Really basic ? about the 4% rule

[Out-to-Lunch]

Why does every 4% post have to devolve into a debate about what a rule is? Happens every time on bogleheads and now it's showing up here. It's just a study that drew a conclusion from data. Sure is better than what they used before Bengen's work. Where's the "pulled it out of my arse" emoji?

+1! Exactly.

 

[Midpack]

Why does every 4% post have to devolve into a debate about what a rule is? Happens every time on bogleheads and now it's showing up here. It's just a study that drew a conclusion from data. Sure is better than what they used before Bengen's work. Where's the "pulled it out of my arse" emoji?

It’s not new here. Should we ignore it when someone claims the rule was meant to be applied literally without adjustments - knowing there are new readers every day?

 

[REWahoo]

Where's the "pulled it out of my arse" emoji?

The mods are using it to discuss posts identifying the right age to start SS and whether or not to pay off your mortgage early.

 

[corn18]

It’s not new here. Should we ignore it when someone claims the rule was meant to be applied literally without adjustments - knowing there are new readers every day?

No.

 

[MichaelB]

The mods are using it to discuss posts identifying the right age to start SS and whether or not to pay off your mortgage early.

Wrong. Dividends vs total return. .

Also, thinking about ICE vs EV.

 

[corn18]

Wrong. Dividends vs total return.

And you can't use historical returns to predict the future. And you can't use Monte Carlo sims because they have a tail. And, and, and...

 

[skyking1]

Coke Vs Pepsi?

@Markola, thanks for the general bent of your post. It would indeed be tragic if folks ignored all else but the portfolio, even though they will certainly have to downsize, for a great example.
Our entire spending plan over the first ten years of retirement is as lumpy as can be, and no set rule or guideline will ever be able to address it.

 

[corn18]

It’s not new here. Should we ignore it when someone claims the rule was meant to be applied literally without adjustments - knowing there are new readers every day?

I was thinking about your post more, and I have to change my mind. I forgot how I was when I first visited the financial fora. While it irritates me now to read the same responses / arguments over and over, I took it all in while I was new. So we should have these conversations each and every time to help others.

My apologies for being curt.

 

[LastBoomer]

Except asset values are inflated

Bergen recently came out and said that although dividend and interest rates are liw, ASSET prices are inflated, both bonds and overall stock market...so the 4% rule was still valid.

Remember folks, this model has been backtested to 1870, during all economic conditions since then, including the Great Depression and the stagflation 1970s.

 

[RapmasterD]

I don't know anyone who's blindly followed/following the 4% SWR methodology, but it was never intended to be used in that way even by Bengen or the Trinity Study authors, it was/is an academic study used for planning purposes. The retiree should monitor and make adjustments accordingly depending on how future returns unfold. For whatever reason this needs to be repeated here over and over...

The Trinity study authors noted in 1998 "The word planning is emphasized because of the great uncertainties in the stock and bond markets. Mid-course corrections likely will be required, with the actual dollar amounts withdrawn adjusted downward or upward relative to the plan. The investor needs to keep in mind that selection of a withdrawal rate is not a matter of contract but rather a matter of planning."

In 1994 Bengen said "the 4% withdrawal rate ("Four percent rule") as a rule of thumb for withdrawal rates from retirement savings." He has restated this many times since 1994...

But I am sure many retirees will continue to misinterpret the intent of SWR...

I am blindly following the 3.5% rule when the time comes to do so. Blindly.

 

[GenXguy]

Bergen recently came out and said that although dividend and interest rates are liw, ASSET prices are inflated, both bonds and overall stock market...so the 4% rule was still valid.

Remember folks, this model has been backtested to 1870, during all economic conditions since then, including the Great Depression and the stagflation 1970s.

He changed it to the 4 1/2% rule over 10 years ago and recently said you could call it the 5% rule. There is another recent thread here that brought that up... again.

 

[meleana]

What about taxes? So you take out 4 % but then in many cases will owe taxes depending which account you take it from each year.

Then you end up with less than the 4% net needed to pay your bills.

We are just a year retired and right now just taking out cash needed to meet our expenses whatever the percentage is. I haven’t paid attention to it that much. Sometimes I know we spend more than we thought. Other times not.

 

[jimbee]

What about taxes? So you take out 4 % but then in many cases will owe taxes depending which account you take it from each year.

Then you end up with less than the 4% net needed to pay your bills.

We are just a year retired and right now just taking out cash needed to meet our expenses whatever the percentage is. I haven’t paid attention to it that much. Sometimes I know we spend more than we thought. Other times not.

Taxes are another spending category, and are paid out of the 4% (or however much you withdraw).

 

[Exchme]

In a recent thread there was a link to a Bengen interview where he explained that the importance of the study was that the safe number was not 7%, which is what a lot of advisors had been telling their clients at the time and that he received a lot of flak from the investment manager community at the time. And yes, he has since revised his number upward a bit.

I think it's a reasonable rule of thumb for a thirty year retirement, especially if there isn't a lot of interest in leaving inheritance to children. But like anything in life, you need to be prepared to be flexible in case the world delivers surprises.

