Author Topic: Sequence of returns risk, fear of retiring in a bear market, 401k poor  (Read 7583 times)

Mrbeardedbigbucks

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Hello,
I'm brand new to these forums and have just recently started reading Mr. Money Mustache and other related blogs. My wife and I are getting serious about leaving our jobs at the end of 2017 so I've been quietly lurking these forums and reading as much information as I can about early retirement.

I think my question is more of a case study, investing question and general advice all wrapped in one.
Perhaps my questions and/or fears have been addressed in this forum or MMM blog posts so please link me to them if that's the case. There's a lot of content here and I haven't had time to read it all.

Case Study Part:

Age: I'm 43 years old, the Mrs is 39, no kids.
Location: New Hampshire

Investments: Total net worth is roughly 950k but should be about 1 million at the end of 2017 (without any market growth) unless there's a market correction then who knows.
Roughly 600k will be in my 401k and 400k in a non-retirement brokerage account. Asset allocation is about 75% stock, 20% bonds, 5% cash.

Debt: 165k mortgage,  4% 30 year fixed, paying $400 more per month to pay down in 15 years. No other debt. We have one credit card and charge as much as we can for the points but pay off in full every month.

Credit score: average of 815  (I don't think this is too relevant but maybe someone will find it useful)

Expenses: I've completed a detailed budget and determined we can live pretty easily on $3300 per month. This includes our mortgage payment. Paying off the mortgage would reduce our expenses to $2500 per month but would take 160k from our brokerage account.

Income during retirement: possible part time work doing something we really enjoy but likely nothing for a year or two. We would prefer not to rely on any part time income as part of our planning but it's certainly an option down the road.

Investing question/fears:


1. We're in the 2nd longest bull market in history. We're concerned about retiring into a bear market and withdrawing 4% of our investments at the same time. If you look at hypothetical portfolios of starting withdrawals in an extended bear market vs withdrawals in a bull market, the principal erosion is significant. Here's an example below. Look at page 11 of this .pdf from Fidelity:

https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/income-diversification.pdf

I know the Fidelity example assumes a 5% withdrawal rate but I think you'd see a similar fate with a 4% withdrawal rate.

I'd like to know what your thoughts are about the importance of sequence of returns. Please help to alleviate our fears of early retirement in a nasty bear market. It's been pretty nice for since early 2009 but we want to be prepared for the worst.

2. If the markets do drop, do I adjust my 4% withdrawal with the market value of my investments? Lets say I take out a monthly withdrawal of $3300 per month which is about 4% annually but our portfolio drops by 5% in a few months down the road. Would I then only withdraw $3166 that month? How do people manage withdrawal rate? We have some wiggle room in the budget but if we see a 20% drop or higher, we couldn't adjust our withdrawals that much. We would be forced to work some kind of job.

3. Finally, I can't access the 401k until age 55 (thats if i leave it in the 401k). We will have to rely on the brokerage account for 12 years. The withdrawal rate on the brokerage account, which has a market value of about 400k, will be 10% annually. So if we take withdrawals going into a longer term bear market, like a 2000-2002 scenario, our 400k may not make it 12 years with a 10% annual withdrawal rate. People who retire in their 30's and 40's, are most of their liquid assets in non-retirement accounts? How do early retirees manage this?

I know this is long winded. I thank you for the time and very much look forward to your answers and advice.

Thanks,
MrBeardedBigBucks


Another Reader

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Ask these questions over at early-retirement.org.  You will get a lot more realistic answers from people in your shoes there.

chasesfish

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I think you're in pretty good shape - As you said yourself, you can always do some part-time work.   Except for the early 70's, most of the big falls are followed by significant rebounds over the next 18-24 months.  Nords describes living through two of these, albeit he also had a pension that helped backstop it.

You should also check out the Mad Fientist's article about a Roth Ladder, you probably want to do a little a year when your tax rate is low and in case you need some money before 59.5.

http://www.madfientist.com/how-to-access-retirement-funds-early/

Heckler

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I can only help with 1., and will do so with an open questiin.  What fees is your Fidelity example assuming?  VTI is 0.05%

Heckler

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You can visualize your personal portfolio here.  And see the effect of a 0.05 MER vs a 2% MER

https://www.portfoliovisualizer.com

Fire2025

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This looks like a good plan to me.  There will always be something to worry about, but if you can be flexible in your budget, which it sounds like you can, and you are okay with doing some part time work, which it sounds like you are, then I can't wait to start reading your posts in the "after FIRE" section!!!

Something else that might help the emotions maybe a longer time horizon for withdrawals, instead of monthly.  Withdrawing monthly would make me feel very "emotionally" tied to the whims of the short term market. I personally would not like that feeling.

