Author Topic: Stop worrying about the 4% rule  (Read 391423 times)

cerat0n1a

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Re: Stop worrying about the 4% rule
« Reply #1550 on: July 03, 2018, 07:51:19 AM »
I guess it's also worth pointing out that local differences can have a significant effect on the calculations. Here in the UK, mortgage rates are typically fixed only for 2-5 years, and variable thereafter. There is no tax relief for mortgage interest and if you don't make the payments and lose the house, you still owe the money - you don't just hand in the keys and walk away. So your potential loss is certainly not limited to the small amount of equity you had at the start. The situation you have in the US, where federal government backed agencies intervene to subsidise/distort the mortgage market, makes it much more of a one-way bet.

boarder42

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Re: Stop worrying about the 4% rule
« Reply #1551 on: July 03, 2018, 07:55:56 AM »
I guess it's also worth pointing out that local differences can have a significant effect on the calculations. Here in the UK, mortgage rates are typically fixed only for 2-5 years, and variable thereafter. There is no tax relief for mortgage interest and if you don't make the payments and lose the house, you still owe the money - you don't just hand in the keys and walk away. So your potential loss is certainly not limited to the small amount of equity you had at the start. The situation you have in the US, where federal government backed agencies intervene to subsidise/distort the mortgage market, makes it much more of a one-way bet.

yeah agreed its different.  though mortgage interest deductions dont work for many anymore with our new tax law changes.  but your mortgage rates are also insanely low compared to ours right now.  i see UK people posting about sub 2% rates all the time.  leverage that til its gone.
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Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1552 on: July 03, 2018, 08:04:46 AM »
I guess it's also worth pointing out that local differences can have a significant effect on the calculations. Here in the UK, mortgage rates are typically fixed only for 2-5 years, and variable thereafter.

I'm in Canada and we don't have the locked in 30yr mortgages like the US. Typically we do 5yr mortgages. They can be fixed for the 5yrs or variable.  I like variable rate mortgages due to the low lending rate. My mortgage rate after inflation is ~0.7%. I'm still pro-mortgage.

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1553 on: July 03, 2018, 08:14:35 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.

Another option...particularly with an expensive $1M home is to get a $500K mortgage and leave $500K equity in the home.  By year 10 you'll have ~$641K equity +/- any appreciation change + the balance of the mortgage investment account.

Thanks for the various points of view on the issue. It's good to hear what people are thinking.

cerat0n1a

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Re: Stop worrying about the 4% rule
« Reply #1554 on: July 03, 2018, 10:20:42 AM »
I guess it's also worth pointing out that local differences can have a significant effect on the calculations. Here in the UK, mortgage rates are typically fixed only for 2-5 years, and variable thereafter. There is no tax relief for mortgage interest and if you don't make the payments and lose the house, you still owe the money - you don't just hand in the keys and walk away. So your potential loss is certainly not limited to the small amount of equity you had at the start. The situation you have in the US, where federal government backed agencies intervene to subsidise/distort the mortgage market, makes it much more of a one-way bet.

yeah agreed its different.  though mortgage interest deductions dont work for many anymore with our new tax law changes.  but your mortgage rates are also insanely low compared to ours right now.  i see UK people posting about sub 2% rates all the time.  leverage that til its gone.

One thing here is to use a mortgage to help with the gap between RE age and the age you can access retirement savings accounts. You might have a 'stache of a certain amount but can't touch some of it yet, so running a mortgage that you intend to pay off with the tax-free lump sum you can take upon retirement is relatively common even away from the FIRE "community."

boarder42

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Re: Stop worrying about the 4% rule
« Reply #1555 on: July 03, 2018, 11:11:01 AM »
I guess it's also worth pointing out that local differences can have a significant effect on the calculations. Here in the UK, mortgage rates are typically fixed only for 2-5 years, and variable thereafter. There is no tax relief for mortgage interest and if you don't make the payments and lose the house, you still owe the money - you don't just hand in the keys and walk away. So your potential loss is certainly not limited to the small amount of equity you had at the start. The situation you have in the US, where federal government backed agencies intervene to subsidise/distort the mortgage market, makes it much more of a one-way bet.

yeah agreed its different.  though mortgage interest deductions dont work for many anymore with our new tax law changes.  but your mortgage rates are also insanely low compared to ours right now.  i see UK people posting about sub 2% rates all the time.  leverage that til its gone.

One thing here is to use a mortgage to help with the gap between RE age and the age you can access retirement savings accounts. You might have a 'stache of a certain amount but can't touch some of it yet, so running a mortgage that you intend to pay off with the tax-free lump sum you can take upon retirement is relatively common even away from the FIRE "community."

again this isnt an issue in america for most people we can all mostly get to our stache's due to most pension systems going away and with the advent of the tax advantaged accounts these can be accessed quite easily.
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steveo

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Re: Stop worrying about the 4% rule
« Reply #1556 on: July 03, 2018, 05:56:55 PM »
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.

This sounds extremely suspect to me. You fail quicker but total failure rates don't increase ? 5- 10 years later is a significant amount of time and lots can happen in that time period.

steveo

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Re: Stop worrying about the 4% rule
« Reply #1557 on: July 03, 2018, 06:11:35 PM »
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.)

I think people should read this. ERN is pessimistic but his analysis is pretty good.


Quote
The case for having a mortgage is pretty simple: You can get a 30-year mortgage for about 4% right now. Probably even slightly below 4% when you shop around. Equities will certainly beat that nominal rate of return over the next 30 years. Open and shut case! End of the discussion, right? Well, not so fast! As we have seen in our posts on Sequence of Return Risk (Part 14 and Part 15), the average return is less relevant than the sequence of returns. Having a mortgage in retirement will exacerbate your sequence of return risk because you are frontloading your withdrawals early on during retirement to pay for the mortgage; not just interest but also principal payments. In other words, if we are unlucky and experience low returns early during our retirement (the definition of sequence risk) wed withdraw more shares when equity prices are down. The definition of sequence risk!

