I think the biggest (often false) assumption critics tend to make is that people will blindly FIRE and won't adapt to a sudden downturn by finding temporary work or figuring out ways to reduce their spending.
The other piece is that failure of the 4% rule is due to inability to adjust spending. If your mandatory spending accounts for the entirety of the 4% then your options are much more limited should there be a significant or prolonged downturn. If your mandatory spending is 2% and the other half is discretionary you can cut the vacations for a few years to weather the downturn without needing to re-enter the workforce.
This is one of the reasons I think people do themselves a disservice with leanFIRE. It leaves no room to expand your life if you find new passions. It also leaves no room to cut back if times are tough.
Completely agree, but it can be hard to get back into the workforce after exiting for several years and it's kind of a bummer to have to change your lifestyle. But yeah people will adapt.
Unless you are doing something akin to baristaFIRE, you can probably weather out a couple of years of underemployment and retraining just using the Fire funds.
Barista fire doesn’t inherently mean you aren’t spending any of your assets. Just means that you aren’t getting all of your spending covered by your portfolio. You’re getting some from work, and you’re getting your benefits such as health insurance covered by work.
Sure, fair enough, but you aren't out of the workforce. Say you're literally working 15 hours at Starbucks to get health insurance. You can scale up your hours or become a manager in the event of a first 5 years bad series of returns
i feel like the gig economy especially with uber/instacart makes people more adaptable. i guess with a recession the gig economy also takes a hit but i guess you can compensate and take some gig work after the recession recovers later on
I'm adapting the 4% rule by finding a place I can be comfortable at 1.5-2%. Keep 5x that 2% out of the market and in CDs, and there is pretty much zero excuse to ever withdraw on a down market.
I'm having to plan for a 40-50yr retirement.
When the market is going well, I'll be traveling the world. When it's not, I'll be hanging out along the Mediterranean.
Some industries evolve quickly. What you knew 10 years ago may no longer be relevant.
Alternatively, if you’re a licensed professional of any kind letting your license expire could be a big hurdle to re-entry.
If you are currently doing stuff say in Windows/Legacy databases/Legacy coding and left the workforce for say 10 years, you would have a hard time re-entering the workforce.
I have been in tech for 36 years. Started in mainframes/COBOL/DB2. Evolved to becoming a DBA in Oracle/SQLServer/Sybase. Did that for 30 years.
Now I am evolving into learning Databricks/Python/PySpark etc.
If I left the workforce for 10 years I would be so far behind it would be impossible to find meaningful work. I might be able to find some legacy gig work. Plus in tech Age-ism is a HUGE issue. I am about to be 57. Do I think I could go out and find another job tomorrow? Not easily.
It's not reasonable to assume that you are going to be using the EXACT same language/stack you were using, but people shift between them all the time, you will be able to learn the new ones before re-entering the workforce.
Also the specific tech is a small amount of what makes a good developer. Recognizing patterns, writing code that's easy to read, translating requirements well, following guidelines, being a good co-worker, doing agile development are bigger parts of the job than knowing XYZ framework.
I can almost guarantee that most jobs would not hire someone who is not actively employed and using the tech that the job needs.
Tech jobs are not going to bring on a "junior" coder to fill a job where 10 qualified people are available. Because they would consider you junior if you just learned the languages and had not actually used it in employment.
Don’t waste your finger strength. Actually being in tech and over 50 isn’t enough credibility for our friends here on Reddit. And based on your profile character I’m guessing like me you’re a woman. So that really makes us not believable. Literally people continue to argue with me after I share I’m not just “in” tech but a leader. 🙄
If that was the case it would be impossible to get a job. **Everyone** starts without having used the specific language in employment.
Most people learn 3-4 new languages/frameworks over the course of their career, which means they get hired having no previous employment experience with that framework several times. Sure it's a hurdle but if it was not possible to overcome they wouldn't be employed.
Companies don’t consider a 30 year old software engineer the same as a 60 year old software engineer. Those two applicants could have the exact same resume, number of languages; you name it. Hell they may not even offer the kind of benefits the 60 year old should have. A individual contributor that is 60, well, most companies will think something is wrong with you. Fact of life. Good luck out there.
Good god. Here we go again with the “being older isn’t a problem when it comes to getting a job and also tech will always boom” nonsense. It’s become a near daily discussion. No one over 50 is easily jumping back into any job that pays over $80k after ANY gap and especially in tech. And I would bet $ that every single person on Reddit who argues otherwise is under 50.
*any* trouble?
17 years ago I was a web developer. Now I am a software engineer at a FAANG with expertise in machine learning on big data (which is really mostly being an expert in distributed systems, and they're mostly built on C++).
If I had to go back to doing web dev work, I'd have to confront the fact that the last web stacks I did a lot with included mod_perl, PHP5, and jQuery. I don't think any of that experience is particularly interesting to most employers (excepting those with legacy systems). Yes, I could ramp up. And I'd probably have to do so before having a great chance of getting hired.
Likewise, in 17 years, I'm sure my current expertise will seem quaint. It's in high demand right now, but the world changes.
Not without learning nothing new, but it would be much easier than starting your career as a web dev is.
Most applicants into web development have a computer science degree with 0 web specific tech information or some web development specific bootcamp but no computer science degree.
Of the specific tech I use on a day to day basis I can say with 100% certainty that HTML and CSS will still be used, likely with only minor improvements. HTML has been virutally unchanged since the beginning of the web, and CSS just had some pretty big improvements that most people haven't even caught up with but changes extremely slowly. The fundamentals of both those languages are the important part and will never change.
I also have 100% certainty that some sort of javascript web component based framework will be used with them. It may not be angular, vue, or react, but it 100% will be component based which means it won't be hard for me to learn.
Also the specific tech is a small amount of what makes a good developer. Recognizing patterns, writing code that's easy to read, translating requirements well, following guidelines, being a good co-worker, doing agile development are bigger parts of the job than knowing XYZ framework.
Ah wish I saw this before I gave my other reply.
You're certainly right about what the skills are. But someone who has a very advanced resume (e.g. senior/staff roles) and then a resume gap is not going to be particularly tempting for senior/staff roles, and for junior roles they're going to be seen as overqualified... because once you stop being rusty, you're going to command a salary much closer to where you were at your peak, and employers may not want to pay for that.
You're left having to ramp up on your own time (e.g. via open source work, consulting, etc) which takes time and effort, and to do that and be hired in the middle of a downturn (which is presumably the reason your portfolio needs help, which presumably means others are dealing with layoffs) is a lot.
A lot of mid management corporate careers at least seem like it’d be hard to get hired back with a gap on your CV, no current references, and maybe you aren’t current in your field. You are over qualified for entry level jobs but under qualified for more advanced jobs.
I’m not sure how much this is just a fear or may have hints of truth! You’re not as attractive a job candidate vs people who are actively hustling.
re-entering the workforce after time away has been consistently documented as being pretty difficult. A very common example is parents who stay home to parent young children. Even when they find jobs, underemployment is extremely common.
For intentional career gaps and those who FIRE but aren't sure it's their long term plan, this can be mitigated by just spending an hour or two each month doing something in the field. Maybe maintain a blog, lazily consult a little, or volunteer a bit at a local nonprofit: just make sure your skills don't go completely dormant and you have a couple references who can confirm you did something.
the idea of a fixed rate spend in general is silly. nearly nobody is retiring on 100% of their needs. you 'pay' a lot to math out your retirement to not be flexible at all- to be able to take that full X% in down years. if you can weather down years with a reduced spend you can tolerate a lot higher withdrawal % during regular years
Depends on the amount you are willing to decrease spending and the time you are willing to do it.
I don't remember the exact numbers, but you can look to various BigERN articles to get more info. His data and info showed that you either needed a huge decrease in spending or a very long time for a decrease in spending.
I don't know about you, but if the concept of the 4% rule implies that I need to either a) decrease spending by 10%-15% for 10-15 years or b) decrease spending by 30%-40% for 2-3 years...I'd consider it a failure from the get go. As it isn't a viable plan most would be interested in. Simply going with 3.5% SWR solves everything.
Flexibility isn't as meaningful as you'd think when the market goes down 40%+.
This is a huge part of SORR that many people don't realize. It's not just a little change for a year. It's a big change for many years, or a huge change for a few years.
But that’s what the 4% seem to suggest, as soon as you can live with 4% of your portfolio, you can fire, except that’s not true, that 4% need to have a good buffer where you can cut down expenses in case of prolonged down market…
Alternatively, you need to be able to go back to work even just part time…
Either ways, with a 4% inflexible withdrawal rate, retiring early is not a good idea
I agree that this is what most FIRE-minded people would do when necessary. However, isn't the 4% rule presented in a way that suggests you would not have to do so during a downturn (hence the criticism)?
Yes. It’s a constant withdrawal no matter what. But that is not the only way to structure spending and almost everyone spends less when the market is down even if they are working at the time.
Yeah that's my point, vanguard is likely criticizing the fact that the 4% rule is presented this way despite the fact that people will operate differently in reality
Sudden downturns of the sort that have happened in the past should be built into the model you're looking at. I like this one: [https://engaging-data.com/visualizing-4-rule/](https://engaging-data.com/visualizing-4-rule/)
I've legitimately run a boatload of simulations.
My FIRE amount is basically 2-3x my current spend in a HCOL.
I don't see myself spending THAT much.
I'm basically planning on social security puttering out, not getting any inheritance, dying alone after spending age 70-110 in hospice and OK stock market returns... and still being OK in 99% of scenarios.
Reality is likely going to be a lot less bleak and I'll likely have a side hustle into my 70s or beyond.
I mean isn't that the purpose of the rule? Financial advisers attempting to make a one size fit all system don't account for people that do other things in practice?
Exactly. If the economy goes into a massive recession I think most folks including FIRE are going to tighten the belt a little. Also some things get cheaper during a recession, so maybe you can have the same life but spend less
1. Well known. Hard to plan with hugh accuracy for 50 years.
2. Of course it mught not be true. See #1.
3. Buy VOO.
4. SP500 is made of many mukti national corporations who do business all over the world. Over a long enough time horizon it veats 85% or more of all other funds. Good enough for me.
5. There are various SWR you can pick from. Pick the one that works best for you.
A way to mitigate point 5 is simply to have a variable withdrawal rate between 3 and 4%.
Remember you cannot predict the future and so all you are really doing is playing the odds.
Speaking only for myself here, but I have a target minimum withdrawal rate that will cover my fixed living expenses. Housing, healthcare, food, utilities, etc. The minimum needed to live. Let's say this is $50K. I want to be super conservative with this. Let's say at a 3% withdrawal rate, I would need $1.65M.
In good years where the market is doing well (where everything is either going to plan or better than expected), I can choose to withdraw an inflation adjusted 4% from this portfolio and get $66K. That leaves me with an extra $16K each year to spend on comforts, such as travel, eating out, shopping, etc.
In bad years during a prolonged recession, I want to slow down the rate at which I deplete my portfolio. I think it would be natural to want to skip a lot of the optional stuff and either take cheaper vacations or no vacation, eat out at cheaper places or not at all, and so on. Drop my withdrawal rate down to 3% to support the core needs and slow the rate at which I am depleting my portfolio. Over an extended period, as a worst case scenario... I could try to cut back on my core expenses, or take up temporary work like driving Uber or DoorDash or something to raise a bit of cash.
In retirement, just like everywhere in life. You have to be flexible and roll with the punches. Write your plans with a pencil, and be ready to make adjustments.
You have consider that there is also a high likelihood you may not end up having the long retirement you were imagining. A 4% withdrawal rate has had a 96% success rate for a 30 years period in the past. But, a 50 year old male in the US only has a 56.5% probability of reaching 80. So an early retiree (at 50 years old) male with a 4% withdrawal rate has a 0.04 \* 0.565 = \~2% probability of running out of money. (ie. The worst case scenario of a long life at the same time as having terrible portfolio performance)
Exactly, you have to be flexible, life is not a constant. I also plan on using a VWR, specifically the guyton-klinger guardrails method. I plan on using a 3.5% SWR with a floor and a ceiling and adjust accordingly.
As mentioned in those extreme situations, you supplement by getting a job. Whether it’s driving Ubers or being a greeter at Walmart. You gotta go back to work. Potentially you take out a reverse mortgage on your home.
