/1/2018) for a male aged 68, and it says that Principal will pay out at a starting 4.49% rate on a CPI-indexed annuity.

So it is still possible at the moment.
I'm not seeing an option on immediateannuities.com to select a CPI adjustment. They do have some options for indexed annuities, but I'm not seeing any that are indexed to inflation.
You have to fill out the form that says "Calculate My FREE Annuity Quote Now!", then hit "get my quote". On the next page, there is a dropdown that says "Select cost of living adjustment". One of the options on that dropdown is "CPI".
Thanks!

Those considering a withdrawal rate less than 3% would probably be well served to floor their income with a SPIA paying 4.5%, in addition to SS, and then implementing a higher withdrawal rate for the remainder of their portfolio.
Of course SPIA payout rates aren't the same as withdrawal rates from an investment portfolio (as they are partly your own money coming back). But if you don't care whether you leave a legacy, then a "real" (inflation-adjusted) life annuity is about as close as you can get to guaranteeing your standard of living for the rest of your life. The fact that you are getting some of your own money back is also good tax-wise.
In theory, theory and practice are identical. In practice, they often differ.

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

Post by flyingaway » Wed Nov 22, 2017 11:35 am

KSActuary wrote:
Wed Nov 22, 2017 11:19 am
Using supposed random number streams to create scenarios using historical returns/relationships from which someone can deduce a "success" rate is a stretch. People look at the Nest Egg calculator at Vanguard and try to "improve" their odds by changing withdrawals and/or allocations like its some kind of college psych study. I always point to the possible success streams used in a calculator like that and suggest that someone starting with $2.5 million and ending up with $10.0 million will most likely change their behavior during the life period and invalidate the study itself.

Simplicity and conservatism are what make retirement enjoyable.
Yes, I prefer NOT to have $10MM at the end of my retirement. I always use the 4% rule as a number to tell me how much I have is enough, and that is the time I claim financial independence.

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

Post by dbr » Wed Nov 22, 2017 11:39 am

willthrill81 wrote:
Wed Nov 22, 2017 11:17 am

Those considering a withdrawal rate less than 3% would probably be well served to floor their income with a SPIA paying 4.5%, in addition to SS, and then implementing a higher withdrawal rate for the remainder of their portfolio.
Otar considers this decision in his book. The gist of the comment is that for low withdrawal rates there isn't enough risk of running out of money to justify an SPIA, probably even inflation adjusted. For high withdrawal rates an SPIA doesn't save the retiree. For those on the cusp at around 4% an SPIA may be very helpful. One should first consider the effect of already having SS or other pensions/annuities.

It is always a consideration that a fixed income stream is not a good match for possibly variable expenses, especially those increasing at the end of life. So there is a lot to trade-off and balance.

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willthrill81
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Re: The 4% rule DOES fail but still makes sense!

Post by willthrill81 » Wed Nov 22, 2017 11:49 am

dbr wrote:
Wed Nov 22, 2017 11:39 am
willthrill81 wrote:
Wed Nov 22, 2017 11:17 am

Those considering a withdrawal rate less than 3% would probably be well served to floor their income with a SPIA paying 4.5%, in addition to SS, and then implementing a higher withdrawal rate for the remainder of their portfolio.
Otar considers this decision in his book. The gist of the comment is that for low withdrawal rates there isn't enough risk of running out of money to justify an SPIA, probably even inflation adjusted. For high withdrawal rates an SPIA doesn't save the retiree. For those on the cusp at around 4% an SPIA may be very helpful. One should first consider the effect of already having SS or other pensions/annuities.

It is always a consideration that a fixed income stream is not a good match for possibly variable expenses, especially those increasing at the end of life. So there is a lot to trade-off and balance.
I think that a SPIA might be a good fit for those who are 'nervous nellies' about withdrawing 4% (or close) from their portfolio. Todd Tresidder noted that many of the retirees he consulted had a poverty mentality, where they were afraid to spend anything from their portfolio for fear of depleting it. He noted that many of these people were well served by investing some (Vanguard says that most of their customers who buy annuities do so with only 20% of their portfolio) into a SPIA so that they know that their basic living expenses are covered. This helped them sleep better and be willing to spend more of their portfolio on what they wanted.

But this is a very individual decision. YMMV.
“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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Hyperborea
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Re: The 4% rule DOES fail but still makes sense!

Post by Hyperborea » Wed Nov 22, 2017 1:04 pm

dbr wrote:
Wed Nov 22, 2017 10:29 am
OldSport wrote:
Wed Nov 22, 2017 10:03 am


What asset allocation is this based on (%stocks/%bonds)? Are there index fund asset allocations where the 4% rule is less likely to fail?
The general answer to that is the rule does fail if there are not enough stocks. The cutoff normally observed is a falloff at and under about 30% stocks. There doesn't seem to be a clear maximum and it isn't horribly harmful to have all stocks. The case of an all TIPS ladder is interesting. At 0% real, as has been the case in some recent years, the withdrawal rate is 3.3%. This increases to 3.8% at 1.0% real interest. My guess is that at low enough interest rates you can't find an inflation indexed annuity that pays better than about 4%, but I don't know what is available now if one can even find a company that offers such a thing.

Is that the answer you were looking for?

The %age in stocks needs to increase as the probable length of retirement increases beyond the Trinity study 30 years. If you retire younger than 65 or so you need to be thinking about longer durations. For a 4% WR to have a reasonable success rate you need to be near or at 100% equity for a 40+ year retirement and longer periods have too much risk of failure even then. If you can pull back to 3.5% you can get away with 75% equities for 40 years. A couple retiring at 55 has a 10% chance of at least one of them being alive in 42 years.

The usual 4% WR plans being safe for 30 years also include as success cases where the portfolio goes to zero the day after 30 years. If you are too conservative in your portfolio allocation then those zero after 30 years situations are even more likely. Even a 65 year old couple has a 10% chance that one is alive at 30+ years. What are you going to do if the portfolio goes to zero at 30 years + 1 day?

Reducing spending as the portfolio declines is one option but so is holding more equity. Maybe not 100% but certainly more like 50% to 75% even for the "short" 30 year retirements.

https://earlyretirementnow.com/2016/12/ ... t-1-intro/

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

Post by EnjoyIt » Wed Nov 22, 2017 2:57 pm

Here is what I came up with:

1) The 4% rule is not a rule but a guideline.
2) Some people are insecure with the 4% guideline and are willing to decrease their guideline to something lower through working longer.
3) No one is a robot and therefor spending will vary over the years.
4) Anyone who has been able to save 25+ years in expenses while working and living below there means will have a very very low likelihood of them running out of money in retirement regardless of the size of their portfolio or sequence of events.
5) Many people and myself included have some irrational fears regarding early retirement and future prospects.
6) Some people with a strong work ethic can't understand why someone would choose to not work.
7) Early retirees ignore Social Security in their calculations but SS may play a significant role in portfolio survival.

Am I missing anything?
Last edited by EnjoyIt on Wed Nov 22, 2017 3:05 pm, edited 1 time in total.

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

Post by EnjoyIt » Wed Nov 22, 2017 3:04 pm

Hyperborea wrote:
Wed Nov 22, 2017 1:04 pm
dbr wrote:
Wed Nov 22, 2017 10:29 am
OldSport wrote:
Wed Nov 22, 2017 10:03 am


What asset allocation is this based on (%stocks/%bonds)? Are there index fund asset allocations where the 4% rule is less likely to fail?
The general answer to that is the rule does fail if there are not enough stocks. The cutoff normally observed is a falloff at and under about 30% stocks. There doesn't seem to be a clear maximum and it isn't horribly harmful to have all stocks. The case of an all TIPS ladder is interesting. At 0% real, as has been the case in some recent years, the withdrawal rate is 3.3%. This increases to 3.8% at 1.0% real interest. My guess is that at low enough interest rates you can't find an inflation indexed annuity that pays better than about 4%, but I don't know what is available now if one can even find a company that offers such a thing.

