4% "Safe" Withdrawal Rate?

aldershot

another opinion that the future probably cannot look like the past:

https://www.janus.com/bill-gross-investment-outlook

N1AK

AnotherJoe wrote: »

Its a rule of thumb so I doubt its written in stone anywhere, its not even agreed if it will let the pot last indefinitely or until you die assuming you retire around age 65, but I thought it was a plain old 4% of whatever it is at the start of every year.

It is just a rule of thumb but the rule definitely wasn't based on 4% of whatever's left. If it was then it would be impossible to ever run out, when the whole point of the rate is to represent a level that is unlikely run out in a realistic period.

As a couple of people have already mentioned the 4% figure is more optimistic than a lot of people recommend; I know people like MMM still use it but I've always assumed that's because they want to overstate the case for the concept they've built their brand around (early retirement is achievable and awesome).

jamesd

N1AK wrote: »

As a couple of people have already mentioned the 4% figure is more optimistic than a lot of people recommend; I know people like MMM still use it but I've always assumed that's because they want to overstate the case for the concept they've built their brand around (early retirement is achievable and awesome).

There's a rather better reason to use it or the more modern rules: there were no past performances in which a person using the rule and investing as described would have had no money left at the end of their 30 year planning horizon. The rule worked for the great depression's sustained low returns, two world wars, the cold war and periods of high inflation.

For the Guyton and Klinger approach they modified the time threshold to 40 years and offered a range of alternatives that included 100% past success rate down to 95% (their lowest recommendation) and 90%. Other work since theirs including Guyton's sequence of returns risk taming and keeping a year of income in cash would further increase the available income that would not in any considered past time have produced failure.

aldershot wrote: »

another opinion that the future probably cannot look like the past:

https://www.janus.com/bill-gross-investment-outlook

He considered only the most recent 40 years. The studies for safe withdrawal rates go back more than 100 years and also often include semi-random variations as a further check. Yet even in his very limited time period, he and you didn't choose to mention that there have been some severe testing times for those retiring, notably those retiring just before the market drops at the start of the century, the hardest very recent case, where the cohort is OK. No surprise that he didn't mention that because his context wasn't retirement planning, but here that is the context and his period does include two particularly testing retirement times where people are doing OK if they followed the rules.

In the retirement planning context there are things like Pfau's Safe Withdrawal Rates and Retirement Date Market Conditions which observes both past total success for the 4% rule and that the period since around 1995 has so far been below target for the 4% rule to succeed even though it's not yet been sustained enough to cause trouble.

Three key things to understand about Pfau's work:

1. The below 4% results are so far, not the whole planned horizon
2. It's from before work like Guyton's apparent taming of sequence of returns risk by using cyclically adjusted price/earnings ratios to adjust the investment mix or the finding about a year in cash notably boosting the safe withdrawal rate. Also uses a non-optimal investment mixture without small caps.
3. It's using fixed income level rather than higher paying things like the Guyton-Klinger rules.

So while Pfau shows that the 4% rule isn't looking so good (assuming you believe that cyclically adjusted P/E affects future returns), the things he didn't consider and use would still take it higher. And today you can see that in his own retirement dashboard even with non-optimal investment mixtures he's still at quite high levels of income even though the plain 4% rule method is now calculated by him to be at 2.42%.

The big lesson? The 4% rule isn't a good choice, pick something better. You don't need to cut your income by using a poor rule when better ones are available.

At a minimum use Guyton and Klinger plus Guyton's sequence of return risk taming and a year of planned income in cash.

LXdaddy

jamesd wrote: »

At a minimum use Guyton and Klinger plus Guyton's sequence of return risk taming and a year of planned income in cash.

Agreed .