4% rule and early retirement?

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TravelGeek
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Re: 4% rule and early retirement?

Post by TravelGeek » Tue Feb 13, 2018 1:21 pm

HomerJ wrote:
Tue Feb 13, 2018 1:07 pm
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.
What does "includes a 1% advisor fee in his calculations" mean?

Is he saying that you can withdraw 3.5% - 4% safely, and then hand 1% to your advisor? (leaving you with 2.5%-3%)

I always considered advisor expenses as part of my expenses that need to be covered by my hopefully safe withdrawals. I happen to not have an advisor, so I budget 0% for that expense. :)

wolf359
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Re: 4% rule and early retirement?

Post by wolf359 » Tue Feb 13, 2018 1:31 pm

Ron Scott wrote:
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.
I found this comment very funny. Mr. Money Mustache, who espouses the 4% rule, lives in Colorado, and literally smokes dope (which is legal there.)

He points out that the 4% rule:

- is a rule of thumb, not a suicide pact. If you're you're flexible enough to be frugal and reduce your spending if the market tanks, 4% is not a problem.

- Disregards flexibility. If you're flexible in early retirement, you could even (gasp!) get a job if you have to, In fact, if you're disciplined enough to accumulate the assets to retire early, you're probably driven enough that your hobbies or other activities may generate revenue. It doesn't take much earnings to survive those market events that normally would kill the 4% rule.

- Also doesn't account for the retiree collecting social security.

Personally, I'm targeting a desired standard of living, and a minimal standard of living before I retire. If the markets tank, I'd cut back on expenses. 4% covers the desired standard of living, but I'd probably survive on a 2% withdrawal rate (which is mainly dividends/interest only.)

alfaspider
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Re: 4% rule and early retirement?

Post by alfaspider » Tue Feb 13, 2018 2:38 pm

1% AUMs sound particularly insane when you start thinking about retirement withdrawals. If you told a working person that they should spend 25% of their salary on a financial adviser, they'd look at you like you have two heads. Yet many people willingly accept the 1% fee equivalent to 25% of their "salary" in retirement.

JBTX
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Re: 4% rule and early retirement?

Post by JBTX » Tue Feb 13, 2018 3:06 pm

TheNightsToCome wrote:
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
Interesting. Thanks for posting.

Of course there will be those that say the US will always be exceptional and this proves international diversification is unnecessary for US investors.

TheNightsToCome
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Re: 4% rule and early retirement?

Post by TheNightsToCome » Tue Feb 13, 2018 3:39 pm

HomerJ wrote:
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.
Well, Russia isn't in the data set.

Looks like the UK SWR was 3.05%, and 12 of the remaining nations had SWRs below 3%, including Switzerland, Australia, Norway, Ireland, Spain, Belgium, Finland, and France, among others.

Everyone has to find their own comfort level, but I think the exceptional US historical experience lulls many of us into overconfidence. A UK citizen might have had the same sense of confidence circa 1910, but the next 35 years brought a depression sandwiched between two world wars and the loss of dominance.

TheNightsToCome
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Re: 4% rule and early retirement?

Post by TheNightsToCome » Tue Feb 13, 2018 3:46 pm

JBTX wrote:
Tue Feb 13, 2018 3:06 pm
TheNightsToCome wrote:
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
Interesting. Thanks for posting.

Of course there will be those that say the US will always be exceptional and this proves international diversification is unnecessary for US investors.
"Of course there will be those that say the US will always be exceptional and this proves international diversification is unnecessary for US investors."

Yes. Might turn out to be true during our lifetimes, but I'm not comfortable with that bet and there is no need to take it, especially when the PE10 is higher now than 1929.

halfnine
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Re: 4% rule and early retirement?

Post by halfnine » Tue Feb 13, 2018 4:40 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
I have seen similar charts elsewhere. It appeared to me that barring a devastating war a portfolio that was globally invested in both stocks and bonds would work quite well with a 3.5% SWR. Of course, having such a portfolio might be quite hard to fathom if one comes from a country where home bias has historically been rewarded.

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HomerJ
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Re: 4% rule and early retirement?

Post by HomerJ » Tue Feb 13, 2018 5:00 pm

TheNightsToCome wrote:
Tue Feb 13, 2018 3:39 pm
Looks like the UK SWR was 3.05%, and 12 of the remaining nations had SWRs below 3%, including Switzerland, Australia, Norway, Ireland, Spain, Belgium, Finland, and France, among others.

