Say Goodbye to the 4% Rule - tips from the WSJ

[gerrym51]

Quote:

Originally Posted by obgyn65 Clearly annuities have been discussed many times here. They have many pros and cons i.e. no money left for heirs, etc which I will not repeat. However, from a pure mathematical standpoint, some annuities do make sense in some cases. In my case, my Excel ER model is optimized with the purchase of some deferred annuities up to my mid 50s (say up to about 100k in all) and larger SPIAs much later in life (about 100k age 75 and another 100k around 85 if I am still alive). Choose your company carefully - mine is one of the top 3. The first deferred annuity I bought last year will generate 12% per year from 62 until I die. I'm aware that part of the % includes repayment of principal,also discussed in other threads. I am aware many here dislike or even hate annuities and will beat up my comments above. That's fine. This is America, people can disagree. Good luck.

i don't think people beat you up because they hate annuities. it's in the same league of taking ss early. you buy an annuitie and you loose control of it. you take ss at 70 and you did not get payments for the 8 years up to 70.

it's the UNCERTAINTY of when you die that causes this problem. if we all knew exactly when we are going to die this would be MUCH easier.

[Accidental Retiree]

I can see the appeal to ObGyn of annuities, especially given that he's only using a very small part of his assets (IIRC what he's shared), phased in a few years apart.

Even if he lost them all, he'd have a boatload left and would be just fine, it seems to me, especially as he's still working and earning.

What I am curious about is why, after all he has learned here, he has not yet branched out at least a little bit into index funds, Wellesley, or something like that. Something simple to ease into investing in areas new to him.

If nothing else, investing in something simple would help him find another way to increase his monthly 'spending.'

[youbet]

Quote:

Originally Posted by Lisa99 I consistently fail to understand why people take 4% as 'though shalt never cross that line.".

I don't anybody, including here on this board, that is running their FIRE retirement plan by strictly withdrawing 4% + CPI every year repeatedly. I know it gets talked about a lot, but do you know anyone actually doing it?

[mickeyd]

The 4%SWR "rule" is no more a rule than the age in bonds "rule" is a rule. Both are guides to get you going if you do not have a clue where to start.

Few posters here consider either as a "rule", more of a guide for others to use.

[youbet]

Quote:

Originally Posted by mickeyd Few posters here consider either as a "rule", more of a guide for others to use.

What others? Seriously, we talk about how dumb those folks are who "follow the 4% rule blindly" and all that. But when I stopped and thought about it, I can't name a single person doing that, here or in real life. I'm sure there is someone someplace doing it. But I haven't run across anyone yet.

[obgyn65]

I have never claimed to be an expert in financial matters. Please kindly remember that I still work - have not FIREd yet. Sometimes I post between two patients. I participate to this forum the best I can, in a different language than my native tongue, and cannot write as much as others have the time to do. Additionally, as mentioned before, I tend to be more a listener than a talker. This is the only place where it feels safe to share my financial information without being (too) chastised.

By the way I bought shares. See the new thread. I am proud of myself today.

Quote:

Originally Posted by Midpack People 'beat up your comments' because your posts rarely if ever do more than scratch the surface. You always tell us you're too busy to add any substance, fair enough.

[EvrClrx311]

Moral: Try not to retire at a market peak. Or more specifically, try not to retire when your first decade is going to be a recession, which just so happens to occur right after a the peak. Easier said than done, but if you do 4% will work very well for you.

The problem is timing, something we cannot control. Most people (not particularly those on this site) who have the ability to worry about the 4% rule watch their egg grow on the market run up. They feel euphoric near the peak. Times are good. Economy looks strong, er... at least equities do. They project back how well the last 5-10 years have been and assume it'll continue into the future. They take the leap... assuming 4% will work, as a conservative figure.

If that happens to be 1999... or 2007... or 2013(?)... they might find themselves enduring some sleepless nights.