Quote
The equity glidepath slope reverses in retirement! As we detailed in the previous two installments of the series (Part 19 and Part 20), a glidepath shifting from a moderate bond allocation at the commencement of retirement to a mostly equity portfolio later in retirement can serve as a hedge against Sequence Risk. But with a mortgage, wed do the opposite. Having a mortgage is similar (though not identical, I know) to a short bond position, and paying off the mortgage means we shift money out of equities and into bonds. The wrong direction! That can only exacerbate Sequence Risk!

This point below is the key point that I'd make. It's a risk to return call if you want to keep a mortgage in retirement. The potential benefit is more money but if you don't need more money to me it comes across as a very poor trade off however other people may view the risk differently.

Quote
The lesson from this exercise: If you are risk-averse and like to hedge out the tail risk its best to have no mortgage and a moderate bond allocation. If you are a risk-taker (degenerate gambler?) then you might as well go all-in: Have a mortgage and 100% equities in the portfolio as well.

Quote
Who cares if we end up with $6 million instead of $7 million when were in our 80s? We are willing to pay that cost for the hedge against Sequence of Return Risk, i.e., the very unpleasant tail risk of running out of money after 30 or 40 years due to poor portfolio returns in the first few years after retirement.

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1558 on: July 03, 2018, 06:25:44 PM »
I think we've shown above your SORR on the mortgage is the same or better than your 4%WR FIRE and definitely better than your 5%WR FIRE. Add in the option of pulling equity out and that risk goes to close to zero historically. I wouldn't work extra years of my life to accumulate more money than 4%WR, but I would accept and utilize some addition money if it was available.

Perhaps the fact that I am facing FIRE with a mortgage and don't have an option to live in a paid off house provides a different view point, but I am not seeing the risk you are. You can lose your paid off house in FIRE if you can't pay the taxes on it or if you can't afford to maintain it so it's not risk free accommodation for life.
« Last Edit: July 03, 2018, 06:32:54 PM by Retire-Canada »

steveo

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Re: Stop worrying about the 4% rule
« Reply #1559 on: July 03, 2018, 06:52:18 PM »
I think we've shown above your SORR on the mortgage is the same or better than your 4%WR FIRE and definitely better than your 5%WR FIRE.

I don't think that this is factually correct. Over the long term leverage will work for you but over the short term you can get hit. I suggest reading big ERN's post or even my post above. You are increasing your exposure to SORR by having a mortgage.

Add in the option of pulling equity out and that risk goes to close to zero historically. I wouldn't work extra years of my life to accumulate more money than 4%WR, but I would accept and utilize some addition money if it was available.

I don't think that this is an issue here at all. You are still going to get to whatever WR you are going to get too. It's just with a mortgage you are more exposed to SORR.

Perhaps the fact that I am facing FIRE with a mortgage and don't have an option to live in a paid off house provides a different view point, but I am not seeing the risk you are. You can lose your paid off house in FIRE if you can't pay the taxes on it or if you can't afford to maintain it so it's not risk free accommodation for life.

I think that this is a different discussion. The discussion is really about is it worth buying a house. I suppose taxes and maintenance may play a role in this decision as well. These decisions are in my opinion going to be specific to the individual person.

If we are talking about retiring with or without a mortgage and the pros and cons of this to me the discussion is pretty clear cut. If you choose to have a mortgage you presumably increase your chance of ending up with more money over the course of your retirement at a cost of increasing your risk when it comes to SORR.

I think it's a personal decision about what you want to do based on your risk profile.
« Last Edit: July 03, 2018, 06:56:50 PM by steveo »

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1560 on: July 03, 2018, 06:58:31 PM »
I think we've shown above your SORR on the mortgage is the same or better than your 4%WR FIRE and definitely better than your 5%WR FIRE.

I don't think that this is factually correct. Over the long term leverage will work for you but over the short term you can get hit. I suggest reading big ERN's post or even my post above. You are increasing your exposure to SORR by having a mortgage.

Then please point out the error in the results I posted above. I'm happy to be wrong and learn from it.

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1561 on: July 03, 2018, 07:41:56 PM »
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.

So I ran the cFIREsim simulation again and added in a $60K income event after 10yrs and then extended the mortgage run 10 more years for 40 total. I kept everything else the same. $60K happens to be the built up equity on that mortgage after 10yrs.

The result was 99.1% success against historical data.

If you wanted to get to 100% success against historical data you could take out a $900K mortgage and then at 10yrs you'd have $160K equity you could reinvest if you wanted to. It takes ~$80K to roll over to 100% success on cFIResim.

Let's recall the following [all using 80/20 AA] with cFIREsim:

- 4%WR success after 30yrs = 96.6%
- 4%WR success after 40yrs = 91.7%
- 5%WR success after 30yrs = 73.7%
- 5%WR success after 40yrs = 64.8%

So if these ^^ are risk levels we are comfortable with [Steveo you are pro 5%WR correct?] the mortgage risk is less.

steveo

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Re: Stop worrying about the 4% rule
« Reply #1562 on: July 03, 2018, 08:20:46 PM »
Retire-Canada - I think something is wrong with your analysis but I'm not sure what it is. I suggest that you read the article that was linked and go from there. Maybe you can pick what ERN is doing incorrectly. I think though your model is a simplistic model and if some options were tweaked such as increasing your repayments over time (interest rates could increase) then the analysis may change.

I don't think my 5% WR (which I'm fine with) is comparable to having a mortgage. The mortgage adds a different take to the whole analysis. I still believe (via reading big ERN's article and using logic as I did above) that a mortgage increases your SORR but increases your chances of increased returns over a longer time period (say 30 years) and for me that is a dumb bet to take but I am not really worried about longevity risk or having the most money when I die.

I can understand your initial analysis of a non-inflation adjusted payment but we should mention the potential downside risk here as well. The risk is that interest rates increase. The US is not a good example to use here for mortgage analysis as it isn't a free market for mortgages. There is a high amount of government intervention but even then I think you can increase your SORR via taking on a mortgage and there may also be various tax/benefits implications from holding the mortgage.

I think your second analysis is really pushing the boundaries of what could occur in reality and avoiding any discussion on the risk of that approach.

