4% Rule Conundrum

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marcopolo
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Re: 4% Rule Conundrum

Post by marcopolo »

Marseille07 wrote: Wed Dec 07, 2022 1:39 pm
marcopolo wrote: Wed Dec 07, 2022 12:56 pm Sure. But, then you are changing the definition of "success" as it relates to the 4% "rule"
Re-retiring while keeping a floor at SWR + CPI isn't a free lunch. The retirees need to evaluate if the 10% failure rate is acceptable.
I agree.
You were claiming it only slightly increases risk.
I was just providing the data that indicates a bigger impact.

Whether it is a worthwhile trade-off is a personal decision.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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HomerJ
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Re: 4% Rule Conundrum

Post by HomerJ »

Marseille07 wrote: Wed Dec 07, 2022 1:39 pm
marcopolo wrote: Wed Dec 07, 2022 12:56 pm Sure. But, then you are changing the definition of "success" as it relates to the 4% "rule"
Re-retiring while keeping a floor at SWR + CPI isn't a free lunch. The retirees need to evaluate if the 10% failure rate is acceptable.
Just remember that "failure" means cutting back expenses in bad times. It doesn't have to mean running out of money.

If 4% represents "bare-bones" survival, then yes, I wouldn't count on 4%.

If 4% includes a decent chunk of discretionary expenses, then it's fine.

A 10% chance of "I might only take an expensive vacation every other year instead of every year" is much different than a 10% chance of "I might find myself living under a bridge eating garbage."
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
Marseille07
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Re: 4% Rule Conundrum

Post by Marseille07 »

marcopolo wrote: Wed Dec 07, 2022 1:48 pm I agree.
You were claiming it only slightly increases risk.
I was just providing the data that indicates a bigger impact.

Whether it is a worthwhile trade-off is a personal decision.
It's subjective. When you look at it in terms of the rate of change, it sounds massive (double) but in the grand scheme of things, 10% failure rate means 90% success rate, and this is assuming you don't reduce your standard of living by a dime and drive yourself to the ground.
dbr
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Re: 4% Rule Conundrum

Post by dbr »

HomerJ wrote: Wed Dec 07, 2022 1:44 pm
vineviz wrote: Wed Dec 07, 2022 7:01 am
exodusing wrote: Wed Dec 07, 2022 6:45 am There have been many posts on this issue. Probably the most popular explanation is that 4% is a rule of thumb, not some immutable law.
An extension to this is that the “rule” ignores a simple fact of life: the expected SWR moves inversely to market prices.

The expected SWR is higher when prices are “low” than when they are “high”.

Imaging a constant “4% rule” ignores this fundamental truth.
A worthless "fundamental truth" since we never know if prices are "low" or "high" in the present.

We can only know looking backwards.
While it may be true that it is difficult to know in practice how to use this, it is still a statement that acknowledges the fundamental origin of the supposed paradox. The origin of the paradox lies in the fact that the safe withdrawal rate for a retirement starting at a specific time and circumstances is not the safe withdrawal rate that applies over the total set of all times and circumstances. The overall SWR is the minimum of the set of all SWRs by year. But a retiree does not retire in all years; they retire in a specific year.
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HomerJ
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Re: 4% Rule Conundrum

Post by HomerJ »

Leesbro63 wrote: Wed Dec 07, 2022 1:47 pm
HomerJ wrote: Wed Dec 07, 2022 1:44 pm
vineviz wrote: Wed Dec 07, 2022 7:01 am
exodusing wrote: Wed Dec 07, 2022 6:45 am There have been many posts on this issue. Probably the most popular explanation is that 4% is a rule of thumb, not some immutable law.
An extension to this is that the “rule” ignores a simple fact of life: the expected SWR moves inversely to market prices.

The expected SWR is higher when prices are “low” than when they are “high”.

Imaging a constant “4% rule” ignores this fundamental truth.
A worthless "fundamental truth" since we never know if prices are "low" or "high" in the present.

We can only know looking backwards.
I think using historical “valuation” can give us a decent idea whether prices are high or low.
It hasn't for the past 30 years. But maybe going forward, sure...
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
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HomerJ
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Re: 4% Rule Conundrum

Post by HomerJ »

vineviz wrote: Wed Dec 07, 2022 1:28 pm
tibbitts wrote: Wed Dec 07, 2022 11:03 am
vineviz wrote: Wed Dec 07, 2022 10:35 am
educatedguesser wrote: Wed Dec 07, 2022 10:21 am It would seem to be the case that, for 1st year withdrawals, adding the previous year's inflation factor to the original 4% (or 2% or 3.5% or whatever seems comfortable to you) amount, does no harm, and is just as "safe". Therefore the question -- why isn't THAT the recommendation, and why don't I see that advised anywhere?
My guess is that very few people who are seriously contemplating retirement planning are using the "4% rule" are using it as any sort of proscriptive guideline.

Why try to tweak the "rule" when the only reasonable approach is to not use the rule at all?
Although I'm not a fan of the rule either, in its absence, what should someone use to determine how much inflation-adjusted income they can reasonably count on for some extended period (30 years for example) from a portfolio, whether in full retirement or not?
There several approaches to constructing a better forward estimate of SWR than merely extrapolating past results. These range from very simplistic equations to more complicated models to approaches that don't even try to explicitly model the SWR (the funded ratio, for instance).

At a VERY simplistic level, the expected SWR is lower when expected real returns are lower and when expected volatility is higher and a simple linear equation provides a reasonable estimate for whatever point on the distribution you want to target, the time period you want to plan for, and the asset allocation you want to use.

For instance, if you want a 95% probability of success (roughly comparable to the historical SWR results) over 30 years you could derive a simple estimate from an equation like this:

.035 + (RETURN/2) - (VOLATILITY/5).

RETURN is expected real return, and VOLATILITY is the standard deviation of annual real returns.

So if the expected real return of a 60/40 portfolio is 4.5% and the expected volatility is 9%, your estimate is 0.0333 + (.045/2) - (.09/5) = 3.8%.

If the expected real return of a 50/50 portfolio is just 2% and the expected volatility is 7%, your estimate is 0.0333 + (.02/2) - (.07/5) = 2.9%.

And so forth.

This a a fairly crude approach, since few of the underlying relationships are actually linear, but it's a lot less crude than just hoping that past results repeat in the future.
Another problem with this approach is that "expected" returns have been way off for the past 30 years, so it's hard to put a lot of faith in them.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
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HomerJ
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Re: 4% Rule Conundrum

Post by HomerJ »

dbr wrote: Wed Dec 07, 2022 1:53 pm
HomerJ wrote: Wed Dec 07, 2022 1:44 pm
vineviz wrote: Wed Dec 07, 2022 7:01 am
exodusing wrote: Wed Dec 07, 2022 6:45 am There have been many posts on this issue. Probably the most popular explanation is that 4% is a rule of thumb, not some immutable law.
An extension to this is that the “rule” ignores a simple fact of life: the expected SWR moves inversely to market prices.

The expected SWR is higher when prices are “low” than when they are “high”.

Imaging a constant “4% rule” ignores this fundamental truth.
A worthless "fundamental truth" since we never know if prices are "low" or "high" in the present.

