The Money Mustache Community
General Discussion => Post-FIRE => Topic started by: nara on February 05, 2017, 07:46:10 PM
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Do you incorporate inflation into your 4% estimate?
This article was a discouraging read. I would like to hear some thoughts. https://www.moneyunder30.com/how-realistic-is-financial-independence-in-your-30s
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Yes, that's part of all the studies that backtest the 4% rule. 4% of your initial portfolio, adjusted for inflation each year.
Edit:
That article is stupid. They assume a 4% rate of return with 3% inflation. The CGAR of the stock market is actually 9.1%. After adjusting for inflation that drops to 6.8%. So almost 7x higher than the numbers that author uses (1% after inflation).
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Do you incorporate inflation into your 4% estimate?
This article was a discouraging read. I would like to hear some thoughts. https://www.moneyunder30.com/how-realistic-is-financial-independence-in-your-30s
The only thing I see, here we assume 7% annual return and live on 4%.
The article has a total annual return of 4%. Huuuge difference.
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Yes, the 4% rule is based on inflation.....
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That website looks like a really bad resource. The author is not doing a good job reading up on FIRE if he doesn't realize that the 4% rule already accounts for inflation, and his answer in the comments to a question about reinvesting dividends is not exactly wrong, but kind of dumb.
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Include inflation, yes.
The 4% rule originated with Bengen in this paper: http://www.retailinvestor.org/pdf/Bengen1.pdf
It was backed up by the Trinity Study: https://incomeclub.co/wp-content/uploads/2015/04/retirement-savings-choosing-a-withdrawal-rate-that-is-sustainable.pdf
Both say to increase/decrease the withdrawal based on inflation/deflation.
You can replicate these studies for your own particular case using www.cfiresim.com or www.firecalc.com .
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Also, moneyunder30 doesn't seem to have a clue. I'm pretty sure the author never read those 2 papers, and I'm pretty sure that he never took MMM frugality to heart. 50K/year? Good lord! Root of Good is living off $40K raising 3 kids!
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The author of the original article, sorry to put it this way, is an idiot. Maybe not an idiot (but probably), but to be charitable is at best a lazy maroon.
Lots and lots of people have looked into this very question and come up with answers that are vastly less stupid than this guy. My advice: Seek out the smart people and ignore the dumb people.
In a nutshell (caveats and conditions noted!) a 4% inflation adjusted withdrawal rate would have worked in the past. Could the future be worse than the past? You bet! But the safe withdrawal rate is inflation adjusted based on historical rates of inflation.
This guy read "four percent" and then stopped reading. Because he is lazy and dumb, he assumed there should be an inflation correction because he was too dumb/lazy to know there already was one.
There is so much stupidity to unpack in that article it is hard to pin it down on one thing. Part of the problem is his disjointed thought process. But here is the money shot:
On the surface, this might seem like an easy calculation. Let’s say you’re 30 years old, you expect to live to 90, and you’re content living on $50,000 a year. You need 60 years of income. Sixty times $50,000 is $3 million.
Right? Well, not exactly, because we’re forgetting inflation.
A 4% SWR says you need 25 times expenses, or $1.25 million. That gives a $50K inflation adjusted withdrawal rate. That allows you to retire with the same lifestyle with less than half the savings. Because, math.
Again my advice: Seek out the smart people and ignore the dumb people. This guy is dumb.
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Do you incorporate inflation into your 4% estimate?
This article was a discouraging read. I would like to hear some thoughts. https://www.moneyunder30.com/how-realistic-is-financial-independence-in-your-30s
It may be a bit harsh to say the author is an idiot, but he's definitely misguided and does not correctly understand the 4% rule.
First, the 4% rule is NOT based upon living only off one's dividends/interest. If you have any assets yourself, you already have realized that a diversified equities fund will average closer to paying approximately 2% dividends, and even a high-interest savings account will pay more like 1% interest. Therefore, if you are going to use the 4% rule, you almost certainly will in part be selling some of your assets each year. The only way to avoid this is to save 50x your yearly expenses so that you have a 2% withdrawal rate instead of a 4% withdrawal rate.
Second, as already mentioned, the 4% rule is ALREADY INFLATION-ADJUSTED. In fact, since a well-diversified retirement portfolio will average more like 6-7% return per year, it is likely that over time, your account will grow faster than inflation, and you will end up dying with substantially more money than what you had at the time of retirement.
Third, none of these authors who are skeptical of FIRE seems to EVER take into account that people are not automatons with no ability to adjust their COL and/or their income. If I'm living on $50k (which is actually double my current expenditure rate for my own expenses, but whatever), and the market suddenly drops so that my portfolio is now 50% of what it was, am I seriously going to just keep merrily spending $50k as if nothing had happened until I run out of money? Of course not. I am going to notice, hmm, the market dropped, and I can't afford to spend $50k any more. In response, I would delay certain purchases, cut back discretionary spending on things like eating out and travel, and otherwise take steps to prevent depleting my account. On the income side, I might even consider going back to work PT to help offset my expenses and decrease the drain on my portfolio.
So what are the valid critiques of living on 4% for the FIRE crowd? To my mind, there are basically two.
First, the 4% rule is based upon a series of 30 year study periods. Since most early retirees can expect to have a RLE (retirement life expectancy) well beyond 30 years, it is reasonable to question whether the 4% rule holds for people like us versus people who retire in their mid to late 60s. Unfortunately, there is no way to definitively answer this question, and you will have to make some assumptions about the future based upon your own personal risk tolerance and expectations for what will happen.
Similarly, the criticism that past market performance does not guarantee future market performance is well-taken and cannot be summarily dismissed. That being said, the Trinity Study that generated the 4% rule covers some of the worst economic times in modern history (including The Great Depression), and while it's not impossible that future depressions/recessions could be even worse, it may not be realistic to assume that such a possibility is likely.
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First, the 4% rule is based upon a series of 30 year study periods. Since most early retirees can expect to have a RLE (retirement life expectancy) well beyond 30 years, it is reasonable to question whether the 4% rule holds for people like us versus people who retire in their mid to late 60s. Unfortunately, there is no way to definitively answer this question, and you will have to make some assumptions about the future based upon your own personal risk tolerance and expectations for what will happen.
Similarly, the criticism that past market performance does not guarantee future market performance is well-taken and cannot be summarily dismissed. That being said, the Trinity Study that generated the 4% rule covers some of the worst economic times in modern history (including The Great Depression), and while it's not impossible that future depressions/recessions could be even worse, it may not be realistic to assume that such a possibility is likely.
The duration is a definite problem unless you're a money machine blogger like MMM or have some other good side hustle. cfiresim.com shows that 4% withdrawal only succeeds 75% of the time, assuming no Social Security. I played around a bit with different asset allocations and it didn't improve much. And the second concern "past results don't indicate future results" just gets more worrisome with more time.
BTW, I believe it was Bengen, not Trinity, that lit the fire under the 4% rule (see the links I posted above). "Therefore, I counsel my clients to with-draw at no more than a four-percent rate during the early years of retirement."
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Do you incorporate inflation into your 4% estimate?
This article was a discouraging read. I would like to hear some thoughts. https://www.moneyunder30.com/how-realistic-is-financial-independence-in-your-30s
No wonder you were discouraged. This article is completely wrong.
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^+1 ....Yes.
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Third, none of these authors who are skeptical of FIRE seems to EVER take into account that people are not automatons with no ability to adjust their COL and/or their income. If I'm living on $50k (which is actually double my current expenditure rate for my own expenses, but whatever), and the market suddenly drops so that my portfolio is now 50% of what it was, am I seriously going to just keep merrily spending $50k as if nothing had happened until I run out of money? Of course not. I am going to notice, hmm, the market dropped, and I can't afford to spend $50k any more. In response, I would delay certain purchases, cut back discretionary spending on things like eating out and travel, and otherwise take steps to prevent depleting my account. On the income side, I might even consider going back to work PT to help offset my expenses and decrease the drain on my portfolio.
I found this article on earlyretirementnow.com (https://earlyretirementnow.com/2017/02/08/the-ultimate-guide-to-safe-withdrawal-rates-part-9-guyton-klinger/) on Guyton-Klinger withdrawal rules very enlightening. It seems that the necessary curb in spending would be significant.
So what are the valid critiques of living on 4% for the FIRE crowd? To my mind, there are basically two.
First, the 4% rule is based upon a series of 30 year study periods. Since most early retirees can expect to have a RLE (retirement life expectancy) well beyond 30 years, it is reasonable to question whether the 4% rule holds for people like us versus people who retire in their mid to late 60s. Unfortunately, there is no way to definitively answer this question, and you will have to make some assumptions about the future based upon your own personal risk tolerance and expectations for what will happen.
Similarly, the criticism that past market performance does not guarantee future market performance is well-taken and cannot be summarily dismissed. That being said, the Trinity Study that generated the 4% rule covers some of the worst economic times in modern history (including The Great Depression), and while it's not impossible that future depressions/recessions could be even worse, it may not be realistic to assume that such a possibility is likely.
I would add a third one (once again picked up from earlyretirementnow.com (https://earlyretirementnow.com/2016/12/14/the-ultimate-guide-to-safe-withdrawal-rates-part-2-capital-preservation-vs-capital-depletion/)):
3. The 4% rule is also based on running your portfolio to zero at the end. So if you in the final years of your life see you portfolio dwindling and you luckily(?) die before it hits zero, that counts as a success. Well, it wouldn't in my book.
Plus, if we want to extrapolate this rule to time frames of more than 30 years, a portfolio of zero is not a good start. And if I use a stricter criteria (minimum portfolio after 30 years should be 75% of starting portfolio in real dollars, then the probabilities go down: According to cfiresim a $1M portfolio of 80% stocks and 20% bonds has only a 74.5% probability to be more than $750k (in real dollars) after 30 years. For a 60%/40% stock/bond split the probability is ca. 57%.
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Plus, if we want to extrapolate this rule to time frames of more than 30 years, a portfolio of zero is not a good start. And if I use a stricter criteria (minimum portfolio after 30 years should be 75% of starting portfolio in real dollars, then the probabilities go down: According to cfiresim a $1M portfolio of 80% stocks and 20% bonds has only a 74.5% probability to be more than $750k (in real dollars) after 30 years. For a 60%/40% stock/bond split the probability is ca. 57%.
Personally this sounds pretty safe to me. Just to clarify that this isn't including any form or reduced spending or additional income at all. It's a blind rule that I think turns out pretty good in the long run.
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Plus, if we want to extrapolate this rule to time frames of more than 30 years, a portfolio of zero is not a good start. And if I use a stricter criteria (minimum portfolio after 30 years should be 75% of starting portfolio in real dollars, then the probabilities go down: According to cfiresim a $1M portfolio of 80% stocks and 20% bonds has only a 74.5% probability to be more than $750k (in real dollars) after 30 years. For a 60%/40% stock/bond split the probability is ca. 57%.
Personally this sounds pretty safe to me. Just to clarify that this isn't including any form or reduced spending or additional income at all. It's a blind rule that I think turns out pretty good in the long run.
You find a success rate of 74.5% acceptable? How much reduction in spending and how many extra years of work in retirement are you willing to undergo?
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Plus, if we want to extrapolate this rule to time frames of more than 30 years, a portfolio of zero is not a good start. And if I use a stricter criteria (minimum portfolio after 30 years should be 75% of starting portfolio in real dollars, then the probabilities go down: According to cfiresim a $1M portfolio of 80% stocks and 20% bonds has only a 74.5% probability to be more than $750k (in real dollars) after 30 years. For a 60%/40% stock/bond split the probability is ca. 57%.
Personally this sounds pretty safe to me. Just to clarify that this isn't including any form or reduced spending or additional income at all. It's a blind rule that I think turns out pretty good in the long run.
You find a success rate of 74.5% acceptable? How much reduction in spending and how many extra years of work in retirement are you willing to undergo?
I would take a 75% chance of never having to lower my spending or ever work again over a 100% chance of working more years. Since a 3% withdrawl rate has NEVER failed, one would have to reduce their spending at most 25% (It's actually much lower than that, but for argument's sake). And since this is not a permanent reduction, but only for a year or two of really bad years, I see zero reason to worry in the proposed scenario.
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I'm so tired of dealing with this sort of BS misinformation that I've about decided not to bother.
Here's my new strategy: You're right! You can never retire. You need to stay in your 9-5 job for as long as you can possibly stand it. Please purchase a new vehicle every three years, remodel your kitchen every seven years, and be sure to keep all of your credit cards maxed out. There are poor unfortunate souls who actually WANT those used cars, old appliances, and your credit rating to be terrible, and the economy needs industrious patriotic American consumers like you to keep the hamster wheel spinning in overdrive at all times. You can safely disregard the hundreds of early retirees on this forum, they're all deluded dreamers who are only pretending to be happy. The reality is that only people with soul-sucking office jobs and shiny new SUVs are truly happy inside.
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3. The 4% rule is also based on running your portfolio to zero at the end. So if you in the final years of your life see you portfolio dwindling and you luckily(?) die before it hits zero, that counts as a success. Well, it wouldn't in my book.
Therefore, the 4% rule doesn't apply to you, and you should use some other number.
Also, congratulations! You are the five billionth person to point out that if you change the base assumptions that resulted in the 4% rule, then you come up a some number that isn't 4%.
*I realize you are not literally the five billionth person to point this out. It just feels like it.
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3. The 4% rule is also based on running your portfolio to zero at the end. So if you in the final years of your life see you portfolio dwindling and you luckily(?) die before it hits zero, that counts as a success. Well, it wouldn't in my book.
Therefore, the 4% rule doesn't apply to you, and you should use some other number.
Also, congratulations! You are the five billionth person to point out that if you change the base assumptions that resulted in the 4% rule, then you come up a some number that isn't 4%.
*I realize you are not literally the five billionth person to point this out. It just feels like it.
What exactly is your problem with my post? I added one more point to Libertea's list of two valid critiques of the 4% rule. I didn't see you taking those two points to task, only my added point.