Also a question about the age 55 withdrawals from your 401K.  The "age 55 rule" requires that separation from the job tied to the 401k be after you turn 55.  Or are you talking about another rule?  I would love to know about this rule.  I'll be able to pull the trigger at age 55, but if it happens sooner I would love an option.  At this point I feel very tied to the wait for the "age 55 rule".

Financial.Velociraptor

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1. We're in the 2nd longest bull market in history. We're concerned about retiring into a bear market and withdrawing 4% of our investments at the same time. If you look at hypothetical portfolios of starting withdrawals in an extended bear market vs withdrawals in a bull market, the principal erosion is significant. Here's an example below. Look at page 11 of this .pdf from Fidelity:

https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/income-diversification.pdf

I know the Fidelity example assumes a 5% withdrawal rate but I think you'd see a similar fate with a 4% withdrawal rate.

I'd like to know what your thoughts are about the importance of sequence of returns. Please help to alleviate our fears of early retirement in a nasty bear market. It's been pretty nice for since early 2009 but we want to be prepared for the worst.

2. If the markets do drop, do I adjust my 4% withdrawal with the market value of my investments? Lets say I take out a monthly withdrawal of $3300 per month which is about 4% annually but our portfolio drops by 5% in a few months down the road. Would I then only withdraw $3166 that month? How do people manage withdrawal rate? We have some wiggle room in the budget but if we see a 20% drop or higher, we couldn't adjust our withdrawals that much. We would be forced to work some kind of job.

3. Finally, I can't access the 401k until age 55 (thats if i leave it in the 401k). We will have to rely on the brokerage account for 12 years. The withdrawal rate on the brokerage account, which has a market value of about 400k, will be 10% annually. So if we take withdrawals going into a longer term bear market, like a 2000-2002 scenario, our 400k may not make it 12 years with a 10% annual withdrawal rate. People who retire in their 30's and 40's, are most of their liquid assets in non-retirement accounts? How do early retirees manage this?


1.  Bull markets don't die of old age.  I think there is good reason to believe that the next correction will be short lived and that we have a dozen years or more left of a secular bull market.  Reason?  Check out something known as the M/Y ratio.  Basically, when the Middle Aged cohort of population (35-49) is larger than the Young cohort (20-35), the markets boom.  Lots of people in peak earning and peak spending years.  If you have the option of being flexible with spending (not paying extra on mortgage for instance) and picking up part time work for 18-24 months in a downturn, I think you will be quite resilient.

2. Your withdrawal rate is 4% of your starting capital, adjusted upward for inflation.  If there is a downturn, you continue to draw at the original rate.  Lots of online calculators now show the failure rate based on past data for this approach.  Four percent is normally deemed "safe".  Be sure to include your ability to reduce spending in a crunch and the future SS windfall.

3. I went FIRE at 40 with most of my assets in taxable.  But don't believe the hype that you can't access 401k/tIRA without penalty before retirement age.  There is a whole thread here to dispell that myth: https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/.  For example, if you go with section 72(t) withdrawals, you should be able to withdraw a little over 3% annually from tax deferred accounts.  I haven't needed to do that.


SeattleCPA

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AnotherReader, you might find more than one of these resources useful:

1. GoCurryCracker did a really interesting post  two years ago about what it would have been like to retire in 1966. (This is one of the very worst worst case scenario starting points.) It's very interesting... and very helpful to concretely shape thinking:

http://www.gocurrycracker.com/the-worst-retirement-ever/

BTW, spoiler alert: Things don't have to be as gloomy as you might worry.

2. At my blog a while back, I did a post that tried to summarize the ideas from David Swensen's "Pioneering Portfolio Management" book that would help in a bear market. You might find that helpful, but to summarize you can minimize your risks with a strong asset allocation formula you've tested with lots of simulation and by accepting a variable withdrawal rate. Here's link:

http://evergreensmallbusiness.com/bear-market-survival-tactics/

3. Regarding the issue of withdrawal rates, you want to be careful about using one of the popular tools (like firecalc or my favorate cfiresim) because they assume asset allocation formulas that may very widely from the one you use. The good news is, you can very possibly model a SWR for your asset allocation using the PortfolioCharts withdrawal rate calculator, which is available here:

https://portfoliocharts.com/portfolio/withdrawal-rates/

4. This final point... I have personally found that showing some flexibility in my withdrawal rate makes a HUGE difference in the portfolio success rate. You can test to see if you get the same benefit using the cfiresim calculator available here:

http://www.cfiresim.com/

E.g.: If you want to take (say) 4.5% on (say) $1,000,000, that maybe succeeds 83% of the time for a 30 year retirement. But if you can dial spending down to $40,000 in a bad patch, your success rate jumps to 95%.

