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March 23, 2012


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New to this

Ahhh, the real beauty of being retired....You can just tell your "customers" your not working today, and what are they going to do about it, fire you...?

Very jealous...., as I impatiently wait for 3% Rule discussion....

Retired Syd

@New: True, but please don't fire me from your blog reading list!

New to this

My Goal – Gain enough confidence in the “science” behind the 3% Rule to feel genuine peace (no faking allowed) to rely on it to “govern” our retirement for the rest of our lives.


1) If you retired at the peak of the market in Sept 2007 and calculated 3% of your assets to set your spending levels for the rest of your life, by the time the crash was finished in March 2009 crash you would be withdrawing, say 5 or 6%, (not 3%) of your remaining nest egg.

Now compare this to the guy (or gal) who retired at the bottom of the crash in March 2009. They would have the opposite problem in that they would now find themselves living on say 1.5%.

So I guess in real life if you found yourself in either of these situations, you would make some real-time adjustments along the way, but nevertheless, it just doesn’t feel like a “responsible” methodology in which to base your financial future.

2)Lack of underlying rationale for “why” 3% works. Does this correlate to GDP or something that has a high structural likelihood of repeating. Or is this simply the amount that worked for the last 50 years while the US dominated the capital markets?

Will the US dominate the capital markets for the next 50 years? Who knows…, but the point is that we seem to be uncomfortably ignoring the disclaimer found at the bottom of every glossy brochure from the investment industry. “Future results may not replicate the past.”

3)Taxes – If 3% has to cover taxes, then one way to solve that problem is to invest in things that have lousy returns, thereby not generating much tax. Of course this is an illogical extreme, but you have to admit there’s an irony here…

My list continues, but I’ll stop here for now to get the conversation started….

P.S. I’m not sure if relying on an internet blog is really the best place to sort all this stuff out, but what the heck…, if you ask a “professional”, (which I have several times), all you inevitably get is their sales pitch.

Quite simply, they have an agenda that may not necessarily be the same as mine (or yours)….So who better to ask than a CPA who has a proven ability to be financially successful, but even more importantly, is betting their own future on this working….?

Thanks for taking up this conversation, Syd…..Can’t wait to hear your insights because if I can calm my 4:00am voice on these concerns, I am so finished with my J.O.B!

Retired Syd

@New to this: I'm going to give you a little preview because I need to assign you some homework. William Bengen is a financial planner that came up with this rule (It's actually the 4% rule, it's only 3% for early retirees--with more years to cover).

What he was intending to do is to figure the withdrawal rate that would have been the safe rate over ANY period of retirement over the last historical 80 years. Meaning that he chopped up those 80 years and modeled out a retirement for each of the 30- 40- and 50-year periods. So that a retiree that retired at ANY time during that chunk would have never outlived his money. Modeling out those time frames, he found that a retiree would never have run out of money over any 30-year chunk of time if they used the 4% rule.

Let me repeat, over any historical chunk of time, including the Great Depression. So, yes, we've had a great recession, but at least so far, it doesn't look to be as bad as the great depression, so you have every reason to expect that the 30 year period that this period falls within will not be worse than ANY historical 30 year period over the last 80 years. If you expect that, you should adjust your withdrawal rate downward.

In most time frames within that 80 years, an even higher withdrawal rate would have worked. But he was trying to figure out what would have been the absolutely safe rate even in the worst of times. Your results may vary, of course, but this was just what would have happened over recent history. Yes, it might be that the next 30-50 years is worse than any of those time chunks over the last 80 years. It's not a guarantee. Since no one has a crystal ball predict the future, the past is all we have to go on. You have to decide whether that's good enough for you.

Here is your homework:

First, warm up with these overviews:




Now that you are warmed up--read the original Bengen article:


No cheating! If you really want to understand all the answers to your questions, you have to make it all the way through the Bengen article.

I couldn't possibly cover all this information in just one post, so do your homework and then when I write a fresh piece on the subject, you will be all caught up.

Happy reading!

New to this

Thanks Syd! But as I’ve been impatiently waiting, I actually managed to find all these posts already by rooting around your archives….And all of my questions come “After” reading all this stuff….

I desperately want to believe it, and can get there for moments at a time, but somehow my “bones” still haven’t gotten there….As is often the case, (I suspect) with wannabe early retirees, I’ll be giving up a job that pays really, really well (Only problem is I can’t stand it)….

But until I can really, really believe we’ll be “safe” living on the 3% rule for the next 40 or 50 years (hopefully), I haven’t been able to muster up the courage to QUIT….

Thanks for engaging in the back-and-forth….It sounds like you really are at peace with your decision…I’ll look forward to your post….!

Just lurking

New to this - I have been quietly lurking while you go through your process, but throught I'd chime in to encourage your quest, its like you're saying exactly what I've been thinking. I've already semi-retired, so no looking back now, but I can't say I don't worry about some of the exact same things you broght up with your questions. But having been on this site for a while, Syd will come through and tell you what she knows and not pretend to tell you what she doesn't. I'm also looking forward to her post on this....Go Syd....

