article - F.I.R.E. – Ignited By The Bull, Extinguished By The Bear

[Cabaka]

article from a ceo of an investment company.

while, he's typically more bearish than most, he gives an example of why FIRE doesn't work. I would tend to agree with him except that his model is suggesting being invested all the time and being long all the time. I believe in FIRE but only if you can sit in cash or short when the time comes.

anyways, he throws cold water on FIRE which is almost the mantra here; so I thought you all might enjoy the article.

"However, the rise of the “F.I.R.E.” movement is symptomatic of a late stage bull market advance. More importantly, we can also predict how things will turn out for Shen and Leung.
For this discussion I want to use the data provided by Shen and Leung to build our examples.
Invested asset value:  $1 million
Annualized withdrawal rate: 3.5%
Annualized return rate: 6% (Not specified but a reasonable estimate)
Living needs: $35,000 annually.
Life expectency: 85-years of age."

https://realinvestmentadvice.com/f-i-r-e-ignited-by-the-bull-extinguished-by-the-bear/

[A Fella from Stella]

By dousing the FIRE he gets the clicks.

It's a low risk thing for him to write a blog no one will remember. I guess what we need to do is catalogue all the antiFIRE pieces and see how the next two cycles play out.

[insufFIcientfunds]

Seems like I have read a lot of posts about how people retire but still do things from time to time to earn cash. MMM might be fire, but here I am writing on his blog, reading his credit card favs, etc. So it seemed like that article didn't take into account the fact young people who fire prob will do things from time to time to earn some side cash. I think saying they are not employable after a period of time is not accurate either.

Retired is my 85 year old grandma. A good day for her is normal bloodpressure, a call from family, and a healthy #2. Unfortunately, she is not employable, but she's on medicare, SS, pension, etc.

Overall, stupid article.

[TheAnonOne]

The 4% rule takes into account basically the worst that US history has to throw at it. A 3.5% SWR is basically 100% success.

Why would this (2019) start year be any worse than basically anything in the past? This guy is clueless.

Also, going to cash is market timing, you are basically statistically guaranteed to under-perform doing this.

[flipboard]

The 4% rule takes into account basically the worst that US history has to throw at it. A 3.5% SWR is basically 100% success.

US market hasn't existed that long. Does 4% SWR still work when applied to the entire history of the world's markets?

while, he's typically more bearish than most, he gives an example of why FIRE doesn't work. I would tend to agree with him except that his model is suggesting being invested all the time and being long all the time. I believe in FIRE but only if you can sit in cash or short when the time comes

How will you know when the time comes?

[TheAnonOne]

The 4% rule takes into account basically the worst that US history has to throw at it. A 3.5% SWR is basically 100% success.

US market hasn't existed that long. Does 4% SWR still work when applied to the entire history of the world's markets?

while, he's typically more bearish than most, he gives an example of why FIRE doesn't work. I would tend to agree with him except that his model is suggesting being invested all the time and being long all the time. I believe in FIRE but only if you can sit in cash or short when the time comes

How will you know when the time comes?

The 4% rule has failed in other countries more often than the USA in many cases. However, in some fast growing countries, higher SWRs have worked.

FIRE is about remaining flexible. Hardly anyone will earn literally $0 over 30+ years.

[EvenSteven]

The 4% rule takes into account basically the worst that US history has to throw at it. A 3.5% SWR is basically 100% success.

US market hasn't existed that long. Does 4% SWR still work when applied to the entire history of the world's markets?

while, he's typically more bearish than most, he gives an example of why FIRE doesn't work. I would tend to agree with him except that his model is suggesting being invested all the time and being long all the time. I believe in FIRE but only if you can sit in cash or short when the time comes

How will you know when the time comes?

The 4% rule has failed in other countries more often than the USA in many cases. However, in some fast growing countries, higher SWRs have worked.

FIRE is about remaining flexible. Hardly anyone will earn literally $0 over 30+ years.

And even fewer couples will be paying 15% long term capital gain tax on an a taxable income of 35K per year. But hey, I'm no CEO of some investment company.

[nereo]

The 4% rule has failed in other countries more often than the USA in many cases. However, in some fast growing countries, higher SWRs have worked.

