The Money Mustache Community
General Discussion => Post-FIRE => Topic started by: AdrianC on January 22, 2016, 06:25:31 AM
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Lots of people talk about it, but does anyone really do it?
Has anyone retired early intending to withdraw 4% of their portfolio annually, and has no other source of income or financial or medical benefit? No pension, no still working spouse , no part time gig as greeter at Wal Mart.
How is that working out for you?
EDIT: I don't mean retire and never earn another dollar for the rest of your lives. I mean rather has anyone retired early intending to withdraw 4% of their portfolio annually, and has no other *regular* source of income or financial or medical benefit? Expecting SS down the road is not counted since most of us will be getting some SS.
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Can't speak for the adrenaline freaks but the 4% rule is designed to cover a 30 yr retirement. An early retirement would almost certainly run longer than that so if they're not using something less than 4% they really ought to.
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Why not use 4%? Even for 60 years, you have an 83% chance to never have to work again. And that remaining 17%, what's wrong with working a couple years after the market has tanked? Even if it is a greeter at Wal-Mart?
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following. I think we could be as close to five years from FIRE, and after watching the investments closely I just can't seem to get comfortable with it. I'm not sure our investments will ever earn enough, consistently, to do it.
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I'm not sure our investments will ever earn enough, consistently, to do it.
It's not about consistently, some years they'll earn 30%, some year's they'll earn -30%.
Can't speak for the adrenaline freaks but the 4% rule is designed to cover a 30 yr retirement. An early retirement would almost certainly run longer than that so if they're not using something less than 4% they really ought to.
Requisite madfientist link: http://www.madfientist.com/safe-withdrawal-rate/
The key to me is recognizing that you're taking a risk either way. You're either working now and risking that it'll turn out you didn't need to, or retiring now, and risking that you might need to go back to work for a while later. Obviously the math works out differently for all of us, but let's not say "adrenaline freaks," as if one choice is super risky and the other super safe.
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I'm not sure our investments will ever earn enough, consistently, to do it.
It's not about consistently, some years they'll earn 30%, some year's they'll earn -30%.
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Well, that's my problem, I can't remember a year in the last 15 where my investments earned anywhere close to 30%. There were a couple years where I think we did 10%-14%. I fully admit that I could possibly have some losers. Although most of it is indexes. And there are probably years where I didn't pay close enough attention.
Obviously things I need to work on.
I know that history shows that the average is 4% earnings after inflation over a 30 year history. The data is there to prove it. But what if the times are changing and those returns that help smooth the average aren't going to be available?
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I'm not sure our investments will ever earn enough, consistently, to do it.
It's not about consistently, some years they'll earn 30%, some year's they'll earn -30%.
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Well, that's my problem, I can't remember a year in the last 15 where my investments earned anywhere close to 30%. There were a couple years where I think we did 10%-14%. I fully admit that I could possibly have some losers. Although most of it is indexes. And there are probably years where I didn't pay close enough attention.
Obviously things I need to work on.
I know that history shows that the average is 4% earnings after inflation over a 30 year history. The data is there to prove it. But what if the times are changing and those returns that help smooth the average aren't going to be available?
4% isn't the average market return after inflation. 4% is the amount you can take out and be very confident that you won't run out of money in a random 30 year period. The S&P 500 has average about 7% after inflation historically. The 4% has a huge safety margin built into that already.
And, yes, if your max in the last 15 years was 10%-14%, then you really need to start paying more attention. S&P 500 was up 33% in 2013, 26% in 2009, and 29% in 2003.
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Requisite madfientist link: http://www.madfientist.com/safe-withdrawal-rate/
It's a good read...but he's another one who isn't FIRE on 4%.
Let's not make this about proving the 4% rule - there's lot's of threads for that. I was just interested in who has actually done it. Who FIRE'd on 4?
And if you're FIRE'd but not on 4%, please chime in too. Did you target less than 4%? Why?
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Let's not make this about proving the 4% rule - there's lot's of threads for that. I was just interested in who has actually done it. Who FIRE'd on 4?
And if you're FIRE'd but not on 4%, please chime in too. Did you target less than 4%? Why?
Apologies for jumping on the derailment bandwagon. I think there's a huge selection bias on the internet. The people with blogs are the people who likely have a hard time earning nothing -- they're clearly people who enjoy being busy. Nothing wrong with that, but they're not the people who are going to earn nothing ever again and pull 4%. Even the people on the forum, I suspect many of them (like me) are posting here because they're "at work" and looking for a distraction. My guess is posting activity drops considerably at FIRE.
I too am very curious if anyone has actually followed the Trinity Study withdrawal algorithm to the letter. I wholly believe in 4% as a good guideline, but I think you'd have to be some kind of madman to check your total networth on day one of retirement, and withdraw 4% of that number, increasing for inflation, no matter what happens in the market for the rest of your life.
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I think if you asked MMM himself - he would say 4% is really safe. However, he would also say that you should probably have some "margins of safety" built in as well. IE: Willing to go back to work at least part time in the future, social security, online fun income etc. The thought is, if you have the work ethic and smarts to retire early on 4% of your assets, you should be able to adapt and pick up additional income down the road if needed or flex your mustachian muscles and cut your spending some more.
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I wholly believe in 4% as a good guideline, but I think you'd have to be some kind of madman to check your total networth on day one of retirement, and withdraw 4% of that number, increasing for inflation, no matter what happens in the market for the rest of your life.
Well, that all depends on how it goes, right? Historically, at the end of 30 years, the average balance is 2x your starting balance and the median is 1.5x. (real dollars, not nominal) Would you really consider someone a madman who did exactly that for 30 years and ended up with more money than they started with?
And to stay on topic (yeah!), I don't think it's possible for anyone to follow the Trinity Study exactly. Most of us are going to collect SS at some point, right?
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Stets: let's not say "adrenaline freaks," as if one choice is super risky and the other super safe.
I didn't say it that way. The "As if" was your convention.
You're either working now and risking that it'll turn out you didn't need to, or retiring now, and risking that you might need to go back to work for a while later.
I said nothing of working longer. But since you brought it up. Working a wee bit extra and NOT retiring is not taking risk. Retiring with 83% confidence is risk. Having to go back to work after 20 years is risk. Now, maybe somebody sees that as acceptable? Have a nice day
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Why not use 4%?
Why not?
