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

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alex123711
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What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by alex123711 »

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

Post by JustinR »

If you were a robot and were following the rule literally you would continue withdrawing 4% off the original amount. In theory, based on historic data, you would be fine.

Realistically you'll lower the amount you withdraw because the future isn't the past.

There's also a few "dynamic" withdrawal strategies that flex based on what's happening with the economy. Two examples:
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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 »

The problem with all of these discussions is that “it’s not a rule.
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 rai »

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.

You should be able to carry on as planned but what I’d do is cut back spending a little.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by Sandtrap »

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?
Excellent reading that specifically studies this: "Sequence of Returns Risk". (also search forum archives for this, also WIKI).
"Ages of the Investor: Life Cycle Investing" by Bernstein.
Available at Amazon.com
https://smile.amazon.com/Ages-Investor- ... 336&sr=8-3

Research: "Sequence of Returns Risk", "Variable Withdrawal", "Liability Matching Portfolio", etc. for ways to reduce the impact of this event.

j :D
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Johm221122
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by Johm221122 »

In most time periods you could withdrawal 4% plus inflation every year of original account balance and make it 30 years.
But if you do there is no guarantee that this would be one of those time periods. I don't know how to post a chart but a Google search will easily get you one. It's over a 90% chance of working
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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 »

Johm221122 wrote: Fri Feb 12, 2021 6:23 am In most time periods you could withdrawal 4% plus inflation every year and make it 30 years.
But if you do there is no guarantee that this would be one of those time periods. I don't know how to post a chart but a Google search will easily get you one. It's over a 90% chance of working
IMO, calling it a rule implies that it always works. History does not necessarily repeat itself, but it very often rhymes.

There are countless threads where posters think that 4% is a mortal lock, that they can do 4% even if early retired (ie, for longer than 30 years), etc. Words matter, and it would perhaps be better to rename this damned thing.
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 Top99% »

The closest example of that I could find for US investors is shown https://www.retireearlyhomepage.com/reallife20.html here for some common portfolios. Scroll down to "What if you retired in January 2000?". Folks holding 75/25 US stocks/fixed income no doubt had some sleepless nights but in the end it looks like they will make it through. Of course nobody knows what will happen in the future.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by Johm221122 »

TomatoTomahto wrote: Fri Feb 12, 2021 6:48 am
Johm221122 wrote: Fri Feb 12, 2021 6:23 am In most time periods you could withdrawal 4% plus inflation every year and make it 30 years.
But if you do there is no guarantee that this would be one of those time periods. I don't know how to post a chart but a Google search will easily get you one. It's over a 90% chance of working
IMO, calling it a rule implies that it always works. History does not necessarily repeat itself, but it very often rhymes.

There are countless threads where posters think that 4% is a mortal lock, that they can do 4% even if early retired (ie, for longer than 30 years), etc. Words matter, and it would perhaps be better to rename this damned thing.
Yes I can agree thay it's not a rule.
Everyone has to make there choice of withdrawal strategies and while I'm personally leaning to 4% plus inflation I wouldn't be locked into it and if market dropped 40% I cut some of my discretionary budget.
The one thing on the other side of this discussion is we rarely see the mention of most people end up with more money after 30 years using the 4% plus inflation guideline
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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 »

TomatoTomahto wrote: Fri Feb 12, 2021 6:48 am
Johm221122 wrote: Fri Feb 12, 2021 6:23 am In most time periods you could withdrawal 4% plus inflation every year and make it 30 years.
But if you do there is no guarantee that this would be one of those time periods. I don't know how to post a chart but a Google search will easily get you one. It's over a 90% chance of working
IMO, calling it a rule implies that it always works. History does not necessarily repeat itself, but it very often rhymes.

