What happens if you retire using the 4% rule and the market crashes 40%+ the next week

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geerhardusvos
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by geerhardusvos »

CoAndy wrote: Fri Feb 12, 2021 8:41 am I am thinking that I would like to have about 24 months worth of withdrawals sitting in an earmarked savings account for just this purpose.
Flexibility myths: https://earlyretirementnow.com/2018/05/ ... ity-myths/
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by CurlyDave »

nisiprius wrote: Fri Feb 12, 2021 8:43 am
...The big thing in the 1990s was that before Bengen and the Trinity study, it was commonly suggested that safe withdrawal rate = historical return of the portfolio, and e.g. Peter Lynch was irresponsibly suggesting a 7% withdrawal rate for a 100%-stocks portfolio. The 4% number came down on everyone like a ton of bricks. The important thing about 4% is that it's 4%, not 7%.
Actually, there is a 7% solution. The updated Trinity Study (the one from 2011) shows that a non inflation adjusted 7% is a perfectly reasonable withdrawal method.

And, there is a subtlety to the math that many do not catch. The study had to use 7% of initial value rather than 7% of current value in order to get any failures. 7% of current value not only never fails, it is immune to SORR.

There is a lot of unsung virtue in a non-adjusted 7% withdrawal rate. If we assume a 3% constant inflation, withdrawals are higher than under the 4% guideline for the first 19 years. Think about that for a minute. if I start at 65, I will enjoy higher withdrawals until I am 84, at which point I will have to be satisfied with somewhat less, tempered by the increases in SS I have enjoyed all along the way.

Of course there is a price to pay in the form of lower terminal values, but being the richest man in the graveyard does not seem like a noble aspiration out here in my neck of the woods.

IMHO the financial industry did us a disservice by popularizing the 4% guideline and not mentioning the 7% solution much more prominently.
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JoMoney
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by JoMoney »

The 4% SWR "Safe Withdrawal Rate", not 'rule', was a study using past market data. It already incorporated market crashes greater than 40% in the study. If the portfolio had a 90% survivability that doesn't mean you won't wind up in the unlucky 10%. Further, we don't know what the future brings, 'black swan' events are a thing and are impossible to account for in a probability which defies the axioms of probability making a probabilistic model provably wrong to begin with. There is risk, you can look at the past and hope the future looks something like that, the bigger your 'margin of safety' the better you'll weather the extremes, and that's about the best you can do.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by aristotelian »

One thing you can do is simply not adjust for inflation. Just doing that for a few years can greatly improve your chance of success. You might look at the "Guyton Klinger rules" research on this.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by tibbitts »

Bogleheads somewhat brush off the effect on retirement plans for market drops - not unreasonable since the average Boglehead probably needs to use at most 1% of investments per year in retirement. But it's interesting that if someone comes to the forum after a downturn asking if they can reasonably retire on, say, 19x expenses, the answer will uniformly be NO. Yet a month before that downturn most Bogleheads would have been okay with them retiring on 25x.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by Dandy »

Retirement is often underestimated. You don't often realize the extent of the change. You face up to 30 years or more of life and the aside from a pension, SS or an annuity for most the pot must handle the rest. No more contributions to your 401k or a company match, no salary or bonus that used to make market plunges less concerning. You may have a wait to collect Medicare (or SS) so health and most often dental insurance is on you to handle.

When the market drops you will still be withdrawing -- a new feeling of I'm taking money out of my sinking nest egg making it sink further and it needs to fund my retirement for --decades?

The 4% idea -- like most withdrawal approaches is usually a decent start but blindly following any approach is risky. Your ability to recover from bad markets or bad choices is limited in retirement. So, it is probably good to consider 4% or a bit less as only a starting point and be prepared to adjust based on age, health, inflation and portfolio performance. The 4% idea was based when interest rates were much higher and bonds were on a multi decade bull market until recent lows.

I believe the 4% idea was based on having a 60/40 allocation and was supposed to fund retirement for "only" 30 years.

Sorry, but I don't believe there really is a set it and forget it withdrawal approach -- if the market drops a lot I suggest you cut your withdrawals a decent amount if possible.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by Grt2bOutdoors »

nisiprius wrote: Fri Feb 12, 2021 8:43 am One of the early studies that suggested a 4% rule said:
The word planning is emphasized because of the great uncertainties in the stock and bond markets. Mid-course corrections likely will be required, with the actual dollar amounts withdrawn adjusted downward or upward relative to the plan. The investor needs to keep in mind that selection of a withdrawal rate is not a matter of contract but rather a matter of planning.
It turned out that it was not hard to email the senior authors of that paper, Professor Philip L. Cooley, so I did. I wrote to him:
[So, what a] "4% SWR" means is not that you can treat a portfolio as if it were a guaranteed annuity. I think all the [Trinity] authors meant is that if it is late 2008 and your stocks halve in value, you don't need to halve your spending instantly. It's OK to cross your fingers and continue spending according to the 4%-then-COLAed plan, even though it means dipping into capital, and it's OK to go on doing that for a while.
Cooley replied:
You have hit the nail on the head! I've tried to explain that thought to journalists but they don't seem to get it. You've got it. Stay flexible my friend!, which is the advice we should give to retirees.
Some things to keep in mind is that "safe withdrawal rate" studies are supposed to take account of the worst cases that have ever occurred; they are not supposed to be averages.

