4% rule and early retirement?

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wguillioli
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4% rule and early retirement?

Post by wguillioli » Thu Feb 08, 2018 5:21 pm

Is there research / recommendations on the 4% safe withdrawal rule and early retirement?

If I understand correctly the 4% rule was done with a 30-year time horizon. What happens if one has potentially 40 or 50 years in retirement? The 4% rule still applies?

livesoft
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Re: 4% rule and early retirement?

Post by livesoft » Thu Feb 08, 2018 5:22 pm

Yes, there is a ton of stuff. Start your weekend reading early and start it here:
https://earlyretirementnow.com/2016/12/ ... t-1-intro/
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mhalley
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Re: 4% rule and early retirement?

Post by mhalley » Thu Feb 08, 2018 5:33 pm

There has been a lot of talk that the 4% rule might not work going forward due to high pe and low interest rates. To be really safe with early retirement, cutting back to 3-3.5% might be prudent. Mad fiendish thinks 3.5% should be fine.
https://www.madfientist.com/safe-withdrawal-rate/

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Lancelot
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Re: 4% rule and early retirement?

Post by Lancelot » Thu Feb 08, 2018 5:43 pm

This guy presents an interesting concept: David Zolt authored an article in the Journal of Financial Planning titled “Achieving a Higher Safe Withdrawal Rate With the Target Percentage Adjustment” to address these questions. A 4% initial withdrawal with annual CPI increases thereafter has a 94% probability of success over 30 years. If the retiree skips CPI increases in years in which their withdrawal rate exceeds the Target Percentage, the probability of success increases to 100% (99.8%).

http://www.targetpercentage.com/

Not endorsing this, just sharing :sharebeer
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David Jay
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Re: 4% rule and early retirement?

Post by David Jay » Thu Feb 08, 2018 6:12 pm

Something around 2.5% is a "perpetual" portfolio, where the inflation adjusted value of the account is not eroded. So early retirement requires something less than 4% (30 years) and more than 2.5%.
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Re: 4% rule and early retirement?

Post by randomguy » Thu Feb 08, 2018 6:40 pm

David Jay wrote:
Thu Feb 08, 2018 6:12 pm
Something around 2.5% is a "perpetual" portfolio, where the inflation adjusted value of the account is not eroded. So early retirement requires something less than 4% (30 years) and more than 2.5%.
I have seen something like 3.4% for perpetual. I have also seen the 2.5% number you mention but the cases I have seen have had a 1% AUM fee. Obviously these are all historical numbers for a given portfolio with a given set of rules (withdraw start or end of year, how much stock/bonds, what type of stocks and bonds,...)

Ron Scott
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Re: 4% rule and early retirement?

Post by Ron Scott » Thu Feb 08, 2018 7:38 pm

The 4% Rule is born of studies using historical data and wet-nursed by modern Monte Carlo techniques and tools like Firecalc that quickly create highly individualized SWR assessments—all of which are designed to apply to you personally and all based on that same little file of historical data. You can run 20 variations of your own situation in under an hour or get into it all night long. And guess what? Voila: The 4% Rule WORKS 90% OF THE TIME! Like the statisticians say: Garbage In Garbage Out.

Even in a modern-day "normal" retirement--smile now--in which we spend a third of our lives preparing for work, a third working and a third in retirement bliss--I'd have to be smoking dope to set up a plan to spend 4% of my nest egg every year. Why? Because the past is not the future, and past returns are not indicative of future returns. We simply do not know what future returns will be and it is not prudent to pretend we do. I will not.

Here's what I think a prudent answer to your situation is: Assume that over time, if you invest wisely, you will generally keep pace with inflation. Then just do the simple math. If you retire at 60 and think you'll live to 90, divide your stash by 30 and spend that. Ditto for retirements at 50 (40 years in retirement), 40 and so on. You can factor in good years/bad years, SS, pensions, annuities, windfalls, etc. yourself and modify the amount accordingly.

If I am wrong and the past repeats itself or gets better, you can adjust midstream or just die with some money in the bank. Not a horror.

If I am right and ignored, you'll be broke at 80-something or worse and subject to the generosity of your kids or the vicissitudes of some future government body for your wellbeing.

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Re: 4% rule and early retirement?

Post by randomguy » Thu Feb 08, 2018 11:03 pm

Ron Scott wrote:
Thu Feb 08, 2018 7:38 pm

If I am right and ignored, you'll be broke at 80-something or worse and subject to the generosity of your kids or the vicissitudes of some future government body for your wellbeing.
If your right at some point along the way you will adjust spending to match reality. Nobody is going to follow the path until they are broke. Being conservative will always leave you with more cash when you die. You have to decide if you are willing to pay that price in less living at an early age you want to pay.

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Re: 4% rule and early retirement?

Post by marcopolo » Thu Feb 08, 2018 11:16 pm

Ron Scott wrote:
Thu Feb 08, 2018 7:38 pm
We simply do not know what future returns will be and it is not prudent to pretend we do. I will not.

Here's what I think a prudent answer to your situation is: Assume that over time, if you invest wisely, you will generally keep pace with inflation.
Those two thoughts seem quite contradictory. You made an assumption about future returns, while they may be more conservative than some others, it is still a prediction. You seem to think those that are assuming say 3% real are making optimistic predictions, and you are just being prudent. Well, what if you are wrong and we get -2% returns going forward, then you are just making the same mistake. Why stop there, why not assume -5% real?
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Re: 4% rule and early retirement?

Post by Ron Scott » Thu Feb 08, 2018 11:36 pm

marcopolo wrote:
Thu Feb 08, 2018 11:16 pm
Ron Scott wrote:
Thu Feb 08, 2018 7:38 pm
We simply do not know what future returns will be and it is not prudent to pretend we do. I will not.

Here's what I think a prudent answer to your situation is: Assume that over time, if you invest wisely, you will generally keep pace with inflation.
Those two thoughts seem quite contradictory. You made an assumption about future returns, while they may be more conservative than some others, it is still a prediction. You seem to think those that are assuming say 3% real are making optimistic predictions, and you are just being prudent. Well, what if you are wrong and we get -2% returns going forward, then you are just making the same mistake. Why stop there, why not assume -5% real?
No, And with that logic, any decision on a WR would be contradictory. That won't do.

In the real world we must make decisions without knowledge of the future. Assuming the future will be a replication of the past or close to it is not a prediction I would make with regard to investment performance. I assume it's less but not negative (we'd be putting our money under a mattress at some point then).

3-3.5% seems reasonable to me.

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Re: 4% rule and early retirement?