We can only know looking backwards.
While it may be true that it is difficult to know in practice how to use this, it is still a statement that acknowledges the fundamental origin of the supposed paradox. The origin of the paradox lies in the fact that the safe withdrawal rate for a retirement starting at a specific time and circumstances is not the safe withdrawal rate that applies over the total set of all times and circumstances. The overall SWR is the minimum of the set of all SWRs by year. But a retiree does not retire in all years; they retire in a specific year.
This I agree with. I'm just saying you won't know until afterwards.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
Leesbro63
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Re: 4% Rule Conundrum

Post by Leesbro63 »

HomerJ wrote: Wed Dec 07, 2022 1:52 pm
Marseille07 wrote: Wed Dec 07, 2022 1:39 pm
marcopolo wrote: Wed Dec 07, 2022 12:56 pm Sure. But, then you are changing the definition of "success" as it relates to the 4% "rule"
Re-retiring while keeping a floor at SWR + CPI isn't a free lunch. The retirees need to evaluate if the 10% failure rate is acceptable.
Just remember that "failure" means cutting back expenses in bad times. It doesn't have to mean running out of money.

If 4% represents "bare-bones" survival, then yes, I wouldn't count on 4%.

If 4% includes a decent chunk of discretionary expenses, then it's fine.

A 10% chance of "I might only take an expensive vacation every other year instead of every year" is much different than a 10% chance of "I might find myself living under a bridge eating garbage."
I think failure is like retiring in 1966. And by 1974 finding that your real stash is down by over half in real terms. And having 22 more years to go. Yeah, in hindsight we know that 4% actually did work. But how many could have just kept spending more inflated dollars every year (as per the 4% “rule”…constant real spending) as they saw their stash melt away? It just wouldn’t have happened for anyone but the totally oblivious. And the stress of that melting away is my definition of failure.
dbr
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Re: 4% Rule Conundrum

Post by dbr »

HomerJ wrote: Wed Dec 07, 2022 1:58 pm
dbr wrote: Wed Dec 07, 2022 1:53 pm
HomerJ wrote: Wed Dec 07, 2022 1:44 pm
vineviz wrote: Wed Dec 07, 2022 7:01 am
exodusing wrote: Wed Dec 07, 2022 6:45 am There have been many posts on this issue. Probably the most popular explanation is that 4% is a rule of thumb, not some immutable law.
An extension to this is that the “rule” ignores a simple fact of life: the expected SWR moves inversely to market prices.

The expected SWR is higher when prices are “low” than when they are “high”.

Imaging a constant “4% rule” ignores this fundamental truth.
A worthless "fundamental truth" since we never know if prices are "low" or "high" in the present.

We can only know looking backwards.
While it may be true that it is difficult to know in practice how to use this, it is still a statement that acknowledges the fundamental origin of the supposed paradox. The origin of the paradox lies in the fact that the safe withdrawal rate for a retirement starting at a specific time and circumstances is not the safe withdrawal rate that applies over the total set of all times and circumstances. The overall SWR is the minimum of the set of all SWRs by year. But a retiree does not retire in all years; they retire in a specific year.
This I agree with. I'm just saying you won't know until afterwards.
Absolutely. It is not clear how to compute an SWR from information available at the time. Vineviz had made a couple of suggestions. I agree one still has the problem regarding whether or not one knows what one would need to know at the time.
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HomerJ
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Re: 4% Rule Conundrum

Post by HomerJ »

Marseille07 wrote: Wed Dec 07, 2022 10:35 am
Leesbro63 wrote: Wed Dec 07, 2022 10:26 am I think one solution to the conundrum is occasional “resets to reality”. After a 2010-2021 bull market, it might be ok to “re-retire” on higher dollars. And after a 2008-9, or maybe a 2022, a reset to lower dollars might make sense.
I like the ratchet-up approach where you take the higher of 4% remaining balance or 4% SWR + CPI. It slightly elevates the risk of running out of money vs 4% SWR but provides a reasonable floor while automatically adjusts to the upside.
This is what I plan to do...

If we get 5 good years, I'll just "re-retire" and start over with a new 4% (Also easier to do since I'll be 5 years older, so not as worried about lasting the entire 30 years).

15 years into retirement, if the money is still looking good, I'll come up with a whole new thing (I'm surprised there aren't more threads here from the 75-80 year olds) because 4% is way too conservative if you only have 10-15 years left. Probably look at SPIAs to cover all expenses, and then start giving away a good chunk of what's left (keeping some for one-off big expenses, or long-term health care)
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
Leesbro63
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Re: 4% Rule Conundrum

Post by Leesbro63 »

HomerJ wrote: Wed Dec 07, 2022 2:03 pm
Marseille07 wrote: Wed Dec 07, 2022 10:35 am
Leesbro63 wrote: Wed Dec 07, 2022 10:26 am I think one solution to the conundrum is occasional “resets to reality”. After a 2010-2021 bull market, it might be ok to “re-retire” on higher dollars. And after a 2008-9, or maybe a 2022, a reset to lower dollars might make sense.
I like the ratchet-up approach where you take the higher of 4% remaining balance or 4% SWR + CPI. It slightly elevates the risk of running out of money vs 4% SWR but provides a reasonable floor while automatically adjusts to the upside.
This is what I plan to do...

If we get 5 good years, I'll just "re-retire" and start over with a new 4% (Also easier to do since I'll be 5 years older, so not as worried about lasting the entire 30 years).

15 years into retirement, if the money is still looking good, I'll come up with a whole new thing (I'm surprised there aren't more threads here from the 75-80 year olds) because 4% is way too conservative if you only have 10-15 years left. Probably look at SPIAs to cover all expenses, and then start giving away a good chunk of what's left (keeping some for one-off big expenses, or long-term health care)
+1. This. Yes, my conclusion is that periodic “resets” are required.
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educatedguesser
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Re: 4% Rule Conundrum

Post by educatedguesser »

dbr wrote: Wed Dec 07, 2022 12:24 pmI think there are some odd things about how we infer things from the data sets that give us the 4% rule.

One thing that is clear is that two people who are on the same path get the same result. That is true if one starts the path at $1M spending $40,000/year or one is on the same path a year later with more or less than $1M and spending $40,000/year.

An example is 1917 where there is a big loss to a portfolio the first year, but yet the retirement does not fail. At the end of the first year the portfolio is down to $679k, but it ends up 30 years later at $900k. And yet if you start a retirement in 1918 with $679K and spend $40,000 for 29 years your retirement also does not fail and you end up with $900k. The withdrawal rate in the first case is 4% and in the second case is 5.9%.
Yes, so this is proving my point, I think. In your case, the 1917 retiree and the 1918 retiree are "on the same path". And, the 1918 retiree is benefiting by taking out an even greater % than the 1917 retiree. In my example, the latter retiree is taking out more (4% + inflation factor) than they originally would have under the traditional 4% rule (just the 4%), but it's still a smaller amt than the person who retired a year earlier and has the same starting balance in 2023. Therefore my reasoning that adding the inflation factor to the year 1 SWR is very safe.
dbr wrote: Wed Dec 07, 2022 12:24 pmIn this case $1M, $40k withdrawal, 1917 start and $679k, $40k withdrawal, 1918 start are the same path, as unbelievable as that might be.
Yes, they have the same balance on a given date. Same as my scenario.
dbr wrote: Wed Dec 07, 2022 12:24 pmAnother way to say this is that summarizing this data by saying that the over all years safe withdrawal rate is 4% is not the same thing as saying the safe withdrawal rate for each and every year is 4%.
This is the crux of my confusion / misunderstanding of the statistics I think. 2 portfolios that have the same balance on 12/31/2022 should be able to safely withdraw the same amt for the upcoming year, and the amt to pick would be the higher of the two...the SWR of the person who retired a year earlier with $1M and gets to apply their inflation factor to their higher starting balance per the traditional guideline.

