Ben Felix: 2.7% Retirement Rule.

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Apathizer
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Ben Felix: 2.7% Retirement Rule.

Post by Apathizer »

The most recent Common Sense Investing episode discusses safe withdrawal retirement rates. He makes a convincing argument a 2-3% rate is probably more realistic, and that a 4% rate is probably unrealistic.
https://www.youtube.com/watch?v=1FwgCRIS0Wg
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JoMoney
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Re: Ben Felix: 2.7% Retirement Rule.

Post by JoMoney »

SWR studies were based on a 30 year withdrawal period.
Whatever your balance is, divided by 30, would be a 3.33% withdrawal rate, suggesting less than that seems overly conservative (unless you're much younger than a typical retiree, and a longer retirement period expected.)

With the current TIPS rates averaging about 1.5% real, one could absolutely guarantee a 4.1% inflation adjusted withdrawal rate for 30 years using TIPS.
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Re: Ben Felix: 2.7% Retirement Rule.

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JoMoney wrote: Fri Dec 23, 2022 11:06 pm SWR studies were based on a 30 year withdrawal period.
The Anarkulova study didn't define the SW by a fixed period. The study starts with a couple at age 65 and randomly assigns/"draws" modern-to-future-looking mortality and then randomly assigns returns on the stated AA using historical data across multiple markets. The average joint survival is 89.7 while those in the top 95% will live to 100.5 years. This modeling includes a mortality simulator with the 4% WR giving a17.4% chance to deplete wealth ($0) prior to death and 16% chance that you live another 5 years beyond the depletion.

Here's the morality method from the study:
2.3 Mortality. Our modeling approach examines the joint distribution of longevity and portfolio outcomes for retirees. We model mortality risk using the period life tables from the SSA.10 Table III summarizes the distribution of remaining life expectancy in years for the last survivor from a 65-year-old heterosexual couple at various retirement dates. Our base case scenario is investors retiring in 2022. The life expectancy is 24.7 years for a couple, but there is considerable uncertainty about longevity outcomes. The 5th percentile of time to death is 12.3 years, whereas the 95th percentile is 35.5 years. The table also shows distributional statistics for investors retiring in 2065 (young adults today) or 2085 (newborns today). The life expectancies are longer, such that longevity concerns are more acute for younger generations.
...
For each set of parameters, we generate 1,000,000 simulation draws to estimate financial ruin probabilities and other functions of interest. Each iteration m = 1, . . . , 1,000,000 has the following steps: 1. We draw the lifespans of a male, a female, and a couple (with lifespan equal to the greater of the male and female lifespans) using the SSA mortality tables. Mortality tables report death probabilities by age conditional on living until that age. Investors are assumed to retire when they turn 65. We use monthly conditional death probabilities and Bernoulli draws to deter-mine whether death occurs in a given month. The monthly conditional death probabilities are calculated as one-twelfth of the annual probabilities. We simulate the monthly longevity process until both the male and female have died, and we denote the length in months of the longer of the two lifespans as T (m). 2. We draw monthly asset returns on domestic stocks, international stocks, bonds, and bills to form a time series of T (m) months of returns using the stationary block bootstrap approach of Politis and Romano (1994).
I take a number of issues with this study, but I think the methods need to be defined up.
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Re: Ben Felix: 2.7% Retirement Rule.

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Oh Lordy…… here we go again……
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Re: Ben Felix: 2.7% Retirement Rule.

Post by Ocean77 »

JoMoney wrote: Fri Dec 23, 2022 11:06 pm SWR studies were based on a 30 year withdrawal period.
Whatever your balance is, divided by 30, would be a 3.33% withdrawal rate, suggesting less than that seems overly conservative (unless you're much younger than a typical retiree, and a longer retirement period expected.)

With the current TIPS rates averaging about 1.5% real, one could absolutely guarantee a 4.1% inflation adjusted withdrawal rate for 30 years using TIPS.
The problem with your examples is that the math may be right, but no person on this planet would have the nerve to actually execute such a plan of using only fixed income and spending it down. By the time you're 25 years into it and have only a fraction left of your nest egg, how could you continue spending, with the goal to die in 5 years, or be destitute and broke.
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Re: Ben Felix: 2.7% Retirement Rule.

Post by Ocean77 »

Apathizer wrote: Fri Dec 23, 2022 10:57 pm The most recent Common Sense Investing episode discusses safe withdrawal retirement rates. He makes a convincing argument a 2-3% rate is probably more realistic, and that a 4% rate is probably unrealistic.
https://www.youtube.com/watch?v=1FwgCRIS0Wg
I like Ben Felix but one thing I found odd about this video: As he explains, one reason for the lower withdrawal rate is that country survivorship bias should be accounted for (which Bengen did not). Ok so imagine you retired in Russia in the early 1900s with a nice portfolio of Russian stocks. Then comes 1917 and the revolution, and oops, investors are disowned. Surely this is a bad thing. But how would it have helped that investor to use a lower withdrawal rate up until the revolution?
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Re: Ben Felix: 2.7% Retirement Rule.