Even for 60 years, you have an 83% chance to never have to work again. And that remaining 17%, what's wrong with working a couple years after the market has tanked? Even if it is a greeter at Wal-Mart?
That's why. heh heh heh
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Posting to follow
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Requisite madfientist link: http://www.madfientist.com/safe-withdrawal-rate/
It's a good read...but he's another one who isn't FIRE on 4%.
Let's not make this about proving the 4% rule - there's lot's of threads for that. I was just interested in who has actually done it. Who FIRE'd on 4?
And if you're FIRE'd but not on 4%, please chime in too. Did you target less than 4%? Why?
I'm three years into FIRE on MORE than 4% WR. If you have a high allocation to income, you can be much less worried about sequence of returns risk. I currently pull 100.18% of my projected annual budget strictly from dividends, distributions, and interest. The market can tank 80% for all I care so long as my investments keep making their cash payments. I wait a *long* time for a rebound. I also sell options around my existing holdings to supplement returns and reduce volatility.
You 4% people seem overly cautious to me.
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I suspect that anyone who relies on historical data is making a mistake.
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I think the OP may struggle to find a solid group of people who could speak to FIREing on 4% and never earning another dollar for the rest of their lives. My wife and I intend to FIRE on 4% very shortly here but I like work (meaning doing stuff). It will literally be impossible for me to live my life, doing stuff, without that somehow turning into a little money at various times.
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I suspect that anyone who relies on historical data is making a mistake.
I also prefer future data
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Why not use 4%? Even for 60 years, you have an 83% chance to never have to work again. And that remaining 17%, what's wrong with working a couple years after the market has tanked? Even if it is a greeter at Wal-Mart?
I honestly intend to retire on a 5% wr because I don't include my house which can be downsized, pensions (only government) and inheritance. Mind you my wife wants something like a 3% WR so lets see what really happens.
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I suspect that anyone who relies on historical data is making a mistake.
I also prefer future data
LOL. I love it.
OP, we are ER'ing very soon on 4% but I feel comfortable doing so only because of certain caveats:
We will be eligible for social security but didn't account for it in our calculations.
We're likely to pick up some project work from time to time.
Our budget at 4% isn't super lean and includes optional expenses like travel that can be pared back if necessary.
This is pretty close to how MMM described his rationale for the 4% rule. And it works for me. In fact the only reason I want these extra layers of safety is because we are young. If we were 55 I'd use 4% without losing any sleep. But our money needs to last a very long time.
If I wanted to feel *super super safe* I'd save until we were at a 3% WR but at a certain point I'm just giving up years of my life for extra safety blanket. And those are years of my life I won't get back. So 4% (with caveats) is where we landed.
SIS
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4% is safe if you have done your homework. If you have zero debt, if you have saved for education, healthcare, home repairs, etc. Have all your ducks in a row before retirement. The 4% will handle day to day expenses. I'd hate to pay a mortage or car loan out of that 4%.
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We are withdrawing 2.5% excluding the house and the college fund. We are still in our 40s. We just completed our first year of FIRE. We have little kids so our activities and our spending is somewhat limited to their school schedule.
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I said nothing of working longer. But since you brought it up. Working a wee bit extra and NOT retiring is not taking risk. Retiring with 83% confidence is risk. Having to go back to work after 20 years is risk. Now, maybe somebody sees that as acceptable?
Risk is unavoidable--Risk of working is that you may die tomorrow and have spent your life doing what you don't enjoy or at least not doing what you would most enjoy. The other side is you wind up on public assistance. Which is the worse outcome depends on the person.
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Dividends. Part of your 4% or in addition to?
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I think the OP may struggle to find a solid group of people who could speak to FIREing on 4% and never earning another dollar for the rest of their lives. My wife and I intend to FIRE on 4% very shortly here but I like work (meaning doing stuff). It will literally be impossible for me to live my life, doing stuff, without that somehow turning into a little money at various times.
I don't mean retire and never earn another dollar for the rest of your lives. I mean rather has anyone retired early intending to withdraw 4% of their portfolio annually, and has no other *regular* source of income or financial or medical benefit?
Let's ignore social security because none of us retiring early are getting it for a decade or two or three. I don't factor it in at all.
So, for example, if you retire early on 4%, but your spouse still works and you get your families medical coverage from her employer, that doesn't count. (Medical insurance is our second largest expense, after groceries).
It occurs to me too that a single person with no dependents or a young couple can take more risk and have more budget flexibility than those of us with mouths to feed. For them a 4% or more WR could make perfect sense.
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I'm three years into FIRE on MORE than 4% WR. If you have a high allocation to income, you can be much less worried about sequence of returns risk. I currently pull 100.18% of my projected annual budget strictly from dividends, distributions, and interest. The market can tank 80% for all I care so long as my investments keep making their cash payments. I wait a *long* time for a rebound. I also sell options around my existing holdings to supplement returns and reduce volatility.
You 4% people seem overly cautious to me.
Might well turn out to be :-)
I'm surprised that dividends, distributions and interest are giving you >4%. Do you mind sharing a bit about your investments?
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I honestly intend to retire on a 5% wr because I don't include my house which can be downsized, pensions (only government) and inheritance. Mind you my wife wants something like a 3% WR so lets see what really happens.
Let us know how that battle goes. Similar problem here :-)
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Might well turn out to be :-)
I'm surprised that dividends, distributions and interest are giving you >4%. Do you mind sharing a bit about your investments?
My fixed income all pays more than 4%. My equities are largely REIT, BDC, and MLP. Also some hybrid preferreds and equity funds that are invested in global debt paying more than 4%. It isn't hard to find sectors that pay more than 4% as income. It's usually at the expense of some growth. I have an allocation to insurance to manage my inflation risk. My written puts usually pay in excess of 12% as well. Options are a different asset class and have a different risk/reward profile...
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We are withdrawing 2.5% excluding the house and the college fund. We are still in our 40s. We just completed our first year of FIRE. We have little kids so our activities and our spending is somewhat limited to their school schedule.
We have 3 kids. As they get older the expenses go up. Gymnastics, martial arts, after school activities, orthodontics, medical ailments and so on really eat into the budget.
Looks like you have a great safety margin at 2.5%.
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I honestly intend to retire on a 5% wr because I don't include my house which can be downsized, pensions (only government) and inheritance. Mind you my wife wants something like a 3% WR so lets see what really happens.