There are countless threads where posters think that 4% is a mortal lock, that they can do 4% even if early retired (ie, for longer than 30 years), etc. Words matter, and it would perhaps be better to rename this damned thing.
The 4% Suggestion
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by JoeRetire »

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?
You get to choose. This is one of those "rules" that nobody but yourself can decide to enforce.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by Greg in Idaho »

"4% rule" = "Squirrel" for Bogleheads
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by rai »

The code is more like what you’d call guidelines than actual rules. -Barossa, Pirates of the Caribbean.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by HomeStretch »

For a new retiree with a 25x portfolio faced with a 40% portfolio drop, a natural reaction might be to reduce spending below 4% and, without a short recovery, to earn additional income through a part-time job. In the future with the benefit of hindsight, a retiree could assess whether one or both or other measures were successful in allowing the portfolio to recover or whether the measure(as) taken were even necessary.

Karsten at EarlyRetirementNow has a multi-part case study on Safe Withdrawal Rates that is an interesting read if you haven’t done so already. Several of the parts deal with Sequence of Return Risk and the impact of cutting expenses, earning additional income, etc. Historical returns are used to model the success of measures taken.
https://earlyretirementnow.com/safe-wit ... te-series/
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by 260chrisb »

My "rule" is to have 2-3 years of yearly anticipated expenses not subject to the market at all times from here on out and am not concerned with a withdrawal rate and hope to be able to weather market downturns. Hopefully we don't see extended periods (2-4 years) of down markets that would require me to modify said "rule". None of us know what the future holds for the markets but I've got non financial assets that could be sold if it came to that but I look at the future of the markets in the same manner I've always looked at them; some years are good, some are bad, but in the long run they're good.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by arcticpineapplecorp. »

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

Post by qwertyjazz »

TomatoTomahto wrote: Fri Feb 12, 2021 6:10 am The problem with all of these discussions is that “it’s not a rule.
I think that people understand type differently. I do not know if any applied rule that always works. F=MA but when you start to measure things then we have different heuristics and different takes. Rules are helpful, useful and needed. There are also boundary conditions and probabilistic interpretations. The 4% rule is not a bad one. It is better than ones I use in daily work. But it is not absolute as no rule can ever be.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by 22twain »

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.
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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 »

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.

You should be able to carry on as planned but what I’d do is cut back spending a little.
Yes, the 4% analysis includes such a crash and is one reason the safe withdrawal is as low as it is. The result depends a lot on what happens next. A crash that begins a long bear market is very different from a crash followed by or part of a long bull market.

In practice the worst years to retire in the last hundred or so have not been worst years due to crashes but due to long bear markets and high inflation.

It is also just common sense that given that market crashes of 40% are very possible that one should hold less risky portfolios than100% stocks. Historically the optimum asset allocation for 4% retirements is about 60/40. 50/50 is fine too, and now you have a 20% portfolio crash.

People are well advised to have or arrange non investment sources of income as well, such as recognizing Social Security as an income stream and considering the use of annuities at some point in the retirement.

Someplace out there Kitces wrote a paper on this very topic in which some data documents that safe withdrawal rates are higher based on post crash portfolio values than they are on average.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by dogagility »

Greg in Idaho wrote: Fri Feb 12, 2021 7:04 am "4% rule" = "Squirrel" for Bogleheads
Squirrel!! :shock:
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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 »

markets don't crash 40% and stay there for a year. If your withdrawals are annual you will have 51 more weeks for the market to recover which it most likely will, maybe not to where it was but to a certain extent. Personally I would take my portfolio dividends accumulated the previous year and the difference from my SRR fund bucket for the next year withdrawal if the market has not recovered by then, but that is just 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 dbr »

stocknoob4111 wrote: Fri Feb 12, 2021 7:44 am markets don't crash 40% and stay there for a year. If your withdrawals are annual you will have 51 more weeks for the market to recover which it most likely will, maybe not to where it was but to a certain extent. Personally I would take my portfolio dividends accumulated the previous year and the difference from my SRR fund bucket for the next year withdrawal if the market has not recovered by then, but that is just me.
In theory you are supposed to be selling bonds to buy more stock and to fund withdrawals.
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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 »

dbr wrote: Fri Feb 12, 2021 7:48 am In theory you are supposed to be selling bonds to buy more stock and to fund withdrawals.
Yeah, but in a way having a separate fund is like withdrawing from bonds, it's just mental accounting as some people say. Having a separate emergency fund is in effect just having more cash allocated to fixed income and may as well be part of your portfolio but psychologically it feels different to have it in a separate bucket and out of your actual portfolio I guess.
Last edited by stocknoob4111 on Fri Feb 12, 2021 7:58 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 Exchme »

