As we are approaching our retirement "number", a number of thoughts come to mind, mainly related to "is that still really enough?".
Seems to me that there are a number of risks:
1 - What will our expenses be? (we still have kids in college, don't know whether they'll find jobs, etc.)
2 - What if there's an economic disaster, US debt bites us, etc. Not sure there is any way to protect against this, so probably shouldn't even worry about it.
3 - And the point of this post, a possible flaw in the 4% rule:
We all know that if you retire and the the market drops rapidly right after that, then it can be bad and this situation is what would lead to potential failures per Firecalc. But take the last 5 years as an example. Say you were at 90% of your retirement target in 2007. Then the market plunged and you dropped to perhaps 50% of your target. So now after 5 or so years you reach your target number.
It seems that statistically, anybody is most likely to be at their target at the end of a run-up in the market. This also implies that the risk of a market drop is higher at the times when people are more likely to have met their financial goals. Whereas something like Firecalc calculates the odds of retirement success randomly for each year in a set of scenarios, the reality is that you are *more likely* to reach your goals and retire in the years after good market runups, which means you might be more likely to experience failures of the market right after retirement. This implies that a target should be higher than the 4% (or whatever other percentage target you set) for this reason.
Has anybody else thought of this problem? Any thoughts?
Seems to me that there are a number of risks:
1 - What will our expenses be? (we still have kids in college, don't know whether they'll find jobs, etc.)
2 - What if there's an economic disaster, US debt bites us, etc. Not sure there is any way to protect against this, so probably shouldn't even worry about it.
3 - And the point of this post, a possible flaw in the 4% rule:
We all know that if you retire and the the market drops rapidly right after that, then it can be bad and this situation is what would lead to potential failures per Firecalc. But take the last 5 years as an example. Say you were at 90% of your retirement target in 2007. Then the market plunged and you dropped to perhaps 50% of your target. So now after 5 or so years you reach your target number.
It seems that statistically, anybody is most likely to be at their target at the end of a run-up in the market. This also implies that the risk of a market drop is higher at the times when people are more likely to have met their financial goals. Whereas something like Firecalc calculates the odds of retirement success randomly for each year in a set of scenarios, the reality is that you are *more likely* to reach your goals and retire in the years after good market runups, which means you might be more likely to experience failures of the market right after retirement. This implies that a target should be higher than the 4% (or whatever other percentage target you set) for this reason.
Has anybody else thought of this problem? Any thoughts?