Vanguard looks at the 4% rule, 20 years later

[audreyh1]

Quote:

Originally Posted by David1961 I'm curious what you do if your portfolio goes down by 10% in a year. Do you reduce spending by 10% the next year?

My income, i.e. the amount I can withdraw, would drop by 10%. Yes to that part.

My spending is a different animal. At present my retirement income exceeds my expenses by a wide margin, so if income only dropped 10%, I might not have to cut my spending at all.

[Major Tom]

Quote:

Originally Posted by clifp I have yet to meet an actual retiree IRL or a forum who faithful follows the 4%, and I think that is a good thing.

If there is such an individual i.e. one who began the withdrawal phase with a fixed percentage of the starting value of the portfolio, and sticks to it, with adjustments only for inflation, over the course of 20, 30 or more years, then I hope that he/she will post here. I'm sure we will all have questions to ask!

[ejman]

Quote:

Originally Posted by unclemick No surprise here - after 21 years of ER at age 71 me and the IRS are just the best of new found pals. Now - I suspect in my being a 'cheap SOB' in early years of ER anticipating 'the shoe to drop any time' and wanting to be ready 'just in case' I was not alone. It might be like the OMY syndrome and very common. Hindsight says I kinda enjoyed getting down with my bad frugal and varying withdrawals. Knock on wood - health has held up so I have no regrets on not spending earlier on hiking, skiing, travel, etc., etc. heh heh heh - so all in all 2-6% plus variable withdrawal range and some Mr Market dipsy doodles 1993 -2014 I'm happy and my new found pals at the IRS are ecstatic.

Isn't it wonderful to think that you and the 'guvmint' are on the same side on this one? After all, if your IRA portfolio shrinks 50% then your "pals" share shrinks even further. Yeah its nice when we can all pull together.

[audreyh1]

Quote:

Originally Posted by ejman Isn't it wonderful to think that you and the 'guvmint' are on the same side on this one? After all, if your IRA portfolio shrinks 50% then your "pals" share shrinks even further. Yeah its nice when we can all pull together.

Agree - unclemick's post is just hilarious! Especially his newfound camaraderie with the IRS!

[ERD50]

Quote:

Originally Posted by Major Tom If there is such an individual i.e. one who began the withdrawal phase with a fixed percentage of the starting value of the portfolio, and sticks to it, with adjustments only for inflation, over the course of 20, 30 or more years, then I hope that he/she will post here. I'm sure we will all have questions to ask!

I don't understand why this would be considered a rare occurrence. Even at a full 4%, adjusted for inflation every year, we know that 95% of times they would have survived just fine. And many of those rides would not have been scary at all.

Take 1982 for example - their portfolio increased in real dollars, never took even a minor dip from the starting point, just up and up, even with the 4% withdrawals! It was double in just 7 years. Would they be worried?

edit/add: just ran a simulation, and you could retire in 1982 with greater than an 8% inflation adjuste WR, and never see your portfolio buying power dip below the start point! Sweet!

-ERD50

[clifp]

Quote:

Originally Posted by ERD50 I don't understand why this would be considered a rare occurrence. Even at a full 4%, adjusted for inflation every year, we know that 95% of times they would have survived just fine. And many of those rides would not have been scary at all. Take 1982 for example - their portfolio increased in real dollars, never took even a minor dip from the starting point, just up and up, even with the 4% withdrawals! It was double in just 7 years. Would they be worried? edit/add: just ran a simulation, and you could retire in 1982 with greater than an 8% inflation adjuste WR, and never see your portfolio buying power dip below the start point! Sweet! -ERD50

The question isn't survival at all, I and I suspect Major Tom believe the numbers. It is just a matter of mechanics of being retired and implementing the 4% rule.

First, I suspect once people are actually retired the most important number for figuring out how much to spend is the value of the current portfolio not what it was 5 or 10 years ago when they retired.

Second people spending is function of needs and events more than inflation. Even if somebody was actually basing their spending solely on their initial portfolio value, they adjust spending on things beside the government inflation value. I seriously want to meet an actual retiree who in Jan 2009, said last year I withdrew $43,420, in 2008 inflation was 3.8% so this year I'll withdraw $45,070

I would think that person either had huge balls or hadn't been paying attention the last few months.

