Should estimation of the current market cycle play a role in determining ER?

[Bertram]

So, let me offer some random thoughts that have been going through my mind recently. It seems that most people agree that entering ER just when a major swing from bull to bear market happens is not a good starting point (especially given how important the first 10 years is for the success rate of the portfolio). Of course it's never possible to predict the specific timing of theses trends ahead of time, but only in retrospect does it become obvious when the market was in which phase.

So I was wondering, with all that uncertainty, whether you think the decsion to FIRE should even be influenced by what one presumes the curent market cycle is? I don't have hard rules and thresholds but rather soft likelihoods/threshholds that increase/the decrease likelihood of FIRE at point X in time.

So my worry is that once I accept that "Yes, it's better to hold out another few years because the market is certainly going to drop in the next 1-2 years / has started dropping", then suddenly I am also thinking "Hold on, when the next couple years are going to be really bullish, maybe tack on a few years to give you more options/freedoms in retirement". And suddenly no matter how I expect the market to develop, OMY snydrome kicks in which is obviously stupid. So neither ignoring it is wise, nor is it wise to depend on it too much. But then again, anyhing inbetween seems arbitrary in whether or not it may even help in any relevant measure. Severe case of overthinking it... maybe the old adage about the hopelessnes of trying to time the market is just as relevant here...?

How much is/was your projected/past FIRE date influenced by what you think/thought about the market condition around that FIRE date?

[ender]

I think it depends on your risk factors. There are many, market cycle is just one.

A few of my posts I've written here before on this subject of risk factors:

Here is a non-comprehensive list of things which also affect risk tolerance:

• Government/private pensions
• Social security
• Inheritances
• Ease of reentering workforce (some careers this is nearly impossible, others are easy)
• Ability to move to LCOL area
• Ability to lower spending
• Actual impact of "failure" or down years (is it reduced luxury spending or electric bill/food)
• Kids and overall health
• Expectation of large, non-recurring expenses in future (ie housing related repairs, etc)
• Overall asset diversification
• ER age
• Ability, interest, and profitability of parttime work (or hobbies) in ER
• Government assistance programs should ER implode

Someone who has no pension, retires very early because of a huge income (so reduced SS eligibility), has no inheritance expectation, works in a career where their future reentry earning potential is minimal, maintains nearly 4% spending with nearly no extra spending in an already LCOL area, have multiple kids with medical problems, and is retiring at age 32 will hopefully view their risk tolerance of the 4% rule differently than others.

And yes, of course you can work to mitigate these - everyone here should be doing their best to do that. Reducing the risk of each individual factor (where possible) reduces your overall risk, meaning you can safely retire at 4% (or really higher, if you are "good" on many or most of those items - more than a 4% SWR is completely possible even without a pension).

Most of us just have to get to SS age with $0 remaining and we'll be fine - I am still in my 20s and already have an estimated SS benefit of almost $10k a year if I didn't earn anything more. If I retire at age 40, it will only be 27 years where ER has to "work" for me to "win" at ER and my SS benefit will be much greater than $10k. For those folks here who came to the ideas of ER later and are in their 40s or even 50s that gap is even less and their SS benefit likely will be even larger. That should heavily mitigate risk for anyone who is around that age.

It is likely most people simply have not thought through all the actual implications of the above. Or even what "failing" at the 4% scenarios mean and what the implications practically speaking for a "failed" ER would actually be. Or knowing how many would need to be present to reduce the risk of a SWR 4% failing significantly. Pretty much any one of the first six items should give someone significant security in ER working out at 4% given that none of them are included in the Trinity study "success" scenarios. If you have more than one of them you should be able to reliably ER on a withdrawal rate higher than 4%.

The reality is everyone has different situations which naturally shape their risk tolerance differently. It is important to realize nearly all of those factors can be controlled or influenced, but also that everyone will have different abilities to do so.

But to not acknowledge a difference in risk tolerance resulting from the factors discussed in this wall of text on the whole is a bit shortsighted.


The biggest problem, which I suspect you also agree with, is that people do not look at their situation and investigate what factors increase or reduce the risk associated with their actual ER plan.

