Wade Pfau: Does The 4% Rule Work In Today’s Markets?

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YRT70
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Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by YRT70 » Sun Sep 08, 2019 1:48 pm

In this article Wade uses Monte Carlo simulations with the low interest rate world of today as a starting point. For a 50/50 asset allocation to stocks and bonds, the simulations indicate that the 4% withdrawal rate using historical expectations had a 94% chance of success. Using current expectations the 4% rule now has a 69% chance of success.

Wade writes: "The 4% rule may work for today’s retirees, but it is far from a sure bet or a “safe” spending strategy."

Curious to hear what other people think about this article. I'm aware that MC simulations have serious limitations but I think they can be interesting nonetheless.

Article: https://retirementresearcher.com/4-rule ... s-markets/

Image
Portfolio Success Rates for a 4% Withdrawal Rate, Rolling vs. Monte Carlo Simulations, For a 30-Year Retirement, Inflations Adjustments.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by livesoft » Sun Sep 08, 2019 1:56 pm

There are many articles nowadays mentioning that 4% is problematic going forward, so I don't see anything new in this article other than it has caught your attention. Have you looked at all the other pieces that pretty much state the same thing?
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by stlutz » Sun Sep 08, 2019 1:59 pm

I always like to compare these claims vs. the cost of a CPI-adjusted annuity as well as an annuity that adjusts at 3%/yr. (which is cheaper than the CPI option and are available from higher-quality insurers)

Inflation adjusted:
65 year old couple: 3.34%
65 year old male: 4.20%

3% COLA
65 year old couple: 3.64% (3.36% for the highest rated insurer)
65 year old male: 4.56% (4.31% for the highest rated insurer)

These figures are definitely lower vs. a year ago.

So, whether 4% works depends on one's martial status.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by flyingaway » Sun Sep 08, 2019 2:02 pm

I use the 4% rule as a guide for financial independence. I started slowing down and feeling comfortable when my portfolio satisfied the 4% rule. I also started to enjoy life more after that time.

I am a little bit tired of daily talking and debating about these rules. If you don't like it, work for a few more years. If you have no choice, work (trim) on your retirement budget.

Frankly speaking, I am thankful that someone figured out the 4% rule so that I know where I am.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by vineviz » Sun Sep 08, 2019 2:07 pm

YRT70 wrote:
Sun Sep 08, 2019 1:48 pm

Wade writes: "The 4% rule may work for today’s retirees, but it is far from a sure bet or a “safe” spending strategy."

Curious to hear what other people think about this article. I'm aware that MC simulations have serious limitations but I think they can be interesting nonetheless.
It seems like a sensible analysis to me. I think anyone planning an imminent retirement must somehow account for the current reality of high equity valuations combined with low bond yields.
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by Stinky » Sun Sep 08, 2019 2:11 pm

Thanks for posting the article. I can’t say that I’ve paid much attention to other articles like this.

It confirms what I felt in my gut - 3% (or something close to it) should probably replace 4% as a rough guideline in the plans of near- and recently-retired folks.
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by AlohaJoe » Sun Sep 08, 2019 2:13 pm

YRT70 wrote:
Sun Sep 08, 2019 1:48 pm
In this article Wade uses Monte Carlo simulations with the low interest rate world of today as a starting point.
Pfau (and his co-authors) first published this model in January 2013. So while it hasn't been three decades, we do have over five years of real experience to compare against the model.

https://medium.com/@justusjp/5-year-ret ... 76fe8a5efa
The cumulative returns from 2013 until the (almost) end of 2017 are 103%.

That’s an 82nd percentile sequence of returns, according to the model. That is, 82% of other “possible worlds” had worse stock returns than we actually had. Of course, the model might be wrong. Or the model might be right and we just got lucky. After all, being in the 82nd percentile isn’t impossible.
Personally these models have been persistently wrong for so long that I have low confidence in them.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by jdilla1107 » Sun Sep 08, 2019 2:26 pm

stlutz wrote:
Sun Sep 08, 2019 1:59 pm
I always like to compare these claims vs. the cost of a CPI-adjusted annuity as well as an annuity that adjusts at 3%/yr. (which is cheaper than the CPI option and are available from higher-quality insurers)

Inflation adjusted:
65 year old couple: 3.34%
65 year old male: 4.20%

3% COLA
65 year old couple: 3.64% (3.36% for the highest rated insurer)
65 year old male: 4.56% (4.31% for the highest rated insurer)

These figures are definitely lower vs. a year ago.

So, whether 4% works depends on one's martial status.
Where do you get these rates? I arbitrarily selected immediateannuities.com from google and it shows significantly higher rates. (5.5% for a couple) That seems too high, but I'm curious what a good resource for this is.

Edit: Oh, I see the inflation adjustment is the difference. 5.5% is with no inflation adjustment. I'm still curious what site you use.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by bertilak » Sun Sep 08, 2019 2:36 pm

What about the poor slobs who made their plans last year using the 4% rule and just now retired? Do they feel betrayed?

What advice are people hearing today that will be retracted the day they retire?
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by Will do good » Sun Sep 08, 2019 2:37 pm

Not sure I buy into "This time is different". I wonder how many experts would have predicted this years bond index would pass 8-9%?
I use 4%as a guide and adjust as needed, as long as you are not super tight with 4% SWR most would be fine.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by afan » Sun Sep 08, 2019 2:53 pm

The success depends not only on investment returns but also on how long you need the money to last. Someone retiring at 70 in poor health should have less worries than a healthy 50 year old early retiree.

