Recent rehash of the 4% rule in Ben Felix video

[LOL!]

This 15 minute Ben Felix video is getting some traction over at Bogleheads.org:

It covers the standard 4%-maybe rule of portfolio safe withdrawal rate and serves as nice reminder for folks whole might not have assimilated the idea.

 

[targatom2019]

So what’s he saying is be flexible on the withdraw rate correct ?

 

[LOL!]

I think he's saying that the 4% rule does not apply to early retirees and never did.

Also here is a link to the Vanguard paper with flexibility thoughts that he cited:
https://personal.vanguard.com/pdf/ISGELR.pdf

 

[GravitySucks]

So he suggests the 4% rule be cut to a 2.5% rule. Nope!

Why do money people always insist your labor is riskless? Work in tech and expect not to be let go before you're 66. There's risk. Work on ladders or any physical labor and not expect having a gap due to injury. There's risk. Pick the wrong field. There's risk.

 

[FANOFJESUS]

How about doing this

 

[LOL!]

So he suggests the 4% rule be cut to a 2.5% rule. Nope!

You are right: Nope, he didn't suggest that.

 

[tb001]

You are right: Nope, he didn't suggest that.

I was confused around that particular point. I thought historically somewhere between 3-3.5% was a perpetual swr, at least for US. Was the 2.5% number adjusting for other developed countries?

 

[GravitySucks]

Rewatched.
Looks like he suggests a 2.5% floor. So is he suggesting a being able to scrape by on 2.5% in bad years?

 

[LOL!]

Rewatched.
Looks like he suggests a 2.5% floor. So is he suggesting a being able to scrape by on 2.5% in bad years?

He said that Vanguard modeled a 2.5% floor for spending changes. He reviewed a few studies without making recommendations. The viewer has to draw their own conclusions, except in his video he said it was not a bad idea to have some supplemental earned income.

"For early retirees the 4% rule is not useful. Based on a longer time period, global data, and current market valuations a more reasonable guideline might be closer to 2.5%. And even then constant inflation-adjusted spending is both risky and inefficient. Alternative spending strategies like Vanguard's dynamic approach might be part of the solution. But any early retiree should also keep in mind the possibility of finding ways to turn themselves into a safe asset by continuing to earn at least a bit of income."

And if you are not an early retiree, the above is not about you anyways.

 

[HI Bill]

He misses what FIRECALC captures, which is the fact that most don't need a constant withdrawal rate, and can lower it once SS or pensions begin.

Early retirees experience the greatest SORR in the time period before they start taking SS payments, or pension payments. If one retires at 55, and takes SS at 70, then the riskiest period is 15 years, and the 4% "rule" will likely suffice until the 'reinforcements' arrive. For a 4% withdrawal rate, FIRECALC usually shows the first failures at ~17 years in...so if you FIRE with less than 17 years to SS, you'll likely be okay, even if you don't reduce spending below 4% during down markets.

I w#rked several years longer than I planned to (54 vs. 50) so that I could enjoy more travel. The risk I didn't foresee was the travel restrictions being placed due to COVID-19. I gave up several 'best health' years of my life to be able to travel more, and ironically, can't travel at least for the next year. One gives up presumably healthier years of their life to have a lower withdrawal rate. I think I'll go back to the "Rich, Broke or Dead" calculator, which, with all its flaws, helps put things back into perspective. https://engaging-data.com/will-money-last-retire-early/

 

[Markola]

Rewatched.
Looks like he suggests a 2.5% floor. So is he suggesting a being able to scrape by on 2.5% in bad years?

Good grief. I have an idea. How about if everyone works until they drop and has a 0% SWR? That would ensure portfolio success.

 

[Retch The Grate]

I was confused around that particular point. I thought historically somewhere between 3-3.5% was a perpetual swr, at least for US. Was the 2.5% number adjusting for other developed countries?

