Kitces: How the 4% rule has held up since 2000 & 2008

[lawman3966]

Quote:

Originally Posted by walkinwood Michael Kitces has written another balanced article. He observes that the current state of 2000 and 2008 retirees portfolios is comparable to that of 1929, 1937 and 1966 retirees. Better in some respects. https://www.kitces.com/blog/how-has-...sis/#more-7856 Be sure to read the last section on historical perspective. This one observation struck me and I'll incorporate this calculation in my annual analysis of our situation

I ran a scenario running both Firecalc and ******** with a $1 million portfolio, 64/35 stocks/bonds, and a $40K withdrawal over 30 years.
This generates success rates of 96% with Firecalc and 91% with ********.

This does not appear to square with what Mr. Kitces states, though I have not run through his numbers in detail.

Would you trust Kitces's numbers to set your withdrawal rate even if ******** suggests that there's a 9% chance of running out of money in the target time frame?

[bmcgonig]

Quote:

Originally Posted by nash031 Pfau is selling something... I read his stuff with interest, but take it with a grain of salt.

He now works for an insurance co. He could be accused of selling SPIAs formerly, not a bad thing to many people. The thing is : he shows his work, he shows his assumptions. You can argue with those assumptions, but taking his work with a grain of salt just means that ur taking his assumptions I.e, present low bond rates predicting future low bond rates, and lower stock returns in the future, with a grain of salt.

As an aside GMO and Jeremy Grantham just came out with their latest 7 yr forecast, and for the first time since 1999 it's a negative forecast. Supposedly these forecast have been quite accurate in the past.


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[daylatedollarshort]

We aren't big risk takers so we're using matching strategies for the money we need for our basic retirement lifestyle:

Matching strategy - Bogleheads

Even a zero real return can provide a worry free 2.5% SWR over a 40 year retirement.

Our MO for increased financial security in retirement has been to look for ways to reduce unnecessary / wasteful recurring expenses and increase our passive business / hobby income since we can control those, but we cannot control the stock market or interest rates.

[nash031]

Quote:

Originally Posted by lawman3966 Would you trust Kitces's numbers to set your withdrawal rate even if ******** suggests that there's a 9% chance of running out of money in the target time frame?

You didn't ask me per se, but yes. Why? Because this isn't an unchangable path. You can drive failure modes to zero by modifying any number of things including spending, withdrawals, asset allocations, etc., in the already unlikely event that it becomes necessary. That's just me, and I don't plan to 100% by FIRECalc or anything else anyway... for now!

[nash031]

Quote:

Originally Posted by bmcgonig ...but taking his work with a grain of salt just means that ur taking his assumptions I.e, present low bond rates predicting future low bond rates, and lower stock returns in the future, with a grain of salt.

Yep, that's pretty much exactly right. He could be right. I don't plan using a historical return; I plan using a more conservative number, so I'm accounting for the possibility of lower stock returns in the future already. Why do I also need to reduce my WR to 2.5% if my numbers show a 4% will work even at the lower stock return? If you're into doubling up on being conservative (along with all the other already conservative assumptions most of us make in retirement planning), then that's fine. At some point, enough is enough, and predictions of 2.5% SWR in the future are akin to Yahoo! Finance headlines that read, "NO ONE WILL EVER RETIRE EVER!" and the article telling you you need to replace 90% of your salary in perpetuity to ever fully retire.

The 4% model has worked during periods of low stock return when markets were overvalued. Overvaluation isn't expected (by any rational person) to last the next 30 or 40 years (lucky us if it does!), so I find that Pfau saying a 30 year WR should be based on lower future stock returns disingenuous. The likelihood that stock returns remain low forever and ever ignores history even though history shows that overvaluation leads to lower stock returns - the basis of their argument. As others have told us, these guys are pushing "this time it's different", but there's as much likelihood that it's not.

[Ed_The_Gypsy]

VBINX is 60% Wilshire 5000 Index (Greaney has a typo in the table itself saying S&P 500) and 40% Lehman Aggregate Bond Market Index.

Wellington (VWELX) is also 60/40 but is a manged fund. Odd for Vanguard, eh?

I decided to see how they compare over time. First, I compared them on PerfChart, which plots total return but stops at January 1999. The difference between the two was remarkable but did not cover the same range, so I built tables similar to John Greaney's from historical data from Yahoo Finance on the same basis. My VBINX values were a little different from year-to-year than his as I took the first day in January instead of the last day of December. Oh, well. The difference was still striking.

Having proven once again that I have no business picking individual stocks, I am gradually moving everything into VWELX. Old Dutch adage: We grow too soon old and too late smart.

(The attachments did not quite turn out as expected. If they are illegible, please advise and I will try again.)

[Texas Proud]

Quote:

Originally Posted by nash031 You didn't ask me per se, but yes. Why? Because this isn't an unchangable path. You can drive failure modes to zero by modifying any number of things including spending, withdrawals, asset allocations, etc., in the already unlikely event that it becomes necessary. That's just me, and I don't plan to 100% by FIRECalc or anything else anyway... for now!

Just sayin that you can never get to zero...

We could have a nuclear war...

We could have an asteroid crash into the US and destroy most the the country or world...

Heck, aliens could show up and want to use us as food... (I kinda put this really really low however)...


So, you might approach zero, but you can never ever get there....

