Author Topic: Stop worrying about the 4% rule  (Read 196767 times)

arebelspy

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Re: Stop worrying about the 4% rule
« Reply #600 on: February 13, 2017, 05:01:56 PM »
1.1%, minimum 300k.

(Probably should take this to another thread, if it'll continue.)
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CanuckExpat

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Re: Stop worrying about the 4% rule
« Reply #601 on: February 13, 2017, 07:10:40 PM »
The annuity comparison is a nice thought if it makes you feel better, but there are difference (that make it a more aggressive or conservative estimate):

1) The insurance company probably invests more conservatively

2) With an annuity, you can count on living off dead people's money as long as you live long enough. You don't get that advantage with DIY investing and 4% rule: me and you could both FIRE tomorrow at 4%, but if you get hit by a bus, your stash is going to your heir, not me. If we both FIRE tomorrow using an annuity and you get hit by a bus, your stash is going to pay me in my old age (assuming I live that long).

3) The insurance company "plays both sides" which helps even things out for them: they sell life insurance and annuities, if people live longer than their actuarial tables predict, one product turns out better for them while the other turns out worse, and vice versa.

I think single premium immediate annuity are great products, and I'd consider it a part of my retirement planning at some point, if needed, but it doesn't work well for the extreme early retiree. It's almost impossible to get one younger than 40 or 50, and even if you do, the quoted rates will be horrible. There are not enough people retiring that early and buying annuities for it to work out.
« Last Edit: February 13, 2017, 08:23:59 PM by CanuckExpat »
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arebelspy

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Re: Stop worrying about the 4% rule
« Reply #602 on: February 13, 2017, 07:17:53 PM »
I think single premium immediate annuity are great products, and I'd consider it a part of my retirement planning at some point, if needed, but it doesn't work well for the extreme early retiree. It's almost impossible to get one younger than 40 or 50, and even if you do, the quoted rates will be horrible. There are not enough people retiring that early and buying annuities for it to work out.

Agree with all of this.
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Telecaster

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Re: Stop worrying about the 4% rule
« Reply #603 on: February 13, 2017, 11:45:51 PM »
The annuity comparison is a nice thought if it makes you feel better, but there are difference (that make it a more aggressive or conservative estimate):

<snip>

2) With an annuity, you can count on living off dead people's money as long as you live long enough. You don't get that advantage with DIY investing and 4% rule: me and you could both FIRE tomorrow at 4%, but if you get hit by a bus, your stash is going to your heir, not me. If we both FIRE tomorrow using an annuity and you get hit by a bus, your stash is going to pay me in my old age (assuming I live that long).

The other thing though, is that by following the 4% rule in most cases you wind up fabulously wealthy in old age.

With a SPIA you most likely will get your principle back, and you'll be lucky to get much if anything more than that. 

To put it another way, insurance companies feel unlucky if they have to pay you much more than your principle, and are betting they will wind up fabulously wealthy in your old age.   

arebelspy

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Re: Stop worrying about the 4% rule
« Reply #604 on: February 14, 2017, 01:17:31 AM »
The annuity comparison is a nice thought if it makes you feel better, but there are difference (that make it a more aggressive or conservative estimate):

<snip>

2) With an annuity, you can count on living off dead people's money as long as you live long enough. You don't get that advantage with DIY investing and 4% rule: me and you could both FIRE tomorrow at 4%, but if you get hit by a bus, your stash is going to your heir, not me. If we both FIRE tomorrow using an annuity and you get hit by a bus, your stash is going to pay me in my old age (assuming I live that long).

The other thing though, is that by following the 4% rule in most cases you wind up fabulously wealthy in old age.

With a SPIA you most likely will get your principle back, and you'll be lucky to get much if anything more than that. 

To put it another way, insurance companies feel unlucky if they have to pay you much more than your principle, and are betting they will wind up fabulously wealthy in your old age.

Definitely. It's suboptimal from a math perspective. But perhaps still okay from a psychological perspective.

The insurance company gets rich. But they may be better capable of riding out the lows than you are (then again, maybe not, if they go BK).

Reminds me of the pay off mortgage debate, whereby you have more money not doing it, but some people get more peace of mind out of doing it. Ditto SPIA.
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Mr Mark

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Re: Stop worrying about the 4% rule
« Reply #605 on: February 14, 2017, 01:56:03 AM »
...

2) With an annuity, you can count on living off dead people's money as long as you live long enough. You don't get that advantage with DIY investing and 4% rule: me and you could both FIRE tomorrow at 4%, but if you get hit by a bus, your stash is going to your heir, not me. If we both FIRE tomorrow using an annuity and you get hit by a bus, your stash is going to pay me in my old age (assuming I live that long).

3) The insurance company "plays both sides" which helps even things out for them: they sell life insurance and annuities, if people live longer than their actuarial tables predict, one product turns out better for them while the other turns out worse, and vice versa.

I think single premium immediate annuity are great products, and I'd consider it a part of my retirement planning at some point, if needed, but it doesn't work well for the extreme early retiree. It's almost impossible to get one younger than 40 or 50, and even if you do, the quoted rates will be horrible. There are not enough people retiring that early and buying annuities for it to work out.

+1

The forum debated this extensively some time ago I recall... As you get older (>65? >75?) there may be real value to buying an inflation adjusted annuity to secure a minimum income because of the 'death effect' (if your concern is 100% sustainable SWR, not leaving money to heirs), especially if you don't get (or don't trust) social security payments. This enables an insurance company to pay a higher than market WR + still make money, because some of their clients will die and never even get their principal back, and they can probably get re-insurance on any residual risk they are taking.

If you knew you only have 9 years to live a 10% SWR is gonna be just fine.
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Re: Stop worrying about the 4% rule
« Reply #606 on: February 14, 2017, 04:23:32 AM »
But you have to remember that the company probably issues thousands of annuity contracts.  They get to run many trials, so only a bare majority of them have to succeed for them to make a profit.  So they could handle, say, a 70% chance of success and still be profitable.  An individual only gets one trial, and so typically aims for a much higher chance of success, thereby reducing the SWR.

I think you might have misunderstood what the SWR literature is saying.  It's not that 95% of individual retirees with a 4% SWR successfully last 30 years, it's that 100% of people who retire in 95% of YEARS will successfully last 30 years.

Every single person in a given year will succeed or fail together.  There is no averaging effect for an insurance company to exploit, because if 2017 turns out to be one of the few years when a 4% SWR fails, then every single annuity contract they sell in 2017 will go bankrupt.

Most people don't seem to understand this important difference.  We're not each gambling that our personal portfolio will be in the 95% of successful cases like it's a random spin, we're gambling that our chosen retirement moment will not be among the 5% of worst years in world history to invest.

No, I totally get all that.  As Retire-Canada pointed out, I was referring to the fact that an early retiree is stuck with the success or failure of his/her chosen year, whereas an insurance company gets to play all of the years.
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Slate-WA

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Re: Stop worrying about the 4% rule
« Reply #607 on: February 17, 2017, 09:55:15 AM »
Hey, hoping you have some opinions on this without starting a new thread.