Ultimately, your ability to react to changing circumstances is the most important set of risk factors when it comes to this topic. If you are unable to adapt for <reasons> then you should care more about your perception of market cycle. If you can react? Meh. Just decide if your initial portfolio is down 20% from its start at any point in the first 5 years of FIRE that you will work parttime for a while.

[BTDretire]

I'm with you vacillating between the market is at a new high, better be careful,
to the economy has grown so slow, that it could go on another tens years with things getting better every year.
  My situation is not whether to retire , but more how to position my money in the market.
 Right now I'm on the optimistic side.

[tonysemail]

I think this advice came from Nords.
If you hold two year's living expense in cash equivalents, then you can ride out the duration of most short term market crashes.
i.e. aim for 27X annual expenses instead of 25X
This little bit of insurance greatly mitigates against sequence of returns risk.

On the topic of market cycles, these two posts helped me.
http://www.madfientist.com/safe-withdrawal-rate/
https://www.kitces.com/blog/understanding-sequence-of-return-risk-safe-withdrawal-rates-bear-market-crashes-and-bad-decades/

[swamimeister]

 It might be to your benefit to learn about stock charts. I'm surprised that there isn't more reference to that in MMM. It isn't easy and takes time but can also be very interesting and profitable. At this time, it looks to me that the market will continue upward at least for a while. If it does take a turn downward in an intermediate or longer term timeframe, you could have the knowledge to make money in a falling market. Looking at it that way, it wouldn't matter to you whether the market is rising or falling in the future.

[TheAnonOne]

Basically, your advocating for OMY.

The success of the 4% rule is basically decided within the first 5 years.

If you "Retire" in 2020 @ 25X money(4%rule) but keep working another 1-5 years you will basically guarantee success because you "rode out" those first 1-5 years without losing any principal.

If you hit 25X expense and immediately quit working, then you need to watch the first 5-10 years pretty closely. This is shown pretty clearly by how the 4% rule has a 85-95 percent success rate, but the 3% rule is more or less a guaranteed shot.

Again this 'safety' is NOT FREE. You are paying for it with YEARS of your life and probably unnecessarily so.


The one time it might be worth checking is if the CAPE is at some crazy value like 40+ (like back in 2000) it might be pretty obvious that it's a bit high and prudent to work another year(ish) but at a slightly overvalued mark like 26 today, probably nothing to worry about.

[mancityfan]

I do really like Nords strategy of having 2 years in cash on hand to mitigate sequence of return problems. I am 6-7 years away from ER, I am glad I am not going to ER in the next 2 years as we are way overdue for a correction in my view.

[Eric]

It might be to your benefit to learn about stock charts. I'm surprised that there isn't more reference to that in MMM. It isn't easy and takes time but can also be very interesting and profitable. At this time, it looks to me that the market will continue upward at least for a while. If it does take a turn downward in an intermediate or longer term timeframe, you could have the knowledge to make money in a falling market. Looking at it that way, it wouldn't matter to you whether the market is rising or falling in the future.

I personally wish MMM would spend more time talking about Phrenology.  I mean, it's a lot more interesting than some technical stock market analysis and basically just as reliable.

[ImCheap]

I'm not there yet but getting closer everyday, our plan is have a good slug of short term fixed at the start, enough to get us thru a good 5+ years if needed, yeah I may leave some cash on the table just like not making an insurance claim but so be it.

Ibonds don't get much love these days but for someone starting retirement I would think having a slug of Ibonds to fall back on is not a bad plan, could do much worse. Little bit of a liability matching portfolio.  That and moving with the bumps in the road like we have always lived and we should be good.

[tonysemail]

If you "Retire" in 2020 @ 25X money(4%rule) but keep working another 1-5 years you will basically guarantee success because you "rode out" those first 1-5 years without losing any principal.

If you hit 25X expense and immediately quit working, then you need to watch the first 5-10 years pretty closely. This is shown pretty clearly by how the 4% rule has a 85-95 percent success rate, but the 3% rule is more or less a guaranteed shot.

Again this 'safety' is NOT FREE. You are paying for it with YEARS of your life and probably unnecessarily so.

