4% rule gone for good?

[ETFs_Rule]

Remember that 4% is a 'Worst Case' historical number.

+2
Even during the 2000's you could have taken out more than 4%.

 

[mathjak107]

except those who retired in 2000 . that year only is a problem so far.

 

[mathjak107]

I'm curious where the common denominator comes from. Makes sense. I just don't remember reading this anywhere.

michael kitces looked in to this.

https://www.kitces.com/blog/what-returns-are-safe-withdrawal-rates-really-based-upon/

 

[papadad111]

michael kitces looked in to this.



https://www.kitces.com/blog/what-returns-are-safe-withdrawal-rates-really-based-upon/

This is a very well written post and insightful article. I only wish there were similar articles on x% for 50 years given life expectancies are increasing and we on this forum are EARLY retirees and hopefully we live 50 rather than 30 more years from retirement. ( retiring at 65 and making it another 50 is unlikely....retiring at 45 and making it another 50 is also not super high probability but the odds are that at least some will hit 95...).

 

[David1961]

This is a very well written post and insightful article. I only wish there were similar articles on x% for 50 years given life expectancies are increasing and we on this forum are EARLY retirees and hopefully we live 50 rather than 30 more years from retirement. ( retiring at 65 and making it another 50 is unlikely....retiring at 45 and making it another 50 is also not super high probability but the odds are that at least some will hit 95...).

+1. The article lists 1966 as one of the worst times (if not the worst time) to retire. Since we are at about the 50 year mark, it'd be interesting to see what the 50 year SWR would have been for someone retiring in 1966. I imagine that's built into Firecalc, though.

 

[REWahoo]

I imagine that's built into Firecalc, though.

Yes it is.

 

[Independent]

I am torn between the comfort of being conservative and absoulte zero desire to have a ton of money left when I go.

If you're in excellent health, you're a good candidate for a Single Premium Immediate Annuity.

 

[Jack_Pine]

If you're in excellent health, you're a good candidate for a Single Premium Immediate Annuity.

I have looked at that in the past and will take another look.

 

[audreyh1]

This is a very well written post and insightful article. I only wish there were similar articles on x% for 50 years given life expectancies are increasing and we on this forum are EARLY retirees and hopefully we live 50 rather than 30 more years from retirement. ( retiring at 65 and making it another 50 is unlikely....retiring at 45 and making it another 50 is also not super high probability but the odds are that at least some will hit 95...).

The problem is there are far fewer 50 year periods so the statistical sample is much smaller.

 

[bld999]

If you're in excellent health, you're a good candidate for a Single Premium Immediate Annuity.

Plus you have a higher chance of out living an average life, so need to prepare for more years out of the kitty.

 

[pb4uski]

+1. The article lists 1966 as one of the worst times (if not the worst time) to retire. Since we are at about the 50 year mark, it'd be interesting to see what the 50 year SWR would have been for someone retiring in 1966. I imagine that's built into Firecalc, though.

Yes it is.

Assuming that is the worst period it looks like a 3.15% WR would have still succeeded. ($31,500 initial withdrawal, $1m portfolio, 49 year time horizon, all other assumptions default gives 100% success).

 

[mathjak107]

i find knowing that we need about a 2% real return average the first 15 years of a retirement gives us a pretty good guide as to where we stand.

you know that y2k retiree who is under 2% better cut back withdrawals well in advance of failure.

that correlation between failures and numbers means historical data is not historical data that has to play out to be true.

if 8 plus 2 is 10 and 9 plus 1 is 10 and 6 plus 4 is ten all we need to know is if we see the number 10 some event will happen regardless of how the sum is arrived at .

so anytime we see less than 2% real return a red flag should go up.

 

[papadad111]

The problem is there are far fewer 50 year periods so the statistical sample is much smaller.

Yes that is the problem in trying to determine a safe 50 year withdraw rate. Also the data that we DO have is USA only and the economy is so much more global that it ever was even in the 30 year sample periods. So .... I wonder mathematically if one can string together a "series of worst returns" to simulate a worst case 50 year period and then determine a safe withdraw rate. I think 3 percent or more may be too high.

Something on order of 2.3-2.7 percent maybe? . Of course the likelihood of some real black swan happening also is higher as is the likelihood of winding up with a huge pot of dough at the end .... Guess best is Variable withdraw after the first 15 or 20 years ( a " higher risk" period).

 

[2017ish]

Yes that is the problem in trying to determine a safe 50 year withdraw rate. Also the data that we DO have is USA only and the economy is so much more global that it ever was even in the 30 year sample periods. ....

