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https://ofdollarsanddata.com/why-the-5-rule-is-the-new-4-rule/
An additional take on Bergen’s new book and data, which I posted about 6-8 weeks ago.
Nothing for me to add except Nick is a smart guy, and the table in the article is pretty compelling.
I’ve read Nick for a few years now, and he just keeps getting better.
I agree, 5% sounds very reasonable.
After reading his new book and running all our numbers through Maxifi and Boldin, we seem to be perfectly fine retiring in the next few years.
I’m happy to go with 5%. The software says we’ll be able to spend more than that until we start taking Social Security at age 70, so we’ll see how it goes.
Anyway, I always tell my wife that in the worst case scenario, there’s always geo-arbitrage 🙂 There are plenty of cheaper places to live than the US if it comes to that.
I’d be hesitant with geo-arbitrage as a back up plan. Gets harder the older you become. Within the US possibly.
I’ve seen too many people who’ve geo-arbitraged from UK to Spain and Portugal even pre-retirement end up returning in a worse real estate position driven by health and proximity to family support.
No intention to start the debate again on this, but depending on your current ages, why take the risk of delaying SS income, when you could smooth things out by starting at FRA even if you don’t need it to spend it thereby increasing the security on your core investments for the future and the stability of your lifestyle perhaps.
That’s one approach. It’s been explained before that as it is the most secure inflation protected income someone will get there are ample reasons to seek to maximise it through deferral as a longevity hedge.
There’s no “risk” in delaying SS income other than in an early death where one may not have had payback, but that rather puts financial considerations in the shade.
I picked up a few of things:
“Bengen admits he could’ve gone further by adding Real Estate Investment Trusts (REITs), crypto, and other asset classes, but decided against it because of the diminishing returns from the recent four additions.” Bengen’s new 50/40/5 portfolio is more diversified than the previous one.
Mr.Maggiulli thinks the higher withdrawal rate is valid if you can decrease your spending during market crashes. He includes a link to a table that indicates that if 20% (or more) of your spending is discretionary and can be reduced at will, then one will never run out of money during a 30 year withdrawal period. (emphasis mine).
One caveat is the portfolio. All of Bengen’s data assumes one has a well-diversified portfolio with large- mid- and small-caps as well as foreign equities with a healthy dose of US Treasury bills and some cash. (Bills have a short-term maturity of 4-weeks to 1-year). Most recently 9/23 bills had a rate of 4.01 to 3.62%.
This mirrors my findings. My portfolio is well diversified and is currently 56/44%. That 44% is bonds and cash, but is fluid. For a few years, because of returns my bond component was less and cash higher. As interest rates fall I’ll be making adjustments.
Last year I withdrew 3.5% because that’s all we needed. The data suggests I could pull 4.4%, reducing it by 20% to 3.5% during “market crashes”. While 4.5% or 5% is the new initial withdrawal starting rate, I’m obviously pretty conservative. However, there is a possibility my spouse could live for another 25 years. On the other hand, she has her own retirement accounts from which she does not yet take withdrawals and which I do not include here.
I noticed the additional complexity, but missed the 20% spending reduction. I think I’ll stick with 4%. (Actually, I’m spending less than 1% this year, but I’m planning to travel again, and my CCRC fees will keep going up.) I have no interest whatever in dying with zero.
Yes, “zero” can easily become a negative number. Bengen’s “new” spending rate is generous. I don’t increase my withdrawals each year to keep up with inflation. However, the RMD calculator I use indicates that I’ll have to increase the amount of my withdrawal by about 1.75% each year per IRS rules. If I assume a 4% return each year, then the next RMD will be 4.6% and increase each year thereafter. My withdrawals don’t have to be spent.
It seems the increase of withdrawal rates is enabled by adding a few more funds such as small cap, etc. Having not read the Bergman’s new book, I would assume that it references the percentage in each. I’m pretty happy with my set and forget total market fund but if you’re willing to add a little more complexity to your accounts then this might be a way to wring out a higher safe withdrawal rate.
I refer to Callan’s periodic table of investments from time to time. I’ve got copies with annual data going back to 1991. It provides data on annual returns of key indices. The nine indices have changed over time. I used it as an aid when I built my allocations.