Fallacy of the 4% Rule

[CalBird]

Look up the concept of "Fleet in Being". Having extra money in the bank improves my life whether I spend it or not.

I agree money in the bank would provide sense of security. It’s about balance of being secured and not unnecessarily conservative.

 

[marko]

Trying to thread that needle 30 years out is almost impossible. A percent or two one way or the other can often make the difference between leaving a hefty legacy or being destitute by age 85.

A good reason for constant monitoring and adjustments along the way.

 

[CalBird]

4% is to cover the worst case like 1960s. The average SWR of 30 years retirement for last 100+ years is about 6%.

So for the first decade you want to be on the safe side to leaning towards 4% in case the worst case happens. After first decade if the worst case( high inflation and low growth) didn’t happen, the SWR should bump up towards 6% to catch up.

But the pain is the first decade is the time you really want to spend more but you should not. That’s why many people ended up with substantial amount of money in later years, a good problem to worry about.

 

[brett]

Never been a believer in the 4 percent rule. Or any such rule. It is a guideline that in our case we have never applied.

Our decisions are based on ROR, inflation rate, spend, size of equity accounts, etc.

Not once in 13/14 years of retirement I we ever even thought about the so called 4 percent rule. It is more about results and common sense to us.

 

[imjustawarrior]

I have always thought of the 4% rule of thumb as an easy way to calculate if you can retire or not when you are laying in bed at night hating your job and wanting to quit.

In general, the 4% rule is not for a retired person. There are easier ways to see how you are doing. firecalc being one of them.

 

[Dtail]

I have always thought of the 4% rule of thumb as an easy way to calculate if you can retire or not when you are laying in bed at night hating your job and wanting to quit.

In general, the 4% rule is not for a retired person. There are easier ways to see how you are doing. firecalc being one of them.

Agree that it can function as retirement ready decision.
However keep in mind that Firecalc uses the 4%WR concept built into its calculations as to the 95% success rate.
I will say that probably very few folks on this site truly use the 4% guidance with inflation raises as a continuing spending methodology.

 

[imjustawarrior]

However keep in mind that Firecalc uses the 4%WR concept built into its calculations as to the 95% success rate.

I thought firecalc was a historical return calculator. Since the 4% rule was developed from historical returns, the two will give similar results for a 60/40 portfolio over 30 years. If this is what you meant, then I agree with you. I don't think firecalc has any 4%WR concept built into it.

 

[Dtail]

I thought firecalc was a historical return calculator. Since the 4% rule was developed from historical returns, the two will give similar results for a 60/40 portfolio over 30 years. If this is what you meant, then I agree with you. I don't think firecalc has any 4%WR concept built into it.

Yes that is what I meant.

 

[CaptTom]

I agree it's more of a targeting tool than something to use after retirement. A handy rule of thumb which lets you know when you're getting close.

Once I pulled the trigger and retired, I switched from planning mode to execution. I keep an eye on my finances to figure out when to trigger my 2nd pension, when to start SS, and when to start withdrawing from my 401k. I'm still not ready to go into BTD mode yet, but I'm starting to see that I might have to at some point.

 

[KiwiFI]

I thought the collective here decided that it's not a "rule" but a "guideline". Few, if any follow it literally but for those just starting out, it's more about giving you an idea of what is/is not possible.

But here's a question: OP hails from Australia. Is the 4% guideline based mainly upon US markets? What if an early retiree is heavily invested in markets that are less productive than the US (not that Australia isn't, but some other places that are)?

Interesting point. The guideline is based on US indexes as far as I know. While there are still good returns to be made in smaller indexes, it does bear thinking about.

The good news is there are dozens of S&P/Nasdaq style ETFs to invest in here to get that exposure. It wasn't always this way of course.

 

[KiwiFI]

I agree--some advisors blithely quote the 4% rule just to cover their you-know-whats. When I first started chatting with my then-advisor about retiring in a few years, he immediately brought up the basic 4% rule. I listened and replied that I had recently read a couple of articles suggesting that 4% might not be conservative enough, and other articles offering alternative withdrawal methods, and I asked him what he thought about more recent work like that. He immediately replied, with the same indifference, "Well, we can use a 3.5% withdrawal rate." I bit my tongue, but what I wanted to bark at him was along the lines of, "I didn't hire you to simply execute a well-known rule of thumb or to toss the ball right back into my court; I hired you to give me your opinion based on your expertise and my personal situation as to how much I can safely withdraw in retirement for 30 years." This was shortly before I fired him. I'm sure he loved the 4% rule because it freed him from doing the difficult analyses and offering an actual opinion based on his supposed expertise.

Exactly! It;s why many planners aren't worth the trailing commissions you pay them. The industry was overhauled here a decade ago due to flagrant conflicts of interest, leaving many clients worse off.

 

[Lewis Clark]

The optimal result is that I spend my last nickel on the day I die.

This may be optimal for you.

This may not be an optimal result for those who are survived by a spouse or other dependants.

 

[Koolau]

Interesting point. The guideline is based on US indexes as far as I know. While there are still good returns to be made in smaller indexes, it does bear thinking about.

The good news is there are dozens of S&P/Nasdaq style ETFs to invest in here to get that exposure. It wasn't always this way of course.