This is frequently said but I think misguided.  Yes, the 4% WR is founded on the trinity study which used returns from the SP500, and yes other markets - particularly in smaller countries - have not faired as well, but where the argument goes off the rails is when one either assumes that a person from another country cannot follow a similar strategy or (worse) the assumption is made that because other countries have failed the US is, in effect, relying on the US is akin to suvivorship bias.

The SP500 represents one of the largest swaths of the global economy, and has so for the last century, as well as a relatively stable market with established laws.  It's orders-of-magnitude larger than making a comparison to other countries - particularly ones that are much smaller.

[Cabaka]

The 4% rule takes into account basically the worst that US history has to throw at it. A 3.5% SWR is basically 100% success.

Why would this (2019) start year be any worse than basically anything in the past? This guy is clueless.

Also, going to cash is market timing, you are basically statistically guaranteed to under-perform doing this.

yes, he's clueless; he has only been an investment manager since the 1990s and instructed his customers to start reducing equity investments in December 2007.

and I am not going thru the debate of moving averages/mkt timing again here as it goes no where and convinces no one. the mkt is up 2.5% from its 2018 highs. on 10/10/2018 my "market timing" said to lighten up and did not say to reverse that until 1/15/2019, which means I preserved capital because I was not losing much compared to those fully invested during that period while you guys did not get back to even until nearly may.

go ahead, call me a market timer; i'd say i'm pretty dam good at it.

[frugledoc]

The 4% rule takes into account basically the worst that US history has to throw at it. A 3.5% SWR is basically 100% success.

Why would this (2019) start year be any worse than basically anything in the past? This guy is clueless.

Also, going to cash is market timing, you are basically statistically guaranteed to under-perform doing this.

yes, he's clueless; he has only been an investment manager since the 1990s and instructed his customers to start reducing equity investments in December 2007.

and I am not going thru the debate of moving averages/mkt timing again here as it goes no where and convinces no one. the mkt is up 2.5% from its 2018 highs. on 10/10/2018 my "market timing" said to lighten up and did not say to reverse that until 1/15/2019, which means I preserved capital because I was not losing much compared to those fully invested during that period while you guys did not get back to even until nearly may.

go ahead, call me a market timer; i'd say i'm pretty dam good at it.

Good or lucky?

[BicycleB]

So, @Cabaka:

1. What is your portfolio allocation now?
2. What criteria will you use to change it?
3. Are these the same criteria you used on 10/10/18 and 1/15/19?
4. What portfolio changes did you make on those dates? If your changes were on different dates, please explain.
5. How long have you used the current criteria?

[Buffaloski Boris]

Good article. I’ve come to appreciate the RE skeptics.  Although he doesn’t use the jargon of the FI/RE community, he’s talking about SoRR and correctly pointing out that retiring early is a thing in late bull markets, not bear markets when folks have seen their pre-retirement stashes chopped. He’s also not making wild claims like you need $5 million to retire early. His caution is well placed, although I think the tax analysis is a little on the pessimistic end.

[Andy R]

Yeah this is a well known problem - people retiring at high P/E values - and it should be taken into account.
SOR risk, another big one that needs to be addressed.
Interestingly the bond tent idea addresses both of these as I understand it.
Have you read the earlyretirementnow.com series? It goes through and much more, and in a lot of depth.

The easy solution is to work for a couple more years.

At a 3.5% withdrawal rate, you have about 28.5x your expenses, so at a inflation adjusted 6% long term return, 2 more years of work would mean your portfolio is worth 32x expenses. If you also saved some of your expenses, it would be closer to 33x and you now have a 3.0% withdrawal rate which historically has been the perpetual draw-down rate that I believe has never failed and has maintained the inflation adjusted value of the portfolio in the worst cases.

[Buffaloski Boris]

Yeah this is a well known problem - people retiring at high P/E values - and it should be taken into account.
SOR risk, another big one that needs to be addressed.
Interestingly the bond tent idea addresses both of these as I understand it.
Have you read the earlyretirementnow.com series? It goes through and much more, and in a lot of depth.

The easy solution is to work for a couple more years.

