The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: Interest Compound on November 15, 2015, 01:01:54 AM
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I’ve always been a staunch advocate for bonds in any portfolio. But I’m on the verge of switching to 100% stocks, and want to share my reasoning. I'm sure a lot of this is already obvious to many of you, so feedback is welcome! :)
VPW
Variable Percentage Withdrawal (VPW) (https://www.bogleheads.org/forum/viewtopic.php?f=10&t=120430&p=1761580#p1761563) initially drove me to consider 100% stocks, as that allocation supports a higher withdrawal rate. It can do this, because unlike the 4% rule, it aims to draw down your portfolio. A 30 year old using VPW can initially withdraw 5.1% with 100% stocks, but change it to 80/20 stocks/bonds and the initial withdrawal drops to 4.5%, meaning I'll have to work longer to reach FIRE.
Discovering VPW removed a big hurdle of 100% stocks for me. The fear of portfolio failure is gone, as VPW cannot fail. It tells you exactly how much you can safely withdrawal, there is no risk of prematurely depleting your portfolio, you end up with much more money to spend than simply sticking to the 4% rule, I don’t have to live paycheck to paycheck in retirement, and I can FIRE earlier. I discuss the pros and cons here:
http://forum.mrmoneymustache.com/post-fire/playbook-on-down-marketsportfolio-steps/
Here's a breakdown of the difference between VPW and the 4% rule for a 30 year old early retiree, with a starting retirement year of 1929:
VPW is the solid line, 4% rule is the dotted line.
(http://i.imgur.com/rCjGAbt.png)
We see the 4% rule portfolio was wiped out after 22 years of retirement, while VPW grew to 3.5 million, before completing the drawdown on schedule after 70 years of withdrawals. The last 20 years of withdrawals averaged $400,000 a year.
Starting year of 1966:
(http://i.imgur.com/IKDo7Yf.png)
We see the 4% rule portfolio was wiped out after 25 years of retirement, while VPW grew to 7 million, and still has 20 years of withdrawals to go.The current-year withdrawal is $400,000.
Long story short, I’m ok with the income fluctuations inherent in VPW. None of the worst case historical scenarios look scary to me, and stocks did better than bonds during those periods with VPW anyway. I think it's important to be flexible and I'm careful not to confuse retirement expense needs with withdrawal amount. Expense needs are part of budgeting. withdrawal amount is like an income. When you were working you had a budget and an income. I don't think retirement should be any different. I didn't live paycheck to paycheck during my working years, and I don't want to live paycheck to paycheck in retirement. We always warn people of the risks when living paycheck to paycheck during their working years, but if your expenses are exactly 40k, and you save up exactly 1 million and retire with the 4% rule, that looks very much like living paycheck to paycheck to me. That's more risk than I'm willing to take. The easiest way for me to avoid this, is to increase my income with side-gigs…by doing all the fun stuff I'll be doing anyway.
I genuinely can't imagine not doing anything that generates income for 50 years. Not because I'm a workaholic, but because it seems to be the natural progression of learning new skills. Suddenly you have tons of free time to FINALLY work on the things your passionate about. Maybe you want to write, learn a programming language, design websites, learn photography, build houses (MMM)...etc. Chances are, someone out there is willing to throw money at you to develop those new skills.
I have tons of friends who decided to learn photography. Within a month they were booking paid gigs. Two paid gigs a month, as a beginner doing something they love, is enough to bring you from a 4% withdrawal rate, to 3% on a $1,000,000 portfolio.
That said, with VPW, chances are high the side-gigs won’t be necessary. VPW gives me a higher paycheck in the vast majority of years, and a lower paycheck in the rare times when I'm in danger of a portfolio wipe. The 4% rule is like VPW, but with a fixed paycheck. Sure it's easier to budget, but it's the worst of both worlds. You miss out on the higher paycheck in the vast majority of years, and you still risk a portfolio wipe. It's easy to look at VPW and be afraid of "a lot of variability". But in your working career, if you were offered a 50% raise would you turn it down because it had "a lot of variability"? I like a lot of variability on the upside, I have planned for the variability on the downside.
Stock ladder?
I read an article, can’t find it now, that presented investing in a way I hadn’t thought of it before then. Imagine someone saving up for retirement, between the ages of 30 through 60. They said we should visualize it like a CD ladder:
The deposits of age 30 ———> will fund the expenses of age 60
The deposits of age 31 ———> will fund the expenses of age 61
The deposits of age 32 ———> will fund the expenses of age 62
…
The deposits of age 58 ———> will fund the expenses of age 88
The deposits of age 59 ———> will fund the expenses of age 89
The deposits of age 60 ———> will fund the expenses of age 90
Looking at it this way, each deposit has a full 30 years to “cook”. A full 30 year time horizon, before it gets used up. As we all know, volatility in stock returns over 30 years gets very narrow…similar to bonds actually…just a bit further up the Y axis:
(http://i.imgur.com/omoHGa3.png)
Bonds:
(http://i.imgur.com/wikJb37.png)
Even if stocks drop 50% the year you turn 60, only the deposit you made when you were 30 years old is affected, because that’s the only deposit you’re withdrawing that year. Given this visualization, it seems like a no-brainer to go 100% stocks. Of course I'll be FIRE much earlier than 60 years old, but the vast majority of my money will have decades to "cook" before being used.
While doing research on the topic, Brooklynguy had some really insightful posts along these same lines:
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But the "specific years" you need stocks to outperform bonds are not the years between investment and the commencement of retirement, but the entire remainder of your life. Even during the accumulation phase when you're working towards the goal of accumulating enough to pull the trigger on retirement, the time horizon for your investments is the rest of your life (not your retirement date).
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Source (http://forum.mrmoneymustache.com/investor-alley/asset-allocation-100-stocks-for-how-long/msg414952/#msg414952)
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Of course 100% stocks doesn't make sense if your investing time horizon is less than a decade! But in reality, when you invest during the accumulation phase, your investment time horizon is the entirety of the remainder of your life (i.e., multiple decades) (because you are not going to be accessing those funds immediately upon retirement--you are going to be slowly drawing them down over the rest of your life).
The historical data show that the optimal asset allocation for multi-decade periods was always 100% stocks (or, depending on the precise settings for variables such as your investment expense ratio, near 100% stocks)--this allocation produced both the highest portfolio values and the highest success rates in every historical period covered by cfiresim. So, if you assume that the future will be no worse than the past, then 100% stocks is (beyond argument) the best allocation.
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Source (http://forum.mrmoneymustache.com/investor-alley/why-would-i-be-in-anything-other-than-100-stocks/msg540444/#msg540444)
Emergency fund - break even calculation
After seeing the break-even calculation on investing vs keeping an emergency fund in cash, I’ve never held an emergency fund. In short, money in stocks is expected to just about double every 8 years or so. After that point, even if stocks crash 50%, you'll still be ahead by investing it vs keeping it in cash. In that sense, a cash emergency fund really has a limited shelf-life of usefulness:
(Green means you were better off investing the money, even after the crash)
(http://i.imgur.com/QgezyME.png)
For the above calculation, I used 10.2% for stocks, and 1% for the savings account:
(http://i.imgur.com/UApV8n6.png)
While these numbers change wildly in reality, the general premise should hold true.
Bonds - break even calculation
I never thought to apply the same calculation to bonds! It seems bonds and emergency funds, both have a limited shelf-life:
(http://i.imgur.com/qXbSMBU.png)
I used 5.5% for bonds:
(http://i.imgur.com/Xpm7U1Z.png)
Withdrawals change the chart
Withdrawals change the above charts pretty significantly. Here's a 100% stock vs 100% bond chart with no withdrawals. We see they touch during the 2008 crash:
(http://i.imgur.com/ACB8kOp.png)
Now if we start with a $1,000,000 portfolio, and $40,000 yearly deposits...
(http://i.imgur.com/ywazztq.png)
Since stocks spend most of their time growing, then crash quickly, most of your withdrawals will be taken during up years. As a result, the withdrawals don't depress the stock portfolio as much, creating a bigger buffer before the 2008 crash.
GoCurryCracker's path to 100% equities
This article (http://www.gocurrycracker.com/path-100-equities/) was the final push I needed. "Wait a second?! Isn’t 100% stock super risky? What if the stock market suffers a major drop? What if the Great Recession happens all over again? I think the phrasing of these questions holds an underlying assumption, that the stock price on any given day is important. Unless you plan to buy or sell, the price is largely irrelevant."
Staying the course
I've been investing for 15 years, and am quite comfortable with staying the course during a crash. Please consider the following scary links before making a similar move:
What was the 2008 crash like in real time? (https://www.bogleheads.org/forum/viewtopic.php?f=10&t=168261)
http://www.livingafi.com/2014/05/drawdown-part-1-the-basics/
http://forum.mrmoneymustache.com/investor-alley/why-would-i-be-in-anything-other-than-100-stocks/msg541017/#msg541017
http://forum.mrmoneymustache.com/investor-alley/why-would-i-be-in-anything-other-than-100-stocks/msg541078/#msg541078
Thoughts?
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It's obvious you put a lot of work into this post, so thanks.
I remain skeptical of basing any retirement decisions on the VPW, as per our discussion in the other thread on it.
I go back and forth on 100% stocks (or maybe 90/10 at the most) versus a much more diversified (including gold, etc., more PP based). I personally wouldn't go 60/40 or anything like that--high stocks, or high diversification into various assets, but just a middling stocks/bonds seems suboptimal to both of those options to me.
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Mirrors a lot of research I've been doing recently that makes bonds look like total losers (other than as a security blanket), but only in the case where one does not rebalance. There *appear* to be real gains to be had long term with at least a little bit of bonds available to rebalance into (sort of an automatic way to do some actual, working market timing). I didn't see that in your calculations, did I miss it, or did you find it to not be worthwhile?
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I absolutely agree with 100% stock approach during retirement assuming a paid off home and a cash emergency fund. Together they are major stabizing factor. I almost never see this asked or taken into account when discussing asset allocation % mixes.
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The historical data show that the optimal asset allocation for multi-decade periods was always 100% stocks (or, depending on the precise settings for variables such as your investment expense ratio, near 100% stocks)--this allocation produced both the highest portfolio values and the highest success rates in every historical period covered by cfiresim. So, if you assume that the future will be no worse than the past, then 100% stocks is (beyond argument) the best allocation.
Because I can already see Tyler (creator of PortfolioCharts.com) wincing at these statements, let me clarify that they, like the original post in this thread, were referring to asset allocation as a sliding scale solely between two options: "stocks" and "bonds," each as a single unified asset class. In reality, per Rebs' comment above regarding more diversified portfolios (like the permanent portfolio), there are of course specific asset allocations that have fared better historically once you start slicing and dicing these two generic asset classes into more specific subclasses and/or add other asset classes into the mix. (My own favored approach continues to be to keep things simple and stick with 100% stocks, using a portfolio comprising broadly-diversified domestic and international total market index funds.)
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Mirrors a lot of research I've been doing recently that makes bonds look like total losers (other than as a security blanket), but only in the case where one does not rebalance. There *appear* to be real gains to be had long term with at least a little bit of bonds available to rebalance into (sort of an automatic way to do some actual, working market timing). I didn't see that in your calculations, did I miss it, or did you find it to not be worthwhile?
Everything I've found shows a reduction in returns, and therefore withdrawals, with any allocation to bonds. Here's cfiresim (Custom VPW) with 100% stocks:
(https://i.sli.mg/cuRrRn.png)
and 90% stocks:
(https://i.sli.mg/BVTPJI.png)
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Good post, nice to read a new/different viewpoint on an old topic.
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Hear, hear. All of these discussions of course rely on the assumption that returns going forward will be similar to historical returns. But with that assumption, the numbers don't lie. I'm at 100% stocks right now and don't see changing that.
The rationalizations for people getting into lower-return investments (or investing sub-optimally, eg, DCA) need to just go away. The real reason is people are scared. Anything else is just an attempt to justify that fear.
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The historical data show that the optimal asset allocation for multi-decade periods was always 100% stocks (or, depending on the precise settings for variables such as your investment expense ratio, near 100% stocks)--this allocation produced both the highest portfolio values and the highest success rates in every historical period covered by cfiresim. So, if you assume that the future will be no worse than the past, then 100% stocks is (beyond argument) the best allocation.
Because I can already see Tyler (creator of PortfolioCharts.com) wincing at these statements, let me clarify that they, like the original post in this thread, were referring to asset allocation as a sliding scale solely between two options: "stocks" and "bonds," each as a single unified asset class. In reality, per Rebs' comment above regarding more diversified portfolios (like the permanent portfolio), there are of course specific asset allocations that have fared better historically once you start slicing and dicing these two generic asset classes into more specific subclasses and/or add other asset classes into the mix. (My own favored approach continues to be to keep things simple and stick with 100% stocks, using a portfolio comprising broadly-diversified domestic and international total market index funds.)
Good to see you know me well. ;) Your comments are spot-on. (And your own plan seems perfectly reasonable.)
I appreciate the well-researched post, Interest Compound. Just a few comments:
1) Yes, when you limit your investing options to a single broad stock fund and a broad bond fund, high percentages of stocks usually win out. Interestingly, research has shown that 100% stocks has a lower SWR than lower stock allocations, and there's no real difference in retirement safety between 35% stocks and 80% stocks. The sweet spot for maximizing both withdrawal rates and long-term returns for a traditional stock/bond portfolio seems to be about 75-80% stocks. Importantly, other portfolios that use more diverse funds have different results. (more on that below)
From Wade Pfau (http://retirementresearcher.com/william-bengens-safemax/)
(http://i0.wp.com/retirementresearcher.com/wp-content/uploads/2012/02/Fig2_3-300x2251.jpg)
2) Specifically referencing the charts you show from PortfolioCharts, the following comment jumped out: "As we all know, volatility in stock returns over 30 years gets very narrow…similar to bonds actually…just a bit further up the Y axis". I think I know what you're getting at, but to be clear for those interpreting the charts: The uncertainty of the long-term average return gets lower the longer you hold an investment, but the annual volatility is exactly the same in year 30 as it is in year 1. The distinction is very important for something like withdrawal rates. Despite the 3% difference in CAGR (since 1972) for the two portfolios you show, the difference in long-term SWR over that same timeframe is less than 1%. The high volatility of stocks negates much of the average returns benefit when considering drawdowns, and it's absolutely possible for a lower-return portfolio to be much safer in retirement than a higher-return option depending on the volatility. Here are a few examples. Note how the 60-40 and TSM (total stock market) pretty much match the chart above, and also how none of the top 3 SWR portfolios have more than 40% stocks.
From PortfolioCharts.com (http://portfoliocharts.com/)
(https://portfoliocharts.files.wordpress.com/2015/09/swr-vs-cagr.jpg)
3) Regarding cash, I personally believe everyone should be realistic about it and account for a little bit in their allocation. It's not just about maximizing every tiny percentage of possible return, but also about good planning and making your life easier. I personally recommend for retirees to have 1 year of cash set aside no matter how they invest. Top off your living expense fund at the end of the year (rebalancing in the most tax-efficient manner in the process) and leave your investments alone after that. Assuming the standard 4% SWR, if you really think that having 1/25th of your portfolio in cash is going to kill your retirement chances then IMHO you're over-thinking it.
All that said, 100% stocks works fine for many people and I appreciate how you use VPW as an added safety measure and are realistic about your ability to make more money in the future. If your primary goal for using VPW is to increase your withdrawal rate, I believe another way to approach the problem is to look at greater portfolio diversification beyond over-simplified "stocks" and "bonds". But if 100% stocks is your thing and makes you most comfortable, your plan seems well researched and I think with that kind of thoughtfulness you'll do just fine. Nice work!
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2) Specifically referencing the charts you show from PortfolioCharts, the following comment jumped out: "As we all know, volatility in stock returns over 30 years gets very narrow…similar to bonds actually…just a bit further up the Y axis". I think I know what you're getting at, but to be clear for those interpreting the charts: The uncertainty of the long-term average return gets lower the longer you hold an investment, but the annual volatility is exactly the same in year 30 as it is in year 1. The distinction is very important for something like withdrawal rates. Despite the 3% difference in CAGR (since 1972) for the two portfolios you show, the difference in long-term SWR over that same timeframe is less than 1%. The high volatility of stocks negates much of the average returns benefit when considering drawdowns, and it's absolutely possible for a lower-return portfolio to be much safer in retirement than a higher-return option depending on the volatility. Here are a few examples. Note how the 60-40 and TSM (total stock market) pretty much match the chart above, and also how none of the top 3 SWR portfolios have more than 40% stocks.
(Emphasis added.)
This is very important to understand, and a bit counterintuitive at first. What makes it the case is the annual withdrawals.
If it were money sitting for decades, untouched, the higher CAGR should almost always win. But volatility matters a lot when making withdrawals, due to a higher chance of it being "down" when you have to make withdrawals.
I used to way undervalue volatility versus CAGR, but they both play an important role.
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The historical data show that the optimal asset allocation for multi-decade periods was always 100% stocks (or, depending on the precise settings for variables such as your investment expense ratio, near 100% stocks)--this allocation produced both the highest portfolio values and the highest success rates in every historical period covered by cfiresim. So, if you assume that the future will be no worse than the past, then 100% stocks is (beyond argument) the best allocation.
Because I can already see Tyler (creator of PortfolioCharts.com) wincing at these statements, let me clarify that they, like the original post in this thread, were referring to asset allocation as a sliding scale solely between two options: "stocks" and "bonds," each as a single unified asset class. In reality, per Rebs' comment above regarding more diversified portfolios (like the permanent portfolio), there are of course specific asset allocations that have fared better historically once you start slicing and dicing these two generic asset classes into more specific subclasses and/or add other asset classes into the mix. (My own favored approach continues to be to keep things simple and stick with 100% stocks, using a portfolio comprising broadly-diversified domestic and international total market index funds.)
Good to see you know me well. ;) Your comments are spot-on. And your plan seems perfectly reasonable!
I appreciate the well-researched post, Interest Compound. Just a few comments:
1) Yes, when you limit your investing options to a single broad stock fund and a broad bond fund, high percentages of stocks usually win out. Interestingly, research has shown that 100% stocks has a lower SWR than lower stock allocations, and there's no real difference in retirement safety between 35% stocks and 80% stocks. The sweet spot for maximizing both withdrawal rates and long-term returns for a traditional stock/bond portfolio seems to be about 75-80% stocks. Importantly, other portfolios that use more diverse funds have different results. (more on that below)
From Wade Pfau (http://retirementresearcher.com/william-bengens-safemax/)
(http://i0.wp.com/retirementresearcher.com/wp-content/uploads/2012/02/Fig2_3-300x2251.jpg)
Agreed, I'm totally with you on that. This type of research, and posts like this (https://www.bogleheads.org/forum/viewtopic.php?f=10&t=173371&sid=0e46bcfe4bc937d0d2d8b2dd16fafabc) are what led me to my initial 80/20 allocation. VPW is what really flipped things around for me.
2) Specifically referencing the charts you show from PortfolioCharts, the following comment jumped out: "As we all know, volatility in stock returns over 30 years gets very narrow…similar to bonds actually…just a bit further up the Y axis". I think I know what you're getting at, but to be clear for those interpreting the charts: The uncertainty of the long-term average return gets lower the longer you hold an investment, but the annual volatility is exactly the same in year 30 as it is in year 1. The distinction is very important for something like withdrawal rates. Despite the 3% difference in CAGR (since 1972) for the two portfolios you show, the difference in long-term SWR over that same timeframe is less than 1%. The high volatility of stocks negates much of the average returns benefit when considering drawdowns, and it's absolutely possible for a lower-return portfolio to be much safer in retirement than a higher-return option depending on the volatility. Here are a few examples. Note how the 60-40 and TSM (total stock market) pretty much match the chart above, and also how none of the top 3 SWR portfolios have more than 40% stocks.
From PortfolioCharts.com (http://portfoliocharts.com/)
(https://portfoliocharts.files.wordpress.com/2015/09/swr-vs-cagr.jpg)
Totally with you on that too. This is the beauty of VPW. Volatility is bad, as withdrawals during a bad year can really kill the long-term growth of the portfolio (pretty much the opposite of the chart I showed with the "Huge Gap"). It seems VPW is the saving grace for the 100% stock portfolio, as it negates this. Here's what the VPW yearly withdrawals looked like starting in the same 1972, 40 year withdrawal period from your chart:
(Inflation-adjusted - Solid line is VPW - Dotted line is the 4% withdrawal rate)
(http://i.imgur.com/KfKBGNY.png)
It avoids crippling the portfolio in the starting years, then really explodes. The median withdrawal over the period is $71,000 and the average of the first 20 years is $50,700. This isn't an apples to apples comparison though, as VPW purposely draws down the portfolio to 0, while the 4% rule still has $2 million inflation-adjusted dollars for your heirs.
I had some trouble replicating the results from your chart, until I realized it was using 100% domestic stocks, whereas all my charts are cap weighting between domestic and international stocks (so 50/50). While 100% domestic stocks failed with a 5% withdrawal rate starting in 1972 (hitting 0 in 1994), the cap weight 50/50 domestic/international did better than the Permanent Portfolio:
(http://i.imgur.com/HHsTph5.png)
(http://i.imgur.com/U4sUfV1.png)
(http://i.imgur.com/PggtKxx.png)
Looking at VPW with 60/40, it doesn't really help too much during this time period. First I'll have to work a bit longer, as the initial withdrawal rate is 4.0% instead of the 5.1% of 100% stocks, then the median withdrawal moves down to $66,000. If I change the start year to something like 1950, it's even worse, with the median withdrawal dropping from $130k with 100% stocks, to $76k with 60/40 stocks/bonds.
To be honest, on principle I can't go with any of the alternative portfolios listed, permanent portfolio included. The allocations...20% here, 14% there, 4% here, they just seem like they were made to overfit the data. As my signature says, passive investing (as I define it) has a deep humility at its core--the aim is not to separate winners from losers, but rather to hold the entire market. Now you could argue I'm not staying true to this mantra, as this whole thread is about going 100% stocks (winners) and skipping out on Bonds (losers), but that's why I made this thread. So everyone here can tell me if I'm being an idiot :)
3) Regarding cash, I personally believe everyone should be realistic about it and account for a little bit in their allocation. It's not just about maximizing every tiny percentage of possible return, but also about good planning and making your life easier. I personally recommend for retirees to have 1 year of cash set aside no matter how they invest. Top off your living expense fund at the end of the year (rebalancing in the most tax-efficient manner in the process) and leave your investments alone after that. Assuming the standard 4% SWR, if you really think that having 1/25th of your portfolio in cash is going to kill your retirement chances then IMHO you're over-thinking it.
It's interesting you say that, because this is a staple of VPW, and it makes no sense to me. With VPW you keep 1 year of living expenses in cash, then at the end of the year you top it up with a withdrawal up to the recommended number. How does keeping 1 year of expenses in cash help you, when you're still making a withdrawal from your portfolio at the end of the year, regardless of market conditions? I'd think that taking the withdrawals monthly would be more efficient, since it keeps your money working for you longer, and most years the market goes up.
Can you explain your reasoning behind this?
All that said, 100% stocks works fine for many people and I appreciate how you use VPW as an added safety measure and are realistic about your ability to make more money in the future. If your primary goal for using VPW is to increase your withdrawal rate, I believe another way to approach the problem is to look at greater portfolio diversification beyond over-simplified "stocks" and "bonds". But if 100% stocks is your thing and makes you most comfortable, your plan seems well researched and I think with that kind of thoughtfulness you'll do just fine. Nice work!
Thanks for your feedback Tyler! I haven't made the decision yet, but I'm close to pulling the trigger.
