4% rule failures?

[tuixiu]

Curious if anyone has ever heard of a real life example of someone failing in FIRE when using a reasonable safe withdrawal rate, and if so how was it realized and handled?

I don't mean like that garrulous legend who was in these forums before my time, I mean someone taking a 4%ish type of withdrawal from a reasonably allocated stash and realizing there was no way it could continue so they went back to work out of necessity. I don't doubt it has happened and I would think the recent economy might have produced a few.

I'm trying to imagine how one realizes they are one of the lines that end up under the bar on firecalc, since it isn't always obvious and many of those lines that look sketchy end up being able to successfully support someone for over 50 years.

Then taking into account future income changes like SS, the Bernicke (sp?) spending theories, etc. I'm really interested in how someone decides it is 4th and 10 and they need to punt on FIRE.

 

[REWahoo]

...someone taking a 4%ish type of withdrawal from a reasonably allocated stash and realizing there was no way it could continue so they went back to work out of necessity.

We've seen many return to work out of choice, not financial necessity. There were more than a few who returned to work out of perceived necessity when the market went into the tank in 2008, unsure their nest egg would recover. We've seen one or two who apparently didn't have a "reasonably allocated stash" see their heavily weighted portfolio crash and burn, but they generally faded away and didn't report how they coped.

However, I don't recall anyone who ever met all your criteria above who owned up to it on this board. That isn't to say it has never happened, only that I don't remember ever reading about it here.

 

[lowflyer]

REWahoo’s makes the point that there are many different stories and ER comes in different shapes and sizes. Someone who directly fits your description is likely not monitoring this forum anymore, but we’ll see.

Another thing that fits our situation is that back in 2007, things looked real good and ER seemed to be a certainty. Then with the market drop, I “perceived” that things had changed enough that I stepped-up my part-time work (thankfully doing something I enjoy.) Things have worked out better than I “perceived” at that time and earlier this year, I began moving back into full ER mode. Since we have not had to pull the full 4% as we had originally planned, along with a re-vamped portfolio, things are better now.

 

[Rustic23]

Go to Walmart, and ask the guy that give you a cart.

 

[Midpack]

However, I don't recall anyone who ever met all your criteria above who owned up to it on this board. That isn't to say it has never happened, only that I don't remember ever reading about it here.

+1. Basic human nature would prevent most people from admitting their plan failed, they would just quietly go back to work or otherwise adjust. A good thing to keep in mind when reading anything on the internet...

 

[ral3210]

Even with the results of the last 10 years in the markets, taking 4% and adjusting for inflation would last for several more years. So, if people have been forced back to work it is not b/c of taking 4% out. The problem is that 4% will not work over 30 or 40 years for many b/c expense ratios are often not considered, and b/c future returns will be different than the past 100 years. Also, the sequence of returns early on can kill any plan dependent on stocks. After losing some money in 2008 I was fortunate to load up on long term bonds with YTM at the time of 10% for the next 20 years. Companies that some thought would go bankrupt, such as Metlife.

 

[Jake46]

We've seen many return to work out of choice, not financial necessity. There were more than a few who returned to work out of perceived necessity when the market went into the tank in 2008, unsure their nest egg would recover. We've seen one or two who apparently didn't have a "reasonably allocated stash" see their heavily weighted portfolio crash and burn, but they generally faded away and didn't report how they coped.

However, I don't recall anyone who ever met all your criteria above who owned up to it on this board. That isn't to say it has never happened, only that I don't remember ever reading about it here.

+1

 

[ERD50]

Yes, tough to say. Some people have dropped off that probably went back to work, but I don't know if they were doing 4% and had a diversified portfolio. Could be due to other issues. There was at least one painful case of a failure due to a very non-diversified portfolio. I applaud that person for admitting it, as it does help others to see the real risks behind that approach.

Also, remember that the historical data says that a 30 year 4% WR and a diversified portfolio means that you could see your portfolio drop to less than half what it was (in buying power) and still 'succeed'. I think most would be pretty frightened by that, and might go back to work or make other adjustments if that happened.

-ERD50

 

[Moemg]

I will honestly admit that when we had that incredible drop in 2008 I questioned whether I should return to work but after adjusting my 4% for the new reality I decided against it . I was also close to SS age so that made a difference . Had I been in my 50's I probably would have taken a part time job for awhile just to be sure that my portfolio survived .

 

[Rich_by_the_Bay]

I will honestly admit that when we had that incredible drop in 2008 I questioned whether I should return to work but after adjusting my 4% for the new reality I decided against it . I was also close to SS age so that made a difference . Had I been in my 50's I probably would have taken a part time job for awhile just to be sure that my portfolio survived .

Yup. It scared me into working part-time for an extra year. But I think that had I already retired at the time I would have just hung in there.