Is that the answer you were looking for?

The %age in stocks needs to increase as the probable length of retirement increases beyond the Trinity study 30 years. If you retire younger than 65 or so you need to be thinking about longer durations. For a 4% WR to have a reasonable success rate you need to be near or at 100% equity for a 40+ year retirement and longer periods have too much risk of failure even then. If you can pull back to 3.5% you can get away with 75% equities for 40 years. A couple retiring at 55 has a 10% chance of at least one of them being alive in 42 years.

The usual 4% WR plans being safe for 30 years also include as success cases where the portfolio goes to zero the day after 30 years. If you are too conservative in your portfolio allocation then those zero after 30 years situations are even more likely. Even a 65 year old couple has a 10% chance that one is alive at 30+ years. What are you going to do if the portfolio goes to zero at 30 years + 1 day?

Reducing spending as the portfolio declines is one option but so is holding more equity. Maybe not 100% but certainly more like 50% to 75% even for the "short" 30 year retirements.

https://earlyretirementnow.com/2016/12/ ... t-1-intro/
I believe those calculations ignore SS. A couple retiring in their 50s will eventually be able to collect some form of fixed income from the government. Depending on a family's spending SS can end up being a substantial boon. A family who was able to save enough and live on $100k/yr will likely be getting at least $25k in SS making the likelihood of portfolio survival much higher.

Equally many people I think ignore what healthcare spending will likely look like. Expenses will likely rise till medicare kicks in followed by a swift decrease that year. Expenses will then likely rise substantially in the last few years of life.

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

Post by flyingaway » Wed Nov 22, 2017 3:47 pm

EnjoyIt wrote:
Wed Nov 22, 2017 2:57 pm
Here is what I came up with:

1) The 4% rule is not a rule but a guideline.
2) Some people are insecure with the 4% guideline and are willing to decrease their guideline to something lower through working longer.
3) No one is a robot and therefor spending will vary over the years.
4) Anyone who has been able to save 25+ years in expenses while working and living below there means will have a very very low likelihood of them running out of money in retirement regardless of the size of their portfolio or sequence of events.
5) Many people and myself included have some irrational fears regarding early retirement and future prospects.
6) Some people with a strong work ethic can't understand why someone would choose to not work.
7) Early retirees ignore Social Security in their calculations but SS may play a significant role in portfolio survival.

Am I missing anything?
A good summary!

grok87
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Re: The 4% rule DOES fail but still makes sense!

Post by grok87 » Wed Nov 22, 2017 3:57 pm

EnjoyIt wrote:
Wed Nov 22, 2017 2:57 pm
Here is what I came up with:

1) The 4% rule is not a rule but a guideline.
2) Some people are insecure with the 4% guideline and are willing to decrease their guideline to something lower through working longer.
3) No one is a robot and therefor spending will vary over the years.
4) Anyone who has been able to save 25+ years in expenses while working and living below there means will have a very very low likelihood of them running out of money in retirement regardless of the size of their portfolio or sequence of events.
5) Many people and myself included have some irrational fears regarding early retirement and future prospects.
6) Some people with a strong work ethic can't understand why someone would choose to not work.
7) Early retirees ignore Social Security in their calculations but SS may play a significant role in portfolio survival.

Am I missing anything?
Good summary but i think #4 is basically begging the question. That's basically the point we are discussing.

Not sure if this has already been posted in this thread but there was a study that said the 4% rule would not have worked well in a variety of other countries historically.
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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willthrill81
Posts: 2356
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Re: The 4% rule DOES fail but still makes sense!

Post by willthrill81 » Wed Nov 22, 2017 4:12 pm

grok87 wrote:
Wed Nov 22, 2017 3:57 pm
EnjoyIt wrote:
Wed Nov 22, 2017 2:57 pm
Here is what I came up with:

1) The 4% rule is not a rule but a guideline.
2) Some people are insecure with the 4% guideline and are willing to decrease their guideline to something lower through working longer.
3) No one is a robot and therefor spending will vary over the years.
4) Anyone who has been able to save 25+ years in expenses while working and living below there means will have a very very low likelihood of them running out of money in retirement regardless of the size of their portfolio or sequence of events.
5) Many people and myself included have some irrational fears regarding early retirement and future prospects.
6) Some people with a strong work ethic can't understand why someone would choose to not work.
7) Early retirees ignore Social Security in their calculations but SS may play a significant role in portfolio survival.

Am I missing anything?
Good summary but i think #4 is basically begging the question. That's basically the point we are discussing.

Not sure if this has already been posted in this thread but there was a study that said the 4% rule would not have worked well in a variety of other countries historically.
This is the research from Wade Pfau you're probably thinking about. Basically, he found that for a global ex-U.S. portfolio, about 3.5% was the SWR for a 30 year retirement. That's hardly earth shattering, but some would probably find it worthwhile. At any rate, investors who are putting all of their eggs into a country represents 5% of less of global equities is making a huge, very risky bet.
“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

grok87
Posts: 7591
Joined: Tue Feb 27, 2007 9:00 pm

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

Post by grok87 » Wed Nov 22, 2017 4:39 pm

willthrill81 wrote:
Wed Nov 22, 2017 4:12 pm
grok87 wrote:
Wed Nov 22, 2017 3:57 pm
EnjoyIt wrote:
Wed Nov 22, 2017 2:57 pm
Here is what I came up with:

1) The 4% rule is not a rule but a guideline.
2) Some people are insecure with the 4% guideline and are willing to decrease their guideline to something lower through working longer.
3) No one is a robot and therefor spending will vary over the years.
4) Anyone who has been able to save 25+ years in expenses while working and living below there means will have a very very low likelihood of them running out of money in retirement regardless of the size of their portfolio or sequence of events.
5) Many people and myself included have some irrational fears regarding early retirement and future prospects.
6) Some people with a strong work ethic can't understand why someone would choose to not work.
7) Early retirees ignore Social Security in their calculations but SS may play a significant role in portfolio survival.

Am I missing anything?
Good summary but i think #4 is basically begging the question. That's basically the point we are discussing.

Not sure if this has already been posted in this thread but there was a study that said the 4% rule would not have worked well in a variety of other countries historically.
This is the research from Wade Pfau you're probably thinking about. Basically, he found that for a global ex-U.S. portfolio, about 3.5% was the SWR for a 30 year retirement. That's hardly earth shattering, but some would probably find it worthwhile. At any rate, investors who are putting all of their eggs into a country represents 5% of less of global equities is making a huge, very risky bet.
Thanks
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Hyperborea
Posts: 381
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Location: Silicon Valley

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

Post by Hyperborea » Wed Nov 22, 2017 8:42 pm

EnjoyIt wrote:
Wed Nov 22, 2017 3:04 pm
Hyperborea wrote:
Wed Nov 22, 2017 1:04 pm
dbr wrote:
Wed Nov 22, 2017 10:29 am
OldSport wrote:
Wed Nov 22, 2017 10:03 am


What asset allocation is this based on (%stocks/%bonds)? Are there index fund asset allocations where the 4% rule is less likely to fail?
The general answer to that is the rule does fail if there are not enough stocks. The cutoff normally observed is a falloff at and under about 30% stocks. There doesn't seem to be a clear maximum and it isn't horribly harmful to have all stocks. The case of an all TIPS ladder is interesting. At 0% real, as has been the case in some recent years, the withdrawal rate is 3.3%. This increases to 3.8% at 1.0% real interest. My guess is that at low enough interest rates you can't find an inflation indexed annuity that pays better than about 4%, but I don't know what is available now if one can even find a company that offers such a thing.

Is that the answer you were looking for?

The %age in stocks needs to increase as the probable length of retirement increases beyond the Trinity study 30 years. If you retire younger than 65 or so you need to be thinking about longer durations. For a 4% WR to have a reasonable success rate you need to be near or at 100% equity for a 40+ year retirement and longer periods have too much risk of failure even then. If you can pull back to 3.5% you can get away with 75% equities for 40 years. A couple retiring at 55 has a 10% chance of at least one of them being alive in 42 years.

