Don’t cheat yourself with the 4% rule

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Abe
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Don’t cheat yourself with the 4% rule

Post by Abe » Mon Jun 04, 2018 4:48 pm

Although this is nothing new, I thought the article was interesting. She talks about a more flexible retirement withdrawal method rather than something more rigid like the 4% rule. I think Taylor does this.

https://finance.yahoo.com/news/don-t-ch ... 58618.html
Slow and steady wins the race.

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Re: Don’t cheat yourself with the 4% rule

Post by randomguy » Mon Jun 04, 2018 5:03 pm

Abe wrote:
Mon Jun 04, 2018 4:48 pm
Although this is nothing new, I thought the article was interesting. She talks about a more flexible retirement withdrawal method rather than something more rigid like the 4% rule. I think Taylor does this.

https://finance.yahoo.com/news/don-t-ch ... 58618.html
Reads like an ad for an financial advisor:). it all sounds good but for actual details you need to go see a FA.

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Abe
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Re: Don’t cheat yourself with the 4% rule

Post by Abe » Mon Jun 04, 2018 5:06 pm

randomguy wrote:
Mon Jun 04, 2018 5:03 pm
Abe wrote:
Mon Jun 04, 2018 4:48 pm
Although this is nothing new, I thought the article was interesting. She talks about a more flexible retirement withdrawal method rather than something more rigid like the 4% rule. I think Taylor does this.

https://finance.yahoo.com/news/don-t-ch ... 58618.html
Reads like an ad for an financial advisor:). it all sounds good but for actual details you need to go see a FA.
Yes, I caught that at the end, but I still thought the article was interesting.
Slow and steady wins the race.

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Re: Don’t cheat yourself with the 4% rule

Post by Jordan4FI » Mon Jun 04, 2018 5:31 pm

Well of course you should be flexible... Who really could and wants to stick to a % and that's it.. I plan to be able to go from 3% to 6% as required. Yet I will always try to keep my basic needs under 15K, then the rest of my income is fun money. But you should be able to spend more or less as the year dictates.

the 4% rule is a good goal at minimum amounts, but somewhere between x25 and x35 is a sweeter spot. I am reaching for x30 for 36K income.. and I wont even really need that much (in Thailand) but if I Hit that # then I'll be able to be that much more relaxed and free..

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Re: Don’t cheat yourself with the 4% rule

Post by willthrill81 » Mon Jun 04, 2018 5:42 pm

The biggest criticism of the '4% rule' offered in that paper is that following it would have, historically, left a lot of money on the table at the end of the 30 year period typically examined.

But I have yet to hear even a rumor of one person who has rigidly followed this 'rule' or any other. Telling retirees reliant on their portfolios for income to spend even more in 2009 than they did in 2008 would fly like a 200 ton boulder and for good reason. We all intuitively make adjustments depending on how our portfolios perform, rules be darned.

Also, the author seems to position the '4% rule' as only being appropriate in the event of another major depression. Recent history can attest to that notion being false. While retirees from the year 2000 who rigidly followed the '4% rule' would be alright today, the first decade of portfolio performance would have been very hard for those with a significant holding in stocks. Those with a 50/50 portfolio (TSM/TBM) would have seen their portfolio down 30% in nominal dollars by Feb., 2009 from where they started less than a decade earlier. No one knew at that time that we would go nine-plus years without another bear market, nor is it prudent to count on such a long bull market to enable one's retirement to be successful.

We all make adjustments because we intuitively understand the value of doing so.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Don’t cheat yourself with the 4% rule

Post by zaboomafoozarg » Mon Jun 04, 2018 5:51 pm

4% rule is risky business, at least for someone looking to retire a little early.

I'm planning to use the 2.5% rule when I retire, with no SS or pension factored in.

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Re: Don’t cheat yourself with the 4% rule

Post by cusetownusa » Mon Jun 04, 2018 7:01 pm

Abe wrote:
Mon Jun 04, 2018 4:48 pm
Although this is nothing new, I thought the article was interesting. She talks about a more flexible retirement withdrawal method rather than something more rigid like the 4% rule. I think Taylor does this.

https://finance.yahoo.com/news/don-t-ch ... 58618.html
I stopped reading at the part where she incorrectly described what the 4% rule is. If she can’t get that part correct the rest of her argument is flawed.

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Re: Don’t cheat yourself with the 4% rule

Post by PharmerBrown » Mon Jun 04, 2018 7:22 pm

cusetownusa wrote:
Mon Jun 04, 2018 7:01 pm
Abe wrote:
Mon Jun 04, 2018 4:48 pm
Although this is nothing new, I thought the article was interesting. She talks about a more flexible retirement withdrawal method rather than something more rigid like the 4% rule. I think Taylor does this.

https://finance.yahoo.com/news/don-t-ch ... 58618.html
I stopped reading at the part where she incorrectly described what the 4% rule is. If she can’t get that part correct the rest of her argument is flawed.
That's pretty bad. With her version of the 4% rule, you will never run out of money.

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Re: Don’t cheat yourself with the 4% rule

Post by Mitchell777 » Mon Jun 04, 2018 7:29 pm

The frightening part is if you read that article on Yahoo and then read the comments people make regarding the article.