Another Reader

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Seattle CPA - I think you should address the OP, not me.

I don't think the GoCurryCrackers' situation is relevant to the OP.  The OP is interested in a more conventional lifestyle from what I understand from the post.  Although Justin over at Root of Good has kids, his financial hacks might be of some use to the OP. Paying off the mortgage or assembling the assets to produce the income to cover the payments might put the OP in ER territory. 

There is evidence now that 4 percent is not sustainable for periods much longer than 30 years.  Only the taxable portfolio is being considered initially and the proposed withdrawal rate is 10 percent.  A bad sequence of returns will have them back at work PDQ.  It's not clear if the budget includes taxes on dividends and harvested capital gains.  Not sure if the OP has appropriately considered the rate of increase in health insurance costs.  In addition, I don't think he can access the 401(k) at 55 without penalty because he is not separating from the company at 55.

Personally, I would not consider doing this.  The margin just is not there.  And that's what the OP is hearing from people in similar circumstances over at early-retirement.org.



frugal_c

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I think it's a legitimate concern.  Hope for the best and plan for the worst is probably appropriate here.  I am planning to retire on 4% but I want to be comfortable reducing that to 3% for an extended period and without part time work.

To get to your actual numbers it looks like you can live off of 3% once you have your mortgage paid off.  Personally I would do that first so you don't have to worry about needing to work part-time.  That is just me, for you if you are very confident and okay with going back to something part-time and you can clear $10-20k from that then you could certainly retire at year end.  You are in a good situation where it is just a matter of how much risk you are willing to take on and how you mitigate that risk.
« Last Edit: May 06, 2017, 01:34:21 PM by frugal_c »

MDM

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There is evidence now that 4 percent is not sustainable for periods much longer than 30 years.
Whether one favors or opposes the 4% guideline, one could say there is no evidence either way - only historical results and estimates of future investment and investing behaviors.  Accepted answers seem to depend on the level of "certainty" one wishes.

Quote
In addition, I don't think he can access the 401(k) at 55 without penalty because he is not separating from the company at 55.
Correct - but rolling the 401k to an IRA, then doing a Roth pipeline cuts the "inaccessibility window" to five years.

Quote
And that's what the OP is hearing from people in similar circumstances over at early-retirement.org.
Interesting - is there a link to that thread?

Another Reader

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Here's a link to the thread.  http://www.early-retirement.org/forums/f28/sequence-of-returns-risk-and-fear-of-retiring-into-a-bear-market-86664.html#post1878054

And an interesting study on the SWR referenced from same.  https://earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro/

For a 40 plus year retirement, I would not feel comfortable above 3 percent.  This study suggests 3.25.  Haven't vetted the assumptions or calculations.

NorCal

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I strongly recommend reading the book "Asset Dedication".  It's an under-appreciated work in the FIRE community.

The book covers an excellent strategy for managing sequence of returns risk.  The general (oversimplified) idea is to buy bonds that mature in the next several years as the bond portion of your portfolio.  If you have the next 3-5 years of expenses covered by maturing bonds, you can keep the rest of your portfolio in equities and avoid the sequence of returns risk on a rolling 3-5 year basis.  It's worth a read.

SeattleCPA

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Seattle CPA - I think you should address the OP, not me.

I don't think the GoCurryCrackers' situation is relevant to the OP.  The OP is interested in a more conventional lifestyle from what I understand from the post.  Although Justin over at Root of Good has kids, his financial hacks might be of some use to the OP. Paying off the mortgage or assembling the assets to produce the income to cover the payments might put the OP in ER territory. 

There is evidence now that 4 percent is not sustainable for periods much longer than 30 years.  Only the taxable portfolio is being considered initially and the proposed withdrawal rate is 10 percent.  A bad sequence of returns will have them back at work PDQ.  It's not clear if the budget includes taxes on dividends and harvested capital gains.  Not sure if the OP has appropriately considered the rate of increase in health insurance costs.  In addition, I don't think he can access the 401(k) at 55 without penalty because he is not separating from the company at 55.

Personally, I would not consider doing this.  The margin just is not there.  And that's what the OP is hearing from people in similar circumstances over at early-retirement.org.

Argh... sorry.

Mrbeardedbigbucks

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Thank you everyone. Much appreciated.

I've been getting some good information from you Mustachians and also some people over at early-retirement.org as recommended by Another Reader. Some people there seem to be a bit more conservative and not as optimistic but it's good to get different opinions.