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I had some trouble replicating the results from your chart, until I realized it was using 100% domestic stocks, whereas all my charts are cap weighting between domestic and international stocks (so 50/50). While 100% domestic stocks failed with a 5% withdrawal rate starting in 1972 (hitting 0 in 1994), the cap weight 50/50 domestic/international did better than the Permanent Portfolio:
Be careful not to look at only one starting year and extrapolate over every starting year. For the tool you're using, re-run the same analysis for every start year (or use PC which does it for you ;) ). Looking at the single worst timeframes for each, the Permanent Portfolio has supported a higher WR than a 50/50 US/Int'l stock split using a traditional Trinity/Bengen study withdrawal system (I'll look into adding a VPW option). Whether that means it's "better" for you depends on considering other factors and goals as well, and I have no problem with your 50/50 stock allocation. I don't believe in a one-size-fits-all portfolio.
To be honest, on principle I can't go with any of the alternative portfolios listed, permanent portfolio included. The allocations...20% here, 14% there, 4% here, they just seem like they were made to overfit the data. As my signature says, passive investing (as I define it) has a deep humility at its core--the aim is not to separate winners from losers, but rather to hold the entire market. Now you could argue I'm not staying true to this mantra, as this whole thread is about going 100% stocks (winners) and skipping out on Bonds (losers), but that's why I made this thread. So everyone here can tell me if I'm being an idiot :)
I guess that's a matter of opinion. The PP is equally split between four assets selected for specific economic conditions. I really don't see that as over-fitting the data. Same for something like Bernstein, Ivy, etc. with portfolios equally divided among several assets. The Swedroe allocation may seem a little random, but the entire theory is built on investing in high-risk stocks so that you can get the same overall return with lower portfolio volatility while dialing back stock exposure. Merriman may look over-fit until you read through his explanation, and then it makes sense. Basically, I wouldn't judge the allocations of diverse portfolios until you take the time to read up and truly understand them.
One of the major themes of Modern Portfolio Theory is about thoughtfully selecting different assets that, when combined, have better overall performance than any individual asset on their own. It's counter-intuitive when you only think about long-term averages, study the returns of each asset in isolation, or artificially limit yourself to two options. But once you account for multiple diverse assets, correlations, and annual rebalancing it starts to make sense. The William Bernstein books cover this topic pretty well.
That said, I definitely do not recommend investing in any portfolio you do not understand or are not comfortable with for any reason. If after considering the various tradeoffs a straightforward stock portfolio still makes the most sense to you, that's a perfectly fine plan.
It's interesting you say that, because this is a staple of VPW, and it makes no sense to me. With VPW you keep 1 year of living expenses in cash, then at the end of the year you top it up with a withdrawal up to the recommended number. How does keeping 1 year of expenses in cash help you, when you're still making a withdrawal from your portfolio at the end of the year, regardless of market conditions? I'd think that taking the withdrawals monthly would be more efficient, since it keeps your money working for you longer, and most years the market goes up.
Can you explain your reasoning behind this?
My opinion is that having a year of cash is not about being most efficient economically but personally. Most passive investment strategies call for simple annual rebalancing and leaving things alone the rest of the year. Keeping that same schedule with withdrawals (rather than withdrawing money every month) is a lot less effort and supports the passive mindset. IMHO, if you're trying to squeeze every last dime out of your investments by managing them monthly in retirement, you're not nearly as passive as you might think. Keeping one year of expenses in cash should not have a significant effect on your overall portfolio performance (once you have 25+ saved up), but its benefit to your emotions and investing behavior are quite noticeable.
When I first started FIRE, I tried only taking out a few months of cash at a time and frankly it was a hassle. A year really does feel right, and the fact that doing it that way also allows me to easily calculate my expenses for the year and withdraw the money in the most tax-efficient way possible are also nice bonuses. FWIW, my own portfolio includes a nice chunk of cash (on top of the annual expenses) as part of my AA.
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Can you post a chart with the withdrawal amounts for these as well? That's my main issue, although you say it doesn't bother you so that's good. From your second post it looks like VPW drops from $40k/year to under $18k/year in the first 1/3 of retirement? That's a pretty huge drop in standard of living! I can imagine that being painful (even more so for my wife, and thus for me..). The chart shows it will get better after that, but I can imagine that if I had to spend 1/2 what I had planned for several years I might be scared that I had screwed up, and start looking for work. Had I been out of the workforce a while, or I was old, and had trouble getting a job it might start to really panic.
Some variability in withdraws is fine, and probably inevitable, but cutting costs in 1/2 might seem nigh near impossible, and not sure it's something I'd like to live through to gain 1% in SWR.. Personal preference though.
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Can you post a chart with the withdrawal amounts for these as well? That's my main issue, although you say it doesn't bother you so that's good. From your second post it looks like VPW drops from $40k/year to under $18k/year in the first 1/3 of retirement? That's a pretty huge drop in standard of living! I can imagine that being painful (even more so for my wife, and thus for me..). The chart shows it will get better after that, but I can imagine that if I had to spend 1/2 what I had planned for several years I might be scared that I had screwed up, and start looking for work. Had I been out of the workforce a while, or I was old, and had trouble getting a job it might start to really panic.
Some variability in withdraws is fine, and probably inevitable, but cutting costs in 1/2 might seem nigh near impossible, and not sure it's something I'd like to live through to gain 1% in SWR.. Personal preference though.
Remember, I'm making a big distinction here between retirement expense needs, and withdrawal amount. Also, due to a lack of long-term data for international stocks, these two charts are 100% domestic stocks.
That $18k a year number is derived from looking at the worst case historical scenarios, as a 30 year old, who lives off their portfolio until age 100. Those same worst case scenarios would've resulted in a portfolio wipe with the 4% rule:
(http://i.imgur.com/3fvHHtm.png)
In the worst case scenario of 1929, VPW would have you withdrawing less than you want for 23 of the first 26 years. The remaining 44 years have an average withdrawal of $73,800, while your 4% rule counterpart lost their ability to feed themselves after 22 years.
(http://i.imgur.com/uyeTOcb.png)
Similar story for the 1966 investor, where VPW would have you withdrawing less for 16 of the first 21 years, while the remaining years (so far) would have you averaging a $59,000 withdrawal. While your 4% rule counterpart lost their ability to feed themselves after 25 years.
(http://i.imgur.com/m58v3gK.png)
If you use 50/50 domestic/international stocks for the 1966 case (international data is available starting in 1972, so only the first few years are 100% domestic) the 4% rule lasts a bit longer, but now you end up broke at age 77...I'm not sure if that's better or worse:
(http://i.imgur.com/DI9NxXs.png)
The typical scenario for VPW looks more like this:
(http://i.imgur.com/1BEkOFW.png)
The worst case scenarios for VPW have you spending less for about two decades so the portfolio can recover for the rest of your life, while those same years for the 4% rule would have resulted in portfolio wipes. In short, either way you end up working again. VPW has you doing it while you're younger, on a part-time basis doing the things you love (hopefully!), with $700,000 in the bank. The 4% rule has you doing it when you're 55, on a full-time basis, with $0 in the bank.
Pick your poison :-P
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I had some trouble replicating the results from your chart, until I realized it was using 100% domestic stocks, whereas all my charts are cap weighting between domestic and international stocks (so 50/50). While 100% domestic stocks failed with a 5% withdrawal rate starting in 1972 (hitting 0 in 1994), the cap weight 50/50 domestic/international did better than the Permanent Portfolio:
Be careful not to look at only one starting year and extrapolate over every starting year. For the tool you're using, re-run the same analysis for every start year (or use PC which does it for you ;) ). Looking at the single worst timeframes for each, the Permanent Portfolio has supported a higher WR than a 50/50 US/Int'l stock split using a traditional Trinity/Bengen study withdrawal system (I'll look into adding a VPW option). Whether that means it's "better" for you depends on considering other factors and goals as well, and I have no problem with your 50/50 stock allocation. I don't believe in a one-size-fits-all portfolio.
To be honest, on principle I can't go with any of the alternative portfolios listed, permanent portfolio included. The allocations...20% here, 14% there, 4% here, they just seem like they were made to overfit the data. As my signature says, passive investing (as I define it) has a deep humility at its core--the aim is not to separate winners from losers, but rather to hold the entire market. Now you could argue I'm not staying true to this mantra, as this whole thread is about going 100% stocks (winners) and skipping out on Bonds (losers), but that's why I made this thread. So everyone here can tell me if I'm being an idiot :)
I guess that's a matter of opinion. The PP is equally split between four assets selected for specific economic conditions. I really don't see that as over-fitting the data. Same for something like Bernstein, Ivy, etc. with portfolios equally divided among several assets. The Swedroe allocation may seem a little random, but the entire theory is built on investing in high-risk stocks so that you can get the same overall return with lower portfolio volatility while dialing back stock exposure. Merriman may look over-fit until you read through his explanation, and then it makes sense. Basically, I wouldn't judge the allocations of diverse portfolios until you take the time to read up and truly understand them.
One of the major themes of Modern Portfolio Theory is about thoughtfully selecting different assets that, when combined, have better overall performance than any individual asset on their own. It's counter-intuitive when you only think about long-term averages, study the returns of each asset in isolation, or artificially limit yourself to two options. But once you account for multiple diverse assets, correlations, and annual rebalancing it starts to make sense. The William Bernstein books cover this topic pretty well.
That said, I definitely do not recommend investing in any portfolio you do not understand or are not comfortable with for any reason. If after considering the various tradeoffs a straightforward stock portfolio still makes the most sense to you, that's a perfectly fine plan.
It's interesting you say that, because this is a staple of VPW, and it makes no sense to me. With VPW you keep 1 year of living expenses in cash, then at the end of the year you top it up with a withdrawal up to the recommended number. How does keeping 1 year of expenses in cash help you, when you're still making a withdrawal from your portfolio at the end of the year, regardless of market conditions? I'd think that taking the withdrawals monthly would be more efficient, since it keeps your money working for you longer, and most years the market goes up.
Can you explain your reasoning behind this?
My opinion is that having a year of cash is not about being most efficient economically but personally. Most passive investment strategies call for simple annual rebalancing and leaving things alone the rest of the year. Keeping that same schedule with withdrawals (rather than withdrawing money every month) is a lot less effort and supports the passive mindset. IMHO, if you're trying to squeeze every last dime out of your investments by managing them monthly in retirement, you're not nearly as passive as you might think. Keeping one year of expenses in cash should not have a significant effect on your overall portfolio performance (once you have 25+ saved up), but its benefit to your emotions and investing behavior are quite noticeable.
When I first started FIRE, I tried only taking out a few months of cash at a time and frankly it was a hassle. A year really does feel right, and the fact that doing it that way also allows me to easily calculate my expenses for the year and withdraw the money in the most tax-efficient way possible are also nice bonuses. FWIW, my own portfolio includes a nice chunk of cash (on top of the annual expenses) as part of my AA.
I think it might be best to leave this thread to only stocks/bonds, as I need to wrap my mind around your comments on the other portfolios. I'll probably make a new thread in a week or two on that :)
Regarding the year of cash, I always assumed I'd simply setup an automatic monthly withdrawal from my Vanguard account at the beginning of the year, call it my "paycheck", and leave it alone for the year. After typing that, and re-reading your post, I can already see some things I'd want to change.
"Oh, I made enough money with my hobbies last month to cover next month's expenses, let's cancel that Vanguard paycheck for next month!"
"Oh, we've had a big crash, let's recalculate VPW for the year and reset the monthly withdrawals!"
Hmm...having a year of buffer in cash makes a lot of sense.
Thanks for the insight Tyler!
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Can you post a chart with the withdrawal amounts for these as well? That's my main issue, although you say it doesn't bother you so that's good. From your second post it looks like VPW drops from $40k/year to under $18k/year in the first 1/3 of retirement? That's a pretty huge drop in standard of living! I can imagine that being painful (even more so for my wife, and thus for me..). The chart shows it will get better after that, but I can imagine that if I had to spend 1/2 what I had planned for several years I might be scared that I had screwed up, and start looking for work. Had I been out of the workforce a while, or I was old, and had trouble getting a job it might start to really panic.
Some variability in withdraws is fine, and probably inevitable, but cutting costs in 1/2 might seem nigh near impossible, and not sure it's something I'd like to live through to gain 1% in SWR.. Personal preference though.
Some additional comments in addition to the charts from earlier.
VPW is a rational solution to the SWR dillema (http://forum.mrmoneymustache.com/post-fire/playbook-on-down-marketsportfolio-steps/): Markets went down a lot so should I reduce my withdrawals? By how much? Markets went up a lot so should I increase my withdrawals? By how much? VPW provides a mathematical answer that will protect the portfolio from ruin, yet keep targeting portfolio depletion on an exact selected year.
VPW is not a unique method. The principles on which it is based (e.g. using an amortization schedule to determine withdrawal rates) predate it. The key new contribution of VPW is that it adapts withdrawal rates to the asset allocation, it allows for a flexible last-withdrawal age, and it comes with a neat backtesting spreadsheet to evaluate its historical behavior.
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The typical scenario for VPW looks more like this:
(https://i.sli.mg/g4xWcK.png)
Those huge dives in 2000, 2007, etc. Ugly. Having to "cut back" doesn't sound appealing to me, I'd much prefer stability. Something similar to the below (which I just made up and eyeballed, but the idea of raising steadily in real terms when the portfolio supports it):
(http://forum.mrmoneymustache.com/investor-alley/revisiting-the-asset-allocation-question-the-case-for-100-stocks/?action=dlattach;attach=14185)
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The typical scenario for VPW looks more like this:
(https://i.sli.mg/g4xWcK.png)
Those huge dives in 2000, 2007, etc. Ugly. Having to "cut back" doesn't sound appealing to me, I'd much prefer stability. Something similar to the below (which I just made up and eyeballed, but the idea of raising steadily in real terms when the portfolio supports it):
(http://forum.mrmoneymustache.com/investor-alley/revisiting-the-asset-allocation-question-the-case-for-100-stocks/?action=dlattach;attach=14185)
My actual spending will probably mirror your blue line. Well, I'm sure there will be some spike years when the kids go to college, or some emergency/unexpected expense happens, but that's close enough. But why should my paycheck be at all related to my spending? Remember, I'm making a distinction here between retirement spending, and withdrawal amount.
I don't want to live paycheck to paycheck in retirement and I view VPW as a paycheck. In other words, just because VPW says I can withdrawal $83,000 one year, doesn't mean I'm going to go out and find something to spend an extra $43,000 on that year! :) The only thing that should be cut back in 2000 and 2007, is your paycheck. Unless you were living paycheck to paycheck, and immediately grew your lifestyle with your paycheck, you shouldn't feel a thing.
Seriously, if you were offered a 50% raise during your working years, would you turn it down because it had "a lot of variability"? Of course not. You'd take the money and either spend it, pad your emergency fund, or invest it. Since we are all mustachians here, we'd likely end up saving/investing most of it.
From what I've seen, there are two ways people handle this with VPW:
1. They literally treat it like a paycheck, withdrawal every year on Jan 1st, and leave whatever they don't spend growing in their savings account for emergencies. This is akin to someone working, saving maybe 30% of their "paycheck", and putting it away for a rainy day.
2. They literally treat it like a paycheck, withdrawal every year on Jan 1st, but they only withdrawal enough to top off their 1 year buffer of cash. This is akin to someone working, saving maybe 30% of their "paycheck", and investing it.
The person following #1 will have a steadily growing allocation to cash. You could make the argument they're no longer "100% stocks", but they usually don't see it that way. They see it as their emergency/vacation/spending account. The person following #2 will build a bigger and bigger buffer for their withdrawals in the following years. If the person who retired in 1955 from our chart, only spends $40,000 a year for the first 5 years (exactly what their expenses were before retirement), and invests the rest (following #2's plan), they will have earned themselves a 10% raise for the rest of their lives. By this I mean their VPW withdrawal each year will have increased by 10%. If they do this for the first 10 years, they will have earned themselves a 30% raise for the rest of their lives.
We've got a lot of folks here preparing for the worst with a 4% SWR, lowering their retirement paycheck, putting money in bonds to reduce paycheck volatility, and living paycheck to paycheck. I think I've found a better way.
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Withdrawing more than you are going to spend seems silly to me.
Actual withdrawal amount should match spending (even if potential withdrawal amount is much higher). Thus the blue line.
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Withdrawing more than you are going to spend seems silly to me.
One possible scenario where it might make sense would be to withdraw funds from a taxable account where the long-term capital gains tax would be zero for the current year (e.g. $37K withdrawal on a budget of $28K expenses). In the following year you could start paying your living expenses out of these funds until you clarified what your tax situation would be for the next year.
Even if you decided to later re-invest the funds, you would have still reset your cost basis to lower your taxes for withdrawals in future years.
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Withdrawing more than you are going to spend seems silly to me.
One possible scenario where it might make sense would be to withdraw funds from a taxable account where the long-term capital gains tax would be zero for the current year (e.g. $37K withdrawal on a budget of $28K expenses). In the following year you could start paying your living expenses out of these funds until you clarified what your tax situation would be for the next year.
Even if you decided to later re-invest the funds, you would have still reset your cost basis to lower your taxes for withdrawals in future years.
IMO you'd be better off doing a Roth rollover in that case.
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Withdrawing more than you are going to spend seems silly to me.
One possible scenario where it might make sense would be to withdraw funds from a taxable account where the long-term capital gains tax would be zero for the current year (e.g. $37K withdrawal on a budget of $28K expenses). In the following year you could start paying your living expenses out of these funds until you clarified what your tax situation would be for the next year.
Even if you decided to later re-invest the funds, you would have still reset your cost basis to lower your taxes for withdrawals in future years.
IMO you'd be better off doing a Roth rollover in that case.
Agreed, if you have any remaining Roth conversions available at that time.
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Withdrawing more than you are going to spend seems silly to me.
One possible scenario where it might make sense would be to withdraw funds from a taxable account where the long-term capital gains tax would be zero for the current year (e.g. $37K withdrawal on a budget of $28K expenses). In the following year you could start paying your living expenses out of these funds until you clarified what your tax situation would be for the next year.
Even if you decided to later re-invest the funds, you would have still reset your cost basis to lower your taxes for withdrawals in future years.
IMO you'd be better off doing a Roth rollover in that case.
Agreed, if you have any remaining Roth conversions available at that time.
Is there a scenario where you couldn't backdoor Roth, if you're in a 0% LTCG bracket?
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From what I've seen, there are two ways people handle this with VPW:
1. They literally treat it like a paycheck, withdrawal every year on Jan 1st, and leave whatever they don't spend growing in their savings account for emergencies. This is akin to someone working, saving maybe 30% of their "paycheck", and putting it away for a rainy day.
2. They literally treat it like a paycheck, withdrawal every year on Jan 1st, but they only withdrawal enough to top off their 1 year buffer of cash. This is akin to someone working, saving maybe 30% of their "paycheck", and investing it.
The person following #1 will have a steadily growing allocation to cash. You could make the argument they're no longer "100% stocks", but they usually don't see it that way. They see it as their emergency/vacation/spending account. The person following #2 will build a bigger and bigger buffer for their withdrawals in the following years. If the person who retired in 1955 from our chart, only spends $40,000 a year for the first 5 years (exactly what their expenses were before retirement), and invests the rest (following #2's plan), they will have earned themselves a 10% raise for the rest of their lives. By this I mean their VPW withdrawal each year will have increased by 10%. If they do this for the first 10 years, they will have earned themselves a 30% raise for the rest of their lives.
(http://i.imgur.com/drb35BS.png)
I've thought about this a bit more. The red line is person #1's paycheck throughout their retirement. They can choose to spend it, save it, whatever. The red line is essentially their new job, and they may do whatever they wish with their paychecks. The blue line is person #2's withdrawn paycheck. I went through each year, looked at the VPW paycheck, and decided how much person #2 needed to spend that year. I modeled some surprise medical expenses, college payments, buying a new car...etc. I never once went above my VPW paycheck, and each year I "saved" about 20-50% of it. There were a few years during the mid 70's and 80's where I took out the max, but those were exceptions.
I think person #1's strategy can make sense. Think about it as rebalancing to cash, but only after you've met your expenses for the year, and any money in the cash allocation can be spent anytime without worry of depleting your portfolio. I don't think I'd take that path, but it makes sense to me. I can see how someone would prefer that level of safety.
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Withdrawing more than you're going to spend and leaving it sitting in cash, rather than invested, sounds like a terrible idea, and a good way to hurt your portfolio's longevity chances.
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Withdrawing more than you are going to spend seems silly to me.
One possible scenario where it might make sense would be to withdraw funds from a taxable account where the long-term capital gains tax would be zero for the current year (e.g. $37K withdrawal on a budget of $28K expenses). In the following year you could start paying your living expenses out of these funds until you clarified what your tax situation would be for the next year.
Even if you decided to later re-invest the funds, you would have still reset your cost basis to lower your taxes for withdrawals in future years.
IMO you'd be better off doing a Roth rollover in that case.
Agreed, if you have any remaining Roth conversions available at that time.
Is there a scenario where you couldn't backdoor Roth, if you're in a 0% LTCG bracket?
Perhaps I'm not understanding the advantage of the Backdoor Roth in this situation. From http://thefinancebuff.com/the-backdoor-roth-ira-a-complete-how-to.html (http://thefinancebuff.com/the-backdoor-roth-ira-a-complete-how-to.html), my understanding is that it's useful if my income exceeds the contribution limit.
In the scenario I'm describing, traditional IRA funds have been converted to a Roth over a period of years to minimize the effects of RMD at age 70. I would have funds remaining in taxable accounts and could withdraw $40K+ per year at zero long-term capital gains tax. If there are sufficient funds and my expenses are below $40K/year, I'm living essentially tax-free until SS benefits are withdrawn (and taxed) at age 70.
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Withdrawing more than you're going to spend and leaving it sitting in cash, rather than invested, sounds like a terrible idea, and a good way to hurt your portfolio's longevity chances.
That's how I feel too, and maybe with the 4% rule it's true. But remember, all the VPW graphs I've shown thus far, including the worst-case scenarios, are following person #1's path, as if they literally threw away their cash allocation each year. Even with this, the portfolio's longevity surpassed the 4% rule, with a higher median withdrawal. If someone feels safer keeping their excess in cash during retirement, it won't hurt them too bad. Heck, they can even put it in CDs if they wanted to, and feel just as safe. Then it would look like your typical retirement glide-path :-P
But let's not get too hung up on this. I agree person #2's path is better, and it's the one I'd choose.
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The math for this works for me 100% of the time. You can't create pie charts or graphs for emotion and that is the grenade pin as to why this allocation ends up failing for the majority of investors. Honestly--I wholeheartedly agree with all of the data presented but where are the psychological formulas? (Us programmers, engineers, accountants, etc., are good at creating efficient systems, but I've been in enough relationships to know my systems fail when presented with human reality.)
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Even with this, the portfolio's longevity surpassed the 4% rule, with a higher median withdrawal.
As you noted (http://forum.mrmoneymustache.com/post-fire/playbook-on-down-marketsportfolio-steps/msg867219/#msg867219) in the other VPW thread, it's difficult to use any single metric to compare different withdrawal strategies because it will always focus on only one of the multiple tradeoffs involved (for example, the traditional "success rate" metric focuses exclusively on likelihood of avoiding total portfolio depletion but otherwise ignores variability in terminal portfolio value and completely ignores spending levels throughout the retirement period).
