Larry Swedroe: 3% is the new 4%

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

Post by marcopolo »

typical.investor wrote: Mon Feb 04, 2019 8:08 am
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.
I am not doing this. But, if you believe the 4% rule works, where is the flaw in the approach?

Instead of thinking about ratcheting up your withdrawal, think about if that was a different person. You retire in year one with the $1M. your neighbor waits a year, and has $1.2M at retirement. Surely, by the 4% rule, he can withdraw $48k, and adjust for inflation going forward, right?

Well, you also have $1.2M, why can't you do the same? The money has no memory.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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nisiprius
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Re: Larry Swedroe: 3% is the new 4%

Post by nisiprius »

As a matter of curiosity, how does this relate to the Vanguard Managed Payout Fund, VGPDX?

It uses an actively managed portfolio with a modern, factor-aware, alternatives-aware allocation, and a 55% stock allocation which is two or three times more than that of their other "retirement income" funds (Wellesley, 38%; LifeStrategy Income, 20%; Target Retirement income, 30%).

Image

Vanguard's own "product summary" says:
The Managed Payout Fund is designed to give you regular monthly payouts... The Managed Payout Fund targets an annual distribution rate of 4%. To accomplish this, the fund’s portfolio managers aim to adjust the fund’s overall asset allocation over time with an emphasis on sustaining its monthly payouts, keeping pace with inflation, and preserving capital over the long term.
So it has an "emphasis" on achieving an annual payout of 4% of capital while keeping pace with inflation--and "preserving capital over the long term," i.e. not spending down capital except temporarily. Past descriptions have made it clear that "preserving capital" means preserving it in real terms, although I don't see this explicitly here. The goal of "preserving capital" is clearly a higher one than merely "not going to zero."

Given that Vanguard itself has issued cautions about lower market returns going forward, doesn't this seem overoptimistic?
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MichCPA
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Re: Larry Swedroe: 3% is the new 4%

Post by MichCPA »

Warren Buffett has repeatedly said that low interest rates increase the value of stock relative to earnings. This does make sense looking at DCF valuation models. So a 'high' PE may be justified. Now in the case of bonds, even though the price drops when interest rates rise, potential future return is created by higher rates.

If interest rates stay low, your stock returns should have you covered. If interest rates rise, the added return on bonds should have you covered. That's the beauty of using a super conservative number like 4%.
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Re: Larry Swedroe: 3% is the new 4%

Post by willthrill81 »

naha66 wrote: Mon Feb 04, 2019 7:36 am
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.
Would you please explain why you believe so?

Do you believe that it's easier for someone with a $500k portfolio to reduce their spending than someone with a $5 million portfolio?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
typical.investor
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Re: Larry Swedroe: 3% is the new 4%

Post by typical.investor »

marcopolo wrote: Mon Feb 04, 2019 8:17 am
typical.investor wrote: Mon Feb 04, 2019 8:08 am
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.
I am not doing this. But, if you believe the 4% rule works, where is the flaw in the approach?

Instead of thinking about ratcheting up your withdrawal, think about if that was a different person. You retire in year one with the $1M. your neighbor waits a year, and has $1.2M at retirement. Surely, by the 4% rule, he can withdraw $48k, and adjust for inflation going forward, right?

Well, you also have $1.2M, why can't you do the same? The money has no memory.
I’m not convinced 4% will always work for market tops. This method would pretty much assure you are setting your withdrawal to the market top.

It’s like you are saying you can rewind back a year to your portfolio’s high mark after a 50% crash six months before you retired. I mean if it works for the person who retired before you, and you believe the 4% rule, it should pretty much work for you too.

What we want to do though is not sell distressed assets before they can recover. If you think the 4% rule ensures that, then I guess you are safe.
marcopolo
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Re: Larry Swedroe: 3% is the new 4%

Post by marcopolo »

typical.investor wrote: Mon Feb 04, 2019 8:39 am
marcopolo wrote: Mon Feb 04, 2019 8:17 am
typical.investor wrote: Mon Feb 04, 2019 8:08 am
marcopolo wrote: Mon Feb 04, 2019 7:48 am
evestor wrote: Mon Feb 04, 2019 1:00 am

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.
I am not doing this. But, if you believe the 4% rule works, where is the flaw in the approach?

Instead of thinking about ratcheting up your withdrawal, think about if that was a different person. You retire in year one with the $1M. your neighbor waits a year, and has $1.2M at retirement. Surely, by the 4% rule, he can withdraw $48k, and adjust for inflation going forward, right?

Well, you also have $1.2M, why can't you do the same? The money has no memory.
I’m not convinced 4% will always work for market tops. This method would pretty much assure you are setting your withdrawal to the market top.

It’s like you are saying you can rewind back a year to your portfolio’s high mark after a 50% crash six months before you retired. I mean if it works for the person who retired before you, and you believe the 4% rule, it should pretty much work for you too.

What we want to do though is not sell distressed assets before they can recover. If you think the 4% rule ensures that, then I guess you are safe.
That is why i repeatedly said "if you believe in the 4% rule". The "rule" does not make any exceptions for market tops, and in actuality, it is BASED on market tops, for better starting points, the SWR is quite a bit higher. When one retires, they do not know whether or not we are at a market top, you can only know that in hindsight.

Going backwards is a bit more problematic because you have a longer time horizon to support. But, going forward, your time horizon shrinks, further supporting an increased withdrawal.

I am not advocating this approach, i was just responding to the poster (evestor) who posed a possible problem with the rule.
Once in a while you get shown the light, in the strangest of places if you look at it right.
naha66
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Re: Larry Swedroe: 3% is the new 4%

Post by naha66 »

willthrill81 wrote: Mon Feb 04, 2019 8:30 am
naha66 wrote: Mon Feb 04, 2019 7:36 am
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.
Would you please explain why you believe so?

Do you believe that it's easier for someone with a $500k portfolio to reduce their spending than someone with a $5 million portfolio?
No Its the same, its just as easy for me to cut back because I'm use to living on less. Let's say I like to play golf 5 times a month and one of those rounds at a high end course. I just cut back to 3 times with no high end course. Just as someone with 5 million has a 50K a year golf club membership that he drops and then joins a cheaper club. I'm guessing you don't know how families live toward the lower end of the income spectrum.
azanon
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Re: Larry Swedroe: 3% is the new 4%

Post by azanon »

nisiprius wrote: Mon Feb 04, 2019 8:18 am As a matter of curiosity, how does this relate to the Vanguard Managed Payout Fund, VGPDX?

