Risk Management for life

[Ron Scott]

We all face 3 generic risks in preparing FI for retirement. A) The purchasing power of our portfolio can be reduced below our comfort levels, e.g., through inflation. B) We can underestimate our spending needs and one or more unexpected expenses puts a dent in the portfolio. C) A bad sequence of returns, e.g. in equities, mucks-up our SWR strategy.

The typical responses to these risks include ignoring them (an American favorite), purposely spending below traditional SWRs (say 3%), adopting a flexible annual spending strategy and “cutting back” enough to neutralize the effect of a hit to FI, buying an annuity to transfer some of the risk to an insurer, and going back to work.

(FWIW, the Times did an interesting piece today on this with leading economists agreeing on how complex and difficult it is to develop an FI plan reflecting these risks.)

My question is, how can we help people who are considering FIRE to address these risks in their plan?

[brooklynmoney]

I just read that Times article. One of the ways to mitigate risk that they proposed was buying an annuity which I think many of us would be against for the fees alone. They also pointed out that Social Security is an annuity and by waiting to take it until 70 that increases what you get by I think 8% a year. So that’s definitely a strategy I would explore as I have a high “longevity risk” as a woman whose grandmother lived to 95.

[boarder42]

There are dozens of conversations on here about all of this. In general these are likely overblown fears and unlikely to affect anyone. Decreasing your WR guarantees only one thing. You worked longer. It does not guarantee anything else.

The risks you're propagating here and in your other thread is only going to lead to a single thing people working longer than is necessary. Which is a guaranteed locked in risk. Capitalism has to fail for most scenarios you're presenting to be a realistic risk to users of the forum. So you probably should homestead and be 100% self supporting if you are truly afraid of any of these

[Sailor Sam]

As @Malcat likes to point you, you can't save your way to a risk free life. Which means that I advocate for:

1. Understanding your own, individual spending floor. The minimum below which mental or physical health will suffer. I could shut off water, or get rid of my dog in order to stay below my spending limits, but then my life would be significantly less enjoyable. So, I'll find a way to keep the dog, and the ability to hydrate him. On the flip side, I don't mind geo-arbitraging, as I have friends scattered throughout the country. Whereas someone with only local ties, who needs time to make good friends but also needs a friend community, well maybe the decide they can shut the water off for a month.

2. Pre-stage your decisions to remove the emotion from them. Decide beforehand what your response will be, should a certain set of circumstances occur. It is hard, hard, hard to make calm personal decisions when events around you are spiraling. People say they can do it. They can't.

3. Make peace with [your individual assessment of what you have decided is] acceptable risk. Execute the plans you've made in step 2 as the set conditions arise, and don't think about it too much.

[Ron Scott]

Social Security is an annuity and by waiting to take it until 70 that increases what you get by I think 8% a year. So that’s definitely a strategy I would explore as I have a high “longevity risk” as a woman whose grandmother lived to 95.

Delaying SS is a general  no brainer but I’d still advise running the numbers on a SS calculator. Example: Some of those who will convert to spousal benefits can take SS earlier without losing much at all.

I myself am waiting to 70.

[Loren Ver]

There are always risks for every action, including taking no action or waiting to take action (ie working longer and putting off retirement).

One thing that is certain, is that you will die eventually.

That is one reason why I like this calculator so much, the grey line can help put some of the other risks into perspective. 

https://engaging-data.com/will-money-last-retire-early/

You can't remove risks, you can only jostle them about so the ones you find acceptable are the ones sitting on top for you to deal with.  If the risk you want to deal with is "work until I am older than maybe necessary and I find that the most acceptable" then great!  Do that.  Just remember, you don't get to stitch anymore of that time on to the end of the quilt of your life, once it's done, its done. 

