FIRE on 4%?

[Exflyboy]

I think the benefits of the 4% SWR outweigh the risks.  The human behavioral financial psychology of loss aversion costs way more than necessary.

To be fair though, a $40k+ military pension makes it considerably easier to "rely" on the 4% rule than someone who will be 100% sustained from portfolio withdrawals. I would be careful presuming the risk tolerance for your situation is the same as someone where 100% of their annual spend is from investments.

Worst case of a trinity study 'failure' is you drop your spending to closer to your pension income and just have a less luxurious ER.  It would make things much easier to take risks (or perhaps a better way to phrase it is lowering the perceived risk and worst-case outcome) knowing that you have a fairly large reliable income. Well, except if you are exflyboy apparently :-)

It does not really change the math, but it does change the overall worst-case associated with ER. Considerably easier for you to reduce your spending from your portfolio to 0% than someone with a 100% portfolio ER.

Hey did I miss getting a minor insult?.. I must be slipping...:)

[ender]

I'm always a little perplexed when I hear that comment, and I'm sure part of it is the read-only context of a forum without seeing the body language or the tone of voice.  Arebelspy's response is exactly right, but let me expand on the whole envelope of available responses.

I think you read way more into what I said than I said. You seem to have read into it the perspectives/complaints you have presumably have heard before about why people can't RE, why it's not fair, or some other complainy-pants objections and laments about your unfair pension. Or something like that.

I was simply making an observation regarding the implication in response to your statements about how much loss aversion affects our behavior. Everyone's personal risk tolerance will be different because of differences in situation.


A lot of factors affect this. For what it's worth I completely agree with your perspective on people who worry about the 4% rule. Here is a non-comprehensive list of things which also affect risk tolerance:

• Government/private pensions
• Social security
• Inheritances
• Ease of reentering workforce (some careers this is nearly impossible, others are easy)
• Ability to move to LCOL area
• Ability to lower spending
• Actual impact of "failure" or down years (is it reduced luxury spending or electric bill/food)
• Kids and overall health
• Expectation of large, non-recurring expenses in future (ie housing related repairs, etc)
• Overall asset diversification
• ER age
• Ability, interest, and profitability of parttime work (or hobbies) in ER
• Government assistance programs should ER implode

Someone who has no pension, retires very early because of a huge income (so reduced SS eligibility), has no inheritance expectation, works in a career where their future reentry earning potential is minimal, maintains nearly 4% spending with nearly no extra spending in an already LCOL area, have multiple kids with medical problems, and is retiring at age 32 will hopefully view their risk tolerance of the 4% rule differently than others.

And yes, of course you can work to mitigate these - everyone here should be doing their best to do that. Reducing the risk of each individual factor (where possible) reduces your overall risk, meaning you can safely retire at 4% (or really higher, if you are "good" on many or most of those items - more than a 4% SWR is completely possible even without a pension).

Most of us just have to get to SS age with $0 remaining and we'll be fine - I am still in my 20s and already have an estimated SS benefit of almost $10k a year if I didn't earn anything more. If I retire at age 40, it will only be 27 years where ER has to "work" for me to "win" at ER and my SS benefit will be much greater than $10k. For those folks here who came to the ideas of ER later and are in their 40s or even 50s that gap is even less and their SS benefit likely will be even larger. That should heavily mitigate risk for anyone who is around that age.

It is likely most people simply have not thought through all the actual implications of the above. Or even what "failing" at the 4% scenarios mean and what the implications practically speaking for a "failed" ER would actually be. Or knowing how many would need to be present to reduce the risk of a SWR 4% failing significantly. Pretty much any one of the first six items should give someone significant security in ER working out at 4% given that none of them are included in the Trinity study "success" scenarios. If you have more than one of them you should be able to reliably ER on a withdrawal rate higher than 4%.

The reality is everyone has different situations which naturally shape their risk tolerance differently. It is important to realize nearly all of those factors can be controlled or influenced, but also that everyone will have different abilities to do so.

But to not acknowledge a difference in risk tolerance resulting from the factors discussed in this wall of text on the whole is a bit shortsighted.


The biggest problem, which I suspect you also agree with, is that people do not look at their situation and investigate what factors increase or reduce the risk associated with their actual ER plan.

[dabears847]

I don't mind (the info is public) but I don't think that you're using the generally-accepted definition of a 4% SWR.

Great Post from Nords, really enjoyed it. Do you have more information posted elsewhere without digging through 20 pages of posts?

I'm wishing there was a section on the forum for everyone to post their plan/strategy and asking for individuals like this to review and opine on the options available. Then for someone like Nords, he can post his plan for others to ask questions.

[Nords]

Great Post from Nords, really enjoyed it. Do you have more information posted elsewhere without digging through 20 pages of posts?

I'm wishing there was a section on the forum for everyone to post their plan/strategy and asking for individuals like this to review and opine on the options available. Then for someone like Nords, he can post his plan for others to ask questions.

I've written about it on the blog.  Here are three recent/popular posts on the subject, and you can find more there by searching for the keyword "4%".
http://the-military-guide.com/2015/10/29/asset-allocation-during-financial-independence/
http://the-military-guide.com/2015/05/21/survive-stock-market-crash/
http://the-military-guide.com/2014/02/20/how-should-i-invest-during-retirement/

On this forum, I think you could read the case studies and the journals.  But admittedly that's not in one place.

[Telecaster]

It's simply a different form of insurance.  Everyone hopes that they never have a fire or an auto accident, yet everyone buys insurance against those financial (and personal) disasters.  Hopefully the money spent on insurance premiums is wasted, but the waste implies that insurance policies suck almost as badly as the insurance companies selling them.  Yet somehow fire and auto insurance is an accepted part of our lives while annuities are viewed with skepticism.

