The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: erutio on September 17, 2019, 11:17:26 AM
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If someone retired at the peak in 2007, say around October, would their portfolio have survived?
Lets say x = annual spend and they had exactly 25x saved, and spent exactly $X per year. Assuming portfolio was 75% stocks, 20 bonds, 5 cash.
Can someone smarter than me simulate it out from 2007 to now?
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Obviously we don't know yet, but it doesn't look too bad on CFireSim - try the "single simulation cycle", you can try a 2019-2029 retirement and put 2007 as the "start year" for the simulation.
Looks rough at the very beginning, but the portfolio is currently up about 20% over the start.
Good returns since the crash and low inflation have helped.
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S&P high was ~1,549 in October 2007. Low was ~735 in February 2009.
I just ran the monthly numbers on a $1 million portfolio for someone who retired on October 1, 2007, and withdrew $3,333/month, increasing the withdrawal by 0.1667% every month (2% per year).
The lowest point for the portfolio was just shy of $440k in February 2009. While the market recovered by March 2013, the principal balance of the portfolio has not yet reached $1 million again. However, it looks pretty safe. I feel a lot more confident about the 4% rule after running out those numbers than I did before. Maybe I won't wait until I'm at 3.5%.
Edit: added 2% inflation
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S&P high was ~1,549 in October 2007. Low was ~735 in February 2009.
I just ran the monthly numbers on a $1 million portfolio for someone who retired on October 1, 2007, and withdrew $3,333/month ($40k/yr) but did not adjust for inflation.
The lowest point for the portfolio was just shy of $440k in February 2009. While the market recovered by March 2013, the principle balance of the portfolio would not reach $1 million again until January 2018. That's without ever increasing withdrawals for inflation (simply because that math would have taken a little longer), but inflation has been pretty negligible over the last decade.
Which is why you have some bonds in your portfolio - not quite so bad for the 80/75/5 portfolio suggested.
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S&P high was ~1,549 in October 2007. Low was ~735 in February 2009.
I just ran the monthly numbers on a $1 million portfolio for someone who retired on October 1, 2007, and withdrew $3,333/month ($40k/yr) but did not adjust for inflation.
The lowest point for the portfolio was just shy of $440k in February 2009. While the market recovered by March 2013, the principle balance of the portfolio would not reach $1 million again until January 2018. That's without ever increasing withdrawals for inflation (simply because that math would have taken a little longer), but inflation has been pretty negligible over the last decade.
Which is why you have some bonds in your portfolio - not quite so bad for the 80/75/5 portfolio suggested.
60% leverage?
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S&P high was ~1,549 in October 2007. Low was ~735 in February 2009.
I just ran the monthly numbers on a $1 million portfolio for someone who retired on October 1, 2007, and withdrew $3,333/month ($40k/yr) but did not adjust for inflation.
The lowest point for the portfolio was just shy of $440k in February 2009. While the market recovered by March 2013, the principle balance of the portfolio would not reach $1 million again until January 2018. That's without ever increasing withdrawals for inflation (simply because that math would have taken a little longer), but inflation has been pretty negligible over the last decade.
Which is why you have some bonds in your portfolio - not quite so bad for the 80/75/5 portfolio suggested.
I edited to add 2% inflation, but even 100% stock has survived, though I'd be pretty terrified to see my portfolio halved after less than two years. I do like the idea of a glide path for the last couple years before retirement and the first few years after. That is the window that most indicates the success of a cohort. Ramping up to 20% bonds during that window, then shifting back to 100% stocks looks like a great way to ensure a long and safe retirement.
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S&P high was ~1,549 in October 2007. Low was ~735 in February 2009.
I just ran the monthly numbers on a $1 million portfolio for someone who retired on October 1, 2007, and withdrew $3,333/month ($40k/yr) but did not adjust for inflation.
The lowest point for the portfolio was just shy of $440k in February 2009. While the market recovered by March 2013, the principle balance of the portfolio would not reach $1 million again until January 2018. That's without ever increasing withdrawals for inflation (simply because that math would have taken a little longer), but inflation has been pretty negligible over the last decade.
Which is why you have some bonds in your portfolio - not quite so bad for the 80/75/5 portfolio suggested.
60% leverage?
Oops. 75/20/5. Typed far too quickly.
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Thanks guys, makes me feel better about 4%.
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I really really hope I can stand firm in the face of losing half. I am FIREd now but looking at these numbers really makes me wonder lol. But very comforting to see the recovery.
Sent from my VCE-AL00 using Tapatalk
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Yes. I FIREd shortly before the Great Recession and saw my NW (house and investments) drop 50%. I had paid off my house before quitting, no debt and had extremely low basic expenses and enough in a safe EF (bonds and laddered CDs) to last me without having to touch investments. I did a bit of belt tightening but not much, and I had other options such as getting a roommate or 2 or going back to work (the HORROR!) if I needed more money. I didn't need to do either of those and just rode it out by not spending much. Eventually it all righted itself and I even came out ahead in the NW dept.
Your example shows that 4% or whatever static withdrawal model you want to choose doesn't happen that often in the real world. Expenditures tend to fluctutate up and down with an individual's net wealth, whether they are still accumulating or in the distribution phase.
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Yes. I FIREd shortly before the Great Recession and saw my NW (house and investments) drop 50%. I had paid off my house before quitting, no debt and had extremely low basic expenses and enough in a safe EF (bonds and laddered CDs) to last me without having to touch investments. I did a bit of belt tightening but not much, and I had other options such as getting a roommate or 2 or going back to work (the HORROR!) if I needed more money. I didn't need to do either of those and just rode it out by not spending much. Eventually it all righted itself and I even came out ahead in the NW dept.
That was my thought. Instead of having all your savings in stocks, you might want to have some other source of income. In your case renting out a room. But it could also be a cash cushion in a savings account. The idea would be to not have to sell your stocks when they are at -50% of their purchase price.
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The 2007 marked climbed up again.
But what to do if you were a Japanese person and your stocks fell with 50% and stayed there?
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The 2007 marked climbed up again.
But what to do if you were a Japanese person and your stocks fell with 50% and stayed there?
maybe not just be invested in a small market thats just climbed 400% in 5 years and rely on that to retire on???
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The 2007 marked climbed up again.
But what to do if you were a Japanese person and your stocks fell with 50% and stayed there?
maybe not just be invested in a small market thats just climbed 400% in 5 years and rely on that to retire on???
I predict that if the US market climbs 400% in 5 years, Mustachians and Bogleheads will tell you to "stay the course". They will, of course, present a lot of data to support their argument and claim that doing anything else is just market timing.
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The 2007 marked climbed up again.
But what to do if you were a Japanese person and your stocks fell with 50% and stayed there?
maybe not just be invested in a small market thats just climbed 400% in 5 years and rely on that to retire on???
I predict that if the US market climbs 400% in 5 years, Mustachians and Bogleheads will tell you to "stay the course". They will, of course, present a lot of data to support their argument and claim that doing anything else is just market timing.
yawn.
of course you skip the "small market piece"
whatever. japan is a bullshit comparison anyway.
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The 2007 marked climbed up again.
But what to do if you were a Japanese person and your stocks fell with 50% and stayed there?
maybe not just be invested in a small market thats just climbed 400% in 5 years and rely on that to retire on???
I predict that if the US market climbs 400% in 5 years, Mustachians and Bogleheads will tell you to "stay the course". They will, of course, present a lot of data to support their argument and claim that doing anything else is just market timing.
If that were the case, then Mustachians and Bogleheads would tell you that you'll never see a recession again, since we haven't had one over the last 5 years.
We're using a century of data to make predictions about the future, not 5 years.
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The 2007 marked climbed up again.
But what to do if you were a Japanese person and your stocks fell with 50% and stayed there?
This is the fallacy of only looking at market peaks. Surely this hypothetical investor didn't invest everything as soon as the Nikkei topped out and then liquidated everything?
Their market had a pretty steep run up prior to the fall. Not only that, but the normal volatility in that "lost decade" period still provided plenty of opportunity for market gains.
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Surely this hypothetical investor didn't invest everything as soon as the Nikkei topped out and then liquidated everything?
True, but I think the hypothetical is about someone who hits their "number" at what turns out to be a peak, and retires based on that number only to see their portfolio subsequently tank. Like, I have $250k, my number is $1M, and over the next 5 years the market returns 300%, so I hit $1M and FIRE, only to see it drop to $500k and level off (to give an example somewhat similar to Japan in the late 80s into 1990).
