Author Topic: Market Fear/ SWR - Irrational Fear?  (Read 22788 times)

tooqk4u22

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Market Fear/ SWR - Irrational Fear?
« on: January 30, 2013, 07:16:31 AM »
Lets say hypothetically I was in a position to pull the chute based on a 4% SWR today (I am not BTW but others may be in this boat) and I can't stop thinking about the last decade, which is obviously driven by the markets touchint their all time highs again. 

The thing I can't stop worrying about is that I stop and then the market falls out again and then all of a sudden my 4% SWR is a 6-8% SWR - and remember that when it comes to the SWR for market investments it assumes capital appreciation is part of that number, not just dividends.  Anyway during these downturns - equities got hammered (down 50%) and balanced funds did too but not as much - Vanguard Balanced (down 35%).  And with an ER you wouldn't be 100% in bonds. 

I know it has been discussed in variations - most of which include returning to work or side income.  So how does one get over this fear - other than "Well I can just go back to work".  If had the number when the market was at the bottom then I wouldn't be as worried. 

Some of this goes to the one more year syndrom that MMM discussed in the lastest post but the psychology of seeing two large drops in the last 10 years makes it hard to get over it and not stop until I can meet a 4% SWR on a 35% drop in the market values or the equivelant of a 2.6% SWR - obviously seems to conservative.   

Anybody out there staring at their portfolio right now and in this position?  Talk us through your thoughts please.


arebelspy

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #1 on: January 30, 2013, 07:26:41 AM »
This is an oft discussed topic on the early-retirement.org forums.

Ultimately there is no way to remove risk and be 100% "safe," so if you need that to be comfortable, you'll never be comfortable. Everyone's sleep at night factor is different, and you'll have to accumulate the amount that will let you stay the course in down times.

All solutions are mathematically inferior (as is almost every "money" advice that is dine for psychological reasons), like a different AA

One possible solution is annuitizing part of your portfolio with an SPIA to provide a barebones spending amount, and let the rest ride the market.

One key is being flexible with spending - i.e. have a budget where you can cut spending if the market dives - and/or have a way to pick up extra income.

Ultimately you just have to keep running FIRECalc and the other retirement calculators and convince yourself that your plan is safe enough, it won't ever be risk free, and take the plunge.  You'll be happy you did.
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Re: Market Fear/ SWR - Irrational Fear?
« Reply #2 on: January 30, 2013, 07:44:49 AM »
As I said in another thread, if you retire with a $1M portfolio, at a 4 percent SWR, you will withdraw $40,000 the first year.  If inflation is 2 percent, the second year you will withdraw $40,800.  If the market drops and your portfolio is $700,000, the SWR theory says you go ahead and withdraw the $40,800.  Yet someone retiring that year with a $700,000 portfolio that is identical in composition can only withdraw $28,000 at a 4 percent SWR.  The future is the same for both portfolios, but the cash withdrawal rate is very different.  Yes, the guy starting withdrawals in the second year has an extra year to pay for, but that's 29 years away.

In my view, the truly safe withdrawal rate is the one that allows you to mostly avoid decumulation or at least allows you to mitigate by reinvesting a portion of what Uncle Sam forces you to withdraw from tax deferred accounts.  Ideally, you would consider dividends, interest and net rental income as the income you could safely "withdraw" in any given year.  Blending the higher return of rental income with the 2 to 3 percent dividend yield might get you to 4 percent most years.  Pension income and Social Security help if they are available to you.

I'm way more conservative than MMM on this issue, but that's my comfort level.  I'm not willing to roll the Monte Carlo dice with my financial well being.

tooqk4u22

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #3 on: January 30, 2013, 08:17:50 AM »
Arebelspy - I realize nothing is risk free, ideally I would like some rentals like you are building to level off some of the cash flow aspect - historically you could do this with REITS but because they are an accepted standard asset class now and pensions/insurance cos have signifcantly increased their allocations REITS now trade with beta in line with other equities and the yields are pathetic to boot.  But as I have said elsewhere, rentals make no sense in my area but I keep looking.

AR - that is the issue.  Seems too conservative but and would delay FIRE quite a bit for people to do this.  No pensions for me and I don't bank on SSI, which will always be there but I beleive it will be means tested at some point but I don't know if it will be income or assets that determine it - to some extent it is means tested now because it becomes taxable at certain levels it just doesn't go back to the SSI program.




arebelspy

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #4 on: January 30, 2013, 08:30:05 AM »
Arebelspy - I realize nothing is risk free, ideally I would like some rentals like you are building to level off some of the cash flow aspect - historically you could do this with REITS but because they are an accepted standard asset class now and pensions/insurance cos have signifcantly increased their allocations REITS now trade with beta in line with other equities and the yields are pathetic to boot.  But as I have said elsewhere, rentals make no sense in my area but I keep looking.

Well this is getting off topic, but why does it have to be in your area?

My area appreciated 25% over the last year, deals are harder to find, and numbers make less sense than they did.  They still work, but every deal isn't a home run anymore cash flow wise.

So I'm looking elsewhere.

I purchased a note on a home in Mississippi last summer.  Right now I'm considering pulling the trigger on a few properties in Ohio, as well as Houston.

If my local market isn't going to give me the numbers I want, and somewhere else will... okay.  I'll go there.

(Disclaimer: I am still investing in Vegas.. last purchase was 12/14/12, hoping to close on another next week... but I'm also looking elsewhere because if the Vegas market keeps going the way it's going, I may be priced out based on my ROI criteria.)
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Re: Market Fear/ SWR - Irrational Fear?
« Reply #5 on: January 30, 2013, 09:06:27 AM »
In real estate, leverage is your friend, when understood and used correctly.  Money right now is cheaper than it has ever been.  The long term benefits of leverage are amazing at current pricing, even with modest assumptions about rents and appreciation.  The tax benefits of real estate are unbeatable, even if you have to wait to use them.  Buy right, hold on for the long term, and you will do very well.

High earners are the carcass the government vultures love the best.  It's the easiest money for them.  That's you, Tooqk4u22.  Look at your total tax bracket and ask yourself if buying generic paper towels or saving a few basis points on equity investing costs make up for this.  In your shoes, I would start studying real estate and looking at properties in areas where the numbers make sense.

Tyler

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #6 on: January 30, 2013, 09:10:04 AM »
Anybody out there staring at their portfolio right now and in this position?  Talk us through your thoughts please.

So I'm not quite there but I'm pretty close.  Close enough to be really watching my spending to see if I'm closer than I realize.

It's a natural fear.  And a common one for personalities who put a lot of faith in spreadsheets and simulations (lots of ER engineers in my experience). And I'm honestly going through the same thought process. 

The analytical side of me says that (like you point out) portfolio volatility in the first few years has a large effect on long-term SWRs.  Therefore, I need to invest in a way that meets my income needs while minimizing portfolio volatility.  That's why I personally like the Permanent Portfolio as the risk of a large negative swing is lower than many other investment strategies (its largest annual loss over 40 years is something like 5%).  Now there are other investment strategies that will perform better over certain economic conditions and (if you're lucky) perhaps up your SWR a little, but for me personally that helps me sleep better at night.  I imagine rentals also have a stabilizing effect (assuming you don't leverage your way to ruin in a housing crash), but that really isn't my cup of tea. 