Have you seen the comparison of different variable withdrawal strategies that Pfau did? It's available here: "Making Sense Out of Variable Spending Strategies for Retirees" (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2579123) (and was discussed in this thread: Pfau on Variable Withdrawal Strategies (http://forum.mrmoneymustache.com/investor-alley/pfau-on-variable-withdrawal-strategies/)). To do an apples-to-apples performance comparison of the various withdrawal strategies, he used an "XYZ" benchmark for all of them -- the X% probability that spending falls below a threshold of $Y (in inflation-adjusted dollars) by year Z of retirement. As noted in the linked thread, his methodology used Monte Carlo simulations with built-in capital market assumptions and therefore produced what many of us view as overly pessimistic results across the board for all of the strategies, but I thought the XYZ metric was an interesting way of comparing different withdrawal strategies (both variable and non-variable) against one another.
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The whole concept of the MMM style of early retirement is built around first reducing your expenses to the minimum, happy, sustainable level and then building your finances and retirement plan around that. For me, the traditional fixed purchasing power assumption for withdrawal rates best matches that mindset. My spending has been X for years now, and I'm very happy with that. So I'll plan my retirement around a relatively constant X. Of course I'll be smart and flexible about it, but firing up a spreadsheet that tells me I can can now spend way more or way less just seems kinda unnecessary and counter to everything I've built.
The problem I think I have with VPW (and other variable withdrawal strategies) is that they work the other direction, often looking to maximize spending without regard to how much is actually required to be happy. Or focusing so much on the not working part that they pretend drastically reducing spending below a happy level will be just fine and stress free. It does strike me as a good method for non-Mustachinan retirees who love to spend money when they can. But I see little benefit for me personally.
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Comment to follow
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The problem I think I have with VPW (and other variable withdrawal strategies) is that they work the other direction, often looking to maximize spending without regard to how much is actually required to be happy. Or focusing so much on the not working part that they pretend drastically reducing spending below a happy level will be just fine and stress free. It does strike me as a good method for non-Mustachinan retirees who love to spend money when they can. But I see little benefit for me personally.
This is a good point. If I choose to use a VPW it would be to save the additional cash when returns were great and use that money instead of withdrawing when returns were poor. I don't see the need to increase spending and I don't think its possible to decrease spending significantly.
Still I think that there is something to this approach. Withdraw more when returns are great and place the money into safer assets. When returns are poor withdraw from the safer assets. Personally I would do this anyway but you can't model this so well in a statistical model.
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If VPW tells you your allowed withdrawal amount is $70K and you only need $40K you can just leave the "excess" $30K in the portfolio.
When you calculate the following year's withdrawal amount the that $30K will be indistinguishable from having a higher return over the last year.
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The whole concept of the MMM style of early retirement is built around first reducing your expenses to the minimum, happy, sustainable level and then building your finances and retirement plan around that. For me, the traditional fixed purchasing power assumption for withdrawal rates best matches that mindset. My spending has been X for years now, and I'm very happy with that. So I'll plan my retirement around a relatively constant X. Of course I'll be smart and flexible about it, but firing up a spreadsheet that tells me I can can now spend way more or way less just seems kinda unnecessary and counter to everything I've built.
The problem I think I have with VPW (and other variable withdrawal strategies) is that they work the other direction, often looking to maximize spending without regard to how much is actually required to be happy. Or focusing so much on the not working part that they pretend drastically reducing spending below a happy level will be just fine and stress free. It does strike me as a good method for non-Mustachinan retirees who love to spend money when they can. But I see little benefit for me personally.
Good point. The higher spending concept didn't bother me as much as the whiplash from lower spending simply because I, like you, have spent around X, and, being as optimized as I can, decreasing expenses a significant amount would impact my happiness. So I don't want to decrease expenses, and VPW gives a very significant chance of that happening over the 4% WR (which, if strictly followed, never decreases expenses).
The idea that higher expenses won't make me happier is also true. So VPW offers only downside (less happiness via significantly decreased expenses) and no upside (no more happiness via higher expenses). For me, at least.
The problem I think I have with VPW (and other variable withdrawal strategies) is that they work the other direction, often looking to maximize spending without regard to how much is actually required to be happy. Or focusing so much on the not working part that they pretend drastically reducing spending below a happy level will be just fine and stress free. It does strike me as a good method for non-Mustachinan retirees who love to spend money when they can. But I see little benefit for me personally.
This is a good point. If I choose to use a VPW it would be to save the additional cash when returns were great and use that money instead of withdrawing when returns were poor. I don't see the need to increase spending and I don't think its possible to decrease spending significantly.
The problem is, there is no "additional cash." Your returns are the same regardless of your withdrawal method. So by taking out more from your AA into a lower returning asset when returns are high, you are decreasing the chance of your portfolio lasting.
Still I think that there is something to this approach. Withdraw more when returns are great and place the money into safer assets. When returns are poor withdraw from the safer assets. Personally I would do this anyway but you can't model this so well in a statistical model.
If you withdraw more when returns are great, you will have to decrease spending when returns are poor, as you won't have the assets returning enough to save you. If you don't decrease spending, yes, you can use some of that money you withdrew and didn't spend, until it runs out, but it would have been better to not withdraw it in the first place.
If VPW tells you your allowed withdrawal amount is $70K and you only need $40K you can just leave the "excess" $30K in the portfolio.
When you calculate the following year's withdrawal amount the that $30K will be indistinguishable from having a higher return over the last year.
Naturally. But then what's the point of using VPW if you don't actually use it? The best I can figure is to figure out a max withdrawal number for that year. But if you're just going to take out your same amount anyways, and let your portfolio grow by the excess (the smart thing to do anyways, IMO, increasing your chance of portfolio longevity), you aren't really using VPW, you're using a more normal X% rule.
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Naturally. But then what's the point of using VPW if you don't actually use it? The best I can figure is to figure out a max withdrawal number for that year. But if you're just going to take out your same amount anyways, and let your portfolio grow by the excess (the smart thing to do anyways, IMO, increasing your chance of portfolio longevity), you aren't really using VPW, you're using a more normal X% rule.
You could be like Bernstein and put it in I-bonds or TIPS, or mix in some other bonds, you could even stick it in a PP. Sort of like taking your winnings off the table. Or you can artificially force your returns to be inflation +1% after a 4% withdrawal every year regardless of market performance. That might be too much work for the benefit, but I am reading "Value Averaging" right now (does that sound like an exciting read or what).
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The problem is, there is no "additional cash." Your returns are the same regardless of your withdrawal method. So by taking out more from your AA into a lower returning asset when returns are high, you are decreasing the chance of your portfolio lasting.
I'm not sold on this point. Its a little similar to rebalancing and I think there is a chance that it could increase your returns. You cash out a little during the good times and have some buffer during the bad times.
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The problem is, there is no "additional cash." Your returns are the same regardless of your withdrawal method. So by taking out more from your AA into a lower returning asset when returns are high, you are decreasing the chance of your portfolio lasting.
I'm not sold on this point. Its a little similar to rebalancing and I think there is a chance that it could increase your returns. You cash out a little during the good times and have some buffer during the bad times.
Okay. Explain to me how VPW generates additional money (looking at overall net worth).
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Tyler wrote a * awesome post on this topic (the main topic of the thread, 100% stock allocation, not the VPW, which we've sidetracked to) yesterday:
http://portfoliocharts.com/2015/11/17/how-safe-withdrawal-rates-work/
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Naturally. But then what's the point of using VPW if you don't actually use it? The best I can figure is to figure out a max withdrawal number for that year. But if you're just going to take out your same amount anyways, and let your portfolio grow by the excess (the smart thing to do anyways, IMO, increasing your chance of portfolio longevity), you aren't really using VPW, you're using a more normal X% rule.
So in my own case I have 2 budgets: #1 for essential or mostly essential items that I would like to spend each year [phone, mortgage, food, etc..] and #2 for non-essentials [new sports gear, international travel, larger home maintenance projects, new computer, etc...] that I don't need in any given year, but over say 10yrs I'll want to spend $$ in each area. I can defer those costs for a period of time if my investments are not doing well.
So my annual spending would not be the same each year if my portfolio allowed it. I've used the variable spending options in cFIREsim to see what that looks like and if I try a $40K/yr fixed WR vs a $30-$50K VWR I get similar backtesting success rates for much lower saved starting amounts. It would make the difference between working a number of extra years if I wanted to stick with the fixed 4% WR.
I haven't decided on exactly how I will determine when to spend $30K and when to spend $50K. I could use VPW to give me this signal as well as a signal when I needed to bring in additional income if it was suggesting a WR amount less than my base costs.
Now if it started to tell me I could take out $200K/yr I have no useful way to spend that kind of $$ so I would spend my base amount and pay for any items on my non-essential list I wanted to deal with in a given year. Then leave the rest to compound.
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Tyler wrote a * awesome post on this topic (the main topic of the thread, 100% stock allocation, not the VPW, which we've sidetracked to) yesterday:
http://portfoliocharts.com/2015/11/17/how-safe-withdrawal-rates-work/
Tyler's post is awesome. In my view, it reinforces the notion that, solely as between "stocks" and "bonds," 100% stocks is the best option for long retirements. As an initial matter, I would note that the data used in his analysis only goes back to 1972, which means that the sample size of long retirement periods is quite limited. Despite that, the data supports the same arguments made in the old forum threads and the Go Curry Cracker post Interest Compound cross-referenced in the OP (which all relied on the much bigger data set contained in cFIREsim) -- that high stock allocations had the highest historical success rates, with negligible differences in success rates among the various degrees of "high" stock allocation, but very meaningful differences in terminal portfolio values. So 100% stocks historically had a success rate on par with the highest success rate of any stock/bond allocation whatsoever, but significantly higher average terminal portfolio values. As always, though, Tyler makes a compelling case for looking beyond the generic total stock market and total bond market alternatives for additional portfolio fine-tuning options.
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As always, though, Tyler makes a compelling case for looking beyond the generic total stock market and total bond market alternatives for additional portfolio fine-tuning options.
Indeed. But how to avoid the curve fitting from data mining?
The recent post on the Merriman Ultimate Buy and Hold Portfolio seems very much to be a case of this, to me.
That's one plus for the PP in my mind--1/4th to each of 4 asset types, done. No "well 17.35% of this one and 29.84% of this one, etc. performed best historically." Not that I'm a huge PP fan, but at least I know it isn't curve fitting.
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Indeed. But how to avoid the curve fitting from data mining?
The recent post on the Merriman Ultimate Buy and Hold Portfolio seems very much to be a case of this, to me.
That's one plus for the PP in my mind--1/4th to each of 4 asset types, done. No "well 17.35% of this one and 29.84% of this one, etc. performed best historically." Not that I'm a huge PP fan, but at least I know it isn't curve fitting.
Yep, that's a big concern for any highly customized portfolio. I think you need to view any highly specific allocation with an extra grain of salt. Tyler's response in post # 11 above (that once you read the explanation for some of these recommended portfolios, then they start to make sense) only gets you so far, because one can come up with a reasonable sounding explanation after the fact for almost any historically high performing allocation derived from backtesting.
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because one can come up with a reasonable sounding explanation after the fact for almost any historically high performing allocation derived from backtesting.
Not always; I didn't think the Merriman explanation was particularly compelling, and I still haven't heard a reasonable sounding explanation for dual momentum. ;)
But I agree, it's tough to find something that works and be convinced as to why it works, without some post-hoc fallacies potentially going on.
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Not always; I didn't think the Merriman explanation was particularly compelling, and I still haven't heard a reasonable sounding explanation for dual momentum. ;)
But I agree, it's tough to find something that works and be convinced as to why it works, without some post-hoc fallacies potentially going on.
Regarding Merriman - anyone who uses standard deviation as "risk" is just vomit-inducing, in my opinion. And I know you're joking about dual momentum, but I do think that the theory makes a lot of sense - get out when valuation is too crazy, and buy the best performing sectors since they tend to go up more so than the total market in the short term - BUT, in reality, it's a lot harder to pull off real time, and if you're going to use some sort of active strategy, focusing on fundamentals, imo, is a much better method than looking at charts. Plus, it makes you smarter and more in tune with what you actually own - I think REIs have a huge advantage in this regard vs index investors - they (for the most part) know exactly what they own and are intimate with the risks and what could go wrong
I think the whole obsession with finding a good strategy and how things backtests is a testament to 1) how poorly the human brain judges probabilities of outcomes, and 2) just how much people, no matter how intelligent, looks for shortcuts. The best strategy involves a large time commitment, and poring over regulatory filings isn't exactly 99% of the population's idea of fun. But looking for shortcuts to that has its downsides - when you introduce needless complexity like specifically tailored and backtested asset allocations in an effort to "optimize", you're participating in what Charlie Munger refers to as "Physics Envy". Trying to fit real life into a fancy equation is what leads to people like Merriman depending on standard deviation and beta as a measure of "risk". If you want to avoid sinking hours into studying businesses, then buy a total market US fund and just leave it alone.
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Great points about the limits of backtesting and dangers of over-fitting. Just because a particular portfolio looks good looking backwards or the originator can tell an eloquent story about it doesn't mean it's a good idea today. On the other hand, just because a portfolio has surprising returns doesn't mean we should automatically dismiss it as an over-fitted portfolio. Discerning the difference takes a lot of wisdom. Come to think of it, that deserves its own future post. Thanks!
The Merriman portfolio sorta treads that line for me, and maybe wasn't the best example to reference earlier in the thread. Regardless of the reasoning, however, I do appreciate that the end result is well-diversified so I definitely don't think it's a bad idea (or I wouldn't have referenced it at all).
I agree that the PP is a good example of a portfolio that originated from something other than data mining and curve fitting. Even if after reading up on the theory behind it you don't personally use the exact assets Harry Browne landed on, following his advice and thinking will generally point you towards an excellent asset allocation built on a solid foundation.
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Not always; I didn't think the Merriman explanation was particularly compelling, and I still haven't heard a reasonable sounding explanation for dual momentum. ;)
But I agree, it's tough to find something that works and be convinced as to why it works, without some post-hoc fallacies potentially going on.
Regarding Merriman - anyone who uses standard deviation as "risk" is just vomit-inducing, in my opinion. And I know you're joking about dual momentum, but I do think that the theory makes a lot of sense - get out when valuation is too crazy, and buy the best performing sectors since they tend to go up more so than the total market in the short term - BUT, in reality, it's a lot harder to pull off real time
Of course market timing is great, when it's successful. No one's disputing that. That just may not happen as regularly as active investors hope. :)
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The math for this works for me 100% of the time. You can't create pie charts or graphs for emotion and that is the grenade pin as to why this allocation ends up failing for the majority of investors. Honestly--I wholeheartedly agree with all of the data presented but where are the psychological formulas? (Us programmers, engineers, accountants, etc., are good at creating efficient systems, but I've been in enough relationships to know my systems fail when presented with human reality.)
The math works.
For us:
Investments: Stocks and a few I-bonds bought many years ago at good interest rates.
Anchor: Paid for house, zero debt and some cash and a willingness to not pull money out of the investment portion until absolutely necessary.
We don't need bonds. The house is the security blanket.
IMHO, stocks will not give the returns many people are expecting. Bogle says returns might be something like 4% annually before inflation over the next ten years, and I think he could be right. And bonds will be worse than that.
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I don't really get it. Of course a variable strategy that is designed to vary the amount you withdraw to ensure it can't fail, will not fail by definition, because it can't, you simply lower the amount to withdraw until it guarantees success. Why can't you just do that with a modified 4% strategy? Like plan on 40k/yr, but then when the shit hits the fan you adjust down to 18k/yr? Isn't that essentially going to do the same thing? The problem is that if I could live on only 18k/yr, then I worked way too long and seriously over saved if I have a stash that generates 40k/yr.
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Bogle's comment is focused on just US stocks/assets though, EM and EAFE are cheap and have higher forward expected returns based on all the jazz Bogle and others look at to predict that stuff.
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I don't really get it. Of course a variable strategy that is designed to vary the amount you withdraw to ensure it can't fail, will not fail by definition, because it can't, you simply lower the amount to withdraw until it guarantees success. Why can't you just do that with a modified 4% strategy? Like plan on 40k/yr, but then when the shit hits the fan you adjust down to 18k/yr? Isn't that essentially going to do the same thing? The problem is that if I could live on only 18k/yr, then I worked way too long and seriously over saved if I have a stash that generates 40k/yr.
You can definitely use some other variable withdrawal strategy. You can go by gut feel or by specific signals. VPW could provide the specific signals if you cared to use it for that purpose.
I guess one thing I don't understand about the talk of steady COL withdrawals is that my expenses include a component that is not tied to a specific year, but over the course of a decade say I would need to address. So it would be quite possible to go from say $40K/yr avg WR to $25K for a period if shit hit the fan with my investments, but that hardly means that $25K/yr is all I need to live off and I over saved to hit $40K/yr WR on average.
Your roof has a few leaks and your investments have tanked so you patch the leaks and replace the roof a few years later when things recover.
Your SO wants to renovate the kitchen and your investments have tanked so you just paint and do the more elaborate upgrades later.
I could easily reduce my COL by 25%+ for a year or two, but at some point I'd have to expend the deferred costs.
If you look at the amount you have to save for a fixed WR vs a variable WR with floor and ceiling amounts you could say that by not being flexible you have to over save to pay for the lack of flexibility.
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The problem is, there is no "additional cash." Your returns are the same regardless of your withdrawal method. So by taking out more from your AA into a lower returning asset when returns are high, you are decreasing the chance of your portfolio lasting.
I'm not sold on this point. Its a little similar to rebalancing and I think there is a chance that it could increase your returns. You cash out a little during the good times and have some buffer during the bad times.
Okay. Explain to me how VPW generates additional money (looking at overall net worth).
I'm not stating that it generates additional money. That isn't possible. What may be possible is that you take out more money when the market is high and invest it into safer assets which means when the market drops you can not take money out at all or take out a minimal amount. Over time this might lead to you coming out ahead or at least having decreased volatility in your spending and your portfolio.
The actual results will always be dependent on how the market performs. If you get 20 years of booming returns in stocks you would come out with less. If you had booms and busts you might come out ahead. If you had a sequence of negative returns nothing is going to work.
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Naturally. But then what's the point of using VPW if you don't actually use it? The best I can figure is to figure out a max withdrawal number for that year. But if you're just going to take out your same amount anyways, and let your portfolio grow by the excess (the smart thing to do anyways, IMO, increasing your chance of portfolio longevity), you aren't really using VPW, you're using a more normal X% rule.
So in my own case I have 2 budgets: #1 for essential or mostly essential items that I would like to spend each year [phone, mortgage, food, etc..] and #2 for non-essentials [new sports gear, international travel, larger home maintenance projects, new computer, etc...] that I don't need in any given year, but over say 10yrs I'll want to spend $$ in each area. I can defer those costs for a period of time if my investments are not doing well.
So my annual spending would not be the same each year if my portfolio allowed it. I've used the variable spending options in cFIREsim to see what that looks like and if I try a $40K/yr fixed WR vs a $30-$50K VWR I get similar backtesting success rates for much lower saved starting amounts. It would make the difference between working a number of extra years if I wanted to stick with the fixed 4% WR.
I haven't decided on exactly how I will determine when to spend $30K and when to spend $50K. I could use VPW to give me this signal as well as a signal when I needed to bring in additional income if it was suggesting a WR amount less than my base costs.
Now if it started to tell me I could take out $200K/yr I have no useful way to spend that kind of $$ so I would spend my base amount and pay for any items on my non-essential list I wanted to deal with in a given year. Then leave the rest to compound.
I like this approach in theory. The problem is that I did the figure on it and gave myself a 3% WR for essentials and a 5% WR for the non-essentials. My target ended up about the same.
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As always, though, Tyler makes a compelling case for looking beyond the generic total stock market and total bond market alternatives for additional portfolio fine-tuning options.
Indeed. But how to avoid the curve fitting from data mining?
The recent post on the Merriman Ultimate Buy and Hold Portfolio seems very much to be a case of this, to me.
That's one plus for the PP in my mind--1/4th to each of 4 asset types, done. No "well 17.35% of this one and 29.84% of this one, etc. performed best historically." Not that I'm a huge PP fan, but at least I know it isn't curve fitting.
My main concern with lots of portfolios is curve fitting. I also think the PP could be curve fitting based on your expected returns. It might have just been a point in time that the PP worked so well.
I think the best approach is to review the data and make your own decision based upon general principles like paying as little fees as possible, diversification and rebalancing.
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Only looking at back-tested returns with no supporting investing philosophy other than maximizing a number at all costs is a bad idea and a sure sign of curve fitting. But following financial dogma without regard to historical data or competing ideas is just as short-sighted. When selecting a portfolio that you'll actually be able to stick with for the long run, IMHO it's important to engage both sides of the thought process. Admittedly, that takes time and requires a learning process. Easy answers usually fall on either end of the undesirable extremes above.
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I like this approach in theory. The problem is that I did the figure on it and gave myself a 3% WR for essentials and a 5% WR for the non-essentials. My target ended up about the same.
(https://farm1.staticflickr.com/746/22706629488_029852434c_b.jpg)
Here is a 4% fixed WR simulation. You need to save $1M to get 99.13% success vs. historical data.
(https://farm6.staticflickr.com/5628/23125060345_42431b7e9d_b.jpg)
Avg Yearly WR = $40K
Avg Total WR - $1.2M
(https://farm6.staticflickr.com/5759/23111059842_fffd027fe9_b.jpg)
Here is a variable WR simulation in the range of $30K to $50K WR. You need to save $800K to get 99.13% success vs. historical data.
(https://farm1.staticflickr.com/727/23136552831_db926a61fd_b.jpg)
Avg Yearly WR = $41.1K
Avg Total WR - $1.23M
So you get some similar results and have to save 20% less with the variable WR example.
Assuming you are saving $30K/yr and getting 7% return that's 2.5 less years you have to work to close the gap from $800K to $1M.
I might be missing something, but it seems to me a VWR combined with some lifestyle flexibility can save you a bunch of time before FIRE.
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So you get some similar results and have to save 20% less with the variable WR example.
Forgive me, I am still failing to understand this. How do you get similar results? You have significantly reduced withdraws during down markets - so of course you come out ahead compared with a rigid withdraw strategy. But i'm still failing to see how this is significant. Couldn't you just achieve the exact same results by trimming some fat out of your budget during lean years even with a rigid 4% withdraw (which I guess is not exactly rigid if you can lower it when neccessary)? Or better yet just lower your overall needed stash to the bare minimum of expenses right off the bat? Then if the market tanks you still have a good chance of success, and if it does better than expected you can ratchet your spending back up to account for the "fat" you are now able to have in your annual budget. And why not just take it a step further really crank it down? Instead of saving up $1M I could shorten my career and I only need $100k with this VWR. It will have 100% success rate, if you count a string of several years where I have to vary my withdraw so it's lower than my expenses a "success".
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Forgive me, I am still failing to understand this. How do you get similar results? You have significantly reduced withdraws during down markets - so of course you come out ahead compared with a rigid withdraw strategy. But i'm still failing to see how this is significant. Couldn't you just achieve the exact same results by trimming some fat out of your budget during lean years even with a rigid 4% withdraw (which I guess is not exactly rigid if you can lower it when neccessary)? Or better yet just lower your overall needed stash to the bare minimum of expenses right off the bat? Then if the market tanks you still have a good chance of success, and if it does better than expected you can ratchet your spending back up to account for the "fat" you are now able to have in your annual budget. And why not just take it a step further really crank it down? Instead of saving up $1M I could shorten my career and I only need $100k with this VWR. It will have 100% success rate, if you count a string of several years where I have to vary my withdraw so it's lower than my expenses a "success".
Reread my posts above as I have answered most of your questions. Keep in mind the simulation results I posted are not for VPW they are for a $30-$50K/yr variable WR which is quite different as there are hard floors and ceilings on WR each year.
