If History says.... would you change 4% rule ?

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soccerrules
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If History says.... would you change 4% rule ?

Post by soccerrules » Tue Jul 31, 2018 11:26 am

Just read this in an article about proposed legislation to "help" future retirees.

You know the rule of thumb that says in retirement you should withdraw only about 4% of your portfolio each year? Perhaps you could do better. Research done by Maryland-based financial adviser Michael Kitces says sticking to that “will most commonly just leave a huge amount of money left over.”

Even accounting for massive stock market SPX, +0.75% crashes — like the wipeouts of 2000-2002 and 2007-2009 — Kitces’ research, which goes all the way back to the 1870s and uses data from famed Yale economist Robert Shiller — found that in more than two-thirds of the time, the average person, after 30 years in retirement, would still wind up with nearly 2.8 times more than what they began with. And that’s adjusted for inflation. In other words, writes Kitces, “it’s overwhelmingly more likely that retirees will have opportunities to ratchet their spending higher than a 4% rule, than ever need to spend that conservatively in the first place!” The only caveat: Unless there’s another Great Depression.”


Would you change your withdrawal rate seeing this data ? (Yes I know the 4% is a general guideline and you need to be flexible, etc etc. )
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Pajamas
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Re: If History says.... would you change 4% rule ?

Post by Pajamas » Tue Jul 31, 2018 11:42 am

No, my spending is based on my needs and wants, not on how much money I have available to spend. I'm fine with having extra money available that I won't use. I much prefer that to needing money that I don't have.

If I didn't have enough money to meet my needs and wants, I might feel differently and prefer not only to spend everything, but also to die in debt. The majority of Americans apparently do die with personal debt, not to mention a per capita share of government debt at the local, state, and national levels.


http://time.com/money/4709270/americans-die-in-debt/

The numbers used included mortgage debt, so it might not be the case that they die with a negative net worth; that's not addressed.

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Re: If History says.... would you change 4% rule ?

Post by goblue100 » Tue Jul 31, 2018 11:56 am

I will certainly use the "GB100 common sense variable withdrawal rate", which means if the stock market has a good year, I'll look to spend a little more. If returns are negative, I'll spend less.
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Re: If History says.... would you change 4% rule ?

Post by Nate79 » Tue Jul 31, 2018 12:22 pm

I recall that a few years ago (?) Bengen updated his SWR from 4% to 4.5%. There have been a number of threads and posts on here that show the SWR as a function of initial year and indeed only a few years has it been as low as 4%. Most years the SWR was much higher.

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Re: If History says.... would you change 4% rule ?

Post by sperry8 » Tue Jul 31, 2018 12:29 pm

Not sure I'd change based on history... but I did change based on my actuals. I retired 11 years ago (2007) and this into the Great Recession. Even including the 50% drop in assets... my withdrawal rate could easily have been 5% (rather then the 4% rule). I still am not spending that much (as I don't need to), but I am less concerned about future crashes than I used to be knowing the 4% rule is very conservative.
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Earl Lemongrab
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Re: If History says.... would you change 4% rule ?

Post by Earl Lemongrab » Tue Jul 31, 2018 12:56 pm

I don't plan my spending based on my savings. I planned my savings to well exceed my desired spending. That way stock market downturns and large unknown spending needs are already covered.

People act like having a dollar left when you go is a tragedy. If I end up with a bunch of money left when I die (and I hope that's the case) then the money goes to the family, and I like those people.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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Re: If History says.... would you change 4% rule ?

Post by Broken Man 1999 » Tue Jul 31, 2018 12:59 pm

Nope. But then again I don't use a 4% rule to begin with.

I have to believe given this long-running bull market that recent retirees are pleasantly surprised how much their investment portfolios have fattened up, so in many cases 4% is not necessary to enjoy the standard of living you desire in retirement, much less a rate higher than 4%.

I derive no pleasure to spend for spending's sake, that just isn't me.

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GAAP
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Re: If History says.... would you change 4% rule ?

Post by GAAP » Tue Jul 31, 2018 1:03 pm

No -- but I wouldn't use any "SWR" with automatic CPI increases, and my needs don't match the assumptions in that study anyway.

