Revisiting the asset allocation question - The case for 100% stocks

[Metric Mouse]

Volatility is only temporary, but you can permanently cripple your portfolio trying to avoid it.

I'm trying to decide if I love this quote, or should come up with ways to pick it a part.  Thought provoking for sure!

[mathjak107]

Bill Bernstein: "...the best "annuity purchase" you can make is to delay beginning Social Security until age 70".

Is there a reference for that quote, and more background?

I would have thought it was calculated to be actuarially equal, so unless you happen to know something the actuarial tables don't (heavy smoker, or family history of living to 120, etc) that it was a crapshoot either way.

It's from "The Investor's Manifesto". I believe you are correct that SS start dates are calculated to be actuarially equal. Bernstein's idea is to delay so you get higher payments when your human capital (ability to earn) is low or non-existent. It's about risk-reduction more than being financially optimal.

On page 145 he says: "This calculates out to a guaranteed real return from waiting of 8 percent per year, which is hard to beat anywhere in the capital markets. Should you "live too long", the bigger monthly check will come in very handy indeed."

social security has not been neutral since  folks started living longer . we also still have spousal benefits  and adders for the spouse that increase things .

with the odds of a 65 year old couple at 74% of one of them seeing 85 and almost 50% of seeing 90 i would not want to bet against  those odds .

social security increases are just that ,  an increase . it is not a 6% or 8% roi  at all . you get about a 6% increase each year from 62 to fra and 8% from fra to 70 .

but it is not a return because you are giving up both checks and spousal benefits as part of the deal of delaying .

actual return is much less . in fact if you are spending down a balanced portfolio in order to delay and giving up checks as well as spousal benefits it can take almost 24 years to see any roi .

delaying does eventually give you not only more money  as as well as allow more spending early on if you live long enough .

social security has zero sequence risk so no extra powder has to be kept dry for poor outcomes .

we are delaying because it cuts our need to be dependent on markets  more . i go from 3.50% to less than a  2.50% withdrawal rates . the difference will refill what we spent down from our own money early on while delaying .

you do not wait until 70 to spend more . you draw your full budgeted amount day 1 and refill down the road .

if you live to 90 you can see a real return of about 5% which rivals balanced fund returns .

using the fidelity social security optimizing software , it worked out the optimum plan for us for most dollars .

it is an in house tool only not on line .

what it came up with and we are doing is this :

i am 64 and my wife 66 .

she was collecting an early benefit at 62 and stopped it when she hit fra .  her benefit now grows 8% a year and  when she is 70 she will resume . i will be 68 -10 months when she resumes and i will file restricted application for 1/2 hers .

at 70 i wile file for mine and when i file she gets a spousal adder of 4200.00 added to her benefit .

so we should see , even with my wife's poor work record about 55k a year plus colas  by delaying .

we are spending a bit more delaying than we would have filing early since we eventually will refill our savings with a 70% bigger check at 70 then it would have been at 62 .

no one should consider an annuity until they delayed ss . there is no annuity you can buy for the money in checks you give up by delaying that will pay you a cola adjusted amount like ss will .

charts by michael kitces





below is assuming spending down balanced portfolio while delaying

[DavidAnnArbor]

following

[Interest Compound]

...Like imagine a guy (Guy A) with 100% stocks who has a 500k home with an 80% LTV mortgage and $1.2m in invested assets.  So his net worth is $1.3m.

In contrast, the guy who doesn't have a mortgage (let's call him Guy B) only has 800k in invested assets pre crash.  His net worth also starts at $1.3m

The big problem with comparisons like this, is they both have the same starting point. Since the housing market only grows with inflation long-term:



While the market grows faster than inflation long-term:



Person A, with their 100% stocks, is significantly more likely to have a much higher net-worth when the crash comes, than Person B. In fact, if they have to wait about 10 years for the crash, Person A on average will have about double the net-worth of Person B.

Keep that in mind when thinking about making real-world-decisions based on such comparisons.

[NorcalBlue]

To put some numbers to my statements on VPW, I've looked at all the available years, tested the standard 30 year retirement and a longer 70 year retirement, both with $1,000,000 in 100% stocks, and these factors remained consistent (all dollars inflation-adjusted):

• In total, there was a 65% chance that VPW never lowered your withdrawal amount below the 4% rule.
• The median withdrawal for these 65% of people was between $120k-$150k.
• ---> If you were part of the unlucky 35%, 92% of your retirement years remained above the 4% rule.
• ------> In the worst case scenario 8% of years where you fell short, you were typically about $5,000 short for the year. About $400-$500 a month.
• The times this happened were clustered around 1966 and 1929, where the 4% rule left you unable to feed yourself.
• The median withdrawal for these 35% of people, was between $50k-$70k.

This assumes Person #1's path, where they take the full possible withdrawal each year, and throw away 100% of withdrawn cash that's above and beyond their living expenses. No cash buffer, no keeping the unused portion invested (Person #2's path), none of that. The numbers above represent a subset of a subset of a worst case scenario (35%), on top of another worst case scenario (8%), on top of another worst case scenario (withdrawing the total amount each year, even if you don't need it, throwing away the excess cash each year so there's no buffer), and the result is $400-$500 a month.

If you aren't comfortable with that, VPW isn't for you.

IC - is the VPW 4% on the annual portfolio balance in the example above?  Thanks.

[Interest Compound]

We're working on different goal-sets I think.  And maybe picturing different scenarios entirely.  My scenario is someone who has just retired and wants to mitigate sequence of returns risk.  They can either keep a mortgage or pay it down.  I agree that Person A is more likely to have more money than Person B after the passage of time (remember they are the same person, just taking different hypothetical paths).  I agree that "on average" they will win if you are measuring who has the most toys at some end date.  That would be true of anybody who makes an asset allocation choice to put more in a higher risk/higher return asset.  But at the margins the higher risk investor is more fragile.