I moved my 401k to a selfdirected portfolio - and I'm not 100% where I want to put the money.

I put the first batch in VOO. 

Question 1 - where should I put the rest?  Small Cap?  International?  is there a good thread to point me toward regarding the perfect vanguard portfolio?  Or is it so personal that there's no right answer?
Question 2 - Is there any benefit to choosing a vanguard ETV vs. Mutual Fund? 

Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #608 on: February 17, 2017, 09:59:33 AM »
Question 1 - where should I put the rest?  Small Cap?  International?  is there a good thread to point me toward regarding the perfect vanguard portfolio?  Or is it so personal that there's no right answer?
Question 2 - Is there any benefit to choosing a vanguard ETV vs. Mutual Fund?

There is no perfect portfolio. There are some common ones that would be reasonable choices for most people. Have a look below in the investing section asset allocation gets talked about a lot.

On the ETF vs. MF there are also several threads in investing that cover this. The take away is that although there are some smaller differences you can choose either without it materially affecting your retirement.

Classical_Liberal

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Re: Stop worrying about the 4% rule
« Reply #609 on: February 18, 2017, 12:09:38 AM »
Hey, hoping you have some opinions on this without starting a new thread.

I moved my 401k to a selfdirected portfolio - and I'm not 100% where I want to put the money.

I put the first batch in VOO. 

Question 1 - where should I put the rest?  Small Cap?  International?  is there a good thread to point me toward regarding the perfect vanguard portfolio?  Or is it so personal that there's no right answer?
Question 2 - Is there any benefit to choosing a vanguard ETV vs. Mutual Fund?

https://portfoliocharts.com/

Data is only back to 1972, but it's a great resource created by a forum contributor. 

Nords

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Re: Stop worrying about the 4% rule
« Reply #610 on: February 18, 2017, 05:52:14 PM »
He basically said that the annuity is not a good proxy because he would never buy one

I would be shocked if that was the crux of his argument, because him buying one is irrelevant to if it's a good comparison or not.  I think you're probably vastly oversimplifying his position.

There are problems with using it, but like I said above, it may make someone feel better about DIYing.
Well, I could complicate it.  It's frustrating to be quoted without context.

I don't remember that discussion, but the annuity topic generally comes up two ways. 

The first is when someone expresses a desire to have a cushy military pension with all of its benefits.  The financial response boils down to getting a quote from an annuity seller like the Thrift Savings Plan or an employer or Berkshire Hathaway or whoever else offers them.  (Does Vanguard still do that?)  It'd be for a lifetime inflation-adjusted annuity, perhaps with a survivor benefit. 

As others have pointed out several times that's also the description of Social Security, which might be enough for any American concerned about the 4% SWR failure rate.  SS is not considered in the original 4% SWR Trinity Study or Bengen's analysis, and even someone in their 30s could have a struggling portfolio bailed out in its final years by SS.  As others have pointed out, 19 times out of 20 the retiree will live their entire remaining life with "enough", and in a few cases with "way more than enough".

[I'm in the camp of "way more than enough" because anyone with the motivation and persistence to achieve FI before a traditional age-65 retirement will probably also find ways to cut their ER expenses even more, or to earn money having fun with their ER.]

The second context is when someone is generally concerned about the 4% SWR failure rate and suffering from the "Just One More Year" syndrome.  Again the answer is to buy an annuity to cover the period of vulnerability.  Maybe that's a SPIA for a bare-bones budget, or maybe it's a short-term annuity during the early part of financial independence (before SS) to address sequence-of-returns risk.  Or maybe it's a deferred annuity as longevity insurance for someone who won't get SS.  It wouldn't even have to have an inflation adjustment.

The insurance companies tend to sell the simple annuities more cheaply because they make their profit margin from the mortality credits, not so much from the individual buying the annuity.  Unless, of course, you happen to become one of those mortality credits.

I'm not a big fan of indexed annuities or variable annuities because they're too expensive and too heavily weighted in the favor of the insurer (and the sales staff).  I'm also not a fan of whole or universal life insurance, but that's a whole 'nother thread.

Three relevant digressions:
Last December I lost a shipmate who had become a good friend.  He went into the hospital for complications with pneumonia, he was on social media that night, and suddenly the next day he was dead.  He was three years younger than me and he was larger than life.  He was happily retired from the military but he also left behind his fourth-grade class.  I still miss him every time someone brings up Harley-Davidson motorcycles or when I see vets with goatees & ponytails or hear Metallica.  I miss him a lot.

You know those thought experiments like "What if you found out that you only have a month left to live?"
Well, a couple of weeks ago one of my friends passed away in hospice.  He was diagnosed a month before he died, and it was too late for anything but palliative care. 
He was 76 years old and he was widowed three years ago-- yet he's survived by several siblings and his mother.   

Finally, yesterday I spent seven hours in the emergency room helping an acquaintance.  I broke a few speed records getting her there because we were both convinced that she was dying of a heart attack.  (I even managed to dial 911 along the way and ask them to have the ER crew stand by.)  After numerous scans & samples they determined that it wasn't cardiac or bleeding or ulcers, but that her body is breaking down from osteoporosis.  She's already healed a cracked pelvis, and for the last five months she's been dealing with two cracked vertebrae.  She was going through tremendous pain and nausea that was only eased by a Vicodin with a chaser of 8 mg of morphine.  She's 51 years old but looks 10 years older due to lifestyle choices (and perhaps genetics).  She's spending the weekend with more Vicodin and anti-nausea meds and muscle relaxants... and hopefully finding the time to decide what she wants to do next.

If you're concerned about the 5% failure rate of the 95% success rate, or if you're suffering from JOMY Syndrome, then maybe you have bigger issues to worry about. 

Set a budget, save up 25x, declare financial independence, and live your best life.
« Last Edit: February 18, 2017, 06:00:47 PM by Nords »
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arebelspy

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Re: Stop worrying about the 4% rule
« Reply #611 on: February 18, 2017, 06:00:10 PM »
Couldn't agree more.

Love to hear it from someone who's approaching a decade and a half ER'd.
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Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #612 on: February 18, 2017, 08:12:35 PM »
Set a budget, save up 25x, declare financial independence, and live your best life.

Amen.

EscapeVelocity2020

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Re: Stop worrying about the 4% rule
« Reply #613 on: February 18, 2017, 10:45:07 PM »
Thanks for the reply Nords, except I don't know specifically why Rebs agreed with you (he probably just didn't make himself clear).  In my comments, I was referring back to your original statements (which I linked to, repeatedly).  You began to discuss your original comment that you have a cushy military pension (which is enviable, but sadly increasingly unattainable for non-military unless willing to commit a significant premium to the 4% SWR equivalent).  At the time of the original comments, I found there to be a 60% cash premium for someone in their 40's to get the same COLA 'pension/annuity' as relying on a 60/40 and 4% SWR.