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The math for this works for me 100% of the time. You can't create pie charts or graphs for emotion and that is the grenade pin as to why this allocation ends up failing for the majority of investors. Honestly--I wholeheartedly agree with all of the data presented but where are the psychological formulas? (Us programmers, engineers, accountants, etc., are good at creating efficient systems, but I've been in enough relationships to know my systems fail when presented with human reality.)
I think that's the biggest risk, but it's not one I'm worried about for myself. I have years of practice :) For others though...I think most non-investor people however, (my friends/family) would be better off with something like a 60/40 stock/bond allocation. Maybe even 40/60. While this puts them at a much higher inflation-risk, no one ever panic sold because of inflation.
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Even with this, the portfolio's longevity surpassed the 4% rule, with a higher median withdrawal.
As you noted (http://forum.mrmoneymustache.com/post-fire/playbook-on-down-marketsportfolio-steps/msg867219/#msg867219) in the other VPW thread, it's difficult to use any single metric to compare different withdrawal strategies because it will always focus on only one of the multiple tradeoffs involved (for example, the traditional "success rate" metric focuses exclusively on likelihood of avoiding total portfolio depletion but otherwise ignores variability in terminal portfolio value and completely ignores spending levels throughout the retirement period).
Have you seen the comparison of different variable withdrawal strategies that Pfau did? It's available here: "Making Sense Out of Variable Spending Strategies for Retirees" (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2579123) (and was discussed in this thread: Pfau on Variable Withdrawal Strategies (http://forum.mrmoneymustache.com/investor-alley/pfau-on-variable-withdrawal-strategies/)). To do an apples-to-apples performance comparison of the various withdrawal strategies, he used an "XYZ" benchmark for all of them -- the X% probability that spending falls below a threshold of $Y (in inflation-adjusted dollars) by year Z of retirement. As noted in the linked thread, his methodology used Monte Carlo simulations with built-in capital market assumptions and therefore produced what many of us view as overly pessimistic results across the board for all of the strategies, but I thought the XYZ metric was an interesting way of comparing different withdrawal strategies (both variable and non-variable) against one another.
I haven't seen this yet, thanks for the link! From a quick review, I don't think I saw any that combine the two factors I'm looking for:
1. Depletes the portfolio on a timeline.
2. Adjusts based on asset allocation.
I'll check this out though :)
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Vikb - your point there is interesting. I approached the situation differently however I think you make a good point. If I work out minimal expenses through to maximum expenses and choose a VWR I may be able to FIRE with a smaller target.
I focussed on my end point within Excel rather than using cfirmsim however I am thinking that I will utilise your approach as it makes sense to me.
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Reread my posts above as I have answered most of your questions. Keep in mind the simulation results I posted are not for VPW they are for a $30-$50K/yr variable WR which is quite different as there are hard floors and ceilings on WR each year.
But if you're fine living on a 30k budget, FIRE on the 4% rule and you only need 750k, even less than your variable withdrawal!
And you can use VPW as a ceiling to raise spending later if you want!
Our point Vik is that most of us have a budget we want to spend. We want to save up to support that. We might be okay tightening the belt and reducing spending in a severe downturn if we HAD to, but we don't want that to be a primary option. Our spending is what it is because it makes us happy, and it's already optimized.
If we were happy spending 30k, instead of 40k, we'd FIRE on less to begin with. We don't want to be happy spending 40k, then have to cut back to unhappy levels. That's what variable withdrawals often promise: having to cut back way more than you'd like, way more often than you'd like.
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Reread my posts above as I have answered most of your questions. Keep in mind the simulation results I posted are not for VPW they are for a $30-$50K/yr variable WR which is quite different as there are hard floors and ceilings on WR each year.
But if you're fine living on a 30k budget, FIRE on the 4% rule and you only need 750k, even less than your variable withdrawal!
And you can use VPW as a ceiling to raise spending later if you want!
Our point Vik is that most of us have a budget we want to spend. We want to save up to support that. We might be okay tightening the belt and reducing spending in a severe downturn if we HAD to, but we don't want that to be a primary option. Our spending is what it is because it makes us happy, and it's already optimized.
If we were happy spending 30k, instead of 40k, we'd FIRE on less to begin with. We don't want to be happy spending 40k, then have to cut back to unhappy levels. That's what variable withdrawals often promise: having to cut back way more than you'd like, way more often than you'd like.
Pretty much. I think the disconnect for me is that the two options don't seem comparable. What I mean is following a 4% SWR and a spending of $40k/yr, is not even remotely close to following a vwr with a spending of $40k/yr but the option that you will adjust your spending down significantly in down markets. Of course the vwr will "win" in that situation, it's designed to by definition. If you are able to FIRE on a vwr that gives you $40k/yr, but might cut it down to $30k/yr, and you can still get by comfortably for a few years without sacrificing, then saving up 25X your $40k budget to use a 4% SWR means you are grossly over saving. It would be more comparable if your VWR option was like $50k/yr and might be reduced to a minimum of $40k/yr (which is the budget of the 4% SWR example).
I'm still a long way away from FIRE, but I plan to use the 4% rule, and start off pretty close to the bare bones budget that I am comfortable with. Maybe I will get OMY syndrome and try to pad the stash, but I think I will want to pull the trigger once I cross the threshold. I may front load my "bare bones" budget years at the beginning of my retirement if the markets perform poorly in those first few years, but odds are I will still end up with more money than I can spend.
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Pretty much. I think the disconnect for me is that the two options don't seem comparable. What I mean is following a 4% SWR and a spending of $40k/yr, is not even remotely close to following a vwr with a spending of $40k/yr but the option that you will adjust your spending down significantly in down markets. Of course the vwr will "win" in that situation, it's designed to by definition. If you are able to FIRE on a vwr that gives you $40k/yr, but might cut it down to $30k/yr, and you can still get by comfortably for a few years without sacrificing, then saving up 25X your $40k budget to use a 4% SWR means you are grossly over saving. It would be more comparable if your VWR option was like $50k/yr and might be reduced to a minimum of $40k/yr (which is the budget of the 4% SWR example).
To me the $40K/yr fixed WR and the $30K - $50K/yr VR are comparable simply because over a reasonable period of time you are getting ~$40K/yr to spend so your lifestyle will be the same.
If you guys really can't adjust your spending by +/-25% per year than I can see that this won't work for you, but that lack of flexibility seems pretty shocking to me.
There are so many COL items I have that I want to spend on in FIRE, but that I don't feel forced to execute in any one year:
- replace computer/camera/phone
- major home reno projects
- replace car/motorcycle
- replace clothing
- major trips
- replace sports equipment [bike, surfboards, fly fish gear, etc...]
I just don't see it as a hardship or challenge to adjust my spending so these sorts of expenditures avoid market downturns. I'll end up with the same lifestyle as the $40K/yr fixed WR person, but have to work 2.5yrs less [using the sample values I posted above].
And yes the VWR plan is designed to weather market shocks, but that's my whole point. It seems superior with the assumption that you do not need exactly $40K/yr every year.
The disconnect I have with your example is how you can compare a $40K fixed WR with a $40K - $50K variable WR??? In every year you do the same or better than the $40K/yr fixed WR that's not equivalent.
I also don't understand how Arls can posit that being able to defer $10K/yr of expenses from a budget of $40K/yr for a few years during a market downturn means you would be fine FIRE-ing with a $30K/yr fixed WR for a 30yr+ retirement??? That just doesn't compute for me. I can put off replacing a car, a roof or buying new clothes for a few years. but at some point those expenses have to occur.
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Vikb - your point there is interesting. I approached the situation differently however I think you make a good point. If I work out minimal expenses through to maximum expenses and choose a VWR I may be able to FIRE with a smaller target.
I focussed on my end point within Excel rather than using cfirmsim however I am thinking that I will utilise your approach as it makes sense to me.
I'm glad the info was useful Steve.
I'm not excited about having to work full-time for 2.5 extra years to get to the same average performance level for a fixed WR vs. VWR plan. At least when I look at that the hassle of potentially having to manage my non-essential expenses vs. all that time chained to a desk it seems like a no brainer for me.
And for Arls and FC in no way am I suggesting that this is the plan for you. If you look at the opportunity cost of working extra years to hit a 4% fixed WR and that's the best solution for you I say go for it!
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Pretty much. I think the disconnect for me is that the two options don't seem comparable. What I mean is following a 4% SWR and a spending of $40k/yr, is not even remotely close to following a vwr with a spending of $40k/yr but the option that you will adjust your spending down significantly in down markets. Of course the vwr will "win" in that situation, it's designed to by definition. If you are able to FIRE on a vwr that gives you $40k/yr, but might cut it down to $30k/yr, and you can still get by comfortably for a few years without sacrificing, then saving up 25X your $40k budget to use a 4% SWR means you are grossly over saving. It would be more comparable if your VWR option was like $50k/yr and might be reduced to a minimum of $40k/yr (which is the budget of the 4% SWR example).
To me the $40K/yr fixed WR and the $30K - $50K/yr VR are comparable simply because over a reasonable period of time you are getting ~$40K/yr to spend.
If you guys really can't adjust your spending by +/-25% per year than I can see that this won't work for you, but that lack of flexibility seems pretty shocking to me.
There are so many COL items I have that I want to spend on in FIRE, but that I don't feel forced to execute in any one year:
- replace computer/camera/phone
- major home reno projects
- replace car/motorcycle
- replace clothing
- major trips
- replace sports equipment [bike, surfboards, fly fish gear, etc...]
I just don't see it as a hardship or challenge to adjust my spending so these sorts of expenditures avoid market downturns. I'll end up with the same lifestyle as the $40K/yr fixed WR person, but have to work 2.5yrs less [using the sample values I posted above].
And yes the VWR plan is designed to weather market shocks, but that's my whole point. It seems superior with the assumption that you do not need exactly $40K/yr every year.
The disconnect I have with your example is how you can compare a $40K fixed WR with a $40K - $50K variable WR??? In every year you do the same or better than the $40K/yr fixed WR that's not equivalent.
I also don't understand how Arls can posit that being able to defer $10K/yr of expenses from a budget of $40K/yr for a few years during a market downturn means you would be fine FIRE-ing with a $30K/yr fixed WR for a 30yr+ retirement??? That just doesn't compute for me. I can put off replacing a car, a roof or buying new clothes for a few years. but at some point those expenses have to occur.
Because we don't see it as saving you 2.5 years of work, it's actually making you work longer, so you can have excess in your budget. If you can comfortably live on 30k/yr, then saving for 40k/yr using a 4% SWR or saving for an average of 40k/yr using a vwr are both foolish options in my opinion. A better option would be to just use the 4% swr and a target of 30k/yr. I think it's foolish to rigidly apply the 4% rule too and would advise that you remain flexible. I'll be fairly young when I FIRE and will probably know within the first several years how my portfolio is going to do. The 4% rule is rigid and still provides me a very low chance of failure even if I fail to adapt to the crashing economy, but of course I will adapt and I think that completely eliminates the possibility of failure. If one of those 5% failure scenarios happens when I FIRE, I will earn more money, and temporarily cut my budget (though I won't be able to cut it as drastically as you are suggesting) and will still fair just fine long term. A much more likely scenario is that I get good returns early in my FIRE and my portfolio ends up exploding and I can continually increase my spending without fear of failure.
I understand what you are getting at, and I suppose I already plan to incorporate a similar strategy of adjusting my spending (I would just call it being flexible though, not having an actual system to calculate out how much I should take out). I am just planning to pull the trigger much closer to the spending floor and take my chances that I will still have more than enough luxury in time. I don't know that it's worth those extra years at a desk to guarantee I have an average of $10k/yr fat in my budget, when it's not needed and I have a good chance of getting that anyway.
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If you guys really can't adjust your spending by +/-25% per year than I can see that this won't work for you, but that lack of flexibility seems pretty shocking to me.
Because we want to be optimized as possible, to FIRE as soon as possible. That means cutting down to a budget that would be painful to cut more from.
If we can FIRE on 30k annually (and it'd be painful to cut more), then saving up to support a 40k VPW (so your spending can fluctuate from 30-50k) seems way too much. And FIREing on a 30k VPW means you're way more likely to have to cut spending past the point you want to.
If your budget is filled with fat to where you can regularly cut without pain, your budget is too high, meaning you worked too long.
I want cuts to only occur in the most dire of market crashes, and for them to be painful when they do happen. Not to work extra so I can go "oh, I just won't do X, Y, and Z this year, no big deal" because if it was no big deal, why did I work so much longer to fund X, Y, and Z every single year except in market crashes? I want to go "damn, market's down.. guess I should earn some money to fund X, or guess I gotta decide between X and Y" or whatever. Not "oh, market's down, no biggie, I planned for the with VPW".. cause if I planned to reduce spending, I oversaved.
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Withdrawing more than you're going to spend and leaving it sitting in cash, rather than invested, sounds like a terrible idea, and a good way to hurt your portfolio's longevity chances.
That's how I feel too, and maybe with the 4% rule it's true. But remember, all the VPW graphs I've shown thus far, including the worst-case scenarios, are following person #1's path, as if they literally threw away their cash allocation each year. Even with this, the portfolio's longevity surpassed the 4% rule, with a higher median withdrawal. If someone feels safer keeping their excess in cash during retirement, it won't hurt them too bad. Heck, they can even put it in CDs if they wanted to, and feel just as safe. Then it would look like your typical retirement glide-path :-P
But let's not get too hung up on this. I agree person #2's path is better, and it's the one I'd choose.
1st question ... what goes in the future value spot on the VPW setup for cfireSIM
2nd question have you run this capping your withdrawal at say 4.5% or even 4% to see what the worst draw down year looks like? So you would just use it to dictate bad years not go up in good years.
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If you guys really can't adjust your spending by +/-25% per year than I can see that this won't work for you, but that lack of flexibility seems pretty shocking to me.
Because we want to be optimized as possible, to FIRE as soon as possible. That means cutting down to a budget that would be painful to cut more from.
If we can FIRE on 30k annually (and it'd be painful to cut more), then saving up to support a 40k VPW (so your spending can fluctuate from 30-50k) seems way too much. And FIREing on a 30k VPW means you're way more likely to have to cut spending past the point you want to.
If your budget is filled with fat to where you can regularly cut without pain, your budget is too high, meaning you worked too long.
I want cuts to only occur in the most dire of market crashes, and for them to be painful when they do happen. Not to work extra so I can go "oh, I just won't do X, Y, and Z this year, no big deal" because if it was no big deal, why did I work so much longer to fund X, Y, and Z every single year except in market crashes? I want to go "damn, market's down.. guess I should earn some money to fund X, or guess I gotta decide between X and Y" or whatever. Not "oh, market's down, no biggie, I planned for the with VPW".. cause if I planned to reduce spending, I oversaved.
Yes. Exactly the point I was trying to articulate.
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Wow.
Lots of work into these posts.
100% stocks? Sure, why not as long as you are diversified and intend to live off dividends or distributions I think it's a good call.
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I've always been 100% stocks now as I am in the accumulation phase and figure I have time on my side. But always thought about switching to either 90/10 or 80/20 stocks/bonds AA strategy when I retired. But I like the idea of VPW and am starting to feel more comfortable leaving it all 100% in stocks even when I retire too based on this. I like the idea of being flexible in my spending.
I understand the point arebelspy and frugal nacho are trying to make but I guess the extra $10k pad with a $30-50k variable spending is "safer" in my opinion than just planning for a 4% WR at the lowest spending of $30k. Maybe that's because I don't have as good of a handle on my budget. But I think there are definitely luxury expenses that I can put off like travel or what not that won't cause a significant change to my lifestyle. But what I'm worried about is planning to spend a lower amount and then be hit with an emergency spending that I can't put off. I think having that pad means I'm more comfortable and the difference of saving to 750k vs. 800k (4% WR at 30k vs. $30-50k VPW) doesn't seem as big a difference as saving 800k vs 1M ($30-50k VPW vs 4% WR at 40k spending).
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This is a very interesting thread. I usually use VWR when I plug my numbers into cfiresim, mainly for the reasons Vikb is suggesting. Some years I will need more money than others, because of a house repair, or taking a trip, or what have you. It makes sense to me, too, to withdraw less, and forego any unnecessary expenses on years where the market is down. I like having the flexibility, and don't want to feel stuck with a fixed withdrawal rate year after year.
It's probably like the mortgage payoff question (which we have done, as well, though while also maxing out RRSP and TFSAs) -- it's an emotional preference. Our spending patterns are not regular. Some years we have bigger expenses than others, and this could make a $10-20k difference in our expenses. I'd like to plan accordingly.
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To put some numbers to my statements on VPW, I've looked at all the available years, tested the standard 30 year retirement and a longer 70 year retirement, both with $1,000,000 in 100% stocks, and these factors remained consistent (all dollars inflation-adjusted):
- In total, there was a 65% chance that VPW never lowered your withdrawal amount below the 4% rule.
- The median withdrawal for these 65% of people was between $120k-$150k.
- ---> If you were part of the unlucky 35%, 92% of your retirement years remained above the 4% rule.
- ------> In the worst case scenario 8% of years where you fell short, you were typically about $5,000 short for the year. About $400-$500 a month.
- The times this happened were clustered around 1966 and 1929, where the 4% rule left you unable to feed yourself.
- The median withdrawal for these 35% of people, was between $50k-$70k.
This assumes Person #1's path, where they take the full possible withdrawal each year, and throw away 100% of withdrawn cash that's above and beyond their living expenses. No cash buffer, no keeping the unused portion invested (Person #2's path), none of that. The numbers above represent a subset of a subset of a worst case scenario (35%), on top of another worst case scenario (8%), on top of another worst case scenario (withdrawing the total amount each year, even if you don't need it, throwing away the excess cash each year so there's no buffer), and the result is $400-$500 a month.
If you aren't comfortable with that, VPW isn't for you.
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If you aren't comfortable with that, VPW isn't for you.
(http://s.quickmeme.com/img/88/88d7d49de5f442a92c73a61befc3f19ed7edbddba8a8efe853824a40f7f5ed36.jpg)
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Withdrawing more than you're going to spend and leaving it sitting in cash, rather than invested, sounds like a terrible idea, and a good way to hurt your portfolio's longevity chances.
That's how I feel too, and maybe with the 4% rule it's true. But remember, all the VPW graphs I've shown thus far, including the worst-case scenarios, are following person #1's path, as if they literally threw away their cash allocation each year. Even with this, the portfolio's longevity surpassed the 4% rule, with a higher median withdrawal. If someone feels safer keeping their excess in cash during retirement, it won't hurt them too bad. Heck, they can even put it in CDs if they wanted to, and feel just as safe. Then it would look like your typical retirement glide-path :-P
But let's not get too hung up on this. I agree person #2's path is better, and it's the one I'd choose.
1st question ... what goes in the future value spot on the VPW setup for cfireSIM
2nd question have you run this capping your withdrawal at say 4.5% or even 4% to see what the worst draw down year looks like? So you would just use it to dictate bad years not go up in good years.
I've always used Cfiresim's old site:
http://gator3089.hostgator.com/~boknows/input.php
As this has more options. It wasn't until this post that I realized the new site now allows for VPW. Unfortunately, it didn't work for me (all simulations resulted in a blank screen), so I can only guess at what Future Value does. Since the default is 0, it's probably determining the value you're shooting for when the withdrawal period (30 years perhaps) is over. My default this is 0, because VPW is meant to completely deplete your portfolio. The VPW author says he doesn't want to be the "richest person in the graveyard".
For your second question, yes I've played with those settings. I like the defaults best :)
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yeah capping it does not appear to affect the bad draw down years much at all.
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Relevant article in today's NY Times by a prominent economist: How Much of Your Nest Egg to Put Into Stocks? All of It (http://www.nytimes.com/2016/02/13/your-money/how-much-of-your-nest-egg-to-put-into-stocks-all-of-it.html?ref=business)
It even includes a nod to the forum's recurring theme of "a priori vs. a posteriori" that could almost make one believe it was written in response to debates held here ;)
My argument for full equity exposure rests not only on their historical and empirical superiority but their logical superiority. Consider this: [logical reasons given]
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Unlikely, but amusing. :)
Good find!
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That is a good article. I think I will always have some bonds or cash but I can see the logic of that article. I'm also not getting stressed despite my assets dropping at least 10%. Mind you I'm still in the accumulation phase.
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I've completed the transition to 100% stocks. The one thing I didn't count on, never having to rebalance again! Whenever I go to make new contributions, I simply check the current breakdown:
(http://i.imgur.com/Oz2nrmV.png)
https://personal.vanguard.com/us/funds/snapshot?FundId=3141&FundIntExt=INT#tab=2
And invest my new money accordingly. So 52.9% of any new contribution goes to VTSAX (USA) and the rest goes to VTIAX (International). Since I'm invested at market-weight, my portfolio won't shift off-balance, no matter how long I leave it alone :) I'm also no longer worried about trying to fit all my bonds in retirement accounts. My 100% stock portfolio involves less tinkering, simplicity is a good thing :)
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To put some numbers to my statements on VPW, I've looked at all the available years, tested the standard 30 year retirement and a longer 70 year retirement, both with $1,000,000 in 100% stocks, and these factors remained consistent (all dollars inflation-adjusted):
- In total, there was a 65% chance that VPW never lowered your withdrawal amount below the 4% rule.
- The median withdrawal for these 65% of people was between $120k-$150k.
- ---> If you were part of the unlucky 35%, 92% of your retirement years remained above the 4% rule.
- ------> In the worst case scenario 8% of years where you fell short, you were typically about $5,000 short for the year. About $400-$500 a month.
- The times this happened were clustered around 1966 and 1929, where the 4% rule left you unable to feed yourself.
- The median withdrawal for these 35% of people, was between $50k-$70k.
This assumes Person #1's path, where they take the full possible withdrawal each year, and throw away 100% of withdrawn cash that's above and beyond their living expenses. No cash buffer, no keeping the unused portion invested (Person #2's path), none of that. The numbers above represent a subset of a subset of a worst case scenario (35%), on top of another worst case scenario (8%), on top of another worst case scenario (withdrawing the total amount each year, even if you don't need it, throwing away the excess cash each year so there's no buffer), and the result is $400-$500 a month.
If you aren't comfortable with that, VPW isn't for you.
Tried (poorly) to visualize this:
(http://i.imgur.com/Vspo599.png)
If you were in the Unlucky 35%, this is the breakdown of your retirement years:
(http://i.imgur.com/tVfI4DB.png)
And of course, the median withdrawal for the 4% rule was $40k.
(http://i.imgur.com/9ukf4bK.png)
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Thanks for posting this IC. Some form of variable WR is in my future. I have no kids so leaving money is not a concern. I'll need to study VPW.
Currently I am just simulating a VWR with a simple floor and ceiling value in cFIREsim.
I'm coming at FIRE with a low starting portfolio value relative to my target WR rate of $40K/yr. I definitely don't want to work FT any longer than I have to, but I don't mind working PT as part of the progression through FIRE.
So some sort of VWR plan is in the cards as they seem to offer the best mix of success vs. WR $ for lower starting portfolio values.
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I've always been 100% equities and will be so as long as shares represent a portion of business. I don't plan on ever selling my holdings so withdrawal rates don't really apply.
"How does he intend to cover living expenses then?"
Dividends. Everything I buy/own pays dividends. The dividends will be used for living expenses, charity, blow money and reinvestment.
I've never been a fan of the common plan of selling off shares at some specific rate to cover living expenses. Feels too much like slaying the goose that has so much potential to lay more eggs.
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Feels too much like slaying the goose that has so much potential to lay more eggs
...or shit more dollar bills (http://forum.mrmoneymustache.com/investor-alley/dividend-growth-funds/msg659395/#msg659395).