The usual 4% WR plans being safe for 30 years also include as success cases where the portfolio goes to zero the day after 30 years. If you are too conservative in your portfolio allocation then those zero after 30 years situations are even more likely. Even a 65 year old couple has a 10% chance that one is alive at 30+ years. What are you going to do if the portfolio goes to zero at 30 years + 1 day?

Reducing spending as the portfolio declines is one option but so is holding more equity. Maybe not 100% but certainly more like 50% to 75% even for the "short" 30 year retirements.

https://earlyretirementnow.com/2016/12/ ... t-1-intro/
I believe those calculations ignore SS. A couple retiring in their 50s will eventually be able to collect some form of fixed income from the government. Depending on a family's spending SS can end up being a substantial boon. A family who was able to save enough and live on $100k/yr will likely be getting at least $25k in SS making the likelihood of portfolio survival much higher.

Equally many people I think ignore what healthcare spending will likely look like. Expenses will likely rise till medicare kicks in followed by a swift decrease that year. Expenses will then likely rise substantially in the last few years of life.
Correct, those calculation do not include SS for any of them. It's generally not been so easy to account for if you aren't at the age or close to where you will take it. If you are close or at the point of taking SS are you then still going to take 4% or so from the portfolio? Then you still have the same issues. If you are living on SS and the 4% withdrawal then living just on SS is not somewhere you want to end up. A 30% or so equity allocation might be ok for 30 years but just barely if one is withdrawing 4%. You would be safer with 50% or so. You will have more buffer in the portfolio for unexpected costs and more likelihood of surviving longer than the 30 years in case you do too.

If one is farther away from taking SS then it gets harder to integrate into your planning. I retired last year at 51 and am almost 20 years from taking SS. Between my wife and I we are looking at a 10% chance of one of us surviving nearly 50 years. I certainly don't want to run the portfolio down and be living on SS only at 80 (i.e. about 30 years from retiring). The amount that I want to live on for the next 20 years needs to come only from the portfolio. I've done this in the past by running FireCalc with various settings - longer time periods with all the data, shorter 20 year time periods requiring that there be a set amount left to fund the next 20-30 years with the aid of SS. It gives some useful info. SS helps but the further away it is then the less help that it is and therefore a lower impact on my overall withdrawal rate.

The more recent study at Early Retirement Now has quantified those SS (and/or pension) payments in the future into %age adjustments to your withdrawals. He too finds that the further away SS is and the smaller the SS payments are as a fraction of your initial portfolio then the lower the impact on your WR.

https://earlyretirementnow.com/2017/01/ ... -pensions/

flyingaway
Posts: 1528
Joined: Fri Jan 17, 2014 10:19 am

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

Post by flyingaway » Thu Nov 23, 2017 12:05 pm

Hyperborea wrote:
Wed Nov 22, 2017 8:42 pm
EnjoyIt wrote:
Wed Nov 22, 2017 3:04 pm
Hyperborea wrote:
Wed Nov 22, 2017 1:04 pm
dbr wrote:
Wed Nov 22, 2017 10:29 am
OldSport wrote:
Wed Nov 22, 2017 10:03 am


What asset allocation is this based on (%stocks/%bonds)? Are there index fund asset allocations where the 4% rule is less likely to fail?
The general answer to that is the rule does fail if there are not enough stocks. The cutoff normally observed is a falloff at and under about 30% stocks. There doesn't seem to be a clear maximum and it isn't horribly harmful to have all stocks. The case of an all TIPS ladder is interesting. At 0% real, as has been the case in some recent years, the withdrawal rate is 3.3%. This increases to 3.8% at 1.0% real interest. My guess is that at low enough interest rates you can't find an inflation indexed annuity that pays better than about 4%, but I don't know what is available now if one can even find a company that offers such a thing.

Is that the answer you were looking for?

The %age in stocks needs to increase as the probable length of retirement increases beyond the Trinity study 30 years. If you retire younger than 65 or so you need to be thinking about longer durations. For a 4% WR to have a reasonable success rate you need to be near or at 100% equity for a 40+ year retirement and longer periods have too much risk of failure even then. If you can pull back to 3.5% you can get away with 75% equities for 40 years. A couple retiring at 55 has a 10% chance of at least one of them being alive in 42 years.

The usual 4% WR plans being safe for 30 years also include as success cases where the portfolio goes to zero the day after 30 years. If you are too conservative in your portfolio allocation then those zero after 30 years situations are even more likely. Even a 65 year old couple has a 10% chance that one is alive at 30+ years. What are you going to do if the portfolio goes to zero at 30 years + 1 day?

Reducing spending as the portfolio declines is one option but so is holding more equity. Maybe not 100% but certainly more like 50% to 75% even for the "short" 30 year retirements.

https://earlyretirementnow.com/2016/12/ ... t-1-intro/
I believe those calculations ignore SS. A couple retiring in their 50s will eventually be able to collect some form of fixed income from the government. Depending on a family's spending SS can end up being a substantial boon. A family who was able to save enough and live on $100k/yr will likely be getting at least $25k in SS making the likelihood of portfolio survival much higher.

Equally many people I think ignore what healthcare spending will likely look like. Expenses will likely rise till medicare kicks in followed by a swift decrease that year. Expenses will then likely rise substantially in the last few years of life.
Correct, those calculation do not include SS for any of them. It's generally not been so easy to account for if you aren't at the age or close to where you will take it. If you are close or at the point of taking SS are you then still going to take 4% or so from the portfolio? Then you still have the same issues. If you are living on SS and the 4% withdrawal then living just on SS is not somewhere you want to end up. A 30% or so equity allocation might be ok for 30 years but just barely if one is withdrawing 4%. You would be safer with 50% or so. You will have more buffer in the portfolio for unexpected costs and more likelihood of surviving longer than the 30 years in case you do too.

If one is farther away from taking SS then it gets harder to integrate into your planning. I retired last year at 51 and am almost 20 years from taking SS. Between my wife and I we are looking at a 10% chance of one of us surviving nearly 50 years. I certainly don't want to run the portfolio down and be living on SS only at 80 (i.e. about 30 years from retiring). The amount that I want to live on for the next 20 years needs to come only from the portfolio. I've done this in the past by running FireCalc with various settings - longer time periods with all the data, shorter 20 year time periods requiring that there be a set amount left to fund the next 20-30 years with the aid of SS. It gives some useful info. SS helps but the further away it is then the less help that it is and therefore a lower impact on my overall withdrawal rate.

The more recent study at Early Retirement Now has quantified those SS (and/or pension) payments in the future into %age adjustments to your withdrawals. He too finds that the further away SS is and the smaller the SS payments are as a fraction of your initial portfolio then the lower the impact on your WR.

https://earlyretirementnow.com/2017/01/ ... -pensions/
I consider social security as a safety net, hopeful it could balance out those unpredictable factors such as healthcare cost.

EnjoyIt
Posts: 1314
Joined: Sun Dec 29, 2013 8:06 pm

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

Post by EnjoyIt » Fri Nov 24, 2017 10:00 am

Hyperborea wrote:
Wed Nov 22, 2017 8:42 pm
EnjoyIt wrote:
Wed Nov 22, 2017 3:04 pm
Hyperborea wrote:
Wed Nov 22, 2017 1:04 pm
dbr wrote:
Wed Nov 22, 2017 10:29 am
OldSport wrote:
Wed Nov 22, 2017 10:03 am


What asset allocation is this based on (%stocks/%bonds)? Are there index fund asset allocations where the 4% rule is less likely to fail?
The general answer to that is the rule does fail if there are not enough stocks. The cutoff normally observed is a falloff at and under about 30% stocks. There doesn't seem to be a clear maximum and it isn't horribly harmful to have all stocks. The case of an all TIPS ladder is interesting. At 0% real, as has been the case in some recent years, the withdrawal rate is 3.3%. This increases to 3.8% at 1.0% real interest. My guess is that at low enough interest rates you can't find an inflation indexed annuity that pays better than about 4%, but I don't know what is available now if one can even find a company that offers such a thing.

