Author Topic: Stop worrying about the 4% rule  (Read 418524 times)

pecunia

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Re: Stop worrying about the 4% rule
« Reply #1500 on: June 29, 2018, 09:42:53 AM »
Mr. Green:
Quote
The thing I think most working people don't understand is just how easy it is to be oblivious if you choose to be. I have no compelling reason to remember what day of the week it is, what the Dow Jones number is, or what is going on in the news. I'm doing my FIRE thing and it's real easy to get lost in living your life.

That sounds good and the picture looks good.  I guess if I wasn't working we would have the freedom to hike for an extended period in some place with magnificent vistas.  It would be a place 4% closer to heaven.

tyort1

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Re: Stop worrying about the 4% rule
« Reply #1501 on: June 29, 2018, 10:52:20 AM »
I'm not saying that it's actionable for everyone (like if you are just getting started building a portfolio), and certainly not the same action for everyone, but when you are ahead of the game it is prudent to dial back exposure to risk and volatility.  Given the exceptional returns we have experienced since 2009, high stock exposure and 4% SWR is not my best bet.  Everyone here seems to think they have high risk tolerance, but I'll be interested to see how they feel in the middle of a bear market, especially if they are retired.  Fortunately I only need 2 - 3% WR currently, but that assumes inflation stays tame until I get to Medicare and SS.  I will probably ER in a year or two depending mostly on circumstances outside my finances (other than healthcare, I might still work to have access to my company plan).

Anyway, Financial Samurai has posted a bit about this recently (https://www.financialsamurai.com/ideal-retirement-scenario-conservative-returns-and-a-steady-income/).

So the answer to the possibility of stocks "maybe" having a low return is to shift your assets to something that's guaranteed to have a low return (bonds)?  Uhm, what?

BUT, having said that, my take is that during accumulation you generally are able to deal with market dips a lot more easily.  In retirement that changes.  But I have a few hedges that I'm going to use to deal with what I believe is the biggest threat to FIRE: low or negative returns during the first 10 years of FIRE. 

Like Mr. Green, I'll have 2 years cash to live on if there's a massive dip.  I'll also have a paid off house, so if S really does HTF, at least I don't have a mortgage payment and my house is not at risk.  I'm also over-estimating my FIRE budget a bit, mainly to give myself more flexibility and wiggle room from year to year.  And I won't be 100% stocks, it's 80/20 for me, and even the stocks are split between US and World. 

Eric

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Re: Stop worrying about the 4% rule
« Reply #1502 on: June 29, 2018, 01:13:23 PM »
This is one of the big reasons why I'm keeping a year or two of my living expenses in cash.

Like Mr. Green, I'll have 2 years cash to live on if there's a massive dip.  I'll also have a paid off house, so if S really does HTF, at least I don't have a mortgage payment and my house is not at risk.  I'm also over-estimating my FIRE budget a bit, mainly to give myself more flexibility and wiggle room from year to year.  And I won't be 100% stocks, it's 80/20 for me, and even the stocks are split between US and World.

How does this cash allocation factor into your overall AA?  I'm assuming that this cash in addition to your invested portfolio from which you would withdrawal your 4%, and not part of your 4% calc, right?

So couldn't you just re-frame this as using a lower WR?  Portfolio + cash = total portfolio = WR < 4%.

(not trying to discourage your plans, but it seems a bit disingenuous to defend the 4% rule while also using a lower WR.  this is what's happening here, right?)

tyort1

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Re: Stop worrying about the 4% rule
« Reply #1503 on: June 29, 2018, 01:32:59 PM »
This is one of the big reasons why I'm keeping a year or two of my living expenses in cash.

Like Mr. Green, I'll have 2 years cash to live on if there's a massive dip.  I'll also have a paid off house, so if S really does HTF, at least I don't have a mortgage payment and my house is not at risk.  I'm also over-estimating my FIRE budget a bit, mainly to give myself more flexibility and wiggle room from year to year.  And I won't be 100% stocks, it's 80/20 for me, and even the stocks are split between US and World.

How does this cash allocation factor into your overall AA?  I'm assuming that this cash in addition to your invested portfolio from which you would withdrawal your 4%, and not part of your 4% calc, right?

So couldn't you just re-frame this as using a lower WR?  Portfolio + cash = total portfolio = WR < 4%.

(not trying to discourage your plans, but it seems a bit disingenuous to defend the 4% rule while also using a lower WR.  this is what's happening here, right?)

True.  Although I tend to think of the cash more as an emergency fund.  Emergency funds are good to have. 

Mr. Green

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Re: Stop worrying about the 4% rule
« Reply #1504 on: June 29, 2018, 03:34:40 PM »
This is one of the big reasons why I'm keeping a year or two of my living expenses in cash.

Like Mr. Green, I'll have 2 years cash to live on if there's a massive dip.  I'll also have a paid off house, so if S really does HTF, at least I don't have a mortgage payment and my house is not at risk.  I'm also over-estimating my FIRE budget a bit, mainly to give myself more flexibility and wiggle room from year to year.  And I won't be 100% stocks, it's 80/20 for me, and even the stocks are split between US and World.

How does this cash allocation factor into your overall AA?  I'm assuming that this cash in addition to your invested portfolio from which you would withdrawal your 4%, and not part of your 4% calc, right?

So couldn't you just re-frame this as using a lower WR?  Portfolio + cash = total portfolio = WR < 4%.

(not trying to discourage your plans, but it seems a bit disingenuous to defend the 4% rule while also using a lower WR.  this is what's happening here, right?)

True.  Although I tend to think of the cash more as an emergency fund.  Emergency funds are good to have.
The cash is part of my "fixed income", or bond allocation. However, the reality of our situation is that we probably won't hit a 4% WR because we just don't spend that much. We sold a property that we thought we'd build a house on so our stash is about 200k heavier than we planned for. We also have someone giving us 8k a year for a land lease so that's 8k less we have to pull out of the stash, though it may not run long term.

We had planned to spend 40k in FIRE, or 4% of $1 million, and this year our spending is on target for 36k. Though a true 4% WR for us has now become 58k with the unplanned income events.


PizzaSteve

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Re: Stop worrying about the 4% rule
« Reply #1506 on: June 29, 2018, 04:43:46 PM »
What do you all think of this:

https://www.msn.com/en-us/money/savingandinvesting/this-is-how-much-to-withdraw-from-your-retirement-savings/ar-AAzkdSm?li=BBnbfcN#image=1
A bit simplistic and not aimed at early retirees.

Main points.

1.  Tax advantaged retirement accounts have Minimum Distribution requirements.
2.  The minimum distributions are required, but might not be the best amount to take.
      2a.  Retirees might consider taking more than the minimum out, if they need it, since the minimum rate is very conservative
      2b.  Retirees might consider what rates of return they can expect, in their withdrawl assumptions, so their income is sustainable,
      2c.  Retirees might consider a flexible withdraw strategy that adjusts based on actual returns (less if returns are bad, more if returns are good and not just a fixed amount)
3.  You might want to consider developing an investment plan and budget to know what is best for you.
« Last Edit: June 29, 2018, 04:45:42 PM by PizzaSteve »

EscapeVelocity2020

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Re: Stop worrying about the 4% rule
« Reply #1507 on: June 29, 2018, 07:31:21 PM »
A few thoughts I got out of this -  having 2 years of WR in cash either means you have an effective SWR of 4.3% (if the cash is not part of your investments but you count it that way) or, more likely, a conservative 3.7% SWR (having 80k extra on a 1M portfolio spending 40k/yr, all nominal).