The 4% was only touted as working for a 30 year retirement. Many early retireea may need their money to last longer.

But even at 30 years, I would want as close to a zero predicted failure rate as I could get. If you live to 90 and run out of money at that point (call it a 2% possibility) what do you do then? Go back to work? It is easier to suggest cutting back than to tell someone their standard of living has to fall below what they expected just in case.

I can see many people facing down markets and sticking with 4% since the historical record includes downturns and recoveries that made it work long term.

Since our lifestyle has not changed as our assets have accumulated we live on less than we can afford. We will be happy with withdrawal rates well below 4%. Getting one's living standard to a safe sustainable level solves many of these problems.
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by Seasonal » Sun Sep 08, 2019 3:08 pm

Will do good wrote:
Sun Sep 08, 2019 2:37 pm
Not sure I buy into "This time is different".
The SWR will likely be the same as every other time the 10 year treasury was yielding 1.5% and the S&P 500 had a p/e of 20x. How have things usually worked out with that sort of starting point?

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by randomguy » Sun Sep 08, 2019 3:12 pm

jdilla1107 wrote:
Sun Sep 08, 2019 2:26 pm
stlutz wrote:
Sun Sep 08, 2019 1:59 pm
I always like to compare these claims vs. the cost of a CPI-adjusted annuity as well as an annuity that adjusts at 3%/yr. (which is cheaper than the CPI option and are available from higher-quality insurers)

Inflation adjusted:
65 year old couple: 3.34%
65 year old male: 4.20%

3% COLA
65 year old couple: 3.64% (3.36% for the highest rated insurer)
65 year old male: 4.56% (4.31% for the highest rated insurer)

These figures are definitely lower vs. a year ago.

So, whether 4% works depends on one's martial status.
Where do you get these rates? I arbitrarily selected immediateannuities.com from google and it shows significantly higher rates. (5.5% for a couple) That seems too high, but I'm curious what a good resource for this is.

Edit: Oh, I see the inflation adjustment is the difference. 5.5% is with no inflation adjustment. I'm still curious what site you use.
These annuities have a COLA adjustment NOT an inflation adjustment. You shouldn't compare them with an inflation adjusted SWR since you are basically not protecting against one of the worst cases.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by JoeRetire » Sun Sep 08, 2019 3:14 pm

bertilak wrote:
Sun Sep 08, 2019 2:36 pm
What about the poor slobs who made their plans last year using the 4% rule and just now retired? Do they feel betrayed?
Perhaps.

But other than a few minutes of "woe me" self pity, what's the point of feeling betrayed?

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by randomguy » Sun Sep 08, 2019 3:20 pm

AlohaJoe wrote:
Sun Sep 08, 2019 2:13 pm
YRT70 wrote:
Sun Sep 08, 2019 1:48 pm
In this article Wade uses Monte Carlo simulations with the low interest rate world of today as a starting point.
Pfau (and his co-authors) first published this model in January 2013. So while it hasn't been three decades, we do have over five years of real experience to compare against the model.

https://medium.com/@justusjp/5-year-ret ... 76fe8a5efa
The cumulative returns from 2013 until the (almost) end of 2017 are 103%.

That’s an 82nd percentile sequence of returns, according to the model. That is, 82% of other “possible worlds” had worse stock returns than we actually had. Of course, the model might be wrong. Or the model might be right and we just got lucky. After all, being in the 82nd percentile isn’t impossible.
Personally these models have been persistently wrong for so long that I have low confidence in them.
In defense of the model, you will only get the piss poor results like 5% of the time. It isn't too surprising that any one five year period doesn't have the worst cases. Imagine the model is simulating the last 40 years. The person retiring in 2000 and 2001 had a tough time. Everyone else (including 2007 so far) has had pretty smooth sailing. Maybe 2013 was our 1995 and we are about to hit 2000. Again they aren't saying the person retiring tomorrow will have poor results. They are saying that it is likely someone will for some year.

That being said, I always get the feeling is that the model people always pick conservative assumptions and then stack them on top of each other to get the results.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by desiderium » Sun Sep 08, 2019 3:24 pm

What is calculated as safe may not turn out to be. Not only are returns uncertain, but expenses have a way of being unpredictable. Increased precision of analysis will not resolve this. Three options to address uncertainty include having a large excess of savings, having a contingency plan to trim expenses and being able to earn some money to blunt withdrawals. Uncertainty only increases for those retiring early.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by willthrill81 » Sun Sep 08, 2019 3:26 pm

AlohaJoe wrote:
Sun Sep 08, 2019 2:13 pm
YRT70 wrote:
Sun Sep 08, 2019 1:48 pm
In this article Wade uses Monte Carlo simulations with the low interest rate world of today as a starting point.
Pfau (and his co-authors) first published this model in January 2013. So while it hasn't been three decades, we do have over five years of real experience to compare against the model.

https://medium.com/@justusjp/5-year-ret ... 76fe8a5efa
The cumulative returns from 2013 until the (almost) end of 2017 are 103%.

