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Dangers of Relying on the 4% Rule in Early Retirement Scenarios

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  • Dangers of Relying on the 4% Rule in Early Retirement Scenarios

    Many of you are probably familiar with the 4% rule (you can safely withdrawal 4% of your assets in retirement each year and never run out of money). I think about it often as I plan for my own retirement. I wrote a rather lengthy blog post about my thoughts on the 4% rule and how it may conceivably run into trouble, especially in early retirees. The article doesn't dig into the technical aspects of failure as I feel this arena is well represented on the internet, but more the inability or unwillingness to adhere to a 4% withdrawal rate when things go wrong or lifestyle needs/wants change. In my mind health care is the biggest unknown and talking to physicians it is their number one concern as well.

    I'm curious to know what the crowd here thinks about these issues. What sustainable withdrawal rate do you feel comfortable with? How big of a deal is health care in retirement?

    http://thehappyphilosopher.com/dangers-of-relying-on-the-4-rule-in-early-retirement-scenarios/

  • #2
    Excellent article. You weren't kidding when you said it was long! I think there are several excellent points in there I want to reiterate for the TLDR crowd:

    1) 4% rule is great, but you may end up being forced into spending more than 4% by factors way out of your control.

    2) FIRE via extreme monetary efficiency is great (MMM method) but much more susceptible to having the boat capsized by major life events like illness, divorce, etc. because there is less margin for error.

    3) Always, always have a plan B for life. Returning to work doing what you used to do if your FIRE plans go awry isn't always an option. This is especially true for physicians who may be denied credentials/privileges if they are out too long.

    Comment


    • #3
      I read the post, and featured it in today's Sunday Best.

      I don't plan on drawing 4%, but would be quite comfortable with anything under about 3.33%. So $3M would give us $100,000 a year to spend, which is quite a bit higher than our current annual spend.

      Early Retirement Now (Ph.D. Economist) has had a great series on this topic recently -- Parts 1, 2, and 3 here. Part 4 coming soon.

      Comment


      • #4
        I agree that no one should use the 4% rule as drawn up by the Trinity researchers as their actual retirement spending plan. I feel the same way about a 3.33% rule, a 2.5% rule, a 5% rule etc.

        Start in the right ballpark and adjust as you go.
        Helping those who wear the white coat get a fair shake on Wall Street since 2011

        Comment


        • #5
          I read the posting this morning on POFs blog.  It is really good.  I also worry about super firers and affordable healthcare.

          Comment


          • #6




            I agree that no one should use the 4% rule as drawn up by the Trinity researchers as their actual retirement spending plan. I feel the same way about a 3.33% rule, a 2.5% rule, a 5% rule etc.

            Start in the right ballpark and adjust as you go.
            Click to expand...


            This is what I dont like about these blog posts like Pfau and the ones by ERN guy. Its all very data, regression, etc...heavy, which lends credibility but it doesnt account for reality. Has anyone ever looked at what a 95%+ likelihood scenario has one withdrawing based on some static % each year after a few years? Its usually a massive amount of capital that even the most imaginative would have a hard time spending. They also dont seem to account for how people really spend their money in life, more at the beginning and then hardly at all in those latter decades. A lot of the trinity situations had you ending the 30 years with several multiples of your starting wealth, and if you combined that with another couple decades in the lower spending years it would be even larger.

            Yes, no one can just take a single number and extrapolate out crazily, but these super low percentage posts seem to miss a lot of real life obvious points about spending and compounding on those time frames. Especially when their basis is influenced by adding in valuation and backward looking metrics like CAPE and applying them as if it doesnt create worse data than without. Its the kind of move that makes you feel better but is actually worse. Its just curve fitting and too much data that isnt predictive or useful and you get the usual GIGO, but feel pretty strongly about it.

            The truth is as WCI has said many a time before its dynamic, and it doesnt matter at all what your % is if you havent built up a sizeable nest egg in the first place. If you've no savings then even 0 wont last.

            Comment


            • #7
              Most of the early retirees who end up traveling the world are also likely too young to have major medical illnesses that could derail their withdrawal rate plans. Having seen enough upper middle class patients with their savings wiped out with multiple unexpected surgeries makes me skeptical that one should ever rely on a set percentage or number in your bank account. That being said, all we can do is prepare and adapt.

