Larry Swedroe: 3% is the new 4%

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
visualguy
Posts: 2178
Joined: Thu Jan 30, 2014 1:32 am

Re: Larry Swedroe: 3% is the new 4%

Post by visualguy »

knpstr wrote: Sun Feb 03, 2019 8:29 pm I think it would seem that most people that plan seriously for retirement always have a built in "cushion" in their budget. For example, my preferred retirement income is really about 2x times actual barebones necessities. So hypothetically speaking (as I am far from retirement) if I had a 4% WR it could be cut down to say 2%.

In a majority of cases 4% is going to be too cautious, but if one could cut 2% without losing their home, or being able to afford food, etc, that is a pretty robust plan, in my opinion.

I think even Larry said as much when he further clarified that retirement planning and withdrawals is a "living plan". In theory a stated SWR is convenient way to plan, in practice everyone uses a variable rate.
I wasn't planning anywhere near that much cushion beyond non-discretionary stuff. I guess people who plan a lot of travel or have expensive hobbies have such a cushion, but not sure how widely this applies. In my view, if 4% or very close to that doesn't really work reliably for a 30-year retirement, then the whole strategy is questionable, and it makes sense to work harder on alternatives such as real estate, and maybe look more at annuities or other fixed income.
User avatar
willthrill81
Posts: 22705
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Larry Swedroe: 3% is the new 4%

Post by willthrill81 »

knpstr wrote: Sun Feb 03, 2019 8:29 pm
visualguy wrote: Sun Feb 03, 2019 7:54 pm
willthrill81 wrote: Sun Feb 03, 2019 4:59 pm But it's vital to keep in mind that no one is strictly following the '4% rule'. I've seriously never even heard of a rumor of anyone who did it or even seriously attempted to do so. Virtually everyone makes adjustments to their withdrawals, ratcheting them up when their portfolio does well and cutting them when the inverse occurs. No sane person is going to blindly spend down their portfolio to zero. The '4% rule' is used by most people around here at least in the way that they should use it: as an approximate guideline for how large a 'typical' (i.e. ~65 year old) retiree needs to produce a given amount of withdrawals.
You are relying on a cushion, which is just a different way of saying that the SWR may be lower, or advocating a variable withdrawal rate. The need for a cushion naturally raises the question of how big this cushion should be...
I think it would seem that most people that plan seriously for retirement always have a built in "cushion" in their budget. For example, my preferred retirement income is really about 2x times actual barebones necessities. So hypothetically speaking (as I am far from retirement) if I had a 4% WR it could be cut down to say 2%.

In a majority of cases 4% is going to be too cautious, but if one could cut 2% without losing their home, or being able to afford food, etc, that is a pretty robust plan, in my opinion.
+1

It's like HomerJ has said here many times: among Bogleheads, the difference between '4% rule' type withdrawals 'succeeding' or 'failing' probably comes down to how many vacations you'll be able to afford in retirement. The notion of 'follow the 4% rule and you're putting yourself at real risk of financial ruin' is, at best, silly, not the least of which is because nobody is following the 4% rule in the first place.

And there's a difference between using a lower WR than 4% and having a cushion. I don't think that it's wise to plan on a bare-bones budget involving 4% withdrawals; those considering such a move would probably do well to buy a SPIA with part of their portfolio. But the fact that you could cut your 4% withdrawals down to 3% or 2% is not the same as only withdrawing 3% or 2% in the first place.
“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
wesgreen
Posts: 224
Joined: Fri Jan 07, 2011 9:14 am

Re: Larry Swedroe: 3% is the new 4%

Post by wesgreen »

That makes sense, for him and his followers. On the other hand, if you don't take Mr. Swedroe's recommendation to invest in Int., but instead follow Mr. Bogle's investment advice, I believe 4.5% could be the new 4%.
User avatar
willthrill81
Posts: 22705
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Larry Swedroe: 3% is the new 4%

Post by willthrill81 »

visualguy wrote: Sun Feb 03, 2019 8:44 pm
knpstr wrote: Sun Feb 03, 2019 8:29 pm I think it would seem that most people that plan seriously for retirement always have a built in "cushion" in their budget. For example, my preferred retirement income is really about 2x times actual barebones necessities. So hypothetically speaking (as I am far from retirement) if I had a 4% WR it could be cut down to say 2%.

In a majority of cases 4% is going to be too cautious, but if one could cut 2% without losing their home, or being able to afford food, etc, that is a pretty robust plan, in my opinion.

I think even Larry said as much when he further clarified that retirement planning and withdrawals is a "living plan". In theory a stated SWR is convenient way to plan, in practice everyone uses a variable rate.
I wasn't planning anywhere near that much cushion beyond non-discretionary stuff. I guess people who plan a lot of travel or have expensive hobbies have such a cushion, but not sure how widely this applies. In my view, if 4% or very close to that doesn't really work reliably for a 30-year retirement, then the whole strategy is questionable, and it makes sense to work harder on alternatives such as real estate, and maybe look more at annuities or other fixed income.
The '4% rule' is not a strategy.
“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
User avatar
Tony-S
Posts: 220
Joined: Tue Sep 18, 2018 11:48 am

Re: Larry Swedroe: 3% is the new 4%

Post by Tony-S »

willthrill81 wrote: Sun Feb 03, 2019 5:13 pmThat's possible. But it could also be that we are getting closer to the upper limit of human beings' lifespans. If we merely extrapolate prior medical advances and the resulting increased lifespans far enough into the future, people would one day be living for thousands of years. Maybe that will happen, but it could be that biological limits prohibit anything remotely like that from happening.
I'm not talking about science fiction. I'm talking about the data released by the CDC that shows US life expectancy has declined and a substantial cause is the opioid crisis (along with increased numbers of deaths from suicides and chronic liver disease).
sambb
Posts: 2967
Joined: Sun Mar 10, 2013 3:31 pm