I think it's wise to at least be aware of the preceding market conditions before you FIRE. Maybe look back a little and ask to what degree your recent returns might be unusual. With that said, it's hard to look at the Nikkei in 1990 and not think that you've got a solid 40 years of a relatively consistent trend line to back you up (although maybe something in your head should ask whether 10-fold increases every 20 years are sustainable).
SP500 versus Nikkei 225, log scale
(http://www.painting-with-numbers.com/download/document/136/151207+blog+The+SECOND+Most+Useful+Graph+Ever+graph+%233.docx.jpg) (https://www.macrotrends.net/assets/images/large/nikkei-225-index-historical-chart-data.png)
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The 2007 marked climbed up again.
But what to do if you were a Japanese person and your stocks fell with 50% and stayed there?
maybe not just be invested in a small market thats just climbed 400% in 5 years and rely on that to retire on???
I predict that if the US market climbs 400% in 5 years, Mustachians and Bogleheads will tell you to "stay the course". They will, of course, present a lot of data to support their argument and claim that doing anything else is just market timing.
If that were the case, then Mustachians and Bogleheads would tell you that you'll never see a recession again, since we haven't had one over the last 5 years.
We're using a century of data to make predictions about the future, not 5 years.
You also don't invest based on the market being high or low. It should be more on when you need the money. Money that you NEEEEED shouldn't be in the market, even if you miss out on big gains. You start slowly moving money to safer investments as your RE draws near. If the market tanks the day after RE it shouldn't devastate you bc all your dough is not in the market at that point.
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spartana is my hero.
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The 2007 marked climbed up again.
But what to do if you were a Japanese person and your stocks fell with 50% and stayed there?
That happened, and we should expect something like this to happen again somewhere in our lives. However, there are a few points about how to avoid it.
-Valuations matter at least a little, price/earnings were over 90 at the peak of the Japanese market, which is absurd compared to nearly any other stock market event in history. Using a 1/CAPE10 withdrawal rate as a savings goal would do a lot to help prevent these things.
-The "reverse glide path" concept would be very effective at avoiding this as well.
-Diversification would have worked. Using the Bill Bernstein "No-Brainer" portfolio of 25% Japan Large Cap Stocks, 25% Japan small cap value stocks, 25% foreign to Japan stocks, 25% Japan intermediate-term government bonds would have given a 40-year safe withdrawal rate of 3.2%, which is not great, but not terrible, especially with one of the above mitigation strategies or others discussed. Similar to his "If You Can" portfolio of 33% Japan, 33% Foreign, 33% Bond, 1% cash portfolio. We are very fortunate to have https://portfoliocharts.com/portfolio/withdrawal-rates/ where we can now backtest Japan scenarios.
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spartana is my hero.
+1
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The 2007 marked climbed up again.
But what to do if you were a Japanese person and your stocks fell with 50% and stayed there?
That happened, and we should expect something like this to happen again somewhere in our lives. However, there are a few points about how to avoid it.
-Valuations matter at least a little, price/earnings were over 90 at the peak of the Japanese market, which is absurd compared to nearly any other stock market event in history. Using a 1/CAPE10 withdrawal rate as a savings goal would do a lot to help prevent these things.
-The "reverse glide path" concept would be very effective at avoiding this as well.
-Diversification would have worked. Using the Bill Bernstein "No-Brainer" portfolio of 25% Japan Large Cap Stocks, 25% Japan small cap value stocks, 25% foreign to Japan stocks, 25% Japan intermediate-term government bonds would have given a 40-year safe withdrawal rate of 3.2%, which is not great, but not terrible, especially with one of the above mitigation strategies or others discussed. Similar to his "If You Can" portfolio of 33% Japan, 33% Foreign, 33% Bond, 1% cash portfolio. We are very fortunate to have https://portfoliocharts.com/portfolio/withdrawal-rates/ where we can now backtest Japan scenarios.
additionally mortgage rates were very low in Japan. holding a mortgage and investing the funds in the market would have produced a reasonable return over the long term.
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S&P high was ~1,549 in October 2007. Low was ~735 in February 2009.
I just ran the monthly numbers on a $1 million portfolio for someone who retired on October 1, 2007, and withdrew $3,333/month, increasing the withdrawal by 0.1667% every month (2% per year).
The lowest point for the portfolio was just shy of $440k in February 2009. While the market recovered by March 2013, the principal balance of the portfolio has not yet reached $1 million again. However, it looks pretty safe. I feel a lot more confident about the 4% rule after running out those numbers than I did before. Maybe I won't wait until I'm at 3.5%.
Edit: added 2% inflation
I feel really stupid for having to ask this question, but it's been nagging at me for several days (since I first read this thread): Can someone explain why the bolded part above is true? How is that even possible? Is it because in this scenario the investor continued to pull money out each year (presumably 4%ish) rather than going back to some kind of work and leaving the portfolio intact to grow back with the market? (I hope I'm making sense here.)
Seriously, this post is scaring the shit out of me.
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S&P high was ~1,549 in October 2007. Low was ~735 in February 2009.
I just ran the monthly numbers on a $1 million portfolio for someone who retired on October 1, 2007, and withdrew $3,333/month, increasing the withdrawal by 0.1667% every month (2% per year).
The lowest point for the portfolio was just shy of $440k in February 2009. While the market recovered by March 2013, the principal balance of the portfolio has not yet reached $1 million again. However, it looks pretty safe. I feel a lot more confident about the 4% rule after running out those numbers than I did before. Maybe I won't wait until I'm at 3.5%.
Edit: added 2% inflation
I feel really stupid for having to ask this question, but it's been nagging at me for several days (since I first read this thread): Can someone explain why the bolded part above is true? How is that even possible? Is it because in this scenario the investor continued to pull money out each year (presumably 4%ish) rather than going back to some kind of work and leaving the portfolio intact to grow back with the market? (I hope I'm making sense here.)
Seriously, this post is scaring the shit out of me.
Of course the investor kept withdrawing 4% throughout the drop. They retired. That's literally the premise of this thread.
Despite starting at the very top of the market at the start of the Great Recession - the portfolio sustained the retiree/investor just fine, and has almost recovered the starting value - without ever having an dollar of added income, or cutting a dollar from their 4% spending.
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S&P high was ~1,549 in October 2007. Low was ~735 in February 2009.
I just ran the monthly numbers on a $1 million portfolio for someone who retired on October 1, 2007, and withdrew $3,333/month, increasing the withdrawal by 0.1667% every month (2% per year).
The lowest point for the portfolio was just shy of $440k in February 2009. While the market recovered by March 2013, the principal balance of the portfolio has not yet reached $1 million again. However, it looks pretty safe. I feel a lot more confident about the 4% rule after running out those numbers than I did before. Maybe I won't wait until I'm at 3.5%.
Edit: added 2% inflation
I feel really stupid for having to ask this question, but it's been nagging at me for several days (since I first read this thread): Can someone explain why the bolded part above is true? How is that even possible? Is it because in this scenario the investor continued to pull money out each year (presumably 4%ish) rather than going back to some kind of work and leaving the portfolio intact to grow back with the market? (I hope I'm making sense here.)
Seriously, this post is scaring the shit out of me.
Yes, that's how the 4% "rule" study worked. The retiree is an automaton that mindlessly spends their 4% each year (plus inflation) no matter what. You focused on "the principal balance of the portfolio has not yet reached $1 million again" and apparently ignored "However, it looks pretty safe."
And, of course, unlike the Trinity study, you're allowed to be smart about things, cut back on your spending, find extra income sources, etc.
So why the fear?
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Yes, that's how the 4% "rule" study worked. The retiree is an automaton that mindlessly spends their 4% each year (plus inflation) no matter what. You focused on "the principal balance of the portfolio has not yet reached $1 million again" and apparently ignored "However, it looks pretty safe."
And, of course, unlike the Trinity study, you're allowed to be smart about things, cut back on your spending, find extra income sources, etc.
So why the fear?
It just didn't fit with my understanding of how the market recovery would/should work. But yeah, if the retiree is mindlessly continuing to spend 4%, then it makes more sense. Thanks for restoring my (apparently fragile) hope.
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If anything, this thread should encouraging instead of scaring you.
2007-2008 was a historically bad recession, and yet, given the assumptions, following the 4% guideline would have still worked.
Here are the assumptions:
1 - You retired at the peak of the market in 2007.
2 - You had not earned a single cent since then.
3 - You have robotically spent your 4% annual spend, without cutting back.
You would have been retired for 12 years, and now have more money in your stash than when you started. Any little bit of side hustling or cutting back costs, especially in the early years, would have resulted in even more money in your stash.
