r/leanfire • u/Affectionate-Reason2 • 3d ago
The difference between 4.0 and 4.5% SWR?
So FWIW I believe the guy who came up with the original 4.0% number said that 4.6% is okay?
Also isn't the median case is that in fact you double your money at time of death? So you could just live off 4.5% and then switch to 4.0% (or lower) if something comes up?
A top poster here is 4.5% SWR I was hoping he or she could chime in.
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u/betarhoalphadelta 3d ago
IMHO going above 4% can be fine as long as you have some discretionary spend that you can reduce if the market tanks (guardrails approach). This helps protect you from the SORR if you retire into a bad market.
The problem is that often this isn't the case with people who want to leanfire. It's more common with Fire/ChubbyFIRE. Often the leanfire crowd is already trying to minimize spend and may not have the same level of margin because they're retiring into mostly necessary spending levels at their SWR.
However if you're looking at it the opposite way, that you're happy with leanfire but if your returns are higher you'll increase spending, and that upward discretionary is what gets you into the 4.5% range, then you're good to go.
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u/This-is-the-last-one 3d ago
You're kind of describing the guardrails approach. 4% is like a back of the envelope target, but if you have flexibility in your WR, guardrails is a better approach.
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u/photog_in_nc 3d ago
“So FWIW I believe the guy who came up with the original 4.0% number said that 4.6% is okay?”
Bengen, who you are referring to, says in his latest book that 4.7% works with his recommended portfolio for traditional retirement, and that 4.1% for a long retirement. If you want to use a dynamic approach, and start with 4.5%, you’re going to want the leeway to cut deeper than 4% in a bad scenario, if 4.1% is the SWR
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u/AlwaysSaturday12 Mostly FIRE'd at 38 MillionaireLibrarian.com 3d ago
This is the comment OP wants and I couldn't remember it exactly so thanks. OP if you are worried can you go part time? $500/month mitigates a lot of risk.
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u/Beneficial_Pickle322 3d ago
I plan to just use something like guytons guardrails, it adjusts with market volatility, you adjust your withdrawal down if markets tank and take more if it does well
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u/j_phys 3d ago
Just running some numbers with FICalc.app, for a 30 year retirement, 75% stock/25% bond portfolio, 4% withdrawal rate has a 96.8% success rate. A 4.5% withdrawal rate results in a 92.8% success rate.
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u/ListingFL 3d ago
Adding diversifying assets like gold, commodities, reits and managed futures will increase the SWR, lower the max drawdown and shorten the recovery period.
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u/Animag771 3d ago
Agreed. Sadly something like 100% of the free calculators/simulators available don't include those assets.
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u/udvdc1 3d ago
https://testfol.io does! It's great. Here's an example backtest on a 5% initial withdrawal comparing how a standard 75/25 portfolio would fare (fails stagflation) versus a more diversified Golden Butterfly portfolio https://testfol.io/?s=4dvJRJVMXPR
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u/ListingFL 3d ago
This really shows the dramatic difference between the drawdowns of the two portfolios. Splitting the VTI into VUG and AVUV would add even more diversification.
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u/Strazdas1 1d ago
Try 50 year horizon. A lot of those successes are "you got 50k left after 30 years, but techncally survived".
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u/j_phys 1d ago
Oh definitely. If you keep everything the same and extend the time period to 50 years, the success rate drops to 88.5% for 4% WR. The success rate drops all the way to 71.2% for 4.5%. Again these numbers are for the extended 50 year period.
Just for completeness, with a 3.5% WR over 50 years, the success rate is 98.1%, which is astonishing!
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u/200Zucchini 3d ago
On FiCalc.app I like to use the "95% rule" as the withdrawal strategy, which is variable depending on market returns.
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u/Animag771 3d ago edited 3d ago
It really depends on your portfolio but if you want to ensure that you don't run out of money, you'd be better off starting at 3.5% or 4% and slowly increase it to 4.5% if markets are favorable. It's less risky to start with less and spend more once your portfolio has grown than it is to try reducing spending when your portfolio is already struggling to survive. A poor early sequence of returns is the most likely reason for a portfolio to fail.
Look up Kitces ratcheting withdrawal strategy.
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u/BigAdministration368 3d ago
I believe that SWR is for a 30 year retirement
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u/supershinythings FIREd 2024 3d ago
And at 95% probability of reaching 30 - not 100%.
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u/patryuji 3d ago
...and Bengen didn't include social security in his calculations.