Re: Larry Swedroe: 3% is the new 4%

Post by sambb »

Why does anyone care about what This advisor says about this topic. Is there something special about this indicidual
visualguy
Posts: 2178
Joined: Thu Jan 30, 2014 1:32 am

Re: Larry Swedroe: 3% is the new 4%

Post by visualguy »

willthrill81 wrote: Sun Feb 03, 2019 8:54 pm The '4% rule' is not a strategy.
Right, but if our investment strategy (Boglehead-style stock/bond indexing) isn't expected to sustain it in the future, then it's time to look for another strategy.
User avatar
willthrill81
Posts: 22705
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Larry Swedroe: 3% is the new 4%

Post by willthrill81 »

visualguy wrote: Sun Feb 03, 2019 9:06 pm
willthrill81 wrote: Sun Feb 03, 2019 8:54 pm The '4% rule' is not a strategy.
Right, but if our investment strategy (Boglehead-style stock/bond indexing) isn't expected to sustain it in the future, then it's time to look for another strategy.
That's part of the reason that I became a trend follower. Academic research has shown that it may significantly reduce sequence of returns risk.
“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
visualguy
Posts: 2178
Joined: Thu Jan 30, 2014 1:32 am

Re: Larry Swedroe: 3% is the new 4%

Post by visualguy »

willthrill81 wrote: Sun Feb 03, 2019 9:19 pm
visualguy wrote: Sun Feb 03, 2019 9:06 pm
willthrill81 wrote: Sun Feb 03, 2019 8:54 pm The '4% rule' is not a strategy.
Right, but if our investment strategy (Boglehead-style stock/bond indexing) isn't expected to sustain it in the future, then it's time to look for another strategy.
That's part of the reason that I became a trend follower. Academic research has shown that it may significantly reduce sequence of returns risk.
Yes. My confidence that the standard strategy will work is also not all that strong, which is the reason I invest in direct real estate. However, I often struggle with the balance between the two. Not sure how much to put in each one.
User avatar
zaboomafoozarg
Posts: 2196
Joined: Sun Jun 12, 2011 12:34 pm

Re: Larry Swedroe: 3% is the new 4%

Post by zaboomafoozarg »

visualguy wrote: Sun Feb 03, 2019 9:06 pmRight, but if our investment strategy (Boglehead-style stock/bond indexing) isn't expected to sustain it in the future, then it's time to look for another strategy.
Or you can just lower your withdrawal rate. Not sure why that original study made 4% a magic number.
Stormbringer
Posts: 1018
Joined: Sun Jun 14, 2015 7:07 am

Re: Larry Swedroe: 3% is the new 4%

Post by Stormbringer »

Random Walker wrote: Sat Feb 02, 2019 9:54 pm3% is the new 4%
That makes no sense to me when you can get an inflation-adjusted life annuity with about a 4% payout rate. More income. Less risk.
"Compound interest is the most powerful force in the universe." - Albert Einstein
Socal77
Posts: 219
Joined: Thu Oct 19, 2017 1:14 pm

Re: Larry Swedroe: 3% is the new 4%

Post by Socal77 »

Except at 70 RMD is currently 3.65%.
User avatar
knpstr
Posts: 2890
Joined: Thu Nov 20, 2014 8:57 pm
Location: Michigan

Re: Larry Swedroe: 3% is the new 4%

Post by knpstr »

visualguy wrote: Sun Feb 03, 2019 8:44 pm I wasn't planning anywhere near that much cushion beyond non-discretionary stuff. I guess people who plan a lot of travel or have expensive hobbies have such a cushion, but not sure how widely this applies. In my view, if 4% or very close to that doesn't really work reliably for a 30-year retirement, then the whole strategy is questionable, and it makes sense to work harder on alternatives such as real estate, and maybe look more at annuities or other fixed income.
If a couple needs say $20,000/year for all the basics and plans for a $40,000/yr retirement, that doesn't seem too extreme, even though it is a large cushion. It simply doesn't take much for the necessities in the Midwest. Property taxes, home insurance, groceries, electric/gas is actually less than $20,000 so that gives you some slush for non-recurring expenses like maintenance/repair/replacement. Medicare premiums aren't too expensive. Of course, some people lump non-necessities into the necessities category which artificially inflates the matter.

In all likelihood, if we get social security (as promised) it will cover all of our normal necessities. Making any nest egg and rental real estate nothing but redundancy/cushion.

I think if one lives very frugally and contributes regularly to investments throughout their working lifetime, it makes such a cushion almost inevitable.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius
User avatar
Taylor Larimore
Advisory Board
Posts: 30200
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Larry Swedroe returns

Post by Taylor Larimore »

Bogleheads:

I am happy to see Larry Swedroe has returned to this forum with a valuable and informative post.

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
randomguy
Posts: 9208
Joined: Wed Sep 17, 2014 9:00 am

Re: Larry Swedroe: 3% is the new 4%

Post by randomguy »

sambb wrote: Sun Feb 03, 2019 9:05 pm Why does anyone care about what This advisor says about this topic. Is there something special about this indicidual
Larry has posted here for a long time AND I can't think of much that he has written that isn't worth reading about and understanding. You might not agree with his conclusions but it is pretty darn valuable to understand how he is getting there because he is one of the best in the business.
metalworking
Posts: 232
Joined: Sun Jan 03, 2016 9:20 pm

Re: Larry Swedroe returns

Post by metalworking »

Taylor Larimore wrote: Sun Feb 03, 2019 10:15 pm Bogleheads:

I am happy to see Larry Swedroe has returned to this forum with a valuable and informative post.