At the same time, the rational side of me knows that ER is a practical engineering problem and not a theoretical math problem.  For me, the phase I'm going through right now is the "off-spreadsheet" phase.  Basically, what's my plan and are my assumptions realistic?  Do I really want to not work at all for the rest of my life?  If that's not true, why am I putting so much time refining a financial model that is based on a false assumption?  If I'll be happy and fulfilled taking a year off before getting a part time job at an art museum, then that extra few thousand a year totally changes all my financial assumptions and I'm spinning my mental wheels for no good reason. 

Good question.  I'm interested in other approaches as well. 
« Last Edit: January 30, 2013, 09:14:26 AM by Tyler »

skyrefuge

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #7 on: January 30, 2013, 09:21:27 AM »
Anybody out there staring at their portfolio right now and in this position?

It would take only a 3.2% withdrawal from my current stash to cover my expenses, so yeah, I guess I'm in that position. But I'm still sitting in a cubicle, so obviously I don't have any good advice to share!

Well, I have a little. I try to tell myself that the SWR calculations do include the scenario we're worried about, where someone retired just after a big market run-up, and then fell into a hole. And the research found that those situations are either survivable, or too rare to care about. And then I go to FIRECalc and enter my numbers and get a 100% success rate over 50 years, even before I enter any Social Security/pension. I agree that it would be nice to be able to run 50-year scenarios that start in 2000 or 2007 and see how those recent market dives in the first year of retirement would have affected things.

I think the most valuable thing for me would be to find how much of an outlier MMM is. I think he's not quite aware that he's a lot more awesome than the average person, so the fact that his finances have been a runaway success since retirement may not be applicable to everyone. On the other hand, maybe anyone who gets to the point of saving that much money *is* inherently awesome, and MMM's experience is not at all unusual. There just isn't enough data out there for me to know which one is true. I have spent some time at the early-retirement forums searching for case-studies of people who have retired in the last decade or so, to see how many had to start eating dog food. I've found some examples, and no one was eating dog food, so I felt like that sort of thing gives me some encouragement. Though it's hardly a valid statistical analysis...maybe the people eating dog food could also no longer pay for their internet connections so they can't report on their new dining habits.

As I said in another thread, if you retire with a $1M portfolio, at a 4 percent SWR, you will withdraw $40,000 the first year.  If inflation is 2 percent, the second year you will withdraw $40,800.  If the market drops and your portfolio is $700,000, the SWR theory says you go ahead and withdraw the $40,800.  Yet someone retiring that year with a $700,000 portfolio that is identical in composition can only withdraw $28,000 at a 4 percent SWR.

I think in the second scenario, the issue is that the SWR calculations don't "know" that the market dropped 30% the year before. As far as they're concerned, it could have just had a 30% run-up, so hey, let's be safe here because we might be in a bubble that could suddenly pop. Except in reality, it had already popped. So that's probably one of the cases where the final portfolio value would end up ballooning to $10M or something, because the SWR calculation errs on the side of being too conservative.

tooqk4u22

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #8 on: January 30, 2013, 09:23:23 AM »
Well this is getting off topic, but why does it have to be in your area?


Your right....it has something I have thought but really not that much because I have always felt that you need to be within a reasonable drive of the properties - mostly to be sure that they are being kept up and occupied acceptably and you tend know the areas around you better than those far away.

You seem to be buying a property all the time, just curious how much leverage do you use? Also how do you get comfortable with investing in other markets - prices, rents, drivers, quality management that acts in your best interest, etc?


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Re: Market Fear/ SWR - Irrational Fear?
« Reply #9 on: January 30, 2013, 09:23:49 AM »
I forgot to point out the most important aspect of relying on dividends and net rental income, the stability of that income in all types of markets.  When the stock market tanked, most companies, except banks, continued to pay the dividends.  Some dividends got cut, but most stayed the same or even increased.  When my Phoenix properties dropped by half of their peak values or more, the rent checks still arrived every month.  The vacancy and collection loss went up, but by and large, the income remained stable. 

If you hold a strong hand, you won't be forced to liquidate to meet your income requirements in bad markets for the underlying assets.  This is why Warren Buffet would be perfectly happy if the stock market shut down for awhile.  The businesses he owns would continue to operate and to throw off cash as dividends.  Who cares about the market price of an asset at any given point in time if you are not looking to sell?

tooqk4u22

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #10 on: January 30, 2013, 09:27:22 AM »
In real estate, leverage is your friend, when understood and used correctly.  Money right now is cheaper than it has ever been.  The long term benefits of leverage are amazing at current pricing, even with modest assumptions about rents and appreciation.  The tax benefits of real estate are unbeatable, even if you have to wait to use them.  Buy right, hold on for the long term, and you will do very well.

High earners are the carcass the government vultures love the best.  It's the easiest money for them.  That's you, Tooqk4u22.  Look at your total tax bracket and ask yourself if buying generic paper towels or saving a few basis points on equity investing costs make up for this.  In your shoes, I would start studying real estate and looking at properties in areas where the numbers make sense.

Agree completely about the leverage and real estate, and that it smooths out the income when combined with other investments. 

Your also spot on about the tax aspect, which I have largely ignored.  While the tax advantages would be meaningful while I am working they would be less so upon FIRE or if I even dialed working back to a lower pay/stress/hours type of job.  But maybe I should rethink this - I suppose it is possible that the PV of those tax advantages from now until fire might be worth the lower actual return (although I am not crazy about that strategy).

John74

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #11 on: January 30, 2013, 09:37:48 AM »
The 4% SWR rule would have worked if you retired in 1929, at the beginning of a 89% market correction. So it should allow you to overcome some pretty horrid market conditions. However, you have to remember that 4% is only 95% safe for 30 years. Therefore, any young retiree who expects to be retired for more than 30 years should take the 4% rule with a large grain of salt. For us, a lower withdrawal rate or a flexible spending plan are probably in order.

tooqk4u22

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #12 on: January 30, 2013, 09:40:23 AM »
But I'm still sitting in a cubicle, so obviously I don't have any good advice to share!

Funny

I think the most valuable thing for me would be to find how much of an outlier MMM is. I think he's not quite aware that he's a lot more awesome than the average person, so the fact that his finances have been a runaway success since retirement may not be applicable to everyone.

He is pretty awesome and an outlier but the thing is his rental property generates sufficient income to do what he does- he would never be able to match it without the rental, without that I am not convinced he would be as confident in his approach if he had to rely solely on the markets and assuming no side gig/blog/spousal income. 

To the point of AR and Arebelspy - the rental is a key piece as it smoothes out the issues with markets.  If I could get a 10% cash return on half of my worht like MMM then FIRE wouldn't be an issue - and the reality is that a third would be great.  My threshold for rentals is 7% cash on cash due to where rates are right now - I know others subscribe to 10%. All the deals I have looked at in my area are in the 4-5% range - taxes are the killer.


I forgot to point out the most important aspect of relying on dividends and net rental income, the stability of that income in all types of markets.  When the stock market tanked, most companies, except banks, continued to pay the dividends.  Some dividends got cut, but most stayed the same or even increased.  When my Phoenix properties dropped by half of their peak values or more, the rent checks still arrived every month.  The vacancy and collection loss went up, but by and large, the income remained stable. 