I'm in agreement with most of your post.
Small quibbles below:

1) Working 5 more years is a big exaggeration.
That implies a 28% savings rate ... yeah, I'd probably have a very different perspective if that was my savings rate.
at 66% savings rate, one more year should accumulate 2X annual expenses.
I've accepted being a wage slave for one more year.

2) the alternative is not "FREE" either.
there's a long list of stuff i'd be willing to cut in a down year.
But cutting them wouldn't make me particularly happy either.
Would that really maximize my happiness vs working one more year?  Maybe.

edited to fix bad math.  dumb goofball

[neo von retorch]

My wife got a book (for free!) at work that was written by John Bogle! I probably can't articulate what he said too well, but basically stock prices reflect A) revenue growth, B) dividends and C) speculative "value." Over 110 years... the revenue and dividend portion of stock prices is pretty much exactly correlated. The speculative portion goes all over the map, but ultimately only affects long-term stock prices a tiny amount, and shouldn't be considered by wise investors. (Again, this was all explained more correctly and more eloquently in the book. If I ever put the pieces together at the right moment, I'll update this post with a better summary.)

I guess my point being - probably yes. Think about the overall P/E and how far off they currently are, and take that into consideration.

(Oh, and the book is Don't Count On It!)

Here's the relevant excerpt! https://hurricanecapital.wordpress.com/2016/04/02/john-bogle-on-investment-vs-speculative-return/

[rahby1us]

I think this advice came from Nords.
If you hold two year's living expense in cash equivalents, then you can ride out the duration of most short term market crashes.
i.e. aim for 27X annual expenses instead of 25X
This little bit of insurance greatly mitigates against sequence of returns risk.

On the topic of market cycles, these two posts helped me.
http://www.madfientist.com/safe-withdrawal-rate/
https://www.kitces.com/blog/understanding-sequence-of-return-risk-safe-withdrawal-rates-bear-market-crashes-and-bad-decades/

From Michael Kitces website, a somewhat surprising blow to the 2 years of expenses strategy:

"Cash reserve strategies that hold aside several years of spending to avoid liquidations during bear markets are a popular way to manage withdrawals for retirees. In theory, the strategy is presumed to enhance risk-adjusted returns by allowing retirees to spend down their cash during market declines and then replenish it after the recovery. Yet recent research in the Journal of Financial Planning reveals that the strategy actually results in more harm than good; while in some scenarios the cash reserves effectively allow the retiree to “time” the market by avoiding an untimely liquidation, more often the retiree simply ends out with less money due to the ongoing return drag of a significant portfolio position in cash. "

https://www.kitces.com/blog/research-reveals-cash-reserve-strategies-dont-work-unless-youre-a-good-market-timer/

[TheAnonOne]

I think this advice came from Nords.
If you hold two year's living expense in cash equivalents, then you can ride out the duration of most short term market crashes.
i.e. aim for 27X annual expenses instead of 25X
This little bit of insurance greatly mitigates against sequence of returns risk.

On the topic of market cycles, these two posts helped me.
http://www.madfientist.com/safe-withdrawal-rate/
https://www.kitces.com/blog/understanding-sequence-of-return-risk-safe-withdrawal-rates-bear-market-crashes-and-bad-decades/

From Michael Kitces website, a somewhat surprising blow to the 2 years of expenses strategy:

"Cash reserve strategies that hold aside several years of spending to avoid liquidations during bear markets are a popular way to manage withdrawals for retirees. In theory, the strategy is presumed to enhance risk-adjusted returns by allowing retirees to spend down their cash during market declines and then replenish it after the recovery. Yet recent research in the Journal of Financial Planning reveals that the strategy actually results in more harm than good; while in some scenarios the cash reserves effectively allow the retiree to “time” the market by avoiding an untimely liquidation, more often the retiree simply ends out with less money due to the ongoing return drag of a significant portfolio position in cash. "

https://www.kitces.com/blog/research-reveals-cash-reserve-strategies-dont-work-unless-youre-a-good-market-timer/

This isn't apples to apples.

The situation is...
25X expenses in the market AND 2X expenses in cash
OR
25X expenses in the market and NO CASH

Clearly option 1 is better.