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Re: Don’t cheat yourself with the 4% rule

Post by MrPotatoHead » Mon Jun 04, 2018 9:54 pm

zaboomafoozarg wrote:
Mon Jun 04, 2018 5:51 pm
4% rule is risky business, at least for someone looking to retire a little early.

I'm planning to use the 2.5% rule when I retire, with no SS or pension factored in.
plus one

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Re: Don’t cheat yourself with the 4% rule

Post by tibbitts » Mon Jun 04, 2018 10:03 pm

zaboomafoozarg wrote:
Mon Jun 04, 2018 5:51 pm
4% rule is risky business, at least for someone looking to retire a little early.

I'm planning to use the 2.5% rule when I retire, with no SS or pension factored in.
I don't know that that means. The 2.5% or 4% rule is only related to what you withdraw from a portfolio, and has never had anything to do with SS or pension. Having a pension and SS of $100k+ per year, or none or at all, has no effect on SWR.

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Re: Don’t cheat yourself with the 4% rule

Post by SittingOnTheFence » Mon Jun 04, 2018 10:46 pm

I've been retired 10 yrs. I didn't read the referenced article but when I was planning retirement and pondering if I had enough funds and how long they would last I thought the 4% rule was a good rule-of-thumb as a guideline.

I note that RMD starts at 3.65% and goes up from there.

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Re: Don’t cheat yourself with the 4% rule

Post by CnC » Mon Jun 04, 2018 10:47 pm

zaboomafoozarg wrote:
Mon Jun 04, 2018 5:51 pm
4% rule is risky business, at least for someone looking to retire a little early.

I'm planning to use the 2.5% rule when I retire, with no SS or pension factored in.
Isn't that still a bit to risky? Better off just working till you drop right? That way you have a 0% chance of running out of money. Rather than that outlandish 5% chance if you retire at 25x or the 1.5% if you retire at 50x

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Re: Don’t cheat yourself with the 4% rule

Post by White Coat Investor » Mon Jun 04, 2018 11:38 pm

willthrill81 wrote:
Mon Jun 04, 2018 5:42 pm
Telling retirees reliant on their portfolios for income to spend even more in 2009 than they did in 2008 would fly like a 200 ton boulder and for good reason.
Sometimes boulders fly:

https://www.deseretnews.com/article/865 ... vered.html
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Re: Don’t cheat yourself with the 4% rule

Post by willthrill81 » Tue Jun 05, 2018 12:14 am

White Coat Investor wrote:
Mon Jun 04, 2018 11:38 pm
willthrill81 wrote:
Mon Jun 04, 2018 5:42 pm
Telling retirees reliant on their portfolios for income to spend even more in 2009 than they did in 2008 would fly like a 200 ton boulder and for good reason.
Sometimes boulders fly:

https://www.deseretnews.com/article/865 ... vered.html
I think I'd call that plummeting rather than flying. Very sad story. :(
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Don’t cheat yourself with the 4% rule

Post by AlphaLess » Tue Jun 05, 2018 12:18 am

cusetownusa wrote:
Mon Jun 04, 2018 7:01 pm
Abe wrote:
Mon Jun 04, 2018 4:48 pm
Although this is nothing new, I thought the article was interesting. She talks about a more flexible retirement withdrawal method rather than something more rigid like the 4% rule. I think Taylor does this.

https://finance.yahoo.com/news/don-t-ch ... 58618.html
I stopped reading at the part where she incorrectly described what the 4% rule is. If she can’t get that part correct the rest of her argument is flawed.
You call that an argument, I call that an advertisement.
On the internet, you get what you paid for, metaphorically speaking.
yahoo.finance is like the toilet of the internet.
There is literally very few things you can trust on that web site (the stock quotes deserve a much needed exemption).

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Re: Don’t cheat yourself with the 4% rule

Post by willthrill81 » Tue Jun 05, 2018 12:20 am

SittingOnTheFence wrote:
Mon Jun 04, 2018 10:46 pm
I've been retired 10 yrs. I didn't read the referenced article but when I was planning retirement and pondering if I had enough funds and how long they would last I thought the 4% rule was a good rule-of-thumb as a guideline.

I note that RMD starts at 3.65% and goes up from there.
People often conflate RMDs with spending. The '4% rule' only addresses spending, and RMDs need not be spent at all. You must withdraw RMDs from certain, usually tax-deferred accounts, but you don't have to spend a dime of that money beyond potentially paying taxes on it. Many who have no need to spend the money just turn around and immediately reinvest it (via a taxable account) into the assets sold to make the withdrawal.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Don’t cheat yourself with the 4% rule

Post by IlliniDave » Tue Jun 05, 2018 3:35 am

Yep, the way the writer describes it , with her 4% rule it would be almost impossible to run out of money barring some sort of economic catastrophe. It's actually not a bad approach for someone with an amount of flexibility in her/his spending.