I'm confident that the idea of having a mortgage being definitely the right idea is far from removed from a nuanced discussion on withdrawal rates. Maybe in reality by having a mortgage you should also target a lower WR until you get past the SORR stage but again I think why bother. My goal is to reach financial independence not to be the richest.
« Last Edit: July 03, 2018, 08:24:56 PM by steveo »

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1563 on: July 04, 2018, 08:40:14 AM »
Retire-Canada - I think something is wrong with your analysis but I'm not sure what it is. I suggest that you read the article that was linked and go from there. Maybe you can pick what ERN is doing incorrectly. I think though your model is a simplistic model and if some options were tweaked such as increasing your repayments over time (interest rates could increase) then the analysis may change.

The one thing I noticed was ERN assumes a 2% inflation rate. cFIREsim uses historical inflation rates. Given the mortgage is not adjusted for inflation this handicaps it in ERNs simulation. I agree my use of cFIREsim is simple and I think that's a strength of this analysis. It's an easy tool for people to use and enter their own numbers for comparison. If you think my analysis is wrong run some of your own and share the results.

If you are in the US you can lock in rates for 30yrs so that seems reasonable to hold the rate steady in the analysis at least that far. ERN does the same thing. So you can ignore my 2nd 40yr analysis and just look at the 30yr results that are comparable to ERNs analysis. That still gives us a 98.3% success rate using cFIREsim's historical dataset.

I don't think my 5% WR (which I'm fine with) is comparable to having a mortgage. The mortgage adds a different take to the whole analysis. I still believe (via reading big ERN's article and using logic as I did above) that a mortgage increases your SORR but increases your chances of increased returns over a longer time period (say 30 years) and for me that is a dumb bet to take but I am not really worried about longevity risk or having the most money when I die.

To your bolded point a 5%WR is not comparable to investing the mortgage like we've shown above. It's a lot more risky.

Personally I am not looking to get super rich and I am not super rich hence wanting to have my money continue to work for me and not sit idle in a very expensive piece of land/building. While I feel pretty strongly that trading extra years of your life to go sub-4%WR is a bad transaction from an opportunity cost perspective I don't feel like having some additional money is a bad thing if I don't have to work for it and it's not super risky. So far you haven't made a compelling case for your increased SORR argument.

If I was spending 2% of my invested portfolio I wouldn't bother with investing the mortgage because I would have more money than I could ever realistically use.  I'm not even close to that at this point and I wouldn't keep working to make that happen, but I would let my money work for me while I am FIRE to hit a sub-4%WR.

Keeping in mind I am currently almost at 5%WR so I can't even see 2%WR from where I am standing. ;)

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Re: Stop worrying about the 4% rule
« Reply #1564 on: July 04, 2018, 10:28:06 AM »
Retire-Canada - I think something is wrong with your analysis but I'm not sure what it is. I suggest that you read the article that was linked and go from there. Maybe you can pick what ERN is doing incorrectly. I think though your model is a simplistic model and if some options were tweaked such as increasing your repayments over time (interest rates could increase) then the analysis may change.

The one thing I noticed was ERN assumes a 2% inflation rate. cFIREsim uses historical inflation rates. Given the mortgage is not adjusted for inflation this handicaps it in ERNs simulation. I agree my use of cFIREsim is simple and I think that's a strength of this analysis. It's an easy tool for people to use and enter their own numbers for comparison. If you think my analysis is wrong run some of your own and share the results.

If you are in the US you can lock in rates for 30yrs so that seems reasonable to hold the rate steady in the analysis at least that far. ERN does the same thing. So you can ignore my 2nd 40yr analysis and just look at the 30yr results that are comparable to ERNs analysis. That still gives us a 98.3% success rate using cFIREsim's historical dataset.

I don't think my 5% WR (which I'm fine with) is comparable to having a mortgage. The mortgage adds a different take to the whole analysis. I still believe (via reading big ERN's article and using logic as I did above) that a mortgage increases your SORR but increases your chances of increased returns over a longer time period (say 30 years) and for me that is a dumb bet to take but I am not really worried about longevity risk or having the most money when I die.

To your bolded point a 5%WR is not comparable to investing the mortgage like we've shown above. It's a lot more risky.

Personally I am not looking to get super rich and I am not super rich hence wanting to have my money continue to work for me and not sit idle in a very expensive piece of land/building. While I feel pretty strongly that trading extra years of your life to go sub-4%WR is a bad transaction from an opportunity cost perspective I don't feel like having some additional money is a bad thing if I don't have to work for it and it's not super risky. So far you haven't made a compelling case for your increased SORR argument.

If I was spending 2% of my invested portfolio I wouldn't bother with investing the mortgage because I would have more money than I could ever realistically use.  I'm not even close to that at this point and I wouldn't keep working to make that happen, but I would let my money work for me while I am FIRE to hit a sub-4%WR.

Keeping in mind I am currently almost at 5%WR so I can't even see 2%WR from where I am standing. ;)

The bolded/underlined/italics - that statement is GREAT.  Really captures the heart of the logic behind not paying down the mortgage. 
Frugalite in training.

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Re: Stop worrying about the 4% rule
« Reply #1565 on: July 04, 2018, 10:49:30 AM »
Yup and whether to pay down the mortgage or not is one of those fuzzy math deals where the numbers say never pay down a mortgage.

Emotions can tell us exactly the opposite though.

Disclaimer.. I paid mine off before starting to invest.. It worked out great but I would have had more $$ if I had not.

steveo

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Re: Stop worrying about the 4% rule
« Reply #1566 on: July 04, 2018, 03:51:46 PM »
Retire-Canada - I think something is wrong with your analysis but I'm not sure what it is. I suggest that you read the article that was linked and go from there. Maybe you can pick what ERN is doing incorrectly. I think though your model is a simplistic model and if some options were tweaked such as increasing your repayments over time (interest rates could increase) then the analysis may change.

The one thing I noticed was ERN assumes a 2% inflation rate. cFIREsim uses historical inflation rates. Given the mortgage is not adjusted for inflation this handicaps it in ERNs simulation. I agree my use of cFIREsim is simple and I think that's a strength of this analysis. It's an easy tool for people to use and enter their own numbers for comparison. If you think my analysis is wrong run some of your own and share the results.

If you are in the US you can lock in rates for 30yrs so that seems reasonable to hold the rate steady in the analysis at least that far. ERN does the same thing. So you can ignore my 2nd 40yr analysis and just look at the 30yr results that are comparable to ERNs analysis. That still gives us a 98.3% success rate using cFIREsim's historical dataset.