The market is always reacting to news and no one knows tomorrows news, so the 4% rule is like the "pirate code", more of a suggestion. So I think retirees that have a lot of years ahead and were right at the 25X expenses would be foolish to keep spending at the original level, they should cut back spending and perhaps try to take on some work.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by deltaneutral83 »

I always thought the idea of retirement was to be debt free with a 60/40 at 3-4% which mitigates a 50% drawdown to portfolio of 25% drawdown while giving you tremendous growth potential. The "but what about Japan" commentary is certainly a possibility, but we can't eliminate every risk while we're above ground. And then there's that whole cutting expenses thing you can do if it makes things easier for a year.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by TheTimeLord »

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?
You would only have 40% less if you were 100% stocks with no pension, social security or annuities. If I remember correctly the 4% rule was based on a 60/40 portfolio so assuming bonds remained steady your portfolio would have shrunk by 24%. Also, I think a lot of people tend to forget that for many people their portfolio contribution only needs to cover a portion, let's say 50%, of their expenses not covered by social security, pensions or annuities.
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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 »

stocknoob4111 wrote: Fri Feb 12, 2021 7:58 am
dbr wrote: Fri Feb 12, 2021 7:48 am In theory you are supposed to be selling bonds to buy more stock and to fund withdrawals.
Yeah, but in a way having a separate fund is like withdrawing from bonds, it's just mental accounting as some people say. Having a separate emergency fund is in effect just having more cash allocated to fixed income and may as well be part of your portfolio but psychologically it feels different to have it in a separate bucket and out of your actual portfolio I guess.
It is mental accounting, so what is accomplished by fooling yourself.

But with due respect to buckets, there actually is a difference in portfolio management going on there. The difference is between the idea of maintaining a fixed asset allocation by rebalancing and the idea of letting values in different buckets fluctuate so the asset allocation is changing over time. Trying to prove that one scheme or the other actually produces better results is very hard to do. Asset allocation is not a strong lever on retirement withdrawal security because decreased volatility is also accompanied by decreased returns, and these offset each other. A stronger lever on retirement security is restricting withdrawals. That can seem like surrendering before even fighting the battle, but it is a time honored solution to the problem going back to Bengen, Bernicke, Clyatt, and others and extending to Variable Percentage Withdrawal.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by KlangFool »

stocknoob4111 wrote: Fri Feb 12, 2021 7:44 am markets don't crash 40% and stay there for a year.
Yes, it could be a lot longer. And, there could be multiple drops too.

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

Post by wootwoot »

Rules are meant to be broken.
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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 »

TheTimeLord wrote: Fri Feb 12, 2021 8:07 am
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?
You would only have 40% less if you were 100% stocks with no pension, social security or annuities. If I remember correctly the 4% rule was based on a 60/40 portfolio so assuming bonds remained steady your portfolio would have shrunk by 24%. Also, I think a lot of people tend to forget that for many people their portfolio contribution only needs to cover a portion, let's say 50%, of their expenses not covered by social security, pensions or annuities.
You are exactly right in your observation.

A nit is that 4% research has considered the results at a range of asset allocations and there is historically a very small maximum at 60/40. Realistically anything from 30/70 to 80/20 is all about the same. Certainly it is the same within the range of error in the problem to start with.
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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 »

dbr wrote: Fri Feb 12, 2021 7:48 am
stocknoob4111 wrote: Fri Feb 12, 2021 7:44 am markets don't crash 40% and stay there for a year. If your withdrawals are annual you will have 51 more weeks for the market to recover which it most likely will, maybe not to where it was but to a certain extent. Personally I would take my portfolio dividends accumulated the previous year and the difference from my SRR fund bucket for the next year withdrawal if the market has not recovered by then, but that is just me.
In theory you are supposed to be selling bonds to buy more stock and to fund withdrawals.
When you’re in the withdrawal phase, and not the accumulation phase, by spending from your bonds (or cash) you are in effect raising your stock allocation. It depends on how fast you’re spending from your non-stock side.

