Vanguard looks at the 4% rule, 20 years later

[Major Tom]

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]

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]

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.

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]

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]

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]

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]

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.


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[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

 

[daylatedollarshort]

We're planning on 0% real for a few years then 1% real long term. Anything over that will be party time. I am not much of a a risk taker but I'm also not a big spender so it works out.

 

[Gunny]

FIRECalc gives me a 98% success rate on a WR of 6% over 30 years with a 60/40 portfolio and figuring SS at for me at 70 and DW at 62. As I also have a COLA'ed pension and other investments I do not plan to tap into, I am very comfortable with that. Any reason I shouldn't be? I FIRE in June.


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[David1961]

FIRECalc gives me a 98% success rate on a WR of 6% over 30 years with a 60/40 portfolio and figuring SS at for me at 70 and DW at 62. As I also have a COLA'ed pension and other investments I do not plan to tap into, I am very comfortable with that. Any reason I shouldn't be? I FIRE in June.


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If you are comfortable, that's what matters. If it were me, I'd ask the following:

What are chances you will live longer than 30 years?
How much more money would you need to turn that 98% into 100%

 

[David1961]

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

That's about the way I would look at the various WR's too. But I might change 2.5% to "very comfortable" and 2% to "all set". Even if your investments just keep up with inflation, a 2% WR would last 50 yrs. Either way, it's judgement call.

 

[audreyh1]

Doesn't anyone withdrawing less than 3% worry that you'll leave a huge chunk to your heirs while limiting your enjoyment in your golden years? Is that your intention?

 

[Major Tom]

Doesn't anyone withdrawing less than 3% worry that you'll leave a huge chunk to your heirs while limiting your enjoyment in your golden years? Is that your intention?

I'm withdrawing less than 3% specifically because I began ESR/ER with a smaller portfolio that I ideally would have liked. I want to give it a chance to grow a little so that (hopefully) I will have the option to spend more in the future. I'm 51 years old, so a little sacrifice now should lead to more fun later on.

If there is money left over after I'm gone, that's fine. I can always think of a person or charity I like, to leave it to.

 

[Major Tom]

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

That's roughly how I look at it also. I'm at 2%, and I like feeling very comfortable.

 

[Hermit]

Doesn't anyone withdrawing less than 3% worry that you'll leave a huge chunk to your heirs while limiting your enjoyment in your golden years? Is that your intention?

My tendency seems to be to give any extra money to my kids (heirs) anyway.

 

[audreyh1]

I'm withdrawing less than 3% specifically because I began ESR/ER with a smaller portfolio that I ideally would have liked. I want to give it a chance to grow a little so that (hopefully) I will have the option to spend more in the future. I'm 51 years old, so a little sacrifice now should lead to more fun later on.

If there is money left over after I'm gone, that's fine. I can always think of a person or charity I like, to leave it to.

Fair enough. I can see a strategy of underdrawing at first, to be adjusted later.

I also retired very early and let my portfolio grow for over a decade with 0 withdrawals. And somehow we made it through two nasty bear markets, and thankfully it still managed to grow in real terms. I had other (riskier) investments to draw on before I started drawing on the retirement portfolio.

 

[RetireBy90]

While I am planning on a 4% or less in 2 years, I can understand backing off to 3 or 3.5. I am also planning a modest 6% return on retirement funds. With a conservative 2 to 3% difference, I'm not planning on taking any of the principal. Am I missing something?

 

[audreyh1]

My tendency seems to be to give any extra money to my kids (heirs) anyway.

We gift quite a bit too - to siblings and their families, and to charity. But we prefer to do this by drawing more when we are living, rather than letting it accumulate until after we are gone. Since we are gifting to siblings (no children of our own), now seems way more important than later.

 

[Major Tom]

Fair enough. I can see a strategy of underdrawing at first, to be adjusted later.

I also retired very early and let my portfolio grow for over a decade with 0 withdrawals. And somehow we made it through two nasty bear markets, and thankfully it still managed to grow in real terms. I had other (riskier) investments to draw on before I started drawing on the retirement portfolio.

I am a little concerned that I'll find it difficult to adjust my draw upwards later. I do tend to suffer from an effect that has been much discussed here, and that is that the same frugality that propelled me to be able to ER, also threatens to make it a little difficult to loosen the purse strings in ER. Have you had any issues with this, audreyh1?

 

[ERD50]

Doesn't anyone withdrawing less than 3% worry that you'll leave a huge chunk to your heirs while limiting your enjoyment in your golden years? Is that your intention?

No, that's not a 'worry' at all.

A worry would be running out of money after quitting work before full retirement age, and then what? My kids would probably help out, but I hope to never hit that stage. Keeping my WR conservative is how I do that.

I do what I want, drink good beer/wine, eat good food, go to concerts, buy what I want. I'm not limiting myself to any great degree. Otherwise, I would have managed to work longer. Everything is a balance, mine feels good to me.

-ERD50

 

[W2R]

Doesn't anyone withdrawing less than 3% worry that you'll leave a huge chunk to your heirs while limiting your enjoyment in your golden years? Is that your intention?

I've been withdrawing around 2%, but this year due to starting SS it will be down to 1.x%. I want to leave some to my daughter, but not a huge chunk; her husband has a great job and they are better off than I have ever been, so there isn't much point in that.

I don't *worry* about it exactly, but I agree that the logical move now is to ramp up my lifestyle a bit if that will enhance my life in some way. I have been doing pretty well in that effort, or so I thought, spending lots more on things I truly enjoy, but the more I spend the more the market booms and the more my portfolio grows. Consequently my withdrawal as a percentage of my 12/31 balance each year has been dropping. This is so ironic.

I am looking for a nicer house. That's something I would value and it should put a dent in my portfolio, for sure, plus increased operating costs would increase my yearly WR. But the house has to be one I would like more than my present house. Still looking....

 

[Major Tom]

I don't *worry* about it exactly, but I agree that the logical move now is to ramp up my lifestyle a bit if that will enhance my life in some way. I have been doing pretty well in that effort, or so I thought, spending lots more on things I truly enjoy, but the more I spend the more the market booms and the more my portfolio grows. Consequently my withdrawal as a percentage of my 12/31 balance each year has been dropping. This is so ironic.

We should all be so lucky. I'm officially envious!