Author Topic: Stop worrying about the 4% rule  (Read 229961 times)

TomTX

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Re: Stop worrying about the 4% rule
« Reply #650 on: February 25, 2017, 05:15:56 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).

Emotionally scary, I suppose - but should I sell 100% more stock shares than I normally would (presuming 50% downturn) or pay maybe 10% in interest on the HELOC before the market likely comes back by year 3?
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Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #651 on: February 25, 2017, 06:32:10 PM »
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.

When we asked "Did anyone actually have a HELOC reduced or closed down in 2008?" We came up with one person who that happened to. The take away from me was don't count on a HELOC up to the full credit level of your current home value as that is the risk that could occur. If your house is worth $500K and you want a max HELOC at say $400K and the house value drops the bank may choose to reduce your HELOC limit. OTOH I think if you had a $500K home and wanted a $100K HELOC as an emergency fund you would be pretty safe. Your bank would have to feel the home was worth less than $125K to be worried at that credit limit assuming they were after an 80% max to their HELOC lending.

TomTX

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Re: Stop worrying about the 4% rule
« Reply #652 on: February 25, 2017, 07:11:37 PM »
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.

When we asked "Did anyone actually have a HELOC reduced or closed down in 2008?" We came up with one person who that happened to. The take away from me was don't count on a HELOC up to the full credit level of your current home value as that is the risk that could occur. If your house is worth $500K and you want a max HELOC at say $400K and the house value drops the bank may choose to reduce your HELOC limit. OTOH I think if you had a $500K home and wanted a $100K HELOC as an emergency fund you would be pretty safe. Your bank would have to feel the home was worth less than $125K to be worried at that credit limit assuming they were after an 80% max to their HELOC lending.

And in a situation like 2009, you only need like $40k from the HELOC.
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arebelspy

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Re: Stop worrying about the 4% rule
« Reply #653 on: February 25, 2017, 08:06:39 PM »


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.

When we asked "Did anyone actually have a HELOC reduced or closed down in 2008?" We came up with one person who that happened to.

Who is "we" and who were you asking?

IIRC, there were quite a few people on the E-R.org forum it happened to.

I hope you weren't asking here at these forums, where most of the crowd is going enough to barely begin investing at that time, let alone have large HELOCs, and basing results on that.

This forum is good for a lot of things, but experience over decades much less so (apart from a few individuals, like Another Reader, but then that just gives you anecdotes with a small sample size).  Bogleheads and E-R.org would be much better for that (and asking 6 years ago...The make up of such sites obviously changes over time).

If you meant some other people, I'm not sure what you're talking about.
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Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #654 on: February 25, 2017, 08:41:53 PM »
Who is "we" and who were you asking?

It was a point of discussion in one of threads here on the MMM Forums. People frequently talk about HELOCs being affected in 2008, but when the I asked for first person accounts there was only one. While this forum may not have people who have been on the FIRE path for decades there are lots of older folks who lived through 2008 and having a HELOC is nothing special.

If you have links to discussions on the topic with first person accounts of this happening I'd love to read about them.

arebelspy

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Re: Stop worrying about the 4% rule
« Reply #655 on: February 25, 2017, 09:09:51 PM »
What percent it happens to, I don't know, but it exists as more than a rumor (i.e. people saying it happened to them).

Besides that person you mentioned here, you can easily find anecdotes:
Quote
I had a $400k HELOC sitting at zero amount for nearly 8 years, it was closed after the Great Recession. I didn't protest because I never used it.
http://www.early-retirement.org/forums/f28/heloc-paydown-vs-1st-mortgage-paydown-which-first-81098.html#post1707311

Quote
You can't count on being able to tap your home equity/HELOC in a crisis. I had a $100,000 HELOC which was closed by the bank (it was Washington Mutual) during the financial crisis. It wasn't because I abused it, I now realize they were in the process of going belly up.

The point being cash or equivalents is cash; HELOC is not reliable.
https://www.bogleheads.org/forum/viewtopic.php?p=722602&sid=2fed613e7ad856e9e7b06f84033a0f71#p722602

Enough reports exist of it happening that I wouldn't make it my primary plan.

I'd have one open, sure, I just wouldn't count on it.  It'd be like counting on an ARM interest rate to stay low in a recession.  Typically the fed won't raise rates at that time, because of how bad that would be for the economy, so you're probably safe counting on it... but I wouldn't make my primary plan relying on my ARM mortgage to stay low, or being in trouble if it didn't. Ditto a HELOC--I wouldn't make my primary plan based on being able to tap it.
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deborah

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Re: Stop worrying about the 4% rule
« Reply #656 on: February 25, 2017, 09:10:53 PM »
I suspect that the people who it happened to didn't see the thread you posted, or didn't answer. Certainly, in the meetups I have attended of MMM people (around 200 people in 3 continents), I have talked to about 5 that it occurred to (the topic was not brought up at any of these meetups, so this was just in random conversation), so I would say that it was much more common than you think.

Nords

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Re: Stop worrying about the 4% rule
« Reply #657 on: February 25, 2017, 09:19:04 PM »
Who is "we" and who were you asking?

