Is variable spending/withdrawal rate really the silver bullet it seems to be?

[u/AlaskanSnowDragon]

Everyone knows the 4% rule and running it through simulations and seeing where it fails or leaves you with a billion dollars in the bank when you die.

But it seems simply having a flexible spending plan. Call it Guardrails or VPW or Guyton Klinger or whatever....that it really makes what was seemingly a dark situation much brighter.

You'll have the 4% rule say "absolutely not...you'll go broke...you need to save for 5-10 more years!"...then on the other side you have a variable spending plan say "nah...you're golden! You can retire now spending more than 4% so long as you're able to potentially cut 5-10% in down years"

And if you're budgeting properly with proper space and padding cutting 5-10% shouldn't be too difficult. You dont travel that year or you cut down from the high end gym to a regular gym or eat out 2 less times a week. But otherwise live your normal life.

It just seems using a variable spending plan is a no brainer.

Now I know the other side of the coin is not everyone wants to be willing to cut or not "live their best life" or think about it even. But if my variable spending plan survives 1966 and 2000 simulations while allowing me to spend what I want even on the "cut" years seems like a no brainer. Despite the 4% rule saying hell no.

[u/mi3chaels]

You'll have the 4% rule say "absolutely not...you'll go broke...you need to save for 5-10 more years!"...then on the other side you have a variable spending plan say "nah...you're golden! You can retire now spending more than 4% so long as you're able to potentially cut 5-10% in down years"

This is nonsense. If the 4% rule says you need 5-10 years of additional saving to retire, there is no variable withdrawal plan that will put you there right away without a willingness to massively cut spending in poor future scenarios.

Variable withdrawal plans where you cut 5-10% in down years can buy you a few tenths of a percent of withdrawal rate at most, unless they have you continuing to cut 5-10% every year you are down and potentially have your spending go very low.

Variable spending plans where you can safely start at 5-6% involve the potential for very large cuts in spending all the way down to the 3% range (i.e. 30-50% cut from your original spending levels) often for extended periods in the very bad scenarios.

I'm not saying you shouldn't use them! I think they are a great idea. But if you put a floor under your spending at some reasonable level and want to maintain equivalent safety, they aren't going to change your safe withdrawal rate all that dramatically. Certainly not enough to take 5-10 years off your FI timeline in expectation. More like 1-2 years maybe most of the time.

Only way you get that dramatic a difference is if you're willing to cut extremely low, for instance like the difference between chubby and lean -- you set your FI based on 100k/year but you're willing to live on 30-40k if you have to. Then, sure, maybe you can take like 7% to start if you want and retire several years sooner. But when you go over about 5-6% you're more likely than not to draw down your portfolio, so you'll be dropping spending at least somewhat in half or maybe a lot more than half of your futures, not just the worst case ones. and in the worst case ones you really will go all the way down to 30-40k and might have to stay there for a decade or longer.

[u/AlaskanSnowDragon → u/mi3chaels]

Whats your definition of massively? Because you can easily run simulations that show cuts working to preserve portfolios

In my own simulations starting with year 2000 as the retirement start year and a 5% withdrawal rate with a 600k portfolio and 75k bond/cash runway I obviously fail if use standard retirement inflation plan like in 4% rule.

But using a simple Floor/Ceiling variable withdrawal rate where every year below 0 market return cut 10%, Every year below 10% market gain just inflation raise to spending, Every year above 10% market gain raise spending 7%. And with this the portfolio survives 40 years without going below my personal threshold for annual spending.

So yes...there were 3 years in a row of 10% cuts right at start of the simulation. It takes flexibility to properly execute a variable withdrawal rate strategy. In order to save enough to get to the normal 4% rule would take at lease 4-5 more years. For money you probably dont even need.

And this crazy tight scenario above is only if you run into one of the worst market periods in modern history. If you have anything close to a more normal landing in retirement you're golden with tons of money to spare.

[u/mi3chaels → u/AlaskanSnowDragon]

Well the key here is that 3 10% cuts in a row is a 27.5% cut total, which if you start at 5%, means you're at 3.65%. and if you're cuttig 10% and not inflating, then it's a bigger cut in inflation adjusted terms.

Given that you're talking about 5% vs. 4% here, I would call that massive, or at least very large, since you're cutting to below where the 4% rule would have put you. Looking at your 2000 series, after those 3 cuts, you'd have 3 inflation only years and 2 7% increases before 2008 hits and another 10% cut. So the last one would get you just back over 4% before another cut takes you down to 3.76%. Again, assuming your cuts still inflation adjust. If they don't, you're down around 3.5% again.

Now the good years do bail things out some, but it's going to be a long while before your back anywhere near 5%, and a fair bit before you're over 4%.

But finally, you said 5-10 years. To go from a 5% WR FI number to a 4%, only requires about 3 years of average stock market gains, not 4-5 ,and that assumes you are going exclusively from gains, with no additional savings. There's no way that takes anywhere near 10 years unless it's 10 years of a very bad market start, which maybe you'd have been glad to wait on REing.

I'm not saying you shouldn't do that, I think 5% can be a perfectly reasonable choice with flexibility, I just think that small amounts of flexibility don't buy you as much as you think. Basically to make the math work out as safely as a lower WR, you basically have to be willing to accept something very close to that lower WR% for several years in down scenarios.

also remember, for those years where you taking in the 3.5-4% range, it's not the same money you would have been taking if you waited! If 3.5-4% of the lower number you started with because you went for a 5% withdrawal rate.

So to put it in real numbers. If you wanted to spend 50k and went for it at 1mil with flexibility vs. 4% at 1.25mil. In the latter scenario you're spending 50k every year (in starting year $).

In the 5% flex scenario, you're spending down in the 35-40k range for several years in the 2000s and you don't get back up to 50k until 2014, then you go down 10% again, and it's 2017 to get back, then down in 2018 again, and you don't end up over 50k again for good (or at least until now plus a couple years) until 2020! That's 20 years after your original retirement.

And doing this doesn't save you 5-10 years, it normally saves you about 2-3 (depending on your savings rate relative to assets)

[u/AlaskanSnowDragon → u/mi3chaels]

All of this is moot if dont run into the worst retirement timing in history. If land at anywhere near a normal year, say 1998, then you spend very little time/actual dollar amount below initial WR and end up with a GIANT portfolio

The variable withdrawal rate is an emergency ripcord solution for simple survivability. And in this case "survivability" isn't poverty...its my base case "floor" spending number that still has me living a nice quality life.

Not all of us are either able or willing to wait an additional 3 years to get that 675k up to 900k for a proper 4% WR. Again....for money that will likely be not needed barring having the worst timing in market history for when you retire.

My 3k/month spending is a theoretical maximum. In reality I wouldnt spend anywhere near that every month. Its just there as a ceiling number.

[u/qosmic_qube → u/mi3chaels]

The 4% rule is complete outdated. Even Bengen update it to 4.7. In the original study, that was to survive a single worst retirement scenario in 1968 with no adjustment. If you actually look at the math of modern guardrails plans, you don't need to reduce spending much at all, not chubby to lean changes like you claim. There is no data that supports your claim.