Negative TNW drop in FIRE

[soulpatchmike]

I am curious how many of you in Post-FIRE have ever experienced a 0 or negative YoY growth rate to TNW based on your planned draw-down strategy?  It seems to me that many people in Post-FIRE continue to grow TNW and likely will continue until death...

Are the FIRE calculators too conservative or has the past 10 years since this site has been around not experienced a large enough correction for widespread flat/declines?

[desk_jockey]

Negative TNW for a síngle year?  Pre-FI despite a good savings rate I had a slight y/y drop in net worth (excluding primary residence) in 2018.  I imagine others saw a 1 year blip along the way too. 

You won’t find too many people on this forum that RE’ed before Jan2009. The market has consistency been up since then so I would be surprised if any recent retirees have had 2 years back-to-back reductions in TNW unless they had a considerable one-time expenses.   Recent past performance doesn’t predict the future, so most of us expect a multi-year drop at some point.

[soulpatchmike]

The folks who FIRED before the recession are the perfect example of what I am looking for.  If folks lost 50% of TNW during the recession the curiosity for me is, now 10+ years later do you have more(>20% more), less(<20% less) or about the same(+/- 20% overall) as you did pre-recession.

It seems typical for most people to draw no more than growth/dividends, which leaves you minimally the base amount of equities you retired with.  I suppose it's possible to die landing at or near zero, but would be very nerve-racking to attempt it with all the unknowns involved over a long 20-40 or more year period.

[secondcor521]

The folks who FIRED before the recession are the perfect example of what I am looking for.  If folks lost 50% of TNW during the recession the curiosity for me is, now 10+ years later do you have more(>20% more), less(<20% less) or about the same(+/- 20% overall) as you did pre-recession.

It seems typical for most people to draw no more than growth/dividends, which leaves you minimally the base amount of equities you retired with.  I suppose it's possible to die landing at or near zero, but would be very nerve-racking to attempt it with all the unknowns involved over a long 20-40 or more year period.

Most people I know who FIREd before the recession have a lot more now.  That's because most FIREd people I know are at some reasonable ratio of stocks and bonds.  Since the depth of the recession, VTI is up about 450% and BND is up about 11%.  Most of them withdraw less than the stereotypical 4%.

(A few went back to work around that time.  Even fewer bailed near the bottom and never got back in - those are the people who have ended up in the worst situation relatively speaking.)

I have about 80% more than when I FIREd, but I chose a good time to leave (Feb 2016) and good things to be invested in over that timeframe (US stocks).  I also have been spending at only about a 1% WR.

...

I'm not sure why you want anecdotes when you have data, though.  You can run FIREcalc or cFIREsim yourself and get many more data points - and they're objective ones rather than subjective ones.

There haven't been that many long declines in the last ten years, you're right about that.  But most people I know who are FIREd have run historical calculators and are familiar with the notion that multi-year retreats and drawdowns have occurred historically and are very likely to happen again.  That's why we don't withdraw more than 4% or so in the first place!

Also, most FIREes I know are fairly conservative and like to plan for longer life expectancies, higher expenses, worse returns, etc.  Suspenders, belts, and staple gun they might say.  So they're frequently more conservative than the 4% rule.

I would add that the conservativeness of a WR% is really quite a bit bigger than one might intuit.  For example, 3.5% doesn't seem that much more conservative than 4%, but it results in quite a bit more excess at plan end.  2% and the like are ridiculously bullet proof - I'd say there's probably not any realistic scenario where 2% will work where 3.5% wouldn't - hyperinflation or an asteroid would destroy both.

[SwordGuy]

Whether I got nervous or not would totally depend upon the nature of my plan.

Some people have a delayed FIRE income (such as a pension start date) and their plan is to draw down savings by so much per year.   So as long as that's what they're doing their net worth would be dropping according to plan.   No sweat.

