The Money Mustache Community

Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: brooklynguy on November 15, 2013, 07:40:16 AM

Title: Knowing When to Pull the Trigger (In Light of Market Fluctuations)
Post by: brooklynguy on November 15, 2013, 07:40:16 AM
Hello all,

Can anyone offer any advice on how fluctuations in the size of one's stash due to market volatility factors in to one's decision to pull the trigger on early retirement?  For example, let's say I have determined that I need $500K to attain financial independence.  And let's assume I have a current stash of $400K, in a volatile market.  In a few months, the market shoots up 25%, and (voila!) I now have $500K.  Should I now declare early retirement, because I have reached FI?  Or should I build in additional safety margin by amassing an even larger stash, knowing that a market correction can easily turn my $500K stash back into $400K (or less).

Would appreciate any thoughts on this issue.  If this topic has been covered previously, I would be grateful if someone could point me to the thread.

Thanks very much!
Title: Re: Knowing When to Pull the Trigger (In Light of Market Fluctuations)
Post by: Eric on November 15, 2013, 03:58:24 PM
Aren't they all volatile markets?

I'll just say two things.  One, it's important to have a safety margin:

http://www.mrmoneymustache.com/2011/10/17/its-all-about-the-safety-margin/

And two, have you seen the FireCalc (http://www.firecalc.com/) website?  (Or cFIREsim (http://www.cfiresim.com/input.php)?)You can run scenarios there looking at different factors.  My main takeaway is that if I pull the FIRE trigger, and the markets immediately drop 20%, I'll need to make some adjustments, such as picking up extra work or reducing expenses.
Title: Re: Knowing When to Pull the Trigger (In Light of Market Fluctuations)
Post by: i_am_the_slime on November 15, 2013, 04:37:54 PM
Quote from: Eric on November 15, 2013, 03:58:24 PM
My main takeaway is that if I pull the FIRE trigger, and the markets immediately drop 20%, I'll need to make some adjustments, such as picking up extra work or reducing expenses.

This is really the key.  Basically the only time retiring with a modest withdrawal rate (such as 4%) doesn't work is if the market drops a lot in the first few years of retirement.  And if it does, you can do something about it. 
Title: Re: Knowing When to Pull the Trigger (In Light of Market Fluctuations)
Post by: dadof4 on November 15, 2013, 05:24:44 PM
Quote from: i_am_the_slime on November 15, 2013, 04:37:54 PM
This is really the key.  Basically the only time retiring with a modest withdrawal rate (such as 4%) doesn't work is if the market drops a lot in the first few years of retirement.  And if it does, you can do something about it. 
In many cases that's true. But a scarier scenario arises when the drop happens a bit later in retirement, or a long period of stagnation.

Look at cases of retirements in the mid 60's.

for example, if we take cfiresim's "default" setting ($1M, 40k constant WR, change to 40 year retirement). The guy who retired in 1964, would have reached 1972 with his 'stache at 930k - IOW doing what it should be. But 2 years later, it is at $520k. That guy has been retired for ten years, and will have a harder time going back to his earlier profession. It rebounds a bit, but has no real growth for around a decade, all while our friend is busy withdrawing.

Then again, if he would use a variable spending model (eg reduce his spending to 30k from 1974), he would have enough money to benefit from the nearly 2 decade long bull market starting 1982.
Title: Re: Knowing When to Pull the Trigger (In Light of Market Fluctuations)
Post by: CDP45 on November 15, 2013, 07:08:46 PM
Wade Pfau talks about this on his blog, apparently the first years of retirement returns are the most important for the survivability of the stache, though most don't take into account Social security which is another $15,000/yr? That's quite a big margin representing $375,000 in assets at 4%. It would be interesting to read more about how people are actually retireing. Also Wade's research of actual retirees shows they all reduce expenses as they age, basically if your stache can make it till 80, you're good.
Title: Re: Knowing When to Pull the Trigger (In Light of Market Fluctuations)
Post by: alanwbaker on November 15, 2013, 07:57:36 PM
Quote from: brooklynguy on November 15, 2013, 07:40:16 AM
And let's assume I have a current stash of $400K, in a volatile market.  In a few months, the market shoots up 25%, and (voila!) I now have $500K.  Should I now declare early retirement, because I have reached FI?  Or should I build in additional safety margin by amassing an even larger stash, knowing that a market correction can easily turn my $500K stash back into $400K (or less).

Before you think about pulling the trigger, step back and think about asset allocation.  Those numbers imply that your current asset allocation is 100% equities.  If so, it's no wonder you are worried about market volatility!  Markets are always volatile, so it's important to