Author Topic: Are we retiring to early? Or to optimistic in our target FIRE date?  (Read 12056 times)

astvilla

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Perhaps this doesn't belong in the Investor thread, but figured I'd ask here.

FIRE sounds very appealing and a lot of what's said about FIRE makes it sound pretty easy. Invest in index funds, allocate assets, lower taxes, watch how you spend, rinse, repeat, sounds pretty simple and easy.

But there seem to be a lot of things that could derail plans for FIRE. Loss of work and long-term unemployment could derail a lot of people's plans for retiring as they have to dip into their stash. Couldn't some of us be underestimating how much we need for FIRE if unexpected events occur? Unemployment, health conditions, unplanned kid, divorce, parent's hospital bill, unknown liabilities held by parents/family, and more could all dent our stashes and put a lid on plans to retire.

I haven't seen a lot of people take into account factors like job loss into FIRE, especially during recessions or crises. Most of what I read just assumes that we will all be working during a recession or downturn. Then buying equity while it's cheap and rebalancing, buying stocks with bonds (side question: bonds can go up with higher interest rates, so couldn't both bonds and stocks drop together dramatically? How would you use bonds to buy stocks during a downturn?). But what if cash is needed for more immediate expenses, even if you have a mustachian lifestyle and are unemployed? Considering that some of us are young or just starting, recessions/crises are likely going to happen sometime in our working career. As we approach FIRE or during our pursuit of FIRE, some of us might sacrifice ambition, job, or professional growth. Couldn't that sacrifice come back to bite us if we don't take our careers seriously enough or commit long enough to it? Would retiring early hurt some people's chances for re-entering the workforce should unexpected events occur? The recent thread mentioning a 1972-like scenario and mention of long-term global slowdown in growth and flat economy had me wondering.

I feel like our goal to FIRE assumes everything is going to happen the way we predict it's going to happen. But that's obviously not true, plans change. I'm wondering if we're a bit too optimistic about reaching FIRE sometimes and maybe we should not throw away our careers so quickly? Decisions based off the goal of reaching FIRE could exacerbate risks of failing to reach FIRE sometimes.

What behaviors or decisions could we make to stay focused on FIRE during bad times? Particularly psychological mind traps we should guard against. Should we accumulate a little more extra than we need? Maybe I'm just thinking into all this too much.
« Last Edit: May 14, 2015, 12:53:53 AM by astvilla »

marty998

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What if the world ends tomorrow...etc etc, where does the rabbit hole end when it comes to asking "what if" questions?

You can't plan for everything, and chances are what will wipe you out is something that you may never have foreseen anyway.

We all make choices based on what we know, what we have experienced, and what we have planned for. Sometimes it works out well, sometimes it doesn't.

I believe someone once said "that's life".

FIRE is a choice you have to make on your own. If you're not comfortable with taking the plunge, I suppose you can continue working in whatever capacity you choose...

nath

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We'll the benefit of being a mustachian is even if you are only half way to FI you will still have low expenses and a decent stach to keep you afloat under low work conditions. Plus don't forget we can be creative to make money and having a positive attitude can take you far.

theadvicist

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Yeah I figure if something terrible happens, everyone will be screwed, and actually, Mustacians will be the best off because we are used to working things out for ourselves, managing with lower expenditure etc.

If the economy really does implode, you're still going to be far better off with assets and savings, than someone who's relying on someone else for a job day to day.

Also, keeping up with your former type of work - contracting or consulting - can keep your skills sharp if you did need to get back into the world of work.

Basically, I'd sum up as you're worrying too much. Focus on what you can control.

RichMoose

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As Mustachians, we are prepared for the worst because of our choices.

1) Are you spending 50% or less of your take-home pay? Low expenses are a huge help during times of unemployment.

2) Do you have an emergency fund? Many of us do and there are many threads on this forum that recommend 3 - 6 months of expenses saved in an e-fund.

3) Are you resilient and willing to learn new things? Even during periods of poor employment there are jobs for people who want jobs. It may not be in your field, it may be temp work, it may require you get your hands dirty, but they're out there.

brooklynguy

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It is understandable to worry about the risks of retiring too early, and much has already been written on that subject -- allaying that concern is pretty much the entire raison d'etre of early retirement blogs like MMM.

But most of the original post is devoted to the "risks" of planning to retire early before you actually reach the finish line, which makes no sense to me.  To echo the responses above, taking steps to achieve financial independence (whether or not towards the end of retiring early) makes you better-equipped to handle factors like job loss.

As we approach FIRE or during our pursuit of FIRE, some of us might sacrifice ambition, job, or professional growth. Couldn't that sacrifice come back to bite us if we don't take our careers seriously enough or commit long enough to it?

What exactly is it that you are worried about?  If you start slacking off at work because, hell, you've only got seven more years until retirement, right?, then, yeah, that decision might bite you in the ass.  The better approach is to take your commitments seriously for as long as they remain your commitments.  If the concern is really just the risk of relieving yourself of your employment commitment too early, then see paragraph one.