Is that the answer you were looking for?

The %age in stocks needs to increase as the probable length of retirement increases beyond the Trinity study 30 years. If you retire younger than 65 or so you need to be thinking about longer durations. For a 4% WR to have a reasonable success rate you need to be near or at 100% equity for a 40+ year retirement and longer periods have too much risk of failure even then. If you can pull back to 3.5% you can get away with 75% equities for 40 years. A couple retiring at 55 has a 10% chance of at least one of them being alive in 42 years.

The usual 4% WR plans being safe for 30 years also include as success cases where the portfolio goes to zero the day after 30 years. If you are too conservative in your portfolio allocation then those zero after 30 years situations are even more likely. Even a 65 year old couple has a 10% chance that one is alive at 30+ years. What are you going to do if the portfolio goes to zero at 30 years + 1 day?

Reducing spending as the portfolio declines is one option but so is holding more equity. Maybe not 100% but certainly more like 50% to 75% even for the "short" 30 year retirements.

https://earlyretirementnow.com/2016/12/ ... t-1-intro/
I believe those calculations ignore SS. A couple retiring in their 50s will eventually be able to collect some form of fixed income from the government. Depending on a family's spending SS can end up being a substantial boon. A family who was able to save enough and live on $100k/yr will likely be getting at least $25k in SS making the likelihood of portfolio survival much higher.

Equally many people I think ignore what healthcare spending will likely look like. Expenses will likely rise till medicare kicks in followed by a swift decrease that year. Expenses will then likely rise substantially in the last few years of life.
Correct, those calculation do not include SS for any of them. It's generally not been so easy to account for if you aren't at the age or close to where you will take it. If you are close or at the point of taking SS are you then still going to take 4% or so from the portfolio? Then you still have the same issues. If you are living on SS and the 4% withdrawal then living just on SS is not somewhere you want to end up. A 30% or so equity allocation might be ok for 30 years but just barely if one is withdrawing 4%. You would be safer with 50% or so. You will have more buffer in the portfolio for unexpected costs and more likelihood of surviving longer than the 30 years in case you do too.

If one is farther away from taking SS then it gets harder to integrate into your planning. I retired last year at 51 and am almost 20 years from taking SS. Between my wife and I we are looking at a 10% chance of one of us surviving nearly 50 years. I certainly don't want to run the portfolio down and be living on SS only at 80 (i.e. about 30 years from retiring). The amount that I want to live on for the next 20 years needs to come only from the portfolio. I've done this in the past by running FireCalc with various settings - longer time periods with all the data, shorter 20 year time periods requiring that there be a set amount left to fund the next 20-30 years with the aid of SS. It gives some useful info. SS helps but the further away it is then the less help that it is and therefore a lower impact on my overall withdrawal rate.

The more recent study at Early Retirement Now has quantified those SS (and/or pension) payments in the future into %age adjustments to your withdrawals. He too finds that the further away SS is and the smaller the SS payments are as a fraction of your initial portfolio then the lower the impact on your WR.

https://earlyretirementnow.com/2017/01/ ... -pensions/
Great comment. Sure the further away it is, the less impact it has especially on the now. But, it will always have some form of impact. Just a simple example of a coupe retiring at 55 and will get SS in 15 years. At 55 the couple should have a decent history with social security especially if they were able to make enough money to retire at 55. I see no reason why we can not assume this couple would at a minimum get $25k for the higher earning spouse and half that for the lower earning spouse. $37,500 per year is decent money. Now lets get this couple retiring with $2.5 million withdrawing 4% and living on $100k/yr. So lets say this couple had some really bad years how low can their portfolio get and them still be able to spend $100k/yr by the time they reach 70? ($100k-$37.5k) x 25 = $1,562,500. Basically their portfolio can decrease by $1 million dollars and they can continue with their unchanged lifestyle. In addition if we talk about poor returns now because valuations are high, then by the time this couple only has $1.5 million valuations would be lower and returns should be expected higher which would allow the portfolio grow. Add in Medicare at 65 which should cut their health care costs significantly and you start to see a reasonable picture of portfolio survival and even portfolio growth

But, I fully agree that those retiring in their 30s or even early 40s can not really on SS in any meaningful way.

flyingaway
Posts: 1528
Joined: Fri Jan 17, 2014 10:19 am

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

Post by flyingaway » Fri Nov 24, 2017 11:39 am

EnjoyIt wrote:
Fri Nov 24, 2017 10:00 am
Hyperborea wrote:
Wed Nov 22, 2017 8:42 pm
EnjoyIt wrote:
Wed Nov 22, 2017 3:04 pm
Hyperborea wrote:
Wed Nov 22, 2017 1:04 pm
dbr wrote:
Wed Nov 22, 2017 10:29 am


The general answer to that is the rule does fail if there are not enough stocks. The cutoff normally observed is a falloff at and under about 30% stocks. There doesn't seem to be a clear maximum and it isn't horribly harmful to have all stocks. The case of an all TIPS ladder is interesting. At 0% real, as has been the case in some recent years, the withdrawal rate is 3.3%. This increases to 3.8% at 1.0% real interest. My guess is that at low enough interest rates you can't find an inflation indexed annuity that pays better than about 4%, but I don't know what is available now if one can even find a company that offers such a thing.

Is that the answer you were looking for?

The %age in stocks needs to increase as the probable length of retirement increases beyond the Trinity study 30 years. If you retire younger than 65 or so you need to be thinking about longer durations. For a 4% WR to have a reasonable success rate you need to be near or at 100% equity for a 40+ year retirement and longer periods have too much risk of failure even then. If you can pull back to 3.5% you can get away with 75% equities for 40 years. A couple retiring at 55 has a 10% chance of at least one of them being alive in 42 years.

The usual 4% WR plans being safe for 30 years also include as success cases where the portfolio goes to zero the day after 30 years. If you are too conservative in your portfolio allocation then those zero after 30 years situations are even more likely. Even a 65 year old couple has a 10% chance that one is alive at 30+ years. What are you going to do if the portfolio goes to zero at 30 years + 1 day?

Reducing spending as the portfolio declines is one option but so is holding more equity. Maybe not 100% but certainly more like 50% to 75% even for the "short" 30 year retirements.

https://earlyretirementnow.com/2016/12/ ... t-1-intro/
I believe those calculations ignore SS. A couple retiring in their 50s will eventually be able to collect some form of fixed income from the government. Depending on a family's spending SS can end up being a substantial boon. A family who was able to save enough and live on $100k/yr will likely be getting at least $25k in SS making the likelihood of portfolio survival much higher.

Equally many people I think ignore what healthcare spending will likely look like. Expenses will likely rise till medicare kicks in followed by a swift decrease that year. Expenses will then likely rise substantially in the last few years of life.
Correct, those calculation do not include SS for any of them. It's generally not been so easy to account for if you aren't at the age or close to where you will take it. If you are close or at the point of taking SS are you then still going to take 4% or so from the portfolio? Then you still have the same issues. If you are living on SS and the 4% withdrawal then living just on SS is not somewhere you want to end up. A 30% or so equity allocation might be ok for 30 years but just barely if one is withdrawing 4%. You would be safer with 50% or so. You will have more buffer in the portfolio for unexpected costs and more likelihood of surviving longer than the 30 years in case you do too.

If one is farther away from taking SS then it gets harder to integrate into your planning. I retired last year at 51 and am almost 20 years from taking SS. Between my wife and I we are looking at a 10% chance of one of us surviving nearly 50 years. I certainly don't want to run the portfolio down and be living on SS only at 80 (i.e. about 30 years from retiring). The amount that I want to live on for the next 20 years needs to come only from the portfolio. I've done this in the past by running FireCalc with various settings - longer time periods with all the data, shorter 20 year time periods requiring that there be a set amount left to fund the next 20-30 years with the aid of SS. It gives some useful info. SS helps but the further away it is then the less help that it is and therefore a lower impact on my overall withdrawal rate.