Let us know how that battle goes. Similar problem here :-)
This is a tough one isn't it. My wife is also just starting part time work so its easy for her to say it. To be fair to her she does most of the work around the house and taking care of the kids.
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We are withdrawing 2.5% excluding the house and the college fund. We are still in our 40s. We just completed our first year of FIRE. We have little kids so our activities and our spending is somewhat limited to their school schedule.
We have 3 kids. As they get older the expenses go up. Gymnastics, martial arts, after school activities, orthodontics, medical ailments and so on really eat into the budget.
Looks like you have a great safety margin at 2.5%.
There are all sorts of costs aren't there. I think we have just spent probably about $2000 sending the 3 kids off to school this year. Admittedly it's a big expense year as 2 kids start at a new school and require school uniforms and one requires a laptop.
My daughter has braces - that costs $5000 over 2 years. She is the oldest kid. Hopefully the other kids don't need them but typically the dentist/orthodontist will tell you they do.
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We are withdrawing 2.5% excluding the house and the college fund. We are still in our 40s. We just completed our first year of FIRE. We have little kids so our activities and our spending is somewhat limited to their school schedule.
We have 3 kids. As they get older the expenses go up. Gymnastics, martial arts, after school activities, orthodontics, medical ailments and so on really eat into the budget.
Looks like you have a great safety margin at 2.5%.
There are all sorts of costs aren't there. I think we have just spent probably about $2000 sending the 3 kids off to school this year. Admittedly it's a big expense year as 2 kids start at a new school and require school uniforms and one requires a laptop.
My daughter has braces - that costs $5000 over 2 years. She is the oldest kid. Hopefully the other kids don't need them but typically the dentist/orthodontist will tell you they do.
Can relate to concerns about extra costs when it come to kids. I am on the cusp of FI with a SWR of just at 4% - but have 3 kids. I am laid off, but will probably only go back to a PT job to cover the extras.
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... but I like work (meaning doing stuff). It will literally be impossible for me to live my life, doing stuff, without that somehow turning into a little money at various times.
There's lot of stuff that I like doing.
However, that stuff, wouldn't pay me a salary. :)
I need to make sure that I have enough money....because once I FIRE.... there's no going back.
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I think the OP may struggle to find a solid group of people who could speak to FIREing on 4% and never earning another dollar for the rest of their lives. My wife and I intend to FIRE on 4% very shortly here but I like work (meaning doing stuff). It will literally be impossible for me to live my life, doing stuff, without that somehow turning into a little money at various times.
I don't mean retire and never earn another dollar for the rest of your lives. I mean rather has anyone retired early intending to withdraw 4% of their portfolio annually, and has no other *regular* source of income or financial or medical benefit?
Let's ignore social security because none of us retiring early are getting it for a decade or two or three. I don't factor it in at all.
So, for example, if you retire early on 4%, but your spouse still works and you get your families medical coverage from her employer, that doesn't count. (Medical insurance is our second largest expense, after groceries).
It occurs to me too that a single person with no dependents or a young couple can take more risk and have more budget flexibility than those of us with mouths to feed. For them a 4% or more WR could make perfect sense.
The issue is that you are choosing to overlook social security which is going to be an important part of any frugal person's retirement. What I try to do for "FIRE" is to bridge the gap to social security age which is also around the time that I would start tapping into tax advantaged accounts. There are ways to access the IRA early, but it's easier for me to just look at it saving X amount to fund pre-IRA/Social Security and let the "true retirement" take care of itself with social security and my 401k/ira contributions. If I were to say, stop working at 40, it's hard for me to believe that there would be no income from whatever I happen to be doing with my time from that age to "true retirement age", so there is no worry that the 4% rule won't work over the 22 year period from 40 to 62 when I would then have access to social security, (and shortly after that,) medicare, IRA's etc, is just not something that ever comes to mind because it's not realistic. I'm not sure 4% is the right number for this purpose for myself.
For the 4% rule to work, it doesn't matter how small your family is, it's a very simple mathematical equation and works off your available capital and expenses. I don't know that single person would be able to cut their expenses any easier than a family -a single person already has a smaller budget than a family, so their 25x goal is probably a much smaller number to begin with.
Sometimes I wonder if the 4% is too conservative for my purposes, when we are expecting to do some sort of paid work in 'early retirement'
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I think I saw to many posts discussing 4% and wether you can make it on that.
But there was no discussion about 4% of what?
I think It is tough on 4% of $700k, much easier on $1.4M.
Also if you only have 10 years until Social Security, and will receive $20,000 that can
be like adding another $500k to you nestegg at 4%.
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I think I saw to many posts discussing 4% and wether you can make it on that.
But there was no discussion about 4% of what?
I think It is tough on 4% of $700k, much easier on $1.4M.
Also if you only have 10 years until Social Security, and will receive $20,000 that can
be like adding another $500k to you nestegg at 4%.
4% of 700k is 28k, so that would only be tough if your annual spending is higher than that. If you spend 20k per year or 25k per year or 28k per year, then 700k is obviously plenty. The math is simple - you grow your portfolio to 25x of your annual expenses, and then mathematically you take 4% of your nest egg each yaer to spend.
Most people don't just take 4% though, they use variable withdrawal strategies, where they spend more in good years and less in bad years.
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This guy has been living on the 4% rule for 20 years (actually, because of the growth in his account, he's down to living on 1%):
http://www.retireearlyhomepage.com/20year.html
Also, he just published a short little piece on Wade Pfau's recent proclamation regarding current retirees' need to withdraw only 1.7%.
http://www.retireearlyhomepage.com/wadepfau_2016.html
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I think I saw to many posts discussing 4% and wether you can make it on that.
But there was no discussion about 4% of what?
I think It is tough on 4% of $700k, much easier on $1.4M.
Also if you only have 10 years until Social Security, and will receive $20,000 that can
be like adding another $500k to you nestegg at 4%.
4% of 700k is 28k, so that would only be tough if your annual spending is higher than that. If you spend 20k per year or 25k per year or 28k per year, then 700k is obviously plenty. The math is simple - you grow your portfolio to 25x of your annual expenses, and then mathematically you take 4% of your nest egg each yaer to spend.
Most people don't just take 4% though, they use variable withdrawal strategies, where they spend more in good years and less in bad years.
I am pretty sure MMM and family live a "luxurious lifestyle" on 25k.
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I think I saw to many posts discussing 4% and wether you can make it on that.
But there was no discussion about 4% of what?
