4% rule

The market dropped to lowest point in 1932 I believe then slowly rose over 13 years - till 1945 or so to get back to its high in 1929.

In 1936, in time for the election FDR decided to balance the budget (after considerable economic recovery). The cuts resulted in an dip in the economy in 1937.

People do say its the war plants hiring especially after Pearl Harbor that ended the Great Depression. I also have met people who say some companies expected return of the Great Depression after VJ-Day. Apparently that didn’t happen in part due to GI Benefits, VA Loans, the Marshall Plan, and savings from the war years when hubbies were at war and much was rationed. Also US manufacturing was undamaged and could supply while Europe and Japan rebuilt from wartime destruction.

the 4% rule was based upon ANNUAL rebalancing of the portfolio.

I am not sure this is correct. I think 4% still worked even if you did not rebalance.

That being said, if annual rebalancing is truly required, doesn’t that turn retirement saving into casino gambling? Who would have had the cajones to rebalance in 1930, then again sell even more “safe” (fixed income) money to rebalance yet again in 1931 or 1932? Is this not “Pascal’s Wager”…where the penalty for being wrong is eternal hell? If you were born in 1864, just as the Civil War was ending, you’d have been 65 in 1929. Say you you read Bengen and Trinity in the 1920s (yeah, I know they didn’t exist then) and saved 25x what you spend. You know that past history suggests that you can safely spend 4% of your nest egg every year, and adjust for inflation/deflation. It’s June 30, 1929 and you retire. Are you going to have the guts to rebalance on June 30, 1930? Great, you do have the guts. Now it’s June 30, 1931. Have the guts to sell even more safe money to keep flushing into risk? Wow! You are great at sticking to the system! Now it’s June 30, 1932? Still sticking to it?

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Paulh… In 1936, in time for the election FDR decided to balance the budget (after considerable economic recovery). The cuts resulted in an dip in the economy in 1937.

What? A balanced budget was bad for the economy? But The Government can only screw up the economy, not save it? Why I never!

People do say its the war plants hiring especially after Pearl Harbor that ended the Great Depression. I also have met people who say some companies expected return of the Great Depression after VJ-Day. Apparently that didn’t happen in part due to GI Benefits, VA Loans, the Marshall Plan, and savings from the war years when hubbies were at war and much was rationed. Also US manufacturing was undamaged and could supply while Europe and Japan rebuilt from wartime destruction.

There actually was a stiff recession after the war. That’s one reason it was assumed Truman would be defeated in 1948. Everything you listed is true as reasons why we didn’t 1929 again but I don’t know to what extent the Fed got involved. (I also think "the “business community” was probably over-griping about another 1929 too.)

the 4% rule was based upon ANNUAL rebalancing of the portfolio.
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I am not sure this is correct. I think 4% still worked even if you did not rebalance.

I think it was premised on re-balancing, however in the end the way the numbers land it works almost as well even if you don’t re-balance. Only 1 or 2 more failures and much higher max ending amounts. 1929 is one of those periods where NOT rebalancing would probably done better. Cash-on-hand & bonds value skyrocketed giving stocks time to recover. Going all fixed income might have survived also. I’m sure there’s an online calculator that can specify 1929

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I also have met people who say some companies expected return of the Great Depression after VJ-Day.

Individuals expected this too. Some, anyway. My father, born in 1934, frequently mentioned that after the war, “people” (I assume he meant his lower-middle-income family and friends) were seriously worried that Depression conditions would return. That was the mentality of the time, at least for those around him. He also commented, a few times, that Warren Buffett had a lot of guts to bet against that mentality, which persisted even into the 1950s.

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"I also have met people who say some companies expected return of the Great Depression after VJ-Day.

Individuals expected this too. Some, anyway. My father, born in 1934, frequently mentioned that after the war, “people” (I assume he meant his lower-middle-income family and friends) were seriously worried that Depression conditions would return. That was the mentality of the time, at least for those around him. He also commented, a few times, that Warren Buffett had a lot of guts to bet against that mentality, which persisted even into the 1950s."


“Normal” is whatever you have experienced.
And normal does not of necessity ever happen again during your lifetime.
But cycles do repeat - rarely exact repeats but similar.
However, your own perspectives change and things you learn - or do not learn - are never
quite the same.

Howie52
Nostradamus wrote obscurely about the future he envisioned and so could be interpreted in
different ways at different times. But people impose their perspectives on the past, present
and future views.