At a 3.5% withdrawal rate, you have about 28.5x your expenses, so at a inflation adjusted 6% long term return, 2 more years of work would mean your portfolio is worth 32x expenses. If you also saved some of your expenses, it would be closer to 33x and you now have a 3.0% withdrawal rate which historically has been the perpetual draw-down rate that I believe has never failed and has maintained the inflation adjusted value of the portfolio in the worst cases.

The info at early retirement now is very good. If I understand what he’s saying correctly, there are several strategies to minimize retirement failure including a lower withdrawal rate.

[MustacheAndaHalf]

I don't think we should pick this battle: he acknowledges saving a lot of money is good, and being frugal is good.  That's much closer to the FIRE philosophy than most people get.

He's right that the 4% withdrawal rule doesn't work if it becomes 8%... if you lose -50% in a crash, and keep spending at the same level, you can crash your portfolio.  He also emphasizes there's a lot of people in the financial industry who joined since 2009.  They've never been through a crash.  I actually agree that expected returns are lower when starting from high P/E values.

What's missing is evidence his approach beats the S&P 500.  He doesn't present a fund he's run that beats the S&P 500, even though he points out that equities have barely beaten treasuries since 2000.  Back in 2010, the S&P only beat 61% of large cap funds over 5 years.  But when you look at the 2018 report over the past 15 years, the S&P 500 beats 92% of large cap funds.  Even if he's right about when to sell... it doesn't mean he knows when to buy in again.  Make either decision wrong, and the passive index beats you.  He hasn't established that he's done this, or how to predict when to get back in (maybe that's a different article).

[Maenad]

I preserved capital because I was not losing much compared to those fully invested during that period while you guys did not get back to even until nearly may.

That's not true. I'm fully invested, kept pouring money in all the way down Q4 2018 and all the way back up, got back to my previous portfolio balance in February. Ultimately, the bear had no effect on my FI date.

[Metalcat]

So....he's basically saying that no one can retire ever...

K. Got it.

[nereo]

So....he's basically saying that no one can retire ever...

K. Got it.

Yeah, the article is click-bait.  I think there are two important things which can be highlighted from it;
1) No honest discussion of WR has ever concluded that 4% works 100% of the time - merely that it succeeds (i.e. does not go to $0) in the overwhelming majority of cases.  If you want to be truly bulletproof you need to use a slightly lower WR or build in my flexibility.  SORR has been discussed here ad nauseum, and certainly if you FIRE the year before a big crash your portfolio will more at risk.  BUT, you also have ample time to re-evaluate your path and potentially re-enter the workforce.  Also, arm-chair financial advisors have been warning that the market was overvalued for years.  MMM even wrote a thread about it circa 2014.  Anyone who FIREd that year is sitting pretty, even if there is a 30% drop from present highs tomorrow.

2) I reject the idea that the next bear market will "extinguish FIRE".  If anything it will serve as a wakeup call to (mostly younger) people who have failed to save much during these 'good times'.  Having been around these forums for a while, one common thread among motivating many posters here is having lived through the great recession and emerging from the other side thinking "I never want to be in that vulnerable a financial position, ever".

tl;dr - the fundamentals of FIRE are sound, keep living below your means and investing the difference.  Regardless of whether there's a big crash this year or another decade of impressive growth you will be better off for it.

[Davnasty]

If the overall point is that some people will be overoptimistic when the market is doing well, then sure, some people will.

But I can't take it all that seriously when he's making significant incorrect assumptions.

We need to assume that since our couple is in their 30’s, the investable assets are in taxable accounts

Nope

then we need to adjust the annual withdrawals for capital gains tax

Not at a $35,000 annual withdrawal rate. In fact his example couple should be able to withdraw around $102,000 AND all of it would need to be capital gains (some or even most of the withdrawal amount would be principal, not earnings) before they pay any CG tax. Is he taxing the full $35,000 at 15% in his chart?

However, we also have to assume:
•The couple never has children
•Never requires serious medical care (hopefully)
•Never considers buying a house
•Has no major life events, etc.

