4 Percent Rule Can Fail! Here is How it Happens. Video by Ethan S. Braid, CFA

[2HOTinPHX]

In this video we are shown how a balanced portfolio can be safer that an all stock or all bond portfolio. It looks good in the video presentation but he picked the year 2000 as a starting point. The all stock portfolio gets hit right away by sequence of return risk. Is this a fair comparison? Wouldn't they have done somewhat better if they had a recommended three to five years cash reserve? To bad the comments are turned off for the video. Is this video a fail or does it still make a good case for a balanced fund?

 

[mrfeh]

Didn't watch the video, but this isn't really news. The original Trinity study was for 95% chance of success, and that percentage did not apply to "extreme" (all stock or all fixed income) portfolios.

Updated Trinity Study and the 4% Rule - 2024 and Beyond - The Best Interest

Using Wade Pfau's data and "predictions" of the future, we're creating an updated Trinity Study to use for our retirement planning.

bestinterest.blog

Many other articles available if you search "trinity study 4 percent".

 

[Dtail]

So far with a balanced portfolio, the year 2000 retiree has not failed the 4% guidance. Probably in the top 20 of worst years to start a retirement, but as mentioned above the 4% guidance was not for a 100% equity portfolio.

 

[FLSUnFIRE]

No news but I guess he got some clicks. Retire on a historically bad day with a riskier portfolio than the study and you may fail (you may fail anyway even 100% safe is only if the future is no worse than the past). He also trash talks the 100% bond portfolio as the value went down but the portfolio still looks to have just enough to survive 6 more years to survive the 30 year period (and 100% bond is also a riskier portfolio than a balanced). A declining portfolio balance over the period is not a failure unless if fails before the period ends.

Also, after being in the FIRE community since finding John Greaney and the TMF boards in the late 90s (before the acronym even!) I have not run across anyone that acted like a robot that had only a perfectly balanced portfolio, an expected retirement of 30 years, and was withdrawing from that portfolio starting at 4% and adjusted their spending to perfectly match the official CPI (that could be fun to watch someone try as personal inflation and the CPI can be wildly different). The 4% rule/Trinity Study is a tool and not a law of man or nature.

 

[Midpack]

Didn’t watch, not news…the 4% rule is not a withdrawal method in the first place.

 

[donheff]

Yours is a good example of why it is important to briefly describe what a link shows/discusses. Thanks.

 

[Dalton]

Bengen based his 4% rule on a range of something like 50-75% equities, not to mention that he didn't offer 100% success, so yeah, nothing surprising in that video, including that someone got the theory wrong.

 

[G POP]

Yours is a good example of why it is important to briefly describe what a link shows/discusses. Thanks.

Doesn't the OP do that?

" In this video we are shown how a balanced portfolio can be safer that an all stock or all bond portfolio. It looks good in the video presentation but he picked the year 2000 as a starting point. The all stock portfolio gets hit right away by sequence of return risk. Is this a fair comparison? Wouldn't they have done somewhat better if they had a recommended three to five years cash reserve? To bad the comments are turned off for the video. Is this video a fail or does it still make a good case for a balanced fund?"

 

[Al18]

This year, I added a line in my spreadsheet tracking assets, showing the 4% withdrawal rate from the prior year ending balance, and incremented each year, based on the inflation rate as defined by SS. I use this number as a guide to the maximum I can withdraw each year. Each year I’ve been retired, I’ve drawn less.

 

[Zathras]

eDoesn't the OP do that?

" In this video we are shown how a balanced portfolio can be safer that an all stock or all bond portfolio. It looks good in the video presentation but he picked the year 2000 as a starting point. The all stock portfolio gets hit right away by sequence of return risk. Is this a fair comparison? Wouldn't they have done somewhat better if they had a recommended three to five years cash reserve? To bad the comments are turned off for the video. Is this video a fail or does it still make a good case for a balanced fund?"

Perhaps they were saying how this was a good example of why a summary is important.

The subject of the video really is sort of a ‘so?’.
It would be like saying, ‘Important news! Did you know the sky is blue?!’.

 

[Jeffman52]

That is why it is so important to handle "sequence of returns risk" for an extended downturn in the market. Without SORR a downturn or extended downturn in the market has the very real possibility of wiping out years of savings and investments.

 

[jebmke]

That is why it is so important to handle "sequence of returns risk" for an extended downturn in the market. Without SORR a downturn or extended downturn in the market has the very real possibility of wiping out years of savings and investments.

