Is the 4% rule still applicable today?

Triumph13

I would summarise my overall drawdown philosophy as follows:

1. Everyone should have a plan for what to do if markets drop by 50% the day after their retirement.
2. "I'll just rely on the 4% rule to save me" is not a sensible plan.
3. All discussions of the 4% rule always end up as an argument between the  "Look at the numbers, 4% doesn't work!" camp and the "But in the real world no-one would be dumb enough to follow it blindly to the bottom!" camp.

westv

Triumph13 said:

I would summarise my overall drawdown philosophy as follows:

1. Everyone should have a plan for what to do if markets drop by 50% the day after their retirement.
2. "I'll just rely on the 4% rule to save me" is not a sensible plan.
3. All discussions of the 4% rule always end up as an argument between the  "Look at the numbers, 4% doesn't work!" camp and the "But in the real world no-one would be dumb enough to follow it blindly to the bottom!" camp.

The whole point of a sustainable drawdown method is that it's sustainable even if markets do drop 50% the day after you retire.

OldScientist

westv said:

Triumph13 said:

I would summarise my overall drawdown philosophy as follows:

1. Everyone should have a plan for what to do if markets drop by 50% the day after their retirement.
2. "I'll just rely on the 4% rule to save me" is not a sensible plan.
3. All discussions of the 4% rule always end up as an argument between the  "Look at the numbers, 4% doesn't work!" camp and the "But in the real world no-one would be dumb enough to follow it blindly to the bottom!" camp.

The whole point of a sustainable drawdown method is that it's sustainable even if markets do drop 50% the day after you retire.

With constant inflation adjusted withdrawals, at the start of retirement you cannot predict whether they will be sustainable or not since you have no idea of what the SWR for that retirement will actually turn out to be (for the UK, historical SWRs for individual for 30 year retirements ranged from just under 3% to 11% - see graph below, but there is no reason why future SWRs could not be higher or lower than these limits). To be fair, 10 to 15 years after retirement you might be able to project what the SWR will be (see https://portfoliocharts.com/2024/03/15/how-to-harness-the-flowing-nature-of-withdrawal-rate-math/ ) and make some adjustments.



To answer the question in the title of this thread - it is impossible to know in advance whether 4% (or any other choice of starting inflation adjusted withdrawal rate) will last the required amount of time (typically 30 years) or not.

Bostonerimus1

OldScientist said:

Bostonerimus1 said:

The "4% calculations" have been done many times with UK and international stock market returns and the results come with enormous caveats, but for some generic UK type asset allocation the number might be 3.5% , but if you include pension and IFA type fees that might be as low as 2%. Or if you use some variable SWR it might jump up a percent or so overall. This is all highly dependent on the parameters of any model and personal circumstances.

As a rule of thumb, fees reduce the SWR by roughly half the amount of the fee (i.e., fees of 50 bp would reduce the SWR by 25 bp). See https://www.kitces.com/blog/the-impact-of-investment-costs-on-safe-withdrawal-rates/

This is over the life of the drawdown as the fees are assumed to become a smaller percentage of the drawdown as it increases with inflation and the fees fall with falling account balance. Again we have lots of assumptions. At the beginning of drawdown 1% in fees is going to come straight out of the 3.5% you take in income...ie right when sequence of returns risk will have the biggest impact on your portfolio. It's also to be noted that Kices is writing for the financial advisor community so there's some bias in how this result is presented.

seacaitch

While the "4% rule of thumb" (or 3.5% or 3.25% ) should remain useful to accumulators as an indication of the scale of investment/savings pot required to fund a "decent-length" retirement (something which novices might otherwise greatly underestimate!), I suspect that for retirees amortization-based withdrawal (ABW) strategies may come to supplant the various SWR-based methods. Once you recognise that a rigid SWR approach, in the face of ever-changing circumstances, is a bit daft, such that nobody's really going to follow it, then all the various tweaks of SWR can begin to seem like polishing turds, and you'd be better adopting an approach in which continuous adjustment to the task in hand is inherent and not a bolt-on.