It uses an actively managed portfolio with a modern, factor-aware, alternatives-aware allocation, and a 55% stock allocation which is two or three times more than that of their other "retirement income" funds (Wellesley, 38%; LifeStrategy Income, 20%; Target Retirement income, 30%).

Image

Vanguard's own "product summary" says:
The Managed Payout Fund is designed to give you regular monthly payouts... The Managed Payout Fund targets an annual distribution rate of 4%. To accomplish this, the fund’s portfolio managers aim to adjust the fund’s overall asset allocation over time with an emphasis on sustaining its monthly payouts, keeping pace with inflation, and preserving capital over the long term.
So it has an "emphasis" on achieving an annual payout of 4% of capital while keeping pace with inflation--and "preserving capital over the long term," i.e. not spending down capital except temporarily. Past descriptions have made it clear that "preserving capital" means preserving it in real terms, although I don't see this explicitly here. The goal of "preserving capital" is clearly a higher one than merely "not going to zero."

Given that Vanguard itself has issued cautions about lower market returns going forward, doesn't this seem overoptimistic?
My understanding of "4% rule", or maybe now "3% rule" is that it's a rule of "worst case scenario" (Michael Kitces has a great article on that, meaning that 95% of the time you could have withdrawn more than 4% real with a 60/40). In contrast, VG Managed Payout is really designed to provide a steady (average) real 4% return, and the formula auto-corrects over time, depending on how actual returns of the fund are. So if the 4% rule is now a 3% rule, that really shouldn't be a cause for alarm for VG Managed Payout, especially given their auto-correcting formula, since they're aiming for a best guess average 4% real, as opposed to worse-case 4% real (aka 4% Rule).

I think they actually overreacted to be honest, and probably could have left withdrawals at 5% (with the formula they use that adjusts). Especially if the rule really is still 4% rule - again 4% Rule is a worse-case-scenario rule. But if they do that, then ~ 50% of the time, they're not going to be able to say they met their objective in the bi-annual report.
Last edited by azanon on Mon Feb 04, 2019 9:05 am, edited 1 time in total.
randomguy
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Re: Larry Swedroe: 3% is the new 4%

Post by randomguy »

marcopolo wrote: Mon Feb 04, 2019 8:48 am
That is why i repeatedly said "if you believe in the 4% rule". The "rule" does not make any exceptions for market tops, and in actuality, it is BASED on market tops, for better starting points, the SWR is quite a bit higher. When one retires, they do not know whether or not we are at a market top, you can only know that in hindsight.

Going backwards is a bit more problematic because you have a longer time horizon to support. But, going forward, your time horizon shrinks, further supporting an increased withdrawal.

I am not advocating this approach, i was just responding to the poster (evestor) who posed a possible problem with the rule.
Your scheme is fine. If you are using 100% success, you will still have a 100%. if you are using say 95%, your sucess rate might drop a couple pts(i.e the 1927 investors fails instead of making). You will have a much bumpier ride though

If you think more money will make you happy you can definitely do this. Or any of a zillion other schemes.

What nobody can tell you is what the next 50 years will bring. Maybe India and China modernize and we get another 2 billion middle class consumers. Maybe Europes population drop is a drag on stocks. Maybe high speed trading and the like ups volatility. Maybe governmwnt intervention moderates cycles. Who knows
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Re: Larry Swedroe: 3% is the new 4%

Post by randomguy »

naha66 wrote: Mon Feb 04, 2019 9:00 am
No Its the same, its just as easy for me to cut back because I'm use to living on less. Let's say I like to play golf 5 times a month and one of those rounds at a high end course. I just cut back to 3 times with no high end course. Just as someone with 5 million has a 50K a year golf club membership that he drops and then joins a cheaper club. I'm guessing you don't know how families live toward the lower end of the income spectrum.
What happens when you need to spend 100k to renovate your house due to some health issues that cause mobility issues? What about if you need to cut your housing costs in half? Easy to go from 4k ft to 2k. Going from 1200 to 600 is harder. Or your food budget? Giving up eating out is one thing. Skipping meals is another Going from a benz to a civic is easy. Going from a civic to a bike is harder😁
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Re: Larry Swedroe: 3% is the new 4%

Post by willthrill81 »

naha66 wrote: Mon Feb 04, 2019 9:00 am
willthrill81 wrote: Mon Feb 04, 2019 8:30 am
naha66 wrote: Mon Feb 04, 2019 7:36 am
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.
Would you please explain why you believe so?

Do you believe that it's easier for someone with a $500k portfolio to reduce their spending than someone with a $5 million portfolio?
No Its the same, its just as easy for me to cut back because I'm use to living on less. Let's say I like to play golf 5 times a month and one of those rounds at a high end course. I just cut back to 3 times with no high end course. Just as someone with 5 million has a 50K a year golf club membership that he drops and then joins a cheaper club. I'm guessing you don't know how families live toward the lower end of the income spectrum.
Your statement assumes that at least most of one's portfolio withdrawals are for discretionary spending. If that is the case, then your statement would hold true.

However, many retirees are making withdrawals from their portfolios to cover essential spending. A household withdrawing $200k likely has a lot of discretionary spending, more so than a household withdrawing $40k. The former could cut their withdrawals in half and still have almost double what the median U.S. household does. The same is not true of the latter household.

And my wife and I lived below the poverty line for years, so I know full well how "families live toward the lower end of the income spectrum."
“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
KarenC
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Re: Larry Swedroe: 3% is the new 4%

Post by KarenC »

marcopolo wrote: Mon Feb 04, 2019 8:48 am […]

That is why i repeatedly said "if you believe in the 4% rule". The "rule" does not make any exceptions for market tops, and in actuality, it is BASED on market tops, for better starting points, the SWR is quite a bit higher. When one retires, they do not know whether or not we are at a market top, you can only know that in hindsight.

Going backwards is a bit more problematic because you have a longer time horizon to support. But, going forward, your time horizon shrinks, further supporting an increased withdrawal.

