Understanding 4% rule - Bogleheads.org (2024)

Hi,

Trying to understand 4%, something does not feel logical. So say someone as $1M in 2008 maybe just before GFC. Now say GFC happens over a period of 6 months and the portfolio is down 20% to 800K. So at $1M when the person retired, he/she can withdraw 40K a year for 30 years. But hardly maybe 6 months later, if say another exactly identical person retired he/she can only withdraw 32K and that to for 30 years ? This seems like wrong 2 identical persons with same portfolio value and maybe same age will have different SWRs ?
Something does not add up or seems logical here when we all know markets can be super dynamic and 20-30% can happen pretty quickly.

What am I missing logically ?

It's not a rule, it's historical data. 4% plus inflation was the safest highest withdrawal rate
1. Not guaranteed
2. Most times it's very conservative historically
3. The future may be different than the past

If you have flexibility it should be safe. But it has a lot of problems like lumpy expenses have to be accounted for somehow.

Johm221122 wrote: ↑Mon Feb 12, 2024 7:18 pmIt's not a rule, it's historical data. 4% plus inflation was the safest highest withdrawal rate
1. Not guaranteed
2. Most times it's very conservative historically
3. The future may be different than the past

If you have flexibility it should be safe. But it has a lot of problems like lumpy expenses have to be accounted for somehow.

And sometimes it's 3.5%, or 3.25% or ...

Like most things, the 4% bit is not absolute / perfect and thus why you also see people who prefer things like a variable withdrawal rate to help address the volatility that is inherent to our financial lives. This is also why many people seek to save more money than is technically needed per the 4% rule...an additional margin of safety.

I think the 4% is a great starting point to help identify one's long term goals with supporting historical data...but the ultimate outcome for the period of your financial life you will live in may be better or worse than average.

Thus is life.

What you are describing is known as the "sequence of returns risk" or SORR when drawing down a portfolio.

Many people talk about long term average returns and make simplistic assumptions based on them. This is how you get Dave Ramsey ranting against the 4% rule and declaring "the stock market returns 10-12% a year on average so you can withdraw 8% of your investments per year and be fine!" This rationale drives a lot of people bonkers, including financial advisors and mathematicians and people like yourself who quite reasonably intuits that the strategy sounds very risky.

The 4% rule of thumb was determined based on research that took into account many different 30 year market cycles, including the very worst ones wherein an imaginary retiree would have started drawing down her portfolio just as markets crashed. It's also based on a relatively conservative portfolio of stocks AND bonds which reduces volatility and risk. If you stick to it you're unlikely to run out of money even if you're unlucky enough to retire at the worst statistical time and stocks tank during the first few years while you are withdrawing (to avoid this scenario, many like to have 2 years expenses in cash upon retirement to avoid having to sell stocks early in the plan during a bear market).

The truth is that if you stick to the 4% SWR, in the vast majority of cases you will die with even more money than you started with. You can run simulations on FIREcalc or any retirement projection software or calculator and see this. In the worst cases, you'll narrowly avoid ending up broke after 30 years.

The inconvenient truth is that Dave Ramsey - as bad as his logic is - is generally right about a much higher withdrawal rate being appropriate for most. This is because most people don't do things like increase their distributions for inflation every year. And of course many will die sooner than the worst/best case which typically involves planning to age 95 or 100. And those who do live that long tend to actually spend less - often much less - in the final decade or so. Whereas the SWR research assumes you spend more and more every year from retirement to death. Further, people naturally pull back spending when markets are down even if they don't need to technically speaking. And there's the other matter of most people having a bare bones level of spending ensured by social security and other income streams. Few retire fully on a portfolio of stocks and bonds alone.

The two identical persons in the opening post did not have identical portfolio balances at the start of the withdrawal phase. The 4% initial withdrawal rate is applied to the balance at the start of the withdrawal phase.

Using historical return and inflation data from 1926 to 1992, William Bengen calculated that an initial withdrawal rate 4% resulted in at least 30 years of inflation-adjusted withdrawal amounts for all starting years for portfolios of 50% and 75% stocks. Bengen stated that the portfolio of 50% stocks lasted at least 33 years and the portfolio of 75% stocks lasted at least 32 years. How many years of inflation-adjusted withdrawal were supported varied with the start of the withdrawal phase.

swayswift wrote: ↑Mon Feb 12, 2024 6:56 pmWhat am I missing logically ?

You are not missing anything. This is a consequence of fixed withdrawals that don't not adjust for the portfolio balance. Consider instead variable withdrawals where you adjust withdrawals based on portfolio performance. If you adjust fully to the new portfolio balance and horizon, you won't have the history dependence that the 4% fixed withdrawal methodology has.