Post by Lawrence of Suburbia »

Ocean77 wrote: Sat Dec 24, 2022 1:28 am
Apathizer wrote: Fri Dec 23, 2022 10:57 pm The most recent Common Sense Investing episode discusses safe withdrawal retirement rates. He makes a convincing argument a 2-3% rate is probably more realistic, and that a 4% rate is probably unrealistic.
https://www.youtube.com/watch?v=1FwgCRIS0Wg
I like Ben Felix but one thing I found odd about this video: As he explains, one reason for the lower withdrawal rate is that country survivorship bias should be accounted for (which Bengen did not). Ok so imagine you retired in Russia in the early 1900s with a nice portfolio of Russian stocks. Then comes 1917 and the revolution, and oops, investors are disowned. Surely this is a bad thing. But how would it have helped that investor to use a lower withdrawal rate up until the revolution?
That's the whole semi-conscious thing that lurks in the backbrain when discussing SWRs: the known unknowns, compounded with the unknownable ones. While I think that having a SWR set up at the beginning of retirement (or 25x, 30x savings, whatever) is certainly a prudent idea, it bears little correlation to what the retiree actually spends once retirement is underway.

I'm actually going to shoot for a ~2.7% ($1,000/month) portfolio withdrawal for 2023 myself; but more for fun (a challenge!) than any other reason.
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Re: Ben Felix: 2.7% Retirement Rule.

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Apathizer wrote: Fri Dec 23, 2022 10:57 pm He makes a convincing argument a 2-3% rate is probably more realistic, and that a 4% rate is probably unrealistic.
What's the argument?
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Re: Ben Felix: 2.7% Retirement Rule.

Post by abc132 »

A few years ago you got lower than 4% by looking at low fixed income payments. Today you can get below 4% by looking at historical (war-torn) returns outside of the US. A stock/bond portfolio has a risk of failure even when the same amount of money in TIPS can guarantee 30 years of payments. The SWR typically is used for the stock/bond failure so you might ignore SWR results if you are using a 30 year TIPS ladder and not worried about longevity past the 30 years.

SWR usually does not mean what you can safely retire with. It is a term used inconsistently with respect to assumptions but it typically reflects only stock/bond risk.
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Re: Ben Felix: 2.7% Retirement Rule.

Post by Apathizer »

HomerJ wrote: Sat Dec 24, 2022 2:03 am
Apathizer wrote: Fri Dec 23, 2022 10:57 pm He makes a convincing argument a 2-3% rate is probably more realistic, and that a 4% rate is probably unrealistic.
What's the argument?
Did you watch it? Basically, the exceptional performance of markets over the last decade or so is historically anomalous, so consistent 4% returns seems unlikely for a well diversified portfolio with a retiree risk appropriate stock/bond allocation.
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Re: Ben Felix: 2.7% Retirement Rule.

Post by HomerJ »

Apathizer wrote: Sat Dec 24, 2022 2:25 am
HomerJ wrote: Sat Dec 24, 2022 2:03 am
Apathizer wrote: Fri Dec 23, 2022 10:57 pm He makes a convincing argument a 2-3% rate is probably more realistic, and that a 4% rate is probably unrealistic.
What's the argument?
Did you watch it? Basically, the exceptional performance of markets over the last decade or so is historically anomalous, so consistent 4% returns seems unlikely for a well diversified portfolio with a retiree risk appropriate stock/bond allocation.
I haven't had a chance to watch it (I dislike videos in general compared to reading)... but I hope he said more than that.

The 4% rule has nothing to do with the exceptional performance of markets over the last decade. We could have pulled 8%-10% a year probably over the last decade.

The 4% "rule" is just an observation, that in the U.S., over the past 130 years, the WORST 30-year period had a withdrawal rate of around 4% for a 60/40 portfolio.

That was the WORST 30-year period (I believe it was 1966 with a 3.8% SWR). All other 30-year periods in U.S. history had HIGHER withdrawal rates.

It's certainly possible that the next 30 years will be the worst 30 years in U.S. history, and we will only be able to pull 2.7%. But I don't know how he can calculate that.
Last edited by HomerJ on Sat Dec 24, 2022 2:43 am, edited 1 time in total.
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Re: Ben Felix: 2.7% Retirement Rule.

Post by marcopolo »

Apathizer wrote: Sat Dec 24, 2022 2:25 am
HomerJ wrote: Sat Dec 24, 2022 2:03 am
Apathizer wrote: Fri Dec 23, 2022 10:57 pm He makes a convincing argument a 2-3% rate is probably more realistic, and that a 4% rate is probably unrealistic.
What's the argument?
Did you watch it? Basically, the exceptional performance of markets over the last decade or so is historically anomalous, so consistent 4% returns seems unlikely for a well diversified portfolio with a retiree risk appropriate stock/bond allocation.
This has been discussed ad nauseum in another thread staring with this post:

viewtopic.php?p=6991524#p6991524

I doubt another thread on the topic will bring forth any new thoughts.
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Re: Ben Felix: 2.7% Retirement Rule.

Post by HomerJ »

marcopolo wrote: Sat Dec 24, 2022 2:40 am I doubt another thread on the topic will bring forth any new thoughts.
Yes, good point.
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Re: Ben Felix: 2.7% Retirement Rule.