It was a point of discussion in one of threads here on the MMM Forums. People frequently talk about HELOCs being affected in 2008, but when the I asked for first person accounts there was only one. While this forum may not have people who have been on the FIRE path for decades there are lots of older folks who lived through 2008 and having a HELOC is nothing special.

If you have links to discussions on the topic with first person accounts of this happening I'd love to read about them.
I have two anecdotes. 

Laurence from Early-Retirement.org had his HELOC frozen by his lender in 2008.  Not just limited, but frozen.  He could make payments of course, but he couldn't write more checks at all.  Here's a thread which summarizes that incident and more:
http://www.early-retirement.org/forums/f28/emergency-fund-upside-down-and-backwards-38755.html#post715441
Rumor in that thread had Chase freezing HELOCs in entire regions, not just individual homes.

A local Hawaii startup, Pipeline Micro, experienced a similar problem with their seed funds (several hundred thousand dollars).  They had them parked at a brokerage in auction-rate CDs.  When that market locked up in 2008, they were cut off from "their" money.  (The brokerage generously offered to let them borrow on margin against the balance... but at margin lending rates.)  That lack of liquidity led directly to financial decisions which cost the firm some hires, some revenue, and some advantages.  It led to a downward spiral.  They're no longer in business. 

I was a brand-new angel investor then, and I was impressed by their business model (as well as their accomplishments to that point).  Luckily I had not yet whipped out my checkbook.  It was a powerful example of a startup where one meteor strike killed them. 

From then on I favored startups where everything had to go wrong for them to fail, instead of everything going right for them to succeed.
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Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #658 on: February 26, 2017, 05:24:44 AM »
Thanks for the links. I wouldn't have any emergency plan that didn't have several layers of depth to it. I don't have a HELOC at the moment as my home equity is low. I do have a LOC with no tie to my home equity I use as an emergency fund. My bank didn't do anything to my LOC  during 2008, but say they did I have access to all my investment accounts at any time without any penalties.

Before I FIRE I'll get a HELOC in place with a different institution than the one I have the LOC with for added redundancy.

TomTX

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Re: Stop worrying about the 4% rule
« Reply #659 on: February 26, 2017, 08:36:18 AM »
A HELOC is just one of many, many "fallback" options if the market goes sour. NONE of them are guaranteed.

So what? We're not Bogleheads who consider 2% a SWR adequate, plus paid off house, plus 1 year in the E-fund, plus 5 years of laddered CDs. Plus that stash of bullion in the safe, that doesn't count, or the vacation house, or the "angel investing"....

As a more practical person, I am talking more about a HELOC as one option in a "defense in depth" to protect a portfolio during a market crash during the critical first few years of ER.

What could be done if the HELOC is frozen/closed and you don't want to draw on your equities in a 50% market crash?

Open a HELOC somewhere else. There are thousands of banks and credit unions which offer them. There were ALWAYS banks willing to issue HELOCs to people with good credit. Maybe the limit is lower, but we only need $25k.
Open a CC with 0% interest for an extended period - I get offers of 15-21 months of 0% interest all the time.
Use a CC with low interest.*
Get a part time job
Craigslist stuff
Do side-gig stuff.
Etc

*I have an old card that's 8.9% fixed. Not as low as a HELOC, but better than selling stocks at half price. But if my spend is $25k, it will cost me about a thousand bucks in interest to live on the credit card for a year. I would wait until just after the statement closes to make my initial purchase so that I get 60 days of "float" before interest accrues, and the balance will slowly grow through the year. Spending $1k extra in interest is a hell of a lot better than selling $50k in stocks at $25k. Admittedly, I could only get 11 months of expenses on this example card - I've got a dozen cards. I have over $200k in available credit - not even counting the substantial amount my wife has available.
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arebelspy

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Re: Stop worrying about the 4% rule
« Reply #660 on: February 26, 2017, 01:23:27 PM »


A HELOC is just one of many, many "fallback" options if the market goes sour. NONE of them are guaranteed.

Yep. That's exactly what we're pointing out. It's not guaranteed, and should be a fallback plan, not the primary one.  :)
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secondcor521

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Re: Stop worrying about the 4% rule
« Reply #661 on: February 27, 2017, 04:15:34 AM »
Who is "we" and who were you asking?

It was a point of discussion in one of threads here on the MMM Forums. People frequently talk about HELOCs being affected in 2008, but when the I asked for first person accounts there was only one. While this forum may not have people who have been on the FIRE path for decades there are lots of older folks who lived through 2008 and having a HELOC is nothing special.

If you have links to discussions on the topic with first person accounts of this happening I'd love to read about them.
I have two anecdotes. 

Laurence from Early-Retirement.org had his HELOC frozen by his lender in 2008.  Not just limited, but frozen.  He could make payments of course, but he couldn't write more checks at all.  Here's a thread which summarizes that incident and more:
http://www.early-retirement.org/forums/f28/emergency-fund-upside-down-and-backwards-38755.html#post715441
Rumor in that thread had Chase freezing HELOCs in entire regions, not just individual homes.

<snip>

I had a HELOC from USAA that they froze in about that same time frame.  I took it personally at first, but then was told that there was no problem with me; it was a risk management move on USAA's part to reduce their exposure to the housing downturn.  I had opened it just as a cheap precautionary measure so had a zero balance on it at the time and no intent to use it, so I didn't mind very much.