You can create variable withdrawals by recalculating SWR withdrawals periodically with a new balance and horizon. Or you can use amortization based withdrawals (ABW) as suggested by the lifecycle model in economics. I compare these two strategies here.

GaryA505 wrote: ↑Mon Feb 12, 2024 7:23 pm

Johm221122 wrote: ↑Mon Feb 12, 2024 7:18 pmIt's not a rule, it's historical data. 4% plus inflation was the safest highest withdrawal rate
1. Not guaranteed
2. Most times it's very conservative historically
3. The future may be different than the past

If you have flexibility it should be safe. But it has a lot of problems like lumpy expenses have to be accounted for somehow.

And sometimes it's 3.5%, or 3.25% or ...

That's where flexibility should make it safe. You should be prepared to cut spending in worse case scenario

In 1995, the 4% Rule was far better than all of the previous unresearched spending suggestions from famous mutual fund managers.

4% SWR was the first of the thoroughly researched spending plans, so salute Bengen for his pioneering work, then use a plan that annually adjusts each year's withdrawal amount to your most recent annual portfolio value. The certainty of spending an inflation buffered amount for 30 years without ever considering your recent portfolio value, sounds attractive but that method has both the risks of overspending and under-spending. My father was in the 1968 cohort who would have gone broke if he had blindly used 4% SWR. The opposite can also be true. A few, lucky 4% SWR retirees would have too much left over if they do not encounter any high inflation years in their retirements.

I use the RMD portfolio spending method of my age-based RMD % of each recent annual portfolio value plus spending dividends and interest, developed by Sun and Webb at Boston College's Center for Retirement Research. Yes, that is slightly variable spending but those variations are small, and as my portfolio value fluctuates during each year, I can see my probable future amount of next year's spending.

heyyou wrote: ↑Mon Feb 12, 2024 11:15 pmIn 1995, the 4% Rule was far better than all of the previous unresearched spending suggestions from famous mutual fund managers.

4% SWR was the first of the thoroughly researched spending plans, so salute Bengen for his pioneering work, then use a plan that annually adjusts each year's withdrawal amount to your most recent annual portfolio value. The certainty of spending an inflation buffered amount for 30 years without ever considering your recent portfolio value, sounds attractive but that method has both the risks of overspending and under-spending. My father was in the 1968 cohort who would have gone broke if he had blindly used 4% SWR. The opposite can also be true. A few, lucky 4% SWR retirees would have too much left over if they do not encounter any high inflation years in their retirements.

I use the RMD portfolio spending method of my age-based RMD % of each recent annual portfolio value plus spending dividends and interest, developed by Sun and Webb at Boston College's Center for Retirement Research. Yes, that is slightly variable spending but those variations are small, and as my portfolio value fluctuates during each year, I can see my probable future amount of next year's spending.

I've been slightly fascinated with this method, as it seems to mitigate (somewhat) the back-loaded nature of a pure RMD strategy. I first thought it might result in too high of a withdrawal rate, but maybe not.

swayswift wrote: ↑Mon Feb 12, 2024 6:56 pmHi,

Trying to understand 4%, something does not feel logical. So say someone as $1M in 2008 maybe just before GFC. Now say GFC happens over a period of 6 months and the portfolio is down 20% to 800K. So at $1M when the person retired, he/she can withdraw 40K a year for 30 years. But hardly maybe 6 months later, if say another exactly identical person retired he/she can only withdraw 32K and that to for 30 years ? This seems like wrong 2 identical persons with same portfolio value and maybe same age will have different SWRs ?
Something does not add up or seems logical here when we all know markets can be super dynamic and 20-30% can happen pretty quickly.

What am I missing logically ?

Did the company's average record of earnings (adjusted for inflation) change over the 6 months?

It would be better to decide the value of a business on its earning potential than upon the price at a point in time.

"In the short term the market is a voting machine,
in the long-term it is a weighing machine. " Ben Graham

swayswift wrote: ↑Mon Feb 12, 2024 6:56 pmHi,

Trying to understand 4%, something does not feel logical. So say someone as $1M in 2008 maybe just before GFC. Now say GFC happens over a period of 6 months and the portfolio is down 20% to 800K. So at $1M when the person retired, he/she can withdraw 40K a year for 30 years. But hardly maybe 6 months later, if say another exactly identical person retired he/she can only withdraw 32K and that to for 30 years ? This seems like wrong 2 identical persons with same portfolio value and maybe same age will have different SWRs ?
Something does not add up or seems logical here when we all know markets can be super dynamic and 20-30% can happen pretty quickly.

What am I missing logically ?