A retiree with a pension/ss who only has a 1% withdrawal rate might rebalance more frequently from bonds than an older retiree with a 5% withdrawal 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 ohboy! »

I find the fire calc and rules like this to be extremely trendy and thought of too simply.

Calculating retirement potential merely 30 days apart in Spring of 2020 had a 30% difference. Especially for the younger people who want to “FIRE” and are all in equities.

If someone retires with say $1m. (60/40). Budgeting $36k a year. And they own their house worth an additional $400k. If the market tanks 30%, and rates are still this low, should they cash-out refi for 2.5% say $200k?

It seems to me someone owing $200k on their house @ 2.5% (conservative rate) with $1.2m (60/40) probably looks significantly better on most of these calculators and rules than someone with the house owned and only $1m. But are they really?
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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 »

Wanderingwheelz wrote: Fri Feb 12, 2021 8:20 am
dbr wrote: Fri Feb 12, 2021 7:48 am
stocknoob4111 wrote: Fri Feb 12, 2021 7:44 am markets don't crash 40% and stay there for a year. If your withdrawals are annual you will have 51 more weeks for the market to recover which it most likely will, maybe not to where it was but to a certain extent. Personally I would take my portfolio dividends accumulated the previous year and the difference from my SRR fund bucket for the next year withdrawal if the market has not recovered by then, but that is just me.
In theory you are supposed to be selling bonds to buy more stock and to fund withdrawals.
When you’re in the withdrawal phase, and not the accumulation phase, by spending from your bonds (or cash) you are in effect raising your stock allocation. It depends on how fast you’re spending from your non-stock side.

A retiree with a pension/ss who only has a 1% withdrawal rate might rebalance more frequently from bonds than an older retiree with a 5% withdrawal rate.
You can rebalance using only withdrawals if you are not far out of balance. If stock values change by a lot rebalancing requires selling bonds to buy stocks or vice-versa even after taking withdrawals from bonds. That is why people advocate bands methods to decide on rebalancing. An alternative is to not do anything in particular to intentionally rebalance.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by Kenkat »

When people say you can withdraw 4% for 30 years with a 90% chance of success, that leaves 10% chance of failure.

A scenario like you described is potentially pushing you into the failure category. Potentially because the duration of the drop will also matter and also because as others have pointed out, there’s a lot of assumptions that go into that 4% calculation so it’s not a set it and forget it. But if you are going to fail, this would be the type of event that would be concerning.

The “rule” says you can take 4% of the original amount and “probably” be ok (the 90% above). That said, this type of event would be a great time not to go on that expensive trip, buy that new lake house, etc. If you can get by on less, it sure isn’t a bad idea. There are many other strategies people use to account for this type of scenario, including Variable Percentage Withdraw, x years of expenses in safe investments, etc.

In the real world, I’d plan for adjustments in the plan as a given as you learn new information about returns, your expenses, etc. in 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 dbr »

Kenkat wrote: Fri Feb 12, 2021 8:30 am When people say you can withdraw 4% for 30 years with a 90% chance of success, that leaves 10% chance of failure.

A scenario like you described is potentially pushing you into the failure category. Potentially because the duration of the drop will also matter and also because as others have pointed out, there’s a lot of assumptions that go into that 4% calculation so it’s not a set it and forget it. But if you are going to fail, this would be the type of event that would be concerning.

The “rule” says you can take 4% of the original amount and “probably” be ok (the 90% above). That said, this type of event would be a great time not to go on that expensive trip, buy that new lake house, etc. If you can get by on less, it sure isn’t a bad idea. There are many other strategies people use to account for this type of scenario, including Variable Percentage Withdraw, x years of expenses in safe investments, etc.