Post by Lawrence of Suburbia »

Why not just average the New Standard SWR (2.7%) with the old (4%)? Gets you 3.3%, which my gut tells me is just fine. If market returns are lousy going forward, just spend less for awhile. Spam sandwiches. Ditch cable, get a TV antenna.
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Re: Ben Felix: 2.7% Retirement Rule.

Post by 9-5 Suited »

HomerJ wrote: Sat Dec 24, 2022 2:03 am
Apathizer wrote: Fri Dec 23, 2022 10:57 pm He makes a convincing argument a 2-3% rate is probably more realistic, and that a 4% rate is probably unrealistic.
What's the argument?
I suppose Bill Bengen also discovered the 2.7% rule for investors who have 1.0% management fees + 0.3% fund expenses above and beyond the index cost 😉

I have said this in other threads, but of course if you keep mining return series from more time period and more countries and bring them together in more new methodologies, you’ll likely keep finding new worst-case scenarios. And there’s always good reason to be alert to the possibility such a thing could come to pass. But there is absolutely no reason an investor should (1) feel compelled to use a fixed withdrawal rate at all or (2) feel compelled to manage his/her life around the absolute worst-case scenarios.
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Re: Ben Felix: 2.7% Retirement Rule.

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Ocean77 wrote: Sat Dec 24, 2022 1:20 am
JoMoney wrote: Fri Dec 23, 2022 11:06 pm SWR studies were based on a 30 year withdrawal period.
Whatever your balance is, divided by 30, would be a 3.33% withdrawal rate, suggesting less than that seems overly conservative (unless you're much younger than a typical retiree, and a longer retirement period expected.)

With the current TIPS rates averaging about 1.5% real, one could absolutely guarantee a 4.1% inflation adjusted withdrawal rate for 30 years using TIPS.
The problem with your examples is that the math may be right, but no person on this planet would have the nerve to actually execute such a plan of using only fixed income and spending it down. By the time you're 25 years into it and have only a fraction left of your nest egg, how could you continue spending, with the goal to die in 5 years, or be destitute and broke.
Perhaps that's the complaint OP should have used against a SWR percentage rather than suggest such a low withdrawal rate.
A 2.7% withdrawal rate would last 55 years at current TIPS rates, and for a 65 year old retiree to plan to age 120 is ridiculous, and if the fear is that non-TIPS investments would perform worse, don't invest in them when you have the guaranteed option.

Outliving ones money might be a concern, so buy a SPIA. Looking at a Blueprintincome.com quote for a 60yo male, $100k would buy $7,115.28 of income today.
Using a 2.7% initial withdrawal rate and inflation adjusting 3% each year, the investor would be 93 years old before their 2.7% SWR was distributing what the SPIA had been paying every year for the past 33 years, and guarantees to continue paying as long as they live.
A 2.7% SWR is ridiculously low and sets an expectation of poverty for people who could easily afford a better retirement lifestyle even with a very conservative expectations / portfolio.

Regarding getting skittish with a TIPS ladder 25 years into a 30 year withdrawal plan, if the retiree realized that a little sooner, like 20 years into it, they could probably exchange their TIPS ladder for a SPIA paying roughly the equivalent.
i.e. imagining one was 60 at the start, and 20 years in at age 80, I see a SPIA quote for an 80yo male paying $12,553.08 on a $100k SPIA. Which implies that if rates 20 years in the future are same as today, the retiree could exchange the remaining portion of their TIPS ladder for a SPIA that will continue to pay as long as they live.
$1,000,000 at 1.5% real TIPS rate for 30 years amortizes out to $41,639 real annual withdrawal, and implies the remaining balance starting at 60 and going to 80 would be a remaining real equivalent of $370,000 in the portfolio, which can buy a $46,446.24/year SPIA for an 80yo male in today's dollars today.
Last edited by JoMoney on Sat Dec 24, 2022 10:18 am, edited 1 time in total.
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Re: Ben Felix: 2.7% Retirement Rule.

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HomerJ wrote: Sat Dec 24, 2022 2:39 am
Apathizer wrote: Sat Dec 24, 2022 2:25 am
HomerJ wrote: Sat Dec 24, 2022 2:03 am
Apathizer wrote: Fri Dec 23, 2022 10:57 pm He makes a convincing argument a 2-3% rate is probably more realistic, and that a 4% rate is probably unrealistic.
What's the argument?
Did you watch it? Basically, the exceptional performance of markets over the last decade or so is historically anomalous, so consistent 4% returns seems unlikely for a well diversified portfolio with a retiree risk appropriate stock/bond allocation.
I haven't had a chance to watch it (I dislike videos in general compared to reading)... but I hope he said more than that.

The 4% rule has nothing to do with the exceptional performance of markets over the last decade. We could have pulled 8%-10% a year probably over the last decade.

The 4% "rule" is just an observation, that in the U.S., over the past 130 years, the WORST 30-year period had a withdrawal rate of around 4% for a 60/40 portfolio.