Post by Ron Scott » Thu Feb 08, 2018 11:39 pm

randomguy wrote:
Thu Feb 08, 2018 11:03 pm
Ron Scott wrote:
Thu Feb 08, 2018 7:38 pm

If I am right and ignored, you'll be broke at 80-something or worse and subject to the generosity of your kids or the vicissitudes of some future government body for your wellbeing.
If your right at some point along the way you will adjust spending to match reality. Nobody is going to follow the path until they are broke. Being conservative will always leave you with more cash when you die. You have to decide if you are willing to pay that price in less living at an early age you want to pay.
Certainly possible, although there are death spirals with assets, when the need to withdraw coincides with a significant downturn in value. Playing it safe isn't really paying a price to me. I expect to leave a nice estate.

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Re: 4% rule and early retirement?

Post by marcopolo » Thu Feb 08, 2018 11:46 pm

Ron Scott wrote:
Thu Feb 08, 2018 11:36 pm
marcopolo wrote:
Thu Feb 08, 2018 11:16 pm
Ron Scott wrote:
Thu Feb 08, 2018 7:38 pm
We simply do not know what future returns will be and it is not prudent to pretend we do. I will not.

Here's what I think a prudent answer to your situation is: Assume that over time, if you invest wisely, you will generally keep pace with inflation.
Those two thoughts seem quite contradictory. You made an assumption about future returns, while they may be more conservative than some others, it is still a prediction. You seem to think those that are assuming say 3% real are making optimistic predictions, and you are just being prudent. Well, what if you are wrong and we get -2% returns going forward, then you are just making the same mistake. Why stop there, why not assume -5% real?
No, And with that logic, any decision on a WR would be contradictory. That won't do.

In the real world we must make decisions without knowledge of the future. Assuming the future will be a replication of the past or close to it is not a prediction I would make with regard to investment performance. I assume it's less but not negative (we'd be putting our money under a mattress at some point then).

3-3.5% seems reasonable to me.
I can't argue with that. I also make fairly conservative assumptions about future growth. But, i recognize that it is informed by history as a starting point, then adjusted to provide a margin of error due to variability of returns over my time horizon. If not looking at the past, on what do you base your 3-3.5% ?
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Watty
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Re: 4% rule and early retirement?

Post by Watty » Thu Feb 08, 2018 11:53 pm

It is important to remember that the academic safe withdrawal rate studies really do not relate to the real world well since your income needs will vary in different stages of retirement.

When looking at a safe withdrawal rate scenario the word "failure" is often used and sounds pretty dire when in the real world "failure" would mean that you would have to cut your spending by ten or twenty percent but if you had a well planned retirement you would not be at risk of being homeless or going hungry.

wguillioli
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Re: 4% rule and early retirement?

Post by wguillioli » Fri Feb 09, 2018 12:20 pm

Thank you everyone for the thoughts and resources. Lots to learn. Definitely not a decision to take lightly. I appreciate all the thoughts.

Tal-
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Re: 4% rule and early retirement?

Post by Tal- » Fri Feb 09, 2018 12:50 pm

My view:

For someone retiring before 50, with a ~70/30 is stock/bond allocation:

2.5% is the safe number, that I believe can be taken basically in perpetuity.
3.0% is probably the best number, and roughly the number we're shooting for.
3.5% is probably safe for early retirees *if* this includes discretionary spending that can be cut down as needed.
4.0% still has a fair chance of success (50%?), but that's not high enough for me to sleep well at night.

Over the long haul, these strategies are fairly robust against trends we've seen in the past, but are less robust against one-time expenses (wedding, new house, college, huge vacation, medical, tending to aging parents, etc.).

I also love Ron Scott's point that the past may or may not be a good indication of the future. If we were to enter an extended period of depreciation like Japan, all bets are off.
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IoTfela
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Re: 4% rule and early retirement?

Post by IoTfela » Fri Feb 09, 2018 12:53 pm

https://www.wsj.com/articles/forget-the ... 1518172201

WSJ article on 4% rule. Seems safer to go with 3% and adjust based on market performance/inflation.

rj49
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Re: 4% rule and early retirement?

Post by rj49 » Fri Feb 09, 2018 1:16 pm

As someone who retired at 43 and have had 13 years of ER, I'd advise starting out low and living simply and then raising spending over time. When I first retired I even tracked every expense, to make sure I was spending at a sustainable pace, and I've always kept a large percentage of fixed income to avoid having to draw down from stocks.

Instead of a SWR method, I've always used a total percentage method, simply taking 3-4% of the ending balance of the previous year. Depending on your age, healthcare/pension coverage, mortgage, and other factors, you could just start out with something like 2.5% and increase it by .5% every 5 years or so. Another idea, called lifetime consumption smoothing, is to spend more when you're younger and eager to travel, and then spend less later in life, especially as Medicare and SS reduce your spending needs. The advantage of a fixed percentage method is that it forces you to cut back if your investments aren't doing well, so it makes portfolio depletion much more difficult, and fits more with natural human behavior. Reading things like Mr. Money Mustache's blog and "Your Money or Your Life" also makes it much easier to live below your means in retirement and focus on more important things.

I found that too much worrying about finding the perfect withdrawal method or portfolio construction just wasted my time, leading to too much buying and selling, performance chasing, and market timing, making decisions based on finance writers and gurus, as well as people on here. The unlimited time of early retirement means you can get sucked into investment advice and research and get into the thrills of trying new portfolios and asset classes.

The other thing I found is that hobbies and interests changed over time, so after doing a lot of travel it doesn't appeal to me much now, which dramatically reduces my spending needs, and I bought a house a few years ago with cash, which also means I don't have to sell assets to get monthly rent. Then I found that after 12 years of retirement, I wanted some sort of job that would allow me both freedom and a way to engage with people and challenges, so I started driving Uber and Lyft last year, making $10k in 6 months of driving and further reducing my need for withdrawals. Now I have the opposite challenge in retirement over worrying about portfolio depletion--I have to force myself to find ways to spend the 4% or so I withdraw every year.

So focusing too much on a withdrawal method will probably matter less than life choices and how you find happiness and meaning in retirement, as well as the financial impact of big events like house-buying, marriage beginning or ending, or possible health issues not covered by insurance.

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Re: 4% rule and early retirement?

Post by Ron Scott » Fri Feb 09, 2018 2:21 pm

marcopolo wrote:
Thu Feb 08, 2018 11:46 pm
If not looking at the past, on what do you base your 3-3.5% ?
Yep, that's the question and you might not like my answer, but here goes.

I'm triangulating into it, looking at the future like this:

1. I believe my grandparents, parents and I have lived during a Golden Age in America. Sure, we had wars and the depression in there but America always came out of it in a really good way and we became the center of the world economically. Related to this has been our expanding population--a good thing to happen to us and at the right time. While I doubt anyone alive today will live to see America drop to #2, the trajectory just won't be the same IMO. Those days are over and with them the rate of growth in equities. So I do "look" at the past but I discount it quite a bit.

