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  • The 4% rule is not safe for FIRE

    Just came across this simulation.  Thought it would be helpful for any FIRE types here planning on long retirements.  Doesn't look like the 4% rule is necessarily safe - especially if you want money left over to pass on in an estate.  Thoughts from the FIRE community?

    https://earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro/

     

  • #2
    I agree and have linked to most of the articles in ERN's series via The Sunday Best. He recently released the 13th post in the SWR series.

    The lower your stock allocation and the longer your time frame, and the higher the starting valuations (CAPE, etc...) the more likely 4% could fail you. The key is to be flexible and have contingency plans. You could start with a lower withdrawal rate OR ratchet spending down in a market downturn, OR earn income as a retiree, plan on social security helping, etc...

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    • #3




      I agree and have linked to most of the articles in ERN’s series via The Sunday Best. He recently released the 13th post in the SWR series.

      The lower your stock allocation and the longer your time frame, and the higher the starting valuations (CAPE, etc…) the more likely 4% could fail you. The key is to be flexible and have contingency plans. You could start with a lower withdrawal rate OR ratchet spending down in a market downturn, OR earn income as a retiree, plan on social security helping, etc…
      Click to expand...


      All good points.  Enjoyed your interview of big ERN BTW.  :-)

      Comment


      • #4
        I have been increasingly researching the 5% withdrawal rate. That is, withdrawing (up to) 5% of the portfolio annually. I accidentally stumbled across it on portfolio visualizer, when I could not seem to run out of money with the "4% SWR", even up to 10%.

        This is not the same as the Trinity Study SWR, where you withdraw 4% (or whichever) the starting value of your portfolio and increase that number annually with inflation.

        I am referring to withdrawing 5% of the January 1 balance each year (or at least having the ability to do so). Some years that number will be higher than others, but so long as your balance starts high enough, and you can be flexible with your discretionary spending, it seems logical to do so.

        Comment


        • #5




          I have been increasingly researching the 5% withdrawal rate. That is, withdrawing (up to) 5% of the portfolio annually. I accidentally stumbled across it on portfolio visualizer, when I could not seem to run out of money with the “4% SWR”, even up to 10%.

          This is not the same as the Trinity Study SWR, where you withdraw 4% (or whichever) the starting value of your portfolio and increase that number annually with inflation.

          I am referring to withdrawing 5% of the January 1 balance each year (or at least having the ability to do so). Some years that number will be higher than others, but so long as your balance starts high enough, and you can be flexible with your discretionary spending, it seems logical to do so.
          Click to expand...


          Just seems like a lot to pull out.  I'd imagine a 4% SWR would be a bit high for those who plan to start pulling it in their 40s.

          I don't even hold half a million in cash like some people I read about online. ;-)

          Comment


          • #6




            Just came across this simulation.  Thought it would be helpful for any FIRE types here planning on long retirements.  Doesn’t look like the 4% rule is necessarily safe – especially if you want money left over to pass on in an estate.  Thoughts from the FIRE community?

            https://earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro/

             
            Click to expand...


            You might be interested in these earlier threads that contain extensive discussions of this topic: "Your Safe Withdrawal Rate Is Not Safe," and "How much do I need for retirement?"
            Erstwhile Dance Theatre of Dayton performer cum bellhop. Carried (many) bags for a lovely and gracious 59 yo Cyd Charisse. (RIP) Hosted epic company parties after Friday night rehearsals.

            Comment


            • #7
              I too have read ERN s blog on longer retirement withdrawals.  POF has talked about this as well.   It is pretty intuitive to me that if you plan a retirement of 50-60 years you need a lower swr and a higher equity allocation.  He has done the math.  Or you could win powerball.  Also stay flexible.

              Comment


              • #8
                I'm curious if ERN can run simulation on a japanese citizen retiring in 1989 (right before their big crash) if they had lets say 75% of their retirement in the Nekkei (rest lets say international). What is their SWR?

                Not doom and gloom, I'm genuinely interested.

                Comment


                • #9




                  I’m curious if ERN can run simulation on a japanese citizen retiring in 1989 (right before their big crash) if they had lets say 75% of their retirement in the Nekkei (rest lets say international). What is their SWR?

                  Not doom and gloom, I’m genuinely interested.
                  Click to expand...


                  Looks like a 50:50 stock:bond SWR was 0.25% for Japan (apparently between 1900 and 2014) using domestic assets, and 2.2% using a global 50:50 portfolio (with returns measured in local currency): https://www.advisorperspectives.com/articles/2014/03/04/does-international-diversification-improve-safe-withdrawal-rates.
                  Erstwhile Dance Theatre of Dayton performer cum bellhop. Carried (many) bags for a lovely and gracious 59 yo Cyd Charisse. (RIP) Hosted epic company parties after Friday night rehearsals.

                  Comment


                  • #10







                    I’m curious if ERN can run simulation on a japanese citizen retiring in 1989 (right before their big crash) if they had lets say 75% of their retirement in the Nekkei (rest lets say international). What is their SWR?

