Stop worrying about the 4% rule

[brooklynguy]

To add to the link collection, here's a thread from a couple of months ago that generated some good discussion on this topic:

http://forum.mrmoneymustache.com/investor-alley/are-safe-withdrawal-rates-really-safe/

[Livewell]

Great thread, thanks for starting.   

Regarding the worse case scenario, GCC had a good article on this not too long ago - what would happen if you had retired in 1965?  http://www.gocurrycracker.com/the-worst-retirement-ever/

[MoonShadow]

The 4% SWR also assumes you live in the USA      and    the USA continues to be similar to what it was in the past.

Other places have much lower SWRs - Australia is about 3.6%, Japan is (from memory) 0.6%.

No, it doesn't assume it will be similar to the past--it assumes it will be no worse than the past. And those other countries worst case scenarios are worse than ours have been, yes, but I'm curious what their average scenarios were. That would be a lot more interesting to me, but I'm not aware of that data existing.

Even better

It assumes that it won't be worse than the WORST period in the history of the US

As a refresher, that period included an Oil Embargo, the closing of the gold window, discredited economic policies (Laffer Curve anyone?), price fixing, runaway inflation, gasoline shortages, etc...  just about the perfect storm of horrible economic conditions

And yet the 4% rule worked, by definition

I agree with the meat of this post, but I can't just let this go. The Laffer Curve has never been discredited.  For that matter, it is mathmatically provable, so it cannot be discredited.  The unknown variable of the Laffer Curve is where the "peak" is.  Said another way, the 'ideal' tax rate is an unknown number, and one that is likely variable across economic conditions.  If you don't agree, it's only because you didn't understand what the Laffer Curve actually was.

[forummm]

The 4% SWR also assumes you live in the USA      and    the USA continues to be similar to what it was in the past.

Other places have much lower SWRs - Australia is about 3.6%, Japan is (from memory) 0.6%.

No, it doesn't assume it will be similar to the past--it assumes it will be no worse than the past. And those other countries worst case scenarios are worse than ours have been, yes, but I'm curious what their average scenarios were. That would be a lot more interesting to me, but I'm not aware of that data existing.

Even better

It assumes that it won't be worse than the WORST period in the history of the US

As a refresher, that period included an Oil Embargo, the closing of the gold window, discredited economic policies (Laffer Curve anyone?), price fixing, runaway inflation, gasoline shortages, etc...  just about the perfect storm of horrible economic conditions

And yet the 4% rule worked, by definition

I agree with the meat of this post, but I can't just let this go. The Laffer Curve has never been discredited.  For that matter, it is mathmatically provable, so it cannot be discredited.  The unknown variable of the Laffer Curve is where the "peak" is.  Said another way, the 'ideal' tax rate is an unknown number, and one that is likely variable across economic conditions.  If you don't agree, it's only because you didn't understand what the Laffer Curve actually was.

This is off topic. And the Laffer Curve is not relevant to modern day taxation in the US. The US economy did great in the 50s when the top marginal rate was 90%. It's nowhere near that now.

[tooqk4u22]

2) Take historical returns. Cut them down 25-50%, then run the Monte Carlo. More subtle. Justified on current low bond yield. This is basically assuming we have times which will be considerably worse than the Great Depression, or 66-82 stagflation for investors. It's fine to play "What if?" - but this isn't really predictive.

Nothing about the Trinity Study is predictive....its just many many iterations of potential outcomes using randomized historical data sets.  There is no final say on this topic simply because it is not predicitive and in my opinion questioning the status quo with additional research and updated information and methodologies is not a fool's errand. 

Here is another thread to add to the list:

http://forum.mrmoneymustache.com/investor-alley/what-warren-buffett-said-in-1999/msg720887/#msg720887

[Nords]

Nothing about the Trinity Study is predictive....its just many many iterations of potential outcomes using randomized historical data sets.  There is no final say on this topic simply because it is not predicitive and in my opinion questioning the status quo with additional research and updated information and methodologies is not a fool's errand. 

When you link to a predictive study, I'll use it to determine tomorrow's stock market close.

[MDM]

Nothing about the Trinity Study is predictive....its just many many iterations of potential outcomes using randomized historical data sets.

One can delete the word "randomized" from the quote above.  The Trinity Study (see http://www.aaii.com/journal/article/retirement-savings-choosing-a-withdrawal-rate-that-is-sustainable for the original paper) simply used historical data sets to backtest portfolio withdrawal success rates.

[johnny847]

I didn't read all the posts in this thread in detail, but I think variable spending rates have not been discussed before.

Strictly speaking, a variable spending rate does not follow the 4% rule. But I think it's pretty dumb to stick your head in the ground and always withdraw an inflation adjusted 4% from your portfolio, no matter how the market is doing.
Furthermore, this isn't the way people spend money. At least, I don't think. I don't think people plan on spending the same amount of money every year.
Finally, the 4% rule was never tested on retirements longer than 30 years. It does not logically follow that the 4% rule to work for 50 year retirements just because it works for 30 year retirements.

So here's a portion of the post I wrote earlier: http://forum.mrmoneymustache.com/investor-alley/'your-age-in-bonds'-a-bad-choice-for-early-retirement/msg719856/#msg719856

But what about a 50 year retirement? Somebody FIREing in their 30s and living until their 80s? (or whatever start age you prefer, really)
With a constant 4% inflation adjusted withdrawal rate, here are the success rates:
50/50: 56.8%
60/40: 70.5%
70/30: 76.8%
80/20: 80%
90/10: 85.3%
100/0: 85.3%

And then with a variable spending rate of 3.5% to 4.5% of the initial portfolio, inflation adjusted every year:
50/50: 75.8%
60/40: 87.4%
70/30: 93.7%
80/20: 95.8%
90/10: 96.8%
100/0: 95.8%

Let's tone it down a bit. What about 40 year retirements?
Here's the constant 4% inflation adjusted withdrawal rate success rates:
50/50: 65.7%
60/40: 75.2%
70/30: 81%
80/20: 82.9%
90/10: 86.7%
100/0: 87.6%

And here's the numbers when you have a variable spending scheme of 3.5% to 4.5% of the original portfolio, inflation adjusted every year.
50/50: 87.6%
60/40:93.3%
70/30: 94.3%
80/20: 94.3%
90/10: 96.2%
100/0: 95.2%

Notice the nice increases in success rate by adopting a variable spending rate. For 40 year retirements, only 70/30 allocations and above survived 80%+ of the time with the rigid 4% withdrawals, but after applying a variable spending rate, all allocations 50/50 and higher survived 87.6%+ of the time (I consider anything above about 85% to be all the same, but w/e).
For 50 year retirements, only 80/20 allocations and above survived 80% of the time with the rigid 4% rule, but after adopting a variable spending rate, all allocations 60/40 and higher survived 87.4%+ of the time.

And as Jeremy at Go Curry Cracker points out,

…the wealth remaining 10 years after retirement, combined with the cumulative inflation during those 10 years, can explain 80 percent of the variation in a retiree’s maximum sustainable withdrawal rate after 30 years

In other words, if you can make it through the first 10 years without severely depleting your portfolio or inflation going out of control, your portfolio is likely to enter Too Big to Fail territory.  I’ve never heard better news, because I’ve always wanted to be a Bank

So another approach to strengthen the 4% rule is to lower your spending for the first ten years.