That’s an 82nd percentile sequence of returns, according to the model. That is, 82% of other “possible worlds” had worse stock returns than we actually had. Of course, the model might be wrong. Or the model might be right and we just got lucky. After all, being in the 82nd percentile isn’t impossible.
Personally these models have been persistently wrong for so long that I have low confidence in them.
:thumbsup

Unless efforts are made to counteract it, Monte Carlo analyses assume that returns are independent of each other, which most finance academics believe is false. So right from the start, Pfau's analysis is likely fatally flawed.

Pfau has (justly, IMHO) earned a reputation as being a perma-bear. He was touting a 2% SWR not very long ago.

Michael Kitces noted just how poor the returns were for the first crucial 15 years of a 30 year retirement in the worst periods of the past.
The average real return on a 60/40 (re-)balanced portfolio associated with the worst safe withdrawal rate scenarios in history was a mere 0.86% average annual compound growth rate over the first 15 years of retirement. In point of fact, this was actually driven by a slightly negative real return in bonds (at -0.15%) and a slightly positive real return in equities of 0.73% (the reason the rebalanced portfolio returns were slightly higher than the returns of stocks or bonds separately was due to the favorable market timing of some of the rebalancing trades).
https://www.kitces.com/blog/what-return ... ased-upon/

So that means that those forecasting lower than a 4% SWR over the next 30 years are saying that the real return of a 60/40 AA over the next 15 years will likely be lower than .86% annualized.

For those that think that this a strong enough possibility to warrant guarding against, I would humbly remind them that the lowest real return of a 60 TSM /40 intermediate-term Treasury portfolio over a 15 year period since 1972 (according to Portfolio Visualizer) was 3.60% (i.e. 2000-2014), 3.24% if equities were evenly split between U.S. and international.

But at the end of the day, all of this SWR discussion is moot because virtually no one is using a SWR approach to determine their withdrawals. Everyone makes adjustments.
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by willthrill81 » Sun Sep 08, 2019 3:33 pm

YRT70 wrote:
Sun Sep 08, 2019 1:48 pm
Curious to hear what other people think about this article. I'm aware that MC simulations have serious limitations but I think they can be interesting nonetheless.
I'm curious as to why you find a tool with serious limitations to be interesting.
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by stlutz » Sun Sep 08, 2019 3:40 pm

randomguy wrote:
Sun Sep 08, 2019 3:12 pm
jdilla1107 wrote:
Sun Sep 08, 2019 2:26 pm
stlutz wrote:
Sun Sep 08, 2019 1:59 pm
I always like to compare these claims vs. the cost of a CPI-adjusted annuity as well as an annuity that adjusts at 3%/yr. (which is cheaper than the CPI option and are available from higher-quality insurers)

Inflation adjusted:
65 year old couple: 3.34%
65 year old male: 4.20%

3% COLA
65 year old couple: 3.64% (3.36% for the highest rated insurer)
65 year old male: 4.56% (4.31% for the highest rated insurer)

These figures are definitely lower vs. a year ago.

So, whether 4% works depends on one's martial status.
Where do you get these rates? I arbitrarily selected immediateannuities.com from google and it shows significantly higher rates. (5.5% for a couple) That seems too high, but I'm curious what a good resource for this is.

Edit: Oh, I see the inflation adjustment is the difference. 5.5% is with no inflation adjustment. I'm still curious what site you use.
These annuities have a COLA adjustment NOT an inflation adjustment. You shouldn't compare them with an inflation adjusted SWR since you are basically not protecting against one of the worst cases.
Data is from immediate annuities.

The "inflation adjusted" category shows results with a CPI adjustment.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by Normchad » Sun Sep 08, 2019 3:45 pm

To me it’s interesting that the community at large seems to have nearly unshakable confidence in the following things:

1) nobody knows nothing, the future and the market are unpredictable, and
2) the 4% SWR that has historically worked in every rolling 30 year period in history, is no longer safe.

Not sure how to square those two things. Some feel that 2% is the only reasonable SWR to consider now. I believe the original trinity study authors revised their data later, and found that the actual SWR was closer to 4.5%.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by willthrill81 » Sun Sep 08, 2019 3:48 pm

Normchad wrote:
Sun Sep 08, 2019 3:45 pm
To me it’s interesting that the community at large seems to have nearly unshakable confidence in the following things:

1) nobody knows nothing, the future and the market are unpredictable, and
2) the 4% SWR that has historically worked in every rolling 30 year period in history, is no longer safe.

Not sure how to square those two things. Some feel that 2% is the only reasonable SWR to consider now. I believe the original trinity study authors revised their data later, and found that the actual SWR was closer to 4.5%.
In practice, virtually no one actually believes that "nobody knows nothing." If they did, then it would be virtually impossible to even determine one's AA. But yes, it's true that predicting what will happen with stocks is extremely difficult. Bond markets seem to be more predictable, and unless inflation falls significantly, total bond market's anticipated real return over the next decade is roughly 0%.