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Re: If History says.... would you change 4% rule ?

Post by MnD » Tue Jul 31, 2018 1:37 pm

I already have by giving myself permission to spend 5% of annual portfolio balance.
If I can't find satisfying utility for that much spending I'll give some to my kids and/or to extended family or the community when they can still shake my hand and say thanks. If I can't spend It at the 5% rate, it will be satisfying to see what utility others put that money towards versus winning the richest guy in the graveyard contest.

Mean and median real ending portfolio 35 years out is right where you started at 5% of annual portfolio balance at 70/30. Historical lowest sequence is about 40% and historical sequence highest is 2.5X. I have an abundance versus scarcity driven perspective on life so I genuinely look forward to spending in retirement what I saved and invested over decades or giving some away if I can't find a use for it. isn't that the point versus preserving "cash mountain" until the grave? If things really went south I'd probably annuitize at least some the portfolio if it dipped below 50% real of original value. I have some other circuit breakers to use as well so no worries! :beer

Given the joint life expectancy table and an ultra-low SWR portfolio hoarding approach, my kids would be 60 before receiving some (likely) jumbo inheritance. I think our plan is better than that.
Last edited by MnD on Tue Jul 31, 2018 2:21 pm, edited 1 time in total.

aristotelian
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Re: If History says.... would you change 4% rule ?

Post by aristotelian » Tue Jul 31, 2018 2:17 pm

I would probably bump up my withdrawal rate a bit if I made it through the first few years unscathed.

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Re: If History says.... would you change 4% rule ?

Post by Gnirk » Tue Jul 31, 2018 2:33 pm

Pajamas wrote:
Tue Jul 31, 2018 11:42 am
No, my spending is based on my needs and wants, not on how much money I have available to spend. I'm fine with having extra money available that I won't use. I much prefer that to needing money that I don't have.
+1

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Re: If History says.... would you change 4% rule ?

Post by SQRT » Tue Jul 31, 2018 2:49 pm

aristotelian wrote:
Tue Jul 31, 2018 2:17 pm
I would probably bump up my withdrawal rate a bit if I made it through the first few years unscathed.
I went through the first 10 years of retirement basically just spending divs (around 3.5% of market value). Last couple years I have ramped it up by about 1-1.5% more. I can easily “get by” on just divs (very nicely in fact). But it seemed less than optimal to leave a very outsized legacy given the market results. Have increased gifting, and unlike many here, can think of many “productive” (and fun) ways to spend a little more. If (when) market tanks I will simply revert to div spending. My pension alone would provide a very well funded retirement.

My method is a form of Variable Withdrawal and can’t really imagine a fixed methodology set at retirement and not ever adjusted? Flexibility is key both in spending and withdrawing,no?

You can only spend it or give it away, now or later.
Last edited by SQRT on Wed Aug 01, 2018 8:36 am, edited 1 time in total.

invst65
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Re: If History says.... would you change 4% rule ?

Post by invst65 » Tue Jul 31, 2018 2:50 pm

Gnirk wrote:
Tue Jul 31, 2018 2:33 pm
Pajamas wrote:
Tue Jul 31, 2018 11:42 am
No, my spending is based on my needs and wants, not on how much money I have available to spend. I'm fine with having extra money available that I won't use. I much prefer that to needing money that I don't have.
+1
+2

I drew up a budget we could live on and be happy with in retirement and we've been sticking to it. Various calculators tell me we have more than enough and the portfolio will be growing to some impressive numbers if we live long enough. That's good to know but I'm going to wait and see it start to materialize before I start spending it.

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Re: If History says.... would you change 4% rule ?

Post by SQRT » Tue Jul 31, 2018 2:52 pm

MnD wrote:
Tue Jul 31, 2018 1:37 pm
I already have by giving myself permission to spend 5% of annual portfolio balance.
If I can't find satisfying utility for that much spending I'll give some to my kids and/or to extended family or the community when they can still shake my hand and say thanks. If I can't spend It at the 5% rate, it will be satisfying to see what utility others put that money towards versus winning the richest guy in the graveyard contest.