The more recent study at Early Retirement Now has quantified those SS (and/or pension) payments in the future into %age adjustments to your withdrawals. He too finds that the further away SS is and the smaller the SS payments are as a fraction of your initial portfolio then the lower the impact on your WR.

https://earlyretirementnow.com/2017/01/ ... -pensions/
Great comment. Sure the further away it is, the less impact it has especially on the now. But, it will always have some form of impact. Just a simple example of a coupe retiring at 55 and will get SS in 15 years. At 55 the couple should have a decent history with social security especially if they were able to make enough money to retire at 55. I see no reason why we can not assume this couple would at a minimum get $25k for the higher earning spouse and half that for the lower earning spouse. $37,500 per year is decent money. Now lets get this couple retiring with $2.5 million withdrawing 4% and living on $100k/yr. So lets say this couple had some really bad years how low can their portfolio get and them still be able to spend $100k/yr by the time they reach 70? ($100k-$37.5k) x 25 = $1,562,500. Basically their portfolio can decrease by $1 million dollars and they can continue with their unchanged lifestyle. In addition if we talk about poor returns now because valuations are high, then by the time this couple only has $1.5 million valuations would be lower and returns should be expected higher which would allow the portfolio grow. Add in Medicare at 65 which should cut their health care costs significantly and you start to see a reasonable picture of portfolio survival and even portfolio growth

But, I fully agree that those retiring in their 30s or even early 40s can not really on SS in any meaningful way.
Your example essentially uses social security as a safety cushion, which is what I am going to do. But I do have serious concern about the survivalbility of the socail security, the impact of huge national debt, possible change of medicare. Nothing should be taken for granted, if you don't have to.

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Hyperborea
Posts: 381
Joined: Sat Apr 15, 2017 10:31 am
Location: Silicon Valley

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

Post by Hyperborea » Fri Nov 24, 2017 1:58 pm

flyingaway wrote:
Fri Nov 24, 2017 11:39 am
EnjoyIt wrote:
Fri Nov 24, 2017 10:00 am
Great comment. Sure the further away it is, the less impact it has especially on the now. But, it will always have some form of impact. Just a simple example of a coupe retiring at 55 and will get SS in 15 years. At 55 the couple should have a decent history with social security especially if they were able to make enough money to retire at 55. I see no reason why we can not assume this couple would at a minimum get $25k for the higher earning spouse and half that for the lower earning spouse. $37,500 per year is decent money. Now lets get this couple retiring with $2.5 million withdrawing 4% and living on $100k/yr. So lets say this couple had some really bad years how low can their portfolio get and them still be able to spend $100k/yr by the time they reach 70? ($100k-$37.5k) x 25 = $1,562,500. Basically their portfolio can decrease by $1 million dollars and they can continue with their unchanged lifestyle. In addition if we talk about poor returns now because valuations are high, then by the time this couple only has $1.5 million valuations would be lower and returns should be expected higher which would allow the portfolio grow. Add in Medicare at 65 which should cut their health care costs significantly and you start to see a reasonable picture of portfolio survival and even portfolio growth

But, I fully agree that those retiring in their 30s or even early 40s can not really on SS in any meaningful way.
Your example essentially uses social security as a safety cushion, which is what I am going to do. But I do have serious concern about the survivalbility of the socail security, the impact of huge national debt, possible change of medicare. Nothing should be taken for granted, if you don't have to.
I think that the SS is being double counted in the example given. It's being used to take the safe WR up to 4% from the lower level that it starts at (I'll give the calculation below) and so it isn't also available as an extra black swan defense.
  1. The couple is 55 and so has a 10% chance of one of them seeing 42 years.
  2. 4% WR has less than 100% survivability for 40 years - https://earlyretirementnow.com/2016/12/ ... t-1-intro/
    • 75/25 allocation - 93% success
    • 50/50 allocation - 86% success
  3. 100% survivable WR for those allocations
    • 75/25 allocation - 3.5% SWR
    • 50/50 allocation - 3.25% SWR
  4. Impact of SS in 15 years on WR
    • use SS withdrawal adjustment from Retire Early Now - https://earlyretirementnow.com/2017/01/ ... -pensions/
    • No data for 15 years so extrapolate from existing to get 0.36% per 1% that annual SS is of initial portfolio
    • SS of $37.5K / year is 1.5% of initial portfolio
    • total SS boost to SWR is 0.54% (0.36% * 1.5)
  5. Total SS boosted SWR
    • 75/25 allocation - ~4% (3.5% + 0.54%)
    • 50/50 allocation - ~3.8% (3.25% + 0.54%)
So, that couple is just hitting 4% and only at higher equity allocations. The safety factor that SS gives has been used up to boost the WR.

EnjoyIt
Posts: 1314
Joined: Sun Dec 29, 2013 8:06 pm

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

Post by EnjoyIt » Fri Nov 24, 2017 5:14 pm

Hyperborea wrote:
Fri Nov 24, 2017 1:58 pm
flyingaway wrote:
Fri Nov 24, 2017 11:39 am
EnjoyIt wrote:
Fri Nov 24, 2017 10:00 am
Great comment. Sure the further away it is, the less impact it has especially on the now. But, it will always have some form of impact. Just a simple example of a coupe retiring at 55 and will get SS in 15 years. At 55 the couple should have a decent history with social security especially if they were able to make enough money to retire at 55. I see no reason why we can not assume this couple would at a minimum get $25k for the higher earning spouse and half that for the lower earning spouse. $37,500 per year is decent money. Now lets get this couple retiring with $2.5 million withdrawing 4% and living on $100k/yr. So lets say this couple had some really bad years how low can their portfolio get and them still be able to spend $100k/yr by the time they reach 70? ($100k-$37.5k) x 25 = $1,562,500. Basically their portfolio can decrease by $1 million dollars and they can continue with their unchanged lifestyle. In addition if we talk about poor returns now because valuations are high, then by the time this couple only has $1.5 million valuations would be lower and returns should be expected higher which would allow the portfolio grow. Add in Medicare at 65 which should cut their health care costs significantly and you start to see a reasonable picture of portfolio survival and even portfolio growth

But, I fully agree that those retiring in their 30s or even early 40s can not really on SS in any meaningful way.
Your example essentially uses social security as a safety cushion, which is what I am going to do. But I do have serious concern about the survivalbility of the socail security, the impact of huge national debt, possible change of medicare. Nothing should be taken for granted, if you don't have to.
I think that the SS is being double counted in the example given. It's being used to take the safe WR up to 4% from the lower level that it starts at (I'll give the calculation below) and so it isn't also available as an extra black swan defense.
  1. The couple is 55 and so has a 10% chance of one of them seeing 42 years.
  2. 4% WR has less than 100% survivability for 40 years - https://earlyretirementnow.com/2016/12/ ... t-1-intro/
    • 75/25 allocation - 93% success
    • 50/50 allocation - 86% success
  3. 100% survivable WR for those allocations
    • 75/25 allocation - 3.5% SWR
    • 50/50 allocation - 3.25% SWR
  4. Impact of SS in 15 years on WR
    • use SS withdrawal adjustment from Retire Early Now - https://earlyretirementnow.com/2017/01/ ... -pensions/
    • No data for 15 years so extrapolate from existing to get 0.36% per 1% that annual SS is of initial portfolio
    • SS of $37.5K / year is 1.5% of initial portfolio
    • total SS boost to SWR is 0.54% (0.36% * 1.5)
  5. Total SS boosted SWR
    • 75/25 allocation - ~4% (3.5% + 0.54%)
    • 50/50 allocation - ~3.8% (3.25% + 0.54%)
So, that couple is just hitting 4% and only at higher equity allocations. The safety factor that SS gives has been used up to boost the WR.
Lets just pull away from ERN for a second.