[Options]

Quote:

Originally Posted by youbet ... Pfau/Schiller may be correct. Or Kitice's more optimistic outlook may be correct. Or the future may be something entirely different from any of our expectations. That's the way life is. ...

+1

Quote:

Originally Posted by youbet Everybody is selling something. There are no guru's with the "one" correct answer. Take all authors with a grain of salt. The exception to the above might be gov't reports on historical and current performance of economic factors. Or articles based on those reports where the reader has a firm grip on the data being used and the statistical tools being used to analyze it. And even gov't reports which seem to be strictly quantitative statements of the facts can be loaded with bias meant to influence the public/voters. Inflation calculation methodologies come to mind......... Guru-seekers, beware!

+1

Quote:

Originally Posted by nash031 ... If you're into doubling up on being conservative (along with all the other already conservative assumptions most of us make in retirement planning), then that's fine. At some point, enough is enough, and predictions of 2.5% SWR in the future are akin to Yahoo! Finance headlines that read, "NO ONE WILL EVER RETIRE EVER!" a+1nd the article telling you you need to replace 90% of your salary in perpetuity to ever fully retire. The 4% model has worked during periods of low stock return when markets were overvalued. Overvaluation isn't expected (by any rational person) to last the next 30 or 40 years (lucky us if it does!), so I find that Pfau saying a 30 year WR should be based on lower future stock returns disingenuous. The likelihood that stock returns remain low forever and ever ignores history even though history shows that overvaluation leads to lower stock returns - the basis of their argument. As others have told us, these guys are pushing "this time it's different", but there's as much likelihood that it's not.

Emphasis added

+1
All very well said.

[bmcgonig]

Quote:

Originally Posted by nash031 Yep, that's pretty much exactly right. He could be right. I don't plan using a historical return; I plan using a more conservative number, so I'm accounting for the possibility of lower stock returns in the future already. Why do I also need to reduce my WR to 2.5% if my numbers show a 4% will work even at the lower stock return? If you're into doubling up on being conservative (along with all the other already conservative assumptions most of us make in retirement planning), then that's fine. At some point, enough is enough, and predictions of 2.5% SWR in the future are akin to Yahoo! Finance headlines that read, "NO ONE WILL EVER RETIRE EVER!" and the article telling you you need to replace 90% of your salary in perpetuity to ever fully retire. The 4% model has worked during periods of low stock return when markets were overvalued. Overvaluation isn't expected (by any rational person) to last the next 30 or 40 years (lucky us if it does!), so I find that Pfau saying a 30 year WR should be based on lower future stock returns disingenuous. The likelihood that stock returns remain low forever and ever ignores history even though history shows that overvaluation leads to lower stock returns - the basis of their argument. As others have told us, these guys are pushing "this time it's different", but there's as much likelihood that it's not.

You're right. Stock returns don't remain low forever, they normalize in bear markets. Then they revert thereafter to normal or high. If we had a 20% correction tomorrow, both Pfau and GMO would change their forecast to higher returns. So the returns are lower just for the period before the correction. If you retire before a severe bear, your returns will be low for what seems forever. If you retire after it ends, it may be high for what seems like forever. So they will only remain low till the next real bear.

But really, whether we admit it or not, this time IS different. Firecalc has never run a calculation with rates as low as this, and PEs as high. Never. May not make a difference to our retirement eventually, but this time really IS different.


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[nash031]

Quote:

Originally Posted by bmcgonig But really, whether we admit it or not, this time IS different. Firecalc has never run a calculation with rates as low as this, and PEs as high. Never. May not make a difference to our retirement eventually, but this time really IS different.

Every time is different. If it wasn't, we'd know exactly what to do and everyone would do it.

[shotgunner]

I know this may seem to be an obvious question. When the author states subsequent years are increased by an inflation rate what measure is he using for this study, I don't see it cited. Is it CPI, PPI or something else? I used an annual increase of 2% but based on 7 years of personal spending in semi-ER even 2% a year is too generous for me. 1.2 percent a year is my 7 year running average.

[big-papa]

Quote:

Originally Posted by shotgunner I know this may seem to be an obvious question. When the author states subsequent years are increased by an inflation rate what measure is he using for this study, I don't see it cited. Is it CPI, PPI or something else? I used an annual increase of 2% but based on 7 years of personal spending in semi-ER even 2% a year is too generous for me. 1.2 percent a year is my 7 year running average.

Most articles I've read use CPI-U. As others have noted, one's personal inflation rate is going to deviate from that. For me at least, if following this sort of withdrawal methodology, I'd use my personal inflation rate rather than published inflation rates. For backtesting, since I'm not yet retired and I've not tracked personal inflation, I also use CPI-U.

[GravitySucks]

Quote:

Originally Posted by nash031 You didn't ask me per se, but yes. Why? Because this isn't an unchangable path. You can drive failure modes to zero by modifying any number of things including spending, withdrawals, asset allocations, etc., in the already unlikely event that it becomes necessary. That's just me, and I don't plan to 100% by FIRECalc or anything else anyway... for now!

+1. Plans are not static. My plan B and plan C lifestyles would still be quite comfortable and enjoyable. In fact i may move to plan B because its looking more enjoyable than plan A. It gets down to about plan G (building a sod house out on the prairie) when things get dicey.
Non market disasters are more likely to derail a 4% WR life. YMMV.

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