It’s not a RULE but a study done on historical data with certain assumptions.

swayswift wrote: ↑Mon Feb 12, 2024 6:56 pmHi,

Trying to understand 4%, something does not feel logical. So say someone as $1M in 2008 maybe just before GFC. Now say GFC happens over a period of 6 months and the portfolio is down 20% to 800K. So at $1M when the person retired, he/she can withdraw 40K a year for 30 years. But hardly maybe 6 months later, if say another exactly identical person retired he/she can only withdraw 32K and that to for 30 years ? This seems like wrong 2 identical persons with same portfolio value and maybe same age will have different SWRs ?
Something does not add up or seems logical here when we all know markets can be super dynamic and 20-30% can happen pretty quickly.

What am I missing logically ?

You are missing that the amount that can be withdrawn safely for 30 years, taken as a result of tabulating historical experience, varies tremendously from starting year to stating year. 4% is the worst result over all the starting years examined. The safe withdrawal rates for either of your two investors are not 4% and are different from each other.

4% is not a property of any given portfolio starting in any given year. It is a description of the worst case of a tabulation of a bunch of years.

If you want to see the actual data that is being described by this "rule" you can look at the graphical tabulation here:

https://engaging-data.com/visualizing-4-rule/

The model runs hypothetical retirements using the actual market results year by year from starting years of 1871 to present less duration of retirement and traces the out comes. 4% is usually quoted as being the withdrawal rate under which no more than 5% of the historical experiences run out of money. You can look at all those curves and understand how different the outcome is depending on what historical year someone started.

swayswift wrote: ↑Mon Feb 12, 2024 6:56 pmHi,

Trying to understand 4%, something does not feel logical. So say someone as $1M in 2008 maybe just before GFC. Now say GFC happens over a period of 6 months and the portfolio is down 20% to 800K. So at $1M when the person retired, he/she can withdraw 40K a year for 30 years. But hardly maybe 6 months later, if say another exactly identical person retired he/she can only withdraw 32K and that to for 30 years ? This seems like wrong 2 identical persons with same portfolio value and maybe same age will have different SWRs ?
Something does not add up or seems logical here when we all know markets can be super dynamic and 20-30% can happen pretty quickly.

What am I missing logically ?

Not a lot missed. Just keep in mind here that this is all based on what happened in the past. the worst case scenario is not 2007 or 2008 because those were less than 30 years ago, and so those years are not historical scenarios at all, and they're also not bad cases because we know now that the stock market skyrocketed and bond yields fell after. The worst case is you retired in 1966. 4% worked in 1966 and that's the worst case. I admit there are some other interesting cases that are also close to 4%.

NOW THEN: If you want to make the 4% rule into some sort of religion, then yes, that means you can withdraw 4% of whatever the peak amount was ever. Many people have figured that out, and they're not wrong. But the 4% rule is not a rule. It's a reflection of what would have worked in the worst case.

As I understand the process, the retiree has 2 pools of money, one stocks and one bonds. The allocation is up to the individual. The bond money is more stable, historically, so the 4% is pulled from the stable fund. The stock fund is allowed to grow, which it should do over time. Dont forget that bonds also produce income which help minimize what new money is removed from that fund.

Please correct any misinterpretations that I may have.

dbr wrote: ↑Tue Feb 13, 2024 7:31 am

swayswift wrote: ↑Mon Feb 12, 2024 6:56 pmHi,

Trying to understand 4%, something does not feel logical. So say someone as $1M in 2008 maybe just before GFC. Now say GFC happens over a period of 6 months and the portfolio is down 20% to 800K. So at $1M when the person retired, he/she can withdraw 40K a year for 30 years. But hardly maybe 6 months later, if say another exactly identical person retired he/she can only withdraw 32K and that to for 30 years ? This seems like wrong 2 identical persons with same portfolio value and maybe same age will have different SWRs ?
Something does not add up or seems logical here when we all know markets can be super dynamic and 20-30% can happen pretty quickly.

What am I missing logically ?

You are missing that the amount that can be withdrawn safely for 30 years, taken as a result of tabulating historical experience, varies tremendously from starting year to stating year. 4% is the worst result over all the starting years examined. The safe withdrawal rates for either of your two investors are not 4% and are different from each other.

4% is not a property of any given portfolio starting in any given year. It is a description of the worst case of a tabulation of a bunch of years.

If you want to see the actual data that is being described by this "rule" you can look at the graphical tabulation here:

https://engaging-data.com/visualizing-4-rule/

The model runs hypothetical retirements using the actual market results year by year from starting years of 1871 to present less duration of retirement and traces the out comes. 4% is usually quoted as being the withdrawal rate under which no more than 5% of the historical experiences run out of money. You can look at all those curves and understand how different the outcome is depending on what historical year someone started.