Another is that by simple math, a level-dollar 3.33% withdrawal rate on a savings account that does not grow at all will last 30 years. Similarly, if you can just manage to keep up with inflation but no more, then an initial 3.33% withdrawal rate with COLA increases thereafter, will also last thirty years. Therefore 4% does not seem like an unrealistic amount to hope for.

The thing that really bugs me is why people can't just call it a "rule of thumb" and be done. It is a perfectly good rule of thumb for planning. It's insane to try to calculate whether the accurate value is really 3.75% or 4.2%. A problem, I think, is that SWR theorists and advisors feel competitive and want to compete by saying "my strategy lets you withdraw more safely."

The big thing in the 1990s was that before Bengen and the Trinity study, it was commonly suggested that safe withdrawal rate = historical return of the portfolio, and e.g. Peter Lynch was irresponsibly suggesting a 7% withdrawal rate for a 100%-stocks portfolio. The 4% number came down on everyone like a ton of bricks. The important thing about 4% is that it's 4%, not 7%.
+1. Your post should be a sticky on the forum page. Staying flexible is the key not just in retirement planning but in life itself.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by Grt2bOutdoors »

aristotelian wrote: Fri Feb 12, 2021 10:12 am One thing you can do is simply not adjust for inflation. Just doing that for a few years can greatly improve your chance of success. You might look at the "Guyton Klinger rules" research on this.
Essentially you are withdrawing less by doing so on a “real” basis. Nothing wrong with that, if the good or service costs the same or less each year, why spend more?
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by dbr »

The more serious dilemma in 4% planning is the fact that most of the outcomes will leave a lot of unspent money at death. This is fine if that is one's intent.

I'm not sure I know of a really effective solution to that. One possibility is to spend a lot more at the beginning and if things are going south by halfway through the plan then to live in reduced means in the second half of retirement. If you reverse that and are safely conservative at the beginning and it turns out things have gone gang busters, then it is too late to benefit from it. Just a half-baked thought.

Oh, that also means that a market crash just after retirement need receive no more than a modest adjustment.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by aristotelian »

Grt2bOutdoors wrote: Fri Feb 12, 2021 10:42 am
aristotelian wrote: Fri Feb 12, 2021 10:12 am One thing you can do is simply not adjust for inflation. Just doing that for a few years can greatly improve your chance of success. You might look at the "Guyton Klinger rules" research on this.
Essentially you are withdrawing less by doing so on a “real” basis. Nothing wrong with that, if the good or service costs the same or less each year, why spend more?
Agreed. The point being, a small adjustment can make a big difference.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by Marseille07 »

alex123711 wrote: Fri Feb 12, 2021 5:58 am Or within the next few months, would you base your 4% rate off the original amount or would you use the 40% less, or somewhere in between?
40% less. No one should be using constant-dollar + inflation in real life. I know the Trinity study was based on that but it's just not practical in retirement. Your withdrawal should always be based on your current portfolio value, no matter which strategy you're using.
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corn18
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by corn18 »

Thought I would have a look at this. 3 lines:

The blue one is what firecalc calculates based on the worst 30 years in history. That happens to be 1969 start date for a 60/40 portfolio (which is what this chart uses). Interesting that you can survive for 30 years, but not 35.

The orange line is a 40% drop in year 1 followed by the worst historical returns ever. That is stacking black swans, but if you want to try to mitigate this, then go for it.

The grey line is a 26% drop in year 1, which represents what would happen to a 60/40 portfolio.

Image

I looked through my historical return data. The worst 1 year drop for a 60/40 portfolio is -26%. That was in 1917. But if you use that as your start date, you did pretty good:

Image

The key is not to spas when the market drops 40%. It does not mean the end of the world. Or maybe it does. If you can, reduce spending in the year following a major crash and see how things go. I would not recompute the WR with the lower balance. That's just silly.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by MathWizard »

I am planning on a market drop of 45% the day after I retire.

I'll probably end up with twice as much as I started with (or more),
but my plan assumes this drop, only 75% of promised SS benefits,
and health costs rising 2% faster than normal inflation.

If I retired today, I could keep my pre-pandemic state of living (well above median
household income), and still
have enough for a different house (for better mobility) down the line, and
an extra $50K for travel above what we normally have been doing during those first few years of retirement.

I grew up poor. If I end up with a huge pile of money, so be it. It's better than the alternative.