Best wishes
Taylor
Agreed. Great to hear from him.
Luckywon
Posts: 1215
Joined: Tue Mar 28, 2017 10:33 am

Re: Larry Swedroe returns

Post by Luckywon »

metalworking wrote: Sun Feb 03, 2019 10:26 pm
Taylor Larimore wrote: Sun Feb 03, 2019 10:15 pm Bogleheads:

I am happy to see Larry Swedroe has returned to this forum with a valuable and informative post.

Best wishes
Taylor
Agreed. Great to hear from him.
It's fantastic Mr. Swedroe is sharing his insights here. Priceless and free. doesn't get better than that!
sambb
Posts: 2967
Joined: Sun Mar 10, 2013 3:31 pm

Re: Larry Swedroe: 3% is the new 4%

Post by sambb »

In researching this individual ,he seems to be part of a financial services and investment advisory firm.
User avatar
LadyGeek
Site Admin
Posts: 68742
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Larry Swedroe: 3% is the new 4%

Post by LadyGeek »

The wiki has some background info: Larry Swedroe
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
User avatar
Will do good
Posts: 1044
Joined: Fri Feb 24, 2012 8:23 pm

Re: Larry Swedroe: 3% is the new 4%

Post by Will do good »

Mr. Swedroe, I might not always agreed with you but I appreciate your contribution and opening our mind.
User avatar
HomerJ
Posts: 15724
Joined: Fri Jun 06, 2008 12:50 pm

Re: Larry Swedroe: 3% is the new 4%

Post by HomerJ »

knpstr wrote: Sun Feb 03, 2019 8:29 pmIn a majority of cases 4% is going to be too cautious, but if one could cut 2% without losing their home, or being able to afford food, etc, that is a pretty robust plan, in my opinion.

I think even Larry said as much when he further clarified that retirement planning and withdrawals is a "living plan". In theory a stated SWR is convenient way to plan, in practice everyone uses a variable rate.
This.

4% represents the worst-case in the past in U.S. history. For many Bogleheads, retirement is full of discretionary expenses.

4% working 90% or 95% of the time is plenty robust, if the 5% or 10% (failing) "penalty" is that you take 2 vacations a year instead of 4 vacations a year. We're not talking about living under a bridge. Now Swedroe is writing for a bigger audience, so maybe his advice is more relevant to someone retiring with bare-bones survival at 25x expenses.

I think it would be pretty foolish to work 5 more years of your life (if you're already fairly old) just to make sure 100% that you can take 4 vacations a year. Losing those 5 years of retirement, a guaranteed loss of 5 years, is far worse than a small chance you may have to cut back on vacations during a downturn.

And technically, downturns really only hurt if they happen early in retirement, when you're still young, and still have relevant skills.

Far better to retire at 4%, with the expectation of MAYBE going back to work (or cutting back some, but not all, fun) if bad things happen.

Isn't that better than working for 5 more years to make sure you don't have to go back to work if bad things happen. But you already worked 5 more years! (so technically you just guaranteed that bad things happened)
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
User avatar
onthecusp
Posts: 820
Joined: Mon Aug 29, 2016 3:25 pm

Re: Larry Swedroe: 3% is the new 4%

Post by onthecusp »

scottinmet wrote: Sun Feb 03, 2019 3:44 pm I'm always a bit amused when I see these 4% vs 3% SWR debates pop up. I think almost everyone here is already targeting 3% or lower when they retire. They do this by not including SS, pensions, and inheritances in their calculations. If 3% is the majority consensus for personal retirement, I don't think it matters what future SWR number you believe in, just as long as it's greater than your target.
I disagree with your statement. There are many people here including social security and pensions. The easiest way is through the use of calculators like firecalc or I-ORP. For example, I use them to evaluate delaying social security. I will most likely withdraw substantially more than 4% between retirement and starting SS. Then I could cut back to much less than 3% once SS contributes a substantial amount of my retirement income. At that point I may reevaluate, set aside a "bucket" for long term care and take 4% on the remainder and become a spendthrift!
User avatar
HomerJ
Posts: 15724
Joined: Fri Jun 06, 2008 12:50 pm

Re: Larry Swedroe: 3% is the new 4%

Post by HomerJ »

zaboomafoozarg wrote: Sun Feb 03, 2019 9:30 pm
visualguy wrote: Sun Feb 03, 2019 9:06 pmRight, but if our investment strategy (Boglehead-style stock/bond indexing) isn't expected to sustain it in the future, then it's time to look for another strategy.
Or you can just lower your withdrawal rate. Not sure why that original study made 4% a magic number.
Because that was the worst case scenario in the past.

Doesn't guarantee the next 30 years won't be worse, but it's a pretty good place to start, don't you think?

They looked at all the 30-year periods in the past for a 60/40 portfolio. Many supported 5% or 6% a year withdrawals. Some supported 7% or 8% a year withdrawals. The worst ones only supported 4% a year withdrawals.

Therefore, they said, "Hey, every 30-year period in the past supported between 4%-8% a year withdrawals. If you plan around 4%, that should be pretty safe"

Does that not make some sense?
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
User avatar
HomerJ
Posts: 15724
Joined: Fri Jun 06, 2008 12:50 pm

Re: Larry Swedroe: 3% is the new 4%

Post by HomerJ »

visualguy wrote: Sun Feb 03, 2019 8:44 pmIn my view, if 4% or very close to that doesn't really work reliably for a 30-year retirement, then the whole strategy is questionable, and it makes sense to work harder on alternatives such as real estate, and maybe look more at annuities or other fixed income.
So far, it's worked completely reliably. It hasn't failed yet (well technically 3.8%).

Even the people retiring in 2000 at the highest valuations in U.S. history are doing fine if they had a 60/40 portfolio and withdrew 4% a year.

Even after TWO crashes in the first 9 years of their retirement. That's some pretty serious sequence of returns risk showing up. Yet 4% still worked.