I think It is tough on 4% of $700k, much easier on $1.4M.
Also if you only have 10 years until Social Security, and will receive $20,000 that can
be like adding another $500k to you nestegg at 4%.
4% of 700k is 28k, so that would only be tough if your annual spending is higher than that. If you spend 20k per year or 25k per year or 28k per year, then 700k is obviously plenty. The math is simple - you grow your portfolio to 25x of your annual expenses, and then mathematically you take 4% of your nest egg each yaer to spend.
Most people don't just take 4% though, they use variable withdrawal strategies, where they spend more in good years and less in bad years.
I am pretty sure MMM and family live a "luxurious lifestyle" on 25k.
Not a really good example. Because MMM easily earns six figures from this blog and has plenty of "business expenses" that don't get reported on the "annual family expenses".
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I think I saw to many posts discussing 4% and wether you can make it on that.
But there was no discussion about 4% of what?
I think It is tough on 4% of $700k, much easier on $1.4M.
Also if you only have 10 years until Social Security, and will receive $20,000 that can
be like adding another $500k to you nestegg at 4%.
4% of 700k is 28k, so that would only be tough if your annual spending is higher than that. If you spend 20k per year or 25k per year or 28k per year, then 700k is obviously plenty. The math is simple - you grow your portfolio to 25x of your annual expenses, and then mathematically you take 4% of your nest egg each yaer to spend.
Most people don't just take 4% though, they use variable withdrawal strategies, where they spend more in good years and less in bad years.
I am pretty sure MMM and family live a "luxurious lifestyle" on 25k.
Not a really good example. Because MMM easily earns six figures from this blog and has plenty of "business expenses" that don't get reported on the "annual family expenses".
IDK what his blog generates, but he clearly states that his house is paid for. Not being critical, just reporting the facts. It makes a big difference, as does COL. My house is paid for, too, but the property taxes alone here are nearly 12k per year. Oh, hell yes, location matters.
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I am pretty sure MMM and family live a "luxurious lifestyle" on 25k.
Not a really good example. Because MMM easily earns six figures from this blog
Irrelevant to his spending. His blog could earn him 1MM/yr, and it doesn't change the fact that his family's core spending has been ~25k/yr for years and years. Not counting housing. The imputed value of his paid off house is ~15k, IMO (based on previous calculations), so he's living a 40k lifestyle, or so, and it's quite luxurious, yes.
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The issue is that you are choosing to overlook social security which is going to be an important part of any frugal person's retirement.
Can we estimate the expected social security benefit for an early retiree? My wife and I have both worked enough years to qualify, but not enough to get the full amount (I think).
Whatever estimate I can get, I'm still going to cut some from it. Social security is underfunded. Cuts in benefits are likely.
For the 4% rule to work, it doesn't matter how small your family is, it's a very simple mathematical equation and works off your available capital and expenses. I don't know that single person would be able to cut their expenses any easier than a family -a single person already has a smaller budget than a family, so their 25x goal is probably a much smaller number to begin with.
Kids come with unpredictable expenses, and we don't want our kids to have to suffer, so we feel like we should have a larger safety margin.
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The ? that gets me somewhat confused is people always say save 25% of your needs so 25x80k = 2 million saved for being fire'd BUT thats not true on a 4% withdrawal is it if you need to figure in taxes on your withdrawal. You need more like 2.5 million saved to net 80k. so your really saving 31x's. this is at least where i got confused.
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The issue is that you are choosing to overlook social security which is going to be an important part of any frugal person's retirement.
Can we estimate the expected social security benefit for an early retiree? My wife and I have both worked enough years to qualify, but not enough to get the full amount (I think).
Whatever estimate I can get, I'm still going to cut some from it. Social security is underfunded. Cuts in benefits are likely.
For the 4% rule to work, it doesn't matter how small your family is, it's a very simple mathematical equation and works off your available capital and expenses. I don't know that single person would be able to cut their expenses any easier than a family -a single person already has a smaller budget than a family, so their 25x goal is probably a much smaller number to begin with.
Kids come with unpredictable expenses, and we don't want our kids to have to suffer, so we feel like we should have a larger safety margin.
People have been calling for social security cuts for decades, even on Mr. Collins' blog, they were saying that a few decades ago. I can't say with confidence what I'm going to get 3-4 decades from now from Social Security, but I am fairly confident that those who have a smaller lifetime earnings (such as early retirees) will continue receive a higher proportion of their career earned income than someone who retires at 65-70 where the continued work doesn't lead to much additional benefits. In regards to unexpected expenses, I think you have to do your best to budget. Early retiring with kids is probably more difficult than without kids, but there are plenty here who have done it and figured out how to do it.
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The issue is that you are choosing to overlook social security which is going to be an important part of any frugal person's retirement.
Can we estimate the expected social security benefit for an early retiree? My wife and I have both worked enough years to qualify, but not enough to get the full amount (I think).
Whatever estimate I can get, I'm still going to cut some from it. Social security is underfunded. Cuts in benefits are likely.
For the 4% rule to work, it doesn't matter how small your family is, it's a very simple mathematical equation and works off your available capital and expenses. I don't know that single person would be able to cut their expenses any easier than a family -a single person already has a smaller budget than a family, so their 25x goal is probably a much smaller number to begin with.
Kids come with unpredictable expenses, and we don't want our kids to have to suffer, so we feel like we should have a larger safety margin.
Yes, you can get an estimate of your Social Security benefits if you go to the Social Security webpage and sign up for an online account. The projected amount that appears on your annual statement assumes (a) that you will continue to earn your current salary into the future, and (b) that you will work until the age at which you collect (62, FRA, 70). For early retirees, that means the estimate is wildly off. So there's a tool on the website that lets you enter in your actual projected salary year by year, and lets you pick the age at which you plan to stop working.
Once you have that figure, if you're pessimistic, then lop 23% off the top of it (i.e., to get 77% of your expected benefit, which is what current fund projections show SS can continue to provide for a very long time.
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so he's living a 40k lifestyle, or so, and it's quite luxurious, yes.
My back of the envelope estimation is that 40k a year puts a family better off than ~99.7% of human beings that have ever existed. I'd call that luxurious. Peer group comparison and hedonic adaptation are such a funny thing though -- I don't know how else I can rationalize people breaking out the word "suffering" to describe what would happen to their children if they're denied something only .3% of humans have ever had.