I don't think my 5% WR (which I'm fine with) is comparable to having a mortgage. The mortgage adds a different take to the whole analysis. I still believe (via reading big ERN's article and using logic as I did above) that a mortgage increases your SORR but increases your chances of increased returns over a longer time period (say 30 years) and for me that is a dumb bet to take but I am not really worried about longevity risk or having the most money when I die.

To your bolded point a 5%WR is not comparable to investing the mortgage like we've shown above. It's a lot more risky.

Personally I am not looking to get super rich and I am not super rich hence wanting to have my money continue to work for me and not sit idle in a very expensive piece of land/building. While I feel pretty strongly that trading extra years of your life to go sub-4%WR is a bad transaction from an opportunity cost perspective I don't feel like having some additional money is a bad thing if I don't have to work for it and it's not super risky. So far you haven't made a compelling case for your increased SORR argument.

If I was spending 2% of my invested portfolio I wouldn't bother with investing the mortgage because I would have more money than I could ever realistically use.  I'm not even close to that at this point and I wouldn't keep working to make that happen, but I would let my money work for me while I am FIRE to hit a sub-4%WR.

Keeping in mind I am currently almost at 5%WR so I can't even see 2%WR from where I am standing. ;)

The bolded/underlined/italics - that statement is GREAT.  Really captures the heart of the logic behind not paying down the mortgage.

This is another one of those picking the returns arguments though. My returns on housing have been great. Probably better than the stock market. I wouldn't though leverage more into the property market. To state that paying off the mortgage means you have your money working for you rather than in an unproductive expensive asset may be true but it also may be completely untrue. It's the same argument as stating invest in small cap stocks in Ethiopia because they are going to have a run. My take is you invest based on your asset allocation and use leverage if you are so inclined. If property is such a bad investment then don't invest in it. The leverage question is basically irrelevant.

I should add that none of those comments add anything at all to the argument (which appears correct) that having a mortgage increases your SORR. If you are so inclined then go for it.

tyort1

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Re: Stop worrying about the 4% rule
« Reply #1567 on: July 04, 2018, 04:00:07 PM »
Retire-Canada - I think something is wrong with your analysis but I'm not sure what it is. I suggest that you read the article that was linked and go from there. Maybe you can pick what ERN is doing incorrectly. I think though your model is a simplistic model and if some options were tweaked such as increasing your repayments over time (interest rates could increase) then the analysis may change.

The one thing I noticed was ERN assumes a 2% inflation rate. cFIREsim uses historical inflation rates. Given the mortgage is not adjusted for inflation this handicaps it in ERNs simulation. I agree my use of cFIREsim is simple and I think that's a strength of this analysis. It's an easy tool for people to use and enter their own numbers for comparison. If you think my analysis is wrong run some of your own and share the results.

If you are in the US you can lock in rates for 30yrs so that seems reasonable to hold the rate steady in the analysis at least that far. ERN does the same thing. So you can ignore my 2nd 40yr analysis and just look at the 30yr results that are comparable to ERNs analysis. That still gives us a 98.3% success rate using cFIREsim's historical dataset.

I don't think my 5% WR (which I'm fine with) is comparable to having a mortgage. The mortgage adds a different take to the whole analysis. I still believe (via reading big ERN's article and using logic as I did above) that a mortgage increases your SORR but increases your chances of increased returns over a longer time period (say 30 years) and for me that is a dumb bet to take but I am not really worried about longevity risk or having the most money when I die.

To your bolded point a 5%WR is not comparable to investing the mortgage like we've shown above. It's a lot more risky.

Personally I am not looking to get super rich and I am not super rich hence wanting to have my money continue to work for me and not sit idle in a very expensive piece of land/building. While I feel pretty strongly that trading extra years of your life to go sub-4%WR is a bad transaction from an opportunity cost perspective I don't feel like having some additional money is a bad thing if I don't have to work for it and it's not super risky. So far you haven't made a compelling case for your increased SORR argument.

If I was spending 2% of my invested portfolio I wouldn't bother with investing the mortgage because I would have more money than I could ever realistically use.  I'm not even close to that at this point and I wouldn't keep working to make that happen, but I would let my money work for me while I am FIRE to hit a sub-4%WR.

Keeping in mind I am currently almost at 5%WR so I can't even see 2%WR from where I am standing. ;)

The bolded/underlined/italics - that statement is GREAT.  Really captures the heart of the logic behind not paying down the mortgage.

This is another one of those picking the returns arguments though. My returns on housing have been great. Probably better than the stock market. I wouldn't though leverage more into the property market. To state that paying off the mortgage means you have your money working for you rather than in an unproductive expensive asset may be true but it also may be completely untrue. It's the same argument as stating invest in small cap stocks in Ethiopia because they are going to have a run. My take is you invest based on your asset allocation and use leverage if you are so inclined. If property is such a bad investment then don't invest in it. The leverage question is basically irrelevant.

I should add that none of those comments add anything at all to the argument (which appears correct) that having a mortgage increases your SORR. If you are so inclined then go for it.

The house appreciates in value regardless of how much (or how little) the mortgage is paid off. 

I have no idea about SORR so I'll stay out of that discussion.  Fun to watch you guys hash though it, though.
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Roadrunner53

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Re: Stop worrying about the 4% rule
« Reply #1568 on: July 05, 2018, 05:49:47 AM »
Sorry, but what is SORR?

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Re: Stop worrying about the 4% rule
« Reply #1569 on: July 05, 2018, 06:20:58 AM »
SORR = sequence of returns risk.  It's a relatively new phrase in early retirement jargon.  It refers to the fact that if you have a bad few years at the beginning of retirement, that you can get into trouble with sustaining your retirement because the remaining investments can't recover from the double whammy of bad returns plus your withdrawals.
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Roadrunner53

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Re: Stop worrying about the 4% rule
« Reply #1570 on: July 05, 2018, 06:44:02 AM »
SORR = sequence of returns risk.  It's a relatively new phrase in early retirement jargon.  It refers to the fact that if you have a bad few years at the beginning of retirement, that you can get into trouble with sustaining your retirement because the remaining investments can't recover from the double whammy of bad returns plus your withdrawals.