It's also easier to stop worrying about the 4% rule when you hit 50 and older due to being 'able' to hold a bond allocation, knowing all you have to do is get to 65 for Medicare and SS.  At 40 and younger, you both can and need to hold stocks to counterbalance longevity risk, but then you are exposed to sequence of return and inflation risk.

I'm still unsure about the 4% rule for ER's in the 40 - 50 age group.  In some cases bonds and cash will be prudent, but they still need to lean heavily on stocks.  I guess we will see, since this forum is going to be the hub for young ER's in a time of high PE's, except it still seems that most err on the side of caution around 4% and sub-50y.o. ER.  Not that there's anything wrong with that :)  still doing better than the Boomer generation.

Mr. Green

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Re: Stop worrying about the 4% rule
« Reply #1508 on: June 29, 2018, 09:04:38 PM »
A few thoughts I got out of this -  having 2 years of WR in cash either means you have an effective SWR of 4.3% (if the cash is not part of your investments but you count it that way) or, more likely, a conservative 3.7% SWR (having 80k extra on a 1M portfolio spending 40k/yr, all nominal).

It's also easier to stop worrying about the 4% rule when you hit 50 and older due to being 'able' to hold a bond allocation, knowing all you have to do is get to 65 for Medicare and SS.  At 40 and younger, you both can and need to hold stocks to counterbalance longevity risk, but then you are exposed to sequence of return and inflation risk.

I'm still unsure about the 4% rule for ER's in the 40 - 50 age group.  In some cases bonds and cash will be prudent, but they still need to lean heavily on stocks.  I guess we will see, since this forum is going to be the hub for young ER's in a time of high PE's, except it still seems that most err on the side of caution around 4% and sub-50y.o. ER.  Not that there's anything wrong with that :)  still doing better than the Boomer generation.
I created a blog that doesn't really get any traffic, more so I would have a record 30 years from now about how life turned out based on retiring early under the conditions that are advocated for here. I suppose by then the youngsters will either have a whole bunch of examples about what not to do in life or a whole lot more confidence pulling the trigger because there are so many well documented examples of success.

DreamFIRE

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Re: Stop worrying about the 4% rule
« Reply #1509 on: June 29, 2018, 10:11:27 PM »
It's also easier to stop worrying about the 4% rule when you hit 50 and older due to being 'able' to hold a bond allocation, knowing all you have to do is get to 65 for Medicare and SS.

Yes, the added SS benefits definitely help.  Full retirement age is 67, so you would take a cut in benefits if you started taking them early at 65.  Also, I wouldn't want to live on SS alone even starting benefits at FRA, so I want my stash to last past 65 and 67, although I have calculated I will be able to reduce my WR to 2% or less since SS will cover at least half.  So, with SS after 15 years of FIRE, cFireSIM gives me a 100% success rate based on expected expenses and desired discretionary spending.  Only real concern for me is ACA / healthcare.

maizeman

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Re: Stop worrying about the 4% rule
« Reply #1510 on: June 30, 2018, 11:15:29 AM »
Fortunately I only need 2 - 3% WR currently, but that assumes inflation stays tame until I get to Medicare and SS.

So I've been thinking a lot about why this topic generates so much sturm und drang. And I'd like to propose the following model:

1) Some disagreements about withdrawal rates are caused by lack of knowledge on one or both sides, and these discussions then to be highly productive.

2) Some differences in withdrawal rates are caused by differences in tolerance for risk or (perhaps more importantly) tolerance for uncertainty. These discussions are perhaps not as productive, but still seem to be interesting to both sides.

3) Some differences are caused by the sunk cost fallacy and tend to generate the most heated discussion for the least potential benefit.

With both the posters I've had the least productive interactions with on this forum (and EV I certainly don't put you in that camp!), it later emerged that both had worked many many years past when they could have retired and now had assets equal to 40-60x annual spending. When a person has put in those extra years of work, I'd imagine it really feels much better to be able to tell themselves that those extra years of work bought them additional safety and freedom from uncertainty.

So in these conversations, one side felt attacked by people who think they wasted years of their life, and the other side felt attacked by people who are trying to talk them into wasting years of their lives.

And what is to be gained? If I can convince a newbie who is aiming for a 2% WR that they can be comfortable with a 3.5% or 4% WR I may have helped in a little way to given them a few extra years to pursue whatever gives them happiness or meaning in life. If I convince a person who has already saved 50x their annual expenses that they didn't have to save that much.... it probably doesn't help them at all.

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1511 on: June 30, 2018, 11:42:38 AM »
And what is to be gained? If I can convince a newbie who is aiming for a 2% WR that they can be comfortable with a 3.5% or 4% WR I may have helped in a little way to given them a few extra years to pursue whatever gives them happiness or meaning in life. If I convince a person who has already saved 50x their annual expenses that they didn't have to save that much.... it probably doesn't help them at all.

Good points MM. The bolded text is why I continue to post in this thread. I'm not trying to convince someone already at 2% WR they made poor choices. As you note those decisions are made. But, I do think it's valuable to point out the opportunity costs and the other potential FIRE failure modes beyond going broke to folks who are still a ways away from a 4%WR. It's important to see beyond money and realize that at some point trading more of your life and your health for $$ you don't need increases your risk for FIRE failure.

It seems very common to overestimate the risk of running out of money once you get to a 4%WR with a modicum of FIRE plan flexibility and to underestimate the risk to your health and personal relationships by continuing to work full-time at the typical sedentary desk jobs most of us professionals have.
« Last Edit: June 30, 2018, 11:44:24 AM by Retire-Canada »

maizeman

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Re: Stop worrying about the 4% rule
« Reply #1512 on: June 30, 2018, 12:02:51 PM »
Yup, and I agree that is important work, RC. Keep fighting the good fight.

Mr. Green

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Re: Stop worrying about the 4% rule
« Reply #1513 on: June 30, 2018, 03:05:21 PM »
I can totally understand how someone with 40-60x annual expenses learning that 25x annual expenses is likely all they'd ever need could take it personally, like an attack. Like Retire-Canada, my participation is directed toward those still learning, or undecided. No good comes from telling someone they could have retired sooner. Hopefully those folks are able to let that go as the past being what it is. We could have retired years ago, easily in our mid-20s if we knew what we knew now but I'm not going to get hung up on that. Instead, I'm going to be grateful that we're in the position to enjoy many years of not working, and try to always take maximum advantage of the time I've been given. Knowing that statistically I have about a 1 in 5 chance of being dead by 65 helps keep things in perspective. Carpe diem, baby!

Monkey Uncle

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Re: Stop worrying about the 4% rule
« Reply #1514 on: June 30, 2018, 06:44:39 PM »
It seems very common to overestimate the risk of running out of money once you get to a 4%WR with a modicum of FIRE plan flexibility and to underestimate the risk to your health and personal relationships by continuing to work full-time at the typical sedentary desk jobs most of us professionals have.

