History of the 4% rule

[nun]

For once here's an interesting article from Yahoo Finance. It nicely covers the history of the 4% rule.

retirement-spending-solution-forbes: Personal Finance News from Yahoo! Finance

Long before I ever heard of a SWR my approach was a "modified Mcawber algorithm" where I would never spend more than the income my portfolio could produce and use cash to supplement it in down years.

"Annual investment income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual investment income twenty pounds, annual expenditure twenty pounds ought and six, result misery."

Control of expenses is as big a factor in success as investment return and of course the big question in such a plan is how big that cash reserve has to be.

 

[walkinwood]

Thanks for posting. Nice read.

 

[Nords]

I think the article's biggest flaw is the author's assumption that Bengen will ever retire...

 

[ranchoparque]

Very helpful article thanks. I am not yet retired and am wondering what is the best way to invest in retirement in order to generate the 4% indexed for inflation. From what I know now it would be a combination of investments in taxable and tax deferred accounts. To that I would probably add some annuities at some point. I am also wondering about some funds such as the Vanguard Managed Payout Funds.

If you have any feedback or a link to another useful thread on how to generate the 4% in retirement I would appreciate it.

I am a conservative invester with a cola'd pension and my wife will have social security but I would prefer to keep my investments conservative with about 100-minus my age in equities until I reach a minimum equity exposure of about 25%.

 

[nun]

Very helpful article thanks. I am not yet retired and am wondering what is the best way to invest in retirement in order to generate the 4% indexed for inflation. From what I know now it would be a combination of investments in taxable and tax deferred accounts. To that I would probably add some annuities at some point. I am also wondering about some funds such as the Vanguard Managed Payout Funds.

If you have any feedback or a link to another useful thread on how to generate the 4% in retirement I would appreciate it.

I am a conservative invester with a cola'd pension and my wife will have social security but I would prefer to keep my investments conservative with about 100-minus my age in equities until I reach a minimum equity exposure of about 25%.

You need to look at your expenses and see how much of those will be covered by your pension and SS. Once you know that you can think about how to invest your money.

My first thought would be that with a Cola'd pension you can be a little more aggressive with your investments and that an annuity isn't the best option for you as you have a guaranteed income source already.

As far as investing goes the Vanguard Managed Payout is just fine. There are as many approaches to investing as there are investors, but I keep it simple. My approach is to passively invest and rebalance using 4 core Vanguard funds; Total Stock Market, Total International, Total Bond Market and Wellesley. My AA has been 50/50 for that past 5 years and will probably stay there in ER.

 

[donheff]

Interesting but I take issue with this:

"Another issue: Implementing Bengen's method by yourself, with its portfolio rebalancing, can be tricky. Can an average retiree handle this himself? "There are plenty of individuals who could do it," he answers. "But they must be prepared to spend large blocks of time on portfolio management."
​

That's someone with a vested interest in our fear to take on the task talking.

 

[REWahoo]

Very helpful article thanks. I am not yet retired and am wondering what is the best way to invest in retirement in order to generate the 4% indexed for inflation. From what I know now it would be a combination of investments in taxable and tax deferred accounts. To that I would probably add some annuities at some point. I am also wondering about some funds such as the Vanguard Managed Payout Funds.

If you have any feedback or a link to another useful thread on how to generate the 4% in retirement I would appreciate it.

I am a conservative invester with a cola'd pension and my wife will have social security but I would prefer to keep my investments conservative with about 100-minus my age in equities until I reach a minimum equity exposure of about 25%.

Not a direct answer to your question, but worth the read:

https://personal.vanguard.com/us/insights/article/retirement-savings-03012011?SYND=RSS&Channel=AN

 

[JmfromTx]

Good article. I'd never heard of this guy. I bet he advises a lot of very wealth clients. His asset allocation would make me lose sleep.

 

[steelyman]

The first time I ever ran across the notion of a 4% withdrawal rate was when I read an article in the T. Rowe Price Report newsletter. That may have been the motivation for me actually sitting down and starting the planning process for FIRE. The newsletter (which I think is a decent source of information) is archived here:

T. Rowe Price - Invest with Confidence

The specific article starts on page 7 and is titled "New Analysis Offers Guidelines on Saving for Retirement".

Obviously, TRP was not the first to come up with this.

 

[powerplay]

Nice article, thanks for sharing it.

 

[nun]

Interesting but I take issue with this:

"Another issue: Implementing Bengen's method by yourself, with its portfolio rebalancing, can be tricky. Can an average retiree handle this himself? "There are plenty of individuals who could do it," he answers. "But they must be prepared to spend large blocks of time on portfolio management."
​

That's someone with a vested interest in our fear to take on the task talking.

+1. I thought exactly the same when I read that. I suppose people with lots of funds spread over various custodians might have to put some effort into it. But today it's so easy with companies like Vanguard, TIAA-CREF, Fidelity etc. The AA info is right there and it's a simple matter to transfer a few percent from a stock fund to a bond fund in a market run up. Many people do go hog wild with all the funds available and end up with 20, 30 or more funds. I find having 4 funds works just fine and rebalancing is easy.
Now tax efficiency and withdrawal is more difficult.

 

[REWahoo]

Financial planner Bill Bengen defends his conclusion that retirees can spend 4.5% of their savings a year and not outlive their money.

OK. You go first...

