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Michael Sivy on 4% Rule
Old 07-24-2011, 05:12 AM   #1
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Michael Sivy on 4% Rule

This is a brief article. He makes a few good points. Aside from the issue about all the assumptions (of which there are many more than he has cited)... he notes that one can adjust along the way.

The 4% withdrawal figure is designed to ensure that even in a terrible stock market, you won’t liquidate your principle too fast. Setting your withdrawal rate very low to begin with provides a cushion against a bad stretch in the stock market like the past few years.

That makes sense if you can afford it, but the 4% figure is unrealistic for many people and is also based on all sorts of unstated assumptions. You need to examine these if you want to get the most out of the money you’re actually able to save.
The 4% Myth: Where the Wisdom on Retirement Goes Wrong | Moneyland |

IMO - one of the biggest issue/assumptions that could be overlooked by people that retire is age... especially those around FRA is mortality.

Some interesting statistics in this document besides life expectancy.

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Old 07-24-2011, 07:04 AM   #2
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So the million dollar question is how much more can be squeezed if somebody is willing to take .5% or 1% variability in the withdrawal.

And what about the lucky people who want to quit at 45 with 40+ years of expected retired life? Really th people in coutries which do not have any solid data on stocks or bond returns over the years...


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Old 07-24-2011, 09:12 PM   #3
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The take-away for the average Joe is...

SS (even with all its issues) will be there for people of modest means and will account for a good-sized share of your pre-retirement income.

And since Mr Average Joecan retire at 65, He can take a larger amount than 4% since they will probably live less than 30 years. Note that the 4% rule applied to 30-year retirements

And since the 4% rule is for the very worst sequence of markets, in all likelihood you could take a larger percentage than that.
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Old 07-25-2011, 04:33 AM   #4
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Sivy is talking about just accepting the rule of thumb as a universal law that applies to all... and, I suppose the risk of being afraid to retire and working longer than needed.

There is still longevity risk present. People should develop a plan and manage to it... make adjustments as needed... not ignore it.

IMO - If anyone intends to take a high WR on a portfolio of stocks... they really need to understand how they will manage it, how they will identify if they are in an "unlucky senario" that will jeopardize their base lifestyle... and adjust/reset.

There is no free lunch if one intends to actually mitigate risk!

It is not a fair comparison... since this is a narrow article about a specific aspect of trying to manage income.... but I like the Otar framework.

If one is a red zoner... they might want to consider employing a SPIA with some or part of their money.

However, they may have options about the timing of the purchase depending on the level of assets they hold and the WR needed.

One might establish a reserve level for future SPIA purchase if things do seem to work out. But, of course, that type of decision would take careful analysis and be highly dependent on someones situation.... one size does not fit all!
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Old 07-25-2011, 09:14 AM   #5
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We will probably FIRE in two years. We hold a 60/30/10 portfolio. Our total portfolio expenses (ER, income taxes, and hidden costs) are 1% of assets. Thus, we will live on 3% per year. We like the 4% rule because we want to leave an inheritance to our kids.
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Old 07-25-2011, 02:18 PM   #6
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hmmmmm, maybe use Guyton's method?
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Old 07-26-2011, 03:04 AM   #7
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his only flaw in his idea of using dividend paying stocks is dividends are cut or suspended as we saw in downturns.

to make up the shortfall it means selling stocks at a loss,a no no in retirement.
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Old 07-26-2011, 06:14 AM   #8
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Another assumption built into the 4% rule is that once you set your withdrawal rate, you can never change it. If fact, you can be flexible. If you are prepared to withdraw less for two or three years when times are bad, you’ll actually be able to withdraw more over the long term.
He lost me at that statement. Good post for discussion, bad article for planning.

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