ERD50: No, the 4% rule has been "The Number" in the broad financial community ever since Bengen's 1994 paper and the Trinity study.
William Bengen - Wikipedia, the free encyclopedia While it is true that not everybody agreed with it, the broad community did. It's only in the last few years that the general consensus is starting to think that 4% is too high.
IMHO, the right SWR to start with when doing initial backtests is what was accepted at the time (notwithstanding that 1972 is 20 years before Bengen's paper). AFAIK, Guyton started from that 4% number when he invented his Withdrawal Decision Rules.
It's tricky to avoid the hindsight bias fallacy, and IMHO --
for the purposes of comparing these two withdrawal strategies -- using a SWR of 3%-3.5% is hindsight bias.
OTOH, capping the CPI adjustment to 6% is
also hindsight bias! The only time inflation has been much above 6% is one period of a few years centered around 1977.
So IMHO the proper comparison of plain SWR vs. G-K is 4% and 5.5%, with no inflation caps.
::sigh:: Alas, my OCD is starting to show.
I just put together this spreadsheet to try to get an understanding of what the actual differences there would be between these two withdrawal methods, not to get bogged down in arcane details. And, as you indicated, to see how the G-K rules performed on historical data.
siamond: Yes, I had similar thoughts about some sort of Sanity Rule ceiling. Once you survive the 1970's and pull out of the 1980's pothole, the G-K withdrawal grows sky high, like 50% more than the inflation-only growth of the standard SWR method. There's a lot of refinements you could do, but: a) it makes the model much more complex, and b) it doesn't matter. What we really want to know is "does the portfolio have a good chance to survive?" The added complexity doesn't help answer that -- the simple original rules give us the answer to that.
As far a putting a "bare minimum" floor, I'm against it. It's all well and good to say, "I insist on taking at least $X", but reality says that when the portfolio gets to zero, you won't be making ANY withdrawals.
Heh, using $1,000,000 starting value. Yes, that's more likely, but it doesn't matter. Using $10K or $100K is the same, just add another zero. In another thread where I used a $1M initial value some people got all freaked out at seeing final values in the tens of millions, and annual draws in the half-million range. The freaking out interfered with the discussion, so I keep the starting numbers low so that the finals don't get that big.
BTW, in playing around with the parameters, I discovered that the SWR (for standard SWR method ) can be
extremely sensitive at the cusp. A difference of 0.2% (4.2% to 4.4%) means the difference in the final value of $2.2M vs. $88K-headed-for-the-cliff. Pick a too-high SWR and you'll be eating Alpo when you're 92.
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I didn't stress this, but also in the sheet is data for the S&P returns where you are in/out based on the 10 month SMA, like Faber's QTAA method. Using that instead of buy&hold is a more substantial improvement than fiddling with the decimal points of the SWR.
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Anyway ...... I uploaded a new version. This one lets you individually set the CPI caps, and it also has charts of the annual draws and portfolio values. Same URL:
https://www.dropbox.com/s/cwprtn6y8ouyajj/SPY_Withdraw_by_Guyton_rules.xls This will be my last update unless somebody finds an error that I need to correct.