1. Home
  2. Financial Planning
  3. 4% rule (paper by Sharpe, Scott, and Watson)
  4. Page 2

4% rule (paper by Sharpe, Scott, and Watson)

I'm reminded of a marketing presentation, guy at the front is building a case for a certian high tech product. He stars with a China population of 8 Billion, and ends with a potential sales number. I raise my hand and tell him the world population wasn't even 6 billion at the time, there were likely only 800 million China residents. "well, these are all estimates" he replied, and stuck with his final numbers.

You are right, all of the input isn't known. But there are statistics. I don't know when I will die, but my insurance guy can tell me that in a pool of 10,000 45 year olds in my general health, half will live until X age. The market will not return 20%, nor 0% in the next twenty years. Is

10% right? I don't know, maybe the 8% I've suggested is closer. But isn't that what Monte Carlo and Statistical approaches are all about? Trying to quantify a range of outcomes? And the results are at least better than "I don't know"

JOE

Reply to
joetaxpayer
Loading thread data ...

The "Die Broke" method might work better. The idea is to buy annuities to get your income (including pensions and SS) to match your expenses, keeping the remainder of your capital in investments (stocks, mutual funds, and bonds). If your expenses grow, buy more annuities.

-- Ron

Reply to
Ron Peterson

Suppose a planner said that his simulations had convinced him that for a single man, a reasonable withdrawal rate was X% initially, increased at the rate of inflation thereafter, and that his formula for X was 4

  • 0.1*(age - 65), working out to 4% for someone retiring at 65, 5% for someone retiring at 75, etc. I would consider that more sensible than a 4% suggestion for everyone. If that means he suggests a 4.4% withdrawal rate to a 69yo, so what? Are you afraid of decimals?

I'd say that uncertain inputs make the problem harder and make simulations more valuable.

Reply to
beliavsky

Joe,

Don't be so sure.

Some years ago I cared for a 95 year old man.

He had retired from the Syracuse symphony at 85 but still went to several old age homes a month giving violin concerts.

He had jogged five miles a day until 91. At that point, he thought he should "slow down a bit" because of his age. So he cut down to jogging three miles and walking the last two!

Of course, longevity ran in his family. His father died at the age of 106 from a serious case of mumps.

Best,

--ron

Reply to
Ron Rosenfeld

It seems like you are arguing both sides, so correct me here where I'm wrong. On the one hand you argue for the 4% rule or the other to which you posted a link. These rules were derived from simulations. On the other it seems you are arguing that simulations have no value because the inputs (in this case) are unknown and vary wildly. Given this, why support your two rules? Or are you just worried about black box solutions? In which case why not use B's hypthetical program, but only if the author provides the assumptions?

-Will

william dot trice at ngc dot com

Reply to
Will Trice

BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.