Author Topic: 0.83% draw down rate is doomed to fail!  (Read 5011 times)

patrickza

  • Pencil Stache
  • ****
  • Posts: 547
  • Age: 40
    • The Investor Challenge
0.83% draw down rate is doomed to fail!
« on: November 20, 2015, 12:40:09 AM »
I did a double posting on the bogleheads forum (https://www.bogleheads.org/forum/viewtopic.php?f=2&t=178004) as well as here asking about a pension strategy. The basics of that was that in 3 years I wanted to fire on what would then be about $740k, with either a lump sum of $188k lump sum to add to investments, or a pension at 62 of $21k. My expenses are $1100 a month and I have a side income covering $600.

So while I was expecting some analysis on what would be the better option, and yes there was a useful post there, a couple of the members felt the need to tell me that I had in no way enough to FIRE. Apparently a draw down rate of 0.83% isn't safe enough, never mind the pension kicking in later. It seems that the market is no way safe for for an all equity portfolio, even though I could live of half of the dividends my vanguard world fund (VWRD) would provide.

The best part was that they couldn't understand why I wanted FIRE at 40 years old. That's far too young!

Just a side note, I do think it's a forum worth respecting in most cases, but unfortunately they seem to have no concept of mustachianism.

BlueMR2

  • Handlebar Stache
  • *****
  • Posts: 2008
Re: 0.83% draw down rate is doomed to fail!
« Reply #1 on: November 20, 2015, 03:14:47 AM »
I do have to agree with the one statement from that thread though - "Where do you ALWAYS get that job?"  Knowing talented people myself that have been out of work for years now, long out of unemployment, with either no job at all or just a few part time hours here and there trying to scrape by.  It's exceptionally hard to get hired when you have an employment gap.

That doesn't mean "don't do it" to me, but to be realistic, I wouldn't expect to ever find work for someone else again once FIREing.  I'd have starting my own business as a comparable backup plan (but realize the risk that also entails).

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28108
  • Age: -999
  • Location: Seattle, WA
Re: 0.83% draw down rate is doomed to fail!
« Reply #2 on: November 20, 2015, 03:27:03 AM »
Bogleheads is great for investments. Not for early retirement. For normal retirement age, with multiple millions, sure.

To each his own. :)

Your plan sounds great to me!
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

zephyr911

  • Magnum Stache
  • ******
  • Posts: 3628
  • Age: 41
  • Location: Northern Alabama
  • I'm just happy to be here. \m/ ^_^ \m/
    • Pinhook Development LLC
Re: 0.83% draw down rate is doomed to fail!
« Reply #3 on: December 08, 2015, 09:10:56 AM »
I do have to agree with the one statement from that thread though - "Where do you ALWAYS get that job?"  Knowing talented people myself that have been out of work for years now, long out of unemployment, with either no job at all or just a few part time hours here and there trying to scrape by.  It's exceptionally hard to get hired when you have an employment gap.

That doesn't mean "don't do it" to me, but to be realistic, I wouldn't expect to ever find work for someone else again once FIREing.  I'd have starting my own business as a comparable backup plan (but realize the risk that also entails).
One more reason to develop and maintain many skills, and keep doing things in FIRE that could earn income. But do them for free if you like, as a volunteer or for your neighbors.

AlanStache

  • Handlebar Stache
  • *****
  • Posts: 1917
  • Age: 40
  • Location: South East Virginia
Re: 0.83% draw down rate is doomed to fail!
« Reply #4 on: December 08, 2015, 09:32:28 AM »
"revisit in 8-10 years"!!!!!  wtf

Do you have to decide to take the lump sum vs pension when you retire or can you select the pension at retirement in 3 years then change your mind 5 years after that and get a lump sum then? 

The basic math almost definitely says to take the lump sum; and I might question the "security" of the pension; would it still be there after a Black Swan (Greece is cutting pensions right?). 


Reynold

  • Stubble
  • **
  • Posts: 229
Re: 0.83% draw down rate is doomed to fail!
« Reply #5 on: December 08, 2015, 01:07:10 PM »
Some people are very risk-averse; long ago I put together a spreadsheet to calculate what we needed to save for retirement, and being a good engineer type put in adjustments for inflation, investment return, etc.  This was before any online resources existed to check these things.  My DW immediately wanted me to check what our savings rate would have to be for conditions of 10% inflation, which she had seen in her lifetime, and 2% returns (not real returns, total returns, so -8% on your money each year), which she had also seen, for all time including retirement.  This assumption, of course, gave staggeringly high savings rates needed for any kind of even vaguely early retirement rate.   

So if someone doesn't trust or understand the much more sophisticated analysis done by the like of Kitces, like my friends who saw their 401k drop from 700k to below 200k in 2009, and say it still hasn't recovered over 200k (!!!), and didn't know then or now what it was invested in, even categories, like stocks vs. bonds, the market is a Scary and Dangerous Place. . .

AZDude

  • Handlebar Stache
  • *****
  • Posts: 1298
Re: 0.83% draw down rate is doomed to fail!
« Reply #6 on: December 08, 2015, 01:41:24 PM »
I do have to agree with the one statement from that thread though - "Where do you ALWAYS get that job?"  Knowing talented people myself that have been out of work for years now, long out of unemployment, with either no job at all or just a few part time hours here and there trying to scrape by.  It's exceptionally hard to get hired when you have an employment gap.

That doesn't mean "don't do it" to me, but to be realistic, I wouldn't expect to ever find work for someone else again once FIREing.  I'd have starting my own business as a comparable backup plan (but realize the risk that also entails).