[ERD50]

Quote:

Originally Posted by clifp The question isn't survival at all, I and I suspect Major Tom believe the numbers. It is just a matter of mechanics of being retired and implementing the 4% rule. First, I suspect once people are actually retired the most important number for figuring out how much to spend is the value of the current portfolio not what it was 5 or 10 years ago when they retired. Second people spending is function of needs and events more than inflation. Even if somebody was actually basing their spending solely on their initial portfolio value, they adjust spending on things beside the government inflation value. I seriously want to meet an actual retiree who in Jan 2009, said last year I withdrew $43,420, in 2008 inflation was 3.8% so this year I'll withdraw $45,070 I would think that person either had huge balls or hadn't been paying attention the last few months.

Well, my personal rate of inflation hasn't been much. But I did not cut anything from the budget in the downturn. My charts showed this was a historic downturn, I was well aware of it.

But that's not the point. Downturns like that is what leads to 3-4% WR, just in case. But on average (try a 50% success rate), that has not been what retirees face. But we need to be conservative - just in case.

-ERD50

[Fermion]

Quote:

Originally Posted by Major Tom 20 years would take you to age 66. What would you do if your portfolio failed at age 66?

I guess we would do what 80% of the USA is going to do...rely on SS and complain about the government.

[clifp]

Quote:

Originally Posted by ERD50 Well, my personal rate of inflation hasn't been much. But I did not cut anything from the budget in the downturn. My charts showed this was a historic downturn, I was well aware of it. But that's not the point. Downturns like that is what leads to 3-4% WR, just in case. But on average (try a 50% success rate), that has not been what retirees face. But we need to be conservative - just in case. -ERD50

But did you increase your spending by 3.8% like the Trinity study would have you do.

The point that Vanguard guy, myself, and I think Major Tom are making that real retirees don't behave in the same robotic method as the hypothetical retiree in the Trinity studies do.

I suspect that for careful planners like we have on the forum, the actual failure meaning people run out of money by systematic overspending before they die is even smaller than FIRECalc would predict.

[Major Tom]

Quote:

Originally Posted by clifp The question isn't survival at all, I and I suspect Major Tom believe the numbers.

I do believe the numbers or, to be more accurate, I have a pretty good understanding of what they mean. I was merely wondering - and this is by no means an original thought - how many people would begin a 30, 35 or 40 year withdrawal period with a particular WR, and stick to that exact same WR, with annual adjustments for inflation, for their entire retirement? There may be several different reasons for retirees pulling out different amounts. For instance, quite a lot of people seem comfortable with a WR that gives, say, a 95% chance of success, or the highest WR that will still just give a 100% chance of success. I am not taking issue with those decisions, as everyone has different risk tolerances and intended strategies but let's, for instance, take a retiree who feels comfortable with a WR that Firecalc gives a 95% chance of success. If he/she is unlucky enough to have a poor sequence of returns early on in retirement, then we know that at least historically, he/she can continue following the strategy and won't run out of money. There is, however, a difference between rationally knowing something, and having the emotional make-up to follow-through. I wouldn't mind betting that, after a poor sequence of returns, many folk would reduce their spending a little until the market recovered somewhat.

Likewise, what if our retiree were lucky enough to experience a good sequence of returns (or even an "average" one)? If, after 10 or 15 years, you were to find yourself with considerably more money than you were planning/hoping for, after adjusting for inflation? Perhaps a few would stick to the same WR but I'm betting that at least a few would either increase their withdrawals for a few years, or perhaps reset their strategy, and begin another 30 or 40 year withdrawal period. I bet a few folk here reset every few years - c'mon - own up

All I'm saying is that when at least 30 years have passed since the Trinity study and similar studies that were based on it were carried out, how many retirees will have experienced an entire retirement with the exact same WR (with adjustments for inflation) throughout the entire period? I can tell you that if I hit paydirt and end up one of those particularly lucky high-flying trajectories in Firecalc, I won't still be living on the same amount (inflation adjusted) as when I started!

PS - I wrote this reply a few hours ago, but it has been sitting on my computer in review mode and un-posted until now because I ended up napping with 2 cats on top of me and couldn't move

[Major Tom]

Quote:

Originally Posted by clifp The point that Vanguard guy, myself, and I think Major Tom are making that real retirees don't behave in the same robotic method as the hypothetical retiree in the Trinity studies do.

That's exactly what I meant, though you said it far more succinctly than I did.