I do agree with the rest of the comments that people do die young and we should enjoy our youth and our health (whether through good fortune, hard work, or lifestyle choices).  I've never disagreed with that.  I guess I'll just make an aside that folks in their 30's and 40's probably get pretty depressed working and also reading blogs and forums about how much getting old sucks and not being retired sucks.  A better framing should be that getting older doing what you love to do, either still working a little longer until you can retire, or FI and then finding a better avocation like pastor or blogger or just kick-ass in your own original field (chemical engineer for me, which used to suck as contractor but now rocks as part of Norwegian International Oil Company).

One thing I do disagree with is the idea that folks today retiring in their 30's should expect to fall back on Social Security in 35+ years.  Maybe you are removed from just how different the working world has been from the 1990's to today, but I fear that folks think hitting that 4% / 25x threshold is still magical.  40 years from 1976 (the rolling period you should compare to if your plan includes SS, and I think there were still lines at gas stations and Presidents telling us to wear sweaters) is vastly different from 40 years from 2017.  I have all sorts of strong opinions that Medicare will be bankrupt or severely curtailed, social security will be only for poverty protection, and the USA will have a lower quality of living on average (somewhat better for 1%, much worse for 99%).
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arebelspy

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Re: Stop worrying about the 4% rule
« Reply #614 on: February 18, 2017, 11:03:18 PM »
All trends point the other direction.
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EscapeVelocity2020

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Re: Stop worrying about the 4% rule
« Reply #615 on: February 18, 2017, 11:12:29 PM »
All trends point the other direction.

I really don't understand what you are saying and I think you have something important that you want to say.  So stop being so enigmatic! 
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Re: Stop worrying about the 4% rule
« Reply #616 on: February 19, 2017, 08:08:16 AM »
...
One thing I do disagree with is the idea that folks today retiring in their 30's should expect to fall back on Social Security in 35+ years.  Maybe you are removed from just how different the working world has been from the 1990's to today, but I fear that folks think hitting that 4% / 25x threshold is still magical.  40 years from 1976 (the rolling period you should compare to if your plan includes SS, and I think there were still lines at gas stations and Presidents telling us to wear sweaters) is vastly different from 40 years from 2017.  I have all sorts of strong opinions that Medicare will be bankrupt or severely curtailed, social security will be only for poverty protection, and the USA will have a lower quality of living on average (somewhat better for 1%, much worse for 99%).
I'll comment on the bolded sections in order.  Perhaps this is what 'rebs was getting at
1) Medicare has been expanded multiple times since its inception in 1966, and each time it has included more people and a broader slice of the population

2) EVen the most conservative (pessimistic) projects on SSI show that it will be able to meet 70% of current obligations with no changes to the program. Other models indicate we might not have shortfalls at all should we maintain low unemployement and decent growth. It is currently still running a surplus. SSI has faced projected shortfalls before, and after LOTS of political bickering each time it has been tweaked to remain solvent. Also worth noting that other projected shortfalls in the conservative models never panned out (i.e. reality was better than the pessimistic model).

3) Overwhelmingly the trend for QOL has been upwards.  Despite all the press about 'stagnant' wages and how the "1% are seeing all the gains, this hasn't changed.  On a real-adjusted basis, the middle class today are doing better today then they were 20 years ago. What's changed is that we *feel* poorer, because our expectations have outpaced our growth. We see HUGE gains at the top of the income spectrum, and feel bad because we've made only modest gains around the middle.
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EscapeVelocity2020

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Re: Stop worrying about the 4% rule
« Reply #617 on: February 19, 2017, 03:16:46 PM »
I hope you are right and the next generation enjoys continued prosperity and social guarantees in a nice, neat extrapolation of the gains of the 1960s to 2000, but I'm just not so sure after the near collapse in 2008, with no real changes instituted to stop it from happening again.  And if people were satisfied with the status quo and where the future was taking them, why the self destructive votes for Brexit and Trump?  And plenty of evidence that the world is becoming more desperate to shake things up and vote for change agents.

But like I said, I would prefer to be reading too much into current events.  I'm perfectly aware we've gone through significant social upheaval in the past, but back then QOL gains involved getting the first household radio, TV, microwave, and VHS player.  Nowadays QOL comes from genetically modified food and targeted big data mining.  In other words, these improvements are more ambiguous and could likely be causing more harm than good (for the individual).

But these are just opinions.  The more one tries to understand facts around things like climate change and inflation adjusted household income and the economic issues in Greece, the more confused one gets around if it is better to just ignore trends.
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Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #618 on: February 19, 2017, 03:34:44 PM »
Being pessimistic has a huge financial, opportunity and mental health cost so unless the evidence clearly points to needing to be pessimistic I'll choose to be an optimist.

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Re: Stop worrying about the 4% rule
« Reply #619 on: February 19, 2017, 07:05:54 PM »
Being pessimistic has a huge financial, opportunity and mental health cost so unless the evidence clearly points to needing to be pessimistic I'll choose to be an optimist.

I second that.

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Re: Stop worrying about the 4% rule
« Reply #620 on: February 19, 2017, 07:49:27 PM »
Being pessimistic has a huge financial, opportunity and mental health cost so unless the evidence clearly points to needing to be pessimistic I'll choose to be an optimist.

I didn't think I was being pessimistic, just an open-eyed pragmatist and a realist.  Being a pessimist would imply that I think all hope is lost and things will definitely continue to get worse.  I do think that, in order for things to improve, sometimes they do need to get worse, and 2008 to now has been an unusually unbroken string of economic prosperity (seemingly built on the back of financial manipulations like zero interest rate policy and quantitative easing).  But I don't think I've suffered any financial, mental, or opportunity costs these last 9 years, so maybe this comment wasn't directed at me?
« Last Edit: February 19, 2017, 07:54:12 PM by EscapeVelocity2020 »
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arebelspy

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Re: Stop worrying about the 4% rule
« Reply #621 on: February 20, 2017, 02:30:06 AM »
Your posts seem to indicate otherwise.

And everyone thinks they're a realist. The optimists have data for why they should be optimistic, and the pessimists have data for why they're pessimistic.

If you think things will get better, you're an optimist. If you think they'll get worse, you're a pessimist.

Whether or not you think that can change is irrelevant. You say a pessimist thinks nothing can get better, but plenty of pessimists think it can, it just likely won't. Similarly, plenty of optimists think it could get worse, it just likely won't. A fatalism about one's viewpoint is separate from the viewpoint itself.
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Mr Mark

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Re: Stop worrying about the 4% rule
« Reply #622 on: February 20, 2017, 05:02:39 AM »
Being pessimistic has a huge financial, opportunity and mental health cost so unless the evidence clearly points to needing to be pessimistic I'll choose to be an optimist.