I think we're mostly on the same page here. Where we disagree is the last statement in bold. From what I can see, since Person B on average has less money over the long-run, they are in turn more fragile in the context of retiring early and living off their money for decades.

Yes, they're mitigating short-term sequence of returns risk (which is much easier for the average investor to see), but overall they're subjecting themselves to more risk of running out of money before they die.

[Radagast]

Bill Bernstein: "...the best "annuity purchase" you can make is to delay beginning Social Security until age 70".

Is there a reference for that quote, and more background?

I would have thought it was calculated to be actuarially equal, so unless you happen to know something the actuarial tables don't (heavy smoker, or family history of living to 120, etc) that it was a crapshoot either way.

I think you are reading it as "it's better to delay than take it" (and arguing it's a wash either way), where as he's saying "it's a better annuity than you can buy."

That is, he's not comparing taking it early to late, he's comparing delaying it to purchasing an annuity.  If you want an annuity, delaying SS is more efficient, money wise, because most annuities are such bad deals.  Does that make more sense?

It's from "The Investor's Manifesto". I believe you are correct that SS start dates are calculated to be actuarially equal. Bernstein's idea is to delay so you get higher payments when your human capital (ability to earn) is low or non-existent. It's about risk-reduction more than being financially optimal.

On page 145 he says: "This calculates out to a guaranteed real return from waiting of 8 percent per year, which is hard to beat anywhere in the capital markets. Should you "live too long", the bigger monthly check will come in very handy indeed."

Those both clarify a bit, thanks. Seems more reasonable, or at least on the face less objectionable :)

If I recall, SS is not actuarially fair. Like many US retirement programs, distributions were calculated many decades ago and never updated. Thus you effectively get a guaranteed inflation adjusted yield of a little more than 8% per year by delaying. Been a while since I read that and I just filed it away in the "things to remember in 30 years" category so you'd need to look into specifics.

[Mariposa]

Such great analysis from every side. Following.

[Radagast]

Does going through the actual sucky periods (1906, 1929, 1937, and 1966) and illustrating how much scarier it is to be Person A in those periods help you at all to see why leverage can increase risk?  I'm sure you can find examples of the counter-phenomenon you cite (early growth protecting Person A from a crisis down the road), but they're not coming out in this strawman, at least not when it counts.  I know that all this is sensitive to a variety of assumptions and circumstances, but studies have typically shown that the most risk is in the early returns not the later ones and this seems to bear that out.  In those scenarios Person A gets hit harder because that is when they have the most leverage.

I think IC would point out that many of these periods would not have been nearly as bad if you had 50% in international stocks. Owning only US stocks adds its own additional risks.

On the other hand, I agree with you that even though 50% international is less risky, it is even less risky still to own a house without a mortgage. In this case it is all about "safety and enough" vs. "less safety and probably much more than enough". Ultimately, I am all about diversification of risks and assets. Owning a house (especially a well-insulated house with a vegetable garden) is a very obvious way to get huge diversification that no electronic assets can replace.

[bassguitar115]

I'm currently at about 90/10 stocks/bonds. Based on the information in this post (and some speculation on my part regarding the bond market), I'm thinking of moving to 100% stocks. I'm 26 and have a long investing path ahead of me.

If I make this transition, what is the best way to handle the transaction? I have some bond market funds in my IRA and some bond market funds in my taxable account (before I had any idea what I was doing). I'm just looking for any tips/advice. Should I sell all and immediately buy more VTSAX or are there other issues I should consider?

[Interest Compound]

To put some numbers to my statements on VPW, I've looked at all the available years, tested the standard 30 year retirement and a longer 70 year retirement, both with $1,000,000 in 100% stocks, and these factors remained consistent (all dollars inflation-adjusted):

• In total, there was a 65% chance that VPW never lowered your withdrawal amount below the 4% rule.
• The median withdrawal for these 65% of people was between $120k-$150k.
• ---> If you were part of the unlucky 35%, 92% of your retirement years remained above the 4% rule.
• ------> In the worst case scenario 8% of years where you fell short, you were typically about $5,000 short for the year. About $400-$500 a month.
• The times this happened were clustered around 1966 and 1929, where the 4% rule left you unable to feed yourself.
• The median withdrawal for these 35% of people, was between $50k-$70k.

This assumes Person #1's path, where they take the full possible withdrawal each year, and throw away 100% of withdrawn cash that's above and beyond their living expenses. No cash buffer, no keeping the unused portion invested (Person #2's path), none of that. The numbers above represent a subset of a subset of a worst case scenario (35%), on top of another worst case scenario (8%), on top of another worst case scenario (withdrawing the total amount each year, even if you don't need it, throwing away the excess cash each year so there's no buffer), and the result is $400-$500 a month.

If you aren't comfortable with that, VPW isn't for you.

IC - is the VPW 4% on the annual portfolio balance in the example above?  Thanks.

I don't use a specific % when backtesting VPW. Download the VPW spreadsheet and see how it works:

https://www.bogleheads.org/wiki/Variable_percentage_withdrawal

If you're trying to use the VPW function on cfiresim.com, the number it's asking for is the "Internal Rate" number on the "Table" sheet of the VPW spreadsheet. Since my calculations are based off a 100% stock portfolio, the Internal Rate is 5%.

[Interest Compound]

I think we're mostly on the same page here. Where we disagree is the last statement in bold. From what I can see, since Person B on average has less money over the long-run, they are in turn more fragile in the context of retiring early and living off their money for decades.