Everyone has to find their own comfort level, but I think the exceptional US historical experience lulls many of us into overconfidence. A UK citizen might have had the same sense of confidence circa 1910, but the next 35 years brought a depression sandwiched between two world wars and the loss of dominance.
Umm.. I get the exact opposite conclusion. In order for the U.S. SWR to drop down to those countries numbers, we'd have to experience invasion and/or a devastating war.

Isn't it more likely THOSE countries SWRs will come up to OUR level? Maybe our historical SWR is the "normal" level, going forward (yes, of course, if World War III breaks out, all bets are off)

Really, all I'm asking to is to see the numbers from say 1950 or 1960 to today.

SWR is supposed to cover the worst-case scenario. If you include WWII and the invasion and occupation of your country for multiple years, I agree the worst-case SWR is going to be pretty low.

visualguy
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Re: 4% rule and early retirement?

Post by visualguy » Tue Feb 13, 2018 5:37 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
True, and the SWR for the US or US+ex-US may be lower in the future than the 4%, 3.5% or even 3% that many of us assume. It's obviously not a rule of economics that these SWRs work - they may not, even without huge wars or other disasters. It's enough if there's a very long period of stagnation due to bad government policies, aging populations, or a big economic shift to new players (e.g. China, India) where it's hard for us to participate in the economic growth through stock market investment.

The question is what to do about this uncertainty... One option is to work longer and save more. It's not always an option... Many careers have a limited time span, people burn out, etc. Also, even though it's possible that the SWR won't work, the probability seems low, so I think it's reasonable to be reluctant to spend more years working if you aren't happy doing that and if the probability that you will need that extra money is low.

An alternative is to diversify into direct real estate which adds another asset class. Instead of having almost everything in a stock/bond portfolio, have some in that and some in direct real estate investments. It requires some work, but I think it's overall the least painful approach to mitigating the risk of a stock/bond portfolio not meeting its expectations. Good returns in the right locations (which are not that difficult to find), good tax treatment, and somewhat different characteristics than the stock/bond markets. It may or may not work better, but it can be an effective way to reduce risk.

TheNightsToCome
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Re: 4% rule and early retirement?

Post by TheNightsToCome » Tue Feb 13, 2018 6:19 pm

visualguy wrote:
Tue Feb 13, 2018 5:37 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
True, and the SWR for the US or US+ex-US may be lower in the future than the 4%, 3.5% or even 3% that many of us assume. It's obviously not a rule of economics that these SWRs work - they may not, even without huge wars or other disasters. It's enough if there's a very long period of stagnation due to bad government policies, aging populations, or a big economic shift to new players (e.g. China, India) where it's hard for us to participate in the economic growth through stock market investment.

The question is what to do about this uncertainty... One option is to work longer and save more. It's not always an option... Many careers have a limited time span, people burn out, etc. Also, even though it's possible that the SWR won't work, the probability seems low, so I think it's reasonable to be reluctant to spend more years working if you aren't happy doing that and if the probability that you will need that extra money is low.

An alternative is to diversify into direct real estate which adds another asset class. Instead of having almost everything in a stock/bond portfolio, have some in that and some in direct real estate investments. It requires some work, but I think it's overall the least painful approach to mitigating the risk of a stock/bond portfolio not meeting its expectations. Good returns in the right locations (which are not that difficult to find), good tax treatment, and somewhat different characteristics than the stock/bond markets. It may or may not work better, but it can be an effective way to reduce risk.
"It's obviously not a rule of economics that these SWRs work - they may not, even without huge wars or other disasters."

Right. US in 1965-66 had high valuations followed by stagflation and the 4% rule failed, without invasion/disaster. Japan in 1989 again had high valuations, followed by balance sheet recession and eventual deflation. The Nikkei total real return is still negative almost 30 years later, without invasion/disaster.

The historical sample size with the current combination of high stock and bond valuations is de minimis. I'm going to speculate that if we had an "n" of 10,000 with the current combination of high stock and bond valuations, then the failure rate would be significant even with a 3% SWR. High starting valuations cause lower prospective returns and a higher risk of large drawdowns (thus increasing sequence of returns risk).

"The question is what to do about this uncertainty"

I think this depends on your options and how much you love/hate your job.

I quit a very lucrative career in 2001 because the workload was not sustainable. I had to get out -- immediately. It didn't matter if I had enough money.

I eventually found my way back to another good position, and I'm working to make the job more sustainable over time. My employer has been amenable to gradual changes that have improved the workload.