              I've also wondered about taking one's healthcare needs abroad...PoF, perhaps you could start the trend and get all the specialties to move out to New Zealand?  

              Comment


              • #8




                Excellent article. You weren’t kidding when you said it was long! I think there are several excellent points in there I want to reiterate for the TLDR crowd:

                1) 4% rule is great, but you may end up being forced into spending more than 4% by factors way out of your control.

                2) FIRE via extreme monetary efficiency is great (MMM method) but much more susceptible to having the boat capsized by major life events like illness, divorce, etc. because there is less margin for error.

                3) Always, always have a plan B for life. Returning to work doing what you used to do if your FIRE plans go awry isn’t always an option. This is especially true for physicians who may be denied credentials/privileges if they are out too long.
                Click to expand...


                Thanks for the concise summary. It was too long of a post, but every time I came back to edit I found myself adding to it. I finally just had to force myself to hit publish before it became a book!

                Comment


                • #9







                  I agree that no one should use the 4% rule as drawn up by the Trinity researchers as their actual retirement spending plan. I feel the same way about a 3.33% rule, a 2.5% rule, a 5% rule etc.

                  Start in the right ballpark and adjust as you go.
                  Click to expand…


                  This is what I dont like about these blog posts like Pfau and the ones by ERN guy. Its all very data, regression, etc…heavy, which lends credibility but it doesnt account for reality. Has anyone ever looked at what a 95%+ likelihood scenario has one withdrawing based on some static % each year after a few years? Its usually a massive amount of capital that even the most imaginative would have a hard time spending. They also dont seem to account for how people really spend their money in life, more at the beginning and then hardly at all in those latter decades. A lot of the trinity situations had you ending the 30 years with several multiples of your starting wealth, and if you combined that with another couple decades in the lower spending years it would be even larger.

                  Yes, no one can just take a single number and extrapolate out crazily, but these super low percentage posts seem to miss a lot of real life obvious points about spending and compounding on those time frames. Especially when their basis is influenced by adding in valuation and backward looking metrics like CAPE and applying them as if it doesnt create worse data than without. Its the kind of move that makes you feel better but is actually worse. Its just curve fitting and too much data that isnt predictive or useful and you get the usual GIGO, but feel pretty strongly about it.

                  The truth is as WCI has said many a time before its dynamic, and it doesnt matter at all what your % is if you havent built up a sizeable nest egg in the first place. If you’ve no savings then even 0 wont last.
                  Click to expand...


                  That is one of the problems with the 4% or X% rule, the outcomes are so varied just looking at probabilistic market returns. When you add the messiness of life and the black swans of multiple bad things happening at once as they often seem to, trying to determine outcomes becomes maddening. My frustration is that many people focus on the math problem (markets, CAPE ratios, bond yields) but ignore the human problem (illness, lifestyle happiness, divorce, kids, etc). The good news it that anyone even aiming for 4% has a great chance of ending up with more money than they can spend.

                  Comment


                  • #10
                    I echo your concerns about the 4% rule early in retirement.  I plan to target an initial 3% withdrawal rate and then adjust as necessary.  As for health care, this issue is in considerable flux; I plan to watch and wait before making a decision about how much to budget for health care in retirement.  After obtaining financial independence, I could always just go work at REI 20 hours per week for health care benefits, which would be a perfectly acceptable low-stress encore career.

                    Comment


                    • #11




                      I echo your concerns about the 4% rule early in retirement.  I plan to target an initial 3% withdrawal rate and then adjust as necessary.  As for health care, this issue is in considerable flux; I plan to watch and wait before making a decision about how much to budget for health care in retirement.  After obtaining financial independence, I could always just go work at REI 20 hours per week for health care benefits, which would be a perfectly acceptable low-stress encore career.
                      Click to expand...


                      I love the REI idea. That actually looks like a pretty fun job, although I suspect I would end up spending my entire paycheck there if they offered an employee discount!

                      Comment


                      • #12
                        Healthcare and education will have to come down relatively to everything else. Nothing can outstrip inflation or earnings for so long, and it will literally become too much of a burden nationally and will die of its own greed. We should in some intermediate time period see it undergo disinflation and deflation hopefully, though policy can always wreck things for a while.