Enjoyable post, Nords.  I do want to comment on this paragraph though.   Insurance of course is paying someone to take a risk that yhou  don't want to take.  But it only makes sense if the cost reasonable.   I happily pay for fire insurance because I'm not willing to risk losing my house, and it really doesn't cost very much.   

Car insurance is a little different.  I buy the minimum I legally can, because the cost of more coverage just isn't worth it.   So I'm self-insuring as much as possible there.

Annuities also provide risk protection, against volatility risks and such.  But the costs are extremely high.   When you pencil it out, if you can afford an annuity then you don't need the protection because you can also get protection by simply lowering your SWR--which is what happens when you buy an annuity anyway.  In short, there's just downside, no upside.   

[arebelspy]

Car insurance is a little different.  I buy the minimum I legally can, because the cost of more coverage just isn't worth it.   So I'm self-insuring as much as possible there.

This might change your mind:
http://forum.mrmoneymustache.com/ask-a-mustachian/anyone-ever-been-sued-for-liability

I'm 100% on board for self-insuring based on vehicle damage, and just insuring for damage to other people, if one could do that. Sadly, no.

And umbrella insurance requires high limits on car insurance, so if you want an umbrella, you'd need to raise them.

[brooklynguy]

I'm 100% on board for self-insuring based on vehicle damage, and just insuring for damage to other people, if one could do that. Sadly, no.

Why can't one do that?  Typically, only liability insurance is mandatory.

[arebelspy]

I'm 100% on board for self-insuring based on vehicle damage, and just insuring for damage to other people, if one could do that. Sadly, no.

Why can't one do that?  Typically, only liability insurance is mandatory.

But liability on their vehicle too, yes?

[brooklynguy]

But liability on their vehicle too, yes?

I'm not sure I follow what you mean.  You're typically required to purchase liability insurance (which covers damages that you cause to others), but you're not typically required to purchase property insurance covering damage to your own vehicle.

[arebelspy]

But liability on their vehicle too, yes?

I'm not sure I follow what you mean.  You're typically required to purchase liability insurance (which covers damages that you cause to others), but you're not typically required to purchase property insurance covering damage to your own vehicle.

Yes, as I said, I wish you could self-insure vehicle damage (including to theirs) and only have coverage on any damage to other people.  :)

I'd gladly pay out of pocket to repair their vehicle.. not so much repair their injuries.

Reread this, keeping in mind I'm saying I wish you could self-insure vehicle damage (to either vehicle) while still just doing liability to any physical harm to the people:

I'm 100% on board for self-insuring based on vehicle damage, and just insuring for damage to other people, if one could do that. Sadly, no.

Does that quote make more sense now?

[brooklynguy]

I'd gladly pay out of pocket to repair their vehicle.. not so much repair their injuries.

Ah, got it, thanks - I had misunderstood your point.

But I don't think I'd be as comfortable self-insuring against damage to other people's vehicles as I am with self-insuring against damage to my own.  In the case of your own vehicle, there's a known ceiling on your total potential losses (the total value of the vehicle), which makes it easy to evaluate whether the insurance is worth the cost, but that's not the case for damage you may cause to other people's vehicles -- you might total a Ferrari, or cause a 50-car pile up.

Like both you and Telecaster, though, I prefer to mostly self-insure against longevity risk rather than purchase any annuities beyond social security.

[Nords]

It's simply a different form of insurance.  Everyone hopes that they never have a fire or an auto accident, yet everyone buys insurance against those financial (and personal) disasters.  Hopefully the money spent on insurance premiums is wasted, but the waste implies that insurance policies suck almost as badly as the insurance companies selling them.  Yet somehow fire and auto insurance is an accepted part of our lives while annuities are viewed with skepticism.

Enjoyable post, Nords.  I do want to comment on this paragraph though.   Insurance of course is paying someone to take a risk that yhou  don't want to take.  But it only makes sense if the cost reasonable.   I happily pay for fire insurance because I'm not willing to risk losing my house, and it really doesn't cost very much.   

Car insurance is a little different.  I buy the minimum I legally can, because the cost of more coverage just isn't worth it.   So I'm self-insuring as much as possible there.

Annuities also provide risk protection, against volatility risks and such.  But the costs are extremely high.   When you pencil it out, if you can afford an annuity then you don't need the protection because you can also get protection by simply lowering your SWR--which is what happens when you buy an annuity anyway.  In short, there's just downside, no upside.

Perhaps we agree on the definitions, and now we're just haggling over the price. 

I think the reasons behind an annuity are sleep-at-night comfort for investors who want to match assets against liabilities (annuity vs longevity) or who just can't stand to see a SWR success rate of less than 100.00001%.  You seem to think you know what's a fair price for the various types of insurance, but I'm only able to comparison shop.  I suspect the reality is that most humans grossly underestimate the cost of insuring "against" excessive longevity.  Moshe Milevsky used to be against SPIAs in the 1990s, but in the 2000s he became a supporter in his book "Are You A Stock Or A Bond?"  With centenarians among the human population's fastest-growing demographic, we may find out that insurance companies sucked at pricing annuities almost as badly as they sucked at pricing long-term care insurance.

While I'm happy to self-insure my vehicles for comprehensive and collision, we pay the premiums for the maximum coverage of UIM/UM and liability.  UIM/UM is very cheap and there are a surprising number of that type of driver on the road, with a correlation (probably a causation) between a lack of insurance and the potential for injury.  We have liability insurance for our gross worth-- not our net worth, because the civil court judge & jury don't care whether you have a mortgage or other debts. 

[Retire-Canada]

Yes, as I said, I wish you could self-insure vehicle damage (including to theirs) and only have coverage on any damage to other people.  :)

When you look at what insurance payouts are on property damage vs. injuries I think liability insurance is already heavily skewed towards covering the cost of injuries. A fancy car getting totalled could cost $100K which is peanuts in terms of personal injury.