I have always viewed the "4% rule" and any similar benchmarks as rough measures of portfolio resiliency, not working models. I don't know anyone who actually controls their spending using the 4% model. Once you "step off the curb" into retirement traffic, you have to pay attention and adapt or you might get run over -- no matter how may times you looked right/left before stepping off.

 

[Sunset]

Didn't watch the video as OP gave what I think is a good summary of the issue.
The Sequence of Reduced Returns SORR event.

I think there is a misnomer in saying all stock if someone has 3->5 years of cash invested, especially as it's probably in CDs or bonds.

That was largely my view to be very aggressive, but have 3->5 years of cash available in case the market crashed so wouldn't need to sell in a down market.

This video creator cherry picks as he has another video of 5% with withdrawal again starting in year 2000 to show how bad some choices are.

 

[Koolau]

Didn’t watch, not news…the 4% rule is not a withdrawal method in the first place.

Right. I only used it to determine how much I needed to save. I've never even considered using it as a withdrawal method. YMMV

 

[Koolau]

This year, I added a line in my spreadsheet tracking assets, showing the 4% withdrawal rate from the prior year ending balance, and incremented each year, based on the inflation rate as defined by SS. I use this number as a guide to the maximum I can withdraw each year. Each year I’ve been retired, I’ve drawn less.

There were years early on when I needed to withdraw considerably more than 4% from my stash - so I did. This was 2007 to 2010 time frame as well! I never worried about it (well, not really "worried" though I thought it through pretty carefully.)

 

[2HOTinPHX]

Right. I only used it to determine how much I needed to save. I've never even considered using it as a withdrawal method. YMMV

Understanding that the 4% is more of a guide for saving, what should we be using as a withdrawal method then? Do you just estimate annual living expenses minus income like SS and pensions and then pull the rest as needed from retirement accounts. If you are under or near the 4% suggested target roll with it? Also make sure enough is set aside from market risk for some lumpy expenses and SORR that lets you sleep better at night. Keep retirement funds simple by using a balanced fund you are comfortable with like the video above shows? Oh and as the video suggest don't live to long...LOL

 

[2HOTinPHX]

Didn't watch the video, but this isn't really news. The original Trinity study was for 95% chance of success, and that percentage did not apply to "extreme" (all stock or all fixed income) portfolios.

Updated Trinity Study and the 4% Rule - 2024 and Beyond - The Best Interest

Using Wade Pfau's data and "predictions" of the future, we're creating an updated Trinity Study to use for our retirement planning.

bestinterest.blog

Many other articles available if you search "trinity study 4 percent".

Thanks for the link that was a good clear semi-short read.

 

[mrfeh]

Understanding that the 4% is more of a guide for saving, what should we be using as a withdrawal method then?

Here is one option:

Variable percentage withdrawal - Bogleheads

www.bogleheads.org

There are many others. I suggest you visit bogleheads.org and search for "withdrawal strategy".

 

[Andre1969]

I always thought the 4% rule shot for a 95% success rate over 30 years?

I had a feeling, fairly early on, that retiring around 1999/2000 would ultimately prove to be a failure cycle. A few years back, I started an excel spreadsheet, tracking a theoretical portfolio using my actual rates of return each year, and the "official" inflation numbers.

If I had retired on 12/31/1999, my portfolio would have run out of money in 2023. Now, my calculations were pretty rough and simple. I'd subtract the full year's living expenses at the beginning of the year, and then whatever was left over would have the gain or loss applied to it. Realistically, I would have probably taken out monthly withdrawals.

With a 3% withdrawal rate, with this year's gains so far, my portfolio would be slightly above its 12/31/1999 starting point. My spreadsheet started with $1M, and would now be at $1.03M. Of course, $1M today is worth a lot less than it was 25 years ago!

For whatever reason, I never bothered to plot out 3.5%, but I just did now, and it would still be positive. However, that $1M would be whittled down to around $453K. So, while inflation and withdrawals would have taken their toll, it would still most likely be on track to survive the 5 more years it would need, to hit 30.

