Did the 4% rule just become the 5% rule? :)

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dknightd
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Re: Did the 4% rule just become the 5% rule? :)

Post by dknightd »

minimalistmarc wrote: Fri Oct 23, 2020 7:50 am Yes, but the pension provides a safety net so if you make it to 80 and run out of money you can switch to live like a monk mode
That is more or less my plan. Delay SS till 70. Buy an annuity (i.e. buy my own pension) that together with SS will allow us to live comfortably enough, with some fun. RMD starting at 72 will likely provide more than we need for additional fun. But maybe not. If SS and pension provide enough, then RMD might be money we give away, or, stash in the bank, and give away when we die.
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Re: Did the 4% rule just become the 5% rule? :)

Post by Leesbro63 »

minimalistmarc wrote: Fri Oct 23, 2020 7:50 am
Leesbro63 wrote: Fri Oct 23, 2020 5:14 am
minimalistmarc wrote: Thu Oct 22, 2020 3:27 pm I think Bengen’s got it right. 5% will probably be fine, especially if you have a pension.
5% works or it doesn’t. Other sources of income have nothing to do with it.
Yes, but the pension provides a safety net so if you make it to 80 and run out of money you can switch to live like a monk mode
What you are REALLY saying is this: if you have another source of income, you can assume the higher risk of failure of a higher withdrawal rate.
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willthrill81
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Re: Did the 4% rule just become the 5% rule? :)

Post by willthrill81 »

Outer Marker wrote: Fri Oct 23, 2020 4:49 am Mathmatically, you can withdraw 5% of the portfolio forever and never run out of money. Its the self-guarantee of a minimum, lnfatoin-adjusted "floor" that causes the potential for problems. If you're willing to live on less in the down years, you can withdraw at a higher rate on average.
Bengen isn't talking about withdrawing 5% of the portfolio balance every year. He's talking about withdrawing 5% in the first year of retirement and then withdrawing that same dollar amount, adjusted for inflation, in every subsequent year. It's sometimes referred to as a fixed real dollar withdrawal strategy.
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Re: Did the 4% rule just become the 5% rule? :)

Post by Outer Marker »

willthrill81 wrote: Fri Oct 23, 2020 9:35 am
Outer Marker wrote: Fri Oct 23, 2020 4:49 am Mathmatically, you can withdraw 5% of the portfolio forever and never run out of money. Its the self-guarantee of a minimum, lnfatoin-adjusted "floor" that causes the potential for problems. If you're willing to live on less in the down years, you can withdraw at a higher rate on average.
Bengen isn't talking about withdrawing 5% of the portfolio balance every year. He's talking about withdrawing 5% in the first year of retirement and then withdrawing that same dollar amount, adjusted for inflation, in every subsequent year. It's sometimes referred to as a fixed real dollar withdrawal strategy.
Thanks, Will . . Exactly my point. I plan to take out 4 or 5 % a year (haven't decided) and eat more canned tuna in down years if I have to. In good years, my portfolio is going to increase in value and I'll get a "raise". Presumably my 70/30 portfolio is going to outpace the rate of inflation, so I'll likely end up with more than I started.
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Re: Did the 4% rule just become the 5% rule? :)

Post by SquawkIdent »

Outer Marker wrote: Fri Oct 23, 2020 9:41 am
willthrill81 wrote: Fri Oct 23, 2020 9:35 am
Outer Marker wrote: Fri Oct 23, 2020 4:49 am Mathmatically, you can withdraw 5% of the portfolio forever and never run out of money. Its the self-guarantee of a minimum, lnfatoin-adjusted "floor" that causes the potential for problems. If you're willing to live on less in the down years, you can withdraw at a higher rate on average.
Bengen isn't talking about withdrawing 5% of the portfolio balance every year. He's talking about withdrawing 5% in the first year of retirement and then withdrawing that same dollar amount, adjusted for inflation, in every subsequent year. It's sometimes referred to as a fixed real dollar withdrawal strategy.
Thanks, Will . . Exactly my point. I plan to take out 4 or 5 % a year (haven't decided) and eat more canned tuna in down years if I have to. In good years, my portfolio is going to increase in value and I'll get a "raise". Presumably my 70/30 portfolio is going to outpace the rate of inflation, so I'll likely end up with more than I started.
+1

While my portfolio will be more conservative, I’ll be doing the same thing. I have several legs of the stool that are very safe, so while my yearly withdrawal will go up and down but will not dramatically change the overall yearly picture.
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Re: Did the 4% rule just become the 5% rule? :)

Post by Bratbill »

mptfan wrote: Thu Oct 22, 2020 4:10 pm I always bristle when I hear someone refer to the "4% rule" because I don't interpret it as a rule, I interpret it as a worst case scenario for conservative planning purposes, as explained in the article cited at the beginnig of this thread...

He says it was, historically, just the “worst-case scenario.” That was based on someone who retired at the worst moment he could find in modern times: October 1968, just as the stock market peaked, and runaway inflation was beginning. Someone who retired at that moment had to endure a bear market for U.S. stocks that would last 14 years, and skyrocketing inflation that crushed the purchasing power of their savings and fed their bonds into the shredder.

Someone retiring then would still have been OK for 30 years if they withdrew no more than 4% (actually, in 2006 he raised that calculation to 4.5%), Bengen says.

This !!!
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willthrill81
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Re: Did the 4% rule just become the 5% rule? :)

Post by willthrill81 »

Outer Marker wrote: Fri Oct 23, 2020 9:41 am
willthrill81 wrote: Fri Oct 23, 2020 9:35 am
Outer Marker wrote: Fri Oct 23, 2020 4:49 am Mathmatically, you can withdraw 5% of the portfolio forever and never run out of money. Its the self-guarantee of a minimum, lnfatoin-adjusted "floor" that causes the potential for problems. If you're willing to live on less in the down years, you can withdraw at a higher rate on average.
Bengen isn't talking about withdrawing 5% of the portfolio balance every year. He's talking about withdrawing 5% in the first year of retirement and then withdrawing that same dollar amount, adjusted for inflation, in every subsequent year. It's sometimes referred to as a fixed real dollar withdrawal strategy.
Thanks, Will . . Exactly my point. I plan to take out 4 or 5 % a year (haven't decided) and eat more canned tuna in down years if I have to. In good years, my portfolio is going to increase in value and I'll get a "raise". Presumably my 70/30 portfolio is going to outpace the rate of inflation, so I'll likely end up with more than I started.
I'm planning on a somewhat similar approach. We'll use the time value of money formula to determine each year's withdrawals based on our current portfolio size, expected forward returns, life expectancy, and desired residual portfolio. It's guaranteed to not prematurely deplete a portfolio but smooths out withdrawals more than a pure percentage-of-portfolio withdrawal method.
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Re: Did the 4% rule just become the 5% rule? :)

Post by Oregano »

What a terrible time to update this "rule", when prospective returns for a balanced portfolio have never been worse.

