Nathan Drake wrote: ↑Sat Jul 24, 2021 12:13 am
HomerJ wrote: ↑Sat Jul 24, 2021 12:08 am
Nathan Drake wrote: ↑Sat Jul 24, 2021 12:06 am
That’s far too simplistic. You could have 1% real over the 30 year period, but if your first 10-15 are unusually bad it will fail. The sequence matters.
Yes, the sequence matters. That's what the bonds are for. 40% in bonds/cash/CDs protects you from the sequence.
It's really not that hard.
Bonds won’t save you if they are giving you a negative real return in addition to your stock drawdowns.
Sure they will... A small negative real return even over multiple years isn't the sequence that breaks you. It's a large crash (which is what stocks do) that takes a while to recover (so you're selling stocks for multiple years at 30%-50% down) - that's the sequence that breaks you.
But selling from bonds that are -2% or -5% down won't break you.
It’s really not hard to think that the likelihood of 4% failing today is higher than it’s been in the past, given where we are.
I can see where you are coming from. Bond rates are indeed very low, AND stock valuations are high.
But it is pretty similar to the 1960s.. stock valuations were near record highs then too. Bond rates weren't as low, but interest rates were rising, so bond funds were losing money. And we had ten years of high inflation, even double-digit infation.
So if 4% worked during those years (okay 3.8% in 1966), it's pretty robust. We would need 10 years of high inflation just to match the 1960s, and even that wouldn't be enough... Because 4% mostly worked in that period. We'd need something even worse.
It could happen... I wouldn't tell anyone to blindly pull 4% for 30 years. I wouldn't tell anyone to retire if 4% was bare-bones survival with no room to cut anything.
People should remain flexible.
I'm pretty conservative, just like you... But I think you put far too much faith in the predictions from valuations. But let's say they are right. You don't recognize how low the bar is for 4% to last 30 years... You save 25 years of expenses, you expect it to last 25 years at least... You barely need any growth at all for it to last 30 years. If valuations predict 2% real (and I believe they are predicting higher than that right now, even at these super high levels), that's plenty for 4% to work.
30 years is a long time. We both have no idea what the 2030s or the 2040s will look like.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59