I sense the argument with my logic has something to do with probability theory and the fact that the earlier retiree's portfolio has 1 more year of existence in the withdrawal phase, and that somehow makes his path probabilistically different.
Last edited by educatedguesser on Wed Dec 07, 2022 2:13 pm, edited 1 time in total.
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HomerJ
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Re: 4% Rule Conundrum

Post by HomerJ »

Leesbro63 wrote: Wed Dec 07, 2022 2:01 pm
HomerJ wrote: Wed Dec 07, 2022 1:52 pm
Marseille07 wrote: Wed Dec 07, 2022 1:39 pm
marcopolo wrote: Wed Dec 07, 2022 12:56 pm Sure. But, then you are changing the definition of "success" as it relates to the 4% "rule"
Re-retiring while keeping a floor at SWR + CPI isn't a free lunch. The retirees need to evaluate if the 10% failure rate is acceptable.
Just remember that "failure" means cutting back expenses in bad times. It doesn't have to mean running out of money.

If 4% represents "bare-bones" survival, then yes, I wouldn't count on 4%.

If 4% includes a decent chunk of discretionary expenses, then it's fine.

A 10% chance of "I might only take an expensive vacation every other year instead of every year" is much different than a 10% chance of "I might find myself living under a bridge eating garbage."
I think failure is like retiring in 1966. And by 1974 finding that your real stash is down by over half in real terms. And having 22 more years to go. Yeah, in hindsight we know that 4% actually did work. But how many could have just kept spending more inflated dollars every year (as per the 4% “rule”…constant real spending) as they saw their stash melt away? It just wouldn’t have happened for anyone but the totally oblivious. And the stress of that melting away is my definition of failure.
Well my point is that no one would actually follow the constant 4% spending plus inflation "rule" in that situation.

If you retire into a bunch of really bad years, you cut back. The failure is that you spend less than you planned, maybe for a short while, maybe for a long while, but no one blindly follows 4% into bankruptcy.

The point is that the 4% study had a 10% failure that you go broke in year 27 or something (if you live that long). But, in real life, for people on this site, the 10% failure is that you retire into a bad economic period, and you only get to take 2 vacations a year instead of 4 vacations a year for a while.

"Failure" isn't nearly as scary as it sounds.

I do agree that stressing over money could also ruin retirement. I will admit I am working a couple extra years instead of retiring right at 4% to create a buffer for myself as well. For instance, say $2 million is my goal... I might work a little longer and get to $2.2 million... but I don't reset my expectations around the new $2.2 million number... I'm still thinking of myself as retiring with $2 million, so I have the $200,000 buffer (in cash\CDs\etc) in case we have bad times the first couple of years after I retire.
Last edited by HomerJ on Wed Dec 07, 2022 2:19 pm, edited 2 times in total.
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Leesbro63
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Re: 4% Rule Conundrum

Post by Leesbro63 »

HomerJ wrote: Wed Dec 07, 2022 2:12 pm
Leesbro63 wrote: Wed Dec 07, 2022 2:01 pm
HomerJ wrote: Wed Dec 07, 2022 1:52 pm
Marseille07 wrote: Wed Dec 07, 2022 1:39 pm
marcopolo wrote: Wed Dec 07, 2022 12:56 pm Sure. But, then you are changing the definition of "success" as it relates to the 4% "rule"
Re-retiring while keeping a floor at SWR + CPI isn't a free lunch. The retirees need to evaluate if the 10% failure rate is acceptable.
Just remember that "failure" means cutting back expenses in bad times. It doesn't have to mean running out of money.

If 4% represents "bare-bones" survival, then yes, I wouldn't count on 4%.

If 4% includes a decent chunk of discretionary expenses, then it's fine.

A 10% chance of "I might only take an expensive vacation every other year instead of every year" is much different than a 10% chance of "I might find myself living under a bridge eating garbage."
I think failure is like retiring in 1966. And by 1974 finding that your real stash is down by over half in real terms. And having 22 more years to go. Yeah, in hindsight we know that 4% actually did work. But how many could have just kept spending more inflated dollars every year (as per the 4% “rule”…constant real spending) as they saw their stash melt away? It just wouldn’t have happened for anyone but the totally oblivious. And the stress of that melting away is my definition of failure.
Well my point is that no one would actually follow the constant 4% spending plus inflation "rule" in that situation.

If you retire into a bunch of really bad years, you cut back. The failure is that you spend less than you planned, maybe for a short while, maybe for a long while, but no one blindly follows 4% into bankruptcy.

The point is that the 4% study had a 10% failure that you go broke in year 27 or something (if you live that long). But, in real life, for people on this site, the 10% failure is that you retire into a bad economic period, and you only get to take 2 vacations a year instead of 4 vacations a year for a while.

"Failure" isn't nearly as scary as it sounds.

I do agree that stressing over money could also ruin retirement. I will admit I am working a couple extra years instead of retiring right at 4% to create a buffer for myself as well. For instance, say $2 million is my goal... I might work a little longer and get to $2.2 million... but I don't reset my expectations around the new $2.2 million number... I'm still thinking of myself as retiring with $2 million, so I have the $200,000 buffer (in cash\CDs\etc) in case we have bad times the first couple of years after I retire.
I disagree about “failure”. It’s definitely as scary as it sounds.
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HomerJ
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Re: 4% Rule Conundrum

Post by HomerJ »

Leesbro63 wrote: Wed Dec 07, 2022 2:16 pm I disagree about “failure”. It’s definitely as scary as it sounds.
Maybe. I do agree that I would be pretty stressed if I was down 40% five years into retirement. I'd probably look for work. But I also have a 50/50 portfolio, so the market would have be down around 80% for our retirement to be down that far (plus my buffer that I mentioned above would have covered me for the first 3 years anyway)

And to be fully honest, I also have a paid-off house which I don't include in any of this. If we get to the point where we HAVE to sell the house, move to much cheaper place (or rent) to access that money, then I will consider my retirement plan as "failed", but there technically is a ton of equity there that should cover us for 7-10 extra years if really needed. So that helps with peace of mind too.
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Leesbro63
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Re: 4% Rule Conundrum

Post by Leesbro63 »

HomerJ wrote: Wed Dec 07, 2022 2:21 pm
Leesbro63 wrote: Wed Dec 07, 2022 2:16 pm I disagree about “failure”. It’s definitely as scary as it sounds.
Maybe. I do agree that I would be pretty stressed if I was down 40% five years into retirement. I'd probably look for work. But I also have a 50/50 portfolio, so the market would have be down around 80% for our retirement to be down that far (plus my buffer that I mentioned above would have covered me for the first 3 years anyway)

And to be fully honest, I also have a paid-off house which I don't include in any of this. If we get to the point where we HAVE to sell the house, move to much cheaper place (or rent) to access that money, then I will consider my retirement plan as "failed", but there technically is a ton of equity there that should cover us for 7-10 extra years if really needed. So that helps with peace of mind too.
This ALL sounds pretty scary. Or at least stressful.
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Re: 4% Rule Conundrum

Post by exodusing »

HomerJ wrote: Wed Dec 07, 2022 1:57 pm
vineviz wrote: Wed Dec 07, 2022 1:28 pm
tibbitts wrote: Wed Dec 07, 2022 11:03 am
vineviz wrote: Wed Dec 07, 2022 10:35 am
educatedguesser wrote: Wed Dec 07, 2022 10:21 am It would seem to be the case that, for 1st year withdrawals, adding the previous year's inflation factor to the original 4% (or 2% or 3.5% or whatever seems comfortable to you) amount, does no harm, and is just as "safe". Therefore the question -- why isn't THAT the recommendation, and why don't I see that advised anywhere?
My guess is that very few people who are seriously contemplating retirement planning are using the "4% rule" are using it as any sort of proscriptive guideline.