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I miss skyrefuge.
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I've always thought of asset allocation in relation to my goals.
During the accumulation phase I plan to continue in 100% stocks. The reason for this is the higher CAGAR and the fact that as long as I'm living off my earned wage income, the volatility shouldn't matter to me at all because i control the date at which i FIRE. It's possible that a major market crash would then delay my FIRE date, but again it's something that I can control (as long as i don't panic and sell).
Once you hit a point where you have the % withdraw rate you are targeting for FIRE then absolute CAGAR should be less important. The key here is do you get enough gains to cover your withdraw rate and inflation while minimizing volatility (since you are now drawing down). In this case having a portion of stocks and bonds can be much more safer than 100% stocks.
So basically my approach is 100 stocks to build wealth
stocks and bonds to maintain wealth after i pull the fire trigger.
Combining this with something like a variable withdraw would make it even safer.
(sorry if folks have already discussed this, i'm running out the door to devotion and could only skim the entire post)
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I miss skyrefuge.
Where did he go?
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Where did he go?
Hopefully (for his sake) off to enjoy FIRE, but hopefully (for our sake) he'll return and grace us with his presence once in a while.
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There are a few 100% stock posts on the front page right now, as we usually see when stocks hit an all-time-high (about once a year or so), so I gave this thread another read.
The VPW withdrawal sheet has been updated with a few more years of data:
https://www.bogleheads.org/wiki/Variable_percentage_withdrawal
And the percentage withdrawal for anyone above 30 years old is still over 5% with 100% stocks. Hmm...with my side-gig (a few hours a week) + VPW, I could FIRE today! Would it still be FIRE if I need the side-gig? Hmm...something to think about.
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There are a few 100% stock posts on the front page right now, as we usually see when stocks hit an all-time-high (about once a year or so), so I gave this thread another read.
The VPW withdrawal sheet has been updated with a few more years of data:
https://www.bogleheads.org/wiki/Variable_percentage_withdrawal
And the percentage withdrawal for anyone above 30 years old is still over 5% with 100% stocks. Hmm...with my side-gig (a few hours a week) + VPW, I could FIRE today! Would it still be FIRE if I need the side-gig? Hmm...something to think about.
It amuses me how strongly I can agree with your ideas/posts on the Golden Butterfly, and so strongly disagree with your ideas/posts on withdrawal strategy*. :)
That's the great thing about interactive threads and forums for discussions like these. You get a lot of great ideas, arguments for a bunch of different things, and can decide on your own which ones hold weight, and which ideas make sense to you.
Thanks to you (and Tyler and BrooklynGuy and waltworks and many, many others) for participating in these good discussions. :)
*As discussed elsewhere, I think the VPW is...poor, for a number of reasons.
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Would it still be FIRE if I need the side-gig? Hmm...something to think about.
How many hours/week? 8hrs or less I would say it was FIRE. Assuming you didn't hate those 8hrs.
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and many, many others
...including skyrefuge, who is still sorely missed.
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and many, many others
...including skyrefuge, who is still sorely missed.
Yup. Ditto warfreak2. And many others. Hope they're out there, FIRE'd or rocking their way there. :)
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The math for this works for me 100% of the time. You can't create pie charts or graphs for emotion and that is the grenade pin as to why this allocation ends up failing for the majority of investors. Honestly--I wholeheartedly agree with all of the data presented but where are the psychological formulas? (Us programmers, engineers, accountants, etc., are good at creating efficient systems, but I've been in enough relationships to know my systems fail when presented with human reality.)
The math works.
For us:
Investments: Stocks and a few I-bonds bought many years ago at good interest rates.
Anchor: Paid for house, zero debt and some cash and a willingness to not pull money out of the investment portion until absolutely necessary.
We don't need bonds. The house is the security blanket.
IMHO, stocks will not give the returns many people are expecting. Bogle says returns might be something like 4% annually before inflation over the next ten years, and I think he could be right. And bonds will be worse than that.
spending the living room instead of bonds may be tough . i know our grocery will not take it .
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There are a few 100% stock posts on the front page right now, as we usually see when stocks hit an all-time-high (about once a year or so), so I gave this thread another read.
The VPW withdrawal sheet has been updated with a few more years of data:
https://www.bogleheads.org/wiki/Variable_percentage_withdrawal
And the percentage withdrawal for anyone above 30 years old is still over 5% with 100% stocks. Hmm...with my side-gig (a few hours a week) + VPW, I could FIRE today! Would it still be FIRE if I need the side-gig? Hmm...something to think about.
It amuses me how strongly I can agree with your ideas/posts on the Golden Butterfly, and so strongly disagree with your ideas/posts on withdrawal strategy*. :)
That's the great thing about interactive threads and forums for discussions like these. You get a lot of great ideas, arguments for a bunch of different things, and can decide on your own which ones hold weight, and which ideas make sense to you.
Thanks to you (and Tyler and BrooklynGuy and waltworks and many, many others) for participating in these good discussions. :)
*As discussed elsewhere, I think the VPW is...poor, for a number of reasons.
Indeed! This is why I love forums like these.
You get to make up your own opinions, but you don't get to make up your own facts.
Liking VPW or not is subjective. Some people have a good opinion of it, some don't. That's fine :) I tried to keep my Golden Butterfly posts as factual as possible. It's easy to agree with facts :)
(https://i.sli.mg/asyHdo.png)
(doesn't exactly fit, but I LOVE this :) )
I've had some time to think about VPW, and my opinion hasn't changed. Of the 8700 overlapping years from both 30 year and 70 year retirements, starting from 1871, only 243 of them had withdrawals lower than the standard 4% rule. Those 243 years were short about $500 a month, and clustered around the time when the 4% rule would've wiped.
So it's all subjective. I'd rather subject myself to that risk, than the sequence of returns risk of total portfolio wipe with the 4% rule. My easy access to a side-gig surely plays a part in this analysis. As does my desire to shave a few years off my FIRE date :-P
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I tried to keep my Golden Butterfly posts as factual as possible. It's easy to agree with facts :)
Ha! An epically long thread indicates otherwise. ;)
Because there's more than one way to productively invest, two smart people can look at the same facts and come to different conclusions about the best way to proceed. I appreciate the opportunity to discuss different perspectives, and hope the forum never becomes too homogeneous on the "right" way to invest.
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Would it still be FIRE if I need the side-gig? Hmm...something to think about.
How many hours/week? 8hrs or less I would say it was FIRE. Assuming you didn't hate those 8hrs.
About 12 hours split between two people to cover living expenses. But that's the thing, a big reason I want to FIRE is so I can spend MORE time on the side-gig. So yea...how about 140 hours a week between two people? Best FIRE ever :D
No, it probably doesn't count as "FIRE", but that's ok with me :)
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The math for this works for me 100% of the time. You can't create pie charts or graphs for emotion and that is the grenade pin as to why this allocation ends up failing for the majority of investors. Honestly--I wholeheartedly agree with all of the data presented but where are the psychological formulas? (Us programmers, engineers, accountants, etc., are good at creating efficient systems, but I've been in enough relationships to know my systems fail when presented with human reality.)
The math works.
For us:
Investments: Stocks and a few I-bonds bought many years ago at good interest rates.
Anchor: Paid for house, zero debt and some cash and a willingness to not pull money out of the investment portion until absolutely necessary.
We don't need bonds. The house is the security blanket.
IMHO, stocks will not give the returns many people are expecting. Bogle says returns might be something like 4% annually before inflation over the next ten years, and I think he could be right. And bonds will be worse than that.
spending the living room instead of bonds may be tough . i know our grocery will not take it .
It would have to be one seriously bad, multi-year bear market for us to spend all our cash, I-bonds and dividends. That said, in the 8 months since the post you dragged up I have gotten more interested in bonds, and currently have 20% in cash and short term bonds (BSV). That's about 8 years of living expenses.
One thing that puzzles me no end is when people have debt (mortgage) and own debt (bonds). The math seldom works out in that case.
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One thing that puzzles me no end is when people have debt (mortgage) and own debt (bonds). The math seldom works out in that case.
A mortgage is not easy to rebalance in and out of.
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a 4% mortgage and returns on TLT at 18% ytd and 13% the last 3 years is why . bond returns are more about appreciation than interest .
when the tide shifts it may not be a great idea to have conventional bond funds but for now a mortgage is just another housing expense and bonds are an investment .
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a 4% mortgage and returns on TLT at 18% ytd and 13% the last 3 years is why . bond returns are more about appreciation than interest .
when the tide shifts it may not be a great idea to have conventional bond funds but for now a mortgage is just another housing expense and bonds are an investment .
In this case, a mortgage is not "just another housing expense" (like property taxes, or repairs), but rather leverage.
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the leverage is variable . it gets less and less with each payment and is relative to what you owe . plunk down a big down payment and leverage is all over the place . but there is usually some leverage involved at least in the early years ,if you invest the whole enchilada . but that does not really answer the question as to why own bonds and a mortgage nor dies it assume you are going to borrow that money and throw it all in investments so leverage is a factor .
in fact many with a mortgage have little to invest in anything else so a mortgage is best kept as an expense in my opinion . what you do after that is something else .
the mere fact that most folks suck as investors and demonstrate poor investor behavior means that leverage can be a double edge sword and cut them too .
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a 4% mortgage and returns on TLT at 18% ytd and 13% the last 3 years is why . bond returns are more about appreciation than interest .
when the tide shifts it may not be a great idea to have conventional bond funds but for now a mortgage is just another housing expense and bonds are an investment .
Going forward:
30 year fixed 3.49%
30 year bond 2.23%
15 year fixed 2.78%
10 year note 1.51%
Expecting bond appreciation is speculation, not investment. No one can reliably predict interest rates. The best estimate of bond returns is the rate on the day you buy it.
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same apply's to stocks . appreciation is all speculation as to what we may get . but we all invest anyway and take our chances . any bonds i own now are only being held for total return , not just interest . so far so good , especially my high yield bond fund up double digits since i bought it .
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same apply's to stocks . appreciation is all speculation as to what we may get . but we all invest anyway and take our chances . any bonds i own now are only being held for total return , not just interest . so far so good , especially my high yield bond fund up double digits since i bought it .
In the long run the appreciation of stocks is due to the company's earnings. Long term buy and hold of stocks is investing, not speculation.
Sure, in an interest rate reducing cycle bonds have done well. Do you expect more appreciation from your bond funds? Why?
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my portfolio is dynamic . the types of funds i hold shift slightly with the bigger picture .right now my bond funds are appreciating as much or more than my stock funds . once that trend is over and rates rise different types of bond funds will replace the existing ones.
so far my high yield bond fund is up 13% , my total bond fund almost 8% , i trade in and out of TLT as a speculation and have seen 15% from those trades but tlt is not an active part of my portfolio , it is fun trading . i dart in and out of kmi,gld and tlt sometimes within just days . so far that fun money is up 37% ytd
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Since a mortgage can't be 'called' if the market goes down, what do you see as the additional risk of holding a mortgage in a downtown?
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Since a mortgage can't be 'called' if the market goes down, what do you see as the additional risk of holding a mortgage in a downtown?
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there is less risk but the downturn the pay down your mortgage crowd uses is along the lines of utter market devestation for multiple years. which regardless of if your home is paid off our not turns the entire premise of the 4% rule on its head and will likely land you back trying to get an income stream regardless of house paid down or not.
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Since a mortgage can't be 'called' if the market goes down, what do you see as the additional risk of holding a mortgage in a downtown?
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those extra mortgage payments you are pulling out while spending down increase draw rate and increase sequence risk .
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Since a mortgage can't be 'called' if the market goes down, what do you see as the additional risk of holding a mortgage in a downtown?
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those extra mortgage payments you are pulling out while spending down increase draw rate and increase sequence risk .
except historically sequence risk hasnt affected this and has increased chances of you being successful in retirement if you held a mortgage vs not. just plug numbers into CFireSim. its not all doom and gloom.
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but as we all know the past may be very different going forward in these uncharted waters . we really have no history under these conditions . my vote is keep sequence risk as low as you can . it is a far worse retirement killer than returns are .
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Thanks for your responses. Starting with 100 yen 30, 20, and 10 years ago the real value in today's yen is 115.83, 101.57, and 101.86, respectively. This does not appear to be catastrophic to a mortgage payer on its own.
If ones only acceptable investments are guaranteed to pay less than ones mortgage interest rate, of course pay off the mortgage.
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Thanks for your responses. Starting with 100 yen 30, 20, and 10 years ago the real value in today's yen is 115.83, 101.57, and 101.86, respectively. This does not appear to be catastrophic to a mortgage payer on its own.
If ones only acceptable investments are guaranteed to pay less than ones mortgage interest rate, of course pay off the mortgage.
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I agree. I think levering using a mortgage is fine... it's just a risk preference and it usually pays off, but not always.
I also think about behavioral impulses. Like imagine a guy (Guy A) with 100% stocks who has a 500k home with an 80% LTV mortgage and $1.2m in invested assets. So his net worth is $1.3m. Say he has 30k of expenses ex mortgage and pays $30k a year on the mortgage. In a big 50% crash he suddenly has invested assets of $600k and a mortgage of 400k, with 60k of cash outflow per year and possibly an underwater house, so he's taking 10% out of his stash per year when the market is at a low and feeling nervous. Let's say the house is down 15% and his net worth is now $625k .
In contrast, the guy who doesn't have a mortgage (let's call him Guy B) only has 800k in invested assets pre crash. His net worth also starts at $1.3m and has 30k of expenses. In that big 50% crash he now has invested assets of 400k, with 30k of outflow per year. That's still steep but he's taking 7.5% out not 10%, so his sequence of returns risk is lower. If his house is also down 15%, his net worth is now $825k.
Our hypothetical unlevered guy has over 30% more net worth after the crash than the levered guy and if it were me I'd be feeling better in the second scenario. This works in both directions, of course--in an upswing our levered gentlemen will be getting much higher levered returns. Now many folks will say that over the long run the market will likely recover and Guy A will be richer. But my goal is not to be the richest person. My goal is to have a fortress balance sheet so that I can do what I want to do and not have to work for money. With my low WR of 3.3% it makes a lot of sense for me to pay off a mortgage and get a guaranteed return that approximates my WR rather than take on more risk just to try to capture a risk premium above my WR (which I don't need).
So it may be that people have different goals. My goal is just to take out the amount I need and not be forced back to work even in really shitty scenarios. My secondary goal is not to lose sleep when the market tanks. A third goal is to simplify my life and not have to deal with banks etc if I don't have to. Paying off my mortgage in my particular case helps me achieve all these goals.
correct and since the market runs up more than down scenario b is much more likely than your first scenario therefore less risky when historical data is applied.
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My goal is to have a fortress balance sheet so that I can do what I want to do and not have to work for money. With my low WR of 3.3% it makes a lot of sense for me to pay off a mortgage and get a guaranteed return that approximates my WR rather than take on more risk just to try to capture a risk premium above my WR (which I don't need).
So it may be that people have different goals. My goal is just to take out the amount I need and not be forced back to work even in really shitty scenarios. My secondary goal is not to lose sleep when the market tanks. A third goal is to simplify my life and not have to deal with banks etc if I don't have to. Paying off my mortgage in my particular case helps me achieve all these goals.
Agree completely.
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My goal is to have a fortress balance sheet so that I can do what I want to do and not have to work for money. With my low WR of 3.3% it makes a lot of sense for me to pay off a mortgage and get a guaranteed return that approximates my WR rather than take on more risk just to try to capture a risk premium above my WR (which I don't need).
So it may be that people have different goals. My goal is just to take out the amount I need and not be forced back to work even in really shitty scenarios. My secondary goal is not to lose sleep when the market tanks. A third goal is to simplify my life and not have to deal with banks etc if I don't have to. Paying off my mortgage in my particular case helps me achieve all these goals.
Fair enough. You have to run your own race.
My perspective is that shooting for a sub-4% WR and paying off my mortgage rather than investing the funds is a sure way to work extra years FT and if that means a small risk of having to work PT at some point down the road I'm more than happy to accept that. I'm suspect there will be a point in my life when a chill PT job related to one of my hobbies will be welcome.
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In contrast, the guy who doesn't have a mortgage (let's call him Guy B) only has 800k in invested assets pre crash. His net worth also starts at $1.3m and has 30k of expenses. In that big 50% crash he now has invested assets of 400k, with 30k of outflow per year. That's still steep but he's taking 7.5% out not 10%, so his sequence of returns risk is lower. If his house is also down 15%, his net worth is now $825k.
Your scenario B guy doesn't seem to be paying property taxes and insurance on his paid off house. Some places this could be as little as an extra $2k a year, but in other places it could be $10k a year. This changes your argument, best case the person has to use 8% of their nest egg, and worst case they will be equal to guy A at 10%.
I know that these numbers are all made up anyway, but long term the money you invest should provide you with enough cushion that even in the event of a huge economic downturn you have more than enough investment reserves to withdraw less % than someone who paid off their mortgage.
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Then guy A is paying $30k a year on principal and interest?
I call BS!!
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I know these numbers were probably off the top of your head, so let's run some real numbers. Let's say a person got their mortgage and started investing from zero in 1992. I chose this year randomly, but wanted them to be invested through the dot com crash and then retire before the 2008/9 crash.
So, if they put 20% down on a $480k home, they would have a principal balance of $400k. If you want a paid off home before you retire early, and let's say you would need 15 years to save 25x your yearly budget, then you better get to making those extra payments - to the tune of an EXTRA $1075 per month (http://www.bankrate.com/calculators/home-equity/additional-mortgage-payment-calculator.aspx). That's on top of your $1796 per month normal P&I payment just to pay it off in 30 years (this is with a 3.5% mortgage rate, which was UNHEARD of in 1994!! but anything more than ~5-6% and paying down the mortgage is a no-brainer). So, here are the 2 scenario's:
1 = pay normal mortgage payment of $1796 and invest the extra $1075 per month
2 = pay a $2871 mortgage payment to have a paid off house in 15 years
Who gets to an invested portfolio that can support a 4% SWR first? It takes saving ~$24k for 15 years for scenario 2 to have a paid off house and a $750k portfolio (https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&mode=2&startYear=1992&endYear=2007&initialAmount=1&annualOperation=1&annualAdjustment=24000&inflationAdjusted=false&annualPercentage=0.0&rebalanceType=1&benchmark=%5ESPXTR&portfolio1=Custom&portfolio2=Custom&portfolio3=Custom&TotalStockMarket1=80&TotalBond1=20) which would support a $30k annual spend at 4% SWR. If you had invested the extra for 15 years you would have a total of ~$1.17MM (https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&mode=2&startYear=1992&endYear=2007&initialAmount=1&annualOperation=1&annualAdjustment=36900&inflationAdjusted=false&annualPercentage=0.0&rebalanceType=1&benchmark=%5ESPXTR&benchmarkSymbol=VTSAX&portfolio1=Custom&portfolio2=Custom&portfolio3=Custom&TotalStockMarket1=80&TotalBond1=20), but you'd have to withdraw ~$51.5k per year for the next 15 years until you pay off your mortgage. This represents a SWR of 4.4%.
So, if both retired at the end of 2007 (basically right before a downturn) - how would they have fared?
1 = Withdrawing a constant $51.5k a year, with $51.5k withdrawn as cash at the beginning of 2008, at the end of 2015 you'd have ~$1.248MM (https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&mode=2&startYear=2008&endYear=2015&initialAmount=1118500&annualOperation=2&annualAdjustment=51500&inflationAdjusted=false&annualPercentage=4.4&rebalanceType=1&benchmark=%5ESPXTR&benchmarkSymbol=VTSAX&portfolio1=Custom&portfolio2=Custom&portfolio3=Custom&TotalStockMarket1=80&TotalBond1=20)
2 = Withdrawing a constant $30k a year, with $30k withdrawn as cash at the beginning of 2008, at the end of 2015 you'd have ~$841k (https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&mode=2&startYear=2008&endYear=2015&initialAmount=720000&annualOperation=2&annualAdjustment=30000&inflationAdjusted=false&annualPercentage=4.4&rebalanceType=1&benchmark=%5ESPXTR&benchmarkSymbol=VTSAX&portfolio1=Custom&portfolio2=Custom&portfolio3=Custom&TotalStockMarket1=80&TotalBond1=20)
Or, you could pay off the remainder of the mortgage (~$251k) in one swoop at the end of 2007, which would leave you with ~$919k invested. This would give you a ~3.3% SWR going forward.
If you calculated it so that you only worked long enough so that after you paid a lump sum on your mortgage when you retire you would have 25x expenses, you would only have to work ~14 years (1 year less than paying down your mortgage early).
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I know these numbers were probably off the top of your head, so let's run some real numbers. Let's say a person got their mortgage and started investing from zero in 1992. I chose this year randomly, but wanted them to be invested through the dot com crash and then retire before the 2008/9 crash.
So, if they put 20% down on a $480k home, they would have a principal balance of $400k. If you want a paid off home before you retire early, and let's say you would need 15 years to save 25x your yearly budget, then you better get to making those extra payments - to the tune of an EXTRA $1075 per month (http://www.bankrate.com/calculators/home-equity/additional-mortgage-payment-calculator.aspx). That's on top of your $1796 per month normal P&I payment just to pay it off in 30 years (this is with a 3.5% mortgage rate, which was UNHEARD of in 1994!! but anything more than ~5-6% and paying down the mortgage is a no-brainer). So, here are the 2 scenario's:
1 = pay normal mortgage payment of $1796 and invest the extra $1075 per month
2 = pay a $2871 mortgage payment to have a paid off house in 15 years
Who gets to an invested portfolio that can support a 4% SWR first? It takes saving ~$24k for 15 years for scenario 2 to have a paid off house and a $750k portfolio (https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&mode=2&startYear=1992&endYear=2007&initialAmount=1&annualOperation=1&annualAdjustment=24000&inflationAdjusted=false&annualPercentage=0.0&rebalanceType=1&benchmark=%5ESPXTR&portfolio1=Custom&portfolio2=Custom&portfolio3=Custom&TotalStockMarket1=80&TotalBond1=20) which would support a $30k annual spend at 4% SWR. If you had invested the extra for 15 years you would have a total of ~$1.17MM (https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&mode=2&startYear=1992&endYear=2007&initialAmount=1&annualOperation=1&annualAdjustment=36900&inflationAdjusted=false&annualPercentage=0.0&rebalanceType=1&benchmark=%5ESPXTR&benchmarkSymbol=VTSAX&portfolio1=Custom&portfolio2=Custom&portfolio3=Custom&TotalStockMarket1=80&TotalBond1=20), but you'd have to withdraw ~$51.5k per year for the next 15 years until you pay off your mortgage. This represents a SWR of 4.4%.
So, if both retired at the end of 2007 (basically right before a downturn) - how would they have fared?
1 = Withdrawing a constant $51.5k a year, with $51.5k withdrawn as cash at the beginning of 2008, at the end of 2015 you'd have ~$1.248MM (https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&mode=2&startYear=2008&endYear=2015&initialAmount=1118500&annualOperation=2&annualAdjustment=51500&inflationAdjusted=false&annualPercentage=4.4&rebalanceType=1&benchmark=%5ESPXTR&benchmarkSymbol=VTSAX&portfolio1=Custom&portfolio2=Custom&portfolio3=Custom&TotalStockMarket1=80&TotalBond1=20)
2 = Withdrawing a constant $30k a year, with $30k withdrawn as cash at the beginning of 2008, at the end of 2015 you'd have ~$841k (https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&mode=2&startYear=2008&endYear=2015&initialAmount=720000&annualOperation=2&annualAdjustment=30000&inflationAdjusted=false&annualPercentage=4.4&rebalanceType=1&benchmark=%5ESPXTR&benchmarkSymbol=VTSAX&portfolio1=Custom&portfolio2=Custom&portfolio3=Custom&TotalStockMarket1=80&TotalBond1=20)
Or, you could pay off the remainder of the mortgage (~$251k) in one swoop at the end of 2007, which would leave you with ~$919k invested. This would give you a ~3.3% SWR going forward.