I think the important point dbr makes above is depicted clearly in this bar graph from a Michael Kitces article, The Ratcheting Safe Withdrawal Rate – A More Dominant Version Of The 4% Rule?

As far as your specific question swayswift, I don't think you're missing anything. In fact, the hypothetical scenario you described is practically identical to the one in the wiki article on safe withdrawal rates: Limitations of the Trinity study.

However, I think the wiki's response to the scenario described — that the 4% rule was never intended to be applied rigidly or uncritically — largely misses the point.

I gave this matter some thought in 2021, when the market had just gone through a dramatic explosion in value, and I was contemplating the start of portfolio withdrawals. In my view, while willingness to be flexible in the application of the approach might still be important, that doesn't really address the quandary of the investor on the cusp of starting Year 1 withdrawals in the midst of a volatile market.

I came to think that a practical way to address the issue is to consider using a multi-year average for the beginning balance of the 4% rule. Maybe averaging the portfolio balances over the last two or three years before withdrawals start could help to smooth out the kind of volatility you described in the OP.

LaramieWind wrote: ↑Tue Feb 13, 2024 8:29 amAs I understand the process, the retiree has 2 pools of money, one stocks and one bonds. The allocation is up to the individual. The bond money is more stable, historically, so the 4% is pulled from the stable fund. The stock fund is allowed to grow, which it should do over time. Dont forget that bonds also produce income which help minimize what new money is removed from that fund.

Please correct any misinterpretations that I may have.

In the usual study the investor maintains a balanced portfolio of stocks and bonds, meaning that between withdrawals and sales and purchases to rebalance the asset allocation is fixed for the duration.

Varying the asset allocation by jiggering around pools of money is an idea that appeals to some but is difficult to show that it is helpful. In any case that is NOT the assumption in the usual models that were published to show the 4% statistic.

A reading of something like the original Trinity study would be helpful.

https://www.aaii.com/journal/199802/feature.pdf
https://en.wikipedia.org/wiki/Trinity_study

LaramieWind wrote: ↑Tue Feb 13, 2024 10:50 amTo simplify I did not go into any re-balancing scenario. Some do it quarterly, semi-yearly or yearly. Are you implying that you should regularly withdraw from your equity portfolio as part of the 4%?

You should withdrawal to keep your asset allocation at your chosen risk level. Your portfolio should maintain your chosen allocation at all times.

iceport wrote: ↑Tue Feb 13, 2024 8:34 am

dbr wrote: ↑Tue Feb 13, 2024 7:31 am

See Also

VTSAX vs VOO: Comparing Vanguard's Popular Funds - Retire Before Dad

swayswift wrote: ↑Mon Feb 12, 2024 6:56 pmHi,

Trying to understand 4%, something does not feel logical. So say someone as $1M in 2008 maybe just before GFC. Now say GFC happens over a period of 6 months and the portfolio is down 20% to 800K. So at $1M when the person retired, he/she can withdraw 40K a year for 30 years. But hardly maybe 6 months later, if say another exactly identical person retired he/she can only withdraw 32K and that to for 30 years ? This seems like wrong 2 identical persons with same portfolio value and maybe same age will have different SWRs ?
Something does not add up or seems logical here when we all know markets can be super dynamic and 20-30% can happen pretty quickly.

What am I missing logically ?

You are missing that the amount that can be withdrawn safely for 30 years, taken as a result of tabulating historical experience, varies tremendously from starting year to stating year. 4% is the worst result over all the starting years examined. The safe withdrawal rates for either of your two investors are not 4% and are different from each other.

4% is not a property of any given portfolio starting in any given year. It is a description of the worst case of a tabulation of a bunch of years.

If you want to see the actual data that is being described by this "rule" you can look at the graphical tabulation here:

https://engaging-data.com/visualizing-4-rule/

The model runs hypothetical retirements using the actual market results year by year from starting years of 1871 to present less duration of retirement and traces the out comes. 4% is usually quoted as being the withdrawal rate under which no more than 5% of the historical experiences run out of money. You can look at all those curves and understand how different the outcome is depending on what historical year someone started.

I think the important point dbr makes above is depicted clearly in this bar graph from a Michael Kitces article, The Ratcheting Safe Withdrawal Rate – A More Dominant Version Of The 4% Rule?

As far as your specific question swayswift, I don't think you're missing anything. In fact, the hypothetical scenario you described is practically identical to the one in the wiki article on safe withdrawal rates: Limitations of the Trinity study.

However, I think the wiki's response to the scenario described — that the 4% rule was never intended to be applied rigidly or uncritically — largely misses the point.

I gave this matter some thought in 2021, when the market had just gone through a dramatic explosion in value, and I was contemplating the start of portfolio withdrawals. In my view, while willingness to be flexible in the application of the approach might still be important, that doesn't really address the quandary of the investor on the cusp of starting Year 1 withdrawals in the midst of a volatile market.