 

[Rustic23]

I don't play with FireCalc a great deal, however, if you just push submit when it comes up with the default 30,000 and 750,000, you get a 94.5% success rate, and you don't go below the zero line for 22 years. So I am not real sure there are that many around here that would have had the importunity for their portfolio to go down that much. Even a 50% reduction in that portfolio, would still leave 375,000 and would last 12 years at zero interest. I guess what I am saying, is I am not sure it has gotten bad enough for a balanced portfolio to have failed, if ones expenses were accurately estimated to begin with. I also think most on this board over estimate their expenses, and that plays into it also.

 

[haha]

Even a 50% reduction in that portfolio, would still leave 375,000 and would last 12 years at zero interest.

My guess is that once a portfolio that is one's only or main source of support hits $375,000, life changes, and likely forever.

Ha

 

[lowflyer]

A few weeks ago, someone posted a link to an article addressing how the 4% rule fared during the recent market upset. With the market recovering quite well since early 2009, the long-term damage was less than we maybe would have expected in February and March of 2009. It was pretty scary back then and it's not unreasonable that some would consider returning to some level of work. The fact is, that while the market downturn was real, we may have "perceived" we were at more risk than we were, so people act accordingly.

 

[Arnie]

I'm trying to imagine how one realizes they are one of the lines that end up under the bar on firecalc

I would think one way to see if you are "on one of those lines" is to redo the calculations you made to determine if you were ready to retire in the first place. If the calculations still come out telling you to go for it, you are still fine. For example (oversimplifying) someone who retired with a 4% SWR based on needing 40k per year and having $1 million in savings is as good off five years later if they meet the same basic criteria. If they only have 500k left and cannot live on 20k per year, they are headed under the bar.

I imagine most everyone is doing some sort of gut check regularly and has a basic feel where they are and whether they need to adjust income or spending.

 

[Rustic23]

Ha,
I would agree, and I am not sure I could set there for long, feeling safe that FireCalc says all will be well eventually.

 

[Nords]

Curious if anyone has ever heard of a real life example of someone failing in FIRE when using a reasonable safe withdrawal rate, and if so how was it realized and handled?

We've had people whose ER plans were derailed by their investments not working out the way they'd expected, and IIRC one of them was either ER'd or about to.

But their portfolios were highly concentrated or highly volatile, so they don't meet your "reasonable" criteria.

I suppose H0cU$ is a failed ER, but his asset allocation is overly conservative and his credibility highly suspect.

Raddr has been running a long-term thread on his board about the hapless Y2K ER who refuses to reduce his spending to reflect reality. As his withdrawal rate approaches 10% it looks pretty terminal for that guy but who knows, he might still pull it out.

I think the vast majority of ERs would abandon the strict 4% rule at the second year of trouble, electing to cut spending or seek part-time work (or both). They wouldn't necessarily post about it.

I suppose a second failed ER scenario would be explosive growth of health insurance expenses or having to spend outrageous sums of money to pay the healthcare bills for an uninsured family member. Again, posting here might not be their highest priority.

It's a shame that such a potentially educational topic is self-limiting by its own nature.

 

[SecondCor521]

A few years ago I pondered this question in a little different way -- assuming a hypothetical "ideal" retiree who is taking 4% from an 80/20 port and planning on exactly 30 years left, then what kind of test could be applied to see if one needed to punt?

It looks like all of the failing sequences in that scenario have the property that you have less in inflation adjusted dollars in your port than you began with at the 10 year mark. So one could use that as a danger signal.

Note that there are some successful sequences that also meet the criteria in the previous paragraph, so it's not a guaranteed failure at that point.

I think most people in that situation would be nervous enough to reevaluate their plans anyway (or would have already done so somewhere along the way in those first ten years).

2Cor521

 

[ERD50]

I would think one way to see if you are "on one of those lines" is to redo the calculations you made to determine if you were ready to retire in the first place. If the calculations still come out telling you to go for it, you are still fine. For example (oversimplifying) someone who retired with a 4% SWR based on needing 40k per year and having $1 million in savings is as good off five years later if they meet the same basic criteria. If they only have 500k left and cannot live on 20k per year, they are headed under the bar.

It would seem that way, but it's not.

If you run FIRECALC again, you are effectively subjecting yourself to two sequential strings of the worst periods in history. Or at least the 'bad' string you may have experienced, followed by the worst. It doesn't reflect history at that point. We can only guess what the future will be.

Consider those strings that dip to 50% and then recover. If you re-run with that amount, you obviously have a much higher failure rate with that amount (softened a bit, since your portfolio length has shortened by x years). It's going to take that 50% portfolio, and once again subject it to the same conditions that caused it to drop 50% in the first place.

You will need to drop your WR to ~ 2% if you want to be that robust.

-ERD50

 

[REWahoo]

It would seem that way, but it's not.

+1

 

[walkinwood]

I've written about my experience on this board
http://www.early-retirement.org/forums/f29/er-on-hold-47618.html

Happy to say that as of last month, we're back in ER mode. Returning to work when needed has always been one of the contingency plans. We also have a 'reasonable' portfolio allocation of 60 equities / 40 bonds. I've discussed these aspects on this forum too.