(Eventually I refinanced my first mortgage and at that point the new mortgage company required that either USAA subordinate my HELOC to the new mortgage, or that I cancel it.  For whatever reason USAA wouldn't subordinate, so I canceled it.  Haven't had one since.)
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mathjak107

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Re: Stop worrying about the 4% rule
« Reply #662 on: February 27, 2017, 06:51:59 AM »
we sold  investment property's in 2008-2009 . two banks at closing cancelled the closings because they had no money to give out when the dates were approaching  . finally a 3rd bank followed up with the money . what should have been less than a 1 month closing took almost  5 months

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Re: Stop worrying about the 4% rule
« Reply #663 on: February 27, 2017, 08:23:00 AM »


A HELOC is just one of many, many "fallback" options if the market goes sour. NONE of them are guaranteed.

Yep. That's exactly what we're pointing out. It's not guaranteed, and should be a fallback plan, not the primary one.  :)

Which is why the HECM seems so interesting as an alternative. Although expensive, it is irrevocable and essentially allows you to strip out all the equity in your house and pay it back when you die. Unlike a HELOC you don't have to make payments. If someone gets to 62, has something like a 5 or 6% swr (either through bad planning or they retired earlier and hit a bad sequence of returns) and lots of home equity this would allow them to retire with more confidence.



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Nords

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Re: Stop worrying about the 4% rule
« Reply #664 on: February 27, 2017, 04:49:04 PM »
Wade Pfau chimed in today on HECMs:
https://retirementresearcher.com/using-reverse-mortgages-responsible-retirement-income-plan/

Quote
Especially since 2013, the federal government has been refining regulations for its HECM program in order to improve the sustainability of the underlying mortgage insurance fund, to better protect eligible non-borrowing spouses, and to ensure borrowers have sufficient financial resources to meet their homeowner obligations.

Financial planning research has shown that coordinated use of a reverse mortgage starting earlier in retirement outperforms waiting to open a reverse mortgage as a last resort option once all else has failed.

Reverse mortgages have transitioned from a last resort to a retirement income tool that can be incorporated as part of an overall efficient retirement income plan. Two benefits give opening a reverse mortgage earlier in retirement the potential to improve retirement outcomes, even after accounting for loan costs.
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deborah

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Re: Stop worrying about the 4% rule
« Reply #665 on: February 27, 2017, 05:00:15 PM »
Very interesting article Nords. Thanks for pointing it out.

TomTX

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Re: Stop worrying about the 4% rule
« Reply #666 on: February 27, 2017, 07:03:02 PM »
Interesting, but I can no longer take anything Pfau says at face value.
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Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #667 on: February 27, 2017, 07:11:02 PM »
Interesting, but I can no longer take anything Pfau says at face value.

Why not?

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Re: Stop worrying about the 4% rule
« Reply #668 on: February 28, 2017, 04:30:07 AM »
The problem I have with reverse mortgages is more of a philosophical/ideological issue.  It's just one more tool to drain intergenerational wealth in favor of increased consumption now.  I realize they have a place (better than eating cat food or part of a calculated plan), but I would hope most on this forum plan better than to squeeze out every last bit of net worth, even if it means giving the banks more of your lifetime earnings.  IMHO, it's better for one to admit they have over consumed in housing, sell and downsize than give interest to the banks.

Whats next?  Financial products to borrow against your SS or your kids future SS?  At a very low fees and rate, of course!

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Re: Stop worrying about the 4% rule
« Reply #669 on: February 28, 2017, 05:08:36 AM »


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.

When we asked "Did anyone actually have a HELOC reduced or closed down in 2008?" We came up with one person who that happened to.

Who is "we" and who were you asking?

IIRC, there were quite a few people on the E-R.org forum it happened to.

I hope you weren't asking here at these forums, where most of the crowd is going [autofill for young?] enough to barely begin investing at that time, let alone have large HELOCs, and basing results on that.

This forum is good for a lot of things, but experience over decades much less so (apart from a few individuals, like Another Reader, but then that just gives you anecdotes with a small sample size).  Bogleheads and E-R.org would be much better for that (and asking 6 years ago...The make up of such sites obviously changes over time).

If you meant some other people, I'm not sure what you're talking about.
I provided a specific example on that other thread, along with links. None of which persuaded R-C to reconsider their position, alas. Perhaps the same words coming from the mighty ARS might have greater effect. Meh, it will or it won't, but I'd hate for others to be lulled into a sense of security when recent, actual events are so easily verified.
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Re: Stop worrying about the 4% rule
« Reply #670 on: February 28, 2017, 05:16:58 AM »
The problem I have with reverse mortgages is more of a philosophical/ideological issue.  It's just one more tool to drain intergenerational wealth in favor of increased consumption now.  I realize they have a place (better than eating cat food or part of a calculated plan), but I would hope most on this forum plan better than to squeeze out every last bit of net worth, even if it means giving the banks more of your lifetime earnings.  IMHO, it's better for one to admit they have over consumed in housing, sell and downsize than give interest to the banks.