The bigger issue, of course, is that even Bengen acknowledges it was never a useful rule in the first place. It doesn't actually produce useful guidance beyond the first couple years of withdrawals. The best logic I've seen for a withdrawal strategy which I haven't seen anyone discuss in a long, long time was from Jim Otar, I believe (someone correct me if I'm wrong). His view was to estimate how much of a lifetime annuity your portfolio could be turned into as a guide to a safe withdrawal rate. Then, every few years or if the markets have moved substantially one way or the other, you recalculate the lifetime annuity amount and adjust your withdrawal rate as needed. The beauty of this is that it accounts for your current asset values and ages throughout the remainder of your life, whereas the 4% rule basically becomes irrelevant a few years into the plan because it doesn't tell you how you should adjust your withdrawals if portfolio returns are higher or lower than expected. The trade-off with the Otar strategy is that you may have to adjust your withdrawals downward in some periods, which may not be desirable. The flip side of the 4% rule is that you might limit your withdrawals to unnecessarily low amounts for a very long time.
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Re: Did the 4% rule just become the 5% rule? :)

Post by sojersey »

tibbitts wrote: Thu Oct 22, 2020 3:10 pm
Schlabba wrote: Thu Oct 22, 2020 2:33 pm You can also look at it the other way around. If you retire relatively young, lets say 40, then 10 years into retirement you can still choose to go back to the workforce if the first 10 years of your retirement ate too much into your wealth.
There are very few cases where you could take 10 years off starting at age 40 and resume ten years later - at least not in a position many people would consider acceptable. Being hired in your 50s is just not that easy.
This. I would never retire expecting "I can just go back in". Maybe it works for some, but I watched when my mother was out of work for ~8 years due to injury (in her 50s) and then eventually just the inertia that made it harder to get back in. She did not have a good time when she did have to go back to work (when she was 59/60)

I would rather have some reliable passive income by then to avoid it entirely, but please don't assume its a cake walk. I compare it to the thought of going back to school for a masters degree these days (which fortunately is not needed in my line of work)
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Re: Did the 4% rule just become the 5% rule? :)

Post by Da5id »

Oregano wrote: Fri Oct 23, 2020 10:39 am What a terrible time to update this "rule", when prospective returns for a balanced portfolio have never been worse.
Darned if I know what prospective returns are. "Never been worse" is a strong statement. Sure CAPE is high and yields are low. But were prospects worse in the meltdowns of the past? The great depression? 2008 crisis? Hard to say. I do agree that 4% probably isn't a "rule" many people here think is a good spending plan. Having some flexibility to spend less if things go south in the early years is how many would act in real life. Faith in the past safety of 4% is probably not much comfort if you retire into a terrible sequence of returns...
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Re: Did the 4% rule just become the 5% rule? :)

Post by willthrill81 »

tibbitts wrote: Thu Oct 22, 2020 3:10 pm
Schlabba wrote: Thu Oct 22, 2020 2:33 pm You can also look at it the other way around. If you retire relatively young, lets say 40, then 10 years into retirement you can still choose to go back to the workforce if the first 10 years of your retirement ate too much into your wealth.
There are very few cases where you could take 10 years off starting at age 40 and resume ten years later - at least not in a position many people would consider acceptable. Being hired in your 50s is just not that easy.
It depends on how much additional income you might need. If you're only spending $40k, it's not difficult for most to get a job making $20k-30k, greatly relieving the stress on the portfolio. But if you're withdrawing $160k, going back into the workforce after a decade of being out is not likely to move the needle much.
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Re: Did the 4% rule just become the 5% rule? :)

Post by caffeperfavore »

It's not a rule, it's more like a guideline. :)
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Re: Did the 4% rule just become the 5% rule? :)

Post by Ice-9 »

finite_difference wrote: Thu Oct 22, 2020 1:04 pm Pretty sure Bogleheads are not about to change from 4% to 5% considering they currently follow the 3% rule. (Or 3.5% if you’re really living on the edge.)
I just wanted to say that, if I could add a "HaHa" to your post like I can with iPhone messages, I would. :D
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Schlabba
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Re: Did the 4% rule just become the 5% rule? :)

Post by Schlabba »

sojersey wrote: Fri Oct 23, 2020 2:01 pm
tibbitts wrote: Thu Oct 22, 2020 3:10 pm
Schlabba wrote: Thu Oct 22, 2020 2:33 pm You can also look at it the other way around. If you retire relatively young, lets say 40, then 10 years into retirement you can still choose to go back to the workforce if the first 10 years of your retirement ate too much into your wealth.
There are very few cases where you could take 10 years off starting at age 40 and resume ten years later - at least not in a position many people would consider acceptable. Being hired in your 50s is just not that easy.
This. I would never retire expecting "I can just go back in". Maybe it works for some, but I watched when my mother was out of work for ~8 years due to injury (in her 50s) and then eventually just the inertia that made it harder to get back in. She did not have a good time when she did have to go back to work (when she was 59/60)

I would rather have some reliable passive income by then to avoid it entirely, but please don't assume its a cake walk. I compare it to the thought of going back to school for a masters degree these days (which fortunately is not needed in my line of work)
Whether that is possible or not is very situational. I meant it more as a worst-case scenario instead of expecting to go back to work.