Mean and median real ending portfolio 35 years out is right where you started at 5% of annual portfolio balance at 70/30. Historical lowest sequence is about 40% and historical sequence highest is 2.5X. I have an abundance versus scarcity driven perspective on life so I genuinely look forward to spending in retirement what I saved and invested over decades or giving some away if I can't find a use for it. isn't that the point versus preserving "cash mountain" until the grave? If things really went south I'd probably annuitize at least some the portfolio if it dipped below 50% real of original value. I have some other circuit breakers to use as well so no worries! :beer

Given the joint life expectancy table and an ultra-low SWR portfolio hoarding approach, my kids would be 60 before receiving some (likely) jumbo inheritance. I think our plan is better than that.
This reflects my view. Well said.

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Re: If History says.... would you change 4% rule ?

Post by jsprag » Tue Jul 31, 2018 3:59 pm

soccerrules wrote:
Tue Jul 31, 2018 11:26 am
Would you change your withdrawal rate seeing this data ? (Yes I know the 4% is a general guideline and you need to be flexible, etc etc. )
No. It's an academic finding derived from applying very specific success criteria to a historical data set. There's a lot of assumptions built into the Kitce analysis that may not be applicable to any given individual based on their own measure of success, retirement horizons, flexible earning potential, risk tolerance, etc... It's useful but not canonical.

Recommended reading: https://earlyretirementnow.com/2016/12/ ... t-1-intro/

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Re: If History says.... would you change 4% rule ?

Post by randomguy » Tue Jul 31, 2018 4:11 pm

soccerrules wrote:
Tue Jul 31, 2018 11:26 am
Just read this in an article about proposed legislation to "help" future retirees.

You know the rule of thumb that says in retirement you should withdraw only about 4% of your portfolio each year? Perhaps you could do better. Research done by Maryland-based financial adviser Michael Kitces says sticking to that “will most commonly just leave a huge amount of money left over.”

Even accounting for massive stock market SPX, +0.75% crashes — like the wipeouts of 2000-2002 and 2007-2009 — Kitces’ research, which goes all the way back to the 1870s and uses data from famed Yale economist Robert Shiller — found that in more than two-thirds of the time, the average person, after 30 years in retirement, would still wind up with nearly 2.8 times more than what they began with. And that’s adjusted for inflation. In other words, writes Kitces, “it’s overwhelmingly more likely that retirees will have opportunities to ratchet their spending higher than a 4% rule, than ever need to spend that conservatively in the first place!” The only caveat: Unless there’s another Great Depression.”


Would you change your withdrawal rate seeing this data ? (Yes I know the 4% is a general guideline and you need to be flexible, etc etc. )
Why would you change? I mean this is all well known info. If you want a steady SWR that never deviates, you are stuck at 4% (maybe 4.5% with some smallcaps/international. Maybe 3.5 if your a pessimist). If you are willing to cut spending by 30%+, you can start doing things like 5 and 6% SWR and on average have good outcomes. You will spend a bit less money in the bottom 20% or so of cases though.

And it isn't the great depression. It is the 60s/70s. And some 1800's panic whose exact year I can't remember:). There will be a half dozen years every hundred where retirement is sketchy. How much to worry about them is up to you.

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Re: If History says.... would you change 4% rule ?

Post by togb » Tue Jul 31, 2018 8:46 pm

It gives me some comfort to read about studies of how things worked out in the past, but that does not guarantee it would work that way in the future. I think 4% is a pretty good starting point, to the extent that you have at least 3% in fixed income or dividends to get you most of the way to that 4%. I'm sort of tracking the growth on tIRAs because it does seem like you couldn't go far wrong by withdrawing 80-90% of the growth each year, with a cap of 5-6% in case of a crazy good year. Now that won't work in years where you don't have growth, so that's where the dividends and fixed income and cash reserves come in. I also plan to have Roth money as a contingency.

I thought about being more conservative in early retirement just to be safe, then realized that's when I'll most likely be best able to actually enjoy some travel and other good stuff that costs money. So my current thinking is to do some part-time work to bolster income without having to withdraw at a rate that does not seem conservative. Consulting or maybe get a real estate license-- something that will leave plenty of "me time". I don't want to live in fear of outliving my money, but also don't want to have a big portfolio outlast me. I think different years might pan out different ways based on how investments perform.