I get this but you can't get to 4% purely on dividens/interest without investing in more risky stocks and bonds - but as Arebelspy suggested this can help if you have flexibility in expenses and/or willing to work.

tooqk4u22

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #13 on: January 30, 2013, 09:43:56 AM »
At the same time, the rational side of me knows that ER is a practical engineering problem and not a theoretical math problem.  For me, the phase I'm going through right now is the "off-spreadsheet" phase.  Basically, what's my plan and are my assumptions realistic?  Do I really want to not work at all for the rest of my life?  If that's not true, why am I putting so much time refining a financial model that is based on a false assumption?  If I'll be happy and fulfilled taking a year off before getting a part time job at an art museum, then that extra few thousand a year totally changes all my financial assumptions and I'm spinning my mental wheels for no good reason. 

This is an interesting perspective - while I want to be in a position that I won't have to work ever I don't envision this to be the case.  I like to work, I just want to do it by choice and with the flexibility that if I want to take a few months off at a time then its not an issue (I imagine this is hard to find unless you work for yourself) but even if it is a little bit of income it would change the assumptions considerably.

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #14 on: January 30, 2013, 09:50:07 AM »
Here's an interesting article with some examples of a 4.39 percent SWR.  The most interesting one is 1929, which covers some deflationary years where the withdrawals are reduced.

http://investingforaliving.wordpress.com/2013/01/29/revisiting-the-worst-times-to-retire-in-history-2012-update/

Tooqk4u22:  I said dividends and net rental income.  If you take the 2.7 percent the market currently yields in dividends and your 7 percent cash on cash requirement for real estate, where would you be?

tooqk4u22

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #15 on: January 30, 2013, 10:30:11 AM »
Here's an interesting article with some examples of a 4.39 percent SWR.  The most interesting one is 1929, which covers some deflationary years where the withdrawals are reduced.

http://investingforaliving.wordpress.com/2013/01/29/revisiting-the-worst-times-to-retire-in-history-2012-update/

Thanks for the link - not a bad scenario but I need more than 30years - the whole premise of the 4% SWR is having enough for 30 years - if you have $1 a day after its a win.  Eating into principal isn't the thing that is bad its just when you do it early on in the early retirement scenario when it hurts. 

Tooqk4u22:  I said dividends and net rental income.  If you take the 2.7 percent the market currently yields in dividends and your 7 percent cash on cash requirement for real estate, where would you be?

Don't worry, I caught that - short answer is if I could get a third of my investable net worth into a stable 7% cash on cash return rentals then things would be super as that would translate to a 10% leveraged current return (not IRR).  Problem is that I can't get that without going to other markets - but again maybe I need to rethink this.



arebelspy

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #16 on: January 30, 2013, 12:18:01 PM »
As I said in another thread, if you retire with a $1M portfolio, at a 4 percent SWR, you will withdraw $40,000 the first year.  If inflation is 2 percent, the second year you will withdraw $40,800.  If the market drops and your portfolio is $700,000, the SWR theory says you go ahead and withdraw the $40,800.  Yet someone retiring that year with a $700,000 portfolio that is identical in composition can only withdraw $28,000 at a 4 percent SWR.

I think in the second scenario, the issue is that the SWR calculations don't "know" that the market dropped 30% the year before. As far as they're concerned, it could have just had a 30% run-up, so hey, let's be safe here because we might be in a bubble that could suddenly pop. Except in reality, it had already popped. So that's probably one of the cases where the final portfolio value would end up ballooning to $10M or something, because the SWR calculation errs on the side of being too conservative.

And someone who withdraws 40,800 that 2nd year, regardless of market activity, is a fool, IMO.  Again, flexibility in spending, and being willing to work a side gig in the worst case scenario.

I also want to FIRE and have the option to never work again.  However I don't want to delay it to where this is an actuality (and, as above, one can never remove uncertainty.. world war, for example, could change things).

Perhaps a better way to think about your FIRE probabilities is in that way.. If you have a 95% success rate in FIRECalc, instead of thinking of the 5% as "failure," think of it as a 5% chance you'll have to pick up a little bit of side income OR reduce spending a little bit.  0% chance you'll actually end up with dog food if you're willing to do one (or both) of those things.
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arebelspy

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #17 on: January 30, 2013, 12:27:53 PM »
Your right....it has something I have thought but really not that much because I have always felt that you need to be within a reasonable drive of the properties - mostly to be sure that they are being kept up and occupied acceptably and you tend know the areas around you better than those far away.

Yes, many people feel that way.  I'd rather get a 10% return that's across the country and I never see than one I can drive by and get 7%.  YMMV.  (Numbers are general for illustrative purposes, do not necessarily apply to my market, or yours.)

You seem to be buying a property all the time

Probably seems like I'm buying more than I am, because I constantly have stuff in escrow (so I may post "yay, getting another one" because I'm excited and it's relevant to a thread), and then it gets pushed back due to one reason or another, then a few months later I say "yay, bought one" but it's the same one referenced before.  In 2012 I purchased 4 (two flips, two buy and holds) plus the note, about every other month.  Hoping to purchase 5-6 this year.

just curious how much leverage do you use?

Depends on your view of leverage.  Some would say a risky amount, some would say a prudent amount.  I put down 25% on each property I purchase.  Then my repairs costs (on a non fix and flip rehab, but one in better shape for my long term buy and hold portfolio, basic stuff like paint and carpet) generally average another 5-10%.

Also how do you get comfortable with investing in other markets - prices, rents, drivers, quality management that acts in your best interest, etc?

Research, talking to knowledgeable people in the area (nothing beats boots on the ground), and feeling comfortable with the numbers.  Pick a market you think has potential, then talk with some experts in the area, you may find opportunity.

Another thing that helps is being willing to live with less than perfect conditions and change them (i.e. bad property manager? Fire them and find a new one.) without stressing about it.
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 two 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.

tooqk4u22

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #18 on: January 30, 2013, 01:21:01 PM »
Probably seems like I'm buying more than I am, because I constantly have stuff in escrow (so I may post "yay, getting another one" because I'm excited and it's relevant to a thread), and then it gets pushed back due to one reason or another, then a few months later I say "yay, bought one" but it's the same one referenced before.  In 2012 I purchased 4 (two flips, two buy and holds) plus the note, about every other month.  Hoping to purchase 5-6 this year.

Still pretty impressive/active.

Depends on your view of leverage.  Some would say a risky amount, some would say a prudent amount.  I put down 25% on each property I purchase.  Then my repairs costs (on a non fix and flip rehab, but one in better shape for my long term buy and hold portfolio, basic stuff like paint and carpet) generally average another 5-10%.

75% LTV is not too aggressive especially if you can get the 7+% cash on cash with reasonable underwriting assumptions.

Research, talking to knowledgeable people in the area (nothing beats boots on the ground), and feeling comfortable with the numbers.  Pick a market you think has potential, then talk with some experts in the area, you may find opportunity.

Another thing that helps is being willing to live with less than perfect conditions and change them (i.e. bad property manager? Fire them and find a new one.) without stressing about it.

Thanks - now that I think about it the darn full time gig may be an impediment.  Certainly as a teacher you have more lattitude than I do to explore these markets/managers in the summers - not that you don't do this throughout the year too - but I imagine having that time in the summers to tour, find, interview, repair, etc makes it a little easier.