That was the WORST 30-year period (I believe it was 1966 with a 3.8% SWR). All other 30-year periods in U.S. history had HIGHER withdrawal rates.

It's certainly possible that the next 30 years will be the worst 30 years in U.S. history, and we will only be able to pull 2.7%. But I don't know how he can calculate that.
Here's the article.

Basically, the author's are saying "what should a baby born today use as a SWR?" and "what if the USA outperforming doesn't continue the future?", AKA mean-reverts.

Summary of methods:
*Randomly assign a USA mortality tables to a 65 year retiree.
*Randomly match that to 10 year-blocks of bootstrap AA of domestic, international, bonds, and bills in a given country in the pool, which includes much smaller or devastated ones like Germany, Japan, Turkey, Chile, etc.
*Do a million matches (Monte Carlo).

Repeat this method through a matrix of varying AA (0/100 - 100/0 and target date funds...which apparently are sub-optimal) and survivor modes (single male, female, and heterosexual joint) and failure thresholds (1%, 5%, and 10%). Because this is a matrix output, you will find lots of head lines on the "new" SWR. The authors found the joint US couple SWR is 4.22% while the Developed sample joint SWR is 2.2% at the 5% failure rate with a 60/40 portfolio.

Commentary:
Critically missing is the withdrawal strategy. No one uses the fixed WR. That was a cutting edge concept when the Trinity study was published, but we know spending decreases overtime in retirement (or at least is reverse-"J" shaped) and there are VPR, SPIA, SS/pensions, bond tents, reverse mortgages, etc. I feel like the author went through all this trouble of trying say people will longer and the USA may revert to the mean, but totally dropped the ball on people actually spend money in retirement.

Zooming out, we already know both these stories. Longevity is trending up. And the SWR from non-USA markets. It's published in Money Ratios, Pfau, and others have reported significantly smaller SWR in non-USA markets and have been discussed in this forum. Combine these two factors and you get this paper.
Last edited by DVMResident on Sat Dec 24, 2022 10:38 am, edited 1 time in total.
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Re: Ben Felix: 2.7% Retirement Rule.

Post by drumboy256 »

I'm pulling 8% year until I take SS---- studies be damned! :sharebeer
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Re: Ben Felix: 2.7% Retirement Rule.

Post by Triple digit golfer »

No thanks. I'll assume 4-5% is safe for a 30 year retirement.

Being overly conservative and assuming that over 30 years my investments won't even keep up with inflation and living like a pauper or forcing myself to work longer than I'll likely need to is not part of my plan.
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Re: Ben Felix: 2.7% Retirement Rule.

Post by austin757 »

It amazes me that this dead horse continues to get beat. Just further proves the point of the financial experts in academia and in business that NEED to stay relevant by claiming new research or studies.

If 4% is too high for you, then take less. Really is as simple as that.
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Re: Ben Felix: 2.7% Retirement Rule.

Post by Normchad »

For those who haven’t tried it, EarlyRetirementNow.com has an excellent spreadsheet called the SWR Toolbox v2.0.

I was playing it with it yesterday. If you want to experiment with different lengths of retirements, different asset allocation, differing income streaks starting and stopping in the future you can do that.

One of the coolest things, it will show you various SWRs, for example, the SWR when CAPE was over 20, or when the S&P was at an all time high.

Personally, I’m aiming for 3.0% as a perpetual withdrawal rate. I.e. when I die, my portfolio will likely be the same size in real terms, regardless of how long I draw on it.
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Re: Ben Felix: 2.7% Retirement Rule.

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Triple digit golfer wrote: Sat Dec 24, 2022 10:34 am No thanks. I'll assume 4-5% is safe for a 30 year retirement.

Being overly conservative and assuming that over 30 years my investments won't even keep up with inflation and living like a pauper or forcing myself to work longer than I'll likely need to is not part of my plan.
:thumbsup
In current times, I agree.
I could swallow the 2.7% argument if we were talking in a time of TIPS offering a real (-1.30%), which has happened for 5-10year TIPS (but longer terms remained higher), but that's not the situation we're currently in.
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Re: Ben Felix: 2.7% Retirement Rule.

Post by Nathan Drake »

JoMoney wrote: Sat Dec 24, 2022 10:45 am
Triple digit golfer wrote: Sat Dec 24, 2022 10:34 am No thanks. I'll assume 4-5% is safe for a 30 year retirement.

Being overly conservative and assuming that over 30 years my investments won't even keep up with inflation and living like a pauper or forcing myself to work longer than I'll likely need to is not part of my plan.
:thumbsup
In current times, I agree.
I could swallow the 2.7% argument if we were talking in a time of TIPS offering a real (-1.30%), which has happened for 5-10year TIPS (but longer terms remained higher), but that's not the situation we're currently in.
There’s risk that TIPS are no longer offered, I believe it was discussed that Canada is no longer offering them
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Re: Ben Felix: 2.7% Retirement Rule.

Post by nedsaid »

I have joked about the Zero Fund Portfolio and now I suppose we are headed to a Zero percent sustainable withdrawal rate.
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Re: Ben Felix: 2.7% Retirement Rule.