If things are going well The two big-ticket items I may "splurge" on would be
1) a self-driving car if this comes to pass. Lack of transportation in rural areas is a big issue for the elderly.
The day when the kids have to convince the parent to give up the car keys is a pivotal day, with the loss of
independence. I'd like to avoid/postpone that as long as possible.
2) geothermal and/or solar energy options. Maybe call this a hobby. It may not pay off, but I have been
interested since my teen years, and though it has some payback, I have never been able to make a financial
case for it. I am doing some proof-of-concept projects $1K, and maybe that can be my retirement hobby.
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corn18
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by corn18 »

MathWizard wrote: Fri Feb 12, 2021 12:17 pm I am planning on a market drop of 45% the day after I retire.

I'll probably end up with twice as much as I started with (or more),
but my plan assumes this drop, only 75% of promised SS benefits,
and health costs rising 2% faster than normal inflation.

If I retired today, I could keep my pre-pandemic state of living (well above median
household income), and still
have enough for a different house (for better mobility) down the line, and
an extra $50K for travel above what we normally have been doing during those first few years of retirement.

I grew up poor. If I end up with a huge pile of money, so be it. It's better than the alternative.

If things are going well The two big-ticket items I may "splurge" on would be
1) a self-driving car if this comes to pass. Lack of transportation in rural areas is a big issue for the elderly.
The day when the kids have to convince the parent to give up the car keys is a pivotal day, with the loss of
independence. I'd like to avoid/postpone that as long as possible.
2) geothermal and/or solar energy options. Maybe call this a hobby. It may not pay off, but I have been
interested since my teen years, and though it has some payback, I have never been able to make a financial
case for it. I am doing some proof-of-concept projects $1K, and maybe that can be my retirement hobby.
I decided not to stack black swans because that meant I had to work a lot longer. If you like your work, padding the portfolio is not a bad idea.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by sperry8 »

alex123711 wrote: Fri Feb 12, 2021 5:58 am Or within the next few months, would you base your 4% rate off the original amount or would you use the 40% less, or somewhere in between?
Basically this happened to me. I retired in July 2007. Went in via lump sum at 80/20. Market dropped 50+% over the next 18 months.

My withdrawal rate jumped to 4.5% in that first year after the drop (it was 3.1% the year prior). The money I needed to live on didn't change because the market dropped.

But as the market recovered over time, withdrawal rates slowly came down. They remained in the just sub 4% range for 3 years but as the receovery gathered steam, withdrawal rates dropped to sub 3% (where they are today). Again, my $ amount I need to live on is fixed (has only risen 5% net since retirement). Although capital gains dropped off a cliff those first few years, dividend payments helped cushion the blow of the % going over 4%.

So to answer your question, I didn't do a thing other than buying low during the 50+% drop (putting some of my 20% to work). I also TLHed the full 80% and reduced taxation for over a decade. In fact, just last year I used up the last of my TLH from 08/09.

Now, had the recovery taken longer to come back, I would've had to reduce spend. But with the 20% out, I had a multi year buffer and it allowed me to ride it through.

So my advice (which I follow) is to keep a multi year cash buffer. While this loses to inflation over time, it allows me not to worry about the scenario you describe (unless a Japan style L occurs). And in such a scenario, I'll just tighten my spend further once cash + divs deplete over time.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by inittowinit »

There are only two certainties in life, and neither of them is "a sufficient sequence of returns to see you comfortably through retirement"...
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by Schlabba »

MathWizard wrote: Fri Feb 12, 2021 12:17 pm I am planning on a market drop of 45% the day after I retire.

I'll probably end up with twice as much as I started with (or more),
but my plan assumes this drop, only 75% of promised SS benefits,
and health costs rising 2% faster than normal inflation.
That is almost like a 2% withdrawal rate. Did you ever consider how many years you'll be working extra to be this conservative? The "safe-withdrawal-rate" is actually quite "safe". There would have been no point to the research if they were looking for a "random-withdrawal-rate".
sperry8 wrote: Fri Feb 12, 2021 12:27 pm
alex123711 wrote: Fri Feb 12, 2021 5:58 am Or within the next few months, would you base your 4% rate off the original amount or would you use the 40% less, or somewhere in between?
Although capital gains dropped off a cliff those first few years, dividend payments helped cushion the blow of the % going over 4%.
My plan is retiring with a high dividend yield fund. I like the stability compared to share prices.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by alex_686 »

rai wrote: Fri Feb 12, 2021 6:16 am In theory you should be ok as the projected future returns of stocks should be higher and you’re going to be spending bonds as you rebalance.
What theory is this? I haven’t heard of anything line this, in fact theory and historical evidence suggests otherwise. Past returns have no impact on future returns. The Random Walk theory. Specifically, markets don’t mean revert.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by Marseille07 »

sperry8 wrote: Fri Feb 12, 2021 12:27 pm So my advice (which I follow) is to keep a multi year cash buffer. While this loses to inflation over time, it allows me not to worry about the scenario you describe (unless a Japan style L occurs). And in such a scenario, I'll just tighten my spend further once cash + divs deplete over time.
This is good advice. Unless absolutely necessary, we should cap withdrawals at some percentage (could be adjusted annually). If that's not happening then they don't have enough EF, it's really that simple.
ncbill
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by ncbill »

Literally the next week?