I came to think that a practical way to address the issue is to consider using a multi-year average for the beginning balance of the 4% rule. Maybe averaging the portfolio balances over the last two or three years before withdrawals start could help to smooth out the kind of volatility you described in the OP.

This chart is probably the most relevant piece of information in this thread, as it shows the large variation in starting SWR over many years. It also illustrates why not many people actually use the "4% rule".

EDIT: Can someone please point Dave Ramsey to this chart?

swayswift wrote: ↑Mon Feb 12, 2024 6:56 pmHi,

Trying to understand 4%, something does not feel logical. So say someone as $1M in 2008 maybe just before GFC. Now say GFC happens over a period of 6 months and the portfolio is down 20% to 800K. So at $1M when the person retired, he/she can withdraw 40K a year for 30 years. But hardly maybe 6 months later, if say another exactly identical person retired he/she can only withdraw 32K and that to for 30 years ? This seems like wrong 2 identical persons with same portfolio value and maybe same age will have different SWRs ?
Something does not add up or seems logical here when we all know markets can be super dynamic and 20-30% can happen pretty quickly.

What am I missing logically ?

The VPW approach (see the Wiki) addressed my concerns. The 4% estimate was great for making FI estimates during accumulation years, but for me was not suitable for the deaccumilulation phase.

swayswift wrote: ↑Mon Feb 12, 2024 6:56 pmHi,

Trying to understand 4%, something does not feel logical. So say someone as $1M in 2008 maybe just before GFC. Now say GFC happens over a period of 6 months and the portfolio is down 20% to 800K. So at $1M when the person retired, he/she can withdraw 40K a year for 30 years. But hardly maybe 6 months later, if say another exactly identical person retired he/she can only withdraw 32K and that to for 30 years ? This seems like wrong 2 identical persons with same portfolio value and maybe same age will have different SWRs ?
Something does not add up or seems logical here when we all know markets can be super dynamic and 20-30% can happen pretty quickly.

What am I missing logically ?

If you are going to place your faith in the 4% rule, then you need to believe both individuals can withdraw an inflation adjusted 40k from their portfolio and still make it for 30 years. Yes it is a higher starting withdrawal rate for the person who retired later.

Jeepergeo wrote: ↑Tue Feb 13, 2024 11:47 am

swayswift wrote: ↑Mon Feb 12, 2024 6:56 pmHi,

Trying to understand 4%, something does not feel logical. So say someone as $1M in 2008 maybe just before GFC. Now say GFC happens over a period of 6 months and the portfolio is down 20% to 800K. So at $1M when the person retired, he/she can withdraw 40K a year for 30 years. But hardly maybe 6 months later, if say another exactly identical person retired he/she can only withdraw 32K and that to for 30 years ? This seems like wrong 2 identical persons with same portfolio value and maybe same age will have different SWRs ?
Something does not add up or seems logical here when we all know markets can be super dynamic and 20-30% can happen pretty quickly.

What am I missing logically ?

The VPW approach (see the Wiki) addressed my concerns. The 4% estimate was great for making FI estimates during accumulation years, but for me was not suitable for the deaccumilulation phase.

Yes, they should change the name from "4% rule" to "4% worst case estimate".

Most of the studies assume all accumulation portfolios end up with the same value and that we can simply compare AA's with an equal retirement balance. The 4% rule is one of these studies. Something like 25x expenses has been able to last 30 years while adjusting for inflation. AA hasn't mattered very much because our stock returns have recovered from poor initial sequences.

If you retire with 25x and your portfolio drops by 20% you have a 20x portfolio with the expectation that you can still spend 1x per year. The 4% rule let's you spend 5% after than 20% downturn. Of course someone else retiring after the downturn still needs 25x expenses to retire according to the 4% rule, so they need a 25x portfolio while you only need 20x. The 4% rule is thus inconsistent with itself, but 25 expenses is a pretty safe goal for retirement historically. The 4% rule doesn't include social security. 10x to 15x expenses may be enough if you work until you are close to receiving social security.

The alternatives aren't much better - you can't predict your future returns within a factor of 2 to 4 so of course you can't really predict what you should spend with much accuracy. Add to it that you don't know how long you will live and most spending methods are no better than simply adjusting a 25x portfolio to your outcome - spend a little more if things look good and spend a little less if they don't. Spending is lumpy. If you spend too much one year try to spend a bit less in future years or try to save up for bigger spending years.

Spending 1x from a 30x portfolio is much safer than changing the AA of your 25x portfolio. If safety is the goal, there is no substitute for portfolio size.

