Sequence of returns risk and the 4% rule

[ToushiTime]

Some of you have discussed on here whether retirees should adhere to the 4% drawdown rule.

Ben Felix just released a new YouTube video on whether to follow the rule and what would happen if shxt hits the fan just before/during retirement.

He argues that it might be okay to go very low on cash and bonds and high on equities right into and through retirement if you adjust your drawdowns based on the level of returns each year.

"Sequence of Returns Risk"
https://www.youtube.com/watch?v=QGzgsSXdPjo

Any thoughts?

[RetireJapan]

I think it makes sense, as it mirrors how people will react in real life.

No one is going to keep taking out 4%+inflation in the face of a stock market crash. Instead, they are going to cut their discretionary spending and wait for their portfolio to recover.

Personally I am planning to take a fixed %, maybe 5%, and not adjust for inflation. But that is a fair way off.

[ToushiTime]

> Personally I am planning to take a fixed %, maybe 5%, and not adjust for inflation. But that is a fair way off.

What’s you reasoning for that?
You mean poor returns in a recession would be partly offset by deflation making them go further?

[RetireJapan]

> Personally I am planning to take a fixed %, maybe 5%, and not adjust for inflation. But that is a fair way off.

What’s you reasoning for that?
You mean poor returns in a recession would be partly offset by deflation making them go further?

Just simplicity. Taking a fixed 5% (instead of a fixed amount, as recommended by the 4% rule) means that the portfolio will never be completely depleted, although there is a chance of it shrinking to the point that the withdrawals are no longer sufficient.

Can't see that happening for us though, as our spending needs are much less than the projected amounts.

Should also let us a spend a bit more too

[ToushiTime]

So you mean using 5% of the remaining balance each year without adjusting for inflation?
In other words, your budget will shrink each year, especially with inflation.
But you can also up your spending if the stock market booms I guess.

[ChapInTokyo]

I’m using the Monex Vision app to simulate my safe withdrawal amount, taking into consideration the changing asset mix of my remaining portfolio as the future events unfold.



One reason for not going by a fixed safe withdrawal rate is because I am currently renting my mansion which will become difficult as the years pass. So I am expecting to buy a house or a mansion at some point with a good chunk of my invested assets which will throw a spanner in any academically derived safe withdrawal rate.

Obviously this will not apply to those of you with your own houses, although earthquakes and tsunamis in the future might also make any of our plans less than perfect.

[RetireJapan]

So you mean using 5% of the remaining balance each year without adjusting for inflation?
In other words, your budget will shrink each year, especially with inflation.
But you can also up your spending if the stock market booms I guess.

Might shrink temporarily, but should grow as the portfolio does.

[goodandbadjapan]

So you mean using 5% of the remaining balance each year without adjusting for inflation?
In other words, your budget will shrink each year, especially with inflation.
But you can also up your spending if the stock market booms I guess.

Might shrink temporarily, but should grow as the portfolio does.

I'm probably going to take this approach, too. Makes sense. Can take more when markets are up and less when markets are down and you can't run out of money. But, as Ben said, there is the risk that your withdrawals no longer cover your needs.

[eyeswideshut]

I think it makes sense, as it mirrors how people will react in real life.

No one is going to keep taking out 4%+inflation in the face of a stock market crash. Instead, they are going to cut their discretionary spending and wait for their portfolio to recover.

Personally I am planning to take a fixed %, maybe 5%, and not adjust for inflation. But that is a fair way off.

I like this idea and it is simpler than having to work out inflation. So basically you just take out 5% of whatever your portfolio is worth on a given date every year? So if the portfolio goes down you take less and if it goes up you take more. The risk scenarios would be stagflation, where asset prices go nowhere but inflation increases significantly or a prolonged deep market crash. Both of which could cause some lean years but, in theory, the portfolio should survive.

[RetireJapan]

So basically you just take out 5% of whatever your portfolio is worth on a given date every year?

Yes. For us, this should be more than we need for basic expenses, so we will add it to a cash fund.

In a severe market crash we could even use some of the fund to buy when prices are depressed.