I've approached it the other way around: looked at what I want/need to spend (two different numbers) then use a withdrawal percentage as a measure of adequacy of portfolio size. I'm also in the 2.5% or less cohort, for a combination of a) margin, b) legacy, and c) because I can without disrupting my desired arc. The latter is not due to immense wealth, but rather because I tend to be pretty darn content with a relatively low consumption lifestyle.

Once I retire I'll probably never think about withdrawal rates in the context of my own financial activity.
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Re: Don’t cheat yourself with the 4% rule

Post by ryman554 » Tue Jun 05, 2018 8:48 am

zaboomafoozarg wrote:
Mon Jun 04, 2018 5:51 pm
4% rule is risky business, at least for someone looking to retire a little early.

I'm planning to use the 2.5% rule when I retire, with no SS or pension factored in.
Please show me the data the supports your 2.5% statement.

You can justify 3.5% or something nearby with data. Search for "perpetual withdrawal rate". If it's good enough for inifinity, it's good enough for early retirement.

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Re: Don’t cheat yourself with the 4% rule

Post by willthrill81 » Tue Jun 05, 2018 9:25 am

ryman554 wrote:
Tue Jun 05, 2018 8:48 am
zaboomafoozarg wrote:
Mon Jun 04, 2018 5:51 pm
4% rule is risky business, at least for someone looking to retire a little early.

I'm planning to use the 2.5% rule when I retire, with no SS or pension factored in.
Please show me the data the supports your 2.5% statement.

You can justify 3.5% or something nearby with data. Search for "perpetual withdrawal rate". If it's good enough for inifinity, it's good enough for early retirement.
There certainly isn't a '2.5% rule'. Some might just choose to use a 2.5 withdrawal rate.

Similarly, people conflate things when they say that they're going to use a 3% safe withdrawal rate. The 'safe withdrawal rate' is dictated by the results of a particular investment and withdrawal strategy over a specified period of time, not what you personally elect to do. Using the term SWR instead of just WR becomes very confusing to those who don't understand what the term really means.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Don’t cheat yourself with the 4% rule

Post by goblue100 » Tue Jun 05, 2018 9:41 am

This article I came across fits the thread:
https://assetbuilder.com/knowledge-cent ... ement-rule

I'm not advocating this approach, but I was sort of amused by the setup to the story:
"She was surprised when I told her we have more money now than we did when we first retired.

That might not sound unusual until we realize that Billy and his wife, Akaisha, have been retired for 27 years. In 1991, they quit their jobs. They were just 38 years old. Billy worked as an investment broker. Akaisha ran their restaurant. But in search of greener pastures, they sold their business, their home, and nearly all of their possessions. They retired decades before conventional wisdom says they should.

The Kaderlis put their entire proceeds, about $500,000, in Vanguard’s S&P 500 index fund. “We knew that we were going to be retired for a really long time,” says Billy, “so we decided not to include bonds in our portfolio.” The couple planned to spend no more than 4 percent of their portfolio each year."

I would liked to have seen responses to a hypothetical thread started by this couple "Am I ready to retire?". :twisted:
I used an inflation calculator and according to it 500,000 in 1991 is around 950,000 today. Their risk of ruin must have been high, and it appears their expenses have been low and flexible.
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Re: Don’t cheat yourself with the 4% rule

Post by amp » Tue Jun 05, 2018 10:01 am

ryman554 wrote:
Tue Jun 05, 2018 8:48 am
zaboomafoozarg wrote:
Mon Jun 04, 2018 5:51 pm
4% rule is risky business, at least for someone looking to retire a little early.

I'm planning to use the 2.5% rule when I retire, with no SS or pension factored in.
Please show me the data the supports your 2.5% statement.

You can justify 3.5% or something nearby with data. Search for "perpetual withdrawal rate". If it's good enough for inifinity, it's good enough for early retirement.
I'm retiring early this summer, and I'm also planning on a 2.5% SWR, with about 40% of that spending for discretionary items. It's not that I don't think that a higher rate won't work. In fact, I find the 3.25 - 3.5% SWR suggested in the Guide to Safe Withdrawal Rates from the Early Retirement Now blog quite convincing. But rather, it's mostly my conservative nature. I have two main concerns. I would like to be able to sleep well at night if we get a big downturn in the next few years. Second, if I have miscalculated my expenses, this leaves me room on the upside if I need it. Like many early retirees, health care is a big issue for me, and who knows what will happen there. Additionally, I will be renting in retirement and in the area I'm moving to, rents have been rising faster than inflation of late.

And of course the 2.5% is just for planning purposes. I'll reevaluate in a few years and perhaps up my spending if I've been too cautious.

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Re: Don’t cheat yourself with the 4% rule

Post by knpstr » Tue Jun 05, 2018 10:27 am

It is better to ultimately read the Kitces article, than they Yahoo! summary of the article.

