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4% rule gone for good?
Old 05-09-2015, 12:41 PM   #1
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4% rule gone for good?

Here's a nice condensation of the current debate regarding the safe withdrawal rate (it includes photos of Bill Bengen, originator of the 4% rule, relaxing during his well-deserved retirement):

New Math for Retirees and the 4% Withdrawal Rule - The New York Times

Quote:
"Critics of the rule point out that it is based on conditions in the United States during a very specific time in history; it also doesnít take into account items like investments costs, taxes, different time horizons or the reality that most retirees donít spend their money in a linear fashion. Some people may want to spend more early in retirement and may be willing, even comfortable, making cuts when the market plunges once again. And if retirees want to leave money to their children, they may need to trim their spending further."
I'd say those criticisms could be leveled at any withdrawal system. A system by its very nature is never fully flexible or able to account for the unknown. All that said, there's no denying Bengen's accomplishment, which provided a dose of realism when it was badly needed and reset retiree expectations for a generation.
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Old 05-09-2015, 01:00 PM   #2
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The critics in the OP's quote don't seem to understand the 4% rule. It does include investment costs and taxes; those are part of the withdrawal.
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Old 05-09-2015, 01:05 PM   #3
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A system by its very nature is never fully flexible or able to account for the unknown. All that said, there's no denying Bengen's accomplishment, which provided a dose of realism when it was badly needed and reset retiree expectations for a generation.

I agree. Anything that gets one to start thinking about retirement (early or not) and asking themselves, "Now how am I going to do this" is a good start. Any start is better than none at all.
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Old 05-09-2015, 01:05 PM   #4
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I'd say those criticisms could be leveled at any withdrawal system. A system by its very nature is never fully flexible or able to account for the unknown.
The VPW System is completely Flexible unless the entire economy melts down. It is far safer than any SWR such as 4%, 3% or even 2%.... And will probably let you spend more money

VPW Method
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Old 05-09-2015, 01:10 PM   #5
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Meh.

If one reads 19th century English literature, there are often references to 'gentlemen', men of independent means who do not engage in any occupation or profession for gain, who are often referred to as 'three percenters'. That 'three percent' refers to their perpetuities, investments held by them or their families that pay out about a 3% annual return, and which they live on.

A three percent perpetuity corresponds pretty well with a 4% withdrawal from investments intended to last 25-30 years.

There will ALWAYS be external conditions that put a withdrawal system at risk. Some flexibility is needed.

The Retirement Calculator From Hell - Part I
The Retirement Calculator From Hell - Part II
The Retirement Calculator from Hell, Part III, including the quote "Thus, any estimate of long-term financial success greater than about 80% is meaningless."
Retirement Calculator from Hell, Part IV
The Retirement Calculator from Hell, Part V
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Old 05-09-2015, 01:11 PM   #6
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It is far safer than any SWR
Safer in what sense? You do still have money to withdraw, but the amounts go up and down and in a bad sequence could fall below your basic expenses. Fine, if you can tolerate this, but usually I think of safer in withdrawals as predictable and I can count on having at least enough money to live on.
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Old 05-09-2015, 01:19 PM   #7
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I'd say those criticisms could be leveled at any withdrawal system. A system by its very nature is never fully flexible or able to account for the unknown. All that said, there's no denying Bengen's accomplishment, which provided a dose of realism when it was badly needed and reset retiree expectations for a generation.
+1

I was w*rking for a financial services megacorp in the late 1990's. We had mutual fund sales people who would tell prospective retirees they should roll their 401k balances into (loaded) equity mutual funds.

They would say that the last 10, 20, 30, 40, and 50 year real returns on the S&P were 14%, 13%, 8%, 7%, and 9%. Certainly, with those historic returns, someone with a $500,000 nest egg could retire and withdraw $40,000, growing with inflation, while the value of the portfolio would also grow with inflation.

Bergen demonstrated that $20,000 was more reasonable. That was a huge difference.
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4% rule gone for good?
Old 05-09-2015, 07:51 PM   #8
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4% rule gone for good?

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+1



I was w*rking for a financial services megacorp in the late 1990's. We had mutual fund sales people who would tell prospective retirees they should ...

Fortunately, there is a way to tell when mutual fund salespeople are lying. If their lips are moving...


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Old 05-10-2015, 02:07 PM   #9
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I know a lot of retired people and none of them use a mathematical withdrawal system. My view is that 4% (or any %) is just a curb feeler -- you still have to pay attention.
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Old 05-10-2015, 02:25 PM   #10
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I know a lot of retired people and none of them use a mathematical withdrawal system. My view is that 4% (or any %) is just a curb feeler -- you still have to pay attention.
I agree that 4% is "just a curb feeler", however there are plans that will help you 'pay attention' better than you can by 'winging it'.

I am retired and I use a Mathematical withdrawal system called VPW (Variable Percentage Withdrawal).