Obviously the waters get muddy when we start looking at 27X in the market vs 25X and 2X cash

[markbike528CBX]

I personally wish MMM would spend more time talking about Phrenology.  I mean, it's a lot more interesting than some technical stock market analysis and basically just as reliable.

AND for those of us with shaved/bald heads, Phrenology so easy to do! 
The difficulty is coming up with actionable financial indicators from bumps on the skull, at least without ROFL, which presumably would disturb the Phrenology session.

[Eric]

Bertram,
I've been thinking a lot about this lately too.  I guess it's a normal thing when you're getting close.  Personally, if the markets are flat for the next 3 years, I can retire based on my savings.  However, if they're up 10% over the next 2 years, plus my savings, I'd hit my number in 2 instead of 3 years.  The big issue of course would be that 10% over 2 years would add to the already unprecedented positive run for (US) stocks.  So I'm considering 3 years no matter market conditions.  Is that one more year syndrome?  I'm not sure it counts as such if you plan it out in advance.

If markets are up and I work 3 years, I'll end up with a larger starting balance more able to withstand the likely lower future returns (whether that's just a crash or a sideways market) and if they're not, then I'll feel better about not retiring right at the end of the bull.

Although to make it more complicated, considering that I invest internationally as well, I sort of feel like that if the gains were driven by the international market and not the US market that I'd be more likely to call it prior to my 3 year period.

[rantk81]

Personally, I don't think I will mind having "OMY" syndrome.  As I approach closer and closer to FI, the stress of work seems to melt away.  Knowing how close I am to "never having to come back" makes it MUCH MUCH more tolerable.

For me, most of the stress of working during my life has been from the thought of knowing I am not financially independent.  The knowledge that I had to retain employment, or to fear a long term stint of unemployment has been the biggest driver of stress for me.

I definitely plan on succumbing to OMY syndrome for a year or two, regardless of whether the market is high or low.  I would be especially paranoid if the market is high (like I feel it is now) though.

[neo von retorch]

Personally, if the markets are flat for the next 3 years, I can retire based on my savings.  However, if they're up 10% over the next 2 years, plus my savings, I'd hit my number in 2 instead of 3 years.

So I guess my point about the Bogle article is this:

Some of the market pricing is always speculation. If the market rises 10% over the next 2 years, you can probably count on more than a little of it being speculative, and ignore that portion of it (not that you can completely know how much that is, but you can at least make some educated decisions.)

Does that make sense? In other words, as long as businesses are growing their earnings and revenues, you can count on some positive movement to the fundamental value underlying the stock market prices, and you should try to ignore the speculative portion of market pricing, focus on the business value, and base your retirement strategy on that.

[Eric]

Does that make sense? In other words, as long as businesses are growing their earnings and revenues, you can count on some positive movement to the fundamental value underlying the stock market prices, and you should try to ignore the speculative portion of market pricing, focus on the business value, and base your retirement strategy on that.

Is there a way to separate out the speculative portion though?  I don't really see how.  I mean, I doubt that the markets will go up while the PE ratio simultaneously is lowered, right?  (at least not in the short term)

[neo von retorch]

I guess if you want to be really conservative, take your current investments, divide by the current PE (see http://www.multpl.com/) and then multiply by 15 (the mean) and treat that as the "core" value of your holdings at the beginning of your retirement.

I'm sure the main problem with this is - it's likely TOO conservative, so you'll need more before you can retire, but 20 years from now, you'll have tons of money you didn't need, and fewer years of your life left over. I'd like to explore this idea some more, though.

[Eric]

I personally don't believe the PE ratio is a very good indicator of anything mostly because of lack of context (user rocketpj explains it well here), and I especially don't believe that its long term average is at all relevant (GAAP and all that jazz).  I was just using it as shorthand to make the point that I don't think it's possible to separate out the speculative portion (again, at least not in the short term.)

Not to mention the fact that I'm not even sure how you'd go about figuring out the current PE of a global portfolio and be able to compare it to a historical average PE of the same global portfolio.

Of course, that's just complaining about methods and not really solving the problem.  Where's that damn crystal ball!!