We do have data from other markets; the 20th century in the USA markets was a golden era. The Shocking International Experience of the 4% Rule (The paper discussed in the link is the first I read from Wade Pfau.)

 

[David1961]

Yes that is the problem in trying to determine a safe 50 year withdraw rate. Also the data that we DO have is USA only and the economy is so much more global that it ever was even in the 30 year sample periods. So .... I wonder mathematically if one can string together a "series of worst returns" to simulate a worst case 50 year period and then determine a safe withdraw rate. I think 3 percent or more may be too high.

Something on order of 2.3-2.7 percent maybe? . Of course the likelihood of some real black swan happening also is higher as is the likelihood of winding up with a huge pot of dough at the end .... Guess best is Variable withdraw after the first 15 or 20 years ( a " higher risk" period).

A rule of thumb that I have is that with a 0% real rate of return (your investments just keep up with inflation), a 2% WR should last you 50 years. I'm sure there are scenarios where this may not work, but for me 2% would be a very safe WR for 50 years. Especially if you can adjust your spending if you suffer some bad years at the beginning.
But with this approach, you'd be much more likely to die before you run out of money (and thus could leave a lot of money to your heirs).

 

[ERD50]

A rule of thumb that I have is that with a 0% real rate of return (your investments just keep up with inflation), a 2% WR should last you 50 years. ...

To be clear - that is not a 'rule of thumb' it is simple arithmetic. 100/50=2.

However, that simple arithmetic does not take into account sequence of returns.

You can model this in FIRECalc. Set portfolio entry "Start" tab at $1M, period at 50 years, $0 spending. Set 'other spending' tab to $20,000 (2%), no inflation adjustment. Set "Your portfolio" tab to:

A portfolio with random performance, with a mean total portfolio return of 0 % and variability (standard deviation) of 0 %. Assume an inflation rate of 0 %.​

And you'll see a straight line decline to $0 on year 50, as expected.

Now change the standard deviation to a mere 10% (to simulate some sequence of returns variability)... and success rate drops to 33%.

The lowest and highest portfolio balance at the end of your retirement was $-533,105 to $1,541,546, with an average at the end of $-60,275.

-ERD50

 

[papadad111]

We do have data from other markets; the 20th century in the USA markets was a golden era. The Shocking International Experience of the 4% Rule (The paper discussed in the link is the first I read from Wade Pfau.)

This is just partial data -- for example where is the data for world #2 economy China? Perhaps china is a 21st century story so the data is not included. But can not be ignored...

Such an economic mega shift ( the rise of China ) certainly will alter the forward looking long view of all of these economies and related asset returns (USA included).

 

[2017ish]

This is just partial data -- for example where is the data for world #2 economy China? Perhaps china is a 21st century story so the data is not included. But can not be ignored...

Such an economic mega shift ( the rise of China ) certainly will alter the forward looking long view of all of these economies and related asset returns (USA included).

Agree on the difference going forward, if China continues on its upward trajectory. Pfau specifically addressed the omission of China and the survivorship bias of his data:

Keep in mind also that I am only looking at the 19 developed market countries in the dataset, with data going back to 1900. Travel back in time to 1900, though, and ask people to put together a list of 19 developed market countries for the 20thcentury, and you would probably find frequent mention of countries like Argentina, Russia, and China, among others. As those countries never made the dataset, even the results I describe here include survivorship bias.

If you could remove that bias, however, the 20th century results would be more dismal....

 

[audreyh1]

Yes that is the problem in trying to determine a safe 50 year withdraw rate. Also the data that we DO have is USA only and the economy is so much more global that it ever was even in the 30 year sample periods. So .... I wonder mathematically if one can string together a "series of worst returns" to simulate a worst case 50 year period and then determine a safe withdraw rate. I think 3 percent or more may be too high.

Something on order of 2.3-2.7 percent maybe? . Of course the likelihood of some real black swan happening also is higher as is the likelihood of winding up with a huge pot of dough at the end .... Guess best is Variable withdraw after the first 15 or 20 years ( a " higher risk" period).

My instincts (based on prior reading/discussion) are that around 3.3% is probably a "perpetual" number that would reasonably survive 50 years or even indefinitely.

But it is best to have a response plan and be able to cut back if one finds oneself on one of the a "worst case" trajectories.

Otherwise, being too conservative may mean depriving oneself during retirement and leaving a lot behind. If that is a goal - OK.