+2
Time to deploy the MMM optimism gun!
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Re: Stop worrying about the 4% rule
« Reply #623 on: February 20, 2017, 08:27:11 AM »
Thanks for the comment Rebs.  Of course, what I post is different from my day to day life.  Most people who know me would probably call me an optimistic person, unless talking about the latest Trump fiasco.  Even on that I try to be open minded and hopeful.  Probably one reason I seem pessimistic is that I've hit FI and market losses would impact me more than further outsize gains.  And this Forum is so full of optimists too!  I'm not one to join the chorus.  I don't foresee any imminent collapse or anything, I just like to point out the things others seem to either be unaware of or not talking about.  For instance,  2008/9 was probably tougher mentally on an ER than worker because the worker was still (hopefully) buying in through their 401k and living off income vs potentially living off shrinking investments and suffering dividend cuts.  Not saying this to make people pessimistic, just thought things like this are worth being reminded of (that we've had it incredibly good) or informing younger investors so they are better prepared.
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Re: Stop worrying about the 4% rule
« Reply #624 on: February 20, 2017, 09:41:55 AM »
...
But like I said, I would prefer to be reading too much into current events.  I'm perfectly aware we've gone through significant social upheaval in the past, but back then QOL gains involved getting the first household radio, TV, microwave, and VHS player.  Nowadays QOL comes from genetically modified food and targeted big data mining.  In other words, these improvements are more ambiguous and could likely be causing more harm than good (for the individual).

It's an interesting viewpoint, but not one I agree with.  The trouble with "advancements" is that they are often difficult to notice while they are happening but obvious when viewed by future generations. Looking specifically at the last 20 years I think one of our biggest "advancements"* has been the increasing connectedness of our world; video-conferencing, instant messages, long-distance/international calling and file sharing have become so common place that it's easy to forget 25 years ago these things were prohibitively expensive and time consuming (when available at all). As a scientist I also have to note that our ability to collect, store and process data has been growing exponentially for quite some time.  By one measure the environmental data collected in the last 15 years exceeds that collected within the previous 150.

*agree that "advancements" are often in the eye of the beholder and how they are used. Computers can be used to increase productivity and interact with more people, or they can be used to isolate ones-self from neighbors and ruin your health.
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Re: Stop worrying about the 4% rule
« Reply #625 on: February 20, 2017, 12:03:30 PM »
Thanks for your viewpoint Nereo.  I don't mean to say all advancements have 100% been dragging humanity down, but more pointing out that advancements in the past (that changed society) were pretty benign.  I'm sure families thought the world was coming to an end when Elvis shaking his hips on their radio (figuratively), then black and white TV subversively showed men on the moon, and don't even get me started on when MTV started showing videos :)  Those were the days, before we paid for cable to then have to sit through commercials - and they wonder why people are cutting the cord, but I digress.

I like that you chose global connectedness.  In some ways it has improved life making it a little easier to keep in touch as we travel, but also facilitates things like terrorism and propaganda.  Reminds me of Kevin Kelly's What Technology Wants.

Quote
“If we examine technologies honestly, each one as its faults as well as its virtues. There are no technologies without vices and none that are neutral. The consequences of a technology expand with its disruptive nature. Powerful technologies will be powerful in both directions, for good and bad. There is no powerfully constructive technology that is not also powerfully destructive in another direction, just as there is no great idea that cannot be greatly perverted for great harm. The greater the promise of a new technology, the greater its potential for harm as well”
 
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Re: Stop worrying about the 4% rule
« Reply #626 on: February 20, 2017, 01:40:24 PM »
Thanks for your viewpoint Nereo.  I don't mean to say all advancements have 100% been dragging humanity down, but more pointing out that advancements in the past (that changed society) were pretty benign.  I'm sure families thought the world was coming to an end when Elvis shaking his hips on their radio (figuratively), then black and white TV subversively showed men on the moon, and don't even get me started on when MTV started showing videos :)  Those were the days, before we paid for cable to then have to sit through commercials - and they wonder why people are cutting the cord, but I digress.

Well don't forget the fear and distrust that came with the nuclear bomb and the launch of sputnik.  Who knows how close humanity came to a global halocaust, but the hysteria was very real on both continents. Then there were things like the "horseless carriage"  - perhaps THE biggest gamechanger to cities, and originally seen as noisy, unreliable, useless, and expensive.  Many cities banned them at first.

Quote
I like that you chose global connectedness.  In some ways it has improved life making it a little easier to keep in touch as we travel, but also facilitates things like terrorism and propaganda.  Reminds me of Kevin Kelly's What Technology Wants.
...and child pornography. The FBI had that so under wraps by the mid 1990s that it was practically non-existent.  Then all of a sudden the internet allowed the disease to spread, and now it's the law enforcement equivalent of playing whack-a-mole.  Sigh...
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Re: Stop worrying about the 4% rule
« Reply #627 on: February 20, 2017, 02:02:31 PM »
When I get pessimistic about the world, this usually puts it into perspective:

http://www.humanprogress.org/
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Re: Stop worrying about the 4% rule
« Reply #628 on: February 20, 2017, 02:32:08 PM »
When I get pessimistic about the world, this usually puts it into perspective:

http://www.humanprogress.org/
^^ :-)
That gave me a nice warm fuzzy feeling.  Thanks.
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Re: Stop worrying about the 4% rule
« Reply #629 on: February 21, 2017, 02:51:17 PM »
One thing I do disagree with is the idea that folks today retiring in their 30's should expect to fall back on Social Security in 35+ years.  Maybe you are removed from just how different the working world has been from the 1990's to today, but I fear that folks think hitting that 4% / 25x threshold is still magical.  40 years from 1976 (the rolling period you should compare to if your plan includes SS, and I think there were still lines at gas stations and Presidents telling us to wear sweaters) is vastly different from 40 years from 2017.  I have all sorts of strong opinions that Medicare will be bankrupt or severely curtailed, social security will be only for poverty protection, and the USA will have a lower quality of living on average (somewhat better for 1%, much worse for 99%).
I watched Becoming Warren Buffet the other day and in it he says that he is extremely bullish on America's future. The documentary talks about his involvement in the Civil Rights and Women's movements through his first wife and he says one of the reasons he is so bullish is that we've managed to achieve what we have using literally only half our talent pool. If recent years have shown us anything, it's that women are just as capable as men, if not more so, to hold high level corporate positions and make great contributions to our society. If Buffet is such a bull about our country, I would feel a bit foolish thinking my opinion to the contrary is a smart one to have. I just think his sentiments about our future speak volumes about how resilient our society is, regardless of what issues we see in the news today that make us think otherwise.
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Re: Stop worrying about the 4% rule
« Reply #630 on: February 22, 2017, 08:18:11 PM »
@Green - I have the utmost respect for Mr. Buffet and agree that his is a case where bullish optimism has worked out through thick and thin.  However, I'd argue that nowadays he can win the game with one hand tied behind his back.  Companies throw themselves at him in the form of 'one off deals' to give him a stake in their company for below market rates, just to say that Buffet has taken a position in them (yikes, almost sounds sexual, except he is not Tumpy-creepy).

