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The "Father" of 4% SWR doesn't recommend it...
Old 07-09-2008, 06:08 PM   #1
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The "Father" of 4% SWR doesn't recommend it...

Found this on the other forum Spending Safely.

It's only a rule of thumb at best to begin with, but the 4% SWR has become gospel to an awful lot of people. Interesting that (arguably) the father of the idea hasn't recommended it for several years...

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The 4% mantra started with Bill Bengen, 60, a soft-spoken investment adviser in El Cajon, Calif., who has written a series of landmark research papers since 1994 on safe withdrawal rates. What most people don't realize, though, is that Bengen no longer recommends the 4% rate. "The figure is stuck in the corner of people's minds, and I don't know how to get it out," he laments.

Bengen now suggests that the 4% figure—actually 4.1% for a 60/40 portfolio of large caps and bonds and 4.5% if you toss in small caps—merely seems impressive when plugged into Excel spreadsheets. In practice, the strategy, which Bengen stopped using with his own clients about three years ago, is inflexible and unrealistic he says—and the formula is too stingy.
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Old 07-09-2008, 06:13 PM   #2
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Too stingy, meaning I can get more
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Old 07-09-2008, 06:14 PM   #3
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Better too stingy than not stingy enough. I'd always rather err on the side of conservatism in my financial projections.
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Old 07-09-2008, 07:47 PM   #4
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Gurumania. I think if you have enough sense to retire early, you have enough sense to know how much you should spend and how you should fund that amount over your possible lifetime.

If you don't, hasta la vista pendejo!

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Old 07-09-2008, 07:54 PM   #5
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One of the issues of the 4% SWR is that it leaves your portfolio with way too much money. One of the other issues is that, at times, you might feel like there's not enough. Depending on the market, you can adjust otherwise.

I imagine there will be an honorary PhD coming my way any day now.
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Old 07-09-2008, 08:42 PM   #6
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Bengen stopped using with his own clients about three years ago, is inflexible and unrealistic he says—and the formula is too stingy.

Three years ago I was earning 5% on my money market and made >10% on my investments.

In any case, I too think 4% is a little conservative but I think it's better to be conservative than not (especially the first few years of retirement).
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Old 07-09-2008, 09:01 PM   #7
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With all of the unknowns over such a long time period how can he possibly recommend a change of 0.1%?

There can't possibly be a statistically significant difference to the distribution of outcomes of 4% versus 4.1% when you run a simulation with so many unknowns, it's absurd to even recommend such a change. I would think the delta would need to be much larger ~1% (pure speculation on my part for an exact number) for it to produce any statistically significant difference.
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Old 07-09-2008, 10:27 PM   #8
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With all of the unknowns over such a long time period how can he possibly recommend a change of 0.1%?
I thought he was throwing out a SWR somewhere between 4.5% and 5.7%, depending on the current PE.

The mention of 4.1% at the beginning of the article was some correction based on a 60/40 weighting, but that was still referencing the "old way" that he doesn't like anymore.
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Old 07-10-2008, 08:20 AM   #9
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Originally Posted by slazenger View Post
I thought he was throwing out a SWR somewhere between 4.5% and 5.7%, depending on the current PE.

The mention of 4.1% at the beginning of the article was some correction based on a 60/40 weighting, but that was still referencing the "old way" that he doesn't like anymore.
Definitely agree, but also have to agree with JayOh in the fact that unless it is an egregious error/miscalculation, a slight correction will not mean much to people. If they withdraw 4% the first three to four years and realize that they are up 25%... they may start withdrawing more like 4.5-5%... I really think that closer to 4% rather than 5.5% is better as you start retirement. As you get a feel for your expenses and your portfolio balance, then you can adjust accordingly.
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Old 07-10-2008, 09:26 AM   #10
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Originally Posted by TN_INVEST View Post
Bengen stopped using with his own clients about three years ago, is inflexible and unrealistic he says—and the formula is too stingy.

Three years ago I was earning 5% on my money market and made >10% on my investments.
Against inflation and modest taxes, you were making zero on your money market and maybe 5-6% on your (equity?) investments.

I think the author needs to do a little more research before calling Bengen the 'father' of the 4% idea. The concept was around for decades prior to Bengens study. Harvard did a study in the early 70's to determine how much could be withdrawn annually from their endowment fund safely and came up with ~4%.

But when people havent talked about you for a while, I guess its profitable to go back and say that you no longer agree with something you said in the 90's. In this instance, his clients were in the midst of a broad based bull market in most asset classes and they wanted to SPEND! SPEND! SPEND! Gosh darn it, look at what I've got! My house is up 50%, my equities are up 40% and my REITs have doubled! There is NO WAY I'm going to spend just a measly 4% this year.