EscapeVelocity2020

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Maybe you are looking for a more analytic answer, in addition to the practical advice above.  One thing on my mind about 'the dangers' of ER would be the length of time between leaving said career that got you to FI and collecting anything like 'old age and disability insurance' (aka social security) and Medicare.  Affordable Care significantly reduced the worry about being able to afford decent medical insurance between ER and 65 y.o. (given how fast the premiums could rise over 20 - 30 years), but it's also hard to judge if ACA will be around in its current form.  A bigger issue is that you don't have much SS to look forward to if you don't have an earnings history, so if you do happen to fall on hard times (like if high inflation takes hold) in your 60's and 70's, you're pretty much out of luck without a COLA.

With all that pessimism out of the way, one of my main takeaways from Mustachianism isn't necessarily that ER means chucking your 'high pay / high stress' career and laying down for the next 30+ years.  Generally, the idea is to leverage and minimize the crappy career so that you can get to FI / FU money ASAP and pursue more interesting career / freelance / income-producing endeavors.  Sure it's risky, and for some it is easier to stay with the crappy career until satisfactorily FI, but it's a choice and you are consciously aware of the alternatives and trade-offs.

By the way, I'm not a fan of the 'retire early and just get a job if it doesn't work out' philosophy.  I think that could lead to being stuck in an even crappier career if that truly is plan A.  That should be plan F, if all the investing, side-hustling, cost cutting, and emergency funds have failed....

bgraycpa

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FIRE seems to be the ability to leave work, not necessarily doing it. Mostly everyone on here that has hit this seems to continue earning in ER.

I would say, if you're questioning your ability to exit, then it's because you haven't arrived there yet. There is no software, formulae or analytical reasoning to satisfy the psychological/emotional part of the equation.

TexasStash

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The OP's question (or questions) is a valid one, but it sounds like it is driven by emotion rather than an honest observation of the facts. I think it would be good to go back and read the Safety Margin blog post. Each person who FIREs will develop their own safety margin based on their tolerance for these types of risks. MMM is very up front that he built a much larger than necessary safety margin due to his own risk tolerance levels.

People on here don't necessarily ignore those problems... they just tend to believe in their ability to adjust to changing life circumstances and continue on. Living well below your means does that. And most people on here are looking to FIRE using the 4% rule, so likely with well over $500k in assets and maybe $20-25k in annual spending. That gives you a ton of time to adjust to the changing circumstances of life. Fear has the tendency to give us tunnel vision and tell us we won't have any choices when bad things happen... A more realistic view of life makes us realize that early retirees have options when it comes to a) getting a job, b) buying health insurance, c) weathering a downturn, d) assuming responsibility for a family member, etc.

StockBeard

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What exactly is it that you are worried about?  If you start slacking off at work because, hell, you've only got seven more years until retirement, right?, then, yeah, that decision might bite you in the ass. 
Crap, that's totally me

forummm

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I am of the opinion that, for my family personally, we shouldn't quit our jobs and have no income unless we're fully FI. Because future income is not guaranteed. And I'm unlikely to get a job making near my current salary once I've been out of the workforce for X years. Maybe it works out (and it probably will to get some kind of income, even hourly retail work). But it's not likely to get a job, let alone a high paying job, during a crisis downturn where unemployment is skyrocketing and no one is hiring. Perhaps during the recovery.

I also am highly skeptical of most people here who say they will just use their bonds to buy stocks when a crash happens. Timing the market bottom is very difficult. If it drops 20% and then you cash out your bonds for stocks, what happens when it drops another 30%? If you rebalance your portfolio, you will be moving a small portion of your bonds to stocks, but only a small portion, and likely not at the market bottom either.

Figuring out how much you need is a tricky question. I struggle with it myself. We don't have children yet. The politics around healthcare is highly uncertain. The market is substantially overvalued. Interest rates are at rock bottom. Should we homeschool our future children or move to a better (and more expensive) school district? Should we offer to pay for some/all of their college or let them get the benefits of paying their own way (as I did)? Will college be free (online) or continue to increase in expense as it has? Will robots take over the world and make us their slaves?

No one can really answer these questions. But you can get close. And you can use the Power of Strength ideas MMM mentions as safety hedges. For me, I'm planning to oversave and just die with a lot of money for charity. And I'm expecting that we'll spend a lot more than we do now, but that most of that spending will be optional (traveling the world, etc). If I get lucky, we do a lot of lavish stuff and charities are happy. If I get unlucky I deal with that (getting a job, doing less expensive stuff, etc) but we don't starve.

MrMoogle

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If you're more than 2 years out, your FIRE date should only be an estimate, not a deadline.  If you're within two years, and something happens, you should be able to recover without it affecting your NW much, but it will still push your deadline back approximately day for day.  If you're FI and you're doing the OMY, and lose your job, maybe you move up your date :)

None of those plausible scenarios seem too bad to me.