Johm221122 wrote: ↑Tue Feb 13, 2024 10:59 am

LaramieWind wrote: ↑Tue Feb 13, 2024 10:50 amTo simplify I did not go into any re-balancing scenario. Some do it quarterly, semi-yearly or yearly. Are you implying that you should regularly withdraw from your equity portfolio as part of the 4%?

You should withdrawal to keep your asset allocation at your chosen risk level. Your portfolio should maintain your chosen allocation at all times.

So you are re-balancing daily? That makes little sense.

LaramieWind wrote: ↑Tue Feb 13, 2024 8:29 amAs I understand the process, the retiree has 2 pools of money, one stocks and one bonds. The allocation is up to the individual. The bond money is more stable, historically, so the 4% is pulled from the stable fund. The stock fund is allowed to grow, which it should do over time. Dont forget that bonds also produce income which help minimize what new money is removed from that fund.

Please correct any misinterpretations that I may have.

Here is how William Bengen put it in the appendix of "Determining Withdrawal Rates Using Historical Data".

Second, changes in the portfolio values were computed as follows: assume a portfolio had an initial value of $l 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%, 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 was 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.

At the beginning of the second year, the portfolio is rebalanced to the 50/50 allocation; stocks begin the year with a value of $516,900, as do bonds. Assuming a 12-percent rate of return for stocks during the second year, and a 6-percent rate of return for treasuries, stocks grow to $578,928, and bonds grow to $547,914. This gives a new portfolio value of $1,126,842. Last year's withdrawal of $41,200 is increased by the inflation rate of 2 percent during the second year, giving a withdrawal amount of $42,024 and a final portfolio value of $l,084,818. This process is repeated for each succeeding year. Observe that the second year's withdrawal of $42,024 is approximately 4.1 percent of the year's starting portfolio values of $1,033,800.

FactualFran wrote: ↑Tue Feb 13, 2024 12:56 pm

LaramieWind wrote: ↑Tue Feb 13, 2024 8:29 amAs I understand the process, the retiree has 2 pools of money, one stocks and one bonds. The allocation is up to the individual. The bond money is more stable, historically, so the 4% is pulled from the stable fund. The stock fund is allowed to grow, which it should do over time. Dont forget that bonds also produce income which help minimize what new money is removed from that fund.

Please correct any misinterpretations that I may have.

Here is how William Bengen put it in the appendix of "Determining Withdrawal Rates Using Historical Data".

Second, changes in the portfolio values were computed as follows: assume a portfolio had an initial value of $l 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%, 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 was 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.

At the beginning of the second year, the portfolio is rebalanced to the 50/50 allocation; stocks begin the year with a value of $516,900, as do bonds. Assuming a 12-percent rate of return for stocks during the second year, and a 6-percent rate of return for treasuries, stocks grow to $578,928, and bonds grow to $547,914. This gives a new portfolio value of $1,126,842. Last year's withdrawal of $41,200 is increased by the inflation rate of 2 percent during the second year, giving a withdrawal amount of $42,024 and a final portfolio value of $l,084,818. This process is repeated for each succeeding year. Observe that the second year's withdrawal of $42,024 is approximately 4.1 percent of the year's starting portfolio values of $1,033,800.

That is what understood, an annual re-balancing. I also understand some may chose to re-balance at different intervals. I have never heard of anyone maintaining ones AA at

all times

.

LaramieWind wrote: ↑Tue Feb 13, 2024 12:51 pm

Johm221122 wrote: ↑Tue Feb 13, 2024 10:59 am

LaramieWind wrote: ↑Tue Feb 13, 2024 10:50 amTo simplify I did not go into any re-balancing scenario. Some do it quarterly, semi-yearly or yearly. Are you implying that you should regularly withdraw from your equity portfolio as part of the 4%?

You should withdrawal to keep your asset allocation at your chosen risk level. Your portfolio should maintain your chosen allocation at all times.

So you are re-balancing daily? That makes little sense.

No, with your withdrawals and yearly if needed

But not this

historically, so the 4% is pulled from the stable fund.

The 4% study doesn't include stable fund and bond funds are not stable

I'm confused why you ignored

You should withdrawal to keep your asset allocation at your chosen risk level.

swayswift wrote: ↑Mon Feb 12, 2024 6:56 pm
What am I missing logically ?

It's quite simple - you work today for $40k, that is your current income and your current spending is anchored to that, next year your employer decided to cut your salary by 10% and now you only have $36K income, what do you do? adjust your spending needs to your new income or not. That's all there is to portfolio withdrawals, it's an income stream. Whether you are getting a paycheck or that income is coming from your nest egg, they are the same. There is some variability to it.