If you calculated it so that you only worked long enough so that after you paid a lump sum on your mortgage when you retire you would have 25x expenses, you would only have to work ~14 years (1 year less than paying down your mortgage early).
yes makes perfect sense horse has been beat to death but the pay down your house people always argue that you cant predict future returns. but what they never seem to understand is that if those doomsday returns hit that they keep saying ARE A CHANCE ... then both people in those scenarios are fucked. ... there is also a chance the earth erupts in nuclear war. i dont have a bomb shelter i'll just die... a chance aliens will invade. a chance someone gets elected president and declares all housing free and forgives all mortgages. a chance pigs fly. the chance that people try to protect against by getting rid of a mortgage hasnt ever happened before and if it ever did it woud be devastating no matter how diverse your portfolio or withdrawal rate mortgage or not.
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Interest Compound and other familiar names I see here often have really good advice. I am just bookmarking so I can read more later.
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I also wonder whether we are even talking about the same scenario. If I have a fully owned house and financial assets that I need a 3.3% return on to keep pace, do you really think I should run out and get a mortgage? I can understand someone in the accumulation phase wanting to take that bet but why should I? If things go well I end up with more money than I need and if the bad scenarios play out I end up nervous about my WR. Doesn't seem like a good trade to me.
Yes. It's almost inevitable that early on in our quest for financial independence we have a mortgage and invest in stocks. It just makes the most sense, most of the time. As net worth rises - mainly due to a very high savings rate - there is less need to take so much risk. Some folks diversify into bonds. We liked the idea of being debt free.
We moved to a low cost of living area some years ago, and our house is less than 10% of net worth. A mortgage just isn't worth the bother.
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at this stage i have little desire to start with a mortgage if we buy another place next year. i am no longer ,nor do i have to be the aggressive investor i used to be .
now i am more interested in decreasing sequence risk by reducing draw rate . adding a mortgage would increase draw rate and make us more dependent on markets .
we are doing whatever we can to reduce that dependency such as holding out longer to take social security .
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This is a fascinating thread. In theory, I believe this is the way to go for someone like me with a lot of flexibility (43, single, no kids, no mortgage, etc.).
My issue is this: I have over saved (good problem to have I know) as I knew nothing about the mechanics of ER/RE/FIRE a few years ago. My portfolio is currently $1.4M and I'm still accumulating (easy money in my current gig) for another 6 months or so. My current annual spend is only $30k. That being said, I'd like to responsibly expand my lifestyle (spending) as much as my portfolio warrants moving forward (blasphemy around here I know).
Given the above, I'm really struggling selecting an appropriate A.A. I feel like I've "made it" for the lack of a better term. And that's the one issue I have with a 100% stock A.A. at this point with a CAPE sitting around 26. Having a great depression like event and leaving me with $200k would be a disaster. If I had a smaller stache, I believe the 100% stock/vpw is the way to go, hands down. Just not sure it's worth the risk at this point for me. I'm about 65/15/20 at this point (stock/bond/cash - still working on allocating my cash).
On the other hand, I'm comfortable with a $30k spend if necessary which could be supported strictly by dividends in a 100% stock portfolio even in a downturn). I feel I have the flexibility to use the VPW and 100% Stock AA method. Given that I'm only 43, it just feels like this approach is the way to go.
I know it's a thread hijack, but I'm really struggling with this - would be a great help if some of you on this thread would comment on what you would do in this situation? Thanks.
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What to do depends on what you are worried about - the best AA is one that lets you sleep at night.
If you are concerned about a 50% drop in the market - the question is why?
If you simply don't bother to read the news or check your balance it will bounce back after a year or two. You have enough cash that you can take capital out, to live on, even at the bottom without wiping yourself out. If you can cut costs for a couple of years it might even have negligible effect.
Having bonds/cash around would mean that you have a buffer to live on or even invest while the market is down. Historically this might have reduced your overall long term gain but if you already had more than you need and this plan makes you happier then do it.
Assuming you aren't in a field where can jump back into work for a few years at high salary. Generally the first few years post FIRE are the riskiest, so would call for the safest strategy.
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This is a fascinating thread. In theory, I believe this is the way to go for someone like me with a lot of flexibility (43, single, no kids, no mortgage, etc.).
My issue is this: I have over saved (good problem to have I know) as I knew nothing about the mechanics of ER/RE/FIRE a few years ago. My portfolio is currently $1.4M and I'm still accumulating (easy money in my current gig) for another 6 months or so. My current annual spend is only $30k. That being said, I'd like to responsibly expand my lifestyle (spending) as much as my portfolio warrants moving forward (blasphemy around here I know).
Given the above, I'm really struggling selecting an appropriate A.A. I feel like I've "made it" for the lack of a better term. And that's the one issue I have with a 100% stock A.A. at this point with a CAPE sitting around 26. Having a great depression like event and leaving me with $200k would be a disaster. If I had a smaller stache, I believe the 100% stock/vpw is the way to go, hands down. Just not sure it's worth the risk at this point for me. I'm about 65/15/20 at this point (stock/bond/cash - still working on allocating my cash).
On the other hand, I'm comfortable with a $30k spend if necessary which could be supported strictly by dividends in a 100% stock portfolio even in a downturn). I feel I have the flexibility to use the VPW and 100% Stock AA method. Given that I'm only 43, it just feels like this approach is the way to go.
I know it's a thread hijack, but I'm really struggling with this - would be a great help if some of you on this thread would comment on what you would do in this situation? Thanks.
You answered the question yourself. You aren't comfortable with 100% stocks, so under no circumstances should you be 100% stocks. Looking at the worst-case scenario, a 65/35 stocks/bonds $1.4 million portfolio never went below a $30k withdrawal with VPW, and had a median withdrawal of $65k a year.
A more typical scenario has a median withdrawal of about $100k a year.
The rule: Your asset allocation should be based on your unique ability, willingness, and need to take financial risk. You have the willingness, but it seems you don't have the ability, and you definitely don't have the need. If 65/35 is what you're comfortable with, you'll be fine :)
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This is a fascinating thread. In theory, I believe this is the way to go for someone like me with a lot of flexibility (43, single, no kids, no mortgage, etc.).
My issue is this: I have over saved (good problem to have I know) as I knew nothing about the mechanics of ER/RE/FIRE a few years ago. My portfolio is currently $1.4M and I'm still accumulating (easy money in my current gig) for another 6 months or so. My current annual spend is only $30k. That being said, I'd like to responsibly expand my lifestyle (spending) as much as my portfolio warrants moving forward (blasphemy around here I know).
Given the above, I'm really struggling selecting an appropriate A.A. I feel like I've "made it" for the lack of a better term. And that's the one issue I have with a 100% stock A.A. at this point with a CAPE sitting around 26. Having a great depression like event and leaving me with $200k would be a disaster. If I had a smaller stache, I believe the 100% stock/vpw is the way to go, hands down. Just not sure it's worth the risk at this point for me. I'm about 65/15/20 at this point (stock/bond/cash - still working on allocating my cash).
On the other hand, I'm comfortable with a $30k spend if necessary which could be supported strictly by dividends in a 100% stock portfolio even in a downturn). I feel I have the flexibility to use the VPW and 100% Stock AA method. Given that I'm only 43, it just feels like this approach is the way to go.
I know it's a thread hijack, but I'm really struggling with this - would be a great help if some of you on this thread would comment on what you would do in this situation? Thanks.
You answered the question yourself. You aren't comfortable with 100% stocks, so under no circumstances should you be 100% stocks. Looking at the worst-case scenario, a 65/35 stocks/bonds $1.4 million portfolio never went below a $30k withdrawal with VPW, and had a median withdrawal of $65k a year.
A more typical scenario has a median withdrawal of about $100k a year.
The rule: Your asset allocation should be based on your unique ability, willingness, and need to take financial risk. You have the willingness, but it seems you don't have the ability, and you definitely don't have the need. If 65/35 is what you're comfortable with, you'll be fine :)
Thanks for the response I.C. I guess I've always been a value person. If the market had a CAPE below 17 right now, I'd be 100% stocks. Not trying to time anything, but historically, this market seems frothy. But I'm curious, what would you do in the same situation I'm in - I'm interested? Thanks.
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What to do depends on what you are worried about - the best AA is one that lets you sleep at night.
If you are concerned about a 50% drop in the market - the question is why?
If you simply don't bother to read the news or check your balance it will bounce back after a year or two. You have enough cash that you can take capital out, to live on, even at the bottom without wiping yourself out. If you can cut costs for a couple of years it might even have negligible effect.
Having bonds/cash around would mean that you have a buffer to live on or even invest while the market is down. Historically this might have reduced your overall long term gain but if you already had more than you need and this plan makes you happier then do it.
Assuming you aren't in a field where can jump back into work for a few years at high salary. Generally the first few years post FIRE are the riskiest, so would call for the safest strategy.
Thanks for the response. I'm curious - what would you do in the same situation?
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What to do depends on what you are worried about - the best AA is one that lets you sleep at night.
If you are concerned about a 50% drop in the market - the question is why?
If you simply don't bother to read the news or check your balance it will bounce back after a year or two. You have enough cash that you can take capital out, to live on, even at the bottom without wiping yourself out. If you can cut costs for a couple of years it might even have negligible effect.
Having bonds/cash around would mean that you have a buffer to live on or even invest while the market is down. Historically this might have reduced your overall long term gain but if you already had more than you need and this plan makes you happier then do it.
Assuming you aren't in a field where can jump back into work for a few years at high salary. Generally the first few years post FIRE are the riskiest, so would call for the safest strategy.
Thanks for the response. I'm curious - what would you do in the same situation?
Personally, work out what the minimum you need to live on - whether that's rent a cabin in the woods, travel in an RV, or living in Mexico or Thailand. Put 24x (ie 4% SWR) that in a safe 60/40 stock/bond (or whatever Vanguard say is the safe portfolio).
Have that 4% SWR amount paid to yourself as a baseline salary every month
Then you know you are covered, if there is a market crash just ignore it for a couple of years knowing that you are completely safe for ever and it will bounce back without you running out of money
The rest 100% stocks, mostly ETFs but maybe 25% individual stocks /reits and watch that grow, when it is doing well consider that "a good year" and buy a boat !
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What to do depends on what you are worried about - the best AA is one that lets you sleep at night.
If you are concerned about a 50% drop in the market - the question is why?
If you simply don't bother to read the news or check your balance it will bounce back after a year or two. You have enough cash that you can take capital out, to live on, even at the bottom without wiping yourself out. If you can cut costs for a couple of years it might even have negligible effect.
Having bonds/cash around would mean that you have a buffer to live on or even invest while the market is down. Historically this might have reduced your overall long term gain but if you already had more than you need and this plan makes you happier then do it.
Assuming you aren't in a field where can jump back into work for a few years at high salary. Generally the first few years post FIRE are the riskiest, so would call for the safest strategy.
Thanks for the response. I'm curious - what would you do in the same situation?
Personally, work out what the minimum you need to live on - whether that's rent a cabin in the woods, travel in an RV, or living in Mexico or Thailand. Put 24x (ie 4% SWR) that in a safe 60/40 stock/bond (or whatever Vanguard say is the safe portfolio).
Have that 4% SWR amount paid to yourself as a baseline salary every month
Then you know you are covered, if there is a market crash just ignore it for a couple of years knowing that you are completely safe for ever and it will bounce back without you running out of money
The rest 100% stocks, mostly ETFs but maybe 25% individual stocks /reits and watch that grow, when it is doing well consider that "a good year" and buy a boat !
Why would you do that? Isn't it better to have a larger portfolio, live on less than 4% but still more than the "bare absolute minimum" as ones preferences go, and then if things go well slowly increase expenses mostly in non recurring items. e.g. take a nicer holiday, treat yourself with food, etc knowing if the market goes down you can always cut. If you buy a boat you have recurring expenses about it forever or until you sell (good luck in a downturn) and in the meantime you've lived in a cabin in the woods for that.
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Yes - I was being slightly facetious. But the point stands of having a guaranteed safe minimum amount as a safety if the market really goes down would give you peace of mind.
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Hi all, I posted on Bogleheads forum for the first time. Boy, do I feel lowly in their company. Am I right in thinking in general, they are bigger fish with more investment knowledge, and bigger wedge? I mean, my 4% SWR was basically rubbished, said it will not work for an RE scenario, thought about inflation, health insurance costs etc? I mean, I have done my sums, and I am FI already, probably need to shift more into bonds, then I am ready to roll. Yes, I am heavy on equities, but I have been thru market volatility before, I dont blink, just keep getting my dividends and will not need to sell. I took a breath, looked at my IPS, and feel better. I will continue to save hard and live modestly.
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Most people on the Bogleheads forum don't understand the word "optimism" or "enough."
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Most people on the Bogleheads forum don't understand the word "optimism" or "enough."
I haven't been there much but I think people in general are like this. We all worry about the downside. I do it as well. I've done the analysis and I think I'm good at a 5.5% WR. I can downsize my house and I should get social security and possibly a tonne of inheritance. I should basically be fine.
The problem is I keep thinking about when I get to that level and I keep wondering about buying more stuff.
I think pulling the trigger will be hard for me.
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The problem is I keep thinking about when I get to that level and I keep wondering about buying more stuff.
That's the choice we all face. You can have stuff or you can have your freedom. You can also replace "stuff" with "fear". Either way you can out spend or out fear your ability or invest.
I love my sports bling, but it's becoming very apparent to me I can have a new flash mountain bike whenever I want and enjoy it on the weekends while I work during the week to pay for it or I can keep riding my old one that's just fine and shortly be able to ride it in all those amazing places they shoot ads in bike magazines.
So far the choice for freedom is winning out.
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The problem is I keep thinking about when I get to that level and I keep wondering about buying more stuff.
That's the choice we all face. You can have stuff or you can have your freedom. You can also replace "stuff" with "fear". Either way unless you can out spend or out fear your ability or invest.
I love my sports bling, but it's becoming very apparent to me I can have a new flash mountain bike whenever I want and enjoy it on the weekends while I work during the week to pay for it or I can keep riding my old one that's just fine and shortly be able to ride it in all those amazing places they shoot ads in bike magazines.
So far the choice for freedom is winning out.
It's also fear as well isn't it. In Australia we have our retirement fund called Super. You can't touch this until you are 60. My plan involves getting to Super with a fair degree of safety. Super hould then take me through to social security. I also have buffer though within my house. The buffer is probably massive.
So my planned WR is really high at 5.5% but I think it's basically pretty safe. The thing is I keep thinking should I get down to 4%. It seems crazy for me to even bother though because I don't really care. It's going to be interesting seeing what I do though.
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Most people on the Bogleheads forum don't understand the word "optimism" or "enough."
:) There might be one Bogle who understood "Enough":
https://www.amazon.com/Enough-True-Measures-Money-Business/dp/0470524235/
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It's also fear as well isn't it. In Australia we have our retirement fund called Super. You can't touch this until you are 60. My plan involves getting to Super with a fair degree of safety. Super hould then take me through to social security. I also have buffer though within my house. The buffer is probably massive.
So my planned WR is really high at 5.5% but I think it's basically pretty safe. The thing is I keep thinking should I get down to 4%. It seems crazy for me to even bother though because I don't really care. It's going to be interesting seeing what I do though.
How old will you be [were you] when you'll start FIRE at 5.5%WR?
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It's also fear as well isn't it. In Australia we have our retirement fund called Super. You can't touch this until you are 60. My plan involves getting to Super with a fair degree of safety. Super hould then take me through to social security. I also have buffer though within my house. The buffer is probably massive.
So my planned WR is really high at 5.5% but I think it's basically pretty safe. The thing is I keep thinking should I get down to 4%. It seems crazy for me to even bother though because I don't really care. It's going to be interesting seeing what I do though.
How old will you be [were you] when you'll start FIRE at 5.5%WR?
I'm not FIRE'd yet. I will be 47.
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It's also fear as well isn't it. In Australia we have our retirement fund called Super. You can't touch this until you are 60. My plan involves getting to Super with a fair degree of safety. Super hould then take me through to social security. I also have buffer though within my house. The buffer is probably massive.
So my planned WR is really high at 5.5% but I think it's basically pretty safe. The thing is I keep thinking should I get down to 4%. It seems crazy for me to even bother though because I don't really care. It's going to be interesting seeing what I do though.
How old will you be [were you] when you'll start FIRE at 5.5%WR?
I'm not FIRE'd yet. I will be 47.
you also have to look at what the historical market trends say the current market trends will support which right now in the us as of this post is 3.65% and your money would have historically lasted forever in the US. now you're just looking at 23 years so thats a different story. but my plans at 37 in the US dont include social security. thats more of just an added safety net. and in 7 years i plan to look at the shiller PE and see where my money stands. the company i work for has insane returns on our private ESOP which i have to sell when i leave. so depending on market conditions this likely only adds 1 year to FIRE if it is lower than 3.8%
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I'm not FIRE'd yet. I will be 47.
We are similar ages. I'm definitely not working FT until I hit 4%WR. Like you I'll have the Canadian version of SS and a house that will likely be equal to 40% to 50% of my FIRE portfolio when its paid off. I feel like free time is too previous at this age to be chained to a desk chasing a false sense of security.
Focusing on money as = FIRE success is missing the big picture in my opinion. There are so many ways a FIRE could fail that do not involve $$. If a 5.5% WR gets you rolling and you've got a bunch of buffers to reduce the risk go for it. We are not getting any younger! ;)
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at this stage i have little desire to start with a mortgage if we buy another place next year. i am no longer ,nor do i have to be the aggressive investor i used to be .
now i am more interested in decreasing sequence risk by reducing draw rate . adding a mortgage would increase draw rate and make us more dependent on markets .
we are doing whatever we can to reduce that dependency such as holding out longer to take social security .
Bill Bernstein: "...the best "annuity purchase" you can make is to delay beginning Social Security until age 70".
Returning to the mortgage question, I ran my actual data in cFiresim, solving for Max Initial Spending over a 40 year retirement, with and without a mortgage.
Mortgage 75% of house value, 30 year fixed at 3.4%. Proceeds from mortgage invested per asset allocation. Asset allocations of stocks/bonds/cash: 50/45/5, 60/35/5, 75,20,5.
Result: With the mortgage the Max Initial Spending increases by 2.5% to 2.8% depending on success rate (90-100%). A useful improvement in spending versus less hassles and a few chips off the table. Those with higher house value to net worth ratios would obviously see more advantage in holding the mortgage.
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Bill Bernstein: "...the best "annuity purchase" you can make is to delay beginning Social Security until age 70".
Is there a reference for that quote, and more background?
I would have thought it was calculated to be actuarially equal, so unless you happen to know something the actuarial tables don't (heavy smoker, or family history of living to 120, etc) that it was a crapshoot either way.
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Bill Bernstein: "...the best "annuity purchase" you can make is to delay beginning Social Security until age 70".
Is there a reference for that quote, and more background?
I would have thought it was calculated to be actuarially equal, so unless you happen to know something the actuarial tables don't (heavy smoker, or family history of living to 120, etc) that it was a crapshoot either way.
I think you are reading it as "it's better to delay than take it" (and arguing it's a wash either way), where as he's saying "it's a better annuity than you can buy."
That is, he's not comparing taking it early to late, he's comparing delaying it to purchasing an annuity. If you want an annuity, delaying SS is more efficient, money wise, because most annuities are such bad deals. Does that make more sense?
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I would have thought it was calculated to be actuarially equal, so unless you happen to know something the actuarial tables don't (heavy smoker, or family history of living to 120, etc) that it was a crapshoot either way.
If you live longer than 82, delay Social Security to 70
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wait i will check the crystal ball . perhaps if it can give me the exact day i can bounce the check to the undertaker
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mathjak107 - Bond appreciation only happens to someone holding a bond when yields fall. Since it can't be predicted, it's a guess. Here knowing history helps: bond yields 25 years ago were 8.05% on the 30-year bond, but are 2.28% today. On average, bond yields have fallen for decades and as a result there has been more bond capital gains than capital losses. Would anyone predict another 6% average drop, from 2% to -4% in the next decades? Because using history without context would make that assumption.
And on a general point, if you only reference your own investments, which nobody else knows, there isn't much room for debate. You're saying you are correct based on private information you selectively reveal, meanwhile the people debating you relying on published information that others can look up. If you only quote your own personal information, you won't learn anything and others won't have a way to validate your data.
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I'm not FIRE'd yet. I will be 47.
We are similar ages. I'm definitely not working FT until I hit 4%WR. Like you I'll have the Canadian version of SS and a house that will likely be equal to 40% to 50% of my FIRE portfolio when its paid off. I feel like free time is too previous at this age to be chained to a desk chasing a false sense of security.
Focusing on money as = FIRE success is missing the big picture in my opinion. There are so many ways a FIRE could fail that do not involve $$. If a 5.5% WR gets you rolling and you've got a bunch of buffers to reduce the risk go for it. We are not getting any younger! ;)
I don't think I will have a problem with a 5.5% WR. I may work part time. I may not. We may spend less. We may sell our house and downsize. Social security is always there as a back-up. The kids are getting older and when we are ready to retire the older 2 should be pretty close to independent.
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Bill Bernstein: "...the best "annuity purchase" you can make is to delay beginning Social Security until age 70".
Is there a reference for that quote, and more background?
I would have thought it was calculated to be actuarially equal, so unless you happen to know something the actuarial tables don't (heavy smoker, or family history of living to 120, etc) that it was a crapshoot either way.
It's from "The Investor's Manifesto". I believe you are correct that SS start dates are calculated to be actuarially equal. Bernstein's idea is to delay so you get higher payments when your human capital (ability to earn) is low or non-existent. It's about risk-reduction more than being financially optimal.
On page 145 he says: "This calculates out to a guaranteed real return from waiting of 8 percent per year, which is hard to beat anywhere in the capital markets. Should you "live too long", the bigger monthly check will come in very handy indeed."
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And on a general point, if you only reference your own investments, which nobody else knows, there isn't much room for debate. You're saying you are correct based on private information you selectively reveal, meanwhile the people debating you relying on published information that others can look up. If you only quote your own personal information, you won't learn anything and others won't have a way to validate your data.
They may have been directed at me? In the interest of sharing and debate, here's an example:
cFiresim, solving for Max Initial Spending, over a 40 year retirement, with and without a mortgage.
$1M Portfolio
$100K house
$75K mortgage 30 year fixed at 3.4%. $332.61/mo, $3991/yr*. Proceeds from mortgage invested per asset allocation.
Asset allocation of stocks/bonds/cash: 75,20,5, cash at 0.5% interest.
95% success rate
No mortgage: Max Initial Spending $35,893
With mortgage: Max Initial Spending $36,401
With the mortgage the Max Initial Spending increases by 1.4%
85% success rate
No mortgage: Max Initial Spending $39,507
With mortgage: Max Initial Spending $40,185
With the mortgage the Max Initial Spending increases by 1.7%
* Seems a bit high? I got it from Bankrate.com.
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Bill Bernstein: "...the best "annuity purchase" you can make is to delay beginning Social Security until age 70".
Is there a reference for that quote, and more background?
I would have thought it was calculated to be actuarially equal, so unless you happen to know something the actuarial tables don't (heavy smoker, or family history of living to 120, etc) that it was a crapshoot either way.
I think you are reading it as "it's better to delay than take it" (and arguing it's a wash either way), where as he's saying "it's a better annuity than you can buy."