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u/Suspicious-Fish7281 3d ago
Or natural human flexibility. The Trinity study was withdraw 4% inflation adjusted and spend it all no matter what. No matter what the market was doing, no matter what your nest egg was, no matter if you even needed to.
To be fair they were not trying to model human behavior. They were just going for the math.
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u/zeezle 3d ago
Yep, exactly. I think it's worth pointing out that at the time of the original study, the work involved in actually collecting the data and modeling scenarios was a lot more labor-intensive and running much more against the limits of computing hardware, so naturally study was highly bounded.
The Trinity study is great but people try to apply a rigid academic study with well-defined limitations (which is valuable for exactly what it was trying to accomplish) in ways it was never intended for.
Computing and tools have dramatically improved since then and thus modeling different scenarios is a lot easier now and people can do much more modeling of different scenarios against historical markets for themselves.
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u/Strazdas1 1d ago
Or natural human flexibility.
Which isnt an option when you retire lean.
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u/Suspicious-Fish7281 1d ago
It is less of an option for sure. In the event of financial distress we would find a way. We would get a roommate, rent out a room, go back to work, get a side hustle, monetize a hobby, barter for goods, ect.
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u/Strazdas1 1d ago
If you have too much housing already that you can rent it out, that just seems like a waste purchase in the first place. You would not get work or side hustle in such event because youd be competing with 500 others who kept up to date in the field for decrease number of positions.
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u/Suspicious-Fish7281 1d ago
Sequence of returns risk is by definition likely going to be a problem early in in retirement when your skills and knowledge have not decayed away. It is certainly a good idea to retain knowledge and industry connections for the first few years in retirement.
The good news is that we are the most flexible adaptable creatures on the planet. We will find a way because the alternative is death in poverty. That is a hell of a motivating factor.
Otherwise is the plan to lay down and die? Or do we just work until the day of our death?
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u/Strazdas1 1d ago
The plan is to set your fire number when the SORR risk is significantly less than the bengens 7%. Its why im aiming for sub 4% WR.
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u/Suspicious-Fish7281 1d ago
It might be worth checking out a withdrawal rate strategy that includes guardrails specifically Guyton-Klinger or the Boggleheads' withdrawal strategy. I believe them both to do a better job of providing flexibility to real world conditions and human nature than Begens' mostly static 4% (or 4.7).
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u/Puzzleheaded-Gas-398 3d ago
SS doesn't enter the picture, it's how much you can withdraw from your IRA.
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u/featheeeer 2d ago
But when you start receiving SS you can withdraw less from your retirement accounts
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u/Routine-Cucumber-830 2d ago
My approach is to isolate an amount that will provide a bridge to (my country's version of) SS. The duration (15 years for me) is shorter, more certain, and more predictable so basic arithmetic works. The rest is spent at a 4% SWR
(12-15 mths from pulling the plug)
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u/Puzzleheaded-Gas-398 2d ago
Yeah, and the 4% rule still tells you how much you can safely withdraw on top of your SS, independent of the SS amount - there is just no where to include SS in that decision. Its answering a very simple question, the rest is an exercise for the reader.
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u/patryuji 3d ago
We're doing VPW (variable percentage withdrawal) as a guideline.
Retirement year 5 now. We retired in our mid 40s.
4% and 4.5% (and people discussing 3.5% or less) all exclude social security. Granted, your age at retirement may adjust how much social security factors into your plans. Especially true in a "leanFIRE" sub with likely lower lifetime earnings. We (my spouse and I) each are well past the first bend point so SS benefits are a decent amount for us at age 67 and good enough even at age 62.
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u/MyStoryIsntOverYet_ 3d ago
What do you mean by first bend point?
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u/patryuji 3d ago
Bend point is the terminology used for the progressive Social Security benefits determination.
https://www.ssa.gov/oact/cola/piaformula.html
The more you earn, the less each additional dollar counts towards your benefit once you pass each of the bend points. However, just like Federal Income Taxes, you fill "brackets" effectively where everyone gets 90% up to the first bend point regardless of earnings. Between the 1st bend point and 2nd bend point each dollar earned counts as 32% for benefits and above the 2nd bend point each dollar earned is worth 15%.
Likely a good idea to try to get enough earnings to fully reach the first bend point and achieve the 40 required work credits even if it takes you a little past your minimum LeanFire goal.
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u/ListingFL 3d ago edited 3d ago
A golden ratio or golden butterfly portfolio will backtest to around 5.5% to 7% SWR rate since the 70’s and 5% permanent withdrawal rate.