Thank you for the explanation!

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1571 on: July 05, 2018, 07:48:09 AM »
I should add that none of those comments add anything at all to the argument (which appears correct) that having a mortgage increases your SORR. If you are so inclined then go for it.

Sorry Steveo you really have not shown this ^^^ is true at all. The numbers I have posted [which you can verify with cFIREsim] show the mortgage account is less risky than the FIRE account at 4%WR over 30yrs. Instead of just insisting you are correct just because please demonstrate it. If it is true you'll be able to show it.

To Exflyboy's point there is nothing at all wrong with doing something that is not optimal according to the math for any number of reasons. If it makes you happy or more secure emotionally/psychologically in your retirement plans. Even if you just read a blog post and decided that sounds cool. We are not robots. We don't have to compute every decision.

That said I think it is important to dig down into these issues and see what's what so we can have the facts to support the various options.
« Last Edit: July 05, 2018, 07:59:20 AM by Retire-Canada »

steveo

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Re: Stop worrying about the 4% rule
« Reply #1572 on: July 05, 2018, 06:53:05 PM »
I should add that none of those comments add anything at all to the argument (which appears correct) that having a mortgage increases your SORR. If you are so inclined then go for it.

Sorry Steveo you really have not shown this ^^^ is true at all. The numbers I have posted [which you can verify with cFIREsim] show the mortgage account is less risky than the FIRE account at 4%WR over 30yrs. Instead of just insisting you are correct just because please demonstrate it. If it is true you'll be able to show it.

To Exflyboy's point there is nothing at all wrong with doing something that is not optimal according to the math for any number of reasons. If it makes you happy or more secure emotionally/psychologically in your retirement plans. Even if you just read a blog post and decided that sounds cool. We are not robots. We don't have to compute every decision.

That said I think it is important to dig down into these issues and see what's what so we can have the facts to support the various options.

I agree with your comments about having to judge things rationally and factually. It's also okay to do something sub-optimal. I'm not convinced in relation to your analysis and I trust ERN's analysis more but he and myself could be wrong. I think I have shown that the analysis in relation to SORR is correct. I've used ERN's blog post (his analysis on the whole is the best I've seen on WR's) plus a logical definition of what could occur when it comes to holding a mortgage whereas I think your analysis is a little too simplistic however that doesn't mean you are wrong.

So we have different analysis stating that a mortgage is safer or less safe specifically when it comes to SORR. I suppose we have to leave it there until we know statistically the correct option based on this issue which may not occur. We also have to recognise that this is just betting with probabilities. The future may be different to the past.

We shouldn't though state that there is no impact in relation to SORR because the evidence says so. The evidence is at this point unclear however I'm erring on the side that a mortgage increases your SORR.

I agree it's good to dig into these issues and come up with good guidelines for people to use.

Personally there is no way in hell that I am leveraging into any market at this point in time but that is a subjective personal decision.
« Last Edit: July 05, 2018, 06:59:02 PM by steveo »

boarder42

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Re: Stop worrying about the 4% rule
« Reply #1573 on: July 05, 2018, 08:11:04 PM »
The only evidence that it effects your safety is that you run out of money sooner with a mortgage in some cases you still fail fire in both situations. Doesn't really matter if the money lasts 20 years or 15 years you lost. The mortgage prevents failures of more historic scenarios specifically when related to inflation. 
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PizzaSteve

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Re: Stop worrying about the 4% rule
« Reply #1574 on: July 05, 2018, 08:32:42 PM »
SORR = sequence of returns risk.  It's a relatively new phrase in early retirement jargon.  It refers to the fact that if you have a bad few years at the beginning of retirement, that you can get into trouble with sustaining your retirement because the remaining investments can't recover from the double whammy of bad returns plus your withdrawals.

Thank you for the explanation!
Good explanation, though it is not a relatively new term.  It is an old concept. 

Basically, equity markets are volatile, so financial analysts sought to quantify the risks of the market.  Using old data (and assuming that old data has value as predictive of future events (a key assumption), the analysis showed that market volatility ranges could be quantified and then a range and probability of possible return outcomes could be simulated (fitting data to the bell curve of prior outcomes).

This type of simulation is the foundation behind papers like the Trinity Study and derived conclusions from it (like 4% is a pretty secure withdraw rate).  will the future fit the past?  No one knows, but a sequence of returns similar to the past is a fundamental assumption behind the models.  Note that I was doing this at Wharton on minicomputers using Minitab in 1984. 

Anyway, this all this boils down to using mathmatical models to help people plan.  Since you only have one life, it is up to you to decide if you want to work more, save more and be conservative or YOLO it, trust the data will apply to you and plan to live off better than 4% returns.

The thread is a good resource to explore various people's decisions.
« Last Edit: July 05, 2018, 08:37:42 PM by PizzaSteve »
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steveo

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Re: Stop worrying about the 4% rule
« Reply #1575 on: July 05, 2018, 11:00:25 PM »
The only evidence that it effects your safety is that you run out of money sooner with a mortgage in some cases you still fail fire in both situations. Doesn't really matter if the money lasts 20 years or 15 years you lost. The mortgage prevents failures of more historic scenarios specifically when related to inflation.

Where is your analysis that supports this ? I'd also suggest the time to run out of money does matter. You may be close to receiving social security or some other payments for instance.

It's probably a good idea to also read ERN's posting on this issue and even the whole WR question. There is lots of good stuff on his site.
« Last Edit: July 05, 2018, 11:02:52 PM by steveo »

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Re: Stop worrying about the 4% rule
« Reply #1576 on: July 06, 2018, 12:01:04 AM »
also suggest the time to run out of money does matter.

This is a very important point that seems to be lost on folks.  A failure is not just a failure.  Failure scenario "a" can be waaay different than scenario "b".  This is of particular importance to the crowd that promotes adding in extra income or decreasing spending to avoid SORR, or those with higher WR's who are OK with increased risk for those necessities at some point in a 50-60 retirement.  IOW a failure rate of 20%, but one in which a worst case is coming up 50K short, is totally different than a failure rate of 5% when the fewer in frequency failures are massive misses.  One implies minor corrections could put you at 100%.  While the other implies in 5% of the cases it's cat food and government housing, or some huge lifestyle changes at some point. 