I think it is very difficult to see the downside of continuing to work.  It's all you know, and you can't even imagine how much healthier you will be when you are no longer chained to a desk.  I'm 6 months FIREd now, and I'm amazed at how much less stress I feel, how much better I sleep, how much better my back feels, and how much girth I've lost.  I don't own a scale, but I'm somewhere between 2 and 3 belt notches skinnier, and I haven't even been trying to lose weight.

I probably could have pulled the plug somewhere between 12 and 18 months sooner than I did, but at the time all I could think about was "what if I don't really have enough?"  I mean, I'm glad I have the buffer that I built up, what with all the health care uncertainty in the U.S., but if I would have known just how much easier it is to stay healthy without the daily grind at the desk, I might have reconsidered that extra O and a half MY.

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1515 on: June 30, 2018, 07:11:35 PM »
I think it is very difficult to see the downside of continuing to work.  It's all you know, and you can't even imagine how much healthier you will be when you are no longer chained to a desk.  I'm 6 months FIREd now, and I'm amazed at how much less stress I feel, how much better I sleep, how much better my back feels, and how much girth I've lost.  I don't own a scale, but I'm somewhere between 2 and 3 belt notches skinnier, and I haven't even been trying to lose weight.

Yes you've hit the nail on the head. Having been programmed to work and consume your whole life how can you even rationally decide if working more is a good idea? You really don't have a basis to make the decision on and frankly it's always easier to stick with your programming than fight against it. So people will grasp for any number of OMY reasons even if the real reason is it's just scary to face a huge life change.

Let's look at it another way if I told you someone you cared about had a compulsive habit they were having difficulty stopping and that was harming them you'd be worried and want to support them to make the change. If it was drugs/smoking/gambling/overeating/etc... there would be no controversy and just about everyone here would agree that that person needed to change.

OTOH if the problem was work...particularly sedentary work suddenly there are all sorts of justifications for it to continue well past the point where an enormous amount of wealth has been accumulated. We look back and see smoking as the scourge of one generation, then sugar and I am fairly confident sedentary computer work will be the smoking of the current generation.

Just like smoking or sugar...work is not something that's easily given up...especially by the typical MMMer who is a professional and has so much of their personal identity wrapped up in the career. Just like smoking or sugar in any one moment the health risks are not obvious. We could all go smoke one pack of cigarettes or eat a dozen donuts and have no serious health impacts. Just like picturing one more day at our desks seems so trivial. But in all these cases decades of abuse takes a huge toll on our lives.

In the case of work it's worse than just our health that's being impacted it's also our personal relationships. If you ask a typical OMYer what's the most important thing in their lives hearing their wife/husband and kids would be a pretty common response. But, you have to wonder if you voluntarily choose to continue working 40-60hrs a week for money you don't need and once chores/sleep/non-quality time is accounted for only have maybe 20-30hrs for the family can you really say they are your priority? Personally I don't think so.

You can do the same calculations around your health and come to similar conclusions. After all time is the most precious resource any of us has so when you really want to know what some one cares about or prioritizes you can just look at where they allocate their time.
« Last Edit: July 01, 2018, 07:32:46 AM by Retire-Canada »

Monkey Uncle

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Re: Stop worrying about the 4% rule
« Reply #1516 on: July 01, 2018, 04:54:24 AM »
That's a great analogy, Retire-Canada.  I hadn't thought of it that way, but it makes sense to think of OMY as a detrimental habit that needs to be broken.

Malkynn

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Re: Stop worrying about the 4% rule
« Reply #1517 on: July 01, 2018, 06:12:55 AM »
I think it is very difficult to see the downside of continuing to work.  It's all you know, and you can't even imagine how much healthier you will be when you are no longer chained to a desk.  I'm 6 months FIREd now, and I'm amazed at how much less stress I feel, how much better I sleep, how much better my back feels, and how much girth I've lost.  I don't own a scale, but I'm somewhere between 2 and 3 belt notches skinnier, and I haven't even been trying to lose weight.

Yes you've hit the nail on the head. Having been programmed to work and consume your whole life how can you even rationally decide if working more is a good idea? You really don't have a basis to make the decision on and frankly it's always easier to stick with your programming than fight against it. So people will grasp for any number of OMY reasons even if the real reason is it's just scary to face a huge life change.

Let's look at it another way if I told you someone you cared about had a compulsive habit they were having difficulty stopping and that was harming them you'd be worried and want to support them to make the change. If it was drugs/smoking/gambling/overeating/etc... there would be no controversy and just about everyone here would agree that that person needed to change.

OTOH if the problem was work...particularly sedentary work suddenly there are all sorts of justifications for it to continue well past the point were an enormous amount of wealth has been accumulated. We look back and see smoking as the scourge of one generation, then sugar and I am fairly confident sedentary computer work will be the smoking of the current generation.

Just like smoking or sugar...work is not something that's easily given up...especially by the typical MMMer who is a professional and has so much of their personal identity wrapped up in the career. Just like smoking or sugar in any one moment the health risks are not obvious. We could all go smoke one pack of cigarettes or eat a dozen donuts and have no serious health impacts. Just like picturing one more day at our desks seems so trivial. But in all these cases decades of abuse takes a huge toll on our lives.

In the case of work it's worse than just our health that's being impacted it's also our personal relationships. If you ask a typical OMYer what's the most important thing in their lives hearing their wife/husband and kids would be a pretty common response. But, you have to wonder if you voluntarily choose to continue working 40-60hrs a week for money you don't need and once chores/sleep/non-quality time is accounted for only have maybe 20-30hrs for the family can you really say they are your priority? Personally I don't think so.

You can do the same calculations around your health and come to similar conclusions. After all time is the most precious resource any of us has so when you really want to know what some one cares about or prioritizes you can just look at where they allocate their time.

This is so true.

My old job was actually pretty sweet compared to how most of my colleagues typically have to work: less stress, higher pay, more freedom, etc...
Because I felt so grateful for my job, I subconsciously blinded myself to how bad it was. I knuckled down, handled all the shit, accepted the stress and bullshit as "just part of the job" and comfortably settled in to ride out the decade I would need to FIRE.

Then circumstance and injury took me out of the game, forced me to downshift, and motivated me to be a hell of a lot more demanding about how I choose to work. It was either that or my career was over. My doctor made that clear.

Now that it's been 2 years since I downshifted, only work part time and the way I want to, and focused on living my best life. It took leaving and learning to be happy to actually see how miserable and pathological my previous situation was. It was so bad for my well being and health and I was sitting there grateful for the abuses I was taking because other people had it worse.

It's so easy to get comfortable with the devil you know.

pecunia

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Re: Stop worrying about the 4% rule
« Reply #1518 on: July 01, 2018, 08:24:11 AM »
Quote
I'm 6 months FIREd now, and I'm amazed at how much less stress I feel, how much better I sleep, how much better my back feels, and how much girth I've lost.