I have a lot of reading to do. The blogs, websites and books recommended by everyone should keep me busy for a while.

I'm thinking my 2018 retirement date is realistic but it would be more of a partial retirement. It might make sense to work 2-3 days per week to keep less pressure on my portfolio in the event we do see a down market for a period of years. I can live with having 4-5 days off per week. Maybe after 2-3 years I could reassess the part time work.

Please keep the comments and recommendations coming.


frugal_c

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You are probably already aware of it but I would look at one of the historical withdraw simulators, cfiresim is the one I tend to use.  It will give you statistics on how often a given portfolio has lasted given X years retirement, Y% withdrawal, etc.  For instance, a 40 year retirement with a 4% withdrawl and 75/25 stocks/bonds has historically made it 90% of the time.  With the same numbers but a 3% withdrawal it is 100% successful
« Last Edit: May 06, 2017, 05:59:07 PM by frugal_c »

TomTX

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Here's a link to the thread.  http://www.early-retirement.org/forums/f28/sequence-of-returns-risk-and-fear-of-retiring-into-a-bear-market-86664.html#post1878054

And an interesting study on the SWR referenced from same.  https://earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro/

For a 40 plus year retirement, I would not feel comfortable above 3 percent.  This study suggests 3.25.  Haven't vetted the assumptions or calculations.

That's not a study. It's a pessimistic view of the future masquerading as a study. They tacked on future "data" by assuming the next 10 years will have 0% real return for bonds and 6.6% for stocks.

Basically another way of handicapping by assuming "the future will on average be worse than the past"

Pfau used this method at least once. It's not quite as obvious as "assume 1% manager fees"

Frankly, it's a way of scaring people into wasting more years of their lives working.

Another Reader

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That's not a study. It's a pessimistic view of the future masquerading as a study. They tacked on future "data" by assuming the next 10 years will have 0% real return for bonds and 6.6% for stocks.

Basically another way of handicapping by assuming "the future will on average be worse than the past"

Pfau used this method at least once. It's not quite as obvious as "assume 1% manager fees"

Frankly, it's a way of scaring people into wasting more years of their lives working.

What's his motivation for "scaring people into wasting more years of their lives working"?

Pfau's work is paid for be people trying to sell something (annuities). 

This guy is planning his retirement and telling you how and why.  As we all know, past performance is not indicative of future performance.  His expectations for future returns are explained and justified.  You may not agree.  Having lived through the 1950's to the end of the 1970's when the pie was growing faster than the population and then the 1980's through today where the trend reversed, I'm inclined to think his assumptions are not unreasonable. YMMV.

TomTX

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That's not a study. It's a pessimistic view of the future masquerading as a study. They tacked on future "data" by assuming the next 10 years will have 0% real return for bonds and 6.6% for stocks.

Basically another way of handicapping by assuming "the future will on average be worse than the past"

Pfau used this method at least once. It's not quite as obvious as "assume 1% manager fees"

Frankly, it's a way of scaring people into wasting more years of their lives working.

What's his motivation for "scaring people into wasting more years of their lives working"?

Pfau's work is paid for be people trying to sell something (annuities). 

This guy is planning his retirement and telling you how and why.  As we all know, past performance is not indicative of future performance.  His expectations for future returns are explained and justified.  You may not agree.  Having lived through the 1950's to the end of the 1970's when the pie was growing faster than the population and then the 1980's through today where the trend reversed, I'm inclined to think his assumptions are not unreasonable. YMMV.

I don't know his motivations and have little reason to investigate them. If you care, feel free to do so.

I do know that it's not a study. It takes data, but then throws into the mix all this invented assumption about the future.

DavidAnnArbor

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Do you factor in all the legislative changes and uncertainty regarding health insurance into your budget? 

CCCA

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a few additional questions.
1) does the $3300 include the $400 extra for the mortgage?
1a) How much time is left on the mortgage if you don't pay the extra $400/month?
2) what do you expect to get in Social security when that time comes?


I think if you model this in cfiresim, you'll get a good sense of whether or not your fears are founded or unfounded.


In theory a $1,000,000 portfolio should be fine for $40K / year expenses. Especially if that drops to $35K/yr when your mortgage is paid off.  The safer thing to do might be to stop paying the mortgage off early.  That way, you spending is reduced and you are more likely to see your stache grow rather than shrink (since you'll only be withdrawing 3.5% instead of 4%).






Another Reader

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60 years ago, very few individuals invested in the stock market or in any of the paper asset markets. 160 years ago, the stock market did not exist, at least not in recognizable form.  Assuming the behavior of an entity that hasn't been around for all that long and had different participants until fairly recently will continue in the same pattern might not be reasonable.  Evaluating the factors that would likely change the pattern and changing the assumptions based on the evaluation is at least as sensible as assuming no change.