[arebelspy]

Yes, as I said, I wish you could self-insure vehicle damage (including to theirs) and only have coverage on any damage to other people.  :)

When you look at what insurance payouts are on property damage vs. injuries I think liability insurance is already heavily skewed towards covering the cost of injuries. A fancy car getting totalled could cost $100K which is peanuts in terms of personal injury.

Maybe, maybe not, especially given car damage is a lot more frequent than bodily injury, they may balance out.

[dabears847]

Great Post from Nords, really enjoyed it. Do you have more information posted elsewhere without digging through 20 pages of posts?

I'm wishing there was a section on the forum for everyone to post their plan/strategy and asking for individuals like this to review and opine on the options available. Then for someone like Nords, he can post his plan for others to ask questions.

I've written about it on the blog.  Here are three recent/popular posts on the subject, and you can find more there by searching for the keyword "4%".
http://the-military-guide.com/2015/10/29/asset-allocation-during-financial-independence/
http://the-military-guide.com/2015/05/21/survive-stock-market-crash/
http://the-military-guide.com/2014/02/20/how-should-i-invest-during-retirement/

On this forum, I think you could read the case studies and the journals.  But admittedly that's not in one place.

Thanks for the information, I didn't know about your website. The information can be hard to dig through on the forum. I'll keep reading your links and the article on a stock market crash was exactly the information I was in search of.

[EscapeVelocity2020]

I think the benefits of the 4% SWR outweigh the risks.  The human behavioral financial psychology of loss aversion costs way more than necessary.

To be fair though, a $40k+ military pension makes it considerably easier to "rely" on the 4% rule than someone who will be 100% sustained from portfolio withdrawals. I would be careful presuming the risk tolerance for your situation is the same as someone where 100% of their annual spend is from investments.

Worst case of a trinity study 'failure' is you drop your spending to closer to your pension income and just have a less luxurious ER.  It would make things much easier to take risks (or perhaps a better way to phrase it is lowering the perceived risk and worst-case outcome) knowing that you have a fairly large reliable income. Well, except if you are exflyboy apparently :-)

It does not really change the math, but it does change the overall worst-case associated with ER. Considerably easier for you to reduce your spending from your portfolio to 0% than someone with a 100% portfolio ER.

If you believe that, just annuitize some of your portfolio into an income floor, and you have the same situation.

I'd rather keep control of the money, personally, and ride it out, but if someone else taking the risk for you helps you sleep, it is an option.

I'm always a little perplexed when I hear that comment, and I'm sure part of it is the read-only context of a forum without seeing the body language or the tone of voice.

At first I read this sentence as directed at me, but I think we're in agreement, so was it directed at the poster I was quoting?

Didn't mean to create additional confusion-- "that comment" refers to Ender's which starts with "To be fair...", but I've encountered it many times. 

And your annuity recommendation is the best response!

Does Nords dislike my response?  The numbers were actual (a 42 y.o. gets scarcely above a 30 yr treasury rate for an annuity, which is reasonable, except you also have the downside of the insurer declaring bankruptcy after tying up your money...).

[arebelspy]

Does Nords dislike my response?  The numbers were actual (a 42 y.o. gets scarcely above a 30 yr treasury rate for an annuity, which is reasonable, except you also have the downside of the insurer declaring bankruptcy after tying up your money...).

Your response was complaining about why it's a poor value and one should just invest instead.

I agree with it, but it's not relevant to someone wanting an annuity because they're not willing to invest in the market.

There are tradeoffs to everything, there's no such thing as a free lunch.

The tradeoff to an annuity right now is the low valuations, so you have to work way longer than normal, and the risk of the company going bust (though you can try to mitigate a little that by going with a big company that will likely only go bust if the whole thing collapses, but the risk will still exist).

There's benefits too, obviously, such as not worrying about the ups/downs of the market, having a stable pension (i.e. it won't get "cut" like many actual pensions do), etc.

But the response was to people complaining they didn't have a pension, and the answer is: Create your own with a SPIA.

Your response to that was why you didn't like a SPIA, which, while all valid points for why one might not like one, still is irrelevant, because the answer to "I don't have a pension" remains "You can make one, if the tradeoffs are worth it to you." (They apparently aren't, to you.)

[EscapeVelocity2020]

Ah, thanks for clarifying ARS.  I didn't mean for it to be a complainy response (interest rates are what they are).  SPIA's aren't a good alternative for young people hoping to ER and we should probably wait for higher Fed rates and/or keep up our good health into our older age before we tie up money in longevity insurance (especially if we have kids). 

I truly appreciate military veterans like Nords and don't state this as a complaint about their pension.  I'm glad the US is treating retired military well for duty served.  There are other public pensioners that fiddle with the system in ways which I do disagree with, but that is off topic...

[brooklynguy]

SPIA's aren't a good alternative for young people hoping to ER and we should probably wait for higher Fed rates and/or keep up our good health into our older age before we tie up money in longevity insurance (especially if we have kids). 

I'm in the same camp as you, Rebs and Telecaster on the cost-benefit analysis, but, as Nords said, SPIAs are not the only option for someone looking to obtain annuitized longevity insurance (beyond social security) -- there is an ever-expanding menu of available options, including SPIA-equivalents with deferred start dates.  And Pfau has been doing some interesting research on the potential role of annuities as bond-substitutes in retirement portfolios (relevant thread:  "Wade Pfau on bonds in a retirement portfolio"), though personally I prefer to self-insure against longevity risk (to the extent not covered by social security) with a 100% equity allocation.

[arebelspy]

Ah, thanks for clarifying ARS.  I didn't mean for it to be a complainy response (interest rates are what they are).  SPIA's aren't a good alternative for young people hoping to ER and we should probably wait for higher Fed rates and/or keep up our good health into our older age before we tie up money in longevity insurance (especially if we have kids). 