Yes, they're mitigating short-term sequence of returns risk (which is much easier for the average investor to see), but overall they're subjecting themselves to more risk of running out of money before they die.

Let's try some math and see if we can observe the phenomenom you describe in the historical record.  Again, it is the downside tails I am interested in, not the averages where everything works fine for everybody. 

SO...  Assume both guys have $800k of net worth ex house, but one guy takes a 400k mortgage and the other guy doesn't (so Person A invests $1.2m in stocks and Person B only invests $800k).  You can assume the house is worth 500k but that's not critical for this (Person A has 100k of equity while Person B has 500k of equity in the house).  I paramaterized the cfiresim runs as follows:  both have 30k of base spending that will inflation adjust .  Person A also has 30k a year in fixed mortgage payments for 30 years that does not inflation adjust.  Run the simulations for 40 years and make the asset allocation 100% stocks in line with the subject of this overall thread. So Person A starts with 1.2m of invested assets and Person B starts with 800k.  You need to add non inflation adjusting extra spending for the first 30 years for Person A to capture the mortgage.  Results:

Person A (with mortgage):
Average ending wealth:  $4.5m
Success rate:  90%
Lowest dip:  ($5.5m)
Fifth lowest dip: ($4.5m)
Vintages with wipe outs or near wipeout:  1906, 1929-30, 1937, 1965-69

Person B (without mortgage):
Average ending wealth:  $4.1m
Success rate: 93%
Lowest dip: ($0.6m)
Fifth lowest dip: (0.3m)
Vintages with wipe outs or near wipeout: Basically the same as Person A except for 1937

As expected, average wealth is higher for Person A.  Interestingly success rates are similar.  But dig one layer deeper and look at the scariest dips (i.e. the risks at the margins).  While both have high success rates, when things go really shitty for the leveraged investor things can get much uglier (just like they can much rosier on the upside).  At least in the historical record Person A can end up wiped out and then some.  The only time Person B gets decimated they probably could have lived off their home equity in the last years.  I'm sure you can get different results by playing with the parameters etc. but I'm concerned about the dips not the averages and I'm also starting with a low WR so keep those assumptions intact in your runs.  Basic takeaway--leverage exacerbates dips. 

Statistics are one thing, but actually walking through the historical periods and seeing what would happen brings it alive for me.  So I think it's illuminating to look even closer at the particular times in history when wipe outs occurred and how our competing Persons did-- 

The worst runs for Person A happens in the 1929 vintage, the classic depression scenario.  By 1942, 14 years after early retirement, Person A is basically out of money.  If they can somehow keep borrowing they'd be in the hole to the tune of $5m by the end of the run.  Ouch.  How is Person B doing in 1942?  300k in net worth, so down over 50% from the 800k original.  Not great.  But even without supplementation Person B limps along and only runs out of money in 1962, fully 20 years after Person A!  Both Person A and Person B score as 1929 vintage failures in the run, but Person B went broke after 14 years whereas Person B survived just fine for 34 years.  That's a big difference.

Person A also had a sucky time with the 1906 vintage, going bust after 24 years and ending the 40 years in the hole to the tune of 800k.  How did Person B do?  This also scores as a failure for B, but he doesn't run out of money until 1945, 39 years into the 40 year run and he ends the run in the hole to the tune of -61k.  1906 scores as a failure for both Person A and Person B but these are very different results in my view.

Vintage 1966 sucked big.  How did our two guys do?  This was the worst run for my friend Mr. B and he ends in the hole to the tune of 600k, running out of money in 1993, 27 years into the run.  Ouch.  Did A fare better?  Nope.  Worse as usual.  A ran out of money in 1990 and ended the run in the hole to the tune of $1m.

How about 1937, a vintage that some people might compare in terms of stage of cycle and policy to today (like say Ray Dalio).  This was a near miss for Person A, who ends the run with only 28k in assets.  Person B?  Not a near miss--he ends with $651k inflation adjusted, or 81% of his initial value.

Does going through the actual sucky periods (1906, 1929, 1937, and 1966) and illustrating how much scarier it is to be Person A in those periods help you at all to see why leverage can increase risk?  I'm sure you can find examples of the counter-phenomenon you cite (early growth protecting Person A from a crisis down the road), but they're not coming out in this strawman, at least not when it counts.  I know that all this is sensitive to a variety of assumptions and circumstances, but studies have typically shown that the most risk is in the early returns not the later ones and this seems to bear that out.  In those scenarios Person A gets hit harder because that is when they have the most leverage.

Of course leverage becomes more attractive as interest rates go down.  You can get a significantly cheaper mortgage right now then in any of these precedential periods (where the rate on a 30 year fixed typically would have been more like 5-7%).  But leverage also becomes less attractive as expected returns come down.  And those two things are correlated.  Leverage is probably at its potential worst when the risks of a big sustained drop are at their highest.  So if you have any reason to believe risks are increased to the downside at your time of retirement (high schiller P/E's, decreasing ammunition for fiscal and monetary support, declining growth rates, exploding debt levels) that might play into your thinking.  But at the end of the day there is a risk and return tradeoff that you need to make for yourself.   

Great analysis!

Interestingly, the numbers in your example come out pretty similar to a 100/0 vs 67/33 stock/bond comparison. In other words, if Person B put their $400k in Bonds instead of a mortgage, they last just about as long during the catastrophe scenarios.

I know you don't want to nit-pick the details of your example too much, but I feel the need to make a few points on it:

• In the first year person A is withdrawing $60,000 in expenses from a $1,200,000 portfolio (5% withdrawal rate)
• In the first year person B is withdrawing $30,000 in expenses from an $800,000 portfolio (3.75% withdrawal rate)
• According to the Amortization Schedule Calculator, mortgage interest rates would have to be 6.5% for their mortgage payment to be $30,000 a year on a $400,000 house:
  
  
  
  You're essentially taking $400,000 of Person B's portfolio, and swapping it out for an asset with a guaranteed 6.5% return, at the exact moment that stocks start performing poorly.