Kitces wrap up:
"The bottom line, though, is simply to recognize that even market scenarios like the tech crash in 2000 or the financial crisis of 2008 are not ones that will likely breach the 4% safe withdrawal rate, but merely examples of bad market declines for which the 4% rule was created. In turn, this is an implicit acknowledgement of just how conservative the 4% rule actually is, and how horrible the historical market returns really were that created it. In the end, this doesn’t necessarily mean that the 4% rule is ‘sacred’ and that some future market disaster couldn’t be bad enough to undermine it (and of course, it can/should still be adopted for individual circumstances like a longer/shorter time horizon, the impact of taxes, the impact of fees and other investment costs, etc.). But when the Great Depression and the stagflationary 1970s couldn’t break it, and the crash of 1987 and even the global financial crisis of 2008 were just speed bumps, it will take a lot to set a new safe withdrawal rate below 4%!"
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Re: Don’t cheat yourself with the 4% rule

Post by Glockenspiel » Tue Jun 05, 2018 10:34 am

zaboomafoozarg wrote:
Mon Jun 04, 2018 5:51 pm
4% rule is risky business, at least for someone looking to retire a little early.

I'm planning to use the 2.5% rule when I retire, with no SS or pension factored in.
And I feel with 2.5% withdrawals and not factoring in SS or pension, you are being far too conservative and will end up lots of money left on the table.

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Re: Don’t cheat yourself with the 4% rule

Post by wrongfunds » Tue Jun 05, 2018 10:41 am

goblue100 wrote:
Tue Jun 05, 2018 9:41 am
This article I came across fits the thread:
https://assetbuilder.com/knowledge-cent ... ement-rule

I'm not advocating this approach, but I was sort of amused by the setup to the story:
"She was surprised when I told her we have more money now than we did when we first retired.

That might not sound unusual until we realize that Billy and his wife, Akaisha, have been retired for 27 years. In 1991, they quit their jobs. They were just 38 years old. Billy worked as an investment broker. Akaisha ran their restaurant. But in search of greener pastures, they sold their business, their home, and nearly all of their possessions. They retired decades before conventional wisdom says they should.

The Kaderlis put their entire proceeds, about $500,000, in Vanguard’s S&P 500 index fund. “We knew that we were going to be retired for a really long time,” says Billy, “so we decided not to include bonds in our portfolio.” The couple planned to spend no more than 4 percent of their portfolio each year."

I would liked to have seen responses to a hypothetical thread started by this couple "Am I ready to retire?". :twisted:
I used an inflation calculator and according to it 500,000 in 1991 is around 950,000 today. Their risk of ruin must have been high, and it appears their expenses have been low and flexible.
One of the chart shows that $20K in 1972 is now equivalent to $116K in 2017 due to inflation. Is that really correct?

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Re: Don’t cheat yourself with the 4% rule

Post by willthrill81 » Tue Jun 05, 2018 10:44 am

wrongfunds wrote:
Tue Jun 05, 2018 10:41 am
goblue100 wrote:
Tue Jun 05, 2018 9:41 am
This article I came across fits the thread:
https://assetbuilder.com/knowledge-cent ... ement-rule

I'm not advocating this approach, but I was sort of amused by the setup to the story:
"She was surprised when I told her we have more money now than we did when we first retired.

That might not sound unusual until we realize that Billy and his wife, Akaisha, have been retired for 27 years. In 1991, they quit their jobs. They were just 38 years old. Billy worked as an investment broker. Akaisha ran their restaurant. But in search of greener pastures, they sold their business, their home, and nearly all of their possessions. They retired decades before conventional wisdom says they should.

The Kaderlis put their entire proceeds, about $500,000, in Vanguard’s S&P 500 index fund. “We knew that we were going to be retired for a really long time,” says Billy, “so we decided not to include bonds in our portfolio.” The couple planned to spend no more than 4 percent of their portfolio each year."

I would liked to have seen responses to a hypothetical thread started by this couple "Am I ready to retire?". :twisted:
I used an inflation calculator and according to it 500,000 in 1991 is around 950,000 today. Their risk of ruin must have been high, and it appears their expenses have been low and flexible.
One of the chart shows that $20K in 1972 is now equivalent to $116K in 2017 due to inflation. Is that really correct?
$119,880 today to be exact. Inflation in the 1970s and early 1980s was horrendous.

http://www.usinflationcalculator.com/
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Re: Don’t cheat yourself with the 4% rule

Post by tadamsmar » Tue Jun 05, 2018 10:47 am

The 4% rule is rigid if you actually follow it during retirement.

But I think of it as more of a pre-retirement planning heuristic.

To use it, you have to compare it with something, a retirement spending estimate, to estimate a target size for your nest egg at the point of retirement.

You are likely to have a lot of flexibility about spending during retirement, but perhaps not in some of the scenarios that you are planning for during the pre-retirement period.

But I am not sure how much flexibility you have in the planning. There are two things you can change: the (1) the estimated withdrawal rate, or (2) your retirement spending estimate. The risk/return estimate of the investments is kind of baked in, I think.

The 4% is already a Monte Carlo estimate. Seems to me that applying Monte Carlo to your spending rate can amount to a "how low can you go" game, where you might have a high chance of an uncomfortably low spending rate.

The fact that you typically end up being able to spend more than 4% is not an estimation error. It's just a consequence of self-annuitization. The plan needs to be biased toward not having a loss.
Last edited by tadamsmar on Tue Jun 05, 2018 1:33 pm, edited 1 time in total.