Doesn't mean it's a guarantee. Nothing in life in guaranteed. But you don't have to panic just because some guy writes an article.
Last edited by HomerJ on Sun Feb 03, 2019 11:43 pm, edited 1 time in total.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
Topic Author
Random Walker
Posts: 4719
Joined: Fri Feb 23, 2007 8:21 pm

Re: Larry Swedroe: 3% is the new 4%

Post by Random Walker »

02nz wrote: Sun Feb 03, 2019 2:45 pm
grok87 wrote: Sun Feb 03, 2019 8:36 am I'm suspicious of arguments involving valuations etc. seems like market timing.
If you think valuations don't matter, that's fine. But looking at valuations and deciding on a more conservative withdrawal rate is not, by any reasonable definition, market timing. One of the most tiresome tendencies on this forum is when people dogmatically and sanctimoniously call anything and everything market-timing. Dollar cost averaging? Timing! Rising glidepath in retirement? Timing! :oops:
I agree. There is a difference between in and out market timing versus customizing one’s own glide path towards a retirement portfolio by opportunistically looking at valuations. High valuations not only imply lower mean future expected returns, the whole potential distribution of future returns shifts left. Good outcomes are less good, and bad outcomes are worse. I agree, looking at valuations, expected returns, the potential dispersion of returns, one can very rationally decide a lot of equity risk is not worth it, and then cool off the AA.

Dave
Day9
Posts: 1000
Joined: Mon Jun 11, 2012 6:22 pm

Re: Larry Swedroe: 3% is the new 4%

Post by Day9 »

HomerJ wrote: Sun Feb 03, 2019 11:28 pm ...They looked at all the 30-year periods in the past for a 60/40 portfolio. Many supported 5% or 6% a year withdrawals. Some supported 7% or 8% a year withdrawals. The worst ones only supported 4% a year withdrawals.

Therefore, they said, "Hey, every 30-year period in the past supported between 4%-8% a year withdrawals..
Just to nitpick but I believe that they found 5% of historical scenarios failed with a 4% rule. If you plug these numbers into firecalc you get this result as well. The failing scenarios included retiring just before the great depression and just before the stagflation of the 60s and 70s. A 3% rule worked even in these scenarios.
I'm just a fan of the person I got my user name from
User avatar
HomerJ
Posts: 15724
Joined: Fri Jun 06, 2008 12:50 pm

Re: Larry Swedroe: 3% is the new 4%

Post by HomerJ »

Day9 wrote: Sun Feb 03, 2019 11:38 pm
HomerJ wrote: Sun Feb 03, 2019 11:28 pm ...They looked at all the 30-year periods in the past for a 60/40 portfolio. Many supported 5% or 6% a year withdrawals. Some supported 7% or 8% a year withdrawals. The worst ones only supported 4% a year withdrawals.

Therefore, they said, "Hey, every 30-year period in the past supported between 4%-8% a year withdrawals..
Just to nitpick but I believe that they found 5% of historical scenarios failed with a 4% rule. If you plug these numbers into firecalc you get this result as well. The failing scenarios included retiring just before the great depression and just before the stagflation of the 60s and 70s. A 3% rule worked even in these scenarios.
That is somewhat correct. I believe retiring the day before the Great Depression, 4% worked fine. I think 1966 and 1967 failed at 4% (but 3.8% worked fine).

At no time in U.S. history (yet) has one needed to go as low as 3%.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
User avatar
HomerJ
Posts: 15724
Joined: Fri Jun 06, 2008 12:50 pm

Re: Larry Swedroe: 3% is the new 4%

Post by HomerJ »

Random Walker wrote: Sun Feb 03, 2019 11:36 pm
02nz wrote: Sun Feb 03, 2019 2:45 pm
grok87 wrote: Sun Feb 03, 2019 8:36 am I'm suspicious of arguments involving valuations etc. seems like market timing.
If you think valuations don't matter, that's fine. But looking at valuations and deciding on a more conservative withdrawal rate is not, by any reasonable definition, market timing. One of the most tiresome tendencies on this forum is when people dogmatically and sanctimoniously call anything and everything market-timing. Dollar cost averaging? Timing! Rising glidepath in retirement? Timing! :oops:
I agree. There is a difference between in and out market timing versus customizing one’s own glide path towards a retirement portfolio by opportunistically looking at valuations. High valuations not only imply lower mean future expected returns, the whole potential distribution of future returns shifts left. Good outcomes are less good, and bad outcomes are worse. I agree, looking at valuations, expected returns, the potential dispersion of returns, one can very rationally decide a lot of equity risk is not worth it, and then cool off the AA.

Dave
You guys make perfectly good sense.

My point is if you ALREADY are planning for bad times (i.e. 4%), then the fact that bad times are more likely to happen isn't really an issue.

I mean, if you were planning for average returns and planning around 6% withdrawals, then the fact that expected returns are lower because of valuations would be far more relevant.

But if you're already planning around poor returns, then expected poor returns doesn't really change anything.

It's like carrying an umbrella around every day. If one day, you read an article that the chance of rain is higher today than yesterday, it doesn't change anything for you. You're ALREADY carrying an umbrella.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
tibbitts
Posts: 12549
Joined: Tue Feb 27, 2007 6:50 pm

Re: Larry Swedroe: 3% is the new 4%

Post by tibbitts »

visualguy wrote: Sun Feb 03, 2019 12:41 pm When the SWR becomes significantly lower than 4%, the investment strategy becomes a lot more questionable in my opinion. It starts being a lot more attractive to do something like 50% or less Boglehead (mostly in tax-deferred) and 50% or more in direct real estate, which is pretty much what many of my friends and colleagues do.
That is not much different from saying it starts being more attractive to get a part-time job.
tibbitts
Posts: 12549
Joined: Tue Feb 27, 2007 6:50 pm

Re: Larry Swedroe: 3% is the new 4%

Post by tibbitts »

HomerJ wrote: Sun Feb 03, 2019 11:40 pm
Day9 wrote: Sun Feb 03, 2019 11:38 pm
HomerJ wrote: Sun Feb 03, 2019 11:28 pm ...They looked at all the 30-year periods in the past for a 60/40 portfolio. Many supported 5% or 6% a year withdrawals. Some supported 7% or 8% a year withdrawals. The worst ones only supported 4% a year withdrawals.