Post by Triple digit golfer »

nedsaid wrote: Sat Dec 24, 2022 11:11 am I have joked about the Zero Fund Portfolio and now I suppose we are headed to a Zero percent sustainable withdrawal rate.
I remember that! Good call. The combination of the two is the ultimate in simplicity.
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Re: Ben Felix: 2.7% Retirement Rule.

Post by flyingaway »

The only really safe rule is to work until your death, and hope that you do not get unemployed. I cannot believe that people keep discussing this whenever someone pops up a new number or re-pops up an old number.
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Re: Ben Felix: 2.7% Retirement Rule.

Post by JoMoney »

Nathan Drake wrote: Sat Dec 24, 2022 11:00 am
JoMoney wrote: Sat Dec 24, 2022 10:45 am
Triple digit golfer wrote: Sat Dec 24, 2022 10:34 am No thanks. I'll assume 4-5% is safe for a 30 year retirement.

Being overly conservative and assuming that over 30 years my investments won't even keep up with inflation and living like a pauper or forcing myself to work longer than I'll likely need to is not part of my plan.
:thumbsup
In current times, I agree.
I could swallow the 2.7% argument if we were talking in a time of TIPS offering a real (-1.30%), which has happened for 5-10year TIPS (but longer terms remained higher), but that's not the situation we're currently in.
There’s risk that TIPS are no longer offered, I believe it was discussed that Canada is no longer offering them
That might be a "risk" for future retirees, but for those who don't have a risk tolerance for more risky investments, TIPS are available to lock in now at maturities out to 30 years.
Insurance products like a SPIA don't seem to be going anywhere, and although they don't offer an inflation linked guarantee, the nominal rates being offered against "implied inflation" suggested by TIPS vs. Treasury rates, suggest much higher than a 2.7% SWR, and the SPIA would be guaranteed income for life.
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Re: Ben Felix: 2.7% Retirement Rule.

Post by JoMoney »

To add to some of my above comments, I don't necessarily suggest a TIPS ladder or a SPIA is the way to go for any specific situation, but I consider them ultra-conservative options. I'm just using it as an example that if the government backed bond portfolio, and insurance companies, will guarantee you a >4% 30yr SWR or equivalent, the 2.7% "Retirement Rule" is beyond ultra-conservative.
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Re: Ben Felix: 2.7% Retirement Rule.

Post by bog007 »

Richest person in the cemetery at 2.7
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Re: Ben Felix: 2.7% Retirement Rule.

Post by mrspock »

Can anyone find a single example — even anecdotal, of anyone who went broke in a 30yr (or less) retirement with a 3-3.5% SWR having a 60/40 to 80/20 mix of VTI/BND or VOO/BND (or similar total US or S&P 500 tickers/MFs)? (no tinkering, no tilting) How about 4%?

Ya. That’s what I thought.

Lots of things CAN happen. It’s a fools game to plan for all outcomes regardless of probability/likelihood. You plan for what is reasonably likely, and adjust accordingly if the very unlikely scenarios arise. Even the inflation scenario we have right now, doesn’t fall into anything which isn’t accounted for in the 4% rule or Montecarlo tools using data going back to the 1920s.
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Re: Ben Felix: 2.7% Retirement Rule.

Post by Apathizer »

flyingaway wrote: Sat Dec 24, 2022 11:17 am The only really safe rule is to work until your death, and hope that you do not get unemployed. I cannot believe that people keep discussing this whenever someone pops up a new number or re-pops up an old number.
Those of us with a pension probably won't have to. Between that and SS my retirement income should be enough to cover essential expenses. That's not to say I don't want to have something left in my ROTH, hopefully about $100K or so that I can use for indulgences.

But I think someone should also consider doing work they find enjoyable even if it doesn't pay that well. That's what I might do at some point.
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Re: Ben Felix: 2.7% Retirement Rule.

Post by ScubaHogg »

DVMResident wrote: Sat Dec 24, 2022 10:16 am
HomerJ wrote: Sat Dec 24, 2022 2:39 am
Apathizer wrote: Sat Dec 24, 2022 2:25 am
HomerJ wrote: Sat Dec 24, 2022 2:03 am
Apathizer wrote: Fri Dec 23, 2022 10:57 pm He makes a convincing argument a 2-3% rate is probably more realistic, and that a 4% rate is probably unrealistic.
What's the argument?
Did you watch it? Basically, the exceptional performance of markets over the last decade or so is historically anomalous, so consistent 4% returns seems unlikely for a well diversified portfolio with a retiree risk appropriate stock/bond allocation.
I haven't had a chance to watch it (I dislike videos in general compared to reading)... but I hope he said more than that.

The 4% rule has nothing to do with the exceptional performance of markets over the last decade. We could have pulled 8%-10% a year probably over the last decade.

The 4% "rule" is just an observation, that in the U.S., over the past 130 years, the WORST 30-year period had a withdrawal rate of around 4% for a 60/40 portfolio.

That was the WORST 30-year period (I believe it was 1966 with a 3.8% SWR). All other 30-year periods in U.S. history had HIGHER withdrawal rates.