So I'm going to look for an advisor to pay that will call that idea poppycock and when he figures out that he can get a lot more customers by chanting that mantra...we're good to go!

Its probably pretty reasonable to be more intuitive and responsive to your investment returns during exceptionally bad and exceptionally good markets.

On the other hand, the historical data seems to indicate that depriving yourself during bear markets and splurging during up markets might not work out for you.
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Old 07-10-2008, 09:48 AM   #11
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"After studying historical data, Kitces concluded that a higher withdrawal rate is safe in most situations as long as adjustments are made if the stock market becomes overvalued during the first 15 years of a person's retirement."

I don't think he means "overvalued" since that would only mean that the market will drop to it's fair value again.

I think he means "if the stock market fair value increases more than expected" then a higher SWR would be safe.

The problem is, nobody knows that fact until after it happens.

I'll stick with the 4% rule, thanks.
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Old 07-10-2008, 09:58 AM   #12
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a slight correction will not mean much to people.
I'm not so sure about that. In this case it's spawned an article, tons of publicity, and possibly a new "research" paper or two.

I've always felt that Bengen & Guyton have managed to take a relatively straightforward concept, overcomplicate it, and scare people to death with it... and I'm pretty sure that neither of them will ever ER.
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Old 07-10-2008, 10:05 AM   #13
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Quote:
Originally Posted by JayOh View Post
With all of the unknowns over such a long time period how can he possibly recommend a change of 0.1%?

There can't possibly be a statistically significant difference to the distribution of outcomes of 4% versus 4.1% when you run a simulation with so many unknowns, it's absurd to even recommend such a change. I would think the delta would need to be much larger ~1% (pure speculation on my part for an exact number) for it to produce any statistically significant difference.
You are reading it wrong... his initial work suggested a 4.1% withdrawal rate... which people rounded to 4%... he is not suggesting to go from 4.0 to 4.1... he is suggesting that either of these numbers is wrong.
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Old 07-10-2008, 10:13 AM   #14
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CFB.... the problem is not how you described...

Remember... it is 4% to start and then adjusted for inflation.... say you retired in the early 90s... now your portfolio has been going gangbusters for a decade... and your 4% plus inflation is now say 2%.... you would ask... why can I not spend MORE.... I think the question is something most people would ask...

Now, fast forward to someone who retired in 1999 as their dot com stocks pushed them way past what they needed..... they started at 4%.. then increased it by inflation... their stock crash... now their 4% plus inflation is 8% or even 10%.... They are now worried they will not have enough...


This is the problem that I have with the strict 4% to start and increase by inflation... are you going to be the first example or the second? If the first, I can not see any reason to not 're-retire' and start your 4% over again... on the second, I don't see someone spending like they have enough...
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Old 07-10-2008, 10:48 AM   #15
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I'm not so sure about that. In this case it's spawned an article, tons of publicity, and possibly a new "research" paper or two.

I've always felt that Bengen & Guyton have managed to take a relatively straightforward concept, overcomplicate it, and scare people to death with it... and I'm pretty sure that neither of them will ever ER.
What I mean to say by the article/research is that it is very deterministic over time, but more as regards to saying you can spend more than 1% and would probably want to spend less than 7%. Earlier in retirement, I would suggest each person would want to be able to live off of 4% or so of their savings, and then if their portfolio grows, then they can do what Bengen suggests and push it up closer to 5%, but the reason that the 4% SWR is so popular is that it is fairly time-tested for many different market conditions. Slightly more favorable market conditions (even 1966-1982, but not 1929-1955) will allow for a higher rate, but regarding general security a 4% is still a bit more secure.
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Old 07-10-2008, 10:55 AM   #16
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Quote:
Originally Posted by Texas Proud View Post
Now, fast forward to someone who retired in 1999 as their dot com stocks pushed them way past what they needed..... they started at 4%.. then increased it by inflation... their stock crash... now their 4% plus inflation is 8% or even 10%.... They are now worried they will not have enough...
Well, if this hypothetical cohort was figuring on 4% withdrawal from dotcom stocks, then they were not actually paying attention to the 4% "rule", which is based on SP500 stocks and bonds mixed, not on a pure stock high-risk portfolio.
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Old 07-10-2008, 04:23 PM   #17
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Quote:
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CFB.... the problem is not how you described...
Well, since you pretty much restated exactly what I said, I think it is.