I bet most even here would try and get their job back. :)
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by l1am »

TomatoTomahto wrote: Fri Feb 12, 2021 6:48 am History does not necessarily repeat itself, but it very often rhymes.
This is why I'll likely go with VPW.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by Wanderingwheelz »

MathWizard wrote: Fri Feb 12, 2021 12:17 pm I am planning on a market drop of 45% the day after I retire.

I'll probably end up with twice as much as I started with (or more),
but my plan assumes this drop, only 75% of promised SS benefits,
and health costs rising 2% faster than normal inflation.

If I retired today, I could keep my pre-pandemic state of living (well above median
household income), and still
have enough for a different house (for better mobility) down the line, and
an extra $50K for travel above what we normally have been doing during those first few years of retirement.

I grew up poor. If I end up with a huge pile of money, so be it. It's better than the alternative.

If things are going well The two big-ticket items I may "splurge" on would be
1) a self-driving car if this comes to pass. Lack of transportation in rural areas is a big issue for the elderly.
The day when the kids have to convince the parent to give up the car keys is a pivotal day, with the loss of
independence. I'd like to avoid/postpone that as long as possible.
2) geothermal and/or solar energy options. Maybe call this a hobby. It may not pay off, but I have been
interested since my teen years, and though it has some payback, I have never been able to make a financial
case for it. I am doing some proof-of-concept projects $1K, and maybe that can be my retirement hobby.
I should put you in touch with my dad. He’ll be 80 on his next birthday and he’s not had one single year in retirement where he’s been a net spender- not even close, because he’s planned for all of the black swans that never happened. I think he told my wife and I recently that his new car fund has $260,000 in it. And he just bought a new car. Lol I mean, seriously? He could probably buy a self driving car now even if it’s a prototype.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by 1210sda »

22twain wrote: Fri Feb 12, 2021 7:26 am Firecalc has an option buried in the "Investigate" tab that gives you a spreadsheet showing the annual portfolio values for all 30 year periods (or whatever length you chose on the starting page), starting with every year from 1871 until (currently) 1990. Look for the checkbox after the word "optionally" on that tab.

It also lets you pick one starting year to give a more detailed spreadsheet. Try 1929, for example. That one doesn't turn out too bad in the end.

Enter values on the starting page that give you "4% rule" withdrawals, e.g. 40000 annual spending and a 1000000 initial portfolio. In one of the other tabs, you can adjust the portfolio to your taste. The default is a 75/25 stock/bond split.
Thanks for the link
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corn18
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by corn18 »

22twain wrote: Fri Feb 12, 2021 7:26 am Firecalc has an option buried in the "Investigate" tab that gives you a spreadsheet showing the annual portfolio values for all 30 year periods (or whatever length you chose on the starting page), starting with every year from 1871 until (currently) 1990. Look for the checkbox after the word "optionally" on that tab.

It also lets you pick one starting year to give a more detailed spreadsheet. Try 1929, for example. That one doesn't turn out too bad in the end.

Enter values on the starting page that give you "4% rule" withdrawals, e.g. 40000 annual spending and a 1000000 initial portfolio. In one of the other tabs, you can adjust the portfolio to your taste. The default is a 75/25 stock/bond split.
Pick 1969 if you want the worst year for a 60/40 portfolio. 1921 was the best.
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sperry8
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by sperry8 »

Schlabba wrote: Fri Feb 12, 2021 12:52 pm
MathWizard wrote: Fri Feb 12, 2021 12:17 pm I am planning on a market drop of 45% the day after I retire.

I'll probably end up with twice as much as I started with (or more),
but my plan assumes this drop, only 75% of promised SS benefits,
and health costs rising 2% faster than normal inflation.
That is almost like a 2% withdrawal rate. Did you ever consider how many years you'll be working extra to be this conservative? The "safe-withdrawal-rate" is actually quite "safe". There would have been no point to the research if they were looking for a "random-withdrawal-rate".
sperry8 wrote: Fri Feb 12, 2021 12:27 pm
alex123711 wrote: Fri Feb 12, 2021 5:58 am Or within the next few months, would you base your 4% rate off the original amount or would you use the 40% less, or somewhere in between?
Although capital gains dropped off a cliff those first few years, dividend payments helped cushion the blow of the % going over 4%.
My plan is retiring with a high dividend yield fund. I like the stability compared to share prices.
Never understood the high div yield fund concept. Dividends are just a forced return of capital. Stock NAV increases can be held until you want to return your capital (by selling shares). Cap gains taxes are also lower than ordinary dividend taxes (for most). Yes, they come with more volatility, but that is the point of the cash buffer. So you don't have to sell in any short term period allowing the NAV to correct.
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Marseille07
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by Marseille07 »

sperry8 wrote: Fri Feb 12, 2021 4:42 pm Never understood the high div yield fund concept. Dividends are just a forced return of capital. Stock NAV increases can be held until you want to return your capital (by selling shares). Cap gains taxes are also lower than ordinary dividend taxes (for most). Yes, they come with more volatility, but that is the point of the cash buffer. So you don't have to sell in any short term period allowing the NAV to correct.
Some approaches are really strange. This game isn't really difficult (imo). We just maintain EF at X dollars and refill using withdrawals up to Y%, that's it. If the EF is already full, there's no reason to withdraw more for the sake of withdrawing.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by 59Gibson »