Of course the 4% rule only works in the framework of its assumptions. But the questions are: how relevant are these assumptions in practice, particularly for early retirees (what this forum is about).
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Of course the 4% rule only works in the framework of its assumptions. But the questions are: how relevant are these assumptions in practice, particularly for early retirees (what this forum is about).
I'm assuming you've read the sticky thread (http://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/) about the 4% rule, which discusses all of these questions and many more in excruciating detail.
The short answer is that SWRs below 4% were (historically) just as likely to last 100 years as they were to last 40 years. The 30 year time frame is a rough approximation of "forever" when talking about the stock market, because it's longer than the typical market cycles so if survives that long it typically survives indefinitely. The only failure cases for periods of 30 years or 50 years or 100 years are all determined inside of the first ten years.
relevant graph from page 3 of the thread referenced above:
(http://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/?action=dlattach;attach=11290;image)
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What exactly is your problem with my post? I added one more point to Libertea's list of two valid critiques of the 4% rule. I didn't see you taking those two points to task, only my added point.
Of course the 4% rule only works in the framework of its assumptions. But the questions are: how relevant are these assumptions in practice, particularly for early retirees (what this forum is about).
You should therefore be arguing against the assumptions, not against the rule. Changing the assumptions and then claiming the rule doesn't work with added assumptions isn't very helpful.
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Of course the 4% rule only works in the framework of its assumptions. But the questions are: how relevant are these assumptions in practice, particularly for early retirees (what this forum is about).
I'm assuming you've read the sticky thread (http://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/) about the 4% rule, which discusses all of these questions and many more in excruciating detail.
The short answer is that SWRs below 4% were (historically) just as likely to last 100 years as they were to last 40 years. The 30 year time frame is a rough approximation of "forever" when talking about the stock market, because it's longer than the typical market cycles so if survives that long it typically survives indefinitely. The only failure cases for periods of 30 years or 50 years or 100 years are all determined inside of the first ten years.
relevant graph from page 3 of the thread referenced above:
(http://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/?action=dlattach;attach=11290;image)
sol,
Thank you for actually confirming my point with your post and the graph. Eyeballing the graph: For a 4% WR the success rate is significantly (>=10%) lower for a 40 year retirement than for a 30 year retirement. The success rates converge at the 3.0% WR, which presumably then marks the SWR for a perpetual retirement (if they were such a thing). So an early retiree might adopt 3.0%, 3.25% or perhaps even 3.5% as a WR, but 4% looks iffy in my book.
I agree with you that the success rate is determined in the first 10 to 15 years. But that doesn't change the fact that the SWR is lower for a 40-year retirement than for a 30-year retirement. And my point is that this is because a portfolio that is close to zero after 30 years (and thus still counted as a success there) will not survive 40 years. So the trouble for that portfolio still starts in the first 10 to 15 years, but doesn't kill it until after 30 years.
That's why I believe that using a portfolio final value of zero is a weakness of this approach. Using longer time periods can mitigate this to a point, but then you run into different problems (e.g. for a 50-year simulation you are just now including the year 1966 as retirement start date, for a 60 year simulation you have to wait several more years).
So in what way was my post BS and misinformation? It seems to me that you interpreted an intention into it that simply wasn't there.
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So in what way was my post BS and misinformation? It seems to me that you interpreted an intention into it that simply wasn't there.
You're right! You can never retire. Better to keep that office job as long as possible, just to be safe.
Just because a 3% SWR has never failed, for any length of retirement at any time in history, doesn't mean it will work if you start it today. The world economy could collapse tomorrow. The future is uncertain. Please work as long as you can possibly stand it and then maybe add a few more years after that just to be certain nothing bad happens.
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What exactly is your problem with my post? I added one more point to Libertea's list of two valid critiques of the 4% rule. I didn't see you taking those two points to task, only my added point.
Of course the 4% rule only works in the framework of its assumptions. But the questions are: how relevant are these assumptions in practice, particularly for early retirees (what this forum is about).
You should therefore be arguing against the assumptions, not against the rule. Changing the assumptions and then claiming the rule doesn't work with added assumptions isn't very helpful.
But isn't it always about the assumptions? I mean we're not debating here whether a mathematical theorem is correct in and of itself. I'm sure that all the calculations behind the 4% rule are correct. But those calculations are just a mathematical exercise, unless we can apply this rule to our situation. And for that it's all about evaluating the assumptions.
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Thank you for actually confirming my point with your post and the graph. Eyeballing the graph: For a 4% WR the success rate is significantly (>=10%) lower for a 40 year retirement than for a 30 year retirement. The success rates converge at the 3.0% WR, which presumably then marks the SWR for a perpetual retirement (if they were such a thing). So an early retiree might adopt 3.0%, 3.25% or perhaps even 3.5% as a WR, but 4% looks iffy in my book.
You pay a very high price to chase after a 100% success rate using historical data especially if you have zero spending flexibility. It costs you the most precious resource you have - time at the prime of your life and fails to account for all the ways you can fail at retirement that are not captured by $$/% and tabulated in a spreadsheet. Many of these non-financial types of failures are [in my opinion] exacerbated by working extra years.
By all means shoot for 3%WR or maybe 2%WR because as you rightly point out simulating longer FIRE periods using historical data is problematic as there are fewer full cycles of data to utilize. I can think of ways a 3%WR is not going to survive 50yrs. 2%WR may even be too risky for some people.
Personally I think being afraid is one of the primary risks with FIRE and is exemplified by people working too long chasing after an abstract of security while failing to appreciate the opportunity costs associated with that pursuit. The irony is they may well fail despite their massive investment accounts. At least they can distract themselves from their failure watching the numbers grow to absurd levels.
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Plus, if we want to extrapolate this rule to time frames of more than 30 years, a portfolio of zero is not a good start. And if I use a stricter criteria (minimum portfolio after 30 years should be 75% of starting portfolio in real dollars, then the probabilities go down: According to cfiresim a $1M portfolio of 80% stocks and 20% bonds has only a 74.5% probability to be more than $750k (in real dollars) after 30 years. For a 60%/40% stock/bond split the probability is ca. 57%.
Personally this sounds pretty safe to me. Just to clarify that this isn't including any form or reduced spending or additional income at all. It's a blind rule that I think turns out pretty good in the long run.
You find a success rate of 74.5% acceptable? How much reduction in spending and how many extra years of work in retirement are you willing to undergo?
I find it more than acceptable. I'm willing to work at any point if I have too but I'm failing to see why I would need too. I can always spend a little less. I can always downsize my house. I can always get a little social security. I can always expect some inheritance. I also have 3 kids and expect my spending to fall.
My point is that you are focussed on the negatives of a 4% WR whereas I can see a lot of reasons why a 6% WR for me should be pretty safe.
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Of course the 4% rule only works in the framework of its assumptions. But the questions are: how relevant are these assumptions in practice, particularly for early retirees (what this forum is about).
I'm assuming you've read the sticky thread (http://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/) about the 4% rule, which discusses all of these questions and many more in excruciating detail.
The short answer is that SWRs below 4% were (historically) just as likely to last 100 years as they were to last 40 years. The 30 year time frame is a rough approximation of "forever" when talking about the stock market, because it's longer than the typical market cycles so if survives that long it typically survives indefinitely. The only failure cases for periods of 30 years or 50 years or 100 years are all determined inside of the first ten years.
relevant graph from page 3 of the thread referenced above:
(http://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/?action=dlattach;attach=11290;image)
I just want to state that I love this chart.
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Thank you for actually confirming my point with your post and the graph. Eyeballing the graph: For a 4% WR the success rate is significantly (>=10%) lower for a 40 year retirement than for a 30 year retirement. The success rates converge at the 3.0% WR, which presumably then marks the SWR for a perpetual retirement (if they were such a thing). So an early retiree might adopt 3.0%, 3.25% or perhaps even 3.5% as a WR, but 4% looks iffy in my book.
You pay a very high price to chase after a 100% success rate using historical data especially if you have zero spending flexibility.
I'm assuming that you mean "lots of spending flexibility", because if you have zero spending flexibility, then one line of defense against an adverse scenario, the reduction of spending, has evaporated, thus the less spending flexibility (or alternatively income generating flexibility) you have, the higher should be the success rate that you're shooting for.
It costs you the most precious resource you have - time at the prime of your life and fails to account for all the ways you can fail at retirement that are not captured by $$/% and tabulated in a spreadsheet. Many of these non-financial types of failures are [in my opinion] exacerbated by working extra years.
Sure, it does, but then so what? Everything has a price, that is a truism. But I find it more honest to say, that I am taking conservative assumptions, have a success rate <95% for my calculation for a WR of 4%, but retire anyway on that WR, because the non-financial cost of not doing so is too high, than to pretend (by using inappropriate assumptions) that 4% is a WR that will give me success probabilities in the 95% range (or whatever range you choose).
By all means shoot for 3%WR or maybe 2%WR because as you rightly point out simulating longer FIRE periods using historical data is problematic as there are fewer full cycles of data to utilize. I can think of ways a 3%WR is not going to survive 50yrs. 2%WR may even be too risky for some people.
Personally I think being afraid is one of the primary risks with FIRE and is exemplified by people working too long chasing after an abstract of security while failing to appreciate the opportunity costs associated with that pursuit. The irony is they may well fail despite their massive investment accounts. At least they can distract themselves from their failure watching the numbers grow to absurd levels.
I don't know why there is this hostility and pejorative accusations against people who consider a lower WR than 4% as the baseline. I find this completely unnecessary and it does the concept of FIRE a disservice. I'm guessing that there is a lot (too much in my book) anchoring on that 4% number for historical reasons.
A thought experiment: If the Trinity Study would have found that 5% is the SWR of a 60/40 portfolio with a success rate of 95% in a 20 year retirement (just to pull a fictitious scenario of out the hat), would all those who would now dare to suggest that for longer retirements such as 30 years, perhaps 4% is a more appropriate number, face the same line of counter-arguments (you're just afraid, you don't consider the cost of working longer, etc.).
Again just a thought...
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Ursus Major - I think that you are missing a couple of key points:-
1. The 4% SWR is pretty safe as is. It is 95% safe over 30 years and typically you end up with money left over.
2. The assumptions of the 4% SWR are pretty extreme - no additional income or reduced spending at all.
I accept that if you have a really tight budget with no leeway to adjust and you utilise a 4% WR and you have a bad sequence of returns in the first 10 years you could be in some trouble.
If you take a step back here what do you believe the real chances are of falling on the wrong side of the pros and cons of the 4% SWR. I think it's much more likely to fall on the right side - i.e. you end up better off than the theoretical 4% rule. When you consider that rule is 95% okay can you see why a bunch of us believe that this rule isn't something worth worrying about at all.
I am comfortable with a 5% to 6% WR based on the adjustments that I can make.
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So the 4% rule was based on the absolute worst 30 year period since the late 1800's from memory.
Assuming that 30 years = 60years (using the reverse mortgage interest thought process) for a moment.
Then as long as economic conditions are no worse than the absolute worse they have ever been since 100+ years ago, 4% will work.
In fact if you look at the average of the SWR's that would have worked it looks like 5.5% is a better answer.. Just be sure you can drop to 4% if you have to.
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Ursus Major - I think that you are missing a couple of key points:-
1. The 4% SWR is pretty safe as is. It is 95% safe over 30 years and typically you end up with money left over.
The statement is correct, but not particularly helpful, because
a) Our retirement time frame as (aspiring) early retirees is longer than 30 years, potentially 60 years or more for some members of this forum. And if you look at the graph earlier in this thread you'll see that the success rate goes down for longer periods, e.g. <85% for 60 years. One of the reasons this is the case, is because the model allows the depletion of the portfolio after the time frame. That might be fine in real life, but isn't good for simply extrapolating the 30 year results to longer time frames.
b) The fact that you typically end up with money left over is irrelevant, because we are not optimizing for the median (or average) case, we are trying to protect against the downside. Imagine a weapon with a 20 gun ammo magazine, 19 are blanks and one is live and the position of the live bullet in the magazine is random. If you play one round of Russian Roulette with that, then you typically end up alive (95% probability). Still probably not a good idea, if you consider the downside.
2. The assumptions of the 4% SWR are pretty extreme - no additional income or reduced spending at all.
I accept that if you have a really tight budget with no leeway to adjust and you utilise a 4% WR and you have a bad sequence of returns in the first 10 years you could be in some trouble.
Well, that's what failure is all about, a bad sequence of return at the start, isn't it? If you don't believe you'll have that, you should be fine to ramp up your WR even more. And I don't know, how much you are able to tighten your budget. You may need to tighten a lot. Here's a post on earlyretirementnow.com re. applying the Guyton-Klinger rules (as one way to reduce spending in an adverse scenario): https://earlyretirementnow.com/2017/02/08/the-ultimate-guide-to-safe-withdrawal-rates-part-9-guyton-klinger/
The relevant graph is this one:
(https://earlyretirementnowdotcom.files.wordpress.com/2017/02/swr-part9-chart3.png?w=809)
That's a lot of reduction in spending. Now you may be able to cut less, if you cut at the first sign of trouble and cut a lot. But even then you'll probably need to cut at least 25%, possible more.
If you take a step back here what do you believe the real chances are of falling on the wrong side of the pros and cons of the 4% SWR. I think it's much more likely to fall on the right side - i.e. you end up better off than the theoretical 4% rule. When you consider that rule is 95% okay can you see why a bunch of us believe that this rule isn't something worth worrying about at all.
Well, it's not 95% okay, if your retirement is longer than 30 years. So why are you using the 95% number? Are you planning for a 30 year retirement horizon? Well, then you're fine and nothing of this applies to you. But if it is longer, the fact that it is 95% safe for 30 years matters to you as much as the fact that it is 100% safe for 20 years...
I am comfortable with a 5% to 6% WR based on the adjustments that I can make.
Yes, you said earlier (IIRC) that you're comfortable with a 75% success rate. Good for you!
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So the 4% rule was based on the absolute worst 30 year period since the late 1800's from memory.
Assuming that 30 years = 60years (using the reverse mortgage interest thought process) for a moment.