Perhaps the strongest active advocate for amortization-based approaches is Ben Matthew:
https://www.linkedin.com/in/bmathecon/

...with detailed articles like this:
https://www.whitecoatinvestor.com/amortization-based-withdrawal-vs-safe-withdrawal-rates

...while developing his comprehensive and well-regarded TPAW tool found here:
https://tpawplanner.com/
https://tpawplanner.com/learn

...plus, he's highly responsive to questions and requests on this dedicated 35-page Bogleheads thread:
https://www.bogleheads.org/forum/viewtopic.php?t=331368


I've been using a "simple" (slightly hardcore) amortization withdrawal approach for over twenty years, and will do so hopefully for a further 30+ years, guided by the PMT spreadsheet function plus current portfolio size (so adjusts to actual mkt performance and past spending), current asset allocation & real return forecasts (so adjusts to anticipated future returns), forecast longevity (so adjusts to the passage of time & health outlook). This makes my spending plan responsive to reality, continually evolving as things change, never running out, nor unintentionally leaving a giant fortune unspent in old age.

For less hardcore and more sophisticated ABW approaches, I'd suggest taking a look at the TPAW Planner mentioned.

Bostonerimus1

OldScientist said:

westv said:

Triumph13 said:

I would summarise my overall drawdown philosophy as follows:

1. Everyone should have a plan for what to do if markets drop by 50% the day after their retirement.
2. "I'll just rely on the 4% rule to save me" is not a sensible plan.
3. All discussions of the 4% rule always end up as an argument between the  "Look at the numbers, 4% doesn't work!" camp and the "But in the real world no-one would be dumb enough to follow it blindly to the bottom!" camp.

The whole point of a sustainable drawdown method is that it's sustainable even if markets do drop 50% the day after you retire.

With constant inflation adjusted withdrawals, at the start of retirement you cannot predict whether they will be sustainable or not since you have no idea of what the SWR for that retirement will actually turn out to be (for the UK, historical SWRs for individual for 30 year retirements ranged from just under 3% to 11% - see graph below, but there is no reason why future SWRs could not be higher or lower than these limits). To be fair, 10 to 15 years after retirement you might be able to project what the SWR will be (see https://portfoliocharts.com/2024/03/15/how-to-harness-the-flowing-nature-of-withdrawal-rate-math/ ) and make some adjustments.



To answer the question in the title of this thread - it is impossible to know in advance whether 4% (or any other choice of starting inflation adjusted withdrawal rate) will last the required amount of time (typically 30 years) or not.

You can certainly pick a SWR that would have worked a large percentage of the time (95% is a popular probability) for all the historical data. From your graph of 30 year starting spans that would be about 3%. But there's many ways of selecting the data to form data sets for analysis. The bigger issues, IMO, are the assumption that future markets will be similar to historical markets and that the retiree will manage their money sensibly and not panic sell when markets are falling by 50%.

Bostonerimus1

seacaitch said:

While the "4% rule of thumb" (or 3.5% or 3.25% ) should remain useful to accumulators as an indication of the scale of investment/savings pot required to fund a "decent-length" retirement (something which novices might otherwise greatly underestimate!), I suspect that for retirees amortization-based withdrawal (ABW) strategies may come to supplant the various SWR-based methods. Once you recognise that a rigid SWR approach, in the face of ever-changing circumstances, is a bit daft, such that nobody's really going to follow it, then all the various tweaks of SWR can begin to seem like polishing turds, and you'd be better adopting an approach in which continuous adjustment to the task in hand is inherent and not a bolt-on.

Perhaps the strongest active advocate for amortization-based approaches is Ben Matthew:
https://www.linkedin.com/in/bmathecon/

...with detailed articles like this:
https://www.whitecoatinvestor.com/amortization-based-withdrawal-vs-safe-withdrawal-rates

...while developing his comprehensive and well-regarded TPAW tool found here:
https://tpawplanner.com/
https://tpawplanner.com/learn

...plus, he's highly responsive to questions and requests on this dedicated 35-page Bogleheads thread:
https://www.bogleheads.org/forum/viewtopic.php?t=331368


I've been using a "simple" (slightly hardcore) amortization withdrawal approach for over twenty years, and will do so hopefully for a further 30+ years, guided by the PMT spreadsheet function plus current portfolio size (so adjusts to actual mkt performance and past spending), current asset allocation & real return forecasts (so adjusts to anticipated future returns), forecast longevity (so adjusts to the passage of time & health outlook). This makes my spending plan responsive to reality, continually evolving as things change, never running out, nor unintentionally leaving a giant fortune unspent in old age.