Yup, I 100% agree with you!

here is an ever-expanding menu of available options, including SPIA-equivalents with deferred start dates.

And how are those payouts calculated?  Mostly based on today's rates, from what I understand, so you get the worst of both worlds, IMO.  And if not, and it's tied to market performance somehow, you're then still taking on the market risk you're worried about, with the unpredictability of not knowing what your annuity will be.

Correct me if I'm wrong.  :)

[brooklynguy]

And how are those payouts calculated?  Mostly based on today's rates, from what I understand, so you get the worst of both worlds, IMO.

Yes, I think that's right, which is why I agree that purchasing a private market annuity today is generally a bad value proposition for an early retiree.  A deferred lifetime annuity might make sense as a compromise between the competing tradeoffs for a person who wants the guaranteed longevity insurance of an annuity but doesn't want to work all the extra years required to fund an entire retirement that way.

[Financial.Velociraptor]

When Dad retired, he cashed out his 401(k) and asked for help deploying it.  I gave him lots of options, including very conservative ones such as 100% municipal bonds.  His only requirement was "IT CAN'T GO DOWN ~ It's everything I worked for all my life!"  We ultimately went with an annuity.  It only pays 3.5% but with SS it is enough.  Basically he has two annuities.  SS and privately purchased held in a tIRA.  His cash earnings on the annuity roughly equal his RMDs so: IT DOESN'T GO DOWN.  Dad is happy and would be a nervous wreck with any other option.  I think he is paying a high price for security but to him it is worth it.

[MoonShadow]

When Dad retired, he cashed out his 401(k) and asked for help deploying it.  I gave him lots of options, including very conservative ones such as 100% municipal bonds.  His only requirement was "IT CAN'T GO DOWN ~ It's everything I worked for all my life!"  We ultimately went with an annuity.  It only pays 3.5% but with SS it is enough.  Basically he has two annuities.  SS and privately purchased held in a tIRA.  His cash earnings on the annuity roughly equal his RMDs so: IT DOESN'T GO DOWN.  Dad is happy and would be a nervous wreck with any other option.  I think he is paying a high price for security but to him it is worth it.

Sounds like he is paying a high price for your (and any siblings') inheritance.

[Financial.Velociraptor]

  I think he is paying a high price for security but to him it is worth it.

Sounds like he is paying a high price for your (and any siblings') inheritance.

'Scuse?  I am not (and neither is anyone else) entitled to an inheritance.  It is HIS money.  Not mine.  I'm offended by that.

[MoonShadow]

  I think he is paying a high price for security but to him it is worth it.

Sounds like he is paying a high price for your (and any siblings') inheritance.

'Scuse?  I am not (and neither is anyone else) entitled to an inheritance.  It is HIS money.  Not mine.  I'm offended by that.

Sorry, I wasn't trying to upset you.  I realize it's his money.  Is he a big fan of any particular charities?

[Nords]

When Dad retired, he cashed out his 401(k) and asked for help deploying it.  I gave him lots of options, including very conservative ones such as 100% municipal bonds.  His only requirement was "IT CAN'T GO DOWN ~ It's everything I worked for all my life!"  We ultimately went with an annuity.  It only pays 3.5% but with SS it is enough.  Basically he has two annuities.  SS and privately purchased held in a tIRA.  His cash earnings on the annuity roughly equal his RMDs so: IT DOESN'T GO DOWN.  Dad is happy and would be a nervous wreck with any other option.  I think he is paying a high price for security but to him it is worth it.

I think your father and my father-in-law have the same risk profiles.  They're willing to suffer inflation (and to complain happily about it to anyone who'll listen) just to avoid volatility.

I'm pretty sure that my PILs are trying to live off their SS and the interest from GICs & CDs.  Because, after all, you can't ever touch the principal.

[Financial.Velociraptor]

Sorry, I wasn't trying to upset you.  I realize it's his money.  Is he a big fan of any particular charities?

It's cool.  I'm already over it.  Friends?

His only charity is Catholic Church.

[MoonShadow]

Sorry, I wasn't trying to upset you.  I realize it's his money.  Is he a big fan of any particular charities?

It's cool.  I'm already over it.  Friends?

His only charity is Catholic Church.

One that doesn't need it, of course.

[Telecaster]

When Dad retired, he cashed out his 401(k) and asked for help deploying it.  I gave him lots of options, including very conservative ones such as 100% municipal bonds.  His only requirement was "IT CAN'T GO DOWN

That's what my MIL says, with one other requirement:  It has to go up more than the market.  I floated the conservative bonds approach and boy did that get shot down.

[AdrianC]

If I'd succumbed to JOMY Syndrome then I would've missed out on some of the best years of my daughter's life.  (Including the exciting "danger teen" era.)  I would not have surfed as near as much with her, and I wouldn't have trained alongside her to get our taekwondo black belts.  I would've kept gaining weight around my waist (instead of converting it into surfing muscles around my shoulders) and I would've kept gaining points on my blood pressure & cholesterol.  I would've had to outsource most of my life (rental property management, housecleaner, yardwork) so that I could earn more margin of safety for the portfolio.  My spouse and I would've missed years of even better togetherness & intimacy.  I would've endured several (more) years of workplace dissatisfiers and epic rush-hour commutes.  I would've missed some incredible world travel (Japan, Thailand, all over the Mainland) and a couple of cruises.  Eventually I would've retired (perhaps with an extra push from a family or medical crisis) to discover that I had way more money than I needed-- and had missed out on years of satisfying, fulfilling retirement.

The 4% SWR is a great hypothesis, and the execution is messily variable & volatile, but we appear to be following the track of "way more money than we need". 

I think the benefits of the 4% SWR outweigh the risks.  The human behavioral financial psychology of loss aversion costs way more than necessary.