Why try to tweak the "rule" when the only reasonable approach is to not use the rule at all?
Although I'm not a fan of the rule either, in its absence, what should someone use to determine how much inflation-adjusted income they can reasonably count on for some extended period (30 years for example) from a portfolio, whether in full retirement or not?
There several approaches to constructing a better forward estimate of SWR than merely extrapolating past results. These range from very simplistic equations to more complicated models to approaches that don't even try to explicitly model the SWR (the funded ratio, for instance).

At a VERY simplistic level, the expected SWR is lower when expected real returns are lower and when expected volatility is higher and a simple linear equation provides a reasonable estimate for whatever point on the distribution you want to target, the time period you want to plan for, and the asset allocation you want to use.

For instance, if you want a 95% probability of success (roughly comparable to the historical SWR results) over 30 years you could derive a simple estimate from an equation like this:

.035 + (RETURN/2) - (VOLATILITY/5).

RETURN is expected real return, and VOLATILITY is the standard deviation of annual real returns.

So if the expected real return of a 60/40 portfolio is 4.5% and the expected volatility is 9%, your estimate is 0.0333 + (.045/2) - (.09/5) = 3.8%.

If the expected real return of a 50/50 portfolio is just 2% and the expected volatility is 7%, your estimate is 0.0333 + (.02/2) - (.07/5) = 2.9%.

And so forth.

This a a fairly crude approach, since few of the underlying relationships are actually linear, but it's a lot less crude than just hoping that past results repeat in the future.
Another problem with this approach is that "expected" returns have been way off for the past 30 years, so it's hard to put a lot of faith in them.
So long as you can find a reliable way to calculate expected returns and volatility, this approach is likely fine. The problem, as you suggest, is finding a calculation method that's sufficiently reliable. For example, just looking at past returns has not been as successful as p/e ratios (or CAPE). Whether this will continue to be true is unclear. Whether there is any method that's sufficiently reliable is also unclear.

If you can adjust (there's a fair amount of discretionary spending in your plan), then you'll be fine, although you may find, with hindsight, that you could have done better. Such is life. People seem to want more certainty than is possible.
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Re: 4% Rule Conundrum

Post by neurosphere »

educatedguesser wrote: Wed Dec 07, 2022 7:52 am In my original scenario, there is an $8.2K difference between the suggested withdrawal amts for 2 people retiring 1 year apart but with the same starting balances on 12/31/2022. I don't think anyone would say that the $8.2K compounded over 30 years would be required to make up for that extra yr of retirement.
But in addition to needing the money to last one less year, now person A has 29 years of possible returns left, meaning whatever the market does in year 30, no matter HOW bad, doesn't determine "failure". While person B is still subject to that particular year, which may be one of the worst years ever in history. I guess we could go back over the data set to see how many failures were because of what happened in year 30 rather than any previous year. This is a result of a determining a "binary" fail or not fail result to any previous year. Failure by $1 is still a FAIL.
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes" (even in taxable accounts).
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Re: 4% Rule Conundrum

Post by FactualFran »

educatedguesser wrote: Wed Dec 07, 2022 2:11 pm This is the crux of my confusion / misunderstanding of the statistics I think. 2 portfolios that have the same balance on 12/31/2022 should be able to safely withdraw the same amt for the upcoming year, and the amt to pick would be the higher of the two...the SWR of the person who retired a year earlier with $1M and gets to apply their inflation factor to their higher starting balance per the traditional guideline.

I sense the argument with my logic has something to do with probability theory and the fact that the earlier retiree's portfolio has 1 more year of existence in the withdrawal phase, and that somehow makes his path probabilistically different.
A possible source of confusion is that 4% as the SWR is the maximum that has been successful for all the starting years that were tried. Each starting year has its own SWR, the initial withdrawal rate that results in the portfolio lasting for 30 years.

Using the 50:50 stock:bond portfolio that Bengen used, for 1954 as the starting year the SWR was 7.17%. For 1955 as the starting year, one year later, the SWR was 5.78%. 1954 as the starting year benefited from the high inflation-adjusted return for that year; 1955 as the starting year did not.
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neurosphere
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Re: 4% Rule Conundrum

Post by neurosphere »

FactualFran wrote: Wed Dec 07, 2022 2:46 pm
educatedguesser wrote: Wed Dec 07, 2022 2:11 pm This is the crux of my confusion / misunderstanding of the statistics I think. 2 portfolios that have the same balance on 12/31/2022 should be able to safely withdraw the same amt for the upcoming year, and the amt to pick would be the higher of the two...the SWR of the person who retired a year earlier with $1M and gets to apply their inflation factor to their higher starting balance per the traditional guideline.

I sense the argument with my logic has something to do with probability theory and the fact that the earlier retiree's portfolio has 1 more year of existence in the withdrawal phase, and that somehow makes his path probabilistically different.
A possible source of confusion is that 4% as the SWR is the maximum that has been successful for all the starting years that were tried. Each starting year has its own SWR, the initial withdrawal rate that results in the portfolio lasting for 30 years.
Great reminder. Person A WILL HAVE (i.e. "had" based on historical data) an SWR of 5%. Person B WILL HAVE ("had") an SWR of 4.5%. But they are each taking 4% because they don't yet know what their SWR was, is, or will to have been but only that 4% is "safe". :D
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Re: 4% Rule Conundrum

Post by HomerJ »

FactualFran wrote: Wed Dec 07, 2022 2:46 pm
educatedguesser wrote: Wed Dec 07, 2022 2:11 pm This is the crux of my confusion / misunderstanding of the statistics I think. 2 portfolios that have the same balance on 12/31/2022 should be able to safely withdraw the same amt for the upcoming year, and the amt to pick would be the higher of the two...the SWR of the person who retired a year earlier with $1M and gets to apply their inflation factor to their higher starting balance per the traditional guideline.

I sense the argument with my logic has something to do with probability theory and the fact that the earlier retiree's portfolio has 1 more year of existence in the withdrawal phase, and that somehow makes his path probabilistically different.
A possible source of confusion is that 4% as the SWR is the maximum that has been successful for all the starting years that were tried. Each starting year has its own SWR, the initial withdrawal rate that results in the portfolio lasting for 30 years.

Using the 50:50 stock:bond portfolio that Bengen used, for 1954 as the starting year the SWR was 7.17%. For 1955 as the starting year, one year later, the SWR was 5.78%. 1954 as the starting year benefited from the high inflation-adjusted return for that year; 1955 as the starting year did not.
Just one correction... You mean 4% was the minimum.

95% of other starting years, you could have pulled MORE than 4%.

That's why 4% is so conservative. It's the worst-case scenario (so far)


Simpsons reference:

Bart (the 10-year kid): This is the worst day of my life!
Homer (trying to be a helpful Dad): No, this is the worst day of your life, SO FAR...
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
marcopolo
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Re: 4% Rule Conundrum

Post by marcopolo »

HomerJ wrote: Wed Dec 07, 2022 2:58 pm
FactualFran wrote: Wed Dec 07, 2022 2:46 pm
educatedguesser wrote: Wed Dec 07, 2022 2:11 pm This is the crux of my confusion / misunderstanding of the statistics I think. 2 portfolios that have the same balance on 12/31/2022 should be able to safely withdraw the same amt for the upcoming year, and the amt to pick would be the higher of the two...the SWR of the person who retired a year earlier with $1M and gets to apply their inflation factor to their higher starting balance per the traditional guideline.