Sorry, I don't follow you on that. Could you please explain the "30 years = 60 years" logic for me.
Then as long as economic conditions are no worse than the absolute worse they have ever been since 100+ years ago, 4% will work.
In fact if you look at the average of the SWR's that would have worked it looks like 5.5% is a better answer.. Just be sure you can drop to 4% if you have to.
I my previous post in this thread I mentioned the Russian Roulette example to explain why I don't think that averages matter. And when you drop your WR from 5.5% to 4% (presumably of your original portfolio then CPI adjusted) in an adverse scenario, you could already be hosed, because your WR from your actual (reduced) portfolio is significantly higher. Which works of course to a degree, but only so far...
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a) Our retirement time frame as (aspiring) early retirees is longer than 30 years, potentially 60 years or more for some members of this forum. And if you look at the graph earlier in this thread you'll see that the success rate goes down for longer periods, e.g. <85% for 60 years. One of the reasons this is the case, is because the model allows the depletion of the portfolio after the time frame. That might be fine in real life, but isn't good for simply extrapolating the 30 year results to longer time frames.
I get this but stuff still happens that may help. For instance I'm 43 and I am looking to retire in 3-5 years time. I assume that I'll be retired by 50. Let's say I live another 50 years. I assume I'll inherit some money and if I don't that I will receive some social security payments. I also assume that my house can be downsized. These assumptions aren't exactly unlikely scenarios. They are pretty likely.
b) The fact that you typically end up with money left over is irrelevant, because we are not optimizing for the median (or average) case, we are trying to protect against the downside. Imagine a weapon with a 20 gun ammo magazine, 19 are blanks and one is live and the position of the live bullet in the magazine is random. If you play one round of Russian Roulette with that, then you typically end up alive (95% probability). Still probably not a good idea, if you consider the downside.
I don't see it like this. It's not like Russian Roulette at all. If you fail at russian roulette you die and it's impossible to see it coming. If ER looks like failing you have multiple options. You can spend less. You can go back and do a little work. For instance packing shelves and earning $10k per year might be a huge chunk of your ER spending.
I think that the fact that you are typically left with money is relevant because it means that the odds are on your side when it comes to FIRE. Typically people are saving too much without any adjustments.
Well, that's what failure is all about, a bad sequence of return at the start, isn't it? If you don't believe you'll have that, you should be fine to ramp up your WR even more. And I don't know, how much you are able to tighten your budget. You may need to tighten a lot
...
That's a lot of reduction in spending. Now you may be able to cut less, if you cut at the first sign of trouble and cut a lot. But even then you'll probably need to cut at least 25%, possible more.
I agree that most people here could probably ramp up the WR past 4%. My only proviso is that you aren't on a too tight budget. My only concern with an ERE type retirement is that your spending is really low. My spending is relatively low but it's not at a bare bones level. I have 3 kids right now. I've paid $5k over the last two years for my daughters braces. We've bought two macbook airs over the last 3 years for my kids schooling. We pay for swimming and soccer lessons. I think most people on this forum could cut their spending by a bit if it was required or go back to work and earn 25% of their budget. I can't talk for everyone else but I get the impression that most people err on the side of safety anyway. There are people on this forum who don't and they seem to be going okay as well.
Well, it's not 95% okay, if your retirement is longer than 30 years. So why are you using the 95% number? Are you planning for a 30 year retirement horizon? Well, then you're fine and nothing of this applies to you. But if it is longer, the fact that it is 95% safe for 30 years matters to you as much as the fact that it is 100% safe for 20 years...
I use the 95% figure because I think budgeting for the next 30 years is a fairly long timeframe to reassess within that timeframe. 50% with adjustments is probably okay. 50% plus some buffers may be okay.
The 95% figure as per any figure is not 95% safe but nothing is. It's just a figure based on historical data. You can't really get 100% safety in reality.
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So the 4% rule was based on the absolute worst 30 year period since the late 1800's from memory.
Assuming that 30 years = 60years (using the reverse mortgage interest thought process) for a moment.
Sorry, I don't follow you on that. Could you please explain the "30 years = 60 years" logic for me.
I could be wrong but I assume ExFlyboy means that you could get a reverse mortgage. If this is the case I could get a reverse mortgage and get another 30 years living expenses. Personally I wouldn't do this but I would downsize. I could easily go from my 4 bedroom house in a massively expensive city to a 2 bedroom shack or retirement village somewhere a lot cheaper.
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Quick side question for you all...
Can you give me a quick demo of the process once I retire and want to take money?
Let's say $50k is my benchmark for living expenses. (should the 50k be net of taxes or pre?)
I save $1,250,000 and quit.
Year 1 I take $50k out.
Year 2 - do I take out 4% regardless of what the market did that year?
I'm not trying to live on 50k forever right...I'm trying to live on 4% of my nest egg?
thanks.
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a) Our retirement time frame as (aspiring) early retirees is longer than 30 years, potentially 60 years or more for some members of this forum. And if you look at the graph earlier in this thread you'll see that the success rate goes down for longer periods, e.g. <85% for 60 years. One of the reasons this is the case, is because the model allows the depletion of the portfolio after the time frame. That might be fine in real life, but isn't good for simply extrapolating the 30 year results to longer time frames.
I get this but stuff still happens that may help. For instance I'm 43 and I am looking to retire in 3-5 years time. I assume that I'll be retired by 50. Let's say I live another 50 years. I assume I'll inherit some money and if I don't that I will receive some social security payments. I also assume that my house can be downsized. These assumptions aren't exactly unlikely scenarios. They are pretty likely.
steveo,
you can model these events with an assumed probability into your calculations and come up with a SWR based on that. Have you ever done that? How did they do on the 1966 retirement year? Or are you assuming that nothing comparable will ever happen.
b) The fact that you typically end up with money left over is irrelevant, because we are not optimizing for the median (or average) case, we are trying to protect against the downside. Imagine a weapon with a 20 gun ammo magazine, 19 are blanks and one is live and the position of the live bullet in the magazine is random. If you play one round of Russian Roulette with that, then you typically end up alive (95% probability). Still probably not a good idea, if you consider the downside.
I don't see it like this. It's not like Russian Roulette at all. If you fail at russian roulette you die and it's impossible to see it coming. If ER looks like failing you have multiple options. You can spend less. You can go back and do a little work. For instance packing shelves and earning $10k per year might be a huge chunk of your ER spending.
You are overstretching the Russian Roulette analogy. All it was meant to do is to show that the average or likely outcome is irrelevant, if the focus is on downside protection.
I think that the fact that you are typically left with money is relevant because it means that the odds are on your side when it comes to FIRE. Typically people are saving too much without any adjustments.
The odds are on your side in the Russian Roulette example, too. That's not a particularly strong argument.
Well, that's what failure is all about, a bad sequence of return at the start, isn't it? If you don't believe you'll have that, you should be fine to ramp up your WR even more. And I don't know, how much you are able to tighten your budget. You may need to tighten a lot
...
That's a lot of reduction in spending. Now you may be able to cut less, if you cut at the first sign of trouble and cut a lot. But even then you'll probably need to cut at least 25%, possible more.
I agree that most people here could probably ramp up the WR past 4%. My only proviso is that you aren't on a too tight budget. My only concern with an ERE type retirement is that your spending is really low. My spending is relatively low but it's not at a bare bones level. I have 3 kids right now. I've paid $5k over the last two years for my daughters braces. We've bought two macbook airs over the last 3 years for my kids schooling. We pay for swimming and soccer lessons. I think most people on this forum could cut their spending by a bit if it was required or go back to work and earn 25% of their budget. I can't talk for everyone else but I get the impression that most people err on the side of safety anyway. There are people on this forum who don't and they seem to be going okay as well.
Thanks for raising that point. Yes, that's actually my big concern about ERE and the main reason why I'm so persistent about my point. You need a lot of slack in your budget to mitigate a bad sequence of return through budget cuts. Just cutting "a bit" won't do it. Do you have a preset rule on how you are going to cut your budget, when you hit a year or two of bad returns? Just curious, because if you don't cut quickly and deeply, your cuts may have to be much more severe than 25%. (See the graph re. Guyton-Klinger rules that I posted above and I also recommend reading the associated blog post, link is above the graph.
Well, it's not 95% okay, if your retirement is longer than 30 years. So why are you using the 95% number? Are you planning for a 30 year retirement horizon? Well, then you're fine and nothing of this applies to you. But if it is longer, the fact that it is 95% safe for 30 years matters to you as much as the fact that it is 100% safe for 20 years...
I use the 95% figure because I think budgeting for the next 30 years is a fairly long timeframe to reassess within that timeframe. 50% with adjustments is probably okay. 50% plus some buffers may be okay.
The 95% figure as per any figure is not 95% safe but nothing is. It's just a figure based on historical data. You can't really get 100% safety in reality.
Of course it's only a figure based on historical data. But that part was never in dispute. Also I never claimed that I am aspiring 100% safety. The 20 year example was just to show that the numbers are meaningless, if they don't apply to your scenario. And it does indeed appear that the 95% figure doesn't apply to you (just as the fictitious 100% figure in the 20 year scenario doesn't), because your retirement horizon is longer and you don't want to exhaust your capital at the end of 30 years. Now you can do a lot of mental accounting to "explain" that fact away (I can reduce my spending, I can expect an inheritance, I can work part-time, etc.), but that's not helpful for a general discussion, mainly because it's too vague (without a clearly formulated example) to back-test against historical scenarios and to a lesser degree because it likely doesn't apply to everyone (particularly the inheritance expectation). And that has nothing to do with the 4% rule, because that rule is only about what your portfolio can do for you, not what an inheritance can do for you.
So to restate my original point: I still believe that one of the weaknesses of applying the 4% rule to a retirement horizon longer than 30 years is that the original rule allowed for capital depletion, meaning it counts any portfolio amount >=$0 at the end of the 30 years as a success.
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Slate-WA -
4% rule, as stated in the academic research on the issue is:
You take 4% of your portfolio in year one, then adjust for inflation each year.
So you start at $50K, then adjust up for inflation for year 2 - maybe $51-52K. Then yet more in year 3.
If you were to just take 4% of whatever the portfolio is at every year, that would be a very, very robust plan. But you'd have to be able to halve your spending potentially in a very bad year.
As spartana points out - most people, I wouldn't think actually follow the inflation adjustments verbatim. You've decided to retire, so you pay for whatever expenses you have out of your portfolio. It would be unusual for that amount to lock-step follow inflation year after year.
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Ursa Major's chart above also assumes that reduction in spending and WR is because of declining market conditions when it may be simply that the ERee is just spending less at those time periods regardless of the market. I've been FIRE around 13 or so years now and my spending varies based not just on the market but on my life at that time. Right now I'm spending very little (probably 1 - 2% WR based on the size of my stash) even though the market is booming (and my stash is growing). Its just that right now I'm not spending as much as I did in the early years because of lifestyle choices not because I have to reduce expenses. This ebb and flow of WR spending seems to be a pretty common thing among ERees as things in their lives change and often expenses they had at the onset of ER no longer exist.
Just to be clear and restate what I already said in the post where I included the graph: It's not my chart, is from a blog post at https://earlyretirementnow.com/2017/02/08/the-ultimate-guide-to-safe-withdrawal-rates-part-9-guyton-klinger/ which I highly recommend.
And that chart is all about a forced reduction in spending due to an adverse market scenario (from the blog post you can find out that it uses the January 1966 retirement date).
It's great for you, if your WR is so low, because with anything below 2% you probably have a 100% success rate even in worse than historical scenarios. But that is the expected outcome, if you retire in a year with reasonable equity valuations (assuming 2003 or 2004 in your case). You didn't specify what your initial WR was, but it probably was around 4%. And you were also lucky that the 2008/2009 crisis was severe, but short. So congratulations! You're in all likelihood set for life and those bad scenarios (e.g. 1966 retirement or 1999 retirement) don't apply to you.
Of course the fact that your spending went down due to lifestyle choices is great for you, but it isn't clear that this can be generally applied. If you would have been so unlucky to have an expensive medical condition, your spending might be significantly higher for all we know. Or perhaps most people wouldn't want to make the lifestyle choices that you do? Who knows...
So it is hard to extrapolate individual experiences into a general rule as the 4% rule, if we don't have any data on the general population. Also (to take up a point from a previous post that steveo makes and I think is very relevant):
My only concern with an ERE type retirement is that your spending is really low. My spending is relatively low but it's not at a bare bones level
And that is the crux: If folks retire immediately, as soon as their bare bones level budget is covered by the 4% rule, they don't have much or any slack to cut expenses. Sure, if the crisis hits after 10 years, they may have a bit more, but who knows, if it is enough...
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So the 4% rule was based on the absolute worst 30 year period since the late 1800's from memory.
Assuming that 30 years = 60years (using the reverse mortgage interest thought process) for a moment.
Sorry, I don't follow you on that. Could you please explain the "30 years = 60 years" logic for me.
I could be wrong but I assume ExFlyboy means that you could get a reverse mortgage. If this is the case I could get a reverse mortgage and get another 30 years living expenses. Personally I wouldn't do this but I would downsize. I could easily go from my 4 bedroom house in a massively expensive city to a 2 bedroom shack or retirement village somewhere a lot cheaper.
Actually what I was referring was MMM's post on the 4% WR where he points out that mathematically there is very little difference between a 30 year and a 60 year mortgage. i.e if you add say just $150/m to your 30 year mortgage, its paid off in 15 years. The argument being that a savings stash is the same thing in reverse. I.e make your WR say 3.9% and it will be the same risk over 60 years as it will 30.
If you use Cfiresim and use a 60 year time frame this fact seems to be true, except of course there are not that many 60 year periods available to project results over.
For me I rationalise that if my stash has not grown significantly over 10 years I still have time to make spending adjustments.
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Actually what I was referring was MMM's post on the 4% WR where he points out that mathematically there is very little difference between a 30 year and a 60 year mortgage. i.e if you add say just $150/m to your 30 year mortgage, its paid off in 15 years. The argument being that a savings stash is the same thing in reverse. I.e make your WR say 3.9% and it will be the same risk over 60 years as it will 30.