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Part 6 of ERN's safe withdrawal series deals with 2000-2016 case study.
short answer is that your portfolio would now be anywhere between 30-70% down. Surviving the next 11-12 years is likely to be touch and go.
https://earlyretirementnow.com/2017/01/18/the-ultimate-guide-to-safe-withdrawal-rates-part-6-a-2000-2016-case-study/
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Yes, that's how the 4% "rule" study worked. The retiree is an automaton that mindlessly spends their 4% each year (plus inflation) no matter what. You focused on "the principal balance of the portfolio has not yet reached $1 million again" and apparently ignored "However, it looks pretty safe."
And, of course, unlike the Trinity study, you're allowed to be smart about things, cut back on your spending, find extra income sources, etc.
So why the fear?
It just didn't fit with my understanding of how the market recovery would/should work. But yeah, if the retiree is mindlessly continuing to spend 4%, then it makes more sense. Thanks for restoring my (apparently fragile) hope.
Good!
We retired with plenty of buffer in our annual expenditures. That way, it would be relatively easy to cut back and, if times were really bad, even very poorly paid work would make a big difference. We also chose to have multiple sources of passive income so we weren't totally tied to the stock market. It reduces our sequence of returns risk and adds other diversity of income protections, too.
Some folks figure out their mandatory expenses to the penny and quit when their stash is exactly 25 times that. They don't have any wiggle room in their budget. If they are already been super frugal their stash can be quite small. To me, that's asking for trouble. Other people shrug it off and choose to deal with it if things go wrong.
To each his own. I prefer multiple safety features in our FIRE plan. :)
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The 2007 marked climbed up again.
But what to do if you were a Japanese person and your stocks fell with 50% and stayed there?
Which stocks? Do you have 100% of your funds in your home market? (in your case norway?!). I always think this Japan example/scare-story is silly.
With a global weighted portfolio that person in Japan would see a portion of their stock portfolio drop 50% (how large a portion I don't know. It's 17% today, but I don't know what that was at the crash). Regardless, if the home market is a tiny country with a fragile, focused economy it seems ludicrous to me to have more than 30, maybe 50% in that market! Especially since any hit to the economy is likely to cost you your job at the same time. Why would you do that? Ok, so there's a crash, and half your portfolio drops 50%, you're down 25%. Meh..
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I’ve not heard a convincing rationale for all this talk about how a Japan scenario could not possibly happen in the US. If anything, Japan revealed that a stock crash followed by decades of economic stagnation wasn’t only something that happened in poor countries, as many believed at the time. Yes, valuations for stocks and real estate were insane but if you think you would have spotted the bubble in advance and diversified before the drop, I hope you are not currently overweight US stocks with the S&P 500’s PE ratio 40.6% above its average, and I hope you have insulated your portfolio from real estate in an environment where the median priced home is unaffordable in 74% of US counties. Yes, the details are always different; how could they not be? But FWIW, the percentage of the US population over 65 years old just surpassed Japan’s rate in the late 80s.
I don’t claim to know the future, but saying “We’re different. Our market always bounces back.” sounds a whole lot like “this time is different.” I heard people whistling past the graveyard in 1999 and 2007 too.
https://www.housingwire.com/articles/median-priced-homes-arent-affordable-in-74-of-u-s-housing-markets/
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Here’s the real mind-bender: It’s 2007 and you are OMY away from retirement with a $950k portfolio (spending is $40k). One year later, you have contributed the remaining $50k, but your diversified portfolio has dropped 30% to only $700k. Can you still retire as planned, or do you have to work several more years?
Following the 4% rule would have required you to work maybe 3-4 more years, but as the example above demonstrates in hindsight, your late 2008 retirement at a 5.7% WR was actually secure and all those years of life in a cubicle or in an industrial shop were unnecessary. Had you retired a year earlier, you would have taken the plunge oblivious to the coming crash, but because you were already retired you would probably have spent the recession jobless, and then halted the job search as the portfolio rebounded. Ironically, you would have worked 3-4 fewer years if you retired at the worst possible time compared to if you waited to retire when your portfolio’s market value was $1M.
This paradox is another reason I calculate my portfolio’s ability to support me in retirement based on the sum of my earnings per share and interest, rather than my portfolio’s constantly fluctuating market value. If we apply the lessons of A Random Walk Down Wall Street when it comes to holding our shares through a downturn, why should we then make the decision to retire based on market prices? If you are on the way to your boss’s office to hand in your resignation, do you check your phone and turn around if the market is down 0.5% since you hit your FIRE number this morning?
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Here’s the real mind-bender: It’s 2007 and you are OMY away from retirement with a $950k portfolio (spending is $40k). One year later, you have contributed the remaining $50k, but your diversified portfolio has dropped 30% to only $700k. Can you still retire as planned, or do you have to work several more years?
Following the 4% rule would have required you to work maybe 3-4 more years, but as the example above demonstrates in hindsight, your late 2008 retirement at a 5.7% WR was actually secure and all those years of life in a cubicle or in an industrial shop were unnecessary. Had you retired a year earlier, you would have taken the plunge oblivious to the coming crash, but because you were already retired you would probably have spent the recession jobless, and then halted the job search as the portfolio rebounded. Ironically, you would have worked 3-4 fewer years if you retired at the worst possible time compared to if you waited to retire when your portfolio’s market value was $1M.
This paradox is another reason I calculate my portfolio’s ability to support me in retirement based on the sum of my earnings per share and interest, rather than my portfolio’s constantly fluctuating market value. If we apply the lessons of A Random Walk Down Wall Street when it comes to holding our shares through a downturn, why should we then make the decision to retire based on market prices? If you are on the way to your boss’s office to hand in your resignation, do you check your phone and turn around if the market is down 0.5% since you hit your FIRE number this morning?
+1
Nobody knows which market will be the next Japan and when it will be the next Japan, so every investor must be prepared for any kind of scenario.
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I heard people whistling past the graveyard in 1999 and 2007 too.
But, as is being covered here, things turned out fine for FIREd folks after both of those crashes, so it's not exactly the stirring indictment of the strategy that you seem to present it as..
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If someone retired at the peak in 2007, say around October, would their portfolio have survived?
Lets say x = annual spend and they had exactly 25x saved, and spent exactly $X per year. Assuming portfolio was 75% stocks, 20 bonds, 5 cash.
Can someone smarter than me simulate it out from 2007 to now?
Answer: https://www.gocurrycracker.com/how-are-the-2000-and-2008-retirees-doing-4-percent-rule/
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If someone retired at the peak in 2007, say around October, would their portfolio have survived?
Lets say x = annual spend and they had exactly 25x saved, and spent exactly $X per year. Assuming portfolio was 75% stocks, 20 bonds, 5 cash.
Can someone smarter than me simulate it out from 2007 to now?
You can test for yourself in Portfolio Visualizer:
https://www.portfoliovisualizer.com/backtest-portfolio
Use VTI for US Stocks, BND for US bonds, CASHX for cash. Start with $1M September 2007. Pull out an inflation adjusted $40K/year.
Final balance $1,114,321 inflation adjusted ($1,413,261 without adjusting for inflation.)
The last withdrawal was $48,333
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I'm going to throw this one out there...go check out the guy who writes at Early Retirement Dude.
He's been interviewed a few times and talks about this exact thing, I think he pulled the plug with $1.6mil in 2006 and had to be talked out of selling it all at the bottom.
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I retired in May of 2007. My net worth is much higher. But I didn’t exactly follow the 4% rule. When the market took the big drop, we just pulled money from the money market account and didn’t make any big purchases.
We are also spending much more now than back when I was working. I have some expensive hobbies and we moved to a more expensive area. And I bought a plane.
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I’ve not heard a convincing rationale for all this talk about how a Japan scenario could not possibly happen in the US. If anything, Japan revealed that a stock crash followed by decades of economic stagnation wasn’t only something that happened in poor countries, as many believed at the time. Yes, valuations for stocks and real estate were insane but if you think you would have spotted the bubble in advance and diversified before the drop, I hope you are not currently overweight US stocks with the S&P 500’s PE ratio 40.6% above its average, and I hope you have insulated your portfolio from real estate in an environment where the median priced home is unaffordable in 74% of US counties. Yes, the details are always different; how could they not be? But FWIW, the percentage of the US population over 65 years old just surpassed Japan’s rate in the late 80s.
I don’t claim to know the future, but saying “We’re different. Our market always bounces back.” sounds a whole lot like “this time is different.” I heard people whistling past the graveyard in 1999 and 2007 too.
https://www.housingwire.com/articles/median-priced-homes-arent-affordable-in-74-of-u-s-housing-markets/
Allow me to try and give a convincing rationale for why there will be no repeat of the Japanese stock market experience in the USA.