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Re: Don’t cheat yourself with the 4% rule

Post by DVMResident » Tue Jun 05, 2018 11:26 am

knpstr wrote:
Tue Jun 05, 2018 10:27 am
It is better to ultimately read the Kitces article, than they Yahoo! summary of the article.

Kitces wrap up:
"The bottom line, though, is simply to recognize that even market scenarios like the tech crash in 2000 or the financial crisis of 2008 are not ones that will likely breach the 4% safe withdrawal rate, but merely examples of bad market declines for which the 4% rule was created. In turn, this is an implicit acknowledgement of just how conservative the 4% rule actually is, and how horrible the historical market returns really were that created it. In the end, this doesn’t necessarily mean that the 4% rule is ‘sacred’ and that some future market disaster couldn’t be bad enough to undermine it (and of course, it can/should still be adopted for individual circumstances like a longer/shorter time horizon, the impact of taxes, the impact of fees and other investment costs, etc.). But when the Great Depression and the stagflationary 1970s couldn’t break it, and the crash of 1987 and even the global financial crisis of 2008 were just speed bumps, it will take a lot to set a new safe withdrawal rate below 4%!"
Thanks for the quote. The bold section is important. The 4% SWR is so conservative and infrequent. From 1870-1987, a 8% SWR occur more often than a 4%! For the limitations for the WSJ article, I think the BH community has mostly rallied around around the same punch line: dynamic withdrawals strategies are superior to fixed.

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Re: Don’t cheat yourself with the 4% rule

Post by CnC » Tue Jun 05, 2018 11:52 am

My question is why does anyone treat their yearly expenses as a fixed amount? Unless you are paying on a mortgage your expenses are extremely flexible. Even with a mortgage they are, you can always choose to sell the house and move or apply for a reverse mortgage and have it pay itself effectively living in a place for free assuming you have equity in the home.

The average family of 4 lives on ±60k a year if you are spending that much or more in retirement you have excess spending. Not nessissarly spending you want to get rid of but certainly spending you can get rid of.

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Re: Don’t cheat yourself with the 4% rule

Post by willthrill81 » Tue Jun 05, 2018 12:28 pm

CnC wrote:
Tue Jun 05, 2018 11:52 am
My question is why does anyone treat their yearly expenses as a fixed amount?
This was originally done for the purposes of modeling spending in retirement to determine such things as the safe withdrawal rate. It is more complicated to model flexible withdrawals, but modern software is capable of doing so.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Don’t cheat yourself with the 4% rule

Post by tadamsmar » Tue Jun 05, 2018 12:34 pm

DVMResident wrote:
Tue Jun 05, 2018 11:26 am
I think the BH community has mostly rallied around around the same punch line: dynamic withdrawals strategies are superior to fixed.
It's not clear to me that dynamic withdrawal strategies lead to the assumption that you need to save less for retirement. Is there some evidence of that?

The wiki has an article on variable percentage withdrawal: https://www.bogleheads.org/wiki/Variabl ... withdrawal

But I don't see anything in there that provides a procedure for setting a goal for the size of your nest egg at retirement. The whole point of the derivation of the 4% rule was to help you set that goal.

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Re: Don’t cheat yourself with the 4% rule

Post by tadamsmar » Tue Jun 05, 2018 12:41 pm

willthrill81 wrote:
Tue Jun 05, 2018 12:28 pm
CnC wrote:
Tue Jun 05, 2018 11:52 am
My question is why does anyone treat their yearly expenses as a fixed amount?
This was originally done for the purposes of modeling spending in retirement to determine such things as the safe withdrawal rate. It is more complicated to model flexible withdrawals, but modern software is capable of doing so.
Actually goal of the modeling was not to determine a safe withdrawal rate. The goal was to set a target for the size of your nest egg at retirement.

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Re: Don’t cheat yourself with the 4% rule

Post by willthrill81 » Tue Jun 05, 2018 1:52 pm

tadamsmar wrote:
Tue Jun 05, 2018 12:41 pm
willthrill81 wrote:
Tue Jun 05, 2018 12:28 pm
CnC wrote:
Tue Jun 05, 2018 11:52 am
My question is why does anyone treat their yearly expenses as a fixed amount?
This was originally done for the purposes of modeling spending in retirement to determine such things as the safe withdrawal rate. It is more complicated to model flexible withdrawals, but modern software is capable of doing so.
Actually goal of the modeling was not to determine a safe withdrawal rate. The goal was to set a target for the size of your nest egg at retirement.
That is not true of Bengen's original article from 1994, the seminal work in the safe withdrawal rate research. His explicit goal was to determine the safe withdrawal rate. Here's the executive summary of that article with my emphasis underlined.
At the onset of retirement, investment advisors make crucial recommendations to clients concerning asset allocation, as well as dollar amounts they can safely withdraw annually, so clients will not outlive their money. This article utilizes historical investment data as a rational basis for these recommendations. It employs graphical interpretations of the data to determine the maximum safe withdrawal rate (as a percentage of initial portfolio value), and establishes a range of stock and bond asset allocations that is optimal for virtually all retirement portfolios. Finally, it provides guidance on "mid-retirement" changes of asset allocation and withdrawal rate.
http://www.retailinvestor.org/pdf/Bengen1.pdf
“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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tadamsmar
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Re: Don’t cheat yourself with the 4% rule