 

[CRLLS]

He changed it to the 4 1/2% rule over 10 years ago and recently said you could call it the 5% rule. There is another recent thread here that brought that up... again.

If you listen to his recent interview linked to somewhere on this site, when he did change it, he also said he changed the market indices that he used for calculating. I'm pretty sure the 4% and 4.5%, or maybe the 5% are not due to recent improvements in the markets or simply a sharper pencil on his part. Surely not if he is still back testing to the same dates. Unless one is invested in the indices he used just now 4% 4.5% and 5% depending on what your 60/40 AA is truly invested in. Regardless, he didn't ever blindly recommend the use of the 4% rule for any of his clients' W/D plans. At least that was my takeaway from the interview.

 

[audreyh1]

What about taxes? So you take out 4 % but then in many cases will owe taxes depending which account you take it from each year.

Then you end up with less than the 4% net needed to pay your bills.

We are just a year retired and right now just taking out cash needed to meet our expenses whatever the percentage is. I haven’t paid attention to it that much. Sometimes I know we spend more than we thought. Other times not.

You will likely owe taxes every year, and it will come out of whatever is withdrawn. So you had better model your likely taxes in retirement and include it in your spending total.

 

[GenXguy]

If you listen to his recent interview linked to somewhere on this site, when he did change it, he also said he changed the market indices that he used for calculating. I'm pretty sure the 4% and 4.5%, or maybe the 5% are not due to recent improvements in the markets or simply a sharper pencil on his part. Surely not if he is still back testing to the same dates. Unless one is invested in the indices he used just now 4% 4.5% and 5% depending on what your 60/40 AA is truly invested in. Regardless, he didn't ever blindly recommend the use of the 4% rule for any of his clients' W/D plans. At least that was my takeaway from the interview.

I've posted this months back on this forum, but he changed it to 4.5% by including a small cap allocation in his model. And it wasn't recent at all - it was over 10 years ago, so it's certainly not related to any "recent improvements in the market".

Actually, I had mentioned it was over 10 years ago in the post you responded to!

 

[CRLLS]

Well, 10 years is recent as far as when the original study was done. And my point remains the same. Unless you are invested in specifically the ones used in his study, there is no reason to believe that 4%, 4.5% or 5% are historically safe for any generic 60/40 AA.

 

[youbet]

It's interesting to see that the Bengen 4% SWR is so frequently discussed without mentioning that it applies to a very specific AA. Folks who feel they have "won the game" and go to a high percentage fixed AA or folks who like to be the river boat gambler and stay with a high equity AA have, by choice, moved away from the Bengen study and it in no way applies to them.

However, you can use FireCalc to back test your AA.

 

[audreyh1]

It's interesting to see that the Bengen 4% SWR is so frequently discussed without mentioning that it applies to a very specific AA. Folks who feel they have "won the game" and go to a high percentage fixed AA or folks who like to be the river boat gambler and stay with a high equity AA have, by choice, moved away from the Bengen study and it in no way applies to them.

However, you can use FireCalc to back test your AA.

The Trinity Study tried different AAs, and got the 4% with very few failures result, although for some reason they switched to corporate bonds from intermediate treasuries. Looks like Bengen also did investigate a range of AAs.

 

[GenXguy]

Well, 10 years is recent as far as when the original study was done. And my point remains the same. Unless you are invested in specifically the ones used in his study, there is no reason to believe that 4%, 4.5% or 5% are historically safe for any generic 60/40 AA.

Well I actually said "over" 10 years ago. I double-checked - it was in 2006, so 15 years ago! And that's not recent in regard to what's happening in the market.

There are no guarantees. It's possible things will be different this time.

 

[RobbieB]

I've been pulling well over 4% for 7 years and I got more dough than when I started.

Nothing is "safe". Every time I hear the word I cringe.

 

[Markola]

I've been pulling well over 4% for 7 years and I got more dough than when I started.

Nothing is "safe". Every time I hear the word I cringe.

+1. Including w*rking in stressful j*bs, which is hazardous to one’s health.

 

[Flyfish1]

I just want to know where the 4% income comes from in today's environment. Furthermore there is no 4% rule. It's just a tabulation of historical returns. It may be better or worse in the future. Good luck.

I'm an income investor, and I just looked at my REIT holdings - averaging 6% yields. My outside the market private real estate holdings are typically 7-8% preferred returns. I've been in other deals with 12% returns - but yes some risk. Sprinkle a few higher yield plays across a diversified portfolio and you can easily hit 4% yield.

I'm not positive about this but I think my cash value life insurance pays a 5% yield.

 

[ncbill]

+1. Including w*rking in stressful j*bs, which is hazardous to one’s health.

Doesn't have to be stressful...time and statistics can just catch up to you.

Wife's uncle just died...made it a barely a year after his cancer diagnosis at age 70, was still working full-time AFAIK.

Everyone should also remember Bernstein's 80% rule from his "Retirement Calculator from Hell" series...basically, any retirement calculator result above 80% means little because of other potential causes of failure that simply can't be financially modeled.