[mathjak107]

alot of the time frames in the rolling 30 year periods were very heavily influenced by the time frames and exact sequencing to the time frames before it or in it.

in fact the 17 year period from 1987 to 2003 had the markets returning an incredible almost 14% average return yearly.

you could have survived just about any kind of higher inflation over that time frame or any rolling period connected to it.

many times in our history events and sequencing are so unique that it is likely things will never play out that way again.


in fact PFAU'S monte carlo simulations had very different results compared to historical ones as far as swr and failure periods..

personally i think the historical data itself is not the best way to determine success rate.

but i will say there is a common denominator to those time frames that failed that maybe a great predictor of success rate.


so what do i mean?

numbers crunching by KITCES has determined that every failed time frame had a common denominator.

that was a real return average less than 2% over the first 15 years of a 30 year retirement always resulted in failure.

so with that as a guide you can tell well in advance where you stand approx.

as an example someone retiring in march 2000 who owned just a total market fund and cash is coming up on a real return now of not only less than 2% but negative 1%.

a clear sign without spending cuts mathamatially this will likely be a failed retirement. what happens after the devastation of less than 2% real return made anything over the last 15 years of the 30 year period irrelevant as there wasn't enough money left to grow even if the best of times came after the fact.


monitoring your 15 year real return average may be the best way to see how you stand if in theory you were to follow the 4% rule and spend and inflation adjust yearly like a robot.


since that would be the worst case scenerio anything you do to spend less or inflation adjust less often in real life will make things better.

[ERD50]

Quote:

Originally Posted by Major Tom Quote: Originally Posted by clifp View Post The point that Vanguard guy, myself, and I think Major Tom are making that real retirees don't behave in the same robotic method as the hypothetical retiree in the Trinity studies do. That's exactly what I meant, though you said it far more succinctly than I did.

I don't think we're communicating. I don't disagree with either of you that many/most retirees will adjust spending with portfolio dips.

What I was responding to, was Major Tom's statement that seemed to say that someone not making adjustments due to portfolio dips would be rare/non-existent. But as I pointed out, many historic paths did not see big dips in buying power, some saw no dips at all, even at 8% WR.

I don't robotically increase spending to match some published number, but if my expenses went up by that amount, I would do it w/o worry. I figure I may have higher than published future inflation (health care, taxes, pay for maintenance & repairs that I DIY now, unknowns?), so I'll 'bank' what I can now.

And if I did do for 20-30 years with only inflation adjustments, what questions would there be to ask? I imagine I would simply say 'I chose a conservative WR, one a bit lower than what would have historically survived the worst of the worst, so I stuck with it, and (making a hypothetical future assumption here) my path ended up not being as bad as the worst we've seen, so I was OK with inflation adjusted spending'. I guess it just doesn't seem remarkable to me, that's all.

-ERD50

[Major Tom]

Quote:

Originally Posted by ERD50 I don't think we're communicating. I don't disagree with either of you that many/most retirees will adjust spending with portfolio dips. What I was responding to, was Major Tom's statement that seemed to say that someone not making adjustments due to portfolio dips would be rare/non-existent. But as I pointed out, many historic paths did not see big dips in buying power, some saw no dips at all, even at 8% WR.

My apologies if I didn't communicate my opinion clearly enough, and I may well have not taken enough time to attempt to understand your point of view either, ERD50. What I was attempting to posit, was that instances of someone not making adjustments for any reason whatsoever (not just portfolio dips) would be rare. Those reasons might include increases or decreases in portfolio value, (either short term, or over a longer period), unforeseen financial need, or just plain whimsy.

Quote:

Originally Posted by ERD50 I don't robotically increase spending to match some published number, but if my expenses went up by that amount, I would do it w/o worry. I figure I may have higher than published future inflation (health care, taxes, pay for maintenance & repairs that I DIY now, unknowns?), so I'll 'bank' what I can now. And if I did do for 20-30 years with only inflation adjustments, what questions would there be to ask? I imagine I would simply say 'I chose a conservative WR, one a bit lower than what would have historically survived the worst of the worst, so I stuck with it, and (making a hypothetical future assumption here) my path ended up not being as bad as the worst we've seen, so I was OK with inflation adjusted spending'. I guess it just doesn't seem remarkable to me, that's all.

I do see your point, which I think is that although the potential exists for large variations in portfolio value, in the majority of historical cases, the deviation is not that great. Therefore, a retiree choosing a WR that is neither extremely conservative or aggressive stands a good chance of not experiencing a sequence of returns that may cause him/her to reevaluate that WR.