The original SWR study was by Bengen. The Trinity study came afterward. Bengen ran his analysis again a few year back with an allocation to small-cap value stocks, I believe, which boosted the SWR to 4.5% for 30 year retirements.
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by Day9 » Sun Sep 08, 2019 3:51 pm

According to immediate annuities dot com, a 40-year old man can buy a 4.4% yearly payout SPIA today. A 65-year old man can get 6.5%. I do not know if this website has been updated in the last few months where long term rates have plummeted. But if all these experts, monte carlo simulations, and high current valuations & low yields are telling me to aim for a 3% or even lower SWR then I would be very tempted to annuitize a big chunk of my portfolio. Normally I would only suggest someone annuitize a big chunk of their portfolio late in life, like at age 80+, to hedge against longevity risk.

https://www.immediateannuities.com/annuity-calculators/
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by Watty » Sun Sep 08, 2019 3:56 pm

YRT70 wrote:
Sun Sep 08, 2019 1:48 pm
Curious to hear what other people think about this article.
Not specifically about this article but most of my retirement funds are in retirement accounts where taxes are not an issue. This means that if I did not think 4% would work then for a 30 year retirement I could just put my money into a 30 year ladder of TIPS where 3.33% mature each year and I would also get around an additional quarter of a percent in interest which would bring it up to 3.58%.

I have not done that since I also have the ability to cut back my retirement spending but 10 or even 20 percent and still be very comfortable.

I might have missed it but I did not see where the article defined what "failure" is. Just like in the original studies it may not take into account that few people would keep spending according to plan until they are broke and homeless

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by stlutz » Sun Sep 08, 2019 4:00 pm

bertilak wrote:
Sun Sep 08, 2019 2:36 pm
What about the poor slobs who made their plans last year using the 4% rule and just now retired? Do they feel betrayed?

What advice are people hearing today that will be retracted the day they retire?
On the fixed income side they have had returns front-loaded into the past year. The $100 they had last year will fund the same amount of income as the $110 they have this year.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by Northern Flicker » Sun Sep 08, 2019 4:01 pm

vineviz wrote:
Sun Sep 08, 2019 2:07 pm
YRT70 wrote:
Sun Sep 08, 2019 1:48 pm

Wade writes: "The 4% rule may work for today’s retirees, but it is far from a sure bet or a “safe” spending strategy."

Curious to hear what other people think about this article. I'm aware that MC simulations have serious limitations but I think they can be interesting nonetheless.
It seems like a sensible analysis to me. I think anyone planning an imminent retirement must somehow account for the current reality of high equity valuations combined with low bond yields.
To be clear, it is the historically low real yields that are the problem.

Higher equity valuations are only a problem to the extent that they are high in relation to low real yields. In a low inflation environment, less pricing power drives lower future expected revenue and a lower discount rate for the future revenue, leading to higher valuations and lower nominal expected return.

But it is of course the real return that matters. If equity returns are low and inflation is low, it is unclear the real return of equities will be low as well.
Last edited by Northern Flicker on Mon Sep 09, 2019 12:56 pm, edited 1 time in total.
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by willthrill81 » Sun Sep 08, 2019 4:03 pm

Watty wrote:
Sun Sep 08, 2019 3:56 pm
I might have missed it but I did not see where the article defined what "failure" is. Just like in the original studies it may not take into account that few people would keep spending according to plan until they are broke and homeless
That's just how he defined failure: you spend according to the initial WR, regardless of your portfolio's performance, until you potentially go broke.

Pfau made another big mistake in this paper. He wrongly assumes that bond yields are the only thing driving bond returns. That is obviously patently false, as anyone who held bonds this year alone can attest. 30 year Treasury yield was 2.97% at the start of this year, but Vanguard's long-term Treasury fund VLGSX returned 22.7% as of the end of August.
It is magical thinking to believe that bonds can earn higher rates of return than implied by today’s low-interest-rate environment.
He's an intelligent man, but mistakes like this are just inexcusable IMHO.
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by Broken Man 1999 » Sun Sep 08, 2019 4:11 pm

willthrill81 wrote:
Sun Sep 08, 2019 3:33 pm
YRT70 wrote:
Sun Sep 08, 2019 1:48 pm
Curious to hear what other people think about this article. I'm aware that MC simulations have serious limitations but I think they can be interesting nonetheless.
I'm curious as to why you find a tool with serious limitations to be interesting.
As a current retiree, I simply don't want our retirement to be interesting! :shock:

We started withdrawals from our retirement portfolio in 2015. At this point in time we have more than we started with in 2015. THAT, truthfully has been interesting. A growing portfolio with withdrawals is OK to be interesting. A declining portfolio wouldn't be nearly as interesting. :D

So far, so good. DW and I should be finished our home improvements this year. A new front door and a bathroom remodel for DW's bathroom, and we can drop our withdrawals down again. Last year we just exceeded the 12% bracket a bit. This year should be about the same. Next year should be back in the 12% bracket totally.

There are many ways to lower withdrawals available to a retiree in many cases.I figured with the portfolio returns we have been getting, it made sense to aggressively complete expensive activities. After the remodels our only lumpy expenses might be a roof in a few years Our trusty 2008 vehicle only has 89,000 miles on it.

If one has made it to age of retirement, there is no reason to think anyone would not keep an eye on expenses, after all normal retirees have had 30 to 40 years of living within their means. Retirees aren't suddenly going to go brain dead just because they are retired.

Even at our level of spending, we could easily reduce spending if necessary.

I find these type studies simply give an idea of what spending might be possible, but that spending can be increased or lowered. Very variable, very personal.