Loren

[aetheldrea]

These aren’t anywhere near the top of list of risks I am worrying about. They aren’t even that difficult:
A) Remain invested in the stock market after retirement.
B) Do not retire without understanding your spending needs.
C) Same as any low probability negative event such as a major car accident or getting trapped in mass shooting situation, deal with it if it happens. Act prudently, but don’t ruin your life worrying about things beyond your control.

Delaying taking Social Security benefits seems more “brainless” than “no brainer” to me. I am planning on taking them at 62.

[clarkfan1979]

Glass half-full guy here. If you are going to consider worst case scenario, you need to balance it with best case scenario.

Based on the analysis of Michael Kitces, if someone does a 4% withdrawal on 1 million, there is a 1% chance that that the person runs out of money in year 29 of a 30 year retirement. This is based on someone timing it perfectly and retiring right before the great depression.

On the other extreme, you time it perfectly and you get the top 1% best bull run right after retirement. You continue to withdraw 4% and you end up with how much money at the end of 30 years?

Guess....

[ender]

The typical responses to these risks include ignoring them (an American favorite), purposely spending below traditional SWRs (say 3%), adopting a flexible annual spending strategy and “cutting back” enough to neutralize the effect of a hit to FI, buying an annuity to transfer some of the risk to an insurer, and going back to work.

Oh please, are you actively trying to troll here?

Read this - https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/ There's... 40 pages talking about the 4% rule being super conservative/safe as it is.

My risk analysis is to recognize that even retiring on 4% SWR is already including an insanely conservative risk analysis perspective as it is.

You can call that "ignoring" if you want.

[boarder42]

Glass half-full guy here. If you are going to consider worst case scenario, you need to balance it with best case scenario.

Based on the analysis of Michael Kitces, if someone does a 4% withdrawal on 1 million, there is a 1% chance that that the person runs out of money in year 29 of a 30 year retirement. This is based on someone timing it perfectly and retiring right before the great depression.

On the other extreme, you time it perfectly and you get the top 1% best bull run right after retirement. You continue to withdraw 4% and you end up with how much money at the end of 30 years?

Guess....

I'm 10x more likely to die a billionaire than run out of money before I die. And I plan to spend more than 4% and will retire at 35.

[GodlessCommie]

Re: delayed Social Security... I looked at my numbers. It takes ~14 years to recoup 1 year of waiting. So if you wait 2 years, and then live to 90, you only broke even.

Re: going back to work. I fail to see how it is any worse than working longer to begin with.

[ender]

Re: delayed Social Security... I looked at my numbers. It takes ~14 years to recoup 1 year of waiting. So if you wait 2 years, and then live to 90, you only broke even.

Re: going back to work. I fail to see how it is any worse than working longer to begin with.

Well, based on this, the OP is now ~65 (the quote was from about 5 years ago):

While the feeling ebbs and flows I basically love my work. I'm 60.

So it's probable they aren't really retiring early at all. I'd actually agree that if you retire at 65 then it is much harder to go back to work but at that point you've already guaranteed working too long.

[Imma]

It's also important to realize that you won't just run out of money suddenly (unless a terrible disaster happened that you couldn't have prepared yourself for, in which case being FI is probably the least of your worries). If, after a couple of years, you find out that your stash is shrinking faster than you'd like, you still have a couple of decades to figure out what to do until your money runs out. You could plant a garden and grow your own food, get a parttime job, become a 1 or 0 car family, downsize your home, move to a different area. Fairly small changes to your lifestyle could make a huge impact in the long term.

[ender]

It's also important to realize that you won't just run out of money suddenly (unless a terrible disaster happened that you couldn't have prepared yourself for, in which case being FI is probably the least of your worries). If, after a couple of years, you find out that your stash is shrinking faster than you'd like, you still have a couple of decades to figure out what to do until your money runs out. You could plant a garden and grow your own food, get a parttime job, become a 1 or 0 car family, downsize your home, move to a different area. Fairly small changes to your lifestyle could make a huge impact in the long term.

And if not, the entire world is collapsing and it won't matter much either way what you did/do :-)