If the couple in our example can spend down their portfolio by $1 million and have SS kick in allowing them to keep spending the same then that couple has to have returns of a minimum of 1.8% real for those 15 years so that their portfolio stays above $1.5 million by the time SS kicks in. Again. if market returns are that low for all those years, by the time they are 70 valuations would be much lower as well and expected returns would therefor likely be higher. 4% or even higher withdrawal rate at such low valuations would not be unreasonable. Again, Medicare would also kick in at 65 decreasing their healthcare expenses at least for a while if this couple is relatively healthy.

So I am not necessarily double counting it, I'm giving an example of how it can be used to offset poor returns during the early parts of retirement. ERN simply adds it into the total calculation. Lastly, is 100% success really the goal or is 99% good enough? What about 98%? I think I'm ok with a small chance of not being successful in which I can adjust spending just a little and still reach my own personal 100% success rate. As always, we are not robots who will spend every penny of 4% during good times and poor times. 4% is good enough for me.

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

Post by EnjoyIt » Fri Nov 24, 2017 5:44 pm

flyingaway wrote:
Fri Nov 24, 2017 11:39 am

Your example essentially uses social security as a safety cushion, which is what I am going to do. But I do have serious concern about the survivalbility of the socail security, the impact of huge national debt, possible change of medicare. Nothing should be taken for granted, if you don't have to.
Exactly! You can't be 100% positive of success. But you can be relative likely to have success if you have a reasonable plan if things are not going exactly as planned. My plan is to:

1) Spend less
2) Take advantage of SS
3) Make a little extra cash on the side (which would likely happen anyways just out of the sheer process of living and doing things I enjoy.)
4) Do my own yard work, take care of the pool myself, get rid of biweekly maid service.
5) Consider not having pets after the last one passes away.
5) Downgrade our home
6) If all else fails a reverse mortgage.

The last 2 are not ideal, but they are on my list of things to do if my 4% is failing badly. Odds are more than likely with this contingency plan, we should be just fine when we are ready to pull the plug in a couple of years.

Just doing the math right now. We can easily spend $5k less a year by traveling less, eating out less, drinking less alcohol, not buying some electronic thingamajig, etc. I'm sure I can find a way to make a couple of thousand a year with minimal effort $3k (I'm sure I can do more but people here are skeptical.) Yard work, pool service, maid service is worth $6k after purchasing everything I need to do it myself. Just doing that cuts a withdrawal rate down below 3.5% if we are still thinking of a $2.5 million portfolio. And we still haven't considered SS.

grok87
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Re: The 4% rule DOES fail but still makes sense!

Post by grok87 » Fri Nov 24, 2017 6:15 pm

EnjoyIt wrote:
Fri Nov 24, 2017 5:44 pm
flyingaway wrote:
Fri Nov 24, 2017 11:39 am

Your example essentially uses social security as a safety cushion, which is what I am going to do. But I do have serious concern about the survivalbility of the socail security, the impact of huge national debt, possible change of medicare. Nothing should be taken for granted, if you don't have to.
Exactly! You can't be 100% positive of success. But you can be relative likely to have success if you have a reasonable plan if things are not going exactly as planned. My plan is to:

1) Spend less
2) Take advantage of SS
3) Make a little extra cash on the side (which would likely happen anyways just out of the sheer process of living and doing things I enjoy.)
4) Do my own yard work, take care of the pool myself, get rid of biweekly maid service.
5) Consider not having pets after the last one passes away.
5) Downgrade our home
6) If all else fails a reverse mortgage.
I say "Check" to all of these except #4. Supposedly one will live longer if one has a dog.
http://time.com/5028171/health-benefits-owning-dog/
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Hyperborea
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Location: Silicon Valley

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

Post by Hyperborea » Fri Nov 24, 2017 6:24 pm

EnjoyIt wrote:
Fri Nov 24, 2017 5:14 pm
If the couple in our example can spend down their portfolio by $1 million and have SS kick in allowing them to keep spending the same then that couple has to have returns of a minimum of 1.8% real for those 15 years so that their portfolio stays above $1.5 million by the time SS kicks in. Again. if market returns are that low for all those years, by the time they are 70 valuations would be much lower as well and expected returns would therefor likely be higher. 4% or even higher withdrawal rate at such low valuations would not be unreasonable. Again, Medicare would also kick in at 65 decreasing their healthcare expenses at least for a while if this couple is relatively healthy.
At 4% WR Firecalc shows ~$680K to $740K (depending on allocation) min portfolio value after 15 years. Might be ok from 70 on with SS but it will require lowering the spending.

EnjoyIt wrote:
Fri Nov 24, 2017 5:14 pm
So I am not necessarily double counting it, I'm giving an example of how it can be used to offset poor returns during the early parts of retirement. ERN simply adds it into the total calculation. Lastly, is 100% success really the goal or is 99% good enough? What about 98%? I think I'm ok with a small chance of not being successful in which I can adjust spending just a little and still reach my own personal 100% success rate. As always, we are not robots who will spend every penny of 4% during good times and poor times. 4% is good enough for me.
How about 86% at 50/50 for a 4% WR? Or 55% at 25/75 for a 4% WR? How low will you be ok with?

You are adding it in to make the 4% WR "safe" too and you are then counting on it as an emergency fallback.

How will any WR work in the future? We don't know. But over the total historical record those survival rates are a maximum. We already know of periods that failed so they can't get any better. Future data may show them to be worse.

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

Post by EnjoyIt » Fri Nov 24, 2017 6:38 pm

Hyperborea wrote:
Fri Nov 24, 2017 6:24 pm
EnjoyIt wrote:
Fri Nov 24, 2017 5:14 pm
If the couple in our example can spend down their portfolio by $1 million and have SS kick in allowing them to keep spending the same then that couple has to have returns of a minimum of 1.8% real for those 15 years so that their portfolio stays above $1.5 million by the time SS kicks in. Again. if market returns are that low for all those years, by the time they are 70 valuations would be much lower as well and expected returns would therefor likely be higher. 4% or even higher withdrawal rate at such low valuations would not be unreasonable. Again, Medicare would also kick in at 65 decreasing their healthcare expenses at least for a while if this couple is relatively healthy.
At 4% WR Firecalc shows ~$680K to $740K (depending on allocation) min portfolio value after 15 years. Might be ok from 70 on with SS but it will require lowering the spending.

EnjoyIt wrote:
Fri Nov 24, 2017 5:14 pm
So I am not necessarily double counting it, I'm giving an example of how it can be used to offset poor returns during the early parts of retirement. ERN simply adds it into the total calculation. Lastly, is 100% success really the goal or is 99% good enough? What about 98%? I think I'm ok with a small chance of not being successful in which I can adjust spending just a little and still reach my own personal 100% success rate. As always, we are not robots who will spend every penny of 4% during good times and poor times. 4% is good enough for me.
How about 86% at 50/50 for a 4% WR? Or 55% at 25/75 for a 4% WR? How low will you be ok with?

You are adding it in to make the 4% WR "safe" too and you are then counting on it as an emergency fallback.

How will any WR work in the future? We don't know. But over the total historical record those survival rates are a maximum. We already know of periods that failed so they can't get any better. Future data may show them to be worse.
I'm not disagreeing with you or ERN. I am showing an example of how it may look. As for 55% or 86%, I don't know. I figure if we are somewhere in the 90s we should be OK because I have so many tools in my belt to make even 90% works. Please see my post above listing my tools.

