January 2024 update to REHP site.
intercst
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This article was posted January 1, 2024.
Amazing!
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That’s the key to retirement success – staying one step ahead. {{ LOL }}
intercst
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Very interesting. One thing I learned from that is over the short term (10 years or less) is when the future is the least well known. You gotta survive the short-term losses.
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Jim:
Post #5175 by mungofitch on the Berkshire Hathaway board (shrewdm.com)
“…no more than 2.68% of today’s starting SPY portfolio value. The notion is that income outcomes like what was typical in the past can only be expected if the starting situation resembles those that were typical in the past.”
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The valuation discussion has been done multiple times before. But it usually reflects a misunderstanding of the “4% rule”. Plus there’s a secondary misunderstanding here, the 4% rule doesn’t apply to “SPY”, it applies to a 60/40 portfolio.
The 4% rule literally states that you can safely withdraw 4%, and thereafter index your withdrawal by CPI, for 30 years, if and only if the next sequence of 30 years is no worse than the worst sequence of 30 years in the study (beginning 1928 or 1966 IIRC). So, if we have a 30 year period beginning with something worse than the great depression or the great stagflation, then yes, your portfolio won’t survive for 30 years.
@intercst is the expert on this and has been writing about it since 1994 or so.
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True. The 4% payout is not guaranteed to succeed. Risk is still there.
On the other hand, if you retire on a 4% plan and see it running off the rails, you have time to make adjustments. Having a back up plan is not a bad idea. That can mean working part time, going back to work, converting a hobby into a business, or moving to a lower cost situation.
And of course the best back up plan is to have reserves above that 4% minimum. Wait a while if you can to accumulate some reserves.
None of this is cast in stone. Adjust as events develop.
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One small quibble - it’s not just applicable to a 60/40 portfolio. The original study by Bengen was done on a 50/50 portfolio, and subsequent work looked at other portfolio allocations. The best rates of success were in the mid-range, generally 50/50 to 70/30, so 60/40 is kind of the happy medium of that range, which is why it tends to be the default when discussing the 4% rule.
For looking what your personal portfolio projections will be, firecalc.com is a great resource, if you dig into the details of how to personalize it, rather than just using the defaults.
AJ
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Exactly. The study was done on various portfolio combinations. And the “safe withdrawal” number comes out slightly different for each of them (just as it does for different withdrawal periods). It’s very important to keep in mind that “4%” is just a rule of thumb because it’s the closest round number to the results for the 60/40 portfolio. And the reason 60/40 is so studied is mainly because it was the “default” recommendation for many years, this despite the studies showing that a stock allocation somewhat higher than 60% is optimal. Furthermore, people extended the study many times, with all sorts of different inputs. For example, you can see that the optimal stock allocation goes up with longer withdrawal periods. I think I even saw someone attempt to do the study using EVERY DAY OF THE YEAR as a starting point instead of just Jan 1st. Instead of about 100 periods examined since 1900, it could be 2500 periods examined! Most people concluded that that was overkill. But the studies using various portfolios 100/0, 50/50, 0/100, all TIPS, etc. Some of the info can be found here.
I do wonder however if an updated study in a few decades may show that a long period of ZIRP followed by normalization of interest rates may have perturbed or even changed those results somewhat. Maybe 60/40 isn’t so good anymore?
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You can study the 4% rule and calculate the historical results to 4 decimal places, but I don’t think you can make a credible forecast of the future with more than one significant digit. Thus, the “correct” number is more likely to be 4%, rather than 3% or 5%.
intercst
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Yep – that was studied. I don’t recall the result.
The one result I do recall from these refinement studies was frequency of rebalancing. The optimal time period was over 10 years – I want to say 11 and some months.
But there are other rebalancing approaches that are simpler and effective. Make deposits exclusively into the sector (bonds or stocks) that is below the target during accumulation. During with draw take funds from the sector above the target.
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The result was … close to 4%.
Frequency of rebalancing is mostly determined by where the money is held. If it is held in tax-free (Roth IRA) or tax-deferred (TIRA, 401k, etc) then you can rebalance as often as you like, annually (most people), quarterly (some people), monthly (very rare). But if it is mostly held in taxable accounts, rebalancing requires careful analysis of what the tax effect might be of doing so. Just like the skim from financial institutions reduces your net withdrawal, so too do taxes paid each year you are withdrawing.
I suspect you may be misremembering (I do that all the time!), because rebalancing over 10 years is almost akin to not rebalancing at all, because 10 years can span multiple business cycles in many cases. Heck, 10 years can see prevailing interest rates go from 5 to near-zero and back to 5 percent! 