2. I listen to a select group of pundits like Burton Malkiel, John Bogle and Larry Swedlow. They're all predicting significantly lower equity returns for the coming decade or so. 4-5% vs. up to 10% historically.

3. Logic tells me that in a reasonably-functioning world investors will demand and get returns that at least keep pace with inflation or do a bit better--or they'll figure out a way to do something about it themselves like start a business. Money is competitive but the real returns on an average portfolio could easily be below 2%.

So I figure the conservative approach is to assume just keeping pace with inflation. If I have 30 years to live and divide my nest egg by 30 I'm spending about 3.3%. If I underestimate, I win.

And--an afterthought--I like the WSJ article posted above: “3% is the new safe withdrawal rate,” says Wade Pfau, a professor at the American College of Financial Services in Bryn Mawr, Pa.


That's it. No magic. Fire away.
Last edited by Ron Scott on Fri Feb 09, 2018 2:32 pm, edited 1 time in total.

JBTX
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Re: 4% rule and early retirement?

Post by JBTX » Fri Feb 09, 2018 2:28 pm

Ron Scott wrote:
Fri Feb 09, 2018 2:21 pm
marcopolo wrote:
Thu Feb 08, 2018 11:46 pm
If not looking at the past, on what do you base your 3-3.5% ?
Yep, that's the question and you might not like my answer, but here goes.

I'm triangulating into it, looking at the future like this:

1. I believe my grandparents, parents and I have lived during a Golden Age in America. Sure, we had wars and the depression in there but America always came out of it in a really good way and we became the center of the world economically. Related to this has been our expanding population--a good thing to happen to us and at the right time. While I doubt anyone alive today will live to see America drop to #2, the trajectory just won't be the same IMO. Those days are over and with them the rate of growth in equities. So I do "look" at the past but I discount it quite a bit.

2. I listen to a select group of pundits like Burton Malkiel, John Bogle and Larry Swedlow. They're all predicting significantly lower equity returns for the coming decade or so. 4-5% vs. up to 10% historically.

3. Logic tells me that in a reasonably-functioning world investors will demand and get returns that at least keep pace with inflation or do a bit better--or they'll figure out a way to do something about it themselves like start a business. Money is competitive but the real returns on an average portfolio could easily be below 2%.

So I figure the conservative approach is to assume just keeping pace with inflation. If I have 30 years to live and divide my nest egg by 30 I'm spending about 3.3%. If I underestimate, I win.

That's it. No magic. Fire away.
This is the way I look at it. I don't profess to be able to foretell the future, but based upon current available information, and input from some reputable people, including the namesake of this site, future returns will likely be muted. There are addtional reasons, including demographics, that could also play into this.

I recall seeing that international SWR's in many cases were slightly lower than 4.0%. I can't imagine what it would be for Japan.

I would say you plan to build a portfolio that supports 3-3.5%, and then in retirement you tweak up and down as necessary, depending on how things go.

Another point of support for your numbers is if you could actually find an inflation adjusted fixed annuity, which I think are kind of hard to find, it would likely be in the 3% range, but below 4.0%.

skor99
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Re: 4% rule and early retirement?

Post by skor99 » Fri Feb 09, 2018 2:31 pm

Ron Scott wrote:
Fri Feb 09, 2018 2:21 pm
marcopolo wrote:
Thu Feb 08, 2018 11:46 pm
If not looking at the past, on what do you base your 3-3.5% ?
Yep, that's the question and you might not like my answer, but here goes.

I'm triangulating into it, looking at the future like this:

1. I believe my grandparents, parents and I have lived during a Golden Age in America. Sure, we had wars and the depression in there but America always came out of it in a really good way and we became the center of the world economically. Related to this has been our expanding population--a good thing to happen to us and at the right time. While I doubt anyone alive today will live to see America drop to #2, the trajectory just won't be the same IMO. Those days are over and with them the rate of growth in equities. So I do "look" at the past but I discount it quite a bit.

2. I listen to a select group of pundits like Burton Malkiel, John Bogle and Larry Swedlow. They're all predicting significantly lower equity returns for the coming decade or so. 4-5% vs. up to 10% historically.

3. Logic tells me that in a reasonably-functioning world investors will demand and get returns that at least keep pace with inflation or do a bit better--or they'll figure out a way to do something about it themselves like start a business. Money is competitive but the real returns on an average portfolio could easily be below 2%.

So I figure the conservative approach is to assume just keeping pace with inflation. If I have 30 years to live and divide my nest egg by 30 I'm spending about 3.3%. If I underestimate, I win.

That's it. No magic. Fire away.
Even if America’s best days are behind it, (which I personally believe is not true), investors can now invest anywhere in the world with very low expenses using ETFs etc. Unless you believe that the whole world is going to have slow growth, there will be opportunities to invest for higher returns. One good option might be to invest in all world ETF and let it work for you.

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Re: 4% rule and early retirement?

Post by smitcat » Fri Feb 09, 2018 2:33 pm

Ron Scott wrote:
Fri Feb 09, 2018 2:21 pm
marcopolo wrote:
Thu Feb 08, 2018 11:46 pm
If not looking at the past, on what do you base your 3-3.5% ?
Yep, that's the question and you might not like my answer, but here goes.

I'm triangulating into it, looking at the future like this:

1. I believe my grandparents, parents and I have lived during a Golden Age in America. Sure, we had wars and the depression in there but America always came out of it in a really good way and we became the center of the world economically. Related to this has been our expanding population--a good thing to happen to us and at the right time. While I doubt anyone alive today will live to see America drop to #2, the trajectory just won't be the same IMO. Those days are over and with them the rate of growth in equities. So I do "look" at the past but I discount it quite a bit.

2. I listen to a select group of pundits like Burton Malkiel, John Bogle and Larry Swedlow. They're all predicting significantly lower equity returns for the coming decade or so. 4-5% vs. up to 10% historically.

3. Logic tells me that in a reasonably-functioning world investors will demand and get returns that at least keep pace with inflation or do a bit better--or they'll figure out a way to do something about it themselves like start a business. Money is competitive but the real returns on an average portfolio could easily be below 2%.

So I figure the conservative approach is to assume just keeping pace with inflation. If I have 30 years to live and divide my nest egg by 30 I'm spending about 3.3%. If I underestimate, I win.

That's it. No magic. Fire away.
You could be exactly correct or we could be headed for a new renaissance with much cheaper energy , AI , medical break throughs or visits from past alien 'family".
Conversely there could be a new famine, nuclear conflict, environmental shift or the like.
The further we move away from the 'norm' the less likely the event will take place in our lifetime - but the potential is never removed 100%.

I agree with much of your thinking but I believe it boils down to ....
Which potential event gives us more of a chill - working XX years more than necessary or not having sufficient funds?