Specifically on his comments about bringing women into the workforce - that was a 'Yuge' one-time gain that I don't see happening again.  I hope that electric cars are on a similar economy-changing level, and I'm optimistic seeing Teslas winning market share for the foreseeable future.  I think electric and self-driving cars are significant positives for the environment and also for humanity doing something more productive than staring out of a windshield at brake-lights for increasingly prolonged spans of our lives.
« Last Edit: February 22, 2017, 08:20:32 PM by EscapeVelocity2020 »
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Re: Stop worrying about the 4% rule
« Reply #631 on: February 22, 2017, 09:11:19 PM »
In the theme of "good things about the 4% SWR", here's a post from Michael Kitces' site about why the 4% SWR might be too low. 

Yes, l-o-w, not a typo, too low.  The original research makes simplifying assumptions about spending, and those assumptions don't accurately model the way that humans actually spend. 

https://www.kitces.com/blog/safe-withdrawal-rates-with-decreasing-retirement-spending/

It reminds me of the quote "All models are wrong, some are just more useful than others."  25x annual expenses might be close enough for other defensive techniques to overcome adverse events, and "just one more year" syndrome might keep people in the workforce far longer than required.
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Re: Stop worrying about the 4% rule
« Reply #632 on: February 22, 2017, 09:51:43 PM »
@Nords - thanks for the link.  I appreciate the idea that due to decreased spending in later years, SWR could creep up 'at least 0.32%, and as much as 0.75%'.

But how has your early retirement jived with this assumed dip in spending?:
 

And that's fine if we all want to assume that we ER to a life of less spending (that eventually is forced upward by declining health).  But that's the clear-eyed choice that people should make, that they are going to take a dip in spending if 4% faces some short term headwinds, not that they can be confident in or up their 4% SWR because people at 60 usually spend less historically when they are 70 - 80.  We are talking to people retiring at 4% in their 30's and 40's here
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Re: Stop worrying about the 4% rule
« Reply #633 on: February 22, 2017, 10:05:59 PM »
Specifically on his comments about bringing women into the workforce - that was a 'Yuge' one-time gain that I don't see happening again.  I hope that electric cars are on a similar economy-changing level, and I'm optimistic seeing Teslas winning market share for the foreseeable future.  I think electric and self-driving cars are significant positives for the environment and also for humanity doing something more productive than staring out of a windshield at brake-lights for increasingly prolonged spans of our lives.
I work in a field closely related to "Big Data" and machine learning. I also have the opportunity to read summaries of the latest scientific research in technology and science on a daily basis. I have no doubt in my mind that the same pace of advancement will continue, if not accelerate. People will no longer drive. Graphene will replace the silicon chip and allow Moore's Law to continue. You will have a super computer in your living room that learns your habits and optimizes your life. Electricity will be wireless. A wind turbine was just deployed off the coast of Denmark that, if used worldwide, has the ability to generate 40 times the amount of power we consume globally. And that's just wind power! Many of the concepts you see in movies like Minority Report and I, Robot are not science fiction. They are the future. All of that advancement will drive growth and create new opportunities that we can only imagine as science fiction right now. I believe that the coming super computing revolution will make the industrial revolution look like cavemen discovering fire. I think my portfolio is in good hands when it comes to expected future returns over the next 60 years.
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Re: Stop worrying about the 4% rule
« Reply #634 on: February 22, 2017, 10:37:10 PM »
Specifically on his comments about bringing women into the workforce - that was a 'Yuge' one-time gain that I don't see happening again.  I hope that electric cars are on a similar economy-changing level, and I'm optimistic seeing Teslas winning market share for the foreseeable future.  I think electric and self-driving cars are significant positives for the environment and also for humanity doing something more productive than staring out of a windshield at brake-lights for increasingly prolonged spans of our lives.
I work in a field closely related to "Big Data" and machine learning. I also have the opportunity to read summaries of the latest scientific research in technology and science on a daily basis. I have no doubt in my mind that the same pace of advancement will continue, if not accelerate. People will no longer drive. Graphene will replace the silicon chip and allow Moore's Law to continue. You will have a super computer in your living room that learns your habits and optimizes your life. Electricity will be wireless. A wind turbine was just deployed off the coast of Denmark that, if used worldwide, has the ability to generate 40 times the amount of power we consume globally. And that's just wind power! Many of the concepts you see in movies like Minority Report and I, Robot are not science fiction. They are the future. All of that advancement will drive growth and create new opportunities that we can only imagine as science fiction right now. I believe that the coming super computing revolution will make the industrial revolution look like cavemen discovering fire. I think my portfolio is in good hands when it comes to expected future returns over the next 60 years.
Ahmen.  And most people will not believe the changes are coming, until they are already living them.  I was writing about how big data, cloud computing, technology convergence and global network connectivity would disrupt industries, create huge pikes of wealth ,and enable new information intensive businesses in the 80s, and some of the most respected global business strategists i worked with would laugh.  Transferred to Tokyo and more listened, but still it was an uphill to get people to really see the changes (though human nature doesnt change much nor quickly).

Still, we romanticise the past.  The cold war was a horror and anyone who barely scratches the surface of what our govt did vs what is happening now would realize we are in a golden age.
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Re: Stop worrying about the 4% rule
« Reply #635 on: February 22, 2017, 11:49:09 PM »
Your delayed FIRE due to fear reduces the risk of portfolio failure in exchange for guaranteed years of life's gone forever.

You can call portfolio failing risk, but the latter is a much bigger failure, to me.

In other words, I'd rather ER at 30 and run out of money at 85 (with an unknown amount of life left) than ER at 65 and have way too much at 85 (with the same unknown amount of life left).

Obviously there are scenarios in between, but how many years are you going to give up?  What if you can only choose one of those options?

What if, in the option where you run out of money, you're allowed to make more along the way, but in the other one, you're not allowed to get years back?
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Re: Stop worrying about the 4% rule
« Reply #636 on: February 23, 2017, 06:52:03 AM »
Your delayed FIRE due to fear reduces the risk of portfolio failure in exchange for guaranteed years of life's gone forever.

You can call portfolio failing risk, but the latter is a much bigger failure, to me.

In other words, I'd rather ER at 30 and run out of money at 85 (with an unknown amount of life left) than ER at 65 and have way too much at 85 (with the same unknown amount of life left).

Obviously there are scenarios in between, but how many years are you going to give up?  What if you can only choose one of those options?

What if, in the option where you run out of money, you're allowed to make more along the way, but in the other one, you're not allowed to get years back?

But there's also the strong possiblity that my life isn't even half over, and I'm making really good money at 43.  Much better than I made in my 20's, although it was somewhat easier back then.  Once I made it over the hump in my 30's (doing what the 'man' told me because I had to) now at FI in my 40's, I feel heistant to hang it up early just because I might only live 40 more years....
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Re: Stop worrying about the 4% rule
« Reply #637 on: February 23, 2017, 07:05:16 AM »
You can call portfolio failing risk, but the latter is a much bigger failure, to me.