A talented person can always find a job to make some money, even if its not the $100K they were making. The thing is, you dont need that $100K in a worst case scenario, you just need enough to pay your expense, which is like $30K. A $30K job is not that difficult to come across if you work hard and have good decision making skills.

MgoSam

  • Magnum Stache
  • ******
  • Posts: 3643
  • Location: Minnesota
Re: 0.83% draw down rate is doomed to fail!
« Reply #7 on: December 08, 2015, 02:01:39 PM »
I do have to agree with the one statement from that thread though - "Where do you ALWAYS get that job?"  Knowing talented people myself that have been out of work for years now, long out of unemployment, with either no job at all or just a few part time hours here and there trying to scrape by.  It's exceptionally hard to get hired when you have an employment gap.

That doesn't mean "don't do it" to me, but to be realistic, I wouldn't expect to ever find work for someone else again once FIREing.  I'd have starting my own business as a comparable backup plan (but realize the risk that also entails).

A talented person can always find a job to make some money, even if its not the $100K they were making. The thing is, you dont need that $100K in a worst case scenario, you just need enough to pay your expense, which is like $30K. A $30K job is not that difficult to come across if you work hard and have good decision making skills.

Agreed. My plan if you can call it as such, is to volunteer and/or work in non-profit after reaching FIRE. This will provide some income, and hopefully it is enough to live off so as to not need touch my stash. My fear is that I have grown used to being my own boss and directed the actions of my small company, I can't imagine not being in control and taking orders...and also being unable to change things if I don't like the way things are being done. Of course, it will also be nice to mentally clock out at the end of the day, and theoretically not need to bring my work home with me on at night, on weekends, and occasionally while on vacation.

sirdoug007

  • Pencil Stache
  • ****
  • Posts: 587
  • Age: 39
  • Location: Houston, TX
Re: 0.83% draw down rate is doomed to fail!
« Reply #8 on: December 08, 2015, 02:43:47 PM »
If you are confident your expenses will remain at $1100/month ($13.2k/year), and you have $500k, why not FIRE today?  That is a 2.6% withdrawal rate not even counting your side gig or future pension.

patrickza

  • Pencil Stache
  • ****
  • Posts: 547
  • Age: 40
    • The Investor Challenge
Re: 0.83% draw down rate is doomed to fail!
« Reply #9 on: December 08, 2015, 11:41:05 PM »
If you are confident your expenses will remain at $1100/month ($13.2k/year), and you have $500k, why not FIRE today?  That is a 2.6% withdrawal rate not even counting your side gig or future pension.

I'd like to be able to spend more if I wanted to, plus I'm still enjoying what I do :)

shotgunwilly

  • Pencil Stache
  • ****
  • Posts: 547
Re: 0.83% draw down rate is doomed to fail!
« Reply #10 on: December 09, 2015, 10:13:00 AM »
Some people are very risk-averse; long ago I put together a spreadsheet to calculate what we needed to save for retirement, and being a good engineer type put in adjustments for inflation, investment return, etc.  This was before any online resources existed to check these things.  My DW immediately wanted me to check what our savings rate would have to be for conditions of 10% inflation, which she had seen in her lifetime, and 2% returns (not real returns, total returns, so -8% on your money each year), which she had also seen, for all time including retirement.  This assumption, of course, gave staggeringly high savings rates needed for any kind of even vaguely early retirement rate.   

So if someone doesn't trust or understand the much more sophisticated analysis done by the like of Kitces, like my friends who saw their 401k drop from 700k to below 200k in 2009, and say it still hasn't recovered over 200k (!!!), and didn't know then or now what it was invested in, even categories, like stocks vs. bonds, the market is a Scary and Dangerous Place. . .

Yea, that didn't happen. Unless their 401k was invested in just a handfull of companies, in which case it was their own fault for not understanding risk.

Even if they were invested in 100% stocks (via an S&P 500 fund or the like), they saw something like a 55% drop. Not >71%.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28108
  • Age: -999
  • Location: Seattle, WA
Re: 0.83% draw down rate is doomed to fail!
« Reply #11 on: December 09, 2015, 10:15:46 AM »
Besides the fact that they may have been undiversified, people exaggerate.  They likely didn't know their own numbers.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

nereo

  • Senior Mustachian
  • ********
  • Posts: 11098
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: 0.83% draw down rate is doomed to fail!
« Reply #12 on: December 09, 2015, 10:34:19 AM »
Besides the fact that they may have been undiversified, people exaggerate.  They likely didn't know their own numbers.
This.  I'm amazed at the continuous disconnect between what the average citizen believes about finances and what is actually true.  According to some polling estimates, 64% of Americans think we are in a recession, a slight majority think that investing long-term money in the stock market is a bad idea, and a large majority thinks SP500 returns over the last 6 years were 'flat' or 'negative' (real annualized returns with dividends are 12.4% - a fantastic run).

People hear doom-and-gloom about the economy all the time and conclude they have done far worse than they have. 

honeybbq

  • Handlebar Stache
  • *****
  • Posts: 1270
  • Location: Seattle
Re: 0.83% draw down rate is doomed to fail!
« Reply #13 on: December 09, 2015, 12:03:22 PM »
I guess in my mind I agree with the (at this point) one person who brought up you might not have enough because of health care. In the US, a stand alone health plan might be well over $1000 a month, and who knows what it could be in 20 years. That $1000 would be almost doubling your burn rate.

But you are right, BH, in general, has no concept of super low expenses and MMM. I think they both have their good points.