Ron Scott
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Re: 4% rule and early retirement?

Post by Ron Scott » Fri Feb 09, 2018 2:34 pm

skor99 wrote:
Fri Feb 09, 2018 2:31 pm
Even if America’s best days are behind it, (which I personally believe is not true), investors can now invest anywhere in the world with very low expenses using ETFs etc. Unless you believe that the whole world is going to have slow growth, there will be opportunities to invest for higher returns. One good option might be to invest in all world ETF and let it work for you.
I still think America will be the world leader in meaningful growth. International investing for Americans in my opinion is a market timing game (and now actually looks pretty good).
smitcat wrote:
Fri Feb 09, 2018 2:33 pm
You could be exactly correct or we could be headed for a new renaissance with much cheaper energy , AI , medical break throughs or visits from past alien 'family".
THAT would be fantastic and I hope to see it happen. (Stephen Hawking predicts humans won't be able to survive on earth more than 100 years longer!)

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Re: 4% rule and early retirement?

Post by marcopolo » Fri Feb 09, 2018 2:52 pm

Ron Scott wrote:
Fri Feb 09, 2018 2:21 pm
marcopolo wrote:
Thu Feb 08, 2018 11:46 pm
If not looking at the past, on what do you base your 3-3.5% ?
Yep, that's the question and you might not like my answer, but here goes.

I'm triangulating into it, looking at the future like this:

1. I believe my grandparents, parents and I have lived during a Golden Age in America. Sure, we had wars and the depression in there but America always came out of it in a really good way and we became the center of the world economically. Related to this has been our expanding population--a good thing to happen to us and at the right time. While I doubt anyone alive today will live to see America drop to #2, the trajectory just won't be the same IMO. Those days are over and with them the rate of growth in equities. So I do "look" at the past but I discount it quite a bit.

2. I listen to a select group of pundits like Burton Malkiel, John Bogle and Larry Swedlow. They're all predicting significantly lower equity returns for the coming decade or so. 4-5% vs. up to 10% historically.

3. Logic tells me that in a reasonably-functioning world investors will demand and get returns that at least keep pace with inflation or do a bit better--or they'll figure out a way to do something about it themselves like start a business. Money is competitive but the real returns on an average portfolio could easily be below 2%.

So I figure the conservative approach is to assume just keeping pace with inflation. If I have 30 years to live and divide my nest egg by 30 I'm spending about 3.3%. If I underestimate, I win.

And--an afterthought--I like the WSJ article posted above: “3% is the new safe withdrawal rate,” says Wade Pfau, a professor at the American College of Financial Services in Bryn Mawr, Pa.


That's it. No magic. Fire away.
I am not quite as pessimistic, but i largely agree with your conclusions. I have personally built our own early retirement (started as of this morning) around a 3% WR at the age of 51, knowing we have to support a fairly long retirement. I suspect we will leave a fairly large estate to my children, and I am OK with that. As the 3% will support what we consider a very nice lifestyle.

The only thing i was pointing out in your original post was your statement about not knowing if the future will be like the past, and not pretending to know. It came a cross as a bit critical/condescending of others who look at history as a guide to future market expectations. You seem to look and the past and are fairly certain that the future will be quite different. That is OK, but your are in fact pretending to know. I agree with you that you have to assume something, and you have chosen your assumption, and I have no argument with them. Likewise others have made different assumptions based on the same past history. That does not mean they are wrong either. Time will tell....
Once in a while you get shown the light, in the strangest of places if you look at it right.

Ron Scott
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Re: 4% rule and early retirement?

Post by Ron Scott » Fri Feb 09, 2018 3:06 pm

marcopolo wrote:
Fri Feb 09, 2018 2:52 pm
The only thing i was pointing out in your original post was your statement about not knowing if the future will be like the past, and not pretending to know. It came a cross as a bit critical/condescending of others who look at history as a guide to future market expectations.
I meant to be critical, not condescending. Apologies...

I AM concerned when others scoff at the notion of a 4% Rule being too conservative, and there have a number of threads out there that do just that. Lengthy retirements are relatively new animals and even for Bogleheads, who tend to be upper class types, overspending early in retirement can undo a lifetime of careful saving. I mean to reject the 4% assumption for the better of all.

BTW--did you say you retired today?

marcopolo
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Re: 4% rule and early retirement?

Post by marcopolo » Fri Feb 09, 2018 3:26 pm

Ron Scott wrote:
Fri Feb 09, 2018 3:06 pm
marcopolo wrote:
Fri Feb 09, 2018 2:52 pm
The only thing i was pointing out in your original post was your statement about not knowing if the future will be like the past, and not pretending to know. It came a cross as a bit critical/condescending of others who look at history as a guide to future market expectations.
I meant to be critical, not condescending. Apologies...

I AM concerned when others scoff at the notion of a 4% Rule being too conservative, and there have a number of threads out there that do just that. Lengthy retirements are relatively new animals and even for Bogleheads, who tend to be upper class types, overspending early in retirement can undo a lifetime of careful saving. I mean to reject the 4% assumption for the better of all.

BTW--did you say you retired today?
No need to apologize, it is just as likely that I was reading too much into it.
I tend to like the diversity of opinion. My impression is that for every person arguing that 4% is too conservative, there is another person arguing that 2% is too optimistic. As usual, the truth probably lies somewhere in between. There is no right answer, and any decision comes with different set of risks. That could be running out of money because you assumed 5% was safe, or it could mean dying at your desk because you decided you needed to get below 2%. Everyone has to consider all the factors, and make their own choices on what they are comfortable with.

Yes. I did start my retirement this morning, hopefully not into a really bad sequence of returns!
Once in a while you get shown the light, in the strangest of places if you look at it right.

Ron Scott
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Re: 4% rule and early retirement?

Post by Ron Scott » Fri Feb 09, 2018 3:52 pm

marcopolo wrote:
Fri Feb 09, 2018 3:26 pm
Yes. I did start my retirement this morning, hopefully not into a really bad sequence of returns!
A BIG congrats!

May the downturn portend a buying opportunity that fills your sails.

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Re: 4% rule and early retirement?

Post by randomguy » Fri Feb 09, 2018 4:40 pm

Tal- wrote:
Fri Feb 09, 2018 12:50 pm
My view:

For someone retiring before 50, with a ~70/30 is stock/bond allocation:

2.5% is the safe number, that I believe can be taken basically in perpetuity.
3.0% is probably the best number, and roughly the number we're shooting for.
3.5% is probably safe for early retirees *if* this includes discretionary spending that can be cut down as needed.
4.0% still has a fair chance of success (50%?), but that's not high enough for me to sleep well at night.

Over the long haul, these strategies are fairly robust against trends we've seen in the past, but are less robust against one-time expenses (wedding, new house, college, huge vacation, medical, tending to aging parents, etc.).