According to the image on https://earlyretirementnow.com/2016/12/ ... t-1-intro/, a 5% withdrawal rate has a 70% chance to survive for 60 years. And that is with someone mindlessly adjusting spending for inflation without any flexibility in the budget. I don't know what the numbers are if you spend less in bearmarkets, but it must be better than 70%.
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Re: Did the 4% rule just become the 5% rule? :)

Post by minimalistmarc »

Leesbro63 wrote: Fri Oct 23, 2020 9:01 am
minimalistmarc wrote: Fri Oct 23, 2020 7:50 am
Leesbro63 wrote: Fri Oct 23, 2020 5:14 am
minimalistmarc wrote: Thu Oct 22, 2020 3:27 pm I think Bengen’s got it right. 5% will probably be fine, especially if you have a pension.
5% works or it doesn’t. Other sources of income have nothing to do with it.
Yes, but the pension provides a safety net so if you make it to 80 and run out of money you can switch to live like a monk mode
What you are REALLY saying is this: if you have another source of income, you can assume the higher risk of failure of a higher withdrawal rate.
Yes, that’s it!
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Re: Did the 4% rule just become the 5% rule? :)

Post by 1210sda »

willthrill81 wrote: Fri Oct 23, 2020 10:33 am I'm planning on a somewhat similar approach. We'll use the time value of money formula to determine each year's withdrawals based on our current portfolio size, expected forward returns, life expectancy, and desired residual portfolio.
Will, could you please remind me of the differences between the time value of money approach and longinvests VPW??

Thanks
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Re: Did the 4% rule just become the 5% rule? :)

Post by vineviz »

Da5id wrote: Fri Oct 23, 2020 2:23 pm
Darned if I know what prospective returns are. "Never been worse" is a strong statement. Sure CAPE is high and yields are low. But were prospects worse in the meltdowns of the past?
They were not worse then.
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Re: Changes to 4% rule for retirees?

Post by White Coat Investor »

rossington wrote: Fri Oct 23, 2020 4:11 am
White Coat Investor wrote: Thu Oct 22, 2020 6:02 pm
rickcrna wrote: Thu Oct 22, 2020 12:16 pm Just read a summary of an article in this month's Financial Advisor Journal by Bill Bengen, the inventor of the 4% withdrawal rule for retirees.
Apparently, he has revised upward to 4.5 to 5% safe withdrawal rate. Here is a link to the summary.

https://www.marketwatch.com/story/the-i ... eid=yhoof2

Should promote an interesting discussion.

Rick
It's not a rule. And 5% is fine...most of the time. But there is plenty of warning if this isn't one of those times.
Agreed, be flexible as to how to withdraw... but I would add this caveat: Suppose at at @ age 89 you or your spouse or both require (suddenly?) assisted living with care or skilled nursing care costing 80k,100k or more per year for 3+ years? Will you have the funds to cover this...or will you burden your children with this responsibility? This should be factored in.
Spend down to Medicaid.
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willthrill81
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Re: Did the 4% rule just become the 5% rule? :)

Post by willthrill81 »

1210sda wrote: Fri Oct 23, 2020 8:43 pm
willthrill81 wrote: Fri Oct 23, 2020 10:33 am I'm planning on a somewhat similar approach. We'll use the time value of money formula to determine each year's withdrawals based on our current portfolio size, expected forward returns, life expectancy, and desired residual portfolio.
Will, could you please remind me of the differences between the time value of money approach and longinvests VPW??

Thanks
VPW is a specific application of the time value of money formula. It is specifically designed to exhaust one's portfolio by age 100. Also, the specific withdrawals are based on historic returns of the various AAs on the Wiki page.

However, by using the time value of money formula itself instead of a derivative like VPW, retirees can completely control all of the parameters themselves with ease, changing any variable they want at any time. For instance, you may want to exhaust your portfolio by age 90 for whatever reason. Or you may want to have a set number of dollars remaining by age 80. You can insert whatever returns you wish to assume for your portfolio going forward. And so on. No other method I know of is as flexible as this approach while also being mathematically intuitive and guaranteed to not prematurely deplete your portfolio.

Where this method can be a tremendous help is when you have multiple income streams, lump sums, and/or significant expenses at different points in time. These can all be placed into a spreadsheet that utilizes the TVM formula to determine how much you can plausibly withdraw at any given point in time. Other posters have created such spreadsheets in the thread linked to above.
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Re: Did the 4% rule just become the 5% rule? :)

Post by stocknoob4111 »

it makes no sense, Bengen says the worst is inflation but since inflation is low we can dial 4% to 5%? BUT, all what we are doing right now, spending Trillions in unchecked fashion, lowering interest rates to zero for infinitely low - all that has to end in high inflation no?
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Re: Did the 4% rule just become the 5% rule? :)

Post by willthrill81 »

stocknoob4111 wrote: Fri Oct 23, 2020 10:37 pm it makes no sense, Bengen says the worst is inflation but since inflation is low we can dial 4% to 5%? BUT, all what we are doing right now, spending Trillions in unchecked fashion, lowering interest rates to zero for infinitely low - all that has to end in high inflation no?
In this recent thread, I showed that while the money supply has more than doubled in the last decade, inflation has been quite low. The reason appears to be that the velocity of money has steadily gone down. In other words, the additional money in the system isn't changing hands, and without that happening, inflation cannot go up.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: Did the 4% rule just become the 5% rule? :)

Post by Derpalator »

phxjcc wrote: Fri Oct 23, 2020 2:36 am
mptfan wrote: Thu Oct 22, 2020 4:10 pm I always bristle when I hear someone refer to the "4% rule" because I don't interpret it as a rule, I interpret it as a worst case scenario for conservative planning purposes, as explained in the article cited at the beginnig of this thread...

He says it was, historically, just the “worst-case scenario.” That was based on someone who retired at the worst moment he could find in modern times: October 1968, just as the stock market peaked, and runaway inflation was beginning. Someone who retired at that moment had to endure a bear market for U.S. stocks that would last 14 years, and skyrocketing inflation that crushed the purchasing power of their savings and fed their bonds into the shredder.

Someone retiring then would still have been OK for 30 years if they withdrew no more than 4% (actually, in 2006 he raised that calculation to 4.5%), Bengen says.
Reposting yours.

Hoping that someone will actually read it.

14 year bear market.
Double digit inflation.

And 4% still works?

And this is long before the “financialization” of the US economy.
+3 :D
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Re: Changes to 4% rule for retirees?

