Clark Howard and the 4% rule

[REWahoo]

I did a search but could not find where this had been previously posted.

The 4% Rule: Why it still makes sense for retirement

Clark Howard responds to a WSJ article saying the 4% withdrawal rule should actually be 3%, recreating the 1994 study with updated market returns. Some key findings:

Our work recreated Bengen’s study with retirement withdrawals beginning every year from 1929 to 2009. This is 82 separate retirement starting points. We used actual market data until 2017 and ran multiple simulations with historically conservative average return estimates after that: 5% for stocks, 2% for bonds and 3% for inflation figures.

Here is a brief rundown of our findings:

70% of the time (58 of 82 scenarios) retirement funds lasted 50 years or more.
30% of the time, the money “ran out” [prior to 35 years] with the worst-case scenario in our study being 29 years.

Our conclusion: Yes, the 4% Rule still works.

FIRECalc anyone?

 

[Dtail]

I think at its default settings, Firecalc uses a 3.59% WR in order to achieve 100% success.

I understand though that Bengen's research was effectively using a 95% success rate.

Big ERN definitely sets the SWR % lower than 4% for early retirees with a >30 yr retirement.

 

[jimbee]

I did a search but could not find where this had been previously posted.

The 4% Rule: Why it still makes sense for retirement

Clark Howard responds to a WSJ article saying the 4% withdrawal rule should actually be 3%, recreating the 1994 study with updated market returns. Some key findings:



FIRECalc anyone?

Just did a demo run in Firecalc. Start with $1 million, set term to 30 years, set investments to 60% equities, and use the investigate tab to solve for 95% success. The result was spending $40,249 will result in a 95.8% success rate. Sounds close enough to the Trinity Study to me.

 

[REWahoo]

I think at its default settings, Firecalc [-]uses[/-] shows a 3.59% WR in order to achieve 100% success.

FIFY

Semantics perhaps, but your statement FIRECalc uses a WR % in it's calculations isn't the case. The 3.59% is the starting WR% FIRECalc/history shows has never resulted in running out of money for 30 years. It is the result of a calculation based on user inputs rather than a default WR setting.

 

[Dtail]

FIFY

Semantics perhaps, but your statement FIRECalc uses a WR % in it's calculations isn't the case. The 3.59% is the starting WR% FIRECalc/history shows has never resulted in running out of money for 30 years. It is the result of a calculation based on user inputs rather than a default WR setting.

Yes technically but you know what I meant.

 

[Midpack]

Reading about SWR periodically to keep it in perspective is helpful IMO. It’s a rule of thumb guide, an axe not a scalpel - a scalpel isn’t possible.

Withdrawals are a dynamic process, and have been from the very beginning with Bengen and the Trinity Study - they never said retirees should withdraw for initial 4% inflation adjusted thereafter for 30 years without reevaluating. Anyone looking for a ‘set it and forget it’ guaranteed retirement plan is going to be disappointed- might be to the downside, but it might be upside. There are uncertainties throughout our lifetimes, that doesn’t change because we choose to retire.

People who suggest 4% or any other WR is no longer an SWR may be forgetting (below). Like many, our spending plan includes essentials and non-esssntials, about 2:1 in our case. We can ratchet back spending without affecting our quality of life much, or spend more (probably later rather than sooner).

So, while inflation may be of genuine concern, it is rarely as pronounced as models lead us to believe. Even a 4% annual inflation bump turns your initial $40,000 into $130,000 forty years later, and that simply hasn’t been the reality of actual spending.

Ultimately, you are in control of what you spend. What too many financial pundits forget is that saving and spending are remarkably human experiences.

And remember, retirement planning isn’t linear ‘ it’s a dynamic process. Just like your spending needs change over time, so too do your saving needs. As one example, say markets turn down a bit; most of us reign in our spending. Similarly, if we’re in a good bull run, we may sell something and take that dream vacation.

 

[kevink]

Reading about SWR periodically to keep it in perspective is helpful IMO. It’s a rule of thumb guide, an axe not a scalpel - a scalpel isn’t possible. Withdrawals are a dynamic process, and have been from the very beginning with Bengen and the Trinity Study - they never said retirees should withdraw for initial 4% inflation adjusted thereafter for 30 years without reevaluating. Anyone looking for a black box guaranteed retirement plan is going to be disappointed- might be to the downside, but it might be upside. There are uncertainties throughout our lifetimes, that doesn’t change because we choose to retire.

People who suggest 4% or any other WR is no longer an SWR may be forgetting (below). Like many, our spending plan includes essentials and non-esssntials, about 2:1 in our case. We can ratchet back spending without affecting our quality of life much.