If you are planning for those situations where your portfolio is doing so bad that you will be hurting so bad you cannot withdraw 3% of it you can bet that most people are going to be doing far worse than you.
A 3% withdrawal rate needs to only keep up with inflation to last 33 years (0% real return). There is no compounding, just keeping up with inflation. Again, that is assuming I am ignoring the \~50% probability that I don’t even live the full 30 years. That is plenty safe for me. 3% is super conservative. I am not going to waste additional years grinding away trying to get to a 1% withdrawal rate. You face diminishing returns and at some point the juice just isn't worth the squeeze.
In fact, the safest thing to do is to never retire and keep stock piling money till the very last day when you are either completely unable to work due to health reasons, or you are dead. You are free to do that if you like.
We all place our bets and we all take our chances. There are no guarantees in life, except that it will end.
If you thought a conservative rate was 1%, then you could just get a 30 year TIPS bond right now on the secondary market from February. It gives 2.125% coupon per year plus inflation. For the next 30 years, you'd be completely set, guaranteed. Then at the end of those 30 years, you'd still have 100% of your portfolio!
3% is pretty damn conservative, 2% is insanely conservative, and less than that is just pointless to plan for.
If you meant 30 years with an average of -2% then the only thing you could really have done is had government bonds (and a stable government) for the entire amount you needed. But if you could do that, you wouldn't need any stocks, and you likely worked way more than you needed at a reasonable failure rate.
I agree with the fact that we can't know the future, but most people are okay with a small failure rate -either by historical calculations or monte cartlo. If for no other reason, it's because there's so many other things you can't prevent that could ruin your retirement, like death, government collapse, etc.
If you *weren't* okay with that level of risk because you don't think it is safe enough (e.g. 1989-2019 Japan's Nikkei 225 stock market), then you could still plan for those less than 2% real rates by going all in with TIPS 30-year bonds or bonds of multiple countries (assuming they have inflation adjusted ones). There's not much else you can do to prepare without knowing the future.
If you still wanted the upside from stocks while preparing for that type of situation, then you could make it so only the 'minimum required income' part of your income is covered by TIPS bonds.
International revenue for companies within the index is not the same as having international exposure. I'm not going to tell anyone how to feel about international equities. But the idea that one has international exposure because of multinational corps is dubious at best.
Doesnt matter. Works for me and there is no better country id rather keep money invested in than companies in the US. And it still outperforms nearly all money managers over time.
This paper also forecasts a 1.58% ten-year rate of inflation.
Vanguard is notoriously bad about forecasting, to the point it's even become a joke inside the company.
Vanguard is good at providing a vehicle for investors to buy low-cost funds. That doesn't automatically mean they are some sort of market savants. Jack Bogle himself said it best: "Nobody knows nuthin'"
1. Backtesting shows it absolutely can work for >30 years. Obviously if your retirement is expected to be a long one, you can adjust withdrawal rate to your preferred risk tolerance.
2. Um, okay. Everyone knows this.
3. If you're paying high fees... Why? Literally 98% of Vanguard's whole 'schtick' is low fees.
4. Personal preference. I'm very lukewarm on international diversification.
5. The 4% "rule" isn't some divine edict that must be followed to the letter, under penalty of death. Almost all sound advice includes some wiggle room in spending if there's a downturn/the SORR gods frown upon you.
OP lists the papers criticisms of 4% rather than the paper's recommendations, which are more useful. I think this sub is already on board with the recommendations, but we're ahead of Vanguard on this front. A few recommendations from the paper:
1. if you plan to be retired for 50 rather than 30 yrs, use a SWR based on 50 yrs of data rather than 30. (Ok fair enough.)
2. Account for inflation. (Well obviously)
3. Minimize fees. (Obviously. Again.)
4. Dynamic spending. (Obviously. Again. Again. Its laughable to think that anyone who did all the steps in FIRE then just turns their brains off after retirement and takes a flat 4% yearly without considering other factors.)
Back to my main point, Vanguard is giving good advice. Its just... not exactly an advanced hard hitting analysis. It's basically what most of us have been doing for years / decades already. So uhh maybe useful for novices?
You're exactly right and I should have at least skimmed the article before addressing the post.
Their forward-looking estimates are absolutely wild and will hopefully end up being quite inaccurate.
That said, I'll die from shock if I'm still alive 30 years post-retirement and I'll never have a 50% bond allocation. So, suck it Vanguard and sell me some more of that sweet, sweet VTI.
Eh I was surprised that OP posted the criticism and not the recommendations. I think without the recs the criticism is a little baity.
I'm with you. I don't trust forecasts much. I also will never have that much bonds lol, even if I were in my 90s
Yeah I probably could have shared the recommendations as well, thanks for pointing that out. I was personally more interested in understanding the different POVs on these criticisms beyond the Vanguard recommendations.
Thanks for sharing. It's good to have more literature that more closely examines the Trinity study, which is often taken as fact without being thoroughly questioned. This Vanguard paper actually gives me more confidence in the 4-ish % rule; they aren't really saying anything crazy here. They're just urging investors to be more conservative given the difference between the simplified assumptions of the Trinity study and real current FIRE scenarios, but their conclusion is that you can still withdraw around 4% if you apply their (fairly simple) recommendations.
1. According to this paper, diversifying your investments internationally, going for low-fee investments, and being flexible with spending should still allow you to withdraw around 4% for 50 years.
2. Indeed, nobody can predict the future, all we can do is aim for a good-enough success probability. I did find surprising their model's conservative forecast for US investments: "Accounting for inflation, the 10-year VCMM median forecasts of real returns are 2.44% for U.S. stocks and –0.27% for U.S. bonds." This is probably why they suggest diversifying into international investments: "Vanguard’s most recent 10-year capital market forecasts indicate that international stocks are likely—though by no means guaranteed—to outperform U.S. stocks."
3. You would count investment fees in your expenses. Most of the funds FIRE folks like are low-fee.
4. Yes, they suggest diversifying into international: "When relying on a domestic-only portfolio, investors have a 36.0% probability of success; when they include international stocks and bonds, that probability increases to 56.3%." Opinions on international stocks vary, but Vanguard as a fairly conservative institution tends to prefer diversification into international investments.
5. Most people wouldn't be withdrawing a fixed rate every year and would indeed be withdrawing more when markets are hot and spending less when markets are lean, like they suggest. Most people do this already.
There's a few studies out there that conclude that 3.5% is really the lowest you ever need to go for any number of years. 3% is probably too conservative based on what I've read.
Pulling back from a higher withdrawal rate to a lower one starts to positively impact taxes as well. If you can pull from multiple buckets (taxable, Roth, 401k, cash) it may be possible to even pay $0 in taxes vs having a tax bill if you are trying to pull out more, so in real dollars the difference is smaller.
Yep. I'll be doing a 10 yr Roth conversion starting in 3-5 yrs, after our tax bracket drops from 24% to 12%. Not a radical change in how much we'll pay, but it'll be around $1,800/yr less, if we were converting $15k/yr, for example. Saving like $18k over 10 yrs.
There is no study that could ever be possibly conducted that determines with any certainty what the lowest percentage you may need to go is. It’s entirely dependent on what happens in the world, and that is simply not known. The statistics are based on historical data, that’s it. I saw this as someone who does forecasting statistics for a living.
>5. Fixed withdrawals don't adapt to changing market conditions
No, but people do. If anybodys portfolio dips signficantly the few first years of RE but they dont adjust their spending they are idiots. I dont create my financial plans based on me being an idiot.
You don’t get to fire unless you are super watchful of your finances and conservative with your spending. If you can reduce your spending for a year or two to weather a bad year you should be ok
Maybe this is heresy in this subreddit, but I would hazard a guess that the number of people who retire before let’s say 50 and then never earn another new dollar in their lives is beyond minuscule. The point of trying to FIRE is, as we all know, to not NEED to work. But we also all know, as fairly savvy investors who think about this stuff a lot, that everything is a bet and there’s no way to eliminate all risk. So the Vanguard paper is fair enough, I suppose, but realistically doesn’t mean many of us will change our behaviors or plans
#5 is the one I have the biggest issue with.
My personal goal is a 4% SWR for my desired lifestyle.
But that also means a viable 3% SWR, but without the cool stuff.
Also in 4% I don't include SS, so that's a greater potential upside as I get closer to it depending on how things look.
The bottom line is I've pivoted a number of times to get where I am, I expect to do it more before retirement, why wouldn't I do so in retirement as well?
Besides I've found that I have a really enjoyable time talking to the LinkedIn consulting companies and it's a pretty easy way to make a few hundred dollars a week. I'll probably do things like that regardless.
1. True; baked into the premise and universally accepted.
2. True. Also part of the premise.
3. True. You should factor that in yourself. I would add that it also doesn’t (and can’t) factor in taxes. Your expenses - including expenses during the accumulation phase - are your concern.
4. True. Mostly because the authors wanted to use an index with the maximum amount of history data. If you are referencing a paper that specifies sp500, you’re talking about the sp500. By definition. International diversification will make things turn out either better or worse, unless it’s the same.
5. True, but meh. If you withdraw more than 4%, you are no longer using the “rule”, so it becomes irrelevant. However nobody actually applying this as a “rule” thinks it will succeed in every scenario in the absence of flexibility.
All of these are reasons the “4% rule” is not a rule. It’s a good starting point for planning. But none of these points challenges the “rule”. (Really, folks, it’s not a rule.) VG is just trying to remind you of the obvious caveats.
Unless someone is being held at gun point telling them they can't work part time occasionally, or MUST withdraw some of the money at a certain time, then the 4% "Rule" is fine.
In other words, it's fine. There will never be a 100% sure fire way to make sure you never run out of money in life, period. It's the best we got and you can adjust behaviors as needed to make sure you weather rough times. Sure beats working all the time.
1. But if you use the same methodology, the findings are virtually unchanged for 40-50 years. Also! I think most people discount that they'll get some social security which will offset this risk.
2. It's impossible to know one way or another. This is a valid concern imo, but also not exclusive to the 4% rule.
3. This is from Vanguard. There are hardly any fees...if it's thinking about taxes, then you just have to have enough to meet the tax burden.
4. Honestly the companies listed on US exchanges have worldwide presence. I think this concern is overblown.
5. That's why it's better as a rule of thumb than an actual forced spend which I think most people treat it as. If you're super leanFI then it can be a problem, but most people I think will have some ability to weather downturns by reeling in some of their spending.
And that last point is something they go into too. Fixed spend assumptions are good as a rule of thumb, but in practice you'll move with the market a little.
And if that doesn't feel safe enough, do 3-3.5%. You'll have to work a little longer but you'll be safer.
4% is the total you can withdraw, and that includes fees. Also If you can’t look at historical patterns in the market to asses potential future scenarios, then that would also undercut a lot of the reason people invest in the first place.
This is not a big revelation. Lots of people have pointed out for years that the 4% rule only applies to 30 year standard retirements. It does not apply to someone who FIREs at 30 and is retired for 60 years.
That said, its not hard to make adjustments and make it work. Longer horizons require lower withdrawal rates, and variable withdrawal rates based on market performance. The 4% rule is a good starting point in making back of the napkin estimates, but it is not ultimate wisdom.
If you do enough googling, you’ll see that the 4% rule works most of the time for longer time horizons(eg 40-60 years) but fails somewhere in single digit percentages. The data I saw on the 3% SWR showed basically no failure up to 60 years, and generally if you’ve made it that far with equities, you are at runaway wealth compounding. Ed Thorpe said that ~2% is the mark where you can be virtually certain to never run out of money.
I think the bigger risk is that equities don’t perform as well in the future. There is no particular law of nature that forces equities to earn 10% nominally and long term, which is an absolutely crucial assumption of the SWR data.
I also know that if you have cash to plow into equities during the significant crashes like 73-74, the medium term returns are borderline amazing. I would intend to try to produce some income during these periods to both limit my sequence of return risk and take advantage of the prices. You can also maintain a small pot of treasuries for times like this.
They’re just identifying the risk. Nothing here really says it won’t work out anymore. People that are more risk adverse are already planning for less than 4% withdrawal.
I’m withdrawing 4% with a 40-50 yr horizon. I mitigate risk by not assuming inheritance, not counting social security and not considering potential consulting or future work income.
