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>...If a person has $1M wealth, it's $40K interest in his pocket forever, assuming he invests wisely and follows the 4% drawdown rule. You are overstating the

by opo 7y ago

>...If a person has $1M wealth, it's $40K interest in his pocket forever, assuming he invests wisely and follows the 4% drawdown rule. You are overstating the results of the Trinity Study: >...The 4% refers to the portion of the portfolio withdrawn during the first year; it is assumed that the portion withdrawn in subsequent years will increase with the consumer price index (CPI) to keep pace with the cost of living. The withdrawals may exceed the income earned by the portfolio, and the total value of the portfolio may well shrink during periods when the stock market performs poorly. It is assumed that the portfolio needs to last thirty years. The withdrawal regime is deemed to have failed if the portfolio is exhausted in less than thirty years and to have succeeded if there are unspent assets at the end of the period. https://en.wikipedia.org/wiki/Trinity_study https://en.wikipedia.org/wiki/Trinity_study Nothing in the study indicated that its "in his pocket forever" - just that historically, withdrawal rates of 4% were able to last 30 years before the assets were totally depleted. (Also the wikipedia article has a number of criticisms of the study.)

romaaeterna 7y ago
You can replicate the Trinity study in javascript nowadays. If you want to experiment for yourself, Google for firecalc. 4% is just fine as a rule of thumb, or for the purposes of this post.
- opo 7y ago
  Your main point that "Wealth is far different from income." is very true, but I am not sure why you are doubling down on over-stating the results of the Trinity study. >...4% is just fine as a rule of thumb, or for the purposes of this post. Let's see. Your claim was that "If a person has $1M wealth, it's $40K interest in his pocket forever, assuming he invests wisely and follows the 4% drawdown rule." Going to your suggested website and entering the numbers for 30 years gives a 5% change of bring broke by the end: >...For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 6 cycles failed, for a success rate of 95.0%. That's not what most people think of when they hear they will be able to spend 4% forever. Using a larger number just increases the failure rate. Someone retiring early and trying to last 50 years gives an estimated failure rate of almost 22%: >...For our purposes, failure means the portfolio was depleted before the end of the 50 years. FIRECalc found that 21 cycles failed, for a success rate of 78.8%. Nothing in the Trinity study indicated that its "in his pocket forever" - just that historically, withdrawal rates of 4% were able to last 30 years before the assets were totally depleted
  - romaaeterna 7y ago
    A 95% chance that your portfolio was not depleted (and in fact almost doubled on average to $1.86M in inflation-adjusted dollars). I'd call that pretty conservative. If you want absolute guarantees, life just doesn't have them. Not even if you bury your money in the ground.

by opo 7y ago

romaaeterna 7y ago

You can replicate the Trinity study in javascript nowadays. If you want to experiment for yourself, Google for firecalc. 4% is just fine as a rule of thumb, or for the purposes of this post.

opo 7y ago
Your main point that "Wealth is far different from income." is very true, but I am not sure why you are doubling down on over-stating the results of the Trinity study. >...4% is just fine as a rule of thumb, or for the purposes of this post. Let's see. Your claim was that "If a person has $1M wealth, it's $40K interest in his pocket forever, assuming he invests wisely and follows the 4% drawdown rule." Going to your suggested website and entering the numbers for 30 years gives a 5% change of bring broke by the end: >...For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 6 cycles failed, for a success rate of 95.0%. That's not what most people think of when they hear they will be able to spend 4% forever. Using a larger number just increases the failure rate. Someone retiring early and trying to last 50 years gives an estimated failure rate of almost 22%: >...For our purposes, failure means the portfolio was depleted before the end of the 50 years. FIRECalc found that 21 cycles failed, for a success rate of 78.8%. Nothing in the Trinity study indicated that its "in his pocket forever" - just that historically, withdrawal rates of 4% were able to last 30 years before the assets were totally depleted
- romaaeterna 7y ago
  A 95% chance that your portfolio was not depleted (and in fact almost doubled on average to $1.86M in inflation-adjusted dollars). I'd call that pretty conservative. If you want absolute guarantees, life just doesn't have them. Not even if you bury your money in the ground.