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Kids come with unpredictable expenses, and we don't want our kids to have to suffer, so we feel like we should have a larger safety margin.
I've thought about this as well since we're planning to FIRE before having kids but everything I've read on this forum( (from people who have kids) leads me to believe much of this depends on what you feel obligated to do for your kids. I consider my upbringing to be a fairly poor one but I never felt like we suffered, truly suffered. Sure other kids had expensive clothes and there were times I wanted a Columbia jacket but that was more about being cool and fitting in than actually having said item. I think a lot of that has to do with how parents act. My parents never complained about what they didn't have so we never had those thoughts instilled in us. In college my parents couldn't afford to pay for anything but I believe that helped make me the responsible person I am today because I had to earn it on my own. My wife was the same, had to earn her own way and she's just like me with respect to money. For these reasons I feel confident that we can handle whatever needs come along without breaking the bank. If we have a special needs child that requires spending a lot of money that's a different story but I'm going to play the odds there; I think they're in my favor.
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The ? that gets me somewhat confused is people always say save 25% of your needs so 25x80k = 2 million saved for being fire'd BUT thats not true on a 4% withdrawal is it if you need to figure in taxes on your withdrawal. You need more like 2.5 million saved to net 80k. so your really saving 31x's. this is at least where i got confused.
You need to save 25x your expenses.
Your expenses include taxes, insurance, etc.
Any money you have to pay is an expense.
Save 25x that number.
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I am pretty sure MMM and family live a "luxurious lifestyle" on 25k.
Not a really good example. Because MMM easily earns six figures from this blog
Irrelevant to his spending. His blog could earn him 1MM/yr, and it doesn't change the fact that his family's core spending has been ~25k/yr for years and years. Not counting housing. The imputed value of his paid off house is ~15k, IMO (based on previous calculations), so he's living a 40k lifestyle, or so, and it's quite luxurious, yes.
To some extent, yes it is irrelevant in terms that he is not going to inflate his lifestyle, but knowing that one is receiving far more than your expenses in blog income is absolutely going to be psychologically comforting to anyone trying to live off a nest egg for a very long time.
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The ? that gets me somewhat confused is people always say save 25% of your needs so 25x80k = 2 million saved for being fire'd BUT thats not true on a 4% withdrawal is it if you need to figure in taxes on your withdrawal. You need more like 2.5 million saved to net 80k. so your really saving 31x's. this is at least where i got confused.
You need to save 25x your expenses.
Your expenses include taxes, insurance, etc.
Any money you have to pay is an expense.
Save 25x that number.
Had it all but the taxes figured...guess that was a pretty obvious oops! But thanks!
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Can we estimate the expected social security benefit for an early retiree? My wife and I have both worked enough years to qualify, but not enough to get the full amount (I think).
https://www.ssa.gov/retire/estimator.html
Go here, click on "Estimate your retirement benefits" and fill out the information. It will take you to an estimate showing what you'd receive if you keep working until age 62+. On that page, click "Add a New Estimate" and you can input your estimated retirement age. This will then show you your benefit at age 62 when you stopped working at whatever age you input. Unfortunately it doesn't show any other ages, but of course the longer you wait, the more you'll get.
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I think I saw to many posts discussing 4% and wether you can make it on that.
But there was no discussion about 4% of what?
I think It is tough on 4% of $700k, much easier on $1.4M.
Also if you only have 10 years until Social Security, and will receive $20,000 that can
be like adding another $500k to you nestegg at 4%.
4% of 700k is 28k, so that would only be tough if your annual spending is higher than that. If you spend 20k per year or 25k per year or 28k per year, then 700k is obviously plenty. The math is simple - you grow your portfolio to 25x of your annual expenses, and then mathematically you take 4% of your nest egg each yaer to spend.
Most people don't just take 4% though, they use variable withdrawal strategies, where they spend more in good years and less in bad years.
I am pretty sure MMM and family live a "luxurious lifestyle" on 25k.
Who is this 'Mysterious Money Mustache' you speak of? As far as I can tell, he doesn't even post blog posts anymore (and they certainly aren't anything like the earlier blog posts). The latest thing I found from him was a comment about recreational marijuana (http://www.mrmoneymustache.com/2016/01/13/an-interview-with-the-lawyer-who-retired-at-33/#comment-1285044)
Mr. Money Mustache January 16, 2016, 12:13 pm
Sorry Greg, I guess we’ll have to agree to disagree here. My thoughts are that Marijuana is by far the healthiest of the recreational drugs and is way, way better for you than a beer or a soda at the end of the day. On top of that, it’s far cheaper per serving than even boxed wine and has spectacular benefits for creative people and social bonding.
It is also not reserved for dropouts and low-achievers: you’ll find it circulating at most parties of wealthy business gurus in their 30s and 40s (in the Western half of the country, at least!)
Do you have much personal experience with the plant?
It is partially legal in 23 states and fully legal for recreational use in 4 states so far. Although it is readily available in every state, any prohibition of it is completely batshit crazy in my opinion, to the extent that I wouldn’t live in a place where it is considered criminal, or work at a company where its use was discouraged.
More on my article coming on 4/20 called “The economics of recreational marijuana” ;-)
My takeaway from all of the blog lately is that he would not be returning to work in this lifetime. So we forever have the '4% or more works' camp (until proven wrong, since none of us have lived the next 30 years yet), and the OMG 4% could never work and here's my evidence (historically low Treasuries, rising global economic discord, crashing oil price, inflation, deflation, robots... on and on).
If you are a nervous nelly that never wants to work again and can stomach the idea that you put in a few extra years for peace of mind (or because of altruism, or wanting to be 'sure' you could care for a dependent, or whatever) - then you'll feel great when markets go down and you're still 'stashing and don't have to worry about 4% yet.
If you hate your job, or at 3% or whatever substantially 'more safe' SWR, or are willing to cut expenses to the bone, or willing to work in the future... then you won't be convinced that 4% is impossible to FIRE on. But yes, to the OP, people have FIRE'd on 4% successfully in the past and many advise that they should've retired earlier or could have been more variable in their spending.
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My takeaway from all of the blog lately is that he would not be returning to work in this lifetime. So we forever have the '4% or more works' camp (until proven wrong, since none of us have lived the next 30 years yet), and the OMG 4% could never work and here's my evidence (historically low Treasuries, rising global economic discord, crashing oil price, inflation, deflation, robots... on and on).