[Bateaux]

I've come to realize I'm not mentality prepared for FIRE yet.  We easily have 25 times what we need to withdraw saved now.  I've gotten adicted to saving money.   I really don't want to think about drawing it down. I may have to get out to 40 or 50 times annual needs to feel comfortable about FIRE.  I go through mood swings where I dream of retirement and then hours later I'm scared to death of leaving a secure job.

[mathjak107]

it is so hard to use standard valuations for a gauge of anything . never forget in 1982 by conventional valuation stocks were quite high and many stayed away from equity's . 1982 was the start of the greatest bull market in history .

you have so many other factors involved from macro economics to behavioral science .

but having said that  , high valuations when you retire tend to average out to below average returns 8-12 years later . it has never been any different .

the cape sucks as a shorter term indicator and it is not accurate going out longer then 12 years .

the sweet spot and spooky part is the fact it has always been correct in the 8-12 year range .

so at these levels i plan lower but hope for better

[mathjak107]

I think this advice came from Nords.
If you hold two year's living expense in cash equivalents, then you can ride out the duration of most short term market crashes.
i.e. aim for 27X annual expenses instead of 25X
This little bit of insurance greatly mitigates against sequence of returns risk.

On the topic of market cycles, these two posts helped me.
http://www.madfientist.com/safe-withdrawal-rate/
https://www.kitces.com/blog/understanding-sequence-of-return-risk-safe-withdrawal-rates-bear-market-crashes-and-bad-decades/

From Michael Kitces website, a somewhat surprising blow to the 2 years of expenses strategy:

"Cash reserve strategies that hold aside several years of spending to avoid liquidations during bear markets are a popular way to manage withdrawals for retirees. In theory, the strategy is presumed to enhance risk-adjusted returns by allowing retirees to spend down their cash during market declines and then replenish it after the recovery. Yet recent research in the Journal of Financial Planning reveals that the strategy actually results in more harm than good; while in some scenarios the cash reserves effectively allow the retiree to “time” the market by avoiding an untimely liquidation, more often the retiree simply ends out with less money due to the ongoing return drag of a significant portfolio position in cash. "

https://www.kitces.com/blog/research-reveals-cash-reserve-strategies-dont-work-unless-youre-a-good-market-timer/

this is true ,  the weight and drag in up cycles  never develops the cushion not having cash buffers develop . cash buffers are more mental masturbation then doing anything financial for you .

but i like having my two years cash so i guess i will go blind like my father warned me about .

we set goal posts based on 25x when we retired last year .  we are only drawing 3.50%  delaying ss until 70  and once ss kicks in we will drop to about 2% draws .

we are also using a bit of a rising glide path as far as lowering equity's going in to retirement and increasing a little as time goes on . kind of protection against a prolonged downturn early on before we have a good up cycle in retirement .

regardless of the past prior to retiring , once you set your draw rate anything that happened earlier is behind you .

needing an up cycle to protect you as you start drawing down is required no matter how good markets were prior since your draw is already based on that fact .

spending down early on in to a down market  before an up cycle is no different then a trader having a string of losing trades at the beginning .

[mathjak107]

one important point i want to remind everyone is this :

all these rules of thumb and calculators assume that your money used to generate your income can always go to zero . as long as you reach the desired age with 1 dollar that is an acceptable success rate .

so you may want to consider that fact and keep an emergency fund or some pile of money for use for long term care  out of the income stream .

i know i want to make sure we have money if needed to modify our home should one of us require long term care . we don't want to be shipped 100 miles away from family and friends  to a medicaid home if we can help it .

this is something many of the folks who say they are self insuring long term care themselves do not consider .

in order to actually self insure that money has to be set a side and not counted as part of the income stream since under a worst case scenario it may be gone  and spent down trying to maintain the income flow .

our estate attorney who is one of the most popular in nyc says most of his clients are now the so called self insurers , who did not know what it means to really self insure .

so depending on what you want to have long term money left over for you may want to keep it out of the calculation for determining draw rate .  that is up to you .