Post by rossington »

White Coat Investor wrote: Fri Oct 23, 2020 9:32 pm
rossington wrote: Fri Oct 23, 2020 4:11 am
White Coat Investor wrote: Thu Oct 22, 2020 6:02 pm
rickcrna wrote: Thu Oct 22, 2020 12:16 pm Just read a summary of an article in this month's Financial Advisor Journal by Bill Bengen, the inventor of the 4% withdrawal rule for retirees.
Apparently, he has revised upward to 4.5 to 5% safe withdrawal rate. Here is a link to the summary.

https://www.marketwatch.com/story/the-i ... eid=yhoof2

Should promote an interesting discussion.

Rick
It's not a rule. And 5% is fine...most of the time. But there is plenty of warning if this isn't one of those times.
Agreed, be flexible as to how to withdraw... but I would add this caveat: Suppose at at @ age 89 you or your spouse or both require (suddenly?) assisted living with care or skilled nursing care costing 80k,100k or more per year for 3+ years? Will you have the funds to cover this...or will you burden your children with this responsibility? This should be factored in.
Spend down to Medicaid.
Why? The quality of life and care for you (both) would be at the lowest level. I cannot believe you as a respected physician and investor would advocate this when it can surely be prevented with careful portfolio withdrawal planning.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.
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Re: Changes to 4% rule for retirees?

Post by Outer Marker »

rossington wrote: Sat Oct 24, 2020 5:30 am
White Coat Investor wrote: Fri Oct 23, 2020 9:32 pm
rossington wrote: Fri Oct 23, 2020 4:11 am
White Coat Investor wrote: Thu Oct 22, 2020 6:02 pm
rickcrna wrote: Thu Oct 22, 2020 12:16 pm Just read a summary of an article in this month's Financial Advisor Journal by Bill Bengen, the inventor of the 4% withdrawal rule for retirees.
Apparently, he has revised upward to 4.5 to 5% safe withdrawal rate. Here is a link to the summary.

https://www.marketwatch.com/story/the-i ... eid=yhoof2

Should promote an interesting discussion.

Rick
It's not a rule. And 5% is fine...most of the time. But there is plenty of warning if this isn't one of those times.
Agreed, be flexible as to how to withdraw... but I would add this caveat: Suppose at at @ age 89 you or your spouse or both require (suddenly?) assisted living with care or skilled nursing care costing 80k,100k or more per year for 3+ years? Will you have the funds to cover this...or will you burden your children with this responsibility? This should be factored in.
Spend down to Medicaid.
Why? The quality of life and care for you (both) would be at the lowest level. I cannot believe you as a respected physician and investor would advocate this when it can surely be prevented with careful portfolio withdrawal planning.
A huge second for this. My parents were thinking about playing the spend down to medicade level. Those facilities were abysmal. In their state the differnce between medicade level care and the best private pay facility was $3,000 vs. $5,000. But the level of care was between staying in a "halfway house" like institutuion vs. a mountain resort. I would have stepped in to pay the difference if needed.
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Re: Did the 4% rule just become the 5% rule? :)

Post by michaeljc70 »

552BB wrote: Thu Oct 22, 2020 1:30 pm Hello Bogleheads,



I believe that the Trinity Study and the Bill Bengen work have been some of the most important historical studies.

Now looking at almost a century of historical information I would feel good about using this to inform my opinion on what withdrawal rate I would like to plan on when I decide to leave work.

If I were to retire today (I'm 52 years old) I would shoot for under 4%. Maybe 3 - 3.5%. If I go into my mid 50's to early 60's, 4% seems fine to me. A later retirement and I would definitely say I would feel safe with a withdrawal rate of 4.5 - 5% or higher.

As Bengen reiterates in this article, you don't treat this like physics, it an empirical study.

It will give you a good number to start with. Where you go from there is up to you.

Thats my opinion.



:sharebeer
These "rules" don't take into account SS which most retirees will get (or the equivalent if a teacher, railroad worker, etc.) So, if 4% will work for you at age 52 (which it can with enough in stocks according to the Trinity study), you have that cushion when you start collecting SS. For example, I am 50. I only need my portfolio to cover all my expenses for 12-20 years depending on what age I start to collect SS. That is why I think this broad "rule" is a great guideline but you need a more sophisticated tool (or math) to include future pensions/SS to see the full picture.

Unrelated to that, I find it interesting that so many people are pretty sure (or expecting) that they are going to get low returns over the next 30-40 years.
552BB
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Re: Did the 4% rule just become the 5% rule? :)

Post by 552BB »

Good morning Bogleheads,



Hello michaeljc70,


michaeljc70 wrote: Sat Oct 24, 2020 7:46 am
552BB wrote: Thu Oct 22, 2020 1:30 pm Hello Bogleheads,



I believe that the Trinity Study and the Bill Bengen work have been some of the most important historical studies.

Now looking at almost a century of historical information I would feel good about using this to inform my opinion on what withdrawal rate I would like to plan on when I decide to leave work.

If I were to retire today (I'm 52 years old) I would shoot for under 4%. Maybe 3 - 3.5%. If I go into my mid 50's to early 60's, 4% seems fine to me. A later retirement and I would definitely say I would feel safe with a withdrawal rate of 4.5 - 5% or higher.

As Bengen reiterates in this article, you don't treat this like physics, it an empirical study.

It will give you a good number to start with. Where you go from there is up to you.

Thats my opinion.



:sharebeer
These "rules" don't take into account SS which most retirees will get (or the equivalent if a teacher, railroad worker, etc.) So, if 4% will work for you at age 52 (which it can with enough in stocks according to the Trinity study), you have that cushion when you start collecting SS. For example, I am 50. I only need my portfolio to cover all my expenses for 12-20 years depending on what age I start to collect SS. That is why I think this broad "rule" is a great guideline but you need a more sophisticated tool (or math) to include future pensions/SS to see the full picture.

Unrelated to that, I find it interesting that so many people are pretty sure (or expecting) that they are going to get low returns over the next 30-40 years.


I agree with what you posted

Bengen, in his original work stated that these numbers don't include SS or any other income compensation.

It was primarily an empirical study. I like the conclusion of his work and the Trinity Study.