I haven't run the numbers with mortgages and make no claim how one way or another works towards either end of such a failure spectrum.  I just think it's definitely something people should keep in mind when playing with these historical numbers and regarding AA.

boarder42

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Re: Stop worrying about the 4% rule
« Reply #1577 on: July 06, 2018, 06:09:15 AM »
The only evidence that it effects your safety is that you run out of money sooner with a mortgage in some cases you still fail fire in both situations. Doesn't really matter if the money lasts 20 years or 15 years you lost. The mortgage prevents failures of more historic scenarios specifically when related to inflation.

Where is your analysis that supports this ? I'd also suggest the time to run out of money does matter. You may be close to receiving social security or some other payments for instance.

It's probably a good idea to also read ERN's posting on this issue and even the whole WR question. There is lots of good stuff on his site.

i've read his info ... as was said above he used fixed inflation - inflation was never fixed in our history.  Run the scenarios thru cFIREsim and you'll find the conclusion i've drawn and Retire canada drew. 

also see my analysis above showing perpetual mortgages and their great hedge against SORR.  you know based on historical data not some fixed conditions that have never occured.
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Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1578 on: July 06, 2018, 08:01:37 AM »
This is a very important point that seems to be lost on folks.  A failure is not just a failure.  Failure scenario "a" can be waaay different than scenario "b".  This is of particular importance to the crowd that promotes adding in extra income or decreasing spending to avoid SORR, or those with higher WR's who are OK with increased risk for those necessities at some point in a 50-60 retirement.  IOW a failure rate of 20%, but one in which a worst case is coming up 50K short, is totally different than a failure rate of 5% when the fewer in frequency failures are massive misses.  One implies minor corrections could put you at 100%.  While the other implies in 5% of the cases it's cat food and government housing, or some huge lifestyle changes at some point. 

I haven't run the numbers with mortgages and make no claim how one way or another works towards either end of such a failure spectrum.  I just think it's definitely something people should keep in mind when playing with these historical numbers and regarding AA.

That's a good point. What do the failures look like and how hard is it to mitigate them?

I added in an $150K income event after 10yrs in my invest the mortgage simulation and pushed the 30yr success rate in cFIREsim to 100%. So in the example we've been playing with instead of taking out a $1M mortgage on your home and investing it all you could only invest $800K and keep $200K in some secure vehicle that matched inflation as closely as possible. Then deploy the $200K after 10yrs to get an investment plan that is far less risky than the standard 4%WR and definitely does not have higher SORR as Steveo claims.

The key with the mortgage as we've pointed out and ERN's analysis failed to take into account is the inflation protection. Once you get past the early years in FIRE inflation is the big risk and a mortgage is a great inflation hedge. Even excluding the equity in the property itself investing the mortgage as discussed in the paragraph above will make your overall FIRE less risky at a 4-5%WR since in some failure years for the 4-5%WR FIRE person their mortgage investment account has a surplus of funds they can draw on.
« Last Edit: July 06, 2018, 09:27:21 AM by Retire-Canada »

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1579 on: July 06, 2018, 08:17:47 AM »
I agree with your comments about having to judge things rationally and factually. It's also okay to do something sub-optimal. I'm not convinced in relation to your analysis and I trust ERN's analysis more but he and myself could be wrong. I think I have shown that the analysis in relation to SORR is correct. I've used ERN's blog post (his analysis on the whole is the best I've seen on WR's) plus a logical definition of what could occur when it comes to holding a mortgage whereas I think your analysis is a little too simplistic however that doesn't mean you are wrong.

Rather than believing anyone Steveo about an important life decision like this I'd encourage you to do your own analysis. It's not that hard.

ERN fails to account for realistic inflation possibilities over the course of the 30yr mortgage. If you do use historical inflation values that lowers the risk of the plan considerably. He also fails to look at any of the obvious ways to take the invested mortgage risk to zero against historical market returns. For example only invest $800K of the $1M mortgage and drop the other $200K in after 10yrs or the SORR has played out.



« Last Edit: July 06, 2018, 09:28:10 AM by Retire-Canada »

AdrianC

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Re: Stop worrying about the 4% rule
« Reply #1580 on: July 06, 2018, 02:25:59 PM »
"...SORR has played out."

When would you know that sequence of returns risk has played out?

secondcor521

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Re: Stop worrying about the 4% rule
« Reply #1581 on: July 06, 2018, 02:32:24 PM »
SORR = sequence of returns risk.  It's a relatively new phrase in early retirement jargon.  It refers to the fact that if you have a bad few years at the beginning of retirement, that you can get into trouble with sustaining your retirement because the remaining investments can't recover from the double whammy of bad returns plus your withdrawals.

Thank you for the explanation!
Good explanation, though it is not a relatively new term.  It is an old concept. 

Basically, equity markets are volatile, so financial analysts sought to quantify the risks of the market.  Using old data (and assuming that old data has value as predictive of future events (a key assumption), the analysis showed that market volatility ranges could be quantified and then a range and probability of possible return outcomes could be simulated (fitting data to the bell curve of prior outcomes).

This type of simulation is the foundation behind papers like the Trinity Study and derived conclusions from it (like 4% is a pretty secure withdraw rate).  will the future fit the past?  No one knows, but a sequence of returns similar to the past is a fundamental assumption behind the models.  Note that I was doing this at Wharton on minicomputers using Minitab in 1984. 

Anyway, this all this boils down to using mathmatical models to help people plan.  Since you only have one life, it is up to you to decide if you want to work more, save more and be conservative or YOLO it, trust the data will apply to you and plan to live off better than 4% returns.

The thread is a good resource to explore various people's decisions.

Emphasis added by me.

As to the first bolded statement, as I said in my previous post that you quoted, it is a relatively new phrase - at least it's relatively new to me and I've been studying FIRE since the late 1990's.  I agree it's an old concept; in fact I think I've complained somewhere that recent bloggers think they've discovered something new which they haven't, and presenting it as such is just silly.