For less hardcore and more sophisticated ABW approaches, I'd suggest taking a look at the TPAW Planner mentioned.

You might consider constant inflation adjusted withdrawals to be daft, but the initial goal was to support inflation adjusted retirement spending in the face of market volatility. The whole point is to maintain your spending power and so has a very different philosophy to the various adjustable withdrawal approaches. The biggest issue I have with SWR is the assumption that future markets will be similar to past ones. That convinced me to base my retirement income generation on SP, DB pensions and annuities. Everyone's withdrawal phase will be different and so it's essential to understand the options.

westv

Bostonerimus1 said:

seacaitch said:

While the "4% rule of thumb" (or 3.5% or 3.25% ) should remain useful to accumulators as an indication of the scale of investment/savings pot required to fund a "decent-length" retirement (something which novices might otherwise greatly underestimate!), I suspect that for retirees amortization-based withdrawal (ABW) strategies may come to supplant the various SWR-based methods. Once you recognise that a rigid SWR approach, in the face of ever-changing circumstances, is a bit daft, such that nobody's really going to follow it, then all the various tweaks of SWR can begin to seem like polishing turds, and you'd be better adopting an approach in which continuous adjustment to the task in hand is inherent and not a bolt-on.

Perhaps the strongest active advocate for amortization-based approaches is Ben Matthew:
https://www.linkedin.com/in/bmathecon/

...with detailed articles like this:
https://www.whitecoatinvestor.com/amortization-based-withdrawal-vs-safe-withdrawal-rates

...while developing his comprehensive and well-regarded TPAW tool found here:
https://tpawplanner.com/
https://tpawplanner.com/learn

...plus, he's highly responsive to questions and requests on this dedicated 35-page Bogleheads thread:
https://www.bogleheads.org/forum/viewtopic.php?t=331368


I've been using a "simple" (slightly hardcore) amortization withdrawal approach for over twenty years, and will do so hopefully for a further 30+ years, guided by the PMT spreadsheet function plus current portfolio size (so adjusts to actual mkt performance and past spending), current asset allocation & real return forecasts (so adjusts to anticipated future returns), forecast longevity (so adjusts to the passage of time & health outlook). This makes my spending plan responsive to reality, continually evolving as things change, never running out, nor unintentionally leaving a giant fortune unspent in old age.

For less hardcore and more sophisticated ABW approaches, I'd suggest taking a look at the TPAW Planner mentioned.

You might consider constant inflation adjusted withdrawals to be daft, but the initial goal was to support inflation adjusted retirement spending in the face of market volatility. The whole point is to maintain your spending power and so has a very different philosophy to the various adjustable withdrawal approaches. The biggest issue I have with SWR is the assumption that future markets will be similar to past ones. That convinced me to base my retirement income generation on SP, DB pensions and annuities. Everyone's withdrawal phase will be different and so it's essential to understand the options.

Everything to do with pensions can only be based on what we know now. As of today's date, a withdrawal of 3 point whatever % is sustainable. Whether that changes we can't know but withdrawals have to start somewhere.

Johnnyboy11

I have issue with the SWR. Say you'd retired two years ago and invested 100% of your pot in a global equities tracker, which will have risen by around 30% since then. Why wouldn't you just re-baseline your SWR and pretend that your just retired, again?

MeteredOut

Johnnyboy11 said:

I have issue with the SWR. Say you'd retired two years ago and invested 100% of your pot in a global equities tracker, which will have risen by around 30% since then. Why wouldn't you just re-baseline your SWR and pretend that your just retired, again?

If following the "rule" strictly, then no. You'd be ahead of the game in your scenari, but the very reason you don't change it is on the thinking that there could eventually be a downturn that means your 4% would be reducing the pot. So, its a balancing act based on historic data.

But, I suspect many people might do what your suggestion because people are not robots. But, if you kept doing it for the good years, you'd also have to commit doing it for any negative return years.