About the 4% rule

[GTM]

I have not read alot of the withdrawal posts so my question may have been asked and answered already.

I understand that the 4% rule allows one to take 4% of their portfolio (assuming it is invested correctly) and will probably provide enough money to live on for a long time.

What I am unclear about is suppose on Jan 1. your portfolio is valued at $1,200,000.
4% is 48,000 per year or $4000 a month.
Does that mean you take $4000 out in Jan, $48,000 for the whole year or $4000 per month forever.

Suppose on July 1 or anytime after your start date the market tanks. If your portfolio depreciates to $800,000 on July 1
will you still with draw $4000 every month?
or recalculate and take 4% of $800,000.

I would think the 4% rule has to be recalculated at points in the future or you may be taking alot more than 4% during bad times.

Any thoughts?

 

[Cut-Throat]

I would think the 4% rule has to be recalculated at points in the future or you may be taking alot more than 4% during bad times.  

Any thoughts?

Here's the deal. - Yes you can continue to take $4 K per month based on historical data that FIRECalc uses. The reason for this is if the 'Market tanks', there is more chance for an upside after this 'tanking' than if you would have started your retirmement with the same $800K.  The market after the 'tank' has less risk than before the tank

And Actually the $4K per month would actually increase by the Inflation rate for the next year, even if the market 'tanked'.

Now in reality, after a 30% hit to a portfoilo, human nature would probably cut back in their spending (this is what causes recessions) and not continue to spend the $4K per month anyway.

Does that mean you take $4000 out in Jan, $48,000 for the whole year or $4000 per month forever

Also, forever usually is around 40-50 years as the 4% rule does eat into principal. But you don't care about forever, because remember we are all going to die

 

[hocus]

I would think the 4% rule has to be recalculated at points in the future

We explored the matter of recalculations of SWRs in some depth in this thread, GTM.

http://early-retirement.org/cgi-bin/yabb/YaBB.pl?board=saferate_board;action=display;num=1080235218

My sense is that we did not achieve a complete consensus on all of the questions raised. But I think it is fair to say that any community member seeking to inform himself or herself of the issues at play could do so by reading through this thread.

 

[ataloss2]

leaving aside all the math stuff.... my favorite quotes from that other thread were:

Anyone who believes they know what will happen
in the financial markets between now and 2029
has a bigger problem than their SWR.

John Galt

There is no absolute SWR, just like there is no Santa Claus. For those who have to get 100% comfortable first,
SWR might as well be STILL WISHING for
RETIREMENT. It's fun to debate though.

John Galt

link to retiring at the worst of times

http://www.retireearlyhomepage.com/worstre.html

 

[hocus]

It's fun to debate though.

That line from the John Galt quote you put up strikes me as being more important than all of the numbers that stretch from here to eternity, Ataloss. So long as we conduct the debate in such a way that it is fun, we learn. So long as we are learning, the numbers take care of themselves in the long run. Is that not so?

 

[arrete]

Also, forever usually is around 40-50 years as the 4% rule does eat into principal.

I think 4% (3.8 actually) is for 30 years. 40-50 years is less than that.
http://www.retireearlyhomepage.com/restud1.html

arrete

 

[RockMiner]

I agree, ataloss and *****. Sometimes these debates run on to wacky extremes. Everybody needs a method to evaluate personal ER-worthyness, but SWR should be viewed as as guide rather than an inviolate rule. It makes no sense to address only the "supply side" of ones finances. We have the ability to adapt to extreme market conditions. I cannot imagine totally ignoring a major portfolio setback because the FIRE calculations say it's OK to do so. Market history does provide a way to "anchor" our thinking but the future is not determined by our opinions of how it ought to be

 

[Hyperborea]

SWR should be viewed as as guide rather than an inviolate rule. It makes no sense to address only the "supply side" of ones finances.  We  have the ability to adapt to extreme market conditions.

This is the argument for a variable withdrawal rate - that history is a guide but it doesn't predict the future. Whether you use a "seat of the pants" approach or you use an algorithmic approach you are still adjusting to current conditions as a precaution against the" future being worse than the past".

 

[ESRBob]

Also, forever usually is around 40-50 years as the 4% rule does eat into principal. But you don't care about forever, because remember we are all going to die

Cut-Throat,
Although 40-50 years may be good enough for any practical purpose, (or any historical study to verify), I have always worked on the assumption that they could be applied in perpetuity.

The fact that you take 4% which is more than real interest on a well-diversified portfolio of stocks and bonds, though, does not (necessarily) mean you are consuming capital. The studies I have read/run show that the portfolio should stay at the same real value or grow a bit in real terms even with the 4% SWR. That is the crucial point that lets this run in perpetuity.

What is the magic secret sauce? Capital Gains (or in some cases 4%+ real yields) in the equity, real estate, commodities, oil&gas and market-neutral portion of the portfolio (60%) -- Whether those capital gains are realized or unrealized, (the better to keep the tax bill low) they provide the growth to compensate for inflation across the whole portfolio and give you a little progress toward real growth.

We all know the future can be different, but historically this holds up nicely across a large percentage (not 100, but 90%+) of historical periods, made more difficult because of the lack of long data series on some of the more exotic asset classes (reit, commodities, market neutral, overseas small stocks, overseas value stocks). In the cases where it doesn't hold up over 20 year+ periods (about 10%) the real loss in the portfolio value is small-- nominal gains are still positive.

Works for me. Only point was to clarify that intrinsic in the model is that it should work in perpetuity due to capital gains.

ESRBob

 

[Cut-Throat]

I think 4% (3.8 actually) is for 30 years.  40-50 years is less than that.
http://www.retireearlyhomepage.com/restud1.html

arrete

I just ran FIRECalc with a $1M Portfoilo, withdrawal of $40K which is 4%, 60% stocks, the rest FIRECalc Defaults. It surives 45 years 100% of the Time Periods.