Mrbeardedbigbucks

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a few additional questions.
1) does the $3300 include the $400 extra for the mortgage?
1a) How much time is left on the mortgage if you don't pay the extra $400/month?
2) what do you expect to get in Social security when that time comes?


I think if you model this in cfiresim, you'll get a good sense of whether or not your fears are founded or unfounded.


In theory a $1,000,000 portfolio should be fine for $40K / year expenses. Especially if that drops to $35K/yr when your mortgage is paid off.  The safer thing to do might be to stop paying the mortgage off early.  That way, you spending is reduced and you are more likely to see your stache grow rather than shrink (since you'll only be withdrawing 3.5% instead of 4%).

1) The $3300 does include paying an extra $400 on the mortgage.
2) I just refinanced a few months ago into a 30 year fixed rather than a 15 year. This way I have the option of making the 30 year fixed payments or I can pay an extra $400 per month to pay it down in 15 years. I will still pay more in interest with this method vs just taking out a 15 year fixed (but only like 2k more) but having the option of dropping down to the 30 year fixed payment at any time was appealing. I'll keep paying $400 as long as i'm employed or the budget allows. If health care premiums increase then we can eliminate the extra principal payments and apply toward health care premiums.

3) Here's our future income breakdown:

My wife will have a $1100 per month pension starting at age 60 with a 100% survivor benefit for me. I also looked at ssa.gov and factored in zeros for the number of years out of 35 we would not work and calculated our projected social security benefits based on that AIME. If i started social security early at age 62, my benefit would be $1400 and my wife $1100. I subtracted 25% from those amounts in case social security takes a haircut by the time we turn 62 - $1050 & $825. So in our 60's and going forward we would have almost $3000 per month in income. By that time, I'm hoping our mortgage would be paid off as well thus reducing expenses by $800 per month. In reality, my 4% withdrawal rate would only need to get us to about 20 years. This is also assuming that we bring in zero income during that time which is not likely.

TomTX

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60 years ago, very few individuals invested in the stock market or in any of the paper asset markets. 160 years ago, the stock market did not exist, at least not in recognizable form.  Assuming the behavior of an entity that hasn't been around for all that long and had different participants until fairly recently will continue in the same pattern might not be reasonable.  Evaluating the factors that would likely change the pattern and changing the assumptions based on the evaluation is at least as sensible as assuming no change.

I would agree with you, with a caveat: When people guess about how the stock market is going to go over the short term, they are very often wrong - no matter how logical their reasoning.

AdrianC

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Here's a link to the thread.  http://www.early-retirement.org/forums/f28/sequence-of-returns-risk-and-fear-of-retiring-into-a-bear-market-86664.html#post1878054

And an interesting study on the SWR referenced from same.  https://earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro/

For a 40 plus year retirement, I would not feel comfortable above 3 percent.  This study suggests 3.25.  Haven't vetted the assumptions or calculations.

That's not a study. It's a pessimistic view of the future masquerading as a study. They tacked on future "data" by assuming the next 10 years will have 0% real return for bonds and 6.6% for stocks.

Basically another way of handicapping by assuming "the future will on average be worse than the past"

Pfau used this method at least once. It's not quite as obvious as "assume 1% manager fees"

Frankly, it's a way of scaring people into wasting more years of their lives working.

I'm curious, why do you think that assuming a 6.6% Real Return for stocks is pessimistic? It seems quite optimistic to me.

The US economy has been growing at about 2%/year for the last 7 years or so. CAPE is very high. Current PE is high. Dividend yields are low. Profit margins are high.

Villanelle

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The 4% rule isn't really a "rule".  You can interpret it as you see fit.  For me, any drop bigger than about 5% (lasting more than a few weeks) would have me cutting expenses so that I wasn't withdrawing a full 4% of the original amount.  Any drop bigger than about 8% (and lasting more than a couple months), would have me considering some sort of side hustle or part time job.  I think we will also have sort of a maximum spend for the first 3 and 5 years, and if we are on glide slope to pass that, we'd cut and work as necessary. Ours is not a planned bare bones budget, so we'd have plenty of fat to trim, and that's just another component of the safety net. 

But there is no right answer.  You need to decide what works for you and what makes you comfortable.  A personal investing statement might be useful for you, so that you have specific plans and wickets, made ahead of time when you aren't anxious over a bad day in the market (or joyful over a good day).  Know that your plan is to keep withdrawing 4% until you get to a certain floor, or to aim for no more than x% total withdraw in the first 5 years (and thus you would make cuts and increase income as necessary), or whatever.  Then, trust your plan and stay the course. 