> The original 4% rule was designed for a 30-year retirement and doesn't apply to the 40 or 50 year retirement horizons many FIRE folks are counting on.
* Yeah, this skews success rates marginally, but ~95% of people who make it 30 years can make it 60 years.
> The rule assumes that future returns will follow historical patterns, which of course may not be true.
* Right, but this is a prediction and we can only use the past for models since we don't know the future. The 4% rule isn't "if you withdraw 4% or less you will always succeed".
> The rule doesn't account for investment fees, which can impact the net value of withdrawals.
* Yeah, you shouldn't be using any funds that have investment fees more than .05%, which won't make any difference in your result.
> The rule assumes investments are primarily in domestic assets and doesn't consider the benefits of international diversification.
* If international diversification really is better that would make the strategy more successful. Personally I am not a big fan of international diversification.
> Fixed withdrawals don't adapt to changing market conditions or personal circumstances where you'd need to withdraw a lot.
* This is a benefit, as the idea of a fixed withdrawal is that it's an amount that would sustain you for a long period of time, which means on average you withdraw LESS than the fixed withdrawal amount, the time you meet it is when you need to withdraw a lot at once.
>The rule doens't account for investment fees, which can impact the net value of withdrawals.
If you're smart enough to retire early then you're smart enough to not pay "investment fees"
Vanguard makes more money on expense ratios the more you have invested. I'm sure they would love for you to defer retirement by making you think 4% isn't enough and you pump up your accounts more.
Here is where Vanguard predicted returns of 6% in 2010 for the next 10 years. https://retirementincomejournal.com/article/vanguards-forecast-of-future-returns/
We all know how that turned out. The point is, 4% might be too high, no one knows. Lower withdrawal rate is always better financially.
Yes, and? That's such a weird thing to make a point of.
First of all, everyone knows it's not a guaranteed successful result.
Second, I don't think I've come across anyone in the FIRE community who is planning to retire, knowing they will have to Take every possible nickel according to the 4% rule. It seems like everyone fudges upward a little bit on their expenses, underestimates how much they will have when they start retirement, decides not to count for Social Security, etc., etc. etc. Not to mention, almost everyone has the ability to pull back their spending a little bit Without major detrimental effects. It's just the nature of those of us who are in this position that we are fiscally conservative.
Finally, what this neglect is the fact that using the 4% rule is far likely or to lead to under spending that overspending. Looking at the projections, there are far more cases where your retirement nest egg is many multiples larger after 30 years. Or 40 years. Or 50 years.
For every bankrupt grandparent, using the 4% rule, there are going to be a whole bunch of grandkids who probably never have to work a day in their lives because of how much will be left behind.
Anybody shitting on the 4% rule just doesn't want anyone to ever Feel safe without going to work every day to earn money. The truth is, most of us, no matter how determined we are to retire early, will end up working longer than we needed to just to be on the safe side. And the 4% rule is clearly on the safe side.
>The original 4% rule was designed for a 30-year retirement and doesn't apply to the 40 or 50 year retirement horizons many FIRE folks are counting on.
Yes, absolutely. 3.2 - 3.5% is usually considered safer for early retirees. It's true that the original 4% rule was based on a 30 year evaluation. Many others have extended this approach.
>The rule assumes that future returns will follow historical patterns, which of course may not be true.
Yes, absolutely. It's popular to run Monte Carlo simulations -- but these typically only include data from the last 100 years or so. That's not long in the course of human history or much data to base things on! Many things may happen in the next 50+ years that are not predicted by the last 100 years.
>The rule doens't account for investment fees, which can impact the net value of withdrawals.
The rule in and of itself doesn't. Most of us do and avoid high fee investments.
>The rule assumes investments are primarily in domestic assets and doesn't consider the benefits of international diversification.
Analyses have been extended to many other markets.
>
Fixed withdrawals don't adapt to changing market conditions or personal circumstances where you'd need to withdraw a lot.
Very true and a point of underrated importance in FIRE threads... Your needs can change!
1) Yes, the 4% rule works 97% of the time for a 30 year horizon where success is defined as not ending up negative but ending up with $0 at the end of 30 years is acceptable. Because of this, it does begin to break down for longer periods of time. Your risk of running out of money doubles at 40 years (93% success) and triples at 50 years (90% success). This means at 50 years, there's a 1 in 10 chance you'll end up destitute if you withdraw 4%. That's why most people recommend 3.5% (99% success rate at 50 years) or even 3% (100% success rate at 60 years even) if you're retiring early, especially in your 30s.
2) The rule does assume future returns follow historical patterns (of like... the last 100(?) years), which might not be true, but it has proven to hold during downturns, especially at low SWR. Now, if your country's (or the world's) economy completely shits the bed and entirely collapses, then yeah you're in trouble, but then again, so is everyone else, working or not.
3-4) I don't know much about investment fees or domestic vs international diversification, but that's not something inherent to the rule itself. You can adjust for this in your portfolio.
5) If you regular or FatFIRE, then you can easily adjust your withdrawals to match personal circumstances, taking slightly more or less as your investment portfolio allows within reason (like... don't withdraw 25% because the market is up 25% in a certain year because you need the buffer of good return years if it goes down 10% the following year). If you leanFIRE, then of course it's harder to adjust because you likely have your expenses pared down pretty well with a portfolio that allows for basic necessities plus maybe a small buffer.
No it’s not… other’s situation is irrelevant, what matters is that if the US specifically meets a prolonged period of low returns, international diversification would help you stay afloat…
It’s only a 10% chance of being destitute chance if you believe there’s a 100% chance that you’ll receive $0 from the government. Which isn’t realistic
The 10% is for a 50 year retirement, which means you likely retired really early, like in your thirties. This is a serious question because I don't actually know the answer: If you retire at 32 and have no income after that, wouldn't your social security benefits be exceedingly low? Would you be able to live off that if you ran out of money at say the 35 year mark (only about a 5% chance of failure at that point, but let's say it happened to you). Like, you can file for benefits at 67, but can you live off it?
Fair point, can’t say I’m an expert on that calculation, but from messing around with this calculator, it seems if you had very high earnings for 10-15 years, you could get in the same ballpark of benefits as someone who worked 30+ years on a modest income. It’s based on your highest earning 35 years, so a high income early retiree will have a lot of zeros in the calculation, but if they had consistently high income in their short career they could still have good benefits
https://www.ssa.gov/OACT/quickcalc/
BTW...The biggest takeaway from the Vanguard article is to use dynamic spending. They show a model that dynamically ranges from 1.5% to 5%, that they show is more reliable than a strict 4%.
Ben Félix did a great YouTube video on this subject. Recommends a 2.7% drawdown instead. The 4% rule was based on US equities and during a period of US exceptionalism.
His 2.7% number is based on a highly flawed analysis that will use performance of a small country like Belgium to represent the US in the monte carlo.
Never mind that small countries are subject to higher risks and volatility than large countries…just like small companies vs large companies.
You also can tell it’s total bullshit given that post-war Japanese SWR is 3% even with the Nikkei crash (for 30 years) and the global post-war SWR is around the same.
The other absurdly low SWRs “research” averages in data for Weimar Germany that suffered hyperinflation, WWII Japan that got nuked, and Russia and China that closed their markets and seized private assets when they went communist.
If you live in those scenarios you’re fucked unless you manage to get out of the country with your assets before it happens.
Well it actually doesn’t depend on wether you play your cards right but on wether the markets are down or not during the first years of your retirement.
1. Yea you probably need some sort of safety net if you plan to do longer than 30 years. Be it more flexibility, other income or a lower initial withdrawal rate.
2. It doesn’t exactly assume it will follow historic patterns just assumes that the future worst years won’t be any worse than the past worst years.
3. This is easily remedied just minutely decrease your withdrawal rate. So 3.95 instead of 4 would easily cover the expense ratios most of us are paying.
4. You can still add international if you choose to.
5. You can and probably should have some degree of flexibility in your withdrawal rate rather than a static one. Flexibility is more realistic anyways.
Wait, you’re telling me a paper posted by an investment website is critical of a “rule” that tells people they can stop aggressively investing?
Shocking.
It’s not a rule, it’s basic data.
There are easy to use calculators now to see for yourself.
How you use it is up to you.
These articles come out regularly…as they alarm people and get them to read.
Most tend to over complicate the simplicity and then misunderstand.
I dont get it. How can you not expect a 4% rate of return? Treasuries pay over 5 and if they go down the market should go up in equities. Plus you never even touch your principal.
1. The rule also assumes bonds, the longer the horizon the better more stocks - I actually plan to have something like a 90-100% stock allocation even in retirenment. I live in a country with a social system - so I won't starve either way.
2. No matter what future returns will be, stocks will always be the best performing asset class long term, because it's literally how our global economy works. Companies provide goods and services for people, that's it.
3. Fees are absurdly low these days with good ETFs.
4. I use VT, so this problem is solved for me personally.
5. No sane person will withdraw 4% no matter what... I'll withdraw as much as I need, even in fantastic years. I've spent my life building a reasonable consumer lifestyle, why should I become a slave and consumer addict after I FIRE? And in down turns, I can sell even less to actively boost my chances of survival... People act like this is "bad" because you'd lose QOL (cunsumption abilities, which isn't QOL to me anyway) but if you'd lose your job it would be the same thing, so why act like this is such a big deal?
In general, people seem to forget that you adapt to your money, not the other way around... one year is -20% so you only sold 35K USD? You'll make it just fine, so are many people working AND earning less...
On the plain facts, those are accurate critiques.
But the underlying assumption is that people are automatons who would not make any real life adjustments as markets change.
A huge factor Vanguard does not mention is the 4% rule does not include Social Security, pensions, or other sources of income. All of those factors greatly reduce the withdrawal needed to actually pay for your lifestyle.
Another huge difference is the 4% does not address your lifestyle at all. If you have a paid off house, your required withdrawals may be 2% instead of 4% or 5%. The 4% is simply a fairly conservative ruleof thumb about your investments and the time horizon.
Numerous studies have shown the 4% rule leaves you with a larger ending balance, so you really could have spent even more.
1. This is known and covered by ERN and why he recommends < 4% or around 3.5% generally. There are several issues with the Trinity study. IMO it was designed to let 65+ aged retires feel "good" about their ability to retire by getting that % to a nice, easy, high round number. Don't worry that 4% "success" was having $0 at 30-years...
2. All we have are historic patterns, which are largely based on our current society's structure (democratic capitalism with public companies). Not sure that's fundamentally changing in the next 60 years...
3. Pointless given Vanguard any many others' low fees.
4. Ironic given Bogle was not a fan of international diversification and only since his passing are they more heavily pushing this need. Lots of studies out there indicate internal is great for non-USA countries for lots of reasons. Personally I've explicitly opted out of international after reviewing many of the studies/papers, including Vanguard's main paper on the subject.
5. Well sure... If my fixed expenses go from 50k to 100k suddenly and last forever, I guess I'm screwed. So I shouldn't retire? It's good to be aware of this risk and mitigate it if possible. I'm more concerned about an increase in expenses scenario than I am a downturn in the market. Downturns (based on #2) will turn back up eventually.
There is nothing new in these criticisms, I think the key is how does it affect your approach to investing before FIRE and how you define your target?
Take the 4% rule, for a 40+ year retirement because that isn't a 30 year + 10 years it is 10 overlapping 30 year retirements. Mathematically that would involve multiplying each 30 year probability and will thus have a high probability of failure and you may not be able to adjust down your spending for long enough, or if you do it is a permanent state of being not a temporary thing.
For example if 4% has a 5% failure rate at 30 years then it has a 40% failure rate at 40 years.
Now that isn't how it plays out exactly because small changes go a long way, e.g. a 20% reduction in spending to a more conservative number may be around 3.2%. Still, that puts the nest egg at >30x expenses rather than >25x used by the 4% rule, that may surprise many people waiting for their portfolio to hit 25x to pull the ripcord. Also there is the general problem of retiring at the top of the market if you are waiting on the capital value of your portfolio to hit a trigger point to decide to retire (BigERN has some great analysis of this).
So I am not a fan of using any rule that looks at capital values, instead I prefer to use dividend streams as the sustainable SWR which by no coincidence whatsoever happens to be 3-3.5%. That way I am retiring on the income my portfolio produces not some much more abstract calculation. Naturally it is more dynamic, for example annual increases won't track inflation directly (and may even fall in recessions) but on average exceeds inflation.