The stock market is a reflection of the economy--everyone (should) know this. But, what exactly does it reflect? In the USA you have new small companies coming onto the stock market all the time. These new companies then grow into larger companies. Most of us could easily name many large cap US stocks (over $100 billion market cap) that did not exist or were very very tiny 20-25 years ago (aapl, goog, amzn, nvda, to name a few.) The growth of these companies is then reflected in the growth of the stock market index over time. If your country (or stock market) cannot produce these world class companies, then your stock market will not show much growth over time. Since Japan's stock market crashed in 1989 and hasn't risen again, I can comfortably surmise that Japan has produced no world class companies in the past 30 years. Please prove me wrong.
But, perhaps a biotech CEO could illustrate the point better than I can. It's a bit of a dry talk, but the important part is less than five minutes long, beginning just before the 7 minute mark. https://www.youtube.com/watch?v=XFK-B1xJzGc (https://www.youtube.com/watch?v=XFK-B1xJzGc)
In these five minutes, the CEO of CRSP, a biotech company with technology that will change the world as we know it, explains how the Europeans who discovered this technology moved their headquarters from London to Basel, Switzerland although none of them were Swiss. Airplanes from London can fly in any direction, but they chose Switzerland. Why not Germany? Or Sweden? Or Luxembourg? Or Austria? Or Turkey? Or Greece? Or Russia? Or even simplest of all, stay put in London! But, then discovered that they couldn't access enough talent or capital in Switzerland or all of Europe. So, they opened shop in the USA and listed on the nasdaq. Japan wasn't even on their radar screen, btw. The benefits of the growth of this company will flow to investors in the US stock market. Not the European or Japanese stock market. To hear the speaker in the link say it, an important part of the US market is researchers who will accept stock in a company in exchange for salary. In Europe (and Japan?) the average person is wary of the stock market and not willing to accept stock in exchange for salary. Again, in these five minutes the European born CEO of a cutting edge technology company explains why the USA is the best place in the world to work and invest.
There are dozens of biotech companies in the USA that are working on curing cancer with 'smart drugs' that target only the cancerous cells. They will be able to sell their products worldwide. But, only investors in the US stock market will reap the benefits as that is where they're listed. Not all the companies will succeed, but some of these will grow into behemoths in the next 10-20 years. Even if the USA cannot or does not produce the researchers or the technology these companies still choose to list in the USA with the benefits flowing to those who invest in the US stock index.
Japan has nothing like this. Ditto Europe.
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I'm not saying anyone on here would be like this.
But I talked to a lot of older, retirement-age people in 2009-2011 who didn't believe the government's inflation statistics. They believed that the massive budget deficits and low interest rates--and these will come up in response to any significant downturn--meant that inflation had to be higher than it was.
Additionally, these retirees feared that the Affordable Care Act would bankrupt them, because...
These people could have held the self-control to not sell stocks during the initial bear market, but through other irrational beliefs may have failed to hold their expenses or health-related planning in the proper range to survive like your models here suggest.
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I'm not saying anyone on here would be like this.
But I talked to a lot of older, retirement-age people in 2009-2011 who didn't believe the government's inflation statistics. They believed that the massive budget deficits and low interest rates--and these will come up in response to any significant downturn--meant that inflation had to be higher than it was.
Additionally, these retirees feared that the Affordable Care Act would bankrupt them, because...
These people could have held the self-control to not sell stocks during the initial bear market, but through other irrational beliefs may have failed to hold their expenses or health-related planning in the proper range to survive like your models here suggest.
So don't be an idiot, or more gently, stop watching the news if you're prone to these types of beliefs.
Although there is a grain of truth in there - while personally I believe the government inflation figures are accurate, what matters for me is my own personal inflation which can be very different from the average of the whole country. Of course these folks probably are not doing the math to figure that out either. For now I'm figuring I'm close enough to average - pretty far away from FIRE still, so seems like a wasted effort to try to figure out what inflation might be for our individual situation in retirement.
The ACA was a big shock price-wise for young healthy people who had to buy their own insurance. Retirees are either on medicare or very close to it. Should have been easy for these folks to see past that one.
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I’ve not heard a convincing rationale for all this talk about how a Japan scenario could not possibly happen in the US. If anything, Japan revealed that a stock crash followed by decades of economic stagnation wasn’t only something that happened in poor countries, as many believed at the time. Yes, valuations for stocks and real estate were insane but if you think you would have spotted the bubble in advance and diversified before the drop, I hope you are not currently overweight US stocks with the S&P 500’s PE ratio 40.6% above its average, and I hope you have insulated your portfolio from real estate in an environment where the median priced home is unaffordable in 74% of US counties. Yes, the details are always different; how could they not be? But FWIW, the percentage of the US population over 65 years old just surpassed Japan’s rate in the late 80s.
I don’t claim to know the future, but saying “We’re different. Our market always bounces back.” sounds a whole lot like “this time is different.” I heard people whistling past the graveyard in 1999 and 2007 too.
https://www.housingwire.com/articles/median-priced-homes-arent-affordable-in-74-of-u-s-housing-markets/
Allow me to try and give a convincing rationale for why there will be no repeat of the Japanese stock market experience in the USA.
The stock market is a reflection of the economy--everyone (should) know this. But, what exactly does it reflect? In the USA you have new small companies coming onto the stock market all the time. These new companies then grow into larger companies. Most of us could easily name many large cap US stocks (over $100 billion market cap) that did not exist or were very very tiny 20-25 years ago (aapl, goog, amzn, nvda, to name a few.) The growth of these companies is then reflected in the growth of the stock market index over time. If your country (or stock market) cannot produce these world class companies, then your stock market will not show much growth over time. Since Japan's stock market crashed in 1989 and hasn't risen again, I can comfortably surmise that Japan has produced no world class companies in the past 30 years. Please prove me wrong.
But, perhaps a biotech CEO could illustrate the point better than I can. It's a bit of a dry talk, but the important part is less than five minutes long, beginning just before the 7 minute mark. https://www.youtube.com/watch?v=XFK-B1xJzGc (https://www.youtube.com/watch?v=XFK-B1xJzGc)
In these five minutes, the CEO of CRSP, a biotech company with technology that will change the world as we know it, explains how the Europeans who discovered this technology moved their headquarters from London to Basel, Switzerland although none of them were Swiss. Airplanes from London can fly in any direction, but they chose Switzerland. Why not Germany? Or Sweden? Or Luxembourg? Or Austria? Or Turkey? Or Greece? Or Russia? Or even simplest of all, stay put in London! But, then discovered that they couldn't access enough talent or capital in Switzerland or all of Europe. So, they opened shop in the USA and listed on the nasdaq. Japan wasn't even on their radar screen, btw. The benefits of the growth of this company will flow to investors in the US stock market. Not the European or Japanese stock market. To hear the speaker in the link say it, an important part of the US market is researchers who will accept stock in a company in exchange for salary. In Europe (and Japan?) the average person is wary of the stock market and not willing to accept stock in exchange for salary. Again, in these five minutes the European born CEO of a cutting edge technology company explains why the USA is the best place in the world to work and invest.
There are dozens of biotech companies in the USA that are working on curing cancer with 'smart drugs' that target only the cancerous cells. They will be able to sell their products worldwide. But, only investors in the US stock market will reap the benefits as that is where they're listed. Not all the companies will succeed, but some of these will grow into behemoths in the next 10-20 years. Even if the USA cannot or does not produce the researchers or the technology these companies still choose to list in the USA with the benefits flowing to those who invest in the US stock index.
Japan has nothing like this. Ditto Europe.
I don’t believe the explanation that the US is the only or best place to find talented or skilled workers. The US ranks 27th in the world in terms of educational quality. FWIW other disadvantages of setting up shop in the US include some of the highest crime in the developed world, some of the highest wage expenses, and a healthcare system that is largely employer funded at a cost 3x that of other developed countries plus administrative costs to deal with the bizarre tangle of laws around healthcare.
The explanation that workers in other countries won’t accept stock options as compensation is an assumption that deserves to be proven. If it cannot be proven, this reminds me of the 1980’s anxieties about how the Japanese might, due to their culture, have a superior work ethic and cooperative tendency that allow them to run better factories and dominate the auto and electronics industries. That narrative was disposed of and forgotten after the market crash, and no lessons were learned about the dangers of using cultural stereotypes as economic predictions. Now, with the US economy riding high, we tell a narrative about ourselves to explain and justify our success.
Why hasn’t Japan produced as many worldwide brands as they once did? Competition from corporate zombies is part of the answer, but I think demographic graying is the other.
https://www.businessinsider.com/us-ranks-27th-for-healthcare-and-education-2018-9
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Wow, this thread got off topic.