Retire-Canada

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OP I am your age and plan to FIRE with a 4.5% - 5% WR. I'll have several years of bonds to draw down as well as  some flexibility in my spending and I'm okay with a limited period of easy PT work should it be needed. With a mortgage eventually getting paid down and government benefits arriving I am far more worried about working too long than running out of money. I can always make more money, but freedom at the prime of my life is a very limited quantity.
« Last Edit: May 07, 2017, 09:22:49 AM by Retire-Canada »

Space Pickle

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haha wow, that early-retirement forum is like the complete opposite of this one. I've been reading some of the threads, their idea of FIRE seems to be around 50-55.

CCCA

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a few additional questions.
1) does the $3300 include the $400 extra for the mortgage?
1a) How much time is left on the mortgage if you don't pay the extra $400/month?
2) what do you expect to get in Social security when that time comes?


I think if you model this in cfiresim, you'll get a good sense of whether or not your fears are founded or unfounded.


In theory a $1,000,000 portfolio should be fine for $40K / year expenses. Especially if that drops to $35K/yr when your mortgage is paid off.  The safer thing to do might be to stop paying the mortgage off early.  That way, you spending is reduced and you are more likely to see your stache grow rather than shrink (since you'll only be withdrawing 3.5% instead of 4%).

1) The $3300 does include paying an extra $400 on the mortgage.
2) I just refinanced a few months ago into a 30 year fixed rather than a 15 year. This way I have the option of making the 30 year fixed payments or I can pay an extra $400 per month to pay it down in 15 years. I will still pay more in interest with this method vs just taking out a 15 year fixed (but only like 2k more) but having the option of dropping down to the 30 year fixed payment at any time was appealing. I'll keep paying $400 as long as i'm employed or the budget allows. If health care premiums increase then we can eliminate the extra principal payments and apply toward health care premiums.

3) Here's our future income breakdown:

My wife will have a $1100 per month pension starting at age 60 with a 100% survivor benefit for me. I also looked at ssa.gov and factored in zeros for the number of years out of 35 we would not work and calculated our projected social security benefits based on that AIME. If i started social security early at age 62, my benefit would be $1400 and my wife $1100. I subtracted 25% from those amounts in case social security takes a haircut by the time we turn 62 - $1050 & $825. So in our 60's and going forward we would have almost $3000 per month in income. By that time, I'm hoping our mortgage would be paid off as well thus reducing expenses by $800 per month. In reality, my 4% withdrawal rate would only need to get us to about 20 years. This is also assuming that we bring in zero income during that time which is not likely.


So from what I am hearing:
a) your real expenses are actually $2900/month (3300 if you pay off mortgage early). 
b) you expect to get about $1100 + 1400 +1100 = $3600/month when you are 62, which is more than your expenses.


Given your ages, you only need to fund about 20 years of expenses from your investments before the SS and pension kick in and then 100% of your expenses will be covered, so your investments become irrelevant.     


This makes things really easy and I think it's safe to assume that you are going to be fine.  Funding a 20 year retirement is much easier than funding a 30+ year retirement, since even if you achieve only a 0% per year return, you can withdraw 5% of your initial stache amount each year before you run out in 20 years.  Even in this very very unlikely circumstance, you won't need any savings at 62 because your income will exceed expenses.  Now, this probably cutting it close, but it's very unlikely that you'd achieve 0% real returns over 20 years.  Again, I'd run this through cfiresim to see how good your situation is.  I'd expect you would have 100% success rate over 20 years (you just need to not hit $0 in 20 years), with the lower expense level ($2900/mo).  But I would try cfiresim with both sets of expenses to see how it works out.


Your situation is very similar to ours in the sense that when we hit 65, our income via pensions, SS and rental income should exceed our spending, so we only have to fund a 22 year retirement.  This makes a huge difference vs funding a 40+ year retirement because you are allowed to draw down principal.


Congrats on being FI and good luck with the RE.


Another Reader

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"Given your ages, you only need to fund about 20 years of expenses from your investments before the SS and pension kick in and then 100% of your expenses will be covered, so your investments become irrelevant. "

I don't think you have considered inflation.  In 20 years, his expenses could easily double.  Health insurance is increasing double digits annually now.     

DavidAnnArbor

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"Given your ages, you only need to fund about 20 years of expenses from your investments before the SS and pension kick in and then 100% of your expenses will be covered, so your investments become irrelevant. "

I don't think you have considered inflation.  In 20 years, his expenses could easily double.  Health insurance is increasing double digits annually now.     