 

[chinaco]

Financial planner Bill Bengen defends his conclusion that retirees can spend 4.5% of their savings a year and not outlive their money.

OK. You go first...

That was based on up to 2006... put in up to 2010 and we might be back to 4.2%

Plus there are some additional qualifiers...

30 years, his rules, portfolio construction, how the portfolio was managed (you do not mess up)...

Plus the general caveat.... the past may not reflect what will happen in the future, one might need to adjust.

 

[nun]

Plus there are some additional qualifiers...

30 years, his rules, portfolio construction, how the portfolio was managed (you do not mess up)...

Plus the general caveat.... the past may not reflect what will happen in the future, one might need to adjust.

These qualifiers are all reasons I go with my particular Mcawber strategy and use 4% as my max allowable withdrawal. It's conservative and you need to combine frugality with a substantial portfolio or other retirement income like a pension.

30 years and my rules....I hope I live longer than that, never withdraw more than the income from your investments and never take out more than 4%, even if you make more than that in a year. In bad years spend cash and in good years top up your cash account and then reinvest.

Portfolio Construction... I go 50/50 AA....reason I can't decide what's the best mix for my age and current economic conditions...so I simply go right in the middle.

Portfolio Management... Another place I've given up all pretense at skill or knowledge so I rebalance whenever I diverge by more than 5% from my AA and I just use a few index funds.

Adjusting.....reduce spending in lean years.

 

[Focus]

I found this the most reassuring part of the article, since I need my investments to last at least 40 years, not just 30 -- as would be true for most of the members of this forum.

Bengen figures with a 4.5% payout rate, when someone hits 95 he will still have a stash worth at least the initial value of his portfolio 96% of the time. Usually he'll have much more left.

 

[FIRE'd@51]

Bentgen's 2006 results seem to be inconsistent with those of Firecalc, for his asset allocation and WR.

A few years ago, I built my own spreadsheet to simulate Firecalc. I don't have returns for intermediate Treasuries, but if I withdraw 4.5% from a portfolio of 55% stock (S&P 500), 23% LT Treasuries and 22% one-month T-bills (which should approximate the duration of intermediate Treasuries), the success rate is only 82% (even with an expense ratio of 0%). My results are closer to those of Firecalc than Bentgen's.

 

[jdw_fire]

pssssst Wellesley

 

[Ed_The_Gypsy]

Remember that Scott Burns got on the map when he called out Peter Lynch who said in an article that one could withdraw 5% forever safely. Scott said, No you can't, and Peter withdrew his statement.

 

[Onward]

I found it a weird article about an over-complicated strategy.

"There are plenty of individuals who could do it," he answers. "But they must be prepared to spend large blocks of time on portfolio management."

he often also picks individual stocks -- such as Coca-Cola, Intel, McDonald's and Procter & Gamble -- because "I can't find a mutual fund focusing on the specific stocks I want."

I wonder if he wanted Enron or Worldcom?

 

[simas]

4% is highly dependent on macro conditions

According to the article I saw in Journal of Financial Planning 4% SWR is highly dependent on general macroeconomic conditions. In that article, authors performed analysis on 20th century looking at 30 year withdrawal period testing every year for each major industrialized country. Only 3 out of 27 countries tested had any scenarios that supported 4% SWR with worst case being Japan, 1942 with SWR of 0.47%.

US went through enormous transformation in 20th century from former emerging power to lone superpower by the end of it. If you think this could be repeated again, 4% is a good safe estimate. If you think US now is more alike to France in early 20th century (overextended empire) than different rates apply and 4%+ should be reserved for countries like India, Brasil and may be China. Of cause if you happen to be in countries that 'lost' (Germany) your safe withdrawal rates are much worse

 

[nun]

I found it a weird article about an over-complicated strategy.

I don't see the complications of a 4% withdrawal rate with some rebalancing. Couldn't be simpler IMHO.

 

[Nords]

According to the article I saw in Journal of Financial Planning 4% SWR is highly dependent on general macroeconomic conditions.

If you're gonna say things like this then it'd be helpful for us to be able to enjoy reading the article too... perhaps via a link or at least a citation.

 

[Running_Man]

If you're gonna say things like this then it'd be helpful for us to be able to enjoy reading the article too... perhaps via a link or at least a citation.

You may not want to see it since Rob Bennett is the first person thanked as a source for the article:

Safe Savings Rates: A New Approach to Retirement Planning over

 

[REWahoo]

You may not want to see it since Rob Bennett is the first person thanked as a source for the article:

Actually it is very informative, especially as to the likely quality of the article.

 

[nun]

You may not want to see it since Rob Bennett is the first person thanked as a source for the article:

Safe Savings Rates: A New Approach to Retirement Planning over

An interesting article and I like the alternate perspective of thinking about a saving rate to achieve a particular level of income. However, it's all a bit academic as who has any idea what they'll need for retirement income 30 or 40 years in the future. The variables are so numerous, like how much will I be making, what %age of final salary will I need, what will my personal circumstances be, what will my budget be? You could use that tables and say I have 30 years until I retire and I predict 30 years or retirement and I want to replace 50% of my final salary....so I'll save 16% of my salary each year and it might be completely off base when you get to be a couple of years from ER.

Just save as much as you can, live frugally, pay off the house, don't have kids or at least hope they get full scholarships or go to West Point etc, keep investing fees to a minimum, don't time the market, rebalance, never spend capital, and take SS at 70.