I am not advocating this approach, i was just responding to the poster (evestor) who posed a possible problem with the rule.
This discussion brings to mind Kitces's Ratcheting Withdrawal Rate:
While the 4% rule was created as a means to set a minimum income floor – a spending amount low enough that, even if “bad” things happen, the withdrawals will be low enough to be sustainable until/as the market recovers – that doesn’t mean spending can never be raised. After all, a few years into retirement, it should be clear whether that adverse sequence-of-return-risk event has or has not occurred. No planner is going to sit down with a client who is 86 years old and retired with $1,000,000, who is now up to $5,000,000 thanks to a great bull market in early retirement, and say “No, you shouldn’t spend a single dime more than $75,000/year, because that’s what your inflation-adjusted spending would be based on that initial 4% withdrawal rate we set 21 years ago” even though that’s clearly far less spending than the account can support given what’s happened during the intervening years. Obviously, at some point, when returns have been good, it’s safe to spend more, and in the real world people can and do make such adjustments.
"The first principle is that you must not fool yourself, and you are the easiest person to fool." — Richard P. Feynman
SGM
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Re: Larry Swedroe: 3% is the new 4%

Post by SGM »

I have read Swedroe's recent book and there is nothing in the index regarding SWR, but his table is listed under MCS in the index. If you have enough fixed income streams to cover your expenses then 3% is no problem. I have been a little suspect of 4% as valuations are very high and interest rates are low. We aren't growing our population at the rates we did earlier. For all I know we could have some really good investment years ahead or not.


While I look at some of this back testing I don't rely upon it. We are considering adding two additional income streams outside of the portfolio including additional rental income and a SPIA. We also round off our plan to 40 years given family longevity. We are not denying ourselves anything of significance and do have a legacy motive as well.
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HomerJ
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Re: Larry Swedroe: 3% is the new 4%

Post by HomerJ »

mac808 wrote: Mon Feb 04, 2019 2:08 am 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.
You may be right, but I also see a BILLION Chinese and Indians entering the middle-class and wanting to buy Coke and jeans.

Seems it's possible the next 30 years could be quite amazing, consumer-wise.
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Re: Larry Swedroe: 3% is the new 4%

Post by warowits »

randomguy wrote: Mon Feb 04, 2019 9:12 am
naha66 wrote: Mon Feb 04, 2019 9:00 am
No Its the same, its just as easy for me to cut back because I'm use to living on less. Let's say I like to play golf 5 times a month and one of those rounds at a high end course. I just cut back to 3 times with no high end course. Just as someone with 5 million has a 50K a year golf club membership that he drops and then joins a cheaper club. I'm guessing you don't know how families live toward the lower end of the income spectrum.
What happens when you need to spend 100k to renovate your house due to some health issues that cause mobility issues? What about if you need to cut your housing costs in half? Easy to go from 4k ft to 2k. Going from 1200 to 600 is harder. Or your food budget? Giving up eating out is one thing. Skipping meals is another Going from a benz to a civic is easy. Going from a civic to a bike is harder😁
The idea that a person of regular means might have a mandatory unavoidable 100k house renovation actually made me laugh out loud. If that is how you use money I can see why retirement with only 500,000 plus social security would terrify you.
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Re: Larry Swedroe: 3% is the new 4%

Post by cheezit »

larryswedroe wrote: Sun Feb 03, 2019 2:01 pm Again, MCS helpful.
Larry,

Thank you for your article, and for the numerous informative posts you've made in this thread.

Among other things, it seems that you've exterted some serious effort towards mitigating some of the weaknesses of conventional monte-carlo models of equity returns.

I'm working in the not-too-distant future to bang out some backtesting and forward-simulation tools in Haskell, I'll have to see if I can incorporate the current state of the art into my modelling (while understanding that any modelling has inherent limitations). My own plan going forward is to try and get to a point where 33x expenses at retirement can maintain my family's standard of living on its own with 50th percentile returns, and can do the same when added to projected social security (eg. with no changes made re:solvency) with 5th percentile returns. I have decades before I hit my number though, so there's a lot of horse to take care of before worrying about that particular cart.
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Re: Larry Swedroe: 3% is the new 4%

Post by Turbo29 »

warowits wrote: Mon Feb 04, 2019 10:14 am
randomguy wrote: Mon Feb 04, 2019 9:12 am
naha66 wrote: Mon Feb 04, 2019 9:00 am
No Its the same, its just as easy for me to cut back because I'm use to living on less. Let's say I like to play golf 5 times a month and one of those rounds at a high end course. I just cut back to 3 times with no high end course. Just as someone with 5 million has a 50K a year golf club membership that he drops and then joins a cheaper club. I'm guessing you don't know how families live toward the lower end of the income spectrum.
What happens when you need to spend 100k to renovate your house due to some health issues that cause mobility issues? What about if you need to cut your housing costs in half? Easy to go from 4k ft to 2k. Going from 1200 to 600 is harder. Or your food budget? Giving up eating out is one thing. Skipping meals is another Going from a benz to a civic is easy. Going from a civic to a bike is harder😁
The idea that a person of regular means might have a mandatory unavoidable 100k house renovation actually made me laugh out loud. If that is how you use money I can see why retirement with only 500,000 plus social security would terrify you.
What if he had to replace an engine on his private jet the same time the house renovation came up?

Sometimes I think someone eating out every night has a harder time cutting back to cooking their own meals than someone cooking their own meals has cutting back by substituting chicken for beef.
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Re: Larry Swedroe: 3% is the new 4%

Post by 3-20Characters »

First of all, let me say that I greatly appreciate Larry’s participation here and actually like reading these __% SWR threads. That said, my big picture take:

I find all these 4% discussions theoretical at best. Not sure how advice can be applied other than a general guideline/framework. For many/most retirees, I submit that the 4% does not apply because they don’t have enough savings. There must be a number at which point retirement savings is actually a retirement emergency fund. Would anyone here advise a retiree with 100k to withdraw 4%? What about someone with 50k? Would these survive a 50% market drop and bear market? Would it even matter? Would a retire with 100k withdrawing 4%/year keep withdrawing 4K plus inflation if his savings shrunk to 75k? Would he cut it in half? Is spending 2k per year less going to be his salvation? Can he even pull that off if he’s on a very tight budget? What if there’s a large unexpected expenese? See how ridiculous it gets?

Once you get up to what? 750k or over, it becomes more of a guide (whether you choose 3% or 3.5% is a matter of your personal comfort level). Is someone with 750k and 30k/year SS going to just spend 4%+ inflation no matter what? I doubt it. They’ll be reviewing their spending and portfolio every year or more often and making adjustments. So it’s nice that they have an “approved” guideline but it’s nothing more than that.

Then you get to someone with 5m. They’re never going to need 4%. They may want it, but they don’t need it. They don’t even need 3%. 2% without pension or SS still has them living very well and if they can’t enjoy being alive and having 100k inflation adjusted $ per year to live on, its nobody’s fault but their own. So they can spend their 4% and not worry because any adjustments (if needed) are just noise. For those with 2-3m, they can surely adjust down to 3% if they feel it necessary. Not a hardship.

Conclusion: __% is useless information to most Americans, a general guideline to people with reasonable retirement savings, and a “how many angels can dance on the head of a pin” question for the wealthy.