I also love Ron Scott's point that the past may or may not be a good indication of the future. If we were to enter an extended period of depreciation like Japan, all bets are off.
You are being very conservative. 3.5% has north of 95% chance for 60 years and 4% is somewhere around 80%. One time expenses are part of your annual expenses and should be accounted for there. If you plan on 100k of expenses over 50 years, you need to up your annual spending expectations by 2k/year. It isn't exact because of sequencing but you could model more exact stuff if you want. But obviously numbers like this are for one specific portfolio (undiversified for better or worse.) and we have no clue what the future will bring. You want to be 20-30% more conservative than the worst case in US history? You can if you don't mind the trade off. Nobody else can decide that for you. Retiring early as possible is a goal only a few people have.

Japan would be far from the end of the world. Remember half your equities were invested globaly and had a very good return over that time period. If the whole world economy pulls a japan, then I have a feeling it will not matter what your SWR rate is. All bets are off when the government seizes all private assets:)

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Re: 4% rule and early retirement?

Post by EnjoyIt » Sat Feb 10, 2018 8:45 pm

wguillioli wrote:
Thu Feb 08, 2018 5:21 pm
Is there research / recommendations on the 4% safe withdrawal rule and early retirement?

If I understand correctly the 4% rule was done with a 30-year time horizon. What happens if one has potentially 40 or 50 years in retirement? The 4% rule still applies?
As you can see by the various answers there is no perfect response since no one can predict the future. You may also notice that some people on this forum feel like they need to have enough money to outlast a scenario even worse than the worst periods of recorded history. These people may or may not be correct.

Also history has shown that a 4% withdrawal rate not only survives most of the time, the retiree ends up with significantly more money than they started with which means those retirees could spend more than 4%.

All these studies look at a fixed withdrawal rate but human nature would not allow such a stringent use of money. In a recession you would likely decrease your spending which increases one's success.

In my opinion if you are looking to retire on a tight budget such as $24k/yr then 4% is a little too risky. If you are looking to retire fat with a significant budget for luxury, travel, and/or toys then 4% is very likely to survive if you are willing to decrease spending during a recession. Simply take one less vacation or delay purchasing that new car until markets improve and your success is likely almost 100%

Also consider that at some point you will get social security which will increase your success rate even further.

We plan to retire early in our mid 40s. Our goal is 3.75%. The extra 2.5% is equal to ~18 months of expenses which will be saved as cash. 18 months is enough time to decide if we are in a severe enough down market that cutting expenses will be required for portfolio survival. Hopefully the slightly lower than 4% withdrawal rate would allow for some portfolio growth and lifestyle creep. I'll let you know in 40-50 years if it works out.

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Re: 4% rule and early retirement?

Post by emoore » Sat Feb 10, 2018 9:21 pm

Typical boglehead responses here. Trend is to assume worse performance from the markets than has ever been seen before. I find it unrealistic that going forward will be worse than the great depression, cold war, world war 1 and 2. Crazy. I assume 5% real and so far that has been conservative.

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Re: 4% rule and early retirement?

Post by naha66 » Sat Feb 10, 2018 10:02 pm

Ron Scott wrote:
Fri Feb 09, 2018 2:21 pm
marcopolo wrote:
Thu Feb 08, 2018 11:46 pm
If not looking at the past, on what do you base your 3-3.5% ?
Yep, that's the question and you might not like my answer, but here goes.

I'm triangulating into it, looking at the future like this:

1. I believe my grandparents, parents and I have lived during a Golden Age in America. Sure, we had wars and the depression in there but America always came out of it in a really good way and we became the center of the world economically. Related to this has been our expanding population--a good thing to happen to us and at the right time. While I doubt anyone alive today will live to see America drop to #2, the trajectory just won't be the same IMO. Those days are over and with them the rate of growth in equities. So I do "look" at the past but I discount it quite a bit.

2. I listen to a select group of pundits like Burton Malkiel, John Bogle and Larry Swedlow. They're all predicting significantly lower equity returns for the coming decade or so. 4-5% vs. up to 10% historically.

3. Logic tells me that in a reasonably-functioning world investors will demand and get returns that at least keep pace with inflation or do a bit better--or they'll figure out a way to do something about it themselves like start a business. Money is competitive but the real returns on an average portfolio could easily be below 2%.

So I figure the conservative approach is to assume just keeping pace with inflation. If I have 30 years to live and divide my nest egg by 30 I'm spending about 3.3%. If I underestimate, I win.

And--an afterthought--I like the WSJ article posted above: “3% is the new safe withdrawal rate,” says Wade Pfau, a professor at the American College of Financial Services in Bryn Mawr, Pa.


That's it. No magic. Fire away.

In the past Wade Pau has always assumed 1% in fees, and he likes Immediate annuities. I'm going with 3.75 to 4% while I'm in my 60's and as long as I'm healthy. If it doesn't go as planned I will cut back. I retired in 2014 and have taken 4% each year and i'm up 20% on a 60/40. I'm pretty sure we started to hear about the 4% is dead in 2014 and 2015. I'm not eating hotdogs and hamburger so my kids can eat steaks on my dole, their doing just fine without my help.

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Re: 4% rule and early retirement?

Post by 2pedals » Sat Feb 10, 2018 10:44 pm

I would read Wade Pfau book. I liked it and learned a lot. He talked about a several different approaches. Although I am not yet retired, I am leaning to a hybrid approach using 2% fixed based on value at retirement (adjusted for CPI) and 2% based on the annual value of funds.

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Re: 4% rule and early retirement?

Post by Cycle » Sat Feb 10, 2018 11:10 pm

smitcat wrote:
Fri Feb 09, 2018 2:33 pm
... visits from past alien 'family".....
Which potential event gives us more of a chill - working XX years more than necessary or not having sufficient funds?
Visits from past alien family certainly gives me a chill. If one finds fulfillment in their work, it makes working to extend savr from 4 to 3.5 not such a big deal. When I look at the model from 3.5 to 2.5 though, it's another 10 years of work for me... Which does give me the chills.

I think 3-3.5 is probably fine assuming you take into account 30k for healthcare and otherwise are flexible with spending, ie recurring costs are low.

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Re: 4% rule and early retirement?

Post by JBTX » Sat Feb 10, 2018 11:22 pm

emoore wrote:
Sat Feb 10, 2018 9:21 pm
Typical boglehead responses here. Trend is to assume worse performance from the markets than has ever been seen before.

So the only relevant data points are those that have been experienced in the US?

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Re: 4% rule and early retirement?

Post by visualguy » Sat Feb 10, 2018 11:42 pm

In my view, the bigger concern is the uncertainty about expenses, not SWR. I'm ok with a WR that always worked in the past, and I don't fear too much that I will happen to be in my retirement just when the markets change so radically as to perform very differently from the way they did in the past.