The studies are a good place to start, but that is about the extent of their value, IMHO.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by visualguy » Sun Sep 08, 2019 4:22 pm

willthrill81 wrote:
Sun Sep 08, 2019 3:26 pm
But at the end of the day, all of this SWR discussion is moot because virtually no one is using a SWR approach to determine their withdrawals. Everyone makes adjustments.
I keep hearing this, but this is just another way to say lower your withdrawal rate when times are bad. Not really something I want to do because I want to enjoy my retirement years (and particularly the first decade) even if the stock market stagnates. Once those years are gone, there isn't a second chance. Also, I'm not planning on having a large amount of expenses that can be cut without a meaningful impact.

Maybe the answer is to allocate a bucket in TIPS, CDs, or some such thing for the first decade, and spend from that regardless of what happens in the markets.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by willthrill81 » Sun Sep 08, 2019 4:27 pm

visualguy wrote:
Sun Sep 08, 2019 4:22 pm
willthrill81 wrote:
Sun Sep 08, 2019 3:26 pm
But at the end of the day, all of this SWR discussion is moot because virtually no one is using a SWR approach to determine their withdrawals. Everyone makes adjustments.
I keep hearing this, but this is just another way to say lower your withdrawal rate when times are bad. Not really something I want to do because I want to enjoy my retirement years (and particularly the first decade) even if the stock market stagnates. Once those years are gone, there isn't a second chance. Also, I'm not planning on having a large amount of expenses that can be cut without a meaningful impact.

Maybe the answer is to allocate a bucket in TIPS, CDs, or some such thing for the first decade, and spend from that regardless of what happens in the markets.
It sounds like a SPIA, a liability matching portfolio, or some combination thereof may serve you well if you're unable or unwilling to reduce your spending. Of course, the downside of these strategies is that they tend to drastically reduce your portfolio's upside potential (no pun intended!), but that might be a good trade-off for you.

But keep in mind that research has shown that big spending reductions aren't necessary. Derek Tharp found that taking a permanent 3% cut in your withdrawals, basically foregoing your inflation adjustment for that year, any time that stocks were down the prior year boosted the SWR from 4.08% for 30 year retirements to 4.56%.
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by EnjoyIt » Sun Sep 08, 2019 4:28 pm

flyingaway wrote:
Sun Sep 08, 2019 2:02 pm
I use the 4% rule as a guide for financial independence. I started slowing down and feeling comfortable when my portfolio satisfied the 4% rule. I also started to enjoy life more after that time.

I am a little bit tired of daily talking and debating about these rules. If you don't like it, work for a few more years. If you have no choice, work (trim) on your retirement budget.

Frankly speaking, I am thankful that someone figured out the 4% rule so that I know where I am.
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by goodenyou » Sun Sep 08, 2019 4:33 pm

visualguy wrote:
Sun Sep 08, 2019 4:22 pm
willthrill81 wrote:
Sun Sep 08, 2019 3:26 pm
But at the end of the day, all of this SWR discussion is moot because virtually no one is using a SWR approach to determine their withdrawals. Everyone makes adjustments.
I keep hearing this, but this is just another way to say lower your withdrawal rate when times are bad. Not really something I want to do because I want to enjoy my retirement years (and particularly the first decade) even if the stock market stagnates. Once those years are gone, there isn't a second chance. Also, I'm not planning on having a large amount of expenses that can be cut without a meaningful impact.

Maybe the answer is to allocate a bucket in TIPS, CDs, or some such thing for the first decade, and spend from that regardless of what happens in the markets.
A rising equity glide path
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by willthrill81 » Sun Sep 08, 2019 4:35 pm

goodenyou wrote:
Sun Sep 08, 2019 4:33 pm
visualguy wrote:
Sun Sep 08, 2019 4:22 pm
willthrill81 wrote:
Sun Sep 08, 2019 3:26 pm
But at the end of the day, all of this SWR discussion is moot because virtually no one is using a SWR approach to determine their withdrawals. Everyone makes adjustments.
I keep hearing this, but this is just another way to say lower your withdrawal rate when times are bad. Not really something I want to do because I want to enjoy my retirement years (and particularly the first decade) even if the stock market stagnates. Once those years are gone, there isn't a second chance. Also, I'm not planning on having a large amount of expenses that can be cut without a meaningful impact.

Maybe the answer is to allocate a bucket in TIPS, CDs, or some such thing for the first decade, and spend from that regardless of what happens in the markets.
A rising equity glide path
Yes, but subsequent analysis done by many here has shown that that doesn't really work any better (and maybe worse) than maintaining a steady AA throughout retirement.
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by Tdubs » Sun Sep 08, 2019 4:35 pm

livesoft wrote:
Sun Sep 08, 2019 1:56 pm
There are many articles nowadays mentioning that 4% is problematic going forward, so I don't see anything new in this article other than it has caught your attention. Have you looked at all the other pieces that pretty much state the same thing?
Well, this is positive and encouraging.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by stlutz » Sun Sep 08, 2019 4:37 pm

willthrill81 wrote:
Sun Sep 08, 2019 4:27 pm
But keep in mind that research has shown that big spending reductions aren't necessary. Derek Tharp found that taking a permanent 3% cut in your withdrawals, basically foregoing your inflation adjustment for that year, any time that stocks were down the prior year boosted the SWR from 4.08% for 30 year retirements to 4.56%.
Isn't that the same thing as using a 3.5% withdrawal rate, given that the market going down for a particular year is not that unusual?