Japan got old. Isolated country with no natural resources, aging population, then limited immigration. That's low growth
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I don't think 2007 is a typical example, the market bounced back extremely quickly to new highs, so you only really needed to wait 2-3 years or 2-3 years of cash, other market drops may have been more challenging or even when the market was just flat for 10yrs+ in the past.
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Portfolio 1 is Betterment's, which I have my portfolio in.
Portfolio 2 is a boglehead's 3 funds
Portfolio 3 is Ray Dalio's All weather
And the Green Benchmark is the SP500
All portfolios started on Nov 2007. I think it is Nov 1st. The exact worst time to get in.
Reupload since I forgot to post the images The first time
Nominal
(https://i.imgur.com/b2Q5KMDl.png)
Real
(https://i.imgur.com/or0e6Wgl.png)
I started with 1000000 and took out 3333 every month for a 4% Safe Withdrawal rate, increasing with inflation.
The SP500 and all weather portfolio retained their balances before after inflation. The Bogleheads and Betterment portfolio did not.
HOWEVER, any slight deviation from the start time significantly increased the final portfolios. You had to have really bad timing to get these results.
My take is that the US stock market has done really well in the past but I question its future viability, especially given these valuations. One thing about the Betterment and Bogle portfolios is they are more diversified. Which is good, since they have a more reliable outcome. But hey, despite their lower returns, they still made it.
SO TLDR. Even when highly diversified. The 4% rule WORKS. If you really want to be secure go with 3.5% and internationally diversify. Don't be dismayed by this recent bull run. Diversification gives you greater certainty of results.
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I think you'll find 2007 was not a worst case scenario as within only a few years you were back in positive returns, have a look at what would happen if you retired in the early 70's or end of the 90's for e.g
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The 2007 marked climbed up again.
But what to do if you were a Japanese person and your stocks fell with 50% and stayed there?
maybe not just be invested in a small market thats just climbed 400% in 5 years and rely on that to retire on???
I predict that if the US market climbs 400% in 5 years, Mustachians and Bogleheads will tell you to "stay the course". They will, of course, present a lot of data to support their argument and claim that doing anything else is just market timing.
yawn.
of course you skip the "small market piece"
whatever. japan is a bullshit comparison anyway.
A pointlessly late reply, I know.
But if you check with the world bank, you will find that Japan's stock market was the same size as the US at the peak of the bubble.
https://data.worldbank.org/indicator/CM.MKT.LCAP.CD?locations=JP-US
Those are using current dollars, so you need to correct for 1990 dollars when the yen was much weaker, but basically they were the same size. So there's one less reason to consider this a "bullshit" scenario.
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I’ve not heard a convincing rationale for all this talk about how a Japan scenario could not possibly happen in the US. If anything, Japan revealed that a stock crash followed by decades of economic stagnation wasn’t only something that happened in poor countries, as many believed at the time. Yes, valuations for stocks and real estate were insane but if you think you would have spotted the bubble in advance and diversified before the drop, I hope you are not currently overweight US stocks with the S&P 500’s PE ratio 40.6% above its average, and I hope you have insulated your portfolio from real estate in an environment where the median priced home is unaffordable in 74% of US counties. Yes, the details are always different; how could they not be? But FWIW, the percentage of the US population over 65 years old just surpassed Japan’s rate in the late 80s.
I don’t claim to know the future, but saying “We’re different. Our market always bounces back.” sounds a whole lot like “this time is different.” I heard people whistling past the graveyard in 1999 and 2007 too.
https://www.housingwire.com/articles/median-priced-homes-arent-affordable-in-74-of-u-s-housing-markets/
Allow me to try and give a convincing rationale for why there will be no repeat of the Japanese stock market experience in the USA.
The stock market is a reflection of the economy--everyone (should) know this. But, what exactly does it reflect? In the USA you have new small companies coming onto the stock market all the time. These new companies then grow into larger companies. Most of us could easily name many large cap US stocks (over $100 billion market cap) that did not exist or were very very tiny 20-25 years ago (aapl, goog, amzn, nvda, to name a few.) The growth of these companies is then reflected in the growth of the stock market index over time. If your country (or stock market) cannot produce these world class companies, then your stock market will not show much growth over time. Since Japan's stock market crashed in 1989 and hasn't risen again, I can comfortably surmise that Japan has produced no world class companies in the past 30 years. Please prove me wrong.
But, perhaps a biotech CEO could illustrate the point better than I can. It's a bit of a dry talk, but the important part is less than five minutes long, beginning just before the 7 minute mark. https://www.youtube.com/watch?v=XFK-B1xJzGc (https://www.youtube.com/watch?v=XFK-B1xJzGc)
In these five minutes, the CEO of CRSP, a biotech company with technology that will change the world as we know it, explains how the Europeans who discovered this technology moved their headquarters from London to Basel, Switzerland although none of them were Swiss. Airplanes from London can fly in any direction, but they chose Switzerland. Why not Germany? Or Sweden? Or Luxembourg? Or Austria? Or Turkey? Or Greece? Or Russia? Or even simplest of all, stay put in London! But, then discovered that they couldn't access enough talent or capital in Switzerland or all of Europe. So, they opened shop in the USA and listed on the nasdaq. Japan wasn't even on their radar screen, btw. The benefits of the growth of this company will flow to investors in the US stock market. Not the European or Japanese stock market. To hear the speaker in the link say it, an important part of the US market is researchers who will accept stock in a company in exchange for salary. In Europe (and Japan?) the average person is wary of the stock market and not willing to accept stock in exchange for salary. Again, in these five minutes the European born CEO of a cutting edge technology company explains why the USA is the best place in the world to work and invest.
There are dozens of biotech companies in the USA that are working on curing cancer with 'smart drugs' that target only the cancerous cells. They will be able to sell their products worldwide. But, only investors in the US stock market will reap the benefits as that is where they're listed. Not all the companies will succeed, but some of these will grow into behemoths in the next 10-20 years. Even if the USA cannot or does not produce the researchers or the technology these companies still choose to list in the USA with the benefits flowing to those who invest in the US stock index.
Japan has nothing like this. Ditto Europe.
This is agonizingly myopic. Imagine the view from someone living in 1990 (in fact you don't have to - George Soros's "Alchemy of Finance", aside from being an interesting read in its own right, includes the realtime diary of an investor living through those times). It seems that the only country delivering on innovation is Japan - heavy industry, autos, electronics, chemicals, you name it. Completely unknown companies dominating established industries at a terrifying pace, or creating entirely new markets. Of course, we all know how that turned out.
If anything, your argument is weirdly reminiscent of the kind of statements that were made about Japan at the height of its success. Now, that in no way means that the US is fated to mirror Japan's path in other ways. The world is full of coincidences that in the end have little significance. But the rationale presented is the opposite of convincing.
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Which stocks? Do you have 100% of your funds in your home market? (in your case norway?!). I always think this Japan example/scare-story is silly.
At the peak in 1990, the Japanse Market accounted for 40% of the MSCI World index if I remember correctly. So a globally diversified stock only investor would still have 40% in Japanse equities. So it's debatable how silly it was/would be to have at least a very large allocation to it. The US market today accounts for ~60% of the index for comparison.
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The 2007 marked climbed up again.
But what to do if you were a Japanese person and your stocks fell with 50% and stayed there?
maybe not just be invested in a small market thats just climbed 400% in 5 years and rely on that to retire on???
I predict that if the US market climbs 400% in 5 years, Mustachians and Bogleheads will tell you to "stay the course". They will, of course, present a lot of data to support their argument and claim that doing anything else is just market timing.
yawn.
of course you skip the "small market piece"
whatever. japan is a bullshit comparison anyway.
A pointlessly late reply, I know.
But if you check with the world bank, you will find that Japan's stock market was the same size as the US at the peak of the bubble.
https://data.worldbank.org/indicator/CM.MKT.LCAP.CD?locations=JP-US
Those are using current dollars, so you need to correct for 1990 dollars when the yen was much weaker, but basically they were the same size. So there's one less reason to consider this a "bullshit" scenario.
Wouldn't that be one MORE reason it's a bullshit scenario? I mean, was Japan's expected future output equal to the USA? Seems preposterous. Should have been recognizable as a bubble once you step back.
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Dr. Doom did this simulation:
https://livingafi.com/2014/05/28/drawdown-part-4-examples/ (https://livingafi.com/2014/05/28/drawdown-part-4-examples/)
Gives you an idea and also models 1929, and 1973 (maybe some other years).