In other words, I'd rather ER at 30 and run out of money at 85 (with an unknown amount of life left) than ER at 65 and have way too much at 85 (with the same unknown amount of life left).

I agree with you, but let's not forget that 30yr old retiree is in great shape to deal with a sequence of returns risk should he be in a poor start year. He/she can hedge against that with tactical portfolio choices, variable spending and as a last resort PT work. If they are in one of many happy start years where there portfolio gets several solid returns one after another they are set for life.

As someone who will FIRE around 50 at above 4%WR I'd be far happier starting FIRE at 40 because of the extra years in the prime of my life that are really mine, the reduced serious negative health impacts of sedentary work and being able to deal with the early sequence of returns risk in my 40's vs. my 50's.

If I could really turn back the clock doing so in my 30's would be even better. Although cFIREsim will give you a lower success rate for a longer FIRE period it's a limited simulation and ignores all the benefits of having extra time in your youth to address FIRE issues. My gut feel is that the situation is safer overall.

I definitely agree with you that working extra years FT in order to mitigate the small chance you might have to do something in FIRE to prevent a portfolio failure. As I have posted before I think it's more about fear of change than a real assessment of that risk and determining extra years of work are the best mitigation strategy. People trained to work all their life will fight pretty hard to keep going in many cases. Clutching at small % FIRE risks is just a rationalization.
« Last Edit: February 23, 2017, 07:50:16 AM by Retire-Canada »

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Re: Stop worrying about the 4% rule
« Reply #638 on: February 23, 2017, 07:09:40 AM »
I feel heistant to hang it up early just because I might only live 40 more years....

Then work. It's your life. Just be aware of the opportunity cost trade you are making and why you are really making it.

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Re: Stop worrying about the 4% rule
« Reply #639 on: February 23, 2017, 07:15:47 AM »
As someone who will FIRE around 50 at above 4%WR I be far happier starting FIRE at 40 because of the extra years in the prime of my life that are really mine, the reduced serious negative health impacts of sedentary work and being able to deal with the early sequence of returns risk in my 40's vs. my 50's.

If I could really turn back the clock doing so in my 30's would be even better. Although cFIREsim will give you a lower success rate for a longer FIRE period it's a limited simulation and ignores all the benefits of having extra time in your youth to address FIRE issues. My gut feel is that the situation is safer overall.

RC, great post!  It's a nice reminder that folks should try to find work they enjoy or a side hustle the whole time that they are beholden to 'the man'.  For me, I do regret sticking it out in a crap job in my 30's (when my kids were being born and doing the 'family nest' bit).  But hey, maybe the struggle made me appreciate my situation now.
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Re: Stop worrying about the 4% rule
« Reply #640 on: February 23, 2017, 12:47:08 PM »
In other words, I'd rather ER at 30 and run out of money at 85 (with an unknown amount of life left) than ER at 65 and have way too much at 85 (with the same unknown amount of life left).

What if, in the option where you run out of money, you're allowed to make more along the way, but in the other one, you're not allowed to get years back?
There's a couple of tweetables in those thoughts.

I should mention that the "retirement spending smile" chart in that article has been around for a while.  (Wade Pfau either created or popularized the phrase.)  I think most of the academic financial research community accepts that.

The latest bleeding-edge research is beginning to hypothesize that the smile is more of a glide slope down to death, and that perhaps end-of-life expenses are at least as rare as the 5% risk of sequence-of-returns failure.  This matches the Boston College Center For Retirement Research paper which has determined that long-term care is rare (only 5% of elders are in a care facility) and the majority of the duration is within the 100 days of Medicare benefits. 

I take this research personally, and I'd better not screw it up.  My father and his father spent over six years (so far) and 14 years (respectively) in dementia care facilities, with longevity of 83 (and still going) and 97.  If genetics loads the gun, then I might be playing Russian Roulette with a semi-automatic pistol.  Regardless of the rest of my life, I'm really really glad that I didn't spend my 40s at a bridge career.

Our total annual spending during our 14+ years of financial independence has been all over the map-- because parenting, slow travel, and other projects like personal-finance writing. 

However our non-discretionary expenses have dropped steadily and we can play fiscal defense like Mustachian hall-of-fame candidates.  Our daughter launched from the nest in 2010.  Although she was a frugal expense (and the best bargain ever) she's now off the payroll.  Since 2002 we've refinanced mortgages nine times (between a home and a rental) and dropped those expenses nearly 40%.*  We eat a lot less calories than in my 30s and 40s, and even at a higher quality of protein (ahi and mahi mahi, please) we're still spending less overall.  We hardly ever eat out (and we rarely eat fast food) because it's more hassle than prepping home-cooked.  Our utilities have dropped steadily due to a photovoltaic array and a net-metering agreement as well as solar water heating.  We use less water for irrigation and we use a lot less water in our house (launching a teen from the nest).  Our gasoline and car expenses have dropped steadily (not commuting) and we could hammer them down even further with an electric vehicle (no oil changes!) recharged from our photovoltaic array.  Internet access is cheaper and faster every year.  Our landline ($26/month) has been replaced by a used iPhone.  Just about every electronic device in the house is cheap and getting cheaper.  The public library and eBooks cost less than paperbacks ever have.  We now only have one paid magazine subscription (Family Handyman, $12/year).  I've had to stop training taekwondo (knee injuries) but I still pay for surf wax by the pound.

*  [We just started a new refinance, and this one's going to be a monster equity cash-out of our home.  We'll be making payments until I'm 86 years old... hopefully in 30 years I'll still have the cognition to understand that!  Our mortgage is a discretionary expense-- a way for us to tap our dead equity as well as pay back a fixed long-term monthly debt with inflation-adjusted military pensions.]

Even our state & federal taxes have gone down since I retired from active duty.  In a few years the federal taxes will go back up when my spouse starts her Reserve pension, but by then both of our retirement accounts will be Roth IRAs.

The only expenses which have crept up over the last 14 years have been sewage (Hawaii's rotting infrastructure), cable TV, and travel.  I reluctantly endure the first (although our daughter is a civil engineer) and my spouse is inching ever closer to eliminating the second.  (http://forum.mrmoneymustache.com/do-it-yourself-forum!/cutting-the-nords-cord/msg1394335/#msg1394335)  The third is totally discretionary and offset by crashing at our daughter's place (wherever the Navy sends her) or military Space A flights.

The longer we've been retired, the more our checking account goes up.  By the time we're drawing Social Security (age 70), we'll be able to pay our non-discretionary expenses within that budget.
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Re: Stop worrying about the 4% rule
« Reply #641 on: February 23, 2017, 11:16:18 PM »
In other words, I'd rather ER at 30 and run out of money at 85 (with an unknown amount of life left) than ER at 65 and have way too much at 85 (with the same unknown amount of life left).

