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The 4% rule .....quick question?
07-23-2017, 06:20 AM
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#1
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Recycles dryer sheets
Join Date: Feb 2015
Posts: 296
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The 4% rule .....quick question?
I know this has been discussed numerous times , but I just want to be sure. Let's assume I have $1 million in a taxable account invested in a 60/40 balanced fund.
I currently DO NOT reinvest the dividends as these are taxed either way....so dividends (assume at 2%) are directed to my bank account.
I then withdraw an additional 2% of the earnings every year to get me to the 4%. Put aside inflation issues for the moment to keep the math simple.
So I have withdrawn 4% ($40,000) from the portfolio.
If dividends are only 1.5% the following year, then I would withdraw 2.5% from earnings to reach 4.0%. Do I have this right?
Also, does the withdrawal need to be adjusted (downward) if a bear market occurs to account for sequence of return risk or is this risk already "baked" into the equation and a non-issue? Thanks.
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07-23-2017, 06:59 AM
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#2
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,204
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Quote:
Originally Posted by MrLoco
....Do I have this right?
Also, does the withdrawal need to be adjusted (downward) if a bear market occurs to account for sequence of return risk or is this risk already "baked" into the equation and a non-issue? ...
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Yes, withdrawals would include all money coming from the account. Think of it this way, if you reinvested the 2.0% or 1.5% of dividends and then withdrew 4%, the net withdrawal would be 2.0% and 2.5% which is what you would be withdrawing as you proposed.
The withdrawal does NOT need to be adjusted if a bear market occurs... it is already baked into the 4%.... if you ran 100 simulations using a 4% withdrawal 95 would have money left over at the end of 30 years and in some cases a lot money. Below is a Firecalc simulation for a 4% WR for 30 years for a 60/40 portfolio starting with $1 million... note that there are few lines that end below zero and many les end up for more than the initial $1 million balance.
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07-23-2017, 10:11 AM
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#3
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Thinks s/he gets paid by the post
Join Date: Jul 2006
Location: Denver
Posts: 3,499
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You do have the withdrawal right - total withdrawal whether by selling or by harvesting dividends should total 4%. You pay taxes and investment expenses from this 4%.
The "traditional" 4% SWR that was presented by William Bergen does not consider market performance, but does consider inflation. You begin with 4% of your initial portfolio and adjust that by inflation every year irrespective of market performance.
Bergen's paper is here http://www.retailinvestor.org/pdf/Bengen1.pdf
If you are going to base your withdrawals on this method, I recommend reading it. It is dry, but not difficult to get through.
Some on this board use a different 4% SWR strategy. They take 4% of the portfolio value on a specific date (say Jan1) and live on that for the year. This amount obviously varies with portfolio performance and does not take inflation into account.
Bob Clyatt had a method based on the above that he called the 4/95 strategy. He detailed it in his excellent book Work Less, Live More.
There are all sorts of other variations too. Here are some of them
https://www.bogleheads.org/wiki/Withdrawal_methods
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07-23-2017, 11:19 AM
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#4
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2006
Location: Pacific latitude 20/49
Posts: 7,677
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Just for further clarification, the 4% is of the original portfolio value and does not change in subsequent years.
You mention dividends and earnings. Dividends are a portion of the earnings. The rest is principal.
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For the fun of it...Keith
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07-23-2017, 11:43 AM
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#5
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Thinks s/he gets paid by the post
Join Date: Apr 2011
Location: Madison
Posts: 1,337
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You also need to remember that this is all forecast on past results. And is for a 30 year rolling period of time. Future results may vary.
If you are 60 and believe you will only live to 90 it is probably as good as any. If you are 30 however, this may be a too aggressive harvest.
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Wild Bill shoulda taken more out of his IRA when he could have. . . .
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07-23-2017, 12:25 PM
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#6
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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To reiterate and rephrase, you take 4% in year one and then inflate that absolute dollar amount by the cost of living (I assume Bengen used the social security CPI) in following years. The percentage of the portfolio that comes out in those following years could be more or less than 4% of the then current portfolio depending on the market.
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Idleness is fatal only to the mediocre -- Albert Camus
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07-23-2017, 01:21 PM
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#7
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Unless this Bergen is a new guy in the area, his name is Bill Bengen.
Ha
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07-23-2017, 02:20 PM
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#8
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Thinks s/he gets paid by the post
Join Date: Mar 2017
Location: New York City
Posts: 2,838
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Quote:
Originally Posted by haha
Unless this Bergen is a new guy in the area, his name is Bill Bengen.
Ha
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Hahahah , I need new glasses, I missed that one.
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Withdrawal Rate currently zero, Pension 137 % of our spending, Wasted 5 years of my prime working extra for a safe withdrawal rate. I can live like a King for a year, or a Prince for the rest of my life. I will stay on topic, I will stay on topic, I will stay on topic
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07-23-2017, 02:38 PM
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#9
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2014
Location: Spending the Kids Inheritance and living in Chicago
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I laughed really hard when I read this: "The 4% rule .....quick question?"
The quick was the funny part.
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07-23-2017, 02:43 PM
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#10
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Thinks s/he gets paid by the post
Join Date: Jul 2009
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I'm thinking we should stop saying "rule."