That is, he's not comparing taking it early to late, he's comparing delaying it to purchasing an annuity. If you want an annuity, delaying SS is more efficient, money wise, because most annuities are such bad deals. Does that make more sense?
It's from "The Investor's Manifesto". I believe you are correct that SS start dates are calculated to be actuarially equal. Bernstein's idea is to delay so you get higher payments when your human capital (ability to earn) is low or non-existent. It's about risk-reduction more than being financially optimal.
On page 145 he says: "This calculates out to a guaranteed real return from waiting of 8 percent per year, which is hard to beat anywhere in the capital markets. Should you "live too long", the bigger monthly check will come in very handy indeed."
Those both clarify a bit, thanks. Seems more reasonable, or at least on the face less objectionable :)
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This is a fascinating thread. In theory, I believe this is the way to go for someone like me with a lot of flexibility (43, single, no kids, no mortgage, etc.).
My issue is this: I have over saved (good problem to have I know) as I knew nothing about the mechanics of ER/RE/FIRE a few years ago. My portfolio is currently $1.4M and I'm still accumulating (easy money in my current gig) for another 6 months or so. My current annual spend is only $30k. That being said, I'd like to responsibly expand my lifestyle (spending) as much as my portfolio warrants moving forward (blasphemy around here I know).
Given the above, I'm really struggling selecting an appropriate A.A. I feel like I've "made it" for the lack of a better term. And that's the one issue I have with a 100% stock A.A. at this point with a CAPE sitting around 26. Having a great depression like event and leaving me with $200k would be a disaster. If I had a smaller stache, I believe the 100% stock/vpw is the way to go, hands down. Just not sure it's worth the risk at this point for me. I'm about 65/15/20 at this point (stock/bond/cash - still working on allocating my cash).
On the other hand, I'm comfortable with a $30k spend if necessary which could be supported strictly by dividends in a 100% stock portfolio even in a downturn). I feel I have the flexibility to use the VPW and 100% Stock AA method. Given that I'm only 43, it just feels like this approach is the way to go.
I know it's a thread hijack, but I'm really struggling with this - would be a great help if some of you on this thread would comment on what you would do in this situation? Thanks.
You answered the question yourself. You aren't comfortable with 100% stocks, so under no circumstances should you be 100% stocks. Looking at the worst-case scenario, a 65/35 stocks/bonds $1.4 million portfolio never went below a $30k withdrawal with VPW, and had a median withdrawal of $65k a year.
A more typical scenario has a median withdrawal of about $100k a year.
The rule: Your asset allocation should be based on your unique ability, willingness, and need to take financial risk. You have the willingness, but it seems you don't have the ability, and you definitely don't have the need. If 65/35 is what you're comfortable with, you'll be fine :)
Thanks for the response I.C. I guess I've always been a value person. If the market had a CAPE below 17 right now, I'd be 100% stocks. Not trying to time anything, but historically, this market seems frothy. But I'm curious, what would you do in the same situation I'm in - I'm interested? Thanks.
If I were in your shoes, I wouldn't delude myself into thinking my knowledge of a single publicly-available metric (CAPE) allows me to predict future returns better than those who have access to that same information (and more).
I'm not too far off from your situation, and my answer is 100% world cap-weighted stocks, with a VPW withdrawal. Volatility is only temporary, but you can permanently cripple your portfolio trying to avoid it.
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Volatility is only temporary, but you can permanently cripple your portfolio trying to avoid it.
I'm trying to decide if I love this quote, or should come up with ways to pick it a part. Thought provoking for sure!
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Bill Bernstein: "...the best "annuity purchase" you can make is to delay beginning Social Security until age 70".
Is there a reference for that quote, and more background?
I would have thought it was calculated to be actuarially equal, so unless you happen to know something the actuarial tables don't (heavy smoker, or family history of living to 120, etc) that it was a crapshoot either way.
It's from "The Investor's Manifesto". I believe you are correct that SS start dates are calculated to be actuarially equal. Bernstein's idea is to delay so you get higher payments when your human capital (ability to earn) is low or non-existent. It's about risk-reduction more than being financially optimal.
On page 145 he says: "This calculates out to a guaranteed real return from waiting of 8 percent per year, which is hard to beat anywhere in the capital markets. Should you "live too long", the bigger monthly check will come in very handy indeed."
social security has not been neutral since folks started living longer . we also still have spousal benefits and adders for the spouse that increase things .
with the odds of a 65 year old couple at 74% of one of them seeing 85 and almost 50% of seeing 90 i would not want to bet against those odds .
social security increases are just that , an increase . it is not a 6% or 8% roi at all . you get about a 6% increase each year from 62 to fra and 8% from fra to 70 .
but it is not a return because you are giving up both checks and spousal benefits as part of the deal of delaying .
actual return is much less . in fact if you are spending down a balanced portfolio in order to delay and giving up checks as well as spousal benefits it can take almost 24 years to see any roi .
delaying does eventually give you not only more money as as well as allow more spending early on if you live long enough .
social security has zero sequence risk so no extra powder has to be kept dry for poor outcomes .
we are delaying because it cuts our need to be dependent on markets more . i go from 3.50% to less than a 2.50% withdrawal rates . the difference will refill what we spent down from our own money early on while delaying .
you do not wait until 70 to spend more . you draw your full budgeted amount day 1 and refill down the road .
if you live to 90 you can see a real return of about 5% which rivals balanced fund returns .
using the fidelity social security optimizing software , it worked out the optimum plan for us for most dollars .
it is an in house tool only not on line .
what it came up with and we are doing is this :
i am 64 and my wife 66 .
she was collecting an early benefit at 62 and stopped it when she hit fra . her benefit now grows 8% a year and when she is 70 she will resume . i will be 68 -10 months when she resumes and i will file restricted application for 1/2 hers .
at 70 i wile file for mine and when i file she gets a spousal adder of 4200.00 added to her benefit .
so we should see , even with my wife's poor work record about 55k a year plus colas by delaying .
we are spending a bit more delaying than we would have filing early since we eventually will refill our savings with a 70% bigger check at 70 then it would have been at 62 .
no one should consider an annuity until they delayed ss . there is no annuity you can buy for the money in checks you give up by delaying that will pay you a cola adjusted amount like ss will .
charts by michael kitces
(https://photos.smugmug.com/photos/i-6dWGZkG/0/O/i-6dWGZkG.png)
below is assuming spending down balanced portfolio while delaying
(https://photos.smugmug.com/photos/i-KmsGcPL/0/O/i-KmsGcPL.png)
(https://photos.smugmug.com/photos/i-pMXGMwg/0/O/i-pMXGMwg.png)
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following
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...Like imagine a guy (Guy A) with 100% stocks who has a 500k home with an 80% LTV mortgage and $1.2m in invested assets. So his net worth is $1.3m.
In contrast, the guy who doesn't have a mortgage (let's call him Guy B) only has 800k in invested assets pre crash. His net worth also starts at $1.3m
The big problem with comparisons like this, is they both have the same starting point. Since the housing market only grows with inflation long-term:
(http://i.imgur.com/4nnJQic.png)
While the market grows faster than inflation long-term:
(http://i.imgur.com/Tj8DbPa.png)
Person A, with their 100% stocks, is significantly more likely to have a much higher net-worth when the crash comes, than Person B. In fact, if they have to wait about 10 years for the crash, Person A on average will have about double the net-worth of Person B.
Keep that in mind when thinking about making real-world-decisions based on such comparisons.
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To put some numbers to my statements on VPW, I've looked at all the available years, tested the standard 30 year retirement and a longer 70 year retirement, both with $1,000,000 in 100% stocks, and these factors remained consistent (all dollars inflation-adjusted):
- In total, there was a 65% chance that VPW never lowered your withdrawal amount below the 4% rule.
- The median withdrawal for these 65% of people was between $120k-$150k.
- ---> If you were part of the unlucky 35%, 92% of your retirement years remained above the 4% rule.
- ------> In the worst case scenario 8% of years where you fell short, you were typically about $5,000 short for the year. About $400-$500 a month.
- The times this happened were clustered around 1966 and 1929, where the 4% rule left you unable to feed yourself.
- The median withdrawal for these 35% of people, was between $50k-$70k.
This assumes Person #1's path, where they take the full possible withdrawal each year, and throw away 100% of withdrawn cash that's above and beyond their living expenses. No cash buffer, no keeping the unused portion invested (Person #2's path), none of that. The numbers above represent a subset of a subset of a worst case scenario (35%), on top of another worst case scenario (8%), on top of another worst case scenario (withdrawing the total amount each year, even if you don't need it, throwing away the excess cash each year so there's no buffer), and the result is $400-$500 a month.
If you aren't comfortable with that, VPW isn't for you.
IC - is the VPW 4% on the annual portfolio balance in the example above? Thanks.
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We're working on different goal-sets I think. And maybe picturing different scenarios entirely. My scenario is someone who has just retired and wants to mitigate sequence of returns risk. They can either keep a mortgage or pay it down. I agree that Person A is more likely to have more money than Person B after the passage of time (remember they are the same person, just taking different hypothetical paths). I agree that "on average" they will win if you are measuring who has the most toys at some end date. That would be true of anybody who makes an asset allocation choice to put more in a higher risk/higher return asset. But at the margins the higher risk investor is more fragile.
I think we're mostly on the same page here. Where we disagree is the last statement in bold. From what I can see, since Person B on average has less money over the long-run, they are in turn more fragile in the context of retiring early and living off their money for decades.
Yes, they're mitigating short-term sequence of returns risk (which is much easier for the average investor to see), but overall they're subjecting themselves to more risk of running out of money before they die.
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Bill Bernstein: "...the best "annuity purchase" you can make is to delay beginning Social Security until age 70".
Is there a reference for that quote, and more background?
I would have thought it was calculated to be actuarially equal, so unless you happen to know something the actuarial tables don't (heavy smoker, or family history of living to 120, etc) that it was a crapshoot either way.
I think you are reading it as "it's better to delay than take it" (and arguing it's a wash either way), where as he's saying "it's a better annuity than you can buy."
That is, he's not comparing taking it early to late, he's comparing delaying it to purchasing an annuity. If you want an annuity, delaying SS is more efficient, money wise, because most annuities are such bad deals. Does that make more sense?
It's from "The Investor's Manifesto". I believe you are correct that SS start dates are calculated to be actuarially equal. Bernstein's idea is to delay so you get higher payments when your human capital (ability to earn) is low or non-existent. It's about risk-reduction more than being financially optimal.
On page 145 he says: "This calculates out to a guaranteed real return from waiting of 8 percent per year, which is hard to beat anywhere in the capital markets. Should you "live too long", the bigger monthly check will come in very handy indeed."
Those both clarify a bit, thanks. Seems more reasonable, or at least on the face less objectionable :)
If I recall, SS is not actuarially fair. Like many US retirement programs, distributions were calculated many decades ago and never updated. Thus you effectively get a guaranteed inflation adjusted yield of a little more than 8% per year by delaying. Been a while since I read that and I just filed it away in the "things to remember in 30 years" category so you'd need to look into specifics.
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Such great analysis from every side. Following.
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Does going through the actual sucky periods (1906, 1929, 1937, and 1966) and illustrating how much scarier it is to be Person A in those periods help you at all to see why leverage can increase risk? I'm sure you can find examples of the counter-phenomenon you cite (early growth protecting Person A from a crisis down the road), but they're not coming out in this strawman, at least not when it counts. I know that all this is sensitive to a variety of assumptions and circumstances, but studies have typically shown that the most risk is in the early returns not the later ones and this seems to bear that out. In those scenarios Person A gets hit harder because that is when they have the most leverage.
I think IC would point out that many of these periods would not have been nearly as bad if you had 50% in international stocks. Owning only US stocks adds its own additional risks.
On the other hand, I agree with you that even though 50% international is less risky, it is even less risky still to own a house without a mortgage. In this case it is all about "safety and enough" vs. "less safety and probably much more than enough". Ultimately, I am all about diversification of risks and assets. Owning a house (especially a well-insulated house with a vegetable garden) is a very obvious way to get huge diversification that no electronic assets can replace.
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I'm currently at about 90/10 stocks/bonds. Based on the information in this post (and some speculation on my part regarding the bond market), I'm thinking of moving to 100% stocks. I'm 26 and have a long investing path ahead of me.
If I make this transition, what is the best way to handle the transaction? I have some bond market funds in my IRA and some bond market funds in my taxable account (before I had any idea what I was doing). I'm just looking for any tips/advice. Should I sell all and immediately buy more VTSAX or are there other issues I should consider?
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To put some numbers to my statements on VPW, I've looked at all the available years, tested the standard 30 year retirement and a longer 70 year retirement, both with $1,000,000 in 100% stocks, and these factors remained consistent (all dollars inflation-adjusted):
- In total, there was a 65% chance that VPW never lowered your withdrawal amount below the 4% rule.
- The median withdrawal for these 65% of people was between $120k-$150k.
- ---> If you were part of the unlucky 35%, 92% of your retirement years remained above the 4% rule.
- ------> In the worst case scenario 8% of years where you fell short, you were typically about $5,000 short for the year. About $400-$500 a month.
- The times this happened were clustered around 1966 and 1929, where the 4% rule left you unable to feed yourself.
- The median withdrawal for these 35% of people, was between $50k-$70k.
This assumes Person #1's path, where they take the full possible withdrawal each year, and throw away 100% of withdrawn cash that's above and beyond their living expenses. No cash buffer, no keeping the unused portion invested (Person #2's path), none of that. The numbers above represent a subset of a subset of a worst case scenario (35%), on top of another worst case scenario (8%), on top of another worst case scenario (withdrawing the total amount each year, even if you don't need it, throwing away the excess cash each year so there's no buffer), and the result is $400-$500 a month.
If you aren't comfortable with that, VPW isn't for you.
IC - is the VPW 4% on the annual portfolio balance in the example above? Thanks.
I don't use a specific % when backtesting VPW. Download the VPW spreadsheet and see how it works:
https://www.bogleheads.org/wiki/Variable_percentage_withdrawal
If you're trying to use the VPW function on cfiresim.com, the number it's asking for is the "Internal Rate" number on the "Table" sheet of the VPW spreadsheet. Since my calculations are based off a 100% stock portfolio, the Internal Rate is 5%.
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I think we're mostly on the same page here. Where we disagree is the last statement in bold. From what I can see, since Person B on average has less money over the long-run, they are in turn more fragile in the context of retiring early and living off their money for decades.
Yes, they're mitigating short-term sequence of returns risk (which is much easier for the average investor to see), but overall they're subjecting themselves to more risk of running out of money before they die.
Let's try some math and see if we can observe the phenomenom you describe in the historical record. Again, it is the downside tails I am interested in, not the averages where everything works fine for everybody.
SO... Assume both guys have $800k of net worth ex house, but one guy takes a 400k mortgage and the other guy doesn't (so Person A invests $1.2m in stocks and Person B only invests $800k). You can assume the house is worth 500k but that's not critical for this (Person A has 100k of equity while Person B has 500k of equity in the house). I paramaterized the cfiresim runs as follows: both have 30k of base spending that will inflation adjust . Person A also has 30k a year in fixed mortgage payments for 30 years that does not inflation adjust. Run the simulations for 40 years and make the asset allocation 100% stocks in line with the subject of this overall thread. So Person A starts with 1.2m of invested assets and Person B starts with 800k. You need to add non inflation adjusting extra spending for the first 30 years for Person A to capture the mortgage. Results:
Person A (with mortgage):
Average ending wealth: $4.5m
Success rate: 90%
Lowest dip: ($5.5m)
Fifth lowest dip: ($4.5m)
Vintages with wipe outs or near wipeout: 1906, 1929-30, 1937, 1965-69
Person B (without mortgage):
Average ending wealth: $4.1m
Success rate: 93%
Lowest dip: ($0.6m)
Fifth lowest dip: (0.3m)
Vintages with wipe outs or near wipeout: Basically the same as Person A except for 1937
As expected, average wealth is higher for Person A. Interestingly success rates are similar. But dig one layer deeper and look at the scariest dips (i.e. the risks at the margins). While both have high success rates, when things go really shitty for the leveraged investor things can get much uglier (just like they can much rosier on the upside). At least in the historical record Person A can end up wiped out and then some. The only time Person B gets decimated they probably could have lived off their home equity in the last years. I'm sure you can get different results by playing with the parameters etc. but I'm concerned about the dips not the averages and I'm also starting with a low WR so keep those assumptions intact in your runs. Basic takeaway--leverage exacerbates dips.
Statistics are one thing, but actually walking through the historical periods and seeing what would happen brings it alive for me. So I think it's illuminating to look even closer at the particular times in history when wipe outs occurred and how our competing Persons did--
The worst runs for Person A happens in the 1929 vintage, the classic depression scenario. By 1942, 14 years after early retirement, Person A is basically out of money. If they can somehow keep borrowing they'd be in the hole to the tune of $5m by the end of the run. Ouch. How is Person B doing in 1942? 300k in net worth, so down over 50% from the 800k original. Not great. But even without supplementation Person B limps along and only runs out of money in 1962, fully 20 years after Person A! Both Person A and Person B score as 1929 vintage failures in the run, but Person B went broke after 14 years whereas Person B survived just fine for 34 years. That's a big difference.
Person A also had a sucky time with the 1906 vintage, going bust after 24 years and ending the 40 years in the hole to the tune of 800k. How did Person B do? This also scores as a failure for B, but he doesn't run out of money until 1945, 39 years into the 40 year run and he ends the run in the hole to the tune of -61k. 1906 scores as a failure for both Person A and Person B but these are very different results in my view.
Vintage 1966 sucked big. How did our two guys do? This was the worst run for my friend Mr. B and he ends in the hole to the tune of 600k, running out of money in 1993, 27 years into the run. Ouch. Did A fare better? Nope. Worse as usual. A ran out of money in 1990 and ended the run in the hole to the tune of $1m.
How about 1937, a vintage that some people might compare in terms of stage of cycle and policy to today (like say Ray Dalio). This was a near miss for Person A, who ends the run with only 28k in assets. Person B? Not a near miss--he ends with $651k inflation adjusted, or 81% of his initial value.
Does going through the actual sucky periods (1906, 1929, 1937, and 1966) and illustrating how much scarier it is to be Person A in those periods help you at all to see why leverage can increase risk? I'm sure you can find examples of the counter-phenomenon you cite (early growth protecting Person A from a crisis down the road), but they're not coming out in this strawman, at least not when it counts. I know that all this is sensitive to a variety of assumptions and circumstances, but studies have typically shown that the most risk is in the early returns not the later ones and this seems to bear that out. In those scenarios Person A gets hit harder because that is when they have the most leverage.
Of course leverage becomes more attractive as interest rates go down. You can get a significantly cheaper mortgage right now then in any of these precedential periods (where the rate on a 30 year fixed typically would have been more like 5-7%). But leverage also becomes less attractive as expected returns come down. And those two things are correlated. Leverage is probably at its potential worst when the risks of a big sustained drop are at their highest. So if you have any reason to believe risks are increased to the downside at your time of retirement (high schiller P/E's, decreasing ammunition for fiscal and monetary support, declining growth rates, exploding debt levels) that might play into your thinking. But at the end of the day there is a risk and return tradeoff that you need to make for yourself.
Great analysis!
Interestingly, the numbers in your example come out pretty similar to a 100/0 vs 67/33 stock/bond comparison. In other words, if Person B put their $400k in Bonds instead of a mortgage, they last just about as long during the catastrophe scenarios.
I know you don't want to nit-pick the details of your example too much, but I feel the need to make a few points on it:
- In the first year person A is withdrawing $60,000 in expenses from a $1,200,000 portfolio (5% withdrawal rate)
- In the first year person B is withdrawing $30,000 in expenses from an $800,000 portfolio (3.75% withdrawal rate)
- According to the Amortization Schedule Calculator, mortgage interest rates would have to be 6.5% for their mortgage payment to be $30,000 a year on a $400,000 house:
(http://i.imgur.com/Ei5sUjC.png)
You're essentially taking $400,000 of Person B's portfolio, and swapping it out for an asset with a guaranteed 6.5% return, at the exact moment that stocks start performing poorly.
Considering the above, the results aren't surprising. I wouldn't get a mortgage at 6.5% if I could pay cash either :)
That said, your post highlights a main point of this thread. Blindly withdrawing expense needs from a portfolio can lead to ruin. Your portfolio doesn't care what your expense needs are, so your withdrawals shouldn't be based on your expense needs. I think it's important to be flexible and I'm careful not to confuse retirement expense needs with withdrawal amount. Expense needs are part of budgeting. withdrawal amount is like an income.
If person A and person B in your example were using VPW, they quickly would've realized they were in trouble. Their income would've dropped below their expense needs, forcing them to react:
- Maybe they get a part-time job to make up the difference. I have tons of friends who decided to learn photography. Within a month they were booking paid gigs. Two paid gigs a month, as a beginner doing something they love, is enough to bring you from a 4% withdrawal rate, to 3% on a $1,000,000 portfolio.
- Maybe they realize they can't actually afford that $400,000 house, and down-size or move to a cheaper area.
They have a few options, but either way they are forced to react. With the 4% rule, or the *expense-needs based* withdrawal method from your example, people can be led into a false sense of security. They might stay in that $400,000 house for years, or decades, only to realize when they're broke that they actually couldn't afford it.
In short, if you're focusing on the downside tails, asset allocation is important, but withdrawal method can have just as big an impact. Discovering VPW removed a big hurdle of 100% stocks for me. The fear of portfolio failure is gone, as VPW cannot fail.
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Maybe they get a part-time job to make up the difference. I have tons of friends who decided to learn photography. Within a month they were booking paid gigs. Two paid gigs a month, as a beginner doing something they love, is enough to bring you from a 4% withdrawal rate, to 3% on a $1,000,000 portfolio.
Do you think finding (and getting hired for) multiple jobs per month that pay you in excess of $400 per month each, as a beginner (with no previous client base for referrals, no marketing, etc.) is a realistic scenario, or more of a fluke?
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Maybe they get a part-time job to make up the difference. I have tons of friends who decided to learn photography. Within a month they were booking paid gigs. Two paid gigs a month, as a beginner doing something they love, is enough to bring you from a 4% withdrawal rate, to 3% on a $1,000,000 portfolio.
Do you think finding (and getting hired for) multiple jobs per month that pay you in excess of $400 per month each, as a beginner (with no previous client base for referrals, no marketing, etc.) is a realistic scenario, or more of a fluke?
I've seen it happen enough times that it doesn't seem like a fluke to me. Let's not focus on this specific example. Maybe it's different elsewhere, but earning $10,000 a year with a side-gig, especially when you're not tied down by the stress/timesink of a job, just doesn't seem to difficult to me ¯\_(ツ)_/¯
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Maybe. Maybe not. Maybe they don't want to. Adding it in as a backup plan D for some people is fine. Assuming it will be the case as part of your withdrawal strategy... well, I personally wouldn't. I'd prefer a more robust model that didn't need additional inputs, nor require me to drastically change my spending year to year.
YMMV. :)
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Maybe. Maybe not. Maybe they don't want to. Adding it in as a backup plan D for some people is fine. Assuming it will be the case as part of your withdrawal strategy... well, I personally wouldn't. I'd prefer a more robust model that didn't need additional inputs, nor require me to drastically change my spending year to year.
Most people using VPW with 100% stocks will never have to lower expenses, or get a part-time gig. If you pick an unlucky year to retire, instead of face a portfolio-wipe, you'll have to reduce expenses or spend 8% of your retirement years working a side-gig for typically about $5000 a year. That's backup-plan territory to me.