One more reason to FIRE

arebelspy

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #19 on: January 30, 2013, 02:22:52 PM »
Thanks - now that I think about it the darn full time gig may be an impediment.  Certainly as a teacher you have more lattitude than I do to explore these markets/managers in the summers - not that you don't do this throughout the year too - but I imagine having that time in the summers to tour, find, interview, repair, etc makes it a little easier.

That's complainy-pants talking.  :)

I don't get any more done in the Summer than the rest of the year (and actually probably less).  And I do summer school in the summers anyways.  Most of the following is coincidence, however winter months sellers are a little more desperate, and owner occupant buyers aren't looking to move = less competition.  Plus bank sellers often want to close before the end of the calendar year to get assets (toxic or not) off the books, so I have a lot of December due to that reason.

My purchases have been:
December, December, November, December, December, January, February, July, December.

1 summer, 8 fall/winter.

Purchases aside, I actually attend at least two real estate investor's meetings every month regardless of the season.  Sometimes it sucks giving up my Saturdays, but it's for the long term, so I put in the time.  You may want to look into some of those.  Meetup.com is a great place to start.
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tooqk4u22

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #20 on: January 30, 2013, 02:29:25 PM »
That's complainy-pants talking.  :)

Your right, thanks for calling me out on it. I toured five properties two weekends ago, its not giving up my Saturday that was the issue it was giving up my Saturday with the kids but still did it.

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #21 on: January 30, 2013, 03:08:41 PM »
Arebelspy:

Which Las Vegas investors' association do you belong to?  I looked on line hoping to make some contacts, but for the most part they appeared to be scammy organizations designed to sell stuff.

arebelspy

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #22 on: January 30, 2013, 04:19:19 PM »
Arebelspy:

Which Las Vegas investors' association do you belong to?  I looked on line hoping to make some contacts, but for the most part they appeared to be scammy organizations designed to sell stuff.

Some are.  But if I can network with the 20-50 people there before and after the meetups and during breaks, I'm willing to sit there and ignore their sales pitches. :)

Honestly, I don't learn much attending them anymore, I only go for networking.  I'm happy if I get one new or good idea per meeting, which is about what I average.

My meetup.com profile is here: http://www.meetup.com/members/29320332/

There you can see which groups I am a member of.  Some are inactive, and I'm only on there in case they ever become active.  You can see which ones are active (and which ones I've attended) by clicking on the individual groups.
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Re: Market Fear/ SWR - Irrational Fear?
« Reply #23 on: January 31, 2013, 12:19:44 AM »
I'm really interested in this thread a) because I'm nearly there but not yet badass enough expenses wise (slow learner) and I need to reposition my allocations to suit retirement (not realising until fairly recently how close I potentially am),                            and b) because I independently came to the conclusion a month or two ago, that having a rental or two providing all or more than say half of my expenses would be helpful in to stabilise a retirement income a la MMM.

As regular readers will know I am in my mid 50s, so my time line is a bit different to you youngsters.
My thoughts are in no particular order: (FWIW)

1. If I invest in real estate in Australia this will probably (as far as I know now)  mean a low ROI due to the costs here, but as long as I can get a ROI better than the cash rate, I am starting to think I am prepared to accept this for stability of cash flow. i.e. stability carries a price in opportunity cost, that you may not wish to pay whilst accumulating, but may be acceptable after retirement.

2. Retired Syd http://retiredsyd.typepad.com is a retired accountant who retired just before the big crash in US and she chronicles how they survived by reducing spending...and a part-time work gig for a while.... now back to where they were when she retired 5 years ago. Its not ideal sequencing but is survivable. What I take from this is make sure there is a bit of fat in your expenses when you do the calculations, so you can cut spending if you get bad sequencing or returns. At least if it happens shortly after you retire, you still have contacts and are more likely to pick up a bit of work.

3. Whilst I probably have a couple of decades less  to cover than most of you, the downside is, that the possibility of picking up work if needed after retirement is probably harder due to poorer employment prospects as one gets more mature. So launching out in a "hobby job", or just finding a part-time gig  may turn out to be a bit riskier than for a young person. Or not, who knows.

4. I'm currently working half time, semiretired and life has become much more fun. I'm doing some of the things I always wanted to, and have even swept leaves in my driveway in my pyjamas on a weekday morning.  Hah, my teenage asked me today "how come you only get to work 3 days and I have to go to school 5 days?" The job is less sucky this way. The only thing I'm missing out on with regard to "Full retirement" is the ability to take a really long holiday....and I could probably swing leave without pay at some point.

5. One scenario I'm thinking of is at some point to cut my hours down further to maybe 1 day a week  or at least to cover my expenses.... keep going until the stash is "ridiculously safely large". If I want some months off at a time, then long service leave or LWOP. I'm lucky in that my job will almost certainly tolerate this sort of reduction, particularly if I don't resign. As has been said before, I think the safest plan is to always be increasing or at least maintaining your net worth in line with inflation  and live on a proportion of the income from the stache. So I define "ridiciulously safely large" as when I am consistently living on less than my investment income and the stache is stable with inflation or  continuing to increase in good years.

6. I guess you could say I'm going to slide into full retirement, rather than going all out and pulling the plug, all or nothing style. This suits my personality... I quite like to dip my toe in and get a taste, before making any irreversible decisions.

arebelspy

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #24 on: January 31, 2013, 06:04:25 AM »
1. If I invest in real estate in Australia this will probably (as far as I know now)  mean a low ROI due to the costs here, but as long as I can get a ROI better than the cash rate, I am starting to think I am prepared to accept this for stability of cash flow. i.e. stability carries a price in opportunity cost, that you may not wish to pay whilst accumulating, but may be acceptable after retirement.

I certainly wouldn't invest in real estate if it was providing LOWER returns, due to the work involved.  I suppose "stability" is one way to look at it, but wait for a vacancy, then tell me that income is stable. ;)

It definitely needs to provide a higher return, or I'm sticking my cash somewhere that is higher, or the same but less work. But YMMV.

And, as I've frequently said to people here in the states who have an overpriced local market: look elsewhere.  I personally know of Aussies who are investing here in the States, but you're also close to all the Asian markets.  Plenty of opportunity for you, why would you accept anemic returns?

2. Retired Syd http://retiredsyd.typepad.com is a retired accountant who retired just before the big crash in US and she chronicles how they survived by reducing spending...and a part-time work gig for a while.... now back to where they were when she retired 5 years ago. Its not ideal sequencing but is survivable. What I take from this is make sure there is a bit of fat in your expenses when you do the calculations, so you can cut spending if you get bad sequencing or returns. At least if it happens shortly after you retire, you still have contacts and are more likely to pick up a bit of work.

The stock market has doubled over the last three years.  As long as you didn't panic and sell low, you're back where you started.  Now granted, withdrawals make this not as likely, but I'd have imagines nearly anyone retiring would have at least a year's expenses in cash just to fund year 1, and often 2-5.

Many retirees on the e-r.org forums retired in the same timeframe and are doing just fine.
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 two kids.
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Re: Market Fear/ SWR - Irrational Fear?
« Reply #25 on: January 31, 2013, 06:19:47 AM »
Food for thought ARS, thanks :). I've  had some of the ideas you suggest, but probably should investigate a bit more seriously. I think I joined earlyretirement.org but got distracted  by something or other and have spent no time there. Sounds like its worth a look.