Post by tadamsmar » Tue Jun 05, 2018 1:56 pm

Here's a quotes from the original Trinity Study:
Mid-course corrections likely will be required,
with the actual dollar amounts withdrawn adjusted downward
or upward relative to the plan. The investor needs to
keep in mind that selection of a withdrawal rate is not a
matter of contract but rather a matter of planning
In other words, it's not a fixed rate, it's a planning tool.
Ironically, even
those retirees who adopt higher withdrawal rates and
who have little or no desire to leave large estates may
end up doing so if they act reasonably prudent in protecting
themselves from prematurely exhausting their
portfolio.
In other words, you may end up with too much money even if you plan to use a variable withdrawal rate. It's not a mistake, it is a consequence of prudence.

https://incomeclub.co/wp-content/upload ... inable.pdf

In this light, calling it a fixed rate is a strawman argument.

But perhaps they should have focused more of portfolio success rates, to avoid all this confusion.

The portfolio size is the decision variable in retirement planning. You're withdrawal rate is not a matter of contract. But the consequences of quitting your job are sometimes difficult to reverse, quitting your job in some cases actually terminates some actual contracts. You can change your withdrawal rate. But you can't go back and change the size of your nest egg on the day you make certain difficult to reverse decisions when you retire.

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tadamsmar
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Re: Don’t cheat yourself with the 4% rule

Post by tadamsmar » Tue Jun 05, 2018 2:07 pm

willthrill81 wrote:
Tue Jun 05, 2018 1:52 pm
tadamsmar wrote:
Tue Jun 05, 2018 12:41 pm
willthrill81 wrote:
Tue Jun 05, 2018 12:28 pm
CnC wrote:
Tue Jun 05, 2018 11:52 am
My question is why does anyone treat their yearly expenses as a fixed amount?
This was originally done for the purposes of modeling spending in retirement to determine such things as the safe withdrawal rate. It is more complicated to model flexible withdrawals, but modern software is capable of doing so.
Actually goal of the modeling was not to determine a safe withdrawal rate. The goal was to set a target for the size of your nest egg at retirement.
That is not true of Bengen's original article from 1994, the seminal work in the safe withdrawal rate research. His explicit goal was to determine the safe withdrawal rate. Here's the executive summary of that article with my emphasis underlined.
At the onset of retirement, investment advisors make crucial recommendations to clients concerning asset allocation, as well as dollar amounts they can safely withdraw annually, so clients will not outlive their money . This article utilizes historical investment data as a rational basis for these recommendations. It employs graphical interpretations of the data to determine the maximum safe withdrawal rate (as a percentage of initial portfolio value), and establishes a range of stock and bond asset allocations that is optimal for virtually all retirement portfolios. Finally, it provides guidance on "mid-retirement" changes of asset allocation and withdrawal rate.
http://www.retailinvestor.org/pdf/Bengen1.pdf
But he says "it provides guidance on "mid-retirement" changes of asset allocation and withdrawal rate". It's a guide for changing your withdrawal rate.

From your quote, the goal is "clients will not outlive their money". The goal is not a fixed withdrawal rate.

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Re: Don’t cheat yourself with the 4% rule

Post by Jack FFR1846 » Tue Jun 05, 2018 2:13 pm

I'm set up for a 2% withdrawal rate. But as things go, I'll reassess and spend more or less on whatever we decide is what we want. Maybe it's a vacation to Europe. Maybe a used McLaren MP4-12C (I have my eye on one). But I don't expect the splurges will be a regular occurrence.
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Re: Don’t cheat yourself with the 4% rule

Post by willthrill81 » Tue Jun 05, 2018 2:34 pm

tadamsmar wrote:
Tue Jun 05, 2018 2:07 pm
willthrill81 wrote:
Tue Jun 05, 2018 1:52 pm
tadamsmar wrote:
Tue Jun 05, 2018 12:41 pm
willthrill81 wrote:
Tue Jun 05, 2018 12:28 pm
CnC wrote:
Tue Jun 05, 2018 11:52 am
My question is why does anyone treat their yearly expenses as a fixed amount?
This was originally done for the purposes of modeling spending in retirement to determine such things as the safe withdrawal rate. It is more complicated to model flexible withdrawals, but modern software is capable of doing so.
Actually goal of the modeling was not to determine a safe withdrawal rate. The goal was to set a target for the size of your nest egg at retirement.
That is not true of Bengen's original article from 1994, the seminal work in the safe withdrawal rate research. His explicit goal was to determine the safe withdrawal rate. Here's the executive summary of that article with my emphasis underlined.
At the onset of retirement, investment advisors make crucial recommendations to clients concerning asset allocation, as well as dollar amounts they can safely withdraw annually, so clients will not outlive their money . This article utilizes historical investment data as a rational basis for these recommendations. It employs graphical interpretations of the data to determine the maximum safe withdrawal rate (as a percentage of initial portfolio value), and establishes a range of stock and bond asset allocations that is optimal for virtually all retirement portfolios. Finally, it provides guidance on "mid-retirement" changes of asset allocation and withdrawal rate.
http://www.retailinvestor.org/pdf/Bengen1.pdf
But he says "it provides guidance on "mid-retirement" changes of asset allocation and withdrawal rate". It's a guide for changing your withdrawal rate.