Whats next?  Financial products to borrow against your SS or your kids future SS?  At a very low fees and rate, of course!
Meh.
I see them as a tool.  Like a hammer or a saw, they can be used in constructive ways or destructive ones.  For individuals or couples with no obvious heirs (or children that have no desire to be saddled with M&D's old home) they can make a crap-ton of sense OR they can be just another method for increasing consumption now at the expense of tomorrow.

I'm thinking now specifically of my parents home; it's way bigger and in completely the wrong location for any of us children to utilize. I'm not really looking forward to the process of selling it when they pass on.  Thankfully my parents have more than 'enough' for retirement, but I'd be completely OK if they took our a reverse mortgage to preserve investment capital.
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TomTX

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Re: Stop worrying about the 4% rule
« Reply #671 on: February 28, 2017, 05:30:48 AM »
Interesting, but I can no longer take anything Pfau says at face value.

Why not?

He's to some extent beholden to the professional money managers.

In recent years he has had a habit of finding different ways to unfairly handicap calculations of SWR for sensational headlines. 4% rule unsafe! paper (bunches of calculations, have to dig down to see that he wasn't counting the 1% advisor fee in the 4%, it was being used to handicap returns) - another 4% rule unsafe! paper (bunches of calculations, you have to dig down to see that he took the historical data, and presumed every year would be 25% worse, so you get a 25% worse Great Depression, 25% worse stagflation in the 70s, etc)

Stuff like that.
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Mr. Green

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Re: Stop worrying about the 4% rule
« Reply #672 on: February 28, 2017, 06:14:39 AM »
The problem I have with reverse mortgages is more of a philosophical/ideological issue.  It's just one more tool to drain intergenerational wealth in favor of increased consumption now.  I realize they have a place (better than eating cat food or part of a calculated plan), but I would hope most on this forum plan better than to squeeze out every last bit of net worth, even if it means giving the banks more of your lifetime earnings.  IMHO, it's better for one to admit they have over consumed in housing, sell and downsize than give interest to the banks.

Whats next?  Financial products to borrow against your SS or your kids future SS?  At a very low fees and rate, of course!
I think that for the Mustachian, the fact the tool can be used early to head off a potentially worse outcome is the real value. For instance, say my home is worth $250,000 (we'll skip inflation for the sake of ease). Let's say my intended retirement is based on a million dollar stash, spending $40,000 a year. If I retire at 35 and my first 30 year retirement period leaves my stash balance a little short of the original million, it would be advantageous for me to be able to tap the dead equity (not earning a return) in my house starting at 65, knowing that means I can leave more money invested and increase my chances that my portfolio will go the distance.

I obviously had the first 30 year retirement period to try and address my under performing portfolio but if my spending cutbacks or income infusions weren't enough, this would be another tool to help get me to the finish line. This scenario would certainly work better than waiting until my stash dropped close to zero and being completely reliant on the reverse mortgage to create my needed cashflow buffer.
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Retire-Canada

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Re: Stop worrying about the 4% rule
« Reply #673 on: February 28, 2017, 06:47:45 AM »
None of which persuaded R-C to reconsider their position,

Diane my position has not changed to date. I use a LOC as my EF. I hold no cash. When I have enough equity in my house I'll take out a HELOC with a different institution for some redundancy at a limit well below by total potential credit limit.

In the thread you referenced I stated that I did not deny/doubt HELOC impacts had happened, but given all the doom and gloom about the topic it was hard to find first person accounts. A few more have bubbled up in this thread and that's great. I'm not against taking onboard new information, but I am not going to base my decisions on what happened to "my cousin", "my neighbour", etc... at best those anecdotes are only marginally helpful as they lack the detail needed for a proper analysis and at worst they are misleading if they do not represent the actual situation.

Risk management assessments are formed by two main factors 1) likelihood of the risk and 2) potential impact should the risk manifest. I still feel pretty confident in the robustness of my line of credit and the HELOC I plan to get and will use them as my first line of defence. I don't see a big risk that they will be affected in a way that causes me huge problems, but as noted above it's not like the HELOC is my whole plan and should it fail Rome falls.

What's different about the discussion here was the context. Looking at an older retiree without enough savings and comparing the HELOC to the HEMC I can see why the later would be preferable. Again going back to the risk assessment in this case the likelihood of a HELOC failing is the same, but the impact is much much more severe because this retiree does not have a properly funded retirement and may not be able to work due to their age.

In my own case it's just a choice between using a low cost credit facility like a LOC/HELOC or selling investments at a lower price than I would prefer or doing some PT work.

So don't worry it's not that THE GREAT ARS spoke to me from heaven that's different in this thread. It's just the details of the situation being discussed are materially different. ;)

BTW - Ars you should use that THE GREAR ARS has a nice ring to it. :)

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Re: Stop worrying about the 4% rule
« Reply #674 on: February 28, 2017, 08:11:36 AM »
The problem I have with reverse mortgages is more of a philosophical/ideological issue.  It's just one more tool to drain intergenerational wealth in favor of increased consumption now.  I realize they have a place (better than eating cat food or part of a calculated plan), but I would hope most on this forum plan better than to squeeze out every last bit of net worth, even if it means giving the banks more of your lifetime earnings.  IMHO, it's better for one to admit they have over consumed in housing, sell and downsize than give interest to the banks.