I also think that it is in the nature of the people on this Bogleheads board to be more conservative in their future assessments. Expecting lower future returns just makes people pad there savings a little more in my opinion.

As for me, I long ago surpassed what I would need. I have the great fortune of loving what I do for my work. I suppose I will retire when I find other interests that take up too much of my time at work, but I also have a very flexible work schedule so that my not happen.



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Re: Changes to 4% rule for retirees?

Post by White Coat Investor »

rossington wrote: Sat Oct 24, 2020 5:30 am
White Coat Investor wrote: Fri Oct 23, 2020 9:32 pm
rossington wrote: Fri Oct 23, 2020 4:11 am
White Coat Investor wrote: Thu Oct 22, 2020 6:02 pm
rickcrna wrote: Thu Oct 22, 2020 12:16 pm Just read a summary of an article in this month's Financial Advisor Journal by Bill Bengen, the inventor of the 4% withdrawal rule for retirees.
Apparently, he has revised upward to 4.5 to 5% safe withdrawal rate. Here is a link to the summary.

https://www.marketwatch.com/story/the-i ... eid=yhoof2

Should promote an interesting discussion.

Rick
It's not a rule. And 5% is fine...most of the time. But there is plenty of warning if this isn't one of those times.
Agreed, be flexible as to how to withdraw... but I would add this caveat: Suppose at at @ age 89 you or your spouse or both require (suddenly?) assisted living with care or skilled nursing care costing 80k,100k or more per year for 3+ years? Will you have the funds to cover this...or will you burden your children with this responsibility? This should be factored in.
Spend down to Medicaid.
Why? The quality of life and care for you (both) would be at the lowest level. I cannot believe you as a respected physician and investor would advocate this when it can surely be prevented with careful portfolio withdrawal planning.
I believe it varies by area, but in many areas when you run out of assets you stay in the same facility and Medicaid starts picking up the tab.

My point was merely that if BOTH spouses needed a SNF, it is no longer a financial catastrophe to run out of money.
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Re: Did the 4% rule just become the 5% rule? :)

Post by whodidntante »

4% always seemed conservative to me, and I guess that was the point. A SWR is based on a model, and assumptions about what the future will look like. If the assumptions do not hold, neither does your SWR. But there's nothing to guarantee we will not have Boglehead portfolio destroying time periods, like high inflation coupled with poor stock and bond returns. I've mentioned possible triggers for this scenario, not that I wish any of you bad fortune. But for myself, if I have a ridiculous surplus of resources for a long life, I will consider myself lucky and disciplined. Discipline alone is not sufficient.
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Re: Did the 4% rule just become the 5% rule? :)

Post by sperry8 »

Oregano wrote: Fri Oct 23, 2020 10:39 am What a terrible time to update this "rule", when prospective returns for a balanced portfolio have never been worse.
Says who? I've been hearing about high CAPE10 and prospective lowered returns for decades. Hasn't happened yet. OK, perhaps a little hyperbole as equity returns are lower over the past twenty years have been in the high 6% range. But I believe bonds did quite well over the same period. My point is, that even at these returns, 4.5% is still low.
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Re: Did the 4% rule just become the 5% rule? :)

Post by Normchad »

Derpalator wrote: Sat Oct 24, 2020 4:54 am
phxjcc wrote: Fri Oct 23, 2020 2:36 am
mptfan wrote: Thu Oct 22, 2020 4:10 pm I always bristle when I hear someone refer to the "4% rule" because I don't interpret it as a rule, I interpret it as a worst case scenario for conservative planning purposes, as explained in the article cited at the beginnig of this thread...

He says it was, historically, just the “worst-case scenario.” That was based on someone who retired at the worst moment he could find in modern times: October 1968, just as the stock market peaked, and runaway inflation was beginning. Someone who retired at that moment had to endure a bear market for U.S. stocks that would last 14 years, and skyrocketing inflation that crushed the purchasing power of their savings and fed their bonds into the shredder.

Someone retiring then would still have been OK for 30 years if they withdrew no more than 4% (actually, in 2006 he raised that calculation to 4.5%), Bengen says.
Reposting yours.

Hoping that someone will actually read it.

14 year bear market.
Double digit inflation.

And 4% still works?

And this is long before the “financialization” of the US economy.
+3 :D
I’ll give it a +4. In a board where we like to say “nobody knows nothing”, an awful lot of people are completely convinced that the next 30 years will be *worse* than any 30 year period ever.....

Not me. I’m willing to risk eating alpo and dying completely destitute. If the worst 30 year period ever happens starting now, too bad for me. Very good chance it won’t though, and so I’ll be fat dumb and happy, and won’t risk wasting an extra 5-10 years working, needlessly chasing the unreachable dream of being financial invincible.
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Re: Did the 4% rule just become the 5% rule? :)

Post by willthrill81 »

Normchad wrote: Sat Oct 24, 2020 10:10 am
Derpalator wrote: Sat Oct 24, 2020 4:54 am
phxjcc wrote: Fri Oct 23, 2020 2:36 am
mptfan wrote: Thu Oct 22, 2020 4:10 pm I always bristle when I hear someone refer to the "4% rule" because I don't interpret it as a rule, I interpret it as a worst case scenario for conservative planning purposes, as explained in the article cited at the beginnig of this thread...

He says it was, historically, just the “worst-case scenario.” That was based on someone who retired at the worst moment he could find in modern times: October 1968, just as the stock market peaked, and runaway inflation was beginning. Someone who retired at that moment had to endure a bear market for U.S. stocks that would last 14 years, and skyrocketing inflation that crushed the purchasing power of their savings and fed their bonds into the shredder.

Someone retiring then would still have been OK for 30 years if they withdrew no more than 4% (actually, in 2006 he raised that calculation to 4.5%), Bengen says.
Reposting yours.

Hoping that someone will actually read it.

14 year bear market.
Double digit inflation.

And 4% still works?

And this is long before the “financialization” of the US economy.
+3 :D
I’ll give it a +4. In a board where we like to say “nobody knows nothing”, an awful lot of people are completely convinced that the next 30 years will be *worse* than any 30 year period ever.....