                        Comment


                        • #13




                          Healthcare and education will have to come down relatively to everything else. Nothing can outstrip inflation or earnings for so long, and it will literally become too much of a burden nationally and will die of its own greed. We should in some intermediate time period see it undergo disinflation and deflation hopefully, though policy can always wreck things for a while.
                          Click to expand...


                          I think education is already trending this way.  More and more colleges and universities are giving free tuition to families under a certain income threshold ($125k/year).

                          http://www.nytimes.com/2017/01/03/nyregion/free-tuition-new-york-colleges-plan.html

                          That article was in the NYT a few days ago.

                          I think there's a reasonable chance that many of the crazy expensive places are going to do this and it'll be the "high" earners paying full price and subsidizing everyone else (basically like Medicaid but for higher education).  I don't make nearly as much as many people in this forum, however I'm pretty sure my kids will not qualify for free tuition anywhere based on my income.  Nor am I rolling in money to the point that I am going to shell out $250k cash in tuition for each of my 3 kids for a fancy undergraduate education.  So my kids won't be attending Harvard unless they get some sort of scholarship.

                          I  will discourage them from taking out many undergraduate loans unless they are obtaining a degree that actually can get them a decent paying job (like engineering or whatever will be the bast in 15-20 years and not English).  If they want a degree that's going to get them a $30k/year job then I will encourage them to go a lower cost school.  I do come from a background/culture that makes me want to contribute to their college/grad school (which differs from many others here who may not feel such an obligation).  My parents helped me significantly, but also persuaded me to make choices that ultimately meant I was able to go to undergrad basically for free due to scholarships, and then was able to use their support to only need relatively small loans when I pursued my medical degree (from a state school).  I strongly disliked some of their advice at the time, but I reaped the benefits when I didn't have 6-figure debt at the end of medical school the way all my friends did.

                          I work now at a place  where someone who went straight through undergrad and medical school without some scholarships/family support would easily have $400k in loans (tuition alone adds up to $400k for those 8 years, so it'll be more than that when other costs are added in).  It's ghastly.
                          An alt-brown look at medicine, money, faith, & family
                          www.RogueDadMD.com

                          Comment


                          • #14


                            I do come from a background/culture that makes me want to contribute to their college/grad school (which differs from many others here who may not feel such an obligation). My parents helped me significantly, but also persuaded me to make choices that ultimately meant I was able to go to undergrad basically for free due to scholarships, and then was able to use their support to only need relatively small loans when I pursued my medical degree (from a state school). I strongly disliked some of their advice at the time, but I reaped the benefits when I didn’t have 6-figure debt at the end of medical school the way all my friends did. I work now at a place where someone who went straight through undergrad and medical school without some scholarships/family support would easily have $400k in loans (tuition alone adds up to $400k for those 8 years, so it’ll be more than that when other costs are added in).
                            Click to expand...


                            I do come from a similar couture where parents bear the cost of children's education, who in turn does the same to their children and also help support the parents in old age.

                            But I also hate being socked with high costs of tuition just because I am a saver who leads a careful life whereas others who squandered away their chances and are in low paying jobs and they get a free ride that my daughter can't. So if the privates do not offer merit based scholarship I will send mine to a state school and reserve the money for a graduate / medical / business school.

                            Comment


                            • #15




                              Healthcare and education will have to come down relatively to everything else. Nothing can outstrip inflation or earnings for so long, and it will literally become too much of a burden nationally and will die of its own greed. We should in some intermediate time period see it undergo disinflation and deflation hopefully, though policy can always wreck things for a while.
                              Click to expand...


                              I agree, but inflation can continue for much longer than expected when something is subsidized and the true cost is hidden, or if there is no viable alternative in the marketplace. Also just because something stops inflating on average doesn't mean it will not inflate for you. There is such a range of health care costs per individual that it doesn't really matter if you are in the top 5% of the curve. My biggest fear financially is that I will develop a chronic expensive health condition that swallows my deductible every year. If I add up my insurance premiums and annual deductible it totally changes my retirement budget.

                              Education costs seem much more manageable as they are temporary, optional and there is a wide range of acceptable alternatives at varying price points in the marketplace. If I retire and the market blows up before the kids are in college then the take out loans or go to a cheaper school...just like I did

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