In the real world, I’d plan for adjustments in the plan as a given as you learn new information about returns, your expenses, etc. in retirement.
All good points.

Just the one comment that someone with 4%, aka 25 years expenses, and a 60/40 portfolio also has ten years expenses in bonds already. That means the tactic of years expenses in bonds and the tactic of not being 100% in stocks comes to the same thing. Personally I think a person on the risky edge of 4% would be insane to be 100% stocks.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by CoAndy »

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

Post by nisiprius »

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%.
Last edited by nisiprius on Fri Feb 12, 2021 8:51 am, edited 3 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 wolf359 »

The only people who really know what it's like to face this situation are those who in retirement and have faced it. Hopefully, one of them will weigh in what it's like to be in withdrawal mode during a crash.

What I think is that it depends upon the specifics of how you're withdrawing.

If I'm withdrawing my funds once a year to move it to cash, and I'm done for the year, then I have a year for the market to recover before I have to worry about it.

If I'm about to withdraw the funds and the crash happens, then I'd make the withdrawal from bonds, and then I have a year for the market to recover.

If I'm withdrawing funds every 3 months or every month, then I'd withdraw from bonds while the market is down.

I would not make any changes to how much I'm withdrawing until the second year or third year of a downturn. Big drops that don't last have become too common. The main thing is to avoid selling stocks during those downturns.

I would definitely write down a strategy for how I'd handle withdrawals during a market crash, so that when it occurs, I am not panicking and I have a plan that was thought out in calmer times. The appropriate place for this plan is the Investor's Policy Statement.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by FreddyC »

What happens depends on your asset allocation.

50-50 and you may be down less than 20%. And if you have social security or other stream, your invested market money is only a portion of your portfolio. Then depending on how long the dip is, may only have to draw down your down portfolio for a year or two. Have a plan and test 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 nisiprius »

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.
The bear market of 1929-1936 lasted seven years. The recovery only lasted three months and was immediately followed by second crash with a decline of -50% to the bottom, also lasting seven years. Despite cheerful presentations of the "average length of a typical bear market" I think the idea of a cash bucket to "ride through a bear market" is deeply flawed. In addition to foregoing some return, I think it is like a gambler's martingale strategy. If the bucket is big enough to last through the bear market then you are much better off than you would have been without it, but if the bear market lasts long enough to empty your bucket you are much worse off than you would have been just spending everything down proportionately.
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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 »

dbr wrote: Fri Feb 12, 2021 8:12 am
...A nit is that 4% research has considered the results at a range of asset allocations and there is historically a very small maximum at 60/40. Realistically anything from 30/70 to 80/20 is all about the same. Certainly it is the same within the range of error in the problem to start with.
While I complete agree that at the time the research was done the maximum was very small, and a wide range of nearly equally good solutions existed.

BUT at this point in time interest rates have been pushed to extreme lows. This is a double-edged sword and the retiree gets cut both ways. Not only is his return lower, there is a significant chance of capital loss if interest rates rebound.

My gut feeling is that the lower interest rates mean that the optimum AA is pushed toward more stocks, as is the entire band of acceptable portfolios. Personally, I put 3-4 years of expenses in an ultra-short term bond fund two or 3 years ago and have the rest in stocks. No rebalancing just keep a "crash fund" in bonds with an average duration of one week. All the rest is in in stocks and real estate. Real brick and mortar real estate.
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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 »

Technically you’re good to go if that happens. But remember, this is all based on backtesting. It may or may not work out of sample.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by Candor »

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

Post by wolf359 »

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:
†he "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%.
I agree. The 4% Rule should be used for planning purposes, not a rigid withdrawal strategy. It puts you in the right ballpark for how much inflation-adjusted income could be generated for a 30 year time period.

And even Bengen's original paper assumed flexibility. It wasn't about the chance of failure. It was percentage of times that the plan had worked without modification. His paper explicitly advised the financial advisor when to adjust how much was being withdrawn from the account.