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Which stocks? Do you have 100% of your funds in your home market? (in your case norway?!). I always think this Japan example/scare-story is silly.
At the peak in 1990, the Japanse Market accounted for 40% of the MSCI World index if I remember correctly. So a globally diversified stock only investor would still have 40% in Japanse equities. So it's debatable how silly it was/would be to have at least a very large allocation to it. The US market today accounts for ~60% of the index for comparison.
The Japanese stock market bubble was so big that it noticeably distorted how stock market values were distributed around the world.
Latest version of one of my favorite figures ever.
(https://imgpile.com/images/1ebcBl.png) (https://imgpile.com/i/1ebcBl)
Would be interesting to know if the collapse of the stock market in japan was enough to make 1990 a very bad starting year to FIRE for someone invested in a cap weighted global index. Those who invested earlier got to ride the bubble up first, so it wouldn't be so bad when it collapsed.
But honestly I don't lose a lot of sleep worrying about the USA today proving to be the Japan of 1989.
At the peak of the bubble the land the japanese imperial palace sat on was worth more than the entirely of all the land in Canada put together. The japanese stock market was trading at more than 60x earnings while the US stock market is currently trading at ~20x earnings.
If I was going to lose sleep about something, it wouldn't be that we're living in 1989 Japan. It'd be that we're living in either 1913 Russia or Austria-Hungary (both of which are also included in that graph above).
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All this is telling me to stay internationally diversified.
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ptf
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Here in Norway you can now get a 10 year mortgage with fixed low interest, I think it was under 3%, lower than the lowest not fixed interest loans.
That probably means that the loan providers expect the market to stagnate for the next 10 years.
Also, the Norwegian government is now changing their 4% rule from taking money out of our oil fund to 3%. And I read that the Germans are expecting lower growth than usual. The interest can hardly be lowered more than it is now. Some countries already have negative interest on loans. The economy could become stagnated in Europe for a longer time.
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Well, yeah, things are going to slow down when the government decides to spend less money. Perhaps they'll restore it to 4% if there's a downturn.
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Well, yeah, things are going to slow down when the government decides to spend less money. Perhaps they'll restore it to 4% if there's a downturn.
It's gonna be a long wait. No one in America wants the gubbermint to spend less money. It will never happen.
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Here in Norway you can now get a 10 year mortgage with fixed low interest, I think it was under 3%, lower than the lowest not fixed interest loans.
That probably means that the loan providers expect the market to stagnate for the next 10 years.
Also, the Norwegian government is now changing their 4% rule from taking money out of our oil fund to 3%. And I read that the Germans are expecting lower growth than usual. The interest can hardly be lowered more than it is now. Some countries already have negative interest on loans. The economy could become stagnated in Europe for a longer time.
I would be interested to learn the interest rates for mortgages and private bank loans in countries/ currencies where government debt has negative yields. Any links or other info would help me understand the current situation.
My specific question is how inversion of the yield curve for government debt affects the market for private debt. Banks tend to borrow from their depositors at low rates for short terms (accounts and CDs) and lend to borrowers at higher rates for longer terms (mortgages, govt bonds). So what happens when the best return banks can get for long-term debt is lower than the amount they must pay to borrow? Banks cannot and will not lend at negative or flat margins.
I suspect there is a decoupling between government and private markets. That is, bank accounts and CDs will have to yield more than short term government debt to attract funds, and private loans (unsubsidized) will have to yield far more than negative yielding long term government debt but also more than bank accounts and CDs. As rates invert, does a spread open up between the yields of private debts and similar-term government debts? If so, central bankers’ efforts to lower rates further will not affect the cost of private debt or stimulate the economy any further, because banks can’t lend at negative rates or margins.
Corporations can sell bonds at low or negative rates, but home buyers, small businesses, students, farmers, etc. who rely on banks will have a relatively higher cost of capital. This all has significant economic and investment implications.
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I would be interested to learn the interest rates for mortgages and private bank loans in countries/ currencies where government debt has negative yields. Any links or other info would help me understand the current situation.
Here's a bank in Denmark which is issuing mortgages at -0.5% interest per year. https://www.cnbc.com/2019/08/12/danish-bank-is-offering-10-year-mortgages-with-negative-interest-rates.html
UBS, a big bank in switzerland, now charges depositors 0.6% of their bank balances per year (but only on balances >500,000 franks). https://www.theguardian.com/business/2019/aug/06/raking-it-in-ubs-to-start-charging-super-rich-clients-for-cash-deposits
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My specific question is how inversion of the yield curve for government debt affects the market for private debt. Banks tend to borrow from their depositors at low rates for short terms (accounts and CDs) and lend to borrowers at higher rates for longer terms (mortgages, govt bonds). So what happens when the best return banks can get for long-term debt is lower than the amount they must pay to borrow? Banks cannot and will not lend at negative or flat margins.
I suspect there is a decoupling between government and private markets. That is, bank accounts and CDs will have to yield more than short term government debt to attract funds, and private loans (unsubsidized) will have to yield far more than negative yielding long term government debt but also more than bank accounts and CDs. As rates invert, does a spread open up between the yields of private debts and similar-term government debts? If so, central bankers’ efforts to lower rates further will not affect the cost of private debt or stimulate the economy any further, because banks can’t lend at negative rates or margins.
The entire yield curve now for German government debt is negative. So, some large institutions are paying money to loan money to the German government. Interestingly enough, this has not sparked a binge in German government spending.
German bank accounts pay zero interest now. Deposits above a certain amount, which varies by institution, are charged negative interest rates. For some banks the threshold for personal accounts is 500,000 EUR, for others 1,000,000 EUR and for corporate accounts 50,000 EUR (or higher). It all depends on the bank. Germany is a graveyard for banks.
Mortgage rates in Germany are between 1.5% and 2.0 % now. They don't have a 30 year fixed like in the USA, so that is on a 10 year balloon note. Banks are actually rather eager to loan at these rates, otherwise they will have to pay negative yields to park the excess funds at the Bundesbank (Fed).
One interesting thing about Germany is that the banks are small and they know their customer and are willing to loan money to businesses in a way that they are not in the USA. Cultural differences.
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I would be interested to learn the interest rates for mortgages and private bank loans in countries/ currencies where government debt has negative yields. Any links or other info would help me understand the current situation.
My specific question is how inversion of the yield curve for government debt affects the market for private debt. Banks tend to borrow from their depositors at low rates for short terms (accounts and CDs) and lend to borrowers at higher rates for longer terms (mortgages, govt bonds). So what happens when the best return banks can get for long-term debt is lower than the amount they must pay to borrow? Banks cannot and will not lend at negative or flat margins.
In France you can get a mortgage loan at ~1-1.5% depending on the duration. Short duration (2 years) personal loans are advertised at .95% (though I must be missing something because the total interest payment is .95% - for a 2-year loan).
Of course we don't have access to 3%-yielding-money markets, and regular savings accounts only earn from from .1 to .75%.
Also, my broker stores their client's money in euro funds with negative yield, so whatever money you keep sitting there actually decreases daily.
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One interesting thing about Germany is that the banks are small and they know their customer and are willing to loan money to businesses in a way that they are not in the USA. Cultural differences.
The main difference is that in the US mortgages are mainly sold off by the banks to the likes of Freddie Mac and Fannie Mae, securitized and sold to investors. A mortgage in the US does not sit on the bank's balance sheet. That is the main difference, not if banks are small or large. US banks have much less credit risk on homebuyers as the bank is not the actual lender after a short period of time (don't know how long) but it's nowhere near like in Europe where most mortages sit on the bank's balance sheet for its entire lifetime.
But yes, German banks are small. It's probably the most over-banked country in the western world. Which means bad profitability for everyone which in turn means banks have less capacity to lend to buisnesses (above all small- and medium-sized ones who rely on bank funding as they are too small to go to the general market). Which is sort of a serious problem. There is a lot to like about Germany - the state of the banking system definately isn't one of them. And that they earn negative interest rates on their deposits at the central bank doesn't help at all. Negative rates are essentially a massive tax on the banking system as banks are very. very reluctant to pass that cost onto customers, but as mentioned above it's starting to happen.
I think when economists write history in the future, negative rates will be seen as a massive failture by the central banks around.
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I’m just thinking if default recoveries are, say, 50%, how many loans at sub-2% interest rates have to perform to make up for a single default?
For a portfolio of 100 equal size loans at 5%, for example, the interest received would cause the portfolio to break even in nominal terms at a default rate of roughly 9% of loans per year. At 3% the break even would be a little over 5%. At 2%, defaults would have to stay somewhere below 4% to break even. And at 0% obviously a single default breaks the profitability of the portfolio.