I have not read all the posts, but my question is what exactly is the consequences of failure of taking 4% if you do not have some spending margin/flexibility. Is it running $ down to nothing at 28.5 yrs, or 3.91% lasting the full 30yrs? Depending when you start pulling 50, 60, 65 yrs of age. Many folks will not see 30 years regardless what the mkt does. It's about balancing the 1 known outcome with an array of financial possibilities. Younger than 50 needs to be more conservative.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by MathWizard »

Wanderingwheelz wrote: Fri Feb 12, 2021 1:28 pm
MathWizard wrote: Fri Feb 12, 2021 12:17 pm
...

I grew up poor. If I end up with a huge pile of money, so be it. It's better than the alternative.

If things are going well The two big-ticket items I may "splurge" on would be
1) a self-driving car if this comes to pass. Lack of transportation in rural areas is a big issue for the elderly.
The day when the kids have to convince the parent to give up the car keys is a pivotal day, with the loss of
independence. I'd like to avoid/postpone that as long as possible.

...
I should put you in touch with my dad. He’ll be 80 on his next birthday and he’s not had one single year in retirement where he’s been a net spender- not even close, because he’s planned for all of the black swans that never happened. I think he told my wife and I recently that his new car fund has $260,000 in it. And he just bought a new car. Lol I mean, seriously? He could probably buy a self driving car now even if it’s a prototype.
I probably think a lot like your dad. Financially, I always had a lot more in common with older
people than with my peers.

In the past 3 years, we have bought the most expensive cars we have ever owned, $25K each.
House is paid off, zero debt, kids are out of college and on their own.
We expect to not have to trade cars until 2027 and 2029 resp. My new car fund is not as large as your dad's,
but I have planned for $5K/year for replacement of the two, and would splurge for at least one if it was self-driving.
I keep cars for 10 years, so I may need the self-driving feature in 2029. I hope they are available before 20 years from now.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by vitaflo »

nisiprius wrote: Fri Feb 12, 2021 8:43 am The thing that really bugs me is why people can't just call it a "rule of thumb" and be done. It is a perfectly good rule of thumb for planning. It's insane to try to calculate whether the accurate value is really 3.75% or 4.2%. A problem, I think, is that SWR theorists and advisors feel competitive and want to compete by saying "my strategy lets you withdraw more safely."
In my experience the people most enamored with SWR are still accumulators. Almost no retirees I know are all that worried about it at all, at least not in any "exact percentage" way. Which has always been a bit weird to me, that the ones most debating the proper SWR are usually ones not yet using it.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by dbr »

vitaflo wrote: Fri Feb 12, 2021 5:03 pm
nisiprius wrote: Fri Feb 12, 2021 8:43 am The thing that really bugs me is why people can't just call it a "rule of thumb" and be done. It is a perfectly good rule of thumb for planning. It's insane to try to calculate whether the accurate value is really 3.75% or 4.2%. A problem, I think, is that SWR theorists and advisors feel competitive and want to compete by saying "my strategy lets you withdraw more safely."
In my experience the people most enamored with SWR are still accumulators. Almost no retirees I know are all that worried about it at all, at least not in any "exact percentage" way. Which has always been a bit weird to me, that the ones most debating the proper SWR are usually ones not yet using it.
But they are using it. The most appropriate use of this analysis of data or modeling of investment behavior is to estimate what will be required to retire. As people often say this is not a plan for retirement. The whole thing is probably most useful from far out and less helpful when one is in the details of actual retirement. In actual retirement expenses are variable and one simply tracks the general average to make sure nothing outrageous is happening and one notes if one's portfolio is on a good track with no huge adverse trend that would indicate corrections are needed.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by JBTX »

alex123711 wrote: Fri Feb 12, 2021 5:58 am Or within the next few months, would you base your 4% rate off the original amount or would you use the 40% less, or somewhere in between?
1. Ideally you will have asked the question before retirement. If you don't think you can withstand that, whether monetarily, or emotionally, then you aren't ready to retire, or you need a lower or more flexible rate.

2. If you are 60/40, you would "only" have lost 24%. All the more reason that an overly aggressive portfolio is not a good idea, unless you have so much money it doesn't matter.

3. Agree that it isn't a rule, it is a guideline. I don't think it is a terribly good guideline when real bond rates are negative, but it is probably OK if you have flexibility

4. No matter what any of these supposed swr experts tell, the amount of data we have as to the viability of 4% as of right now is little to none. Negative real bond rates and comparatively high equity valuations. So what does that mean? We just don't know. Anybody who tells you that we have a 9X% of success is not telling you the truth. We just don't know what the correct percent is.