Considering the above, the results aren't surprising. I wouldn't get a mortgage at 6.5% if I could pay cash either :)

That said, your post highlights a main point of this thread. Blindly withdrawing expense needs from a portfolio can lead to ruin. Your portfolio doesn't care what your expense needs are, so your withdrawals shouldn't be based on your expense needs. I think it's important to be flexible and I'm careful not to confuse retirement expense needs with withdrawal amount. Expense needs are part of budgeting. withdrawal amount is like an income.

If person A and person B in your example were using VPW, they quickly would've realized they were in trouble. Their income would've dropped below their expense needs, forcing them to react:

• Maybe they get a part-time job to make up the difference. I have tons of friends who decided to learn photography. Within a month they were booking paid gigs. Two paid gigs a month, as a beginner doing something they love, is enough to bring you from a 4% withdrawal rate, to 3% on a $1,000,000 portfolio.
• Maybe they realize they can't actually afford that $400,000 house, and down-size or move to a cheaper area.

They have a few options, but either way they are forced to react. With the 4% rule, or the *expense-needs based* withdrawal method from your example, people can be led into a false sense of security. They might stay in that $400,000 house for years, or decades, only to realize when they're broke that they actually couldn't afford it.

In short, if you're focusing on the downside tails, asset allocation is important, but withdrawal method can have just as big an impact. Discovering VPW removed a big hurdle of 100% stocks for me. The fear of portfolio failure is gone, as VPW cannot fail.

[arebelspy]

Maybe they get a part-time job to make up the difference. I have tons of friends who decided to learn photography. Within a month they were booking paid gigs. Two paid gigs a month, as a beginner doing something they love, is enough to bring you from a 4% withdrawal rate, to 3% on a $1,000,000 portfolio.

Do you think finding (and getting hired for) multiple jobs per month that pay you in excess of $400 per month each, as a beginner (with no previous client base for referrals, no marketing, etc.) is a realistic scenario, or more of a fluke?

[Interest Compound]

Maybe they get a part-time job to make up the difference. I have tons of friends who decided to learn photography. Within a month they were booking paid gigs. Two paid gigs a month, as a beginner doing something they love, is enough to bring you from a 4% withdrawal rate, to 3% on a $1,000,000 portfolio.

Do you think finding (and getting hired for) multiple jobs per month that pay you in excess of $400 per month each, as a beginner (with no previous client base for referrals, no marketing, etc.) is a realistic scenario, or more of a fluke?

I've seen it happen enough times that it doesn't seem like a fluke to me. Let's not focus on this specific example. Maybe it's different elsewhere, but earning $10,000 a year with a side-gig, especially when you're not tied down by the stress/timesink of a job, just doesn't seem to difficult to me ¯\_(ツ)_/¯

[arebelspy]

Maybe.  Maybe not.  Maybe they don't want to.  Adding it in as a backup plan D for some people is fine.  Assuming it will be the case as part of your withdrawal strategy... well, I personally wouldn't.  I'd prefer a more robust model that didn't need additional inputs, nor require me to drastically change my spending year to year.

YMMV.  :)

[Interest Compound]

Maybe.  Maybe not.  Maybe they don't want to.  Adding it in as a backup plan D for some people is fine.  Assuming it will be the case as part of your withdrawal strategy... well, I personally wouldn't.  I'd prefer a more robust model that didn't need additional inputs, nor require me to drastically change my spending year to year.

Most people using VPW with 100% stocks will never have to lower expenses, or get a part-time gig. If you pick an unlucky year to retire, instead of face a portfolio-wipe, you'll have to reduce expenses or spend 8% of your retirement years working a side-gig for typically about $5000 a year. That's backup-plan territory to me.

YMMV.  :)

[Tyler]

The fear of portfolio failure is gone, as VPW cannot fail.

To be precise, VPW cannot fail by running out of money but it definitely can fail by not allowing enough of a withdrawal to support your expenses.  But I hear what you're saying and appreciate that you have a plan in place for what you will do if that happens. 

I don't use a specific % when backtesting VPW. Download the VPW spreadsheet and see how it works:

https://www.bogleheads.org/wiki/Variable_percentage_withdrawal

True -- the VPW calculations are all automatic and output the allowable WR for the year.  However, one interesting thing I learned about VPW that may be particularly pertinent to people here is that for very early retirees it behaves almost exactly like a constant % withdrawal (where you simply withdraw X% of the portfolio value every year) for a large portion of retirement.  Play with this for a while and you'll see what I mean.  The VPW ramping magic really doesn't kick in until you get closer to a more traditional retirement age.

But that's just an observation and not a critique.  I'm happy you've found a method that gives you confidence in your plan.

[Metric Mouse]

Maybe they get a part-time job to make up the difference. I have tons of friends who decided to learn photography. Within a month they were booking paid gigs. Two paid gigs a month, as a beginner doing something they love, is enough to bring you from a 4% withdrawal rate, to 3% on a $1,000,000 portfolio.

Do you think finding (and getting hired for) multiple jobs per month that pay you in excess of $400 per month each, as a beginner (with no previous client base for referrals, no marketing, etc.) is a realistic scenario, or more of a fluke?

I've seen it happen enough times that it doesn't seem like a fluke to me. Let's not focus on this specific example. Maybe it's different elsewhere, but earning $10,000 a year with a side-gig, especially when you're not tied down by the stress/timesink of a job, just doesn't seem to difficult to me ¯\_(ツ)_/¯

And on the plus side, if they can do this well to start, their prospects probably look even better in the future as they do build that portfolio/client base/referral base.

