The 4% Rule is now the 5% Rule

[RenoJay]

Apparently, Bill Bengen, creator of the 4% safe withdrawal rule, now believes that it should be 5% based on low inflation expectations.

https://www.marketwatch.com/story/the-inventor-of-the-4-rule-just-changed-it-11603380557?mod=home-page

 

[explanade]

Damn 5% would be more than double what I'm spending now.

Time to blow that dough?

 

[retire to nature]

I agree that it needs to be adjusted. it is all old numbers in guessing game. I had been changing numbers in FIRE cal to make sure since it is all unknowns.

 

[razztazz]

It's a bit of false advertising. He cannot change history ergo it is and will always be "The 4% Rule." (Or Guideline or Principle or Theory....) What he seems to be saying is that, at the present moment, based mostly on low inflation and the fact that he expects it to remain low for a long time, 5% is a good SWR for somebody retiring now or in the foreseeable future.

It's something like using a CAPE-10 as a sounding tool to gain some insight into how you can expect things to unfold at the time you start retirement rather than just assume the potential for tomorrow becoming Jan 1st 1966.

Of course there are others, whom the article was nice enough to mention, that think the SWR should be lower nowadays due to low bond yields and priceilly priced equities.

 

[audreyh1]

Gosh, I haven’t even gotten to 4% yet!

I use %remaining portfolio which works a little differently.

 

[RetMD21]

Interesting that he says inflation is worse than bear markets for retirees. Presumably many retirees can adjust spending if 5% is not looking so favorable. I would still hesitate to retire if I had to count on 5% since as he says it isn't a law of nature.

 

[Rustic23]

I for one thinks inflation is worse than bear market. Normal slow steady may not be bad, but COLAs can’t keep up with hyper-inflation. If food is going up 10% a day and your SS adjust once a year.... well you come be real hungry. I have no idea how it would effect market values, but you would also have to wait on dividends. There are stories of cab drivers having a fair list that changed every hour to keep up with Argentine hyper inflation.

 

[youbet]

It was inflation, more than the bear markets in stocks and bonds, that really crushed retirees in the 1970s, he says. And inflation is worse for retirees than bear markets, he says, because bear markets eventually end, and stocks and bonds recover. Higher prices, once they’ve arrived, never go back to where they were before. “When you get inflation, it gets locked in,” he says. “You’re stuck with [the higher prices] for 30 years.”

This is the most worthwhile point in the whole article. I think most of us here were well aware of the lingering impact of inflation, especially early inflation, but it never hurts to be reminded.

 

[youbet]

I for one thinks inflation is worse than bear market. Normal slow steady may not be bad, but COLAs can’t keep up with hyper-inflation. If food is going up 10% a day and your SS adjust once a year.... well you come be real hungry. I have no idea how it would effect market values, but you would also have to wait on dividends. There are stories of cab drivers having a fair list that changed every hour to keep up with Argentine hyper inflation.

And it doesn't take "hyper-inflation" to knock the stuffing out of a retirement plan. FireCalc shows years in the 1970's where inflation in the low teens led to portfolio failures. The pain of inflation for retirees is that it never corrects. Once general price levels increase, they don't correct. Or at least that's how it's been historically.

 

[ShokWaveRider]

We average ~2%.

 

[braumeister]

We don't target a specific percentage; we just keep track of it to make sure we're not overdoing it. Our last six years (through 2019) looked like this:

 

[mickeyd]

I still have not tapped my retirement stash and it keeps growing. We are 75 yo and seem to get along fine with pensions and SS paying the way. I probably need a long vacation.

 

[Dtail]

Not sure I agree with this concept. I think many folks here would state that a number of categories which are more relevant to a retiree have gone up more than the official CPI rate used, such as food.
If bond yields are already very low, where is the return on that portion of the portfolio, even though it is used just for ballast to stocks for many.

 

[braumeister]

And it doesn't take "hyper-inflation" to knock the stuffing out of a retirement plan. FireCalc shows years in the 1970's where inflation in the low teens led to portfolio failures.

One of the most important lessons I ever learned was to watch what happened with my grandfather. He retired in the early 60s with a tiny portfolio but a very good non-COLA pension, along with SS. Everyone considered him to be "pretty well off" when he retired (first arrow), but inflation over the years until he died (second arrow) was as rough as it could ever be. He was struggling mightily to stay barely solvent at the end, and he was a very intelligent man.