What if, in the option where you run out of money, you're allowed to make more along the way, but in the other one, you're not allowed to get years back?
There's a couple of tweetables in those thoughts.

I should mention that the "retirement spending smile" chart in that article has been around for a while.  (Wade Pfau either created or popularized the phrase.)  I think most of the academic financial research community accepts that.

The latest bleeding-edge research is beginning to hypothesize that the smile is more of a glide slope down to death, and that perhaps end-of-life expenses are at least as rare as the 5% risk of sequence-of-returns failure.  This matches the Boston College Center For Retirement Research paper which has determined that long-term care is rare (only 5% of elders are in a care facility) and the majority of the duration is within the 100 days of Medicare benefits. 

I take this research personally, and I'd better not screw it up.  My father and his father spent over six years (so far) and 14 years (respectively) in dementia care facilities, with longevity of 83 (and still going) and 97.  If genetics loads the gun, then I might be playing Russian Roulette with a semi-automatic pistol.  Regardless of the rest of my life, I'm really really glad that I didn't spend my 40s at a bridge career.

Our total annual spending during our 14+ years of financial independence has been all over the map-- because parenting, slow travel, and other projects like personal-finance writing. 

However our non-discretionary expenses have dropped steadily and we can play fiscal defense like Mustachian hall-of-fame candidates.  Our daughter launched from the nest in 2010.  Although she was a frugal expense (and the best bargain ever) she's now off the payroll.  Since 2002 we've refinanced mortgages nine times (between a home and a rental) and dropped those expenses nearly 40%.*  We eat a lot less calories than in my 30s and 40s, and even at a higher quality of protein (ahi and mahi mahi, please) we're still spending less overall.  We hardly ever eat out (and we rarely eat fast food) because it's more hassle than prepping home-cooked.  Our utilities have dropped steadily due to a photovoltaic array and a net-metering agreement as well as solar water heating.  We use less water for irrigation and we use a lot less water in our house (launching a teen from the nest).  Our gasoline and car expenses have dropped steadily (not commuting) and we could hammer them down even further with an electric vehicle (no oil changes!) recharged from our photovoltaic array.  Internet access is cheaper and faster every year.  Our landline ($26/month) has been replaced by a used iPhone.  Just about every electronic device in the house is cheap and getting cheaper.  The public library and eBooks cost less than paperbacks ever have.  We now only have one paid magazine subscription (Family Handyman, $12/year).  I've had to stop training taekwondo (knee injuries) but I still pay for surf wax by the pound.

*  [We just started a new refinance, and this one's going to be a monster equity cash-out of our home.  We'll be making payments until I'm 86 years old... hopefully in 30 years I'll still have the cognition to understand that!  Our mortgage is a discretionary expense-- a way for us to tap our dead equity as well as pay back a fixed long-term monthly debt with inflation-adjusted military pensions.]

Even our state & federal taxes have gone down since I retired from active duty.  In a few years the federal taxes will go back up when my spouse starts her Reserve pension, but by then both of our retirement accounts will be Roth IRAs.

The only expenses which have crept up over the last 14 years have been sewage (Hawaii's rotting infrastructure), cable TV, and travel.  I reluctantly endure the first (although our daughter is a civil engineer) and my spouse is inching ever closer to eliminating the second.  (http://forum.mrmoneymustache.com/do-it-yourself-forum!/cutting-the-nords-cord/msg1394335/#msg1394335)  The third is totally discretionary and offset by crashing at our daughter's place (wherever the Navy sends her) or military Space A flights.

The longer we've been retired, the more our checking account goes up.  By the time we're drawing Social Security (age 70), we'll be able to pay our non-discretionary expenses within that budget.

You are my hero Nords!

The things that scare me most about retiring early at 4% is health insurance, and more importantly a chronic health disaster or long term care. In my mind I can hedge against or deal with just about anything else.

I'm curious, you mentioned a mortgage. Have you looked into or written about reverse mortgages (HECM). You have to be 62 to use it so probably useless to almost everyone here, but it seems like an interesting strategy to use if you get to 62, have not quite made it to 4%, have a large amt of home equity and want to hedge against sequencing risk and/or delay SS to 70. 
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Re: Stop worrying about the 4% rule
« Reply #642 on: February 24, 2017, 04:52:36 PM »
Thanks!  I'm trying to set a good example of what early retirees do all day...

I'm curious, you mentioned a mortgage. Have you looked into or written about reverse mortgages (HECM). You have to be 62 to use it so probably useless to almost everyone here, but it seems like an interesting strategy to use if you get to 62, have not quite made it to 4%, have a large amt of home equity and want to hedge against sequencing risk and/or delay SS to 70.
I've read about them, but I haven't written about them.

Very few of my readers are older than me (56) so it hasn't come up.  They used to be overpriced and over-sold with high fees, but HUD has cracked down on the abuses and they're a much better deal today.  I think Wade Pfau (again) has been writing about the best ways to use them.

I'm especially enamored of the line-of-credit aspect of a HECM, where you only write a check when you want the money, but otherwise I haven't researched the benefits & pitfalls.



I'm a big fan of paying off a long-term fixed-rate mortgage with the income from a reliable inflation-adjusted annuity (like a military pension).  We've used this tactic since 2004, we've invested most of the money in the stock market, and we're handily ahead of the mortgage interest rate.  This time we may be able to lock in 3.25% for 30 years on a Hawaii VA loan for a very large amount of equity.  We'll bleed a little cash for a nearly five years, but then my spouse will start her Reserve pension and our cash flow will turn positive again.

We started the analysis with trying to reduce the interest rate on our rental property mortgage (4.625%), then it turned into analyzing a bigger loan with the mortgage on our home (3.625%), and then it turned into paying points for an even bigger VA loan.  The key is having enough income to make the payments, and once that hurdle is achieved then the rest is good enough to turn the spreadsheet green.  We also benefited from the math and the advice in Casey Fleming's book "The Loan Guide".

