Another article on the 4% rule

[Gunny]

https://clark.com/personal-finance-credit/budgeting-saving/4-percent-rule-retirement/

A short article with a more positive slant on the validity of the 4% rule going forward than others I've read recently. Seems like every other day there's a piece published refuting the 4% rule in the face of current high market valuations and low bond rates. I would like to have seen more of the details/numbers, e.g. exact AA used in a his article.

 

[DEC-1982]

https://clark.com/personal-finance-credit/budgeting-saving/4-percent-rule-retirement/

A short article with a more positive slant on the validity of the 4% rule going forward than others I've read recently. Seems like every other day there's a piece published refuting the 4% rule in the face of current high market valuations and low bond rates. I would like to have seen more of the details/numbers, e.g. exact AA used in a his article.

And from the article:

"Here is a brief rundown of our findings:

70% of the time (58 of 82 scenarios) retirement funds lasted 50 years or more.
30% of the time, the money “ran out” – with the worst-case scenario in our study being 29 years.
Our conclusion: Yes, the 4% Rule still works."

 

[SpinDr]

Thanks for posting! I had seen the WSJ article, but not the Clark Howard response. Personally will likely only end up needing roughly a 2.5% withdrawl rate for retirement but I like to see the 4% Trinity study continue to hold up. It will help me when I want to splurge a bit!

 

[Red Badger]

As I became financially literate all too late in life, I went from an avid reader of the WSJ to holding it in disdain. I read way too many articles there about needing 80-100% of gross income to retire, as well as the need for an FA to safely navigate investing.

This forum, and other blogs, helped me educate myself to the point of retiring at 60 with no worry or stress about our financial future.

Getting by nicely on ~50% of w*rking income.

My complicated portfolio is 4 funds; two asset and 2 equity. Zzzzzzzzzz. Oh, and a CD ladder to get us from 2017 to 2019 when we'll break open the SS piggy bank.

I like Clark. He gives sage advice. WSJ? Not so much.

 

[samclem]

I, too, think Clark Howard gives good advice and is one of the "good guys" in the financial/consumer advice biz. Still, it doesn't appear that this analysis by his team addressed the specific points of the WSJ article (that high present stock valuations, low interest rates, and longer retirements may spell trouble for the 4% rule). It looks like he did exactly what most of us do: ran something like FIRECalc (or actually FIRECalc) using the historical asset return data and then looked at the results. To address the conclusion of the WSJ article, he'd have to do something different (e.g.. what's the % success for 40 year retirements with data sets that start with stock valuations and interest rates similar to today? etc). It appears he didn't do that.
But the data sets he did use included some of the rosiest years of the most robust economy in the post WW-II world. And, even with that, for 50 year retirements he found that taking 4% resulted in failure 30% of the time. So, I don't know that a present 40 YO ER who wants to take 4% per year adjusted for inflation should take a lot of comfort in this report. I don't.

 

[Cut-Throat]

So, I don't know that a present 40 YO ER who wants to take 4% per year adjusted for inflation should take a lot of comfort in this report. I don't.

4% is a good 'planning tool', I don't know of anyone that actually follows this as a 'Withdrawal tool'.



If you want a Withdrawal Tool, use VPW, which is what I use. It will work 100% of the time and will probably allow you to spend more money. And no; it does not cause 'Wild withdrawal Fluctuations' that will have you eating cat food in down market years. That is easily mitigated by higher Bond Allocations and Delaying Social Security.


Think of VPW as Selling less when the Market is Low and Selling More when the Market is High..

 

[gerntz]

And from the article:

"Here is a brief rundown of our findings:

70% of the time (58 of 82 scenarios) retirement funds lasted 50 years or more.
30% of the time, the money “ran out” – with the worst-case scenario in our study being 29 years.
Our conclusion: Yes, the 4% Rule still works."

Well, 4% (of initial) would work for 25 years if you just put all your assets under a pillow. 4% of total remaining would work that way to infinity.

 

[gerntz]

As I became financially literate all too late in life, I went from an avid reader of the WSJ to holding it in disdain. I read way too many articles there about needing 80-100% of gross income to retire, as well as the need for an FA to safely navigate investing.

This forum, and other blogs, helped me educate myself to the point of retiring at 60 with no worry or stress about our financial future.

Getting by nicely on ~50% of w*rking income.

My complicated portfolio is 4 funds; two asset and 2 equity. Zzzzzzzzzz. Oh, and a CD ladder to get us from 2017 to 2019 when we'll break open the SS piggy bank.

I like Clark. He gives sage advice. WSJ? Not so much.

Love the WSJ. Best paper going imo. But don't read it for its personal finance advice.

 

[pb4uski]

Well, 4% (of initial) would work for 25 years if you just put all your assets under a pillow. 4% of total remaining would work that way to infinity.

Not really... what you are missing is that the withdrawals under the 4% rule start at 4% of the retirement date balance but then increase for inflation each year.... so 4% the first year, becomes 4.1% the second year, 4.2% the third year, etc. so it will definitely NOT last for 25 years if your assets were under a pilliow.

 

[pb4uski]

Love the WSJ. Best paper going imo. But don't read it for its personal finance advice.

+1

 

[audreyh1]

Well, 4% (of initial) would work for 25 years if you just put all your assets under a pillow. 4% of total remaining would work that way to infinity.

The 4% rule withdrawals adjust for inflation to maintain constant spending power. Sticking your money under the mattress and spending 4% of the original value each year does not.

 

[DrRoy]

It doesn't appear that this analysis addressed the specific points of the WSJ article (that high present stock valuations, low interest rates, and longer retirements may spell trouble for the 4% rule). It looks like he did exactly what most of us do: ran something like FIRECalc (or actually FIRECalc) using the historical asset return data and then looked at the results. To address the conclusion of the WSJ article, he'd have to do something different (e.g.. what's the % success for 40 year retirements with data sets that start with stock valuations and interest rates similar to today? etc).
But the data sets he did use included some of the rosiest years of the most robust economy in the post WW-II world. And, even with that, for 50 year retirements he found that taking 4% resulted in failure 30% of the time. So, I don't know that a present 40 YO ER who wants to take 4% per year adjusted for inflation should take a lot of comfort in this report. I don't.

The underlined portion is why I cannot have any comfort with a 4% WR. I see little that suggests we can expect past returns going forward. I also would not live with a 30% failure rate. I am totally satisfied (all our needs and plenty of wants) at 2% WR, and know that I can spend more from time to time.

 

[audreyh1]

I never expected 4% traditional SWR to be a good choice for a 50 year retirement. Too few data sets, even though the “rosy times” after WWII are counterbalanced by horrible times before WWII in Firecalc. We’ve read many times here that 3.3% or thereabouts gets closer to a “perpetual withdrawal rate”.

A huge goal of the traditional 4% approach was to create a constant inflation-adjusted income stream for a 30 year retirement. I pretty much decided that %remaining portfolio withdrawal method was a more sensible approach, especially as I didn’t care about constant income and was not comfortable with blindly adjusting income for inflation.

2%? Your heirs will be very happy.