Again, the strategies talked about above are not actually following the 4% rule. But I think that's okay - the point is that the 4% rule gives us a rough guideline, and we can make it even better.

[a1smith]

And as Jeremy at Go Curry Cracker points out,

…the wealth remaining 10 years after retirement, combined with the cumulative inflation during those 10 years, can explain 80 percent of the variation in a retiree’s maximum sustainable withdrawal rate after 30 years

In other words, if you can make it through the first 10 years without severely depleting your portfolio or inflation going out of control, your portfolio is likely to enter Too Big to Fail territory.  I’ve never heard better news, because I’ve always wanted to be a Bank

So another approach to strengthen the 4% rule is to lower your spending for the first ten years.

I've thought about the 10 year "rule" for sequence of returns risk and I think it is better to express it as a percentage of your retirement period since Wade Pfau was referring to a 30 year retirement when he mentioned 10 years.  For someone retiring in their 50's-60's I think a 10 year period is probably accurate but I don't think you are home free from sequence of returns risk after 10 years if your retire at 30 and potentially have a 60 year retirement period.  So, maybe something in the 30-35% range?  Or is the sequence of returns risk present until the final 20 years of your retirement?  Thoughts, anyone?

[johnny847]

And as Jeremy at Go Curry Cracker points out,

…the wealth remaining 10 years after retirement, combined with the cumulative inflation during those 10 years, can explain 80 percent of the variation in a retiree’s maximum sustainable withdrawal rate after 30 years

In other words, if you can make it through the first 10 years without severely depleting your portfolio or inflation going out of control, your portfolio is likely to enter Too Big to Fail territory.  I’ve never heard better news, because I’ve always wanted to be a Bank

So another approach to strengthen the 4% rule is to lower your spending for the first ten years.

I've thought about the 10 year "rule" for sequence of returns risk and I think it is better to express it as a percentage of your retirement period since Wade Pfau was referring to a 30 year retirement when he mentioned 10 years.  For someone retiring in their 50's-60's I think a 10 year period is probably accurate but I don't think you are home free from sequence of returns risk after 10 years if your retire at 30 and potentially have a 60 year retirement period.  So, maybe something in the 30-35% range?  Or is the sequence of returns risk present until the final 20 years of your retirement?  Thoughts, anyone?

Ah true I should have thought about that more. I don't think you can simply say 10/30 = 33% for the interval after which you are home free with respect to sequence of returns risk though. We get compounding returns from our investments. This nonlinearity would imply that you can't just do a linear projection of taking the "10 year rule" to a 1/3 of your retirement period rule.

What is the analogous rule for longer retirements? That is something I need to think about.

Does anybody know if it is possible to get a CSV of all the terminal portfolio values in a simulation run?

[TomTX]

2) Take historical returns. Cut them down 25-50%, then run the Monte Carlo. More subtle. Justified on current low bond yield. This is basically assuming we have times which will be considerably worse than the Great Depression, or 66-82 stagflation for investors. It's fine to play "What if?" - but this isn't really predictive.

Nothing about the Trinity Study is predictive....its just many many iterations of potential outcomes using randomized historical data sets.  There is no final say on this topic simply because it is not predicitive and in my opinion questioning the status quo with additional research and updated information and methodologies is not a fool's errand. 

I phrased that poorly. Let me try again:

With the handicapping he is using, Pfau is indulging in trying to predict the market based on current conditions. It translates to "The market seems kinda expensive, returns are likely to be poor"

It's the same as the newbie investor saying "the market is near an all-time high, I need to wait in cash until it crashes."

The newbie investor is likely to miss out on gains while waiting. Those taking Pfau's paper's to heart are likely to miss out on years of retirement while waiting.

[arebelspy]

2) Take historical returns. Cut them down 25-50%, then run the Monte Carlo. More subtle. Justified on current low bond yield. This is basically assuming we have times which will be considerably worse than the Great Depression, or 66-82 stagflation for investors. It's fine to play "What if?" - but this isn't really predictive.

Nothing about the Trinity Study is predictive....its just many many iterations of potential outcomes using randomized historical data sets.  There is no final say on this topic simply because it is not predicitive and in my opinion questioning the status quo with additional research and updated information and methodologies is not a fool's errand. 

I phrased that poorly. Let me try again:

With the handicapping he is using, Pfau is indulging in trying to predict the market based on current conditions. It translates to "The market seems kinda expensive, returns are likely to be poor"

It's the same as the newbie investor saying "the market is near an all-time high, I need to wait in cash until it crashes."

The newbie investor is likely to miss out on gains while waiting. Those taking Pfau's paper's to heart are likely to miss out on years of retirement while waiting.

Hear, hear.

Ideally one would run the numbers without pessimistic inputs, and let readers decide for themselves what their ER is, expected future market valuations, etc.

Of course, one might feel justified treating their readers like idiots, if they're worried about the reader taking results from a study using a 0.1% ER, and saying that is their SWR, when they have a 1.5% ER.

You can see the dilemma one is in.  I'd rather run it without the assumptions, and add the caveats, but if you know most people won't read them, the financial headlines will just have the bottom line number, etc., it's a tough spot.

[sol]

Using the default 75/25 stock/bond split in firecalc, the historical record suggests that you are more likely to succeed in a 30 year retirement with a withdrawal rate of 9.25% than you are to fail in a 30 year retirement with a 4% withdrawal rate.  I'm calling it the "unsafe withdrawal rate" by analogy.

[arebelspy]

Using the default 75/25 stock/bond split in firecalc, the historical record suggests that you are more likely to succeed in a 30 year retirement with a withdrawal rate of 9.25% than you are to fail in a 30 year retirement with a 4% withdrawal rate.  I'm calling it the "unsafe withdrawal rate" by analogy.

It's shocking to me the percent is that high (5-10?) of a success rate for 30 years with a 9.25% rate.  Must have had quite a stock market run at the beginning of those successes.

[forummm]

Using the default 75/25 stock/bond split in firecalc, the historical record suggests that you are more likely to succeed in a 30 year retirement with a withdrawal rate of 9.25% than you are to fail in a 30 year retirement with a 4% withdrawal rate.  I'm calling it the "unsafe withdrawal rate" by analogy.

It's shocking to me the percent is that high (5-10?) of a success rate for 30 years with a 9.25% rate.  Must have had quite a stock market run at the beginning of those successes.

The successes are 1874, 1877, 1878, 1922, 1936, and 1982. If you change to 100% equities, the success rate for 9.25% goes up to 17%.

[EscapeVelocity2020]

The successes are 1874, 1877, 1878, 1922, 1936, and 1982. If you change to 100% equities, the success rate for 9.25% goes up to 17%.

Should we really count successes in the 19th century and early 20th century?  How did people even trade stocks and bonds back then?  So along this line of reasoning, I'd say 9.25% is unrealistic.  I would also say a retiree staying in 100% equities indefinitely is only realistic if you retire at the beginning of a bull market or have an alternate income source (blog revenue, rents, etc.), but unrealistic if you retire early and experience a bear market correction within 10 years.  Retired people with 20+ years to go generally cannot withstand a 20% loss without converting some equity to cash or bonds at what are typically in hindsight 'poorly market timed moves', this is just human nature.  I'd have more faith in the 75/25 allocation results, as there is a higher probability that people can maintain this allocation, or spend down the bonds during a bear market.