I don't know how people can build a mental image of getting an exact dollar amount income stream for 30 years after working may be 40 years getting used to a variable income stream, which is what we all are used to in our working lifetime. Some years you get more with 4% withdrawal as your balance go up, this is like getting pay raises, some years you get less, think you didn't get a bonus that year. No matter what live within your means or below that whatever your source of income is and you'll be fine. The confusion is when people try to build mental images with this 4% rule as something magically turned over the day you retired, when all you do is replace one source of income with another.

Elysium wrote: ↑Tue Feb 13, 2024 1:29 pm

swayswift wrote: ↑Mon Feb 12, 2024 6:56 pm
What am I missing logically ?

It's quite simple - you work today for $40k, that is your current income and your current spending is anchored to that, next year your employer decided to cut your salary by 10% and now you only have $36K income, what do you do? adjust your spending needs to your new income or not. That's all there is to portfolio withdrawals, it's an income stream. Whether you are getting a paycheck or that income is coming from your nest egg, they are the same. There is some variability to it.

I don't know how people can build a mental image of getting an exact dollar amount income stream for 30 years after working may be 40 years getting used to a variable income stream, which is what we all are used to in our working lifetime. Some years you get more with 4% withdrawal as your balance go up, this is like getting pay raises, some years you get less, think you didn't get a bonus that year. No matter what live within your means or below that whatever your source of income is and you'll be fine. The confusion is when people try to build mental images with this 4% rule as something magically turned over the day you retired, when all you do is replace one source of income with another.

^^^This is the true "rub" of the matter; employees are trained over their working careers to take what is given to them on a regular basis and live with it - like a rat taking a pellet. There's a big ol' pile of pellets behind a wall just waiting to be dispensed. Rat knows he must work a week, two weeks, a month, then a pellet will fall out of the wall. Rat eats his pellet then goes back to work. If two pellets were to fall out of the wall, Rat would eat both of them; if three pellets, all of them would be eaten- that's Rat nature.

When the employee must become his own employer at retirement, a lever is placed against the wall that dispenses a pellet whenever Rat decides to pull the lever!. If Rat never pulls the lever, he starves. If Rat never stops pulling the lever, he eventually starves. Who has been trained to pull the lever just once per week, two weeks, a month? We all have, our entire working careers. But Rat forgets that what falls from the wall is for expenses; it's not a slot machine. Retirement is not winning the lotto.

heyyou wrote: ↑Mon Feb 12, 2024 11:15 pmIn 1995, the 4% Rule was far better than all of the previous unresearched spending suggestions from famous mutual fund managers.

4% SWR was the first of the thoroughly researched spending plans, so salute Bengen for his pioneering work, then use a plan that annually adjusts each year's withdrawal amount to your most recent annual portfolio value. The certainty of spending an inflation buffered amount for 30 years without ever considering your recent portfolio value, sounds attractive but that method has both the risks of overspending and under-spending. My father was in the 1968 cohort who would have gone broke if he had blindly used 4% SWR. The opposite can also be true. A few, lucky 4% SWR retirees would have too much left over if they do not encounter any high inflation years in their retirements.

I use the RMD portfolio spending method of my age-based RMD % of each recent annual portfolio value plus spending dividends and interest, developed by Sun and Webb at Boston College's Center for Retirement Research. Yes, that is slightly variable spending but those variations are small, and as my portfolio value fluctuates during each year, I can see my probable future amount of next year's spending.

I’m planning on using RMDs as midpoint, use a baseline of 3% and 4% at initial withdrawal rate so I can expect within a reasonable range what level of spending I might be able to sustain in retirement.

Hyperchicken wrote: ↑Tue Feb 13, 2024 2:28 pm... Dang. That rat and pellet thing is pretty depressing.
Guess I better get back to work.

Sometimes I feel like rat in a maze. I'll never get out!

GaryA505 wrote: ↑Tue Feb 13, 2024 2:32 pm

Hyperchicken wrote: ↑Tue Feb 13, 2024 2:28 pm... Dang. That rat and pellet thing is pretty depressing.
Guess I better get back to work.

Sometimes I feel like rat in a maze. I'll never get out!

Pragmatically, the goal is not to get out of the maze, but to solve it and know how to get all the snacks.

If you do get out, you'll be put into another maze, or assigned to some other type of experiment.

Hyperchicken wrote: ↑Tue Feb 13, 2024 2:37 pm

GaryA505 wrote: ↑Tue Feb 13, 2024 2:32 pm

Hyperchicken wrote: ↑Tue Feb 13, 2024 2:28 pm... Dang. That rat and pellet thing is pretty depressing.
Guess I better get back to work.

Sometimes I feel like rat in a maze. I'll never get out!

Pragmatically, the goal is not to get out of the maze, but to solve it and know how to get all the snacks.