Whats next?  Financial products to borrow against your SS or your kids future SS?  At a very low fees and rate, of course!
I think that for the Mustachian, the fact the tool can be used early to head off a potentially worse outcome is the real value. For instance, say my home is worth $250,000 (we'll skip inflation for the sake of ease). Let's say my intended retirement is based on a million dollar stash, spending $40,000 a year. If I retire at 35 and my first 30 year retirement period leaves my stash balance a little short of the original million, it would be advantageous for me to be able to tap the dead equity (not earning a return) in my house starting at 65, knowing that means I can leave more money invested and increase my chances that my portfolio will go the distance.

I obviously had the first 30 year retirement period to try and address my under performing portfolio but if my spending cutbacks or income infusions weren't enough, this would be another tool to help get me to the finish line. This scenario would certainly work better than waiting until my stash dropped close to zero and being completely reliant on the reverse mortgage to create my needed cashflow buffer.
Actually in one paper I read (maybe it was Pfau) there is on average MORE wealth when using a HECM due to the ability to not touch the IRA's and potentially delay social security. Passing on a house to your heirs is likely not the most efficient way to do it. Personally I  would rather inherit an IRA rather than a house that I  have to sell (potentially in another state).

These are all financial tools. They are neither good nor evil, just tools. In my experience sometimes the best uses of these financial products is 'off label use', in other words using them not for their original purpose. The original purpose of a HECM was to help out someone who is struggling in retirement, but I think the real benefit is for people that don't necessarily need them. I just need someone smarter than me to do all the complex analysis to figure out when the fees are worth it. I'm sure these are a useful product, I just can't figure out on the back of a napkin who they are best for and who should avoid them.
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Re: Stop worrying about the 4% rule
« Reply #675 on: February 28, 2017, 08:25:49 AM »
The problem I have with reverse mortgages is more of a philosophical/ideological issue.  It's just one more tool to drain intergenerational wealth in favor of increased consumption now.  I realize they have a place (better than eating cat food or part of a calculated plan), but I would hope most on this forum plan better than to squeeze out every last bit of net worth, even if it means giving the banks more of your lifetime earnings.  IMHO, it's better for one to admit they have over consumed in housing, sell and downsize than give interest to the banks.

Whats next?  Financial products to borrow against your SS or your kids future SS?  At a very low fees and rate, of course!
I think that for the Mustachian, the fact the tool can be used early to head off a potentially worse outcome is the real value. For instance, say my home is worth $250,000 (we'll skip inflation for the sake of ease). Let's say my intended retirement is based on a million dollar stash, spending $40,000 a year. If I retire at 35 and my first 30 year retirement period leaves my stash balance a little short of the original million, it would be advantageous for me to be able to tap the dead equity (not earning a return) in my house starting at 65, knowing that means I can leave more money invested and increase my chances that my portfolio will go the distance.

I obviously had the first 30 year retirement period to try and address my under performing portfolio but if my spending cutbacks or income infusions weren't enough, this would be another tool to help get me to the finish line. This scenario would certainly work better than waiting until my stash dropped close to zero and being completely reliant on the reverse mortgage to create my needed cashflow buffer.
Actually in one paper I read (maybe it was Pfau) there is on average MORE wealth when using a HECM due to the ability to not touch the IRA's and potentially delay social security. Passing on a house to your heirs is likely not the most efficient way to do it. Personally I  would rather inherit an IRA rather than a house that I  have to sell (potentially in another state).

These are all financial tools. They are neither good nor evil, just tools. In my experience sometimes the best uses of these financial products is 'off label use', in other words using them not for their original purpose. The original purpose of a HECM was to help out someone who is struggling in retirement, but I think the real benefit is for people that don't necessarily need them. I just need someone smarter than me to do all the complex analysis to figure out when the fees are worth it. I'm sure these are a useful product, I just can't figure out on the back of a napkin who they are best for and who should avoid them.
I'm not familiar with the HECM. I may be a superior tool to a reverse mortgage. I only wanted to say that using a reverse mortgage earlier in old age, than later as an emergency cashflow issue, would likely be a far greater use of that tool. Though this would apply to any tool that allowed you to tap the equity in your house and let your portfolio continue growing.
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Re: Stop worrying about the 4% rule
« Reply #676 on: February 28, 2017, 08:52:38 AM »

I'm not familiar with the HECM. I may be a superior tool to a reverse mortgage. I only wanted to say that using a reverse mortgage earlier in old age, than later as an emergency cashflow issue, would likely be a far greater use of that tool. Though this would apply to any tool that allowed you to tap the equity in your house and let your portfolio continue growing.
This is a good point. The home that we will have in our 50s is almost certainly NOT the home we will want when we are 80. If using a reverse mortgage allowed us to go a few decades without touching (or barely touching) the rest of our portfolio it could help reduce the dreaded early-year sequence of returns portfolio failure that cause most portfolio failures.
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Re: Stop worrying about the 4% rule
« Reply #677 on: February 28, 2017, 08:53:43 AM »
I'm not familiar with the HECM. I may be a superior tool to a reverse mortgage.