There is a cost of living increase built into Social Security, so I imagine the numbers you showed for what you get at 62 will actually be higher. But I might be wrong.

Mrbeardedbigbucks

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"Given your ages, you only need to fund about 20 years of expenses from your investments before the SS and pension kick in and then 100% of your expenses will be covered, so your investments become irrelevant. "

I don't think you have considered inflation.  In 20 years, his expenses could easily double.  Health insurance is increasing double digits annually now.     

It's highly unlikely that we'll never have additional working income in the next 20 years. We'll most likely work part time or have some kind of income outside of our investments during that time frame. If we happen to fall into a career that we actually enjoy then that's even better. We're both not opposed to working at all but we just don't want our jobs to feel like jobs. It sounds like Mr.MoneyMustache makes a living off his blog but it's not really work for him, he enjoys it just like he enjoys taking carpentry jobs. If my wife finds a job in the bakery and brings in 300 bucks a week then that's great. I might do a few weddings as a JP every month or get some freelance photography work. These are things I enjoy and are not stressful but will bring in some income.

I can stop making extra principal payments on my mortgage if health care costs really do increase exponentially like you believe will happen.

 

DrF

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All the stuff I've read on sequence of risk return mitigation leads me to conclude using a "glide-path" model protects a person the most.

https://earlyretirementnow.com/2017/04/19/the-ultimate-guide-to-safe-withdrawal-rates-part-13-dynamic-stock-bond-allocation-through-prime-harvesting/



Image is from earlyretirementnow.com. The blogger says he's an economics PhD currently working in big finance at a trading desk. I'm taking what he says about his pedigree at face value.
Basically, you should shift to at least a 60-stock/40-bond portfolio, and gently "glide" to an all stock portfolio over the coarse of 360 months or so.
Jack Bogle is currently recommending 50/50.
The real question is - What type of bonds do you hold?

fattest_foot

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I think you're in pretty good shape - As you said yourself, you can always do some part-time work.   

To elaborate, make an assumption that you and your wife both could pick up some part time work for just $10k each a year.

That means you only have to withdraw $20k that year; that'd be enough to soften the blow of a 50% drop in the market.

If the market really did drop 50%, you might consider heading back into the workforce. You should only be a few years out of work at that point and it shouldn't be too difficult. If it's longer than a few years, you're probably past the "worrying" stage of sequence of return.

Being flexible is paramount. You've hit your 25x amount. Get out of the game.

RedmondStash

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OP -- the bottom line is that there are no guarantees. Anything could happen. The bottom could fall out of the stock market and stay there for years. Or it could shoot sky-high and keep churning upward for years. We can't know what's going to happen. Some wise folks here have given you info and strategies to mitigate some risk, but nobody can eliminate it.

So the real question is: Can you live with the risk of having to go back to work? Maybe instead of thinking of it as "retirement," think of it as "extended vacation." You're not shooting into outer space on a rocket and cutting all ties with the world; you'll still be here on Earth with potential jobs around.

I say all this as someone who struggles with how to make peace with the risk and the anxiety that comes with such a big leap of faith, especially in a climate of such political uncertainty and potential sky-high health-care cost increases. You just have to decide if the allure of freedom and the logic and calculations based on your current situation give you a likely success rate that you're comfortable with, and whether you feel confident that you can find a way to supplement your stash with income down the road if necessary.

Take all the time you need to do research and get comfortable with the idea of FIRE. My guess is that the day will come when a switch goes off in your head and you say, "Yeah. Now. I'm ready." Don't worry about it if you're not there yet.

Good luck.

Retire-Canada

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So the real question is: Can you live with the risk of having to go back to work? Maybe instead of thinking of it as "retirement," think of it as "extended vacation." You're not shooting into outer space on a rocket and cutting all ties with the world; you'll still be here on Earth with potential jobs around.

The OP addressed this.

It's highly unlikely that we'll never have additional working income in the next 20 years. We'll most likely work part time or have some kind of income outside of our investments during that time frame. If we happen to fall into a career that we actually enjoy then that's even better. We're both not opposed to working at all but we just don't want our jobs to feel like jobs. It sounds like Mr.MoneyMustache makes a living off his blog but it's not really work for him, he enjoys it just like he enjoys taking carpentry jobs. If my wife finds a job in the bakery and brings in 300 bucks a week then that's great. I might do a few weddings as a JP every month or get some freelance photography work. These are things I enjoy and are not stressful but will bring in some income.