I sense the argument with my logic has something to do with probability theory and the fact that the earlier retiree's portfolio has 1 more year of existence in the withdrawal phase, and that somehow makes his path probabilistically different.
A possible source of confusion is that 4% as the SWR is the maximum that has been successful for all the starting years that were tried. Each starting year has its own SWR, the initial withdrawal rate that results in the portfolio lasting for 30 years.

Using the 50:50 stock:bond portfolio that Bengen used, for 1954 as the starting year the SWR was 7.17%. For 1955 as the starting year, one year later, the SWR was 5.78%. 1954 as the starting year benefited from the high inflation-adjusted return for that year; 1955 as the starting year did not.
Just one correction... You mean 4% was the minimum.

95% of other starting years, you could have pulled MORE than 4%.

That's why 4% is so conservative. It's the worst-case scenario (so far)


Simpsons reference:

Bart (the 10-year kid): This is the worst day of my life!
Homer (trying to be a helpful Dad): No, this is the worst day of your life, SO FAR...
No. It is the maximum.

It is the maximum percentage that worked for all starting years (or whatever success rate you are targeting).
Anything higher would have failed more frequently.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: 4% Rule Conundrum

Post by vineviz »

exodusing wrote: Wed Dec 07, 2022 2:26 pm So long as you can find a reliable way to calculate expected returns and volatility, this approach is likely fine. The problem, as you suggest, is finding a calculation method that's sufficiently reliable. For example, just looking at past returns has not been as successful as p/e ratios (or CAPE). Whether this will continue to be true is unclear. Whether there is any method that's sufficiently reliable is also unclear.
It’s really not all that challenging, actually.

Estimating the parameters around volatility is pretty easy, and the same is true for the risk-free asset (eg Treasury bonds).

The expected equity risk premium is a little more difficult, but using excess earnings yield is much more reliable than using a constant premium.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: 4% Rule Conundrum

Post by HomerJ »

neurosphere wrote: Wed Dec 07, 2022 2:58 pm
FactualFran wrote: Wed Dec 07, 2022 2:46 pm
educatedguesser wrote: Wed Dec 07, 2022 2:11 pm This is the crux of my confusion / misunderstanding of the statistics I think. 2 portfolios that have the same balance on 12/31/2022 should be able to safely withdraw the same amt for the upcoming year, and the amt to pick would be the higher of the two...the SWR of the person who retired a year earlier with $1M and gets to apply their inflation factor to their higher starting balance per the traditional guideline.

I sense the argument with my logic has something to do with probability theory and the fact that the earlier retiree's portfolio has 1 more year of existence in the withdrawal phase, and that somehow makes his path probabilistically different.
A possible source of confusion is that 4% as the SWR is the maximum that has been successful for all the starting years that were tried. Each starting year has its own SWR, the initial withdrawal rate that results in the portfolio lasting for 30 years.
Great reminder. Person A WILL HAVE (i.e. "had" based on historical data) an SWR of 5%. Person B WILL HAVE ("had") an SWR of 4.5%. But they are each taking 4% because they don't yet know what their SWR was, is, or will to have been but only that 4% is "safe". :D
Exactly... but, in real life, Person A and Person B can adjust their withdrawals, so as their portfolios grows and time goes by (Because they are taking 4%, less than they could)
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
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Re: 4% Rule Conundrum

Post by HomerJ »

marcopolo wrote: Wed Dec 07, 2022 3:04 pm
HomerJ wrote: Wed Dec 07, 2022 2:58 pm
FactualFran wrote: Wed Dec 07, 2022 2:46 pm
educatedguesser wrote: Wed Dec 07, 2022 2:11 pm This is the crux of my confusion / misunderstanding of the statistics I think. 2 portfolios that have the same balance on 12/31/2022 should be able to safely withdraw the same amt for the upcoming year, and the amt to pick would be the higher of the two...the SWR of the person who retired a year earlier with $1M and gets to apply their inflation factor to their higher starting balance per the traditional guideline.

I sense the argument with my logic has something to do with probability theory and the fact that the earlier retiree's portfolio has 1 more year of existence in the withdrawal phase, and that somehow makes his path probabilistically different.
A possible source of confusion is that 4% as the SWR is the maximum that has been successful for all the starting years that were tried. Each starting year has its own SWR, the initial withdrawal rate that results in the portfolio lasting for 30 years.

Using the 50:50 stock:bond portfolio that Bengen used, for 1954 as the starting year the SWR was 7.17%. For 1955 as the starting year, one year later, the SWR was 5.78%. 1954 as the starting year benefited from the high inflation-adjusted return for that year; 1955 as the starting year did not.
Just one correction... You mean 4% was the minimum.

95% of other starting years, you could have pulled MORE than 4%.

That's why 4% is so conservative. It's the worst-case scenario (so far)


Simpsons reference:

Bart (the 10-year kid): This is the worst day of my life!
Homer (trying to be a helpful Dad): No, this is the worst day of your life, SO FAR...
No. It is the maximum.

It is the maximum percentage that worked for all starting years (or whatever success rate you are targeting).
Anything higher would have failed more frequently.
well, I'm confused by the semantics here... 4% is the maximum, but in 1954, you could have taken 7.17%.

Sure sounds like 4% is the minimum of all starting years.

But I guess I see what you're saying... 4% worked in 100% (or 95%) of the starting years, the max, while pulling 7.17% only worked in like 30% of the starting years (I made that up, just a guess)
Last edited by HomerJ on Wed Dec 07, 2022 3:15 pm, edited 3 times in total.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
Leesbro63
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Re: 4% Rule Conundrum

Post by Leesbro63 »

HomerJ wrote: Wed Dec 07, 2022 3:09 pm
marcopolo wrote: Wed Dec 07, 2022 3:04 pm
HomerJ wrote: Wed Dec 07, 2022 2:58 pm
FactualFran wrote: Wed Dec 07, 2022 2:46 pm
educatedguesser wrote: Wed Dec 07, 2022 2:11 pm This is the crux of my confusion / misunderstanding of the statistics I think. 2 portfolios that have the same balance on 12/31/2022 should be able to safely withdraw the same amt for the upcoming year, and the amt to pick would be the higher of the two...the SWR of the person who retired a year earlier with $1M and gets to apply their inflation factor to their higher starting balance per the traditional guideline.

I sense the argument with my logic has something to do with probability theory and the fact that the earlier retiree's portfolio has 1 more year of existence in the withdrawal phase, and that somehow makes his path probabilistically different.
A possible source of confusion is that 4% as the SWR is the maximum that has been successful for all the starting years that were tried. Each starting year has its own SWR, the initial withdrawal rate that results in the portfolio lasting for 30 years.

Using the 50:50 stock:bond portfolio that Bengen used, for 1954 as the starting year the SWR was 7.17%. For 1955 as the starting year, one year later, the SWR was 5.78%. 1954 as the starting year benefited from the high inflation-adjusted return for that year; 1955 as the starting year did not.
Just one correction... You mean 4% was the minimum.

95% of other starting years, you could have pulled MORE than 4%.

That's why 4% is so conservative. It's the worst-case scenario (so far)


Simpsons reference:

Bart (the 10-year kid): This is the worst day of my life!
Homer (trying to be a helpful Dad): No, this is the worst day of your life, SO FAR...
No. It is the maximum.

It is the maximum percentage that worked for all starting years (or whatever success rate you are targeting).
Anything higher would have failed more frequently.
well, I'm confused by the semantics here... 4% is the maximum, but in 1954, you could have taken 7.17%.

Sure sounds like 4% is the minimum of all starting years.

