The Sustainability of (Global) Withdrawal Strategies.

[theonlybutler]

Hope I'm not double-posting, this was in the press in Ireland this week. Thought it may be of value to those who intend on FIRE outside the US.
https://blog.iese.edu/jestrada/files/2021/02/Estrada-SGWS.pdf

[maizefolk]

Every financial analysis who gets access to the DMS database (stock and bond market returns for 20+ countries since 1900) seems to have to rediscover for themselves that, unlike the USA, what the financial history of many countries shows is that it is very hard to retire and live off investments when a world war or civil war is being fought in the street outside your house.*

Case in point:

The results are obviously many and varied, but an interesting fact that the figures in the table highlight is that the experience of retirees has been substantially different across countries, being far better in countries like Canada, Denmark, and New Zealand than in countries like Austria, Germany, or Italy.

*Of course, if a world or civil war is being fought in the streets outside your house, you likely have bigger problems to worry about than the decline in your investment portfolio.

[ChpBstrd]

Yes, I think the 4% rule comes with some major caveats.

1) If the US's form of government changed, for example to resemble Russia's one-party corruption state with a single leader, I don't think the past would be relevant to the future. A period of intense ethnic or political violence could also break the trust systems through which the modern economy operates.

2) If the US dollar stopped being the world's reserve currency, the past would not be as relevant.

3) If an event occurred such as a nuclear war, pandemic with millions of deaths, or a financial system collapse, ...

4) If environmental degradation caused enough people to be unable to economically perform, we would see a similar outcome as Rome did with its lead pipes and loss of IQ. For funsies, check your drinking water stats here: https://www.ewg.org/tapwater/

5) A political collapse / economic collapse in China would cause inflation to skyrocket worldwide, and result in the dumping of investment assets by Chinese interests, including US treasuries and corporate assets.

6) If an industry or special interest attained sufficient political power to defend a monopoly, the cost of living could increase dramatically. For example, if homeowners across the US banded together to set strict codes preventing home construction like they did in California, then the price of housing could continue to skyrocket. Similarly, if other deep-moat industries did what colleges and universities did and built massive administrative bloat into their structures to increase executive salaries, costs could go up for decades.

So basically, looking at the US during the 20th century is like looking at the luckiest country in the luckiest timeframe and declaring an economic rule based on that experience. Yes, it is still likely technology and innovation will continue driving productivity growth throughout the 21st century, but we shouldn't rule out a devastating war, a few economic crises, or widespread health problems changing the underlying assumptions of the 4% rule. We'll just have to accept that retirement is risky just as life is risky. There are no guarantees, so we can only take the plunge anyway.

[maizefolk]

2) If the US dollar stopped being the world's reserve currency, the past would not be as relevant.

It's worth noting that, while the original 4% rule paper used a shorter time course, most simulations today use the Shiller dataset which goes back to 1871 (150 years). Bretton Woods didn't kick in until the mid 1940s so about half the past data people are looking at is from a period where the US dollar really wasn't the world's reserve currency.

Otherwise I agree with most of your other caveats. Major wars, revolutions, economic collapse, ecological collapse. Basically most things which would also be problems for people who hadn't FIREd and continued to work are also problems for someone who has FIREd and living off the 4% rule.

I am curious about your reasoning for how a collapse in China causing inflation to skyrocket around the world though.

[ChpBstrd]

2) If the US dollar stopped being the world's reserve currency, the past would not be as relevant.

It's worth noting that, while the original 4% rule paper used a shorter time course, most simulations today use the Shiller dataset which goes back to 1871 (150 years). Bretton Woods didn't kick in until the mid 1940s so about half the past data people are looking at is from a period where the US dollar really wasn't the world's reserve currency.

Otherwise I agree with most of your other caveats. Major wars, revolutions, economic collapse, ecological collapse. Basically most things which would also be problems for people who hadn't FIREd and continued to work are also problems for someone who has FIREd and living off the 4% rule.

I am curious about your reasoning for how a collapse in China causing inflation to skyrocket around the world though.

It's true that stock data goes back to an era when the British pound was the reserve currency. However if you buy into U.S. assets today, you are also buying them at prices which factor in the reserve currency situation. Your stock/bond/home would be a lot cheaper if it was based in Mexico or Morocco instead of the U.S, and currency/governance is the reason why.

A problem in China would create shortages of manufactured goods around the world, which would cause the prices to be bid up. Simultaneously, this scenario would remove a key buyer of US treasuries, if not setting off a round of net selling by the Chinese, which would force prices down and yields up. Rising interest rates would transfer to corporate bonds, causing corporations to raise prices to keep up with interest expenses or eliminate business lines that couldn't out-earn the rising cost of capital. Meanwhile, those shortages of manufactured goods would impact domestic industries that use those goods elsewhere - agriculture equipment:steel, cars:chips, housing:components, textiles:machines, etc. Imagine farmers and truckers unable to obtain spare parts, or even maintenance items like oil filters. So if China had a problem, we'd be in a world of shortages, rising interest rates, and rising prices. 

[bwall]

Re: China

I'm normally an optimist and don't really buy in to doom and gloom, but when the Brookings Institute issues papers, I tend to give them more weight than, say, talking heads on TV.

Here's one:
https://www.brookings.edu/articles/chinas-population-destiny-the-looming-crisis/
that they wrote in 2010 on China's demographics and it has, ahem, aged very well, especially when China is expected to announce soon that their overall population declined in 2020.https://www.nationalreview.com/news/china-expected-to-report-first-population-decline-since-1949/

As they point out in the Brookings paper, Chinese society might be more fragile than anyone really knows. Therefore, I'd tend to put the idea of a black swan event in China leading to economic disruption firmly into the realm of the possible, though certainly not likely or predictable.