Not me. I’m willing to risk eating alpo and dying completely destitute. If the worst 30 year period ever happens starting now, too bad for me. Very good chance it won’t though, and so I’ll be fat dumb and happy, and won’t risk wasting an extra 5-10 years working, needlessly chasing the unreachable dream of being financial invincible.
And the reality of the situation is that many here will have enough SS benefits to cover a significant chunk of their essentials, maybe even all of them. So the risk then isn't of eating dog food but how much you'll have for discretionary spending and how big your bequest will be.

I've often shown that going from a 4% WR to 3% (i.e. 25x to 33x) with a 20% gross saving rate would historically have taken an additional 5-10 years of accumulating. Those are years that can never be recovered no matter what. And yet many are willing to spend that additional time to prepare for a future that they fear will be worse than the worst the U.S. has ever seen while also believing that 3% will somehow be alright. :?

Now if you're one of those fortunate few who would do your work for free and cannot imagine doing anything else, it doesn't really matter how much you accumulate. Most of us aren't there though. I enjoy most of my work, but once I believe that I can comfortably retire with adequate safety, I'll be out the door post haste to go do a thru-hike and trot the globe with my beautiful bride. :D
Last edited by willthrill81 on Sat Oct 24, 2020 10:42 am, edited 1 time in total.
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Re: Did the 4% rule just become the 5% rule? :)

Post by tractorguy »

I've been lurking on the discussions of 3% vs 4% vs something more (or less) for several years now. These always strike me as a analogous to a discussion of how to adjust the sights on a rife to hit a specific target. In reality, this is a discussion about how close you can stand to an exploding hand grenade before you are injured or killed.

I think we'd all be comfortable standing on one side of a hill when somebody exploded one on the other side. However there is a vanishingly small but non-zero chance that there would be a black swan event and a piece of shrapnel could be blown over the hill and hit someone. I consider that situation analogous to having a 2.5% or lower equivalent withdrawal rate. There could be a black swan event but the odds are that something worse could happen that you aren't worrying about.

Similarly, we'd all be somewhat nervous being in a foxhole when someone exploded a grenade near it. However, the military does this all the time in training with only rare accidents. Some of them are on video. https://www.youtube.com/watch?v=Eh8QYoD ... EVERYTHING
Based on this thread, that's probably analogous to a 4.5% or 5% withdrawal rate.

IMOP, any higher rate is analogous to standing in the open, with a hand grenade going off somewhere about 30 or 40 feet from you. Many people won't be injured but some will be and I wouldn't want to do it regularly just because I wasn't injured the first time.
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Re: Did the 4% rule just become the 5% rule? :)

Post by willthrill81 »

tractorguy wrote: Sat Oct 24, 2020 10:42 am I've been lurking on the discussions of 3% vs 4% vs something more (or less) for several years now. These always strike me as a analogous to a discussion of how to adjust the sights on a rife to hit a specific target. In reality, this is a discussion about how close you can stand to an exploding hand grenade before you are injured or killed.

I think we'd all be comfortable standing on one side of a hill when somebody exploded one on the other side. However there is a vanishingly small but non-zero chance that there would be a black swan event and a piece of shrapnel could be blown over the hill and hit someone. I consider that situation analogous to having a 2.5% or lower equivalent withdrawal rate. There could be a black swan event but the odds are that something worse could happen that you aren't worrying about.

Similarly, we'd all be somewhat nervous being in a foxhole when someone exploded a grenade near it. However, the military does this all the time in training with only rare accidents. Some of them are on video. https://www.youtube.com/watch?v=Eh8QYoD ... EVERYTHING
Based on this thread, that's probably analogous to a 4.5% or 5% withdrawal rate.

IMOP, any higher rate is analogous to standing in the open, with a hand grenade going off somewhere about 30 or 40 feet from you. Many people won't be injured but some will be and I wouldn't want to do it regularly just because I wasn't injured the first time.
Nice analogy.

It's even more difficult to truly assess the risks of a given withdrawal rate because virtually no one is actually implementing the fixed real dollar withdrawal method that Bengen first studied in 1994 and in his subsequent work. Everyone is flexible with their spending and withdrawals to some extent, especially when their portfolio is suffering. This provides additional security beyond what the historic success rates suggest. Some tools allow you to backtest the impact of some flexible withdrawal methods. I think that the one available at Portfolio Charts is the best I've seen.
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Re: Did the 4% rule just become the 5% rule? :)

Post by geerhardusvos »

tractorguy wrote: Sat Oct 24, 2020 10:42 am I've been lurking on the discussions of 3% vs 4% vs something more (or less) for several years now. These always strike me as a analogous to a discussion of how to adjust the sights on a rife to hit a specific target. In reality, this is a discussion about how close you can stand to an exploding hand grenade before you are injured or killed.

I think we'd all be comfortable standing on one side of a hill when somebody exploded one on the other side. However there is a vanishingly small but non-zero chance that there would be a black swan event and a piece of shrapnel could be blown over the hill and hit someone. I consider that situation analogous to having a 2.5% or lower equivalent withdrawal rate. There could be a black swan event but the odds are that something worse could happen that you aren't worrying about.

Similarly, we'd all be somewhat nervous being in a foxhole when someone exploded a grenade near it. However, the military does this all the time in training with only rare accidents. Some of them are on video. https://www.youtube.com/watch?v=Eh8QYoD ... EVERYTHING
Based on this thread, that's probably analogous to a 4.5% or 5% withdrawal rate.

IMOP, any higher rate is analogous to standing in the open, with a hand grenade going off somewhere about 30 or 40 feet from you. Many people won't be injured but some will be and I wouldn't want to do it regularly just because I wasn't injured the first time.
“I’m going to be in a completely different county when the grenade goes off! That’s why I’m going with a 1% withdrawal rate on my 100% bonds portfolio! I’ll hear that little boom in the distance and laugh at all the peasants getting ripped up by shrapnel while my blog makes me $300k/year!”
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Re: Did the 4% rule just become the 5% rule? :)

Post by vineviz »

Normchad wrote: Sat Oct 24, 2020 10:10 am I’ll give it a +4. In a board where we like to say “nobody knows nothing”, an awful lot of people are completely convinced that the next 30 years will be *worse* than any 30 year period ever.....
No one is convinced that the next 30 years WILL be worse for retirees than any 30 year period previously. Not that I see anyway.

