I wrote a post a few weeks back titled “How The 4% Rule Shortchanges Retirees“.
The premise was that other than a few times over the course of nearly 100 years, if you only withdrew 4% a year you would have never come remotely close to running out of money. Ever.
I’ll show you that chart again.
As you can see, if you retired in 1929 and almost any year in the 1960s, your money didn’t make it. But other than that, you were more than good to go. In fact, you WAY under-spent what you could have!
The median safe withdrawal rate (SWR) was nearly 50% higher than the 4% rule allowed, at 5.8%. And just to remind you what median actually means: 50% of the time you could have spent MORE than 5.8% a year and still not run out of money. So, you can see why my argument that the 4% rule is very limiting makes sense.
But notice something else. The 60’s were the worst time to retire, much worse even than the Great Depression era. Why is that?
The 1970’s Ruined Retirement Planning
Well, it wasn’t actually the 1960’s that were bad, it was the 1970’s and the first few years of the 80’s. The 70’s ruined EVERYTHING, other than music of course. It was 80’s pop music that ruined everything. This is not debatable. 🙂
So, here’s my theory, take out the 70’s, and even leave in the Great Depression, and VOILA! your 4% rule, and basically ALL previous retirement planning strategies, are null and void. It was the 70’s that forced people to live on the 4% rule. Forcing people to work longer, to save more, to actually WORRY more about a retirement plan that is based on false presumptions, to begin with.
Oh I hear you, “Josh, you can’t just cherry pick and eliminate the bad historical data to prove your point.”
To which I say, “why not?”
What, Exactly, Happened in the 1970’s
Let’s review what actually happened in the 70’s and see if this scenario is likely to occur again. I think you’ll agree with me, upon further review, it won’t. And if it won’t happen again, why are we using the 70’s data to project how much future retirees can spend?
So let’s take a look at what Richard Koo, author of the above, says about the 70’s:
“It was Ronald Reagan and Margaret Thatcher who first argued that the conventional macroeconomic approach of managing aggregate demand would not solve the economic problems faced by the two countries in the late 1970’s.
At the time, Britain and the U.S. were veritable hotbeds of structural malaise: workers frequently went on strike, factories produced defective products, and American consumers had begun buying Japanese passenger cars because the locally made alternatives were so unreliable. The Federal Reserve’s attempt to stimulate the economy with aggressive monetary accommodation led to double-digit inflation, and the U.S. trade deficit steadily expanded as consumers gave up poorly made domestic goods for imports.
This weighed on the dollar, and aggravated inflationary pressures. Higher inflation, in turn, caused a further devaluation of the dollar. When the Fed finally raised interest rates in a bid to curb rising prices, businesses began to put off capital investment Such was the vicious cycle in which the U.S. became trapped.”
Now think about this a second. Massive strikes were occurring in the UK and US. Some of you probably lived through that, if not actually participated in it. I remember vividly pictures of UAW workers taking a sledgehammer to Japanese cars.
But the problem was not with the Japanese cars, it was our own production. It stunk!
Our First Car
My family didn’t have a car for probably the first 12 years of my life. But I remember my mom finally buying a Ford Escort just like this one:
I also remember this car was ALWAYS in the shop and put a hurting on my mom’s cash flow. It stressed her out dearly.
So, I’m a 12 or 13 year old kid, with a much younger brother and sister, poor all my life. Dad is gone. My mom finally gets enough money, somehow, to buy a car, after we moved off the island. But the car isn’t reliable.
The contrast engraved in me could NOT have been clearer. One side are these big, burly union guys bashing a Japanese-made vehicle to the cheers of the crowd. On the other, my 5’2″ single mom, scrapping for pennies raising 3 kids on her own, panicked about where to find the money to fix the car those big, burly union guys made for her.
There was simply NO WAY I’d ever buy a Ford. Thankfully, I’ve since met tons of people who swear by their old F-150 pickup trucks. And I actually did have a Ford minivan 10 years ago which served my family very well. But it took a LONG time to soften that image that was tattooed on my brain.
Era of Globalization
So Reagan and Thatcher came in, along with Pope John Paul, and they sent the Communist threat to the ash heap of history. But they did more than that. They ushered in an era of globalization which we’re living under now.
The Democrats of Clinton, the Labor Party of Tony Blair, never mind the Tories and the GOP, all began to bow down to the bounty that is Globalization and world trade.
There is almost no private sector union any more in the U.S. I don’t know about the UK, but here the era of major union strikes is long gone, at least in the private sector.
The plethora of foreign-made goods has brought in a wave of competition those living in the 70’s would have never dreamed of. Ironically, it’s now the foreign-made goods that are considered cheap! Yet, even with the “Made in the US” tag, most consumers still prefer the cheaply made and cheaply priced, to the supposed superior US manufactured product at a higher price. Study after study shows this, which is kind of depressing to be honest.
So, inferior, locally-made goods are not the problem in the US anymore. Globalization has “solved” that. Mass strikes among union workers not a problem anymore either. How about a runaway inflation like the 70’s?