[Edited for clarity.]
Last edited by 3-20Characters on Mon Feb 04, 2019 11:12 am, edited 2 times in total.
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Re: Larry Swedroe: 3% is the new 4%

Post by flyingaway »

I now have satisfied the 4% rule. It seems that we need to work on the 3% rule.
In a few years, I am afraid that someone will be talking about a 2% rule.
We can work until we are dead, which does not need any rule.
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Re: Larry Swedroe: 3% is the new 4%

Post by MikeG62 »

I think it is important to keep in mind that the floor SWR that Bengen came up with (the 4%) was based upon a 1966 retiree, whose issue was not so much poor market returns, as it was very high inflation.

So even if one believed we have abnormally high valuations today (I don’t), the fact is we have had them before (just think about 2000). Taking these year 2000 retirees, based upon market returns since 2000, these folks appear to be in no worse (actually better) shape than those who retired in 1966 (or those who retired before the Great Depression). Kitces has written on this if you want to see the math.

https://www.kitces.com/blog/how-has-the ... al-crisis/

To those who say bond yields are much lower today than historical averages - I agree. However, so in inflation. Not sure if there is a complete offset there or not.

Also, it’s been written that MC simulations exaggerate the worst case scenario because they treat each year as a fully independent year having nothing to do with the year that came before it. As a result, it seems one could/should probably ignore the worst 5%+/- cases in the output as just not being realistic. See here:

https://www.kitces.com/blog/monte-carlo ... l-returns/

I am in the camp that people should not necessarily work many years more to get to an initial WD rate at or below 3% (because some have written that 3% is the new 4%), as the trade off is not inconsequential (working years longer in a job they may not enjoy and perhaps more importantly having less years in retirement doing what they really want to do).

All this being said, my DW and I are using a WD rate around 3.0%. I could have retired earlier than I did (53), but the reality is I liked my job and the people I worked with. Had neither of those things been true, I’d have retired earlier with a WD rate closer to 4.0%. The fact is we have a very substantial % of our annnual spend that is discretionary. And my modeling assumes our discretionary spending never declines (and that we never collect one dime of SS). In reality, as we age our discretionary spend will undoubtedly drop and the savings will be repurposed likely for increased health care related costs.

So I feel quite comfortable with where we are and not so much believing all the doom and gloom that comes up in these threads from time to time.
Last edited by MikeG62 on Mon Feb 04, 2019 12:42 pm, edited 1 time in total.
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Re: Larry Swedroe: 3% is the new 4%

Post by TheTimeLord »

flyingaway wrote: Mon Feb 04, 2019 11:11 am I now have satisfied the 4% rule. It seems that we need to work on the 3% rule.
In a few years, I am afraid that someone will be talking about a 2% rule.
We can work until we are dead, which does not need any rule.
Even though I am a perennial member of the OMY club I am somewhere between terrified and flummoxed by these threads. Throw in concerns about LTC and you can start feeling like the concept of retirement is impractical for anyone without an 8 digit portfolio. Seriously, what are the odds of being alive after 30 years into retirement for most people?
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Re: Larry Swedroe: 3% is the new 4%

Post by marcopolo »

TheTimeLord wrote: Mon Feb 04, 2019 11:25 am
flyingaway wrote: Mon Feb 04, 2019 11:11 am I now have satisfied the 4% rule. It seems that we need to work on the 3% rule.
In a few years, I am afraid that someone will be talking about a 2% rule.
We can work until we are dead, which does not need any rule.
Even though I am a perennial member of the OMY club I am somewhere between terrified and flummoxed by these threads. Throw in concerns about LTC and you can start feeling like the concept of retirement is impractical for anyone without an 8 digit portfolio. Seriously, what are the odds of being alive after 30 years into retirement for most people?
Just like the field has defined the idea of risk-adjusted returns, I think the academic researchers need to develop the idea of a risk-adjusted SWR, where the risk being considered is the probability of running out of money prior to death (joint for spouses), rather than for a fixed duration.
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Re: Larry Swedroe: 3% is the new 4%

Post by Admiral »

TheTimeLord wrote: Mon Feb 04, 2019 11:25 am
flyingaway wrote: Mon Feb 04, 2019 11:11 am I now have satisfied the 4% rule. It seems that we need to work on the 3% rule.
In a few years, I am afraid that someone will be talking about a 2% rule.
We can work until we are dead, which does not need any rule.
Even though I am a perennial member of the OMY club I am somewhere between terrified and flummoxed by these threads. Throw in concerns about LTC and you can start feeling like the concept of retirement is impractical for anyone without an 8 digit portfolio. Seriously, what are the odds of being alive after 30 years into retirement for most people?
Ignore all the noise. Three years ago, it was "bonds will only return 1%" and "stocks are in a bubble." Nobody knows anything. If you're retiring early (50s) a more conservative (3%ish) INITIAL WR is likely advisable, just to be safe. If you're retiring at 67, it's probably not necessary. From those points forward, you will adjust as needed. Just have some cushion for your discretionary expenses and it will all work out fine. Nobody has any idea what will be happening in the world (or the economy) 10 years from now, much less 30.
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Re: Larry Swedroe: 3% is the new 4%

Post by mac808 »

TheTimeLord wrote: Mon Feb 04, 2019 11:25 am
flyingaway wrote: Mon Feb 04, 2019 11:11 am I now have satisfied the 4% rule. It seems that we need to work on the 3% rule.
In a few years, I am afraid that someone will be talking about a 2% rule.
We can work until we are dead, which does not need any rule.
Even though I am a perennial member of the OMY club I am somewhere between terrified and flummoxed by these threads. Throw in concerns about LTC and you can start feeling like the concept of retirement is impractical for anyone without an 8 digit portfolio. Seriously, what are the odds of being alive after 30 years into retirement for most people?
I think much of this debate is fueled by younger retirees (in their 40s) and/or those who don't want to spend down their portfolios in order to leave substantial inheritances to their kids. I'm in this boat. If I were retiring at FRA and leaving an estate wasn't important to me, then I'd be comfortable with 4%. Perhaps we could do a better job making these differences clear.
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Re: Larry Swedroe: 3% is the new 4%

Post by TN_Boy »

willthrill81 wrote: Mon Feb 04, 2019 9:13 am
naha66 wrote: Mon Feb 04, 2019 9:00 am
willthrill81 wrote: Mon Feb 04, 2019 8:30 am
naha66 wrote: Mon Feb 04, 2019 7:36 am
willthrill81 wrote: Sun Feb 03, 2019 4:59 pm

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.
Would you please explain why you believe so?