I'm keeping this one in the back of my mind for reference.  I had thoughts of letting it go this year, but this little voice kept telling me just a little bit more.  They say when you hear voices, something is wrong.

boarder42

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Re: Stop worrying about the 4% rule
« Reply #1519 on: July 01, 2018, 08:27:10 AM »
Man. Thanks for these posts above. And also due to a conversation with a recent normal age retiree I think I have to go to 4-8s when my child is born. We have the money saved we don't need to work. It doesn't even delay our fire date at this point I need to go to 4-8s and stop worrying about the 6 figure bonuses I'll get in 2 years if I don't. Bc time is now more valuable than money and I need to make this step.

Malkynn

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Re: Stop worrying about the 4% rule
« Reply #1520 on: July 01, 2018, 01:18:36 PM »
Man. Thanks for these posts above. And also due to a conversation with a recent normal age retiree I think I have to go to 4-8s when my child is born. We have the money saved we don't need to work. It doesn't even delay our fire date at this point I need to go to 4-8s and stop worrying about the 6 figure bonuses I'll get in 2 years if I don't. Bc time is now more valuable than money and I need to make this step.

My quality of work has gone way up since I started working less, Iíve actually become a lot more profitable on a per-hour basis. That may not be the case for you, but itís been amazing for me.
Good luck. Too many people undervalue present day time and energy and make trade offs that donít actually work out in their favour, especially if it compromises their health and familyís wellbeing.

DreamFIRE

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Re: Stop worrying about the 4% rule
« Reply #1521 on: July 01, 2018, 02:29:30 PM »
My quality of work has gone way up since I started working less, Iíve actually become a lot more profitable on a per-hour basis. That may not be the case for you, but itís been amazing for me.
Good luck. Too many people undervalue present day time and energy and make trade offs that donít actually work out in their favour, especially if it compromises their health and familyís wellbeing.

Part time for me would be great.  I'm using vacation days almost every week for the rest of the summer, so it will feel like part time for a while.  If I could truly go part time after that, I would still be eligible for healthcare benefits if I worked at least 24 hours/wk.  The problem is that my position is budgeted for full time, and it's unique in that I do a lot of specialized IT work that no one else knows how to do, and I don't think part time will fly with my director, at least not for long.  And by merely mentioning my interest in going part time, it might be enough for them to have someone start training with me in fear that I might leave (and they would probably be proven right in less than a year).  That would be no surprise for them to have me start training someone else, whether a new or existing employee, because they had a second person in my position for over a year before he quit, and that was due to the workload.  That would suck to spend a lot of time training someone over the next year because I have my own peaceful office and am quite independent now, so I'm keeping the thought of part time work and FIRE close to the vest until much closer to my target date.  I'll decide then if I want to offer working part time.

boarder42

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Re: Stop worrying about the 4% rule
« Reply #1522 on: July 01, 2018, 02:59:23 PM »
Every job can be replaced we're all not as critical as we think we are. If you do good work the conversation is worth having

boarder42

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Re: Stop worrying about the 4% rule
« Reply #1523 on: July 01, 2018, 03:00:43 PM »
Man. Thanks for these posts above. And also due to a conversation with a recent normal age retiree I think I have to go to 4-8s when my child is born. We have the money saved we don't need to work. It doesn't even delay our fire date at this point I need to go to 4-8s and stop worrying about the 6 figure bonuses I'll get in 2 years if I don't. Bc time is now more valuable than money and I need to make this step.

My quality of work has gone way up since I started working less, Iíve actually become a lot more profitable on a per-hour basis. That may not be the case for you, but itís been amazing for me.
Good luck. Too many people undervalue present day time and energy and make trade offs that donít actually work out in their favour, especially if it compromises their health and familyís wellbeing.

I feel like the same will be true for me. Have to see how I like it. But a baby life event is the perfect time. My Dept manager is all about family 

DreamFIRE

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Re: Stop worrying about the 4% rule
« Reply #1524 on: July 01, 2018, 04:30:12 PM »
Every job can be replaced we're all not as critical as we think we are. If you do good work the conversation is worth having

Yes, and I plan to have that conversation in the spring if all goes well, at the same time I state my intentions that I will retire otherwise.  At that point, I know without a doubt they would have me start training someone and possibly ask if I would continue working part time for a while until I can get someone up to speed, and that's OK at that point.  I just don't want to have to deal with training someone while working full time as early as October through next spring.  That would totally suck for my last 8 months of work, even more so if I don't FIRE on schedule for some reason.  Things are pretty nice at work the way they are now, so I want things to continue that way for now.

The job is critical requiring 24/7 availability in that what I do much of the time, no other staff in my dept. can do, but that's not to say that I personally can't be replaced.  But someone has to do it, and there is a lot to learn, even for experienced people, as I know from working with the last co-worker with the same job title for over a year before he quit, he still had a lot to learn and wasn't nearly as efficient in accomplishing tasks and projects.  I've been working this position for over 17 years, which has of course advanced with more complexities over the years, and it's not something someone can just step in and take over in an instant with the same efficiency.  So, I think I would have a good shot of staying on part time, although maybe only a day or two instead of 24 hr/wk with benefits, and who knows for what duration, due to labor budget.  There's no guarantee they'll keep me on part time if I offer in October or afterwards, so I'm playing it close to the vest until next spring when the alternative will be to go ahead and FIRE completely.
« Last Edit: July 01, 2018, 04:40:42 PM by DreamFIRE »

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1525 on: July 01, 2018, 05:42:51 PM »
Part time for me would be great.  I'm using vacation days almost every week for the rest of the summer, so it will feel like part time for a while.  If I could truly go part time after that, I would still be eligible for healthcare benefits if I worked at least 24 hours/wk.  The problem is that my position is budgeted for full time, and it's unique in that I do a lot of specialized IT work that no one else knows how to do, and I don't think part time will fly with my director, at least not for long.  And by merely mentioning my interest in going part time, it might be enough for them to have someone start training with me in fear that I might leave (and they would probably be proven right in less than a year).  That would be no surprise for them to have me start training someone else, whether a new or existing employee, because they had a second person in my position for over a year before he quit, and that was due to the workload.  That would suck to spend a lot of time training someone over the next year because I have my own peaceful office and am quite independent now, so I'm keeping the thought of part time work and FIRE close to the vest until much closer to my target date.  I'll decide then if I want to offer working part time.

Can you work from home? Is it possible to agree to the full-time job responsibilities and structure your day to be more efficient and perhaps get the work done in less than FT? Without being in an office with the distractions and the supervision maybe you can find a balance that is healthy and profitable?
« Last Edit: July 01, 2018, 06:07:29 PM by Retire-Canada »

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1526 on: July 01, 2018, 06:17:35 PM »
Man. Thanks for these posts above. And also due to a conversation with a recent normal age retiree I think I have to go to 4-8s when my child is born. We have the money saved we don't need to work. It doesn't even delay our fire date at this point I need to go to 4-8s and stop worrying about the 6 figure bonuses I'll get in 2 years if I don't. Bc time is now more valuable than money and I need to make this step.