The real problem for me is that I can't really tell what my expenses will be because so much depends on unknown factors which are not under my control. The longer the retirement, the harder it is to predict the money needs. Big ticket items like health insurance and long-term care can vary a lot in ways which I can't predict right now. Various things can happen in terms of health, housing, family issues, social security/medicare policies, tax policy, etc. that I simply can't predict right now.

I feel that a reserve is needed beyond the typical 25X or 30X or 33X of expenses unless these expenses are already padded significantly. This reserve could potentially be used also if the economy or markets do something unexpectedly bad, although that wouldn't be the primary purpose of this reserve.

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Re: 4% rule and early retirement?

Post by Keri22 » Sun Feb 11, 2018 1:41 am

You could review "Unveiling the Retirement Myth" by Canadian, Jim Otar.

My story so far: I retired two years ago at 62 with no debt. Having always been frugal, I saved a lot. Having always been conservative with money, I did not risk much. My 401k was not huge and I rolled it into Wellesley Admiral. Biggest risk I have ever taken with $. I look at it infrequently and have drawn nothing from it. I own a house in France which I bought 30 years ago when such places were dirt cheap. I spend half the year there. My total net assets (not including social security) are about $850k. I have been tracking my expenditure daily to really know where it all goes. I think I will be rich and will continue to be happy on 2.5% withdrawal plus SS and my UK state pension. My happiness is associated with family and friendship, not too much with things.

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Re: 4% rule and early retirement?

Post by Sandi_k » Mon Feb 12, 2018 12:35 am

Our plan, assuming retirement at 60/62, and a 35 year horizon:

- We're setting aside $50k per year in cash, starting in 2016. Upon retirement in 2026, we'll have $500k - or enough to last until we claim SocSec. That's a hedge.

- That means we will NOT be using the 4% SWR - which includes 1% AUM, and a COLA every year. That's a hedge.

- We have a COLA-adjusted pension. It may or may not have medical coverage included at a partially-supported amount. The pension income is a hedge - we have less need to be aggressive in our withdrawals.

- Assuming our accounts are where we hope, we can "top up" the withdrawals above $50k per year. That would be 3.75% withdrawals of our accounts between 2026 and 2031. So, for example, let's assume that 3.75% is $53k in 2026; we'd take the $50k in cash, and sell another $3k to reach that 3.75%. If the portfolio is declining, we're assured a minimum of $50k as an income supplement. Lather, rinse, repeat for 5 years.

- For years 2032-2036, the aim is 3.5% (in excess of the $50k). So if the portfolio balance continues to increase, we'd take more than the $50k, although the first $50k is in cash already squirreled away pre-retirement). If the portfolio is declining, we're assured a minimum of $50k as an income supplement. Lather, rinse, repeat for 5 years.

- Beginning in 2037, we'll have RMDs, so the IRS will tell us what we must take. At this point, the initial $500k is now spent, so we'll be living on SocSec x 2, RMDs, and a pension. At this point, taxes are likely to be more of an issue than what percentage to withdraw - we will have escaped the Sequence of Return trap, I think. YMMV.

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Re: 4% rule and early retirement?

Post by Ron Scott » Mon Feb 12, 2018 11:00 am

Sandi_k wrote:
Mon Feb 12, 2018 12:35 am
That means we will NOT be using the 4% SWR - which includes 1% AUM, and a COLA every year.
To be sure, you're paying someone 1% AUM?

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Re: 4% rule and early retirement?

Post by Clever_Username » Mon Feb 12, 2018 11:56 am

Ron Scott wrote:
Mon Feb 12, 2018 11:00 am
Sandi_k wrote:
Mon Feb 12, 2018 12:35 am
That means we will NOT be using the 4% SWR - which includes 1% AUM, and a COLA every year.
To be sure, you're paying someone 1% AUM?
I think Sandi_k is saying that the 4% rule assumes you're paying someone 1% AUM, so it's really "you get 3% + are paying someone 1%" as opposed to a self-managed 4% withdrawing. This is also my understanding of the original 4% rule.
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Re: 4% rule and early retirement?

Post by Hyperborea » Mon Feb 12, 2018 12:05 pm

2pedals wrote:
Sat Feb 10, 2018 10:44 pm
Although I am not yet retired, I am leaning to a hybrid approach using 2% fixed based on value at retirement (adjusted for CPI) and 2% based on the annual value of funds.
This is very similar to a system that was proposed maybe 15 or so years ago by a poster known as "Gummy", a retired applied math prof. Essentially one takes some low fixed percentage of the initial portfolio value. This is sized to cover the basic necessities (shelter, food, health care, basic fun). Then one takes a percentage of the gains from the portfolio. The gains were the amount that the portfolio has increased over inflation since the start of retirement. So, one would take maybe a fixed 2% of the portfolio for basic costs and 50% of the gains for fun. Cruises vs canasta as gummy would put it.

This sort of system front loads the "fun" money in the earlier years when a retiree would be more likely to be able to use it. You can read more about it (and see his math - lots of math) in his weirdly humourous way (much like his lectures were) here - Sensible Withdrawals.
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

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Re: 4% rule and early retirement?

Post by michaeljc70 » Mon Feb 12, 2018 12:28 pm

Most people that retire early can take into account that at some point they are going to get additional income from social security. This can help a little or a lot depending on your expenses (if your expenses are $200k, social security is not going to make much of a dent). Also, you will most likely be paying less for insurance (Medicare vs. buying your own policy). I believe the original 4% "rule" was based on a 50/50 AA. If you go to 70/30 or something like that, you can withdraw more.

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Re: 4% rule and early retirement?

Post by Hyperborea » Mon Feb 12, 2018 12:38 pm

Clever_Username wrote:
Mon Feb 12, 2018 11:56 am
Ron Scott wrote:
Mon Feb 12, 2018 11:00 am
Sandi_k wrote:
Mon Feb 12, 2018 12:35 am
That means we will NOT be using the 4% SWR - which includes 1% AUM, and a COLA every year.
To be sure, you're paying someone 1% AUM?
I think Sandi_k is saying that the 4% rule assumes you're paying someone 1% AUM, so it's really "you get 3% + are paying someone 1%" as opposed to a self-managed 4% withdrawing. This is also my understanding of the original 4% rule.
The original 4% "rule" never assumed anything about AUM fees only that all costs (fees, taxes, etc.) were included in the 4% withdrawal. I'm sure that the financial salesmen have modified it to be 3% for you and 1% for them.
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Re: 4% rule and early retirement?