Do you believe that it's easier for someone with a $500k portfolio to reduce their spending than someone with a $5 million portfolio?
No Its the same, its just as easy for me to cut back because I'm use to living on less. Let's say I like to play golf 5 times a month and one of those rounds at a high end course. I just cut back to 3 times with no high end course. Just as someone with 5 million has a 50K a year golf club membership that he drops and then joins a cheaper club. I'm guessing you don't know how families live toward the lower end of the income spectrum.
Your statement assumes that at least most of one's portfolio withdrawals are for discretionary spending. If that is the case, then your statement would hold true.

However, many retirees are making withdrawals from their portfolios to cover essential spending. A household withdrawing $200k likely has a lot of discretionary spending, more so than a household withdrawing $40k. The former could cut their withdrawals in half and still have almost double what the median U.S. household does. The same is not true of the latter household.

And my wife and I lived below the poverty line for years, so I know full well how "families live toward the lower end of the income spectrum."
I'm with willthrill81 on this. It might be emotionally grating for the retiree with 5m to cut spending, but it seems spectacularly obvious that a retiree with spending based on 5m has more room to cut back than one with 500k.
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Re: Larry Swedroe: 3% is the new 4%

Post by abc132 »

The weakness in the 4% rule is that:

Person A Retires in a year with 2,000,000 and lives off of 80,000.

The market goes up or down 40% the next year (assume 0% inflation for simplicity), depending on if it is a good or bad year.

Person B retires after this good or bad year with the same amount of money as person A and "safely" lives off of $48,000 (bad year) or $112,000 (good year)

So Person B assumes they can safely live off of 48,000 or 112,000, and person A can only safely live off of 80,000 regardless if the market is good or bad.

So we clearly see that the 4% rule is not a sound investment strategy (as it is often used), because it gives two people with the same income wildly different "safe" amounts to spend.


It would have been used equivalently by assuming one had greater than their current assets at the recent peak market valuation, which means person B would assume they had retired earlier with 1.2 million /(0.60) = 2 million, even though they only have 1.2 million after the market drop. This gives person A and B the same "safe" spending rate of $80,000 with the same amount of money (1.2 million).

Note that such a study could have a different "safe" rate than 4%, but it would be a better way of predicting a steady income.

A sound investment strategy MUST give two people in the same situation the same recommendation.
Last edited by abc132 on Mon Feb 04, 2019 12:55 pm, edited 1 time in total.
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Re: Larry Swedroe: 3% is the new 4%

Post by marcopolo »

abc132 wrote: Mon Feb 04, 2019 12:39 pm The weakness in the 4% rule is that:

Person A Retires in a year with 2,000,000 and lives off of 80,000.

The market goes up or down 40% the next year (assume 0% inflation for simplicity), depending on if it is a good or bad year.

Person B retires after this good or bad year with the same amount of money as person A and "safely" lives off of $48,000 (bad year) or $112,000 (good year)

So Person B assumes they can safely live off of 48,000 or 112,000, and person A can only safely live off of 80,000 regardless if the market is good or bad.

So we clearly see that the 4% rule is not a sound investment strategy (as it is often used), because it gives two people with the same income wildly different "safe" amounts to spend.

It would have been used equivalently by assuming one had greater than their current assets at the recent peak market valuation, which means person B would assume they had retired earlier with 1.2 million /(0.60) = 2 million, even though they only have 1.2 million after the market drop. This gives person A and B the same "safe" spending rate of $80,000 with the same amount of money (1.2 million).

Note that such a study could have a different "safe" rate than 4%, but it would be a better way of predicting a steady income.
I am not sure it is really a "weakness". The rule says it is the highest rate that would have worked in the worst case scenario in the past. In better case scenarios, you could have had a higher WR. It was never meant to be optimal.

For the case where the market goes up, person A could simply "retire" again, and using the 4% rule go to 112k, they would be in the same place as person B.

In the case of market going down, it is quite likely (due to lower valuations/higher expected returns), person B is in the scenario where something better that 4% would actually work going forward. It kind of has to if person A is going to make out OK.

I am NOT advocating that anyone actually use the 4% rule as a withdrawal method.
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Re: Larry Swedroe: 3% is the new 4%

Post by willthrill81 »

abc132 wrote: Mon Feb 04, 2019 12:39 pm The weakness in the 4% rule is that:

Person A Retires in a year with 2,000,000 and lives off of 80,000.

The market goes up or down 40% the next year (assume 0% inflation for simplicity), depending on if it is a good or bad year.

Person B retires after this good or bad year with the same amount of money as person A and "safely" lives off of $48,000 (bad year) or $112,000 (good year)

So Person B assumes they can safely live off of 48,000 or 112,000, and person A can only safely live off of 80,000 regardless if the market is good or bad.

So we clearly see that the 4% rule is not a sound investment strategy (as it is often used), because it gives two people with the same income wildly different "safe" amounts to spend.


It would have been used equivalently by assuming one had greater than their current assets at the recent peak market valuation, which means person B would assume they had retired earlier with 1.2 million /(0.60) = 2 million, even though they only have 1.2 million after the market drop. This gives person A and B the same "safe" spending rate of $80,000 with the same amount of money (1.2 million).

Note that such a study could have a different "safe" rate than 4%, but it would be a better way of predicting a steady income.

A sound investment strategy MUST give two people in the same situation the same recommendation.
When Bengen 'discovered' the '4% rule of thumb', it was the mere byproduct of certain specified parameters (e.g. fixed nominal spending plus annual inflation adjustment for a given AA). It was never intended to be a complete strategy for portfolio withdrawals, and virtually no one is using it that way. It is a historically conservative starting point, nothing more.
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Re: Larry Swedroe: 3% is the new 4%

Post by abc132 »

marcopolo wrote: Mon Feb 04, 2019 12:50 pm

I am not sure it is really a "weakness". The rule says it is the highest rate that would have worked in the worst case scenario in the past. In better case scenarios, you could have had a higher WR. It was never meant to be optimal.

For the case where the market goes up, person A could simply "retire" again, and using the 4% rule go to 112k, they would be in the same place as person B.

In the case of market going down, it is quite likely (due to lower valuations/higher expected returns), person B is in the scenario where something better that 4% would actually work going forward. It kind of has to if person A is going to make out OK.

I am NOT advocating that anyone actually use the 4% rule as a withdrawal method.
That would be a variable rate withdrawal, and gives no indication of what a safe steady income should be. The result of such a plan is the expectation that you may only be able to live off of 1/2 or even 20% of what you planned on retiring with. That's unrealistic in worst case scenarios, and ignores what was learned from the trinity study.