But I'm sure you're right, and I'm thinking of it wrong.
4% is the MAXIMUM that worked in in the group of ALL years.
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Re: 4% Rule Conundrum

Post by marcopolo »

HomerJ wrote: Wed Dec 07, 2022 3:09 pm
marcopolo wrote: Wed Dec 07, 2022 3:04 pm
HomerJ wrote: Wed Dec 07, 2022 2:58 pm
FactualFran wrote: Wed Dec 07, 2022 2:46 pm
educatedguesser wrote: Wed Dec 07, 2022 2:11 pm This is the crux of my confusion / misunderstanding of the statistics I think. 2 portfolios that have the same balance on 12/31/2022 should be able to safely withdraw the same amt for the upcoming year, and the amt to pick would be the higher of the two...the SWR of the person who retired a year earlier with $1M and gets to apply their inflation factor to their higher starting balance per the traditional guideline.

I sense the argument with my logic has something to do with probability theory and the fact that the earlier retiree's portfolio has 1 more year of existence in the withdrawal phase, and that somehow makes his path probabilistically different.
A possible source of confusion is that 4% as the SWR is the maximum that has been successful for all the starting years that were tried. Each starting year has its own SWR, the initial withdrawal rate that results in the portfolio lasting for 30 years.

Using the 50:50 stock:bond portfolio that Bengen used, for 1954 as the starting year the SWR was 7.17%. For 1955 as the starting year, one year later, the SWR was 5.78%. 1954 as the starting year benefited from the high inflation-adjusted return for that year; 1955 as the starting year did not.
Just one correction... You mean 4% was the minimum.

95% of other starting years, you could have pulled MORE than 4%.

That's why 4% is so conservative. It's the worst-case scenario (so far)


Simpsons reference:

Bart (the 10-year kid): This is the worst day of my life!
Homer (trying to be a helpful Dad): No, this is the worst day of your life, SO FAR...
No. It is the maximum.

It is the maximum percentage that worked for all starting years (or whatever success rate you are targeting).
Anything higher would have failed more frequently.
well, I'm confused by the semantics here... 4% is the maximum, but in 1954, you could have taken 7.17%.

Sure sounds like 4% is the minimum of all starting years.

But I'm sure you're right, and I'm thinking of it wrong.
The 7.17% is the WR what worked for that starting year.

SWR, at least in the studies like Bengen, Trinity, etc. is defined as THE highest percentage that worked for ALL starting years (or 95%, or 90% of years).
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: 4% Rule Conundrum

Post by HomerJ »

Yep, yep got it now...
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Re: 4% Rule Conundrum

Post by exodusing »

vineviz wrote: Wed Dec 07, 2022 3:06 pm
exodusing wrote: Wed Dec 07, 2022 2:26 pm So long as you can find a reliable way to calculate expected returns and volatility, this approach is likely fine. The problem, as you suggest, is finding a calculation method that's sufficiently reliable. For example, just looking at past returns has not been as successful as p/e ratios (or CAPE). Whether this will continue to be true is unclear. Whether there is any method that's sufficiently reliable is also unclear.
It’s really not all that challenging, actually.

Estimating the parameters around volatility is pretty easy, and the same is true for the risk-free asset (eg Treasury bonds).

The expected equity risk premium is a little more difficult, but using excess earnings yield is much more reliable than using a constant premium.
Estimating parameters is always easy. Estimating reminds me of a favorite quotation:

Glendower: I can call the spirits from the vasty deep.
Hotspur: Why, so can I, or so can any man; But will they come, when you do call for them?

Using p/e (or e/p or e/p - rf, depending on whether you're estimating returns or premiums) probably will be more reliable than using a constant premium, but, again, whether it will be sufficiently reliable (especially over the relevant time frame) is not knowable in advance. Different people have differing amounts of faith.
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Re: 4% Rule Conundrum

Post by FactualFran »

HomerJ wrote: Wed Dec 07, 2022 2:58 pm Just one correction... You mean 4% was the minimum.

95% of other starting years, you could have pulled MORE than 4%.
I meant maximum. Going over the maximum, for example using 5%, would have resulted in failure for some starting years. The first paragraph of https://en.wikipedia.org/wiki/William_Bengen is
William P. Bengen is a retired financial adviser who first articulated the 4% withdrawal rate ("Four percent rule") as a rule of thumb for withdrawal rates from retirement savings; it is eponymously known as the "Bengen rule". The rule was later further popularized by the Trinity study (1998), based on the same data and similar analysis. Bengen later called this rate the SAFEMAX rate, for "the maximum 'safe' historical withdrawal rate", and later revised it to 4.5% if tax-free and 4.1% for taxable. In low-inflation economic environments the rate may even be higher.
The calculations done by Bengen showed that an initial withdrawal rate of 4% worked for 100% of the starting years with portfolios of 50% stocks and 75% stocks, and the rest in bonds. Doing the calculations as he did, for a portfolio of 50% stocks, an initial withdrawal rate of 5% would have been successful for 69% of the starting years.
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Re: 4% Rule Conundrum

Post by dbr »

HomerJ wrote: Wed Dec 07, 2022 3:09 pm
marcopolo wrote: Wed Dec 07, 2022 3:04 pm
HomerJ wrote: Wed Dec 07, 2022 2:58 pm
FactualFran wrote: Wed Dec 07, 2022 2:46 pm
educatedguesser wrote: Wed Dec 07, 2022 2:11 pm This is the crux of my confusion / misunderstanding of the statistics I think. 2 portfolios that have the same balance on 12/31/2022 should be able to safely withdraw the same amt for the upcoming year, and the amt to pick would be the higher of the two...the SWR of the person who retired a year earlier with $1M and gets to apply their inflation factor to their higher starting balance per the traditional guideline.

I sense the argument with my logic has something to do with probability theory and the fact that the earlier retiree's portfolio has 1 more year of existence in the withdrawal phase, and that somehow makes his path probabilistically different.
A possible source of confusion is that 4% as the SWR is the maximum that has been successful for all the starting years that were tried. Each starting year has its own SWR, the initial withdrawal rate that results in the portfolio lasting for 30 years.

Using the 50:50 stock:bond portfolio that Bengen used, for 1954 as the starting year the SWR was 7.17%. For 1955 as the starting year, one year later, the SWR was 5.78%. 1954 as the starting year benefited from the high inflation-adjusted return for that year; 1955 as the starting year did not.
Just one correction... You mean 4% was the minimum.

95% of other starting years, you could have pulled MORE than 4%.

That's why 4% is so conservative. It's the worst-case scenario (so far)


Simpsons reference:

Bart (the 10-year kid): This is the worst day of my life!
Homer (trying to be a helpful Dad): No, this is the worst day of your life, SO FAR...
No. It is the maximum.

It is the maximum percentage that worked for all starting years (or whatever success rate you are targeting).
Anything higher would have failed more frequently.
well, I'm confused by the semantics here... 4% is the maximum, but in 1954, you could have taken 7.17%.

Sure sounds like 4% is the minimum of all starting years.

But I'm sure you're right, and I'm thinking of it wrong.
It is the highest withdrawal rate that would not fail in any year. It is clearly wrong to assume that said rate applies to every year. While the not fail in any year rate is about 4%, the range over all years is more like 4%-8%.

As such it does not tabulate the highest rate that would not fail for an investor starting in 1954 or predict for starting in 2022.

A conservative assumption is that the safe rate for 2022 is not less than the worst rate in history so far. A super conservative assumption is that the safe rate for 2022 is less than the worst year so far but it is difficult to decide how much less is reasonable.