James

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Maybe I'm just thinking into all this too much.


Bingo.


Yes, all your questions have some basis in reality, they are decent concerns, but I'm not sure you have enough understanding of the basics to ask those questions yet. (not saying you shouldn't have asked, but suggesting a different end to those goals) I suggest spending time reading threads here and reading the blog history on MMM. Over time the answers to these questions become more clear, and more importantly it becomes clear why there isn't ONE answer to any of those questions. It's just complex, and an art along with the science, and depends a lot on your circumstances, your goals, your priorities.

astvilla

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I am of the opinion that, for my family personally, we shouldn't quit our jobs and have no income unless we're fully FI. Because future income is not guaranteed. And I'm unlikely to get a job making near my current salary once I've been out of the workforce for X years. Maybe it works out (and it probably will to get some kind of income, even hourly retail work). But it's not likely to get a job, let alone a high paying job, during a crisis downturn where unemployment is skyrocketing and no one is hiring. Perhaps during the recovery.

I also am highly skeptical of most people here who say they will just use their bonds to buy stocks when a crash happens. Timing the market bottom is very difficult. If it drops 20% and then you cash out your bonds for stocks, what happens when it drops another 30%? If you rebalance your portfolio, you will be moving a small portion of your bonds to stocks, but only a small portion, and likely not at the market bottom either.

Figuring out how much you need is a tricky question. I struggle with it myself. We don't have children yet. The politics around healthcare is highly uncertain. The market is substantially overvalued. Interest rates are at rock bottom. Should we homeschool our future children or move to a better (and more expensive) school district? Should we offer to pay for some/all of their college or let them get the benefits of paying their own way (as I did)? Will college be free (online) or continue to increase in expense as it has? Will robots take over the world and make us their slaves?

No one can really answer these questions. But you can get close. And you can use the Power of Strength ideas MMM mentions as safety hedges. For me, I'm planning to oversave and just die with a lot of money for charity. And I'm expecting that we'll spend a lot more than we do now, but that most of that spending will be optional (traveling the world, etc). If I get lucky, we do a lot of lavish stuff and charities are happy. If I get unlucky I deal with that (getting a job, doing less expensive stuff, etc) but we don't starve.

Thanks, I was sort of playing devil's advocate when I framed the question. It just seem the goal to FIRE won't incur many problems. There were things I wasn't considering that could become obstacles that might delay FIRE. Life itself has risks, but we can minimize them and make our lives better by following MMM principles. I remembered a post where someone said they wished he wished he had drafted a prenup and that because he didn't, it delayed FIRE for quite some time. Those are risks we don't always account for, which makes me think one shouldn't drop down to part-time work so quickly or easily, depending on your field.

http://www.financialsamurai.com/the-dark-side-of-early-retirement-risks-dangers/
http://forum.mrmoneymustache.com/antimustachian-wall-of-shame-and-comedy/are-americans-retiring-too-early/
http://forum.mrmoneymustache.com/ask-a-mustachian/pitfalls-of-early-retirement/
http://www.mrmoneymustache.com/2012/04/12/early-retirement-its-not-as-risky-as-you-think/

I didn't do much research before but I was thinking along the same lines as the links above. The problem is there was an interesting discussion about how we assume that in the next correction or crash, stocks we'll rebound but that's not necessarily true. That stocks/equities/bonds, entire economy could take a long time to recover like 1972. So in that time sense, one can't rely on value returning to your assets and instead you would have to keep working, if you can find work. Some fears like robots taking over the world (as a NYT doc in China alluded to among others, global slowdown, everyone hitting middle class, no one having kids, global catastrophe [though global catastrophe isn't my main concern, didn't mean to imply that in my 1st post])
« Last Edit: May 14, 2015, 04:07:18 PM by astvilla »

astvilla

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The OP's question (or questions) is a valid one, but it sounds like it is driven by emotion rather than an honest observation of the facts. I think it would be good to go back and read the Safety Margin blog post. Each person who FIREs will develop their own safety margin based on their tolerance for these types of risks. MMM is very up front that he built a much larger than necessary safety margin due to his own risk tolerance levels.

People on here don't necessarily ignore those problems... they just tend to believe in their ability to adjust to changing life circumstances and continue on. Living well below your means does that. And most people on here are looking to FIRE using the 4% rule, so likely with well over $500k in assets and maybe $20-25k in annual spending. That gives you a ton of time to adjust to the changing circumstances of life. Fear has the tendency to give us tunnel vision and tell us we won't have any choices when bad things happen... A more realistic view of life makes us realize that early retirees have options when it comes to a) getting a job, b) buying health insurance, c) weathering a downturn, d) assuming responsibility for a family member, etc.

Okay wow this is exactly what I was thinking. So people should be saving extra to account for potential missteps. I just don't hear it mentioned a whole lot on the forums, maybe I haven't looked properly but few mention the safety margin. The tone I get from a lot of people is everyone is assuming everything will go according to plan and when something bad happens, they'll do X, Y, and Z, but that's sort of assuming the bad thing that happens, happens the way they expect it to. Like stocks just jumping back up, perhaps stocks won't rocket back up like they did in the last 2 crashes.