If you start your retirement and your balance is at or below your starting point after ten years, I'd make a slight adjustment to the plan. Most likely I'd simply start over and reset 4% withdrawal rate. There's slack in the retirement budget, so that adjustment won't be a problem. In addition, that's also the timeframe when Social Security would kick in.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by DetroitRick »

I don't use that rule robotically, but only as a very general plan. In fact, I use it more as a "2.5% to 5.5% plan" anyway. But, for market crashes of that magnitude, or even the more-common smaller ones, I do/have done two things: use my bonds and cash more heavily to avoid permanent equity impairment, and re-examine both spending and income to see if I can reduce or even curtail withdrawals temporarily. For me, built-in flexibility is the key.

When these things happen, it's impossible to predict how long they last or how deep they go of course, but my leeway in withdrawals and the size and composition of my non-equity holdings reflects my reasonable best guess and has kept me out of trouble.
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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 »

DetroitRick wrote: Fri Feb 12, 2021 9:09 am I don't use that rule robotically, but only as a very general plan. In fact, I use it more as a "2.5% to 5.5% plan" anyway. But, for market crashes of that magnitude, or even the more-common smaller ones, I do/have done two things: use my bonds and cash more heavily to avoid permanent equity impairment, and re-examine both spending and income to see if I can reduce or even curtail withdrawals temporarily. For me, built-in flexibility is the key.

When these things happen, it's impossible to predict how long they last or how deep they go of course, but my leeway in withdrawals and the size and composition of my non-equity holdings reflects my reasonable best guess and has kept me out of trouble.
Do you not rebalance into stock?

There has actually been a whole thread about that: viewtopic.php?f=10&t=326097
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by RadAudit »

To reiterate a point made up thread - you get to become very familiar with the fine print in the study.
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.
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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 »

RadAudit wrote: Fri Feb 12, 2021 9:27 am To reiterate a point made up thread - you get to become very familiar with the fine print in the study.
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.
Absolutely. And since those studies came out there has been a garden industry of devising methods to adjust the withdrawals, the most recent and perhaps complex being VPW in our own Wiki,
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by MnD »

I use 5% of annual portfolio balance robotically.
"Next week" has no bearing versus the annual snapshot I take on November 30, effective the next Jan 1.
If the market dropped 40% from the prior years annual balance and assuming no change in fixed income pricing, I would reduce my income from portfolio by 28% given 70/30. About 1/2 of income is from portfolio so gross income would reduce by 14% and net income by less than that due to a progressive tax code and tax savings. So perhaps a 12% cut to net.

I've experienced two bear markets since retiring late 2018 and income from portfolio has increased significantly every year. We put the extra in durable money-saving things so we have tons of discretion when a cut-back does occur. Needs are about 1/3 of current income so no worries.
Maybe more Mexico versus Hawaii. Kirkland Signature wine is always an option if things get dire. :shock:
70/30 AA for life, Global market cap equity. Rebalance if fixed income <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.
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Re: What happens if you retire using the 4% rule and the market crashes 40%+ the next week

Post by DetroitRick »

dbr wrote: Fri Feb 12, 2021 9:13 am
DetroitRick wrote: Fri Feb 12, 2021 9:09 am I don't use that rule robotically, but only as a very general plan. In fact, I use it more as a "2.5% to 5.5% plan" anyway. But, for market crashes of that magnitude, or even the more-common smaller ones, I do/have done two things: use my bonds and cash more heavily to avoid permanent equity impairment, and re-examine both spending and income to see if I can reduce or even curtail withdrawals temporarily. For me, built-in flexibility is the key.

When these things happen, it's impossible to predict how long they last or how deep they go of course, but my leeway in withdrawals and the size and composition of my non-equity holdings reflects my reasonable best guess and has kept me out of trouble.
Do you not rebalance into stock?

There has actually been a whole thread about that: viewtopic.php?f=10&t=326097
Well, yes of course I do. But for me (in retirement) that is secondary to what I mentioned. In the 2008 recession, I did, but not in huge dollar amounts. I look at the entire picture - asset impairment (which is always for an uncertain length of downturn) vs. buying bargains. Not an either/or decision.
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