If you are a nervous nelly that never wants to work again and can stomach the idea that you put in a few extra years for peace of mind (or because of altruism, or wanting to be 'sure' you could care for a dependent, or whatever) - then you'll feel great when markets go down and you're still 'stashing and don't have to worry about 4% yet.
If you hate your job, or at 3% or whatever substantially 'more safe' SWR, or are willing to cut expenses to the bone, or willing to work in the future... then you won't be convinced that 4% is impossible to FIRE on. But yes, to the OP, people have FIRE'd on 4% successfully in the past and many advise that they should've retired earlier or could have been more variable in their spending.
http://www.retireearlyhomepage.com/
That guy has been living on 4% for the last 20 years. Actually, his stash has grown so large over that 20 years he's pulling out less than 2% now! Gotta give the guy credit for pulling the trigger at 38 in 1994, well before the internet was the bastion of early retirement info that it is today. I was unaware of an examples of people who pulled the trigger on 4% so long ago before seeing that linked in another thread yesterday.
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http://www.retireearlyhomepage.com/
That guy has been living on 4% for the last 20 years. Actually, his stash has grown so large over that 20 years he's pulling out less than 2% now! Gotta give the guy credit for pulling the trigger at 38 in 1994, well before the internet was the bastion of early retirement info that it is today. I was unaware of an examples of people who pulled the trigger on 4% so long ago before seeing that linked in another thread yesterday.
I saw Dude's earlier post (and I don't disagree with anyone that says that (for most intents and purposes) 4% has not failed in the past). So far so good for this guy too, he retired at a really good time (no bear market for 6 years, and a strong bull that more than doubled his 4% stash). We also have recent history which *may* indicate that the equity markets which everyone rely so heavily on for the heavy lifting required in ER might not repeat what this guy experienced, so I'm not sure why it's so relevant. Treasuries are low, the Fed's rate increase most likely contributed to the early 2016 dip, and overall it is harder than ever to find a good risk free asset coupled with volatility (as measured by VIX) is up (which is OK to good for accumulators but bad for the draw-down).
Obviously I can't predict the next 30 years, but people should be willing to consider both sides of how they feel about arguments for and against 4% SWR and I certainly think it is flawed that folks believe they can quit early then go back to work in a decade or two.
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But you don't have to completely quit, draw all the way down, and then "go back."
It's not a black/white on/off binary thing.
"Work full time job" or "earn no money at all."
There's such a thing as a happy medium when you have some flexibility. :)
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But you don't have to completely quit, draw all the way down, and then "go back."
It's not a black/white on/off binary thing.
"Work full time job" or "earn no money at all."
There's such a thing as a happy medium when you have some flexibility. :)
I think about the scenarios where you have a part-time income too. Arbitrarily for easy math, let's say you need $40k/year and so you need $1M for FIRE.
If you can work a job/hobby and make say $15/hour and work about 2 days a week, so 2x8x50 = $12k/year income, you just dropped your required assets by $12k*25 = $300,000. For most families it's even better since you become eligible for lots of tax hacks if you have some earned income vs purely conversions (EITC and savers credit are two good complete hacks options).
This isn't for everyone and won't be. Some careers will allow higher than $15/hour part-time earnings and make this even more viable. Some don't. Some will want to go 100% working to 0% working. Maybe this is a backup plan you build into your planning for feeling more secure ("if on January 1st, $40k is more than 6% of remaining portfolio, find part time job to generate $10k/income") to help alleviate worries or maybe you end up bored.
But the point is there are many options for someone who is FIRE and worried about [whatever your personal fears are].
Personally? I like the idea of switching to contract types of work and taking several months off each year once we're closer to FI.
The ? that gets me somewhat confused is people always say save 25% of your needs so 25x80k = 2 million saved for being fire'd BUT thats not true on a 4% withdrawal is it if you need to figure in taxes on your withdrawal. You need more like 2.5 million saved to net 80k. so your really saving 31x's. this is at least where i got confused.
You need to save 25x your expenses.
Your expenses include taxes, insurance, etc.
Any money you have to pay is an expense.
Save 25x that number.
Had it all but the taxes figured...guess that was a pretty obvious oops! But thanks!
Keep in mind that given current tax code, your first $20k as a married couple you pay no federal income taxes (12.6k + 4050x2 = $20.7k tax free just for a couple). Each kid adds quite a bit too (4k exemption + $1k credit). Given that it's a credit, not deduction, you really get $4k + 10k (as married, your first 18.55k is at 10% so your first two kids are mostly 10% federal taxes) or another $14k.
So with 1 kid you can have about $35k in "income" which isn't taxable. Add a second kid and you are pretty close to $50k in income you can have before you pay any federal taxes, assuming you have no other deductions/credits/etc.
It's... encouraging for Roth conversions :-)
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But you don't have to completely quit, draw all the way down, and then "go back."
It's not a black/white on/off binary thing.
"Work full time job" or "earn no money at all."
There's such a thing as a happy medium when you have some flexibility. :)
Absolutely! Once FIRE'd, I would take a part-time job for a number of years over a full-time job for a shorter period. There's just too much that's lost in the grind of full-time work that affects overall happiness for me, and I suspect many others. No I will not be able to go back to work as a Software Engineer after being out of the industry for 15 years but I don't have to because my expenses are 30-40k. I can work part-time some where and that would cover at least 25% of my yearly spend if not more. That's part of the leap of faith to me, knowing that it will inevitably be okay (and it will be) even though my analytical brain wants to whole path mapped out RIGHT NOW. That's not including Social Security of any of the other safety nets I have available to me. But that's just my scenario. YMMV on safety nets, etc.
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^+1... I think that is the number one thing people just cant get there head around. They don't have to go broke before they go back to work. Keep an eye on things and if your not feeling good at the time go get a job to shore things up. Most cases if they follow the principles they mostly never will need to and also why so many over save for retirement.
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^+1... I think that is the number one thing people just cant get there head around. They don't have to go broke before they go back to work. Keep an eye on things and if your not feeling good at the time go get a job to shore things up. Most cases if they follow the principles they mostly never will need to and also why so many over save for retirement.
One huge benefit from being able to read/learn all about early retirement for those of us in our twenties is that we really have access to a lot of information. Learning from others, understanding things that worked, tactics, etc.
Over the next decade of my life, it'll be easy for me to continue to learn and understand more about the whole concept of FIRE. Considerably easier than most folks here who are at the end of that journey (whether by luck or deliberate intent).