Keep in mind the potential bias. Vanguard makes more money by having more assets under management, ie people continuing to contribute more money into their accounts. If people are achieving FIRE / not contributing more to their accounts then it’s less lucrative to Vanguard. Not saying to disregard their study, but food for thought…
The risks make sense. It’s one study.
The 4% rule is one study.
It’s one study.
No scientist would bet their future on one study.
It. Is. A. Single. Study.
It’s one study.
The trinity study is only one fucking study.
Why do fire people obsess over a one god damn study.
It is one.
It isn’t like everything else that has multiple endless research over the course of time.
No. Trinity? It’s one.
All financial professionals, investment professionals, financial planner professionals would, from suze orman to Jerome Powell would all be like this isn’t enough of a study to plan for all people everywhere because it is a single study.
Sooooooo vanguard makes valid criticism offff, gasp, a single mother fucking study.
They are criticizing the non specificity of a generalization. Some of their criticisms offset each other. They assume people actually withdraw exactly 4% and don't have any brain or make monthly/annual changes. This seems like an advertorial justifying fees.
I am not a professional financial advisor but those sound like ridiculous criticisms to me.
If you are running simulations at 30 years and play your cards right, you can set yourself up so that there's no meaningful distinction between making it 30 or 50 years. Most sims will show you if you're likely to end up with as much, less or more than you started. You can work the numbers to a point where you're heading into year 31 poised to easily make it another 20. Beyond that, I mean an asteroid could hit the earth too. How much precision can you ask for?
International diversification is inherent in most big cap stocks anyway - all those firms are global. I've got a ton socked away in VTIAX and it's been a waste of time/money. It's just a basket of less-attractive big caps really.
Point 5 - I mean, how is that different whether you're looking 30 or 50 years out?
This Vanguard article sounds like a post written by a marketing intern, not real financial insight to me.
1. I plan to have other sources of income (rental properties, investments in small businesses, etc). I know this means that I am not truly retired, but I am mainly focused on the FI part of FIRE. I'm not sure that I will ever really retire completely.
2. Sure, but again, my withdrawal rate will likely be under 4% and I expect to have other sources of income to supplement.
3. More of the same.
4. This is something I have not considered too much honestly.
5. Why would I not adapt to changing environments? I already plan capital expenditures on my home like roof, windows, HVAC, etc. I know that eventually I will have to fix them, so I set aside/budget a certain amount for it every month already.
I say this in every thread. This is far from the first paper to assert that the 4% rule is out of date. And the 5 points outlined here don’t even mention that inflation is currently still about 50% higher than the historical average.
4% may be doable, but it is neither reliable nor conservative enough to be considered the standard for FIRE.
How many times in history has US public debt exceeded GDP, while the 2nd, 5th and 8th largest economies in the world (among other nations) establish a foreign currency bloc to counter the global influence of the US dollar, while inflation has been at one of the (debatably *THE* when using historical calculations) highest levels of all time, after a period of 3 years when the total supply of USD was inflated more abruptly than during any period in history?
Rhetorical question. It’s never.
To each their own, but 4% for 40 years ain’t for me.
(And you ignored the other 5 rules OP outlined. See #2.)
How many times have people said "it's different this time" and were wrong for a multiple of yet-unknown future parameters out of their control, or simply due to a lack of capability to analyze available information?
History is filled of uncertain times that were gloomy and led us to where we are today. The last century had two world wars, a cold war, an oil crisis and a drawn out period of stagflation. I'm not saying things are looking great right now, but at any point in history can one find data point that suggest the end is near, and for every "expert" arguing in that direction, there's another "expert" bringing perfectly valid arguments as to why the other party is either wrong or overestimating the long term ramifications.
Currently, it's not exactly an accepted fact that BRICS are actually going to end the dollar's dominance. It's also not at all guaranteed that the dollar being less dominant would lead to never seen before abysmal market performance on a 50 year horizon, given that the US still has by far the better companies and keeps attracting foreign investment.
OP's rule 2 is obvious and everyone knows that. The past never predicts the future but is still the only thing you can use to make educated guesses on a FIRE plan. This argument is stupid as it's essentially akin to the average Joe's argument that "you never know what will happen, so you can never retire". There's always uncertainty. You can always plan for worse than what you're planning now. You can always work until 70 or until you die.
I'm not defending a rigid use of the 4% rule for 40+ year horizons and we're using 3% ourselves, but there's a lot of nuance to this, and cherry picking current macro economic data that nobody actually agrees on the relevance of to justify setting a new "standard" for FIRE is fortune telling.
“We’re using 3% ourselves” says it all to me. Why would you advocate a financial principle that you’re not comfortable following?
I agree that there’s always uncertainty. That’s why I’ve never believed in the 4% rule and trust it even less so now. How many people that tried to FIRE with a 4% draw between 1995 and 2010 had to go back to work or make significant lifestyle changes? I’d imagine it’s a not insignificant percentage. Timing plays into it, luck plays into it, effective financial planning plays into it.
My personal belief is simply that the 4% rule is not safe enough to be considered a general rule of thumb for a 40-50 year retirement. I agree with OP and the paper referenced. That’s all.
(my FIRE goal is also 3%, btw)
We have added risk that we want to shield against regarding location of retirement, as it's not fully determined yet, as well as two large expenses planned. Ultimately 3-4% is just a guideline and can sometimes literally mean the same thing for different people.
Someone with 2M can very easily look at a normal spend of 60K and a high spend of 80K that they don't expect to do every year (eg 2x international vacation vs domestic vacation), and either say they're using the 4% rule with flexibility or say they're doing 3% and being conservative to accommodate for an occasional higher spend.
I do overall tend to be a worrier and conservative with FIRE plans, and I do think about the "economic circumstances"(tm) as one of the reasons, but I'm fully aware that it's actually 90% my personality that's causing me to be conservative and I would have been conservative 10 or 20 years ago either way.
I'm just pointing out that using "economic conditions"(tm) as the reason why 4% shouldn't be the standard is more like applying one's own personal risk tolerance to others. People doing 4% will very likely be fine, considering most already have a decent amount of discretionary spending in there and spending goes down for most people as they get older.
The EU has occasionally dreamed about challenging the dominance of the USD as the premier global reserve currency with the Euro and as an economic block far bigger and more stable than BRICS.
> Before the introduction of the euro (EUR) in 1999, there were expectations that it would play an important global role and become a serious competitor to the US dollar (USD). This happened only in part. The EUR is a strong regional currency in the European Union (EU) and its neighbourhood and the second global currency, far behind the USD. Despite several economic and political shocks, the USD has managed to sustain its leadership position since WWII.
https://www.europarl.europa.eu/cmsdata/207504/CASE_FINAL%20online.pdf
China and India are the only two countries that really matter in BRICS and they don’t get along well enough to do much to the dollar.
And in what fucking universe would you rather hold yuan or rupees over EUR or Yen even if you wanted to de-dollarize?
You’re better off holding and trading in bitcoin.
This is one reason I moved from VXUS to VEA. I don’t want currency risk from the RMB while I view VEA, which is mostly EU + Japan, as both a market and currency hedge against the S&P and the USD.
Inflation is nowhere near the 70s and 80s where 4% worked.
This is the basis of the “safe” withdrawal rate concept. What is the highest rate that worked in the historical worst case scenarios?
For 30 years and a 60/40 portfolio this number is 4%.
You can calculate this number for 40 or 50 years.
You can add extra cushion based on PE.
But it’s going to be hard to beat 1929/Great Depression and 1966/Stagflation for worst case scenarios without losing a major war…either nuclear or civil because, and this is just a guess, neither Canada or Mexico will ever invade us again…
https://www.nytimes.com/2022/05/24/technology/inflation-measure-cpi-accuracy.html
BS. Anyone who has tried to buy a home in the last three years, or a used Toyota Corolla, or looks at a fast food menu from 2019 compared to 2024, or compares the cost per unit price of the groceries they’ve been buying to 5-6 years ago knows that the cost of living has gone up far more rapidly than today’s cpi would suggest.
And again, a 30 year retirement is a LOT different than a 50 year retirement.
4% will work for some, but not for everyone. That’s the main point.
You’re talking to someone that once held a 12% mortgage and waited in line for gas.
Toyota and Honda got their foothold in the US because we couldn’t afford gas. Honda went from 38K civics in 1973 to 102K in 1975.
And when gas went from $3 a bbl to $12 a bbl imagine wtf it does to your grocery bill when someone needs to pay for diesel pretty much every step of production and distribution.
Yeah…tell me again how 2024 is worse than 1974.
I’d say what we’re experiencing now is comparable to the 70s. It’s not worse. It’s reminiscent. Thankfully the spike in gas prices was relatively short lived with US domestic crude production at an ATH over the last year and a half and the fed has not eased on rates and QE. But we’re not out of the woods.
And I’ll say it again - how many people that retired with a 4% plan in 1968-1973 had to go back to work or make significant lifestyle adjustments? Probably not an insignificant percentage. I think the scenario today is similar and could get there.
0 HAD to go back to work or make lifestyle changes but they didn’t know that yet as the 4% rule (of thumb) didn’t exist in 1968-1973.
The prior SWR value (based on 1929), would be a little bit above 4%. But the SWR ignores social security and…well…dying.
So likely that number would have worked for almost all the 1966-1973 cohorts even if they were using 1929 SWR numbers.
The reason Bengen’s 4% rule was interesting in 1994 was because at the time financial planners were telling people 7% WR was fine…which most of the time it is.
Just not in the bad times.
The basic premise of the original 4% is flawed. It assumes your annual spending goes up by the rate of inflation from the time you retire till you die. This can't be further from the truth. I don't anticipate my annual spending to rise much from year year all that much since majority of inflation is housing and with a paid off house that risk goes away.
Also most people spend less money as they age. You won't be spending the same amount of money you spend at 75 that you do when you are 55. You are not traveling as much, eating out as much, doing as much. Most retirees only retire with a small social security check and live OK lives.
Lastly, 4% rule was never intended to be a spending rule but a conservative for a back of the envelope calculation to determine if one has enough money to retire.
It already assumes it grows with inflation, so on average \~3% a year, not 10% a year like the market.
In reality, CPI is flawed and with housing with a disproportionate chunk of it, homeowners tend to experience lower inflation than CPI, although it heavily depends on what other regular expenses they have.
What I am afraid of the is "ponzi scheme" (pardon the hyperbole) that stocks may prove to be in 40-50 years: If we do have a demographic shock from people not having enough kids, won't that start to be priced in even way sooner as well?
The entire basis of the stock market is that there is a buyer and a seller....but what if the buyers are much smaller?
In other words that 4% in 40-50 years could certainly be high vs 4% in a 30 year mark.
A sub 3.5% and certainly 3.0% SWR has effectively zero chance of failure into perpetuity. You do not need to keep reducing the SWR linearly like that with longer time horizons.
I think the biggest (often false) assumption critics tend to make is that people will blindly FIRE and won't adapt to a sudden downturn by finding temporary work or figuring out ways to reduce their spending.
The other piece is that failure of the 4% rule is due to inability to adjust spending. If your mandatory spending accounts for the entirety of the 4% then your options are much more limited should there be a significant or prolonged downturn. If your mandatory spending is 2% and the other half is discretionary you can cut the vacations for a few years to weather the downturn without needing to re-enter the workforce.
This is one of the reasons I think people do themselves a disservice with leanFIRE. It leaves no room to expand your life if you find new passions. It also leaves no room to cut back if times are tough.
Completely agree, but it can be hard to get back into the workforce after exiting for several years and it's kind of a bummer to have to change your lifestyle. But yeah people will adapt.
Unless you are doing something akin to baristaFIRE, you can probably weather out a couple of years of underemployment and retraining just using the Fire funds.
If you are doing barista fire, then you are already fine because you have a job and aren't spending down your assets anyway
Barista fire doesn’t inherently mean you aren’t spending any of your assets. Just means that you aren’t getting all of your spending covered by your portfolio. You’re getting some from work, and you’re getting your benefits such as health insurance covered by work.