Most of us would prefer something in between that has always worked historically, and allows for a baseline steady income that has always worked historically.
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Re: Larry Swedroe: 3% is the new 4%

Post by abc132 »

willthrill81 wrote: Mon Feb 04, 2019 12:57 pm
When Bengen 'discovered' the '4% rule of thumb', it was the mere byproduct of certain specified parameters (e.g. fixed nominal spending plus annual inflation adjustment for a given AA). It was never intended to be a complete strategy for portfolio withdrawals, and virtually no one is using it that way. It is a historically conservative starting point, nothing more.
I'm sure that there are people that think they can safely withdraw 4% of their retirement amount.

If it was merely a starting point, the investment advice would be to save 25x spending before retiring, and would say nothing about a withdrawal strategy, adjusting for inflation, etc.

It serves very little basis as a starting point for withdrawals, because the amount you can withdraw can vary by a factor of 2 with identical portfolios. That's not a good starting point.
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Re: Larry Swedroe: 3% is the new 4%

Post by marcopolo »

abc132 wrote: Mon Feb 04, 2019 1:02 pm
marcopolo wrote: Mon Feb 04, 2019 12:50 pm

I am not sure it is really a "weakness". The rule says it is the highest rate that would have worked in the worst case scenario in the past. In better case scenarios, you could have had a higher WR. It was never meant to be optimal.

For the case where the market goes up, person A could simply "retire" again, and using the 4% rule go to 112k, they would be in the same place as person B.

In the case of market going down, it is quite likely (due to lower valuations/higher expected returns), person B is in the scenario where something better that 4% would actually work going forward. It kind of has to if person A is going to make out OK.

I am NOT advocating that anyone actually use the 4% rule as a withdrawal method.
That would be a variable rate withdrawal, and gives no indication of what a safe steady income should be. The result of such a plan is the expectation that you may only be able to live off of 1/2 or even 20% of what you planned on retiring with. That's unrealistic in worst case scenarios, and ignores what was learned from the trinity study.

Most of us would prefer something in between that has always worked historically, and allows for a baseline steady income that has always worked historically.
I think you misunderstood what I am saying.
If 4% works, and market goes up, you could restart your retirement when market goes up, and still use 4% rule from there forward (i.e., ever ratcheting down).
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: Larry Swedroe: 3% is the new 4%

Post by flyingaway »

TheTimeLord wrote: Mon Feb 04, 2019 11:25 am
flyingaway wrote: Mon Feb 04, 2019 11:11 am I now have satisfied the 4% rule. It seems that we need to work on the 3% rule.
In a few years, I am afraid that someone will be talking about a 2% rule.
We can work until we are dead, which does not need any rule.
Even though I am a perennial member of the OMY club I am somewhere between terrified and flummoxed by these threads. Throw in concerns about LTC and you can start feeling like the concept of retirement is impractical for anyone without an 8 digit portfolio. Seriously, what are the odds of being alive after 30 years into retirement for most people?
You and I had some discussions about the levels of financial independence (FI) some time ago and I think we both agreed with three levels with different specific numbers. In FIRE community, they have FIRE, lean FIRE, fat FIRE, barista FIRE, etc., which essentially takes care of the FIRE variances.
Maybe we could talk about (not define) lean 4% rule, 4% rule, and fat 4% rule, but we understand that those are the variances of the 4% rule enforced strictly or liberally.
I am using the 4% rule to give me a number that I can use to measure the financial independence. If I had to retirement with the 4% rule, I could make it work by adjusting my flexible implementations. I do prefer not to retire after the 4% rule, as my job is not killing me now, and the alternatives are not very appealing.
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Re: Larry Swedroe: 3% is the new 4%

Post by abc132 »

marcopolo wrote: Mon Feb 04, 2019 1:09 pm
I think you misunderstood what I am saying.
If 4% works, and market goes up, you could restart your retirement when market goes up, and still use 4% rule from there forward (i.e., ever ratcheting down).
[/quote]

So ratchet up but not down? How does that help after a 40% down year when Person A is living off 80,000 and person B (just retired) is living off 48,000, and both with identical portfolios.


I am defining the basis of a retirement withdrawal strategy as one in which two people with equal portfolios and equivalent preference having the same safe withdrawal rate, and with back testing of this same rate.

Surely somebody has put such a basic requirement on retirement withdrawal strategies, and tested accordingly?
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Re: Larry Swedroe: 3% is the new 4%

Post by randomguy »

warowits wrote: Mon Feb 04, 2019 10:14 am
The idea that a person of regular means might have a mandatory unavoidable 100k house renovation actually made me laugh out loud. If that is how you use money I can see why retirement with only 500,000 plus social security would terrify you.
What do you think the cost in your life would be to make your life wheel chair friendly? Feel free to use that number if it makes you feel better. Hey maybe you already live in a on story place with accessible, kitchens, bathrooms, have a car that works, and so on.

And it isn't about terror. Everyone knows that you can get by with less if you have to. Living on SS is far from the end of the world. It is just a simple statement that more money gives more flexibility and pretending having less makes it even easier to live on even less is sketchy at best.
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Re: Larry Swedroe: 3% is the new 4%

Post by marcopolo »

abc132 wrote: Mon Feb 04, 2019 1:40 pm
marcopolo wrote: Mon Feb 04, 2019 1:09 pm
I think you misunderstood what I am saying.
If 4% works, and market goes up, you could restart your retirement when market goes up, and still use 4% rule from there forward (i.e., ever ratcheting down).
So ratchet up but not down? How does that help after a 40% down year when Person A is living off 80,000 and person B (just retired) is living off 48,000, and both with identical portfolios.


I am defining the basis of a retirement withdrawal strategy as one in which two people with equal portfolios and equivalent preference having the same safe withdrawal rate, and with back testing of this same rate.

Surely somebody has put such a basic requirement on retirement withdrawal strategies, and tested accordingly?
4% rule was designed for safety, not optimally.
Person B will be safe, but will likely leave a lot of money on the table because they had the good (or bad) fortune to start retirement in a year when when something higher than 4% would have worked.

This is one of the reasons very few people recommend the 4% as an actual withdrawal method.