If you use Cfiresim and use a 60 year time frame this fact seems to be true, except of course there are not that many 60 year periods available to project results over.
For me I rationalise that if my stash has not grown significantly over 10 years I still have time to make spending adjustments.
Exflyboy,
There is no need to speculate. The image posted earlier in this thread gives us the data:
(http://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/?action=dlattach;attach=11290;image)
So once again eyeballing that image the 95% threshold for 50 and 60 years is at WR of around 3.3% (give or take a bit).
So that's quite different from 4%. You can also see that for a WR of 3.9% your success rate for 60 years is around 83% (again give or take a bit). So unfortunately your assumptions are not backed up by the actual numbers. And to once again reiterate my point: The main reason for that divergence is the fact that depletion of capital is permitted under the 4% rule within the retirement horizon.
And your post is one more example why that is a problem. Folks just more-or-less blindly apply the 4% rule to longer timeframes and think that adjusting the numbers a bit will do it. Even you fell for it and assumed that the SWR for a 60-year portfolio was higher than the numbers show.
Now you can argue that you spend less or have extra income in retirement, but that is unrelated to the rule.
As a side note: The mortgage example is misleading, because it assumes a constant return stream. If you were 100% in bonds, it would be a more appropriate analogy, but for a primarily equity-based portfolio it is not. The curse of volatility...
And a 2nd side note: Yes, I share your reservation about using a 60 year timeframe on cfiresim. Today it wouldn't even include the 1966 retirement scenario. That's why I'm thinking that a 30 year scenario with a final portfolio value of x% (in real terms) of you starting portfolio is probably the better approach. Not sure what x% should be, but 100% is likely too high (because you portfolio could be in a temporary dip) and 50% sounds a bit low. Perhaps 75% or something around that.
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I expect that at different points during most peoples ERs they'll have different expenses and increases, along with decreases, in their spending and thus WRs.. They'll still base it on the 4% rule overall, which I see as successful given most circumstances, but there will be years where just because one CAN have a SWR of 4% they'll choose to withdraw less due to lifestyle changes. That allows the stash to grow for a higher $$ withdrawals in the future.
Yes, in some years they might withdraw less. And in other years they might withdraw more. And perhaps a certain percentage needs to withdraw more in the beginning, before they can start to withdraw less. Nobody knows, so we can't really base any calculation on it. So the x% WR adjusted for inflation is not the worst of assumptions to use as the consumption baseline.
Most people don't just retire on barebones FI but factor in some extra $$s that they may not need or use every year. Just my personal ER experience.
It sounds to me like you're essentially saying: "It is true for me and the twenty people that I know, so it must be true for most people". This appears to be the fallacy of a biased sample (http://www.nizkor.org/features/fallacies/biased-sample.html). Even if it were true for 50% of the population (the median), it is still debatable, whether we should apply the median case to a calculation that is intended for downside protection.
I don't know what "most people" do and I don't know, if they realize how much slack they actually need in their budget to absorb an adverse scenario.
Also in my ER experience I have realized I could have (and should have) retired earlier.
As I told you, you picked a decent year to retire. And if all goes well, we can always determine with hindsight that we could have retired earlier. Unfortunately you have to make that decision without knowing the future, since that DeLorean time machine is unobtainable for most people.
So why didn't you retire a year or two or three or four earlier? You must have had some seemingly plausible reasons at the time.
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I'm not trying to live on 50k forever right...I'm trying to live on 4% of my nest egg?
The 4% WR Rule is based on 4% of the initial portfolio value + inflation withdrawn each year. Are you concerned that the $50K/yr + inflation is too little or too much?
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steveo,
you can model these events with an assumed probability into your calculations and come up with a SWR based on that. Have you ever done that? How did they do on the 1966 retirement year? Or are you assuming that nothing comparable will ever happen.
I tell you how I figure out FI. I look at the historical data and then at the assumptions underlying the historical data. I don't try and micromanage this to somehow control my downside risk. All I do is state that there is a high probability of success if I get to a 5.5% WR with pretty unrealistic assumptions that are not in my favour.
You are overstretching the Russian Roulette analogy. All it was meant to do is to show that the average or likely outcome is irrelevant, if the focus is on downside protection.
I agree with this comment but I don't think it's the best way to live your life in general. If all you are worried about is downside protection in relation to FIRE for instance then you will have to work a long time to manage that downside risk. If you like your job that is fine. If not then I think it's the wrong approach. To me it's not as simple as only worrying about the downside risk. There are trade-offs and these should be recognised.
Thanks for raising that point. Yes, that's actually my big concern about ERE and the main reason why I'm so persistent about my point. You need a lot of slack in your budget to mitigate a bad sequence of return through budget cuts. Just cutting "a bit" won't do it. Do you have a preset rule on how you are going to cut your budget, when you hit a year or two of bad returns? Just curious, because if you don't cut quickly and deeply, your cuts may have to be much more severe than 25%. (See the graph re. Guyton-Klinger rules that I posted above and I also recommend reading the associated blog post, link is above the graph.
I don't have a set figure. I would probably go back to work. My budget is 40k living expenses. I intend to have some bonds, have 2-3 years living expenses in paid leave and probably some cash. On top of that I can always return to work in my current job within say 3 years or work at a menial job like retail. It would be pretty easy for myself and my wife to earn say $20k per year.
I think we could live off $30k without a problem because there is probably $10k in expenses that aren't essential.
Of course it's only a figure based on historical data. But that part was never in dispute. Also I never claimed that I am aspiring 100% safety. The 20 year example was just to show that the numbers are meaningless, if they don't apply to your scenario. And it does indeed appear that the 95% figure doesn't apply to you (just as the fictitious 100% figure in the 20 year scenario doesn't), because your retirement horizon is longer and you don't want to exhaust your capital at the end of 30 years. Now you can do a lot of mental accounting to "explain" that fact away (I can reduce my spending, I can expect an inheritance, I can work part-time, etc.), but that's not helpful for a general discussion, mainly because it's too vague (without a clearly formulated example) to back-test against historical scenarios and to a lesser degree because it likely doesn't apply to everyone (particularly the inheritance expectation). And that has nothing to do with the 4% rule, because that rule is only about what your portfolio can do for you, not what an inheritance can do for you.
So to restate my original point: I still believe that one of the weaknesses of applying the 4% rule to a retirement horizon longer than 30 years is that the original rule allowed for capital depletion, meaning it counts any portfolio amount >=$0 at the end of the 30 years as a success.
I understand what you are stating but my take is that I don't need to backtest anything because it's just a guide and that is all it will ever be. So I look at the situation and state I'm comfortable with that. I think you look at the situation and state that you aren't comfortable with it.
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I'm assuming that you mean "lots of spending flexibility", because if you have zero spending flexibility, then one line of defense against an adverse scenario, the reduction of spending, has evaporated, thus the less spending flexibility (or alternatively income generating flexibility) you have, the higher should be the success rate that you're shooting for.
No I meant to say no spending flexibility. That's what drives the price up.
Sure, it does, but then so what? Everything has a price, that is a truism.
The so what is that the opportunity cost calculations inherent in working extra years at the prime of your life chasing after small likelihood risks make no sense to me. Particularly when there are ways to mitigate the same risks without working those extra years. Everything may have a price, but I would suggest that time is frequently undervalued.
I don't know why there is this hostility and pejorative accusations against people who consider a lower WR than 4% as the baseline. I find this completely unnecessary and it does the concept of FIRE a disservice. I'm guessing that there is a lot (too much in my book) anchoring on that 4% number for historical reasons.
Identifying a major risk to FIRE plans is a worthwhile thing. Particularly when fear is a far more serious risk than some of the low % risks being chased after. The criticism isn't about people it's about their assessment of risk and evaluation of opportunity cost.
It's a bit like someone who is so focused on not tripping on a crack in the pavement getting run over by a bus when they failed to look up crossing the street.
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So once again eyeballing that image the 95% threshold for 50 and 60 years is at WR of around 3.3% (give or take a bit).
So that's quite different from 4%. You can also see that for a WR of 3.9% your success rate for 60 years is around 83% (again give or take a bit).
There's no practical difference between a 83% success rate and a 95% success rate. At 4%, I think there's what like one fail year in all the cFIRE sim data? 83% maybe adds one more year. Basically, both indicate a very high likelihood of success. What those numbers are telling you, is that you have enough money to FIRE and should you find yourself in a fail year, it's your own ability to adapt and not how much you started with that's going to insure your ultimate success. That is to say, if you retired with an 83% chance to succeed, and you find yourself in a fail year, the guy that retired with a 95% chance to succeed isn't going to be laying back with his feet up smirking. You're both going to be sweating bullets and making changes. You're both going to be worried about failure.
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The criticism isn't about people it's about their assessment of risk and evaluation of opportunity cost.
This is exactly what we are talking about. Different people can have different assessments of risk and their evaluations of opportunity costs (in this case time). Personally I think the assumptions underlying the 4% SWR are pretty extreme on the side of safety.
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There's no practical difference between a 83% success rate and a 95% success rate. At 4%, I think there's what like one fail year in all the cFIRE sim data? 83% maybe adds one more year. Basically, both indicate a very high likelihood of success. What those numbers are telling you, is that you have enough money to FIRE and should you find yourself in a fail year, it's your own ability to adapt and not how much you started with that's going to insure your ultimate success. That is to say, if you retired with an 83% chance to succeed, and you find yourself in a fail year, the guy that retired with a 95% chance to succeed isn't going to be laying back with his feet up smirking. You're both going to be sweating bullets and making changes. You're both going to be worried about failure.
^ This is a great post. There is no completely safe number. We could still have a 30, 40, 60-year period that was worse than the past. At some point you have to say "this is close enough" and pull the pin. Then, at some point in the future you:
1) Die happy on a giant pile of money (very likely), or
2) Realize--probably later than you should have--that things aren't working out and you have to change something. Like maybe cut expenses or become a greeter at Wal-mart.
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There's no practical difference between a 83% success rate and a 95% success rate. At 4%, I think there's what like one fail year in all the cFIRE sim data? 83% maybe adds one more year. Basically, both indicate a very high likelihood of success. What those numbers are telling you, is that you have enough money to FIRE and should you find yourself in a fail year, it's your own ability to adapt and not how much you started with that's going to insure your ultimate success. That is to say, if you retired with an 83% chance to succeed, and you find yourself in a fail year, the guy that retired with a 95% chance to succeed isn't going to be laying back with his feet up smirking. You're both going to be sweating bullets and making changes. You're both going to be worried about failure.
^ This is a great post. There is no completely safe number. We could still have a 30, 40, 60-year period that was worse than the past. At some point you have to say "this is close enough" and pull the pin. Then, at some point in the future you:
1) Die happy on a giant pile of money (very likely), or
2) Realize--probably later than you should have--that things aren't working out and you have to change something. Like maybe cut expenses or become a greeter at Wal-mart.
I completely agree with this as well. You don't get a 100% safe number. It's just probabilities. Personally I think you just hit a reasonable number and then figure if you want to quit work.
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Slate-WA -
If you were to just take 4% of whatever the portfolio is at every year, that would be a very, very robust plan.
This would be very robust. In fact, it couldn't fail! The new 100% success rate 4% plan.
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I didn't ER earlier because I wasnt really interested at the time and also thought I needed more money (due to a divorce). Took a long sabbatical of 5 years instead and found I needed less money than I thought I did so never went back to work. Since I don't know any other ERees IRL my experiences about spending levels are just that - my experiences. However I have read enough FIRE blogs like MMM to see that many others have had the same experiences that exoenses often do not increase as much as they thought they would once retired, and sometimes drop quite a bit and working many years longer to have a safe retirement by whatever means you fund it may not be needed.
My initial point wasn't to rehash the validity (or not) of the 4% rule or how my own ER is funded (not completely from investments) just to point out that people do not always spend the entire amount they budgeted for every year once retired. For instance I budget about 1/2 of my income for discretionary spending, home and car repairs. During many of my ER years (since late 2004) I don't always spend that much (some years I didnt spend any of it) so it just gets reinvested.
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Spartana, you always write with the calm voice of reason and you have definitely gotten the whole FIRE thing figured out. Although the discussions on this forum is what makes it so valuable to ERers, sometimes me thinks the discussions can be a bit contentious. There is no one size fits all approach to FIRE. I for one have not even tapped my stash yet because I'm fortunate enough to have a pension that covers living expenses with a decent buffer built in. The buffer is made possible by frugal habits. I am also fortunate that my small side gig, sub teaching, fits into one of my interests of mentoring and coaching kids. When I do start to tap my stash, it will be way less than 4% as my stash also serves as life insurance in case of my untimely demise. My pension gets buried with me. We each have to figure out what will work best for our unique situations. I personally did not FIRE based on the results of a calculator telling me that 4% would work. I decided I would be ok based on input from this FORUM. I listed my assets and asked others to review my plan. The 100% thumbs up from members of this forum gave me more confidence than cFIREsim or FIRECALC.
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steveo,
you can model these events with an assumed probability into your calculations and come up with a SWR based on that. Have you ever done that? How did they do on the 1966 retirement year? Or are you assuming that nothing comparable will ever happen.
I tell you how I figure out FI. I look at the historical data and then at the assumptions underlying the historical data. I don't try and micromanage this to somehow control my downside risk. All I do is state that there is a high probability of success if I get to a 5.5% WR with pretty unrealistic assumptions that are not in my favour.
Well, that's one way of doing it. I prefer to have at least some sense of the downside risk in historical context, before I make my decisions.
You are overstretching the Russian Roulette analogy. All it was meant to do is to show that the average or likely outcome is irrelevant, if the focus is on downside protection.
I agree with this comment but I don't think it's the best way to live your life in general.
Rhetorical fallacy alert: straw man argument (http://www.nizkor.org/features/fallacies/straw-man.html). I never claimed that it is the best way to life my (or anyone's) life in general.