From your quote, the goal is "clients will not outlive their money". The goal is not a fixed withdrawal rate.
At least one of the explicit goals was "to determine the maximum safe withdrawal rate." It's incorrect to say that this was not a goal of the research. Providing guidance for changes during retirement was another goal, not the only one. Even the title of Bengen's work reveals this: "Determining Withdrawal Rates using Historical Data."

Further, not once in Bengen's article does he discuss the target size of a nest egg at retirement. On the contrary, he said "For a client just beginning retirement, determine first the "safe" withdrawal rate." His work was focused on how financial planners should guide current retirees throughout retirement, not future retirees.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Don’t cheat yourself with the 4% rule

Post by Snowjob » Tue Jun 05, 2018 3:23 pm

tadamsmar wrote:
Tue Jun 05, 2018 12:34 pm
DVMResident wrote:
Tue Jun 05, 2018 11:26 am
I think the BH community has mostly rallied around around the same punch line: dynamic withdrawals strategies are superior to fixed.
It's not clear to me that dynamic withdrawal strategies lead to the assumption that you need to save less for retirement. Is there some evidence of that?

The wiki has an article on variable percentage withdrawal: https://www.bogleheads.org/wiki/Variabl ... withdrawal

But I don't see anything in there that provides a procedure for setting a goal for the size of your nest egg at retirement. The whole point of the derivation of the 4% rule was to help you set that goal.
I think what happens are people don't save less, but they simply get to feel better about the 4% (or whatever rate the used) they have saved for. just a confidence boost.

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Re: Don’t cheat yourself with the 4% rule

Post by tadamsmar » Tue Jun 05, 2018 4:13 pm

willthrill81 wrote:
Tue Jun 05, 2018 2:34 pm
Further, not once in Bengen's article does he discuss the target size of a nest egg at retirement. On the contrary, he said "For a client just beginning retirement, determine first the "safe" withdrawal rate." His work was focused on how financial planners should guide current retirees throughout retirement, not future retirees.
Here's the full quote:

"For a client just beginning retirement,
determine first the "safe" withdrawal
rate. Do so by computing the shortest
portfolio life acceptable to the client
(generally the client's life expectancy
plus 5 or 10 years, depending on the
conservatism of the client). Next, using
the charts for a 50/50 stock/bond allocation,
determine the highest withdrawal
rate that satisfies the desired minimum
portfolio life. For a client of age 60-65,
this will usually be about 4 percent."

He repeatedly defines the safe withdrawal rate as a percentage of initial portfolio value.

So I guess the poor client retires first and then goes to the investment adviser to be told what their budget must be.

I personally did it the other way around, I estimated a comfortable withdrawal rate (in real dollars) and then planned the size of my initial portfolio.
Last edited by tadamsmar on Wed Jun 06, 2018 4:08 pm, edited 1 time in total.

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Re: Don’t cheat yourself with the 4% rule

Post by boglemania » Tue Jun 05, 2018 4:22 pm

I'm planning to use the 2.5% rule when I retire, with no SS or pension factored in.
[/quote]

Isn't that still a bit to risky? Better off just working till you drop right? That way you have a 0% chance of running out of money. Rather than that outlandish 5% chance if you retire at 25x or the 1.5% if you retire at 50x
[/quote]

haha, brilliant!

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Re: Don’t cheat yourself with the 4% rule

Post by Grt2bOutdoors » Tue Jun 05, 2018 4:26 pm

Make no plans, when you get there see what you have, then you can decide what you will actually withdraw and what you'll actually spend.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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1210sda
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Re: Don’t cheat yourself with the 4% rule

Post by 1210sda » Tue Jun 05, 2018 4:33 pm

Just for reference,...

Amortizing $1,000,000.

PV: $1,000,000
N: 30 years
Pmt: -$40,000
FV: zero
Int: 1.31% real

it takes just 1.31% real return

Of course there's sequence of return, wild inflation, yada, yada,

1210

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Re: Don’t cheat yourself with the 4% rule

Post by Sandi_k » Tue Jun 05, 2018 4:56 pm

The other point infrequently cited is that the Trinity Study *assumed you'd be paying an advisor 1% of AUM.*

If you're in index funds with ERs of .50 or less, you could conceivably use a target of 4.5%. An ER average of .10? Then a withdrawal target of 4.9%.

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Re: Don’t cheat yourself with the 4% rule

Post by tadamsmar » Tue Jun 05, 2018 5:42 pm

Sandi_k wrote:
Tue Jun 05, 2018 4:56 pm
The other point infrequently cited is that the Trinity Study *assumed you'd be paying an advisor 1% of AUM.*
Actually, the Trinity Study seems to not assume any costs. Citing the study

"The study did not adjust for taxes or transaction costs.
An investor’s own experience would differ depending
on how much of his assets were in tax-deferred accounts,
and the extent to which transaction costs could be held
to a minimum using low-cost index funds"

https://incomeclub.co/wp-content/upload ... inable.pdf

But maybe I am missing something, could your provide the citation?