HECM is the latest term of art for a reverse mortgage.  It sounds fancier to some I think, and tries to distance the idea from the bad rap that some gave to reverse mortgages when they first came out.
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Re: Stop worrying about the 4% rule
« Reply #678 on: March 01, 2017, 01:06:44 PM »
I'll jump in as a fan of the home equity line of credit (heloc). I've worked in banking all my career and have used mortgages as a vehicle to grow wealth.

I've mentioned this topic before and got slammed looking for some strategy discussion on using a heloc as a tool for down years. Basically, if portfolios dip one to two years on average then a heloc should be able to help combat those short years.

Yes, I was one of the people who had their home equity lines of credit reduced, I had three different ones at the time 2008, for three different properties. All three were reduced access to bring in line with current market value of the properties.

Now My house is paid off, and I'd like to access funds versus pulling required floor $30,000 from my portfolio. I've got the 4% portfolio, but the heloc is just cushioning. $40,000 target annual spending

Home value $300,000, 80%ltv, home equity line is available credit of $240,000 or eight years of yearly floor spending. This assumes no pull from the portfolio at all,no side hustle, no other options. Ok, so housing tanks again and now I only have access to $200,000. If most markets return in two years, wouldn't I generate a greater return and reduce portfolio failure? I believe so.

Example:
So market tanks in 2018 greater than 15-20%, I pull $40,000 from heloc.
2019 market comes back, payoff heloc, and draw $40,000 stocks to replenish cash
2020 Markets are good, normal course.

or
Supplement with heloc part two







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Re: Stop worrying about the 4% rule
« Reply #679 on: March 01, 2017, 01:20:45 PM »
Part two,

Supplement Income
We need or want to spend $40,000 yearly, but the market tanks and we can only pull 4% or hypothetically a reduced portion. My million dollar portfolio drops to $750,000 4% is $30,000. I can pull $10,000 from the home equity line in the first few years without stressing my reduced portfolio value.

Or since portfolio is down 25% maybe I pull more via the home equity because I cant swallow selling at a 25% discount.

So say first year I pull $10,000 to combat a bad year, my first year in retirement. year two comes and market is down another 10 percent, so I pull $30,000 from the home equity and start considering re-employment, portfolio is down 35%. Year three and market is still down, I find part time work generating $10,000 yearly, my wife finds the same or we go back to work. However, with supplemental income, portfolio is down but barely due to our withdrawals, we pull $10,000 out year three. Year four is the portfolio still down 35%?

With the first ten years of early retirement considered the riskiest point of failure, the heloc seems to be a great tool.






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Re: Stop worrying about the 4% rule
« Reply #680 on: March 01, 2017, 01:28:48 PM »
With the first ten years of early retirement considered the riskiest point of failure, the heloc seems to be a great tool.

Yes definitely. Best of all it cost nothing until you need it.

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Re: Stop worrying about the 4% rule
« Reply #681 on: March 01, 2017, 01:29:17 PM »
The problem I have with reverse mortgages is more of a philosophical/ideological issue.  It's just one more tool to drain intergenerational wealth in favor of increased consumption now.  I realize they have a place (better than eating cat food or part of a calculated plan), but I would hope most on this forum plan better than to squeeze out every last bit of net worth, even if it means giving the banks more of your lifetime earnings.  IMHO, it's better for one to admit they have over consumed in housing, sell and downsize than give interest to the banks.

Whats next?  Financial products to borrow against your SS or your kids future SS?  At a very low fees and rate, of course!
I think that for the Mustachian, the fact the tool can be used early to head off a potentially worse outcome is the real value. For instance, say my home is worth $250,000 (we'll skip inflation for the sake of ease). Let's say my intended retirement is based on a million dollar stash, spending $40,000 a year. If I retire at 35 and my first 30 year retirement period leaves my stash balance a little short of the original million, it would be advantageous for me to be able to tap the dead equity (not earning a return) in my house starting at 65, knowing that means I can leave more money invested and increase my chances that my portfolio will go the distance.

I obviously had the first 30 year retirement period to try and address my under performing portfolio but if my spending cutbacks or income infusions weren't enough, this would be another tool to help get me to the finish line. This scenario would certainly work better than waiting until my stash dropped close to zero and being completely reliant on the reverse mortgage to create my needed cashflow buffer.
Actually in one paper I read (maybe it was Pfau) there is on average MORE wealth when using a HECM due to the ability to not touch the IRA's and potentially delay social security. Passing on a house to your heirs is likely not the most efficient way to do it. Personally I  would rather inherit an IRA rather than a house that I  have to sell (potentially in another state).

These are all financial tools. They are neither good nor evil, just tools. In my experience sometimes the best uses of these financial products is 'off label use', in other words using them not for their original purpose. The original purpose of a HECM was to help out someone who is struggling in retirement, but I think the real benefit is for people that don't necessarily need them. I just need someone smarter than me to do all the complex analysis to figure out when the fees are worth it. I'm sure these are a useful product, I just can't figure out on the back of a napkin who they are best for and who should avoid them.

