4 ms·

If it’s all in the market, most wisdom says you can take out 4% a year and never run dry. Is 4% of your stash enough to live on? Congratulations you are financi

If it’s all in the market, most wisdom says you can take out 4% a year and never run dry. Is 4% of your stash enough to live on? Congratulations you are financially independent. You can read through mr money mustache if you want more depth..

tutfbhuf 6y ago
Exactly this. Put your cash in S&P500 and live a peaceful life. For optimization: take out a little bit more when the price is considered to be high and take out a little bit less if it's low.
- fratlas 6y ago
  Is this not timing the market? How do you calculate what is "high" and "low" - rolling average increasing 7% per year, compare current price to that expectation?
  - tutfbhuf 6y ago
    Mean reversion. > Mean reversion in finance suggests that asset prices and historical returns eventually revert to their long-term mean or average levels The avg. 7% per year will break down into very good years and bad years. Let's say the S&P500 is already down -5% YTD and has underperformed over recent years, then you would it considered to be low, because you would rather expect the performance to increase in order to match the long-term avg. of 7%. So at this point you would happily buy in and expect mean reversion. But of course there's no such thing as perfect timing (except in hindsight) and no guarantee for mean reversion to happen.
  - llampx 6y ago
    Timing the market is doable I'd say. Not all the time and not by everyone but it is completely doable. Sometimes you will buy too late or sell too early but even buying the dips is timing the market. If you partook in some stocks, more so than otherwise, during the March lows you were also timing the market.
Apes 6y ago
The current risk free rate is absurdly low, which would suggest a much lower sustainable draw down than 4% for the next 10-30 years, probably only around .5 to 1.5% at most.
- bluquark 6y ago
  I agree the 4% rule is too aggressive nowadays. But every .25% increment lower means a huge improvement in sustainability, so even adjusting down to 3% is profoundly more conservative than the original rule. At 1.5% you are going lower even than endowment funds aiming for perpetual maintenance of principal (they often use 2%-2.5%). The 4% rule of thumb was calculated to minimize risk of running out of money during the time period. 1.5% * 30 years = 45%, so an investment that simply keeps up with inflation would leave you with more than half your cash after 30 years. And note that the stock market almost always has positive real returns over periods as long as 30 years (see William Bernstein’s book Deep Risk), so the assumption “just keeps up with inflation” is already very pessimistic.
- eloff 6y ago
  That's rubbish that you think you can predict a 1% return in the market over the next couple decades. It would be extremely unprecedented, and you'd need a very solid argument to have any confidence at all in that prediction.
  - arcticbull 6y ago
    Not to mention SPY has a 1.75% dividend yield.
- marvin 6y ago
  Well, inflation is also absurdly low. The direct return on equity, globally, is around 5% for a pure stock portfolio. What is your basis for believing that the safe withdrawal rate will be less than half this, at less than 1.5%? That sounds excessively pessimistic to me.
  - anonymousiam 6y ago
marcusverus 6y ago
To be clear, the 4% rule assumes a 30 year retirement (i.e. retiring at ~50-60). For early retirement you should target a 3.5% annual withdrawal rate. https://www.madfientist.com/safe-withdrawal-rate/ https://www.madfientist.com/safe-withdrawal-rate/

tutfbhuf 6y ago

Exactly this. Put your cash in S&P500 and live a peaceful life. For optimization: take out a little bit more when the price is considered to be high and take out a little bit less if it's low.

fratlas 6y ago
Is this not timing the market? How do you calculate what is "high" and "low" - rolling average increasing 7% per year, compare current price to that expectation?
- tutfbhuf 6y ago
  Mean reversion. > Mean reversion in finance suggests that asset prices and historical returns eventually revert to their long-term mean or average levels The avg. 7% per year will break down into very good years and bad years. Let's say the S&P500 is already down -5% YTD and has underperformed over recent years, then you would it considered to be low, because you would rather expect the performance to increase in order to match the long-term avg. of 7%. So at this point you would happily buy in and expect mean reversion. But of course there's no such thing as perfect timing (except in hindsight) and no guarantee for mean reversion to happen.
- llampx 6y ago
  Timing the market is doable I'd say. Not all the time and not by everyone but it is completely doable. Sometimes you will buy too late or sell too early but even buying the dips is timing the market. If you partook in some stocks, more so than otherwise, during the March lows you were also timing the market.

Apes 6y ago

The current risk free rate is absurdly low, which would suggest a much lower sustainable draw down than 4% for the next 10-30 years, probably only around .5 to 1.5% at most.

bluquark 6y ago
I agree the 4% rule is too aggressive nowadays. But every .25% increment lower means a huge improvement in sustainability, so even adjusting down to 3% is profoundly more conservative than the original rule. At 1.5% you are going lower even than endowment funds aiming for perpetual maintenance of principal (they often use 2%-2.5%). The 4% rule of thumb was calculated to minimize risk of running out of money during the time period. 1.5% * 30 years = 45%, so an investment that simply keeps up with inflation would leave you with more than half your cash after 30 years. And note that the stock market almost always has positive real returns over periods as long as 30 years (see William Bernstein’s book Deep Risk), so the assumption “just keeps up with inflation” is already very pessimistic.
eloff 6y ago
That's rubbish that you think you can predict a 1% return in the market over the next couple decades. It would be extremely unprecedented, and you'd need a very solid argument to have any confidence at all in that prediction.
- arcticbull 6y ago
  Not to mention SPY has a 1.75% dividend yield.
marvin 6y ago
Well, inflation is also absurdly low. The direct return on equity, globally, is around 5% for a pure stock portfolio. What is your basis for believing that the safe withdrawal rate will be less than half this, at less than 1.5%? That sounds excessively pessimistic to me.
- anonymousiam 6y ago

marcusverus 6y ago

To be clear, the 4% rule assumes a 30 year retirement (i.e. retiring at ~50-60). For early retirement you should target a 3.5% annual withdrawal rate. https://www.madfientist.com/safe-withdrawal-rate/ https://www.madfientist.com/safe-withdrawal-rate/