4% rule gone for good?

[Focus]

Here's a nice condensation of the current debate regarding the safe withdrawal rate (it includes photos of Bill Bengen, originator of the 4% rule, relaxing during his well-deserved retirement):

New Math for Retirees and the 4% Withdrawal Rule - The New York Times

"Critics of the rule point out that it is based on conditions in the United States during a very specific time in history; it also doesn’t take into account items like investments costs, taxes, different time horizons or the reality that most retirees don’t spend their money in a linear fashion. Some people may want to spend more early in retirement and may be willing, even comfortable, making cuts when the market plunges once again. And if retirees want to leave money to their children, they may need to trim their spending further."

I'd say those criticisms could be leveled at any withdrawal system. A system by its very nature is never fully flexible or able to account for the unknown. All that said, there's no denying Bengen's accomplishment, which provided a dose of realism when it was badly needed and reset retiree expectations for a generation.

 

[Which Roger]

The critics in the OP's quote don't seem to understand the 4% rule. It does include investment costs and taxes; those are part of the withdrawal.

 

[steelyman]

A system by its very nature is never fully flexible or able to account for the unknown. All that said, there's no denying Bengen's accomplishment, which provided a dose of realism when it was badly needed and reset retiree expectations for a generation.

I agree. Anything that gets one to start thinking about retirement (early or not) and asking themselves, "Now how am I going to do this" is a good start. Any start is better than none at all.

 

[Cut-Throat]

I'd say those criticisms could be leveled at any withdrawal system. A system by its very nature is never fully flexible or able to account for the unknown.

The VPW System is completely Flexible unless the entire economy melts down. It is far safer than any SWR such as 4%, 3% or even 2%.... And will probably let you spend more money

VPW Method

 

[M Paquette]

Meh.

If one reads 19th century English literature, there are often references to 'gentlemen', men of independent means who do not engage in any occupation or profession for gain, who are often referred to as 'three percenters'. That 'three percent' refers to their perpetuities, investments held by them or their families that pay out about a 3% annual return, and which they live on.

A three percent perpetuity corresponds pretty well with a 4% withdrawal from investments intended to last 25-30 years.

There will ALWAYS be external conditions that put a withdrawal system at risk. Some flexibility is needed.

The Retirement Calculator From Hell - Part I
The Retirement Calculator From Hell - Part II
The Retirement Calculator from Hell, Part III, including the quote "Thus, any estimate of long-term financial success greater than about 80% is meaningless."
Retirement Calculator from Hell, Part IV
The Retirement Calculator from Hell, Part V

 

[growing_older]

It is far safer than any SWR

Safer in what sense? You do still have money to withdraw, but the amounts go up and down and in a bad sequence could fall below your basic expenses. Fine, if you can tolerate this, but usually I think of safer in withdrawals as predictable and I can count on having at least enough money to live on.

 

[Independent]

I'd say those criticisms could be leveled at any withdrawal system. A system by its very nature is never fully flexible or able to account for the unknown. All that said, there's no denying Bengen's accomplishment, which provided a dose of realism when it was badly needed and reset retiree expectations for a generation.

+1

I was w*rking for a financial services megacorp in the late 1990's. We had mutual fund sales people who would tell prospective retirees they should roll their 401k balances into (loaded) equity mutual funds.

They would say that the last 10, 20, 30, 40, and 50 year real returns on the S&P were 14%, 13%, 8%, 7%, and 9%. Certainly, with those historic returns, someone with a $500,000 nest egg could retire and withdraw $40,000, growing with inflation, while the value of the portfolio would also grow with inflation.

Bergen demonstrated that $20,000 was more reasonable. That was a huge difference.

 

[gcgang]

+1



I was w*rking for a financial services megacorp in the late 1990's. We had mutual fund sales people who would tell prospective retirees they should ...

Fortunately, there is a way to tell when mutual fund salespeople are lying. If their lips are moving...


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[jebmke]

I know a lot of retired people and none of them use a mathematical withdrawal system. My view is that 4% (or any %) is just a curb feeler -- you still have to pay attention.

 

[Cut-Throat]

I know a lot of retired people and none of them use a mathematical withdrawal system. My view is that 4% (or any %) is just a curb feeler -- you still have to pay attention.

I agree that 4% is "just a curb feeler", however there are plans that will help you 'pay attention' better than you can by 'winging it'.

I am retired and I use a Mathematical withdrawal system called VPW (Variable Percentage Withdrawal).