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #26 on: January 31, 2013, 07:14:41 AM »
I retired in my early 50's.  I survived both the housing and stock market crashes, took even more equity out of my house to buy houses on sale for cash, and never looked back.  The rent checks came in, the dividends got reinvested. 

Retired Syd is a very high income earner who is entirely invested in paper for income.  Yes, she has a nice house in an expensive area of the Peninsula and a second home in the wine country, but her income comes from that paper portfolio.  Frugality, especially in her hobbies, is not a big part of her game plan.  A long bear market in paper assets would put a big crimp in the money flow because decumulation is part of the plan.

Having said all that, I'm not sure what I would have done under your system.  I probably would have looked elsewhere for real estate, because the yields do not produce sufficient cash flow where you are.   But the anti-wealth accumulation bias of your tax system would have been a really big challenge.

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #27 on: January 31, 2013, 12:43:23 PM »
And, as I've frequently said to people here in the states who have an overpriced local market: look elsewhere.  I personally know of Aussies who are investing here in the States, but you're also close to all the Asian markets.  Plenty of opportunity for you, why would you accept anemic returns?

Because that's what we do here in Australia as there's only ever been a mild fall or a plateau in house prices for a few years here, otherwise it has been bountiful capital gains. This is why Aussies are prepared to accept crap yields, because the capital gain fairy has always saved the day.

I'm not one of them though. While I don't think our prices will tank like they did in the USA and parts of Europe, I also don't think there's much more to milk out out of them and I expect we're in for a decade of flat prices. So crap yields and high, flat prices don't add up to a great place to put one's stash IMO. But, as, I have been wrong for decades on this, it all depends on when Australia's irrationally exuberant love affair with real estate comes to an end!

tooqk4u22

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #28 on: January 31, 2013, 12:55:11 PM »
And, as I've frequently said to people here in the states who have an overpriced local market: look elsewhere.  I personally know of Aussies who are investing here in the States, but you're also close to all the Asian markets.  Plenty of opportunity for you, why would you accept anemic returns?

Because that's what we do here in Australia as there's only ever been a mild fall or a plateau in house prices for a few years here, otherwise it has been bountiful capital gains. This is why Aussies are prepared to accept crap yields, because the capital gain fairy has always saved the day.

I'm not one of them though. While I don't think our prices will tank like they did in the USA and parts of Europe, I also don't think there's much more to milk out out of them and I expect we're in for a decade of flat prices. So crap yields and high, flat prices don't add up to a great place to put one's stash IMO. But, as, I have been wrong for decades on this, it all depends on when Australia's irrationally exuberant love affair with real estate comes to an end!

A notable exception between Australia and US/European Countries is that the debt/GDP is nonexistent - that will keep the AUS$ stable/strong.  Another driver of housing is the declining interest rates and private sector debt seems pretty staggering - a reversal in these could hit housing in Australia.

And just like the US - Australia's economy is 2/3rds services but isn't as diversified - so if commodities exports to China slow it could be disruptive to the Aussie economy.

DoubleDown

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #29 on: January 31, 2013, 02:13:27 PM »
I think one easy way to overcome the fear is to remove the source of the fear: namely, the volatility/risk of markets in our retirement planning. Just before I ER (planned within the next year), I will move a large portion of my investments into "safe" assets, at least for the earlier years of retirement. Large market swings won't matter, my portfolio won't be decimated in the first few years.

All the naysayers will naysay, "But inflation will kill you in the long run!"  Yes, it COULD in the long run, if you were dumb. But you are not dumb. And I will gladly accept the long-term risk of inflation to eliminate the short-term risk of having my portfolio destroyed early. And I will be flexible and pay attention to inflation, and moderate my investing/spending/withdrawal accordingly. In later years, we can be more aggressive in investing and withdrawing, when the time horizon for living off the stash is shorter, and when taking out principal won't be scary.

Here's an example, using a $1MM stash for ease of use, a very early (i.e., long) retirement, and a very negative/conservative outlook (and you still win):

- In 2013, you're 35, and have a $1MM stash. You ER.

- You put 80% of your stash in "safe" investments getting only a 4% real rate of return. The other 20% is in growth assets, hoping for a 8-10% real rate of return.

- Over the next 20 years, you are more or less following a 4% SWR (maybe juggling things a bit during down years, reinvesting extra gains during good years, or working a part time gig since you're still young)

- On average, you will not have touched your principal, and the likelihood of this is extremely high (maybe even guaranteed), because you are in super-safe assets for the bulk of your stash. And you're flexible in your lifestyle. Your smaller investment (20% of stash) in growth assets might have even increased your overall stash, plus part time work, plus NOT increasing spending with inflation to the extent you can (like Arebelspy said above, you don't keep increasing your withdrawal no matter what the market is doing)

- On average, inflation could have have eaten away a fair amount of your purchasing power. 20 years later, at 2% inflation, your $1MM stash may now only be worth $670,000 (in 2013 dollars)

- But who gives a F***? Now you're 55, and you can be much more confident about starting to withdraw principal in those down years, if needed. You probably only have 30 years to live

- Another 10 years passes -- you are 65. Maybe to keep up your purchasing power, you had to eat your stash down to $800k (worth only $500k in 2013 dollars). Wow, you used up $200k of your stash living pretty high on the hog! Plus you probably get SS now

- Who gives a F*** your stash is worth less? Start going into that principal with more abandon if you must, you only have another 20 - 25 years to live, if you're lucky! Spend the SS, keep being flexible, and "only" $500k in 2013 dollars will still get you a long way

James

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #30 on: January 31, 2013, 02:28:42 PM »
- But who gives a F***? Now you're 55, and you can be much more confident about starting to withdraw principal in those down years, if needed. You probably only have 30 years to live

- Another 10 years passes -- you are 65. Maybe to keep up your purchasing power, you had to eat your stash down to $800k (worth only $500k in 2013 dollars). Wow, you used up $200k of your stash living pretty high on the hog! Plus you probably get SS now

- Who gives a F*** your stash is worth less? Start going into that principal with more abandon if you must, you only have another 20 - 25 years to live, if you're lucky! Spend the SS, keep being flexible, and "only" $500k in 2013 dollars will still get you a long way


Wow, that's pretty pessimistic regarding your life expectancy. Look at this line going up. And then consider that mustachians in general are going to be the healthy ones very likely beating those odds by a wide margin. We could easily live beyond 100 given healthy living and rising life expectancy, and who knows what the future brings in control of aging.  I plan on keeping my purchasing power intact if at all possible, and your method doesn't cut it for me.

tooqk4u22

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #31 on: January 31, 2013, 02:42:11 PM »
I think one easy way to overcome the fear is to remove the source of the fear: namely, the volatility/risk of markets in our retirement planning. Just before I ER (planned within the next year), I will move a large portion of my investments into "safe" assets, at least for the earlier years of retirement. Large market swings won't matter, my portfolio won't be decimated in the first few years.


Ummm...yes, but don't take this personally I think your thoughts on how to do this are misguided and fraught with risk - see below.

All the naysayers will naysay, "But inflation will kill you in the long run!"  Yes, it COULD in the long run, if you were dumb.

Call me a naysayer but yes inflation will kill you.