Post by Sandi_k » Mon Feb 12, 2018 1:06 pm

Clever_Username wrote:
Mon Feb 12, 2018 11:56 am
Ron Scott wrote:
Mon Feb 12, 2018 11:00 am
Sandi_k wrote:
Mon Feb 12, 2018 12:35 am
That means we will NOT be using the 4% SWR - which includes 1% AUM, and a COLA every year.
To be sure, you're paying someone 1% AUM?
I think Sandi_k is saying that the 4% rule assumes you're paying someone 1% AUM, so it's really "you get 3% + are paying someone 1%" as opposed to a self-managed 4% withdrawing. This is also my understanding of the original 4% rule.
Yes, that's what I attempted to convey. Thanks for the interpreting. ;)

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Re: 4% rule and early retirement?

Post by marcopolo » Mon Feb 12, 2018 10:50 pm

Hyperborea wrote:
Mon Feb 12, 2018 12:05 pm
2pedals wrote:
Sat Feb 10, 2018 10:44 pm
Although I am not yet retired, I am leaning to a hybrid approach using 2% fixed based on value at retirement (adjusted for CPI) and 2% based on the annual value of funds.
This is very similar to a system that was proposed maybe 15 or so years ago by a poster known as "Gummy", a retired applied math prof. Essentially one takes some low fixed percentage of the initial portfolio value. This is sized to cover the basic necessities (shelter, food, health care, basic fun). Then one takes a percentage of the gains from the portfolio. The gains were the amount that the portfolio has increased over inflation since the start of retirement. So, one would take maybe a fixed 2% of the portfolio for basic costs and 50% of the gains for fun. Cruises vs canasta as gummy would put it.

This sort of system front loads the "fun" money in the earlier years when a retiree would be more likely to be able to use it. You can read more about it (and see his math - lots of math) in his weirdly humourous way (much like his lectures were) here - Sensible Withdrawals.
Interesting read.
But, i must have missed something. How does this front load the early years?
If i understood it correctly, you set a lower fixed percentage (say 2%), and then take a large percentage of portfolio increase above inflation (say 50%) of the "excess". Is that correct?

So, unless you have some good years at the beginning of your withdrawal period, it is not clear to me how it would have the desirable affect of front loading withdrawals.
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: 4% rule and early retirement?

Post by Hyperborea » Tue Feb 13, 2018 2:15 am

marcopolo wrote:
Mon Feb 12, 2018 10:50 pm
Hyperborea wrote:
Mon Feb 12, 2018 12:05 pm
2pedals wrote:
Sat Feb 10, 2018 10:44 pm
Although I am not yet retired, I am leaning to a hybrid approach using 2% fixed based on value at retirement (adjusted for CPI) and 2% based on the annual value of funds.
This is very similar to a system that was proposed maybe 15 or so years ago by a poster known as "Gummy", a retired applied math prof. Essentially one takes some low fixed percentage of the initial portfolio value. This is sized to cover the basic necessities (shelter, food, health care, basic fun). Then one takes a percentage of the gains from the portfolio. The gains were the amount that the portfolio has increased over inflation since the start of retirement. So, one would take maybe a fixed 2% of the portfolio for basic costs and 50% of the gains for fun. Cruises vs canasta as gummy would put it.

This sort of system front loads the "fun" money in the earlier years when a retiree would be more likely to be able to use it. You can read more about it (and see his math - lots of math) in his weirdly humourous way (much like his lectures were) here - Sensible Withdrawals.
Interesting read.
But, i must have missed something. How does this front load the early years?
If i understood it correctly, you set a lower fixed percentage (say 2%), and then take a large percentage of portfolio increase above inflation (say 50%) of the "excess". Is that correct?

So, unless you have some good years at the beginning of your withdrawal period, it is not clear to me how it would have the desirable affect of front loading withdrawals.
It does so entirely because the 4% "rule" is in general pessimistic. In most of the years you could take more, sometimes much more, and be fine. But you don't know in advance. Most people who use some variation of the constant 4% (or other) rule actually adjust the rate down in bad years and up in good years. This sensible withdrawal probably more closely models what people actually do. You really want to pick the fixed WR part that covers your base living costs. I used 2% in the example because that's what the person I quoted was suggesting as their base withdrawal.

You don't take more than a fixed percentage rule in all years but then you probably shouldn't take as much as 4% in a bad year anyways since a 4% WR isn't 100% historically safe even for 30 year retirements. However, on average you take much more because on average you could. The sensible withdrawal approach just systemizes what people actually do. If you take more out in the early years you do limit the growth of the portfolio and because of that the growth or extras to skim off decreases over time.

You can see discussion of this if you go on to the second page of Sensible Withdrawals. Here he uses a 4x25 portfolio (LG+LV+SG+SV) and a simulation.

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Re: 4% rule and early retirement?

Post by TheNightsToCome » Tue Feb 13, 2018 11:42 am

JBTX wrote:
Fri Feb 09, 2018 2:28 pm
Ron Scott wrote:
Fri Feb 09, 2018 2:21 pm
marcopolo wrote:
Thu Feb 08, 2018 11:46 pm
If not looking at the past, on what do you base your 3-3.5% ?
Yep, that's the question and you might not like my answer, but here goes.

I'm triangulating into it, looking at the future like this:

1. I believe my grandparents, parents and I have lived during a Golden Age in America. Sure, we had wars and the depression in there but America always came out of it in a really good way and we became the center of the world economically. Related to this has been our expanding population--a good thing to happen to us and at the right time. While I doubt anyone alive today will live to see America drop to #2, the trajectory just won't be the same IMO. Those days are over and with them the rate of growth in equities. So I do "look" at the past but I discount it quite a bit.

2. I listen to a select group of pundits like Burton Malkiel, John Bogle and Larry Swedlow. They're all predicting significantly lower equity returns for the coming decade or so. 4-5% vs. up to 10% historically.

3. Logic tells me that in a reasonably-functioning world investors will demand and get returns that at least keep pace with inflation or do a bit better--or they'll figure out a way to do something about it themselves like start a business. Money is competitive but the real returns on an average portfolio could easily be below 2%.

So I figure the conservative approach is to assume just keeping pace with inflation. If I have 30 years to live and divide my nest egg by 30 I'm spending about 3.3%. If I underestimate, I win.

That's it. No magic. Fire away.
This is the way I look at it. I don't profess to be able to foretell the future, but based upon current available information, and input from some reputable people, including the namesake of this site, future returns will likely be muted. There are addtional reasons, including demographics, that could also play into this.

I recall seeing that international SWR's in many cases were slightly lower than 4.0%. I can't imagine what it would be for Japan.

I would say you plan to build a portfolio that supports 3-3.5%, and then in retirement you tweak up and down as necessary, depending on how things go.

Another point of support for your numbers is if you could actually find an inflation adjusted fixed annuity, which I think are kind of hard to find, it would likely be in the 3% range, but below 4.0%.
"I recall seeing that international SWR's in many cases were slightly lower than 4.0%. I can't imagine what it would be for Japan."