That was a great post, Nords. You are an inspiration. Thanks.

[dude]

"This guy"?!? 

Sigh.  Nobody appreciates history.

 blog post in this discussion, so please share your thoughts on those Trinity assumptions.

HAHAHA!  Just got around to reading this!  I've been following Greaney for a little while, and yeah, know some of the history.  Wasn't denigrating him with the "this guy" thing at all!  The dude is a flat-out inspiration!

[dude]

I've been retired for nearly 14 years on the 4% SWR, including two awe-inspiring recessions, and I think that record counts as "so far so good" for sequence of returns risk. 

A question: would you mind saying how much of your initial 4% WR was pension and how much was withdrawals from the portfolio?

I don't mind (the info is public) but I don't think that you're using the generally-accepted definition of a 4% SWR.

I didn't look at my pension as a percentage of SWR.  I projected our retirement expenses, subtracted my pension from that, and made sure that our investment portfolio was at least 25x that "expense gap". 

FI = 25 x (expenses - pension).

When I retired in 2002, my military pension was $2655/month or $31,860/year. 
http://www.dfas.mil/militarymembers/payentitlements/military-pay-charts.html  (For those of you with military experience it's O-4>20, Final Pay.)

Today (due to COLAs) I'm receiving $3566/month or $42,792/year.  If you compare my pension to an O-4 servicemember who retires today on the 2016 pay charts with a High Three pension, we're pretty close to parity.  (My Final Pay retirement system is no longer in effect for most of today's retirees.)  According to the CPI, my pension has gone up about 34% in 14 years.  Personally, my pension has risen faster than our family inflation rate in almost every category.

I don't have my 2002-03 expenses handy but 2004 was about $75K (call it $6200/month).  So the pension was 42.8% of our total expenses, and about $43K of our spending came from our investment portfolio.  I have very clear memories of calculating the value of that portfolio on 17 September 2001, after the stock markets re-opened from 9/11.  The number was $1.1M:  lower than I would've liked (and it got lower during the next 13 months before it started recovering) but it was "close enough".

Keep in mind that back then my spouse had just left active duty for the Reserves and unpaid drill weekends, so we had no expectation that she'd earn more than a small pension starting at age 60.  (Our assets had to bridge the big gap between 2002 and 2022, and then still cover a smaller gap after that.)  We were loaded down with mortgage debt on our residence, which boosted our expenses but also let our investment portfolio stay big enough to handle the 4% SWR.  We were losing money on our rental (thanks to my parents-in-law who were squatting there) and we were still parenting (including putting $5000/year in the college fund).  Our investment expenses were pretty close to 1%/year (including a "value" mutual fund charging 1.4%/year) and we had a significant backlog of home maintenance & repairs begging for DIY sweat equity.

In other words, retiring at a 4% SWR into a recession could've been ugly but we had faith in the math and the probabilities.  The inflation-indexed annuity assured us a minimum standard of living even if our portfolio was chopped in half by a bear market.  Plan B was for one of us to re-enter the workforce, but only if absolutely necessary.  My research indicated that we could even hack withdrawals of 6%-7% for a year or two if necessary.

Our spending stayed pretty flat for the next decade (or declined with inflation).  In 2013 (the last summary I have on file) we spent $82K.  During that decade we dropped our mortgage payment by over 40% (serial refinancings) and launched our daughter from the nest.  We built a photovoltaic array and a solar water heating system and dropped our electric bill by over $1400/year.  My spouse retired from the Reserves in 2008 with a few extra points and a surprise promotion to her credit.  (Her pension still starts in 2022.)  My PILs moved back to the Mainland and we were finally able to generate cash flow from our rental property.  We took advantage of both recessions to shift our asset allocation to ETFs with low expense ratios and to convert most of our traditional tax-deferred accounts to Roth IRAs.  We liquidated a small chunk of our portfolio to upgrade our home, spent another small chunk to fix up the rental property, and gave another small chunk to charity.  I've finally submitted my VA disability claim, which may drop my tax bill by $1000-$2000 per year.

I haven't tallied our annual spending since 2013, and in 2015 I stopped tracking our spending.  I could reconstruct it from checking account & credit-card statements, but if anything it's actually dropping.  We spent five months of last year visiting our daughter in Spain, so that knocked our spending down and our checking account balance is still climbing.  Instead of indulging my inner nuke with Quicken details, we're going to automate all of our tracking of our portfolio and our expenses with Personal Capital and/or Mint.  It won't be as detailed as Quicken but it'll be "close enough".

My point is that if I'd done these calculations in 2001 and blindly sought an extra margin of safety from a 2.5%-3% withdrawal rate, then I would've worked a corporate bridge career for at least 2-3 more years.  I finally would've eased into ER in 2005.  Then when the Great Recession hit I probably would've panicked and clamped down very hard on the spending, perhaps even seeking part-time work.  But in 2002, instead of succumbing to the lure of an unreachable 100% success rate and "Just One More Year" Syndrome, I avoided employment and learned how to tolerate financial ambiguity & volatility.  I learned to get comfortable with the 4% SWR and to optimize our finances even further.  Along the journey I learned that I still have tremendous human capital.  Screw the corporate career track-- I could have earned an entrepreneurial lifestyle income from handyman labor or appliance repair or writing (or all three). 

If I'd succumbed to JOMY Syndrome then I would've missed out on some of the best years of my daughter's life.  (Including the exciting "danger teen" era.)  I would not have surfed as near as much with her, and I wouldn't have trained alongside her to get our taekwondo black belts.  I would've kept gaining weight around my waist (instead of converting it into surfing muscles around my shoulders) and I would've kept gaining points on my blood pressure & cholesterol.  I would've had to outsource most of my life (rental property management, housecleaner, yardwork) so that I could earn more margin of safety for the portfolio.  My spouse and I would've missed years of even better togetherness & intimacy.  I would've endured several (more) years of workplace dissatisfiers and epic rush-hour commutes.  I would've missed some incredible world travel (Japan, Thailand, all over the Mainland) and a couple of cruises.  Eventually I would've retired (perhaps with an extra push from a family or medical crisis) to discover that I had way more money than I needed-- and had missed out on years of satisfying, fulfilling retirement.