I agree they are tools and can be used for good, but they were developed for evil.  The issue arises when most middle class Americans have almost all of their net worth tied up in primary residence at retirement. Which is the case:
 

The median family has put themselves in this situation, likely due to high consumption.  So now they "need" money from their only major asset to make ends meet with SS.  Option "A" get a reverse mortgage, PAY interest and fees to a bank, slowly eating away any gains to your undiversified asset and continue to overconsume via your living situation.  Option "B", admit you are overconsuming & sell the damn thing; downsize, rent or find a more affordable living situation, invest proceeds and EARN interest & dividends on diversified assets.  The current low-rate environment only makes option A less unappealing.  With recency bias we forget, rates will likely not remain this low forever.

I'm really not suggesting kids or any sort of legacy is really "owed" anything.  I would assume though, most people would rather provided a legacy than pay interest to Wells Fargo.  Lets face it, this tool is developed to enrich banks and drain the middle class. Without reverse mortgages those who stay in a family home are forced to reduce consumption due to the illiquidity, this wealth would end up in the hands of heirs, not banks.

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Re: Stop worrying about the 4% rule
« Reply #682 on: March 01, 2017, 03:07:44 PM »
BTW - Ars you should use that THE GREAT ARS has a nice ring to it. :)

I'll have to practice my Wizard of Oz voice.
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Re: Stop worrying about the 4% rule
« Reply #683 on: March 02, 2017, 05:32:09 PM »
With the first ten years of early retirement considered the riskiest point of failure, the heloc seems to be a great tool.

Yes definitely. Best of all it cost nothing until you need it.

Costs me $50 a year (is that unusual??), but I have it as a mostly free pile of cash to weather a big drop in a bad market. This allows a 100% stock portfolio to be much lower risk, with the long-term expectations pre and post retirement of far higher returns. I also intend a variable withdrawal based on a fixed percent with ceilings and floors rather than the standard 4% rule (that no one actually follows anyway)

Quote from: Classical_Liberal
I agree they (HELOCs)are tools and can be used for good, but they were developed for evil...

-The median family has put themselves in this situation, likely due to high consumption.
This seems to contradict itself. If it can be a good tool, then why's it inherently evil? The rest of your point said (rightly IMO) that most people make messes out of it for themselves. Banks are greedy, but this isn't something they go out of their way tricking people into, is it? I didn't think so. Not like getting people to buy as much home as they can barely afford, shit like that.

The frugal, low (or no) debt, early retiree should be able to put a HELOC to good use in the rare case they actually ever need it in the first decade or so of retirement. Pull a few grand during some lousy years, pay it off when the market comes back, probably never need it again after that. No need to cut back expenses, get a side job, or rely on weak bonds as a permanent crutch.

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Re: Stop worrying about the 4% rule
« Reply #684 on: March 02, 2017, 05:38:41 PM »
dabears847,

Sorry, I pretty much just repeated what you wrote. I didn't catch it. We're pretty much doing the exact same thing for the exact same reasons.

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Re: Stop worrying about the 4% rule
« Reply #685 on: March 02, 2017, 06:40:43 PM »

Quote from: Classical_Liberal
I agree they (HELOCs)are tools and can be used for good, but they were developed for evil...
This seems to contradict itself. If it can be a good tool, then why's it inherently evil? The rest of your point said (rightly IMO) that most people make messes out of it for themselves. Banks are greedy, but this isn't something they go out of their way tricking people into, is it? I didn't think so. Not like getting people to buy as much home as they can barely afford, shit like that.

You added the bolded portion to my response. My comments were specifically regarding reverse mortgages, a product which is not repaid.  Sorry if I was unclear.

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Re: Stop worrying about the 4% rule
« Reply #686 on: March 03, 2017, 10:26:36 PM »
Quote from: Classical_Liberal
Sorry if I was unclear.

No. My fault. Shit gets cluttered in quotes within quotes within quotes. WFT was this thread about again? heh

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Re: Stop worrying about the 4% rule
« Reply #687 on: March 05, 2017, 12:01:09 AM »
snip

I agree they are tools and can be used for good, but they were developed for evil.  The issue arises when most middle class Americans have almost all of their net worth tied up in primary residence at retirement. Which is the case:
 


That is one scary plot...
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Re: Stop worrying about the 4% rule
« Reply #688 on: March 05, 2017, 12:13:24 AM »
It'd be scary without the numbers.

And I don't know which set of numbers is scarier, the red bar numbers, or the fact that when you include home equity, you still only hit the blue bar numbers.

Gulp.
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Re: Stop worrying about the 4% rule
« Reply #689 on: March 05, 2017, 12:37:46 AM »
That chart is amazing.

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Re: Stop worrying about the 4% rule
« Reply #690 on: March 05, 2017, 08:39:38 AM »
That is one scary plot...
Isn't it. Sometimes the daily volatility of our portfolio is greater than the median net worth of our age group. Yikes!

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Re: Stop worrying about the 4% rule
« Reply #691 on: March 05, 2017, 08:41:35 AM »
It'd be scary without the numbers.

And I don't know which set of numbers is scarier, the red bar numbers, or the fact that when you include home equity, you still only hit the blue bar numbers.

Gulp.

I agree the illiquidity is scary, but if you examine the median person or couple from a mustachian standpoint, it's totally doable... If they liquidate their home.