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Re: Don’t cheat yourself with the 4% rule

Post by zaboomafoozarg » Tue Jun 05, 2018 6:31 pm

ryman554 wrote:
Tue Jun 05, 2018 8:48 am
Please show me the data the supports your 2.5% statement.
It isn't based on historical data, it's based on being able to last for 40 years (the expected time I'll be in retirement, age 45 to 85) with 0% real return.

Of course I might die at 50, or we might have positive real returns over the next 50 years. In both cases I'll end up with more money than I need and I'm OK with that.

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Re: Don’t cheat yourself with the 4% rule

Post by DVMResident » Tue Jun 05, 2018 6:33 pm

tadamsmar wrote:
Tue Jun 05, 2018 12:34 pm
DVMResident wrote:
Tue Jun 05, 2018 11:26 am
I think the BH community has mostly rallied around around the same punch line: dynamic withdrawals strategies are superior to fixed.
It's not clear to me that dynamic withdrawal strategies lead to the assumption that you need to save less for retirement. Is there some evidence of that?

The wiki has an article on variable percentage withdrawal: https://www.bogleheads.org/wiki/Variabl ... withdrawal

But I don't see anything in there that provides a procedure for setting a goal for the size of your nest egg at retirement. The whole point of the derivation of the 4% rule was to help you set that goal.
Agreed, as far as I know, the dynamic withdraw has not driven anyone to claim you need to save less.

At best, one could avoid these wild claims of 2.X-3% SWR/up to 50x expense overcompensates. But it also depends on the 'floor' spending requirements. Some dynamic withdraws protocols can be overly spartan in down year.
Last edited by DVMResident on Tue Jun 05, 2018 6:43 pm, edited 2 times in total.

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Re: Don’t cheat yourself with the 4% rule

Post by DVMResident » Tue Jun 05, 2018 6:39 pm

tadamsmar wrote:
Tue Jun 05, 2018 5:42 pm
Sandi_k wrote:
Tue Jun 05, 2018 4:56 pm
The other point infrequently cited is that the Trinity Study *assumed you'd be paying an advisor 1% of AUM.*
Actually, the Trinity Study seems to not assume any costs. Citing the study

"The study did not adjust for taxes or transaction costs.
An investor’s own experience would differ depending
on how much of his assets were in tax-deferred accounts,
and the extent to which transaction costs could be held
to a minimum using low-cost index funds"

https://incomeclub.co/wp-content/upload ... inable.pdf

But maybe I am missing something, could your provide the citation?
I think Sandi_K is mixing up two different studies. Wade Pfau's has assumed this in at least one study and often refers to a 1% AUM in his writing (an example).

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Re: Don’t cheat yourself with the 4% rule

Post by marcopolo » Tue Jun 05, 2018 6:46 pm

Grt2bOutdoors wrote:
Tue Jun 05, 2018 4:26 pm
Make no plans, when you get there see what you have, then you can decide what you will actually withdraw and what you'll actually spend.
When you get where?
I like this approach, but then it just shifts the challenge to defining a time/event target, rather than a dollar/multiple target. I think you still kind of have to make a plan, no?
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Don’t cheat yourself with the 4% rule

Post by willthrill81 » Tue Jun 05, 2018 7:01 pm

zaboomafoozarg wrote:
Tue Jun 05, 2018 6:31 pm
ryman554 wrote:
Tue Jun 05, 2018 8:48 am
Please show me the data the supports your 2.5% statement.
It isn't based on historical data, it's based on being able to last for 40 years (the expected time I'll be in retirement, age 45 to 85) with 0% real return.

Of course I might die at 50, or we might have positive real returns over the next 50 years. In both cases I'll end up with more money than I need and I'm OK with that.
If you put all of the money into 30 year TIPS, which have a current real yield of .94%, that would translate to a withdrawal rate of 3.01% over a 40 year period. Granted, you can't get 40 year TIPS, so there is some risk there, but assuming 0% real yields for 40 years is very, very conservative (or pessimistic, depending on whether you're a glass half-full or half-empty type of person).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Don’t cheat yourself with the 4% rule

Post by Grt2bOutdoors » Tue Jun 05, 2018 7:26 pm

marcopolo wrote:
Tue Jun 05, 2018 6:46 pm
Grt2bOutdoors wrote:
Tue Jun 05, 2018 4:26 pm
Make no plans, when you get there see what you have, then you can decide what you will actually withdraw and what you'll actually spend.
When you get where?
I like this approach, but then it just shifts the challenge to defining a time/event target, rather than a dollar/multiple target. I think you still kind of have to make a plan, no?
Let’s just say you plan on accumulating $2.5 million and withdraw 3% at retirement. Sometimes things happen where either you weren’t able to accumulate it or there was a permanent reduction in the valuation that affected the final accumulation. Instead of $2.5 million you have $1.5 million. What then? You have to make adjustments to withdrawal rate or adjust and tighten the belt to meet your requirements.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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