YMMV. :)
(http://s.quickmeme.com/img/88/88d7d49de5f442a92c73a61befc3f19ed7edbddba8a8efe853824a40f7f5ed36.jpg)
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The fear of portfolio failure is gone, as VPW cannot fail.
To be precise, VPW cannot fail by running out of money but it definitely can fail by not allowing enough of a withdrawal to support your expenses. But I hear what you're saying and appreciate that you have a plan in place for what you will do if that happens.
I don't use a specific % when backtesting VPW. Download the VPW spreadsheet and see how it works:
https://www.bogleheads.org/wiki/Variable_percentage_withdrawal
True -- the VPW calculations are all automatic and output the allowable WR for the year. However, one interesting thing I learned about VPW that may be particularly pertinent to people here is that for very early retirees it behaves almost exactly like a constant % withdrawal (where you simply withdraw X% of the portfolio value every year) for a large portion of retirement. Play with this (https://portfoliocharts.com/portfolio/retirement-spending/) for a while and you'll see what I mean. The VPW ramping magic really doesn't kick in until you get closer to a more traditional retirement age.
But that's just an observation and not a critique. I'm happy you've found a method that gives you confidence in your plan.
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Maybe they get a part-time job to make up the difference. I have tons of friends who decided to learn photography. Within a month they were booking paid gigs. Two paid gigs a month, as a beginner doing something they love, is enough to bring you from a 4% withdrawal rate, to 3% on a $1,000,000 portfolio.
Do you think finding (and getting hired for) multiple jobs per month that pay you in excess of $400 per month each, as a beginner (with no previous client base for referrals, no marketing, etc.) is a realistic scenario, or more of a fluke?
I've seen it happen enough times that it doesn't seem like a fluke to me. Let's not focus on this specific example. Maybe it's different elsewhere, but earning $10,000 a year with a side-gig, especially when you're not tied down by the stress/timesink of a job, just doesn't seem to difficult to me ¯\_(ツ)_/¯
And on the plus side, if they can do this well to start, their prospects probably look even better in the future as they do build that portfolio/client base/referral base.
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Most people using VPW with 100% stocks will never have to lower expenses, or get a part-time gig. If you pick an unlucky year to retire, instead of face a portfolio-wipe, you'll have to reduce expenses or spend 8% of your retirement years working a side-gig for typically about $5000 a year. That's backup-plan territory to me.
Folks using a 4% SWR plan will [likely] do the same thing if they face some serious headwinds - especially early on. At least everyone that I have chatted with has both some flexibility in annual spending and some side gig plans should they need to work. I haven't talked to anyone who plans on taking out 4%/yr of the initial portfolio value [adjusted for inflation] with no changes regardless of market performance. That essentially means they are using a variable withdrawal rate, but not one that's highly structured.
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Most people using VPW with 100% stocks will never have to lower expenses, or get a part-time gig. If you pick an unlucky year to retire, instead of face a portfolio-wipe, you'll have to reduce expenses or spend 8% of your retirement years working a side-gig for typically about $5000 a year. That's backup-plan territory to me.
Folks using a 4% SWR plan will [likely] do the same thing if they face some serious headwinds - especially early on. At least everyone that I have chatted with has both some flexibility in annual spending and some side gig plans should they need to work. I haven't talked to anyone who plans on taking out 4%/yr of the initial portfolio value [adjusted for inflation] with no changes regardless of market performance. That essentially means they are using a variable withdrawal rate, but not one that's highly structured.
Agreed. I think that's much more typical, and much more realistic.
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Most people using VPW with 100% stocks will never have to lower expenses, or get a part-time gig. If you pick an unlucky year to retire, instead of face a portfolio-wipe, you'll have to reduce expenses or spend 8% of your retirement years working a side-gig for typically about $5000 a year. That's backup-plan territory to me.
Folks using a 4% SWR plan will [likely] do the same thing if they face some serious headwinds - especially early on. At least everyone that I have chatted with has both some flexibility in annual spending and some side gig plans should they need to work. I haven't talked to anyone who plans on taking out 4%/yr of the initial portfolio value [adjusted for inflation] with no changes regardless of market performance. That essentially means they are using a variable withdrawal rate, but not one that's highly structured.
Agreed. I think that's much more typical, and much more realistic.
I think Interest Compound was suggesting that VPW gives you an early warning better than 4% WR. What do you guys consider a serious headwind?
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I love this method b/c i'm always looking for ways to make money on the side anyways plus my wife is a photographer. so when we FIRE we will likley just be doing things we already love to do. i can bring in around 10k a year pretty easy just buying and reselling things like tickets. and one wedding is worth 2-3k for my wife.
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Folks using a 4% SWR plan will [likely] do the same thing if they face some serious headwinds - especially early on. At least everyone that I have chatted with has both some flexibility in annual spending and some side gig plans should they need to work. I haven't talked to anyone who plans on taking out 4%/yr of the initial portfolio value [adjusted for inflation] with no changes regardless of market performance. That essentially means they are using a variable withdrawal rate, but not one that's highly structured.
Agreed. I think that's much more typical, and much more realistic.
I think Interest Compound was suggesting that VPW gives you an early warning better than 4% WR. What do you guys consider a serious headwind?
The warning is just that your portfolio dropped a lot.
VPW telling you to cut your budget by ridiculous amounts is unrealistic, IMO, based on what I'd guess the percent of most ER's budget is "essential."
In other words, you see the market is down, and you cut your spending where you can, or maybe earn a bit more. That's realistic, and what almost anyone would do. Following a formulaic "4% increase with inflation" is as unlikely as following a formulaic "VPW %, drop your spending by 30% this year" or whatever. You'll tighten where you can, even if it means your spending that year may be 5% or whatever. And if it's still down the next year, you keep the belt tight. Maybe you loosen it once the markets rise back up and you're near a 4%.
Pretty much everyone will have a variable spend in FIRE--these aren't spherical withdrawals in a vacuum. In the real world, spending varies year-to-year, and one is likely to cut back if they see their portfolio diving. But the crazy swings in budget that VPW has is unrealistic, to me.
Hope that clarifies on what you were asking. :)
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Most people using VPW with 100% stocks will never have to lower expenses, or get a part-time gig. If you pick an unlucky year to retire, instead of face a portfolio-wipe, you'll have to reduce expenses or spend 8% of your retirement years working a side-gig for typically about $5000 a year. That's backup-plan territory to me.
Folks using a 4% SWR plan will [likely] do the same thing if they face some serious headwinds - especially early on. At least everyone that I have chatted with has both some flexibility in annual spending and some side gig plans should they need to work. I haven't talked to anyone who plans on taking out 4%/yr of the initial portfolio value [adjusted for inflation] with no changes regardless of market performance. That essentially means they are using a variable withdrawal rate, but not one that's highly structured.
Agreed. I think that's much more typical, and much more realistic.
I think Interest Compound was suggesting that VPW gives you an early warning better than 4% WR. What do you guys consider a serious headwind?
Exactly. VPW is a rational solution to the SWR dillema (http://forum.mrmoneymustache.com/post-fire/playbook-on-down-marketsportfolio-steps/): Markets went down a lot so should I reduce my withdrawals? By how much? Markets went up a lot and I need to buy a car, can I increase my withdrawals? By how much? VPW provides a mathematical answer that will protect the portfolio from ruin.
The 4% rule, in contrast, doesn't provide any early warning or guidance for these questions. It doesn't even attempt to.
The argument against VPW seems to be,
- "Well I'd be making these decisions anyway, so why do I need a guide? If the 4% rule tells me I can withdrawal $45k this year, but I feel like the market isn't doing well, I'll just try my best to withdrawal less. That's preferable to VPW explicitly telling me this year's safe withdrawal is $35k, that's unreasonable!"
If I'm going to ignore the recommendation anyway, I'd rather my baseline target be somewhat intelligent (guaranteed not to fail) and in the ballpark of where I need to be:
- "It's Jan 1, and my guaranteed-not-to-fail safe withdrawal based on current market conditions and my age (how long I need the money to last) for this year is $35k, let's try our best to reach that. If it doesn't look like we can get there by reducing expenses alone, let's plan this year for our side-gig to bridge the gap."
Seems a lot better to me than:
- "It's Jan 1. I think the market is down enough that we should adjust our withdrawals. Our 4% rule withdrawal this year based on what my expenses were 5 years ago + inflation is $45k. I'm not sure where we need to be, so let's tighten where we can."
If you're more comfortable with the latter, that's fine :) More options for everybody :D
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I think Interest Compound was suggesting that VPW gives you an early warning better than 4% WR. What do you guys consider a serious headwind?
Just to be clear I've got nothing against the VPW plan IC is talking about. I'm still pretty focused on the saving phase of my plan and then I'll downshift to part-time work for a few years before I can FIRE so I figure that downshift period will provide me lots of time to determine my withdrawal strategy. I will definitely use some sort of variable withdrawal rate, but I don't know how formal the mechanism will be. It's possible I will decide to use VPW.
So what's a serious headwind?
Well to start with any year that my portfolio earns 4% + inflation I'll feel free to spend my full FIRE budget. Any year where I earn less than that I'll start to feel "encouraged" to spend less with the level of motivation commensurate with the performance of my portfolio.*** The longer the downturn and the greater the magnitude the more "motivated" I will be to reduce my spending.
I don't see a problem with the budget cuts proposed by the VPW method IC is talking about. And keep in mind when I say budget/spending cuts that really means cuts to the withdrawal from my portfolio. If I am sufficiently motivated I could work a little part-time to allow my spending to stay "normal".
*** - It seems like the main problem with FIRE plans is a bad start so if I get through the first 10 years in fine form I'll probably have so much money that further market drops won't affect my spending unless they are truly huge.
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I love this method b/c i'm always looking for ways to make money on the side anyways plus my wife is a photographer. so when we FIRE we will likley just be doing things we already love to do. i can bring in around 10k a year pretty easy just buying and reselling things like tickets. and one wedding is worth 2-3k for my wife.
Yea, I think a lot of people underestimate the amount of money they'll make once they're FIRE'd and have all the time in the world. I found this thread enlightening:
Post-FIRE folks: How many of you ended up earning from paying hobbies? (http://forum.mrmoneymustache.com/post-fire/post-fire-folks-how-many-of-you-ended-up-earning-from-paying-hobbies/msg1310470/#msg1310470)
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The argument against VPW seems to be,
- "Well I'd be making these decisions anyway, so why do I need a guide? If the 4% rule tells me I can withdrawal $45k this year, but I feel like the market isn't doing well, I'll just try my best to withdrawal less. That's preferable to VPW explicitly telling me this year's safe withdrawal is $35k, that's unreasonable!"
IMHO, the strongest argument against VPW is that the calculations do not account for your actual spending needs. It maximizes payouts in good years regardless of need and slashes them in bad years regardless of how it will affect your standard of living. For reference, to address the minimum spending problem the guy who invented VPW recommends using it only in conjunction with reliable base income including Social Security, pensions, and annuities to cover your basic expenses. But those options are not available for early retirees.
You address the same shortcoming with your willingness to earn more money in retirement when VPW does not support your needs. That's a perfectly reasonable solution and will work just fine. Saving more to build a buffer so that the worst-case historical outcomes still allow you to pay the bills is also a good option. But other people may have different views on how desirable or practical either of those options are for them personally, so I can understand why VPW is not for everybody.
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I love this method b/c i'm always looking for ways to make money on the side anyways plus my wife is a photographer. so when we FIRE we will likley just be doing things we already love to do. i can bring in around 10k a year pretty easy just buying and reselling things like tickets. and one wedding is worth 2-3k for my wife.
Yea, I think a lot of people underestimate the amount of money they'll make once they're FIRE'd and have all the time in the world. I found this thread enlightening:
Post-FIRE folks: How many of you ended up earning from paying hobbies? (http://forum.mrmoneymustache.com/post-fire/post-fire-folks-how-many-of-you-ended-up-earning-from-paying-hobbies/)
The sample size on that poll (currently 11) is much too small to draw any meaningful conclusions, sadly (aside from the other issues, like sample bias).
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Where did he go?
Hopefully (for his sake) off to enjoy FIRE, but hopefully (for our sake) he'll return and grace us with his presence once in a while.
He's back! :D
http://forum.mrmoneymustache.com/share-your-badassity/my-secret-and-successful-journey-to-making-my-own-clothes/msg1313230/#msg1313230
And only one post away from 1000! Knowing him, it will be spectacular.
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Adding that pressure will make him feel like it needs to be, and deter him from posting.
Feel free to post anything, skyrefuge--round numbers have zero real significance :P
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The argument against VPW seems to be,
- "Well I'd be making these decisions anyway, so why do I need a guide? If the 4% rule tells me I can withdrawal $45k this year, but I feel like the market isn't doing well, I'll just try my best to withdrawal less. That's preferable to VPW explicitly telling me this year's safe withdrawal is $35k, that's unreasonable!"
IMHO, the strongest argument against VPW is that the calculations do not account for your actual spending needs. It maximizes payouts in good years regardless of need and slashes them in bad years regardless of how it will affect your standard of living. For reference, to address the minimum spending problem the guy who invented VPW recommends using it only in conjunction with reliable base income including Social Security, pensions, and annuities to cover your basic expenses. But those options are not available for early retirees.
You address the same shortcoming with your willingness to earn more money in retirement when VPW does not support your needs. That's a perfectly reasonable solution and will work just fine. Saving more to build a buffer so that the worst-case historical outcomes still allow you to pay the bills is also a good option. But other people may have different views on how desirable or practical either of those options are for them personally, so I can understand why VPW is not for everybody.
Thank you for sharing this. There are many ways to structure FIRE: I don't think there is a right way or a wrong way, and discussing the options, and the pros and cons of each option, is very helpful.
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The argument against VPW seems to be,
- "Well I'd be making these decisions anyway, so why do I need a guide? If the 4% rule tells me I can withdrawal $45k this year, but I feel like the market isn't doing well, I'll just try my best to withdrawal less. That's preferable to VPW explicitly telling me this year's safe withdrawal is $35k, that's unreasonable!"
IMHO, the strongest argument against VPW is that the calculations do not account for your actual spending needs. It maximizes payouts in good years regardless of need and slashes them in bad years regardless of how it will affect your standard of living. For reference, to address the minimum spending problem the guy who invented VPW recommends using it only in conjunction with reliable base income including Social Security, pensions, and annuities to cover your basic expenses. But those options are not available for early retirees.
You address the same shortcoming with your willingness to earn more money in retirement when VPW does not support your needs. That's a perfectly reasonable solution and will work just fine. Saving more to build a buffer so that the worst-case historical outcomes still allow you to pay the bills is also a good option. But other people may have different views on how desirable or practical either of those options are for them personally, so I can understand why VPW is not for everybody.
I like the idea of a VPW however I agree with your point. The variability in your spending is more likely to do with needs. For instance our spending is fairly stable however there are one off items like purchasing a car or painting the house that we will be hit with at certain times. We can delay spending on those items in most circumstances but we wouldn't spend extra simply because the markets go up.
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Maybe they get a part-time job to make up the difference. I have tons of friends who decided to learn photography. Within a month they were booking paid gigs. Two paid gigs a month, as a beginner doing something they love, is enough to bring you from a 4% withdrawal rate, to 3% on a $1,000,000 portfolio.
Do you think finding (and getting hired for) multiple jobs per month that pay you in excess of $400 per month each, as a beginner (with no previous client base for referrals, no marketing, etc.) is a realistic scenario, or more of a fluke?
I've seen it happen enough times that it doesn't seem like a fluke to me. Let's not focus on this specific example. Maybe it's different elsewhere, but earning $10,000 a year with a side-gig, especially when you're not tied down by the stress/timesink of a job, just doesn't seem to difficult to me ¯\_(ツ)_/¯
Hah! had to laugh at this. I've hung around enough photography forums where even pros with decade+ experience find it hard to get people to pay. "I'll just do it myself on my iphone, it's good enough?!". Or if people somehow are willing to pay for photos they think they should be nearly free, since cameras are everywhere and anyone can do it. People don't see quality photos from crap if it slapped them in the face so they're ok paying some starving liberal arts barrista $50 to spend 12 hours shooting their wedding. Hard to think of any less profitable side-gig!
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Maybe they get a part-time job to make up the difference. I have tons of friends who decided to learn photography. Within a month they were booking paid gigs. Two paid gigs a month, as a beginner doing something they love, is enough to bring you from a 4% withdrawal rate, to 3% on a $1,000,000 portfolio.
Do you think finding (and getting hired for) multiple jobs per month that pay you in excess of $400 per month each, as a beginner (with no previous client base for referrals, no marketing, etc.) is a realistic scenario, or more of a fluke?
I've seen it happen enough times that it doesn't seem like a fluke to me. Let's not focus on this specific example. Maybe it's different elsewhere, but earning $10,000 a year with a side-gig, especially when you're not tied down by the stress/timesink of a job, just doesn't seem to difficult to me ¯\_(ツ)_/¯
Hah! had to laugh at this. I've hung around enough photography forums where even pros with decade+ experience find it hard to get people to pay. "I'll just do it myself on my iphone, it's good enough?!". Or if people somehow are willing to pay for photos they think they should be nearly free, since cameras are everywhere and anyone can do it. People don't see quality photos from crap if it slapped them in the face so they're ok paying some starving liberal arts barrista $50 to spend 12 hours shooting their wedding. Hard to think of any less profitable side-gig!
Hey, thanks for reminding me! While I haven't done or tried to get any photography jobs since I quit over 7 years ago, I forgot to reply to a voicemail I got last week offering me a $150/hr photo gig.
¯\_(ツ)_/¯
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Maybe they get a part-time job to make up the difference. I have tons of friends who decided to learn photography. Within a month they were booking paid gigs. Two paid gigs a month, as a beginner doing something they love, is enough to bring you from a 4% withdrawal rate, to 3% on a $1,000,000 portfolio.
Do you think finding (and getting hired for) multiple jobs per month that pay you in excess of $400 per month each, as a beginner (with no previous client base for referrals, no marketing, etc.) is a realistic scenario, or more of a fluke?
I've seen it happen enough times that it doesn't seem like a fluke to me. Let's not focus on this specific example. Maybe it's different elsewhere, but earning $10,000 a year with a side-gig, especially when you're not tied down by the stress/timesink of a job, just doesn't seem to difficult to me ¯\_(ツ)_/¯
Hah! had to laugh at this. I've hung around enough photography forums where even pros with decade+ experience find it hard to get people to pay. "I'll just do it myself on my iphone, it's good enough?!". Or if people somehow are willing to pay for photos they think they should be nearly free, since cameras are everywhere and anyone can do it. People don't see quality photos from crap if it slapped them in the face so they're ok paying some starving liberal arts barrista $50 to spend 12 hours shooting their wedding. Hard to think of any less profitable side-gig!
Hey, thanks for reminding me! While I haven't done or tried to get any photography jobs since I quit over 7 years ago, I forgot to reply to a voicemail I got last week offering me a $150/hr photo gig.
¯\_(ツ)_/¯
uhm, ok. I guess you're one of the few. Personally I don't see much market except on the extreme high end and extreme low end (walmart photo studio type, and stock photos that sell for pennies now). I have thousands tied up in photo gear but nobody would pay me for anything. Like I said; "my iphone can do it" mentality. If you have $10k+ in gear then maybe you can get something people will pay for?
Though to be fair my kid's daycare had picture day and once we paid $15 for a photo which was the worst I've ever been charged for! Lighting, exposure and background were awful! I could actually have done better with my phone. I'd be embarrassed to charge for that. So there's a market..? Get people to pay until they figure out how terrible I am? Not very sustainable..
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I bought a $700 lens, a $500 lens, a $200 flash, and a $400 low-end Canon body.
Let's not focus too much on any one particular side-gig. There are lots of ways to bring in $400-$500 a month and get this done. And if you think you can't...work longer. :)
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I feel you, Scandium. I know a ton of people who have tried to make a photography side-gig work, with very limited success.
Even besides the "my iPhone works," any random person can throw a few thousand bucks at a DSLR and lens, put themselves behind the camera, and press a button.
No, it's not the same as a professional. The person matters WAY more than the equipment. But most people don't know that. And so getting paid for any photography is really difficult (especially anything artistic, nature, etc.--photography for getting paid for your "time," e.g. a wedding, is a bit easier, though there's still lots of competition).
I do agree with IC that there are ways to bring in money. I also agree with you, that photography is one of the less likely ones.
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Perhaps developing a side gig business in addition to one's regular job before one goes FIRE would make sense, because then the side gig can continue after retiring from the main job.
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Perhaps developing a side gig business in addition to one's regular job before one goes FIRE would make sense, because then the side gig can continue after retiring from the main job.
That's what I did. But I did it wrong. The side gig income is now higher than my expenses!
¯\_(ツ)_/¯
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It's obvious you put a lot of work into this post, so thanks.
I remain skeptical of basing any retirement decisions on the VPW, as per our discussion in the other thread on it.
I go back and forth on 100% stocks (or maybe 90/10 at the most) versus a much more diversified (including gold, etc., more PP based). I personally wouldn't go 60/40 or anything like that--high stocks, or high diversification into various assets, but just a middling stocks/bonds seems suboptimal to both of those options to me.
When you go looking at gold, remember that the vast majority of (US dollar denominated) gold charts start at what is darn close to an 800 year low price (based on London) and are the point where decades of forced price depression was released.
To me, that's a huge artificial boost to reported returns on gold.
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Perhaps developing a side gig business in addition to one's regular job before one goes FIRE would make sense, because then the side gig can continue after retiring from the main job.
That's what I did. But I did it wrong. The side gig income is now higher than my expenses!
¯\_(ツ)_/¯
We will alert the Retirement Police!
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It's obvious you put a lot of work into this post, so thanks.
I remain skeptical of basing any retirement decisions on the VPW, as per our discussion in the other thread on it.
I go back and forth on 100% stocks (or maybe 90/10 at the most) versus a much more diversified (including gold, etc., more PP based). I personally wouldn't go 60/40 or anything like that--high stocks, or high diversification into various assets, but just a middling stocks/bonds seems suboptimal to both of those options to me.
When you go looking at gold, remember that the vast majority of (US dollar denominated) gold charts start at what is darn close to an 800 year low price (based on London) and are the point where decades of forced price depression was released.
To me, that's a huge artificial boost to reported returns on gold.
Sure.
I'd probably treat it as an uncorrelated, 0% real return (i.e. keeps pace with inflation) asset.
I hold no gold at the moment.
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One thing that puzzles me no end is when people have debt (mortgage) and own debt (bonds). The math seldom works out in that case.
A mortgage is not easy to rebalance in and out of.
HELOC.
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Adding that pressure will make him feel like it needs to be, and deter him from posting.
Feel free to post anything, skyrefuge--round numbers have zero real significance :P
Or is that real zero significance?
:D
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One thing that puzzles me no end is when people have debt (mortgage) and own debt (bonds). The math seldom works out in that case.
A mortgage is not easy to rebalance in and out of.
HELOC.
A financial instrument of our times that hasn't even shown itself to be reliable over the past decade.
Use it while you can, definitely, but don't build a plan on it existing when you need it.
Adding that pressure will make him feel like it needs to be, and deter him from posting.
Feel free to post anything, skyrefuge--round numbers have zero real significance :P
Or is that real zero significance?
:D
Hah! Touche. :D
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One thing that puzzles me no end is when people have debt (mortgage) and own debt (bonds). The math seldom works out in that case.
A mortgage is not easy to rebalance in and out of.
HELOC.
A financial instrument of our times that hasn't even shown itself to be reliable over the past decade.
Use it while you can, definitely, but don't build a plan on it existing when you need it.
Oh, sure.
No guarantees there - I first used one around 2002 as a no-cost alternative to a refi.