The historical US experience has been exceptional. The SWR in other developed markets was lower in almost every case, often much lower:

https://www.advisorperspectives.com/art ... awal-rates

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Re: 4% rule and early retirement?

Post by TheNightsToCome » Tue Feb 13, 2018 11:45 am

marcopolo wrote:
Fri Feb 09, 2018 3:26 pm
Ron Scott wrote:
Fri Feb 09, 2018 3:06 pm
marcopolo wrote:
Fri Feb 09, 2018 2:52 pm
The only thing i was pointing out in your original post was your statement about not knowing if the future will be like the past, and not pretending to know. It came a cross as a bit critical/condescending of others who look at history as a guide to future market expectations.
I meant to be critical, not condescending. Apologies...

I AM concerned when others scoff at the notion of a 4% Rule being too conservative, and there have a number of threads out there that do just that. Lengthy retirements are relatively new animals and even for Bogleheads, who tend to be upper class types, overspending early in retirement can undo a lifetime of careful saving. I mean to reject the 4% assumption for the better of all.

BTW--did you say you retired today?
No need to apologize, it is just as likely that I was reading too much into it.
I tend to like the diversity of opinion. My impression is that for every person arguing that 4% is too conservative, there is another person arguing that 2% is too optimistic. As usual, the truth probably lies somewhere in between. There is no right answer, and any decision comes with different set of risks. That could be running out of money because you assumed 5% was safe, or it could mean dying at your desk because you decided you needed to get below 2%. Everyone has to consider all the factors, and make their own choices on what they are comfortable with.

Yes. I did start my retirement this morning, hopefully not into a really bad sequence of returns!
Congrats!

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Re: 4% rule and early retirement?

Post by marcopolo » Tue Feb 13, 2018 11:55 am

TheNightsToCome wrote:
Tue Feb 13, 2018 11:45 am
marcopolo wrote:
Fri Feb 09, 2018 3:26 pm
Ron Scott wrote:
Fri Feb 09, 2018 3:06 pm
marcopolo wrote:
Fri Feb 09, 2018 2:52 pm
The only thing i was pointing out in your original post was your statement about not knowing if the future will be like the past, and not pretending to know. It came a cross as a bit critical/condescending of others who look at history as a guide to future market expectations.
I meant to be critical, not condescending. Apologies...

I AM concerned when others scoff at the notion of a 4% Rule being too conservative, and there have a number of threads out there that do just that. Lengthy retirements are relatively new animals and even for Bogleheads, who tend to be upper class types, overspending early in retirement can undo a lifetime of careful saving. I mean to reject the 4% assumption for the better of all.

BTW--did you say you retired today?
No need to apologize, it is just as likely that I was reading too much into it.
I tend to like the diversity of opinion. My impression is that for every person arguing that 4% is too conservative, there is another person arguing that 2% is too optimistic. As usual, the truth probably lies somewhere in between. There is no right answer, and any decision comes with different set of risks. That could be running out of money because you assumed 5% was safe, or it could mean dying at your desk because you decided you needed to get below 2%. Everyone has to consider all the factors, and make their own choices on what they are comfortable with.

Yes. I did start my retirement this morning, hopefully not into a really bad sequence of returns!
Congrats!
Thank you!
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: 4% rule and early retirement?

Post by Tyler9000 » Tue Feb 13, 2018 12:02 pm

wguillioli wrote:
Thu Feb 08, 2018 5:21 pm
Is there research / recommendations on the 4% safe withdrawal rule and early retirement?

If I understand correctly the 4% rule was done with a 30-year time horizon. What happens if one has potentially 40 or 50 years in retirement? The 4% rule still applies?
For very long retirements, I recommend reading up on Perpetual Withdrawal Rates. Because they focus on maintaining inflation-adjusted principal rather than spending a portfolio down to zero, they're more conservative than safe withdrawal rates and can theoretically last forever.

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Re: 4% rule and early retirement?

Post by HomerJ » Tue Feb 13, 2018 1:07 pm

Ron Scott wrote:
Fri Feb 09, 2018 2:21 pm
marcopolo wrote:
Thu Feb 08, 2018 11:46 pm
If not looking at the past, on what do you base your 3-3.5% ?
Yep, that's the question and you might not like my answer, but here goes.

I'm triangulating into it, looking at the future like this:

1. I believe my grandparents, parents and I have lived during a Golden Age in America. Sure, we had wars and the depression in there but America always came out of it in a really good way and we became the center of the world economically. Related to this has been our expanding population--a good thing to happen to us and at the right time. While I doubt anyone alive today will live to see America drop to #2, the trajectory just won't be the same IMO. Those days are over and with them the rate of growth in equities. So I do "look" at the past but I discount it quite a bit.

2. I listen to a select group of pundits like Burton Malkiel, John Bogle and Larry Swedlow. They're all predicting significantly lower equity returns for the coming decade or so. 4-5% vs. up to 10% historically.

3. Logic tells me that in a reasonably-functioning world investors will demand and get returns that at least keep pace with inflation or do a bit better--or they'll figure out a way to do something about it themselves like start a business. Money is competitive but the real returns on an average portfolio could easily be below 2%.

So I figure the conservative approach is to assume just keeping pace with inflation. If I have 30 years to live and divide my nest egg by 30 I'm spending about 3.3%. If I underestimate, I win.

And--an afterthought--I like the WSJ article posted above: “3% is the new safe withdrawal rate,” says Wade Pfau, a professor at the American College of Financial Services in Bryn Mawr, Pa.


That's it. No magic. Fire away.
This is a good thoughtful post. #1 may indeed be true.

I would like to point out that #2 is normal. We absolutely could indeed have low returns for the next decade, which could then be followed by double-digit returns in the following decade. That's pretty much how it normally happens. The 10% historical average return INCLUDES the crashes and the bad decades of low returns.

As for Wade Pfau, he's been saying 2.5% and 3% since 2010 and 2011. He also includes a 1% advisor fee in his calculations, so his numbers don't really apply to Bogleheads.

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HomerJ
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Re: 4% rule and early retirement?

Post by HomerJ » Tue Feb 13, 2018 1:20 pm

TheNightsToCome wrote:
Tue Feb 13, 2018 11:42 am
The historical US experience has been exceptional. The SWR in other developed markets was lower in almost every case, often much lower:

https://www.advisorperspectives.com/art ... awal-rates
Any international research that starts from 1900 is suspect. How do they handle the years where multiple countries were 65% bombed into rubble or where the entire government was overthrown?

Pointing out that Russia's stock market went to zero in 1917 when the communists took over isn't a valid data point, in my opinion, when determining my SWR in 2018.

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