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It's interesting though, I have yet to hear anyone admit that they 'felt bad and had to go back to work'. Plenty of, I'm making money on the side or I plan to grow my hobby business, but little admission of failure.
There are also very few people that were around for that last worst 30 year period, and none of them seem to be commenting. I distinctly recall in 2008 and early 2009 that the ER.org forum was full of 60-something y.o. retirees wondering if they would be OK or eating catfood, complaining about big banks, corrupt government or business pension promises, etc. I'm sure we'll get there again (unless the Fed really can just keep expanding its balance sheet, buy up any asset without consequence like domestic inflation or dollar weakness...).
I think people have short memories and little incentive to search the internet and process what 2008 was like, and an even more odd way of dismissing a big decision like giving up a job today with the idea they may have to work harder for less at a similar job in the future, when they probably are less likely to 'want' to work.
Alas, I don't have any good solutions, but I do like to get a little bit of the contrarian ideas out so that people aren't 'shocked' by the fact 2009-2015 comes to an end with a bang or a long whimper eventually. I even think that bloggers and folks making a living on the internet are struggling to keep income stable, much less growing, but that's anecdotal (and to be expected in a business model with a low moat and constant demand to keep up in tech).
Just my 2 cents. You can of course ER on 4% and go back to work after a 50% drop in net worth too, that's fine by me. Personally, my preference is to hang on to a job I enjoy maybe until 2% SWR, maybe even lower since my kids are still young and I don't like to think about things like ACA, figuring out how to pay for college, worrying about how the market is doing (still in accumulation, I really don't care if it is up or down right now, just how it looks when I'm pulling the trigger). Call me a coward, I can handle it :)
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For those interested in failures, I found the following thread (and the linked post in particular) quite relevant:
http://forum.mrmoneymustache.com/welcome-to-the-forum/any-early-retirement-fails-out-there/msg212768/#msg212768
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Can we estimate the expected social security benefit for an early retiree? My wife and I have both worked enough years to qualify, but not enough to get the full amount (I think).
https://www.ssa.gov/retire/estimator.html
Go here, click on "Estimate your retirement benefits" and fill out the information. It will take you to an estimate showing what you'd receive if you keep working until age 62+. On that page, click "Add a New Estimate" and you can input your estimated retirement age. This will then show you your benefit at age 62 when you stopped working at whatever age you input. Unfortunately it doesn't show any other ages, but of course the longer you wait, the more you'll get.
Many thanks!
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I think people have short memories and little incentive to search the internet and process what 2008 was like, and an even more odd way of dismissing a big decision like giving up a job today with the idea they may have to work harder for less at a similar job in the future, when they probably are less likely to 'want' to work.
Just my 2 cents. You can of course ER on 4% and go back to work after a 50% drop in net worth too, that's fine by me. Personally, my preference is to hang on to a job I enjoy maybe until 2% SWR, maybe even lower since my kids are still young and I don't like to think about things like ACA, figuring out how to pay for college, worrying about how the market is doing (still in accumulation, I really don't care if it is up or down right now, just how it looks when I'm pulling the trigger). Call me a coward, I can handle it :)
I think you're doing it right.
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It's interesting though, I have yet to hear anyone admit that they 'felt bad and had to go back to work'. Plenty of, I'm making money on the side or I plan to grow my hobby business, but little admission of failure.
There are also very few people that were around for that last worst 30 year period, and none of them seem to be commenting. I distinctly recall in 2008 and early 2009 that the ER.org forum was full of 60-something y.o. retirees wondering if they would be OK or eating catfood, complaining about big banks, corrupt government or business pension promises, etc. I'm sure we'll get there again (unless the Fed really can just keep expanding its balance sheet, buy up any asset without consequence like domestic inflation or dollar weakness...).
I think people have short memories and little incentive to search the internet and process what 2008 was like, and an even more odd way of dismissing a big decision like giving up a job today with the idea they may have to work harder for less at a similar job in the future, when they probably are less likely to 'want' to work.
Alas, I don't have any good solutions, but I do like to get a little bit of the contrarian ideas out so that people aren't 'shocked' by the fact 2009-2015 comes to an end with a bang or a long whimper eventually. I even think that bloggers and folks making a living on the internet are struggling to keep income stable, much less growing, but that's anecdotal (and to be expected in a business model with a low moat and constant demand to keep up in tech).
Just my 2 cents. You can of course ER on 4% and go back to work after a 50% drop in net worth too, that's fine by me. Personally, my preference is to hang on to a job I enjoy maybe until 2% SWR, maybe even lower since my kids are still young and I don't like to think about things like ACA, figuring out how to pay for college, worrying about how the market is doing (still in accumulation, I really don't care if it is up or down right now, just how it looks when I'm pulling the trigger). Call me a coward, I can handle it :)
I don't think there is any "cowardly" when it comes to this stuff. It's all an exercise in risk tolerance based on the individual. I'm okay with playing the "4% SWR and safety nets" game. If I hung around for a 2% SWR, I can almost guarantee that my death-bed self would want to kick the living piss out of my current self for wasting those years, because I die a little inside every day I have to go back to my office. Your plan doesn't have to be anyone else's plan but your own. This forum just helped me realize my confidence in my own plan, and I've never been more excited about my future.
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...
If I hung around for a 2% SWR, I can almost guarantee that my death-bed self would want to kick the living piss out of my current self for wasting those years, because I die a little inside every day I have to go back to my office.
...
To be quite honest, I was exactly where you describe in my first 'adult' career also, and it sucked pretty horribly for 14 years. I was around the MMM 4% SWR when I quit, but I had also been close to laid off so I was very gun shy about looking a gift horse in the mouth (this will be the 'idiom overdose post', just beware foreign language speakers). I do believe it is Mustachian to milk a crap job while being frugal in order to take control of one's own destiny. In MMM's own case, he started a housing company and a blog, and the blog seems to have turned out pretty well for him. In my case, I leveraged the freedom to work for a company that opened with moving my family overseas. And on into the future, it allowed me to live interesting places in the world on the company dime doing things that I'd do for much less pay (but they are an international company and, guess what, there are parts of the world that still treat their employees like respectable professionals!). So maybe I quit now that I don't want that so much, but I also waffle because it is a pretty amazing lifestyle.