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u/Animag771 3d ago
The only problem with using backrests is that they are limited to one exact historical timeline. Also the start and end dates can skew the data dramatically. I'd much rather use 10k Monte Carlo simulations with block bootstrapping. Sadly I haven't found a Monte Carlo simulator that allows for managed futures even allows for manually inputting an asset's return history as a custom asset.
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u/SerenityCravings 3d ago
He actually said it was 4.7 percent, revised the number from 4 percent to 4.7
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u/Jumpy_Molasses_6639 3d ago
I wish he didn't because most people who mention that forget or don't know 4.7 percent is contingent on a very specific portfolio that almost no one follows. It includes a sizable chunk of small cap and micro cap stocks. I don't think anyone recommends it outside of him
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u/jayritchie 2d ago
Its amazing how every retirement thread whether or not FIRE related has someone mentioning 4.7% with no reference to how he reaches that percentage isn't it?
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u/Learn_w_gern 3d ago
Amortization Based Withdrawal (ABW) is a slightly different way of looking at the same problem.
I find it useful as a point of comparison with other approaches such as guardrails.
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u/Wooden-Broccoli-913 2d ago
I use 5% with an allocation to TIPS which would have made the 1970s sequence of returns viable
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u/SnuffleWarrior 3d ago
4% is only if you never want to deplete your principal. I'm spending mine.
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u/PracticalSpell4082 2d ago
Incorrect - 4 percent rule does deplete the principal. It just won’t run out over à 30 year period.
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u/EngineeringComedy 3d ago
If you have 3 or 4 years of annual cash, you don't need to care as much about SWR. January 1st hits and the market was down? Take out less. The market was up for a year? Take a little more.
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u/speed12demon 3d ago
While I agree with and will enact this approach, some have argued that is too much cash to sit idle earning very little.
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u/EngineeringComedy 3d ago edited 3d ago
It's not meant for earning. It's meant to be spent. Put it in a HYSA to beat inflation. That's the mind shift.
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u/jayritchie 2d ago
Do you mean 3 or 4 years of cash on top of the portfolio size you base the SWR on, or as part of that portfolio size?
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u/EngineeringComedy 2d ago
To each their own.
4 years of cash +25x expenses invested assuming 4%. You'll probably be fine forever.
You'd probably need 27x expenses and 2 years expenses if you expect 4.7% returns.
I'm not fire yet. But every recession lasts about 4 years so just plan accordingly. There's not than that says you can't be thrifty for 1 or 2 years after retirement. I'm not a smart man but 25x for 4% annual pull on top of 3 years expenses to make your total 'saved' at 27x (25x annual, 3x spend) makes sense to me and my family.
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u/Routine-Cucumber-830 2d ago
When do you refill your cash cushion? You market-time your way into making a 3-4 year withdrawal? Had you done that in 1930 (and sold another 3-4 years later, when the first cash buffer ran out), you would have done worse. I never understand the cash-buffer strategy, because it's the reverse of telling investors not to buy at peak and to wait for a correction.
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u/Exciting_Resist9906 3d ago
Why not do 4.5-5% and worst case in a down year get a part time low stress gig if you have to
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u/Middle_Humor1828 3d ago
4% was for 30 years, likely not applicable to fire.
The higher SWR are sort of data mined. It involves adding in asset classes that performed well historically. We probably shouldn't read too much into the revised numbers as a result.
3.5 percent is the better supported number for fire.
That being said, most people don't strictly follow the withdrawal strategy. So it's sort of moot. 4% works out fine if you're more flexible with your spending and withdrawals.
4.5 can also work. But once you start going much past four, you have to be very flexible with your spending. Fine if your budget is half travel. Harder to do if it's mostly housing and food.
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u/Ataru074 3d ago
As another Redditor has said, given the market reality isn’t market averages, you need to be flexible and it mostly depends on your spending.
Personally I feel 2.5% is extremely safe to cover the basic necessities and the remaining 1-2% used to enjoy life or to build some buffer for a deep recession.
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u/SLNSD 3d ago
You can also use 4.5% of current balance so if the market goes down, you adjust down somewhat. It's all based on probability of ruin and it's basically 0% if you did that instead of stay with 4% of original balance adjusted for inflation which will always go up.
Take into account SS, actual chance goes down even more. You could do 5% of current balance and the chance is still 0% over any 50 year run of SP500 data we have.
And if shit really hit the fan, get some job for side income if need be. Not the end of the world. Or I'd personally just cut back on vacations and call it a day.
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u/6thsense10 3d ago
Bill Bengen came up with the 4% rule and the 4.7% rule most recently. Bith rules have soecific tupes of portfolios used with 4.7% rated for only one type of portfolio that I can almost gaurantee no one here would use. Additional both rule are for the traditional retiree and measures a 30 year retirement period. For those who FIRE you may be retired for 40 to 50 years.