I hope not to jump into retirement directly following a good 1-2 year period of performance. One should project their survival rate had that period of time not been so good to them and see if they still feel as confident about it. In a strange twist of fate... when times are rough and the economy is down or has endured some very bad years recently, you're looking brighter on the 4% rule (assuming your egg is large enough). Though it sure feels the opposite in reality. Emotions are a funny thing, always clouding our judgement when it comes to these things.

[Midpack]

Quote:

Originally Posted by EvrClrx311 Moral: Try not to retire at a market peak. Or more specifically, try not to retire when your first decade is going to be a recession, which just so happens to occur right after a the peak. Easier said than done, but if you do 4% will work very well for you.

Not really. You can't predict to begin with. At least historically, the 4% SWR rule means you had a 95% chance of success over 30 years no matter when you retired from 1871 thru 2011 (FIRECALC) even if you blindly withdrew inflation adjusted/constant spending. Trying to time market peaks/troughs is not part of the calculus.

[Lisa99]

I don't know of anyone doing it either, so I guess it's simply an academic discussion.

[Midpack]

Quote:

Originally Posted by mickeyd The 4%SWR "rule" is no more a rule than the age in bonds "rule" is a rule. Both are guides to get you going if you do not have a clue where to start. Few posters here consider either as a "rule", more of a guide for others to use. Quote: Originally Posted by youbet What others? Seriously, we talk about how dumb those folks are who "follow the 4% rule blindly" and all that. But when I stopped and thought about it, I can't name a single person doing that, here or in real life. I'm sure there is someone someplace doing it. But I haven't run across anyone yet. Quote: Originally Posted by Lisa99 I don't know of anyone doing it either, so I guess it's simply an academic discussion.

I always thought the 4% SWR studies were more useful as a guide for determining a nest egg target than as an actual withdrawal methodology. But it's nice to know that from 1871 thru 2011 (FIRECALC) if anyone did blindly withdraw 4% in the first year and inflation adjusted thereafter for 30 years, they'd have a 95% probability of success in any year they started. YMMV

Not sure I've seen anyone say "dumb."

[EvrClrx311]

Quote:

Originally Posted by Midpack Not really. You can't predict to begin with. At least historically, the 4% SWR rule means you had a 95% chance of success over 30 years no matter when you retired from 1871 thru 2011 (FIRECALC) even if you blindly withdrew inflation adjusted/constant spending. Trying to time market peaks/troughs is not part of the calculus.

The reason people question 4.15% now is because the market has done some things recently outside the 150 year 'norm'

The whole idea behind the rule was to find a target that was safe under all known previous conditions, but we'll never know if the future is an outlier that we've never seen, so it is impossible to answer with 100% certainty. What we can do is get to 98% or 99% probabilities... and what I'm suggesting is that your odds of having a better path ahead are drastically increased if the recent market behind you is bad... not good. Makes perfect sense logically, but in practice most people do the opposite. They pull the plug when they feel most confident, when the market has been rising.

This can be demonstrated with some simple charts that I made a few years ago but am missing the link right now. If you look at every 15 year period in history where the market performed worse than average... the following 30 years were better than the historical 30 year average. If you look at every 15 year period where the market has performed better than average, the following 30 year period performed worse than the historical average. There is an inverse correlation between how equities will do moving forward compared to how they've done in the not so distant past. Regression to the mean. Equities want to straddle a linear path... if they've done really well recently, they'll want to fall back to their long term path. And vice versa.

If markets drop over the next 18 months, 2000-2015 just might end up as the worst 15 year period of performance in equity history. If so, there is a very high probability that 2015-2045 will be one of the best 30 year periods we've ever seen. Not guaranteed, just a very strong bias towards it when looking at history.

Two enduring constants:
A) History tends to repeat itself...
B) There is never a shortage of people suggesting why 'this time' it won't (not suggesting you are one of them; just a generality of the masses/media)

[clifp]

Quote:

Originally Posted by Lisa99 I don't know of anyone doing it either, so I guess it's simply an academic discussion.

