Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Interesting article on 4% rule
Old 11-13-2019, 04:03 PM   #1
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 23,687
Interesting article on 4% rule

17 Surprising Facts You Probably Donít Know About The Retirement Income 4% Rule

This might be worth a sticky.

This was a new one to me... I think the 95% thing came from the Trinity Study.

Quote:
14. Many of those surveyed believed the 4% rule has a 95% success rate. However, this is incorrect. Bengen was interested in determining the highest inflation-adjusted withdrawal amount over a 30-year period looking at historical data. The data showed that the highest withdrawal rate that had a balance over even the worst 30-year period was 4.15%. Therefore, the 4% had a 100% success rate.
__________________

__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56...60/35/5 AA
pb4uski is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 11-13-2019, 04:14 PM   #2
Thinks s/he gets paid by the post
 
Join Date: Jan 2018
Location: Tampa
Posts: 4,712
I believe the original study also didn't include fees, which need to be netted down.
In the end, how many folks does anyone know who really use the 4% "rule" for their actual drawdown strategy?
__________________

__________________
TGIM
Dtail is online now   Reply With Quote
Old 11-13-2019, 04:17 PM   #3
Recycles dryer sheets
 
Join Date: May 2019
Posts: 190
I was about to mention that Bengen later changed it to the 4.5% rule, but that's actually already mentioned in the page linked to in the OP.

https://www.reddit.com/r/financialin..._safe/dlz1l6r/
GenXguy is offline   Reply With Quote
Old 11-13-2019, 04:37 PM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 23,687
Yes, I would say that it is one of the better articles that I have seen on the 4% rule.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56...60/35/5 AA
pb4uski is offline   Reply With Quote
Old 11-13-2019, 04:55 PM   #5
Recycles dryer sheets
 
Join Date: Sep 2011
Location: MSP
Posts: 304
Count me in as one who thought it was 95%. Although, three years into retirement and finding Iím quite comfortable with our expenses vs. our planned W/D rate, I find Iím doing much less financial reading and more just enjoying life. (Iím wondering at what point Iíll be ready to let go of the ďlibraryĒ Iíd so grown to love during our planning phase.)
UpAnchor is offline   Reply With Quote
Old 11-13-2019, 05:39 PM   #6
Thinks s/he gets paid by the post
GravitySucks's Avatar
 
Join Date: Feb 2014
Location: Syracuse
Posts: 2,256
Thanks for the link PB4Uski.
__________________
ďNo, not rich. I am a poor man with money, which is not the same thing"
GravitySucks is offline   Reply With Quote
Old 11-14-2019, 07:26 AM   #7
Thinks s/he gets paid by the post
GravitySucks's Avatar
 
Join Date: Feb 2014
Location: Syracuse
Posts: 2,256
I used it for the for the first 5 years as 4.5 % "rule" withdraw.
It's not so much a rule as a suggestion. A bit of info good to know. "At no time did a 70/30 (or so) portfolio holding SP500 for equities and 5 year treasuries as fixed, pulling 4.5% inflation adjusted went to 0 over 30 years in that century."
You have to have a bit of perspective. Back then used to say you can take around 7% a year out. But then inflation wiped that "rule" off the map in the 70s and 80s.
I actually spoke with a 90 year old retired FA who told me I should withdraw closer to 6% than 7% a year since I was retiring at 54.
Quote:
Originally Posted by Dtail View Post
I believe the original study also didn't include fees, which need to be netted down.
In the end, how many folks does anyone know who really use the 4% "rule" for their actual drawdown strategy?
__________________
ďNo, not rich. I am a poor man with money, which is not the same thing"
GravitySucks is offline   Reply With Quote
Old 11-14-2019, 07:44 AM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 8,708
It is a good article. Note, for one, it really does cover 30 years. Many ER folks will sail past that.