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by willthrill81 » Sun Sep 08, 2019 4:42 pm

stlutz wrote:
Sun Sep 08, 2019 4:37 pm
willthrill81 wrote:
Sun Sep 08, 2019 4:27 pm
But keep in mind that research has shown that big spending reductions aren't necessary. Derek Tharp found that taking a permanent 3% cut in your withdrawals, basically foregoing your inflation adjustment for that year, any time that stocks were down the prior year boosted the SWR from 4.08% for 30 year retirements to 4.56%.
Isn't that the same thing as using a 3.5% withdrawal rate, given that the market going down for a particular year is not that unusual?
Starting at 4.56% is not the same as starting at 3.5%. According to Vanguard, U.S. stocks have posted losses only about 28% of the time. It would take almost nine 3% spending cuts to work back to 3.5% withdrawals. A year 2000 retiree would have only had five such cuts by now, almost two-thirds of the way through their retirement.

Basically, this strategy is intended to safely front-load withdrawals compared to the standard 4% rule, although I would certainly argue that some type of adjustment to allow for withdrawals to increase should be used as well.
Last edited by willthrill81 on Sun Sep 08, 2019 4:45 pm, edited 1 time in total.
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by stlutz » Sun Sep 08, 2019 4:45 pm

visualguy wrote:
Sun Sep 08, 2019 4:22 pm
willthrill81 wrote:
Sun Sep 08, 2019 3:26 pm
But at the end of the day, all of this SWR discussion is moot because virtually no one is using a SWR approach to determine their withdrawals. Everyone makes adjustments.
I keep hearing this, but this is just another way to say lower your withdrawal rate when times are bad. Not really something I want to do because I want to enjoy my retirement years (and particularly the first decade) even if the stock market stagnates. Once those years are gone, there isn't a second chance. Also, I'm not planning on having a large amount of expenses that can be cut without a meaningful impact.

Maybe the answer is to allocate a bucket in TIPS, CDs, or some such thing for the first decade, and spend from that regardless of what happens in the markets.
I think the obsession with SWR on this forum (and elsewhere) does show that a lot of people want annuity-type income. All of the SWR talk is just asking how I can make a portfolio of risk assets act like an annuity. The answer is that you can't.

The problem people have with annuities is that nobody want to turn over their nest egg to an insurance company. I know I don't. There are options you can add to annuity purchase to mitigate this (e.g. a cash refund option), but of course that reduces your annuity payout.

For my own retirement, my current plan will be to purchase a deferred annuity that starts paying at age 80 or 85. They are pretty cheap and basically take care of the longevity risk as well as making-poor-decisions-as-one-ages risk. Then I can use my balanced portfolio to take care of the earlier years, which is a more manageable prospect.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by rich126 » Sun Sep 08, 2019 4:45 pm

In theory (well, kind of) if you have lower rates, then usually you have lower inflation so that should help. Now whether lower inflation applies to the items a retired person uses, that is another story. Lower rates probably help those still in the work force the most since it usually means lower loan rates.

And, of course, just because rates are low now, there is no guarantee they will remain low for 30 years.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by goodenyou » Sun Sep 08, 2019 4:48 pm

willthrill81 wrote:
Sun Sep 08, 2019 4:35 pm
goodenyou wrote:
Sun Sep 08, 2019 4:33 pm
visualguy wrote:
Sun Sep 08, 2019 4:22 pm
willthrill81 wrote:
Sun Sep 08, 2019 3:26 pm
But at the end of the day, all of this SWR discussion is moot because virtually no one is using a SWR approach to determine their withdrawals. Everyone makes adjustments.
I keep hearing this, but this is just another way to say lower your withdrawal rate when times are bad. Not really something I want to do because I want to enjoy my retirement years (and particularly the first decade) even if the stock market stagnates. Once those years are gone, there isn't a second chance. Also, I'm not planning on having a large amount of expenses that can be cut without a meaningful impact.

Maybe the answer is to allocate a bucket in TIPS, CDs, or some such thing for the first decade, and spend from that regardless of what happens in the markets.
A rising equity glide path
Yes, but subsequent analysis done by many here has shown that that doesn't really work any better (and maybe worse) than maintaining a steady AA throughout retirement.
OK. How about a SPIA for an Essential Portfolio + Equities/Discretionary Portfolio strategy?
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by willthrill81 » Sun Sep 08, 2019 4:55 pm

goodenyou wrote:
Sun Sep 08, 2019 4:48 pm
willthrill81 wrote:
Sun Sep 08, 2019 4:35 pm
goodenyou wrote:
Sun Sep 08, 2019 4:33 pm
visualguy wrote:
Sun Sep 08, 2019 4:22 pm
willthrill81 wrote:
Sun Sep 08, 2019 3:26 pm
But at the end of the day, all of this SWR discussion is moot because virtually no one is using a SWR approach to determine their withdrawals. Everyone makes adjustments.
I keep hearing this, but this is just another way to say lower your withdrawal rate when times are bad. Not really something I want to do because I want to enjoy my retirement years (and particularly the first decade) even if the stock market stagnates. Once those years are gone, there isn't a second chance. Also, I'm not planning on having a large amount of expenses that can be cut without a meaningful impact.