3.14% for 100% equities iirc from BigERN's analysis. Which is why my target is a 3% withdrawal rate.

 

[REWahoo]

3.14% for 100% equities iirc from BigERN's analysis.

Pi is the answer!

 

[Retch The Grate]

I w#rked several years longer than I planned to (54 vs. 50) so that I could enjoy more travel. The risk I didn't foresee was the travel restrictions being placed due to COVID-19. I gave up several 'best health' years of my life to be able to travel more, and ironically, can't travel at least for the next year. One gives up presumably healthier years of their life to have a lower withdrawal rate. I think I'll go back to the "Rich, Broke or Dead" calculator, which, with all its flaws, helps put things back into perspective. https://engaging-data.com/will-money-last-retire-early/

That's definitely crappy timing HNL. I'm further out, but my retirement target has included a lot of travel expenses, so maybe I'm closer than I had been thinking if extensive international travel doesn't come back. I expect it will and my longer time frame plans have to stay the same, but I feel for you with this timing monkey wrench. Upside, you're hopefully better shielded against SORR risk with a recession underway since you don't need the extra spending on travel?

 

[HI Bill]

That's definitely crappy timing HNL. I'm further out, but my retirement target has included a lot of travel expenses, so maybe I'm closer than I had been thinking if extensive international travel doesn't come back. I expect it will and my longer time frame plans have to stay the same, but I feel for you with this timing monkey wrench. Upside, you're hopefully better shielded against SORR risk with a recession underway since you don't need the extra spending on travel?

Thanks! I had upped travel to 50% of my annual budget, so yes, I'm not terribly worried about SORR right now, especially until travel returns to normal.

As I mentioned before, as I left for month-long trip to New Zealand in February, everything was fine...and I planned to give notice upon my return. This year's planned travel had also included a month in Europe, two in Japan, one in Bali, and two weeks in the Galapagos, all beginning in June after I was to have FIRED. After deferring travel for decades to be able to FIRE and travel more, I haven't quite gotten over this...but am grateful my wife and I are both well!

 

[donheff]

He made two points:

1) Using the traditional 4% SWR adjusted for inflation is too risky with current stock prices and especially for an ER. Using a 60 year horizon, 2.5% is more realistic if you want to go the traditional route.

2) As an alternative he pointed to Vanguard's variable withdrawal floor and ceiling approach. That approach uses a percentage of current portfolio (e.g. 4%) so the withdrawal amount moves up and down significantly year over year. Vanguard suggests putting percentage limiters on the increase/decrease to dampen down volatility in extreme years (e.g., the withdrawal cannot exceed +- 5% of the previous year's withdrawal).

 

[WyomingLife]

I think he's saying that the 4% rule does not apply to early retirees and never did.

Also here is a link to the Vanguard paper with flexibility thoughts that he cited:
https://personal.vanguard.com/pdf/ISGELR.pdf

Thank you so much for posting the paper.

 

[LOL!]

But I don't think he actually "tested" the Vanguard approach in the same way that some test he did arrived at 2.5% for 60 years. The Vanguard paper had this to say about their 35-year examination of something:

We examined the trade-offs mentioned previously in a multiplier framework (that is, a multiple of initial balance or spending amounts
over 35 years for each spending rule [Figure 3c and 3d]). For example, the dollar plus inflation rule produced real ending balances ranging from 0 times the initial amount at the 5th percentile to 5.9 times the initial amount at the 95th percentile (see Figure 3c). In practical terms, this would correspond to an investor with a starting portfolio balance of $1 million and a 5% withdrawal rate ending with an account balance somewhere between $0 and $5.9 million 90% of the time. As Figure 3c shows, the two other approaches produced results in a much narrower range.

Also note that the 2.5% floor could be a 50% cut from the previous year's spending of 5%.

I actually really don't care that much because I don't expect to live another 60 years as I am not fresh retired.