Maybe I'm just thinking into all this too much.


Bingo.


Yes, all your questions have some basis in reality, they are decent concerns, but I'm not sure you have enough understanding of the basics to ask those questions yet. (not saying you shouldn't have asked, but suggesting a different end to those goals) I suggest spending time reading threads here and reading the blog history on MMM. Over time the answers to these questions become more clear, and more importantly it becomes clear why there isn't ONE answer to any of those questions. It's just complex, and an art along with the science, and depends a lot on your circumstances, your goals, your priorities.

I agree with you. I think it's hard to get a good understanding of everything there but you're right, there's no ONE exact right answer for everyone. The equations and math people throw around made it seem more mathematical and certain but I think there's a lot more art to FIRE than discussed. Yeah I read the forums more than MMM's blog for some reason, I like to see more than just one opinion instead of everyone following just one person.

forummm

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I didn't do much research before but I was thinking along the same lines as the links above. The problem is there was an interesting discussion about how we assume that in the next correction or crash, stocks we'll rebound but that's not necessarily true. That stocks/equities/bonds, entire economy could take a long time to recover like 1972. So in that time sense, one can't rely on value returning to your assets and instead you would have to keep working, if you can find work. Some fears like robots taking over the world (as a NYT doc in China alluded to among others, global slowdown, everyone hitting middle class, no one having kids, global catastrophe [though global catastrophe isn't my main concern, didn't mean to imply that in my 1st post])

Yeah, we had a thread here recently about someone trying to retire in 1972. The short of it is that it could easily have felt terrible at the time, but that the person would likely end up insanely rich in the long run due to 30 years of great market returns starting in the 80s. Another thread or two has talked about the 4% rule when used with historically high market valuations. Generally the portfolio failures in those situations were due to really high inflation in the 60s.

astvilla

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I didn't do much research before but I was thinking along the same lines as the links above. The problem is there was an interesting discussion about how we assume that in the next correction or crash, stocks we'll rebound but that's not necessarily true. That stocks/equities/bonds, entire economy could take a long time to recover like 1972. So in that time sense, one can't rely on value returning to your assets and instead you would have to keep working, if you can find work. Some fears like robots taking over the world (as a NYT doc in China alluded to among others, global slowdown, everyone hitting middle class, no one having kids, global catastrophe [though global catastrophe isn't my main concern, didn't mean to imply that in my 1st post])

Yeah, we had a thread here recently about someone trying to retire in 1972. The short of it is that it could easily have felt terrible at the time, but that the person would likely end up insanely rich in the long run due to 30 years of great market returns starting in the 80s. Another thread or two has talked about the 4% rule when used with historically high market valuations. Generally the portfolio failures in those situations were due to really high inflation in the 60s.

But couldn't depending on what stage of FIRE you were at in that time, say nearing retirement, couldn't that situation have been pretty bad if a scenario played out like that? For younger people it's okay probably but for someone just retiring, it could've ended up being much worse than anticipated. Of course the 1970s are much different than today, but it's quite possible that stocks won't bounce back or behave like it has recently. How much more would one have to save to avoid a situation like that? The road to FIRE to me has a lot of intangibles and the date to FIRE to me doesn't feel like it should be black and white but rather a transition.

steveo

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I am of the opinion that, for my family personally, we shouldn't quit our jobs and have no income unless we're fully FI. Because future income is not guaranteed. And I'm unlikely to get a job making near my current salary once I've been out of the workforce for X years. Maybe it works out (and it probably will to get some kind of income, even hourly retail work). But it's not likely to get a job, let alone a high paying job, during a crisis downturn where unemployment is skyrocketing and no one is hiring. Perhaps during the recovery.

I also am highly skeptical of most people here who say they will just use their bonds to buy stocks when a crash happens. Timing the market bottom is very difficult. If it drops 20% and then you cash out your bonds for stocks, what happens when it drops another 30%? If you rebalance your portfolio, you will be moving a small portion of your bonds to stocks, but only a small portion, and likely not at the market bottom either.

Figuring out how much you need is a tricky question. I struggle with it myself. We don't have children yet. The politics around healthcare is highly uncertain. The market is substantially overvalued. Interest rates are at rock bottom. Should we homeschool our future children or move to a better (and more expensive) school district? Should we offer to pay for some/all of their college or let them get the benefits of paying their own way (as I did)? Will college be free (online) or continue to increase in expense as it has? Will robots take over the world and make us their slaves?

No one can really answer these questions. But you can get close. And you can use the Power of Strength ideas MMM mentions as safety hedges. For me, I'm planning to oversave and just die with a lot of money for charity. And I'm expecting that we'll spend a lot more than we do now, but that most of that spending will be optional (traveling the world, etc). If I get lucky, we do a lot of lavish stuff and charities are happy. If I get unlucky I deal with that (getting a job, doing less expensive stuff, etc) but we don't starve.