Anyone doing this correctly should be accounting for these points in their withdrawal rate. Why do the anti fire writers never get this? Especially buying a house, I suspect most people seeking FIRE on these forums already own one.

I could say this another way: if you end up withdrawing more than your SWR your chances of failure go up... this is not new information.

Oh, and Shen & Leung FIRE'd in 2014. Maybe he should've just used a hypothetical couple.

[Davnasty]

Yeah, the article is click-bait.

And if this one isn't clickbaity enough, he referenced his other article, “Everything You’ve Been Told About Savings & Investing Is Wrong”

Everything? Oh man, I better read this several page long article to relearn this investing thing.

ETA: And in both articles it seems he's completely missed the fact that the 4% rule accounts for inflation?

The living requirement in 44 years is based on today’s income level, not the future income level required to maintain the current living standard.

O RLY?

[EvenSteven]

Yeah, the article is click-bait.

And if this one isn't clickbaity enough, he referenced his other article, “Everything You’ve Been Told About Savings & Investing Is Wrong”

Everything? Oh man, I better read this several page long article to relearn this investing thing.

No, no, no. You should just pay this man to manage your money for you!

[Metalcat]

So....he's basically saying that no one can retire ever...

K. Got it.

Yeah, the article is click-bait.  I think there are two important things which can be highlighted from it;
1) No honest discussion of WR has ever concluded that 4% works 100% of the time - merely that it succeeds (i.e. does not go to $0) in the overwhelming majority of cases.  If you want to be truly bulletproof you need to use a slightly lower WR or build in my flexibility.  SORR has been discussed here ad nauseum, and certainly if you FIRE the year before a big crash your portfolio will more at risk.  BUT, you also have ample time to re-evaluate your path and potentially re-enter the workforce.  Also, arm-chair financial advisors have been warning that the market was overvalued for years.  MMM even wrote a thread about it circa 2014.  Anyone who FIREd that year is sitting pretty, even if there is a 30% drop from present highs tomorrow.

2) I reject the idea that the next bear market will "extinguish FIRE".  If anything it will serve as a wakeup call to (mostly younger) people who have failed to save much during these 'good times'.  Having been around these forums for a while, one common thread among motivating many posters here is having lived through the great recession and emerging from the other side thinking "I never want to be in that vulnerable a financial position, ever".

tl;dr - the fundamentals of FIRE are sound, keep living below your means and investing the difference.  Regardless of whether there's a big crash this year or another decade of impressive growth you will be better off for it.

This is the thing, pretty much all criticisms of the FIRE movement, be it this yahoo or Suze, or whatever, they all basically boil down to a fundamental criticism of retirement in general.

Most FI people are retiring with substantially more savings than traditional age retirees these days, so it seems disingenuous to be so concerned.

What is this mythical world that they live in where retiring at 65 makes all of these "concerns" magically disappear???

[UnleashHell]

its almost like if the fund managers want people to save more money and pay them a commission for investing it......

[SwordGuy]

Most FI people are retiring with substantially more savings than traditional age retirees these days, so it seems disingenuous to be so concerned.

What is this mythical world that they live in where retiring at 65 makes all of these "concerns" magically disappear???

The only valid concern is that the Trinity study was based on 30 years and some of that 95% success rate was a portfolio worth $1 starting year 31.

It's fair to have some concern over a 50-60 year retirement, particularly if it's leanFIRE instead of FIRE or fatFIRE.  Nothing that can't be mitigated against.

The thing that's funny is that a lot of Americans retire with little to no savings and yet, somehow, manage to get by for decades.   So, someone retiring with their initial stash cut in half is still way better off than most other Americans are -- plus they had the added advantage of not having to work for 30 years while they were young and full of energy.  How is that really a failure?

[theoverlook]

So many bad assumptions on the author's part...

A big one is assuming 6% return then removing inflation. S&P 500 has returned an average of around 7% .. after inflation over the last 90 years. That's around 9.8% before inflation.

Another has been covered - the taxes. They would pay 0% in taxes, on either dividends or capital gains, unless they have significant income from elsewhere in which case their withdrawals would drop.

Basically yet another "let's work as hard as we can to support the conclusion I've already made before running the numbers" type article.