If all you are worried about is downside protection in relation to FIRE for instance then you will have to work a long time to manage that downside risk. If you like your job that is fine. If not then I think it's the wrong approach. To me it's not as simple as only worrying about the downside risk. There are trade-offs and these should be recognised.
Well, I actually prefer to have a better sense of the down-side risk and then make my decision. I also never said that protecting the downside is the only criteria for the decision to retire early. I did say however that protecting the downside is the only relevant criteria for the FIRE simulation, so for me the takeaway of relevance from that simulation is the success rate (or failure rate); the median outcome is completely irrelevant to me. A small, but important distinction. Once you know your downside according to the model, you can then still decide, whether it is worth it. Two separate pieces of the puzzle in my book. But then I seem to approach this in a more structured way than you do.
Of course it's only a figure based on historical So to restate my original point: I still believe that one of the weaknesses of applying the 4% rule to a retirement horizon longer than 30 years is that the original rule allowed for capital depletion, meaning it counts any portfolio amount >=$0 at the end of the 30 years as a success.
I understand what you are stating but my take is that I don't need to backtest anything because it's just a guide and that is all it will ever be. So I look at the situation and state I'm comfortable with that. I think you look at the situation and state that you aren't comfortable with it.
A question: You say we don't need to back-test anything. So in that case why do you care, if I suggest a different model for back-testing? One is as irrelevant to you than the other?
Yes, you are correct that I am not comfortable with assuming that the 30 year model (with depletion) and 4% WR is the best base scenario for my early retirement, because the success rate deviations between 30 year and 40 year are too big.
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So once again eyeballing that image the 95% threshold for 50 and 60 years is at WR of around 3.3% (give or take a bit).
So that's quite different from 4%. You can also see that for a WR of 3.9% your success rate for 60 years is around 83% (again give or take a bit).
There's no practical difference between a 83% success rate and a 95% success rate. At 4%, I think there's what like one fail year in all the cFIRE sim data? 83% maybe adds one more year. Basically, both indicate a very high likelihood of success.
I think you need to check your numbers. cfiresim simulations start in 1871 and for a 30 year scenario their last cycle currently starts in 1988 (strange that it isn't 1987). That's 118 cycles. So a 95% success rate means that 112 cycles succeeded, thus 6 cycles failed.
For the 40 year period you thus have 108 cycles. A 83% success rate means that ca. 90 cycles succeeded, thus 18 failed.
In other words: You go from 6 failing cycles to 18 and not from 1 to 2.
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Slate-WA -
If you were to just take 4% of whatever the portfolio is at every year, that would be a very, very robust plan.
This would be very robust. In fact, it couldn't fail! The new 100% success rate 4% plan.
Of course it doesn't fail. The minor(?) caveat is that your withdrawals might be very low, if you happen to retire in a bad year. If your portfolio falls by 50%, then you're actually only withdrawing 2% of your original portfolio (in real terms). Great for the portfolio, perhaps not so great for your lifestyle.
cfiresim shows that for a 60/40 portfolio and a 40-year horizon your portfolio would go down as much as 60% withdrawal would be as low as 1.5% of your original portfolio. If that is fine with you, then this would be a decent strategy.
Its only (and I would say: major) downside is that the sequence of return risk will stay with you forever, not just for the first decade or so. That is actually a pretty big deal, because you might feel okay about working part time in your 40s and 50s to compensate for a shortfall, but perhaps less so in your 70s and 80s. To mitigate that you could cap your withdrawals on the upside for the first few years (assuming you have an upside then) to bring your effective withdrawals below 4%.
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Its only (and I would say: major) downside is that the sequence of return risk will stay with you forever,
If you're still talking about a fixed 4% withdrawal, then there's no seq. of return risk. As you agree, such a method can't ever run out of money.
It can fail by giving you too little to live off of. Maybe that's all you mean? But that's a diff. risk.
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I'm not trying to live on 50k forever right...I'm trying to live on 4% of my nest egg?
The 4% WR Rule is based on 4% of the initial portfolio value + inflation withdrawn each year. Are you concerned that the $50K/yr + inflation is too little or too much?
I wasn't aware that the SWR of 4% meant you'd add inflation. I poorly assumed that inflation was factored into the growth of your nest egg somehow. didn't put too much thought.
Where would I grab the inflation rate for each given year to ensure I'm using the correct number that the guidance would be expecting I use?
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Its only (and I would say: major) downside is that the sequence of return risk will stay with you forever,
If you're still talking about a fixed 4% withdrawal, then there's no seq. of return risk. As you agree, such a method can't ever run out of money.
It can fail by giving you too little to live off of. Maybe that's all you mean? But that's a diff. risk.
Yes, that's what I mean. and the risk is not altogether different. In fact you could regard the "run-out-of-money" risk as a special case of the "lower-your-withdrawal-risk", where you lower your withdrawal by 100% for an indefinite amount of time.
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I'm not trying to live on 50k forever right...I'm trying to live on 4% of my nest egg?
The 4% WR Rule is based on 4% of the initial portfolio value + inflation withdrawn each year. Are you concerned that the $50K/yr + inflation is too little or too much?
I wasn't aware that the SWR of 4% meant you'd add inflation. I poorly assumed that inflation was factored into the growth of your nest egg somehow. didn't put too much thought.
Where would I grab the inflation rate for each given year to ensure I'm using the correct number that the guidance would be expecting I use?
I think they use CPI in most of the calculators, but, in retirement you should be spending as little as you can to meet your desired standard of living. That probably doesn't go up by the CPI every year. Some years it might go up more, or less or even go down.
4% rule is a guideline to help you determine when you have enough - not a "how to" for handling your withdrawal phase.
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steveo,
you can model these events with an assumed probability into your calculations and come up with a SWR based on that. Have you ever done that? How did they do on the 1966 retirement year? Or are you assuming that nothing comparable will ever happen.
I tell you how I figure out FI. I look at the historical data and then at the assumptions underlying the historical data. I don't try and micromanage this to somehow control my downside risk. All I do is state that there is a high probability of success if I get to a 5.5% WR with pretty unrealistic assumptions that are not in my favour.
Well, that's one way of doing it. I prefer to have at least some sense of the downside risk in historical context, before I make my decisions.
You are overstretching the Russian Roulette analogy. All it was meant to do is to show that the average or likely outcome is irrelevant, if the focus is on downside protection.
I agree with this comment but I don't think it's the best way to live your life in general.
Rhetorical fallacy alert: straw man argument (http://www.nizkor.org/features/fallacies/straw-man.html). I never claimed that it is the best way to life my (or anyone's) life in general.
I think you are arguing from a point of view that we need to worry about the 4% rule. I don't think that you are recognising that it is a decision based on your risk and opportunity cost profile. I don't really buy the rhetorical fallacy argument here.
If all you are worried about is downside protection in relation to FIRE for instance then you will have to work a long time to manage that downside risk. If you like your job that is fine. If not then I think it's the wrong approach. To me it's not as simple as only worrying about the downside risk. There are trade-offs and these should be recognised.
Well, I actually prefer to have a better sense of the down-side risk and then make my decision. I also never said that protecting the downside is the only criteria for the decision to retire early. I did say however that protecting the downside is the only relevant criteria for the FIRE simulation, so for me the takeaway of relevance from that simulation is the success rate (or failure rate); the median outcome is completely irrelevant to me. A small, but important distinction. Once you know your downside according to the model, you can then still decide, whether it is worth it. Two separate pieces of the puzzle in my book. But then I seem to approach this in a more structured way than you do.
Of course it's only a figure based on historical So to restate my original point: I still believe that one of the weaknesses of applying the 4% rule to a retirement horizon longer than 30 years is that the original rule allowed for capital depletion, meaning it counts any portfolio amount >=$0 at the end of the 30 years as a success.
I understand what you are stating but my take is that I don't need to backtest anything because it's just a guide and that is all it will ever be. So I look at the situation and state I'm comfortable with that. I think you look at the situation and state that you aren't comfortable with it.
A question: You say we don't need to back-test anything. So in that case why do you care, if I suggest a different model for back-testing? One is as irrelevant to you than the other?
Yes, you are correct that I am not comfortable with assuming that the 30 year model (with depletion) and 4% WR is the best base scenario for my early retirement, because the success rate deviations between 30 year and 40 year are too big.
I don't care if you want to concern yourself with the downside. That is your decision. We are just discussing it. Personally I feel that you are being overly cautious but that is your decision. You probably feel that myself and others are overly optimistic. It's up to everyone to come to their own decisions.
I also do care about back-testing but I also recognise the limitations of back-testing. I'm not sure if you understand this point. It's the same to me as people who try and micro manage their asset allocations. All I feel that you can do with back-testing historical data is make some broad decisions based on the data. Micro-managing for instance the downside years to me misses the point.
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4% rule is a guideline to help you determine when you have enough - not a "how to" for handling your withdrawal phase.
Different people appear to have different perspectives but this is my perspective. It's just a guideline. You have to tailor your retirement date and withdrawal phased based on your specific scenario.
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4% rule is a guideline to help you determine when you have enough - not a "how to" for handling your withdrawal phase.
Different people appear to have different perspectives but this is my perspective. It's just a guideline. You have to tailor your retirement date and withdrawal phased based on your specific scenario.
I have yet to hear of anyone taking out exactly 4% of the initial stash + inflation each year without any variation. The journals/accounts I have read have folks who either estimated their spending as significantly higher than it actually was or found that their needs varied quite a bit so they didn't always need the full 4%. I also have not read of anyone who regretted not working longer and saving more.
That's shooting for a 4% WR FIRE plan. The folks that are shooting for 3%WR are most likely also estimating conservatively so they are actually pulling out 2% - 3% annually making their plans that much more robust than they had planned. That also means they could have worked less and saved less to get to the level of FIRE risk they were planning for.
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I also have not read of anyone who regretted not working longer and saving more.
And you won't, until we hit another massive downturn. Everyone who has retired in the past seven years is sitting pretty today.
But if you had asked a 2008 retiree in late 2009, you'd have gotten a different answer. That guy just watched approximately half of his nest egg vanish. He's fine now, but he was freaking out then.
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And you won't, until we hit another massive downturn. Everyone who has retired in the past seven years is sitting pretty today.
But if you had asked a 2008 retiree in late 2009, you'd have gotten a different answer. That guy just watched approximately half of his nest egg vanish. He's fine now, but he was freaking out then.
That's the key. Even that guy who started in that shitty year is fine. And you can take action before you FIRE to address that problem - like using a gliding equity glidepath. That doesn't require extra years of work, but can mitigate the back luck of starting in a year like 2008.
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I know everyone likes to reference the Trinity study but I think blindly using the success rate percentages from that study without considering asset allocation is a bit foolish. The AA used in that study under performs a more aggressive AA significantly. The 40-year success rate of an all-stocks portfolio is 95% when withdrawing 4%, and I think a 90/10 outperforms that by a hair. If you want to sit there and stare at Sol's chart and nothing else, and claim that the 40-year success rate is 10% lower than the 30-year success rate, that's absolutely correct. I feel bad for the person that makes his decision to continue working or not by nothing but Sol's chart, because that's only one tiny piece of data, and the success rate doesn't have to be that low. That doesn't even count all the human intervention factors that would alter the failure course because you know withing the first decade of retirement if you have a problem.
I've said it before and I'll say it again. If you're a 30 year old male in the US, you have a better chance of dying before the age of 65 than you do of running out of money (using Sol's chart). Only 82.5% of 30 year-old males make it to 65. If a 15% failure rate is enough to keep you working, what does a 17.5% chance of dying do?
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I've said it before and I'll say it again. If you're a 30 year old male in the US, you have a better chance of dying before the age of 65 than you do of running out of money (using Sol's chart). Only 82.5% of 30 year-old males make it to 65. If a 15% failure rate is enough to keep you working, what does a 17.5% chance of dying do?
Makes me happy I'm not 30. :D
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Spartana, you always write with the calm voice of reason and you have definitely gotten the whole FIRE thing figured out. Although the discussions on this forum is what makes it so valuable to ERers, sometimes me thinks the discussions can be a bit contentious. There is no one size fits all approach to FIRE. I for one have not even tapped my stash yet because I'm fortunate enough to have a pension that covers living expenses with a decent buffer built in. The buffer is made possible by frugal habits. I am also fortunate that my small side gig, sub teaching, fits into one of my interests of mentoring and coaching kids. When I do start to tap my stash, it will be way less than 4% as my stash also serves as life insurance in case of my untimely demise. My pension gets buried with me. We each have to figure out what will work best for our unique situations. I personally did not FIRE based on the results of a calculator telling me that 4% would work. I decided I would be ok based on input from this FORUM. I listed my assets and asked others to review my plan. The 100% thumbs up from members of this forum gave me more confidence than cFIREsim or FIRECALC.
Thanks Gunny. I pretty much just muddled through and figured it out on my own too. Never heard about the 4% rule or used a calculator but realize that my spending has generally been low enough overall ( and a very comfortable barebones is extremely low for me right now if I had to go that route for awhile) that Im in the 4%ish rule camp alresdy and can't imagine I'll have an ER fail.
Spartana is completely bad ass. Definitely one of my forum heroes.
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If a 15% failure rate is enough to keep you working, what does a 17.5% chance of dying do?
People continue to work because they have been programmed all their lives to do so. The chart is irrelevant it's just the excuse to not make a change. If the chart didn't exist they lock onto something else. The programming is fuelled by fear and fear is pretty much limitless.
So there is no logical analysis going on that you can argue with by demonstrating the poor opportunity cost choice of continuing to work past an already very safe/reasonable point like a 4%SWR. If the concern really was just running out of money there are ways to mitigate those risks that don't involve working extra years, but the folks deep in OMY syndrome aren't really fuelled by a fear of running out of money. I think it's a fear of changing their lives. So if you show them how to mitigate the main financial risks of FIRE with a 4%WR stash they baulk.
I do think you make a good point and it's a point that should be made because maybe you'll catch someone on the verge of OMYing you can divert or somebody who has OMY'd for so long they've hit rock bottom and might be willing to change course.