Good post. The only thing is I'm thinking at this point of retiring as early as possible however I'm comfortable spending less if that is required.

dess1313

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because i have a pension that requires a magic 80, although i may not retire early, i hope to get to the point i can cut back hours and coast easy into retirement.  That would make me happy and help things taper off easy, plus get used to lower incomes, and not have to tap my resources early. 

I'm just starting my mustachian journey, but the way i look at it, every penny i save now, is one less i have to worry about later.  Every dollar in the bank leaves me one dollar more secure.  Ive been off work once due to injury and totally get your concerns, but if you're looking at a potential 15-20 year journey, you have time to think about it once you get on the right path.  You may not be able to decide today what exactly your early retirement date is, but the fact you're researching, and thinking about it is very important.  Just work on enjoying live but saving as much as possible and it will get better and look easier.  In  5 or 10 or 15 years you'll have a better picture each time of where you are, and what your priorities are

DavidAnnArbor

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A bigger issue is that you don't have much SS to look forward to if you don't have an earnings history, so if you do happen to fall on hard times (like if high inflation takes hold) in your 60's and 70's, you're pretty much out of luck without a COLA.

It makes sense to have a part time job if one is FIRE just to have some earnings history to improve the Social Security benefit calculation. It doesn't take much earned income to help boost Social Security benefits significantly.

beltim

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A bigger issue is that you don't have much SS to look forward to if you don't have an earnings history, so if you do happen to fall on hard times (like if high inflation takes hold) in your 60's and 70's, you're pretty much out of luck without a COLA.

It makes sense to have a part time job if one is FIRE just to have some earnings history to improve the Social Security benefit calculation. It doesn't take much earned income to help boost Social Security benefits significantly.

Maybe...but I disagree with EV's premise.  Relative to Mustachian spending levels, Social Security can be quite substantial even with a short earnings history.  Consider, for example, someone who worked 12 years at a salary of, say, $60,000 annually.  That would give them a Social Security benefit of $12,332 per year at age 67.  If your annual expenses are, say, $25,000 a year, then Social Security would provide half of your expenses, and the benefit is completely inflation-adjusted.  The problem for early retirees isn't a low Social Security benefit -- it's that the earliest it can be collected is age 62.  For someone like MMM retiring 30 years before that, it doesn't really help in planning because there's practically no difference between planning to have a stash cover an indefinite time period and a full amount for 30 years, then half that amount for the rest of your life.

But as a backstop, Social Security is a huge boon to early retirees.  Consider someone who planned to live on their stash forever but experienced a bad stock market such that when they hit their 60s their portfolio was only worth half what it was when they started!  Well, then Social Security replaces half their income, they only have to withdraw half as much from their portfolio, and their stash has a much longer expected lifespan.

brooklynguy

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But as a backstop, Social Security is a huge boon to early retirees.

Yup.  I think the tendency for young aspiring early retirees to completely ignore social security in their planning (by necessity, given that, as you said, the amount needed to bridge the gap until eligibility for social security is not materially different than the amount needed to cover an indefinite time period) inappropriately causes many young aspiring early retirees to overlook the huge margin of safety that doing so builds into their retirement plan.

Quote
Consider someone who planned to live on their stash forever but experienced a bad stock market such that when they hit their 60s their portfolio was only worth half what it was when they started!  Well, then Social Security replaces half their income, they only have to withdraw half as much from their portfolio, and their stash has a much longer expected lifespan.

This just prompted me to do some cFIREsim simulations to determine the historical likelihood of a given portfolio dipping below a given threshold, and I think there is a glitch in cFIREsim.  If you run a simulation leaving all the default settings, it reports a success rate of 93.04% and, in the "Dip Analysis" chart, it says that 38% of the cases dipped > 40% below the initial portfolio amount.  But if you run a new simulation, leaving all the default settings except for changing the "criteria for marking a cycle as 'failed"" to "portfolio falls below $600k" (i.e., 40% below the initial value), it reports an overall success rate of 82.61% (indicating that only 17.39% of the cases dipped down to 40% of the initial portfolio value).  Before I bother bo_knows about this, can someone confirm that they agree that this is actually a glitch and that there's not some flaw in how I'm interpreting the results?

EscapeVelocity2020

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It makes sense to have a part time job if one is FIRE just to have some earnings history to improve the Social Security benefit calculation. It doesn't take much earned income to help boost Social Security benefits significantly.

Maybe...but I disagree with EV's premise.  Relative to Mustachian spending levels, Social Security can be quite substantial even with a short earnings history.  Consider, for example, someone who worked 12 years at a salary of, say, $60,000 annually.  That would give them a Social Security benefit of $12,332 per year at age 67.  If your annual expenses are, say, $25,000 a year, then Social Security would provide half of your expenses, and the benefit is completely inflation-adjusted. ...

