The 2% (!?) Rule for Retirement Spending | Rational Reminder 229
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- Опубликовано: 8 май 2024
- Traditionally, people saving for retirement and financial advisors relied on the 4% rule when calculating how much to save for retirement and the associated income those savings would provide after retirement. What if you found out it does not work? Is there another option? Today, we offer you an alternative approach, which is the 2% rule for retirement spending. Before we delve into today’s main topic, we update listeners on the recent London meet-up, what to expect on upcoming shows, and who our special guest is to kick off the first episode of 2023. Then, we discuss today’s main topic and learn what the 2% rule is, how it compares to the 4% rule, and whether the safe percentage for retirement is actually higher. We unpack retirement spending through the lens of several empirical papers, historical data, and market comparisons. We also find out why the US market has always been able to bounce back from uncertainty and whether there is empirical data to support the 4% rule. We also talk about the many financial challenges and opportunities that young people face, the biggest mistake people make regarding retirement, the value of financial literacy, book reviews, and more!
Timestamps:
0:00 Intro
9:40 Main Topic: The 2% Rule for Retirement Spending
12:11 The 4% Rule
19:07 US Exceptionalism
28:18 Expanding the Sample
43:11 The 2.26% Rule
45:42 Considerations
48:27 Main Topic: Conclusion
50:08 Challenges and opportunities for young people today (high housing costs, rising interest rates…)
56:34 Solutions & Reasons to improve expected outcomes
1:02:03 1 Episode in 60 seconds
1:04:19 Book Review: The Elements Of Choice: Why The Way We Decide Matters
1:13:09 Aftershow
Participate in our Community Discussion about this Episode:
community.rationalreminder.ca...
Book From Today’s Episode:
The Elements of Choice: Why the Way We Decide Matters - amzn.to/3VvxZR8
Links From Today’s Episode can be found on: rationalreminder.ca/podcast/229 
Хобби
Ben is the most financially sobering friend that I've never met. Thank you both for your excellent work. Really can't say thanks enough--even if you are depressingly realistic. 🙂
Really loved the Chris Hadfield episode. I even told my 6 year old son about how Chris thinks about competence and being afraid. He got it, which I thought was really cool.
Great guests.
Hi Ben. Can you entertain a thought experiment? Suppose instead of investing in the 60/40 portfolio and withdrawing 2.27% a year for a 30-year retirement period we instead do the following:
Invest 100% in TIPS and withdrawing 2.5% a year (which is higher than 2.27%) for 40 years (which is longer than the proposed retirement periods)
Why wouldn't this "risk-free" plan not be superior to the 60/40 portfolio with a SWR of 2.27%?
I'm sure there's a good answer that I'm missing.
Thanks
Thank you for doing this podcast. Trully great.
Thank you! This was a very interesting video! I will be sharing this, especially the theory behind the 2.26% rule, with friends and family.
Great video. I think most people have a recency bias and assume the US market will continue to outperform international. If the Us continues to outperform similar to the previous decade, then the US will eventually be 99.9% of global equity market cap.
Ben growing hair at the time of life most of us were losing it :)
He's counter cyclically persuing a growth strategy.
Hey barbershops YoY inflation is crazy right now
@@mattg4183 A contrarian hairstyle
Grow out when people are fearful, cut short when people are greedy.
@@007clownfish Time to buy when there's blood in the streets and hair on Ben's head.
That was a great hour. Thanks guys.
The best guest response re: 4% rule was Mr. Milevsky: “Benjamin, I’m not familiar…what is this 4% rule you speak of?”
Yea... I find Mr. Milevsky a bit... prickly in tone and approach but TBH, he was right!
@@Omar-et7sb ok, yes I can see/hear the prickly, but his content has the kind of depth that a stand up comic masters, the base of human nature cast like a spell of a few well timed words
Thanks guys, outstanding data. Some variables to consider: Do you carry a mortgage or pay rent into retirement? Assuming an active retirement costs more (travel, home improvement projects, etc.), will you be as "active" in your eighties as you were in your seventies? Do any remaining big spending events remain into retirement (loans, vacation homes, something else.)? Can you, if need be, adjust your spending during market downturns? Again, thanks for the video; very persuasive and well-documented research.
Only one question remains: just how long will Ben grow his hair?
