ERD50
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
ERD50: No, the 4% rule has been "The Number" in the broad financial community ever since Bengen's 1994 paper and the Trinity study. ... While it is true that not everybody agreed with it, the broad community did. It's only in the last few years that the general consensus is starting to think that 4% is too high.
OK, I guess I'm just saying that as long as I've been on this forum, there have been a significant group that supports a 3-3.5% WR. It wasn't just in the last few years. I don't know about 'general consensus'. But not a big deal either way.
IMHO, the right SWR to start with when doing initial backtests is what was accepted at the time (notwithstanding that 1972 is 20 years before Bengen's paper). AFAIK, Guyton started from that 4% number when he invented his Withdrawal Decision Rules.
Well, I'm going to apply the method to what I believe is relevant for me. They can use 4% in their paper if they want, that's fine. But my starting point is what has survived 100% of the time in the past. And I'm going to enter my expectations/timing for pension and SS, which can bend these results anyhow.
It's tricky to avoid the hindsight bias fallacy, and IMHO -- for the purposes of comparing these two withdrawal strategies -- using a SWR of 3%-3.5% is hindsight bias.
? FIRECALC uses historical data. That is always going to be in 'hindsight'. It's not 'bias', IMO, it's just using the data you have. Lacking a crystal ball, we can't predict the future anyhow. Just as I would look at historical weather data to plan a vacation, I think it is worthwhile to look at historical data for portfolio survival. Neither are perfect, but watcha gonna do? And the future could be worse than the past, and that is why I like to use a 100% success in my FC runs - why use a plan that has been known to fail in the past?
OTOH, capping the CPI adjustment to 6% is also hindsight bias! The only time inflation has been much above 6% is one period of a few years centered around 1977.
Agree, though I wouldn't call it 'hindsight bias', I'd call it throwing out the data you don't like (cheating!).
I say use the numbers that make sense for your situation. Why would I use anything but? What would I learn with 4%, if I plan for something else, and have pension/SS kick in later? If you are just looking for a 'generic' idea of whether G-K is 'better' than straight inflation adjusted WR, that could be done for several WRs, to match up to different scenarios (3, 3.5, 4, 4.5, 5....)So IMHO the proper comparison of plain SWR vs. G-K is 4% and 5.5%, with no inflation caps.
As far a putting a "bare minimum" floor, I'm against it. It's all well and good to say, "I insist on taking at least $X", but reality says that when the portfolio gets to zero, you won't be making ANY withdrawals.
IMO, it makes sense as an input parameter to test the 'rule'. I do want to take at least $X - will this, or any other rule, provide for this?
-ERD50