I like to look at things a couple of different ways. There's too much at stake to just 100% follow anyone's rule, no matter how well it worked out in the past.

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JaneyLH
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Re: If History says.... would you change 4% rule ?

Post by JaneyLH » Tue Jul 31, 2018 9:36 pm

Hard to believe nobody has brought up Bogleheads Variable Percentage Withdrawal method.

https://www.bogleheads.org/wiki/Variabl ... withdrawal

This is what I’m doing, as I have no need to leave a large legacy to anyone. Having no children, my husband and I are enjoying the retirement we hoped for but never really dreamed was possible.

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Re: If History says.... would you change 4% rule ?

Post by ResearchMed » Tue Jul 31, 2018 9:54 pm

JaneyLH wrote:
Tue Jul 31, 2018 9:36 pm
Hard to believe nobody has brought up Bogleheads Variable Percentage Withdrawal method.

https://www.bogleheads.org/wiki/Variabl ... withdrawal

This is what I’m doing, as I have no need to leave a large legacy to anyone. Having no children, my husband and I are enjoying the retirement we hoped for but never really dreamed was possible.
Yup, this!

We aren't quite there yet, but we are getting a bit of a head start in terms of no longer saving.

But the VPW seems perfect.

However, it wouldn't quite work for those who are not trying to "spend down".
For those who are instead trying to spend a bit more if returns continue to be, er, "generous", there's still no model to adjust upward if things go well (or a bit downward if they don't continue that way).

And yet many, other than those truly living at the edge (which probably includes few Bogleheads), probably do or would prefer to have a bit of flexibility to spend more IF there are things they'd like to...
[I know there are those, some of whom posted above, who claim not to want/need to spend more if they had more. However, for those with families to whom they'd like to leave legacies, are there really *not* desires to spend more, perhaps just spending more time *with* those family members...?]

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Re: If History says.... would you change 4% rule ?

Post by heyyou » Tue Jul 31, 2018 10:16 pm

"Rule" implies that we have to follow it, so that's amusing. 4% real SWR was the best of the first ones, in 1994. There have been numerous newer analyses done since then. I think I'll go with the fresher methods, as well as the better cars and phones since the 1994 models, but others are welcome to do whatever suits them.

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Re: If History says.... would you change 4% rule ?

Post by soccerrules » Wed Aug 01, 2018 10:15 am

heyyou wrote:
Tue Jul 31, 2018 10:16 pm
"Rule" implies that we have to follow it, so that's amusing. 4% real SWR was the best of the first ones, in 1994. There have been numerous newer analyses done since then. I think I'll go with the fresher methods, as well as the better cars and phones since the 1994 models, but others are welcome to do whatever suits them.
Hey you!
I am really open and wanting to learn about other options. To be honest if I had the funds I would quit tomorrow. I don't see it happening for at least 3-4 years when youngest is 1/2 through college. I look at the 4% as a recommendation but know if really differs for each situation. (Wants, needs, desires)

Can you expand on the "fresher methods" ?
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Re: If History says.... would you change 4% rule ?

Post by tfb » Wed Aug 01, 2018 10:44 am

soccerrules wrote:
Tue Jul 31, 2018 11:26 am
Even accounting for massive stock market SPX, +0.75% crashes — like the wipeouts of 2000-2002 and 2007-2009 — Kitces’ research, which goes all the way back to the 1870s and uses data from famed Yale economist Robert Shiller — found that in more than two-thirds of the time, the average person, after 30 years in retirement, would still wind up with nearly 2.8 times more than what they began with. And that’s adjusted for inflation.
The Kitces' research is misquoted. The 2.8 times number is nominal, not adjusted for inflation.
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Re: If History says.... would you change 4% rule ?

Post by Fishing50 » Thu Aug 02, 2018 1:11 am

soccerrules wrote:
Wed Aug 01, 2018 10:15 am

I am really open and wanting to learn about other options. To be honest if I had the funds I would quit tomorrow. I don't see it happening for at least 3-4 years when youngest is 1/2 through college. I look at the 4% as a recommendation but know if really differs for each situation. (Wants, needs, desires)

Can you expand on the "fresher methods" ?
Big ERN has great withdrawal rate analysis: https://earlyretirementnow.com/start-here/
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Re: If History says.... would you change 4% rule ?

