I’ve posted Entry #351 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The 4 Percent Rule Points Us to the Average Safe Withdrawal Rate.
Juicy Excerpt: The 4 percent rule is not the product of mere foolishness. It is the product of tough logic being applied to a fundamental misunderstanding.
Evidence Based Investing says
No.
4% is not the average, it is the withdrawal rate that survived every single 30 year period in the historical record.
Sometimes higher rates survived eg 5%, 6% or higher maybe close to 9% in some 30 year periods.
Rob says
A withdrawal rate that only barely survived starting from a time-period at which the valuation level was much lower than the one your retirement is starting from is not safe, Evidence. It’s not a close call. What you are describing is an INSANELY RISKY withdrawal rate.
The lowest safe withdrawal rate we have seen is 1.6 percent. The highest is 9.0 percent. 4.0 percent is a number between those two numbers. That’s all that you can say about it.
If you want to identify the safe withdrawal rate, you need to take into consideration the factors showing what is safe. The biggest factor is the valuation level that applies on the day the retirement begins. Fail to include that one in your calculations and you are going to miss the mark wildly.
Rob
Anonymous says
What 30 year period did not survive a 4% withdrawal rate?
Rob says
Please notice that the word you use is “survive,” not “safe..” 4 percent is indeed the highest always-surviving withdrawal rate for the 147 years of historical return data available to us. If Greaney had claimed to have identified the highest always-surviving withdrawal rate, his study would be accurate.
That’s not the claim he put forward. He claimed to have identified the safe withdrawal rate. That’s a very different thing.
Driving a car drunk is not a safe action. There are alcoholics who tell themselves as they get behind the wheel that “I drove drunk three times before and I am still here, so it is 100 percent safe to do it again.” This is gravely flawed logic. A 4 percent withdrawal taken in a retirement beginning in 1929 had a 50 percent chance of working out and a 50 percent chance of failing. Those retirements barely survived (there was one dollar remaining in the portfolios at the end of 30 years). The fact that there was only one dollar remaining in these portfolios at the end of 30 years does not tell us that these retirements were safe, it tells us that they were high-risk. What the historical return data is telling us is “learn from the experience of investors who came before you and don’t ever, ever, ever leave your employment at a time when your retirement plan is as risky as the ones that were reduced to one dollar of portfolio value at the end of 30 years.”
I believe that a failed retirement is a serious life setback. It is my intent to continue to post honestly re this matter.
I wish you all good things, Anonymous.
Rob
Anonymous says
That’s it? The entire basis of your 15 year rant is a semantic quibble over “survived” versus “safe”?
Nonsense. Even you can’t be that unhinged. “Safe”, as you are defining it, is a subjective unmeasurable warm-and-fuzzy. There is no such thing as that kind of “safe” in the stock market. You’re just using that stupid premise as an excuse to keep attacking Greaney, long after he left you alone.
Rob says
I had become friends with a lot of the people whose lives Greaney destroyed, Anonymous. It is my intent to continue to post honestly re this matter.
I do wish you all good things.
Rob
Anonymous says
Name one person or link to one post in which someone’s life was destroyed by Greaney.
Rob says
The last time that I looked, the Post Archives of the Retire Early board at the Motley Fool site could still be accessed, Anonymous.
In the years when I was posting there (1999 through early 2003), there were discussions of Greaney’s study on almost a daily basis. There were thousands of people there who planned their retirements based on what Greaney claimed in his study.
Rob
Anonymous says
So then, you should be able to provide a link very easily (if what you say is true).
Rob says
The members of your jury will get to hear about everything that happened and to examine all the evidence, Anonymous. That’s how our system works.
I wish you the best of luck with it.
Rob
Anonymous says
The members of your jury will want to know why you made a claim, but could not support it with a link/facts.
Rob says
It will be interesting to see how things play out.
Rob
Anonymous says
So I guess we will all need to wait around for a 30 year period in which 4% doesn’t work. I don’t think any of we will around that long.
Rob says
When we see the next price crash, people will panic, Anonymous. We saw that at the Bogleheads Forum in the days following the 2008 crash. The panic never got out of hand because prices went back up again after a few months. But we saw people there saying things they had never said before in the days before prices went back up. If we do not see prices go back up quickly after the next crash. the sense of panic will grow and people will start looking for explanations for what has happened to them. People will naturally be drawn to examination of the past 36 years of peer-reviewed research in this field and we will all pull together to survive the crisis and then to thrive in the days after we bring it to an end.
I expect to be around and I expect you to be around. But we will have to wait a bit to find out for sure. I hope that works for you.
Rob
Anonymous says
If people use market timing schemes like you, they will be hurt. If they are buy and holders, they will be fine.
Rob says
Okay, Anonymous.
Please take good care.
Rob