Here either. IIRC Jack Bogle offered the first one beginning about 1976 through Vanguard.

 

[SnowballCamper]

This may be optimal for you.

This may not be an optimal result for those who are survived by a spouse or other dependants.

I didn't claim it was optimal for anyone but myself.

 

[TickTock]

The 4% rule/guideline is based on several assumptions and using a specific data set. Change any of the assumptions or the data set and the result changes. That doesn't mean there's a fallacy in the 4%.

I think I'm in the minority here - I think that using Monte Carlo simulations are a valuable tool in addition to using the US historical data set.

 

[Dtail]

The 4% rule/guideline is based on several assumptions and using a specific data set. Change any of the assumptions or the data set and the result changes. That doesn't mean there's a fallacy in the 4%.

I think I'm in the minority here - I think that using Monte Carlo simulations are a valuable tool in addition to using the US historical data set.

Even though the "tails" of Monte Carlo simulations can be aggressive, I do also think it is a valuable tool as another view of withdrawal retirement sequence.
I use the Fidelity planner in conjunction with Firecalc. It typically provides a 3 to 4% more conservative result than Firecalc at least for me.

 

[imjustawarrior]

I think I'm in the minority here - I think that using Monte Carlo simulations are a valuable tool in addition to using the US historical data set.

Maybe we should start a poll. Two of the most common retirement calculators mentioned here seem to be firecalc (historical) and Fidelity (monte carlo). Maybe I am biased in my view because those are the two I use the most. I am also in the camp of using each type. I think it provides a nice cross check in case there is a hole in one of the methodologies.

 

[imjustawarrior]

Even though the "tails" of Monte Carlo simulations can be aggressive,

I think that is why Fidelity cuts it off at 10% for the worst case scenario. We use to do the same thing at work for monte carlo simulations. Planning for tail events normally is not feasible and are very unlikely to show up.

 

[Dtail]

I think that is why Fidelity cuts it off at 10% for the worst case scenario. We use to do the same thing at work for monte carlo simulations. Planning for tail events normally is not feasible and are very unlikely to show up.

That's a reasonable thought. The 90% success rate of Fidelity could be comparable of sorts to the 95% success rate of Firecalc.

 

[Out of Steam]

Never been a believer in the 4 percent rule. Or any such rule. It is a guideline that in our case we have never applied.

Our decisions are based on ROR, inflation rate, spend, size of equity accounts, etc.

Not once in 13/14 years of retirement I we ever even thought about the so called 4 percent rule. It is more about results and common sense to us.

We've followed it reasonably closely, and withdrawn between 3.8 and 4.5% in the 4 1/2 years since we started drawing from retirement accounts. Despite fairly conservative investing, we have a balance of about 15% more than we did at retirement.

Six years in, we now have a roughly 25 year retirement horizon, which changes assumptions somewhat.

 

[TickTock]

Food for thought: if near-cash investments keep up with your increases in spending, you have a guaranteed 25 year retirement with no failures. Of course, year 26 is a whole 'nother matter. . .

 

[Sojourner]

I use the Fidelity planner in conjunction with Firecalc. It typically provides a 3 to 4% more conservative result than Firecalc at least for me.

Does this mean that if FIRECalc gives you a 3.50% SWR for your particular inputs then the Fidelity planner will gives you roughly a 3.36% SWR? How do you use that (fairly small) difference to determine what you actually withdraw and spend?

 

[Dtail]

Does this mean that if FIRECalc gives you a 3.50% SWR for your particular inputs then the Fidelity planner will gives you roughly a 3.36% SWR? How do you use that (fairly small) difference to determine what you actually withdraw and spend?

I actually look at it from the maximum spending side. So for example, if Fidelity shows a maximum spending of 100k, then typically Firecalc will show 103k to 104k.
So I basically use the calculators to know what is the maximum I can spend while achieving the 90 to 100% success rates in the 2 calculators.
I don't use it to determine my actual spending each year, although when I start SS, I expect the actual spending to be somewhere in the max allowed spending range.
Hope this makes sense.

 

[aja8888]

At almost 82 years old, I have never used the 4% (or other %) rule to determine how much I can withdraw from my portfolio. My life changed several times since I was 60 (actually 50) years old. With the closing of my business years ago, and the death of my oldest daughter, we had big changes in our lifestyle and just focused on adjustments to expenses and income. Once my wife died, my world changed again, and financially, things got complicated as we were retired at the time.

It seems like every time I have income/expenses on an even keel, a radical change happens and I go into "fix it" mode. Or maybe just look at it closer mode.

Since the vast amount of my portfolio is in deferred accounts, my RMDs seem to be the vehicle that covers all my expenses in retirement. It works, and I see no advantage to trying to do something different, and ROTH conversions are not working for me at this time.

Maybe I am an outlier with so many significant life changes in the last 25 - 30 years?

 

[Koolau]

Maybe I am an outlier with so many significant life changes in the last 25 - 30 years?

No, I think most of us have life-changing events that come along unpredictably but inevitably. I've had "earth-quake" events that were out of the blue that changed everything. They seem "unique" in their own way, but in the human experience, they're just "normal" tragedies or paradigm shifts. YMMV