If you are looking for something closer to optimally, I think you have to look at things like PMT based approaches.
Siamond has a thread running where he has been developing a spreadsheet for that. McClung's EM approach also does well from an optimally point of view.
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: Larry Swedroe: 3% is the new 4%

Post by Time2Quit »

TheTimeLord wrote: Mon Feb 04, 2019 11:25 am
Even though I am a perennial member of the OMY club I am somewhere between terrified and flummoxed by these threads. Throw in concerns about LTC and you can start feeling like the concept of retirement is impractical for anyone without an 8 digit portfolio. Seriously, what are the odds of being alive after 30 years into retirement for most people?
Agreed, some threads really terrify me as well. I have visions that I be eating Alpo in my later years given all these black swan scenarios that are lurking behind every corner.

As a result, I am requesting perennial membership in the OMY club.

For every Black Swan there is a Golden Goose to balance out the equation, but no one talks about those.


:beer
"It is not the man who has too little, but the man who craves more, that is poor." --Seneca
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Re: Larry Swedroe: 3% is the new 4%

Post by HomerJ »

abc132 wrote: Mon Feb 04, 2019 1:40 pm
marcopolo wrote: Mon Feb 04, 2019 1:09 pm I think you misunderstood what I am saying.
If 4% works, and market goes up, you could restart your retirement when market goes up, and still use 4% rule from there forward (i.e., ever ratcheting down).
So ratchet up but not down? How does that help after a 40% down year when Person A is living off 80,000 and person B (just retired) is living off 48,000, and both with identical portfolios.
It won't help the first year, but the following years, the market is likely to go back up, and Person B will catch up to Person A if they "reset" their retirement 4% withdrawals each year.

Plus, no one here recommends 100% stock the day before you retire. The 4% plan assumes a 60/40 portfolio, so you won't drop 40% in one year.

Plus, if Person B is actually able to retire on $48,000, he would have retired long before the 40% drop. If he can't retire on $48,000, he would keep working until the market recovered.

A lot of assumptions in your contrived example.

I understand your point, but 4% is not a hard rule. It's just the historical worst case scenario. There is no comparing Person A to Person B. There's just YOUR situation.
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Re: Larry Swedroe: 3% is the new 4%

Post by randomguy »

abc132 wrote: Mon Feb 04, 2019 1:40 pm
marcopolo wrote: Mon Feb 04, 2019 1:09 pm
I think you misunderstood what I am saying.
If 4% works, and market goes up, you could restart your retirement when market goes up, and still use 4% rule from there forward (i.e., ever ratcheting down).
So ratchet up but not down? How does that help after a 40% down year when Person A is living off 80,000 and person B (just retired) is living off 48,000, and both with identical portfolios.


I am defining the basis of a retirement withdrawal strategy as one in which two people with equal portfolios and equivalent preference having the same safe withdrawal rate, and with back testing of this same rate.

Surely somebody has put such a basic requirement on retirement withdrawal strategies, and tested accordingly?
[/quote]

I think it was supposed to be never not ever:)

We are talking about the issue of

a) retires in year 1 with 1 million, can spend 40k/year
b) retires in year 2 after the portfolio goes up 50%, can spend 60k/year
c) retire in year 3 after a 50% correction, 750k and can only spend 30k/year
It makes little sense that people so close in retirement have vastly different "allowed" spending. But that is partly because the 4% applies no preconditions. If you measure the SWR for the next 30 years after the markets have fallen 50%, it might be 6%. If you measure the SWR after markets have gone up 50% in a year, it might be 3.5%. But you rapidly run into the case of not enough data

If you crank up the spending every time your portfolio hits new highs (i.e. you take either inflation adjustment or 4% of your portfolio), you will eventually retire at some peak where the 4% rule is likely to fail over the next 30 years. The question is are you far enough along that it doesn't matter. The 1927 retiree who ramped up spending a lot in 28,29 might fail because they only cut 2 years off. The 1920 retiree might be fine since despite the massive ramp up in spending, they only have 20 years left.

What Larry is doing by using valuations is ignore a lot of the data since it doesn't apply and lets only use the data for our currency situation (valuations, interest rates, inflation,....). You do that and you get a lower SWR. But there is a lot of guess work and assumptions being made and small changes can really change things up.
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Re: Larry Swedroe: 3% is the new 4%

Post by MathWizard »

MikeG62 wrote: Mon Feb 04, 2019 11:14 am I think it is important to keep in mind that the floor SWR that Bengen came up with (the 4%)
...
Bengen's result recommended 4.5% . The later Trinity study recommended 4% .
Now we are arguing about 3% rather than 4% .

I understand the argument against locking in an inflation adjusted percentage when
valuations are high (that is expected future returns are low), which is why I discount
the value of the equities in my portfolio based upon the high PE or PE10.

I feel that the intrinsic value of a stock is its ability to earn money. Eventually the
PE ratio will return to the mean. While I would like a big increase in earnings for
the shares that I own, I plan for the price to drop instead.
So, I adjust the price down to what it would be with a more normal PE ratio. Currently
that means down by about 1/3 .

Now, adjusting Bengen's 4.5 % rule down to 3% is the same as assuming the portfolio is actually
1/3 less, so maybe I am agreeing with Larry, but my reasoning for saying so is based on
the value I assign to the equities, not in an ever-changing SWR.

Perhaps this is heresy in attempting to assign a value to equities as a whole rather than saying
that the market always has equities priced correctly, but I am not always convinced in the wisdom
of the crowd. Sometimes the crowd acts like lemmings.
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Re: Larry Swedroe: 3% is the new 4%

Post by heyyou »

3% is the new 4%
Who cares?
Newer withdrawal methods have all addressed each of the shortcomings of Bengen's SWR. Yes, the future is still uncertain, so Larry's forecast may well be accurate, but more modern spending methods will adjust to what would fail when strictly using only Bengen's strategy.

Those who have saved significantly would also be expected to adapt to portfolio changes as retirement proceeds. Warning about 3% as a future SWR seems like ......... You fill in with your own perception.
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Re: Larry Swedroe: 3% is the new 4%

Post by azanon »

MathWizard wrote: Mon Feb 04, 2019 2:05 pm
MikeG62 wrote: Mon Feb 04, 2019 11:14 am I think it is important to keep in mind that the floor SWR that Bengen came up with (the 4%)
...
Bengen's result recommended 4.5% . The later Trinity study recommended 4% .
Now we are arguing about 3% rather than 4% .

..........

Now, adjusting Bengen's 4.5 % rule down to 3% is the same as assuming the portfolio is actually
1/3 less, so maybe I am agreeing with Larry, but my reasoning for saying so is based on
the value I assign to the equities, not in an ever-changing SWR.