[Retire-Canada]

Most people using VPW with 100% stocks will never have to lower expenses, or get a part-time gig. If you pick an unlucky year to retire, instead of face a portfolio-wipe, you'll have to reduce expenses or spend 8% of your retirement years working a side-gig for typically about $5000 a year. That's backup-plan territory to me.

Folks using a 4% SWR plan will [likely] do the same thing if they face some serious headwinds - especially early on. At least everyone that I have chatted with has both some flexibility in annual spending and some side gig plans should they need to work. I haven't talked to anyone who plans on taking out 4%/yr of the initial portfolio value [adjusted for inflation] with no changes regardless of market performance. That essentially means they are using a variable withdrawal rate, but not one that's highly structured.

[arebelspy]

Most people using VPW with 100% stocks will never have to lower expenses, or get a part-time gig. If you pick an unlucky year to retire, instead of face a portfolio-wipe, you'll have to reduce expenses or spend 8% of your retirement years working a side-gig for typically about $5000 a year. That's backup-plan territory to me.

Folks using a 4% SWR plan will [likely] do the same thing if they face some serious headwinds - especially early on. At least everyone that I have chatted with has both some flexibility in annual spending and some side gig plans should they need to work. I haven't talked to anyone who plans on taking out 4%/yr of the initial portfolio value [adjusted for inflation] with no changes regardless of market performance. That essentially means they are using a variable withdrawal rate, but not one that's highly structured.

Agreed.  I think that's much more typical, and much more realistic.

[Pooplips]

Most people using VPW with 100% stocks will never have to lower expenses, or get a part-time gig. If you pick an unlucky year to retire, instead of face a portfolio-wipe, you'll have to reduce expenses or spend 8% of your retirement years working a side-gig for typically about $5000 a year. That's backup-plan territory to me.

Folks using a 4% SWR plan will [likely] do the same thing if they face some serious headwinds - especially early on. At least everyone that I have chatted with has both some flexibility in annual spending and some side gig plans should they need to work. I haven't talked to anyone who plans on taking out 4%/yr of the initial portfolio value [adjusted for inflation] with no changes regardless of market performance. That essentially means they are using a variable withdrawal rate, but not one that's highly structured.

Agreed.  I think that's much more typical, and much more realistic.

I think Interest Compound was suggesting that VPW gives you an early warning better than 4% WR. What do you guys consider a serious headwind?

[boarder42]

I love this method b/c i'm always looking for ways to make money on the side anyways plus my wife is a photographer.  so when we FIRE we will likley just be doing things we already love to do.  i can bring in around 10k a year pretty easy just buying and reselling things like tickets.  and one wedding is worth 2-3k for my wife.

[arebelspy]

Folks using a 4% SWR plan will [likely] do the same thing if they face some serious headwinds - especially early on. At least everyone that I have chatted with has both some flexibility in annual spending and some side gig plans should they need to work. I haven't talked to anyone who plans on taking out 4%/yr of the initial portfolio value [adjusted for inflation] with no changes regardless of market performance. That essentially means they are using a variable withdrawal rate, but not one that's highly structured.

Agreed.  I think that's much more typical, and much more realistic.

I think Interest Compound was suggesting that VPW gives you an early warning better than 4% WR. What do you guys consider a serious headwind?

The warning is just that your portfolio dropped a lot.

VPW telling you to cut your budget by ridiculous amounts is unrealistic, IMO, based on what I'd guess the percent of most ER's budget is "essential."

In other words, you see the market is down, and you cut your spending where you can, or maybe earn a bit more.  That's realistic, and what almost anyone would do.  Following a formulaic "4% increase with inflation" is as unlikely as following a formulaic "VPW %, drop your spending by 30% this year" or whatever.  You'll tighten where you can, even if it means your spending that year may be 5% or whatever.  And if it's still down the next year, you keep the belt tight.  Maybe you loosen it once the markets rise back up and you're near a 4%. 

Pretty much everyone will have a variable spend in FIRE--these aren't spherical withdrawals in a vacuum.  In the real world, spending varies year-to-year, and one is likely to cut back if they see their portfolio diving.  But the crazy swings in budget that VPW has is unrealistic, to me.

Hope that clarifies on what you were asking.  :)

[Interest Compound]

Most people using VPW with 100% stocks will never have to lower expenses, or get a part-time gig. If you pick an unlucky year to retire, instead of face a portfolio-wipe, you'll have to reduce expenses or spend 8% of your retirement years working a side-gig for typically about $5000 a year. That's backup-plan territory to me.

Folks using a 4% SWR plan will [likely] do the same thing if they face some serious headwinds - especially early on. At least everyone that I have chatted with has both some flexibility in annual spending and some side gig plans should they need to work. I haven't talked to anyone who plans on taking out 4%/yr of the initial portfolio value [adjusted for inflation] with no changes regardless of market performance. That essentially means they are using a variable withdrawal rate, but not one that's highly structured.

Agreed.  I think that's much more typical, and much more realistic.

I think Interest Compound was suggesting that VPW gives you an early warning better than 4% WR. What do you guys consider a serious headwind?

Exactly. VPW is a rational solution to the SWR dillema: Markets went down a lot so should I reduce my withdrawals? By how much? Markets went up a lot and I need to buy a car, can I increase my withdrawals? By how much? VPW provides a mathematical answer that will protect the portfolio from ruin.

The 4% rule, in contrast, doesn't provide any early warning or guidance for these questions. It doesn't even attempt to.