Therefore, they said, "Hey, every 30-year period in the past supported between 4%-8% a year withdrawals..
Just to nitpick but I believe that they found 5% of historical scenarios failed with a 4% rule. If you plug these numbers into firecalc you get this result as well. The failing scenarios included retiring just before the great depression and just before the stagflation of the 60s and 70s. A 3% rule worked even in these scenarios.
That is somewhat correct. I believe retiring the day before the Great Depression, 4% worked fine. I think 1966 and 1967 failed at 4% (but 3.8% worked fine).

At no time in U.S. history (yet) has one needed to go as low as 3%.
U.S. history isn't the issue. Today Bogleheads are close to market weight; when you redo the 4% SWR studies based on a market weight of international and domestic, you're now looking at less than 4%.
Grt2bOutdoors
Posts: 23236
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Larry Swedroe: 3% is the new 4%

Post by Grt2bOutdoors »

whodidntante wrote: Sun Feb 03, 2019 11:49 am
Larry was quite upbeat on expected returns of foreign equities. His argument is based on valuations.
I hope he is right, have been waiting quite a while for international to play catch-up.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
User avatar
Clever_Username
Posts: 1760
Joined: Sun Jul 15, 2012 12:24 am
Location: Southern California

Re: Larry Swedroe: 3% is the new 4%

Post by Clever_Username »

sambb wrote: Sun Feb 03, 2019 10:35 pm In researching this individual ,he seems to be part of a financial services and investment advisory firm.
In all his time at this site, he hasn't tried to hide who he is. He also isn't here selling services or advice. If anything, he understands that most of us here don't need those particular services. But that doesn't mean we can't benefit from hearing his views on the matter, and he's not making any money sharing them with us.
"What was true then is true now. Have a plan. Stick to it." -- XXXX, _Layer Cake_ | | I survived my first downturn and all I got was this signature line.
visualguy
Posts: 2178
Joined: Thu Jan 30, 2014 1:32 am

Re: Larry Swedroe: 3% is the new 4%

Post by visualguy »

tibbitts wrote: Sun Feb 03, 2019 11:48 pm
visualguy wrote: Sun Feb 03, 2019 12:41 pm When the SWR becomes significantly lower than 4%, the investment strategy becomes a lot more questionable in my opinion. It starts being a lot more attractive to do something like 50% or less Boglehead (mostly in tax-deferred) and 50% or more in direct real estate, which is pretty much what many of my friends and colleagues do.
That is not much different from saying it starts being more attractive to get a part-time job.
What part-time job would be comparable to owning a few rental properties? If we're now talking 3% SWR for a "lazy portfolio", maybe the solution is to get just a tiny bit less lazy, but nothing like getting another job.
Grt2bOutdoors
Posts: 23236
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Larry Swedroe: 3% is the new 4%

Post by Grt2bOutdoors »

nedsaid wrote: Sun Feb 03, 2019 12:45 pm I will take one more crack at this and if Larry Swedroe thinks I am a blithering idiot, so be it. Something changed in American business after the 2008-2009 financial crisis and bear market. As I have interviewed for jobs, it has occurred to me that though labor is still very valuable, that it is less valuable than before. Artificial intelligence and automation have changed things, how much I am not sure. But I can see it as I have talked to employers, the world has changed. Expectations are so much different now than just 10-11 years ago. One reason that profit margins remain high are productivity improvements that we aren't perceiving yet.
Maybe, or maybe there is more cost cutting and less productivity. Not all companies exhibit high productivity and if they do, it’s because they are doing the same amount with less expense input. Eventually though, if you don’t invest in production, those productivity gains will prove to be illusory.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
User avatar
HomerJ
Posts: 15724
Joined: Fri Jun 06, 2008 12:50 pm

Re: Larry Swedroe: 3% is the new 4%

Post by HomerJ »

visualguy wrote: Mon Feb 04, 2019 12:04 am
tibbitts wrote: Sun Feb 03, 2019 11:48 pm
visualguy wrote: Sun Feb 03, 2019 12:41 pm When the SWR becomes significantly lower than 4%, the investment strategy becomes a lot more questionable in my opinion. It starts being a lot more attractive to do something like 50% or less Boglehead (mostly in tax-deferred) and 50% or more in direct real estate, which is pretty much what many of my friends and colleagues do.
That is not much different from saying it starts being more attractive to get a part-time job.
What part-time job would be comparable to owning a few rental properties? If we're now talking 3% SWR for a "lazy portfolio", maybe the solution is to get just a tiny bit less lazy, but nothing like getting another job.
If we're now talking 3% SWR for a "lazy portfolio", the solution is SPIA(s).
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
User avatar
2pedals
Posts: 1295
Joined: Wed Dec 31, 2014 12:31 pm

Re: Larry Swedroe: 3% is the new 4%

Post by 2pedals »

HomerJ wrote: Sun Feb 03, 2019 11:47 pm But if you're already planning around poor returns, then expected poor returns doesn't really change anything.

