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The 4% rule .....quick question?
Old 07-23-2017, 07:20 AM   #1
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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So I have withdrawn 4% ($40,000) from the portfolio.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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Old 07-23-2017, 07:59 AM   #2
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....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? ...
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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Old 07-23-2017, 11:11 AM   #3
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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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Old 07-23-2017, 12:19 PM   #4
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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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Old 07-23-2017, 12:43 PM   #5
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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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Old 07-23-2017, 01:25 PM   #6
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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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Old 07-23-2017, 02:21 PM   #7
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Unless this Bergen is a new guy in the area, his name is Bill Bengen.

Ha
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Old 07-23-2017, 03:20 PM   #8
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Unless this Bergen is a new guy in the area, his name is Bill Bengen.

Ha
Hahahah, I need new glasses, I missed that one.
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Old 07-23-2017, 03:38 PM   #9
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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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Old 07-23-2017, 03:43 PM   #10
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I'm thinking we should stop saying "rule."

"Guideline" perhaps?
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Old 07-23-2017, 04:06 PM   #11
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I'm thinking we should stop saying "rule."

"Guideline" perhaps?
Approach?

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Old 07-23-2017, 04:14 PM   #12
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Old 07-23-2017, 04:53 PM   #13
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I'm thinking we should stop saying "rule."

"Guideline" perhaps?


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Old 07-23-2017, 05:37 PM   #14
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The 4% wild-a$$ guess?
The 4% fable?
The spreadsheet-junkie's 4%?

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You also need to remember that this is all forecast on past results. ...
+1

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Old 07-23-2017, 06:08 PM   #15
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Unless this Bergen is a new guy in the area, his name is Bill Bengen.

Ha
Yes, of course. And I can't even blame auto-correct
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Old 07-23-2017, 06:15 PM   #16
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The 4% wild-a$$ guess?
The 4% fable?
The spreadsheet-junkie's 4%?

+1

Search the internet for "Taleb's Turkey" or read this version: Nassim Taleb: “Let’s Not Be Turkeys” | Risk Management Monitor

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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Old 07-23-2017, 07:39 PM   #17
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I laughed really hard when I read this: "The 4% rule .....quick question?"

The quick was the funny part.
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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Old 07-23-2017, 11:13 PM   #18
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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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Old 07-24-2017, 07:39 AM   #19
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In my opinion the 4% rule is no longer relevant. Hopefully it will be in the future. But, not now. Fuh git bout it.
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.

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Old 07-24-2017, 07:42 AM   #20
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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
+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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