Also of not, is #13:
Quote:
Bengen calculated that the retiree would withdraw funds annually at the end of each year. Others studying the 4% rule have changed the timing of the withdrawals to the beginning of each year to reflect real life.
Once you've stopped your paycheck, you're going to need some money to live on right away. You don't have to take the full 4% at the beginning of that year, but you need something. Or you have to leave your first year of expenses out of your investments balance. I would like to see a study that uses everything else Bengen had but modified it for the reality of needing money right away.
RunningBum is offline   Reply With Quote
Old 11-14-2019, 07:54 AM   #9
Thinks s/he gets paid by the post
teejayevans's Avatar
 
Join Date: Sep 2006
Posts: 1,317
Is there anyone that anal, who actually stick to 4.15%, calculate inflation and take that amount? It makes a nice rule of thumb. I also disagree with not resetting of the withdrawal amount, since each 30 year period was calculated independently, if you happen to retire in 1926, you could have reset the amount to the 1929 balance and had it last another 30 years.
teejayevans is offline   Reply With Quote
Old 11-14-2019, 08:02 AM   #10
Full time employment: Posting here.
RetireBy90's Avatar
 
Join Date: Feb 2009
Location: Cville
Posts: 731
Quote:
Originally Posted by teejayevans View Post
Is there anyone that anal, who actually stick to 4.15%, calculate inflation and take that amount? It makes a nice rule of thumb. I also disagree with not resetting of the withdrawal amount, since each 30 year period was calculated independently, if you happen to retire in 1926, you could have reset the amount to the 1929 balance and had it last another 30 years.

Interesting observation. I think that the idea was a more consistent stream you could count on each year. Imagine taking the original amount plus inflation in a year where your portfolio was down. In this case your stream of income would be the same as your income from previous year. Then imagine that the following year your portfolio was up and you stuck with your income again was consistent.



First down year you took more than 4% of balance, in up year you took less than 4%. Plan allows you to balance out and keep your portfolio in the game.
__________________
FIRE 31 Aug, 2018
RetireBy90 is online now   Reply With Quote
Old 11-14-2019, 08:06 AM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 8,708
Quote:
Originally Posted by teejayevans View Post
Is there anyone that anal, who actually stick to 4.15%, calculate inflation and take that amount? It makes a nice rule of thumb. I also disagree with not resetting of the withdrawal amount, since each 30 year period was calculated independently, if you happen to retire in 1926, you could have reset the amount to the 1929 balance and had it last another 30 years.
So if you retired in 1929, that means you would be willing to cut your withdrawal by 22% by resetting the amount to the 1930 balance, then another 44% after the 1931 balance, right? I don't think it works to reset the balance in good years, but not bad, but I'm not going to do the math.

IIRC, some here do partial increases after good years, and maybe bad years, but not a full reset. Others (myself included) use VPW, which resets the withdrawal based on eoy balance at a slightly increase in % each year. It works because you start at a smaller %.
RunningBum is offline   Reply With Quote
Old 11-14-2019, 08:43 AM   #12
Thinks s/he gets paid by the post
teejayevans's Avatar
 
Join Date: Sep 2006
Posts: 1,317
Quote:
Originally Posted by RunningBum View Post
So if you retired in 1929, that means you would be willing to cut your withdrawal by 22% by resetting the amount to the 1930 balance, then another 44% after the 1931 balance, right? I don't think it works to reset the balance in good years, but not bad, but I'm not going to do the math.
The study was done using 30 year independent periods, so what happens before the 30 years period is by definition, independent and no effect on next 30 years. So you could readjust 4% rule any year you want, and still be insured of another 30 years if you follow their withdrawal method. That means upping your rate if you retire on a upswing. If you donít want to reset the 30 clock, you donít have to, but you can.
teejayevans is offline   Reply With Quote
Old 11-14-2019, 08:46 AM   #13
Thinks s/he gets paid by the post
teejayevans's Avatar
 
