Stress-testing the 4% rule: How do you handle worst-case timing?

[mrfeh]

A 30% decline followed shortly thereafter by a 20% decline and then otherwise normal returns is unnecessarily pessimistic. Has never happened. Typically, large downturns are subsequently followed by better than long-term average returns. Besides that, when in the history of man had there ever been a 30% downturn shortly followed by a 20% downturn?

Working from memory here...2000-2003 was pretty grim. IIRC, there was something like 20% declines 3 years in a row. That was a big part of the "lost decade".

As bad as the GFC was, I imagine retiring in 2000 was worse than retiring in 2007 (although that is just a guess).

 

[audreyh1]

Yes and it works for you knowing you are at 3.3% and how you use the unspent cash reserves.
So theoretically for you, if you spent all your tested 4.35% withdrawal using your remaining portfolio methodology and we are in a bear market currently, would you still spend throughout the year all the funds you withdrew in Jan of that year?
It is just theoretical and I know you wouldn't put yourself in that scenario.

I never even think about not spending all I withdrew.

 

[audreyh1]

I think this is where a TIPs ladder fits in. Never going to out guess what the market is going to give you.

Starting with a 10 year ladder seemes sane, if lucky to get a few good years in the market you roll a few rungs and you may get a good 12+ years out of it. Obviously this has to fit into one's plan, total AA etc.

We have plenty in fixed income in our portfolio.

 

[audreyh1]

A 30% decline followed shortly thereafter by a 20% decline and then otherwise normal returns is unnecessarily pessimistic. Has never happened. Typically, large downturns are subsequently followed by better than long-term average returns. Besides that, when in the history of man had there ever been a 30% downturn shortly followed by a 20% downturn?

If there was a scenario like that then I suspect that thee would be bargains galore, likely deflation rather than inflation built into your assumptions so your withdrawals would decline and extend the 22 year drawdown.

Keep working.

I believe the stock market decline from early 2000 to the end of 2002 did approach 50%. The S&P 500 declined 49.7%. It was mostly three long grinding down years. There were multiple busts first the big dot com bust, but several other corporate crises in 2001, 2002. And 911.

The 2007-2009 bear market was shorter, but the total decline Oct 2007 through March 2009 was 51.9%. The bulk of that decline was around a year, Oct 2007-Oct 2008, but then we had little recovery a second slightly lower bottom in March 2009. And thereafter worldwide economies were very weak. The recovery was slow.

 

[mystang52]

Having a few years expenses in cash is a great way to avoid worst-case-timing.

This was my approach. In the 2 to 3 years leading up to my ER I was loading up the cash reserves. I've mentioned before that I'm very conservative, and I was almost-fanatical about not mssing my planned ER date. I didn't want a market downturn to affect my plans, and that cash reserve gave me the needed comfort level.

 

[Dalton]

I feel like the 4% rule was stress tested before it was published, to my satisfaction.

 

[walkinwood]

If I understand this correctly, you're using a 5% return on the ETF. What is the variation of returns based on? I think it is unrealistic to expect a 5% return each year with a big down turn twice in 30 years, but have no returns above 5% in that period. Is that what's going on here?

Any realistic model should have a range of outcomes.

 

[Al18]

I guess you didn’t see my thread titled 5.7% constant withdrawals. There were no failures for a 30 year retirement Constant 5.7% Safe Withdrawal rate

 

[Roman]

Hi everyone,

First of all, a huge thank you for the many responses and the engaging discussion – I honestly didn't expect this much input!

It’s been extremely helpful to see the different approaches here, ranging from cash reserves to flexible spending. Regarding my model and the latest comments:

Worst-Case Scenario & Returns: As pointed out, I uses a static 5.5% return and then "injects" massive shocks without the typical recovery phases. I agree this is not a "realistic" market forecast—it’s a deliberate stress test. I wanted to see how the buffer holds up if the market "breaks" and doesn't behave as it has historically. I’d rather plan for an "unfair" market and be pleasantly surprised if "Mean Reversion" works in my favor.

Safety & SORR: The discussion has reinforced my belief that a solid buffer (cash or bonds) is indispensable for me personally. The psychological "sleep well" of not being forced to sell equities during a 30% or 40% drawdown is worth the price of lower expected returns.

I’m definitely taking the references to the "Early Retirement Now" series and the concept of dynamic withdrawal rates (guardrails) as homework. Integrating some flexibility seems to be a key component of a successful long-term strategy.

One final question: We’ve discussed a lot of strategies and safety margins – but how did you handle the "mental switch"? Was it harder for you to find the right strategy, or was the real challenge having the courage to finally "push the button" once your plan gave you the green light?

Thanks for the great discussion!
Roman

PS: Maybe my cautious approach is a bit of a "Swiss thing"—we tend to over-engineer for the worst case and always look for that extra guarantee. I could probably use a bit of that famous American "can-do" spirit and coolness when it comes to trusting the market!

 

[marko]

. I could probably use a bit of that famous American "can-do" spirit and coolness when it comes to trusting the market!

FWIW, I didn’t "trust the market". Back then, I just had no idea what I was doing and skated on through the good times and bad, oblivious.
Now that I know better, I don't know if I'm better off or not.