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I know everyone likes to reference the Trinity study but I think blindly using the success rate percentages from that study without considering asset allocation is a bit foolish. The AA used in that study under performs a more aggressive AA significantly. The 40-year success rate of an all-stocks portfolio is 95% when withdrawing 4%, and I think a 90/10 outperforms that by a hair.
Actually according to cfiresim it's 91.67% both for the 100% equities and 90/10 portfolio (using the default parameters with a 4%WR). It's for the 30-year cycle that a 90/10 allocation provides a higher success rate (96.61%) than the 100% equities scenario (94.42%). Still around 92% is not bad and I also believe that a high equity calculations is key for a successful early retirement.
If you want to sit there and stare at Sol's chart and nothing else, and claim that the 40-year success rate is 10% lower than the 30-year success rate, that's absolutely correct. I feel bad for the person that makes his decision to continue working or not by nothing but Sol's chart, because that's only one tiny piece of data, and the success rate doesn't have to be that low. That doesn't even count all the human intervention factors that would alter the failure course because you know withing the first decade of retirement if you have a problem.
Let's be clear here: That chart was thrown at me as a counterargument to my position. I used it to point out that it in fact backed it up.
I would totally agree that anyone who is looking at retiring really understand the ramifications of the scenario and run their own simulations. They should also run some simulations for an adverse scenario (working extra years, cutting consumption) to see how much that really would help them. And after that they come to a plan of action based on their own perception of and capacity for risk. And perhaps they should also have a predefined "statement of action" at what point they do what. E.g. a series of statements "If my portfolio goes below x% in real teams, I am going to cut my consumption by y%".
And finally they should realize that that a lot of successful cycles (and some failure cycles) do not apply, because we actually have a bit more knowledge: We know current equity and debt valuations and it is reasonable to conclude that a 2017 retiree would have an outcome below the median. Thus the conditional probability of success likely is also lower.
And once the prospective retiree realizes all this, then they can come to an intelligent decision for their course of action.
If this thread has shown me anything, it is that a certain percentage of good-intentioned folks on this forum have a rather loose command of the facts. (And I'm not talking about 91.67% vs 95%, that's just minute stuff.) So when someone claims something, you better fact-check for yourself.
I've said it before and I'll say it again. If you're a 30 year old male in the US, you have a better chance of dying before the age of 65 than you do of running out of money (using Sol's chart). Only 82.5% of 30 year-old males make it to 65. If a 15% failure rate is enough to keep you working, what does a 17.5% chance of dying do?
You do realize that there is a logical problem with this argument, don't you? Your argument - in general terms - is that behavior x has generally a good outcome and its probability of a bad outcome is lower than a bad outcome for y, so it's reasonable to do x, because of that.
So let's go back to the Russian Roulette example with the 20 bullet magazine. If someone offered you $10M for for a "shot", you could argue that as a 30-year old male in the US you have a better chance of dying before the age of 65 than you do of dying from this action. If a 5% failure rate is enough to keep you from taking the "shot", what does a 17.5% of dying do?
Now everyone would see the problem with that line of reasoning. And since the argument is constructed the same way as your argument, it would show to me that your argument also has some logical problem.
I haven't examined this thoroughly, but at first glance it seems that the problem is that you're adding risk. Now that risk is lower than your base risk (dying before 65), but it is (in first approximation) independent and and an additional risk. Therefore the probability for a bad outcome goes up, meaning you either die before 65 or run out of money (or both).
So you are now going (using Sol's chart and again assuming that those two events are independent) from a 17.5% chance of a bad outcome (you'll die before 65) to a 29.875% [1- (1-0.15)*(1-0.175)] chance of a bad outcome (you either die before 65 or run out of money or both).
So that's not a convincing argument to me.
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So let's go back to the Russian Roulette example with the 20 bullet magazine. If someone offered you $10M for for a "shot", you could argue that as a 30-year old male in the US you have a better chance of dying before the age of 65 than you do of dying from this action. If a 5% failure rate is enough to keep you from taking the "shot", what does a 17.5% of dying do?
This makes no sense. You're comparing the 17.5% chance that someone will die within the next 35 years to the 5% chance that he will die right now.
I haven't examined this thoroughly, but at first glance it seems that the problem is that you're adding risk. Now that risk is lower than your base risk (dying before 65), but it is (in first approximation) independent and and an additional risk. Therefore the probability for a bad outcome goes up, meaning you either die before 65 or run out of money (or both).
So you are now going (using Sol's chart and again assuming that those two events are independent) from a 17.5% chance of a bad outcome (you'll die before 65) to a 29.875% [1- (1-0.15)*(1-0.175)] chance of a bad outcome (you either die before 65 or run out of money or both).
You can't simply multiply the numbers together because a requirement for running out of money is being alive.
Edit: typo
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So let's go back to the Russian Roulette example with the 20 bullet magazine. If someone offered you $10M for for a "shot", you could argue that as a 30-year old male in the US you have a better chance of dying before the age of 65 than you do of dying from this action. If a 5% failure rate is enough to keep you from taking the "shot", what does a 17.5% of dying do?
This makes no sense. You're comparing the 17.5% chance that someone will die within the next 35 years to the 5% chance that he will die right now.
You can substitute any other example of an event with a bad outcome if you like.
I haven't examined this thoroughly, but at first glance it seems that the problem is that you're adding risk. Now that risk is lower than your base risk (dying before 65), but it is (in first approximation) independent and and an additional risk. Therefore the probability for a bad outcome goes up, meaning you either die before 65 or run out of money (or both).
So you are now going (using Sol's chart and again assuming that those two events are independent) from a 17.5% chance of a bad outcome (you'll die before 65) to a 29.875% [1- (1-0.15)*(1-0.175)] chance of a bad outcome (you either die before 65 or run out of money or both).
You can't simply multiply the numbers together because a requirement for running out of money is being alive.
I did state that that in first approximation I regarded the events as independent, so the approach is correct for that assumption. Now I understand you disagree with that assumption, so let's dig into this a little more: The combined probability in the model for running out of money and dying would be 2.625% [15%*17.5%]. So if you'd like to exclude those, then the probability or either running out of money or dying (but not both!) is 27.25% [29.875%-2.625%]
So the probability of dying before 65 or running out of money or both is somewhere between 27.25% and 29.875%. Where exactly between those numbers would depend on how the risks of dying and the risks of running out of money were distributed and correlated. But we don't need to look at that, because, we can look at the lower bounds.
So you are now going (using Sol's chart and again assuming that those two events are independent) from a 17.5% chance of a bad outcome (you'll die before 65) to a chance of at least 27.25% of a bad outcome. Still an unconvincing argument to me.
Now I am the first to admit that sometimes I make calculation error and that my command of statistics is not as strong, as I'd like it to be. If I've made a mistake, I hope that someone could point out the error in my thinking and propose a better model and/or more accurate calculation.
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The number of decimal places in this thread amuses me. You're all WAY to focus on the details of results that have enormous error bars.
The statistically "correct" amount of money to save is the one that gives your SWR a 50% success rate. Beyond that you're probably oversaving. You can buy additional security with additional years at your desk job, but they're probably wasted years.
Everyone can reduce expenses in an emergency. No matter what you spend, somebody somewhere is happy spending half that amount and you could be too. Beyond a 50% success rate, you're most likely to never have to reduce spending ever again.
So the real problem here isn't the math, it's your spending. If you want to spend more, you have to work longer. If you want to retire earlier, you have to spend less. This isn't that complicated. Don't pretend you've found some secret loophole in the simple math to justify your desire to spend more, you don't need one. Just accept working longer to spend more. I won't judge.
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People have to do what they feel comfortable with. Personally, I want to be like a big ten bank: too big to fail (TBTF). And I also wanted to quit my job. So I semi-retired, which allowed me to do both at the same time. (My work schedule is more likely to take the form of working for a while, then taking time off, then working for a while, as opposed to working PT constantly.) That being said, I didn't really want to quit working altogether; I just wanted to quit that particular job. I wonder if maybe more people who are on the cusp of FI but not TBTF might ought to consider doing a PT or lifestyle job instead of a "career" per se. The more I think about it, the less sense it makes to me to wait until FI(RE) to start enjoying my life. The fact that I was burned out on my job was reason enough to go very PT if not quit it altogether.
FWIW, my future boss (I go back to work at the end of June) doesn't know yet that I don't intend to get a real job after I do my paid internship. :-p
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The number of decimal places in this thread amuses me. You're all WAY to focus on the details of results that have enormous error bars.
The statistically "correct" amount of money to save is the one that gives your SWR a 50% success rate. Beyond that you're probably oversaving. You can buy additional security with additional years at your desk job, but they're probably wasted years.
Everyone can reduce expenses in an emergency. No matter what you spend, somebody somewhere is happy spending half that amount and you could be too. Beyond a 50% success rate, you're most likely to never have to reduce spending ever again.
So the real problem here isn't the math, it's your spending. If you want to spend more, you have to work longer. If you want to retire earlier, you have to spend less. This isn't that complicated. Don't pretend you've found some secret loophole in the simple math to justify your desire to spend more, you don't need one. Just accept working longer to spend more. I won't judge.
Sol - I am on the same page as yourself when it comes to WR's however I think people like Ursus Major aren't really worried about spending more. They really seem to be focussed on getting close to a 100% success rate with the same level of spending. It really appears to be about managing the risk of retiring in one of those years that are exceptionally bad without reducing your spending by one cent. It sounds extreme to me however that appear to be what they are stating.
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The number of decimal places in this thread amuses me. You're all WAY to focus on the details of results that have enormous error bars.
The statistically "correct" amount of money to save is the one that gives your SWR a 50% success rate. Beyond that you're probably oversaving. You can buy additional security with additional years at your desk job, but they're probably wasted years.
Everyone can reduce expenses in an emergency. No matter what you spend, somebody somewhere is happy spending half that amount and you could be too. Beyond a 50% success rate, you're most likely to never have to reduce spending ever again.
So the real problem here isn't the math, it's your spending. If you want to spend more, you have to work longer. If you want to retire earlier, you have to spend less. This isn't that complicated. Don't pretend you've found some secret loophole in the simple math to justify your desire to spend more, you don't need one. Just accept working longer to spend more. I won't judge.
Sol - I am on the same page as yourself when it comes to WR's however I think people like Ursus Major aren't really worried about spending more. They really seem to be focussed on getting close to a 100% success rate with the same level of spending. It really appears to be about managing the risk of retiring in one of those years that are exceptionally bad without reducing your spending by one cent. It sounds extreme to me however that appear to be what they are stating.
I was essentially trying to say the same thing. If the chances of running out of money are 3 in 20 AND that risk can be mitigated in any number of ways (going back to work, reducing spending, etc.) AND the chances or dying within the next 35 years are 1 in 6 (in my example), I think continuing to work for the sake of blindly withdrawing 4% and never require adjusting is a waste, assuming that's the only thing keeping someone at the job. It's all up to the individual though. This topic has certainly been beaten to death on many occasions.
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The number of decimal places in this thread amuses me. You're all WAY to focus on the details of results that have enormous error bars.
The statistically "correct" amount of money to save is the one that gives your SWR a 50% success rate. Beyond that you're probably oversaving. You can buy additional security with additional years at your desk job, but they're probably wasted years.
Everyone can reduce expenses in an emergency. No matter what you spend, somebody somewhere is happy spending half that amount and you could be too. Beyond a 50% success rate, you're most likely to never have to reduce spending ever again.
So the real problem here isn't the math, it's your spending. If you want to spend more, you have to work longer. If you want to retire earlier, you have to spend less. This isn't that complicated. Don't pretend you've found some secret loophole in the simple math to justify your desire to spend more, you don't need one. Just accept working longer to spend more. I won't judge.
Sol - I am on the same page as yourself when it comes to WR's however I think people like Ursus Major aren't really worried about spending more. They really seem to be focussed on getting close to a 100% success rate with the same level of spending. It really appears to be about managing the risk of retiring in one of those years that are exceptionally bad without reducing your spending by one cent. It sounds extreme to me however that appear to be what they are stating.
I was essentially trying to say the same thing. If the chances of running out of money are 3 in 20 AND that risk can be mitigated in any number of ways (going back to work, reducing spending, etc.) AND the chances or dying within the next 35 years are 1 in 6 (in my example), I think continuing to work for the sake of blindly withdrawing 4% and never require adjusting is a waste, assuming that's the only thing keeping someone at the job. It's all up to the individual though. This topic has certainly been beaten to death on many occasions.
I understood what you were stating as well. If you compare the likelihood of portfolio failure to the likelihood of death I think that people's bias towards working longer should change however I don't think that they actually do change. Some people just look at the worst case and manage to that.
I see the assumptions behind the 4% WR as pretty extreme on the safety side however it comes down to each individuals appetite for risk and the opportunity cost they associate with working. I know that every time I get sucked into these threads I start off thinking maybe I should be more safe and by the time I'm done I think that I'm being too cautious. I've now gone back into cfiresim and looked at the 50% point for myself.
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I've now gone back into cfiresim and looked at the 50% point for myself.
What do you think? Are you over saving if you push for 4%?
50% success rate is about a 6% WR (I get 6.4% for 30years).
Someone with half their spending covered by a pension and with healthcare covered could do this. It's a bit risky for those of us relying on our investment portfolio for 100% of spending for 20 or 30 years before SS kicks in. IMO.
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People have to do what they feel comfortable with. Personally, I want to be like a big ten bank: too big to fail (TBTF). And I also wanted to quit my job. So I semi-retired, which allowed me to do both at the same time. (My work schedule is more likely to take the form of working for a while, then taking time off, then working for a while, as opposed to working PT constantly.) That being said, I didn't really want to quit working altogether; I just wanted to quit that particular job. I wonder if maybe more people who are on the cusp of FI but not TBTF might ought to consider doing a PT or lifestyle job instead of a "career" per se. The more I think about it, the less sense it makes to me to wait until FI(RE) to start enjoying my life. The fact that I was burned out on my job was reason enough to go very PT if not quit it altogether.