The argument against VPW seems to be,

• "Well I'd be making these decisions anyway, so why do I need a guide? If the 4% rule tells me I can withdrawal $45k this year, but I feel like the market isn't doing well, I'll just try my best to withdrawal less. That's preferable to VPW explicitly telling me this year's safe withdrawal is $35k, that's unreasonable!"

If I'm going to ignore the recommendation anyway, I'd rather my baseline target be somewhat intelligent (guaranteed not to fail) and in the ballpark of where I need to be:

• "It's Jan 1, and my guaranteed-not-to-fail safe withdrawal based on current market conditions and my age (how long I need the money to last) for this year is $35k, let's try our best to reach that. If it doesn't look like we can get there by reducing expenses alone, let's plan this year for our side-gig to bridge the gap."

Seems a lot better to me than:

• "It's Jan 1. I think the market is down enough that we should adjust our withdrawals. Our 4% rule withdrawal this year based on what my expenses were 5 years ago + inflation is $45k. I'm not sure where we need to be, so let's tighten where we can."

If you're more comfortable with the latter, that's fine :) More options for everybody :D

[Retire-Canada]

I think Interest Compound was suggesting that VPW gives you an early warning better than 4% WR. What do you guys consider a serious headwind?

Just to be clear I've got nothing against the VPW plan IC is talking about. I'm still pretty focused on the saving phase of my plan and then I'll downshift to part-time work for a few years before I can FIRE so I figure that downshift period will provide me lots of time to determine my withdrawal strategy. I will definitely use some sort of variable withdrawal rate, but I don't know how formal the mechanism will be. It's possible I will decide to use VPW.

So what's a serious headwind?

Well to start with any year that my portfolio earns 4% + inflation I'll feel free to spend my full FIRE budget. Any year where I earn less than that I'll start to feel "encouraged" to spend less with the level of motivation commensurate with the performance of my portfolio.***  The longer the downturn and the greater the magnitude the more "motivated" I will be to reduce my spending.

I don't see a problem with the budget cuts proposed by the VPW method IC is talking about. And keep in mind when I say budget/spending cuts that really means cuts to the withdrawal from my portfolio. If I am sufficiently motivated I could work a little part-time to allow my spending to stay "normal".

*** - It seems like the main problem with FIRE plans is a bad start so if I get through the first 10 years in fine form I'll probably have so much money that further market drops won't affect my spending unless they are truly huge.

[Interest Compound]

I love this method b/c i'm always looking for ways to make money on the side anyways plus my wife is a photographer.  so when we FIRE we will likley just be doing things we already love to do.  i can bring in around 10k a year pretty easy just buying and reselling things like tickets.  and one wedding is worth 2-3k for my wife.

Yea, I think a lot of people underestimate the amount of money they'll make once they're FIRE'd and have all the time in the world. I found this thread enlightening:

Post-FIRE folks: How many of you ended up earning from paying hobbies?

[Tyler]

The argument against VPW seems to be,

• "Well I'd be making these decisions anyway, so why do I need a guide? If the 4% rule tells me I can withdrawal $45k this year, but I feel like the market isn't doing well, I'll just try my best to withdrawal less. That's preferable to VPW explicitly telling me this year's safe withdrawal is $35k, that's unreasonable!"

IMHO, the strongest argument against VPW is that the calculations do not account for your actual spending needs. It maximizes payouts in good years regardless of need and slashes them in bad years regardless of how it will affect your standard of living.  For reference, to address the minimum spending problem the guy who invented VPW recommends using it only in conjunction with reliable base income including Social Security, pensions, and annuities to cover your basic expenses.  But those options are not available for early retirees.

You address the same shortcoming with your willingness to earn more money in retirement when VPW does not support your needs.  That's a perfectly reasonable solution and will work just fine.  Saving more to build a buffer so that the worst-case historical outcomes still allow you to pay the bills is also a good option.  But other people may have different views on how desirable or practical either of those options are for them personally, so I can understand why VPW is not for everybody. 

[arebelspy]

I love this method b/c i'm always looking for ways to make money on the side anyways plus my wife is a photographer.  so when we FIRE we will likley just be doing things we already love to do.  i can bring in around 10k a year pretty easy just buying and reselling things like tickets.  and one wedding is worth 2-3k for my wife.

Yea, I think a lot of people underestimate the amount of money they'll make once they're FIRE'd and have all the time in the world. I found this thread enlightening:

Post-FIRE folks: How many of you ended up earning from paying hobbies?

The sample size on that poll (currently 11) is much too small to draw any meaningful conclusions, sadly (aside from the other issues, like sample bias).

[Interest Compound]

Where did he go?

Hopefully (for his sake) off to enjoy FIRE, but hopefully (for our sake) he'll return and grace us with his presence once in a while.

He's back! :D

http://forum.mrmoneymustache.com/share-your-badassity/my-secret-and-successful-journey-to-making-my-own-clothes/msg1313230/#msg1313230

And only one post away from 1000! Knowing him, it will be spectacular.

[arebelspy]

Adding that pressure will make him feel like it needs to be, and deter him from posting.

Feel free to post anything, skyrefuge--round numbers have zero real significance  :P

[Metric Mouse]

The argument against VPW seems to be,

• "Well I'd be making these decisions anyway, so why do I need a guide? If the 4% rule tells me I can withdrawal $45k this year, but I feel like the market isn't doing well, I'll just try my best to withdrawal less. That's preferable to VPW explicitly telling me this year's safe withdrawal is $35k, that's unreasonable!"

IMHO, the strongest argument against VPW is that the calculations do not account for your actual spending needs. It maximizes payouts in good years regardless of need and slashes them in bad years regardless of how it will affect your standard of living.  For reference, to address the minimum spending problem the guy who invented VPW recommends using it only in conjunction with reliable base income including Social Security, pensions, and annuities to cover your basic expenses.  But those options are not available for early retirees.