It's like carrying an umbrella around every day. If one day, you read an article that the chance of rain is higher today than yesterday, it doesn't change anything for you. You're ALREADY carrying an umbrella.
I think it is more like carrying an umbrella when you are already wearing "gore-tex" type rain gear. I'd rather wear "gore-tex" for cold, windy and rainy days. An umbrella sometimes doesn't work so well.
Last edited by 2pedals on Mon Feb 04, 2019 12:14 am, edited 1 time in total.
tibbitts
Posts: 12549
Joined: Tue Feb 27, 2007 6:50 pm

Re: Larry Swedroe: 3% is the new 4%

Post by tibbitts »

visualguy wrote: Mon Feb 04, 2019 12:04 am
tibbitts wrote: Sun Feb 03, 2019 11:48 pm
visualguy wrote: Sun Feb 03, 2019 12:41 pm When the SWR becomes significantly lower than 4%, the investment strategy becomes a lot more questionable in my opinion. It starts being a lot more attractive to do something like 50% or less Boglehead (mostly in tax-deferred) and 50% or more in direct real estate, which is pretty much what many of my friends and colleagues do.
That is not much different from saying it starts being more attractive to get a part-time job.
What part-time job would be comparable to owning a few rental properties? If we're now talking 3% SWR for a "lazy portfolio", maybe the solution is to get just a tiny bit less lazy, but nothing like getting another job.
All I own is my own house (well actually two of them.) I'm the only person living in them and just those are a part-time job, even with no tenants involved.
Last edited by tibbitts on Mon Feb 04, 2019 12:10 am, edited 1 time in total.
Grt2bOutdoors
Posts: 23236
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Larry Swedroe: 3% is the new 4%

Post by Grt2bOutdoors »

visualguy wrote: Mon Feb 04, 2019 12:04 am
tibbitts wrote: Sun Feb 03, 2019 11:48 pm
visualguy wrote: Sun Feb 03, 2019 12:41 pm When the SWR becomes significantly lower than 4%, the investment strategy becomes a lot more questionable in my opinion. It starts being a lot more attractive to do something like 50% or less Boglehead (mostly in tax-deferred) and 50% or more in direct real estate, which is pretty much what many of my friends and colleagues do.
That is not much different from saying it starts being more attractive to get a part-time job.
What part-time job would be comparable to owning a few rental properties? If we're now talking 3% SWR for a "lazy portfolio", maybe the solution is to get just a tiny bit less lazy, but nothing like getting another job.
Rentals can be good, they can also be bad. In s good economy you don’t have a problem with paying tenants, in a bad economy that is systemic you’ll find rentals are not a panacea for lower market returns in your securities portfolio.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
tibbitts
Posts: 12549
Joined: Tue Feb 27, 2007 6:50 pm

Re: Larry Swedroe: 3% is the new 4%

Post by tibbitts »

HomerJ wrote: Mon Feb 04, 2019 12:08 am
visualguy wrote: Mon Feb 04, 2019 12:04 am
tibbitts wrote: Sun Feb 03, 2019 11:48 pm
visualguy wrote: Sun Feb 03, 2019 12:41 pm When the SWR becomes significantly lower than 4%, the investment strategy becomes a lot more questionable in my opinion. It starts being a lot more attractive to do something like 50% or less Boglehead (mostly in tax-deferred) and 50% or more in direct real estate, which is pretty much what many of my friends and colleagues do.
That is not much different from saying it starts being more attractive to get a part-time job.
What part-time job would be comparable to owning a few rental properties? If we're now talking 3% SWR for a "lazy portfolio", maybe the solution is to get just a tiny bit less lazy, but nothing like getting another job.
If we're now talking 3% SWR for a "lazy portfolio", the solution is SPIA(s).
Possibly, although inflation-adjusted SPIAs don't pay that well and have limitations on their inflation adjustments.
marcopolo
Posts: 3875
Joined: Sat Dec 03, 2016 10:22 am

Re: Larry Swedroe: 3% is the new 4%

Post by marcopolo »

tibbitts wrote: Sun Feb 03, 2019 11:55 pm
HomerJ wrote: Sun Feb 03, 2019 11:40 pm
Day9 wrote: Sun Feb 03, 2019 11:38 pm
HomerJ wrote: Sun Feb 03, 2019 11:28 pm ...They looked at all the 30-year periods in the past for a 60/40 portfolio. Many supported 5% or 6% a year withdrawals. Some supported 7% or 8% a year withdrawals. The worst ones only supported 4% a year withdrawals.

Therefore, they said, "Hey, every 30-year period in the past supported between 4%-8% a year withdrawals..
Just to nitpick but I believe that they found 5% of historical scenarios failed with a 4% rule. If you plug these numbers into firecalc you get this result as well. The failing scenarios included retiring just before the great depression and just before the stagflation of the 60s and 70s. A 3% rule worked even in these scenarios.
That is somewhat correct. I believe retiring the day before the Great Depression, 4% worked fine. I think 1966 and 1967 failed at 4% (but 3.8% worked fine).

At no time in U.S. history (yet) has one needed to go as low as 3%.
U.S. history isn't the issue. Today Bogleheads are close to market weight; when you redo the 4% SWR studies based on a market weight of international and domestic, you're now looking at less than 4%.
Still not as low as 3%.

Also consider that the "3% is the new 4%" argument is based on saying looking at past history is not good enough, you have to consider valuations, and the resulting lower expected returns they imply. If you believe that argument, then adding international, which has lower valuations and higher expected returns, should improve things, not make them worse.
Once in a while you get shown the light, in the strangest of places if you look at it right.
visualguy
Posts: 2178
Joined: Thu Jan 30, 2014 1:32 am

Re: Larry Swedroe: 3% is the new 4%

Post by visualguy »

Grt2bOutdoors wrote: Mon Feb 04, 2019 12:10 am Rentals can be good, they can also be bad. In s good economy you don’t have a problem with paying tenants, in a bad economy that is systemic you’ll find rentals are not a panacea for lower market returns in your securities portfolio.
It's fine in good locations. When the economy is bad, the pool of renters actually gets better (in good locations) because fewer can buy, and some lose their homes. At least, that was my experience in 2008/9... The demand for rentals actually shot up. People still had to live somewhere.
evestor
Posts: 144
Joined: Sat Feb 21, 2015 5:37 pm

Re: Larry Swedroe: 3% is the new 4%

Post by evestor »

larryswedroe wrote: Sun Feb 03, 2019 5:53 pm So in last 10 years, higher than expected returns might have allowed people to begin to take more than the initial rate.
I have assumed (but will admit I have not looked at the detailed math to support) that this is where the 4% 'rule' goes off the rails. IE, if you take more than 4% when you can then you increase the risk you'll need to take less than 4% at other times to compensate.
If you're willing to do both then that's great. But if you really want the 4% rule to hold even in bad times, that you'd need to hold the line in good times too.