The bottom line for early retirees might be "Can you live on half of what you expected to spend in case of poor investing returns or other calamities?" That is, if your early retirement was to start living in a van down by the river and getting free health insurance, then you might want to re-think that.

 

[Markola]

He made two points:

1) Using the traditional 4% SWR adjusted for inflation is too risky with current stock prices and especially for an ER. Using a 60 year horizon, 2.5% is more realistic if you want to go the traditional route.

2) As an alternative he pointed to Vanguard's variable withdrawal floor and ceiling approach. That approach uses a percentage of current portfolio (e.g. 4%) so the withdrawal amount moves up and down significantly year over year. Vanguard suggests putting percentage limiters on the increase/decrease to dampen down volatility in extreme years (e.g., the withdrawal cannot exceed +- 5% of the previous year's withdrawal).

We use a Vanguard advisor. Their Dynamic Spending Model will recommend no more than a 2.5% spending reduction year to year and no more than a 5% spending increase year to year, based on what their Monte Carlo-based software is projecting. Their model factors in SS, Medicare, home equity, part time work and all kinds of stuff particular to our goals and unique situation that the blunt instrument 4% Rule cannot. It’s the difference between a scalpel and a sharp rock.

Hint: We can spend a heck of a lot more money than 4% and retain a 95% Success Rate.

 

[jollystomper]

Good grief. I have an idea. How about if everyone works until they drop and has a 0% SWR? That would ensure portfolio success.

I split the difference . Before retirement I decided 4% was too risky for me to depend, so I went with 2% for planning purposes. Once my portfolio could support that level, I started looking at retirement seriously.

 

[donheff]

We use a Vanguard advisor. Their Dynamic Spending Model will recommend no more than a 2.5% spending reduction year to year and no more than a 5% spending increase year to year, based on what their Monte Carlo-based software is projecting. Their model factors in SS, Medicare, home equity, part time work and all kinds of stuff particular to our goals and unique situation that the blunt instrument 4% Rule cannot. It’s the difference between a scalpel and a sharp rock.

Hint: We can spend a heck of a lot more money than 4% and retain a 95% Success Rate.

+1. I forgot that Vanguard recommended a lesser limiter on reductions (2.5%) than on increases (5%).

 

[LOL!]

We use a Vanguard advisor. Their Dynamic Spending Model will recommend no more than a 2.5% spending reduction year to year and no more than a 5% spending increase year to year, ...

OK, but what was the starting percent withdrawal from the portfolio? If it was 10% of portfolio value for the initial withdrawal, then dropping down to 9.75% (a reduction of 2.5% from 10%) would not seem to make a big difference.

What is "a heck of a lot more" anyways?

 

[donheff]

OK, but what was the starting percent withdrawal from the portfolio? If it was 10% of portfolio value for the initial withdrawal, then dropping down to 9.75% (a reduction of 2.5% from 10%) would not seem to make a big difference.

What is "a heck of a lot more" anyways?

You should read the paper linked above to get the details, but they recommended a starting range of 3.5-5.5 depending on the portfolio.

 

[Markola]

OK, but what was the starting percent withdrawal from the portfolio? If it was 10% of portfolio value for the initial withdrawal, then dropping down to 9.75% (a reduction of 2.5% from 10%) would not seem to make a big difference.

What is "a heck of a lot more" anyways?

8% starting 2024. Keep in mind that we are a couple with no kids, our plan anticipates various one time, temporary and permanent spending needs, and the overall goal is ensuring $1+ left at age 90. At 8% initial withdrawal rate, the portfolio indeed gets spent down by about 2/3 for the first 15 years until maximum SS kicks in for both of us, at which time the portfolio starts growing again. So, we’re trading heavy spending up front vs. dying with a lot of money. Vanguard’s projected success rate is 96%. YMMV.

 

[RetiredAt55.5]

So the video said early retirees could supplement part of their income with a side job.

Thank you for that revolutionary idea Captain Obvious!