                    Not doom and gloom, I’m genuinely interested.
                    Click to expand…


                    Looks like a 50:50 stock:bond SWR was 0.25% for Japan (apparently between 1900 and 2014) using domestic assets, and 2.2% using a global 50:50 portfolio (with returns measured in local currency): https://www.advisorperspectives.com/articles/2014/03/04/does-international-diversification-improve-safe-withdrawal-rates.
                    Click to expand...


                    Nice. Sign me up. This would never happen in the USA ...because we are better than everyone?

                    Comment


                    • #11










                      I’m curious if ERN can run simulation on a japanese citizen retiring in 1989 (right before their big crash) if they had lets say 75% of their retirement in the Nekkei (rest lets say international). What is their SWR?

                      Not doom and gloom, I’m genuinely interested.
                      Click to expand…


                      Looks like a 50:50 stock:bond SWR was 0.25% for Japan (apparently between 1900 and 2014) using domestic assets, and 2.2% using a global 50:50 portfolio (with returns measured in local currency): https://www.advisorperspectives.com/articles/2014/03/04/does-international-diversification-improve-safe-withdrawal-rates.
                      Click to expand…


                      Nice. Sign me up. This would never happen in the USA …because we are better than everyone?
                      Click to expand...


                      Different demographics. Luckily we are vastly different there. Also why an anti immigration policy can be very disastrous.

                      Comment


                      • #12







                        I have been increasingly researching the 5% withdrawal rate. That is, withdrawing (up to) 5% of the portfolio annually. I accidentally stumbled across it on portfolio visualizer, when I could not seem to run out of money with the “4% SWR”, even up to 10%.

                        This is not the same as the Trinity Study SWR, where you withdraw 4% (or whichever) the starting value of your portfolio and increase that number annually with inflation.

                        I am referring to withdrawing 5% of the January 1 balance each year (or at least having the ability to do so). Some years that number will be higher than others, but so long as your balance starts high enough, and you can be flexible with your discretionary spending, it seems logical to do so.
                        Click to expand…


                        Just seems like a lot to pull out.  I’d imagine a 4% SWR would be a bit high for those who plan to start pulling it in their 40s.

                        I don’t even hold half a million in cash like some people I read about online. ?
                        Click to expand...


                        It is more about the flexibility than it is the percent number. And it works really well if there is an ample cash cushion.

                        Comment


                        • #13
                          I just read this article over at Mr. Money Mustache and he seems to still feel that the 4% rule is generally safe and has a pretty convincing argument with historical data to back it up.  Worth a read and very relevant to this discussion...

                           

                          http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/

                          Comment


                          • #14




                            I just read this article over at Mr. Money Mustache and he seems to still feel that the 4% rule is generally safe and has a pretty convincing argument with historical data to back it up.  Worth a read and very relevant to this discussion…

                             

                            http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/
                            Click to expand...


                            The essence of his argument is:

                            "The trinity study assumes a retiree will:

                            • never earn any more money through part-time work or self-employment projects

                            • never collect a single dollar from social security or any other pension plan

                            • never adjust spending to account for economic reality like a huge recession

                            • never substitute goods to compensate for inflation or price fluctuation (vacation in a closer place one year during  an oil price spike, or switch to almond milk in the event of a dairy milk embargo).

                            • never collect any inheritance from the passing of parents or other family members

                            • and never do what most old people tend to do according to studies – spend less as they age"


                            But these don't have anything to do with the question. The question is: How much of your portfolio can you spend without depleting it?

                            The question is not: How can I avoid living under a bridge if I deplete my portfolio? (The answer to that question involves going back to work, or reducing annual spend as the portfolio shrinks, etc.)
                            Erstwhile Dance Theatre of Dayton performer cum bellhop. Carried (many) bags for a lovely and gracious 59 yo Cyd Charisse. (RIP) Hosted epic company parties after Friday night rehearsals.

                            Comment


                            • #15







                              I just read this article over at Mr. Money Mustache and he seems to still feel that the 4% rule is generally safe and has a pretty convincing argument with historical data to back it up.  Worth a read and very relevant to this discussion…

                               

                              http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/
                              Click to expand…


                              The essence of his argument is:

                              “The trinity study assumes a retiree will:

                              • never earn any more money through part-time work or self-employment projects

                              • never collect a single dollar from social security or any other pension plan

                              • never adjust spending to account for economic reality like a huge recession

                              • never substitute goods to compensate for inflation or price fluctuation (vacation in a closer place one year during  an oil price spike, or switch to almond milk in the event of a dairy milk embargo).

                              • never collect any inheritance from the passing of parents or other family members

                              • and never do what most old people tend to do according to studies – spend less as they age”


                              But these don’t have anything to do with the question. The question is: How much of your portfolio can you spend without depleting it?

                              The question is not: How can I avoid living under a bridge if I deplete my portfolio? (The answer to that question involves going back to work, or reducing annual spend as the portfolio shrinks, etc.)
                              Click to expand...


                              The question from the OP was "Thoughts from the FIRE community?"  Since he posted a link to an article discussing "safe withdrawal rates" I think that the link I posted is very relevant to this thread.  I don't see the point of your argument?  Where does anyone on this thread ask the question "How much of your portfolio can you spend without depleting it?"  The OP mentioned having some left over to pass on to an estate, but that doesn't mean you can't spend down some of your portfolio.

                              Comment

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