But I could be wrong...and would love if someone could demonstrate that this is the case. i'm always happy to learn my assumptions are too conservative.
User avatar
nedsaid
Posts: 14238
Joined: Fri Nov 23, 2012 12:33 pm

Re: Larry Swedroe: 3% is the new 4%

Post by nedsaid »

Grt2bOutdoors wrote: Mon Feb 04, 2019 12:07 am
nedsaid wrote: Sun Feb 03, 2019 12:45 pm I will take one more crack at this and if Larry Swedroe thinks I am a blithering idiot, so be it. Something changed in American business after the 2008-2009 financial crisis and bear market. As I have interviewed for jobs, it has occurred to me that though labor is still very valuable, that it is less valuable than before. Artificial intelligence and automation have changed things, how much I am not sure. But I can see it as I have talked to employers, the world has changed. Expectations are so much different now than just 10-11 years ago. One reason that profit margins remain high are productivity improvements that we aren't perceiving yet.
Maybe, or maybe there is more cost cutting and less productivity. Not all companies exhibit high productivity and if they do, it’s because they are doing the same amount with less expense input. Eventually though, if you don’t invest in production, those productivity gains will prove to be illusory.
Could be. I have been wondering about these things myself.
A fool and his money are good for business.
visualguy
Posts: 2178
Joined: Thu Jan 30, 2014 1:32 am

Re: Larry Swedroe: 3% is the new 4%

Post by visualguy »

marcopolo wrote: Mon Feb 04, 2019 12:23 am Also consider that the "3% is the new 4%" argument is based on saying looking at past history is not good enough, you have to consider valuations, and the resulting lower expected returns they imply. If you believe that argument, then adding international, which has lower valuations and higher expected returns, should improve things, not make them worse.
You're assuming market efficiencies that may not be quite so strong due to things like home bias in different countries. Also, there's the currency strength aspect which has a meaningful distorting effect. Considering the major components of ex-US, it's really hard to get excited about its prospects, unfortunately. Hard to feel excitement about jumping into stock markets in Europe, Japan, or China for that matter. Things could change some day in those countries and their economies, but I personally don't have the time to wait for that since I'm much closer to the end of my accumulation period than the beginning.
mac808
Posts: 522
Joined: Mon Sep 19, 2011 8:45 pm

Re: Larry Swedroe: 3% is the new 4%

Post by mac808 »

The main reason I worry about future returns being worse than expected relative to past performance is population growth, which is slowly considerably in all first and second world countries around the world. Productivity will continue to increase thanks to tech and automation, but nobody is really sure what economic growth looks like in a world where there are fewer consumers today than there were yesterday. Japan is already there so we can wait and see how the next decade pans out for them, I guess.
marcopolo
Posts: 3875
Joined: Sat Dec 03, 2016 10:22 am

Re: Larry Swedroe: 3% is the new 4%

Post by marcopolo »

visualguy wrote: Mon Feb 04, 2019 1:20 am
marcopolo wrote: Mon Feb 04, 2019 12:23 am Also consider that the "3% is the new 4%" argument is based on saying looking at past history is not good enough, you have to consider valuations, and the resulting lower expected returns they imply. If you believe that argument, then adding international, which has lower valuations and higher expected returns, should improve things, not make them worse.
You're assuming market efficiencies that may not be quite so strong due to things like home bias in different countries. Also, there's the currency strength aspect which has a meaningful distorting effect. Considering the major components of ex-US, it's really hard to get excited about its prospects, unfortunately. Hard to feel excitement about jumping into stock markets in Europe, Japan, or China for that matter. Things could change some day in those countries and their economies, but I personally don't have the time to wait for that since I'm much closer to the end of my accumulation period than the beginning.
I am not assuming anything. I tend to agree with you.
That is why I said "if you believe that (valuation) argument". The people making expected return predictions based on valuations all (as far as I have seen) predict higher expected returns for ex-US, particularly for emerging markets.
Once in a while you get shown the light, in the strangest of places if you look at it right.
naha66
Posts: 198
Joined: Sun Jul 14, 2013 6:02 pm

Re: Larry Swedroe: 3% is the new 4%

Post by naha66 »

willthrill81 wrote: Sun Feb 03, 2019 4:59 pm
larryswedroe wrote: Sun Feb 03, 2019 12:10 pmSecond, it is exactly because we don't know that is the reason to be conservative, because the consequences of being wrong are literally unthinkable, while the alternatives are more acceptable.
Larry,

First of all, thanks for providing your reasoning for your statement.

I've heard this kind of statement made by critics of the '4% rule' before, but it's just plain silly. People often love to point out that if you strictly followed the '4% rule' in historical instances, you would generally have left a lot of money on the table unnecessarily or, in a few instances, essentially gone broke right after 30 years of withdrawals. But it's vital to keep in mind that no one is strictly following the '4% rule'. I've seriously never even heard of a rumor of anyone who did it or even seriously attempted to do so. Virtually everyone makes adjustments to their withdrawals, ratcheting them up when their portfolio does well and cutting them when the inverse occurs. No sane person is going to blindly spend down their portfolio to zero. The '4% rule' is used by most people around here at least in the way that they should use it: as an approximate guideline for how large a 'typical' (i.e. ~65 year old) retiree needs to produce a given amount of withdrawals.