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

Post by EnjoyIt » Fri Nov 24, 2017 6:40 pm

grok87 wrote:
Fri Nov 24, 2017 6:15 pm
EnjoyIt wrote:
Fri Nov 24, 2017 5:44 pm
flyingaway wrote:
Fri Nov 24, 2017 11:39 am

Your example essentially uses social security as a safety cushion, which is what I am going to do. But I do have serious concern about the survivalbility of the socail security, the impact of huge national debt, possible change of medicare. Nothing should be taken for granted, if you don't have to.
Exactly! You can't be 100% positive of success. But you can be relative likely to have success if you have a reasonable plan if things are not going exactly as planned. My plan is to:

1) Spend less
2) Take advantage of SS
3) Make a little extra cash on the side (which would likely happen anyways just out of the sheer process of living and doing things I enjoy.)
4) Do my own yard work, take care of the pool myself, get rid of biweekly maid service.
5) Consider not having pets after the last one passes away.
5) Downgrade our home
6) If all else fails a reverse mortgage.
I say "Check" to all of these except #4. Supposedly one will live longer if one has a dog.
http://time.com/5028171/health-benefits-owning-dog/
Well that settles it. I will "consider" not getting another dog and then decide to get one because life is better with a dog.

flyingaway
Posts: 1528
Joined: Fri Jan 17, 2014 10:19 am

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

Post by flyingaway » Fri Nov 24, 2017 7:39 pm

EnjoyIt wrote:
Fri Nov 24, 2017 5:44 pm
flyingaway wrote:
Fri Nov 24, 2017 11:39 am

Your example essentially uses social security as a safety cushion, which is what I am going to do. But I do have serious concern about the survivalbility of the socail security, the impact of huge national debt, possible change of medicare. Nothing should be taken for granted, if you don't have to.
Exactly! You can't be 100% positive of success. But you can be relative likely to have success if you have a reasonable plan if things are not going exactly as planned. My plan is to:

1) Spend less
2) Take advantage of SS
3) Make a little extra cash on the side (which would likely happen anyways just out of the sheer process of living and doing things I enjoy.)
4) Do my own yard work, take care of the pool myself, get rid of biweekly maid service.
5) Consider not having pets after the last one passes away.
5) Downgrade our home
6) If all else fails a reverse mortgage.

The last 2 are not ideal, but they are on my list of things to do if my 4% is failing badly. Odds are more than likely with this contingency plan, we should be just fine when we are ready to pull the plug in a couple of years.

Just doing the math right now. We can easily spend $5k less a year by traveling less, eating out less, drinking less alcohol, not buying some electronic thingamajig, etc. I'm sure I can find a way to make a couple of thousand a year with minimal effort $3k (I'm sure I can do more but people here are skeptical.) Yard work, pool service, maid service is worth $6k after purchasing everything I need to do it myself. Just doing that cuts a withdrawal rate down below 3.5% if we are still thinking of a $2.5 million portfolio. And we still haven't considered SS.
I could do all the things except #3 and I do not have any pet and do not plan to have one. I do not plan to do any work for money after I retire. If I really need money, not because of my fault, I will ask my sons for some help.

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

Post by TravelforFun » Fri Nov 24, 2017 7:59 pm

4% SWR has a small chance to fail, 3% shouln't fail. I identify my financial independent number by using the 3% withdrawal rate and my adult kids are thrilled.

TravelforFun

grok87
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Joined: Tue Feb 27, 2007 9:00 pm

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

Post by grok87 » Sat Nov 25, 2017 6:24 am

willthrill81 wrote:
Wed Nov 22, 2017 4:12 pm
grok87 wrote:
Wed Nov 22, 2017 3:57 pm
EnjoyIt wrote:
Wed Nov 22, 2017 2:57 pm
Here is what I came up with:

1) The 4% rule is not a rule but a guideline.
2) Some people are insecure with the 4% guideline and are willing to decrease their guideline to something lower through working longer.
3) No one is a robot and therefor spending will vary over the years.
4) Anyone who has been able to save 25+ years in expenses while working and living below there means will have a very very low likelihood of them running out of money in retirement regardless of the size of their portfolio or sequence of events.
5) Many people and myself included have some irrational fears regarding early retirement and future prospects.
6) Some people with a strong work ethic can't understand why someone would choose to not work.
7) Early retirees ignore Social Security in their calculations but SS may play a significant role in portfolio survival.

Am I missing anything?
Good summary but i think #4 is basically begging the question. That's basically the point we are discussing.

Not sure if this has already been posted in this thread but there was a study that said the 4% rule would not have worked well in a variety of other countries historically.
This is the research from Wade Pfau you're probably thinking about. Basically, he found that for a global ex-U.S. portfolio, about 3.5% was the SWR for a 30 year retirement. That's hardly earth shattering, but some would probably find it worthwhile. At any rate, investors who are putting all of their eggs into a country represents 5% of less of global equities is making a huge, very risky bet.
So I had a chance to re-read the Pfau study- thanks again for linking.

I think the 3.5% is for a Global portfolio *including* the US. For others not familiar with the fine points of Pfau's study it is for a 30 year retirement horizon based on replaying historical events and markets for the 1900-1986 period. The worst case for the global portfolio was starting one's retrement in 1937. If one used a 4% safe withdrawal rate on the global portfolio, then there would have been a 15% chance of failure within 30 years.

Would be interesting to see the global study updated for say the 1986-2016 years.

Personally the conclusion i would draw, based in part on being a big William Bernstein "deep risk" fan, is that 3.5% is a lot better than 4% as a safe withdrawal rate. In other words one needs to save 28.5x ones desired income rather than 25x or 14% more.
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

flyingaway
Posts: 1528
Joined: Fri Jan 17, 2014 10:19 am

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

Post by flyingaway » Sat Nov 25, 2017 12:20 pm

grok87 wrote:
Sat Nov 25, 2017 6:24 am
willthrill81 wrote:
Wed Nov 22, 2017 4:12 pm
grok87 wrote:
Wed Nov 22, 2017 3:57 pm
EnjoyIt wrote:
Wed Nov 22, 2017 2:57 pm
Here is what I came up with:

1) The 4% rule is not a rule but a guideline.
2) Some people are insecure with the 4% guideline and are willing to decrease their guideline to something lower through working longer.
3) No one is a robot and therefor spending will vary over the years.
4) Anyone who has been able to save 25+ years in expenses while working and living below there means will have a very very low likelihood of them running out of money in retirement regardless of the size of their portfolio or sequence of events.
5) Many people and myself included have some irrational fears regarding early retirement and future prospects.
6) Some people with a strong work ethic can't understand why someone would choose to not work.
7) Early retirees ignore Social Security in their calculations but SS may play a significant role in portfolio survival.

Am I missing anything?
Good summary but i think #4 is basically begging the question. That's basically the point we are discussing.

Not sure if this has already been posted in this thread but there was a study that said the 4% rule would not have worked well in a variety of other countries historically.
This is the research from Wade Pfau you're probably thinking about. Basically, he found that for a global ex-U.S. portfolio, about 3.5% was the SWR for a 30 year retirement. That's hardly earth shattering, but some would probably find it worthwhile. At any rate, investors who are putting all of their eggs into a country represents 5% of less of global equities is making a huge, very risky bet.
So I had a chance to re-read the Pfau study- thanks again for linking.

I think the 3.5% is for a Global portfolio *including* the US. For others not familiar with the fine points of Pfau's study it is for a 30 year retirement horizon based on replaying historical events and markets for the 1900-1986 period. The worst case for the global portfolio was starting one's retrement in 1937. If one used a 4% safe withdrawal rate on the global portfolio, then there would have been a 15% chance of failure within 30 years.

Would be interesting to see the global study updated for say the 1986-2016 years.

Personally the conclusion i would draw, based in part on being a big William Bernstein "deep risk" fan, is that 3.5% is a lot better than 4% as a safe withdrawal rate. In other words one needs to save 28.5x ones desired income rather than 25x or 14% more.
Looks like the more money, the better the situation. In this environment, if I could determine my future, I would be shooting for a below 2% withdrawal rate. But when I have to leave the workforce, I will be happy with what I have and withdraw accordingly.