My instinct is that dropping below 3% especially if you are doing % of remaining portfolio will leave a huge amount on the table after you die. But of course I can't prove that.

 

[daylatedollarshort]

To be clear - that is not a 'rule of thumb' it is simple arithmetic. 100/50=2.

However, that simple arithmetic does not take into account sequence of returns.

You can model this in FIRECalc. Set portfolio entry "Start" tab at $1M, period at 50 years, $0 spending. Set 'other spending' tab to $20,000 (2%), no inflation adjustment. Set "Your portfolio" tab to:

A portfolio with random performance, with a mean total portfolio return of 0 % and variability (standard deviation) of 0 %. Assume an inflation rate of 0 %.​

And you'll see a straight line decline to $0 on year 50, as expected.

Now change the standard deviation to a mere 10% (to simulate some sequence of returns variability)... and success rate drops to 33%.



-ERD50

I think with this methodology, the Boglehead wiki refers to it as liability matching (my husband calls it the TIPS and a beach condo (or in general low baseline expenses) plan), the idea is to generally invest in inflation adjusted, low volatility asset classes, particularly I bonds and TIPS ladders, with a zero or greater real yield, always holding the bonds to maturity.

With even a zero real return over a 40 year retirement horizon, one could have a SWR of 2.5%, and real yields, though still low by historical standards for TIPS, currently are higher than zero for TIPS with a maturity date greater than 5 years:

United States Government Bonds - Bloomberg

This means, depending on your rolling average real yields, your SWR might be 3%+ with no worries except in the case of a government collapse or Treasury bond default.

 

[David1961]

To be clear - that is not a 'rule of thumb' it is simple arithmetic. 100/50=2.

However, that simple arithmetic does not take into account sequence of returns.

You can model this in FIRECalc. Set portfolio entry "Start" tab at $1M, period at 50 years, $0 spending. Set 'other spending' tab to $20,000 (2%), no inflation adjustment. Set "Your portfolio" tab to:

A portfolio with random performance, with a mean total portfolio return of 0 % and variability (standard deviation) of 0 %. Assume an inflation rate of 0 %.​

And you'll see a straight line decline to $0 on year 50, as expected.

Now change the standard deviation to a mere 10% (to simulate some sequence of returns variability)... and success rate drops to 33%.



-ERD50

Good point. It really is math more than a rule of thumb.

 

[Running_Man]

+1. The article lists 1966 as one of the worst times (if not the worst time) to retire. Since we are at about the 50 year mark, it'd be interesting to see what the 50 year SWR would have been for someone retiring in 1966. I imagine that's built into Firecalc, though.

Historically 1966 is viewed as the worst year to retire in yet in 1966 10 year bonds yielded 4.6% and the S&P500 yielded 3.5%.

The proponents of total return investing with 10 year yields at 2 percent and S&P500 yield at 1.8% are being given the chance to prove their point over the next 30 years.

 

[youbet]

The problem with retiring in 1966 was inflation, not yields.

I retired into the Great Recession. Since then, there's been a nice recovery and all seems to be working out (so far). But the folks who retired into that inflationary period have never seen a recovery from it. The impact of the 1966 and subsequent years of inflation are still with us today. The growth of CPI slowed but never deflated and there has never been a recovery in prices since that period.

 

[haha]

The problem with retiring in 1966 was inflation, not yields.

I retired into the Great Recession. Since then, there's been a nice recovery and all seems to be working out (so far). But the folks who retired into that inflationary period have never seen a recovery from it. The impact of the 1966 and subsequent years of inflation are still with us today. The growth of CPI slowed but never deflated and there has never been a recovery in prices since that period.

If by recovery you mean a reversal of the inflation, I don't think that ever happens in modern central bank economies.

No matter what they say, governments like inflation. Look at our federal reserve chairs. They have been are falling all over themselves to jack up inflation, but after all it is actually higher than the world average since 18th century. Tax r3eceipts go up, people feel more flush, there is some redistribution from holders of money to borrowers of money -all things that democratic governments find copacetic.

Ha

 

[dallas27]

If by recovery you mean a reversal of the inflation, I don't think that ever happens in modern central bank economies.

No matter what they say, governments like inflation. Look at our federal reserve chairs. They have been are falling all over themselves to jack up inflation, but after all it is actually higher than the world average since 18th century. Tax r3eceipts go up, people feel more flush, there is some redistribution from holders of money to borrowers of money -all things that democratic governments find copacetic.

Ha

They like controlled inflation, because deflation freezes all commerce. High inflation is not much better. Moderate inflation is the sweet spot.


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