[A Fella from Stella]

So many bad assumptions on the author's part...

A big one is assuming 6% return then removing inflation. S&P 500 has returned an average of around 7% .. after inflation over the last 90 years. That's around 9.8% before inflation.

Another has been covered - the taxes. They would pay 0% in taxes, on either dividends or capital gains, unless they have significant income from elsewhere in which case their withdrawals would drop.

Basically yet another "let's work as hard as we can to support the conclusion I've already made before running the numbers" type article.

You're so closed minded. Maybe it's 6% after his fees.

[Cabaka]

So many bad assumptions on the author's part...

A big one is assuming 6% return then removing inflation. S&P 500 has returned an average of around 7% .. after inflation over the last 90 years. That's around 9.8% before inflation.

Another has been covered - the taxes. They would pay 0% in taxes, on either dividends or capital gains, unless they have significant income from elsewhere in which case their withdrawals would drop.

Basically yet another "let's work as hard as we can to support the conclusion I've already made before running the numbers" type article.

that would be great if we all had 90 years until we had to take withdrawals, but even the most mustachian have been investing maybe 40 if we were starting at 20 and going FI at 60 and we have another serious correction coming off the FED rally since 2009.

i'm sorry but 9.8 percent return is a very financial instition number not realistic; but i'm going to let this lie as I know this will go no where here; I mainly come to watch the top is in thread anymore; its entertaining.


BTW, you all dollar cost averagers have now gained less than 1% since the market selloff last October, now 10 months ago; but yeah; the s+p averages 9.8% yearly.

[Davnasty]

So many bad assumptions on the author's part...

A big one is assuming 6% return then removing inflation. S&P 500 has returned an average of around 7% .. after inflation over the last 90 years. That's around 9.8% before inflation.

Another has been covered - the taxes. They would pay 0% in taxes, on either dividends or capital gains, unless they have significant income from elsewhere in which case their withdrawals would drop.

Basically yet another "let's work as hard as we can to support the conclusion I've already made before running the numbers" type article.

that would be great if we all had 90 years until we had to take withdrawals, but even the most mustachian have been investing maybe 40 if we were starting at 20 and going FI at 60 and we have another serious correction coming off the FED rally since 2009.

i'm sorry but 9.8 percent return is a very financial instition number not realistic; but i'm going to let this lie as I know this will go no where here; I mainly come to watch the top is in thread anymore; its entertaining.


BTW, you all dollar cost averagers have now gained less than 1% since the market selloff last October, now 10 months ago; but yeah; the s+p averages 9.8% yearly.

He uses 6% average returns -2.1% inflation for a real return of 3.9%.

During the worst 30-year period (1965-1994), the S&P 500 delivered 4.3% annual [inflation adjusted] returns.

The median annual returns for 30-year periods since 1928 has been 7.1%.

https://fourpillarfreedom.com/heres-how-the-sp-500-has-performed-since-1928/

Even if you use the worst case scenario it's better than his assumption. And you're completely ignoring the much more significant flaw in his argument; that his tax assumptions are all wrong.

If you take issue with the idea that past results can predict future returns well then maybe you have a point, but multiple obvious flaws have been pointed out from this article. It's just a bad piece of writing. Why are you so dead set on defending....

Oh, hi Lance.

[Bloop Bloop]

I actually prefer a bear market because I believe recessions lead to greater purchasing power for those whose incomes stay stable. Am I wrong to think like this? It seems to me that in a recession, property/shares dip, inflation dips, so for someone who's young, partly invested and partly cash, and confident of his earning capacity, it's best to hedge your bets and hope, in part, for a major market failure that would then allow you to buy low.

[Metalcat]

I actually prefer a bear market because I believe recessions lead to greater purchasing power for those whose incomes stay stable. Am I wrong to think like this? It seems to me that in a recession, property/shares dip, inflation dips, so for someone who's young, partly invested and partly cash, and confident of his earning capacity, it's best to hedge your bets and hope, in part, for a major market failure that would then allow you to buy low.

It's actually very difficult to predict whose industry will get smashed by a recession and whose won't, but yes, there are HUGE opportunities in recessions for those who know how to utilize them.