Post by FBN2014 » Thu Aug 02, 2018 2:43 am

I've read Wade Phau says that a SWR of 2-3% is optimal to ensure you don't run out of money. If you have some negative return years early in retirement then sequence of return risk will blow up the portfolio.
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Re: If History says.... would you change 4% rule ?

Post by sperry8 » Thu Aug 02, 2018 2:48 am

FBN2014 wrote:
Thu Aug 02, 2018 2:43 am
I've read Wade Phau says that a SWR of 2-3% is optimal to ensure you don't run out of money. If you have some negative return years early in retirement then sequence of return risk will blow up the portfolio.
I had 50% drop in my first 2 years... and I find 4% to be too low. I think Phau is trying to protect us from a black swan, which is absurd. Following that means you're likely to pass with oodles in the bank.
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JoMoney
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Re: If History says.... would you change 4% rule ?

Post by JoMoney » Thu Aug 02, 2018 2:58 am

Like every hypothetical situation, the answer is: "it depends".
IF I adopted that as a withdrawal scheme, my concern to sticking with it would likely depend on how far into it I was, and what my allocation is/was.
If I was early in retirement and relying on a stock heavy portfolio, I would be reluctant to go much higher.
If I was in the late stages, and my portfolio had grown larger than I anticipated such that the 4% back to my initiating the plan was now a tiny fraction of the current balance I would consider bumping it up, or rebaselining to 4% of the current balance.
If I had a lot of fixed income security that could easily be amortized out to show I could make it to social security, pension, and/or move to a SPIA that might allow for more too.
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Re: If History says.... would you change 4% rule ?

Post by heyyou » Thu Aug 02, 2018 9:42 am

The OP is interested in other methods than Bengen's 4% SWR. A few posts above, Fishing 50 has a link to Big ERN's site with good info.
The Bogleheads wiki has this page:
Follow the links far below the reviews to the authors' original papers.

I like Michael H. McClung's book, "Living Off Your Money." If and when, that gets too complicated for me,
the RMD method of using the RMD % on each recent annual value of the entire portfolio seems reasonable to avoid dying with too much left over. I expect that I will get accustomed to using McClung's method.

That too much leftover problem is a significant possibility (probability?) with Bengen's SWR method since it was tuned to the worst case. However, we will see that we are in a worst case, early in retirement, if there is a crash and no recovery soon after retiring. It seems unwise to pick a WD strategy on retirement day that does not ever again adapt to any market events. Methods that use the recent annual portfolio value better suit me, since we expect to adapt our spending to our income. Needing to live within your means does not end on retirement day.

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Re: If History says.... would you change 4% rule ?

Post by randomguy » Thu Aug 02, 2018 10:09 am

ResearchMed wrote:
Tue Jul 31, 2018 9:54 pm
JaneyLH wrote:
Tue Jul 31, 2018 9:36 pm
Hard to believe nobody has brought up Bogleheads Variable Percentage Withdrawal method.

https://www.bogleheads.org/wiki/Variabl ... withdrawal

This is what I’m doing, as I have no need to leave a large legacy to anyone. Having no children, my husband and I are enjoying the retirement we hoped for but never really dreamed was possible.
Yup, this!

We aren't quite there yet, but we are getting a bit of a head start in terms of no longer saving.

But the VPW seems perfect.


RM
Define perfect:) A scheme that results in less spending when I am young and healthy and more when I am old doesn't match my definition of perfect. Variable income also isn't perfect in my world either. VPW often requires to pay for safety that isn't needed in order to end up with a pile of cash when your dead.


To some extent these limitations are unavoidable. You have to be conservative to avoid the worst cases. You need to be aggressive to not end up with a huge pile of cash. How you chose to balance them will be based on needs (can you handle 50% drops in spending), desires (do you want to spending 20% more money), and fears (i.e. if your porfolio goes to zero how screwed are you? A person with 50k of SS and a 70k pension is not in the same place as someone with 20k of ss).

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