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

Post by flyingaway » Sat Nov 25, 2017 12:22 pm

TravelforFun wrote:
Fri Nov 24, 2017 7:59 pm
4% SWR has a small chance to fail, 3% shouln't fail. I identify my financial independent number by using the 3% withdrawal rate and my adult kids are thrilled.

TravelforFun
The amount of the inheritance is dependent upon the withdrawal rate, if not careful, could become negative.

TravelforFun
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Joined: Tue Dec 04, 2012 11:05 pm

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

Post by TravelforFun » Sat Nov 25, 2017 2:05 pm

flyingaway wrote:
Sat Nov 25, 2017 12:22 pm
TravelforFun wrote:
Fri Nov 24, 2017 7:59 pm
4% SWR has a small chance to fail, 3% shouln't fail. I identify my financial independent number by using the 3% withdrawal rate and my adult kids are thrilled.

TravelforFun
The amount of the inheritance is dependent upon the withdrawal rate, if not careful, could become negative.
That’s why our kids applaud our 3% SWR. Also, inheritance can’t be negative because your heirs are not responsible for your debts.

TravelforFun

flyingaway
Posts: 1528
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Re: The 4% rule DOES fail but still makes sense!

Post by flyingaway » Sat Nov 25, 2017 2:24 pm

TravelforFun wrote:
Sat Nov 25, 2017 2:05 pm
flyingaway wrote:
Sat Nov 25, 2017 12:22 pm
TravelforFun wrote:
Fri Nov 24, 2017 7:59 pm
4% SWR has a small chance to fail, 3% shouln't fail. I identify my financial independent number by using the 3% withdrawal rate and my adult kids are thrilled.

TravelforFun
The amount of the inheritance is dependent upon the withdrawal rate, if not careful, could become negative.
That’s why our kids applaud our 3% SWR. Also, inheritance can’t be negative because your heirs are not responsible for your debts.

TravelforFun
The success rate of the 4% rule is 95.6%, I think they will take the chance of 4.4% for negative inheritance.

EnjoyIt
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Joined: Sun Dec 29, 2013 8:06 pm

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

Post by EnjoyIt » Sat Nov 25, 2017 3:10 pm

flyingaway wrote:
Fri Nov 24, 2017 7:39 pm

I could do all the things except #3 and I do not have any pet and do not plan to have one. I do not plan to do any work for money after I retire. If I really need money, not because of my fault, I will ask my sons for some help.
I would not be surprised if you find yourself making a little money here and there over the years which will pad your retirement portfolio. This is especially true if you have any plans on retiring early. Today something as simple as moving $1million dollars from vanguard to TDA will give you $2500 and takes almost no effort. Maybe you will sell a few things on eBay that you no longer need over the years I'm sure that will add up a little. Maybe in your off time you will design some doohikie that you sell for $50k or watch someone's dog for a week and they get you a gift card. To think in retirement you will make $0 I think is pretty naive. Of coarse the retirement police may come get you and force you into a beach chair with a corona.
flyingaway wrote:
Sat Nov 25, 2017 12:20 pm

Looks like the more money, the better the situation. In this environment, if I could determine my future, I would be shooting for a below 2% withdrawal rate. But when I have to leave the workforce, I will be happy with what I have and withdraw accordingly.
May I ask? Is your goal to leave a massive inheritance? Or are you so fearful that you won't be able to sleep at night unless you know that your portfolio will have to only keep up with inflation and will survive 50 years. 2% withdrawal rate in TIPS and it is guaranteed to survive 50+ years (someone feel free to correct me if I am wrong.) Personally If I had enough for a 2% withdrawal rate I would start looking for ways to spend more money and get it up to at least 3.5% With that I can always drop my spending to 2% if I ever have to.

flyingaway
Posts: 1528
Joined: Fri Jan 17, 2014 10:19 am

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

Post by flyingaway » Sat Nov 25, 2017 3:49 pm

EnjoyIt wrote:
Sat Nov 25, 2017 3:10 pm
flyingaway wrote:
Fri Nov 24, 2017 7:39 pm

I could do all the things except #3 and I do not have any pet and do not plan to have one. I do not plan to do any work for money after I retire. If I really need money, not because of my fault, I will ask my sons for some help.
I would not be surprised if you find yourself making a little money here and there over the years which will pad your retirement portfolio. This is especially true if you have any plans on retiring early. Today something as simple as moving $1million dollars from vanguard to TDA will give you $2500 and takes almost no effort. Maybe you will sell a few things on eBay that you no longer need over the years I'm sure that will add up a little. Maybe in your off time you will design some doohikie that you sell for $50k or watch someone's dog for a week and they get you a gift card. To think in retirement you will make $0 I think is pretty naive. Of coarse the retirement police may come get you and force you into a beach chair with a corona.
flyingaway wrote:
Sat Nov 25, 2017 12:20 pm

Looks like the more money, the better the situation. In this environment, if I could determine my future, I would be shooting for a below 2% withdrawal rate. But when I have to leave the workforce, I will be happy with what I have and withdraw accordingly.
May I ask? Is your goal to leave a massive inheritance? Or are you so fearful that you won't be able to sleep at night unless you know that your portfolio will have to only keep up with inflation and will survive 50 years. 2% withdrawal rate in TIPS and it is guaranteed to survive 50+ years (someone feel free to correct me if I am wrong.) Personally If I had enough for a 2% withdrawal rate I would start looking for ways to spend more money and get it up to at least 3.5% With that I can always drop my spending to 2% if I ever have to.
I don't want to count on making any money in retirement, as I said before, I am willing to work some additional years to make sure that will not be needed.

While I do not really know what will be the ultimate SWR that I can trust, I will be happy with whatever I end up with and will try to make it work. In other words, I am going to work to the day that I no longer want to work, be tomorrow or next year.

However, it is always my position that the 4% rule is a useful tool to estimate how much money you may need in planning your retirement and to decide if you are financially independent.

Johnnie
Posts: 438
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Location: Michigan

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

Post by Johnnie » Sat Nov 25, 2017 7:14 pm

1210sda wrote:
Wed Nov 22, 2017 9:42 am
jefmafnl wrote:
Wed Nov 22, 2017 8:05 am
Many thanks to ArtsDoctor for this:

In order to answer your own questions, you'll need to understand the 1994 study on which the 4% SWR was originally calculated. Once you've actually looked into that study and subsequent studies, you'll see that there are many caveats. You can start with a variety of synopses but Michael Kitces does a reasonable job:

https://www.aicpa.org/interestareas/per ... ch2012.pdf

This is a great paper! Does anyone here know about an update, for instance, further work on whether "stacking" the adjustments to the "SWR" is valid?

J
When I click on the link., it takes me to "page not found" "We’re sorry. The page you requested cannot be found or was moved".. Huh??

1210
I just came from there, here:
https://www.aicpa.org/interestareas/per ... ch2012.pdf
"I know nothing."

grok87
Posts: 7591
Joined: Tue Feb 27, 2007 9:00 pm

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

Post by grok87 » Sat Nov 25, 2017 8:01 pm

Johnnie wrote:
Sat Nov 25, 2017 7:14 pm
1210sda wrote:
Wed Nov 22, 2017 9:42 am
jefmafnl wrote:
Wed Nov 22, 2017 8:05 am
Many thanks to ArtsDoctor for this:

In order to answer your own questions, you'll need to understand the 1994 study on which the 4% SWR was originally calculated. Once you've actually looked into that study and subsequent studies, you'll see that there are many caveats. You can start with a variety of synopses but Michael Kitces does a reasonable job:

https://www.aicpa.org/interestareas/per ... ch2012.pdf

This is a great paper! Does anyone here know about an update, for instance, further work on whether "stacking" the adjustments to the "SWR" is valid?

J
When I click on the link., it takes me to "page not found" "We’re sorry. The page you requested cannot be found or was moved".. Huh??

1210
I just came from there, here:
https://www.aicpa.org/interestareas/per ... ch2012.pdf
thanks for the link
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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