Another problem with this notion is that it ignores the very important impact of the absolute size of one's portfolio. The '4% rule' is a lot more safe for someone with a $5 million portfolio than someone with a $500k portfolio, for instance, simply because it's very likely to be easier for someone starting with $5 million to reduce their spending and still have 'enough' than for someone starting with $500k.



Your last paragraph is just so false and I speak as one of those with about 500k at retirement.
marcopolo
Posts: 3875
Joined: Sat Dec 03, 2016 10:22 am

Re: Larry Swedroe: 3% is the new 4%

Post by marcopolo »

evestor wrote: Mon Feb 04, 2019 1:00 am
larryswedroe wrote: Sun Feb 03, 2019 5:53 pm So in last 10 years, higher than expected returns might have allowed people to begin to take more than the initial rate.
I have assumed (but will admit I have not looked at the detailed math to support) that this is where the 4% 'rule' goes off the rails. IE, if you take more than 4% when you can then you increase the risk you'll need to take less than 4% at other times to compensate.
If you're willing to do both then that's great. But if you really want the 4% rule to hold even in bad times, that you'd need to hold the line in good times too.

But I could be wrong...and would love if someone could demonstrate that this is the case. i'm always happy to learn my assumptions are too conservative.
I don't think this is true.

If you believe in the 4% rule, I think you could actually ratchet up your withdrawal amount whenever the market does well to 4% of the new portfolio value, then effectively start your retirement over again. When the market goes down you can keep using the previous high water mark, adjusted for inflation, so you withdrawal amount would always be monotonically increasing, even in real dollar terms.

Here is an example of how that might work:

Let's say you retire with $1M planning on a 30 year retirement. You withdraw $40k for the first year. There is 3% inflation that year. The market has a nice run up and your portfolio grows to $1.2M. Staying with your original 4% rule, you would withdraw $41.2k in year 2. But, if you believe in the 4%, you could just as restart your retirement and start taking 4% of the $1.2M ($48k). If it works for 30 years, it will work for the 29 you have left. You could arguably take even a little more.

Now fast forward to the next year. Inflation is the same 3%, but now the market tanks, and your portfolio is $800k. But, you simply follow the 4% rule you started last year and withdraw $49,440 (Inflation adjusted $48k).

Rinse and repeat that process for the next 28 years and you real withdrawal amounts only ratchet up, or stay the same, they never go down. All that assumes 4% rule works.
Once in a while you get shown the light, in the strangest of places if you look at it right.
3-20Characters
Posts: 717
Joined: Tue Jun 19, 2018 2:20 pm

Re: Larry Swedroe: 3% is the new 4%

Post by 3-20Characters »

⬆️ I never understood it this way. I always thought it was locked in at retirement and not upping the amount (other than inflation) is what made it robust through different scenarios. Perhaps someone who knows more can comment. I plan to use VWP.
typical.investor
Posts: 2410
Joined: Mon Jun 11, 2018 3:17 am

Re: Larry Swedroe: 3% is the new 4%

Post by typical.investor »

marcopolo wrote: Mon Feb 04, 2019 7:48 am
evestor wrote: Mon Feb 04, 2019 1:00 am
larryswedroe wrote: Sun Feb 03, 2019 5:53 pm So in last 10 years, higher than expected returns might have allowed people to begin to take more than the initial rate.
I have assumed (but will admit I have not looked at the detailed math to support) that this is where the 4% 'rule' goes off the rails. IE, if you take more than 4% when you can then you increase the risk you'll need to take less than 4% at other times to compensate.
If you're willing to do both then that's great. But if you really want the 4% rule to hold even in bad times, that you'd need to hold the line in good times too.

But I could be wrong...and would love if someone could demonstrate that this is the case. i'm always happy to learn my assumptions are too conservative.
I don't think this is true.

If you believe in the 4% rule, I think you could actually ratchet up your withdrawal amount whenever the market does well to 4% of the new portfolio value, then effectively start your retirement over again. When the market goes down you can keep using the previous high water mark, adjusted for inflation, so you withdrawal amount would always be monotonically increasing, even in real dollar terms.

Here is an example of how that might work:

Let's say you retire with $1M planning on a 30 year retirement. You withdraw $40k for the first year. There is 3% inflation that year. The market has a nice run up and your portfolio grows to $1.2M. Staying with your original 4% rule, you would withdraw $41.2k in year 2. But, if you believe in the 4%, you could just as restart your retirement and start taking 4% of the $1.2M ($48k). If it works for 30 years, it will work for the 29 you have left. You could arguably take even a little more.

Now fast forward to the next year. Inflation is the same 3%, but now the market tanks, and your portfolio is $800k. But, you simply follow the 4% rule you started last year and withdraw $49,440 (Inflation adjusted $48k).

Rinse and repeat that process for the next 28 years and you real withdrawal amounts only ratchet up, or stay the same, they never go down. All that assumes 4% rule works.
I don’t think that’s right and will put you at risk.

This is for a more permanent portfolio so the rates are lower but I think the basics are the same.

If 2.8% is the safe rate (equivalent to your 4% for a shorter duration), you would lower that to 2.2% and take 15% of the gain if your portfolio grows.

Or you could use 1.8% and 25% of gains.

Numbers differ for inflation adjustment and would as stated be different for a normal retirement length.

Not sure what the method is called.

Anyway, increasing the base withdrawal in good years seems a sure fire way to induce sequence of return problems.

Maybe 3% +some % of portfolio growth in good years is a good way to go.
Post Reply