It's certainly possible that the next 30 years will be the worst 30 years in U.S. history, and we will only be able to pull 2.7%. But I don't know how he can calculate that.
Here's the article.

Basically, the author's are saying "what should a baby born today use as a SWR?" and "what if the USA outperforming doesn't continue the future?", AKA mean-reverts.
I think this was the same paper that they discussed on Rational Reminder podcast. I sorta stopped listening when they explained they were projecting SWRs for babies.. I mean, how was I supposed to take that seriously?

I’m surprised they didn’t nail it down to the hundredth decimal point
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Re: Ben Felix: 2.7% Retirement Rule.

Post by Nohbdy »

I like the rational reminder, it’s one of my favorite podcasts.

I like to consider the incentives that people operate under.

Is PWL capitol an AUM advisor?

Say you are an AUM advisor. It seems like you have a financial incentive to have (and keep) more assets under management.
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Re: Ben Felix: 2.7% Retirement Rule.

Post by Harry Livermore »

Ocean77 wrote: Sat Dec 24, 2022 1:28 am
I like Ben Felix but one thing I found odd about this video: As he explains, one reason for the lower withdrawal rate is that country survivorship bias should be accounted for (which Bengen did not). Ok so imagine you retired in Russia in the early 1900s with a nice portfolio of Russian stocks. Then comes 1917 and the revolution, and oops, investors are disowned. Surely this is a bad thing. But how would it have helped that investor to use a lower withdrawal rate up until the revolution?
Indeed! Revolution, war, and pestilence are all possibilities that render plans moot.
And the study assigns values for risk premiums based on the US "not heavily impacted economically on their own soil" during WW2 (which seems to be mixing concepts) and "the fact that nuclear war did not happen in Cuba". I mean, I could come up with a dozen other "near misses" and assign some number to each. The study also asserts that moving 40% of the equity allocation to international gets you almost back to 3%. Hmmm. Too rich for my blood. I'll admit my home country bias here... not gonna happen in my portfolio. 10%-15% tops.
I guess the real takeaway is the old saw "nobody knows nuthin". I'm planning on 3%, but as others have mentioned, will adjust if needed. So what?
I think the guy is fun to watch, and I downloaded the study, but, it's all really entertainment. Nobody knows.
Cheers
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Re: Ben Felix: 2.7% Retirement Rule.

Post by sperry8 »

Apathizer wrote: Fri Dec 23, 2022 10:57 pm The most recent Common Sense Investing episode discusses safe withdrawal retirement rates. He makes a convincing argument a 2-3% rate is probably more realistic, and that a 4% rate is probably unrealistic.
https://www.youtube.com/watch?v=1FwgCRIS0Wg
Studies are all well and good. But here is my actual real world data point since retirement 15 years ago. Pulled out 3.24% (average over 15 years). Lowest 2.42% and highest 4.67%. I earned money with this withdrawal rate. Meaning, I am up since the day I retired, forget spending down my money. This timeframe includes the great recession (monies dropped 56%) the Covid drop, and the current ongoing bear market. And of course a bull market in between. Pretty real world I'd say.

I could've withdrawn over 5% and I'd still have made money. Perhaps future returns will be abysmal. Nevertheless, if I didn't make one penny from my assets for the next 25 years, I could draw down my assets to 0 with a 4% withdrawal rate. That would give me 40 years of retirement, and I'd still be averaging much more than the studies suggestion that 2-3% is appropriate.

One great thing about bogleheads is that you can draw on the experience of the people here. No studies required. Ask us and see what we found.
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Re: Ben Felix: 2.7% Retirement Rule.

Post by Trance »

If it's only 2.7%, doesn't this mean we could possibly live off the dividends of our retirement investments? The total world stock index's dividend yield is pretty close to that
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Re: Ben Felix: 2.7% Retirement Rule.

Post by stocknoob4111 »

Completely disagree, the 4% came out of the 1966 cycle where the US experienced tremendous misfortunes... I don't see how he can say that the US was simply lucky, he really makes no sense. He is cherry picking WW2 and Cuban missile crisis. What about the other periods where the US was NOT so lucky?

The WR had been as high as 13% in those "lucky" periods, not 4%

Waiting for Kitces to do a counter :D
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Re: Ben Felix: 2.7% Retirement Rule.

Post by stocknoob4111 »

bog007 wrote: Sat Dec 24, 2022 11:47 am Richest person in the cemetery at 2.7
:mrgreen: :D :D I plan to withdraw 2.7% but have my epitaph engraved in diamonds with the money left over
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Re: Ben Felix: 2.7% Retirement Rule.

Post by vineviz »

stocknoob4111 wrote: Sat Dec 24, 2022 1:48 pm Completely disagree, the 4% came out of the 1966 cycle where the US experienced tremendous misfortunes... I don't see how he can say that the US was simply lucky, he really makes no sense. He is cherry picking WW2 and Cuban missile crisis. What about the other periods where the US was NOT so lucky?

The WR had been as high as 13% in those "lucky" periods, not 4%

Waiting for Kitces to do a counter :D
The 1966 retirement cohort was "lucky" in the sense that despite a pretty terrible run of real returns in the first half of their retirement they did - in fact - enjoy a very strong run of real returns int he second half (from 1982 through 1995, and especially 1982 through 1991).