Maybe the answer is to allocate a bucket in TIPS, CDs, or some such thing for the first decade, and spend from that regardless of what happens in the markets.
A rising equity glide path
Yes, but subsequent analysis done by many here has shown that that doesn't really work any better (and maybe worse) than maintaining a steady AA throughout retirement.
OK. How about a SPIA for an Essential Portfolio + Equities/Discretionary Portfolio strategy?
I believe that such a strategy, sometimes referred to as income flooring, is perfectly acceptable. Wade Pfau has actually advocated that approach as well. A SPIA can be used in conjunction with SS benefits, pension, etc. to cover essential spending, with the remainder of the portfolio being invested more aggressively for discretionary funds and spending being cut if/when needed.

The wrinkle that visualguy may have with this is that it seems that s/he does not want to reduce spending at all "even if the stock market stagnates." That's not very compatible with the above strategy. If you never want to reduce your spending, then you're left with annuities and/or choosing an initial WR that you have faith will not need to be cut down the road. I don't personally like either of those options, but I'm willing to adjust discretionary spending in retirement based on portfolio performance.
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by goodenyou » Sun Sep 08, 2019 5:00 pm

willthrill81 wrote:
Sun Sep 08, 2019 4:55 pm
goodenyou wrote:
Sun Sep 08, 2019 4:48 pm
willthrill81 wrote:
Sun Sep 08, 2019 4:35 pm
goodenyou wrote:
Sun Sep 08, 2019 4:33 pm
visualguy wrote:
Sun Sep 08, 2019 4:22 pm


I keep hearing this, but this is just another way to say lower your withdrawal rate when times are bad. Not really something I want to do because I want to enjoy my retirement years (and particularly the first decade) even if the stock market stagnates. Once those years are gone, there isn't a second chance. Also, I'm not planning on having a large amount of expenses that can be cut without a meaningful impact.

Maybe the answer is to allocate a bucket in TIPS, CDs, or some such thing for the first decade, and spend from that regardless of what happens in the markets.
A rising equity glide path
Yes, but subsequent analysis done by many here has shown that that doesn't really work any better (and maybe worse) than maintaining a steady AA throughout retirement.
OK. How about a SPIA for an Essential Portfolio + Equities/Discretionary Portfolio strategy?
I believe that such a strategy, sometimes referred to as income flooring, is perfectly acceptable. Wade Pfau has actually advocated that approach as well. A SPIA can be used in conjunction with SS benefits, pension, etc. to cover essential spending, with the remainder of the portfolio being invested more aggressively for discretionary funds and spending being cut if/when needed.

The wrinkle that visualguy may have with this is that it seems that s/he does not want to reduce spending at all "even if the stock market stagnates." That's not very compatible with the above strategy. If you never want to reduce your spending, then you're left with annuities and/or choosing an initial WR that you have faith will not need to be cut down the road. I don't personally like either of those options, but I'm willing to adjust discretionary spending in retirement based on portfolio performance.
Guyton-Klinger? Or ad hoc?
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by randomguy » Sun Sep 08, 2019 5:01 pm

Day9 wrote:
Sun Sep 08, 2019 3:51 pm
According to immediate annuities dot com, a 40-year old man can buy a 4.4% yearly payout SPIA today. A 65-year old man can get 6.5%. I do not know if this website has been updated in the last few months where long term rates have plummeted. But if all these experts, monte carlo simulations, and high current valuations & low yields are telling me to aim for a 3% or even lower SWR then I would be very tempted to annuitize a big chunk of my portfolio. Normally I would only suggest someone annuitize a big chunk of their portfolio late in life, like at age 80+, to hedge against longevity risk.

https://www.immediateannuities.com/annuity-calculators/
Those are nominal numbers. SWR are real ones.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by willthrill81 » Sun Sep 08, 2019 5:02 pm

goodenyou wrote:
Sun Sep 08, 2019 5:00 pm
willthrill81 wrote:
Sun Sep 08, 2019 4:55 pm
goodenyou wrote:
Sun Sep 08, 2019 4:48 pm
willthrill81 wrote:
Sun Sep 08, 2019 4:35 pm
goodenyou wrote:
Sun Sep 08, 2019 4:33 pm


A rising equity glide path
Yes, but subsequent analysis done by many here has shown that that doesn't really work any better (and maybe worse) than maintaining a steady AA throughout retirement.
OK. How about a SPIA for an Essential Portfolio + Equities/Discretionary Portfolio strategy?
I believe that such a strategy, sometimes referred to as income flooring, is perfectly acceptable. Wade Pfau has actually advocated that approach as well. A SPIA can be used in conjunction with SS benefits, pension, etc. to cover essential spending, with the remainder of the portfolio being invested more aggressively for discretionary funds and spending being cut if/when needed.

The wrinkle that visualguy may have with this is that it seems that s/he does not want to reduce spending at all "even if the stock market stagnates." That's not very compatible with the above strategy. If you never want to reduce your spending, then you're left with annuities and/or choosing an initial WR that you have faith will not need to be cut down the road. I don't personally like either of those options, but I'm willing to adjust discretionary spending in retirement based on portfolio performance.
Guyton-Klinger? Or ad hoc?
I prefer using the time value of money formula. Input your current portfolio value, your desired terminal (ending) value, your assumed rate of return, and your remaining periods to calculate the current withdrawal.
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by randomguy » Sun Sep 08, 2019 5:09 pm

Northern Flicker wrote:
Sun Sep 08, 2019 4:01 pm

To be clear, it is the historically low real yields that are the problem.