Some people have two FIRE numbers, a leanFIRE number they can live with for awhile and a fatterFIRE number they want to live with.   They fire with the intention to spend at the fatterFIRE level.   But they are dependent on stock/bond based income and the market tanks shortly after they retire so their net worth takes a big hit.     They might switch over to leanFIRE just to combat the dreaded sequence of return risks (I sure as hell would!) and there's nothing to sweat about because that change drops their safe withdrawal rate enough.

Other folks fire the moment they hit their leanFIRE number and find themselves in the same situation.    They should probably take action to cut expenses or raise income to avoid the sequence of returns problem.    To my mind, this is something to sweat about until that action is taken.

Other folks have a great plan and the market (or whatever) is great and their net worth still drops.   If it's because their spending is way higher than they budgeted for they've got a real problem.   If their stock portfolio hadn't been making enough in the market for the last several years I would say their investments suck and they've got a real problem.

So, it depends.

[FIRE 20/20]

Yes, this is expected.  In fact it's a necessary outcome if you select a very safe withdrawal rate like 4%.  It helps to understand where the 4% rule comes from.  Essentially, if you look at history and pick the worst case time to retire, withdrawing 4% of your assets and then adjusting for inflation each year is about as high a withdrawal rate you can start with and still have money left after 30 years.  Read that again - the 4% rule comes from assuming that you're going to retire and start to draw down your assets at the worst possible time in the history that makes up the data set.  What happens in those worst case scenarios?  Either due to inflation or weak stock market growth your net worth drops early in retirement which causes you to withdraw an increasing percentage of your net worth.  This compounds (in a bad way) causing you to take out a larger and larger portion of your assets rather than letting them grow.  With fewer assets to grow and regular withdrawals, you draw it down and get close to zero in about 30 years.  Even for people who don't use the 4% rule, the same basic logic applies.  Most people are risk averse, so they set up a plan that either never would have failed in the past for which we have data or only would have failed in the worst case scenarios.  Either way, most people's plans assume things go to hell at just the wrong time - which is in the first few years after you FIRE. 

So if you happen to FIRE right before a crash or high inflation (or both) then you're probably ok even if you don't make any changes.  That's where the 4% rule comes from.  "ok" in this context means that your assets stay level or drop early, but eventually recover before the damage to your portfolio is permanent.  This wouldn't be fun, but again we specifically chose a withdrawal approach (like 4%) that doesn't fail (or just barely fails) even if things are bad.  And in this scenario your assets are unlikely to ever grow to multiples of the starting amount. 

But by definition, most people don't FIRE right at the worst possible time.  Most people FIRE during slightly bad (but not the worst) times, a normal time, or during a time when market returns are good and inflation is reasonable.  For that vast majority who FIRE during anything other than the worst times then they're going to see early growth that makes their withdrawal rate get lower and lower and lower as their assets grow and grow and grow.  As you can see that's how it has to be if people use very conservative estimates of their needed 'stache to basically never fail. 

www.firecalc.com has an excellent visualization of this.  Go to the site and click on the "Submit" button in the "Start here" box.  You can very clearly see that most of the scenarios (each represented by a line) grow and grow. 

[soccerluvof4]

As touched on by several here having a plan heading into being fire'd is key and there are plenty of individual ideas shared over the years all over MMM. One simple part of your plan could be to have enough monies to carry you through the drop set aside depending on the size of your portfolio to get you through 2-3 years of where the average market bounce back comes back. The key obviously it to withdraw as little as possible when the market drops and be a buyer when stocks are on discount by selling Bonds or if you have cash putting to work. Doing the right things when the market drops or readjusts really adds to your wealth when it comes back and is the difference to those that are doing well like after the Crash of 08/09. And when times are good like now is the time to plan for such events.

[jim555]

It is hard to see how you would have negative NW with the stock and real estate markets at all time highs right now.  The last year real estate has gone bonkers around me. 

[soulpatchmike]

I thought the OP was wondering about the future (or the experience that us longer term FIRE people have had). It's likely that the longer your FIRE timeline the more chances you have to see a big downturn. I'm looking at a 60 year or more RE so likely something like the great recession (or even a great depression) could happen in that time frame. I will be prepared in any case barring a major catastrophe.