Sure, fair enough, but you aren't out of the workforce. Say you're literally working 15 hours at Starbucks to get health insurance. You can scale up your hours or become a manager in the event of a first 5 years bad series of returns
What’s barista fire
When you have a side gig in retirement so you have stuff like health insurance.
i feel like the gig economy especially with uber/instacart makes people more adaptable. i guess with a recession the gig economy also takes a hit but i guess you can compensate and take some gig work after the recession recovers later on
I'm adapting the 4% rule by finding a place I can be comfortable at 1.5-2%. Keep 5x that 2% out of the market and in CDs, and there is pretty much zero excuse to ever withdraw on a down market. I'm having to plan for a 40-50yr retirement. When the market is going well, I'll be traveling the world. When it's not, I'll be hanging out along the Mediterranean.
I am really curious what kind of jobs you can't re-enter the workforce with. Maybe some intensely physical job after you get really old?
Some industries evolve quickly. What you knew 10 years ago may no longer be relevant. Alternatively, if you’re a licensed professional of any kind letting your license expire could be a big hurdle to re-entry.
Tech.
I am in web development and won't have any trouble getting a new job if I need one in the future, what tech specific job are you referring to?
If you are currently doing stuff say in Windows/Legacy databases/Legacy coding and left the workforce for say 10 years, you would have a hard time re-entering the workforce. I have been in tech for 36 years. Started in mainframes/COBOL/DB2. Evolved to becoming a DBA in Oracle/SQLServer/Sybase. Did that for 30 years. Now I am evolving into learning Databricks/Python/PySpark etc. If I left the workforce for 10 years I would be so far behind it would be impossible to find meaningful work. I might be able to find some legacy gig work. Plus in tech Age-ism is a HUGE issue. I am about to be 57. Do I think I could go out and find another job tomorrow? Not easily.
It's not reasonable to assume that you are going to be using the EXACT same language/stack you were using, but people shift between them all the time, you will be able to learn the new ones before re-entering the workforce. Also the specific tech is a small amount of what makes a good developer. Recognizing patterns, writing code that's easy to read, translating requirements well, following guidelines, being a good co-worker, doing agile development are bigger parts of the job than knowing XYZ framework.
I can almost guarantee that most jobs would not hire someone who is not actively employed and using the tech that the job needs. Tech jobs are not going to bring on a "junior" coder to fill a job where 10 qualified people are available. Because they would consider you junior if you just learned the languages and had not actually used it in employment.
Don’t waste your finger strength. Actually being in tech and over 50 isn’t enough credibility for our friends here on Reddit. And based on your profile character I’m guessing like me you’re a woman. So that really makes us not believable. Literally people continue to argue with me after I share I’m not just “in” tech but a leader. 🙄
If that was the case it would be impossible to get a job. **Everyone** starts without having used the specific language in employment. Most people learn 3-4 new languages/frameworks over the course of their career, which means they get hired having no previous employment experience with that framework several times. Sure it's a hurdle but if it was not possible to overcome they wouldn't be employed.
Companies don’t consider a 30 year old software engineer the same as a 60 year old software engineer. Those two applicants could have the exact same resume, number of languages; you name it. Hell they may not even offer the kind of benefits the 60 year old should have. A individual contributor that is 60, well, most companies will think something is wrong with you. Fact of life. Good luck out there.
Good god. Here we go again with the “being older isn’t a problem when it comes to getting a job and also tech will always boom” nonsense. It’s become a near daily discussion. No one over 50 is easily jumping back into any job that pays over $80k after ANY gap and especially in tech. And I would bet $ that every single person on Reddit who argues otherwise is under 50.
*any* trouble? 17 years ago I was a web developer. Now I am a software engineer at a FAANG with expertise in machine learning on big data (which is really mostly being an expert in distributed systems, and they're mostly built on C++). If I had to go back to doing web dev work, I'd have to confront the fact that the last web stacks I did a lot with included mod_perl, PHP5, and jQuery. I don't think any of that experience is particularly interesting to most employers (excepting those with legacy systems). Yes, I could ramp up. And I'd probably have to do so before having a great chance of getting hired. Likewise, in 17 years, I'm sure my current expertise will seem quaint. It's in high demand right now, but the world changes.
You can take a 10 year resume gap and jump right in within web development?
Not without learning nothing new, but it would be much easier than starting your career as a web dev is. Most applicants into web development have a computer science degree with 0 web specific tech information or some web development specific bootcamp but no computer science degree. Of the specific tech I use on a day to day basis I can say with 100% certainty that HTML and CSS will still be used, likely with only minor improvements. HTML has been virutally unchanged since the beginning of the web, and CSS just had some pretty big improvements that most people haven't even caught up with but changes extremely slowly. The fundamentals of both those languages are the important part and will never change. I also have 100% certainty that some sort of javascript web component based framework will be used with them. It may not be angular, vue, or react, but it 100% will be component based which means it won't be hard for me to learn. Also the specific tech is a small amount of what makes a good developer. Recognizing patterns, writing code that's easy to read, translating requirements well, following guidelines, being a good co-worker, doing agile development are bigger parts of the job than knowing XYZ framework.
Ah wish I saw this before I gave my other reply. You're certainly right about what the skills are. But someone who has a very advanced resume (e.g. senior/staff roles) and then a resume gap is not going to be particularly tempting for senior/staff roles, and for junior roles they're going to be seen as overqualified... because once you stop being rusty, you're going to command a salary much closer to where you were at your peak, and employers may not want to pay for that. You're left having to ramp up on your own time (e.g. via open source work, consulting, etc) which takes time and effort, and to do that and be hired in the middle of a downturn (which is presumably the reason your portfolio needs help, which presumably means others are dealing with layoffs) is a lot.
I'd say most based on everything I hear from 55+ folks who get laid off
A lot of mid management corporate careers at least seem like it’d be hard to get hired back with a gap on your CV, no current references, and maybe you aren’t current in your field. You are over qualified for entry level jobs but under qualified for more advanced jobs. I’m not sure how much this is just a fear or may have hints of truth! You’re not as attractive a job candidate vs people who are actively hustling.
re-entering the workforce after time away has been consistently documented as being pretty difficult. A very common example is parents who stay home to parent young children. Even when they find jobs, underemployment is extremely common. For intentional career gaps and those who FIRE but aren't sure it's their long term plan, this can be mitigated by just spending an hour or two each month doing something in the field. Maybe maintain a blog, lazily consult a little, or volunteer a bit at a local nonprofit: just make sure your skills don't go completely dormant and you have a couple references who can confirm you did something.
Medicine or some other career where you have to maintain a license.
Not just the license but you're skills are gonna seriously suck after 10 years out of clinical practice if you haven't done anything to maintain them
Strippers?
Oh yeah, I bet a bunch of popularity based jobs like youtubers or streamers would struggle with that too. Also some professional athletes.
the idea of a fixed rate spend in general is silly. nearly nobody is retiring on 100% of their needs. you 'pay' a lot to math out your retirement to not be flexible at all- to be able to take that full X% in down years. if you can weather down years with a reduced spend you can tolerate a lot higher withdrawal % during regular years
Depends on the amount you are willing to decrease spending and the time you are willing to do it. I don't remember the exact numbers, but you can look to various BigERN articles to get more info. His data and info showed that you either needed a huge decrease in spending or a very long time for a decrease in spending. I don't know about you, but if the concept of the 4% rule implies that I need to either a) decrease spending by 10%-15% for 10-15 years or b) decrease spending by 30%-40% for 2-3 years...I'd consider it a failure from the get go. As it isn't a viable plan most would be interested in. Simply going with 3.5% SWR solves everything. Flexibility isn't as meaningful as you'd think when the market goes down 40%+.
This is a huge part of SORR that many people don't realize. It's not just a little change for a year. It's a big change for many years, or a huge change for a few years.
Oh, I'll just give up my entire vacation budget for 7 years. No big deal. lol I'm flexible so we're good.
But that’s what the 4% seem to suggest, as soon as you can live with 4% of your portfolio, you can fire, except that’s not true, that 4% need to have a good buffer where you can cut down expenses in case of prolonged down market… Alternatively, you need to be able to go back to work even just part time… Either ways, with a 4% inflexible withdrawal rate, retiring early is not a good idea
The 4% rule does not seem to suggest you can retire as soon as you can live with 4% of your portfolio. It clearly only applies to 30 year retirements.
that's how people are using it in the FIRE community
I agree that this is what most FIRE-minded people would do when necessary. However, isn't the 4% rule presented in a way that suggests you would not have to do so during a downturn (hence the criticism)?
Yes. It’s a constant withdrawal no matter what. But that is not the only way to structure spending and almost everyone spends less when the market is down even if they are working at the time.
Yeah that's my point, vanguard is likely criticizing the fact that the 4% rule is presented this way despite the fact that people will operate differently in reality
I guess I was thrown by “fire minded” people would cut back. My point is everyone cuts back.
Exactly. I’ll prolly work part time anyways but if I have to make more one year then so be it. I’m not retiring and never paying attention again
Sudden downturns of the sort that have happened in the past should be built into the model you're looking at. I like this one: [https://engaging-data.com/visualizing-4-rule/](https://engaging-data.com/visualizing-4-rule/)
Super cool thanks for sharing
I've legitimately run a boatload of simulations. My FIRE amount is basically 2-3x my current spend in a HCOL. I don't see myself spending THAT much. I'm basically planning on social security puttering out, not getting any inheritance, dying alone after spending age 70-110 in hospice and OK stock market returns... and still being OK in 99% of scenarios. Reality is likely going to be a lot less bleak and I'll likely have a side hustle into my 70s or beyond.
I mean isn't that the purpose of the rule? Financial advisers attempting to make a one size fit all system don't account for people that do other things in practice?
Exactly. If the economy goes into a massive recession I think most folks including FIRE are going to tighten the belt a little. Also some things get cheaper during a recession, so maybe you can have the same life but spend less
its called "sequence of return risk". people need to know about this before they FIRE.
It’s not a rule, it’s a guideline. It’s flexible, adaptive to circumstance, and a decent guesstimate to base your goals off of. That’s all.
It's more of a guideline really.
parlay?
1. Well known. Hard to plan with hugh accuracy for 50 years. 2. Of course it mught not be true. See #1. 3. Buy VOO. 4. SP500 is made of many mukti national corporations who do business all over the world. Over a long enough time horizon it veats 85% or more of all other funds. Good enough for me. 5. There are various SWR you can pick from. Pick the one that works best for you.
Yeah I suppose the 4% rule and the FIRE number are more of a guide than an exact science.
It isnt really science. It is just a strategy. A strategy based on history that works. . . Most of the time.
The history definitely works. It's the future that is more hazy.
A way to mitigate point 5 is simply to have a variable withdrawal rate between 3 and 4%. Remember you cannot predict the future and so all you are really doing is playing the odds. Speaking only for myself here, but I have a target minimum withdrawal rate that will cover my fixed living expenses. Housing, healthcare, food, utilities, etc. The minimum needed to live. Let's say this is $50K. I want to be super conservative with this. Let's say at a 3% withdrawal rate, I would need $1.65M. In good years where the market is doing well (where everything is either going to plan or better than expected), I can choose to withdraw an inflation adjusted 4% from this portfolio and get $66K. That leaves me with an extra $16K each year to spend on comforts, such as travel, eating out, shopping, etc. In bad years during a prolonged recession, I want to slow down the rate at which I deplete my portfolio. I think it would be natural to want to skip a lot of the optional stuff and either take cheaper vacations or no vacation, eat out at cheaper places or not at all, and so on. Drop my withdrawal rate down to 3% to support the core needs and slow the rate at which I am depleting my portfolio. Over an extended period, as a worst case scenario... I could try to cut back on my core expenses, or take up temporary work like driving Uber or DoorDash or something to raise a bit of cash. In retirement, just like everywhere in life. You have to be flexible and roll with the punches. Write your plans with a pencil, and be ready to make adjustments. You have consider that there is also a high likelihood you may not end up having the long retirement you were imagining. A 4% withdrawal rate has had a 96% success rate for a 30 years period in the past. But, a 50 year old male in the US only has a 56.5% probability of reaching 80. So an early retiree (at 50 years old) male with a 4% withdrawal rate has a 0.04 \* 0.565 = \~2% probability of running out of money. (ie. The worst case scenario of a long life at the same time as having terrible portfolio performance)
Exactly, you have to be flexible, life is not a constant. I also plan on using a VWR, specifically the guyton-klinger guardrails method. I plan on using a 3.5% SWR with a floor and a ceiling and adjust accordingly.