I'm not sure I understand the disagreement.  If anything, what I read from your post, you put even more value on SS than I did.

In order to qualify for SS, you need at least '40 quarters' of earnings history.  Also, the way a career works for most people, the earnings in the first years are a fraction of what most folks earn in the mid and late career.  Raises generally outpace inflation, especially in the first 10 years, which greatly helps the earning history.  SS uses the highest 35 years of earnings (and indexes early years for inflation).  But ultimately, filling in a zero with a large positive number helps the 35 year average quite a bit over short earnings histories, so I agree with both you and DAA.

However, trying to replicate your example, using the SS quick calculator (http://www.ssa.gov/OACT/quickcalc/index.html), a 1982 birth date (to get 12 years earning history (actually 16 years, since the default is a tiny income for the first 4 years)), 60k current earnings, and retire in 2015, I got an annual benefit of about $8k (in 2044 at 62) in 'today's dollars' (comparable to the 25k expenses).

I hope I never 'need' OASDI, but people put a lot of money into it (sometimes without realizing it) and should take it into account in their ER plans, even if the 'stash is Plan A.

« Last Edit: May 20, 2015, 12:50:47 PM by EscapeVelocity2020 »

beltim

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It makes sense to have a part time job if one is FIRE just to have some earnings history to improve the Social Security benefit calculation. It doesn't take much earned income to help boost Social Security benefits significantly.

Maybe...but I disagree with EV's premise.  Relative to Mustachian spending levels, Social Security can be quite substantial even with a short earnings history.  Consider, for example, someone who worked 12 years at a salary of, say, $60,000 annually.  That would give them a Social Security benefit of $12,332 per year at age 67.  If your annual expenses are, say, $25,000 a year, then Social Security would provide half of your expenses, and the benefit is completely inflation-adjusted. ...

I'm not sure I understand the disagreement.  If anything, what I read from your post, you put even more value on SS than I did.
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In order to qualify for SS, you need at least '40 quarters' of earnings history.

Yes, that's exactly it.  You said that "most people don't have much Social Security to look forward to if you don't have an earnings history."  I took this to mean an early retiree earnings history, short in duration, but I did assume at least 10 years of earnings to qualify for retirement benefits at all.  I think a benefit comprising half of a retirees expenses is quite significant.  Alternatively, a married couple who each earned that much in their career, who have retirement expenses of $24k would have their expenses completely covered by Social Security.  I think that is incredibly valuable.

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  Also, the way a career works for most people, the earnings in the first years are a fraction of what most folks earn in the mid and late career.  Raises generally outpace inflation, especially in the first 10 years, which greatly helps the earning history.  SS uses the highest 35 years of earnings (and indexes early years for inflation).  But ultimately, filling in a zero with a large positive number helps the 35 year average quite a bit over short earnings histories, so I agree with both you and DAA.

This is true but irrelevant.  If you have between 10 and 35 years of earnings, and all years were under the Social Security taxable limit, when you earned those dollars were irrelevant except for the inflation adjustment.

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However, trying to replicate your example, using the SS quick calculator (http://www.ssa.gov/OACT/quickcalc/index.html), a 1982 birth date (to get 12 years earning history (actually 16 years, since the default is a tiny income for the first 4 years)), 60k current earnings, and retire in 2015, I got an annual benefit of about $8k (in 2044 at 62) in 'today's dollars' (comparable to the 25k expenses).
Yes, you're calculating taking a benefit at 62 instead of the full retirement age–67 for that age.  The age-62 benefit is 70% of the age 67 benefit, so it makes sense that you'd calculate a number 70% of my calculation.  Both numbers are "right" so to speak.

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I hope I never 'need' OASDI, but people put a lot of money into it (sometimes without realizing it) and should take it into account in their ER plans, even if the 'stash is Plan A.
I completely agree.  Ignorance of Social Security benefits is astonishing even among those who plan to retire early.

beltim

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This just prompted me to do some cFIREsim simulations to determine the historical likelihood of a given portfolio dipping below a given threshold, and I think there is a glitch in cFIREsim.  If you run a simulation leaving all the default settings, it reports a success rate of 93.04% and, in the "Dip Analysis" chart, it says that 38% of the cases dipped > 40% below the initial portfolio amount.  But if you run a new simulation, leaving all the default settings except for changing the "criteria for marking a cycle as 'failed"" to "portfolio falls below $600k" (i.e., 40% below the initial value), it reports an overall success rate of 82.61% (indicating that only 17.39% of the cases dipped down to 40% of the initial portfolio value).  Before I bother bo_knows about this, can someone confirm that they agree that this is actually a glitch and that there's not some flaw in how I'm interpreting the results?

I duplicated it.  My guess is that it only counts as a "failure" if the 30-year period ends with a balance under $600k.

brooklynguy

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My guess is that it only counts as a "failure" if the 30-year period ends with a balance under $600k.

