Bond rates are correlated with stock returns, and the paper assumes a lower-than-historical stock return as well. I don't know whether today's low bond rates are an anomaly or whether the historically high rates/returns in the US were an anomaly, but it seems to me there's a fairly high chance the latter is the case. As the paper points out, the 4% wouldn't have worked in most other countries. If you assume the current rates will continue, then even a 2.5% withdraw rate will have a 10% failure probability over 30 years, and you'd have to go to 1.3% withdraw rate to get a 1% failure probability over 40 years. (And this is assuming optimal mix between stock and bonds so you wouldn't be able to achieve greater withdraw rate at same failure probability by switching to more stocks for example.)
I myself am doing ""extreme saving", but it's a big decision and I think people should make the choice with an accurate picture of the likely benefits and risks. Saying "4% withdrawal rate should last you forever" seems to be overselling the benefits and underplaying the risks. "Making a habit of saving most of your income should give you the greatest possible utility no matter what your investment or retirement plans are" seems like an even stronger statement, which I don't see how you can defend.
The past few days have seen an increase of chatter concerning retirement and financial planning. One of us is even putting out a prospectus for a rational financial planning sequence. Some others have derided the concept of saving for retirement, as there is a probability of death before that time.
I am of the Extreme Early Retirement group. The idea is to save and invest 60-90% of your income, and you will have enough money to retire within a decade rather than four decades of the normal working career. This requires you to exercise your frugality muscle (such as cutting cable, biking to work, eating out less), but due to hedonistic adaptation, you will come out no less unhappy.
The sequences have already spoken on how spending money does not make us happier (after our basic needs are met). A Rational Financial plan should take this into account, even if a majority of people would not want to consider it.
I am just a beginner, so I linked the two big names in EEA, Mr. Money Mustache and Early Retirement Extreme. You can find their journeys towards financial independence here and here.
ERE is an austerity heavyweight, while MMM lives a pretty luxurious lifestyle, but still spends much less than his former coworkers. He just spends on what is important to him, such as travelling with his family and eating organic food, and not on anything frivolous, such as cable or eating out. He lives very far from a deprived lifestyle which the average person would shy away from. It takes a paradigm shift and some grit, but the people of LessWrong are not the type to reject munchkin ideas because it takes a little bit of mental effort.
If I were to make a compilation of posts for a Rational Financial Planning sequence, it will go as such…
How Little Money you need to Retire ?
Basic Retirement Math
Rationalist Spending
Maximizing Utilons per Dollar
Utilons Free Of Charge
Investing Rationally Basics
These are just the basics. Investment advice is scare, and the above does not talk about many fianacial aspects, such as insurance, children, career choice. The authors do speak about them on their blog’s, but I omitted them for brevity. Read and follow these posts however, and you will be better off than 90% of your peers, and well on the road to Extreme Early Retirement.
[Edit] This idea of cutting your expenses and maximizing your savings obviously do not apply only to early retirement. Other financial goals, such as saving for a house, building up capital for a business, or giving more money to charity all will be more quickly accomplished if you learn to cut excesses from your life. The driving idea is the cost to live is very small, you are not made any happier by spending money on the extras, and you should put this money where it matters to you the most.
Petruchio