If you do get out, you'll be put into another maze, or assigned to some other type of experiment.

HAHA! I was kinda mad and depressed when I wrote the rat thing. Now you've made me feel good about it. Back to my lever now. I keep pushing it but nothing comes out. Maybe I need to run another Monte Carlo. Or read another book. Or go talk to an advisor. Or an analyst.

I'm changing my signature line to that!

skipper wrote: ↑Tue Feb 13, 2024 2:17 pm

Elysium wrote: ↑Tue Feb 13, 2024 1:29 pm

swayswift wrote: ↑Mon Feb 12, 2024 6:56 pm
What am I missing logically ?

It's quite simple - you work today for $40k, that is your current income and your current spending is anchored to that, next year your employer decided to cut your salary by 10% and now you only have $36K income, what do you do? adjust your spending needs to your new income or not. That's all there is to portfolio withdrawals, it's an income stream. Whether you are getting a paycheck or that income is coming from your nest egg, they are the same. There is some variability to it.

I don't know how people can build a mental image of getting an exact dollar amount income stream for 30 years after working may be 40 years getting used to a variable income stream, which is what we all are used to in our working lifetime. Some years you get more with 4% withdrawal as your balance go up, this is like getting pay raises, some years you get less, think you didn't get a bonus that year. No matter what live within your means or below that whatever your source of income is and you'll be fine. The confusion is when people try to build mental images with this 4% rule as something magically turned over the day you retired, when all you do is replace one source of income with another.

^^^This is the true "rub" of the matter; employees are trained over their working careers to take what is given to them on a regular basis and live with it - like a rat taking a pellet. There's a big ol' pile of pellets behind a wall just waiting to be dispensed. Rat knows he must work a week, two weeks, a month, then a pellet will fall out of the wall. Rat eats his pellet then goes back to work. If two pellets were to fall out of the wall, Rat would eat both of them; if three pellets, all of them would be eaten- that's Rat nature.

When the employee must become his own employer at retirement, a lever is placed against the wall that dispenses a pellet whenever Rat decides to pull the lever!. If Rat never pulls the lever, he starves. If Rat never stops pulling the lever, he eventually starves. Who has been trained to pull the lever just once per week, two weeks, a month? We all have, our entire working careers. But Rat forgets that what falls from the wall is for expenses; it's not a slot machine. Retirement is not winning the lotto.

Rat just needs to amortize the pellets using the Total Pellet Amortization and Withdrawal (TPAW) strategy.

Ben Mathew wrote: ↑Tue Feb 13, 2024 9:03 pm

skipper wrote: ↑Tue Feb 13, 2024 2:17 pm

Elysium wrote: ↑Tue Feb 13, 2024 1:29 pm

swayswift wrote: ↑Mon Feb 12, 2024 6:56 pm
What am I missing logically ?

It's quite simple - you work today for $40k, that is your current income and your current spending is anchored to that, next year your employer decided to cut your salary by 10% and now you only have $36K income, what do you do? adjust your spending needs to your new income or not. That's all there is to portfolio withdrawals, it's an income stream. Whether you are getting a paycheck or that income is coming from your nest egg, they are the same. There is some variability to it.

I don't know how people can build a mental image of getting an exact dollar amount income stream for 30 years after working may be 40 years getting used to a variable income stream, which is what we all are used to in our working lifetime. Some years you get more with 4% withdrawal as your balance go up, this is like getting pay raises, some years you get less, think you didn't get a bonus that year. No matter what live within your means or below that whatever your source of income is and you'll be fine. The confusion is when people try to build mental images with this 4% rule as something magically turned over the day you retired, when all you do is replace one source of income with another.

^^^This is the true "rub" of the matter; employees are trained over their working careers to take what is given to them on a regular basis and live with it - like a rat taking a pellet. There's a big ol' pile of pellets behind a wall just waiting to be dispensed. Rat knows he must work a week, two weeks, a month, then a pellet will fall out of the wall. Rat eats his pellet then goes back to work. If two pellets were to fall out of the wall, Rat would eat both of them; if three pellets, all of them would be eaten- that's Rat nature.

When the employee must become his own employer at retirement, a lever is placed against the wall that dispenses a pellet whenever Rat decides to pull the lever!. If Rat never pulls the lever, he starves. If Rat never stops pulling the lever, he eventually starves. Who has been trained to pull the lever just once per week, two weeks, a month? We all have, our entire working careers. But Rat forgets that what falls from the wall is for expenses; it's not a slot machine. Retirement is not winning the lotto.

Rat just needs to amortize the pellets using the Total Pellet Amortization and Withdrawal (TPAW) strategy.

Oh lord! Well played, sir. I expect longinvest to come along any moment now to try stealing some of your thunder.