Join Date: Sep 2006
Posts: 1,317
Quote:
Originally Posted by RetireBy90 View Post
Interesting observation. I think that the idea was a more consistent stream you could count on each year. Imagine taking the original amount plus inflation in a year where your portfolio was down. In this case your stream of income would be the same as your income from previous year. Then imagine that the following year your portfolio was up and you stuck with your income again was consistent.
But if you want 35 years without running out of money, resetting the 30 period in your 5 year would work, and you would use that balance.
teejayevans is offline   Reply With Quote
Old 11-14-2019, 09:12 AM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Mar 2011
Posts: 6,072
Quote:
Originally Posted by teejayevans View Post
But if you want 35 years without running out of money, resetting the 30 period in your 5 year would work, and you would use that balance.
Does that mean one could reset the 4% 'original' W/D balance from time to time?

Let's say after 15 years of RE your portfolio balance has grown dramatically, and you now have 15 fewer years to draw. Would it be wise to create a new 'starting point' with today's new balance?
__________________
Living well is the best revenge!
Retired @ 52 in 2005
marko is offline   Reply With Quote
Old 11-14-2019, 09:13 AM   #15
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
REWahoo's Avatar
 
Join Date: Jun 2002
Location: No Country for Old Men
Posts: 45,708
Quote:
Originally Posted by marko View Post
Does that mean one could reset the 4% 'original' W/D balance from time to time?
Yes.

Quote:
Originally Posted by marko View Post

Let's say after 15 years of RE your portfolio balance has grown dramatically, and you now have 15 fewer years to draw. Would it be wise to create a new 'starting point' with today's new balance?
Can't say it would be wise (how certain are you you won't live beyond another 15 years?) but it would be perfectly sound from a FIRECalc/Trinity study perspective.
__________________
Numbers is hard

Charter resident of the lumpen slums of cyberspace

Retired in 2005 at age 58, no pension
REWahoo is offline   Reply With Quote
Old 11-14-2019, 09:37 AM   #16
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 8,708
Quote:
Originally Posted by teejayevans View Post
The study was done using 30 year independent periods, so what happens before the 30 years period is by definition, independent and no effect on next 30 years. So you could readjust 4% rule any year you want, and still be insured of another 30 years if you follow their withdrawal method. That means upping your rate if you retire on a upswing. If you donít want to reset the 30 clock, you donít have to, but you can.
You may have full faith in that study, but I don't, for the following reasons:

1) As I noted before, it does withdrawals at the end of a year, not the beginning. That's just not real life. Starting your withdrawal may have less than 100% success rate. I don't know.

2) It only goes 30 years. I'm nearly 9 years into retirement, and while I don't expect to live more than 30 years, I think there's a decent enough chance that I want to be prepared for it, just in case.

3) It uses historical data. There's no guarantee history will repeat.

4) It mandates that you can really hold to 4% withdrawals. To me the biggest risk in retirement is that I'll have unforeseen unavoidable expenses a lot greater than I budgeted for.

With all that in mind, I don't see a 100% guarantee. Of course if we really wanted an iron clad guarantee, most of us would never retire, "just in case". I was willing to take the chance once based on my situation in 2011, which had a 100% success rate based on history, with a lot of buffer. What I'm not willing to do is play Russian roulette and keep starting over and risk resetting right before a major crash or runaway inflation or an event in my life that forces me to spend a lot more than 4%.

That said, I'm pretty conservative in this regard. I worked OMY for awhile, and spend less than I can, because I can live with that more easily than the fear of running out of money at age 90. You may think there's no risk of that, or that the unlikely combinations of living to a very old age and also running out of money are too unlikely to worry about. Each person makes their own choices on that. IMO one should at least consider worst cases, and not just rely on a study that says historically you have 100% chance of success.
RunningBum is offline   Reply With Quote
Old 11-14-2019, 10:01 AM   #17
Thinks s/he gets paid by the post
 
Join Date: Aug 2005
Location: Crownsville
Posts: 2,436
FireCalc gives a 4% withdrawal rate a 95% chance of success. According to it, 6 out of 119 30-year cycles failed. The earliest looks like it failed around year 23. Also, at year 30, there were a pretty good amount of cycles that were down to 50% or less of the starting value, so chances are, most of those would have failed after a few more years.