5. It may very well be that 4% will work even under today's conditions. But depending on how things play out, the road could be scary. There could be times when you are withdrawing much higher than 4% and rapidly depleting your portfolio, but counting on the market to rebound. One ironic thing of these swr debates is normally we aren't supposed to speculate if the market is high low or whether future returns will be higher or lower than normal, but once you embark on a hard 4%, and if things go south, you are supposed to expect returns will be higher than normal and rescue your plan.

6. 4% was only for 30 years.

7. 4% was.only for the US. Most other countries it is a bit less. Japan is something in the 2's if I recall.

If you do what everybody in the thread is saying, use it as a guildline and not a rule flexible, then 4% will probably be OK. Personally I'll probably shoot for around 3%. I really don't want to be 85 years old hoping and praying that Trinity data will bail us out if things take a turn for the worse.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by Watty »

What happens if you retire using the 4% rule and the market crashes 40%+ the next week
Something that has not been mentioned is the impact of a 40% stock market drop might not be as much as you might think.

This is because you would likely have other sources of income and your portfolio would not be invested 100% in stocks.

For example the Vanguard 2020 Target date fund is about 50% in stocks so a 40% stock market drop would only result in in 20% drop in your portfolio.

You might also get 25% of your retirement spending budget from a different source like Social Security.

If you only get 75% of your retirement spending budget from your portfolio and reduced your spending because of the stock market drop then you would only need to reduce your retirement spending budget by 15%.

15% is even overstating it since part of that 15% would be going towards income taxes. If you are in a 20% combined tax bracket that would be another 3% that you would not need to worry about.

With this scenario you would only need to reduce your retirement spending budget by 12% if you redid all your numbers the day after a 40% stock market crash.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by delamer »

Schlabba wrote: Fri Feb 12, 2021 12:52 pm
MathWizard wrote: Fri Feb 12, 2021 12:17 pm I am planning on a market drop of 45% the day after I retire.

I'll probably end up with twice as much as I started with (or more),
but my plan assumes this drop, only 75% of promised SS benefits,
and health costs rising 2% faster than normal inflation.
That is almost like a 2% withdrawal rate. Did you ever consider how many years you'll be working extra to be this conservative? The "safe-withdrawal-rate" is actually quite "safe". There would have been no point to the research if they were looking for a "random-withdrawal-rate".
sperry8 wrote: Fri Feb 12, 2021 12:27 pm
alex123711 wrote: Fri Feb 12, 2021 5:58 am Or within the next few months, would you base your 4% rate off the original amount or would you use the 40% less, or somewhere in between?
Although capital gains dropped off a cliff those first few years, dividend payments helped cushion the blow of the % going over 4%.
My plan is retiring with a high dividend yield fund. I like the stability compared to share prices.
While not strictly high yield, you should look at what happened to the stability of S&P 500 dividends between 2008 and 2012: https://www.multpl.com/s-p-500-dividend/table/by-year
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by firebirdparts »

alex_686 wrote: Fri Feb 12, 2021 12:59 pm
rai wrote: Fri Feb 12, 2021 6:16 am In theory you should be ok as the projected future returns of stocks should be higher and you’re going to be spending bonds as you rebalance.
What theory is this? I haven’t heard of anything line this, in fact theory and historical evidence suggests otherwise. Past returns have no impact on future returns. The Random Walk theory. Specifically, markets don’t mean revert.
Come on, you know better than this. The “rule” such as it is results from actual events. That’s all it can do. It can reflect how we would have been when this happened in The past (which in this case = fine)
This time is the same
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by stocknoob4111 »

4% has worked in the entire historical period of the stock market and with an 80/20 portfolio for at least a period of 26 years. The bottom line is that this stat in itself is good enough for me to follow the 4% rule. Is it 100% foolproof? No, it isn't. But it is so highly likely to work that I can accept the extremely small risk that it will not. I think there are far greater risks - one may even have a greater chance of dying before the 4% rule fails in a 30 years span.

Some people think the worst history has to offer us isn't enough - something is upcoming in our future that is going to be worse than 130 years of history, well, it could happen but in my view that is so unlikely I can accept that risk.