"Guideline" perhaps?
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07-23-2017, 03:06 PM
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#11
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Sep 2005
Location: Northern IL
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Quote:
Originally Posted by GalaxyBoy
I'm thinking we should stop saying "rule."
"Guideline" perhaps?
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Approach?
-ERD50
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07-23-2017, 03:14 PM
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#12
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Estimate, guess, shot
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07-23-2017, 03:53 PM
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#13
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Thinks s/he gets paid by the post
Join Date: Dec 2016
Location: DC area
Posts: 2,464
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Quote:
Originally Posted by GalaxyBoy
I'm thinking we should stop saying "rule."
"Guideline" perhaps?
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The 4% Pirates Code.
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FI and Semi-ER March 24, 2017
Consulting to stay engaged
"All models are wrong, some are useful." - George Box
“There is always a well-known solution to every human problem: neat, plausible, and wrong.” - H.L. Mencken
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07-23-2017, 04:37 PM
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#14
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Mar 2017
Location: City
Posts: 10,308
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The 4% wild-a$$ guess?
The 4% fable?
The spreadsheet-junkie's 4%?
Quote:
Originally Posted by dtbach
You also need to remember that this is all forecast on past results. ...
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+1
Search the internet for "Taleb's Turkey" or read this version: Nassim Taleb: “Let’s Not Be Turkeys” | Risk Management Monitor
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07-23-2017, 05:08 PM
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#15
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Thinks s/he gets paid by the post
Join Date: Jul 2006
Location: Denver
Posts: 3,499
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Quote:
Originally Posted by haha
Unless this Bergen is a new guy in the area, his name is Bill Bengen.
Ha
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Yes, of course. And I can't even blame auto-correct
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07-23-2017, 05:15 PM
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#16
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Thinks s/he gets paid by the post
Join Date: Jul 2006
Location: Denver
Posts: 3,499
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Quote:
Originally Posted by OldShooter
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Taleb is right, but I think it is wrong to dismiss it as a wild-ass guess or a fable.
Following this model blindly, like many in the financial industry followed their models in past melt-downs, is the wrong thing to do. That's why I believe that anyone planning to use these methods needs to study (not just read) the original papers with all the caveats.
Black Swans can show up anywhere - in annuities, in pensions, in social security, in health, in civilizations etc. So, what's a person to do? I say, start with some rational method (historical performance in this case) and pay close attention. Be flexible and be conservative.
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07-23-2017, 06:39 PM
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#17
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Recycles dryer sheets
Join Date: Jul 2017
Location: Headed to the Hill Country
Posts: 84
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Quote:
Originally Posted by Sunset
I laughed really hard when I read this: "The 4% rule .....quick question?"
The quick was the funny part.
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I saw this in the AM without a reply and thought to myself..
1. You are new here; don't reply
2. Get the popcorn
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Rules were meant to be broken
07-23-2017, 10:13 PM
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#18
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Recycles dryer sheets
Join Date: Feb 2014
Location: SF Bay Area
Posts: 289
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Rules were meant to be broken
In my opinion the 4% rule is no longer relevant. Hopefully it will be in the future. But, not now. Fuh git bout it.
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"The only function of economic forecasting is to make astrology look respectable"
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07-24-2017, 06:39 AM
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#19
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Sep 2005
Location: Northern IL
Posts: 26,806
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Quote:
Originally Posted by FireBug
In my opinion the 4% rule is no longer relevant. Hopefully it will be in the future. But, not now. Fuh git bout it.
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If you may allow me to 'pick on you' a little (nothing personal), I think your statement encapsulates the problem.
The "4% whatever-we-want-to-call-it" is as relevant today as it ever was. It is a historical study. AFAIK, history still shows that a 4% inflation adjusted withdraw approach over 30 years has succeeded in 95% of the time periods in our historical database. So it is still true, so it is still relevant.
The "4% whatever-we-want-to-call-it" never was meant to, never can, never will, and has no mechanism whatsoever to predict the future. It was never relevant in that regard, so it is still irrelevant in that regard.
If you try to apply something improperly, the results are meaningless.
I think it is useful to understand how we would have fared in past cycles. The study is useful for that. Period.
-ERD50
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07-24-2017, 06:42 AM
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#20
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Mar 2011
Posts: 8,332
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Quote:
Originally Posted by ERD50
If you may allow me to 'pick on you' a little (nothing personal), I think your statement encapsulates the problem.
The "4% whatever-we-want-to-call-it" is as relevant today as it ever was. It is a historical study. AFAIK, history still shows that a 4% inflation adjusted withdraw approach over 30 years has succeeded in 95% of the time periods in our historical database. So it is still true, so it is still relevant.
The "4% whatever-we-want-to-call-it" never was meant to, never can, never will, and has no mechanism whatsoever to predict the future. It was never relevant in that regard, so it is still irrelevant in that regard.
If you try to apply something improperly, the results are meaningless.
I think it is useful to understand how we would have fared in past cycles. The study is useful for that. Period.
-ERD50
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+1
However, I'm curious as to why the poster believes it's "no longer relevant". ( or should I not even go there?)
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