You're probably right - that seems consistent with some quick eyeballing of the output graph.  But that's not the way it should work, is it?  I would think setting a specified portfolio amount as the "failure" criterion should mean that any cycle that hits that level at any point gets reported as a failure.  The "Tutorial/FAQ" is a bit ambiguous about how this feature is supposed to work, but it seems consistent with what I described:

Quote from: cFIREsim Tutorial/FAQ
Criteria for marking a cycle as "failed" is a section within the Investigate section that provides a place for the user to define what exactly is a "failure" in retirement. Often, financial planners will consider a portfolio as "failed" if you run out of money before you die. Some people want to leave a legacy around, so they might view their portfolio as a "failure" if it drops below $100,000 or $500,000 or whatever the amount. You can define this value in the Portfolio falls below field. Similarly, with all of the different variable spending plans available, you might consider your retirement as a "failure" if you drop below a certain amount of Yearly Spending. You can define this value in the Yearly Withdrawal falls below field.

EscapeVelocity2020

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...  The age-62 benefit is 70% of the age 67 benefit, so it makes sense that you'd calculate a number 70% of my calculation.  Both numbers are "right" so to speak.

Thanks for the replies beltim.  That has always amazed me, how delaying SS gives such a substantial increase.  Basically you can spend down your stash at 62 with much less worry because of that.  That and annuities also get 'cheaper', so the wind really is at your back starting around 65.  The cosmic irony is that, other than medical expenses, older folks generally start to travel and spend less around the same time...

beltim

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My guess is that it only counts as a "failure" if the 30-year period ends with a balance under $600k.

You're probably right - that seems consistent with some quick eyeballing of the output graph.  But that's not the way it should work, is it?  I would think setting a specified portfolio amount as the "failure" criterion should mean that any cycle that hits that level at any point gets reported as a failure.  The "Tutorial/FAQ" is a bit ambiguous about how this feature is supposed to work, but it seems consistent with what I described:

Quote from: cFIREsim Tutorial/FAQ
Criteria for marking a cycle as "failed" is a section within the Investigate section that provides a place for the user to define what exactly is a "failure" in retirement. Often, financial planners will consider a portfolio as "failed" if you run out of money before you die. Some people want to leave a legacy around, so they might view their portfolio as a "failure" if it drops below $100,000 or $500,000 or whatever the amount. You can define this value in the Portfolio falls below field. Similarly, with all of the different variable spending plans available, you might consider your retirement as a "failure" if you drop below a certain amount of Yearly Spending. You can define this value in the Yearly Withdrawal falls below field.

Yeah, I agree that your definition of the failure criterion makes more sense.  But from a programming point of view, the information you want – how often a portfolio drops 40% or more – is presented on every simulation run.  Why would you add another feature to tell you the same thing?

On the other hand, if you want to leave a specific amount for heirs (or figure out how often you'd be able to leave a specific amount for heirs) or, as we do in this case, want to figure out at the end of an XX year period how often you'd have at least $YY, then the options presented make more sense. 

beltim

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...  The age-62 benefit is 70% of the age 67 benefit, so it makes sense that you'd calculate a number 70% of my calculation.  Both numbers are "right" so to speak.

Thanks for the replies beltim.  That has always amazed me, how delaying SS gives such a substantial increase.  Basically you can spend down your stash at 62 with much less worry because of that.  That and annuities also get 'cheaper', so the wind really is at your back starting around 65.  The cosmic irony is that, other than medical expenses, older folks generally start to travel and spend less around the same time...

My pleasure.  Yes, the increase in Social Security benefits can be impressive.  The benefit levels were chosen to be actuarially equivalent though, so on average the total benefits are the same.  The difference in annual benefits is essentially all due to collecting for different numbers of years.

brooklynguy

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Yeah, I agree that your definition of the failure criterion makes more sense.  But from a programming point of view, the information you want – how often a portfolio drops 40% or more – is presented on every simulation run.  Why would you add another feature to tell you the same thing?

On the other hand, if you want to leave a specific amount for heirs (or figure out how often you'd be able to leave a specific amount for heirs) or, as we do in this case, want to figure out at the end of an XX year period how often you'd have at least $YY, then the options presented make more sense.

I was trying to use the feature to determine the likelihood of dipping below a specified amount not presented in the Dip Analysis chart (such as 50%), and when the results were suspiciously optimistic I ran the 40% level as a control test.

But yeah, now that I think about it, I guess most people setting the failure amount to something higher than zero are probably interested in finding out the chances of the terminal value reaching that level.

forummm

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...  The age-62 benefit is 70% of the age 67 benefit, so it makes sense that you'd calculate a number 70% of my calculation.  Both numbers are "right" so to speak.

Thanks for the replies beltim.  That has always amazed me, how delaying SS gives such a substantial increase.  Basically you can spend down your stash at 62 with much less worry because of that.  That and annuities also get 'cheaper', so the wind really is at your back starting around 65.  The cosmic irony is that, other than medical expenses, older folks generally start to travel and spend less around the same time...