An even more difficult problem is to predict the safe rate for any year as a function of all the things that might be known up to that year. It is interesting to explain after the fact what determined the rate for any given year but that might not be useful before the fact as it only sends then problem down the road to predicting what is needed to predict the SWR.
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Re: 4% Rule Conundrum

Post by vineviz »

exodusing wrote: Wed Dec 07, 2022 3:23 pm Using p/e (or e/p or e/p - rf, depending on whether you're estimating returns or premiums) probably will be more reliable than using a constant premium, but, again, whether it will be sufficiently reliable (especially over the relevant time frame) is not knowable in advance. Different people have differing amounts of faith.
This is all kind of beside the point, though. Right?

The reality is we have to make SOME decision about how much to save for retirement and/or SOME decision about how much to withdraw. We can't avoid these decisions no matter HOW reliable our expectations are.

Our best estimates have to be, by definition, sufficient.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: 4% Rule Conundrum

Post by sycamore »

educatedguesser wrote: Wed Dec 07, 2022 10:21 am It would seem to be the case that, for 1st year withdrawals, adding the previous year's inflation factor to the original 4% (or 2% or 3.5% or whatever seems comfortable to you) amount, does no harm, and is just as "safe". Therefore the question -- why isn't THAT the recommendation, and why don't I see that advised anywhere? Why is it just as safe? Because adding the inflation factor to the original base amount still sums to less than the recommended SWR for a person who retired 1 yr previously, but now has the same portfolio balance as the new retiree.
Maybe someone else mentioned this but I'm a bit confused by why you think inflation adjusting is not advised anywhere. AFAIK there's no question about whether to add the inflation factor each year. Both Bengen and the Trinity study did so, and the "4% rule" we talk about assumes one will adjust for inflation. Of course as a practical matter, one may choose not to do so in order to be more conservative.
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educatedguesser
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Re: 4% Rule Conundrum

Post by educatedguesser »

sycamore wrote: Wed Dec 07, 2022 3:48 pm
educatedguesser wrote: Wed Dec 07, 2022 10:21 am It would seem to be the case that, for 1st year withdrawals, adding the previous year's inflation factor to the original 4% (or 2% or 3.5% or whatever seems comfortable to you) amount, does no harm, and is just as "safe". Therefore the question -- why isn't THAT the recommendation, and why don't I see that advised anywhere? Why is it just as safe? Because adding the inflation factor to the original base amount still sums to less than the recommended SWR for a person who retired 1 yr previously, but now has the same portfolio balance as the new retiree.
Maybe someone else mentioned this but I'm a bit confused by why you think inflation adjusting is not advised anywhere. AFAIK there's no question about whether to add the inflation factor each year. Both Bengen and the Trinity study did so, and the "4% rule" we talk about assumes one will adjust for inflation. Of course as a practical matter, one may choose not to do so in order to be more conservative.
Inflation adjustment as proposed by Bengen's 4% rule occurs only in years 2-n. My proposal asks why not go ahead and inflation-adjust the first year's withdrawal amt by the previous year's inflation factor. (viewtopic.php?p=6996073#p6996073)
Last edited by educatedguesser on Wed Dec 07, 2022 4:13 pm, edited 1 time in total.
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neurosphere
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Re: 4% Rule Conundrum

Post by neurosphere »

HomerJ wrote: Wed Dec 07, 2022 3:06 pm
neurosphere wrote: Wed Dec 07, 2022 2:58 pm Great reminder. Person A WILL HAVE (i.e. "had" based on historical data) an SWR of 5%. Person B WILL HAVE ("had") an SWR of 4.5%. But they are each taking 4% because they don't yet know what their SWR was, is, or will to have been but only that 4% is "safe". :D
Exactly... but, in real life, Person A and Person B can adjust their withdrawals, so as their portfolios grows and time goes by (Because they are taking 4%, less than they could)
Yes. They each start with 4% because they don't yet know if they are 4% or 10%. As each year goes by they have more information/certainty and also, options. E.g. if there are big gains in the first few years, perhaps they annuitize a portion (TIPS ladder?) to help establish a firmer floor, etc.
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Re: 4% Rule Conundrum

Post by sycamore »

educatedguesser wrote: Wed Dec 07, 2022 4:08 pm
sycamore wrote: Wed Dec 07, 2022 3:48 pm
educatedguesser wrote: Wed Dec 07, 2022 10:21 am It would seem to be the case that, for 1st year withdrawals, adding the previous year's inflation factor to the original 4% (or 2% or 3.5% or whatever seems comfortable to you) amount, does no harm, and is just as "safe". Therefore the question -- why isn't THAT the recommendation, and why don't I see that advised anywhere? Why is it just as safe? Because adding the inflation factor to the original base amount still sums to less than the recommended SWR for a person who retired 1 yr previously, but now has the same portfolio balance as the new retiree.
Maybe someone else mentioned this but I'm a bit confused by why you think inflation adjusting is not advised anywhere. AFAIK there's no question about whether to add the inflation factor each year. Both Bengen and the Trinity study did so, and the "4% rule" we talk about assumes one will adjust for inflation. Of course as a practical matter, one may choose not to do so in order to be more conservative.
Inflation adjustment as proposed by Bengen's 4% rule occurs only in years 2-n. My proposal asks why not go ahead and inflation-adjust the first year's withdrawal amt by the previous year's inflation factor. (viewtopic.php?p=6996073#p6996073)
Ah! Thank you, I misunderstood.
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Re: 4% Rule Conundrum

Post by Marseille07 »

neurosphere wrote: Wed Dec 07, 2022 4:13 pm Yes. They each start with 4% because they don't yet know if they are 4% or 10%. As each year goes by they have more information/certainty and also, options. E.g. if there are big gains in the first few years, perhaps they annuitize a portion (TIPS ladder?) to help establish a firmer floor, etc.
I don't know if certainty necessarily increases. What if you were a 1905 retiree, walking into 1929 much later in retirement?
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Re: 4% Rule Conundrum

Post by Leesbro63 »

Marseille07 wrote: Wed Dec 07, 2022 4:20 pm
neurosphere wrote: Wed Dec 07, 2022 4:13 pm Yes. They each start with 4% because they don't yet know if they are 4% or 10%. As each year goes by they have more information/certainty and also, options. E.g. if there are big gains in the first few years, perhaps they annuitize a portion (TIPS ladder?) to help establish a firmer floor, etc.
I don't know if certainty necessarily increases. What if you were a 1905 retiree, walking into 1929 much later in retirement?
There was a big run up to 1929. If you started in 1905 and DID NOT “re-retire” ever, you’d probably have been ok. (Just a guess).

EDIT: But you would have felt terrible seeing a lifetime of accumulation go “poof” in old age.
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Re: 4% Rule Conundrum

Post by Marseille07 »

Leesbro63 wrote: Wed Dec 07, 2022 4:23 pm There was a big run up to 1929. If you started in 1905 and DID NOT “re-retire” ever, you’d probably have been ok. (Just a guess).

EDIT: But you would have felt terrible seeing a lifetime of accumulation go “poof” in old age.
Right. And imagine ratcheting-up during the roaring 1920s...
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Re: 4% Rule Conundrum

Post by Leesbro63 »

Marseille07 wrote: Wed Dec 07, 2022 4:26 pm
Leesbro63 wrote: Wed Dec 07, 2022 4:23 pm There was a big run up to 1929. If you started in 1905 and DID NOT “re-retire” ever, you’d probably have been ok. (Just a guess).