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“I never understood why the 4% Rule is referred to as a Save Withdrawal Rate (SWR) as it defines a rate at which your consumption can exceed your dividend, interest, pensions, Social Security, and other “guaranteed” sources of income without depleting your portfolio in 30 years.”

The SAFE withdrawal Rate (SWR) is not for pensions, not for Social Security and 'other guaranteed sources of income.

It is for assets Not Pension, Not SS and ‘guaranteed income’ like annuities.

It is for your other savings.

If you get dividends and interest, that is part of your annual ‘withdrawal’. It s on stocks/bonds/REITS, etc that you own.

Now, for your planning, take SS, take pensions, take annuities. That adds up to XX bucks.

If you spend YYY bucks, more than XX, they you need to take money (via dividends, interest, etc) on your other assets.

Let’s just make up some numbers for discussion.

Let us say your SS income is $25,000 a year. Your pension is $25,000 a year. If you have an annuity, that pays $10,000 a year, then your ‘guaranteed income’ is $60,000

Now, let us say you want to spend $100,000 a year.

Now, let us just say you have savings (stocks bonds REITS CDs) not in an IRA - of $500,000 a year. It spins off Dividends and Interest of , say $20,000 a year.

Let us say you have an IRA/401K of $500,000 …and when you hit 72, you are forced to take 3.5%, increasing yearly, every year out of it. let’s just say it is 4% and that is $20,000 the first year and increasing.

So , without ‘touching’ assets (other than sale of assets in IRA/401K)

your income is $50,000K plus div/int of $20K…plus $20K from IRA… or $90K

The div/int are WITHDRAWALS and the IRA RMD each year is a WITHDRAWAL from assets

You will be taking roughly ($20K plus $20K = $40K ) or 4% from your ‘assets’.

The next question of course, is whether your pension has a COLA? if not, it’s value decreases dollar buying wise each year. Same for the annuity.

Now, on the day your ‘retire’, you can take %4…and you are doing that, whether you realize it or not, by collecting ‘dividends and interest’…

Now, if you live on less than $90K/yr, you are in good shape. If not…well, keep working! defer SS to get the maximum benefit at age 70.

(left out in this discussion is taking withdrawals from a ROTH IR). Or tax consequences…you pay income tax on IRA withdrawals, dividends, interest, part of annuity, and likely pension and SS - )

That 90K income would be reduced by 15% likely by taxes - maybe more if in a high tax state.

t.

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“Who would have had the cajones to rebalance in 1930, then again sell even more “safe” (fixed income) money to rebalance yet again in 1931 or 1932? Is this not “Pascal’s Wager”…where the penalty for being wrong is eternal hell? If you were born in 1864, just as the Civil War was ending, you’d have been 65 in 1929. Say you you read Bengen and Trinity in the 1920s (yeah, I know they didn’t exist then) and saved 25x what you spend. You know that past history suggests that you can safely spend 4% of your nest egg every year, and adjust for inflation/deflation. It’s June 30, 1929 and you retire. Are you going to have the guts to rebalance on June 30, 1930? Great, you do have the guts. Now it’s June 30, 1931. Have the guts to sell even more safe money to keep flushing into risk? Wow! You are great at sticking to the system! Now it’s June 30, 1932? Still sticking to it?”

Let’s look at it another way. You invested in stocks in the 1920s. By 1928, the stock market was going skyward at an amazing rate. You left all your money in the market. Oh, maybe you owned 30% bonds in 1925, but by 1928, your stocks really outweighed your bonds 10 to 1. You watched the stocks climb and climb and sat back as a ‘smart investor’ who couldn’t lose when everyone else was buying, buying, buying stocks. You never rebalanced? Why? You were making money hand over fist. You borrowed money to buy more stock. Then , you could buy stock with 10% margin. Have $1k cash, buy 10K in stock. Wow! Get rich faster.

Then the crash happened. You had never rebalanced. 95% of your money was in the stock market. Poof…and the next two years down and down till 1932. By then you were eating peanut butter and jelly sandwiches. For dinner.

Now…if you HAD annually rebalanced BEFORE the crash…you’d be a lot happier, right?

Back then, buying and selling stocks were expensive. NO mutual funds back then or on line accounts.

Worse, if you had your ‘money’ in the bank…a good percentage of banks went bust and there was no fed backup - no FDIC…gone!

PS My parents born in 1916/1917. Went to work in 1932 (age 16) after finishing ‘high school’. …made it through the depression…wasn’t fun. Made it through WW2 - dad served - and their habits were ‘coupon clippers’ and a lot of ‘do it yourself’ throughout life.

t.

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