Before the Securities Act (then known as the Rayburn-Fletcher Securities Bill, May 27, 1933), most stock issues and sales were governed by state laws, which were based on principles of merit. The merit-based state laws had been largely ineffective in preventing securities fraud, as enforcement, prosecution, and oversight were all generally ineffective because of weak provisions, inadequate funding, or deliberate efforts by state governments to look the other way. The act superseded state laws through the Interstate Commerce Clause, which applied to so many possible stock sale methods (telephones, mailings, and electronic transfers are all considered aspects of interstate commerce) that it effectively took over all regulation of large stock issues. This was particularly important in light of the vastly increased breadth of stock ownership preceding the Great Depression -- the number of stockholders increased more than fourfold from 1900 to 1928, to 18 million people, or roughly 10% of the population.

With that said, I do agree that flexibility in SWR means that you will have years slightly above 4% and most likely will have years below, either by choice or circumstance, without triggering imminent failure.  The 4% rule is a planning tool, that's all, and relying on spending above 4% exposes you to needing to adjust spending down further and/or earlier than if you start at 4%...

[forummm]

I don't think anyone is advocating a 9.25% SWR. I agree that older data is less useful. The stock market was basically railroads for a lot of that time.

[sol]

So along this line of reasoning, I'd say 9.25% is unrealistic.

Of course it's unrealistic.  It's just as guaranteed to fail as a 4% SWR is guaranteed to succeed, which is to say it's almost certain but not quite.  Hence the label "unsafe withdrawal rate", chosen to remind you that anything between 4 and 9.25% is neither safe nor unsafe.

I merely mention it to highlight that if you're using 4% to plan for the extreme tail of the probability curve, it might be good to keep in mind the perspective provided by the tail at the other end, too.

The average SWR for 30 year periods in the current historical record is just over 6%, not 4%.  We use 4% to conservatively plan for worst case scenarios, fully cognizant of the fact that doing so means we are all but certain to work too long and save too much.

[EscapeVelocity2020]

Of course it's unrealistic.  It's just as guaranteed to fail as a 4% SWR is guaranteed to succeed, which is to say it's almost certain but not quite.  Hence the label "unsafe withdrawal rate", chosen to remind you that anything between 4 and 9.25% is neither safe nor unsafe.

I merely mention it to highlight that if you're using 4% to plan for the extreme tail of the probability curve, it might be good to keep in mind the perspective provided by the tail at the other end, too.

The average SWR for 30 year periods in the current historical record is just over 6%, not 4%.  We use 4% to conservatively plan for worst case scenarios, fully cognizant of the fact that doing so means we are all but certain to work too long and save too much.

On one hand, that is a brilliant framing observation, but on the other hand it makes planning a total crap-shoot.  How far toward 4% do you go before you pull the plug?  You seem to argue that 9.25% and 4% are the extremes, but it's certainly not as easy as splitting the difference, although you could also make that argument if you really wanted to, since none of this examination of historical record can convince anyone of what the next 30 years has in store for us.  That's why I like the 4% rule, people consider it to be a pretty dependable predictor of success for a 30 year period.  That pretty much means you won't suddenly find out that you screwed up (which gives you the wherewithal to adjust), and within 30 years some form of social security is probably within view to help supplement what you have left.

I know this is the 'stop worrying about the 4% rule' thread, so I will at least contribute by saying that you should certainly not continue to work a soul-sucking, family-destroying, unhealthy job just to get to 4%.  There are intangible benefits that offset the satisfaction of 100% bulletproof success, and there are also alternatives such as getting to 6% and then being willing to hustle a little, or go back to work when you get nervous.  There are also things happening now (facilitated by the internet) that are disruptively making retirement more enjoyable, engaging, and inexpensive - helping to bring down costs closer to 4%. 

It's a unique moment in human history, so who am I to say that you need a 4% SWR when people are paid for doing things that they would do anyways if they were retired (posting their game-play videos to YouTube, having a 'paleo/health/special interest blog', publishing eBooks, participating in pot where it is legalized, or craft brewing, and of course the sex industry (we are talking about the internet and human beings here) - the 'long tail' of ways to make at least a bit of income is becoming endless...). 

[johnny847]

Of course it's unrealistic.  It's just as guaranteed to fail as a 4% SWR is guaranteed to succeed, which is to say it's almost certain but not quite.  Hence the label "unsafe withdrawal rate", chosen to remind you that anything between 4 and 9.25% is neither safe nor unsafe.

I merely mention it to highlight that if you're using 4% to plan for the extreme tail of the probability curve, it might be good to keep in mind the perspective provided by the tail at the other end, too.

The average SWR for 30 year periods in the current historical record is just over 6%, not 4%.  We use 4% to conservatively plan for worst case scenarios, fully cognizant of the fact that doing so means we are all but certain to work too long and save too much.

...

I know this is the 'stop worrying about the 4% rule' thread, so I will at least contribute by saying that you should certainly not continue to work a soul-sucking, family-destroying, unhealthy job just to get to 4%.  There are intangible benefits that offset the satisfaction of 100% bulletproof success, and there are also alternatives such as getting to 6% and then being willing to hustle a little, or go back to work when you get nervous.  There are also things happening now (facilitated by the internet) that are disruptively making retirement more enjoyable, engaging, and inexpensive - helping to bring down costs closer to 4%. 

...

Sounds like you missed sol's point entirely. There is no 100% bulletproof success.

[EscapeVelocity2020]

Sounds like you missed sol's point entirely. There is no 100% bulletproof success.

And you have apparently missed my point also, which is does not contribute to a constructive discussion.  Not meaning to go negative, but I think I've heard quite a bit of Sol's repertoire, so 'missing his point entirely' gets a little under my skin.  I don't (and didn't) disagree with him.

[waltworks]

Someone's a Bayesian.

[EscapeVelocity2020]

Someone's a Bayesian.

I didn't know it had such a general defenitiion (https://en.wikipedia.org/wiki/Bayesian_probability).  Bayesian Economics is a bit more derogatory, which is why I don't post much around here...  so I hope you meant the former and not the latter. (http://econlog.econlib.org/archives/2009/11/why_arent_acade.html)

[johnny847]

Sounds like you missed sol's point entirely. There is no 100% bulletproof success.

And you have apparently missed my point also, which is does not contribute to a constructive discussion.  Not meaning to go negative, but I think I've heard quite a bit of Sol's repertoire, so 'missing his point entirely' gets a little under my skin.  I don't (and didn't) disagree with him.

Does or does not your statement "There are intangible benefits that offset the satisfaction of 100% bulletproof success" contradict sol's statement "It's just as guaranteed to fail as a 4% SWR is guaranteed to succeed, which is to say it's almost certain but not quite."

[waltworks]

Someone's a Bayesian.