Retired Syd

@New: Ok, but did you really read the final homework piece--the original Bengen article? (The reason I ask is the link to his article that I had in my original blog post didn't work until I just fixed it this morning.) All the specifics about the modeling are included there, and address your second question above and some of what you asked earlier. That is required reading!

New to this

One more thing that's really nagging me on the Bengen "research"...Since you are apparantly safe to retire any day you choose and live happily-ever-after on 3% from that day forward, why not just continue to wait to set your official retirement day to when the market is trading at its highest level...?

In other words, if I retired 6 months ago, did my 3% calculation based on the Dow being at 11,000, and came up with my budget to live on for the rest of my life...., why wouldn't I say today, hey wait a minute, I think I'd prefer to set my budget based on today's Dow valuation of 13,0000...?

And in theory this game could go on forever...just reset your budget every time the market goes up by declaring a new "start" date....

But somehow this just doesn't feel right so I suspect I'm missing something....Help??


I hear New to This loud and clear, and share two observations.

First (and I think I read this from Syd or Bob a while back), there is a word for the feelings you express .... it's called "normal."

Second, (which seems obvious but we often forget it), we have two resources we can tap anytime we choose later on .... return to a job or some other venture to make money, and/or spend less.

All respectfully offered IMHO.

Enjoy the weekend.

New to this

Just saw your latest comment challenging whether I actually read the link you provided today.

Um, not exactly, so guess I'm busted. Can't you just tell us the answer...?

Retired Syd

@Rick: Thank you, that was my quote--I got it from my dentist (he asked me how I was feeling before a filling replacement. I said "scared." He said, "there's a word for that, it's called normal."

I want to give credit where credit is due.

@New: Really I will write more later, but if you read the first post I referenced in my homework, you'll see that it's a sliding scale, not a fixed 3%. If you are younger, with more years to fund, you'll want to not retire until you've saved at least 33x your expenses (the amount that gets you to 3%.) Unless, of course you're willing to accept that you don't have the "safe max" which is fine, if you're comfortable with that. This is just the safe maximum, it can be done on less (or with a higher withdrawal rate.)

If you are 65 when you retire, with fewer years to fund, you'll have the same safety with a 4% rule (25x expenses). Somewhere in between and the sweet spot is a number between those numbers.

Each year that you wait to retire, the absolute safe number (multiple of expenses you need to have) goes down because you have fewer years to fund. So just waiting a year not only gives the market a chance to positively or negatively affect your nest egg, it allows you to retire on less because you have fewer years to fund. You slowly slide from the 3% rule to the 4% rule.

Deegee was right that you are thinking about this backward. You don't "set your expense" level based on your retirement assets on a specific date, you set your retirement based on whether your assets will be able to cover your expense level. Figure out what you need to live on and if you don't have at least the multiple, you can go ahead and retire, but you won't have the safe maximum. This is not a withdrawal formula, it is a "do I have enough formula." If you spend more or less than the 3% over the future, you have decided to take more or less risk that it lasts for your retirement years. When you retired, you had enough based on historical averages. That's all the rule tells you.

It seems you are looking at budget as a flexible thing. Budget is what you want to spend in retirement. If you want to spend more, wait until you have more saved.

Remember, the rule isn't a rule for how much you get to spend each year. It's a rule that says this and only this: If you retire today and you have enough in your nest egg to retire according to these rules (3% or 4% as your length of retirement dictates), based on history, you will be ok based on history. That's all it says.

Yes, if the market does well (say as well as the BEST equivalent historical stretch), then yes, you could have spent more or funded more retirement years. As Bengen writes, over most periods, a 4% rate would have gotten you even more than 30 years. You run the risk of dying with money if you only spend the safe maximum, yes. He is simply trying to get you the best estimate of the WORST case scenario.

I think a common misconception about this rule is that it is saying this is what you should live on. It's not. All it is saying is that based on history, you wouldn't have outlived your money if you had a nest egg equal to the amount that gets your appropriate withdrawal rate. Yes, your money may have outlived you but most people don't view that as a retirement risk, they are trying to prevent the alternative.

Is any of this resonating?

Retired Syd

@New to this: All right, you have to stay after school, or at least skip recess today.

I know that article is a tough slog, but you have SO MANY questions. And when I just write "the answers," you want to know, justifiably, how I get there, which is really just regurgitating Bengen's findings and what they were based on.

Most people are nervous about whether that rule provides enough to really be safe. So that's how I'm going to approach it when I write my post about it. But you really won't probably feel totally comfortable until you've slogged all the way through Bengen's article. Sorry!

New to this

All right teacher, I just slogged through the Bengen article and frustatingly still have all my above questions....I get what you are trying to say about the rule addressing the question of "do I have enough given a predetermined budget" versus "How much do I get to spend" but the troubling thing is that regardless of which question you are answering, "when" you ask it (e.g. what is the value of the market on that day) has a such a profound impact on the answer.....

I'm really not trying to be difficult, just trying to get really comfortable with how thoroughly this "science" has been vetted before we base our financial future on it.....I'll look forward to your post...

P.S. If your post can genuinely answer my above questions, or at least formally acknowledge where "its just up to chance", you might be writing a pullitzer....

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