Higher equity valuations are only a problem to the extent that they are high in relation to low real yields. In a low inflation environment, less pricing power drives lower future expected revenue and a lower discount rate for the future revenue, leading to higher valuations and lower nominal expected return. But it is of course the real return that matters.
Are our real yields noticeably lower than the time period from ~1936-1960 where the 4% rule did fine? Low yields alone aren't enough. It is the high valuation and low yields that scares people. Now if our valuations are high or correct for the situation is hard to say. Maybe we are about to hit a 20 year period of rates similiar today (or lower) and those valuation make a lot of sense. Or as this simulations predict everything can come crashing down.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by visualguy » Sun Sep 08, 2019 5:23 pm

willthrill81 wrote:
Sun Sep 08, 2019 4:55 pm
goodenyou wrote:
Sun Sep 08, 2019 4:48 pm
OK. How about a SPIA for an Essential Portfolio + Equities/Discretionary Portfolio strategy?
I believe that such a strategy, sometimes referred to as income flooring, is perfectly acceptable. Wade Pfau has actually advocated that approach as well. A SPIA can be used in conjunction with SS benefits, pension, etc. to cover essential spending, with the remainder of the portfolio being invested more aggressively for discretionary funds and spending being cut if/when needed.

The wrinkle that visualguy may have with this is that it seems that s/he does not want to reduce spending at all "even if the stock market stagnates." That's not very compatible with the above strategy. If you never want to reduce your spending, then you're left with annuities and/or choosing an initial WR that you have faith will not need to be cut down the road. I don't personally like either of those options, but I'm willing to adjust discretionary spending in retirement based on portfolio performance.
For me and my wife, maybe the answer is a safe bucket (like CDs) to cover everything during the "good years" (55-68), a deferred annuity for late in life (80+), and take our chances with stocks for the time in between (68-80) and for our reserve money. If we have to cut expenses, we don't want to do it during the "good years", or during the late stages, but maybe ok to some extent during the years in between.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by vitaflo » Sun Sep 08, 2019 7:40 pm

Seasonal wrote:
Sun Sep 08, 2019 3:08 pm
Will do good wrote:
Sun Sep 08, 2019 2:37 pm
Not sure I buy into "This time is different".
The SWR will likely be the same as every other time the 10 year treasury was yielding 1.5% and the S&P 500 had a p/e of 20x. How have things usually worked out with that sort of starting point?
The closest comparable would be June of 1946. PE was 22 and 10yr yield was 2.2%. Using a 4% SWR and starting at $1m you would have ended with $1.6m. Inflation was 3.3% that month and skyrocketed to almost 20% a year later, and it still worked out just fine.

We haven't had a time where the 10yr yield was 1.5%, so in that sense, we are in uncharted waters.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by nisiprius » Sun Sep 08, 2019 7:54 pm

I can't assign any meaning to the statement "Does the 4% Rule Work in Today's Markets?" The rule isn't going to be used at a single point in time, it's going to be applied repeatedly over the next few decades.

Did Dr. Pfau mean to say "Will the 4% Rule Work in Tomorrow's Markets?"
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by bertilak » Sun Sep 08, 2019 8:14 pm

nisiprius wrote:
Sun Sep 08, 2019 7:54 pm
I can't assign any meaning to the statement "Does the 4% Rule Work in Today's Markets?" The rule isn't going to be used at a single point in time, it's going to be applied repeatedly over the next few decades.

Did Dr. Pfau mean to say "Will the 4% Rule Work in Tomorrow's Markets?"
That's what I was getting at in my post above. The 4% rule is (was?) supposed to apply to the future. Well here we are now in somebody's future and the rule given to that somebody -- for their future -- doesn't work? If they have to cut back from 4% to 3% their nest egg may now be 25% short.
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by David Jay » Sun Sep 08, 2019 8:42 pm

The “Newsletter” (at the link in the OP) doesn’t show any of Wade’s assumptions, so we don’t know what kind of numbers he used. I guess the reaction to his white-paper where he documented the assumption of 1% AUM was less than positive, so he has simply stopped detailing his assumptions.

Not impressed.
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by HomerJ » Sun Sep 08, 2019 9:05 pm

vineviz wrote:
Sun Sep 08, 2019 2:07 pm
YRT70 wrote:
Sun Sep 08, 2019 1:48 pm

Wade writes: "The 4% rule may work for today’s retirees, but it is far from a sure bet or a “safe” spending strategy."

Curious to hear what other people think about this article. I'm aware that MC simulations have serious limitations but I think they can be interesting nonetheless.
It seems like a sensible analysis to me. I think anyone planning an imminent retirement must somehow account for the current reality of high equity valuations combined with low bond yields.
4% withdrawal rate ALREADY accounts for the current reality of high equity valuations combined with low bond yields.

4% withdrawals isn't for good or even average times... It's WORST case times.

Someone comes in here and says "Oh man, returns look to be lower than historical averages going forward!!", and most of us (who have been paying attention) say "Oh, good thing I was already prepared for lower than historical averages, so I don't have to change a thing".
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by HomerJ » Sun Sep 08, 2019 9:07 pm

And Wade Pfau posted that 2.5% was the new 4% back in 2011.

(He also assumed 1% expenses in that prediction, which doesn't apply to Bogleheads. Is he still assuming 1% fees?)
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