many years ago my wife and i were featured in both money magazine and the fidelity investment magazines .  money magazine wanted to do a story on someone who is in relatively good pre-retirement shape and does all their own planning , and they wanted to see if their team of pro's could find fault .

the only place we dis-agreed was in handling long term care . we wanted to self insure and they were against it for so many reasons .

in the end they were right and my thinking was flawed , so we ended up making different plans .

while 90% of all rolling 30 year time frames left you with more than you started with  with a 70/30 mix  someone has to be on the losing side of that statistic .

as humans we only have two outcomes and statistics do not count much .

things either work out as planned or they don't .  so which one will you be since someone has to be on the losing side .

it isn't a case of working longer most of the time , it is simply just setting a lower draw initially . you can always take raises if things are turning out better than worst case .

a good rule of thumb is every 3 years take a look at your balance . if you are 50% above your starting point then take a 10% raise on top of inflation adjusting . repeat every 3 years .

it is always better to start lower and be pleasantly surprised than start higher ,set a lifestyle based on higher and have to  take pay cuts down the road .

[mathjak107]

that you better not count every penny you have  in the pile as money you will create your income stream off of . the rules and calculators all assume principal can go to zero .

that can leave you in pretty poor shape if outcomes or sequencing suck  .  you will have lots of eventual expenses as you age that you will need a whole bunch of money for .

if it gets spent down as part of the income pile you may be quite miserable .

[Nords]

I think this advice came from Nords.
If you hold two year's living expense in cash equivalents, then you can ride out the duration of most short term market crashes.
i.e. aim for 27X annual expenses instead of 25X
This little bit of insurance greatly mitigates against sequence of returns risk.

I think I'm being misquoted.

I advocate 25x expenses with two years' expenses in cash.  This implies an asset allocation of 92% equities and 8% cash.

That leads to breathtaking volatility, but with two years' expenses in cash you can ride out the bear market and avoid the sequence-of-returns risk.  (Nobody worries about volatility in a bull market.)  A high asset allocation to stocks will also overcome the "drag" on portfolio performance caused by having 8% in cash.

Along with variable spending and Social Security, this plan drives the 4% SWR failure rate down to zero. 

[markbike528CBX]

I advocate 25x expenses with two years' expenses in cash.  This implies an asset allocation of 92% equities and 8% cash.

That leads to breathtaking volatility, 

By sheer force of intellect ^tm :-).  I have exactly that AA. 
and yes, the bear markets do take your breath away.

[PAstash]

Full disclosure I am no where near your net worth most likely.

I'd diversify my income. If you have a side job or hobby you love that can pay for your utilities and food I'd leave. Flex your frugality muscles should the situation arise. Mayhaps even take on full time work if it were to happen to you know buy more shares.

Cut grass shovel snow deliver papers. Go work at Starbucks part time. See If you can go to part time at your job. Pick up a rental property. ect....

[tonysemail]

I think I'm being misquoted.

oops, sorry.  thanks for chiming in to correct it.

[John Doe]

I think your investment style impacts whether you should consider the current market cycle.  I personally invest in income producing securities with dependable historical distributions.  Provided the income your stash generates covers your expenses or at least a significant portion of your expenses, the fluctuation of your capital should not be all that concerning.  Of course no one wants their capital to drop and dividend distributions have been cut in the past by a number of companies, thus picking your investments and the likelihood of cuts if the economy goes south is an important consideration.  If you are happy with your investment mix, there is a solid history of dividend stability or growth and the income covers a significant portion (preferably all) of your expenses, then the current market cycle should be irrelevant.  My two cents worth, if its worth that much at all.

[Much Fishing to Do]

I've come to realize I'm not mentality prepared for FIRE yet.  We easily have 25 times what we need to withdraw saved now.  I've gotten adicted to saving money.   I really don't want to think about drawing it down. I may have to get out to 40 or 50 times annual needs to feel comfortable about FIRE.  I go through mood swings where I dream of retirement and then hours later I'm scared to death of leaving a secure job.

Be careful...most people's greatest threat to a long comfortable retirement may come from retiring too early....but for the greatest of savers the greatest threat to a long happy retirement may come from not retiring soon enough for it to be a long one.....