As Kitces said, we've had some pretty horrific periods in our past and the 4% SWR rules took all those periods into account. It wasn't pulled out of a hat.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by queso »

ERN did a post last year responding to Financial Samurai's post about the new rule being 0.5% (lol..). Link - https://earlyretirementnow.com/2020/08/ ... awal-rate/
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by Charon »

TomatoTomahto wrote: Fri Feb 12, 2021 6:48 am IMO, calling it a rule implies that it always works.
Interesting. As a scientist, I'd say things that always work (under a given set of assumptions) are typically called "laws" or "principles". Anything that's called a "rule" is a heuristic guideline, backed up by some evidence that it often works. Just like the 4% rule.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by TomatoTomahto »

Charon wrote: Sat Feb 13, 2021 11:17 am
TomatoTomahto wrote: Fri Feb 12, 2021 6:48 am IMO, calling it a rule implies that it always works.
Interesting. As a scientist, I'd say things that always work (under a given set of assumptions) are typically called "laws" or "principles". Anything that's called a "rule" is a heuristic guideline, backed up by some evidence that it often works. Just like the 4% rule.
And of course we know that most people interpret words just as scientists would. /s
I get the FI part but not the RE part of FIRE.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by Charon »

geerhardusvos wrote: Fri Feb 12, 2021 9:52 am
CoAndy wrote: Fri Feb 12, 2021 8:41 am I am thinking that I would like to have about 24 months worth of withdrawals sitting in an earmarked savings account for just this purpose.
Flexibility myths: https://earlyretirementnow.com/2018/05/ ... ity-myths/
For those who aren't clicking through on the link, I'd like to clarify that the cash bucket strategy is not one of the "myths". Indeed the author supports it.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by Marseille07 »

Charon wrote: Sat Feb 13, 2021 11:24 am
geerhardusvos wrote: Fri Feb 12, 2021 9:52 am
CoAndy wrote: Fri Feb 12, 2021 8:41 am I am thinking that I would like to have about 24 months worth of withdrawals sitting in an earmarked savings account for just this purpose.
Flexibility myths: https://earlyretirementnow.com/2018/05/ ... ity-myths/
For those who aren't clicking through on the link, I'd like to clarify that the cash bucket strategy is not one of the "myths". Indeed the author supports it.
I don't know how else to do it. Do people really want to sell AA every month to pay $2000 of CC? Sounds ridiculous to me.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by Charon »

TomatoTomahto wrote: Sat Feb 13, 2021 11:22 am
Charon wrote: Sat Feb 13, 2021 11:17 am
TomatoTomahto wrote: Fri Feb 12, 2021 6:48 am IMO, calling it a rule implies that it always works.
Interesting. As a scientist, I'd say things that always work (under a given set of assumptions) are typically called "laws" or "principles". Anything that's called a "rule" is a heuristic guideline, backed up by some evidence that it often works. Just like the 4% rule.
And of course we know that most people interpret words just as scientists would. /s
I was noting that it was interesting that your usage differs from the use I'm familiar with, but since you want to be a snarky jerk, how about looking in the dictionary? American Heritage definition 4 comes closest to what you're thinking, I imagine: "A generalized statement that describes what is true in most or all cases" (my emphasis). Which is a pretty accurate description of the Trinity Study 4%, which found that for the given portfolio it worked in all historical cases.

And it seems like economists might use "rule" in the same sense as natural and computer scientists. Think, for example, of the Taylor Rule ( https://en.wikipedia.org/wiki/Taylor_rule ) or similar. It's a heuristic guide for action, not a law of nature.
Last edited by Charon on Sat Feb 13, 2021 11:47 am, edited 1 time in total.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by Charon »

Marseille07 wrote: Sat Feb 13, 2021 11:29 am
Charon wrote: Sat Feb 13, 2021 11:24 am
geerhardusvos wrote: Fri Feb 12, 2021 9:52 am
CoAndy wrote: Fri Feb 12, 2021 8:41 am I am thinking that I would like to have about 24 months worth of withdrawals sitting in an earmarked savings account for just this purpose.
Flexibility myths: https://earlyretirementnow.com/2018/05/ ... ity-myths/
For those who aren't clicking through on the link, I'd like to clarify that the cash bucket strategy is not one of the "myths". Indeed the author supports it.
I don't know how else to do it. Do people really want to sell AA every month to pay $2000 of CC? Sounds ridiculous to me.
To clarify, the cash bucket strategy is to keep an extra amount in cash that's withdrawn only if the market has steep declines (to avoid drawing on investments), and is not replenished once used. It's not a about, say, withdrawing a year's expenses from assets at the beginning of the year and putting it in a bank account.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by Marseille07 »

Charon wrote: Sat Feb 13, 2021 11:32 am
Marseille07 wrote: Sat Feb 13, 2021 11:29 am
Charon wrote: Sat Feb 13, 2021 11:24 am
geerhardusvos wrote: Fri Feb 12, 2021 9:52 am
CoAndy wrote: Fri Feb 12, 2021 8:41 am I am thinking that I would like to have about 24 months worth of withdrawals sitting in an earmarked savings account for just this purpose.
Flexibility myths: https://earlyretirementnow.com/2018/05/ ... ity-myths/
For those who aren't clicking through on the link, I'd like to clarify that the cash bucket strategy is not one of the "myths". Indeed the author supports it.
I don't know how else to do it. Do people really want to sell AA every month to pay $2000 of CC? Sounds ridiculous to me.
To clarify, the cash bucket strategy is to keep an extra amount in cash that's withdrawn only if the market has steep declines (to avoid drawing on investments), and is not replenished once used. It's not a about, say, withdrawing a year's expenses from assets at the beginning of the year and putting it in a bank account.
Makes sense, thanks for the clarification. Different from my philosophy but I can see where it would be useful.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by TomatoTomahto »