You address the same shortcoming with your willingness to earn more money in retirement when VPW does not support your needs.  That's a perfectly reasonable solution and will work just fine.  Saving more to build a buffer so that the worst-case historical outcomes still allow you to pay the bills is also a good option.  But other people may have different views on how desirable or practical either of those options are for them personally, so I can understand why VPW is not for everybody.

Thank you for sharing this. There are many ways to structure FIRE: I don't think there is a right way or a wrong way, and discussing the options, and the pros and cons of each option, is very helpful.

[steveo]

The argument against VPW seems to be,

• "Well I'd be making these decisions anyway, so why do I need a guide? If the 4% rule tells me I can withdrawal $45k this year, but I feel like the market isn't doing well, I'll just try my best to withdrawal less. That's preferable to VPW explicitly telling me this year's safe withdrawal is $35k, that's unreasonable!"

IMHO, the strongest argument against VPW is that the calculations do not account for your actual spending needs. It maximizes payouts in good years regardless of need and slashes them in bad years regardless of how it will affect your standard of living.  For reference, to address the minimum spending problem the guy who invented VPW recommends using it only in conjunction with reliable base income including Social Security, pensions, and annuities to cover your basic expenses.  But those options are not available for early retirees.

You address the same shortcoming with your willingness to earn more money in retirement when VPW does not support your needs.  That's a perfectly reasonable solution and will work just fine.  Saving more to build a buffer so that the worst-case historical outcomes still allow you to pay the bills is also a good option.  But other people may have different views on how desirable or practical either of those options are for them personally, so I can understand why VPW is not for everybody.

I like the idea of a VPW however I agree with your point. The variability in your spending is more likely to do with needs. For instance our spending is fairly stable however there are one off items like purchasing a car or painting the house that we will be hit with at certain times. We can delay spending on those items in most circumstances but we wouldn't spend extra simply because the markets go up.

[Scandium]

Maybe they get a part-time job to make up the difference. I have tons of friends who decided to learn photography. Within a month they were booking paid gigs. Two paid gigs a month, as a beginner doing something they love, is enough to bring you from a 4% withdrawal rate, to 3% on a $1,000,000 portfolio.

Do you think finding (and getting hired for) multiple jobs per month that pay you in excess of $400 per month each, as a beginner (with no previous client base for referrals, no marketing, etc.) is a realistic scenario, or more of a fluke?

I've seen it happen enough times that it doesn't seem like a fluke to me. Let's not focus on this specific example. Maybe it's different elsewhere, but earning $10,000 a year with a side-gig, especially when you're not tied down by the stress/timesink of a job, just doesn't seem to difficult to me ¯\_(ツ)_/¯

Hah! had to laugh at this. I've hung around enough photography forums where even pros with decade+ experience find it hard to get people to pay. "I'll just do it myself on my iphone, it's good enough?!". Or if people somehow are willing to pay for photos they think they should be nearly free, since cameras are everywhere and anyone can do it. People don't see quality photos from crap if it slapped them in the face so they're ok paying some starving liberal arts barrista $50 to spend 12 hours shooting their wedding. Hard to think of any less profitable side-gig!

[Interest Compound]

Maybe they get a part-time job to make up the difference. I have tons of friends who decided to learn photography. Within a month they were booking paid gigs. Two paid gigs a month, as a beginner doing something they love, is enough to bring you from a 4% withdrawal rate, to 3% on a $1,000,000 portfolio.

Do you think finding (and getting hired for) multiple jobs per month that pay you in excess of $400 per month each, as a beginner (with no previous client base for referrals, no marketing, etc.) is a realistic scenario, or more of a fluke?

I've seen it happen enough times that it doesn't seem like a fluke to me. Let's not focus on this specific example. Maybe it's different elsewhere, but earning $10,000 a year with a side-gig, especially when you're not tied down by the stress/timesink of a job, just doesn't seem to difficult to me ¯\_(ツ)_/¯

Hah! had to laugh at this. I've hung around enough photography forums where even pros with decade+ experience find it hard to get people to pay. "I'll just do it myself on my iphone, it's good enough?!". Or if people somehow are willing to pay for photos they think they should be nearly free, since cameras are everywhere and anyone can do it. People don't see quality photos from crap if it slapped them in the face so they're ok paying some starving liberal arts barrista $50 to spend 12 hours shooting their wedding. Hard to think of any less profitable side-gig!

Hey, thanks for reminding me! While I haven't done or tried to get any photography jobs since I quit over 7 years ago, I forgot to reply to a voicemail I got last week offering me a $150/hr photo gig.

¯\_(ツ)_/¯

[Scandium]

Maybe they get a part-time job to make up the difference. I have tons of friends who decided to learn photography. Within a month they were booking paid gigs. Two paid gigs a month, as a beginner doing something they love, is enough to bring you from a 4% withdrawal rate, to 3% on a $1,000,000 portfolio.

Do you think finding (and getting hired for) multiple jobs per month that pay you in excess of $400 per month each, as a beginner (with no previous client base for referrals, no marketing, etc.) is a realistic scenario, or more of a fluke?

I've seen it happen enough times that it doesn't seem like a fluke to me. Let's not focus on this specific example. Maybe it's different elsewhere, but earning $10,000 a year with a side-gig, especially when you're not tied down by the stress/timesink of a job, just doesn't seem to difficult to me ¯\_(ツ)_/¯

Hah! had to laugh at this. I've hung around enough photography forums where even pros with decade+ experience find it hard to get people to pay. "I'll just do it myself on my iphone, it's good enough?!". Or if people somehow are willing to pay for photos they think they should be nearly free, since cameras are everywhere and anyone can do it. People don't see quality photos from crap if it slapped them in the face so they're ok paying some starving liberal arts barrista $50 to spend 12 hours shooting their wedding. Hard to think of any less profitable side-gig!