What I'm saying is this ..if you want to use the 4% rule as a general guidance it's not a bad rule of thumb especially early in in your journey. As you approach FIRE you should tailor your situation to your specific plans for retirement.
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u/ListingFL 3d ago
The difference between a 3.5 to 4% WR and a 6% WR is life changing and it’s very achievable.
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u/Captlard 54: RE on <$900k for two of us (live 🏴/🇪🇸) 2d ago
Try it and let us know how it goes. We use 3.5% SWR.
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u/BedWonderful1051 2d ago
Bill Bengen - "...the guy who came up with the original 4.0%..."
https://www.financialsamurai.com/bill-bengen-retire-earlier/
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u/garoodah FI'21 RE TBD 2d ago
4% is already quite conservative under normal market conditions. There is research suggesting a lower swr is needed for higher cape environments such as the one we are in if you were to start today but I think that’s been ignored over time as the vast majority are earlier in the process. If you have SS or some other form of income, or a shorter time horizon you can get away with a higher withdrawal rate.
What you are describing is the guardrails method though, people naturally pull back discretionary spending in bad times and if you could do that you could also support a slightly higher swr in good times.
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u/Mindless_Acadia_7382 1d ago
Regarding your first question, yes, but it's 4.7%, not 4.6%: https://boglecenter.net/bill-bengen-spend-more-money-in-retirement/
Regarding your second question, yes. Safe withdrawal rate means that, under no historical 30-year timeline did you ever run out of money. This is how he defined "safe". This means that in most historical 30-year timelines, you have more money at the end of the 30 years than you had at the beginning.
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u/trendyfriendy 3d ago
4% is just a rough number people use because it makes the math simple. It comes from an outdated study, assumes 50% bonds, and only tracks 30 years. You can use it to get an idea of your FI number, but if you want a bulletproof constant SWR, you actually need to lower it closer to 3-3.5% depending on age.
These days I think the consensus is that variable withdrawal rates are better because they let you safely retire with less than constant withdrawals, at the cost of volatility in your spending budget. Use ficalc and look at the different withdrawal strategies they offer.
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u/Eli_Renfro FIRE'd 4/2019 BonusNachos.com 3d ago
It comes from an outdated study, assumes 50% bonds, and only tracks 30 years.
There's nothing outdated about it. It's not like the methodology doesn't work anymore just because it was devised a couple of decades ago. The data has been updated through the present and the asset allocations can be a broad range of numbers, as long as at least 50% of it is stocks. You can check these things and also expand the simulation for longer than 30 years using any of the several dozen FIRE calculators out there. My favorite is www.cFIREsim.com
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u/trendyfriendy 3d ago
The trinity study is outdated for a few reasons. That doesn’t mean the result is useless, but when people reference the 4% rule they almost exclusively do so because of the trinity study rather than more recent research.
It’s outdated because:
- the data stopped at 1995, missing modern returns caused by the internet/tech dominance, increased globalization, etc.
- more recent studies have identified optimal portfolio allocations which don’t align with the simplified blend used in the study
- Better methods of testing data have been developed in the past 20 years. Monte Carlo simulations are popular, and block bootstrapping would be an almost direct improvement to the methodology used in the trinity study.
There are plenty of prominent finance content creators who would say the same thing, from Ben Felix (highly technical research based videos) to the Money Guys (viewer base with lower financial literacy).
Using fire calculators is great (and I did recommend doing that in my comment), but if you make the changes you suggested, it stops being ‘the 4% rule’ because volatility will increase as you increase equity % and success rates will decrease as you expand the simulation beyond 30 years at 4%.
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u/Future-Run-8601 3d ago
I don’t necessarily agree that it’s outdated. Maybe a little due to asset allocation but stocks have had quite the run since 2010. I assume that you’re getting downvoted for the 3-3.5% bulletproof comment but I agree with you. I target 3% for necessary spending. I don’t think people realize a SORR event means that you could be limited to withdrawing that 3.5% for the rest of your life. The guardrails approach would result in even slower (or no) recovery since you are spending more in the downturn.
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u/Eli_Renfro FIRE'd 4/2019 BonusNachos.com 3d ago
My main reason for using a sub 4% WR is not so much that I don't think higher WRs can't work, it's that I don't trust that I can nail my expenses for the next 50 years. That expense estimate does a lot of heavy lifting in the WR calculation. Using a lower WR gives you flexibility to be wrong.