Interesting article on 4% rule

[pb4uski]

17 Surprising Facts You Probably Don’t 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.

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.

 

[Dtail]

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?

 

[GenXguy]

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/financiali...ngen_and_i_first_proposed_the_4_safe/dlz1l6r/

 

[pb4uski]

Yes, I would say that it is one of the better articles that I have seen on the 4% rule.

 

[UpAnchor]

Count me in as one who thought it was 95%. Although, three years into retirement and finding I’m quite comfortable with our expenses vs. our planned W/D rate, I find I’m doing much less financial reading and more just enjoying life. (I’m wondering at what point I’ll be ready to let go of the “library” I’d so grown to love during our planning phase.)

 

[GravitySucks]

Thanks for the link PB4Uski.

 

[GravitySucks]

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.

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?

 

[RunningBum]

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:

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.

 

[teejayevans]

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.

 

[RetireBy90]

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.

 

[RunningBum]

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 %.

 

[teejayevans]

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 don’t want to reset the 30 clock, you don’t have to, but you can.

 

[teejayevans]

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.

 

[marko]

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?

 

[REWahoo]

Does that mean one could reset the 4% 'original' W/D balance from time to time?

Yes.

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.

 

[RunningBum]

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 don’t want to reset the 30 clock, you don’t 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.

 

[Andre1969]

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?

 

[Chuckanut]

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/Variable_percentage_withdrawal

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.

 

[RunningBum]

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.

 

[Dtail]

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.

 

[ncbill]

I love the people who say they don't trust it because it's based on historical data.

So they're saying the future will be worse than time periods that included the Great Depression, 1973-74 stock market crash, and the highly inflationary 1970s.

The reality is that 4% is so low because it includes those events...most retirees could have taken the 6% a previous poster mentioned and been just fine.

 

[RunningBum]

I love the people who say they don't trust it because it's based on historical data.

So they're saying the future will be worse than time periods that included the Great Depression, 1973-74 stock market crash, and the highly inflationary 1970s.

Not saying it will be. I'm saying it could be. Most of those bad periods were followed by times of prosperity, so as long as you stayed invested in the market, you would recover. I don't know how it compares, but the Japan market is still nowhere close to where it fell from around 1990. I'm pretty certain that would be a failure case if you happened to retire right at or near the peak with 4% withdrawals. The closest we have to compare I think is the US starting around 1966, with the down markets and inflation, but that didn't last 30 years like in Japan. Are you saying it's not possible our market could follow Japan's?

Still, that's just one concern, and not a major one I have. Like I said, the biggest worry I have is that my expenses will be a lot higher than I budgeted for, due to things I was not able to predict. So even if I give you that the future won't be worse than the past ~100 years in the US market, I still wouldn't follow 4% and reset whenever I wanted.

 

[ejman]

The one aspect of the 4% rule that has always confused me is this. Lets say I retired last year with $1 M and took out the 40,000. Assume inflation at 3% so next year my WD is $41,200. It's been a good year for the market so the balance has increased to $1.2 M. My Pal who also had $1 M last year (Exactly identical portfolios) Decides to retire this year so he takes his 4% of 1.2 M i.e. $48,000. Why can he take $48K plus inflation and live happily for 30 years while I can only take $41.2 K plus inflation and live happily for only 29 years (since I already used one of the 30). Doesn't make sense to me.

 

[pb4uski]

... 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. ...

No math is required, just logic.

If you accept the premise that in the year one retires that you can safely withdrawal 4% adjusted for inflation then it logically follows that you can safely ratchet up.

For example, let's say we have a 52 yo early retiree retiring in 2010 with $1 million who has a 50/50 AA and withdraws 3.5% adjusted for inflation (3.5% since they have a longer than 30 year time horizon). At the end of 2018 they would have $1.47 million after withdrawals according to Portfolio Visualizer.

So if we concede that a new 2019 retiree that is 60 years old with $1.47 million and a 30 year time horizon is safe to withdraw 4% adjusted for inflation then it would follow that the 2010 early retiree who is 60 yo in 2019 and has $1.47 million can also withdraw 4% safely.

 

[pb4uski]

I agree.... see above.

The one aspect of the 4% rule that has always confused me is this. Lets say I retired last year with $1 M and took out the 40,000. Assume inflation at 3% so next year my WD is $41,200. It's been a good year for the market so the balance has increased to $1.2 M. My Pal who also had $1 M last year (Exactly identical portfolios) Decides to retire this year so he takes his 4% of 1.2 M i.e. $48,000. Why can he take $48K plus inflation and live happily for 30 years while I can only take $41.2 K plus inflation and live happily for only 29 years (since I already used one of the 30). Doesn't make sense to me.