The 4% SWR is a great hypothesis, and the execution is messily variable & volatile, but we appear to be following the track of "way more money than we need". 

I think the benefits of the 4% SWR outweigh the risks.  The human behavioral financial psychology of loss aversion costs way more than necessary.

This post is so great and gives me great hope!!  As a Fed LEO, I've done similar calculations (i.e., FI = 25x (expenses - pension) though they're somewhat complicated by fact that my wife is 7 years my junior and she did not get a very good head start on saving for retirement* (I was 41, she 34 when we married), so I have to adjust figures for covering some of her spending (a lot of which is frivolous nonsense, but that's another topic). And yet, even with the pension, I still can't bring myself to go 80/20 or 100% -- I'm at 65/35 with a self-imposed 70/30 ceiling.  Too risk averse, I guess.  Which is stupid, because I've got a pretty generous SS benefit waiting for me ($1,630/mo. at 62; $2,393/mo. at 67; $3,014/mo. at 70 -- and these are numbers based on ER at 53, not SS Statement numbers), I'm going to be working part-time doing something I love when I retire from this job (should be able to earn $15k-$20k without much hassle), and even if I didn't work p/t, the draw I'd need on my TSP to cover my gap would be 2.9% of my current balance, and 2% of my projected balance (and that's using 4% as a rate of return). *[This is where my wife is vindicated] Oh, and just to add one more layer of ridiculousness in here, my wife owns her parents' home (who are in their late 70's), valued @ $330k, which would pay off our mortgage, a not insignificant expense which I've accounted for in my ER expenses.  If/when the mortgage goes away, $2,100/mo. gets freed up overnight.  So WTF am I still so uncertain sometimes, and such a pussy when it comes to my asset allocation??!!!!!

I suppose this -- "The human behavioral financial psychology of loss aversion costs way more than necessary" -- answers that question . . .

[AdrianC]

We're 80/20 stocks/cash, with cash so high because I've been thinking the market is too highly priced to buy so cash has been building up. Normally we've been more like 95/5. Never had significant bond holdings.

Buying bonds didn't make sense to me 15 years ago (though it would have turned out fine as it happens) and they certainly make no sense to me right now. Maybe in a few years time bonds will be attractive. Right now I concur with Buffett - bonds are not attractive.

Like Nords, I'm a Berkshire fan. Perhaps our large BRK holding is as a kind of bond substitute. Plus zero debt and a paid off house. I sleep well.

[MoonShadow]

We're 80/20 stocks/cash, with cash so high because I've been thinking the market is too highly priced to buy so cash has been building up.

Yeah, I've had the same feeling for about 6 months now.  I'm about 60/40 index funds to cash equivalents at the moment.  I know that timing the market is hard, but it just feels like it's still overvalued and needs to come down some more.

[Financial.Velociraptor]

So WTF am I still so uncertain sometimes, and such a pussy when it comes to my asset allocation??!!!!!

I suppose this -- "The human behavioral financial psychology of loss aversion costs way more than necessary" -- answers that question . . .

I think a healthy allocation to fixed income is highly underrated.  I'm with you all the way.

[Nords]

Thanks for the comments, everyone.

We're 80/20 stocks/cash, with cash so high because I've been thinking the market is too highly priced to buy so cash has been building up.

Yeah, I've had the same feeling for about 6 months now.  I'm about 60/40 index funds to cash equivalents at the moment.  I know that timing the market is hard, but it just feels like it's still overvalued and needs to come down some more.

So WTF am I still so uncertain sometimes, and such a pussy when it comes to my asset allocation??!!!!!

I suppose this -- "The human behavioral financial psychology of loss aversion costs way more than necessary" -- answers that question . . .

I think a healthy allocation to fixed income is highly underrated.  I'm with you all the way.

I see three ways to deal with these issues.

The problem is that if stock-market volatility can make someone nervous or unhappy, it could be a sign that they have an inappropriate asset allocation for their tolerance.  I'm not talking about "risk tolerance" but rather emotional behavioral financial psychology.  Maybe it's still grounded in loss aversion.

The "solutions" include:
- ignore the markets, or
- change your asset allocation, or
- educate yourself to the point where your faith in your AA outweighs your concerns about the market. 

I've tried all three approaches, and the final one seems to be working the best.  People probably get there as a result of going through the other two phases.

Rick Ferri tells the story from early 2009 about his daughter finally losing her faith and calling him to announce that she was going to cash.  He didn't try to dissuade her, but he made her an offer:  if she stood pat then he'd cover all of her losses over the next few years-- as long as she gave him half of her profits.

When she reframed the problem to wondering why her Dad was being so nice to her, she decided not to mess with her investments.

[dude]

We're 80/20 stocks/cash, with cash so high because I've been thinking the market is too highly priced to buy so cash has been building up. Normally we've been more like 95/5. Never had significant bond holdings.

Buying bonds didn't make sense to me 15 years ago (though it would have turned out fine as it happens) and they certainly make no sense to me right now. Maybe in a few years time bonds will be attractive. Right now I concur with Buffett - bonds are not attractive.

Like Nords, I'm a Berkshire fan. Perhaps our large BRK holding is as a kind of bond substitute. Plus zero debt and a paid off house. I sleep well.

Thing is, the TSP's G Fund has produced a risk free 2.89% over the past 10 years (4.96% over the past 25 years). It returned 2.08% last year when inflation was essentially zero.  So it's better than cash.  It provides a nice buffer to stock volatility.