The largest behemoth in my industry was born out of the last recession where they swallowed up smaller businesses by the hundreds, soon to be thousands.

[harvestbook]

it's best to hedge your bets and hope, in part, for a major market failure that would then allow you to buy low.

But there may be unintended consequences of a failure--such as your personal failure through losing a job, being forced to sell investments at the worst time, losing your home or place to live, getting sick or injured at the exact wrong time, and that the market may stay "failed" for a long, long time.

I prefer to be agnostic and ambivalent about whatever the market is doing, at least as best I can. I don't want to base my behavior on what may or may not happen, but instead of just keep saving, investing, and keeping costs low (the things I can control.) I don't "hope" for the market to go one way or another, although I am confident in the markets over the long term of a lifetime. It's just the timing that can get iffy.

[SimpleLifer]

I appreciate a skeptic's perspective. 

However, he lost all credibility when he started talking about CG tax.  My earned income tax overhead as a w-2 employee is enormous. 

If they're withdrawing $35K per year to cover living expenses, and they are US-based, with the standard deduction for Fed tax, then they have a very low to no-tax burden (depending on which state they live in).

Next.

[Bloop Bloop]

it's best to hedge your bets and hope, in part, for a major market failure that would then allow you to buy low.

But there may be unintended consequences of a failure--such as your personal failure through losing a job, being forced to sell investments at the worst time, losing your home or place to live, getting sick or injured at the exact wrong time, and that the market may stay "failed" for a long, long time.

I prefer to be agnostic and ambivalent about whatever the market is doing, at least as best I can. I don't want to base my behavior on what may or may not happen, but instead of just keep saving, investing, and keeping costs low (the things I can control.) I don't "hope" for the market to go one way or another, although I am confident in the markets over the long term of a lifetime. It's just the timing that can get iffy.

Yes, I agree with what you say, but I feel that all things considered, if you are currently in a strong cash position and you feel like your job sector is buoyant, if you do an Expected Value analysis, a recession offers larger gains than the status quo. Even if the recession lasts for years and years, you still get some benefits from having a decent cash position initially.

[Telecaster]

that would be great if we all had 90 years until we had to take withdrawals, but even the most mustachian have been investing maybe 40 if we were starting at 20 and going FI at 60 and we have another serious correction coming off the FED rally since 2009.

i'm sorry but 9.8 percent return is a very financial instition number not realistic; but i'm going to let this lie as I know this will go no where here; I mainly come to watch the top is in thread anymore; its entertaining.

BTW, you all dollar cost averagers have now gained less than 1% since the market selloff last October, now 10 months ago; but yeah; the s+p averages 9.8% yearly.

Math.  It is your friend.  Not your enemy. Learn it.  Be good at it. Come back when you do. 

[Bloop Bloop]

I think it makes sense to be wary of long-term averages. How do we know that we can replicate the economic success of the last 70 years when there might be issues like overpopulation, populism, global warming, robots, increasing inequality which become pesky thorns in the side of those of us who just want the capitalist system to keep running?

I take a conservative approach for this reason.

[Dee]

Kristy and Bryce are Canadian. They actually did use a financial planner (fee only, I assume):
https://www.greaterfool.ca/?s=millennial-revolution.com.

As Canadians, their assessment and planning for health issues would be different than that faced by Americans. While they might need to re-establish residency in Canada before being covered by our public health coverage, they have the option of coming back home to Canada whenever they want. I believe they have bought travelers' insurance in the meantime. 

They are now tracking their FIRE stash and their post-FIRE stash separately because, surprise, surprise, their earnings since FIRE have been more than zero. So, in time, they will know whether their original stash would have sustained them but it will become more of a hypothetical exercise because these smart, driven people in their early-30s are already earning money while leading their FIREd life of freedom. Kristy especially seems really interested in not just writing books but writing books that can be published, be read and earn money.

I wouldn't be surprised if they address this article in a future blog post.

[bacchi]

Kristy and Bryce are Canadian. They actually did use a financial planner (fee only, I assume):
https://www.greaterfool.ca/?s=millennial-revolution.com.

Good gods, their investment article on dividends is awful.