An overly simplex analysis of a median dual income couple retiring at 67:  Sell home and end with about 200K in total liquid assets.  Assuming a 25 year retirement, death at age 92, which is a very generous lifespan.  4% is FAR too conservative for a 25 year time horizon and could be sustained with 0% real returns, but this is the 4% thread, so we'll use it as a low end.  6%WR could be sustained with about 4% real returns, so I'll use it as a high end. 200k @ 4%WR is $667 a month, at 6%WR is $1000 a month. With median retirement SS payouts per person at $1317 a month, our couple has 2600 a month in SS income.

In total, our median couple has between $3250 and $3600 a month of todays $'s for retirement, depending on how conservative they withdraw.  Same math for a single person with median net worth & SS is $1975 to $2300. 

Conclusion: At least the upper half of households shouldn't have to eat cat food. I'm single and live on the above single range now.  Edit:  It's never too late to start!  Just adopting a mustachian lifestyle in one's 60's with a median net worth leads to a super awesome, happy, fulfilling, and plentiful retirement!

Note: Yes to rounding. Yes this makes assumptions, but has some value as a general analysis of the generic "median" American family.
« Last Edit: March 05, 2017, 08:50:14 AM by Classical_Liberal »

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Re: Stop worrying about the 4% rule
« Reply #692 on: March 05, 2017, 11:09:18 AM »
The average single person is in trouble, is your conclusion?  ;)
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Re: Stop worrying about the 4% rule
« Reply #693 on: March 07, 2017, 09:31:56 AM »
That is one scary plot...
Isn't it. Sometimes the daily volatility of our portfolio is greater than the median net worth of our age group. Yikes!

It is and it isn't -- because a great many people do just fine living on Social Security alone in retirement (and for a good chunk of those over 65, small pensions as well).  What's scary is right-wing plans to kill or reduce SS -- then those numbers become much more concerning.

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Re: Stop worrying about the 4% rule
« Reply #694 on: March 08, 2017, 10:26:52 AM »
That is one scary plot...
Isn't it. Sometimes the daily volatility of our portfolio is greater than the median net worth of our age group. Yikes!

It is and it isn't -- because a great many people do just fine living on Social Security alone in retirement (and for a good chunk of those over 65, small pensions as well).  What's scary is right-wing plans to kill or reduce SS -- then those numbers become much more concerning.

Third rail of politics.  Old people vote. 

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Re: Stop worrying about the 4% rule
« Reply #695 on: March 08, 2017, 10:29:57 AM »
That is one scary plot...
Isn't it. Sometimes the daily volatility of our portfolio is greater than the median net worth of our age group. Yikes!

It is and it isn't -- because a great many people do just fine living on Social Security alone in retirement (and for a good chunk of those over 65, small pensions as well).  What's scary is right-wing plans to kill or reduce SS -- then those numbers become much more concerning.

Third rail of politics.  Old people vote.
And as old people become an even greater % of the overall population, thanks to science and medicine, their influence will grow.
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Re: Stop worrying about the 4% rule
« Reply #696 on: March 08, 2017, 12:52:10 PM »
That is one scary plot...
Isn't it. Sometimes the daily volatility of our portfolio is greater than the median net worth of our age group. Yikes!

It is and it isn't -- because a great many people do just fine living on Social Security alone in retirement (and for a good chunk of those over 65, small pensions as well).  What's scary is right-wing plans to kill or reduce SS -- then those numbers become much more concerning.

Quite a few SS oldies in our condo. They've paid the mortgage off and condo fees cover heat and electricity, maintenance, etc etc. Cost about 12000 a year. Rest is just something for food and they are totally ok.
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Re: Stop worrying about the 4% rule
« Reply #697 on: March 09, 2017, 08:50:52 AM »
BTW - Ars you should use that THE GREAT ARS has a nice ring to it. :)

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Re: Stop worrying about the 4% rule
« Reply #698 on: March 12, 2017, 01:45:24 PM »
The idea of being able to depend on drawing 4% from a risky investment portfolio thru retirement always seemed like the dumbest thing in the world to me.  One retires at 65.  If you're lucky you make it to 90, so 25 years.  Putting $1M in a checking account and withdrawing $40k every year is guaranteed to make it till 90.  There is inflation, so investing the $1M in something like TIPs would allow for the inflation increases needed at last till 90, so why in the world would I put my money in a crazy fluctuating market to try and accomplish the same thing spending?

Now that my idea of retirement is not set at 25 years or less...and the 4% withdraw can continue to work for all these additional years, it finally became interesting.

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Re: Stop worrying about the 4% rule
« Reply #699 on: March 12, 2017, 06:17:48 PM »
The idea of being able to depend on drawing 4% from a risky investment portfolio thru retirement always seemed like the dumbest thing in the world to me.  One retires at 65. If you're lucky you make it to 90, so 25 years.  Putting $1M in a checking account and withdrawing $40k every year is guaranteed to make it till 90.  There is inflation, so investing the $1M in something like TIPs would allow for the inflation increases needed at last till 90, so why in the world would I put my money in a crazy fluctuating market to try and accomplish the same thing spending?

Now that my idea of retirement is not set at 25 years or less...and the 4% withdraw can continue to work for all these additional years, it finally became interesting.
That's a pretty novel idea for a forum focused on early retirement. Please, enlighten us further...


On another note, this thread converted me to mustachianism - many thanks to all of the contributors!