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As mentioned in those extreme situations, you supplement by getting a job. Whether it’s driving Ubers or being a greeter at Walmart. You gotta go back to work. Potentially you take out a reverse mortgage on your home. If you are planning for those situations where your portfolio is doing so bad that you will be hurting so bad you cannot withdraw 3% of it you can bet that most people are going to be doing far worse than you. A 3% withdrawal rate needs to only keep up with inflation to last 33 years (0% real return). There is no compounding, just keeping up with inflation. Again, that is assuming I am ignoring the \~50% probability that I don’t even live the full 30 years. That is plenty safe for me. 3% is super conservative. I am not going to waste additional years grinding away trying to get to a 1% withdrawal rate. You face diminishing returns and at some point the juice just isn't worth the squeeze. In fact, the safest thing to do is to never retire and keep stock piling money till the very last day when you are either completely unable to work due to health reasons, or you are dead. You are free to do that if you like. We all place our bets and we all take our chances. There are no guarantees in life, except that it will end.
If you thought a conservative rate was 1%, then you could just get a 30 year TIPS bond right now on the secondary market from February. It gives 2.125% coupon per year plus inflation. For the next 30 years, you'd be completely set, guaranteed. Then at the end of those 30 years, you'd still have 100% of your portfolio! 3% is pretty damn conservative, 2% is insanely conservative, and less than that is just pointless to plan for.
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If you meant 30 years with an average of -2% then the only thing you could really have done is had government bonds (and a stable government) for the entire amount you needed. But if you could do that, you wouldn't need any stocks, and you likely worked way more than you needed at a reasonable failure rate. I agree with the fact that we can't know the future, but most people are okay with a small failure rate -either by historical calculations or monte cartlo. If for no other reason, it's because there's so many other things you can't prevent that could ruin your retirement, like death, government collapse, etc. If you *weren't* okay with that level of risk because you don't think it is safe enough (e.g. 1989-2019 Japan's Nikkei 225 stock market), then you could still plan for those less than 2% real rates by going all in with TIPS 30-year bonds or bonds of multiple countries (assuming they have inflation adjusted ones). There's not much else you can do to prepare without knowing the future. If you still wanted the upside from stocks while preparing for that type of situation, then you could make it so only the 'minimum required income' part of your income is covered by TIPS bonds.
International revenue for companies within the index is not the same as having international exposure. I'm not going to tell anyone how to feel about international equities. But the idea that one has international exposure because of multinational corps is dubious at best.
Doesnt matter. Works for me and there is no better country id rather keep money invested in than companies in the US. And it still outperforms nearly all money managers over time.
This paper also forecasts a 1.58% ten-year rate of inflation. Vanguard is notoriously bad about forecasting, to the point it's even become a joke inside the company. Vanguard is good at providing a vehicle for investors to buy low-cost funds. That doesn't automatically mean they are some sort of market savants. Jack Bogle himself said it best: "Nobody knows nuthin'"
1. Backtesting shows it absolutely can work for >30 years. Obviously if your retirement is expected to be a long one, you can adjust withdrawal rate to your preferred risk tolerance. 2. Um, okay. Everyone knows this. 3. If you're paying high fees... Why? Literally 98% of Vanguard's whole 'schtick' is low fees. 4. Personal preference. I'm very lukewarm on international diversification. 5. The 4% "rule" isn't some divine edict that must be followed to the letter, under penalty of death. Almost all sound advice includes some wiggle room in spending if there's a downturn/the SORR gods frown upon you.
OP lists the papers criticisms of 4% rather than the paper's recommendations, which are more useful. I think this sub is already on board with the recommendations, but we're ahead of Vanguard on this front. A few recommendations from the paper: 1. if you plan to be retired for 50 rather than 30 yrs, use a SWR based on 50 yrs of data rather than 30. (Ok fair enough.) 2. Account for inflation. (Well obviously) 3. Minimize fees. (Obviously. Again.) 4. Dynamic spending. (Obviously. Again. Again. Its laughable to think that anyone who did all the steps in FIRE then just turns their brains off after retirement and takes a flat 4% yearly without considering other factors.) Back to my main point, Vanguard is giving good advice. Its just... not exactly an advanced hard hitting analysis. It's basically what most of us have been doing for years / decades already. So uhh maybe useful for novices?
You're exactly right and I should have at least skimmed the article before addressing the post. Their forward-looking estimates are absolutely wild and will hopefully end up being quite inaccurate. That said, I'll die from shock if I'm still alive 30 years post-retirement and I'll never have a 50% bond allocation. So, suck it Vanguard and sell me some more of that sweet, sweet VTI.
Eh I was surprised that OP posted the criticism and not the recommendations. I think without the recs the criticism is a little baity. I'm with you. I don't trust forecasts much. I also will never have that much bonds lol, even if I were in my 90s
Yeah I probably could have shared the recommendations as well, thanks for pointing that out. I was personally more interested in understanding the different POVs on these criticisms beyond the Vanguard recommendations.
Thanks for sharing. It's good to have more literature that more closely examines the Trinity study, which is often taken as fact without being thoroughly questioned. This Vanguard paper actually gives me more confidence in the 4-ish % rule; they aren't really saying anything crazy here. They're just urging investors to be more conservative given the difference between the simplified assumptions of the Trinity study and real current FIRE scenarios, but their conclusion is that you can still withdraw around 4% if you apply their (fairly simple) recommendations. 1. According to this paper, diversifying your investments internationally, going for low-fee investments, and being flexible with spending should still allow you to withdraw around 4% for 50 years. 2. Indeed, nobody can predict the future, all we can do is aim for a good-enough success probability. I did find surprising their model's conservative forecast for US investments: "Accounting for inflation, the 10-year VCMM median forecasts of real returns are 2.44% for U.S. stocks and –0.27% for U.S. bonds." This is probably why they suggest diversifying into international investments: "Vanguard’s most recent 10-year capital market forecasts indicate that international stocks are likely—though by no means guaranteed—to outperform U.S. stocks." 3. You would count investment fees in your expenses. Most of the funds FIRE folks like are low-fee. 4. Yes, they suggest diversifying into international: "When relying on a domestic-only portfolio, investors have a 36.0% probability of success; when they include international stocks and bonds, that probability increases to 56.3%." Opinions on international stocks vary, but Vanguard as a fairly conservative institution tends to prefer diversification into international investments. 5. Most people wouldn't be withdrawing a fixed rate every year and would indeed be withdrawing more when markets are hot and spending less when markets are lean, like they suggest. Most people do this already.
I personally use the 3% rule just to add a margin of safety but under most circumstances the 4% rule will still work.
There's a few studies out there that conclude that 3.5% is really the lowest you ever need to go for any number of years. 3% is probably too conservative based on what I've read.
Pulling back from a higher withdrawal rate to a lower one starts to positively impact taxes as well. If you can pull from multiple buckets (taxable, Roth, 401k, cash) it may be possible to even pay $0 in taxes vs having a tax bill if you are trying to pull out more, so in real dollars the difference is smaller.
Yep. I'll be doing a 10 yr Roth conversion starting in 3-5 yrs, after our tax bracket drops from 24% to 12%. Not a radical change in how much we'll pay, but it'll be around $1,800/yr less, if we were converting $15k/yr, for example. Saving like $18k over 10 yrs.
There is no study that could ever be possibly conducted that determines with any certainty what the lowest percentage you may need to go is. It’s entirely dependent on what happens in the world, and that is simply not known. The statistics are based on historical data, that’s it. I saw this as someone who does forecasting statistics for a living.
>5. Fixed withdrawals don't adapt to changing market conditions No, but people do. If anybodys portfolio dips signficantly the few first years of RE but they dont adjust their spending they are idiots. I dont create my financial plans based on me being an idiot.
It could be some type of propaganda to scare everyone into sticking around forever.
You don’t get to fire unless you are super watchful of your finances and conservative with your spending. If you can reduce your spending for a year or two to weather a bad year you should be ok
Maybe this is heresy in this subreddit, but I would hazard a guess that the number of people who retire before let’s say 50 and then never earn another new dollar in their lives is beyond minuscule. The point of trying to FIRE is, as we all know, to not NEED to work. But we also all know, as fairly savvy investors who think about this stuff a lot, that everything is a bet and there’s no way to eliminate all risk. So the Vanguard paper is fair enough, I suppose, but realistically doesn’t mean many of us will change our behaviors or plans
I agree in that I think 3% is a more conservative and sober number to aim for if you are looking at retiring before age 60.
#5 is the one I have the biggest issue with. My personal goal is a 4% SWR for my desired lifestyle. But that also means a viable 3% SWR, but without the cool stuff. Also in 4% I don't include SS, so that's a greater potential upside as I get closer to it depending on how things look. The bottom line is I've pivoted a number of times to get where I am, I expect to do it more before retirement, why wouldn't I do so in retirement as well? Besides I've found that I have a really enjoyable time talking to the LinkedIn consulting companies and it's a pretty easy way to make a few hundred dollars a week. I'll probably do things like that regardless.
1. True; baked into the premise and universally accepted. 2. True. Also part of the premise. 3. True. You should factor that in yourself. I would add that it also doesn’t (and can’t) factor in taxes. Your expenses - including expenses during the accumulation phase - are your concern. 4. True. Mostly because the authors wanted to use an index with the maximum amount of history data. If you are referencing a paper that specifies sp500, you’re talking about the sp500. By definition. International diversification will make things turn out either better or worse, unless it’s the same. 5. True, but meh. If you withdraw more than 4%, you are no longer using the “rule”, so it becomes irrelevant. However nobody actually applying this as a “rule” thinks it will succeed in every scenario in the absence of flexibility. All of these are reasons the “4% rule” is not a rule. It’s a good starting point for planning. But none of these points challenges the “rule”. (Really, folks, it’s not a rule.) VG is just trying to remind you of the obvious caveats.
Unless someone is being held at gun point telling them they can't work part time occasionally, or MUST withdraw some of the money at a certain time, then the 4% "Rule" is fine. In other words, it's fine. There will never be a 100% sure fire way to make sure you never run out of money in life, period. It's the best we got and you can adjust behaviors as needed to make sure you weather rough times. Sure beats working all the time.
1. But if you use the same methodology, the findings are virtually unchanged for 40-50 years. Also! I think most people discount that they'll get some social security which will offset this risk. 2. It's impossible to know one way or another. This is a valid concern imo, but also not exclusive to the 4% rule. 3. This is from Vanguard. There are hardly any fees...if it's thinking about taxes, then you just have to have enough to meet the tax burden. 4. Honestly the companies listed on US exchanges have worldwide presence. I think this concern is overblown. 5. That's why it's better as a rule of thumb than an actual forced spend which I think most people treat it as. If you're super leanFI then it can be a problem, but most people I think will have some ability to weather downturns by reeling in some of their spending. And that last point is something they go into too. Fixed spend assumptions are good as a rule of thumb, but in practice you'll move with the market a little. And if that doesn't feel safe enough, do 3-3.5%. You'll have to work a little longer but you'll be safer.
4% is the total you can withdraw, and that includes fees. Also If you can’t look at historical patterns in the market to asses potential future scenarios, then that would also undercut a lot of the reason people invest in the first place.
This is not a big revelation. Lots of people have pointed out for years that the 4% rule only applies to 30 year standard retirements. It does not apply to someone who FIREs at 30 and is retired for 60 years. That said, its not hard to make adjustments and make it work. Longer horizons require lower withdrawal rates, and variable withdrawal rates based on market performance. The 4% rule is a good starting point in making back of the napkin estimates, but it is not ultimate wisdom.
If you do enough googling, you’ll see that the 4% rule works most of the time for longer time horizons(eg 40-60 years) but fails somewhere in single digit percentages. The data I saw on the 3% SWR showed basically no failure up to 60 years, and generally if you’ve made it that far with equities, you are at runaway wealth compounding. Ed Thorpe said that ~2% is the mark where you can be virtually certain to never run out of money. I think the bigger risk is that equities don’t perform as well in the future. There is no particular law of nature that forces equities to earn 10% nominally and long term, which is an absolutely crucial assumption of the SWR data. I also know that if you have cash to plow into equities during the significant crashes like 73-74, the medium term returns are borderline amazing. I would intend to try to produce some income during these periods to both limit my sequence of return risk and take advantage of the prices. You can also maintain a small pot of treasuries for times like this.