As for the second bolded statement, you are incorrect.  The Trinity study (at least the famous one that I assume you are referring to) was based on historical data, not parameterized simulations a la Monte Carlo.  There are no bell curves in the Trinity study as far as I know.
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EscapeVelocity2020

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Re: Stop worrying about the 4% rule
« Reply #1582 on: July 06, 2018, 08:42:05 PM »
As for the second bolded statement, you are incorrect.  The Trinity study (at least the famous one that I assume you are referring to) was based on historical data, not parameterized simulations a la Monte Carlo.  There are no bell curves in the Trinity study as far as I know.

I think you are missing the point of PizzaSteve's comment, if you read the entire thing.  Basically, by using the Trinity study, you assume that the rolling 30 year periods in the past capture then 30 rolling year period in the future.

FIRE simulators do the Trinity study one better by showing you all of the outcomes of 30 year periods for different asset allocations, income events, etc., but these still have limitations like we can't adjust the periods to start with a "post Fed bank bail-out, persistent low inflation, low unemployment, protectionist trade war, giant corporate tax cut, persistent high-PE, etc." year... 

What unworried 4%-ER'ers bet is that this is no worse than one of the 30 year rolling periods in the past.
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steveo

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Re: Stop worrying about the 4% rule
« Reply #1583 on: July 06, 2018, 08:44:07 PM »
I agree with your comments about having to judge things rationally and factually. It's also okay to do something sub-optimal. I'm not convinced in relation to your analysis and I trust ERN's analysis more but he and myself could be wrong. I think I have shown that the analysis in relation to SORR is correct. I've used ERN's blog post (his analysis on the whole is the best I've seen on WR's) plus a logical definition of what could occur when it comes to holding a mortgage whereas I think your analysis is a little too simplistic however that doesn't mean you are wrong.

Rather than believing anyone Steveo about an important life decision like this I'd encourage you to do your own analysis. It's not that hard.

ERN fails to account for realistic inflation possibilities over the course of the 30yr mortgage. If you do use historical inflation values that lowers the risk of the plan considerably. He also fails to look at any of the obvious ways to take the invested mortgage risk to zero against historical market returns. For example only invest $800K of the $1M mortgage and drop the other $200K in after 10yrs or the SORR has played out.

I definitely agree with you in relation to doing my own analysis. I don't agree with your points here though and I think you are underestimating the potential risk of taking on additional leverage. It's your call though. At the same time let's not try and make out that having a mortgage is always the right idea when that is definitely not clear.

Yes ERN's analysis might have some holes in it but I guess your analysis does as well.

Maybe we just have to accept that some things are not completely black and white and individual preference is going to play a role. A good example is asset allocation. There are many different asset allocations that have led to higher SWR's in the past but that does not mean they will retain that edge now and in the future.

At this point I have no interest in obtaining additional leverage to invest more into the stock market or whatever market I choose to invest in. I'm also extremely confident that you and no one else can prove categorically that having a mortgage is some easy path to increasing your WR with no potential negative side effects.

A good rule to remember is that there are no free lunches. So long as you aren't blind to potential downside risks and you accept those risks then make your own personal decision.

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1584 on: July 06, 2018, 08:55:10 PM »
"...SORR has played out."

When would you know that sequence of returns risk has played out?

When you get through your initial phase of FIRE say after 10yrs and have had the pleasure of significant positive returns such that you feel it's unlikely your portfolio would fail due to a poor early sequence of returns.

If you started with a $40K/yr + inflation from $1M portfolio FIRE plan and at 10yrs you $1.8M after inflation I'd feel comfortable calling the early sequence of return risk to have not been an issue for your start year. If you re-started your FIRE at that point you'd be at a 2.2%WR and have 10yrs less duration to deal with.

In the example you were quoting from you could also just hold that $200K in some inflation mitigated vehicle and not add it to your main mortgage investment account. Unless you needed it and in that case you don't have to make any judgement call about SORR.

PizzaSteve

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Re: Stop worrying about the 4% rule
« Reply #1585 on: July 07, 2018, 09:37:19 AM »
"...SORR has played out."

When would you know that sequence of returns risk has played out?

When you get through your initial phase of FIRE say after 10yrs and have had the pleasure of significant positive returns such that you feel it's unlikely your portfolio would fail due to a poor early sequence of returns.

If you started with a $40K/yr + inflation from $1M portfolio FIRE plan and at 10yrs you $1.8M after inflation I'd feel comfortable calling the early sequence of return risk to have not been an issue for your start year. If you re-started your FIRE at that point you'd be at a 2.2%WR and have 10yrs less duration to deal with.

In the example you were quoting from you could also just hold that $200K in some inflation mitigated vehicle and not add it to your main mortgage investment account. Unless you needed it and in that case you don't have to make any judgement call about SORR.
Good point.

Another scenario is that your plan targets a certain age, for personal, benefit or professional accomplishment reasons (say 40 or 50), but your income and MMM inspired consumption levels has you saving in excess of your retirement needs.

Many high income savers could literally hold cash at 0% and never fail an @ 50 retirement.  There is nothing wrong with that person following a strategy of forgoing market returns for 100% safety because they wont ever need all the value from the money they earned.  It is not optimal, but it is fine.

Sure they could retire earlier with equities, but not without some SOR risk, and assuming they are an MD or something, enjoying performing heart surgeries to save lives or something rather than spending on a mercedes every year, they may want a zero stress, 100% win plan.  This is one reason why treasuries and the like sell so well.

In other words, a bond allocation shortens the SOR window in exchange for less top side wealth, with the extreme example being 100% cash, 0% SOR risk.
« Last Edit: July 07, 2018, 09:43:11 AM by PizzaSteve »
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sol

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Re: Stop worrying about the 4% rule
« Reply #1586 on: July 07, 2018, 09:53:10 AM »
with the extreme example being 100% cash, 0% SOR risk.

Also known as "100% inflation risk".

pecunia

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Re: Stop worrying about the 4% rule
« Reply #1587 on: July 07, 2018, 07:46:12 PM »
How about these lower returns predicted by Vanguard?

https://www.cnbc.com/2017/11/20/jack-bogles-5-bold-investment-predictions-for-2018-and-beyond.html

Mr. Bogle says to expect about a 4% return.  If you FIRE, won't this shrink the stash and make you more susceptible to inflation problems?  He could be wrong too, but "Laissez les bon temps rouler" can't go on forever.