Plans are good, because they work and take out all of the emotions. I retired early because I followed my plan and I will follow my plan in retirement as well.

 

[timo2]

Plans are good, because they work and take out all of the emotions. I retired early because I followed my plan and I will follow my plan in retirement as well.

 

[Major Tom]

I am retired and I use a Mathematical withdrawal system called VPW (Variable Percentage Withdrawal).

Really? I had no idea. I mean - you have never mentioned it here before

 

[ziggy29]

This almost seems like a "death of equities" moment.

I'm just enough of a contrarian to believe that if the conventional wisdom grows acceptance that the 4% rule is "dead", then it's not.

 

[Midpack]

There have been many articles on the death of the 4% rule, most conclude 3% would be safer - duh? Google and read them all. They assume the future will be worse than any 30 year period in history from 1871 through present which includes dozens of recessions, the Great Depression, several World Wars and lesser. Might be, might not...

Of course VPW is safer, it's a variant of the % of remaining portfolio withdrawal method which cannot fail on paper. Of course you could still find yourself having to reduce spending dramatically along the way, but you'll never go broke...

 

[Cut-Throat]

This almost seems like a "death of equities" moment.

I'm just enough of a contrarian to believe that if the conventional wisdom grows acceptance that the 4% rule is "dead", then it's not.

Remember that 4% is a 'Worst Case' historical number. So, in all probability if you retire in 2015, the odds are very much with you that your SWR will be much higher than 4%. Now there may be a WR that is less than 4% in the coming years, but you would have to be unlucky enough to hit that year on the nose.

So, many here throw the 4% number around, like it is some kind of average. Then they cushion their withdrawals by taking 3% or even 2.5%.... Which mostly demonstrates that they really don't have an understanding of where the 4% came from in the first place.

 

[Major Tom]

So, many here throw the 4% number around, like it is some kind of average. Then they cushion their withdrawals by taking 3% or even 2.5%.... Which mostly demonstrates that they really don't have an understanding of where the 4% came from in the first place.

Or we're simply being conservative.

I began retirement with a 2.5% WR, which is now standing at 2% of my current portfolio value. I am expecting to increase my withdrawals later on in my retirement, and being conservative now suits me fine - it's what I need to make me feel comfortable early on in what I hope will be a long retirement period. I may continue with the current WR for a while - who knows?

We are not all looking to maximize the income from our portfolios. Some of us like the comfort that a conservative WR gives us. There are plenty of people and causes I can leave my money to when I go.

 

[daylatedollarshort]

Or we're simply being conservative.

I began retirement with a 2.5% WR, which is now standing at 2% of my current portfolio value. I am expecting to increase my withdrawals later on in my retirement, and being conservative now suits me fine - it's what I need to make me feel comfortable early on in what I hope will be a long retirement period. I may continue with the current WR for a while - who knows?

We are not all looking to maximize the income from our portfolios. Some of us like the comfort that a conservative WR gives us. There are plenty of people and causes I can leave my money to when I go.

+1. I like the idea of not having to worry about the stock market or ever running out of money more than buying a lot of consumer goods. I would rather have a financial security blanket in retirement and the leftover money can go to the food bank, go to a sanctuary for abused circus elephants or help our kids to not have to be wage slaves at high stress jobs.

 

[retire2020]

Remember that 4% is a 'Worst Case' historical number. So, in all probability if you retire in 2015, the odds are very much with you that your SWR will be much higher than 4%. Now there may be a WR that is less than 4% in the coming years, but you would have to be unlucky enough to hit that year on the nose.

So, many here throw the 4% number around, like it is some kind of average. Then they cushion their withdrawals by taking 3% or even 2.5%.... Which mostly demonstrates that they really don't have an understanding of where the 4% came from in the first place.

+1. That's what I'll be planning to withdraw except for the year like 2008..I'll have two years withdrawals saved in cash and will try to stretch it out for three years if it happens to be down term like 2000-2002 and not touch my portfolio. Other than my house, I'm not planning to leave anything behind for three kids.

 

[RunningBum]

Really? I had no idea. I mean - you have never mentioned it here before

Heh, seems like I've seen it a time or two...

Still, I'm thinking VPW might make more sense to me. I need to study it some more, and I think I'd have to have it go to 0 way past the age I expect to die, just in case, but I think I like the flex for a very long retirement.

 

[audreyh1]

Remember that 4% is a 'Worst Case' historical number. So, in all probability if you retire in 2015, the odds are very much with you that your SWR will be much higher than 4%. Now there may be a WR that is less than 4% in the coming years, but you would have to be unlucky enough to hit that year on the nose.