Here's an example, using a $1MM stash for ease of use, a very early (i.e., long) retirement, and a very negative/conservative outlook (and you still win):

- In 2013, you're 35, and have a $1MM stash. You ER.

- You put 80% of your stash in "safe" investments getting only a 4% real rate of return. The other 20% is in growth assets, hoping for a 8-10% real rate of return.

There is nothing safe that will give you a real rate of return of 4% right now - the real return on the 10 US Treasury is -0.2% currently.  And 8-10% real return would beat the historical average for the equities market and is about what it would be nominally.

Just to be clear a real return is inflation adjusted and a nominal term is the actual return not adjusted for inflation (maybe they should have called it the true return and the real return instead for clarity).

- Over the next 20 years, you are more or less following a 4% SWR (maybe juggling things a bit during down years, reinvesting extra gains during good years, or working a part time gig since you're still young)

Yup, year one you are taking out $40k.



- On average, you will not have touched your principal, and the likelihood of this is extremely high (maybe even guaranteed), because you are in super-safe assets for the bulk of your stash. And you're flexible in your lifestyle. Your smaller investment (20% of stash) in growth assets might have even increased your overall stash, plus part time work, plus NOT increasing spending with inflation to the extent you can (like Arebelspy said above, you don't keep increasing your withdrawal no matter what the market is doing)

Regardless of what ARS said, and I agree with him BTW, the SWR does assume you pull out 4% of the initial investment pool and adjust for inflation/deflation each year - it is not 4% of the that years investment pool.  Either way you will only have so much slack in your expenses.

- On average, inflation could have have eaten away a fair amount of your purchasing power. 20 years later, at 2% inflation, your $1MM stash may now only be worth $670,000 (in 2013 dollars)

Assuming you can get a 4% REAL return in SAFE investments then maybe this would work but see above and if you go with your version of the 4% rule you would have to have cut out $13k out of your spending.  And 2% is a bit light for long term inflation assumptions. Oh yeah, if you had 80% of your portfolio in bonds and inflation was running at 2% your portfolio will be down more than that because interest rates will be rising and because you are living off of the income and not reinvesting it the value will go down.

I agree with your starting premise but I think your off on your analysis to get there. Think about it a bit longer.

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #32 on: January 31, 2013, 02:50:53 PM »
If one could get a 4% real return on safe assets, this early retirement thing would be easy peasy.

tooqk4u22

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #33 on: January 31, 2013, 02:56:17 PM »
If one could get a 4% real return on safe assets, this early retirement thing would be easy peasy.

yup

slight edit to one of my comments
Quote
There is nothing safe that will give you a real rate of return of 4% right now

......or ever.

DoubleDown

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #34 on: January 31, 2013, 03:04:55 PM »

Just to be clear a real return is inflation adjusted and a nominal term is the actual return not adjusted for inflation (maybe they should have called it the true return and the real return instead for clarity).


Sorry, should have said nominal return in my example, not real rate of return. I think getting a 4% nominal return over the long run should be pretty straightforward, at a low risk. In which case, I don't think inflation will kill me. Inflation has been pretty much non-existent in the last few years, has it not? Obviously it won't always be that way, but there's usually/often a connection between inflation and return rates on "safe" investments. I.e., rates on safe investments are very low right now, but so is inflation.

And thanks John for essentially the same point!

So IF you could get a 4% NOMINAL rate of return, do you still think my plan as laid out is fraught with peril?


DoubleDown

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #35 on: January 31, 2013, 03:05:26 PM »
We could easily live beyond 100 given healthy living and rising life expectancy, and who knows what the future brings in control of aging.  I plan on keeping my purchasing power intact if at all possible, and your method doesn't cut it for me.

Yeah, I hear ya James. I'm actually not meaning to convey pessimism in regards to life expectancy, and I understand your approach to preserving purchasing power. And I can't fault your approach, being able to preserve your purchasing power is all good. But to preserve that purchasing power, you have to accept the risk to your stash up front (i.e., bad sequencing).

I'm trying to convey that I think we can be a lot less cautious with drawing down principal in those later years by being more cautious with our investments up front. The need for protecting purchasing power relative to inflation will diminish as we age, that's the larger point I'm trying to make. In my quick example, I was saying that even in an almost worst-case scenario, with "only" $500k in 2013 dollars left at age 65, that's a lot to live on! I think we'd likely agree that just about any of us should be ready to retire at 65 with $500k in today's dollars, plus a likely SS income.

And, consider the alternative: the scenarios that fail with bad sequencing up front mystify me a bit, because I can't really envision being heavily leveraged in assets that could destroy your purchasing power so much in the first years (through down markets), it effectively wrecks your entire ER plan. It's not worth it (IMO) to invest in a way that so heavily risks your stash up front in order to try to beat inflation way down the line. "My" plan eliminates that risk, and the only risk to purchasing power (if the risk is realized at all) is pushed way down to the end of the line, when sequencing won't really matter and principal is more readily available.

Thanks for your thoughts, I'm always welcome to more insight or criticism to point out any potential pitfalls!

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #36 on: January 31, 2013, 03:24:08 PM »
Oh god, a 4% nominal return is terrible.  Inflation is probably 3%, so you're talking a 1% real return.  And when it hits double digits and your portfolio is ravaged in purchasing power, you lose, hard.

DOubledown, you need to read up on inflation.  It is the #1 enemy of an early retiree.  Market volatility is nothing.

I'll take a 50% drop and riding it out.  But inflation will erode your buying power and kill you.
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Re: Market Fear/ SWR - Irrational Fear?
« Reply #37 on: January 31, 2013, 03:27:37 PM »


So IF you could get a 4% NOMINAL rate of return, do you still think my plan as laid out is fraught with peril?

In this low inflation environment, finding safe assets paying 4% nominal is quite difficult. CDs pay less than 2%. Treasuries even less. AAA-rated corporates don't fare much better.

Over the long term, safe assets tend to have very low real returns. But given that safe assets are currently very overvalued, I think we should expect returns lower than the historical average and I wouldn't be surprised to even see negative real returns on those assets in the future (look at the TIPS market for hints). So if you invest only in the safest of assets, you will generally have to dip heavily into the principal in real term in order to finance your retirement. For older people it may be OK, but for younger retirees it seems quite risky.


DoubleDown

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #38 on: January 31, 2013, 04:05:23 PM »
I agree about the risk of inflation. We're probably all largely agreeing and I'm just doing a poor job with my example. Maybe any area of disagreement or difference of opinion is the allocation we're comfortable with between higher- and lower-risk investments. I totally understand the notion that you need to have an aggressive investment strategy to make it through a 50+ year retirement, unless you have other areas of income to rely on (pension, rental income, etc.).

I can't stomach the idea of having my portfolio take a huge hit right as I'm retiring, but I'm also in the young man/old man category (I have a relatively short window where my stash has to survive before pensions/etc. kick in with guaranteed income streams indexed to inflation). But even if I didn't have those things, I'd go with a smaller SWR and/or a more conservative investment strategy so I'm not up at night worrying about market downturns that ravaged my portfolio up front. As I said, in later years I should be more comfortable about blowing through some of the principal, and even with the effects of inflation, you should still have a healthy amount of your stash left over with none of the stomach-churning ups and downs along the way.