I didn't know it had such a general defenitiion (https://en.wikipedia.org/wiki/Bayesian_probability).  Bayesian Economics is a bit more derogatory, which is why I don't post much around here...  so I hope you meant the former and not the latter. (http://econlog.econlib.org/archives/2009/11/why_arent_acade.html)

No, no, I just meant you aren't (as far as I can tell) into the "future will look like the past" sort of assumptions of traditional statistics that underly the usual 4% SWR sort of stuff.

It was not intended to be an insult at all. I just thought it was funny that nobody had mentioned it yet, since this sort of basic debate is common in statistics in all sorts of disparate fields.

-W

[EscapeVelocity2020]

Sounds like you missed sol's point entirely. There is no 100% bulletproof success.

And you have apparently missed my point also, which is does not contribute to a constructive discussion.  Not meaning to go negative, but I think I've heard quite a bit of Sol's repertoire, so 'missing his point entirely' gets a little under my skin.  I don't (and didn't) disagree with him.

Does or does not your statement "There are intangible benefits that offset the satisfaction of 100% bulletproof success" contradict sol's statement "It's just as guaranteed to fail as a 4% SWR is guaranteed to succeed, which is to say it's almost certain but not quite."

Feel free to attack me pedantically (I was not meaning to pick on you, but you can pick on me all you want,  I REALLY don't care, and I kinda' appreciate it).  I said exactly what I meant - having a SWR of 4% is pretty much bulletproof if you are willing to actualize a little modification along the way.  Or maybe that was what I meant to say and didn't articulate it perfectly.

In the past, I tried to modify my intention and eliminate mis-interpretation, but ARS responded to my raw posts right away and made me feel bad for editing posts. 

Any anyways, who cares who wins online?  I've never been sent a check saying - congratulations for outsmarting XYZ by telling people that they were mostly right but a little wrong, so you deserve this cut of the proceeds...

Why not just respect the intent of people's posts and internalize their intent, instead of nit-picking?  We should be more concerned about creating (in this case, a bulletproof retirement) - so if you think 4% isn't bulletproof, then start putting up what is. 

[johnny847]

Sounds like you missed sol's point entirely. There is no 100% bulletproof success.

And you have apparently missed my point also, which is does not contribute to a constructive discussion.  Not meaning to go negative, but I think I've heard quite a bit of Sol's repertoire, so 'missing his point entirely' gets a little under my skin.  I don't (and didn't) disagree with him.

Does or does not your statement "There are intangible benefits that offset the satisfaction of 100% bulletproof success" contradict sol's statement "It's just as guaranteed to fail as a 4% SWR is guaranteed to succeed, which is to say it's almost certain but not quite."

Feel free to attack me pedantically (I was not meaning to pick on you, but you can pick on me all you want,  I REALLY don't care, and I kinda' appreciate it).  I said exactly what I meant - having a SWR of 4% is pretty much bulletproof if you are willing to actualize a little modification along the way.  Or maybe that was what I meant to say and didn't articulate it perfectly.

In the past, I tried to modify my intention and eliminate mis-interpretation, but ARS responded to my raw posts right away and made me feel bad for editing posts. 

Any anyways, who cares who wins online?  I've never been sent a check saying - congratulations for outsmarting XYZ by telling people that they were mostly right but a little wrong, so you deserve this cut of the proceeds...

Why not just respect the intent of people's posts and internalize their intent, instead of nit-picking?  We should be more concerned about creating (in this case, a bulletproof retirement) - so if you think 4% isn't bulletproof, then start putting up what is.

You did not say "pretty much bulletproof" before. You said "100% bulletproof success." Not just "bulletproof," but you purposely qualified it to say "100% bulletproof." Maybe if you had just said "bulletproof" I could have given you the benefit of the doubt and said sure, he actually meant "pretty much bulletproof." But to qualify bulletproof with "100%"? Nope.

I don't think ANY withdrawal rate is bulletproof (and by bulletproof I mean 100% guaranteed) (aside from zero - because you've actually got a job or other income stream not from your investments that's sustaining your expenses). Even if you adapt. Nothing is guaranteed. Is a 1% withdrawal rate massively likely to succeed? Yea. That's still not a guarantee.

The whole notion of a safe withdrawal rate is that with high probability, your portfolio will not be depleted before you die. We do our best to establish this probability with past performance, but as we all know, past performance does not indicate future returns.

So what's conclusion if I don't have a bulletproof withdrawal rate? The 4% rule is good enough almost all the time. Use it as a benchmark for when you can retire. Use it as a guideline for how much you can withdraw from your portfolio each year. But as you say, be ready to adapt if the winds change. Particularly in the first approximately one third (I left this ambiguous earlier in this thread - it's 10 years for a 30 year retirement, but you can't just simply extrapolate that to say 1/3 of any retirement) where the sequences of returns risk can hit you hard.

[MoonShadow]

Why not just respect the intent of people's posts and internalize their intent, instead of nit-picking? 

Are you new to this whole 'anonymous on the Internet' thing?

[EscapeVelocity2020]

Thanks MoonShadow, for reminding me of an awesome song (https://www.youtube.com/watch?v=hr0rDW5j1KU).  I'll happily internalize the idea of 'if I ever lose my teeth, north and south'.  As many times in the past, and even more now, I sorta' regret not being born earlier, when people could just share ideas and  have a corresponding reciprocation in the form of 'fun'.

[MoonShadow]

Thanks MoonShadow, for reminding me of an awesome song (https://www.youtube.com/watch?v=hr0rDW5j1KU).  I'll happily internalize the idea of 'if I ever lose my teeth, north and south'.  As many times in the past, and even more now, I sorta' regret not being born earlier, when people could just share ideas and  have a corresponding reciprocation in the form of 'fun'.

I never cared for that song, myself, and that is not where my handle comes from.  I'm MoonShadow on a lot of forums, and the name doesn't really have a good story behind it.  Basicly, my grandfather was part Cherokee by his mother, and once or twice called me that as a child.  I think because I was a quiet and sneaky kid, but it was never explained well.

[EscapeVelocity2020]

Thanks MoonShadow, for reminding me of an awesome song (https://www.youtube.com/watch?v=hr0rDW5j1KU).  I'll happily internalize the idea of 'if I ever lose my teeth, north and south'.  As many times in the past, and even more now, I sorta' regret not being born earlier, when people could just share ideas and  have a corresponding reciprocation in the form of 'fun'.

I never cared for that song, myself, and that is not where my handle comes from.  I'm MoonShadow on a lot of forums, and the name doesn't really have a good story behind it.  Basicly, my grandfather was part Cherokee by his mother, and once or twice called me that as a child.  I think because I was a quiet and sneaky kid, but it was never explained well.

Whoa, thanks for sharing, but I guess we are going off piste.

[ender]

So along this line of reasoning, I'd say 9.25% is unrealistic.

Of course it's unrealistic.  It's just as guaranteed to fail as a 4% SWR is guaranteed to succeed, which is to say it's almost certain but not quite.  Hence the label "unsafe withdrawal rate", chosen to remind you that anything between 4 and 9.25% is neither safe nor unsafe.

I merely mention it to highlight that if you're using 4% to plan for the extreme tail of the probability curve, it might be good to keep in mind the perspective provided by the tail at the other end, too.