[AdrianC]

Thing is, the TSP's G Fund has produced a risk free 2.89% over the past 10 years (4.96% over the past 25 years). It returned 2.08% last year when inflation was essentially zero.  So it's better than cash.  It provides a nice buffer to stock volatility.

Sure. Would a paid off house do the same thing?

[Telecaster]

Like Nords, I'm a Berkshire fan. Perhaps our large BRK holding is as a kind of bond substitute.

I'm a BRK fan too.  But the reason to hold both bonds and stocks is because stocks and bonds behave differently.  BRK behaves like a stock.

Now, you can make an argument for holding 100% stocks (which maybe you were making), but that's a different conversation. 

[dude]

Thing is, the TSP's G Fund has produced a risk free 2.89% over the past 10 years (4.96% over the past 25 years). It returned 2.08% last year when inflation was essentially zero.  So it's better than cash.  It provides a nice buffer to stock volatility.

Sure. Would a paid off house do the same thing?

I don't think so, as it doesn't generate any revenue, right?

[MoonShadow]

Thing is, the TSP's G Fund has produced a risk free 2.89% over the past 10 years (4.96% over the past 25 years). It returned 2.08% last year when inflation was essentially zero.  So it's better than cash.  It provides a nice buffer to stock volatility.

Sure. Would a paid off house do the same thing?

I don't think so, as it doesn't generate any revenue, right?

If a homeowner still owes on a mortgage, and must earn an income to pay for that mortgage; then paying the mortgage off ahead of schedule is mathematically similar to buying a bond of a near yield to the mortgage APR.  No, the house doesn't provide a revenue, but it does displace current income until it is paid off.  The economic law of substitution is in effect here.

It's a particularly attractive strategy in the current bond market for the still accumulating investor, because odds are good that while s/he is paying extra on their mortgage principal, the bond market will eventually shift in favor of new investments, and then the accumulating investor can change patterns at that time without causing harm to their 'mortgage-bond' investments, which will continue to positively affect their mortgage debt even without continued above-regular payments.  If, however, the still accumulating investor were to completely pay-off their mortgage before the bond market turns the corner, the income that was previously directed towards that mortgage could be invested in any fashion, or held as cash ready for a shift in the markets.  In short, the downside risk to paying towards a mortgage versus investing in the current bond market is low.

[Telecaster]

Sure. Would a paid off house do the same thing?

I don't think so, as it doesn't generate any revenue, right?

If a homeowner still owes on a mortgage, and must earn an income to pay for that mortgage; then paying the mortgage off ahead of schedule is mathematically similar to buying a bond of a near yield to the mortgage APR.  No, the house doesn't provide a revenue, but it does displace current income until it is paid off.  The economic law of substitution is in effect here.
[/quote]

They are not alike though.   They are quite different animals.  Let's do a thought experiment.  It has been posited a couple of times on this board in the last couple days that paying down the mortgage is functionally the same as buying a bond with the same APR.  That's basically what you said above.

So, in today's low interest environment, paying down a 3.5% mortgage sounds pretty good because you can't buy bonds with a yield that high.   But if paying the mortgage is the same as buying a bond of the same interest rate, then something even better than a 3.5% mortgage would be a 5% mortgage!  So a 5% bond in today's environment would be pretty great.  I'm sure you bank will be happy to write you a mortgage for that rate if you ask.  Let's go a step further.  You don't even have to get a mortgage.  Simply pay off your credit cards each month, and that's like buying an 18% bond! 

You can see the problem here.   You are absolutely correct in that paying down the mortgage results in a future savings.   And that's a perfectly fine reason to do something.   But it isn't like owning bonds.   

 

[MoonShadow]

  But it isn't like owning bonds.

I said mathematically similar.  I did not same "same as".  Of course you could twist that to an absurdity, but I don't think that anyone here is stupid enough to equate the savings of paying down debt early with deliberately seeking out higher interest debt.  If you already have a mortgage, the differences in paying down that principal or choosing a bond of a near rate comes down to taxes & personal preferences.  Which do you think would put you in a better financial situation overall, a paid off mortgage or a large bond holding?  Personally, I favor paying down debt, but I can see how keeping the mortgage & simply building up a large enough bond holding to pay off the principal at will is also advantageous to particular people.

[clifp]

I think I'm the cautionary tale on the dangers of 4% and early retirement.
I quit working in 1999 at 39, and officially resigned in 2000.

The 4% rule barely existed (published in 97/98 and was not well know) when I retired, so in many ways I was flying blind. Fortunately, I retired with several million and while the $60K (plus and additional 25-50K a year in Angel investments) I spend is far above mustachian levels, my actual WR is between 2.5-3.0% of either starting value or current portfolio.

If I had followed the 4% rule, I'd be well on my way to running out of money sometime between ages 66 and 72 and living out my "golden" years on not much gold, only SS at between $2,100 to 2,600 a month.

I think it is also important to understand that retiring on 4% today requires a leap of faith on returns that I didn't need back in 2000.

My calculation for retiring in 2000 was I could use $2 million to buy California 30 year bonds at 5% and have a $100K tax-free for the next 30 years. Shortly after retiring I discovered TIPs bonds which had real interest coupon of 3.6-3.9% for 10-year bonds. Today those Muni bonds have an interest rate of 2.6-2.9% and 10 TIPs bonds are 0.3% and 30 TIPs bonds are at 1%. Back in 2000, a 50/50 allocation the fixed income to provide a significant chunk of  the 4% withdrawal rate, with very low risk. Today fixed income provides a very small proportion of the income needed, which means the equity portion needs to produce above average returns for the next 30 years.