It's not at all implausible that if G. William Miller had prevailed as Fed chairman for merely 1 or 2 more years longer, the "4% rule" based on US historical data would have been the "3.33% rule" all along. Delaying Volcker's reforms by even 12-18 months would have likely had that large an effect on retirement outcomes.
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Re: Ben Felix: 2.7% Retirement Rule.

Post by marcopolo »

vineviz wrote: Sat Dec 24, 2022 2:22 pm
stocknoob4111 wrote: Sat Dec 24, 2022 1:48 pm Completely disagree, the 4% came out of the 1966 cycle where the US experienced tremendous misfortunes... I don't see how he can say that the US was simply lucky, he really makes no sense. He is cherry picking WW2 and Cuban missile crisis. What about the other periods where the US was NOT so lucky?

The WR had been as high as 13% in those "lucky" periods, not 4%

Waiting for Kitces to do a counter :D
The 1966 retirement cohort was "lucky" in the sense that despite a pretty terrible run of real returns in the first half of their retirement they did - in fact - enjoy a very strong run of real returns int he second half (from 1982 through 1995, and especially 1982 through 1991).

It's not at all implausible that if G. William Miller had prevailed as Fed chairman for merely 1 or 2 more years longer, the "4% rule" based on US historical data would have been the "3.33% rule" all along. Delaying Volcker's reforms by even 12-18 months would have likely had that large an effect on retirement outcomes.
Well, wouldn't the terrible run of returns mean that the retiree had a much higher "expected returns"? So, the subsequent good performance does not seem that lucky. Perhaps, you think expected returns only matter when predicting poor outcomes?
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Re: Ben Felix: 2.7% Retirement Rule.

Post by stocknoob4111 »

Yes, the second half of the 66 cycle was very strong but the first half was extremely bad, and the first half is much more crucial to portfolio longevity than the second half.

I think we could get very creative trying to play with "what if" scenarios using history. Sure, a sequence worse than 1966 can definitely materialize. However all were doing is estimating our confidence level based on probabilities... To me it's a low probability that 1966 would repeat and an even lower probability that it will be way worse than 66. I'm happy taking the chances based on that assessment.
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Re: Ben Felix: 2.7% Retirement Rule.

Post by vineviz »

marcopolo wrote: Sat Dec 24, 2022 2:27 pm
vineviz wrote: Sat Dec 24, 2022 2:22 pm
stocknoob4111 wrote: Sat Dec 24, 2022 1:48 pm Completely disagree, the 4% came out of the 1966 cycle where the US experienced tremendous misfortunes... I don't see how he can say that the US was simply lucky, he really makes no sense. He is cherry picking WW2 and Cuban missile crisis. What about the other periods where the US was NOT so lucky?

The WR had been as high as 13% in those "lucky" periods, not 4%

Waiting for Kitces to do a counter :D
The 1966 retirement cohort was "lucky" in the sense that despite a pretty terrible run of real returns in the first half of their retirement they did - in fact - enjoy a very strong run of real returns int he second half (from 1982 through 1995, and especially 1982 through 1991).

It's not at all implausible that if G. William Miller had prevailed as Fed chairman for merely 1 or 2 more years longer, the "4% rule" based on US historical data would have been the "3.33% rule" all along. Delaying Volcker's reforms by even 12-18 months would have likely had that large an effect on retirement outcomes.
Well, wouldn't the terrible run of returns mean that the retiree had a much higher "expected returns"? So, the subsequent good performance does not seem that lucky. Perhaps, you think expected returns only matter when predicting poor outcomes?
There's no need to speculate on what I think: what I wrote sufficiently answers the question.
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Re: Ben Felix: 2.7% Retirement Rule.

Post by Nathan Drake »

marcopolo wrote: Sat Dec 24, 2022 2:27 pm
vineviz wrote: Sat Dec 24, 2022 2:22 pm
stocknoob4111 wrote: Sat Dec 24, 2022 1:48 pm Completely disagree, the 4% came out of the 1966 cycle where the US experienced tremendous misfortunes... I don't see how he can say that the US was simply lucky, he really makes no sense. He is cherry picking WW2 and Cuban missile crisis. What about the other periods where the US was NOT so lucky?

The WR had been as high as 13% in those "lucky" periods, not 4%

Waiting for Kitces to do a counter :D
The 1966 retirement cohort was "lucky" in the sense that despite a pretty terrible run of real returns in the first half of their retirement they did - in fact - enjoy a very strong run of real returns int he second half (from 1982 through 1995, and especially 1982 through 1991).

It's not at all implausible that if G. William Miller had prevailed as Fed chairman for merely 1 or 2 more years longer, the "4% rule" based on US historical data would have been the "3.33% rule" all along. Delaying Volcker's reforms by even 12-18 months would have likely had that large an effect on retirement outcomes.
Well, wouldn't the terrible run of returns mean that the retiree had a much higher "expected returns"? So, the subsequent good performance does not seem that lucky. Perhaps, you think expected returns only matter when predicting poor outcomes?
Maybe. But bad returns can stay bad for so long that you never get to enjoy the higher periods of actualized returns.