My pleasure.  Yes, the increase in Social Security benefits can be impressive.  The benefit levels were chosen to be actuarially equivalent though, so on average the total benefits are the same.  The difference in annual benefits is essentially all due to collecting for different numbers of years.

Yes. Since SS only needs to payout for the 50% or median level, the payments can be much higher than for individuals who want a 95% level of portfolio survival. Assuming it doesn't get axed before we get there, it's a great social insurance program to serve as a backstop for longevity risk.

DavidAnnArbor

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Assuming it doesn't get axed before we get there, it's a great social insurance program to serve as a backstop for longevity risk.

And if we wait to collect at age 70 it's even more than what we get at age 67. What can we do to prevent Social Security from getting axed?

beltim

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Assuming it doesn't get axed before we get there, it's a great social insurance program to serve as a backstop for longevity risk.

And if we wait to collect at age 70 it's even more than what we get at age 67. What can we do to prevent Social Security from getting axed?

Vote.  Tell politicians that Social Security is important to you.  Donate to, or work with, advocacy groups.

And perhaps most importantly, help educate people.  Without any reform, Social Security will always be able to pay out ~3/4 of promised benefits.  If it were reformed soon, any changes - tax hikes, benefit cuts, or combination – would be relatively modest.  But despite that, almost two thirds of Americans think they won't receive any benefit from Social Security at all (http://www.gallup.com/poll/1693/social-security.aspx).  These people need to be educated. 

DavidAnnArbor

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I agree with you Beltim.  The economist Paul Krugman has said in the past that the fix to Social Security requires some minor tweaking.

2Birds1Stone

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I'm not too worried. I tend to roll with the punches.

My projections for fire have me there at 40 years old assuming I don't have any significant increases to income. If I have to work an extra few years due to underemployment so be it. With a 60% savings rate I'm not too worried about anything.

forummm

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Assuming it doesn't get axed before we get there, it's a great social insurance program to serve as a backstop for longevity risk.

And if we wait to collect at age 70 it's even more than what we get at age 67. What can we do to prevent Social Security from getting axed?

Vote.  Tell politicians that Social Security is important to you.  Donate to, or work with, advocacy groups.

And perhaps most importantly, help educate people.  Without any reform, Social Security will always be able to pay out ~3/4 of promised benefits.  If it were reformed soon, any changes - tax hikes, benefit cuts, or combination – would be relatively modest.  But despite that, almost two thirds of Americans think they won't receive any benefit from Social Security at all (http://www.gallup.com/poll/1693/social-security.aspx).  These people need to be educated.

People think that because politicians keep telling them that. And some are actively proposing to cut benefits for retirees.

beltim

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Assuming it doesn't get axed before we get there, it's a great social insurance program to serve as a backstop for longevity risk.

And if we wait to collect at age 70 it's even more than what we get at age 67. What can we do to prevent Social Security from getting axed?

Vote.  Tell politicians that Social Security is important to you.  Donate to, or work with, advocacy groups.

And perhaps most importantly, help educate people.  Without any reform, Social Security will always be able to pay out ~3/4 of promised benefits.  If it were reformed soon, any changes - tax hikes, benefit cuts, or combination – would be relatively modest.  But despite that, almost two thirds of Americans think they won't receive any benefit from Social Security at all (http://www.gallup.com/poll/1693/social-security.aspx).  These people need to be educated.

People think that because politicians keep telling them that. And some are actively proposing to cut benefits for retirees.

For the first part, usually the same politicians that can't do math.  For the second part, cutting benefits is a legitimate way to ensure long-term financial stability.  It's not my preferred option, but it's an option.

forummm

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Assuming it doesn't get axed before we get there, it's a great social insurance program to serve as a backstop for longevity risk.

And if we wait to collect at age 70 it's even more than what we get at age 67. What can we do to prevent Social Security from getting axed?

Vote.  Tell politicians that Social Security is important to you.  Donate to, or work with, advocacy groups.

And perhaps most importantly, help educate people.  Without any reform, Social Security will always be able to pay out ~3/4 of promised benefits.  If it were reformed soon, any changes - tax hikes, benefit cuts, or combination – would be relatively modest.  But despite that, almost two thirds of Americans think they won't receive any benefit from Social Security at all (http://www.gallup.com/poll/1693/social-security.aspx).  These people need to be educated.

People think that because politicians keep telling them that. And some are actively proposing to cut benefits for retirees.

For the first part, usually the same politicians that can't do math.  For the second part, cutting benefits is a legitimate way to ensure long-term financial stability.  It's not my preferred option, but it's an option.

The politicians are intentionally and disingenuously casting doubt in order to achieve their policy objectives of lowering taxes, reducing government programs, and having people fend for themselves in the private markets.

beltim

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Yes, I suppose there are those as well.

forummm

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Yes, I suppose there are those as well.

There are a bunch of dolts in national office too. But they are largely reading from the same talking points for a reason.