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?
Certainly. I didn't want to argue for the sake of arguing, because you made some good points, but if it will help you or others think though your positions more (even if it reaffirms what you're already thinking), I'd be glad to do so. :)
- 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.
While there are some scenarios where one might retire right after a market tank (a pension kicking in at retirement, for example, or most of their income covered by rental income, so they can ignore the portion of their portfolio that took a hit from the market until it has time to recover), I will grant you that most people wouldn't ER after the market took a large dive. But what I don't agree with is that no one is ready to ER, because one can prepare for and deal with such a scenario. It's called: riding it out. If I was ready to ER on a 80/20 portfolio and the market took a dive, would I ER the next day? Probably not, but only because I have an awesome opportunity to buy stocks cheap, so the income for the next 6 months, plowed into stocks would lower my cost-basis. Would I then ER 6 months later even if the market was only back up to .8X? Sure. Do I need to get back up to the full $X? No. Would I be more careful with my spending early on? Of course. But I'd only be staying on because
I was already in that position to take advantage of it. On the flip side, if I ER'd and 6 months later the market took a dive, would I be looking for a job? Heck no! I'd stay the course and ride it out.
So sure, one might not immediately ER right after a market dive, but nor do they have to go back to work if it does dive after ER, so saying no one is ready to ER in that situation is, IMO, silly.
- 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.
Agreed. And by doing those things you can insulate your portfolio in "down" years. So keeping that in mind, why worry so much about a market crash, since you can do things to help mitigate the impact in that scenario?
- 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.
Hedging against inflation is always good, but unless you know exactly when it will hit worst (i.e. you can predict the future), saying that pushing it off in the early years is more important is meaningless. If inflation is 2% for your fist 5 years, and you match inflation (getting a 0% real return), then it's 15% and you get that same 2% nominal return (-13% real return) you pushed off inflation in your early years, yes, but then got hurt real bad for the next few.
Inflation, whenever it hits, has the potential to ravage your buying power. That's why you need to hedge against it, not just in early years, nor saying it doesn't matter in later years, but be wary of it in any situation. This does not mean fear it, but rather understand it and protect against it. A market crash will always come back, barring collapse of society or government, or something catastrophic like that. This is due to inflation. The market is backed by businesses selling things. As those goods increase in price due to inflation, the worth of those companies increase, and stocks increase. It's not perfectly tied together, and they can even move out of sync, but over the long haul, they track together and are correlated. So if the market crashes 40%, 50%, whatever, it will come back as those companies continue doing what they're doing, inflation hits, those companies are worth more. You can wait out a market crash. You can't "wait out" inflation, your buying power doesn't just come back (barring some deflationary scenario, which is fairly unlikely). That's why inflation is always relevant, not just at certain points in your life.
- 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).
Go to the early-retirement.org forums, there are literally dozens of people who ER'd right before the crash in 2000 and are doing fine a decade later, and people who ER'd right before the 08 crash and are doing fine 5 years later (the majority of which have even more than they started with). This is due to flexibility in spending, mostly, IMO. Look at raddr's Y2K retiree. He's screwed. But he (being a theoretical simulation) kept the same 4% SWR, increased with inflation. Most wouldn't facing the same scenario (and indeed, didn't), and are doing just fine.
- 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.
The opposite for me. If one isn't protecting against inflation (probably via owning some sort of inflation hedge), it's so dangerous. Market risk, as I noted above, can be adjusted to because of your item number two, safety margins, flexibility, etc. and the fact that you can (at least partially) wait it out, so even if you aren't "protected against" volatility (because you hold a large portion of your portfolio in equities) you can deal with a crash.
Both are separate issues, and both are something an early retiree needs to be aware of. Both are dangerous. But I find them like the snake in the jungle versus the tiger. The snake's bite is guaranteed death, and is slow and painful. The tiger bite is big and scary, but not guaranteed to kill you, you can deal with it after it happens (tourniquet, etc.). People are more scared of the tiger fangs though, because it looks scary.
Inflation is the snake. It's silent, no one talks too much about it, and it will kill you. But people are scared of the big fangs of a market crash. Be aware of both.
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?
Yes, that is one advantage of real estate, and one reason I plan to always have at least some aspect of my portfolio containing at least a small inflation hedge like real estate or precious metals.
Let me close this long reply with the reminder that there are no "right" answers, and, as I said earlier, they are great questions worth thinking about and having each person reach their own conclusions.
Best of luck!