This study is just claiming that the 4% rule, based on an exceptional outlier of US performance, may not be tenable because US performance going forward could look more like the international average or worse.

Blending the global portfolio together you get to the 2.7% SWR which is what you can expect. If you hold US only (or any other country only), that SWR is closer to 2%
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Re: Ben Felix: 2.7% Retirement Rule.

Post by stocknoob4111 »

Also not taken into account is the fact that most people aren't going to drawdown their portfolio to the last dollar until they are on the streets, Kitces makes this argument so ultimately it's extremely low risk to use a 4% guideline.. Kitces makes the argument to start with 4% then dynamically course correct along the way which I is the most realistic way people are going to do it anyway.
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Re: Ben Felix: 2.7% Retirement Rule.

Post by vineviz »

stocknoob4111 wrote: Sat Dec 24, 2022 2:30 pm Yes, the second half of the 66 cycle was very strong but the first half was extremely bad, and the first half is much more crucial to portfolio longevity than the second half.

I think we could get very creative trying to play with "what if" scenarios using history. Sure, a sequence worse than 1966 can definitely materialize. However all were doing is estimating our confidence level based on probabilities... To me it's a low probability that 1966 would repeat and an even lower probability that it will be way worse than 66. I'm happy taking the chances based on that assessment.
There are several important distinctions that you are overlooking in this response.

Yes, the 1966 got an "unlucky" sequence of returns relative to the return expectations they would have formed at the beginning of their retirement.

But it's important to understand that it was definitely not nearly as unlucky as it could have been. Being hit with a 10 year flood is bad, but not as bad as being hit with a 100 year flood.

It's also important to understand that things like return expectations are NOT constant over time. They rise and fall with bond yields and, to some extent, with equity valuations.

Once we separate the base level of expected returns from the measure of how lucky or unlucky the sequence of returns was for that cohort, we are free to observe that a 4% initial withdrawal rate is quite conservative under some starting conditions and quite aggressive under others.
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Re: Ben Felix: 2.7% Retirement Rule.

Post by Ocean77 »

Just leave all the speculation aside, and retire in the middle of a bear market. Then you're going to be good, even with the 4% withdrawal rate. Because the biggest risk to any retirement is if a bear market starts soon after retiring. That can't happen if you retire during a bear market, so you eliminated that risk.
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Re: Ben Felix: 2.7% Retirement Rule.

Post by ScubaHogg »

Nohbdy wrote: Sat Dec 24, 2022 12:52 pm I like the rational reminder, it’s one of my favorite podcasts.
I like it to, but sometimes they are too enamored with “studies” by academics. Especially overly clever studies.

Their tag line for a long time was that the podcast was “brought to you by two Canadians.” My private joke was that it was “brought to you by two guys in love with regressions.”
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Re: Ben Felix: 2.7% Retirement Rule.

Post by stocknoob4111 »

vineviz wrote: Sat Dec 24, 2022 2:38 pm But it's important to understand that it was definitely not nearly as unlucky as it could have been. Being hit with a 10 year flood is bad, but not as bad as being hit with a 100 year flood.
We don't need to plan for all the bad luck that can ever transpire, that is a foolish exercise in my opinion because it lies in the less than 1% of probabilities. Can a nuclear attack be initiated against the US, for sure, but the chances of that happening are so low that I am neither going to worry about it nor going to plan for it. And mathematically the 100 year flood happens once in 100 years, that's a 1% chance, again, not really worth worry about and i'm not going to lower my WR because of it.

As I mentioned the 1966 cycle is a baseline that I am happy to accept as a lower bound for outcomes. And I am also optimistic that bad periods are generally followed by good periods. I am not going to plan for a 30 year horrific period, it has never happened in history and that fact is good enough for me.
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Re: Ben Felix: 2.7% Retirement Rule.

Post by vineviz »

stocknoob4111 wrote: Sat Dec 24, 2022 3:08 pm
vineviz wrote: Sat Dec 24, 2022 2:38 pm But it's important to understand that it was definitely not nearly as unlucky as it could have been. Being hit with a 10 year flood is bad, but not as bad as being hit with a 100 year flood.
We don't need to plan for all the bad luck that can ever transpire, that is a foolish exercise in my opinion because it lies in the less than 1% of probabilities. .
What I’m trying to explain that unless you make a concerted effort to evaluate the evidence you can’t possibly know whether a particular outcomes has a 1 % probability of occurring or a 50% probability of occurring.

No one (certainly not Ben Felix OR me) is suggesting that investors try to “ plan for all the bad luck that can ever transpire”.

I, for one, simply want people to avoid fooling themselves into thinking a risky course of action is “safe” or vice versa.
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Re: Ben Felix: 2.7% Retirement Rule.

Post by deanmoriarty »

vineviz wrote: Sat Dec 24, 2022 3:15 pm I, for one, simply want people to avoid fooling themselves into thinking a risky course of action is “safe” or vice versa.
What is your educated guess on what a SWR for a global portfolio could be, from now on?
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