OK, I have only been out of bed for a little over an hour and have already used up more than my quota of words for the morning. Time for another cuppa and a period of relative non-wordiness

[ERD50]

Quote:

Originally Posted by Major Tom My apologies if I didn't communicate my opinion clearly enough, and I may well have not taken enough time to attempt to understand your point of view either, ERD50. What I was attempting to posit, was that instances of someone not making adjustments for any reason whatsoever (not just portfolio dips) would be rare. Those reasons might include increases or decreases in portfolio value, (either short term, or over a longer period), unforeseen financial need, or just plain whimsy. ...

No problem, and I would agree that almost all of us will vary our spending for any number of reasons. I've got a car, furnace, AC, water heater, washer, fridge and freezer that are due/over-due for replacement, so I expect I'll have some increases in the next few years. But those are budgeted for (I actually have an 'amortized budget' line in my spending chart for big items like cars) and the smaller ones average out pretty well.

-ERD50

[clifp]

Quote:

Originally Posted by ERD50 No problem, and I would agree that almost all of us will vary our spending for any number of reasons. I've got a car, furnace, AC, water heater, washer, fridge and freezer that are due/over-due for replacement, so I expect I'll have some increases in the next few years. But those are budgeted for (I actually have an 'amortized budget' line in my spending chart for big items like cars) and the smaller ones average out pretty well. -ERD50

Ah I see the difference, you are smarter about budgeting. While I did have car replacement budget ($30K/10 years = $3K/year needless to say the Tesla blew that budget up) everything else was sort of hand waved away. The problem for me is that my home repair IQ is about 1/2 my financial IQ. So I had only vague ideas, I am going need a roof in 3 or 5, or 15 years, and expensive kitchen remodel sometime. However things like a new water heater, plumbing, a new fence, new flooring for downstairs, completely unplanned, and the vague $100-$200/month home maintenance was total inadequate. Fortunately a low initial WR and good returns on my part has not made these expenses a big deal.

I don't think I've had good sequence of returns, in fact I'd argue that up until 2012 it is been a bad sequence. In my case my spending is 100% a function of my current portfolio and what I started with 15 years ago is completely irrelevant.

[RetireBy90]

Quote:

Originally Posted by clifp Ah I see the difference, you are smarter about budgeting. While I did have car replacement budget ($30K/10 years = $3K/year needless to say the Tesla blew that budget up) everything else was sort of hand waved away. The problem for me is that my home repair IQ is about 1/2 my financial IQ. So I had only vague ideas, I am going need a roof in 3 or 5, or 15 years, and expensive kitchen remodel sometime. However things like a new water heater, plumbing, a new fence, new flooring for downstairs, completely unplanned, and the vague $100-$200/month home maintenance was total inadequate. Fortunately a low initial WR and good returns on my part has not made these expenses a big deal. I don't think I've had good sequence of returns, in fact I'd argue that up until 2012 it is been a bad sequence. In my case my spending is 100% a function of my current portfolio and what I started with 15 years ago is completely irrelevant.

Sounds like me. I plan for those that occur often enough that they catch my attention, but I'm sure that there are many I don't catch. To cover for them, we plan a lower SWR of 3.5% and will only need to draw for 10 years, so we have room to spend more to cover unanticipated costs.

[Major Tom]

Quote:

Originally Posted by RetireBy90 Sounds like me. I plan for those that occur often enough that they catch my attention, but I'm sure that there are many I don't catch. To cover for them, we plan a lower SWR of 3.5% and will only need to draw for 10 years, so we have room to spend more to cover unanticipated costs.

My plan is similarly flexible (some might say fuzzy). I began withdrawals 3.5 years ago at 2.5%. The withdrawals have remained at exactly the same dollar amount (no adjustment for inflation yet) but now represent just 2% of the current portfolio. I have accumulated a small emergency fund (about 5 months living expenses) in my checking account from unspent money, which should cover most likely unforeseen emergencies. For any other unplanned spends, my WR is sufficiently low that I'd be able to cover most eventualities without significantly affecting my long-term plan.

[Snowcat]

Hmnsg.


Sent from my iPhone using Early Retirement Forum

[jkern]

I don't use the 4% rule as a rule at all. I calculate my SWR and compare it to all the literature to determine if I feel comfortable or not.


After all income sources come online (SS for me).


SWR : 4% Not comfortable at all
SWR : 3.5% Concerned
SWR : 3% Ok
SWR : 2.5% Comfortable
SWR : 2% Very comfortable
SWR : 1.5% Look into increasing spending