I was thinking about long-term FIRE to death and the potential to attempt to die broke while using desired spending until that day.  It doesn't seem feasible to make an attempt to die broke while staying in the market.  I just needed to write it down and see how people perceive the idea.  With money in the market, the goal for peace of mind would be to "always" maintain an avg market growth in the portfolio, which will nearly always(the highest number of simulations) make the portfolio increase til death, unless you die in the midst of a downturn.

[frugal_c]

Retire broke seems naive to me, given sequence of returns risk coupled with unknown future inflation rates, unknown lifespan and unknown end of life costs.  I can only conclude its just something people say to get attention.

I am not retired yet but I invested my first slug of money in 2000 right after the peak and was underwater even without withdrawals until 2012 on those investments.

[FIRE Artist]

I thought the OP was wondering about the future (or the experience that us longer term FIRE people have had). It's likely that the longer your FIRE timeline the more chances you have to see a big downturn. I'm looking at a 60 year or more RE so likely something like the great recession (or even a great depression) could happen in that time frame. I will be prepared in any case barring a major catastrophe.

I was thinking about long-term FIRE to death and the potential to attempt to die broke while using desired spending until that day.  It doesn't seem feasible to make an attempt to die broke while staying in the market.  I just needed to write it down and see how people perceive the idea.  With money in the market, the goal for peace of mind would be to "always" maintain an avg market growth in the portfolio, which will nearly always(the highest number of simulations) make the portfolio increase til death, unless you die in the midst of a downturn.

There's the bucket method. Draw from and deplete various buckets at different intervals and die with just SS taken as late as possible. Or, if you are like me with no dependents or  heirs, just end up with a small amount of money to cover basic living expenses and a paid off house that you can tap the equity or sell and downsize if needed for old age care. I plan to do this myself. While I won't blow ALL my savings and investments I do plan to spend down a sizable portion of my investments and saving before they cart me off to to old folks home and sell my house to cover those costs. Money in the market will likely be spent before that happens. Anything left goes to charity.

This is basically what I will be doing, but I won’t be using buckets, I will be using VPW.  Variable Percentage Withdrawal draw down method will guarantee that your portfolio will drop as you age.  It is designed as standard to have you run out of investment money at age 100 with the option to ensure an income floor beyond that if you purchase an annuity with up to half of your remaining portfolio at around age 80.  My ancestry tells me that I don’t have 100 years in me, so I am basing my draw down on a life expectancy of 90 years old, and like Spartana, I can sell my house to pay for my living and care needs beyond 90 if necessary.  I will have a small pension on top of government pensions so will never live in poverty even if the investments and home equity disappear. 

[Much Fishing to Do]

I think a good activity is to backtest one's portfolio (including RE distributions) if retiring in 2000 (so to see the double whammy of the 2000 and 2008 drops).  Even being invested during those years doesnt prepare one for the additional hits taken by the withdrawals on top of it.  For someone with a 80/20 portfolio and a 4% SWR, its quite the wild ride and so one you need to be comfortable with if around those numbers.  Its easy to lose sight of these roller-coasters when on a run like we've been on the past decade.

[Mr. Green]

I think a good activity is to backtest one's portfolio (including RE distributions) if retiring in 2000 (so to see the double whammy of the 2000 and 2008 drops).  Even being invested during those years doesnt prepare one for the additional hits taken by the withdrawals on top of it.  For someone with a 80/20 portfolio and a 4% SWR, its quite the wild ride and so one you need to be comfortable with if around those numbers.  Its easy to lose sight of these roller-coasters when on a run like we've been on the past decade.

Historically speaking, we have fairly confidently known for a couple years now that the 2000 retiree's portfolio fails over 30 years, assuming they blindly withdrew their 4% that whole time. There has been no 30 year period where the last 20 years has been able to make up for the poor performance of the first 10 (2000-2009). The damage from SORR over those first 10 years was so great that we'd need the following 20 to grossly outperform any period we've ever experienced before to avoid exhaustion of funds.