 

[rodi]

One of the most important lessons I ever learned was to watch what happened with my grandfather. He retired in the early 60s with a tiny portfolio but a very good non-COLA pension, along with SS. Everyone considered him to be "pretty well off" when he retired (first arrow), but inflation over the years until he died (second arrow) was as rough as it could ever be. He was struggling mightily to stay barely solvent at the end, and he was a very intelligent man.

My grandfather had a similar experience... Had an awesome pension when he first retired at age 55..., but not COLA. But the inflation in the 70's ate into their budget. My grandmother ended up taking a part time job as a "shop girl" in her 60's to help with the budget. That lasted about 8 years. She enjoyed it - but it was hardly how she planned to spend her 60's. Grandfather's SS would have been impacted if he worked... so it made sense for Grandmother to work 15-20 hours/week at a high end import/gift shop in La Jolla. This was her first paid job since my mom had been born.

 

[NW-Bound]

One of the most important lessons I ever learned was to watch what happened with my grandfather. He retired in the early 60s with a tiny portfolio but a very good non-COLA pension, along with SS. Everyone considered him to be "pretty well off" when he retired (first arrow), but inflation over the years until he died (second arrow) was as rough as it could ever be. He was struggling mightily to stay barely solvent at the end, and he was a very intelligent man.

From 1961 to 1990, the cumulative inflation rate is 328%. Horrendous!

It means that he would need $4.28 in 1990 for every $1 in 1961, in order to keep the same purchasing power.

 

[audreyh1]

Yeah, pretty scary!

 

[NW-Bound]

4% or 5%?

My trailing 12-month expenses run 1.7% of portfolio. The WR is even lower, because my wife has drawn her SS.

 

[walkinwood]

Apparently, Bill Bengen, creator of the 4% safe withdrawal rule, now believes that it should be 5% based on low inflation expectations.

https://www.marketwatch.com/story/t...ule-just-changed-it-11603380557?mod=home-page

Read the actual paper here.
https://www.fa-mag.com/news/choosing-the-highest-safe-withdrawal-rate-at-retirement-58132.html

As always, Bengen's paper is well reasoned and presented with all the caveats clearly spelled out.

Thanks for posting the article.

 

[W2R]

This year my projected annual spending (updated as of today) is 1.27%. I tried to BTD, I tried! Despite spending more, Mr. Market has been making it challenging to raise my WR. I base my WR on my portfolio value on the prior December 31st, and that portfolio value has been rising nicely.

I know, I am so fortunate. It seems to me that those of us who live alone, don't travel, don't have any dependents, and are old enough to get SS just don't need or want to spend as much as other people as we grow older.

 

[audreyh1]

Lucky heirs!

 

[meierlde]

Another interesting set of plots that show probabily of exhaustion by the age starting at 65, including life expectamcy

 

[Onward]

Apparently, Bill Bengen, creator of the 4% safe withdrawal rule, now believes that it should be 5% based on low inflation expectations.

Thanks for posting this. I try to keep up with what Bengen is thinking and saying.

I had to chuckle when I read he is raising the SWR, when so many other "experts" are slashing it.

 

[CRLLS]

This is the most worthwhile point in the whole article. I think most of us here were well aware of the lingering impact of inflation, especially early inflation, but it never hurts to be reminded.

I don't remember too much about the lingering effect of inflation in the 70's. I do remember 12-15% mortgages and car loans. It didn't stop us from having kids or buying our first new car and our first home.

What I do remember that really made a mark on me, was what one of the respected engineers did during that time. After seeing his profit sharing fall to pieces, he quit his job in order to "protect" his investment from falling any further. At that time, the only way to get the profit sharing was to quit. A year or two later, I heard he was stocking shelves in a grocery store. I learned not to take any drastic actions. That has been etched in my memory more than the inflation rates of the time.

 

[foxfirev5]

The market may have provided a false sense of security the last 5 years , but I somehow doubt the future. No way I'm going to raise my WR. I'll simply use my total investment portfolio as a barometer with lower boundaries established based on age. Inflation is and probably will be my only financial concern. If it's low I'll embrace it despite low growth propects. If it shoots up I'll deal with it somehow.