Otar writes about a test to see if your porfolio is on track. I think it has a check about 4 years into retirement. You'll have to look into it, but I clearly remember the topic.

 

[W2R]

Curious if anyone has ever heard of a real life example of someone failing in FIRE when using a reasonable safe withdrawal rate, and if so how was it realized and handled?

I don't mean like that garrulous legend who was in these forums before my time, I mean someone taking a 4%ish type of withdrawal from a reasonably allocated stash and realizing there was no way it could continue so they went back to work out of necessity. I don't doubt it has happened and I would think the recent economy might have produced a few.

I'm trying to imagine how one realizes they are one of the lines that end up under the bar on firecalc, since it isn't always obvious and many of those lines that look sketchy end up being able to successfully support someone for over 50 years.

Then taking into account future income changes like SS, the Bernicke (sp?) spending theories, etc. I'm really interested in how someone decides it is 4th and 10 and they need to punt on FIRE.

It seems to me that like many things in life, ER is a gamble. No matter what SWR you select, it is still a gamble - - because we do not know what the future will bring, or if future market performance will bear any relationship whatsoever to what we have seen in the past.

I think this is why so many here were willing to tighten our belts, or even work temporarily during the 2008-2009 market crash. Even though the portfolios of those who did so might have been OK by 2010, at the time it only seemed prudent to take a proactive stance.

 

[Arnie]

It would seem that way, but it's not.

I used the "one of those lines" and "under the bar" terminology from the original post but did not mean to limit the concept to just FIRECALC. Whether it is FIRECALC or anything else, I would not rely on just one tool.

I mean that whatever logic you used to determine you could retire is just as valid (or invalid) if you rerun it years later. Think of it as though you had really not retired previously and you trying to see if you could do so now with current assumptions for portfolio size, budget, years remaining, etc.

All the various tools/techniques have assumptions and inherent weaknesses but if the results of your periodic reevaluation have gotten significantly more dismal you probably have reason to be concerned.

I suppose one could say "we've been through a real rough patch so it can only get better", but I would be uncomfortable starting a retirement underfunded on that premise - why would I be comfortable continuing one (without adjustments)?

 

[ERD50]

I used the "one of those lines" and "under the bar" terminology from the original post but did not mean to limit the concept to just FIRECALC. Whether it is FIRECALC or anything else, I would not rely on just one tool.

Agreed, but I think the underlying methodology makes FIRECALC one of the best tools out there. Everything else I've tried pretty much converges towards a similar ballpark.

I mean that whatever logic you used to determine you could retire is just as valid (or invalid) if you rerun it years later. Think of it as though you had really not retired previously and you trying to see if you could do so now with current assumptions for portfolio size, budget, years remaining, etc.

...

I suppose one could say "we've been through a real rough patch so it can only get better", but I would be uncomfortable starting a retirement underfunded on that premise - why would I be comfortable continuing one (without adjustments)?

Disagree (at least as far as analysis of past data, as FIRECALC does).

We didn't have two Great Depressions in a row. We didn't have two periods of high inflation like the 80's in a row. The market conditions have been cyclical.

So you are saying, "My hypothetical portfolio just barely survived the inflation of the 80's (or the GD), I need enough left over to do it all over again".

If you want enough buffer to provide some assurance that you could survive a future scenario that might be like two past bad periods strung together, then that would be a reasonable approach. But it's assuming the future will be worse than the worst of the past. And it might be reasonable to allow for that kind of buffer.

But it isn't correct to say that you can just run FIRECALC again after a bad stretch, and say that that new number is the new 'correct' number. By that logic, the you are really saying that those squiggly lines you see that dip, and then correct themselves over the long haul do not really exist - that they all ended up failures. But they didn't.

I know it's a bit tough to get your head around. I've been where you are, and it took me a while to absorb it. It seems like we are fooling ourselves, but we aren't. It's just the way the data runs. Again, future may be different, it's just a benchmark to use.


-ERD50

 

[Arnie]

So you are saying, "My hypothetical portfolio just barely survived the inflation of the 80's (or the GD), I need enough left over to do it all over again".

Nope, not saying that. But let me ask you this ... Take two people, A & B. Both are the same age. Both have same budget. Both have same portfolio. Only difference is A retired five years ago and is doing a gut check to see how things are looking, and B is contemplating retirement now. Both of them see the same thing, that it does not look so hot, 2% SWR advised per whatever tool of choice. How would you advise each of them?

 

[73ss454]

I'm one of the ones that ran out and got a PT job in April of 09 when I thought the world was coming to an end. I'm happy to report that in Oct of this year I ended that as I'm only 5 months away from SS and our port has recovered to that of Oct of 07.

I know Dory had adjusted Firecalc for the large down draft. Does anyone know if it was again adjusted for the large come back in the last year and 1/2?