Yes indeed! And I'd also like to put in a plug for Micheal McClung's amazing book "Living Off Your Money" as the single best resource I've seen for looking at SWR's on an evidence-based basis. It's a daunting, dense tome perhaps better suited for FA's than most investors but I'm sure there are plenty on these boards who've read it or would benefit from doing so.

There's a lot of great discussion of McClung's book on Bogleheads. His innovative approach to withdrawals gets most of the attention, but equally important are his recommended portfolios - none of which bear any resemblance to the simplistic total U.S. stock/corporate bond allocation the 4% rule is based on.

Here's a short review of the book:

https://monevator.com/review-living-off-your-money-by-michael-mcclung/

 

[Bir48die]

I get that whether it is 3% or 4% or 3.5% it makes sense to understand your spending budget then do your math. For some, keeping the WR low is a key measure (I'm talking under 2%). However, there are no steadfast rules in life. As I had dinner Wednesday with two other recent retirees we talked about spending now instead of accumulating.Both of these individuals are adept financially and we discussed out different models of budgeting, etc. In addition we talked about why we skimped and saved if only to deny ourselves experiences in world travel.

So, it's my goal to keep under certain percentages because that's prudent. I also know that once in awhile I'm going to have an opportunity to travel to a few places and blow the budget a bit. I'm trying to get over the feeling of guilt over spending more than I budgeted. However we have been lucky like many of you to grow our portfolio while drawing out our yearly budget. This won't happen all of the time and thus we just might take our camper and run around the U.S. when things contract.

For those of us choosing to take SS later, many of these percentages should go down as will our travel budgets. Much of all of this is a fluid process and we just have to be keenly aware and FLEXIBLE as time goes on.

 

[Huston55]

I didn’t see anything new in the ‘Clark’ article. Their analysis added 25 yrs of data (1993-2018) to Bengen’s and then “assumed” future returns; not especially valuable IMO. It also has to be taken with a grain of salt when written by a person who espouses the “$1,000/month rule”, which equates to a 5% WDR.

The article also seemed to be a rebuttal of the WSJ article which, in summary, says “this time it’s different and retirees should use 3% for a SWR.” Typically, 1966 is used as the “worst time to retire” in most calculators and, I don’t see 2018 as markedly worse than 1966 for an AA of 30-70% equities. So, not much value in the WSJ article either.

Wow, what a nay-sayer I am this morning! But, the one good thing that I did get from reading this is to revisit the data (historical stock/bond returns, stock valuations, forecasts from those I trust—-Bogle) and conclude that we’re personally OK where we are...at least for now.

ETA: Actually, two good things, the second being the link to McClung’s book. Thx kevink.

 

[ncbill]

The reality is most will have a changing WR...spending is higher earlier in retirement, lower as the years go by, then higher at the (very) end.

 

[mickeyd]

The 4% rule is not a rule. It is just a guide for those who need such things. Spend away folks!

 

[dtbach]

The 4% rule is not a rule. It is just a guide for those who need such things. Spend away folks!

+1 Hasn't this thing been beaten to death. It's just a GUIDE!! For the vast majority of people who retire and have a 30 year horizon, it's pretty darn good.

Folks on this board can fine tune much more than average retiree's (although still its a WAG as nobody knows the future) Measure with a micrometer, mark with a chalk and cut with an ax is fairly appropriate when discussing SWR.

 

[gcgang]

Yes indeed! And I'd also like to put in a plug for Micheal McClung's amazing book "Living Off Your Money" as the single best resource I've seen for looking at SWR's on an evidence-based basis. It's a daunting, dense tome perhaps better suited for FA's than most investors but I'm sure there are plenty on these boards who've read it or would benefit from doing so.

There's a lot of great discussion of McClung's book on Bogleheads. His innovative approach to withdrawals gets most of the attention, but equally important are his recommended portfolios - none of which bear any resemblance to the simplistic total U.S. stock/corporate bond allocation the 4% rule is based on.

Here's a short review of the book:

https://monevator.com/review-living-off-your-money-by-michael-mcclung/

Thanks for this. I went to the link that allowed access to the first three chapters.

I liked it because it basically agrees with what I've been doing the last 5+ years of retirement. Most significantly, his Prime Harvesting strategy states "stocks are never purchased after retirement starts". If stocks grow to over 120% of the inflation adjusted initial value, sell to replenish bonds.

He has all sorts of data to support why this does better than rebalancing.

There's a lot more to it. I think he ends up recommending some sort of guaranteed income but I don't think this is just a complicated way to sell annuities - lol. I understand conceptually how such an income reduces drawdowns but I haven't done much to secure this for myself, as I've believed interest rates have been too low.

So, basically, I've been following his system without knowing it.