We tend to take outsize risks with our money that we don't need, but in this case the loan repayment is offset by military pension income.  Although the mortgage broker is making some very encouraging noises, nobody has yet given us a loan amount or an interest rate.
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mathjak107

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Re: Stop worrying about the 4% rule
« Reply #643 on: February 25, 2017, 03:10:57 AM »
the two biggest pitfalls with reverse mortgages are seniors are finding that as their health changes so do the requirements  they have for living .

not being able to drive and finding yourself living in an area with no public transportation can suck . you may have little to no equity left if you sell . reverse compounding interest and fees ain't your friend .

many run in to the same issues when they become ill and want to be closer to family  or move in with family for care .

one other point is that you agree to make all needed repairs when you take that reverse mortgage . nothing could be worse than having to replace a roof that is still fairly okay because the lender tells you to . the reason you took the reverse mortgage in the first place is because cash is so tight .

many find that the fact almost half the value of their property is not loaned against  does not help out as much as they thought and it can still be a struggle .

one aspect of reverse mortgages had interested me  and that was a reverse mortgage to purchase .

that is where you put down about 1/2 on a new place and never make another mortgage payment again . but when i looked in to it i learned those mortgages were really designed for lower income seniors who are a higher risk group . the interest rates on them and fees were just to high to make it worth it compared to a conventional loan
« Last Edit: February 25, 2017, 03:12:57 AM by mathjak107 »

frugaldoc

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Re: Stop worrying about the 4% rule
« Reply #644 on: February 25, 2017, 08:41:22 AM »
the two biggest pitfalls with reverse mortgages are seniors are finding that as their health changes so do the requirements  they have for living .

not being able to drive and finding yourself living in an area with no public transportation can suck . you may have little to no equity left if you sell . reverse compounding interest and fees ain't your friend .

many run in to the same issues when they become ill and want to be closer to family  or move in with family for care .

one other point is that you agree to make all needed repairs when you take that reverse mortgage . nothing could be worse than having to replace a roof that is still fairly okay because the lender tells you to . the reason you took the reverse mortgage in the first place is because cash is so tight .

many find that the fact almost half the value of their property is not loaned against  does not help out as much as they thought and it can still be a struggle .

one aspect of reverse mortgages had interested me  and that was a reverse mortgage to purchase .

that is where you put down about 1/2 on a new place and never make another mortgage payment again . but when i looked in to it i learned those mortgages were really designed for lower income seniors who are a higher risk group . the interest rates on them and fees were just to high to make it worth it compared to a conventional loan
Great points! Thanks. I did not think of the forced repair issue, definitely something to research. Hard to imagine how a lender would really know what needs work though. Unless there is obvious structural damage how would they know? Does anyone know hoe frequently this occurs?

As Nords mentioned I think the best use of these is as a line of credit. Essentially you open up a line at age 62 (only pay initial setup costs, which can be quite expensive) and only take out equity in the event of a bad initial sequence of returns, or to control taxable income if most of your money is coming from IRAs/pension or other ordinary income. My guess is most mustachians have a big enough taxable pile and are living frugally enough this doesn't matter, but for a retired physician living off of 130 or something the tax savings could be substantial. In a low interest rate environment like we are in now you borrow the money at 4ish% (and use it like tax free income since it is a loan) and let the IRAs keep growing at 7ish% (and not have to realize taxable income). And when you pay back the interest (if ever) you get to deduct it.

I'm trying to get someone to do a relatively non biased financial analysis of these (good luck right?) because I'm fascinated by them. What really intrigues me is from my reading of the program, the loan never has to be paid back while you are alive and living in the property. The loan is non recourse which means that can't come after other assets even in the balance of the loan become much higher than the house value. You transfer all that risk to he FHA.

Worse case scenario, things get out of hand and you owe much more than the house is worth as interest rates climb and you keep pulling money out. You lose all that home equity (which was worthless to you from a cash flow perspective anyways), but you have potentially delayed taking social security (higher payment) and you have not depleted your other assets as much (IRAs, taxable, etc).

There is a thread I started over on WCI if anyone has interest in this topic as I  don't want to get too far into the weeds here. Perhaps I will start a new thread here if there is interest.

http://whitecoatinvestor.com/forums/topic/using-a-reverse-mortgage-in-retirement-as-a-strategic-planning-tool/
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Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #645 on: February 25, 2017, 09:13:12 AM »
Could you not just have a HELOC on the house and use that when you needed money? At some point you'll sell and move into an apartment or car home at that time you discharge the HELOC. That would let you get a significant amount of money out of the house and keep control over both how much you take out and what you spend it one.

frugaldoc

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Re: Stop worrying about the 4% rule
« Reply #646 on: February 25, 2017, 09:32:23 AM »
Could you not just have a HELOC on the house and use that when you needed money? At some point you'll sell and move into an apartment or car home at that time you discharge the HELOC. That would let you get a significant amount of money out of the house and keep control over both how much you take out and what you spend it one.

Yes, similar to HELOC, although the lender cannot change the terms of a HECM and the line of credit grows at some rate determined by the FHA. 20 years after a HECM is established your line of credit may be more than your house value, and they cannot take it away from you. Just imagine if you took out a HECM 15 years ago on a huge house in downtown Detroit. Morality and ethics aside one could have stripped out all the 'equity' (which keeps growing even if the house value goes to zero) and handed the keys to the FHA at the end. The bank would have shut down a HELOC very early in the process.

Additionally a HECM doesn't need to be paid back until you move or dies. HELOC must be paid back immediately (at least the interest) and you are at the mercy of the bank. They can change terms or reduce/eliminate your line of credit.

The biggest advantage of a HELOC is that they are significantly cheaper.
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mathjak107

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Re: Stop worrying about the 4% rule
« Reply #647 on: February 25, 2017, 01:09:11 PM »
Could you not just have a HELOC on the house and use that when you needed money? At some point you'll sell and move into an apartment or car home at that time you discharge the HELOC. That would let you get a significant amount of money out of the house and keep control over both how much you take out and what you spend it one.

the last thing you want to do is borrow money when you need money and pay it back with interest  and a floating rate

TomTX

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Re: Stop worrying about the 4% rule
« Reply #648 on: February 25, 2017, 03:27:00 PM »
Could you not just have a HELOC on the house and use that when you needed money? At some point you'll sell and move into an apartment or car home at that time you discharge the HELOC. That would let you get a significant amount of money out of the house and keep control over both how much you take out and what you spend it one.

the last thing you want to do is borrow money when you need money and pay it back with interest  and a floating rate

Only if you expect the market to remain crashed forever.

Now that I really think about it - taking out a HELOC and using it to deal with a stock market downturn is functionally the same as selling bonds when the stock market is down. You are spending equity + interest (either interest incurred from the HELOC, or interest forgone from the bond sale)
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arebelspy

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Re: Stop worrying about the 4% rule
« Reply #649 on: February 25, 2017, 03:40:40 PM »
Could you not just have a HELOC on the house and use that when you needed money? At some point you'll sell and move into an apartment or car home at that time you discharge the HELOC. That would let you get a significant amount of money out of the house and keep control over both how much you take out and what you spend it one.

the last thing you want to do is borrow money when you need money and pay it back with interest  and a floating rate

Only if you expect the market to remain crashed forever.

Now that I really think about it - taking out a HELOC and using it to deal with a stock market downturn is functionally the same as selling bonds when the stock market is down. You are spending equity + interest (either interest incurred from the HELOC, or interest forgone from the bond sale)

Assuming the HELOC is stable (i.e. won't be closed or reduced on you--a big assumption that turned out to not be true in the last big downturn), yes.

Still, being 100% stocks, seeing them crash, then taking on more debt via HELOC to buy more as they continue to fall?  Scary ride, probably not one many people could do (besides the gamblers who will lose it all anyways, or never get to that point).
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