FWIW, my future boss (I go back to work at the end of June) doesn't know yet that I don't intend to get a real job after I do my paid internship. :-p
I plan on going PT next year. I don't want to wait until I get to 4% WR territory. My life is too precious and once you free up a ton more time to do what you want a lot of the negative impacts of FT are mitigated very well.
Unlike you I would be happy to quit working altogether. I have so many items on my bucket list that even once FIREd I'll be making tough choices with what to do with my time.
I'll FIRE at a 4.5% to 5% WR rate most likely based on my current projections. I'll manage the risk of portfolio failure by using a combination of a variable withdrawal rate and a rising equity glide path. Neither of those methodologies cost me more time, but they mitigate the key financial FIRE failure risks.
What I like about your plan is that you are looking beyond your FIRE spreadsheet and $$/% to come up with a plan that takes into account the critical lifestyle elements that are not inputs to cFIREsim.
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What do you think? Are you over saving if you push for 4%?
50% success rate is about a 6% WR (I get 6.4% for 30years).
Punching the numbers I posted above for a 30yr retirement at the lower starting $ value I get ~97% success in cFIREsim without Gov't benefits and 100% with them for 30yrs and 99% success incl Gov't benefits for 50yrs.
That's without getting my investments to 25 times my average annual spending target before FIRE.
I hit a 50% success rate 2yrs ago. So most likely I've already worked far too long. I probably should have FIREd at ~75%. You can call the time between then and when I FIRE my FEAR Tax. ;)
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I've said it before and I'll say it again. If you're a 30 year old male in the US, you have a better chance of dying before the age of 65 than you do of running out of money (using Sol's chart). Only 82.5% of 30 year-old males make it to 65. If a 15% failure rate is enough to keep you working, what does a 17.5% chance of dying do?
That's an interesting way of thinking about it.
I tried running some sims assuming 4% withdrawals, 100% stocks, and the actuarial life tables from the social security administration for men from ages 30-100. Stock return data is from shiller.
(https://i3.imgpile.com/i/QpZor.png) (https://imgpile.com/i/QpZor)
To get around the issue discussed both here and in other threads that extremely long retirement windows can actually increase success rates by taking bad years like 1966 out of the dataset, I calculated the chance of portfolio failure in each year separately using only all possible starting months which had enough data to project out a portfolio that number of years, but excluding starting months which had already gone broke in earlier years. What this means is that the data on failures during year 30 is based on data from simulated retirements starting in 1390 different months, while the data on failures in year 70 (age 100 for someone who retires at 30) is based on only 910 months worth of data. Less than ideal, but it means we won't throw out data on portfolios that failed in 25 years just because we don't have data on how they'd perform in 60 years.
Conclusions:
1. The longer your retirement the lower the chance that you'll have less money than you started with (you'll either be broke or have more money than you know what to do with).
2. Baring major technological advances, we're all dead in the long run.
Both are reasonably obvious conclusions, but I find at least for myself that they feel more real when I can see them graphically rather than arguing back and forth about percentages.
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For comparison, here are 5%, 4%, and 3.5%, also assuming our hypothetical person retires early at 30, and their retirement lasts until death.
(https://i2.imgpile.com/i/QpStE.png) (https://imgpile.com/i/QpStE)
This also lets us calculate FIRE success rates in terms of "don't run out of money before you die" instead of "don't run out of money over X years" which is probably a more relevant number to most of us. For a 30 year old man:
A 5% withdrawal rate has a 21.3% chance of failure before death
A 4% withdrawal rate has a 5.6% chance of failure before death
A 3.5% withdrawal rate has a 0.6% chance of failure before death.
I can regenerate these with the actuarial numbers for a 30 year old woman as well (noticeably less grey in the top right), just don't want to overspam the thread.
Edit: Thanks to sol for pointing out the original graphs lacked a y-axis label.
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The words we use to describe probabilities are an interesting and ambiguous bunch. Apologies in advance for the following nitpicking, I think we're generally in agreement on this topic.
The number of decimal places in this thread amuses me. You're all WAY to focus on the details of results that have enormous error bars.
Yup. I think calculating the numbers is fun, but no argument here about the enormous error bars inherent in trying to predict the future.
The statistically "correct" amount of money to save is the one that gives your SWR a 50% success rate. Beyond that you're probably oversaving. You can buy additional security with additional years at your desk job, but they're probably wasted years.
"Probably" is a loaded word. The only study I know of (http://sourcesandmethods.blogspot.com/2008/02/part-2-to-kent-and-beyond-what-do-words.html) found that people tend to regard an event described as "probably" going to happen as having about 75% odds. So I would say you're probably not oversaving until you hit a success rate of 75%.
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Maizeman, graphs without labelled axes make me a sad panda.
And can you explain what you've done a little better? Are you assuming a person retires at 30 years old, such that age 50 means 20 years of living off of each SWR? Because these success/mortality graphs get VERY different for people who retire at later ages.
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Sol, yes all of these are based off of retiring at 30. The graphs are based off of essentially two numbers (let's leave aside the light blue vs dark blue distinction).
The SSA provides a number that is essentially the "risk of death (https://www.ssa.gov/oact/STATS/table4c6.html)" for a person in a given year based off of their age and gender. By looking at the inflation adjusted returns of the different 100% stock portfolio histories by starting in each different month of Shiller's dataset of 1871-present stock market returns (http://www.econ.yale.edu/~shiller/data.htm), I calculated a "risk of bankruptcy" in a given year, using the number of years since a person started taking withdrawals from their portfolios and the withdrawal rate they've been using.
With those two numbers, it's just a matter of calculating proportions. At the start 100% of people are alive, 30 years old, none of them are bankrupt. Over the next year X% go bankrupt*, and 0.1505% of both bankrupt and non-bankrupt people die. Then at the start of the second year, 99.8405% of people are alive, 31 years old, and none of them are bankrupt. The graph continues that on for the next 70 years (so at the end 0.57% people are alive and 101 years old and 0.05% of people are alive and broke).
Age at FIRE, gender (different life expectancy), and withdrawal rate used are all going to chance the shape of the graph. In principle it'd also be possible to generate these for different investment mixes but *shrug* gotta draw the line somewhere.
*Actually with a 4% withdrawal rate and 100% stocks, no one manages to go bankrupt in year 1, but hopefully you see my point. With a 4% withdrawal rate the first year with a non-zero bankruptcy probability is year 17. Of the 1,546 start months with enough history to calculate stock returns out 17 years, one drops below zero during that year, giving a bankruptcy risk rate of 0.065% for 17 years into FIRE with a 4% withdrawal rate.
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I've now gone back into cfiresim and looked at the 50% point for myself.
What do you think? Are you over saving if you push for 4%?
50% success rate is about a 6% WR (I get 6.4% for 30years).
Someone with half their spending covered by a pension and with healthcare covered could do this. It's a bit risky for those of us relying on our investment portfolio for 100% of spending for 20 or 30 years before SS kicks in. IMO.
I think 50% is a bit risky when it comes to 20 to 30 years until SS kicks in however it depends on your buffers. From my perspective though some people aren't taking into account SS. So they are planning for a really high success rate with assumptions that are already pretty extreme on the safety side.
My perspective now is to look at the 50% success rate within reason. So I'm not quitting as soon as I get to 50% but when I hit a round number or finish a year of work when I'm past the 50% success rate it's a good time for me to consider ER. I'm also looking at the 50% success rate as a better target than a 95% success rate.
I have a little different scenario though in that I live in Australia and I can't touch my old man money until I'm 60. So once I get to a 50% chance of making it to 60 without working I will probably consider myself FI and work out my retirement date from that point. Once I get to that 50% level though I'll be at close to an 70%-80% success rate and that excludes all the in my opinion harsh assumptions such as never working again, no SS, no inheritance, no reduced spending or downsizing.
So my conclusion is that we all have to work through the assumptions of the 4% WR ourselves and specific to our scenarios but there is no need to be overly safe and manage to the 1 to 2 years out of 100 where you follow the WR blindly and don't succeed.
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This also lets us calculate FIRE success rates in terms of "don't run out of money before you die" instead of "don't run out of money over X years" which is probably a more relevant number to most of us. For a 30 year old man:
A 5% withdrawal rate has a 21.3% chance of failure before death
A 4% withdrawal rate has a 5.6% chance of failure before death
A 3.5% withdrawal rate has a 0.6% chance of failure before death.
This is interesting. I'm now 43 and I won't be retired for a number of years. Best case I think 2 more years. I assume the data for someone retiring at 50 is a fair bit different as well. I also think that this analysis needs to clarify the key assumptions that are relevant within the 4% SWR - i.e. no SS, inheritance, reduced spending, any further income or gain in assets from for instance selling your house. I have 3 kids and live in a city with some of the highest house prices in the world and I own my house.
To me the assumptions of the 4% SWR are unrealistic and err on the side of safety. I would also use the same assumptions if I was doing the analysis but when I'm making a subjective call on my target I need to take all of these assumptions into account.
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Indeed the analysis looks different for a man retiring at 45 with a 6% withdrawal rate (that's what you proposed upthread, correct?)
(https://i6.imgpile.com/i/QS5Zo.png) (https://imgpile.com/i/QS5Zo)
And the risk of running out of money before death is 29.6%.
As for all the other factors unique to your personal situation, it's certainly reasonable for you to factor them into your own projections.
Personally I happily expect no inheritance and SS is so far away it doesn't actually alter the success rate appreciably whether I include it or not (either I'll go broke before I can claim it, or I'll have enough money I won't need it.)
Everyone ultimately needs to run their own numbers to see what they're comfortable with, but I really like Mr. Green's idea of combining data from mortality tables with stock market projects to get the actual risk of running out of money before death, rather than just saying something like "I'm thirty now, and I plan to live to 90, so what's the success rate of strategy X over 60 years."
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That's an interesting way of thinking about it.
I tried running some sims assuming 4% withdrawals, 100% stocks, and the actuarial life tables from the social security administration for men from ages 30-100. Stock return data is from shiller.
(https://i3.imgpile.com/i/QpZor.png) (https://imgpile.com/i/QpZor)
Thank you for the graphs. That really does help illustrate the situation. Could I trouble you for a 4%WR graph for someone retiring at 50?
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Sure thing! Also wow, FIREing at 50 definitely makes the failure case for 4% a lot less prominent.
(https://i.imgpile.com/i/QSThC.png) (https://imgpile.com/i/QSThC)
Chance of running out of money before death is 2.4%, less than half what the same withdrawal rate provides at 30.
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Indeed the analysis looks different for a man retiring at 45 with a 6% withdrawal rate (that's what you proposed upthread, correct?)
(https://i6.imgpile.com/i/QS5Zo.png) (https://imgpile.com/i/QS5Zo)
And the risk of running out of money before death is 29.6%.
As for all the other factors unique to your personal situation, it's certainly reasonable for you to factor them into your own projections.
Personally I happily expect no inheritance and SS is so far away it doesn't actually alter the success rate appreciably whether I include it or not (either I'll go broke before I can claim it, or I'll have enough money I won't need it.)
Everyone ultimately needs to run their own numbers to see what they're comfortable with, but I really like Mr. Green's idea of combining data from mortality tables with stock market projects to get the actual risk of running out of money before death, rather than just saying something like "I'm thirty now, and I plan to live to 90, so what's the success rate of strategy X over 60 years."
Thanks for this - this is great. You are correct in that we all need to run our own numbers but looking at this makes me realise how close we are to being able to retire. I suppose I want some buffer because I don't want to worry about going back to work but that buffer doesn't have to be crazy. There is no way I need to get to a 3% or even 4% WR.
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These graphs are fun.
But I feel I should point out there are a couple of options that aren't well captured in these sorts of scenarios. For example, social security and pensions that kick in at a specified age effectively shorten your retirement "lifespan" if they can support your costs once you reach that age. Look at how much red you can remove from those graphs if you get to exclude everything after age 65. In my case, for example, our pensions and SS payments will fully cover our expenses after only 21 years, so my entire FIRE nest egg only has to last that long. That's EASY!
Also, the probability of an early death isn't entirely independent of the probability of a market crash, which is one assumption in these graphs. Big crashes, like the kind associated with depressions and wars, are definitely associated with increased mortality rates. Also, you always have the option of ending your life if you've arrived at that worst case financial scenario. I know several people whose longevity insurance policy is euphemistically referred to as "self termination".
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Sure thing! Also wow, FIREing at 50 definitely makes the failure case for 4% a lot less prominent.
(https://i.imgpile.com/i/QSThC.png) (https://imgpile.com/i/QSThC)
Chance of running out of money before death is 2.4%, less than half what the same withdrawal rate provides at 30.
Thank you. This is a great way to appreciate the data that numbers alone don't convey. It's useful to see the "Go Broke" zone relative to the "I'm Dead" zone. That helps focus me on what's important. Living my life not being chained to a desk to mitigate the risk of running out of money.
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These graphs are fun.
But I feel I should point out there are a couple of options that aren't well captured in these sorts of scenarios. For example, social security and pensions that kick in at a specified age effectively shorten your retirement "lifespan" if they can support your costs once you reach that age. Look at how much red you can remove from those graphs if you get to exclude everything after age 65. In my case, for example, our pensions and SS payments will fully cover our expenses after only 21 years, so my entire FIRE nest egg only has to last that long. That's EASY!
Also, the probability of an early death isn't entirely independent of the probability of a market crash, which is one assumption in these graphs. Big crashes, like the kind associated with depressions and wars, are definitely associated with increased mortality rates. Also, you always have the option of ending your life if you've arrived at that worst case financial scenario. I know several people whose longevity insurance policy is euphemistically referred to as "self termination".
Well it's straightforward enough to incorporate things like social security or pensions into these types of analysis if you're considering them for your own projections, just a couple more lines of code than the version I'm using.
I agree that the actual probability of early death is somewhat correlated with major negative economic events, however, the mortality tables I'm using don't capture that type increased death rate anyway, since they use a single year's worth of data (2013 in this case, somewhat lacking in major wars or economic catastrophes in the USA) to estimate death rates for people at a given age at the start of each year.