 

[audreyh1]

Understanding that the 4% is more of a guide for saving, what should we be using as a withdrawal method then? Do you just estimate annual living expenses minus income like SS and pensions and then pull the rest as needed from retirement accounts. If you are under or near the 4% suggested target roll with it? Also make sure enough is set aside from market risk for some lumpy expenses and SORR that lets you sleep better at night. Keep retirement funds simple by using a balanced fund you are comfortable with like the video above shows? Oh and as the video suggest don't live to long...LOL

Personally I chose not to use the classic 4% of initial portfolio and thereafter inflation adjusted method because it ignores what happens to the portfolio afterwards until in the rare cases, oops, you ran out of money. I didn’t need a fixed COLA amount every year, and I was uncomfortable with blindly adjusting for inflation each year regardless of portfolio performance.

What I chose instead was a method that adjusts to the portfolio value each year, ignoring inflation. So the same x% of the end of year portfolio value each year. This means your withdrawal varies each year and can go down during bad periods. I was comfortable with this as I have a lot of discretionary spending. It also means the amount will grow as the portfolio grows. No inflation adjustment, but with a sufficient allocation to equities, the portfolio should keep up with inflation over a long period of time. FIREcalc also models this method, calling it “% remaining portfolio method”.

However, once retired, most folks here just take a quick look at their current annual withdrawal from the portfolio, compare it to their portfolio value and as long as it’s less than 4% or 3% or whatever they’ve selected as their max safe %, they call it golden and go on with their lives.

 

[Jeffman52]

As DW and I neared retirement I was looking at how much we could take out of retirement accounts without killing the golden goose, while also living very much the same as we did before retiring. As we neared that, I had been working on a spreadsheet for years to map things out to 93 years old. I included SS decisions (62, 65, 67, 70) and what that would mean along with taxes and tax brackets, plus RMD's

Eventually as I did the math on everything, I settled on a 6.2% withdrawal rate to start, that will decline somewhat closer to 4% as DW and I start taking SS. So far so good, six months in and we have more money in our retirement accounts than we did when we retired. It may go down somewhat between now and SS, but even with that, after we start SS and lower our withdrawal rate, it goes right back up. The good thing is that we 'could' tighten our belts at need and we have a bit of buffer in our budget. At the end of the day, I have no worries that we are going to run out of money (unless we get really stupid at some point and just start spending just to be spending).

 

[Koolau]

Understanding that the 4% is more of a guide for saving, what should we be using as a withdrawal method then? Do you just estimate annual living expenses minus income like SS and pensions and then pull the rest as needed from retirement accounts. If you are under or near the 4% suggested target roll with it? Also make sure enough is set aside from market risk for some lumpy expenses and SORR that lets you sleep better at night. Keep retirement funds simple by using a balanced fund you are comfortable with like the video above shows? Oh and as the video suggest don't live to long...LOL

Honestly, I never worried about it one way or the other. My first couple of years in FIRE, I spent more like 6% or more. Even though I retired in late '05 and then 2008 happened, I just soldiered on and tracked my total spending AFTER the fact. 3% to 5% was typical.

As long as your income (like pension) and draw from your stash doesn't materially lower the overall stash number, why worry about the % withdrawal. YMMV

 

[marko]

Honestly, I never worried about it one way or the other. My first couple of years in FIRE, I spent more like 6% or more. Even though I retired in late '05 and then 2008 happened, I just soldiered on and tracked my total spending AFTER the fact. 3% to 5% was typical.

As long as your income (like pension) and draw from your stash doesn't materially lower the overall stash number, why worry about the % withdrawal. YMMV

+1. My WDR has averaged about 5% for almost 20 years now. Among 100 other things, I track my YoY net balance-- portfolio growth minus withdrawals.

As long as the bills are all paid and the year-end balance is higher than the year's starting balance, I'm happy. Had only a few years where that wasn't so, but the following year usually made up for it.

 

[Aerides]

The video...I'm not gonna watch that nonsense from an "Asset Management" company, but it's clear that most of us know more than the video dude....

The 4 percent rule assumes a balanced portfolio, and a 30 year horizon (so, retiring at 55 and planning to live to 98 isn't in scope).

It also - importantly - assumes zero withdrawal in year 0-1, so the first year of retirement allows the portfolio to grow untouched.

And it assumes that most folks aren't silly, and adjust as things go along.

As far as a withdrawal method, we just take what and when we need, rebalance, repeat.

 

[Exchme]

Depends on what you invest in. The studies were based on the S&P 500 (or historical reconstructions of something similar) and the 10 year Treasury (also with reconstructions at times since it wasn’t always sold). To the extent that’s not what you held, your portfolio would have done something else. No method predicts the future however.

So it’s better to think about 4% as being in the ballpark, but it’s too much to ask to expect it to be in the strike zone.