 

[mrfeh]

One final question: We’ve discussed a lot of strategies and safety margins – but how did you handle the "mental switch"? Was it harder for you to find the right strategy, or was the real challenge having the courage to finally "push the button" once your plan gave you the green light?

We have probably over-saved. What I would consider a fairly extravagant lifestyle equates to a 2-2.5% withdrawal rate.

Thus, no worries whatsoever. If 2% is destined to fail, there will probably be bigger problems than money.

 

[Dtail]

As a side point, I always hear about not wanting to sell equities in a down period. If one has a fairly balanced portfolio and uses the concept of rebalancing, then since the equities have already gone down, why wouldn't one rebalance the portfolio by selling on the fixed income side?

 

[jollystomper]

One final question: We’ve discussed a lot of strategies and safety margins – but how did you handle the "mental switch"? Was it harder for you to find the right strategy, or was the real challenge having the courage to finally "push the button" once your plan gave you the green light?

For us, the "use cash to avoid selling in a downturn" strategy was an easy choice since we were already good savers, and were able to save/invest 30-40% of our income in the years approaching retirement. We could build up our cash without impacting our retirement savings and investment pattern that was already in place. Having a job that gave opportunity for bonus/commission pay helped, as much of an unexpectedly large bonus or commission could be used to build up our cash reserve.

 

[mrfeh]

As a side point, I always hear about not wanting to sell equities in a down period. If one has a fairly balanced portfolio and uses the concept of rebalancing, then since the equities have already gone down, why wouldn't one rebalance the portfolio by selling on the fixed income side?

Those not wanting to sell are letting emotions override mathematics.

In such a situation, one would do what you describe.

 

[audreyh1]

As a side point, I always hear about not wanting to sell equities in a down period. If one has a fairly balanced portfolio and uses the concept of rebalancing, then since the equities have already gone down, why wouldn't one rebalance the portfolio by selling on the fixed income side?

Exactly. You sell from fixed income when equities are strongly down.

 

[jazz4cash]

, I modeled a ~5-year bond buffer; with an early -30% shock and a later -20% shock, the portfolio runs out after 22 years in this scenario.

How do you account for worst-case timing in your planning? Is probability enough for your "sleep factor", or do you prefer guardrails/more certainty?

Best regards
Roman

I am curious to know your rationale for this input.

 

[Dtail]

I am curious to know your rationale for this input.

The shocks were 10 years apart. Nothing crazy from that perspective.
However, the linear 5+% equity returns are very conservative and up to now has not happened with 2 bear market drops.

 

[Flyfish1]

There's no reason to avoid selling assets.

Total return is all that matters.

I was waiting for you to respond with that exact response.
My apologies for the late reply.
Glad you are well and unchanged...

 

[jollystomper]

As a side point, I always hear about not wanting to sell equities in a down period. If one has a fairly balanced portfolio and uses the concept of rebalancing, then since the equities have already gone down, why wouldn't one rebalance the portfolio by selling on the fixed income side?

I think it is better said that one does not want to be forced to sell equities in a down period.

 

[audreyh1]

I think it is better said that one does not want to be forced to sell equities in a down period.

But why would you be forced to sell equities unless you had little fixed income?

 

[Koolau]

Big Ern at earlyretirementnow.com has done a truly massive amount of work around stress testing SWR strategies, guardrails, and the like. I suggest OP take a look there for tools and analysis.

The Safe Withdrawal Rate Series - Early Retirement Now

Discover the Safe Withdrawal Rate Series: 4% Rule, Personalized strategies, sequence risk, FIRE planning, free Google Sheet, 2025 updates.

earlyretirementnow.com

Wow. That IS massive! Thanks for the site. I'm not sure I'll go through all of it, but it should be a good resource for specific questions.

Thanks for sharing.

 

[Dtail]

I think it is better said that one does not want to be forced to sell equities in a down period.

You are stating my point in a different way. With a balanced portfolio, one would NOT have to sell equities in a down market, since they are rebalancing with selling of fixed income.

 

[jollystomper]

But why would you be forced to sell equities unless you had little fixed income?

If the fixed income was not enough to cover one's expenses.

There is also the case (and we have seen many threads on this during down times) of folks selling out of equities when the market is falling, out of fear they will not have enough to cover their retirement expenses.

 

[jollystomper]

You are stating my point in a different way. With a balanced portfolio, one would NOT have to sell equities in a down market, since they are rebalancing with selling of fixed income.

True - but, as recent history has shown, it is possible for fixed income (at least bond funds) to also fall during a down market, so even selling fixed income might be at a loss.

Having to think about and deal with these things just makes it easier for me to just keep a relatively large cash position. But then again, I'm not the sharpest tool in the shed .

 

[Dtail]

True - but, as recent history has shown, it is possible for fixed income (at least bond funds) to also fall during a down market, so even selling fixed income might be at a loss.

Having to think about and deal with these things just makes it easier for me to just keep a relatively large cash position. But then again, I'm not the sharpest tool in the shed .

True, it happened in 2022, but that was not historically typical. With rates on the lowish side, it can certainly happen again.