I can stop making extra principal payments on my mortgage if health care costs really do increase exponentially like you believe will happen.

boarder42

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with your numbers and keeping your mortgage you hit a 95% success rate and this assumes no SSA ever and that you dont earn another dollar.  i'd quit today keep my mortgage and go live the life you want.  no reason to keep working .. You're FI based on the numbers you've presented.

if you want 100% success use variable spending to help with down years. just be wiling to earn 3k in down years or spend 3k less in the down years and your money would survive everything except the 1966 year which was awful. 

So IMO you're FI and can RE based on everything you have said so far just be flexible and you made it congrats!

CCCA

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"Given your ages, you only need to fund about 20 years of expenses from your investments before the SS and pension kick in and then 100% of your expenses will be covered, so your investments become irrelevant. "

I don't think you have considered inflation.  In 20 years, his expenses could easily double.  Health insurance is increasing double digits annually now.     


normal inflation is built into cfiresim and the 4% rule. Abnormal inflation, like double digit inflation in health care costs is not and should be taken into account, if you really believe that could happen.  You can put in a different growth rate if you think that is likely.  The likelihood of some expense inflating at 10+% for any long length of time is pretty low or it would rapidly become unaffordable for everyone very quickly.   

Mrbeardedbigbucks

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OP -- the bottom line is that there are no guarantees. Anything could happen. The bottom could fall out of the stock market and stay there for years. Or it could shoot sky-high and keep churning upward for years. We can't know what's going to happen. Some wise folks here have given you info and strategies to mitigate some risk, but nobody can eliminate it.

So the real question is: Can you live with the risk of having to go back to work? Maybe instead of thinking of it as "retirement," think of it as "extended vacation." You're not shooting into outer space on a rocket and cutting all ties with the world; you'll still be here on Earth with potential jobs around.

I think that's how we're both approaching our retirement to start off, more like an extended vacation or just partial retirement. We'll stop working our 40 to 50 hour, 5 days per week jobs and drop down to 20 hours, 2-3 days per week and continue to bring in some income. Based on the results from the FIRE calculators that people have recommended and the Fidelity retirement analysis, we're at least a 90% success rate but it looks much better when we each bring in about $1100 per month for about 10 years. I think making $1100 per month a few days a week is very achievable. Using one of the FIRE calculators, I even assumed three 15k lump sum purchases spread out for the next 40 years for major purchases like new roof, used cars and extended travel and the results are still over 90%.

There's a tremendous amount of good information on these forums. Thank you to everyone who replied and please continue to reply if you have more ideas or info to share.  I'll continue to read up on ways to further reduce our monthly expenses. I'm sure there's something I'm missing.  I'm probably wastefully spending $200-$300 per month and don't even know it.

RedmondStash

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I'll continue to read up on ways to further reduce our monthly expenses. I'm sure there's something I'm missing.  I'm probably wastefully spending $200-$300 per month and don't even know it.

Have you ever tried the experiment of writing down every single penny you spend for a month? If you're looking to better understand how you spend money, that exercise can be enlightening. But you have to write down everything, no matter how seemingly insignificant.

KCM5

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Here's a link to the thread.  http://www.early-retirement.org/forums/f28/sequence-of-returns-risk-and-fear-of-retiring-into-a-bear-market-86664.html#post1878054

And an interesting study on the SWR referenced from same.  https://earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro/

For a 40 plus year retirement, I would not feel comfortable above 3 percent.  This study suggests 3.25.  Haven't vetted the assumptions or calculations.

That is the strangest thread - there's a lot of discussion about who should be allowed to retire early and whether the OP will actually want to/be able to live off of $40,000/yr? What?

Anyway, I think your new plan of reducing your withdrawals for the first few years, either by moving somewhere cheaper or continuing to work part time during at least part of the year makes it a great plan.

You have ways of getting around the 59.5 age issue (Roth ladder seems like the best option there to me) but where I wouldn't be completely comfortable is the 4% withdrawal rate. Bringing it down to 3.5% seems like a better plan. Or the 3.25% that the above study recommends. You'd effectively be doing something like that by withdrawing even lower amounts for the first few year and allowing your stash to grow.

Since your nervous about  bear market, coasting for a few years on part time work will also mitigate that concern.

Jamese20

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Mmm must be abit disappointed by some of these comments as there are even some who think they can predict the next 30 years stock market outlook

Mr buffet was told how bad things were going to get when he started out investing and some were even family members... He simply ignored them.

I also think that 80% success rate is good enough for anything as long as flexibility is involved. 4% is already a worse case pessimistic withdrawal rate In history so anyone saying below that is just fear based driven arguments based on no evidence what so ever worth listening to.

Your expense will lower as you go and looking at your numbers you seem over 100% success already so well done and hopefully I will be in your shoes 10 years from now.