My quality of work has gone way up since I started working less, Iíve actually become a lot more profitable on a per-hour basis. That may not be the case for you, but itís been amazing for me.
Good luck. Too many people undervalue present day time and energy and make trade offs that donít actually work out in their favour, especially if it compromises their health and familyís wellbeing.

I feel like the same will be true for me. Have to see how I like it. But a baby life event is the perfect time. My Dept manager is all about family

Congrats to both of you. Getting a handle on what's important and finding a balance between money and health/happiness is a pretty key skill for a successful life. Boarder the baby is a great time to get the ball rolling. Both because it's important in and of itself for you and to support your wife, but also because it gives you a reason to make the switch at work without having to justify your choice.

To Mailkynn's point...I find that I am at least twice as efficient people expect on average. In some areas I am far more efficient and in some not quite so much. It does mean that I can bill a client 10hrs and actually do 3-5hrs of work to earn that money. So structuring my work for minimum visibility into my processes and maximum flexibility is awesome for me. I can ramp up my $/hr worked so that it's not all that hard to make money and work a reasonable amount of hours.

I don't find I get more efficient with a downshifted schedule, but each hour of work is less unpleasant for sure. I also feel much better since the rest of my life gets most of my time and attention...not my job. That lets me focus on my health, happiness and personal relationships.

Malkynn

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Re: Stop worrying about the 4% rule
« Reply #1527 on: July 01, 2018, 06:22:32 PM »
Man. Thanks for these posts above. And also due to a conversation with a recent normal age retiree I think I have to go to 4-8s when my child is born. We have the money saved we don't need to work. It doesn't even delay our fire date at this point I need to go to 4-8s and stop worrying about the 6 figure bonuses I'll get in 2 years if I don't. Bc time is now more valuable than money and I need to make this step.

My quality of work has gone way up since I started working less, Iíve actually become a lot more profitable on a per-hour basis. That may not be the case for you, but itís been amazing for me.
Good luck. Too many people undervalue present day time and energy and make trade offs that donít actually work out in their favour, especially if it compromises their health and familyís wellbeing.

I feel like the same will be true for me. Have to see how I like it. But a baby life event is the perfect time. My Dept manager is all about family

Congrats to both of you. Getting a handle on what's important and finding a balance between money and health/happiness is a pretty key skill for a successful life. Boarder the baby is a great time to get the ball rolling. Both because it's important in and of itself for you and to support your wife, but also because it gives you a reason to make the switch at work without having to justify your choice.

To Mailkynn's point...I find that I am at least twice as efficient people expect on average. In some areas I am far more efficient and in some not quite so much. It does mean that I can bill a client 10hrs and actually do 3-5hrs of work to earn that money. So structuring my work for minimum visibility into my processes and maximum flexibility is awesome for me. I can ramp up my $/hr worked so that it's not all that hard to make money and work a reasonable amount of hours.

I don't find I get more efficient with a downshifted schedule, but each hour of work is less unpleasant for sure. I also feel much better since the rest of my life gets most of my time and attention...not my job. That lets me focus on my health, happiness and personal relationships.

Iím more efficient at my current job and Iím also building far more profit efficient businesses as a result of having the time to build skills and network.

Itís unreal what you can get done when you have a bit of time and enough energy.

steveo

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Re: Stop worrying about the 4% rule
« Reply #1528 on: July 01, 2018, 07:49:56 PM »
Anyway, Financial Samurai has posted a bit about this recently (https://www.financialsamurai.com/ideal-retirement-scenario-conservative-returns-and-a-steady-income/).

That is a good article.

Quote
Hopefully by the time you reach 50, your net worth will be at least 20X your annual expenses. As soon as you get to 20X annual expenses, you can start considering downshifting or leaving an undesirable job altogether. If you can get to 20X your annual expenses at an earlier age, all the better.

By the time you have your ďenough money,Ē thereís really no need to shoot for greater than a 5% annual return. If your net worth is indeed 20X your annual expenses or more, simple math dictates you can live off your net worth forever and never touch principal with a perpetual 5% return.

This is exactly what I am intending to do. The trick is getting to a 5% WR and then you can add some buffer or just retire. The point is that extra money is really only to keep score and even though I can understand this it's also in my opinion dumb. I'm not trying to be the wealthiest. I'm trying to live the best life that I can on my terms. Money is just a tool to enable that.

I suppose another point about money is that one of the reasons I save money is because I want the risk of having to support myself from a job to disappear. Some people may think they need to reach 20x expenses plus another buffer of 20x expenses in cash or bonds whereas to me you are in a really good situation once you get to 20x expenses. I view my current requirement/goal of getting to 20x expenses plus a buffer (albeit it a relatively small buffer) as being pessimistic but I suppose everyone has to work out that level for themselves.

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1529 on: July 01, 2018, 08:15:34 PM »
I agree with your approach Steveo. I think 5%WR is a reasonable point to pull the trigger if you have a flexible FIRE plan and are prepared to take some action in the unlikely situation that you run into an issue. There is a solid case to be made for the opportunity cost benefit of retiring earlier than later.

I have some issues with the article. If people could lock in a 5% return after inflation guaranteed for the rest of their lives a lot of us would jump on that. The problem is the article omits the danger inflation presents to a FIREr. Once you get past the early phase of FIRE and survive the sequence of returns risk you next mission is to beat inflation. Going to a conservative portfolio is dangerous if it doesn't project you from inflation.

I don't think most of us are equity heavy because we want to get crazy rich. We are heavy in stocks because they are a great hedge against inflation.

Holding a lot of bonds will lower your chances of success in a long retirement. Numbers bellow are for a 40yr FIRE @4%WR using cFIREsim [all settings default unless noted]:

Stocks %/Bonds % = Success %

- 100/0 = 91.7%
- 90/10 = 91.7%
- 80/20 =90.7%
- 70/30 = 88.9%
- 60/40 = 82.4%

I posted this ^^ in another thread. Trying to find "safety" with a high bond allocation is actually more risky for your portfolio than sticking with something more aggressive. We worry a lot about the big crashes, but inflation is a serious threat as well and deserves as much of our attention.

If the article at the link addresses inflation risk in a sensible way I missed it so please point it out to me.

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Re: Stop worrying about the 4% rule
« Reply #1530 on: July 01, 2018, 08:35:39 PM »
Can you work from home? Is it possible to agree to the full-time job responsibilities and structure your day to be more efficient and perhaps get the work done in less than FT? Without being in an office with the distractions and the supervision maybe you can find a balance that is healthy and profitable?

I could do the majority of my work from home, although not all of it, and along with office politics, it's a non-starter.  That discussion has come up with staff in my dept. in the past and was rejected.  A couple years back, I would have loved to work from home, but the good news is that with having my own quiet office for over a year, it makes for a pretty efficient working environment as it is, since I'm not currently having to spend time training someone and work independently most of the time.  I'm not chained to my desk and have a lot of flexibility as well.

I could handle all routine work and pressing issues in 24hr/wk as I will be doing most of the summer while using vacation days, but long term, it would be difficult to make much progress on projects with a continued shortened schedule.  I would also have about 25 days of benefit time to squeeze in during the year.  I always have some backlog as it is working 40+ hr/wk.  I'm doing what two of us used to do while working less hours, albeit the other guy wasn't carrying much of the workload.