The average SWR for 30 year periods in the current historical record is just over 6%, not 4%.  We use 4% to conservatively plan for worst case scenarios, fully cognizant of the fact that doing so means we are all but certain to work too long and save too much.

The thing about this is that to me is most compelling is that it is far easier to account for the "problems" in a 6% SWR (working part-time, lowering expenses, going back to work, starting side businesses, etc) than it is to account for the problems with working too long (you can't "undo" working years).


The more I think about this the more I find a higher than 4% withdrawal rate compelling.


I don't like belaboring this point and I know sol discusses this often but it's so important! Using the study for a 4% withdrawal, which is what everyone uses when picking their withdrawal percentage, you end up overworking in nearly all cases. So either you use 4%, understanding that the same logic to pick 4% means you will have a ton more after 30 years in most cases, or you pick a higher, and decide to adjust your lifestyle appropriately.

Nearly no-Mustachians here plan on doing nothing after FIRE so nearly all of us will have some income potential after that point. Perhaps not the same income as working, but definitely some earning potential (and pension/ss future income).

[arebelspy]

So along this line of reasoning, I'd say 9.25% is unrealistic.

Of course it's unrealistic.  It's just as guaranteed to fail as a 4% SWR is guaranteed to succeed, which is to say it's almost certain but not quite.  Hence the label "unsafe withdrawal rate", chosen to remind you that anything between 4 and 9.25% is neither safe nor unsafe.

I merely mention it to highlight that if you're using 4% to plan for the extreme tail of the probability curve, it might be good to keep in mind the perspective provided by the tail at the other end, too.

The average SWR for 30 year periods in the current historical record is just over 6%, not 4%.  We use 4% to conservatively plan for worst case scenarios, fully cognizant of the fact that doing so means we are all but certain to work too long and save too much.

The thing about this is that to me is most compelling is that it is far easier to account for the "problems" in a 6% SWR (working part-time, lowering expenses, going back to work, starting side businesses, etc) than it is to account for the problems with working too long (you can't "undo" working years).


The more I think about this the more I find a higher than 4% withdrawal rate compelling.


I don't like belaboring this point and I know sol discusses this often but it's so important! Using the study for a 4% withdrawal, which is what everyone uses when picking their withdrawal percentage, you end up overworking in nearly all cases. So either you use 4%, understanding that the same logic to pick 4% means you will have a ton more after 30 years in most cases, or you pick a higher, and decide to adjust your lifestyle appropriately.

Nearly no-Mustachians here plan on doing nothing after FIRE so nearly all of us will have some income potential after that point. Perhaps not the same income as working, but definitely some earning potential (and pension/ss future income).

Well said. A more eloquent explanation of Diane's catchphrase.

[Nords]

The thing about this is that to me is most compelling is that it is far easier to account for the "problems" in a 6% SWR (working part-time, lowering expenses, going back to work, starting side businesses, etc) than it is to account for the problems with working too long (you can't "undo" working years).

The more I think about this the more I find a higher than 4% withdrawal rate compelling.

I don't like belaboring this point and I know sol discusses this often but it's so important! Using the study for a 4% withdrawal, which is what everyone uses when picking their withdrawal percentage, you end up overworking in nearly all cases. So either you use 4%, understanding that the same logic to pick 4% means you will have a ton more after 30 years in most cases, or you pick a higher, and decide to adjust your lifestyle appropriately.

Nearly no-Mustachians here plan on doing nothing after FIRE so nearly all of us will have some income potential after that point. Perhaps not the same income as working, but definitely some earning potential (and pension/ss future income).

Whether your SWR is 4% or 6% or 5.03899875%, you're still going to have to insure against portfolio failure and longevity.  "Wal-Mart greeter" is not insurance, and even at age 54 my body is starting to grumble about physical labor.  Going without some sort of FI insurance (an annuity) is like going without medical insurance.

When I was working, I didn't appreciate the significance of a military pension.  Now that I'm retired, every year I'm more appreciative of its value as insurance against portfolio failure.

If you're confident that a 6% SWR is an acceptable risk of portfolio failure, then I'd still annuitize a bare-bones income as part of your asset allocation.  Maybe you'll depend on Social Security (yeah, I understand that plan has potential flaws) or maybe you'll buy a single-premium insured annuity.  (Yeah, I understand those flaws too.)  You'd also have to devote some thought to long-term care, because the SWR analyses do not account for end-of-life medical expenses.  (More flaws.  Right.  Let's get back to the main point.)  All of these concepts have drawbacks, but the drawbacks are less catastrophic than the prospect of running out of money in your late 70s.

If you're reluctant to annuitize a portion of your investments, then perhaps it's better to "self insure" by working an extra year or two in your 40s than to go back to work for five years in your 70s.

As for "lowering expenses", you should pick a number now and then try surviving on it for a few months.  I'm talking a Jacob Lund Fisker class of low expenses, not just cutting back on the entertainment spending.  It's better to have the extreme frugality experience now (when it's "optional") rather than later (when it's mandatory). 

My parents-in-law are just starting their 80s.  Their investments are 100% CDs & Treasuries (don't get me started on their logic) and they're receiving Social Security.  However inflation has ravaged their portfolio to the point where they're cutting back on utilities and even groceries, not just entertainment and transportation.  They've gone way past their Depression-era frugality and they're deep into deprivation, but the options of "part-time work" and "side businesses" are off the table.  By the way, all four of their parents were Ashkenazi centenarians so my PILs may be living like this for another two decades... with or without their cognition.

Yes, many retirees are surviving on their Social Security income today.  (That's their portfolio & longevity insurance.)  Yes, there may be other types of assistance-- we have supported some of my PIL's expenses.  My brother-in-law is a tax CPA (who just FIREd) and he's doing a great job of keeping an eye on their finances, but we expect "the call" for more support any year now.  Don't get me started on that issue either. 

However it's worth considering whether your portfolio failure might transfer your living expenses to your family or relatives.  Would you rather work an extra year in your 40s to avoid this potential imposition in your 70s?

I'm not against a 6% SWR.  I'm just suggesting that it's better to test-drive these blithely-stated failure contingencies right now, while you're still earning a paycheck, and appreciating the implications.  After the test drive you may decide that it's better to work a little longer for the insurance (or the extra margin of assets) after all.

[forummm]

I think a good example relating to Nords' cautions is Sol. Sol has talked before about how he is thinking about a SWR higher than 4%. But he and his spouse have small pensions that kick in as early as <20 years from RE, and then SS later. And he has a lot of fat in his budget that he could cut out if things went south. It's important to have levels of safety, and more important if you are doing something more risky (like taking a 50% chance your portfolio runs out).

[sol]

I'm not against a 6% SWR.  I'm just suggesting that it's better to test-drive these blithely-stated failure contingencies right now, while you're still earning a paycheck, and appreciating the implications. 

Nords playing the part of voice of reason, as always.

A 6% withdrawal rate fails over a 30 year period half of the time.  Just because it is the statistically correct SWR for society as a whole doesn't make it the correct SWR for you or me or anyone else.

I also think it's important to recognize that very few folks here are looking at 30 year retirement funding periods.  Almost none of us.  I expect mine to be more like 21 years, and a 35 year old early retiree with good genes might reasonably expect to need 60 years out of her portfolio.  Don't believe that mmm line about how 30 years is the same as forever, it totally makes a difference.  You really do have to do your own math.