High Inflation? Not Likely
Hardly. 10 year Treasury bond is now 1.50%. Can’t have that low of a yield if people are expecting massive inflation. Remember, the yield is low because the prices are HIGH. Prices are only high if demand is high. Demand to lock one’s money up for 10 years, or more, at a fixed and historically low rate, does not rise if inflation is imminent.
Kiplinger’s is projecting a 1.6% COLA for Social Security recipients in 2020. I’d be surprised if it were even that high. The Social Security Trustees are thinking at 1.2% increase for 2020. We’ll see.
None of this makes one think high inflation is coming anytime soon. In fact, going back to the book cited above by Richard Koo, Japan did everything in its power to usher in inflation and they couldn’t do it.
Balance Sheet Recession?
Why? Well, Koo’s argument is it was a balance sheet recession, meaning business and consumers were hesitant to take on debt. Could that be the same here? Well, in the first half of 2019 consumer spending was strong. But that’s a backward looking indicator. What forward looking indicators say on consumer spending I’ve no clue. However, from a business investment perspective, banks are still flush with cash and would LOVE to make more loans to businesses. There is HIGH demand for quality corporate debt too. All this tells me there is lending to be done, but fewer business are actually borrowing.
None of this indicates runaway inflation. No matter how you slice and dice it.
We also don’t have a President, ala, Nixon who believes in Wage and Price controls either. You want inflation? Make it illegal for a business to charge more than what the government dictates. Guarantee you’ll get inflation. No Presidential candidate is advocating that. Even Bernie Sanders, who wants to put fossil fuel executives in prison (!), is not calling for price controls across the economy.
Stop Using the 70’s In Your Retirement Model
And thus, we can pretty much close the book on using the 1970’s as part of the discussion as to what could happen in your retirement plan going forward. If we are going to base our retirement planning on the past I think it’s imperative to actually look at the past and consider if the one era which caused the most havoc is likely to occur again. The 70’s, and the 70’s alone, have been the gigantic wet blanket on ALL retirement projections when incorporating a Safe Withdrawal Rate.
We incorporate the 4% rule because of the 70’s. Take out the 70’s, though, and things look MUCH better, even with the Great Depression thrown in there. To be fair, if one is going to take out the 70’s, he should also take out the 80’s as the 80’s were boom time.
That won’t change anything though. The 70’s tested the limits on the Safe Withdrawal Rate, i.e., how much you could safely withdraw without running out of money. The 80’s would be the mirror opposite of the SWR. How much you could spend if you retired during the “good times”. 4% during the bad, 12.1% during the good.
Again, the MEDIAN you could have withdrawn was 5.8%! A FAR cry from the 4% SWR.
Cherry Picking Retirement Data?
Now, one can make the argument, and it’s a good one, that the U.S. of the 20th century was unique among ALL economies in the history of the world. So, we really shouldn’t use it as a starting point anyway in retirement projections. I actually find this argument very endearing.
To use the U.S. of the 20th century for one’s retirement projections is the same level of cherry picking as it would be to use the 1980’s as one’s retirement planning starting point.
Both were unequivocally the best of the best. Why not use Japan in 1940 as one’s starting point? China when Mao took over? Russian in 1917? Germany in 1932?
To only use the U.S. is to assume NONE of the events which happened world wide could happen here. Yet, they happened in what are now the largest economies in the world, behind the good ole U.S of A of course, Germany, China, and Japan!
New Retirement Planning Model
Do you see the futility in all this? You, and I, simply don’t know anything! I did a video just yesterday on paralysis by analysis when it comes to one’s retirement planning. Don’t do this!
All you can do, and should be doing anyway, is to analyze what your cash flows needs will be. I know, I know, how can you know this when you’ve never retired? Well, you’ve got to start somewhere. So, look at your utility bills, your debt(hopefully you have none), your discretionary expenses, your health care bills etc.
Then you say, “hmmmm…it looks like we’re going to need $40k a year to live on. We’ve got $25k a year in Social Security thus we’re going to need to generate $15k a year to make ends meet.”
3 Years Cash; Rest? Stock Index Fund
Okay, now we’re getting somewhere. So, here’s the plan. Take $45k (3 yrs of needed cash to live on) drop it it in CDs. The rest you put into a stock index fund. The next year, you see how things are shaking out. The stock index fund up, down, sideways? Did you actually spend that $15k. Did you need more?
If you only have $65k in your stock index fund, and you need $15k a year to live on, you’re going to be in some trouble in the near future. What can you do to minimize that pending trouble? Sell your home? Take a reverse mortgage? Reduce expenses? Get a part time job?
Notice though that in no way are we looking at a 4% rule, an 8% rule or anything of the sort. We’re looking at CASH FLOW! NOTHING ELSE MATTERS.
So stop the insanity. Make an educated guess on how much you’re going to need. Then find from where it will come and you’re well on your way to a successful retirement plan.
Get to work!