One team recommended book list, and one community sourced list!
Thank you! Great video. Question: does anyone know if there has been a study done on the safe withdrawal rate using the MSCI World Index and a global bond index? I would prefer to get global stock & bond exposure rather than just US exposure for my retirement portfolio.
Would really appreciate if you someone can direct me to such a study if it is available. Thank you!
The argument of "if it gets people to save who wouldn't otherwise" is very good. That's kind of how I view Dividends and (Vanguard's) ESGs. People can understand something about them better, and they may return 50% of the money due to worse compounding, but maybe that's enough, or better than what they would have saved without the easy comprehension model (dividends in particular, they're just easy to understand).
Objectively poor investments, but still with some utility to their owners. That said I draw a hard line at Dave Ramsey, that's just wacky nonsense.
I'd argue that Vanguard ESG indexes aren't poor investments as they don't invest in large cap value stocks mostly (oil, alcohol, tobacco) so you avoid the value traps. If you add small cap value with high profitability that also excludes large (value) you have everything you want to own.
So you're basically rebalancing large growth against small value. Do that both in US and International and your withdraw rate is likely higher than 2.26% 😉👍
PS just chart ESGV against VOO or VTI and you'll change your comment about compounding.
Can't quite wrap my mind around it. If this is the case, wouldn't one want to dump all their cash into a CD instead of stocks? Withdrawing just 2% of the principal will make it last for mind-blowing 50 years! And the interest may cover inflation. The 2% rule kind of implies there is no risk premium in stock investing.
how do I find out about the next london meetup?
How does including markets going to zero help the domestic investor? As an individual domestic investor, if my market goes to zero, there is no SWR. I lose my money. Reducing my spending from 4.5% to 1.9% doesn't do me any good if the problem I'm trying to hedge against is a rifleman seizing 100% of my money.
You should most likely invest in global index funds… this accounts for individual countries’s markets going to zero reducing expected returns…
So, as a young adult now, I can afford to spend 2.02% with 100% US Total Market Cap Weighted portfolio for 27.6 years in retirement still having a 5% ruin rate. That would be before taxes so, say in an average US state with ~5% state tax (assuming no federal for long term cap gains), a 1.9% withdrawal rate. That's bleak.😔
It seems to be an unrealistic strategy today to invest only in domestic funds. Why would someone in Belgium so this? And in many of these smaller markets, broad international funds are not more expensive.
So the survivor bias is a good point, but it would exactly be counteracted significantly by international diversification. Because the 5% worst cases in the simulation seem likely to be often exposed to smaller, individual markets crashing.
We got our hands on the international data. An investor with 10% home country and 90% international stocks has a SWR around 2.7%.
-Ben
Main advantage seems to me that investing domestically hedges against your domestic market outperforming global markets, a protection against being priced out of your own market
If you invest in global equity and it returned 150 % , but in domestic market rose 300% , and you had costs in domestic market, then you may wish you invested domestically because you are inflexible on where you live
Has anyone done a study on variable asset allocation based on market performance? You would not target a specific % allocation, but would instead adjust your % drawn from bonds based on market performance below or above the expected average return. For example, in a recession, you could draw only from bonds, and once the market is up, sell some equities to replenish those bonds. It seem like a sensible way to use the poor correlation between these two asset classes. There's always the risk of running out of bonds to sell before the recession ends, but that's why I would like to see a study.
The appropriate response to the 2% cold shower tool is not to accumulate more but to plan to decumulate less.
That is probably true... but my "behavioral economics" brain won't listen. I will end up streamlining expenses even more NOW to accumulate more.
Yes, but thirty years of retirement starting at 65? Twenty sounds more reasonable. These asset managers want you planning for thirty when Mother Nature has a different take on longevity.
@@rokyericksonroks lol. Sequence of asset management liability risk.
Investors profit from the risk premium if nothing bad happens. So, an investor profits merely if nothing bad happens. No need to necessarily look for "good news". That is ingenious.
What about the impact of flexibility, like having the ability to not withdraw (or less) during a sharp decrease in the market ?
Big positive impact.
-Ben
@@rationalreminder Fair answer aha. Like with any plan, we need back ups.
You can have the same international data with exactly opposite conclusions depending on which currency is your base currency...