As far as going back to work.  Obviously, people do what that have to do, but the time I seriously thought about getting a job was 2009 when millions were looking for work.  I think the chances of me finding a professional job, with skills that were 8-9 years out of date were very slim, I would have been lucky to find a part-time job (say 19 hours a week @$12/hour) which was not even a 1/10 of my annual  salary+bonus when I was working.

[Nords]

I don't think so, as it doesn't generate any revenue, right?

If a homeowner still owes on a mortgage, and must earn an income to pay for that mortgage; then paying the mortgage off ahead of schedule is mathematically similar to buying a bond of a near yield to the mortgage APR.  No, the house doesn't provide a revenue, but it does displace current income until it is paid off.  The economic law of substitution is in effect here.
[/quote]
In the financial world (not just the math), I think there's an overlooked opportunity cost. 

Instead of analyzing this as a mortgage, consider it a chance to convert "dead equity" into another asset.  In my case, we have two 30-year mortgages at 3.625% & 4.625% which allow us to invest the home equity in stock-market equities.  Our properties just happened to be a good place to get a couple of long-term margin loans.

[Threshkin]

There was an article in Marketwatch today that claims a strict interpretation of the 4% rule would have failed already if you retired in 2000.  I have not verified the numbers and don't plan to.  My main take away from the article is "Don't be stupid or blind to changing conditions."

http://www.marketwatch.com/story/why-buy-and-hold-is-a-bad-idea-for-retirees-2016-03-17

[MoonShadow]

If a homeowner still owes on a mortgage, and must earn an income to pay for that mortgage; then paying the mortgage off ahead of schedule is mathematically similar to buying a bond of a near yield to the mortgage APR.  No, the house doesn't provide a revenue, but it does displace current income until it is paid off.  The economic law of substitution is in effect here.

In the financial world (not just the math), I think there's an overlooked opportunity cost. 

Instead of analyzing this as a mortgage, consider it a chance to convert "dead equity" into another asset.  In my case, we have two 30-year mortgages at 3.625% & 4.625% which allow us to invest the home equity in stock-market equities.  Our properties just happened to be a good place to get a couple of long-term margin loans.

Well, it was not overlooked by myself.  But that is almost the same as taking a paid for property and borrowing against it to buy stocks on relatively cheap margin.  I don't think there are many conditions that I would buy stocks on margin, but particularly if a severe margin call could leave me underwater on my primary residence.  I might consider this kind of calculated risk on a rental property, but risk reduction is often a fine strategy all it's own.

[MoonShadow]

There was an article in Marketwatch today that claims a strict interpretation of the 4% rule would have failed already if you retired in 2000.  I have not verified the numbers and don't plan to.  My main take away from the article is "Don't be stupid or blind to changing conditions."

http://www.marketwatch.com/story/why-buy-and-hold-is-a-bad-idea-for-retirees-2016-03-17

I think that analysis is a bit weighted to the downside, because 3% per year of inflation didn't happen.

[clifp]

There was an article in Marketwatch today that claims a strict interpretation of the 4% rule would have failed already if you retired in 2000.  I have not verified the numbers and don't plan to.  My main take away from the article is "Don't be stupid or blind to changing conditions."

http://www.marketwatch.com/story/why-buy-and-hold-is-a-bad-idea-for-retirees-2016-03-17

I think this his is rather a simplistic analysis.  For one thing, it assumes a 100% stock portfolio which isn't realistic. Conventional wisdom at the time along with  academic research such as the efficient frontier hypothesis said a more realistic portfolio, was 75% S&P 500, and 25% Total Bonds.  There are several threads on the subject in various boards, the longest running one is http://raddr-pages.com/forums/viewtopic.php?f=2&t=1208. At this point, 15 years into the retire the inflation-adjusted value of the portfolio is 49%. So you are now withdrawing 8% of your portfolio.

I know personally my portfolio dipped below 50% in March 2009 of my starting value, this despite me having returns that were 1-2% above the indexes (last year was notable exception) and withdrawal rate in the 2.5-3%

It is also worth noting that careful tracking of the year 2000 retiree portfolio, reveal that were bugs in FIRECalc in how it treated the bond portfolio. I believe that CFireSIM fixed these but I'm not 100% sure. But it does make the point that one shouldn't be overly dependent on only one retirement tool.

The most important takeaway for anybody looking at very early retirement in your 30s, and 40s is that FIRECalc/CFIREsim/Trinity study success is different for very early retiree than a traditional retiree.

If you were say 65 in 2000 when you retired, it is possible you'll run out of funds before 30 years pass, but it is even more likely you'll die before you hit 95. But for some like myself, if my portfolio was down 80-90% by the time I hit age 69, that's almost a big of a failure as running completely out of money by age 65. Statistically, I on average I have nearly 20 years left at 69.

I recommend people looking at very early retirement, define success as the minimum amount in their portfolio at their social security age so that portfolio income+ SS income= desired income.

So for instance,  a 37-year old with 40K spend and $1,000,000 portfolio. At age 67 he is eligible for $2,000/month 24K a year in social security.
This means he needs $16k from his portfolio to last from 67 to death, which is approximately 400K.  If you set a minimum of having $400,000 in your portfolio, a 4% withdrawal rate is only successful 75% of the time over 30 year.  Now while they maybe good enough for some people that would give me pause.

[Nords]

There was an article in Marketwatch today that claims a strict interpretation of the 4% rule would have failed already if you retired in 2000.  I have not verified the numbers and don't plan to.  My main take away from the article is "Don't be stupid or blind to changing conditions."

http://www.marketwatch.com/story/why-buy-and-hold-is-a-bad-idea-for-retirees-2016-03-17

Luckily Raddr (an early-retiree doctor) has already verified the real-life numbers and the Y2K retiree is not yet out of money... but time is running out.

http://raddr-pages.com/forums/viewtopic.php?f=2&t=1208&hilit=hapless+Y2K&start=405