All that is to say, the threshold for financial institutions or leveraged investors to maintain solvency becomes narrower at low interest rates, and if low government bond yields are forcing banks to lend at rates lower than interest minus expected default losses, expect a banking crisis and credit freeze at some tipping point in the future.
Obviously those European mortgages with sub-2% or even negative interest rates are going to lose money for the lenders, even if defaults remain low. But how long can this situation hold?
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Obviously those European mortgages with sub-2% or even negative interest rates are going to lose money for the lenders, even if defaults remain low. But how long can this situation hold?
Why is that obvious? European banks can borrow at negative interest rates on their mortgage funding (covered bonds). Banks do not make money based on the rate at which they lend - they make money on the differential between borrowing costs and the lending rate. If a bank lends at 2% for 10 years to the general public and borrows at -0.25% or whatever they have an handsome margin for lending which is very low-risk. Firstly a homebuyer generally has to put down some downpayment and borrows maybe 70-80% of the underlying house value. In addition, even if the borrower defaults, and the collateral is sold of by the lender - the debt doesn't go away for the borrower.
Your calculations on default ratios etc forget to take funding costs into account. A portfolio of loans at 5% doesn't result in a 5% profit for a bank. For starters the bank has to fund the borrowing in some way and a bank also has to hold equity against it and equity is expensive..
Noone knows what will be the catalyst for the next time the shit hits the fan, but one of the more popular places to point at is US corporate debt. US companies have taken on massive amounts of debt to fund share repurchases etc. A mind-boggling pile of debt is rated just one notch above junk status. If you get downgrades en masse a LOT of funds are no longer allowed to hold the debt and will have to sell. Potentially in a market with no buyers as "everyone" will have to sell a truckload of such bonds.
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I backtested my own portfolio starting at the very top in Oct 2007 and withdrawing $40,000/yr on a $1,000,000 portfolio (4%). Assuming I have been withdrawing an *inflation adjusted* amount from Oct 2007 until now (Sep. 2019), the initial withdrawal would be $40,000 and the withdrawal for the current year would be $48,100.
My current balance shows as $1,158,260, so it's even higher than what it was in Oct 2007, the very top of the crash despite me drawing down 4% inflation adjusted yearly. My lowest balance was $538,000 in end Feb 2009.
As long as I stayed the course not only did my portfolio do fine, it actually grew DESPITE starting 4% drawdowns at the top of one of the biggest crashes in the history of markets. The gist of this is that people greatly overestimate risks, in 99% of the cases your portfolio is going to do VERY well if you simply stay the course and don't do anything stupid like pull all your money out at the wrong time.
The above is an absolute worst case scenario IF you retired days before the biggest crash, in reality what are the chances that is going to happen to you? And even if it did you wound up just fine. So, given an average situation you will not only do fine you will do FANTASTIC, the odds are in your favor.
Kitces recently had a video about this, he mentioned that so many people are unnecessarily fearful that they are going to be wiped out by a major crash, in reality that happening has extremely low odds.
Edit - added link to Kitces video on SRR (Sequence of Returns Risk): https://www.youtube.com/watch?v=vVPIpb1wbgI
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In real terms your balance is lower than it was at the beginning - albeit not by very much.
But the problem isn't that it most likely will work out fine in the end - it's the times where the value of the portfolio gets dangerously low and the plan is to live on it for a very long time. In the depths of 2009 you had a portfolio which would be nowhere near to satisfy the 4% rule at that point in time, and you are basically at the same point at which retiring with your 40k/year spening wouldn't be considered even remotely safe. Yes, given markets had just dropped by a lot history tells that the value is likely to recover in a few years, but it probably feels a lot more scary than what the math says.
It's very different to have a big drawdown in the accumulation phase than it is to have it when you live off the portfolio. If the markets totally tanked next week I would be very happy as I could put more cash to work, if I had retired yesterday I probably would be a lot less enthusiastic about it despite what the math says.
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But you will also have had 12 years of not working. How much is that worth?
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In real terms your balance is lower than it was at the beginning - albeit not by very much.
But the problem isn't that it most likely will work out fine in the end - it's the times where the value of the portfolio gets dangerously low and the plan is to live on it for a very long time. In the depths of 2009 you had a portfolio which would be nowhere near to satisfy the 4% rule at that point in time, and you are basically at the same point at which retiring with your 40k/year spening wouldn't be considered even remotely safe. Yes, given markets had just dropped by a lot history tells that the value is likely to recover in a few years, but it probably feels a lot more scary than what the math says.
You apparently missed the point of the 4% rule. You can keep drawing the amount even in a downturn where your current draw is considerably more than 4% of the current portfolio. It still survives around 95% of the scenarios (depending on your method and portfolio style, of course).
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I know how the 4% rule works. I was just pointing out the mental difference between "it has worked in the past" and "this is starting to look REALLY scary now"
It's important not to forget that the vast majority of people on this forum has never actually lived off a portfolio when markets go south big time - which last happened about 10 years ago. Most people probably even have never had large sums invested when the market value drops by a lot almost on a daily basis day after day after day and there is real worry that the (financial) world is just about to end. I think this forum will look very different the next time something similar happens. Life if a lot less complicated in theory than in practice. And that it worked out fine in 2000-2002 and 2007-2009 is no guarantee it will work out equally fine 20-whenever SHTF the next time.
If you talk to a young interest rate trader today the concept of interest rates at 5-6-7-8% seems almost surreal and despite what their fancy Bloomberg graphs tell them the concept is really hard to grasp in times where 3% yield on the 10y US government bond feels really, really high.
Making good money in equities markets have been a breeze for the last 10 years. Just buy and wait and watch the value go up and up and up. Never underestimate how much it hurts when someone gets burnt for real.
Its easy to have faith in the math when the world goes your way. Its also easy to gain theoretical comfort by backtesting and seeing that it worked out fine in the end. It is likely to feel very different when things go south for real and you start questioning the assumptions you once made. On a graph with 120 years of price history a decade with negative returns doesn't look scary. I bet it does when you have lived it for 9 years.
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I've been fully invested in stocks through multiple major crashes without losing my nerve. If I can emulate my hero spartana - I'll be fine with a crash while living off investments.
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Some can, some can’t. Most don’t know which camp they are really in.
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One comment about Japan - there isn't a comparison between the state of the Japanese market in 1989 and our markets now. The Japanese bubble was EPIC... the Dow would've have to be at almost 60,000 for it to be equivalent.
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I've been fully invested in stocks through multiple major crashes without losing my nerve. If I can emulate my hero spartana - I'll be fine with a crash while living off investments.
LOL. Rice and beans and beans and rice fuel the bike ride to the beach for a day of free volleyball and surfing ;-). I did discover during the recession that I don't need much money to be happy.
Note to self: Move to Hawaii before the crash, within biking distance of the beach or even better where I can hitch a ride with @Nords ;)
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I've been fully invested in stocks through multiple major crashes without losing my nerve. If I can emulate my hero spartana - I'll be fine with a crash while living off investments.
LOL. Rice and beans and beans and rice fuel the bike ride to the beach for a day of free volleyball and surfing ;-). I did discover during the recession that I don't need much money to be happy.
Note to self: Move to Hawaii before the crash, within biking distance of the beach or even better where I can hitch a ride with @Nords ;)
Thanks, TomTx, you guys are making a good point about lifestyle.
On one hand (“scarcity”), everyone should stay in the workforce longer due to the fear behind the Just One More Year Syndrome and the unforeseen dinosaur-extinction effects of the worst stock market ever.
On the other hand (“abundance”), we’d all declare FI the microsecond that we hit the 4% SWR tripwire. We’d be living the FI lifestyle when the recession (“depression”?) hits, and nervously getting ready to declare “Game Over” on our portfolios, then buying a single-premium immediate annuity per Jim Otar’s portfolio analysis.
If someone retired at the peak in 2007, say around October, would their portfolio have survived?
Lets say x = annual spend and they had exactly 25x saved, and spent exactly $X per year. Assuming portfolio was 75% stocks, 20 bonds, 5 cash.
Can someone smarter than me simulate it out from 2007 to now?
Thanks guys, makes me feel better about 4%.
As you may have concluded, Erutio, I’m not sure why would you care about the Great Recession when your portfolio has already been tested by the 4% Safe Withdrawal Rate study through even worse periods.
You probably would’ve survived the Great Depression, the Panics Of 1873 and 1913, the stagflation of 1966-82, and the Y2K Internet recession. Even if your portfolio was on thin ice, you would’ve cut back your spending or changed your asset allocation or started Social Security withdrawals at age 62. You might even have gone back to part-time work.