If I wasn't able to find a more tolerable position, then I would have been forced to live a more bare-bones lifestyle. That wouldn't have been the end of the world, but I prefer working in my current position to that alternative.

I agree a motivated investor is likely to find better returns in direct real estate investing than the stock and bond markets, but that is also a job; one that I might consider if I could have a mulligan on 2001.

Ron Scott
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Re: 4% rule and early retirement?

Post by Ron Scott » Tue Feb 13, 2018 8:54 pm

TheNightsToCome wrote:
Tue Feb 13, 2018 3:39 pm

Looks like the UK SWR was 3.05%, and 12 of the remaining nations had SWRs below 3%, including Switzerland, Australia, Norway, Ireland, Spain, Belgium, Finland, and France, among others.

Everyone has to find their own comfort level, but I think the exceptional US historical experience lulls many of us into overconfidence. A UK citizen might have had the same sense of confidence circa 1910, but the next 35 years brought a depression sandwiched between two world wars and the loss of dominance.
I think you're on point here.

Those who keep on churning the same 20th US Century Investment Experience Database--the Trinity believers and Firecalc-heads--believe implicitly that future global economic and political reality will be a glorious repeat of the 20th Century. You can futz all day and night with that database and its gonna give you your 4% for life.

But if the world refuses to cooperate the 4%ers are going to be sharing bedpans while they complain about how the new generation mucked things up.

bhsince87
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Re: 4% rule and early retirement?

Post by bhsince87 » Tue Feb 13, 2018 9:42 pm

I think many people here tend to avoid the other side of the equation.

I'm pondering retiring at 53 in a few months. I do believe that a 4%+ inflation withdrawal gives me a historical 95% success rate for a 30 year time period. But I'm going to go with 3.3 for a while, just in case

The other side of the equation?

My life expectancy chart gives me a 50% chance of being dead in 29 years!
BH87

TheNightsToCome
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Re: 4% rule and early retirement?

Post by TheNightsToCome » Tue Feb 13, 2018 11:44 pm

bhsince87 wrote:
Tue Feb 13, 2018 9:42 pm
I think many people here tend to avoid the other side of the equation.

I'm pondering retiring at 53 in a few months. I do believe that a 4%+ inflation withdrawal gives me a historical 95% success rate for a 30 year time period. But I'm going to go with 3.3 for a while, just in case

The other side of the equation?

My life expectancy chart gives me a 50% chance of being dead in 29 years!
Yes, and you should retire and take your chances if your job is intolerable. I did that (retired -- in the Mr Money Mustache sense of that word) in 2001 because my job was intolerable.

Eventually I found new work that is well paid and not intolerable. I prefer this to retirement.

When I was retired I worried about money, something I never did before "retirement." It wasn't fun, and I was still middle-aged and capable. It would have been much worse if I was elderly and feeble.

When I am old and feeble (if I make it that far) I hope that I have enough wealth to have some sense of power -- there won't be any physical power, and I probably won't be as intellectually nimble either. I don't want to see my wealth decline with my physical strength (and I want my younger wife to be a rich old widow some day).

That trade is only favorable if work doesn't consume and ruin life.

visualguy
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Re: 4% rule and early retirement?

Post by visualguy » Tue Feb 13, 2018 11:54 pm

TheNightsToCome wrote:
Tue Feb 13, 2018 11:44 pm
bhsince87 wrote:
Tue Feb 13, 2018 9:42 pm
I think many people here tend to avoid the other side of the equation.

I'm pondering retiring at 53 in a few months. I do believe that a 4%+ inflation withdrawal gives me a historical 95% success rate for a 30 year time period. But I'm going to go with 3.3 for a while, just in case

The other side of the equation?

My life expectancy chart gives me a 50% chance of being dead in 29 years!
Yes, and you should retire and take your chances if your job is intolerable. I did that (retired -- in the Mr Money Mustache sense of that word) in 2001 because my job was intolerable.

Eventually I found new work that is well paid and not intolerable. I prefer this to retirement.

When I was retired I worried about money, something I never did before "retirement." It wasn't fun, and I was still middle-aged and capable. It would have been much worse if I was elderly and feeble.

When I am old and feeble (if I make it that far) I hope that I have enough wealth to have some sense of power -- there won't be any physical power, and I probably won't be as intellectually nimble either. I don't want to see my wealth decline with my physical strength (and I want my younger wife to be a rich old widow some day).

