4% rule could be wrong

So I am looking into the 4% rule where you retire if you can live off of that. That is based on the average market returns of 8-10% because that’s what it’s been historically.

My issue is that if you have money in bonds as a part of your portfolio, you are not going to get those historic returns. Those returns are for the stock portion of your portfolio.

So if you are 50/50 bonds and stocks. You would get the average of stocks (8%) and whatever the average of the bond market is (right now it’s close to 0). This would make the average return 4%. I understand that bonds aren’t 50% of people portfolio but even if they are 10%, it is something worth noting in the calculations.

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Could be wrong, but not sure the 4% rules assumes 8-10% annual returns in retirement. I think it accounts for lower than expected returns and a ton of scenarios in the calculation. In theory, if you’re taking out 4% per year and gaining 4% per year wouldn’t that also mean you’d never go broke? Your portfolio just might not grow but you’d just be spending what you’re returning in the market and staying even either way. So I think the 4% rule takes that into account. Maybe I’m totally wrong here, this is just me trying to logically think it through

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Hi @thberry10,

Thanks for the response. I don’t think you are understanding what I am saying. You are not going to be getting market returns in your whole portfolio because of bonds. The 8% is the market average. So if your portfolio is 50% and 50% when you retire, only half of your portfolio would be gaining the 8%.

@Jeremy, any thoughts?

So the 4% rule is based on the “Trinity Study” and the logic went like this: They modeled a 50/50 portfolio of stocks/bonds during 55 different starting years.

Then, they took 4% of the starting amount out of the portfolio every year (as though to spend), and adjusted that amount up for inflation every year. Then they counted how many times you went broke within 30 years. Using the 4% withdrawal rate, you would have only gone broke in two starting year (1965 and 1966). The other 96% of years your portfolio never goes to zero (and in the vast majority of cases it’s way up).

That’s really all it is. It isn’t a guarantee of anything happening going forward.

Now, since bonds are paying so little right now, does this 50/50 historical look still apply? I don’t know. I think the idea behind the study was to see if history is any indication of future behavior what would happen. Sometimes bonds are low, sometimes not.

A couple other notes:

  • The trinity study guy recently came out and said 5% is actually a better number. He thinks 4% is too conservative.
  • 4-5% passes the sanity check for me. 1% would be way too low (i.e. you could throw it under the mattress, take out 1%/year and live for 100 years). 10% seems too high… I wouldn’t bank on the average US stock market return and no volatility. 4-5% seems reasonable for an invested portfolio.
  • You aren’t going to be doing this in a vacuum. If 10 years into your 40 year retirement the market is way down, you can slow down spending a bit, or ramp up your side hustle or whatever. It’s not like it’s a one time decision you can never change.
  • You mention 8% is average, but the US market average is closer to 10%. Bonds historically are more like 4-5%, giving your portfolio 7%ish on average? Enough to cover the withdrawal rate and inflation 96% of the time?

That post on MarketWatch about a potential revision to a “5% rule” is terribly interesting.

Certainly not the direction I would have thought a revision would go!

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