Hey, thanks for reminding me! While I haven't done or tried to get any photography jobs since I quit over 7 years ago, I forgot to reply to a voicemail I got last week offering me a $150/hr photo gig.

¯\_(ツ)_/¯

uhm, ok. I guess you're one of the few. Personally I don't see much market except on the extreme high end and extreme low end (walmart photo studio type, and stock photos that sell for pennies now). I have thousands tied up in photo gear but nobody would pay me for anything. Like I said; "my iphone can do it" mentality. If you have $10k+ in gear then maybe you can get something people will pay for?

Though to be fair my kid's daycare had picture day and once we paid $15 for a photo which was the worst I've ever been charged for! Lighting, exposure and background were awful! I could actually have done better with my phone. I'd be embarrassed to charge for that. So there's a market..? Get people to pay until they figure out how terrible I am? Not very sustainable..

[Interest Compound]

I bought a $700 lens, a $500 lens, a $200 flash, and a $400 low-end Canon body.

Let's not focus too much on any one particular side-gig. There are lots of ways to bring in $400-$500 a month and get this done. And if you think you can't...work longer. :)

[arebelspy]

I feel you, Scandium.  I know a ton of people who have tried to make a photography side-gig work, with very limited success.

Even besides the "my iPhone works," any random person can throw a few thousand bucks at a DSLR and lens, put themselves behind the camera, and press a button.

No, it's not the same as a professional.  The person matters WAY more than the equipment.  But most people don't know that.  And so getting paid for any photography is really difficult (especially anything artistic, nature, etc.--photography for getting paid for your "time," e.g. a wedding, is a bit easier, though there's still lots of competition).

I do agree with IC that there are ways to bring in money.  I also agree with you, that photography is one of the less likely ones.

[DavidAnnArbor]

Perhaps developing a side gig business in addition to one's regular job before one goes FIRE would make sense, because then the side gig can continue after retiring from the main job.

[Interest Compound]

Perhaps developing a side gig business in addition to one's regular job before one goes FIRE would make sense, because then the side gig can continue after retiring from the main job.

That's what I did. But I did it wrong. The side gig income is now higher than my expenses!

¯\_(ツ)_/¯

[TomTX]

It's obvious you put a lot of work into this post, so thanks.

I remain skeptical of basing any retirement decisions on the VPW, as per our discussion in the other thread on it.

I go back and forth on 100% stocks (or maybe 90/10 at the most) versus a much more diversified (including gold, etc., more PP based).  I personally wouldn't go 60/40 or anything like that--high stocks, or high diversification into various assets, but just a middling stocks/bonds seems suboptimal to both of those options to me.

When you go looking at gold, remember that the vast majority of (US dollar denominated) gold charts start at what is darn close to an 800 year low price (based on London) and are the point where decades of forced price depression was released.

To me, that's a huge artificial boost to reported returns on gold.

[Metric Mouse]

Perhaps developing a side gig business in addition to one's regular job before one goes FIRE would make sense, because then the side gig can continue after retiring from the main job.

That's what I did. But I did it wrong. The side gig income is now higher than my expenses!

¯\_(ツ)_/¯

We will alert the Retirement Police!

[arebelspy]

It's obvious you put a lot of work into this post, so thanks.

I remain skeptical of basing any retirement decisions on the VPW, as per our discussion in the other thread on it.

I go back and forth on 100% stocks (or maybe 90/10 at the most) versus a much more diversified (including gold, etc., more PP based).  I personally wouldn't go 60/40 or anything like that--high stocks, or high diversification into various assets, but just a middling stocks/bonds seems suboptimal to both of those options to me.

When you go looking at gold, remember that the vast majority of (US dollar denominated) gold charts start at what is darn close to an 800 year low price (based on London) and are the point where decades of forced price depression was released.

To me, that's a huge artificial boost to reported returns on gold.

Sure.

I'd probably treat it as an uncorrelated, 0% real return (i.e. keeps pace with inflation) asset.

I hold no gold at the moment.

[TomTX]

One thing that puzzles me no end is when people have debt (mortgage) and own debt (bonds). The math seldom works out in that case.

A mortgage is not easy to rebalance in and out of.

HELOC.

[TomTX]

Adding that pressure will make him feel like it needs to be, and deter him from posting.

Feel free to post anything, skyrefuge--round numbers have zero real significance  :P

Or is that real zero significance?

:D

[arebelspy]

One thing that puzzles me no end is when people have debt (mortgage) and own debt (bonds). The math seldom works out in that case.

A mortgage is not easy to rebalance in and out of.

HELOC.

A financial instrument of our times that hasn't even shown itself to be reliable over the past decade.

Use it while you can, definitely, but don't build a plan on it existing when you need it.

Adding that pressure will make him feel like it needs to be, and deter him from posting.

Feel free to post anything, skyrefuge--round numbers have zero real significance  :P

Or is that real zero significance?

:D

Hah!  Touche.  :D

[TomTX]

One thing that puzzles me no end is when people have debt (mortgage) and own debt (bonds). The math seldom works out in that case.

A mortgage is not easy to rebalance in and out of.

HELOC.

A financial instrument of our times that hasn't even shown itself to be reliable over the past decade.

Use it while you can, definitely, but don't build a plan on it existing when you need it.

Oh, sure.

No guarantees there - I first used one around 2002 as a no-cost alternative to a refi.