Bill Bengen, known for deriving the 4% rule sat for a podcast with Sam Dogen, a well known FIRE proponent and blogger. The 4% rule is generally the accepted standard for a safe withdrawal rate in retirement to ensure the assets last for 30 years. Listen to the podcast. Their conversation was very illuminating. Get ready to be very surprised.
Bengen retired as a financial advisor in 2013 but he also considers himself a researcher. The process to do the work to come up with 4% sounded very labor intensive. He basically ran the numbers for someone retiring in 1926 and then each each up into the 1970's. The worst case scenario was the cohort that retired in 1968. The safe withdrawal rate for that group was 4.3%. The way Bengen described it, 1968 was so bad that it skewed the entire study. By his work, there were plenty of 30 year retirement periods in his study where 7% was sustainable (listen to the podcast). There were quite a few years where double digit withdrawals would have been sustainable. I've mentioned before having a couple of clients who've been taking out 10 ish percent, one for 20 years and the other for 18 years. The first client will make it just fine unless something hideously expensive happens but I am less certain about the second client.
The 4% rule (7% rule maybe) has a built in cost of living adjustment that Bengen thinks is very important. I've been dismissive of that part of the rule. The growth of the portfolio takes care of that. If someone has $930,000, they take out $37,200 that year but with asset appreciation the account goes up to $958,000 and they take out $38,320 the following year, there's the inflation bump but Bengen views it differently.
One element that I've touched on before and think is crucial to understanding sustainable withdrawal rates that did not come up is not that 4% necessarily pushes the boundaries of sustainability but it creates some flexibility for the times that something very expensive comes up and needs to be addressed. Not quite a year ago, we had a problem with our septic system that was quite expensive as one example. A client recently told me about a roof problem they have that will be very expensive. These things happen and not maxing out the withdrawal rate can help when these things inevitably come along.
4.3% was considered safe for the worst case scenario as I mentioned. Now, Bengen says the worst case has bumped up to 4.7%, I'm not sure I'm on board with that (listen to the podcast). Where Sam writes about FIRE, he asked Bengen what a safe withdrawal rate would be for someone who retired, planning to need the money to last for 50 years instead of the typical 30 used for planning purposes. He said 4.3% which Sam then worked through to come up with a path to people being able to retire much sooner than they typically plan on. Bengen said that would probably work but added that would be an awfully long time to just sit around watching television.
A little more philosophically, about the idea of retiring early, Sam asked how hard and for how long should you work for money you'll never be able to spend? This was another rhetorical device to further the discussion about FIRE. Have you ever thought of it that way? I never have so I think it is an interesting question.
Bengen at 76 years old is far from sitting around watch television. Among other things is working on a book that is almost complete that sounds like will update the context around the 4% rule. He lives in Arizona coincidentally.
For a little levity, I am pretty close to the midwit on both of these.
And a personal note, Walker Fire needs to replace it's Type 1 engine. We have one board member and two firefighters looking. When they find something, they send it to me and I spend a little time on whether it is worth showing to the head fire mechanic of one of the large departments in the area (they are great about helping us with this sort of thing) and then whether to get to the point of a physical inspection.
I took the above picture in 2017. It is now for sale and today I spent time going through it (virtually) to decide whether to pursue it or not. The answer is no but I feel like there's a lesson in here somewhere.
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3 comments:
Great memes! Too True
:-D
I really like this post. I feel like I may have had some input into in from a prior comment, as I'm concerned the 4% rule was already misused, but I think it speaks to a greater issue: the issue isn't would someone have enough in the past, but will they have enough in the future. All we have is the past as a judge, but we also do not have enough data to rely on that for future information. Two examples:
1. physicists say the baseball season would need to be 256 games to ensure the best team would win (https://www.sciencedaily.com/releases/2007/07/070730111649.htm). We've had 1 year of market returns 100 times - we don't have data yet, we have a small supply of anecdotes (we also don't have anything better).
2. I can't find it now, but I recall a stat that the models showed the chance of 2008 occurring at one in a quadrillion.
One more note is that the forward P/E for the S&P 500 is quite elevated. Again, people often misuse the 4% rule to mean "4% of how much I have right now" rather than "4% of assets when starting retirement at 62-65, and increasing by inflation".
I would also note that the rule is about "will you entirely run out of money", which is not how most people judge their success, and certainly might not be happy with the result when they are 92 years old. I don't have answers to this excellent thought experiment, but I do offer caution in a time when the markets are experiencing "animal spirits" on the way up. Those animals can turn hungry when the other thing happens. ~KHC
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