But you don’t need a crystal ball to see that the probability of the 4% “rule” failing over the next 30 years IS higher than ever. To see that all you need are eyes and a calculator.
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Re: Did the 4% rule just become the 5% rule? :)

Post by bog007 »

Unrelated to that, I find it interesting that so many people are pretty sure (or expecting) that they are going to get low returns over the next 30-40 years.
[/quote]

Exactly. I see doom and gloom with bonds and stocks forever on this site and others. pfau was saying this in 2013.
https://papers.ssrn.com/sol3/papers.cfm ... id=2201323
yea we may see lower returns for a few years but who knows.
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Re: Did the 4% rule just become the 5% rule? :)

Post by willthrill81 »

vineviz wrote: Sat Oct 24, 2020 11:04 am
Normchad wrote: Sat Oct 24, 2020 10:10 am I’ll give it a +4. In a board where we like to say “nobody knows nothing”, an awful lot of people are completely convinced that the next 30 years will be *worse* than any 30 year period ever.....
No one is convinced that the next 30 years WILL be worse for retirees than any 30 year period previously. Not that I see anyway.

But you don’t need a crystal ball to see that the probability of the 4% “rule” failing over the next 30 years IS higher than ever. To see that all you need are eyes and a calculator.
Then it's a good thing that virtually nobody is strictly adhering to 4% fixed real dollar withdrawals.
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Re: Did the 4% rule just become the 5% rule? :)

Post by chipperd »

vineviz wrote: Fri Oct 23, 2020 8:47 pm
Da5id wrote: Fri Oct 23, 2020 2:23 pm
Darned if I know what prospective returns are. "Never been worse" is a strong statement. Sure CAPE is high and yields are low. But were prospects worse in the meltdowns of the past?
They were not worse then.
Not sure what you mean by "then", but the CAPE was up to 44+ in 2000 and the 4% "rule" still worked.
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Re: Did the 4% rule just become the 5% rule? :)

Post by 1210sda »

Will,

This is more specifically the "PMT" function within TVM. It's what is used to amortize a loan, for example.

Using a HP 12c financial calculator (if you have access to one) is really fast and simple.

One caution, if you want to target money at the end (legacy, etc.) you can use the FV key. But be aware that in many/most financial calculators, including Excel, the FV should be a negative entry. If not, you might get a larger, erroneous withdrawal amount.

Btw, if someone were to actually attain the targeted rate of return (i) in each and every year, the PMT or withdrawal would be a constant amount every year. Do you know if using a real rate of return would give you inflation adjusted withdrawals. (effectively)??
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Re: Did the 4% rule just become the 5% rule? :)

Post by Da5id »

vineviz wrote: Fri Oct 23, 2020 8:47 pm
Da5id wrote: Fri Oct 23, 2020 2:23 pm
Darned if I know what prospective returns are. "Never been worse" is a strong statement. Sure CAPE is high and yields are low. But were prospects worse in the meltdowns of the past?
They were not worse then.
Huh. In 2008 meltdown people literally thought the financial system could collapse. Such strong statements about future prospects are to me very dubious. People have been saying that the current bull market is done for years because of belief that they understood such prospects. Other than the COVID dip, they've been wrong.

I'm better with "nobody knows nothing" myself.
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Re: Did the 4% rule just become the 5% rule? :)

Post by willthrill81 »

1210sda wrote: Sat Oct 24, 2020 11:23 am Will,

This is more specifically the "PMT" function within TVM. It's what is used to amortize a loan, for example.

Using a HP 12c financial calculator (if you have access to one) is really fast and simple.

One caution, if you want to target money at the end (legacy, etc.) you can use the FV key. But be aware that in many/most financial calculators, including Excel, the FV should be a negative entry. If not, you might get a larger, erroneous withdrawal amount.

Btw, if someone were to actually attain the targeted rate of return (i) in each and every year, the PMT or withdrawal would be a constant amount every year. Do you know if using a real rate of return would give you inflation adjusted withdrawals. (effectively)??
Yes, you can use any financial calculator to implement this approach. I cut my teeth on a BAII Plus. It just becomes cumbersome if you have multiple income streams, lump sum expenses, etc. at different points in time.

Yes, using expected real rates of return would adjust the withdrawals for inflation.

In the thread I linked to above, I showed that using 1/CAPE as a measure of expected stock returns would have considerably smoothed withdrawals for those using this approach. During the 2008 event, for instance, withdrawals would have been quite consistent for most stock-heavy portfolios.
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Re: Did the 4% rule just become the 5% rule? :)

Post by Candor »

My plan for years has been 5% for the first 15 years and then roughly 2% once SS kicks in at 70 but I will have the ability to go to 2% at any time if needed. 2% is slightly above a bare-bones budget for me but I am currently living on that in an effort to reach my goals in the next couple of years so it's not that much of a sacrifice although I wouldn't want to do it for the rest of my life. Of course, if my projections are not panning out along the way, I will have the ability to adjust my withdrawals as needed down to 2% so I will not wait until I'm forced to go to 2% to lower them. I have built in a lot leeway so I'm comfortable with 5% starting out.
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Re: Did the 4% rule just become the 5% rule? :)

Post by vineviz »

willthrill81 wrote: Sat Oct 24, 2020 11:13 am Then it's a good thing that virtually nobody is strictly adhering to 4% fixed real dollar withdrawals.
As I'm sure you know, that's a red herring.

Regardless of the actual withdrawal strategy used by the investor, less retirement income is still less retirement income.
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Re: Did the 4% rule just become the 5% rule? :)

Post by vineviz »

Da5id wrote: Sat Oct 24, 2020 11:25 am
Huh. In 2008 meltdown people literally thought the financial system could collapse. Such strong statements about future prospects are to me very dubious. People have been saying that the current bull market is done for years because of belief that they understood such prospects. Other than the COVID dip, they've been wrong.
There are people today who think the financial system could collapse, but I don't see what relevance that has.

The question is whether the probability of a "safe" withdrawal rate being above 4% are better or worse now than they were in the past. Answering that question doesn't require any sorts of prediction about whether "the financial system could collapse" or whether the "current bull market is done". Or any predictions, actually.