Oh, there are tons of strategies that active investors could use to potentially see higher returns, and thus higher withdrawals. But history has shown that the average person (the safe withdrawal rate studies were done for the average person) over the long-term can’t outperform the wide indexes like the S&P500* for example. And history has further shown that money managers (except perhaps one or two) over the long-term also can’t outperform the wide indexes. The studies were done the the “everyman”, not the few exceptions that have a gift of allocating capital to result in higher returns.
* One question I’ve asked over the decades is - How is it that the “fund managers” of the S&P500 can beat almost all other fund managers consistently, and always over the long-term? I still don’t have an answer to that question. We repeatedly see the S&P500 “fund managers” make decisions (like removing AIV and adding TSLA in late 2020) that look bad for years, yet somehow still outperform everyone in the medium-term and the long-term. This discussion should perhaps get its own post in METAR.
I did misremember. The best return is at 75 months. The stated reason for beating every single shorter rebalance period is on average stock market expansions exceed down market periods in duration.
page 114 Conserving Client Portfolios During Retirement; Bengen; FPA Press
One thing firecalc did not make clear (nor do most calculators) is when you enter a value for “spending”, is that the pre-tax value you want to extract from your portfolio? (for example, would be what my current gross income is, not what I take home after taxes and benefits). I’ve always assumed yes, but it’s never clear to me.
I always assume that spending is the total amount of money that will need to be extracted from the portfolio, including any taxes that you will need to pay on that extraction. Taxes are an expense that you still need to pay in retirement, and you need to account for them as a part of your spending.
AJ
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I’m just the messenger, thought it would be good to have a different take on it, also from an “expert”. I think Jim understands the 4% rule. Go over there and discuss it with him.
Personally, I think using 40% bonds isn’t going to help. Bonds are almost guaranteed to have a lower real return than stocks over our 30 or 40 year retirement.
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Having 40% in fixed income absolutely helps if you retire into a down market. Check out the Year 2000 retiree portfolio returns in my annual update (bottom of the page). After 22 years of withdrawals, the 75/25 allocation in the Retire Early portfolio has less than half its starting balance. The 60/40 alocation of the One Fund portfolio allocation has 86% of its starting balance – big difference. If you happen to retire in a good market like I did, you can raise your stock allocation as your portfolio balance increases. I was at 90/10 once I hit 4X my starting balance a few years into retirement.
2022 Update: Real-Life Retiree Investment Returns (retireearlyhomepage.com)
That said, I don’t like bonds and kept the maturities in my fixed income allocation short using Vanguard’s Short-Term Corporate Bond Fund with a maturity of 2-3 years after I got tired of managing a CD and Treasury Security ladder.
The abysmal returns of fixed income vs. the S&P500 are the cost of insurance if you want to survive the worst case 30-year sequence.
intercst
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Don’t forget that if you’re living off of only qualified dividends and capital gains, a married couple can take more than $100,000/year out of the portfolio at the 0% tax rate. That’s another reason to delay SS to age 70.
intercst
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The vast majority of my retirement funds will be an IRA. 
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Correct, as long as they are married. The year after one of them dies, the survivor will be subject to the Single rate, which has a much lower threshold. If the couple had set up their accounts to throw off $100k+ in qualified dividends, the survivor will face a choice on whether to pay taxes on a good chunk of those dividends, or having to liquidate the dividend-paying stocks, and possibly subjecting themself to paying capital gains taxes on those liquidations.
I would question how many people who can still make the choice to delay SS while taking more than $100k in capital gains and qualified dividends from taxable accounts who don’t have significant balances in pre-tax retirement accounts that will be subject to RMDs at either age 73 or 75. So, long term tax planning definitely needs to be considered when determining whether it’s prudent to only take capital gains and qualified dividends.
It is often more tax-efficient in the long run to use up at least one’s standard deduction, and possibly the lower income brackets, by either using the retirement account money for living expenses, or converting it to a Roth account, rather than trying to have capital gains and qualified dividends be the only income. I’ve seen people lamenting about getting used to paying nothing in taxes for several years, only to be shocked at how much they owe in taxes once RMDs hit. The SECURE and SECURE 2.0 legislation that raised the RMD age requirement exacerbated the tax hit that RMDs can cause by allowing more years for the accounts to grow before being required to take withdrawals.
Add to that the fact that by delaying SS until age 70 to maximize SS income, you are also maximizing the annual income taxes once you start taking the income. So I would strongly suggest looking at potential lifetime taxes, rather than focusing on being able to pay $0 in taxes for a few years.
AJ
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