EscapeVelocity2020

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Re: Stop worrying about the 4% rule
« Reply #1588 on: July 07, 2018, 08:45:15 PM »
with the extreme example being 100% cash, 0% SOR risk.

Also known as "100% inflation risk".

But if inflation is fixed at 2% (prices double in 36 years) then even cash can be OK for risk averse folks!  This is the Goldilocks scenario that we are currently making 30 year decisions from.
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sol

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Re: Stop worrying about the 4% rule
« Reply #1589 on: July 07, 2018, 08:55:33 PM »
But if inflation is fixed at 2%

I feel like assuming 2% long term inflation is like assuming 9% long term stock returns.  Sure, that could totally happen, but that's not the scenario we're trying to guard against when balancing the different types of portfolio failure risks.

DreamFIRE

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Re: Stop worrying about the 4% rule
« Reply #1590 on: July 07, 2018, 09:37:12 PM »
How about these lower returns predicted by Vanguard?

https://www.cnbc.com/2017/11/20/jack-bogles-5-bold-investment-predictions-for-2018-and-beyond.html

Mr. Bogle says to expect about a 4% return.  If you FIRE, won't this shrink the stash and make you more susceptible to inflation problems?  He could be wrong too, but "Laissez les bon temps rouler" can't go on forever.

Yeah, he was predicting "nominal to zero" REAL returns three years ago:

https://forum.mrmoneymustache.com/investor-alley/bogle-projects-'nominal-to-zero'-real-returns-over-the-next-decade/

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1591 on: July 08, 2018, 08:36:31 AM »
Many high income savers could literally hold cash at 0% and never fail an @ 50 retirement.  There is nothing wrong with that person following a strategy of forgoing market returns for 100% safety because they wont ever need all the value from the money they earned.  It is not optimal, but it is fine.

Just out of interest I ran some numbers in cFIREsim.

50yr FIRE @ 4%WR with 90/10 Portfolio - so $40K/yr off $1M = ~85% success

Holding 100% cash at 0% return for 50yrs spending $40K/yr you get the following success rates:

- $1M = 0%
- $2M = 7%
- $3M = 27%
- $4M = 49%
- $5M = 63%
- $6M = 69%
- $7M = 84%

Starting at $1M invested and adding $100K savings per year at 6% return after inflation it takes ~19.5yrs to get to $7M.
Starting at $1M invested and adding $200K savings per year at 6% return after inflation it takes ~14.5yrs to get to $7M.

Of course you can argue the person working on a cash FIRE will die sooner so they don't need to fund their retirement for the same duration. They might even die at their desk in the extra 14-19 years it takes to save up the required cash...that approach has a 0% chance of not running out of money that's independent of portfolio value.
« Last Edit: July 08, 2018, 08:58:21 AM by Retire-Canada »

DreamFIRE

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Re: Stop worrying about the 4% rule
« Reply #1592 on: July 08, 2018, 09:01:53 AM »
If you want to be conservative, you can get cash equivalents that earn more than 0% nominal.  For example, a 3 year CD is yielding 3%.

AdrianC

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Re: Stop worrying about the 4% rule
« Reply #1593 on: July 08, 2018, 10:52:52 AM »
"...SORR has played out."

When would you know that sequence of returns risk has played out?

When you get through your initial phase of FIRE say after 10yrs and have had the pleasure of significant positive returns such that you feel it's unlikely your portfolio would fail due to a poor early sequence of returns.

If you started with a $40K/yr + inflation from $1M portfolio FIRE plan and at 10yrs you $1.8M after inflation I'd feel comfortable calling the early sequence of return risk to have not been an issue for your start year. If you re-started your FIRE at that point you'd be at a 2.2%WR and have 10yrs less duration to deal with.

So really, we know that sequence of returns risk has played out when we are withdrawing substantially less than 4%. To quantify, would it be when we get a 100% success rate in cFIREsim?

boarder42

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Re: Stop worrying about the 4% rule
« Reply #1594 on: July 08, 2018, 11:21:28 AM »
It could be 4% it also could be a shorter life expectancy than when you started. But yes when cfiresim says 100% and you don't have any borderline for a 40 year time line youve surpassed it basically if you get to a 3.5% wr after you've FIREd you're safe
« Last Edit: July 08, 2018, 11:23:05 AM by boarder42 »
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Exflyboy

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Re: Stop worrying about the 4% rule
« Reply #1595 on: July 08, 2018, 11:26:09 AM »
If you want to be conservative, you can get cash equivalents that earn more than 0% nominal.  For example, a 3 year CD is yielding 3%.

I have a relative who is 70 and he claims he is making about 5% just using CD products though Raymond James I believe.

Of course he got a bit cagey when I started asking him about fees and I pointed that interest rates are currently rising. Depending on how long the CD are locked in for and how fast rates rise he may get and effective sending growth that barely matches inflation.

Interesting concept for a "zero risk" portfolio though.

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1596 on: July 08, 2018, 12:05:23 PM »
So really, we know that sequence of returns risk has played out when we are withdrawing substantially less than 4%. To quantify, would it be when we get a 100% success rate in cFIREsim?

If you accept the premise that the future will be no worse than the past a 100% success rate in cFIREsim means you can be pretty confident that you have mitigated both the SORR and inflation risk. So I'd be pretty happy with that.  You could select a different criteria that wasn't quite as high to decide if you wanted. 

But as I noted in the example we've been talking about if making the call is not something you are willing or comfortable doing you can take that requirement off the table and just invest 80% of the mortgage and keep 20% in reserve in an inflation mitigated vehicle. You lose out on some of the potential returns, but you push your success rate against historical data to 100% and your mortgage investment is less risky than the typical 4%WR FIRE plan and much less risky than a 5%WR FIRE plan.
« Last Edit: July 08, 2018, 12:28:47 PM by Retire-Canada »

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #1597 on: July 08, 2018, 12:38:30 PM »
At the same time let's not try and make out that having a mortgage is always the right idea when that is definitely not clear.

I would never suggest that ^^^ in fact I'll go further and say it's definitive that there are all sorts of situations we can conceive of where having a mortgage and investing the proceeds is not a good idea. My comments were only referring to the case we were examining which you presented along with the ERN blog post.