If 60/40 minimizes risk of ruin, and you expect a pension to cover ~40% of retirement income, would a larger equity allocation for the portfolio make sense?
What % of the 60/40 covers the other 60% of annual income required (the non-pension non-guaranteed)?
All I need now is 1.4 million euros and I'm cruising.
Embrace frugality..and you can go with just 1.3 millions
Embrace monke..and you can go with just 0 millions
1.4M euro calculated under what assumption for mean price inflation between now and when you disembark from your cruise?
The US is fundamentally different. Your mistake is this egalitarian idea between countries. Two coasts, huge land area, world reserve currency, no other military compares, there are no peer countries, all of the largest companies are in the US. Good luck with there ever being a war involving foreign nations on US soil. I don't think the comparison really applies. I just don't see this changing any time soon. We have the most business friendly environment and nobody else compares.
I personally like 3.25 - 3.5% for long retirements mainly from ERN's analysis. At a certain point, you're going to waste an extra decade of your finite life trying to eliminate the last 5% risk that you might have. At a certain point, you're better off just dealing with bad situations if they happen.
Cold shower argument is a good one
But considering the 2.26% rule being true for a well diversified stock/bond portfolio, wouldn’t be better to retire by investing 100% in real estate? My hp is that real estate net rentals would be >2.26%…..
This analysis assumes the US isn't _actually_ exceptional, just lucky. What if it is? How could we possibly distinguish exceptional circumstances from exceptional performance? I think it's another instance of the efficient market hypothesis, where the test is meaningful if the deeply held assumption is true, but can't tell you anything about the deep assumption
Even if it is exceptional, that is in current prices (which are high). It will need to be even more exceptional going forward than it is currently to have outsized returns in the future.
-Ben
“Any sufficiently exceptional performance is indistinguishable from luck.” (meme-ified from Arthur Clarke on high tech and magic - call this “reversion to the meme” 😂)
The advice of it being preferable to work longer at a job that I like as opposed to working a shorter amount of time at a job I really dislike with the goal of a retirement without any work makes sense to me. However, even though usually I try to be an optimist, it feels so impractical and difficult to make use of this advice. I thought I have read headlines of studies where the vast majority of people are unhappy with their work. It also seems income sources are going towards things that are more of a winner take all celebrity leaning type creative endeavor like running a podcast or something that makes you somewhat like a celebrity. I'm not really a celebrity type of person and like my privacy and I would expect for most people they end up with their creative endeavor never taking off and all the views and money going toward the top percent of people (like with Twitch and RUclips and podcasts). This isn't really in the purview of these videos, but does anyone have info on practical advice on how to transition from a job you dislike to one you like? For now I feel like I'm saving every cent I can while in a job I don't perform well at for theoretical freedom to one day have some less paying job that I will like more without taking any real action for that to ever happen and while having no clue when I would plan to start taking action toward that.
Can’t wait to be a 401k millionaire so I can live on minimum wage
That rate is low.
Why settle for 2.26%?
Because Monte Carlo?
With not much effort at all you could easily build a 3.5% yielding portfolio of companies with a history of raising dividends over the years at a rate at or higher than inflation.
Just blindly using basket of stocks and a Monte Carlo simulation is an irresponsible way of investing. Maybe as a forecasting tool to be as conservative as possible but do base a portfolio on it - ridiculous. This would only apply to those that think indexing is the way to go but I'd rather try to do a little work and avoid the losers. Even 'dumb' investing such as the Dow Dividend 100 index out performs the "market" over time, well until S&P500 got so tech heavy. We also know that breaking the investment pool of stocks up into quartiles or deciles based on dividend yield beats the "market" over time. Or you can go by those companies that pay dividends and raise them over time. That group beats the "market" as a whole over time. Those are all just no brainer screens that people can run in 5 minutes at their brokerage firm's website. Clearly one can do better research than that, but none of what I put there, that beats the "market" requires investing experience or any ability to do analysis. Just a few selection boxes on a filter.
Then the proportion of bonds to stocks shouldn't be static or many people shouldn't really even have bonds.
Trimming winners and moving monies into undervalued holdings, etc. one should be able to easily hit withdrawal based on 4% of value and then increasing the dollar amount by inflation or slightly more so you can live a little better going forward.
Bunk