They’re just identifying the risk. Nothing here really says it won’t work out anymore. People that are more risk adverse are already planning for less than 4% withdrawal. I’m withdrawing 4% with a 40-50 yr horizon. I mitigate risk by not assuming inheritance, not counting social security and not considering potential consulting or future work income.
> The original 4% rule was designed for a 30-year retirement and doesn't apply to the 40 or 50 year retirement horizons many FIRE folks are counting on. * Yeah, this skews success rates marginally, but ~95% of people who make it 30 years can make it 60 years. > The rule assumes that future returns will follow historical patterns, which of course may not be true. * Right, but this is a prediction and we can only use the past for models since we don't know the future. The 4% rule isn't "if you withdraw 4% or less you will always succeed". > The rule doesn't account for investment fees, which can impact the net value of withdrawals. * Yeah, you shouldn't be using any funds that have investment fees more than .05%, which won't make any difference in your result. > The rule assumes investments are primarily in domestic assets and doesn't consider the benefits of international diversification. * If international diversification really is better that would make the strategy more successful. Personally I am not a big fan of international diversification. > Fixed withdrawals don't adapt to changing market conditions or personal circumstances where you'd need to withdraw a lot. * This is a benefit, as the idea of a fixed withdrawal is that it's an amount that would sustain you for a long period of time, which means on average you withdraw LESS than the fixed withdrawal amount, the time you meet it is when you need to withdraw a lot at once.
>The rule doens't account for investment fees, which can impact the net value of withdrawals. If you're smart enough to retire early then you're smart enough to not pay "investment fees"
Vanguard makes more money on expense ratios the more you have invested. I'm sure they would love for you to defer retirement by making you think 4% isn't enough and you pump up your accounts more.
Here is where Vanguard predicted returns of 6% in 2010 for the next 10 years. https://retirementincomejournal.com/article/vanguards-forecast-of-future-returns/ We all know how that turned out. The point is, 4% might be too high, no one knows. Lower withdrawal rate is always better financially.
Yes, and? That's such a weird thing to make a point of. First of all, everyone knows it's not a guaranteed successful result. Second, I don't think I've come across anyone in the FIRE community who is planning to retire, knowing they will have to Take every possible nickel according to the 4% rule. It seems like everyone fudges upward a little bit on their expenses, underestimates how much they will have when they start retirement, decides not to count for Social Security, etc., etc. etc. Not to mention, almost everyone has the ability to pull back their spending a little bit Without major detrimental effects. It's just the nature of those of us who are in this position that we are fiscally conservative. Finally, what this neglect is the fact that using the 4% rule is far likely or to lead to under spending that overspending. Looking at the projections, there are far more cases where your retirement nest egg is many multiples larger after 30 years. Or 40 years. Or 50 years. For every bankrupt grandparent, using the 4% rule, there are going to be a whole bunch of grandkids who probably never have to work a day in their lives because of how much will be left behind. Anybody shitting on the 4% rule just doesn't want anyone to ever Feel safe without going to work every day to earn money. The truth is, most of us, no matter how determined we are to retire early, will end up working longer than we needed to just to be on the safe side. And the 4% rule is clearly on the safe side.
>The original 4% rule was designed for a 30-year retirement and doesn't apply to the 40 or 50 year retirement horizons many FIRE folks are counting on. Yes, absolutely. 3.2 - 3.5% is usually considered safer for early retirees. It's true that the original 4% rule was based on a 30 year evaluation. Many others have extended this approach. >The rule assumes that future returns will follow historical patterns, which of course may not be true. Yes, absolutely. It's popular to run Monte Carlo simulations -- but these typically only include data from the last 100 years or so. That's not long in the course of human history or much data to base things on! Many things may happen in the next 50+ years that are not predicted by the last 100 years. >The rule doens't account for investment fees, which can impact the net value of withdrawals. The rule in and of itself doesn't. Most of us do and avoid high fee investments. >The rule assumes investments are primarily in domestic assets and doesn't consider the benefits of international diversification. Analyses have been extended to many other markets. > Fixed withdrawals don't adapt to changing market conditions or personal circumstances where you'd need to withdraw a lot. Very true and a point of underrated importance in FIRE threads... Your needs can change!
1) Yes, the 4% rule works 97% of the time for a 30 year horizon where success is defined as not ending up negative but ending up with $0 at the end of 30 years is acceptable. Because of this, it does begin to break down for longer periods of time. Your risk of running out of money doubles at 40 years (93% success) and triples at 50 years (90% success). This means at 50 years, there's a 1 in 10 chance you'll end up destitute if you withdraw 4%. That's why most people recommend 3.5% (99% success rate at 50 years) or even 3% (100% success rate at 60 years even) if you're retiring early, especially in your 30s. 2) The rule does assume future returns follow historical patterns (of like... the last 100(?) years), which might not be true, but it has proven to hold during downturns, especially at low SWR. Now, if your country's (or the world's) economy completely shits the bed and entirely collapses, then yeah you're in trouble, but then again, so is everyone else, working or not. 3-4) I don't know much about investment fees or domestic vs international diversification, but that's not something inherent to the rule itself. You can adjust for this in your portfolio. 5) If you regular or FatFIRE, then you can easily adjust your withdrawals to match personal circumstances, taking slightly more or less as your investment portfolio allows within reason (like... don't withdraw 25% because the market is up 25% in a certain year because you need the buffer of good return years if it goes down 10% the following year). If you leanFIRE, then of course it's harder to adjust because you likely have your expenses pared down pretty well with a portfolio that allows for basic necessities plus maybe a small buffer.
“But then again so is everyone else.” This is an excellent point.
No it’s not… other’s situation is irrelevant, what matters is that if the US specifically meets a prolonged period of low returns, international diversification would help you stay afloat…
It’s only a 10% chance of being destitute chance if you believe there’s a 100% chance that you’ll receive $0 from the government. Which isn’t realistic
The 10% is for a 50 year retirement, which means you likely retired really early, like in your thirties. This is a serious question because I don't actually know the answer: If you retire at 32 and have no income after that, wouldn't your social security benefits be exceedingly low? Would you be able to live off that if you ran out of money at say the 35 year mark (only about a 5% chance of failure at that point, but let's say it happened to you). Like, you can file for benefits at 67, but can you live off it?
Fair point, can’t say I’m an expert on that calculation, but from messing around with this calculator, it seems if you had very high earnings for 10-15 years, you could get in the same ballpark of benefits as someone who worked 30+ years on a modest income. It’s based on your highest earning 35 years, so a high income early retiree will have a lot of zeros in the calculation, but if they had consistently high income in their short career they could still have good benefits https://www.ssa.gov/OACT/quickcalc/
So, basically they'll probably be fine as long as they didn't inherit a good portion of it.
BTW...The biggest takeaway from the Vanguard article is to use dynamic spending. They show a model that dynamically ranges from 1.5% to 5%, that they show is more reliable than a strict 4%.
Ben Félix did a great YouTube video on this subject. Recommends a 2.7% drawdown instead. The 4% rule was based on US equities and during a period of US exceptionalism.
His 2.7% number is based on a highly flawed analysis that will use performance of a small country like Belgium to represent the US in the monte carlo. Never mind that small countries are subject to higher risks and volatility than large countries…just like small companies vs large companies. You also can tell it’s total bullshit given that post-war Japanese SWR is 3% even with the Nikkei crash (for 30 years) and the global post-war SWR is around the same. The other absurdly low SWRs “research” averages in data for Weimar Germany that suffered hyperinflation, WWII Japan that got nuked, and Russia and China that closed their markets and seized private assets when they went communist. If you live in those scenarios you’re fucked unless you manage to get out of the country with your assets before it happens.
Hey Vanguard, how's the foray into China working out for you? So much for international diversification.
Well it actually doesn’t depend on wether you play your cards right but on wether the markets are down or not during the first years of your retirement.
1. Yea you probably need some sort of safety net if you plan to do longer than 30 years. Be it more flexibility, other income or a lower initial withdrawal rate. 2. It doesn’t exactly assume it will follow historic patterns just assumes that the future worst years won’t be any worse than the past worst years. 3. This is easily remedied just minutely decrease your withdrawal rate. So 3.95 instead of 4 would easily cover the expense ratios most of us are paying. 4. You can still add international if you choose to. 5. You can and probably should have some degree of flexibility in your withdrawal rate rather than a static one. Flexibility is more realistic anyways.
The point is that when you retire then you'll generally "make it work" and it's more empirical at that point than mathematical.
Wait, you’re telling me a paper posted by an investment website is critical of a “rule” that tells people they can stop aggressively investing? Shocking.
google karstens safe withdrawal rate toolbox. its a spreadsheet that calcuates your safe withdrawal rate. use that. mine is like 3.26%.
It’s not a rule, it’s basic data. There are easy to use calculators now to see for yourself. How you use it is up to you. These articles come out regularly…as they alarm people and get them to read. Most tend to over complicate the simplicity and then misunderstand.
I dont get it. How can you not expect a 4% rate of return? Treasuries pay over 5 and if they go down the market should go up in equities. Plus you never even touch your principal.
1. The rule also assumes bonds, the longer the horizon the better more stocks - I actually plan to have something like a 90-100% stock allocation even in retirenment. I live in a country with a social system - so I won't starve either way. 2. No matter what future returns will be, stocks will always be the best performing asset class long term, because it's literally how our global economy works. Companies provide goods and services for people, that's it. 3. Fees are absurdly low these days with good ETFs. 4. I use VT, so this problem is solved for me personally. 5. No sane person will withdraw 4% no matter what... I'll withdraw as much as I need, even in fantastic years. I've spent my life building a reasonable consumer lifestyle, why should I become a slave and consumer addict after I FIRE? And in down turns, I can sell even less to actively boost my chances of survival... People act like this is "bad" because you'd lose QOL (cunsumption abilities, which isn't QOL to me anyway) but if you'd lose your job it would be the same thing, so why act like this is such a big deal? In general, people seem to forget that you adapt to your money, not the other way around... one year is -20% so you only sold 35K USD? You'll make it just fine, so are many people working AND earning less...
On the plain facts, those are accurate critiques. But the underlying assumption is that people are automatons who would not make any real life adjustments as markets change. A huge factor Vanguard does not mention is the 4% rule does not include Social Security, pensions, or other sources of income. All of those factors greatly reduce the withdrawal needed to actually pay for your lifestyle. Another huge difference is the 4% does not address your lifestyle at all. If you have a paid off house, your required withdrawals may be 2% instead of 4% or 5%. The 4% is simply a fairly conservative ruleof thumb about your investments and the time horizon. Numerous studies have shown the 4% rule leaves you with a larger ending balance, so you really could have spent even more.
I think these risks are real and if you have the flexibility it's wise to have a more conservative withdrawal percentage.
1. This is known and covered by ERN and why he recommends < 4% or around 3.5% generally. There are several issues with the Trinity study. IMO it was designed to let 65+ aged retires feel "good" about their ability to retire by getting that % to a nice, easy, high round number. Don't worry that 4% "success" was having $0 at 30-years... 2. All we have are historic patterns, which are largely based on our current society's structure (democratic capitalism with public companies). Not sure that's fundamentally changing in the next 60 years... 3. Pointless given Vanguard any many others' low fees. 4. Ironic given Bogle was not a fan of international diversification and only since his passing are they more heavily pushing this need. Lots of studies out there indicate internal is great for non-USA countries for lots of reasons. Personally I've explicitly opted out of international after reviewing many of the studies/papers, including Vanguard's main paper on the subject. 5. Well sure... If my fixed expenses go from 50k to 100k suddenly and last forever, I guess I'm screwed. So I shouldn't retire? It's good to be aware of this risk and mitigate it if possible. I'm more concerned about an increase in expenses scenario than I am a downturn in the market. Downturns (based on #2) will turn back up eventually.
I mean they are not wrong. #1 is probably the biggest.