On the bright side, I think people underestimate how awesome social security is.  Someday soon I'll do a whole post about the ss benefits formula for early retirees, but the upshot is that it typically replaces half or more of a typical mustachians budget at age 67.  It's way more than the chump change most people here seem to assume it is.

[ender]

Whether your SWR is 4% or 6% or 5.03899875%, you're still going to have to insure against portfolio failure and longevity.  "Wal-Mart greeter" is not insurance, and even at age 54 my body is starting to grumble about physical labor.  Going without some sort of FI insurance (an annuity) is like going without medical insurance.

An important consideration in all this, too, is that if you look at the scenarios where a SWR fails, it's often initial years (first five or so) where the market crashes.

This is fortunately the best time to react. It is far easier to adjust in the years immediately after FIRE because as you say, the older you get, the harder it is. You can more easily get back into the job market or even start a second career if you have to.

Another thing which is good to think about along these lines is to ensure that after you FIRE you are still finding ways to grow your skills. This might be hobbies or DIY repairing of things, etc. If you like doing things like this that can be monetized then it's helpful "insurance" to continue to learn/enjoy those skills as in a pinch you can monetize them, too.

On the bright side, I think people underestimate how awesome social security is.  Someday soon I'll do a whole post about the ss benefits formula for early retirees, but the upshot is that it typically replaces half or more of a typical mustachians budget at age 67.  It's way more than the chump change most people here seem to assume it is.

+1

[Nords]

An important consideration in all this, too, is that if you look at the scenarios where a SWR fails, it's often initial years (first five or so) where the market crashes.

This is fortunately the best time to react. It is far easier to adjust in the years immediately after FIRE because as you say, the older you get, the harder it is. You can more easily get back into the job market or even start a second career if you have to.

I agree on that danger zone of the first 5-10 years for 30-year periods.  I sure hope it's true for longer periods, but I doubt there's research to confirm it.  I guess it also means that you start a new 30-year period every year until you're in your 60s or even 70s.

Another thing which is good to think about along these lines is to ensure that after you FIRE you are still finding ways to grow your skills. This might be hobbies or DIY repairing of things, etc. If you like doing things like this that can be monetized then it's helpful "insurance" to continue to learn/enjoy those skills as in a pinch you can monetize them, too.

I'd like to think that the financial skills which get someone to FI will also help them figure out how to earn while they're FI.  That's certainly been the case for me.

However we forum members might also be surrounded by high-performance overachievers who are simply turning their FI periods into extended bridge careers.  I'd really like to see some academic research on how much retirees earn after FI during their 50s, 60s, and 70s.  The good news is that while $10K of earnings won't help a portfolio very much, it's still a significant chunk of annual spending that can help preserve a portfolio.

But I'd still like to know whether the earnings reality of FI matches the fantasy.  For example my brother-in-law the FI tax CPA is really enjoying his retirement (he started last month).  He's finding plenty of things to do all day and I'm pretty sure he'll stay responsible for his own entertainment for the rest of his life.

However on his way out the door of his firm, he agreed to return this December to "help out" during tax season.  You tax workers know that a CPA's tax season runs through April and can easily suck up 60-70 hours per week.  He's expecting to work a fraction of that time, but he's already looking ahead to his winter plans (and the winter driving) and beginning to chafe at the potential commitment.  I feel the same way about earning money during FI... I don't mind an hour or two a day but when the surf is up I want to be free of commitments for at least 96 hours.

Again, if turning skills growth into money is part of the FI plan, then it's probably best to put that plan into action while you're still working for a paycheck.

[MoonShadow]

On the bright side, I think people underestimate how awesome social security is.  Someday soon I'll do a whole post about the ss benefits formula for early retirees, but the upshot is that it typically replaces half or more of a typical mustachians budget at age 67.  It's way more than the chump change most people here seem to assume it is.

Don't get your hopes high that SS will still look like it does now by the time you are 67.  That's already mathmaticly impossible, so it will change in some fashion.  Also, there is a 10 year (40 non-consecutive quarters, each with a full-time at minimum wage minimum for score) minimum work requirement to receive SS benefits.  While this is unlikely to be an issue for most of us, the most hardcore FIRE's end up getting a high paying job out of college, with really low life expenses, and manage FIRE before they can get those 40 credit quarters.  This is more likely for highly skilled women, who quit mid-20's to be a stay-at-home-mother for a term, without ever quite making the 40 quarters first.  This has happened to my own wife, and now we are considering a job for her, in part, to round out her 10 year minimum requirement.

Granted, this is still a good problem to have.

[Cheddar Stacker]

On the bright side, I think people underestimate how awesome social security is.  Someday soon I'll do a whole post about the ss benefits formula for early retirees, but the upshot is that it typically replaces half or more of a typical mustachians budget at age 67.  It's way more than the chump change most people here seem to assume it is.

Don't get your hopes high that SS will still look like it does now by the time you are 67.  That's already mathmaticly impossible, so it will change in some fashion.  Also, there is a 10 year (40 non-consecutive quarters, each with a full-time at minimum wage minimum for score) minimum work requirement to receive SS benefits.  While this is unlikely to be an issue for most of us, the most hardcore FIRE's end up getting a high paying job out of college, with really low life expenses, and manage FIRE before they can get those 40 credit quarters.  This is more likely for highly skilled women, who quit mid-20's to be a stay-at-home-mother for a term, without ever quite making the 40 quarters first.  This has happened to my own wife, and now we are considering a job for her, in part, to round out her 10 year minimum requirement.

Granted, this is still a good problem to have.

This was a worthy read, and given all the annuity and SS discussion, viola:
http://www.gocurrycracker.com/social-security-and-early-retirement/

[clifp]

Whether your SWR is 4% or 6% or 5.03899875%, you're still going to have to insure against portfolio failure and longevity.  "Wal-Mart greeter" is not insurance, and even at age 54 my body is starting to grumble about physical labor.  Going without some sort of FI insurance (an annuity) is like going without medical insurance.

An important consideration in all this, too, is that if you look at the scenarios where a SWR fails, it's often initial years (first five or so) where the market crashes.

This is fortunately the best time to react. It is far easier to adjust in the years immediately after FIRE because as you say, the older you get, the harder it is. You can more easily get back into the job market or even start a second career if you have to.

Another thing which is good to think about along these lines is to ensure that after you FIRE you are still finding ways to grow your skills. This might be hobbies or DIY repairing of things, etc. If you like doing things like this that can be monetized then it's helpful "insurance" to continue to learn/enjoy those skills as in a pinch you can monetize them, too.

On the bright side, I think people underestimate how awesome social security is.  Someday soon I'll do a whole post about the ss benefits formula for early retirees, but the upshot is that it typically replaces half or more of a typical mustachians budget at age 67.  It's way more than the chump change most people here seem to assume it is.