So rather than expecting me to handle everything at 24hr/week, I think they would either hire a replacement full timer and have me work part time for training, or they would have one of the other guys in the dept. cross-train with me while I work part time.  But if either of those occurred, my part time work may only be on a temporary basis due to labor budget.  I can't see anyone else getting near my efficiency level anytime soon, so it could last for months or as long as I want, hard to say.  Although excellent healthcare benefits are available working 24+hr/week, I would settle for an even more reduced schedule.  I think I would really like working that schedule for a while, although it most likely would not be out of need.  After a year or so of that, I may be ready to move on, completely FIRE, and possibly relocate.

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Re: Stop worrying about the 4% rule
« Reply #1531 on: July 01, 2018, 08:48:40 PM »
I don't think most of us are equity heavy because we want to get crazy rich. We are heavy in stocks because they are a great hedge against inflation.

Yup, at least for me this represents my motivation for staying extremely light on bonds (and hence heavier on stocks). Over the long term, a prolonged increase inflation seems like a much bigger risk than a stock market crash.

This is especially true for early retirees who, as you always do a great job of pointing out, have a bunch of options to reducing spending or bring in extra income during a stock market crash in the early years when we're vulnerable to SORR, while a portfolio eroded by inflation tends to creep up on you in your later years when it's harder to make course corrections.

steveo

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Re: Stop worrying about the 4% rule
« Reply #1532 on: July 01, 2018, 09:04:45 PM »
I have some issues with the article. If people could lock in a 5% return after inflation guaranteed for the rest of their lives a lot of us would jump on that. The problem is the article omits the danger inflation presents to a FIREr. Once you get past the early phase of FIRE and survive the sequence of returns risk you next mission is to beat inflation. Going to a conservative portfolio is dangerous if it doesn't project you from inflation.

I agree with this. You won't get a guaranteed 5% return excluding inflation year on year. You need returns of 20% every so often to counteract small/negative returns that will occur. You are only going to get those returns if you have a decent equity allocation.

The most likely failure in your portfolio is due to inflation. Equities are the best (someone might have a better option but I doubt it) hedge against inflation. On the flip side once you get to a 5% WR and you have a reasonable equity allocation you should be okay assuming you get past SORR.

matchewed

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Re: Stop worrying about the 4% rule
« Reply #1533 on: July 02, 2018, 07:52:00 AM »
Which also ties into the whole keeping the mortgage question. As it being a fixed cost and usually a significant portion of a person's expenses you can actually see a decrease in the share of spending towards housing as all other expenses will rise with inflation and that won't.

So those solid inflation hedges being; investing in stocks and having a low interest rate mortgage.

Also Pfau had discussed going into bonds early in retirement to protect yourself from SORR and then converting back to a more aggressive asset allocation as you pass that risk in order to preserve your longevity.

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1534 on: July 02, 2018, 07:59:45 AM »
Which also ties into the whole keeping the mortgage question. As it being a fixed cost and usually a significant portion of a person's expenses you can actually see a decrease in the share of spending towards housing as all other expenses will rise with inflation and that won't.

So those solid inflation hedges being; investing in stocks and having a low interest rate mortgage.

Also Pfau had discussed going into bonds early in retirement to protect yourself from SORR and then converting back to a more aggressive asset allocation as you pass that risk in order to preserve your longevity.

I'm a fan of keeping a mortgage even up here in The Great White North where we don't get to lock in a low 30yr rate. As long as my high credit score gets me low interest rate relative to expected long term equities returns I'd rather keep my money invested and pay down a mortgage. A much bigger liquid portfolio seems like the less risky path to me than a smaller portfolio and a paid off house with $400K - $500K tied up in home equity.

I can see the sense in the idea of a rising equity glide path. I plan to do something along those lines

sol

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Re: Stop worrying about the 4% rule
« Reply #1535 on: July 02, 2018, 08:08:00 AM »
As long as my high credit score gets me low interest rate relative to expected long term equities returns I'd rather keep my money invested and pay down a mortgage. A much bigger liquid portfolio seems like the less risky path to me than a smaller portfolio and a paid off house with $400K - $500K tied up in home equity.

This is certainly the generic advice given on this forum (keep the mortgage and stay invested) but the American tax system significantly complicates this plan, and I'm not at all sure it's the best advice anymore.

For example, last year's tax law removed the deductibility of mortgage interest, and effectively capped itemized deductions.  If many more people are now going to be taking the standard deduction, the mortgage is slightly less profitable than it was before.

As another example, carrying the mortgage may require you to show paper income in excess of one of the many threshhold levels in the US tax code (EITC, ACA, FAFSA, etc) and the resulting large step function in tax rates probably exceeds the nominal long term profit margin between the stock market and mortgage rates for millions of Americans.  I agree there is still an exploitable gap there, I'm just not sure it's worth losing health care coverage.

boarder42

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Re: Stop worrying about the 4% rule
« Reply #1536 on: July 02, 2018, 08:13:50 AM »
As long as my high credit score gets me low interest rate relative to expected long term equities returns I'd rather keep my money invested and pay down a mortgage. A much bigger liquid portfolio seems like the less risky path to me than a smaller portfolio and a paid off house with $400K - $500K tied up in home equity.

This is certainly the generic advice given on this forum (keep the mortgage and stay invested) but the American tax system significantly complicates this plan, and I'm not at all sure it's the best advice anymore.

For example, last year's tax law removed the deductibility of mortgage interest, and effectively capped itemized deductions.  If many more people are now going to be taking the standard deduction, the mortgage is slightly less profitable than it was before.

As another example, carrying the mortgage may require you to show paper income in excess of one of the many threshhold levels in the US tax code (EITC, ACA, FAFSA, etc) and the resulting large step function in tax rates probably exceeds the nominal long term profit margin between the stock market and mortgage rates for millions of Americans.  I agree there is still an exploitable gap there, I'm just not sure it's worth losing health care coverage.

The gap is decreasing as rates rise but even with ACA subsidies it still makes sense to maintain a mortgage now without the interest deduction.  add to that the fact that many of us have rates locked in from the bottom and its even better. 

sol

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Re: Stop worrying about the 4% rule
« Reply #1537 on: July 02, 2018, 08:33:01 AM »
The gap is decreasing as rates rise but even with ACA subsidies it still makes sense to maintain a mortgage now without the interest deduction.  add to that the fact that many of us have rates locked in from the bottom and its even better.

I think that argument makes more sense for richer people than for more typical mustachians.

If you get $14k in health insurance subsidies for being below 400% of the FPL (income of $80k for a family of three), then it's suddenly much harder to justify.  Using the 4% rule, you'd need $350k of mortgage money invested to cover that $14k/year, and that's assuming you had a 0% mortgage rate.  Most households that make $80k don't carry $350k in mortgage debt. 

You and I make more money than that, and carry bigger mortgages, and suddenly the math is less clear.  I'm not nearly as convinced as most people seem to be that carrying the mortgage is the right answer, not when I have three kids hitting the FAFSA in addition to the ACA subsidies to worry about.