Charon wrote: Sat Feb 13, 2021 11:29 am I was noting that it was interesting that your usage differs from the use I'm familiar with, but since you want to be a snarky jerk, how about looking in the dictionary?
I think my putting a “/s” after my post indicated that I was sarcastic and somewhat joking. But, that said, if you want to think of me as a snarky jerk, go ahead. I’m sure it is not the worst thing I’ve been called.
I get the FI part but not the RE part of FIRE.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by Garco »

I retired in 2014, the year I turned 70. I have lived on the RMD's from my core tax-deferred retirement account. I also had savings plus investments in other accounts. Much of that money was inherited. That second source increased my total invested wealth by about a third. Some of it was immediately used to eliminate debt that my grown children had from their graduate education. (They had no remaining debt from their BA/BS programs.) Most of the money in my second source account is in a taxable brokerage account and is not subject to RMD; about 20% of it is in an IRA. We have no debt: our houses are fully paid for.

If the market were to crash 40% next week it would be bad. But we have enough of a reserve that we'd probably work our way out over time. A severe and persistent market crash would affect some elective spending decisions but would not likely affect our life-style or our long-run financial prospects.
Last edited by Garco on Sat Feb 13, 2021 3:00 pm, edited 2 times in total.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by Marseille07 »

Tbh I'm quite surprised that people still talk about 4% SWR, which is constant-dollar + inflation. Many people warned that this idea isn't practical in retirement.
Switching to a percentage-based model would naturally answer the OP's original question.
Last edited by Marseille07 on Sat Feb 13, 2021 3:02 pm, edited 1 time in total.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by geerhardusvos »

Charon wrote: Sat Feb 13, 2021 11:24 am
geerhardusvos wrote: Fri Feb 12, 2021 9:52 am
CoAndy wrote: Fri Feb 12, 2021 8:41 am I am thinking that I would like to have about 24 months worth of withdrawals sitting in an earmarked savings account for just this purpose.
Flexibility myths: https://earlyretirementnow.com/2018/05/ ... ity-myths/
For those who aren't clicking through on the link, I'd like to clarify that the cash bucket strategy is not one of the "myths". Indeed the author supports it.
Wrong. Big ERN doesn’t support the bucket strategy:
And talking about retirees, this spells trouble for all the folks who claim that the simple solution to Sequence Risk is to just keep a “cash bucket,” i.e., a certain number of years worth of expenses in non-risky assets (money market, CDs, government bonds). Well, unfortunately, 16 months’ worth of expenses – the length of the bear market – will not suffice. 56 months of expenses (back to the new all-time-high) will not suffice. You’ll need about 82 months of expenses to cover just your average bear market, significantly longer in the really bad bear markets!

But even that 82-month cash bucket is not enough, which brings me to the next point… 0% returns sucks!!!
https://earlyretirementnow.com/2019/10/ ... more-41937

No emergency fund: https://www.google.com/amp/s/earlyretir ... -fund/amp/
VTSAX and chill
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by Beensabu »

Isn't this what the fixed income allocation is for? So you don't need to sell stocks during a crash to cover expenses? And why on earth wouldn't you lower unnecessary expenses (and thus withdrawal rate at that time) to account for such a situation?

Now if you've already withdrawn your 4% prior to the crash, then you're fine, right? Just pay attention. Adjust as necessary. There's no point in being a slave to a "rule" just because it's a "rule".
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by delamer »

Marseille07 wrote: Sat Feb 13, 2021 2:36 pm Tbh I'm quite surprised that people still talk about 4% SWR, which is constant-dollar + inflation. Many people warned that this idea isn't practical in retirement.
Switching to a percentage-based model would naturally answer the OP's original question.
Even if it isn’t practical for some retirees that doesn’t mean it wouldn’t work for others.

I would counter that some posters don’t acknowledge that withdrawing a variable amount each year isn’t practical for many retirees. If a retiree’s portfolio goes down 25% in one year, taking an equivalent 25% hit to their withdrawal may make it difficult to pay their bills.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by corn18 »

delamer wrote: Sat Feb 13, 2021 6:03 pm
Marseille07 wrote: Sat Feb 13, 2021 2:36 pm Tbh I'm quite surprised that people still talk about 4% SWR, which is constant-dollar + inflation. Many people warned that this idea isn't practical in retirement.
Switching to a percentage-based model would naturally answer the OP's original question.
Even if it isn’t practical for some retirees that doesn’t mean it wouldn’t work for others.

I would counter that some posters don’t acknowledge that withdrawing a variable amount each year isn’t practical for many retirees. If a retiree’s portfolio goes down 25% in one year, taking an equivalent 25% hit to their withdrawal may make it difficult to pay their bills.
I must say that saving for retirement is a lot easier than planning out the withdrawals.
Consistently sets low goals and fails to achieve them.
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