That trade is only favorable if work doesn't consume and ruin life.
+1

The 50s aren't the time to retire in my opinion unless you don't have a choice, your job is intolerable (and you can't find a better one), or you know of some ticking health time bomb.

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HomerJ
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Re: 4% rule and early retirement?

Post by HomerJ » Wed Feb 14, 2018 1:00 am

visualguy wrote:
Tue Feb 13, 2018 11:54 pm
The 50s aren't the time to retire in my opinion unless you don't have a choice, your job is intolerable (and you can't find a better one), or you know of some ticking health time bomb.
Heh, I am SO retiring in my 50s.

Okay, I might work part-time if they'll let me. But if I can't find a part-time job, I'm retiring anyway.

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HomerJ
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Re: 4% rule and early retirement?

Post by HomerJ » Wed Feb 14, 2018 1:03 am

TravelGeek wrote:
Tue Feb 13, 2018 1:21 pm
HomerJ wrote:
Tue Feb 13, 2018 1:07 pm
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.
What does "includes a 1% advisor fee in his calculations" mean?

Is he saying that you can withdraw 3.5% - 4% safely, and then hand 1% to your advisor? (leaving you with 2.5%-3%)

I always considered advisor expenses as part of my expenses that need to be covered by my hopefully safe withdrawals. I happen to not have an advisor, so I budget 0% for that expense. :)
Yeah, it's close to that. When he says 3% with a 1% fee, that's 3.95% for those of us with 0.05% fees...

Actually, I've been told that the math is not quite that straightforward, and it's more like equal to 3.7%, but whatever.

pivoprussia
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Re: 4% rule and early retirement?

Post by pivoprussia » Wed Feb 14, 2018 8:00 am

I didn't see this posted yet in this thread. I think I got it here at some point. I found it very helpful and felt it deserved to be shared again.

http://retirementoptimizer.com/Whitepapers/PerpDist.pdf

I realize not everyone is interested in leaving a large estate. However, perpetual withdraw rates should give an idea of the "floor".

The main takeaways for me:

1-If you want a fixed dollar amount of distributions indexed to CPI - 2.3% of initial asset value

or another option

2-If you want to harvest part of the portfolio growth each year, then take 1.8% of the initial value plus 25% of the growth of the portfolio
during the preceding calendar year.

marcopolo
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Re: 4% rule and early retirement?

Post by marcopolo » Wed Feb 14, 2018 8:20 am

visualguy wrote:
Tue Feb 13, 2018 11:54 pm
TheNightsToCome wrote:
Tue Feb 13, 2018 11:44 pm
bhsince87 wrote:
Tue Feb 13, 2018 9:42 pm
I think many people here tend to avoid the other side of the equation.

I'm pondering retiring at 53 in a few months. I do believe that a 4%+ inflation withdrawal gives me a historical 95% success rate for a 30 year time period. But I'm going to go with 3.3 for a while, just in case

The other side of the equation?

My life expectancy chart gives me a 50% chance of being dead in 29 years!
Yes, and you should retire and take your chances if your job is intolerable. I did that (retired -- in the Mr Money Mustache sense of that word) in 2001 because my job was intolerable.

Eventually I found new work that is well paid and not intolerable. I prefer this to retirement.

When I was retired I worried about money, something I never did before "retirement." It wasn't fun, and I was still middle-aged and capable. It would have been much worse if I was elderly and feeble.

When I am old and feeble (if I make it that far) I hope that I have enough wealth to have some sense of power -- there won't be any physical power, and I probably won't be as intellectually nimble either. I don't want to see my wealth decline with my physical strength (and I want my younger wife to be a rich old widow some day).

That trade is only favorable if work doesn't consume and ruin life.
+1

The 50s aren't the time to retire in my opinion unless you don't have a choice, your job is intolerable (and you can't find a better one), or you know of some ticking health time bomb.
I wish you guys had told me this sooner! I just voluntarily retired at age 51 from a good, high paying, job that i did not hate. Now i am terrified i will be eating cat food in my 60s.

Just kidding, I would mostly likely have ignored you and retired anyway. I am much more worried about running out of time than I am about running out of money.

I was watching the Olympics last night and they were explaining how the scoring works for some event. They throw out the highest and lowest score and take an average of the rest. It reminded me of much of the conversation on these boards about SWR. Some think 4% is too conservative. Others think 2% is too aggressive. I think of those as the high and low judges. I discount both of those extremes.