DreamFIRE

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Re: Stop worrying about the 4% rule
« Reply #1538 on: July 02, 2018, 05:48:57 PM »
The gap is decreasing as rates rise but even with ACA subsidies it still makes sense to maintain a mortgage now without the interest deduction.  add to that the fact that many of us have rates locked in from the bottom and its even better.

I think that argument makes more sense for richer people than for more typical mustachians.

If you get $14k in health insurance subsidies for being below 400% of the FPL (income of $80k for a family of three), then it's suddenly much harder to justify.  Using the 4% rule, you'd need $350k of mortgage money invested to cover that $14k/year, and that's assuming you had a 0% mortgage rate.  Most households that make $80k don't carry $350k in mortgage debt. 

You and I make more money than that, and carry bigger mortgages, and suddenly the math is less clear.  I'm not nearly as convinced as most people seem to be that carrying the mortgage is the right answer, not when I have three kids hitting the FAFSA in addition to the ACA subsidies to worry about.

Yep.  I was posting the same thing a couple weeks ago about losing ACA subsidies with the increased income required to make mortgage payments:

https://forum.mrmoneymustache.com/post-fire/retire-with-just-$620-000/msg2040707/#msg2040707

steveo

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Re: Stop worrying about the 4% rule
« Reply #1539 on: July 02, 2018, 06:49:21 PM »
Which also ties into the whole keeping the mortgage question. As it being a fixed cost and usually a significant portion of a person's expenses you can actually see a decrease in the share of spending towards housing as all other expenses will rise with inflation and that won't.

So those solid inflation hedges being; investing in stocks and having a low interest rate mortgage.

Also Pfau had discussed going into bonds early in retirement to protect yourself from SORR and then converting back to a more aggressive asset allocation as you pass that risk in order to preserve your longevity.

You have to be very careful with this approach and understand your specific situation. I have no mortgage. I will keep a line of credit attached to my home available but only as an emergency source of funds.

Keeping your mortgage increases your SORR. If you are really worried about longevity risk but not SORR then it might be a good option. For me personally I have no interest in it. I'm not concerned about longevity risk because I should inherit money, I can downsize my size and I should be eligible for social security payments. If I get past the SORR years than I should be fine.

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1540 on: July 02, 2018, 08:31:54 PM »
Keeping your mortgage increases your SORR.

Just out of curiosity I ran my numbers with a paid off mortgage and re-mortgaging my paid off house  and investing the equity. Both options get me to a 100% success rate in cFIREsim over 40yrs. I do think that having the mortgage and a bigger investment account provides more financial flexibility. So I'd rather have the mortgage.

I don't have a paid off house  so in reality I'll be somewhere in the middle I'll have something like a $300K mortgage when I FIRE and around $200K equity in the house and a straight up 4%WR. We are talking about moving in FIRE. If that happens we'll buy a joint property and I'll put in the minimum downpayment I can on the new place without needing mortgage insurance. The rest will go into my investments.

I'm in Canada so the whole ACA subsidy issue is irrelevant to me.

steveo

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Re: Stop worrying about the 4% rule
« Reply #1541 on: July 02, 2018, 09:30:06 PM »
Keeping your mortgage increases your SORR.

Just out of curiosity I ran my numbers with a paid off mortgage and re-mortgaging my paid off house  and investing the equity. Both options get me to a 100% success rate in cFIREsim over 40yrs. I do think that having the mortgage and a bigger investment account provides more financial flexibility. So I'd rather have the mortgage.

I don't have a paid off house  so in reality I'll be somewhere in the middle I'll have something like a $300K mortgage when I FIRE and around $200K equity in the house and a straight up 4%WR. We are talking about moving in FIRE. If that happens we'll buy a joint property and I'll put in the minimum downpayment I can on the new place without needing mortgage insurance. The rest will go into my investments.

I'm in Canada so the whole ACA subsidy issue is irrelevant to me.

I'm pretty sure though that the mortgage is a negative when it comes to SORR.

So just say you have 2 million in assets at a 4% WR. So you can spend say 80k per year. You have a mortgage for 1 million. If the market crashes 50% you would have assets of 1 million and just say you have to reduce your spending to 4%. That leaves you with 40k to spend but your mortgage would still have to be serviced with the same amount of money. So if your mortgage costs 20k to service each year that would mean your spending excluding the mortgage drops from 60k to 20k.

I realise that this is an extremely simplistic example but the idea that a mortgage is so good for you is not as simple as it appears. If you have a mortgage you are betting on everything continuing to go up and leverage works for you. That is presumably a positive over the course of 20-30 years because over that period you should have better returns. You are though exposing yourself to increased SORR.

I view having a mortgage as increasing your SORR but decreasing your longevity risk. You can choose whatever option you want but it's not a free trade off.
« Last Edit: July 02, 2018, 10:01:52 PM by steveo »

matchewed

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Re: Stop worrying about the 4% rule
« Reply #1542 on: July 03, 2018, 02:22:15 AM »
Which also ties into the whole keeping the mortgage question. As it being a fixed cost and usually a significant portion of a person's expenses you can actually see a decrease in the share of spending towards housing as all other expenses will rise with inflation and that won't.

So those solid inflation hedges being; investing in stocks and having a low interest rate mortgage.

Also Pfau had discussed going into bonds early in retirement to protect yourself from SORR and then converting back to a more aggressive asset allocation as you pass that risk in order to preserve your longevity.

You have to be very careful with this approach and understand your specific situation. I have no mortgage. I will keep a line of credit attached to my home available but only as an emergency source of funds.

Keeping your mortgage increases your SORR. If you are really worried about longevity risk but not SORR then it might be a good option. For me personally I have no interest in it. I'm not concerned about longevity risk because I should inherit money, I can downsize my size and I should be eligible for social security payments. If I get past the SORR years than I should be fine.

How does having the mortgage increase the SORR risk? If you have X expenses and you've saved your amount (25x the expenses) and have let's say some SORR risk Y. Yet I have X+650 expenses and saved my amount (25x my expenses). Don't I have identical SORR risk? Of course we're assuming all other things bring equal.

cerat0n1a

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Re: Stop worrying about the 4% rule
« Reply #1543 on: July 03, 2018, 02:54:16 AM »
How does having the mortgage increase the SORR risk? If you have X expenses and you've saved your amount (25x the expenses) and have let's say some SORR risk Y. Yet I have X+650 expenses and saved my amount (25x my expenses). Don't I have identical SORR risk? Of course we're assuming all other things bring equal.

Consider two equivalent scenarios:

(mortgage paid off) - net worth X, expenses Y
(mortgage of $500k) - net worth X, amount which can be used to generate an income X+$500k, expenses, Y+ mortgage interest on $500k.