Quote:
now your portfolio has been going gangbusters for a decade... and your 4% plus inflation is now say 2%.... you would ask... why can I not spend MORE.... I think the question is something most people would ask...
Exactly. Problem being, if your portfolio just went gangbusters for a decade, chances are its going to do a lot less well than normal for the next decade. You know, pretty much how its gone the last 8 or so?

So you can giddily spend a bunch extra, but you're exposing yourself to downside drops. Firecalc does show a 'success!' for a period in which the balance nearly hit zero and then rebounded. If that sounds like fun to you, then spend extra and hang on!

Quote:
Now, fast forward to someone who retired in 1999 as their dot com stocks pushed them way past what they needed..... they started at 4%.. then increased it by inflation... their stock crash... now their 4% plus inflation is 8% or even 10%.... They are now worried they will not have enough...
Right. As we've also discussed a bunch of times, major downturns shortly after ER are very bad things. While you might get away with continuing the 4% deal, you might also run into a very low balance period and have to have a lot of faith in the markets ability to rebound. See above.


Quote:
This is the problem that I have with the strict 4% to start and increase by inflation... are you going to be the first example or the second? If the first, I can not see any reason to not 're-retire' and start your 4% over again... on the second, I don't see someone spending like they have enough...
And you may, as we discussed many years ago in a thread titled something like "swr of 6.11%?" or some such. The calculator doesnt know when you retired and when you didnt, and those funny correlative factors that historical data/non-monte carlo calculators depend on may be less than good if the immediate after retirement period involves a huge boom or a huge bust.

Hold on while I think a bit about that huge bust.

Okay, but the point is as you say, being 'strict' about it may be pretty stupid. Or sheer genius.

The real point is that in the midst of an up or downturn, plenty of people will come out of the woodwork to tell you that you can and should spend more of your windfall, or save your pennies because the world is coming to an end.

The truth is somewhere in the middle, and adaptability is always a good idea. Just dont dig too deep into the piles of booty (eh, hold on again for a minute) or live a desperate, horrible life because you've overreacted to temporary market conditions.
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Old 07-10-2008, 04:56 PM   #18
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Well, -----

Okay, but the point is as you say, being 'strict' about it may be pretty stupid. Or sheer genius.

The real point is that in the midst of an up or downturn, plenty of people will come out of the woodwork to tell you that you can and should spend more of your windfall, or save your pennies because the world is coming to an end.

The truth is somewhere in the middle, and adaptability is always a good idea. Just dont dig too deep into the piles of booty (eh, hold on again for a minute) or live a desperate, horrible life because you've overreacted to temporary market conditions.
Hmmm - - 300k -1.1 mil, 12k - 89k and places in-between, age 49 -65. 1993 to Jul 2008.

Ok ok so now I should get a grip and start taking this stuff serious and start running serious calculators?

Or putz on with bursts of remodeling/ extravagent vacation attacks and the 'desperate, horrible' but wickedly sinful joy of being a really cheap bastard one in a while.

Now now remember the past when this forum went off on quests for the real number.

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Old 07-10-2008, 06:43 PM   #19
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I think the author needs to do a little more research before calling Bengen the 'father' of the 4% idea.
You might raise that (pointless) observation with (author) Lynn O'Shaughnessy and/or Business Week. Cheers...
Quote:
The 4% mantra started with Bill Bengen, 60, a soft-spoken investment adviser in El Cajon, Calif., who has written a series of landmark research papers since 1994 on safe withdrawal rates.
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Old 07-11-2008, 08:28 AM   #20
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I thought there was plenty of point to the observation.

In annointing Bengen the "father" of the 4% idea, it creates a certain legitimacy when he's reported to change his mind.

"In 1973, Harvard University did a study to determine how much they could safely withdraw from their endowment fund without eroding the principal. Assuming a portfolio of 50% stocks and 50% bonds and cash, Harvard's analysts calculated they could withdraw 4% the first year and then adjust the subsequent year's withdrawals for inflation. For example, if there was 10% inflation, the second year's withdrawal would be 4.4% of the initial (i.e., first year) asset value."

A few years after Bengens study, Trinity University did a far more detailed and fleshed out study that came to the same conclusion.

So Bengen appears to be the father of running a comparatively lousy study reporting on what was already well known. And for what its worth, as recently as late 2004 he was quoted as saying "Relying upon this measly withdrawal rate is crucial to protect a retiree through truly ugly bear markets, Bengen concluded."

I like my fatherly figures to at least be a bit more consistent in their messages...

And which brand of grumpy pills are you taking this morning?
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