We can actually observe the real expected yield on bonds and the CAPE ratio, and those two numbers are pretty much all you need to have if you want to calculate the probabilities. Whether the actual outcome turns out to be good or bad is largely a matter of luck (or chance), but the distribution of possible outcomes isn't murky at all.
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Re: Did the 4% rule just become the 5% rule? :)

Post by marcopolo »

vineviz wrote: Sat Oct 24, 2020 12:04 pm
Da5id wrote: Sat Oct 24, 2020 11:25 am
Huh. In 2008 meltdown people literally thought the financial system could collapse. Such strong statements about future prospects are to me very dubious. People have been saying that the current bull market is done for years because of belief that they understood such prospects. Other than the COVID dip, they've been wrong.
There are people today who think the financial system could collapse, but I don't see what relevance that has.

The question is whether the probability of a "safe" withdrawal rate being above 4% are better or worse now than they were in the past. Answering that question doesn't require any sorts of prediction about whether "the financial system could collapse" or whether the "current bull market is done". Or any predictions, actually.

We can actually observe the real expected yield on bonds and the CAPE ratio, and those two numbers are pretty much all you need to have if you want to calculate the probabilities. Whether the actual outcome turns out to be good or bad is largely a matter of luck (or chance), but the distribution of possible outcomes isn't murky at all.
This assumes CAPE is a reliable metric for expected returns for equities. The evidence for that does not seem very convincing.
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Re: Did the 4% rule just become the 5% rule? :)

Post by marcopolo »

Normchad wrote: Sat Oct 24, 2020 10:10 am
Derpalator wrote: Sat Oct 24, 2020 4:54 am
phxjcc wrote: Fri Oct 23, 2020 2:36 am
mptfan wrote: Thu Oct 22, 2020 4:10 pm I always bristle when I hear someone refer to the "4% rule" because I don't interpret it as a rule, I interpret it as a worst case scenario for conservative planning purposes, as explained in the article cited at the beginnig of this thread...

He says it was, historically, just the “worst-case scenario.” That was based on someone who retired at the worst moment he could find in modern times: October 1968, just as the stock market peaked, and runaway inflation was beginning. Someone who retired at that moment had to endure a bear market for U.S. stocks that would last 14 years, and skyrocketing inflation that crushed the purchasing power of their savings and fed their bonds into the shredder.

Someone retiring then would still have been OK for 30 years if they withdrew no more than 4% (actually, in 2006 he raised that calculation to 4.5%), Bengen says.
Reposting yours.

Hoping that someone will actually read it.

14 year bear market.
Double digit inflation.

And 4% still works?

And this is long before the “financialization” of the US economy.
+3 :D
I’ll give it a +4. In a board where we like to say “nobody knows nothing”, an awful lot of people are completely convinced that the next 30 years will be *worse* than any 30 year period ever.....

Not me. I’m willing to risk eating alpo and dying completely destitute. If the worst 30 year period ever happens starting now, too bad for me. Very good chance it won’t though, and so I’ll be fat dumb and happy, and won’t risk wasting an extra 5-10 years working, needlessly chasing the unreachable dream of being financial invincible.
I find it even more curious that the people convinced that we will have terrible returns going forward will often simultaneously claim that you only need to work a couple more years to go from 25x expenses (4% WR) to 33x (3% WR), because you know you will get fabulous returns during that time. :oops:
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: Did the 4% rule just become the 5% rule? :)

Post by Da5id »

vineviz wrote: Sat Oct 24, 2020 12:04 pm
Da5id wrote: Sat Oct 24, 2020 11:25 am
Huh. In 2008 meltdown people literally thought the financial system could collapse. Such strong statements about future prospects are to me very dubious. People have been saying that the current bull market is done for years because of belief that they understood such prospects. Other than the COVID dip, they've been wrong.
There are people today who think the financial system could collapse, but I don't see what relevance that has.

The question is whether the probability of a "safe" withdrawal rate being above 4% are better or worse now than they were in the past. Answering that question doesn't require any sorts of prediction about whether "the financial system could collapse" or whether the "current bull market is done". Or any predictions, actually.

We can actually observe the real expected yield on bonds and the CAPE ratio, and those two numbers are pretty much all you need to have if you want to calculate the probabilities. Whether the actual outcome turns out to be good or bad is largely a matter of luck (or chance), but the distribution of possible outcomes isn't murky at all.
Again, I think you are overconfident in your faith in those metrics. But obviously you disagree.
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Re: Did the 4% rule just become the 5% rule? :)

Post by vineviz »

marcopolo wrote: Sat Oct 24, 2020 12:24 pm This assumes CAPE is a reliable metric for expected returns for equities. The evidence for that does not seem very convincing.
On the contrary, the relationship between CAPE and expected real returns is quite powerful.

Many people make the mistake of confusing actual future returns (which are noisy) for expected returns (which are not). Knowing the expected return and knowing the future returns are not the same thing.
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Re: Did the 4% rule just become the 5% rule? :)

Post by vineviz »

Da5id wrote: Sat Oct 24, 2020 12:35 pm Again, I think you are overconfident in your faith in those metrics. But obviously you disagree.
Where does faith come into it? Both the expected real yield of bonds and the CAPE ratio of stocks are directly observable: there's no "belief" necessary to see what those numbers are. And one you observe them, the rest falls out in a purely mathematical manner.

Again, don't think I'm talking about a prediction of what markets will do: that's not what I'm discussing.
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Re: Did the 4% rule just become the 5% rule? :)

Post by marcopolo »

vineviz wrote: Sat Oct 24, 2020 12:43 pm
Da5id wrote: Sat Oct 24, 2020 12:35 pm Again, I think you are overconfident in your faith in those metrics. But obviously you disagree.
Where does faith come into it? Both the expected real yield of bonds and the CAPE ratio of stocks are directly observable: there's no "belief" necessary to see what those numbers are. And one you observe them, the rest falls out in a purely mathematical manner.

Again, don't think I'm talking about a prediction of what markets will do: that's not what I'm discussing.
Can you explain how equities expected return "falls out in a purely mathematical manner" from observing CAPE?

I doubt even Shiller would have that kind of faith in this metric. He even admitted that it is quite possibly just a result of data mining of historical results. Why not use the price of butter in Bangladesh?
Once in a while you get shown the light, in the strangest of places if you look at it right.
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