In reading that article though, it looks like they only go back to the 1926-1955 cycle. So I'm guessing the failure cycles that FireCalc picked up on are from earlier years?
Andre1969 is offline   Reply With Quote
Old 11-14-2019, 10:06 AM   #18
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Chuckanut's Avatar
 
Join Date: Aug 2011
Location: West of the Mississippi
Posts: 9,610
Quote:
Originally Posted by marko View Post
Does that mean one could reset the 4% 'original' W/D balance from time to time?

Let's say after 15 years of RE your portfolio balance has grown dramatically, and you now have 15 fewer years to draw. Would it be wise to create a new 'starting point' with today's new balance?
Some of us do that using a variable percentage withdrawal. Each year we look at inflation, how the portfolio has done, and then figure out how much more or less we can withdraw than the previous year. After a few good years we can comfortably withdraw more. A few bad years and we withdraw less.

The idea is to avoid two undesirable outcomes: (1) Running out of money early, and (2) denying oneself - while alive - some of the good things money can buy, and then leaving an excessively large pile of cash on the table after we are gone.

There are several methods that people can choose from. Take your pick.

https://www.bogleheads.org/wiki/Vari...age_withdrawal

Quote:
Variable percentage withdrawal (VPW) is a withdrawal method that adapts to the retiree's retirement horizon, asset allocation, and portfolio returns during retirement. It combines the best ideas of the constant-dollar, constant-percentage, and 1/N withdrawal methods to allow the retiree to spend most of the portfolio using return-adjusted withdrawals.
The key, IMHO, is to enjoy life and not over think the withdrawal amounts. There is to much uncertainty in our personal lifespan, as well as exogenous events that can whack the best plans. We don't know, what we don't know.
__________________
The worst decisions are usually made in times of anger and impatience.
Chuckanut is offline   Reply With Quote
Old 11-14-2019, 10:16 AM   #19
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 8,708
What I like about VPW is that it adjusts gradually. Have a few good years, and you can spend more, but it's spread out over the rest of your life. Likewise with a few bad years.

I compare that to following 4% plus inflation, which tells you to stick with it even in bad years because history says the market recovers, only to find the future doesn't follow history. In that case, you might have to make drastic changes late in life. VPW would've been throttling you down more gradually.
RunningBum is offline   Reply With Quote
Old 11-14-2019, 10:22 AM   #20
Thinks s/he gets paid by the post
 
Join Date: Jan 2018
Location: Tampa
Posts: 4,712
Quote:
Originally Posted by Andre1969 View Post
FireCalc gives a 4% withdrawal rate a 95% chance of success. According to it, 6 out of 119 30-year cycles failed. The earliest looks like it failed around year 23. Also, at year 30, there were a pretty good amount of cycles that were down to 50% or less of the starting value, so chances are, most of those would have failed after a few more years.

In reading that article though, it looks like they only go back to the 1926-1955 cycle. So I'm guessing the failure cycles that FireCalc picked up on are from earlier years?
I am fairly sure that the failures in Firecalc would include 1965, 1966 starting years of retirement.
The Trinity study shows the 95% success rate at 4% WR. Firecalc appears to mimic those results.
__________________

__________________
TGIM
Dtail is online now   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
80% rule? 4% Rule? What is it really? Talkjk Hi, I am... 20 09-29-2018 10:03 AM
Another article on the 4% rule Gunny FIRE and Money 12 07-10-2018 06:00 AM
Interesting HSA Distribution Rule kramer Health and Early Retirement 28 05-10-2007 02:00 PM
Interesting Job Market-Interesting Blog greg Other topics 1 12-18-2005 01:42 PM
Interesting article in New York Times Traveler Other topics 17 05-19-2004 05:21 AM

» Quick Links

 
All times are GMT -6. The time now is 07:03 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2019, vBulletin Solutions, Inc.
×