Can't emphasize this enough. I have been following retirement discussion on the internet since 2000, I have yet to met any retiree who follows the withdrawal method suggested by the Trinity exactly.

Pretty much everyone 'cheats', i.e uses common sense. Tightens the belt when their portfolio gets hurt, fudges a bit on inflation, engages a bit of market timing etc. I don't even have an exact portfolio value when I retired so I couldn't even take 4% if I wanted to

[Stanley]

IMHO, the value of the 4% rule is that unsophisticated people can have some general idea of how much they can expect to withdraw every year and still have a fighting chance to make the money last their entire life. No guarantees, no promises.

Inaccurate? To be sure! But, far better than some people I know who suddenly inherit $84,563 and then think "WOW, This is more money that I have ever had in my life! I can retire even though I am only 52." Many, if not most, people have very poor financial skills. The price they pay for blowing off math in school while asking "when is anybody going to use this stuff?"

[youbet]

Quote:

Originally Posted by Midpack I always thought the 4% SWR studies were more useful as a guide for determining a nest egg target than as an actual withdrawal methodology. But it's nice to know that from 1871 thru 2011 (FIRECALC) if anyone did blindly withdraw 4% in the first year and inflation adjusted thereafter for 30 years, they'd have a 95% probability of success in any year they started. YMMV Not sure I've seen anyone say "dumb."

Don't you mean 1871 thru 1982? 1982 is the earliest starting year we can test for a 30 year retirement.

[photoguy]

Quote:

Originally Posted by EvrClrx311 what I'm suggesting is that your odds of having a better path ahead are drastically increased if the recent market behind you is bad

I think this is mostly a psychological issue. If the recent market returns are bad then valuations are low and your expected returns going forward are higher. But in return your nest egg is smaller. Conversely, if recent market returns are higher, your portfolio is bigger, but expectations going forward are lower.

If we think of a portfolio in terms of both raw dollars and future expected returns, this would smooth out much of the volatility.

[haha]

Quote:

Originally Posted by Spanky The 4% rule is still valid for planning purpose. The key is to be flexible or adaptable to market conditions. That is, adjust the withdrawal rate and re-balance the portfolio to the desired AA. Our plan is 2% SWR, however.

How in the world is it a 4% rule if you "adjust the withdrawal rate"?

A 4% withdrawal rate is withdrawing 4%, adjusted annually for inflation. Presumably words still mean something.

Ha

[ERD50]

Quote:

Originally Posted by obgyn65 Quote: Originally Posted by Midpack People 'beat up your comments' because your posts rarely if ever do more than scratch the surface. You always tell us you're too busy to add any substance, fair enough. ... Please kindly remember that I still work - have not FIREd yet. Sometimes I post between two patients. ...

And yet, at over 3,000 posts since joining, your posting rate is close to some of the most prolific of us, who are not busy with the kinds of activities you mention?

edit/add: I'm not beating up on you, just trying to provide some perspective.

-ERD50

[pb4uski]

Quote:

Originally Posted by haha ....Presumably words still mean something. ....

You didn't get the memo? Words having meaning was jettisoned back in 2008.

[Tyro]

Quote:

Originally Posted by EvrClrx311 ....what I'm suggesting is that your odds of having a better path ahead are drastically increased if the recent market behind you is bad... not good. Makes perfect sense logically, but in practice most people do the opposite. They pull the plug when they feel most confident, when the market has been rising.

Would it be that that confidence may, in many cases, be because they've reached their "number" -- the nest egg they've calculated (or been told) they need to be FI and RE?

[Tyro]

Quote:

Originally Posted by pb4uski You didn't get the memo? Words having meaning was jettisoned back in 2008.

I thought it was 1998... with all the arguments over the definitions of "sexual relations", "alone" and most importantly, what the definition of "is" is.