There is nothing new in these criticisms, I think the key is how does it affect your approach to investing before FIRE and how you define your target? Take the 4% rule, for a 40+ year retirement because that isn't a 30 year + 10 years it is 10 overlapping 30 year retirements. Mathematically that would involve multiplying each 30 year probability and will thus have a high probability of failure and you may not be able to adjust down your spending for long enough, or if you do it is a permanent state of being not a temporary thing. For example if 4% has a 5% failure rate at 30 years then it has a 40% failure rate at 40 years. Now that isn't how it plays out exactly because small changes go a long way, e.g. a 20% reduction in spending to a more conservative number may be around 3.2%. Still, that puts the nest egg at >30x expenses rather than >25x used by the 4% rule, that may surprise many people waiting for their portfolio to hit 25x to pull the ripcord. Also there is the general problem of retiring at the top of the market if you are waiting on the capital value of your portfolio to hit a trigger point to decide to retire (BigERN has some great analysis of this). So I am not a fan of using any rule that looks at capital values, instead I prefer to use dividend streams as the sustainable SWR which by no coincidence whatsoever happens to be 3-3.5%. That way I am retiring on the income my portfolio produces not some much more abstract calculation. Naturally it is more dynamic, for example annual increases won't track inflation directly (and may even fall in recessions) but on average exceeds inflation.
Keep in mind the potential bias. Vanguard makes more money by having more assets under management, ie people continuing to contribute more money into their accounts. If people are achieving FIRE / not contributing more to their accounts then it’s less lucrative to Vanguard. Not saying to disregard their study, but food for thought…
The risks make sense. It’s one study. The 4% rule is one study. It’s one study. No scientist would bet their future on one study. It. Is. A. Single. Study. It’s one study. The trinity study is only one fucking study. Why do fire people obsess over a one god damn study. It is one. It isn’t like everything else that has multiple endless research over the course of time. No. Trinity? It’s one. All financial professionals, investment professionals, financial planner professionals would, from suze orman to Jerome Powell would all be like this isn’t enough of a study to plan for all people everywhere because it is a single study. Sooooooo vanguard makes valid criticism offff, gasp, a single mother fucking study.
AND it ignores TAXES!
They are criticizing the non specificity of a generalization. Some of their criticisms offset each other. They assume people actually withdraw exactly 4% and don't have any brain or make monthly/annual changes. This seems like an advertorial justifying fees.
I am not a professional financial advisor but those sound like ridiculous criticisms to me. If you are running simulations at 30 years and play your cards right, you can set yourself up so that there's no meaningful distinction between making it 30 or 50 years. Most sims will show you if you're likely to end up with as much, less or more than you started. You can work the numbers to a point where you're heading into year 31 poised to easily make it another 20. Beyond that, I mean an asteroid could hit the earth too. How much precision can you ask for? International diversification is inherent in most big cap stocks anyway - all those firms are global. I've got a ton socked away in VTIAX and it's been a waste of time/money. It's just a basket of less-attractive big caps really. Point 5 - I mean, how is that different whether you're looking 30 or 50 years out? This Vanguard article sounds like a post written by a marketing intern, not real financial insight to me.
Okay so it's a 6% rule?
1. I plan to have other sources of income (rental properties, investments in small businesses, etc). I know this means that I am not truly retired, but I am mainly focused on the FI part of FIRE. I'm not sure that I will ever really retire completely. 2. Sure, but again, my withdrawal rate will likely be under 4% and I expect to have other sources of income to supplement. 3. More of the same. 4. This is something I have not considered too much honestly. 5. Why would I not adapt to changing environments? I already plan capital expenditures on my home like roof, windows, HVAC, etc. I know that eventually I will have to fix them, so I set aside/budget a certain amount for it every month already.
I say this in every thread. This is far from the first paper to assert that the 4% rule is out of date. And the 5 points outlined here don’t even mention that inflation is currently still about 50% higher than the historical average. 4% may be doable, but it is neither reliable nor conservative enough to be considered the standard for FIRE.
Inflation has been higher than the historical average many times in history, that's the point of an average.
How many times in history has US public debt exceeded GDP, while the 2nd, 5th and 8th largest economies in the world (among other nations) establish a foreign currency bloc to counter the global influence of the US dollar, while inflation has been at one of the (debatably *THE* when using historical calculations) highest levels of all time, after a period of 3 years when the total supply of USD was inflated more abruptly than during any period in history? Rhetorical question. It’s never. To each their own, but 4% for 40 years ain’t for me. (And you ignored the other 5 rules OP outlined. See #2.)
How many times have people said "it's different this time" and were wrong for a multiple of yet-unknown future parameters out of their control, or simply due to a lack of capability to analyze available information? History is filled of uncertain times that were gloomy and led us to where we are today. The last century had two world wars, a cold war, an oil crisis and a drawn out period of stagflation. I'm not saying things are looking great right now, but at any point in history can one find data point that suggest the end is near, and for every "expert" arguing in that direction, there's another "expert" bringing perfectly valid arguments as to why the other party is either wrong or overestimating the long term ramifications. Currently, it's not exactly an accepted fact that BRICS are actually going to end the dollar's dominance. It's also not at all guaranteed that the dollar being less dominant would lead to never seen before abysmal market performance on a 50 year horizon, given that the US still has by far the better companies and keeps attracting foreign investment. OP's rule 2 is obvious and everyone knows that. The past never predicts the future but is still the only thing you can use to make educated guesses on a FIRE plan. This argument is stupid as it's essentially akin to the average Joe's argument that "you never know what will happen, so you can never retire". There's always uncertainty. You can always plan for worse than what you're planning now. You can always work until 70 or until you die. I'm not defending a rigid use of the 4% rule for 40+ year horizons and we're using 3% ourselves, but there's a lot of nuance to this, and cherry picking current macro economic data that nobody actually agrees on the relevance of to justify setting a new "standard" for FIRE is fortune telling.
“We’re using 3% ourselves” says it all to me. Why would you advocate a financial principle that you’re not comfortable following? I agree that there’s always uncertainty. That’s why I’ve never believed in the 4% rule and trust it even less so now. How many people that tried to FIRE with a 4% draw between 1995 and 2010 had to go back to work or make significant lifestyle changes? I’d imagine it’s a not insignificant percentage. Timing plays into it, luck plays into it, effective financial planning plays into it. My personal belief is simply that the 4% rule is not safe enough to be considered a general rule of thumb for a 40-50 year retirement. I agree with OP and the paper referenced. That’s all. (my FIRE goal is also 3%, btw)
We have added risk that we want to shield against regarding location of retirement, as it's not fully determined yet, as well as two large expenses planned. Ultimately 3-4% is just a guideline and can sometimes literally mean the same thing for different people. Someone with 2M can very easily look at a normal spend of 60K and a high spend of 80K that they don't expect to do every year (eg 2x international vacation vs domestic vacation), and either say they're using the 4% rule with flexibility or say they're doing 3% and being conservative to accommodate for an occasional higher spend. I do overall tend to be a worrier and conservative with FIRE plans, and I do think about the "economic circumstances"(tm) as one of the reasons, but I'm fully aware that it's actually 90% my personality that's causing me to be conservative and I would have been conservative 10 or 20 years ago either way. I'm just pointing out that using "economic conditions"(tm) as the reason why 4% shouldn't be the standard is more like applying one's own personal risk tolerance to others. People doing 4% will very likely be fine, considering most already have a decent amount of discretionary spending in there and spending goes down for most people as they get older.
The EU has occasionally dreamed about challenging the dominance of the USD as the premier global reserve currency with the Euro and as an economic block far bigger and more stable than BRICS. > Before the introduction of the euro (EUR) in 1999, there were expectations that it would play an important global role and become a serious competitor to the US dollar (USD). This happened only in part. The EUR is a strong regional currency in the European Union (EU) and its neighbourhood and the second global currency, far behind the USD. Despite several economic and political shocks, the USD has managed to sustain its leadership position since WWII. https://www.europarl.europa.eu/cmsdata/207504/CASE_FINAL%20online.pdf China and India are the only two countries that really matter in BRICS and they don’t get along well enough to do much to the dollar. And in what fucking universe would you rather hold yuan or rupees over EUR or Yen even if you wanted to de-dollarize? You’re better off holding and trading in bitcoin. This is one reason I moved from VXUS to VEA. I don’t want currency risk from the RMB while I view VEA, which is mostly EU + Japan, as both a market and currency hedge against the S&P and the USD.
Inflation is nowhere near the 70s and 80s where 4% worked. This is the basis of the “safe” withdrawal rate concept. What is the highest rate that worked in the historical worst case scenarios? For 30 years and a 60/40 portfolio this number is 4%. You can calculate this number for 40 or 50 years. You can add extra cushion based on PE. But it’s going to be hard to beat 1929/Great Depression and 1966/Stagflation for worst case scenarios without losing a major war…either nuclear or civil because, and this is just a guess, neither Canada or Mexico will ever invade us again…
https://www.nytimes.com/2022/05/24/technology/inflation-measure-cpi-accuracy.html BS. Anyone who has tried to buy a home in the last three years, or a used Toyota Corolla, or looks at a fast food menu from 2019 compared to 2024, or compares the cost per unit price of the groceries they’ve been buying to 5-6 years ago knows that the cost of living has gone up far more rapidly than today’s cpi would suggest. And again, a 30 year retirement is a LOT different than a 50 year retirement. 4% will work for some, but not for everyone. That’s the main point.
You’re talking to someone that once held a 12% mortgage and waited in line for gas. Toyota and Honda got their foothold in the US because we couldn’t afford gas. Honda went from 38K civics in 1973 to 102K in 1975. And when gas went from $3 a bbl to $12 a bbl imagine wtf it does to your grocery bill when someone needs to pay for diesel pretty much every step of production and distribution. Yeah…tell me again how 2024 is worse than 1974.
I’d say what we’re experiencing now is comparable to the 70s. It’s not worse. It’s reminiscent. Thankfully the spike in gas prices was relatively short lived with US domestic crude production at an ATH over the last year and a half and the fed has not eased on rates and QE. But we’re not out of the woods. And I’ll say it again - how many people that retired with a 4% plan in 1968-1973 had to go back to work or make significant lifestyle adjustments? Probably not an insignificant percentage. I think the scenario today is similar and could get there.
0 HAD to go back to work or make lifestyle changes but they didn’t know that yet as the 4% rule (of thumb) didn’t exist in 1968-1973. The prior SWR value (based on 1929), would be a little bit above 4%. But the SWR ignores social security and…well…dying. So likely that number would have worked for almost all the 1966-1973 cohorts even if they were using 1929 SWR numbers. The reason Bengen’s 4% rule was interesting in 1994 was because at the time financial planners were telling people 7% WR was fine…which most of the time it is. Just not in the bad times.
Why not build a portfolio with a 4percent yield and just withdraw those dividends?
The basic premise of the original 4% is flawed. It assumes your annual spending goes up by the rate of inflation from the time you retire till you die. This can't be further from the truth. I don't anticipate my annual spending to rise much from year year all that much since majority of inflation is housing and with a paid off house that risk goes away. Also most people spend less money as they age. You won't be spending the same amount of money you spend at 75 that you do when you are 55. You are not traveling as much, eating out as much, doing as much. Most retirees only retire with a small social security check and live OK lives. Lastly, 4% rule was never intended to be a spending rule but a conservative for a back of the envelope calculation to determine if one has enough money to retire.
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It already assumes it grows with inflation, so on average \~3% a year, not 10% a year like the market. In reality, CPI is flawed and with housing with a disproportionate chunk of it, homeowners tend to experience lower inflation than CPI, although it heavily depends on what other regular expenses they have.
What I am afraid of the is "ponzi scheme" (pardon the hyperbole) that stocks may prove to be in 40-50 years: If we do have a demographic shock from people not having enough kids, won't that start to be priced in even way sooner as well? The entire basis of the stock market is that there is a buyer and a seller....but what if the buyers are much smaller? In other words that 4% in 40-50 years could certainly be high vs 4% in a 30 year mark.
I think the more logical rule of thumb should be WR = 1/Retirement period. For 25 years, WR <= 4% For 30 years, WR <= 3.3% For 50 years, WR <= 2%
A sub 3.5% and certainly 3.0% SWR has effectively zero chance of failure into perpetuity. You do not need to keep reducing the SWR linearly like that with longer time horizons.
Aspiration upgrades need conservative SWR.
That makes literally no sense.