+1

+2 on Social Security.  When I first retired I didn't really think about 15 years.  I am realizing that it is my longevity insurance since I plan to take it at 70

In hindsight yes you can spot the bad retirement in five years. When you are actually living the dream not so easy.
It seems very likely that a Y2K retiree is going to be one of the 5% that fail after 30 years.  Raddr long running post show this http://www.raddr-pages.com/forums/viewtopic.php?f=2&t=1208&sid=613efc43b73aa1960cf59252b172407e&start=390.  The post will make more sense in looking at this link.   Now I retired in 99/2000 with more money and more fat to cut from my budget than most, but also without the benefit of lots research on SWRs.


I fully expect a big market correction in 2000, and was prepared for it. I wasn't shocked when it continued in 2001, but 2002 was a shock. 2003 was good rally, but it was short lived. After 5 years the Y2K was $729K (now it real terms its 639K) but people don't actually do a good job mental adjust for inflation when it is modest.  (Back in the 70s and early 80 inflation was top of mind so you factored it in).  So after 5 years your portfolio has drop 1/4 and you are 5 years older. You really going to start looking for a job now. Retirement is nice man.   Maybe you cut back a bit instead. 2005 was another bad but not awful year. (My net worth increased 5% in 2005). So maybe you continue tightening the belt a bit. 2006 was a good year you nudge up spending. 2007 an ok year.

And than the great recession hits. In Raddr spreadsheet the portfolio ends 2008 at $502 and than bounce back in 2009. In reality the 1st quarter of 2009 was really ugly. I distinctly remember Feb 17, 2009. Cause that was the day my portfolio dropped below 2 million (I know still a lot of money) but it now officially under 1/2 what I retired with after less than 10 years. I said "you fucking idiot, unless things turn around really soon you have blown a million dollar lottery ticket (aka stock options)  and are going to have to find a job in the middle of recession.". Now if had only started with 1 million and hadn't cut back spending, the real retirement failure would have come in 2009, 9 year into your retirement.

[Nords]

... but it now officially under 1/2 what I retired with after less than 10 years. I said "you fucking idiot, unless things turn around really soon you have blown a million dollar lottery ticket (aka stock options)  and are going to have to find a job in the middle of recession."

Heh.  I seem to recall having a similar conversation on that date with my spouse!  17 September 2001 and October 2002 were also gloomy times for stock-market assessments.

I think our Great Recession actual peak-to-trough drop was 56%.  It was from a ludicrously high peak to a ridiculously undervalued trough, from five standard deviations on the right side of the bell curve to six standard deviations on the left side, but the emotional impact was not mitigated by logical analysis.

[a1smith]

And as Jeremy at Go Curry Cracker points out,

…the wealth remaining 10 years after retirement, combined with the cumulative inflation during those 10 years, can explain 80 percent of the variation in a retiree’s maximum sustainable withdrawal rate after 30 years

In other words, if you can make it through the first 10 years without severely depleting your portfolio or inflation going out of control, your portfolio is likely to enter Too Big to Fail territory.  I’ve never heard better news, because I’ve always wanted to be a Bank

So another approach to strengthen the 4% rule is to lower your spending for the first ten years.

I've thought about the 10 year "rule" for sequence of returns risk and I think it is better to express it as a percentage of your retirement period since Wade Pfau was referring to a 30 year retirement when he mentioned 10 years.  For someone retiring in their 50's-60's I think a 10 year period is probably accurate but I don't think you are home free from sequence of returns risk after 10 years if your retire at 30 and potentially have a 60 year retirement period.  So, maybe something in the 30-35% range?  Or is the sequence of returns risk present until the final 20 years of your retirement?  Thoughts, anyone?

Ah true I should have thought about that more. I don't think you can simply say 10/30 = 33% for the interval after which you are home free with respect to sequence of returns risk though. We get compounding returns from our investments. This nonlinearity would imply that you can't just do a linear projection of taking the "10 year rule" to a 1/3 of your retirement period rule.

What is the analogous rule for longer retirements? That is something I need to think about.

Does anybody know if it is possible to get a CSV of all the terminal portfolio values in a simulation run?

I looked at cFIREsim and there is a checkbox for Create CSV file with output stats in the right column.  Then, once you get the results plot there is a Download Simulation Data link at the bottom of the page.  However, the CSV file was weird.  I did the default simulation for 2015-2045 retirement and the CSV file only has rows for 1956-1985.  The CSV file does have ending portfolio value with and w/o inflation adjust.  So, it seems to have a bug in the CSV file generator.

[forummm]

Does anybody know if it is possible to get a CSV of all the terminal portfolio values in a simulation run?

I looked at cFIREsim and there is a checkbox for Create CSV file with output stats in the right column.  Then, once you get the results plot there is a Download Simulation Data link at the bottom of the page.  However, the CSV file was weird.  I did the default simulation for 2015-2045 retirement and the CSV file only has rows for 1956-1985.  The CSV file does have ending portfolio value with and w/o inflation adjust.  So, it seems to have a bug in the CSV file generator.

It picks a retirement year for you (in this case 1956). I haven't been able to figure out how to get it to run a specific year you are interested in.

[johnny847]

Does anybody know if it is possible to get a CSV of all the terminal portfolio values in a simulation run?

I looked at cFIREsim and there is a checkbox for Create CSV file with output stats in the right column.  Then, once you get the results plot there is a Download Simulation Data link at the bottom of the page.  However, the CSV file was weird.  I did the default simulation for 2015-2045 retirement and the CSV file only has rows for 1956-1985.  The CSV file does have ending portfolio value with and w/o inflation adjust.  So, it seems to have a bug in the CSV file generator.

It picks a retirement year for you (in this case 1956). I haven't been able to figure out how to get it to run a specific year you are interested in.

This is my problem. I want all the output data, not just a subset.

Yes, I know, cFIREsim is a great resource that's provided for free, and I should be happy that I even have access to such a tool in the first place.

[Nords]

Here's Wade Pfau's overview of the 4% SWR and other withdrawal plans:
"Making Sense Out of Variable Spending Strategies for Retirees"
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2579123
(This link gets you to SSRN's abstract page, and then you can pick your preferred PDF.)

18 pages (large text, big margins) of review & analysis boils down to this 10-item table:

Decision Rule Methods:
[1] & [2] Bengen's Constant Inflation-Adjusted Spending (1994) (the 4% SWR)
[3] Bengen's Fixed-Percentage Withdrawals (2001)
[4] Bengen's Floor-and-Ceiling Withdrawals (2001)
[5] Guyton and Klinger's Decision Rules (2006)
[6] David Zolt's Target Percentage Adjustment (2013)

Actuarial Methods:
[7] & [8] RMD Spending Rules
[9] PMT Formula (ex. Waring and Siegel (2015); Steiner (2014); Bogleheads)
Monte-Carlo PMT Formulas: Frank, Mitchell, and Blanchett Age-Based 3D
Model (2011, 2012a, 2012b); Blanchett, Maciej, and Chen Mortality-Updating
Constant Probability of Failure (2012); David Blanchett's Simple Formula (2013)
[10] Annuitize the Floor & Invest for Discretionary

He concludes:
"Choosing a retirement income strategy is complicated by the fact that there is no single number which can summarize all of the characteristics of the strategy. The failure rate is not sufficient. The tables in this article provide 13 numbers to summarize the performance of a strategy, and all 13 numbers are important. These numbers include the initial spending rate, the evolution of real spending over 30 years at different points in the distribution of outcomes, and the distribution of remaining real wealth after 30 years.