The second case is more exposed to SORR, even though it has greater mean expected long-term return - ignoring taxes, healthcare, whatever. You've effectively borrowed money to buy equities. A mortgage is like the opposite of a bond - rather than receiving money at a fixed interest rate, you're paying it out at a fixed interest rate. So your equity/bond ratio is (say) more like 150/-50 than 80/20.

boarder42

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Re: Stop worrying about the 4% rule
« Reply #1544 on: July 03, 2018, 04:16:46 AM »
To be clear. Historically it does not increase your risk for SORR killing your portfolio. Everytime SORR killed a portfolio it killed it with or without a mortgage. Those with a mortgage run out of money sooner but you still fail in both cases. I think this is often overlooked when we discuss this.

matchewed

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Re: Stop worrying about the 4% rule
« Reply #1545 on: July 03, 2018, 05:48:57 AM »
How does having the mortgage increase the SORR risk? If you have X expenses and you've saved your amount (25x the expenses) and have let's say some SORR risk Y. Yet I have X+650 expenses and saved my amount (25x my expenses). Don't I have identical SORR risk? Of course we're assuming all other things bring equal.

Consider two equivalent scenarios:

(mortgage paid off) - net worth X, expenses Y
(mortgage of $500k) - net worth X, amount which can be used to generate an income X+$500k, expenses, Y+ mortgage interest on $500k.

The second case is more exposed to SORR, even though it has greater mean expected long-term return - ignoring taxes, healthcare, whatever. You've effectively borrowed money to buy equities. A mortgage is like the opposite of a bond - rather than receiving money at a fixed interest rate, you're paying it out at a fixed interest rate. So your equity/bond ratio is (say) more like 150/-50 than 80/20.

You didn't explain how though. You've just repeated the "because it does" argument. It doesn't actually change your AA as it is just easier to calculate a mortgage as a fixed expense rather than jump through the mental gymnastics to make it into a negative bond. Both paid off and people who carry the mortgage into FIRE still have housing related expenses.

I guess you could argue that the non housing expenses as a percentage of expenses is higher and that makes it higher. But let's try to quantify that risk a bit. Does it make some 96% chance to fail move to 75%? That's a big drop. Or does it move 96% to 95% which...meh

cerat0n1a

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Re: Stop worrying about the 4% rule
« Reply #1546 on: July 03, 2018, 06:12:54 AM »
How does having the mortgage increase the SORR risk? If you have X expenses and you've saved your amount (25x the expenses) and have let's say some SORR risk Y. Yet I have X+650 expenses and saved my amount (25x my expenses). Don't I have identical SORR risk? Of course we're assuming all other things bring equal.

Consider two equivalent scenarios:

(mortgage paid off) - net worth X, expenses Y
(mortgage of $500k) - net worth X, amount which can be used to generate an income X+$500k, expenses, Y+ mortgage interest on $500k.

The second case is more exposed to SORR, even though it has greater mean expected long-term return - ignoring taxes, healthcare, whatever. You've effectively borrowed money to buy equities. A mortgage is like the opposite of a bond - rather than receiving money at a fixed interest rate, you're paying it out at a fixed interest rate. So your equity/bond ratio is (say) more like 150/-50 than 80/20.

You didn't explain how though. You've just repeated the "because it does" argument. It doesn't actually change your AA as it is just easier to calculate a mortgage as a fixed expense rather than jump through the mental gymnastics to make it into a negative bond. Both paid off and people who carry the mortgage into FIRE still have housing related expenses.

Have a look at:

https://earlyretirementnow.com/2017/10/11/the-ultimate-guide-to-safe-withdrawal-rates-part-21-mortgage-in-retirement/

(and perhaps also the earlier posts e.g. part 14 & 15 which explain sequence of return risk more thoroughly.)

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1547 on: July 03, 2018, 06:47:26 AM »
I'm pretty sure though that the mortgage is a negative when it comes to SORR.

So just say you have 2 million in assets at a 4% WR. So you can spend say 80k per year. You have a mortgage for 1 million. If the market crashes 50% you would have assets of 1 million and just say you have to reduce your spending to 4%. That leaves you with 40k to spend but your mortgage would still have to be serviced with the same amount of money. So if your mortgage costs 20k to service each year that would mean your spending excluding the mortgage drops from 60k to 20k.

If you were choosing between a paid off house worth $1M or getting a mortgage for $1M and investing it then your choice would be between:

- $1M invested and a $40K/yr spend at 4%WR with a paid off house
- $1M +$1M invested and a $40K/yr spend + the mortgage payments

Additionally if your portfolio started at $2M and you are following a 4%WR plan you don't change the WR amount downwards so that it's 4% of the current amount invested should the portfolio drop.

You can look at it like two separate investment accounts. One the standard FIRE account and one the home equity investment account. Since the FIRE account is the same as it would be with a paid off house the SORR is the same as it would be with a paid off house.

So then you are left with the SORR on the home equity account. At the start you have very little equity in the house so the risk is losing a small amount of equity. The mitigation plan would be the same as for FIRE in that a few years worth of bonds could be held to provide protection against a SORR and then either spent or left to be outrun by the equity portion of that account if early returns were not poor.

I ran these numbers in cFIREsim:

- $1M invested 70/30 with 0.1% fees
- 30yrs
- WR $53612/yr [not inflation adjusted] - this is what my mortgage calculator says is 52 weekly payments at 3.49% for $1M borrowed

I get a 98.3% historical success rate compared to the 95.8% for the main FIRE portfolio at 4%WR over 30yrs with same AA. So the mortgage portfolio is less risky than the FIRE portfolio. It also has one additional safety element...namely that you are building equity the whole time so that you could pull more equity out and reinvest it should you feel you are in one of the very few problematic starting years. I don't have any math to simulate that [thinking about it], but I suspect you could take that historical failure rate to zero with that option.

I'll be FIREing with a mortgage and will likely see that mortgage stay in place for the first 15-30yrs of FIRE depending on what happens when we relocate.
« Last Edit: July 03, 2018, 06:56:15 AM by Retire-Canada »

boarder42

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Re: Stop worrying about the 4% rule
« Reply #1548 on: July 03, 2018, 06:53:43 AM »
yes Retire canada that math is correct and in the 1.7% of years it does fail it just fails faster than the non mortgage holder - so you still fail - so the SORR is the same in both situations meaning you're going to fail in either case its just a matter of when you fail. typically 5-10years earlier with a mortgage.  Which is why i'll never understand the SORR arguement.  b/c if you're trying to prevent FIRE failure not having a low fixed rate mortgage is not beneficial.

also you could add an income event to cfiresim and end the first mortgage and start a new mortgage with new parameters to simulate a perpetual mortgage like you're discussing.

boarder42

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Re: Stop worrying about the 4% rule
« Reply #1549 on: July 03, 2018, 07:00:09 AM »
so i ran the simulation and added a 300k income event 10 years into the mortgage and stopped the original mortgage and restarted a 30 year mortgage with 1.1MM being the new balance since 800k is what is still owed at the end of 10 years with your numbers above and it increased the success rate to 99.15% .  this assumes you can get perpetual mortgages at 3.5% which is unlikely.

if you were able to do it again 10 years later you get to 100% success rate. proving that a perpetual mortgage actually stops SORR. assuming you can get a low rate

numbers re run with 5% interest rates on future finances 2 REFI's every 10 years - 99.15% chance of success

numbers re run with 7% interest rates on future refi's - 98.31%

i really think a perpetual mortgage with staged REFI's does the opposite of what many here are assuming.  it would prevent SORR.

« Last Edit: July 03, 2018, 07:08:09 AM by boarder42 »