I was targeting 2019 for retirement, and expecting to be at around 30x of anticipated retirement expenses (including a significant amount for Health Insurance). But with an opportunity to take a very generous severance package, I opted to retire a year earlier than planned. Between the severance package and the nice run up in the markets last couple of years, I ended up at about 40x anticipated expenses when i pulled the plug (down to about 38x with the recent correction).

If that fails, i expect to have a lot of company, and i don't think working a few extra years would have made much difference to portfolio survival in those cases.
Once in a while you get shown the light, in the strangest of places if you look at it right.

DoctorE
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Re: 4% rule and early retirement?

Post by DoctorE » Thu Feb 15, 2018 3:26 am

marcopolo wrote:
Wed Feb 14, 2018 8:20 am
visualguy wrote:
Tue Feb 13, 2018 11:54 pm
TheNightsToCome wrote:
Tue Feb 13, 2018 11:44 pm
bhsince87 wrote:
Tue Feb 13, 2018 9:42 pm
I think many people here tend to avoid the other side of the equation.

I'm pondering retiring at 53 in a few months. I do believe that a 4%+ inflation withdrawal gives me a historical 95% success rate for a 30 year time period. But I'm going to go with 3.3 for a while, just in case

The other side of the equation?

My life expectancy chart gives me a 50% chance of being dead in 29 years!
Yes, and you should retire and take your chances if your job is intolerable. I did that (retired -- in the Mr Money Mustache sense of that word) in 2001 because my job was intolerable.

Eventually I found new work that is well paid and not intolerable. I prefer this to retirement.

When I was retired I worried about money, something I never did before "retirement." It wasn't fun, and I was still middle-aged and capable. It would have been much worse if I was elderly and feeble.

When I am old and feeble (if I make it that far) I hope that I have enough wealth to have some sense of power -- there won't be any physical power, and I probably won't be as intellectually nimble either. I don't want to see my wealth decline with my physical strength (and I want my younger wife to be a rich old widow some day).

That trade is only favorable if work doesn't consume and ruin life.
+1

The 50s aren't the time to retire in my opinion unless you don't have a choice, your job is intolerable (and you can't find a better one), or you know of some ticking health time bomb.
I wish you guys had told me this sooner! I just voluntarily retired at age 51 from a good, high paying, job that i did not hate. Now i am terrified i will be eating cat food in my 60s.

Just kidding, I would mostly likely have ignored you and retired anyway. I am much more worried about running out of time than I am about running out of money.

I was watching the Olympics last night and they were explaining how the scoring works for some event. They throw out the highest and lowest score and take an average of the rest. It reminded me of much of the conversation on these boards about SWR. Some think 4% is too conservative. Others think 2% is too aggressive. I think of those as the high and low judges. I discount both of those extremes.

I was targeting 2019 for retirement, and expecting to be at around 30x of anticipated retirement expenses (including a significant amount for Health Insurance). But with an opportunity to take a very generous severance package, I opted to retire a year earlier than planned. Between the severance package and the nice run up in the markets last couple of years, I ended up at about 40x anticipated expenses when i pulled the plug (down to about 38x with the recent correction).

If that fails, i expect to have a lot of company, and i don't think working a few extra years would have made much difference to portfolio survival in those cases.
Great post!

msk
Posts: 847
Joined: Mon Aug 15, 2016 10:40 am

Re: 4% rule and early retirement?

Post by msk » Thu Feb 15, 2018 8:21 am

We all wish to have some rule that will last forever, even if one lives to 120 :shock: An excellent strategy is having the WR as a percentage of the portfolio, not as a percentage at some, possibly decades ago, retirement date. Taking a percentage of that year's portfolio value will last forever, but if you withdraw too much then your withdrawals shrink, especially with inflation included. So I looked at the stock market history from 1966 to 2016 (50 years) and looked for an annual percentage rate that will give an amount annually that keeps up with inflation forever, on average, if the 50 year history is typical going forward. Answer: withdraw 5% of the portfolio annually. Some years your cash will rise, some years it will fall (depending on market behavior the previous year) but, on average, the cash being withdrawn should keep up with inflation, and the remaining portfolio should also keep up with inflation. Verified if the same would be delivered by Monte Carlo simulations. Yes, as the Median forecast. So, some tolerance for up/down fluctuations and 5% p.a. is magical.

PS I wanted to retire at 45, but finally pulled the plug at 55. Now, 18 years later, I see that NW has grown by 11.5% p.a. compounded since retirement. We are all scared before we pull the plug, but I suspect for typical BHs, unjustifiably. For non BHs it's probably justified :confused

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