EDIT: But you would have felt terrible seeing a lifetime of accumulation go “poof” in old age.
Right. And imagine ratcheting-up during the roaring 1920s...
On the other hand, things go so bad that maybe there was some comfort in having “lived a little” during prior good times.
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Re: 4% Rule Conundrum

Post by Marseille07 »

Leesbro63 wrote: Wed Dec 07, 2022 4:29 pm On the other hand, things go so bad that maybe there was some comfort in having “lived a little” during prior good times.
I thought you found ratcheting-up with a house paid off scary as it sounds? ;-)
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Re: 4% Rule Conundrum

Post by Leesbro63 »

Marseille07 wrote: Wed Dec 07, 2022 4:38 pm
Leesbro63 wrote: Wed Dec 07, 2022 4:29 pm On the other hand, things go so bad that maybe there was some comfort in having “lived a little” during prior good times.
I thought you found ratcheting-up with a house paid off scary as it sounds? ;-)
I do. It’s a conundrum, like the title of this thread. Scared to party-hearty during good times. But wanting to create hearty-party memories to reflect on if times go bad.

(Of course the real answer is “balance” in all times).
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Re: 4% Rule Conundrum

Post by dbr »

Marseille07 wrote: Wed Dec 07, 2022 4:20 pm
neurosphere wrote: Wed Dec 07, 2022 4:13 pm Yes. They each start with 4% because they don't yet know if they are 4% or 10%. As each year goes by they have more information/certainty and also, options. E.g. if there are big gains in the first few years, perhaps they annuitize a portion (TIPS ladder?) to help establish a firmer floor, etc.
I don't know if certainty necessarily increases. What if you were a 1905 retiree, walking into 1929 much later in retirement?
A 1905 retiree starting at $1M, spending $40k, and holding 80/20 ended up 30 years later with about $450k. The real disaster for that retiree was not 1929 but 1916-1918 when his assets dropped from $959K to $542K. 40 years after retirement he still had $243k, his retirement saved in both cases by the huge runup in stocks between 1926 and 1929. Don't forget that 1929-1933 is not the disaster it seems after you allow for how much wealth was gained running up to 1929.

It is really hard to pin down retirement success and failure over 30-40 year periods to any single event along the way. The 1905 retiree 30 year safe withdrawal rate was 4.7%.
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Re: 4% Rule Conundrum

Post by Marseille07 »

dbr wrote: Wed Dec 07, 2022 5:42 pm A 1905 retiree starting at $1M, spending $40k, and holding 80/20 ended up 30 years later with about $450k. The real disaster for that retiree was not 1929 but 1916-1918 when his assets dropped from $959K to $542K. 40 years after retirement he still had $243k, his retirement saved in both cases by the huge runup in stocks between 1926 and 1929. Don't forget that 1929-1933 is not the disaster it seems after you allow for how much wealth was gained running up to 1929.

It is really hard to pin down retirement success and failure over 30-40 year periods to any single event along the way. The 1905 retiree 30 year safe withdrawal rate was 4.7%.
The math worked out OK as you cited. But the 80/20 portfolio going -75% between 1929~1931 would have been very stressful for them, at least that's what I would imagine if I were them.
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Re: 4% Rule Conundrum

Post by dbr »

Marseille07 wrote: Wed Dec 07, 2022 5:46 pm
dbr wrote: Wed Dec 07, 2022 5:42 pm A 1905 retiree starting at $1M, spending $40k, and holding 80/20 ended up 30 years later with about $450k. The real disaster for that retiree was not 1929 but 1916-1918 when his assets dropped from $959K to $542K. 40 years after retirement he still had $243k, his retirement saved in both cases by the huge runup in stocks between 1926 and 1929. Don't forget that 1929-1933 is not the disaster it seems after you allow for how much wealth was gained running up to 1929.

It is really hard to pin down retirement success and failure over 30-40 year periods to any single event along the way. The 1905 retiree 30 year safe withdrawal rate was 4.7%.
The math worked out OK as you cited. But the 80/20 portfolio going -75% between 1929~1931 would be stressful for them, at least that's what I would imagine if I were them.
Yes, but a difference is that data was from engaging data using real dollars. There were three years there of 5% to 10% deflation. But you are right the individual would be stressed. A bigger problem is that the data doesn't show losses that might have been imposed by bankruptcies and defaults and whatever, as that person would not be in a total market index fund but rather in small pile of stocks that could have gone very wrong.

Holding a 40/60 portfolio largely mitigates the 1929 disaster and destroys him in 1917. In the end he still survives having $170k after 30 years but the retirement fails 35 years out. 20/80 just makes it to 29 years but 1916-1920 destroys him. WW I inflation is the killer then.
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Re: 4% Rule Conundrum

Post by MikeWillRetire »

I believe the 4% rule is based on 95% success rate. So one way to look at this conundrum is to say that Jim may end up in the 5% that fail, and Mary may not.
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Re: 4% Rule Conundrum

Post by canadianbacon »

educatedguesser wrote: Wed Dec 07, 2022 4:08 pm Inflation adjustment as proposed by Bengen's 4% rule occurs only in years 2-n. My proposal asks why not go ahead and inflation-adjust the first year's withdrawal amt by the previous year's inflation factor. (viewtopic.php?p=6996073#p6996073)
Then your 4% WR basically becomes whatever the initial inflation adjustment makes it; if inflation was 5% that year, you are now following the 4.2% rule. Adjust your Monte Carlo simulations accordingly.
Bulls make money, bears make money, pigs get slaughtered.
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Re: 4% Rule Conundrum

Post by FactualFran »

educatedguesser wrote: Wed Dec 07, 2022 4:08 pm Inflation adjustment as proposed by Bengen's 4% rule occurs only in years 2-n. My proposal asks why not go ahead and inflation-adjust the first year's withdrawal amt by the previous year's inflation factor. (viewtopic.php?p=6996073#p6996073)
Bengen's approach includes an inflation adjustment to the initial withdrawal amount that is taken at the end of the first year. The following quote is from the appendix of the article Determining Withdrawal Rates Using Historical Data.
Second, changes in portfolio values were computed as follows: assume a portfoIio had an initial value of $1 million, consisting of $500,000 in stocks and $500,000 in Treasuries (50/50. allocation). During the first year according to Ibbotson data, stocks returned ten percent and bonds returned five percent. Therefore, stocks increased in value to $550,000 during the year, and bonds to $525,000, giving a new portfolio value of $1,075,000. The initial withdrawal rate is assumed to be 4 percent, which is multiplied by $1 million to give a preliminary withdrawal amount of $40,000. However, inflation during the year (also according to Ibbotson) was 3 percent, so the withdrawal amount is increased by 3 percent to $41,200. This leaves $1,033,800 in the portfolio. Note that withdrawals are assumed to occur at the end of each calendar year.
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Re: 4% Rule Conundrum

Post by FactualFran »

MikeWillRetire wrote: Wed Dec 07, 2022 6:19 pm I believe the 4% rule is based on 95% success rate. So one way to look at this conundrum is to say that Jim may end up in the 5% that fail, and Mary may not.
The 4% rule as presented by Bengen had a 100% success rate. A later article by other authors, known as the Trinity study, had a 95% success rate. Bengen and the Trinity study both used data from a Stocks, Bonds, Bill, and Inflation Yearbook, but they used different types of bonds.
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Re: 4% Rule Conundrum

Post by tooluser »

Person A only has a 29 year future at the point in time for which Person B has a 30 year future. Thus Person B has more risk and must spend less to account for that. The additional risk (19% based on statistics of the past) is more than one might intuitively think (3.33% due to 1 more year of 30 total) because there is more uncertainty of cumulative market performance in the later years than in the earlier years.
Like good comrades to the utmost of their strength, we shall go on to the end. -- Winston Churchill
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