Perhaps this is heresy in attempting to assign a value to equities as a whole rather than saying
that the market always has equities priced correctly, but I am not always convinced in the wisdom
of the crowd. Sometimes the crowd acts like lemmings.
Yeah, here is a thread where Bill Bengen discussed the "4.5% Rule" just "one year ago", and in the first response near the top he discusses the switch. There's many interesting tidbits from him in this thread: https://www.reddit.com/r/financialindep ... he_4_safe/
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Re: Larry Swedroe: 3% is the new 4%

Post by MathWizard »

azanon wrote: Mon Feb 04, 2019 2:11 pm
MathWizard wrote: Mon Feb 04, 2019 2:05 pm
MikeG62 wrote: Mon Feb 04, 2019 11:14 am I think it is important to keep in mind that the floor SWR that Bengen came up with (the 4%)
...
Bengen's result recommended 4.5% . The later Trinity study recommended 4% .
Now we are arguing about 3% rather than 4% .

..........

Now, adjusting Bengen's 4.5 % rule down to 3% is the same as assuming the portfolio is actually
1/3 less, so maybe I am agreeing with Larry, but my reasoning for saying so is based on
the value I assign to the equities, not in an ever-changing SWR.

Perhaps this is heresy in attempting to assign a value to equities as a whole rather than saying
that the market always has equities priced correctly, but I am not always convinced in the wisdom
of the crowd. Sometimes the crowd acts like lemmings.
Yeah, here is a thread where Bill Bengen discussed the "4.5% Rule" just "one year ago", and in the first response near the top he discusses the switch. There's many interesting tidbits from him in this thread: https://www.reddit.com/r/financialindep ... he_4_safe/
Thanks for the link.
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Re: Larry Swedroe: 3% is the new 4%

Post by fennewaldaj »

larryswedroe wrote: Sun Feb 03, 2019 12:10 pm
Second, 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. Note that most of the investment risk occurs in the first five years, but then as I explained much of the spending risk occurs later, assuming you live long enough, due to risks of needed long term care and especially when you look at odds of having serious cognitive declines. I cannot tell you how many families I have seen this occur to and wipe out their retirement plans or that of their parents.

Larry
So I am a decent ways from retirement (I am 37 and my wife is 41). We are looking to retire early in ~14-17 years. When I look at our likely SS security benefits if we delay till 70 yrs they appear to be ~$60,000 a year. Even if we assume they are cut by half that is still 30k a year. Given a paid off house is living on that amount really unthinkable? We live in LCOL area and our current expenses are ~50k a year when the house payment is excluded. Our thought is using a variable withdrawal plan that starts at say 4.5%-5% and floors at ~2.5%(of portfolio balance). In this kind of plan we would be unlikely to actually run out of money though the withdrawn amount may be low. Basically we want to spend money in early retirement without completely destroying our retirement if things go poorly in the beginning. I am a pharmacist and I can and likely would go back to work part time if we hit a bad sequence in the 1st few years. I figured social security plus a little extra is likely fine if that is what it comes down to.
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Re: Larry Swedroe: 3% is the new 4%

Post by TheTimeLord »

abc132 wrote: Mon Feb 04, 2019 1:40 pm
marcopolo wrote: Mon Feb 04, 2019 1:09 pm
I think you misunderstood what I am saying.
If 4% works, and market goes up, you could restart your retirement when market goes up, and still use 4% rule from there forward (i.e., ever ratcheting down).
So ratchet up but not down? How does that help after a 40% down year when Person A is living off 80,000 and person B (just retired) is living off 48,000, and both with identical portfolios.


I am defining the basis of a retirement withdrawal strategy as one in which two people with equal portfolios and equivalent preference having the same safe withdrawal rate, and with back testing of this same rate.

Surely somebody has put such a basic requirement on retirement withdrawal strategies, and tested accordingly?
[/quote]

First reason that comes time mind is your 30 year retirement is now 29 years. Second is while 4% was successful for 95% of cases (I thought 3.75% was 100%) I am going to go out on a limb as say something more than 4% was successful for 94% of cases.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
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Re: Larry Swedroe: 3% is the new 4%

Post by skime »

Random Walker wrote: Sat Feb 02, 2019 9:54 pm https://player.fm/series/afford-anythin ... ing-expert

This is a podcast interview by a woman named Paula Pant of Larry Swedroe. Larry discusses his most recent book on retirement. Goes way beyond finances into the importance of finding meaning in retirement, importance of mental stimulation, increased life expectancy, long term care, asset allocation, usefulness of Monte Carlo Simulation, early retirement, and more.

Dave
I'm sticking with 2%.
ebrasmus21
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Re: Larry Swedroe: 3% is the new 4%

Post by ebrasmus21 »

Sometimes these threads are depressing. If 3% (or lower) is the new "standard" I had better hope for a decent inheritance at some point in the next few decades... That or I could stay at, or near, full employment till I'm 75.

I'm a millennial so, to help the cause, maybe I should lay-off the avocado toast.
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Re: Larry Swedroe: 3% is the new 4%

Post by abc132 »

marcopolo wrote: Mon Feb 04, 2019 1:50 pm If you are looking for something closer to optimally, I think you have to look at things like PMT based approaches.
Siamond has a thread running where he has been developing a spreadsheet for that. McClung's EM approach also does well from an optimally point of view.
Thank you.
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Re: Larry Swedroe: 3% is the new 4%

Post by international001 »

SPIAs, SPIAs, SPIAs

Why nobody is advocating for them? I'm confused. Everybody wants to leave $$ to heirs?
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Re: Larry Swedroe: 3% is the new 4%

Post by Broken Man 1999 »

ebrasmus21 wrote: Mon Feb 04, 2019 5:36 pm Sometimes these threads are depressing. If 3% (or lower) is the new "standard" I had better hope for a decent inheritance at some point in the next few decades... That or I could stay at, or near, full employment till I'm 75.

I'm a millennial so, to help the cause, maybe I should lay-off the avocado toast.
Yes, by all means, lay off the avocado toast! We need all the avocados for guacamole! :D

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven then I shall not go. " -Mark Twain
ebrasmus21
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Re: Larry Swedroe: 3% is the new 4%

Post by ebrasmus21 »

Broken Man 1999 wrote: Mon Feb 04, 2019 6:32 pm
ebrasmus21 wrote: Mon Feb 04, 2019 5:36 pm Sometimes these threads are depressing. If 3% (or lower) is the new "standard" I had better hope for a decent inheritance at some point in the next few decades... That or I could stay at, or near, full employment till I'm 75.

I'm a millennial so, to help the cause, maybe I should lay-off the avocado toast.
Yes, by all means, lay off the avocado toast! We need all the avocados for guacamole! :D

Broken Man 1999
As long as the guacamole has a little spiciness to it ;)
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