So adjust the numbers to your own scenario, but I'd still say one way to remove the fear (per the OP) is NOT to be leveraged too heavily in risky investments, at least for the first few years of retirement. See how it goes, re-balance each year as needed. If you fear inflation is starting to kick your ass, then step it up accordingly or find another way to reduce that risk. We all know rental real estate is one proven way to do that. Rents go up with inflation, blah blah. But I'm not going to be in that 90% stocks/10% bond camp!

And to my earlier point: If I'm in safe investments the first couple of years, and continuing to add to the stash through some part time, fun work while I'm still young, who cares if inflation is 2 or even 3% those years? My stash will have only grown even huger (in both real and nominal terms).

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #39 on: January 31, 2013, 04:12:52 PM »
It won't grow the way it needs to in order to be large enough to sustain when inflation eventually rears its ugly head.

Go play with FIRECalc, and put in some scenarios with a "safe" Asset Allocation over 40 years.
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Re: Market Fear/ SWR - Irrational Fear?
« Reply #40 on: January 31, 2013, 05:02:31 PM »
But even if I didn't have those things, I'd go with a smaller SWR and/or a more conservative investment strategy so I'm not up at night worrying about market downturns that ravaged my portfolio up front.

It certainly would be a valid approach. A TIPS ladder is as safe as it gets and, at current (negative) rates, a WR of 2% would ensure that you maintained your purchasing power for roughly 45 years.

tooqk4u22

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #41 on: January 31, 2013, 06:02:22 PM »

So IF you could get a 4% NOMINAL rate of return, do you still think my plan as laid out is fraught with peril?

Ignoring the current fed twist, if you got a 4% nominal return you would have to take 3% of it and reinvest in new bonds to maintain the purchasing power (i.e. no dipping into) your principal assuming inflation averages 3% and you would be left with 1% - this is your SWR in your early years with that kind of portfolio to ensure that in your later years your principal is there with the same purchasing power to be used. 

If this is your plan you may be further from FIRE than you think. 

You are better off with some form of balanced AA - so many to choose but they with the right mix you can smooth volatility, get an ok real return, and some inflation protection - but like anything else nothing is perfect or guaranteed hence why I started the thread.


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Re: Market Fear/ SWR - Irrational Fear?
« Reply #42 on: February 01, 2013, 10:34:45 AM »


You are better off with some form of balanced AA - so many to choose but they with the right mix you can smooth volatility, get an ok real return, and some inflation protection

Yes, I agree with this.

I'm unfairly including assumptions about my own ER scenario that are making the direct question of "is a 4% rate of return enough?" a bit silly, and you guys have legitimately pointed that out. I already know that 4% in assets, by itself, would not be enough for the long haul. In my case, I'll have a paid off mortgage (or current locked in very low rate) and some rental real estate to provide a hedge against inflation. And I will also get a pension and SS payments that will be enough to cover living expenses by themselves, and that will go up with inflation. I also plan to earn a bit on the side the first couple of years to help the stash grow larger, which is technically not a full ER. So I'm being a bit more cavalier with statements like "4% is enough" (for me).

I'll leave it with these main points/questions that I think are valid, as food for thought:

- If one of us was ready to retire tomorrow because we had saved up a stash of $X in Vanguard assets (90% in stocks, 10% in bonds), what would you do if the markets tanked and your stash was now worth 0.5 X or 0.75X? For most, wouldn't it mean working for however many more years to get back to X? I doubt anyone would go forward with their ER the next day if their portfolio was suddenly and drastically reduced like this. And if that's the case, then I think no one is ready to ER if they would change their opinion about being ready based on the market fluctuations in any given day, week, or month.

- We all know bad sequencing is pretty much the primary factor that makes for bad outcomes. So the pressure to get through the early years is probably the hardest and the most uncertain. But fortunately that's when we're still able to exert large amounts of control (take larger investment risks, continue to work on the side every now and again, etc.). So by utilizing the safety margins, we can do easy things to make the stash continue to increase, or at least not decrease, until the window grows smaller for our retirement.

- Inflation has an increasing (compounding) effect over time. The converse is also true -- it has a decreased effect in shorter periods of time. Assuming life spans don't radically change, inflation will be meaningless to us at age 100. It will probably be meaningless even at age 80-90, assuming we can live that long. It will be of some very small importance around age 70, and it keeps increasing in importance as we back up in age (becoming quite important at early ER ages). Again, by pushing off inflationary pressures (preserving your stash) until later years, you are effectively mitigating its impact.

- We've probably all known people who were ready to retire (at a "normal" age of 65) around 2007 - 2009, but had their plans derailed for several years by the market crash. This makes no sense. It is foolhardy to be so heavily leveraged in growth stocks that your stash could be destroyed early, right as you retire, and you have to rely on a resurgence in the market to get back to whole (if it's possible at all).

- For those saying how dangerous inflation is, I think you have to equally acknowledge how dangerous it is to risk your portfolio in the early years through market risk. At least with inflation you can gauge it, follow it, and adjust accordingly. You can't do that with market risk (at least I don't have that crystal ball). Inflation right now is pretty much non-existent, so I can adapt accordingly.

arebelspy

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #43 on: February 01, 2013, 12:08:17 PM »
Definitely food for thought, DoubleDOwn.

I will say I disagree with almost every one of them (4 of the 5 bullet points, only the second I agree with), but they are great questions worth thinking about and having each person reach their own conclusions.

Thanks for sharing your thoughts.
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DoubleDown

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #44 on: February 01, 2013, 12:21:30 PM »
Thanks for your reply Arebelspy. I will say, you definitely have more cojones than me if you'd go forward with an ER even if your stash went down by 50% or whatever (I'm inferring that since you said you disagreed with the other bullet points. More power to you!!

I know I wrote a wall of text, but would you be willing to share some of your thoughts on why you disagree with the other points? Such as, do you disagree that inflation is a non-factor late in life? Or maybe you just don't think that point is relevant, since you're coming from the view that inflation IS a factor to deal with in a very long retirement?

Since you are invested heavily in real estate, wouldn't you say you have effectively hedged yourself against inflation and market downturns, and you won't be heavily leveraged in riskier market assets that could wipe out your cash flow and net worth?

tooqk4u22

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #45 on: February 01, 2013, 01:46:20 PM »
And I will also get a pension and SS payments that will be enough to cover living expenses by themselves, and that will go up with inflation.

If this is truly the case then this is even more justification for more equities.

- If one of us was ready to retire tomorrow because we had saved up a stash of $X in Vanguard assets (90% in stocks, 10% in bonds), what would you do if the markets tanked and your stash was now worth 0.5 X or 0.75X? For most, wouldn't it mean working for however many more years to get back to X? I doubt anyone would go forward with their ER the next day if their portfolio was suddenly and drastically reduced like this. And if that's the case, then I think no one is ready to ER if they would change their opinion about being ready based on the market fluctuations in any given day, week, or month.

Obviously the basis for the OP - I am less comfortable doing it with markets at all time highs and would be more comfortable after a crash.  The working to get back to X is part of it and part of MMMs philosphy - the flexibility aspect - although its not really working to get back to x it is working to supplement until the portfolio/income gets back to X.

But the short answer for me is if the market went down 50% and I wouldn't walk away, that really isn't my fear.  My fear is that I walk away and then it goes down 50%.
 