So, many here throw the 4% number around, like it is some kind of average. Then they cushion their withdrawals by taking 3% or even 2.5%.... Which mostly demonstrates that they really don't have an understanding of where the 4% came from in the first place.

4% relates to a 30 year period which matches a someone retiring at 65. Dropping it to 3.5% or thereabouts is for a 40 year period which better matches an early retiree.

 

[Options]

Here's a nice condensation of the current debate regarding the safe withdrawal rate (it includes photos of Bill Bengen, originator of the 4% rule, relaxing during his well-deserved retirement):

New Math for Retirees and the 4% Withdrawal Rule - The New York Times

...

Article references Pfau's recent work. His predictions are no more likely to be right than all the (at best contradictory) others out there (authority bias). Reminds me of this Buffet statement in his 50th shareholders letter:

“It is entirely predictable that people will occasionally panic, but not at all predictable when this will happen. Though practically all days are relatively uneventful, tomorrow is always uncertain. (I felt no special apprehension on December 6, 1941 or September 10, 2001.) And if you can’t predict what tomorrow will bring, you must be prepared for whatever it does. Investors, of course, can, by their own behavior, make stock ownership highly risky. And many do. Active trading, attempts to “time” market movements, inadequate diversification, the payment of high and unnecessary fees to managers and advisors, and the use of borrowed money can destroy the decent returns that a life-long owner of equities would otherwise enjoy. Indeed, borrowed money has no place in the investor’s tool kit: Anything can happen anytime in markets. And no advisor, economist, or TV commentator – and definitely not Charlie nor I – can tell you when chaos will occur. Market forecasters will fill your ear but will never fill your wallet.”

Emphasis Added.

 

[mathjak107]

in numbers we can relate to , the common denominator to all failures is they maintained less than a 2% average real return the first 15 years and with out spending adjustments made ran out of money before they ran out of time.

as long we you are above that number 4% should hold. so far only the y2k retiree is in danger. real retirns on the s&p 500 is below 2% the last 15 years as well as bonds are 0%. a 50/50 mix with no spending lowered would fail.

 

[urn2bfree]

The problem I see with ALL the SWR research is how narrow minded it is. It looks only at US investing- or in the research of other countries only looks at investing within those countries. So 4% is the worst case scenario for an investor in the S&P, and for most other countries the SWR is lower over the same historical period. So what? Only investing in the S&P is hardly demonstrating the sort of diversification available to investors. Is the whole world headed on a downward economic cycle like we have never seen in the past 150 years along with our poor old gloomy-doomed USA? I have yet to see any research demonstrating what is likely to happen with asset allocation across both US, international,and emerging markets and bonds-also internationally diversified-- with rebalancing. I don't know if the number for a worst case SWR for such a portfolio would be lower or higher, but it seems to me it ought to be part of a more reality based forecast.


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[Which Roger]

The 4% "rule" isn't really a rule; it's a factual statement: "If the future is no worse than the past, then you can withdraw 4% per year for 30 years and probably not run out of money".

The problem occurs when people try to turn this fact into a rule by removing the part in italics.

 

[RunningBum]

There have been many articles on the death of the 4% rule, most conclude 3% would be safer - duh? Google and read them all. They assume the future will be worse than any 30 year period in history from 1871 through present which includes dozens of recessions, the Great Depression, several World Wars and lesser. Might be, might not...

Is there anyone really saying the future will be worse? Or are they saying it could be worse. Maybe you think it can't get any worse than the times you mentioned, but the economy always recovered nicely from those times. What happens if we have a bad period, not followed by a recovery?

Of course VPW is safer, it's a variant of the % of remaining portfolio withdrawal method which cannot fail on paper. Of course you could still find yourself having to reduce spending dramatically along the way, but you'll never go broke...

VPW is more reactive to a prolonged downturn. You will be cutting spending all along as your portfolio drops. With 4% spending increased by inflation, what is your trigger that tells you to cut back? The first few years you might be likely to think that it'll bounce back, so you can stick to the plan. If the recovery doesn't happen, at some point you're going to have to wake up and cut back. That's likely going to have to be a drastic cutback, which seems less manageable than incremental cutbacks all along.

What concerns me about VPW is that if your retirement starts well, you can (but don't have to) spend a lot more. If prolonged bad times follow, you'll be in worse shape than someone who followed the 4% rule and let their nestegg grow more in the good times. Maybe that's not such a concern because most plans will succeed if the early years are good.