Plans are good, because they work and take out all of the emotions. I retired early because I followed my plan and I will follow my plan in retirement as well.
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Old 05-10-2015, 02:31 PM   #11
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Plans are good, because they work and take out all of the emotions. I retired early because I followed my plan and I will follow my plan in retirement as well.
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Old 05-10-2015, 03:33 PM   #12
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I am retired and I use a Mathematical withdrawal system called VPW (Variable Percentage Withdrawal).
Really? I had no idea. I mean - you have never mentioned it here before
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Old 05-10-2015, 04:58 PM   #13
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This almost seems like a "death of equities" moment.

I'm just enough of a contrarian to believe that if the conventional wisdom grows acceptance that the 4% rule is "dead", then it's not.
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Old 05-10-2015, 05:55 PM   #14
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There have been many articles on the death of the 4% rule, most conclude 3% would be safer - duh? Google and read them all. They assume the future will be worse than any 30 year period in history from 1871 through present which includes dozens of recessions, the Great Depression, several World Wars and lesser. Might be, might not...

Of course VPW is safer, it's a variant of the % of remaining portfolio withdrawal method which cannot fail on paper. Of course you could still find yourself having to reduce spending dramatically along the way, but you'll never go broke...
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Old 05-10-2015, 05:57 PM   #15
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This almost seems like a "death of equities" moment.

I'm just enough of a contrarian to believe that if the conventional wisdom grows acceptance that the 4% rule is "dead", then it's not.
Remember that 4% is a 'Worst Case' historical number. So, in all probability if you retire in 2015, the odds are very much with you that your SWR will be much higher than 4%. Now there may be a WR that is less than 4% in the coming years, but you would have to be unlucky enough to hit that year on the nose.

So, many here throw the 4% number around, like it is some kind of average. Then they cushion their withdrawals by taking 3% or even 2.5%.... Which mostly demonstrates that they really don't have an understanding of where the 4% came from in the first place.
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Old 05-10-2015, 06:07 PM   #16
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So, many here throw the 4% number around, like it is some kind of average. Then they cushion their withdrawals by taking 3% or even 2.5%.... Which mostly demonstrates that they really don't have an understanding of where the 4% came from in the first place.
Or we're simply being conservative.

I began retirement with a 2.5% WR, which is now standing at 2% of my current portfolio value. I am expecting to increase my withdrawals later on in my retirement, and being conservative now suits me fine - it's what I need to make me feel comfortable early on in what I hope will be a long retirement period. I may continue with the current WR for a while - who knows?

We are not all looking to maximize the income from our portfolios. Some of us like the comfort that a conservative WR gives us. There are plenty of people and causes I can leave my money to when I go.
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Old 05-10-2015, 06:19 PM   #17
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Or we're simply being conservative.

I began retirement with a 2.5% WR, which is now standing at 2% of my current portfolio value. I am expecting to increase my withdrawals later on in my retirement, and being conservative now suits me fine - it's what I need to make me feel comfortable early on in what I hope will be a long retirement period. I may continue with the current WR for a while - who knows?

We are not all looking to maximize the income from our portfolios. Some of us like the comfort that a conservative WR gives us. There are plenty of people and causes I can leave my money to when I go.
+1. I like the idea of not having to worry about the stock market or ever running out of money more than buying a lot of consumer goods. I would rather have a financial security blanket in retirement and the leftover money can go to the food bank, go to a sanctuary for abused circus elephants or help our kids to not have to be wage slaves at high stress jobs.
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Old 05-10-2015, 06:28 PM   #18
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Remember that 4% is a 'Worst Case' historical number. So, in all probability if you retire in 2015, the odds are very much with you that your SWR will be much higher than 4%. Now there may be a WR that is less than 4% in the coming years, but you would have to be unlucky enough to hit that year on the nose.

So, many here throw the 4% number around, like it is some kind of average. Then they cushion their withdrawals by taking 3% or even 2.5%.... Which mostly demonstrates that they really don't have an understanding of where the 4% came from in the first place.
+1. That's what I'll be planning to withdraw except for the year like 2008..I'll have two years withdrawals saved in cash and will try to stretch it out for three years if it happens to be down term like 2000-2002 and not touch my portfolio. Other than my house, I'm not planning to leave anything behind for three kids.
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Old 05-10-2015, 06:59 PM   #19
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Really? I had no idea. I mean - you have never mentioned it here before
Heh, seems like I've seen it a time or two...

Still, I'm thinking VPW might make more sense to me. I need to study it some more, and I think I'd have to have it go to 0 way past the age I expect to die, just in case, but I think I like the flex for a very long retirement.
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Old 05-10-2015, 08:54 PM   #20
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Remember that 4% is a 'Worst Case' historical number. So, in all probability if you retire in 2015, the odds are very much with you that your SWR will be much higher than 4%. Now there may be a WR that is less than 4% in the coming years, but you would have to be unlucky enough to hit that year on the nose.

So, many here throw the 4% number around, like it is some kind of average. Then they cushion their withdrawals by taking 3% or even 2.5%.... Which mostly demonstrates that they really don't have an understanding of where the 4% came from in the first place.
4% relates to a 30 year period which matches a someone retiring at 65. Dropping it to 3.5% or thereabouts is for a 40 year period which better matches an early retiree.
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