If you’re seeking “better” withdrawal plans than the 4% SWR then you could go with Wade Pfau’s safety method, or Guyton’s guardrails, or Bob Clyatt’s 4%/95% systems. (They’re all variations on variable withdrawals.) You could even (*gasp*) invest in a single-premium immediate annuity (beyond Social Security) as part of your asset allocation.
If you’re curious about the robotic Y2K investor who’s mindlessly spending down their portfolio on the 4% SWR, you could read this old thread on another forum:
http://www.raddr-pages.com/forums/viewtopic.php?f=2&t=1208&hilit=Y2K&start=405#p56774
It’s been tracking the train wreck for over 14 years.
Regardless of the flaws behind the 4% SWR, here’s the comfort factor: when you survive the portfolio’s vulnerability to the sequence of returns risk, then after the first decade of withdrawals your portfolio has grown faster than inflation to the point where your actual withdrawal rate has dropped below 4%.
You might even be at the fabled 3.5% withdrawal rate, which EarlyRetirementNow’s apocalyptically pessimistic analysis has concluded is sustainable for life.
Finally, for the “OMG I can never go back to work” crowd, I’ll point out that there were plenty of FI jobs available during the Great Recession. An FI job is one that pays as little as $10K per year, and the hordes of the unemployed during the Great Recession would have never touched these “Wal-Mart Greeter”, “part-time barista” jobs. The unemployed hordes would’ve been too busy pounding the pavement, networking, updating resumes, and interviewing for full-time work.
Meanwhile the FI people would’ve happily taken $10K of income, knowing that it gave their portfolio a much-needed break while allowing them to continue a good portion of the FI lifestyle. It’s all they needed. $10K for a year or two might have been enough for the portfolio to get through the worst parts while helping the FI person sleep a little better at night, knowing that they’re taking action.
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I've been fully invested in stocks through multiple major crashes without losing my nerve. If I can emulate my hero spartana - I'll be fine with a crash while living off investments.
LOL. Rice and beans and beans and rice fuel the bike ride to the beach for a day of free volleyball and surfing ;-). I did discover during the recession that I don't need much money to be happy.
Note to self: Move to Hawaii before the crash, within biking distance of the beach or even better where I can hitch a ride with @Nords ;)
Thanks, TomTx, you guys are making a good point about lifestyle.
Fair warning, I have no clue how to surf and haven't played volleyball in over 25 years... ;)
Surfing definitely sounds more appealing though.
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Returning back to the OP... we (obviously) do not know how a 2007 retirement portfolio will hold up over 30 years, however even despite the current market highs, do not be fooled into thinking that the portfolio is in good shape. We will not really know until we reach the last 10-years or so of the drawdown.
Look at this portfolio schedule from 1966:
https://www.evidenceinvestor.com/sequence-risk-is-a-big-threat-to-retirees/
(https://www.evidenceinvestor.com/wp-content/uploads/2019/10/Figure-2.png)
Look at how the portfolio appears to still be doing very well, at least nominally for most of the first 20 years. It is in the last 10 years when the compounding effect of inflation really begins to snowball that the the annual withdrawals start of take huge chunks out of the portfolio's capital.
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Maybe the lesson is "if you ever find yourself drawing more than 10% of your portfolio, take a hard look at implementing your contingency plans". By 1979 or 80, you'd have to be thinking "hmm - I am taking a whole lot out of this portfolio this year, maybe it is time to re-visit lowering spending or getting some part-time work".
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Maybe the lesson is "if you ever find yourself drawing more than 10% of your portfolio, take a hard look at implementing your contingency plans". By 1979 or 80, you'd have to be thinking "hmm - I am taking a whole lot out of this portfolio this year, maybe it is time to re-visit lowering spending or getting some part-time work".
Yeah, there is a crossover point where the % you are withdrawing from the portfolio's current value starts to exceed the sustainable rate of growth, and at that point the capital can quickly become depleted as you draw a little more out each year to keep up with inflation..
Mathematically we know that small annual differences can lead to large differences when compounded over enough years. That is why forecasting what a sustainable withdrawal rate on, say a 50yr drawdown is so difficult. A small amount too much each year - which may only be a couple of tenths of 1% - will compound over a long timeframe and could result in failure even though the portfolio appears to be ticking along very nicely for a long long time.
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I stopped working in 2007, and things have worked out quite nicely, but it's never as simple as, "retire in 2007 and can you survive on your portfolio". In addition to our investment portfolio and IRA in 2007, we also sold our house in early 2008 and banked $1mm capital gain. This was kept in cash through most of the stock market declines. (oure luck!) "Cash" means tbills and FDIC insured deposits, ie no more than insured max at any financial institution. No crap MM funds - only US Treasury money market fund.
What helped my weather the stock market declines (psychologically rather than financially) was an outsized bond allocation, around 30%. What this meant was that even as I watched my portfolio value decline dramatically, I knew it would not go to zero. I don't care what you say now, if you lived through 2008/2009 it was not impossible to imagine at the time stock values going to zero.
From 2007 through, I would say.... 2011 we lived very frugally, and expected one of us to go back to work at some point. That never happened. We are a little older than some of you FIRE folks. Now with S&P at new alltime highs our investment portfolio is also at alltime highs, we are on Medicare (so much of the healthcare uncertainty is taken care of) we are getting some social security, a small pension (more later), and life is good. Yes we survived retiring in 2007.
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We are a little older than some of you FIRE folks.
(https://imgpile.com/images/1ydek3.png)
;-)
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@TreeTired ; At what point (if ever) did you swap out your $1m capital gain from t-bills and FDIC insured products to the stock market? Did you make the move all at once or over time? What was the catalyst for your decision?
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My husband and I did FIRE in 2007. We sold a business for basically the exact amount we needed and we went ahead and retired. The venture capitalist who bought the firm once told us that we must have had a crystal ball. I laughed out loud, because if I'd had a crystal ball, I would not have kept 10% of the company. Our shares in that company we sold 90% of did far, far worse than our portfolio in the market. The company was in an industry that got a significant regulatory overhaul during the Obama administration, as a direct result of the recession. It recently finished liquidating. Those shares would have been worth a considerable sum if the industry hadn't been reamed, but their worthlessness is just a lesson in diversification. Take the money and run, kiddos. Don't keep a bunch of shares of a single stock, no matter how promising or great the history has been.
We were young and had a moderate-aggressive portfolio based on our age. It was probably cut in half. I don't know - I stopped opening statements. We had friends who told us they had cashed out of the market and we were fools not to, but I talked my husband out of it.
I had an Economics degree that I had never used for anything. But if I had learned one thing, it was that we should do the opposite of what those people were saying! I remember my husband saying, "Do you mean we should go... all in?"
That was the time of true Mustachianism. We cut every expense, cashed in every asset, and scraped together every penny we could find to put into the market while it was down. And we turned our portfolio even more aggressive some time in - we didn't time the market exactly. I think we had likely already missed the bottom.
The event wasn't without trauma... I went back to school to become a CPA and I now own an accounting firm, so I'm an early-retirement failure. The recession was over by the time I became employed, but I liked it so I kept working. Husband stayed retired. We also paid off our house after the recession, which locked up a lot of equity and ended up being inconvenient when we wanted to move. But the one thing that kept us up at night during the recession was that mortgage payment. I carry a mortgage at 50% of my home value now.
Our portfolio had already rebounded by the time I got my first job as a CPA (historically, I think we were already out of the recession before I made the decision to go to school, but we weren't aware yet). And then, of course, I've been working, which only made our financial security more ridiculous.
So yes, it was easily recoverable, as long as you didn't succumb to panic. Our friends who cashed out did not fare so well.
And remember, retiring immediately before a recession is a fine time to have a recession. You can just re-enter the workforce if you need to. Perhaps not immediately, but absolutely no one was asking questions about employment gaps during the recovery.
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I think you'll find 2007 was not a worst case scenario as within only a few years you were back in positive returns, have a look at what would happen if you retired in the early 70's or end of the 90's for e.g
Yes, when I back-tested the FIRE portfolio options I was considering I would often use retiring in August 2000 as a worst case scenario. I don't remember the exact results but where it basically would fall apart is with something like a 90/10 mix at a 4.5% withdraw. For that the balance was so low by 2009 the last 10 years of boom would have only had you tread water and the next downturn would do you in (thought that hasn't happened yet). With a fairly common around here 80/20 mix and a 4% withdraw, today after 20 years you'd be sitting at a balance that inflation adjusted is about half of where you started. Seemed pretty good to me considering that was such a bad stretch and just small adjustments to spending when the market was way down would have mitigated those losses a lot.