- We all know bad sequencing is pretty much the primary factor that makes for bad outcomes. So the pressure to get through the early years is probably the hardest and the most uncertain. But fortunately that's when we're still able to exert large amounts of control (take larger investment risks, continue to work on the side every now and again, etc.). So by utilizing the safety margins, we can do easy things to make the stash continue to increase, or at least not decrease, until the window grows smaller for our retirement.

See above, but sequencing is the fear for me.

The big risk. 
- Inflation has an increasing (compounding) effect over time. The converse is also true -- it has a decreased effect in shorter periods of time. Assuming life spans don't radically change, inflation will be meaningless to us at age 100. It will probably be meaningless even at age 80-90, assuming we can live that long. It will be of some very small importance around age 70, and it keeps increasing in importance as we back up in age (becoming quite important at early ER ages). Again, by pushing off inflationary pressures (preserving your stash) until later years, you are effectively mitigating its impact.

I may not unerstand your comment but overall I disagree, but I think what you mean inflation mattes less if I am 100 years old and have a bunch of principal because odds are I will be dead this year or next or certainly not much further off so who cares because I am ok with burning through principal then.  And if that is the case it really comes down to how much principal you have then or ever for that matter - i.e. if I had a $1 trillion today and spend $40k it pretty much wouldn't matter what inflation does over the next 100 years because I am probably not going to spend it all - although with a long run of hyperinflation I guess it would be possible. 

But then you are working longer to build up more stash than you reasonably need as you are not matching risk/return.


- We've probably all known people who were ready to retire (at a "normal" age of 65) around 2007 - 2009, but had their plans derailed for several years by the market crash. This makes no sense. It is foolhardy to be so heavily leveraged in growth stocks that your stash could be destroyed early, right as you retire, and you have to rely on a resurgence in the market to get back to whole (if it's possible at all).

Hence why you need asset allocation that has balancing effect and throws off some portion of stable income from bonds and dividends - and if you can find decent rentals then all the better.

- For those saying how dangerous inflation is, I think you have to equally acknowledge how dangerous it is to risk your portfolio in the early years through market risk. At least with inflation you can gauge it, follow it, and adjust accordingly. You can't do that with market risk (at least I don't have that crystal ball). Inflation right now is pretty much non-existent, so I can adapt accordingly.

They can both be dangerous but it is easier to survive a crash than inflation - if you weather the crash it will recover - once inflation erodes your assets the purchasing power will never come back.

happy

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #46 on: February 01, 2013, 04:17:07 PM »
The other big unknown in all this is ones life span. Not trying to take this off topic - but OP is asking about irrational fears.

The term "life expectancy" leads one to think that this is the length of life one can *expect*. Actually its the average predicted life span, a much better term IMO. So if your life expectancy is 95, you are just as likely to die before as after.  The older you get, the higher your predicted average life span increases. If you make it to 100 your  average predicted life span increases 3 more years.

Then natural tendency is to take ones predicted average life span (and maybe even add a bit more for good measure) and use this as a a solid assumption for our mathematical modelling. Partly driven by fear of death and partly driven by this term "life expectancy" which leads us to think this is what we should expect (as some sort of right? sorry I'm taking the mickey).

So if you plan for your average predicted life span, you've got around a 50% chance of not needing all your stache. Look on the bright side: this is good news, you won't be eating dogfood. If you survive the odds and make it past that date, there's every chance you will need even more than what you planned for.

The effect of  the life "expectancy" variable may well overshadow many other variables like inflation, particularly if you survive much less or much longer.

So its probably wise to add a bit of biology into your financial equations:

1. Don't be fooled by life "expectancy", as a term. Its average predicted life span. You can't assume your life expectancy as a right, and paying extra for an upgrade only works sometimes.
2. Individual biology can affect  predicted life span, its probably worth figuring out where you sit. Long living relatives ie grandparents who lived into their 90s, or relatives who died young, are important variables as well as lifestyle. There are calculators you can google, although I can't vouch for the soundness of them.


Ps edited: Moderator - I don't think there is a thread discussing this issue...if you wish, you could move it or I could start another thread.
« Last Edit: February 01, 2013, 04:55:46 PM by happy »

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #47 on: February 01, 2013, 08:46:14 PM »
The more you rely on the income from your assets and the less you rely on decumulation of those assets, the less sequencing of returns (appreciation, not cash flow) matters.  If the rent and dividend checks arrive, the varying values of underlying assets are far less important.

Lots of folks that choose 4 percent as the SWR from a paper asset portfolio that decumulates are going to spend a lot of time checking account balances and worrying that they are going to run out of money when they should be out living their lives instead.

davidm

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #48 on: February 02, 2013, 05:57:07 AM »
I don't think the OP is being irrational at all. Aged 39, based in UK (we could emigrate to Australia), I expect our spending to peak at around 3.3% of current net worth per year in around 10 years time (and remain at that level for 10 years) before dropping back toward say 2.0%. The weighted average is around 2.5%.

The issue for me is that drawing down at my principal aged 40 seems very risky. My wife and I have statistically around a 20% chance of living to a 100. So we'd have to assume the asset base would need to last for at least another 60 years. Based on something like FIREcalc we look to be safe but of course that's based on US history. Based on equivalent UK history, I'd also be safe but pretty marginal (if I assume a state pension + wife's Australian super + wife's final salary pension that make us safe again).

I see the 20th century as a backtest as a decent proxy because it has two world wars and a number of periods of high inflation (which is the real wealth killer). However, I believe that the vulnerability of the SWR approach is using any one specific countries history as a model for the 21st century. Markets were far more closed (protected) in the 20th century (at least until the last 20 years).  In a highly globalized economy, returns on capital on a 50+ year horizon are far more likely to converge (since there is nothing to stop capital flows moving quickly to where higher returns are available), causing SWRs to converge. So going forward, you'd want to think in terms of stressing your portfolio over all countries' histories, rather than just the US. Given that the range in SWRs in the last 100 years is anything between 0.5% (Japan) and 4.5% (US/Canada), the bottomline for me is that that I can't really assume any SWR rate is "safe". I definately think that it might be optimistic for US investors to assume they will at the top of SWR pack in the 21st century as they were in the 20th century.

The end result is that at 40, I don't feel comfortable drawing down my principal; and the corollary of that is that I have to be confident that I can return my withdrawal rate (3%) plus inflation (4%) on a post tax basis to retire. That equates to 9%-12% pre tax and that's clearly not a sustainable return. So unfortunately I need to keep working!






smalllife

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #49 on: February 02, 2013, 07:13:26 AM »
Even if your net worth was cut 50% from your goal, wouldn't the remaining portion be more than enough FU money?  Meaning if you retire tomorrow and the market tanks next year, you still have enough income generating net worth to be selective in finding income producing work.  True, that's not technically FI, but it is still a wonderful situation to be in. Even taking a part time job could cover the expenses of most Mustachians if they cut to the bone during the dry years. 

This has been a great discussion, but it also seems skewed towards never drawing a paycheck again.  For people who are unopposed to working, even at minimum wage, when times get thin I think the big drops are less scary.

(My FI plan includes working two or three nights a week at my current side job: it's a laid back, social atmosphere, and I get paid to do something fun.  Not everyone has that luxury, but I imagine once you pull the plug on a 9-5 situations like that come out of the woodwork precisely because you have the time to indulge them.)