Killing myself because I'd run out of money and don't want to be homeless on the streets in old age is definitely an option, but I'd still consider that to still fall into the set of outcomes classified as "portfolio failures" and plan my strategy based on what the acceptable risk of failure I'm willing to tolerate may be.
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Sure thing! Also wow, FIREing at 50 definitely makes the failure case for 4% a lot less prominent.
(https://i.imgpile.com/i/QSThC.png) (https://imgpile.com/i/QSThC)
Chance of running out of money before death is 2.4%, less than half what the same withdrawal rate provides at 30.
Many thanks for that graph. Talk about perspective!
I am totally, completely done taking on big work projects once I've finished the one I'm doing. I worked part time all last year, my transition year. Then this year I took on a big project for old clients. It's lucrative, but not enough to compensate for having to work full time for weeks on end when we absolutely don't need the money.
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Unless your pension is a Calif state pension
It's not, but I understand the sentiment. America has a nasty habit of breaking its promises to its workers in the pursuit of short term profits.
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Heading a bit off topic, inspired by the graphs...I was talking with my dad last night, telling him about this project I'm working on and how they changed the schedule so a nice and easy part time gig turned into a full time frenzy. It ain't right, me being semi retired and all. He was laughing. He started full time work off the farm at age 15 and retired at age 72, after he was daignosed with kidney failure and began dialysis.
Working is easy, we both agreed. An easy default. He is surprisingly in favor of my semi retirement, but skeptical that I will fully retire, pretty much ever. I am a chip off the old block it is true and was raised in this workaholic environment. I am determined not to follow in his footsteps on this.
Thanks again y'all for the inspiring discussions (this and other threads).
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I'm glad you are resisting the pull to work too long. I think a lot of people equate retiring with sloth. Personally I'll be far more physically active once I FIRE than now. I'll be just as busy. The only difference will be that I'll be doing things I enjoy. I'll also be spending a lot less time sitting at a desk, which will be great for my health.
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Spartana, you and the rest of my Left Coast Mustachean friends stay safe out there.
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God, those are good graphs maizeman.
Thanks for taking the time to share!
(https://i.imgpile.com/i/QSThC.png) (https://imgpile.com/i/QSThC)
Chance of running out of money before death is 2.4%, less than half what the same withdrawal rate provides at 30.
Wow. That red is such a tiny sliver. Compare that to the grey, ugh.
And people work OMY for several MY worrying about that tiny red slice (which itself can be mitigated via income or cutting expenses). How sad.
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I realize that I'm late to this party, but at one point I shared UM's concerns, so I'm sympathetic. I was running 60 year retirement scenarios in FIREcalc, and using the standard 4% withdrawal rate, the probability of success was coming out at about 83%. But adding in expected social security brought that up to 91%, and changing the fees in the calculator from .15 to .05% (Some Vanguard funds are .03%) brought it to 97%. The exact numbers will differ by how long you have until SS and how much you're going to get, but those are known quantities that can be accounted for.
I also find Michael Kitces' argument for increasing withdrawal rates above 4% when the CAPE is at average-to-low levels compelling: https://www.kitces.com/wp-content/uploads/2014/11/Kitces-Report-May-2008.pdf. He tells a hypothetical story about two couples with identical retirement portfolios. One decides to retire immediately using 4% SWR. The other decides to work one more year. In the intervening year, the market has a moderately severe downturn. So now the second couple, following the 4% rule, actually withdraws less than the first couple even thought they have a larger net worth. That doesn't seem right. Kitces' resolution to this paradox is to point out that there is a strong inverse correlation between CAPE and SWR. The second couple could withdraw more than 4% because after the downturn the CAPE is lower, allowing for a higher SWR.
As far as I know, there is no calculator that would allow me to run a 60-year scenario with withdrawal rates increased above 4% based on the CAPE, but once I'm retired, I'll have time to run the numbers myself.
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God, those are good graphs maizeman.
Thanks for taking the time to share!
(https://i.imgpile.com/i/QSThC.png) (https://imgpile.com/i/QSThC)
Chance of running out of money before death is 2.4%, less than half what the same withdrawal rate provides at 30.
Wow. That red is such a tiny sliver. Compare that to the grey, ugh.
And people work OMY for several MY worrying about that tiny red slice (which itself can be mitigated via income or cutting expenses). How sad.
I can't even see a sliver of the red line (of doom?!) on my phone so must be very tiny indeed. And that graph doesn't cover the possibility and greater likelihood of disability and inability due to aging . Death might not be the only problem you have if waiting too long to retire. Pretty sure the 25 years in retirement between 40 and 65 I'm going to have will be much more physically and mentally fit and healthy than the 25 years between 65 and (gulp) 90.
+1. Although not retired yet (soon to be a part-timer), I already know I will be way more physically active with less cubicle time. Barring some unforeseen catastrophe, 90 is a likelihood as I have 3 grandparents in their 90s and still mentally competent. One is approaching 100.
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rachael talcott,
I think you mainly should focus on 'sequence of returns' risk. Your first decade in retirement is what will set up the rest of your results, and you'll know long before you hit even 20 years of retirement if it's failing.
Being adaptable and proactive during that timeframe is just about all anyone needs to do.
CAPE can be helpful, but how it's measured is not the same as it was, so it's not historically consistent. Don't have the link, but there was a detailed rundown on it that made the case that the historical avg. of ~16 should probably be considered ~20 as it's measured now.
So with CAPE ~29, things are overvalued, but not quite as much as it seems. In 30 years, it almost never dropped down to that old avg., much less gone below it. Even after the 'lost decade' of the 2000's dot com bust and huge 2008 crash, CAPE only touched ~15 for a blip before shooting back up. Unless you think that means we're in for a GIGANTIC reversion that will devastate the market for the next 30+ years, I think CAPE's not very helpful or that predictive going forward.
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+1. Although not retired yet (soon to be a part-timer), I already know I will be way more physically active with less cubicle time. Barring some unforeseen catastrophe, 90 is a likelihood as I have 3 grandparents in their 90s and still mentally competent. One is approaching 100.
Howard family members have this problem.... :-)
https://en.wikipedia.org/wiki/Howard_families
My oldest known ancestor died at 92 (great grandmother), every body else at less than 86 (paternal grandfather). My wife's female ancestors are much older, so I'm setting 96 as her date (she said so, must obey). Let the great grandkids-to-be fight over the inheritance.
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God, those are good graphs maizeman.
Thanks for taking the time to share!
(https://i.imgpile.com/i/QSThC.png) (https://imgpile.com/i/QSThC)
Chance of running out of money before death is 2.4%, less than half what the same withdrawal rate provides at 30.
Wow. That red is such a tiny sliver. Compare that to the grey, ugh.
And people work OMY for several MY worrying about that tiny red slice (which itself can be mitigated via income or cutting expenses). How sad.
I keep coming back to it. What a great illustration.
So I went to help an old client this week. Two nights away from home turned into three, most of the last one spent at the plant, programming on the fly, total seat of the pants stuff. And to top it of I had a toothache. All to make $6k that I don't even need*. I have to get free from this toxic mindset.
* OK, so it's more than that. Yes, they called me because they knew I'd fix it. And I did. And yes, it was gratifying. But I get the same, or better, gratification doing a 50 mile bike ride, and I know which one is better for me, mentally and physically.
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I keep coming back to it. What a great illustration.
So I went to help an old client this week. Two nights away from home turned into three, most of the last one spent at the plant, programming on the fly, total seat of the pants stuff. And to top it of I had a toothache. All to make $6k that I don't even need*. I have to get free from this toxic mindset.
* OK, so it's more than that. Yes, they called me because they knew I'd fix it. And I did. And yes, it was gratifying. But I get the same, or better, gratification doing a 50 mile bike ride, and I know which one is better for me, mentally and physically.
It's still a momentary surprise when a money-motivated situation presents itself and I realize that I'm not interested because we have enough already. My wife will be leaving her job soon and we were just talking last night about how they could double her salary from $75,000 to $150,000, which they'd never offer anyway, and she still wouldn't be interested. It kinda feels like wielding a superpower because our society is built on the concept that people need more money, and we're pretty much immune to it at this point.
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God, those are good graphs maizeman.
Thanks for taking the time to share!
(https://i.imgpile.com/i/QSThC.png) (https://imgpile.com/i/QSThC)
Chance of running out of money before death is 2.4%, less than half what the same withdrawal rate provides at 30.
Wow. That red is such a tiny sliver. Compare that to the grey, ugh.
And people work OMY for several MY worrying about that tiny red slice (which itself can be mitigated via income or cutting expenses). How sad.
I keep coming back to it. What a great illustration.
So I went to help an old client this week. Two nights away from home turned into three, most of the last one spent at the plant, programming on the fly, total seat of the pants stuff. And to top it of I had a toothache. All to make $6k that I don't even need*. I have to get free from this toxic mindset.
* OK, so it's more than that. Yes, they called me because they knew I'd fix it. And I did. And yes, it was gratifying. But I get the same, or better, gratification doing a 50 mile bike ride, and I know which one is better for me, mentally and physically.
If you don't mind me asking, PLC programming?
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It's still a momentary surprise when a money-motivated situation presents itself and I realize that I'm not interested because we have enough already. My wife will be leaving her job soon and we were just talking last night about how they could double her salary from $75,000 to $150,000, which they'd never offer anyway, and she still wouldn't be interested. It kinda feels like wielding a superpower because our society is built on the concept that people need more money, and we're pretty much immune to it at this point.
You've been FI for a while now, if I remember right, do you have a sense of how long it took you for the new not-moved-by-money mindset to set it? It does indeed sound like a superpower, and something I hope to develop myself once I hit my own magic number.
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If you don't mind me asking, PLC programming?
Yes. CLX and ME on this one. Hacking away at someone else's poorly commented programs, as per usual.
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If you don't mind me asking, PLC programming?
Yes. CLX and ME on this one. Hacking away at someone else's poorly commented programs, as per usual.
That always pisses me off getting a program with zero/minimal comments.
Related question, do you seek opportunities to earn some side money programming? I am getting ready to ask my employer to switch to a part time (work from home) roll and was wondering about part time gigs programming if they don't bite . I also do HMI, CAD and unfortunately learned Siemens a couple years ago. Been trying to get that out of my head for a while. AB is MUCH easier.
Sorry for the thread hijack!
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It's still a momentary surprise when a money-motivated situation presents itself and I realize that I'm not interested because we have enough already. My wife will be leaving her job soon and we were just talking last night about how they could double her salary from $75,000 to $150,000, which they'd never offer anyway, and she still wouldn't be interested. It kinda feels like wielding a superpower because our society is built on the concept that people need more money, and we're pretty much immune to it at this point.
Yeah, I’ve been so driven to make money for so long I have a hard time turning it off. Lucky for me, in a way, some of my bigger clients are retiring themselves (all older than me) and I haven’t been schmoozing the new guys, so enquiries for new work are slowing down. I’ve been part time since about Oct 2015. Before that I was averaging >50 billable per week for many years, which is how we got to be FI, of course.
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Related question, do you seek opportunities to earn some side money programming? I am getting ready to ask my employer to switch to a part time (work from home) roll and was wondering about part time gigs programming if they don't bite . I also do HMI, CAD and unfortunately learned Siemens a couple years ago. Been trying to get that out of my head for a while. AB is MUCH easier.
Sorry for the thread hijack!
I'll send you a PM.
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I keep coming back to it. What a great illustration.
So I went to help an old client this week. Two nights away from home turned into three, most of the last one spent at the plant, programming on the fly, total seat of the pants stuff. And to top it of I had a toothache. All to make $6k that I don't even need*. I have to get free from this toxic mindset.
* OK, so it's more than that. Yes, they called me because they knew I'd fix it. And I did. And yes, it was gratifying. But I get the same, or better, gratification doing a 50 mile bike ride, and I know which one is better for me, mentally and physically.
It's still a momentary surprise when a money-motivated situation presents itself and I realize that I'm not interested because we have enough already. My wife will be leaving her job soon and we were just talking last night about how they could double her salary from $75,000 to $150,000, which they'd never offer anyway, and she still wouldn't be interested. It kinda feels like wielding a superpower because our society is built on the concept that people need more money, and we're pretty much immune to it at this point.
That's awesome.
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It's still a momentary surprise when a money-motivated situation presents itself and I realize that I'm not interested because we have enough already. My wife will be leaving her job soon and we were just talking last night about how they could double her salary from $75,000 to $150,000, which they'd never offer anyway, and she still wouldn't be interested. It kinda feels like wielding a superpower because our society is built on the concept that people need more money, and we're pretty much immune to it at this point.
You've been FI for a while now, if I remember right, do you have a sense of how long it took you for the new not-moved-by-money mindset to set it? It does indeed sound like a superpower, and something I hope to develop myself once I hit my own magic number.
I think it started once we realized we were bare bones FI and got stronger as we got closer to our desired FI target. When I think about her salary doubling the first thought is still, "That's a lot of cake!" But then I think about what price she pays to make any money period. Shitty commute, inflexible work hours, a company that doesn't let their employees telecommute even though they have the capability, etc. She hasn't quit yet because she likes the actual work and the ladies she works but she's getting closer to that point. As the notion of earning more money regardless of the cost loses it's incentive, it becomes no different than being paid in anything else that has little or no value to you. Like being paid in gum if you only chewed a pack or two a year. I suppose at least the money can still be spent if we want to spend it.
Edit: typo
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CAPE can be helpful, but how it's measured is not the same as it was, so it's not historically consistent. Don't have the link, but there was a detailed rundown on it that made the case that the historical avg. of ~16 should probably be considered ~20 as it's measured now.
This is a pretty good read:
http://www.philosophicaleconomics.com/2013/12/shiller/
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"Like being paid in gum if you only chewed a pack or two a year." So good.
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Yes. CLX and ME on this one. Hacking away at someone else's poorly commented programs, as per usual.
That always pisses me off getting a program with zero/minimal comments.
The only thing worse than a program with no comments is a program with comments.
Seriously, 90% of the comments I've seen over the years have been useless or wrong.