How should a client choose a spending method and parameterize the initial spending rate?  This article provides a framework to think about the important issues, such as spending flexibility, feelings about upside spending growth vs. downside spending risks and a minimum spending threshold to be protected, desired direction of spending (for instance, whether to decrease spending over time), the appropriate planning horizon, and any legacy goals.

With decisions made about these issues, clients can decide on an appropriate XYZ formula and then compare the distributions of spending and wealth created by variable spending rules."

[Monkey Uncle]

However on his way out the door of his firm, he agreed to return this December to "help out" during tax season.  You tax workers know that a CPA's tax season runs through April and can easily suck up 60-70 hours per week.  He's expecting to work a fraction of that time, but he's already looking ahead to his winter plans (and the winter driving) and beginning to chafe at the potential commitment.  I feel the same way about earning money during FI... I don't mind an hour or two a day but when the surf is up I want to be free of commitments for at least 96 hours.

Yeah, I'm starting to get a little skeptical of the frequently tossed-around statements about how easy it is to make up the slack with part-time employment or monetizing a hobby.  I've run some preliminary numbers on starting part-time businesses based around a couple of my hobbies (free-lance BBQ pitmaster and nature tour guide).  Even using wildly optimistic assumptions about how much business I'd get, and assuming that I would work 30+ hrs/week during the 5-6 month warm season (the time of year when I'd really like to be pursuing my own recreational interests), I'd be lucky to clear more than $10k after income and self-employment taxes.  Now, $10k is nothing to sneeze at in the context of $45k/yr total spending, but it doesn't seem like enough to make up for a major portfolio failure.

Taking a menial part-time job would be even worse.  I'd have to work 30 hrs/week, 50 weeks/yr at $9/hr to clear around $11k.

To make a serious dent in your annual $ requirements, it seems like you'd have to do something similar to what Nords' BIL is doing.  Working 60-70 hrs a week at my old career job for half the year is not my idea of retirement.

[forummm]

However on his way out the door of his firm, he agreed to return this December to "help out" during tax season.  You tax workers know that a CPA's tax season runs through April and can easily suck up 60-70 hours per week.  He's expecting to work a fraction of that time, but he's already looking ahead to his winter plans (and the winter driving) and beginning to chafe at the potential commitment.  I feel the same way about earning money during FI... I don't mind an hour or two a day but when the surf is up I want to be free of commitments for at least 96 hours.

Yeah, I'm starting to get a little skeptical of the frequently tossed-around statements about how easy it is to make up the slack with part-time employment or monetizing a hobby.  I've run some preliminary numbers on starting part-time businesses based around a couple of my hobbies (free-lance BBQ pitmaster and nature tour guide).  Even using wildly optimistic assumptions about how much business I'd get, and assuming that I would work 30+ hrs/week during the 5-6 month warm season (the time of year when I'd really like to be pursuing my own recreational interests), I'd be lucky to clear more than $10k after income and self-employment taxes.  Now, $10k is nothing to sneeze at in the context of $45k/yr total spending, but it doesn't seem like enough to make up for a major portfolio failure.

Taking a menial part-time job would be even worse.  I'd have to work 30 hrs/week, 50 weeks/yr at $9/hr to clear around $11k.

To make a serious dent in your annual $ requirements, it seems like you'd have to do something similar to what Nords' BIL is doing.  Working 60-70 hrs a week at my old career job for half the year is not my idea of retirement.

This is my take on it as well. It's *much* easier to put in OMY when we have worked so hard to have everything setup to be saving so much money (and the jobs are not terrible, just not what we're really interested in) and accruing a little bump in eventual SS payout, than it is to work for, say, 6 years at a lower income because we pulled the cord a year too early. And with valuations so high right now, we're much more likely to be on the failure side of things for a 6%WR than if PEs were 15 and the 10 year Treasuries were 5%.

Now, if you're thinking about pulling the cord a year early, and you know that there's some chance you'll be OK, and some chance you'll need to go back and do your old job for 2-3 years to make up the ground you lost (you may need to discount from your old salary, you've burned through a lot of cash that would have been working for you, etc), then you'll have to figure out your own risk tolerance.

[arebelspy]

I used think that as well.

Now I side with Nord's idea that the skills that got you there will probably take you pretty far in earning money when necessary.

Now, $10k is nothing to sneeze at in the context of $45k/yr total spending, but it doesn't seem like enough to make up for a major portfolio failure.

You might be surprised--run some calculations in cFIREsim.

And your estimates seem really low to me in terms of time necessary to make 10-20k.

Like I said, I used to think he same way, now it seems to me that that there's so many ways to make money, it really isn't a problem.

[ender]

Also keep in mind that depending on where your you might want to earn at least $1 of earned income if you want to ridiculously game take advantage of things like the EITC or savers credits.

http://www.irs.gov/Credits-&-Deductions/Individuals/Earned-Income-Tax-Credit/EITC-Income-Limits-Maximum-Credit-Amounts
http://www.irs.gov/Credits-&-Deductions/Individuals/Earned-Income-Tax-Credit/Do-I-Qualify-for-Earned-Income-Tax-Credit-EITC

Those hours working might translate to some big tax credits, depending on how much of your income is coming from Roth sources and/or how much in Roth conversions you are doing :)

For example, let's assume you spend $30k a year and have $100k in Roth IRA principle. You have 5 years you can withdraw $20k of principle and then need to make $10k/year. If you earn $10k/year, using the IRS EITC estimator with 1 child, you are eligible for an EITC of $3,305. If you bump your taxable income to $30k (maybe Roth conversions) you still have an EITC of $2,224. More kids increases this obviously and it may increase it to the point it's worthwhile to have your earned income at the ideal point you get a full EITC.

Since we're talking about gaming err using tax incentives, you might as well put $2k into a Roth IRA and get 50% of that back on AGI up to $36k from the savers credit. So in our hypothetical example, let's say you make $10k, spend $30k (remainder is from Roth IRA withdrawals). You put $2k "back" into a Roth IRA, so when you file taxes you get back $4,305 (EITC of $3305 + $1000 savers credit).

While these numbers are small it should show that a modest income ($10k) can result in a very large percentage of your yearly spending ($14.3k in this case). So your withdrawal from your portfolio is not $30k but just about $15k. This could dramatically change your withdrawal percentage in initial years.

For me personally, where this is important is considering whether to scale down your work before going completely FIRE. It may not be ideal for someone who wants to go 100% working to 0% working and never change that percentage. But for me, if I end up working say 50% or 20% for some years then options for taking advantage of the tax code become numerous. Maybe I am able to scale back to 50% and make say $40k a year gross. I could put a bunch of that into a 401k to lower AGI/MAGI and then basically take advantage of all of the above, too. Perhaps living 50% retired is not what most here want but it is an option that makes the 4% perspective different to consider other scenarios.

Regardless, our tax system is not at all designed for people like mustachians who can save/live under their means on minimal income.. it provides a lot of opportunities for someone able to skillfully control their income to really maximize tax incentives.

Also note that with Roth conversions you can basically pick your taxable income to a dollar every year - have some unused unrefundable credits (such as savers)? Just convert the right amount of pretax to Roth!