Sadly, I also see MMM's blog has lost it's zest (maybe my earlier post quoting MMM's comments on marijuana seemed inflammatory or irrelevant, but I was thinking about this at the time...) which is to say - you get to a comfortable point in life and the decisions are down to - I have it all, and I really just want to do my own thing.
I can continue an easy thing in my own way, so I'll let it drag on a little longer, maybe OMY, or maybe I let it go and claim victory over this OMY syndrome. Once you are convinced you are FI, OMY is simply an academic choice, but then is ER necessarily a victory?
I think that Pete works because it is simply better than not working. Billionaires work, not because they 'need the income'. So maybe a clearer message is to get close to 4%, or at 4% SWR, and then take that freedom to start replacing income in a more preferable way. I got lucky, MMM got pretty lucky (I doubt he expected things would turn out just so), and it is certainly possible to increase your chances and opportunity by leveraging Mustachianism to open up new avenues for success.
But addressing the initial quote - flopping almost dead over the finish line when you hit 4% SWR shouldn't be your only plan at all, IMHO. It is just as 'crazy' as never making a dime again and spending 4% come what may because it seems pretty darn safe historically. Even if you do well for a decade or two, there should always be that thinking that work is something to be celebrated and you will do more of it. Historically (maybe influenced by Puritans or those that lived in the Great Depression), it was driven by being exposed to a failure after 20 or 30 years of ER. I'm not in that camp (although 2008 was pretty impressive to see the reality that the modern banking and market system was just a bigger and more modern version of 'It's a Wonderful Life' (https://www.youtube.com/watch?v=iPkJH6BT7dM)).
Edit to add: But I don't think it will be getting easier in the future to squeeze a crap job with frugality and end up with FI-level freedom. My tact has been to leverage my current FI to make more future freedom (for my extended family, future 'causes') while it is still easy. Make hay while the sun is shining, a bird in the hand is worth two in the bush, etc. (other idioms I had intended to squeeze in). But again, all just my opinion.
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I think I saw to many posts discussing 4% and wether you can make it on that.
But there was no discussion about 4% of what?
I think It is tough on 4% of $700k, much easier on $1.4M.
Also if you only have 10 years until Social Security, and will receive $20,000 that can
be like adding another $500k to you nestegg at 4%.
4% of 700k is 28k, so that would only be tough if your annual spending is higher than that. If you spend 20k per year or 25k per year or 28k per year, then 700k is obviously plenty. The math is simple - you grow your portfolio to 25x of your annual expenses, and then mathematically you take 4% of your nest egg each yaer to spend.
Most people don't just take 4% though, they use variable withdrawal strategies, where they spend more in good years and less in bad years.
I am pretty sure MMM and family live a "luxurious lifestyle" on 25k.
The federal poverty level for a family of three is $20,090.
So, as long as you think $4,910 over the federal poverty level is a Luxurious Lifestyle...
I don't, but living just above the poverty is done by millions, so clearly it can be done.
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I think I saw to many posts discussing 4% and wether you can make it on that.
But there was no discussion about 4% of what?
I think It is tough on 4% of $700k, much easier on $1.4M.
Also if you only have 10 years until Social Security, and will receive $20,000 that can
be like adding another $500k to you nestegg at 4%.
4% of 700k is 28k, so that would only be tough if your annual spending is higher than that. If you spend 20k per year or 25k per year or 28k per year, then 700k is obviously plenty. The math is simple - you grow your portfolio to 25x of your annual expenses, and then mathematically you take 4% of your nest egg each yaer to spend.
Most people don't just take 4% though, they use variable withdrawal strategies, where they spend more in good years and less in bad years.
I am pretty sure MMM and family live a "luxurious lifestyle" on 25k.
The federal poverty level for a family of three is $20,090.
So, as long as you think $4,910 over the federal poverty level is a Luxurious Lifestyle...
I don't, but living just above the poverty is done by millions, so clearly it can be done.
Having a paid for home reduces the "yearly expenses" a fair bit.
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I think I saw to many posts discussing 4% and wether you can make it on that.
But there was no discussion about 4% of what?
I think It is tough on 4% of $700k, much easier on $1.4M.
Also if you only have 10 years until Social Security, and will receive $20,000 that can
be like adding another $500k to you nestegg at 4%.
4% of 700k is 28k, so that would only be tough if your annual spending is higher than that. If you spend 20k per year or 25k per year or 28k per year, then 700k is obviously plenty. The math is simple - you grow your portfolio to 25x of your annual expenses, and then mathematically you take 4% of your nest egg each yaer to spend.
Most people don't just take 4% though, they use variable withdrawal strategies, where they spend more in good years and less in bad years.
I am pretty sure MMM and family live a "luxurious lifestyle" on 25k.
The federal poverty level for a family of three is $20,090.
So, as long as you think $4,910 over the federal poverty level is a Luxurious Lifestyle...
I don't, but living just above the poverty is done by millions, so clearly it can be done.
..and this is exactly why I bring up the imputed rent problem (in multiple threads). His paid off house is giving him about 15k in additional "spending" via saved rent/mortgage payments.
Meaning his spending level is more like 40k, or 2x the poverty level, and yes, at that level you can get quite luxurious by optimizing that spending.
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There other important point to me is the labor value provided by people who are FIREd. Living on poverty line income while working 80 hours a week to get there is very different than living on the poverty line and having the time to cook all your meals from scratch, do your own work around the house, etc. The justifications of where the poverty line is have essentially no bearing on people who are retired intentionally on that amount.
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Some comments:
We had a couple of folks on the thread who did FIRE on 4% and more who intend to soon.
I expected more concrete examples. I think that few do actually retire on 4% and nothing else. There’s the expected pension from a former employer or military, spouse still working, expected occasional part time gigs, and the ever popular “go back to work for a couple of years” if the market tanks (which it will at some point).
Social security is an important consideration, even for an early retiree. I wasn’t even considering it. A good learning for me.
My own conclusion from this thread and others is that it is reasonable to target 25x expenses (don’t forget taxes) as your Financial Independence goal. Reach 25x with some margin of safety and most folks can give up the day job, with caveats, eyes open to risks, etc.
It is not reasonable to then take out an inflation-adjusted 4% each year with no regard to investment performance and spending levels.
And my own story?
We are comfortably FI but our expenses are growing faster than inflation – three growing kids and two ageing parents. Medical insurance plus out of pocket medical costs come a close second behind groceries as our biggest expense. It’s a concern.
We are due for some social security payments down the road (thanks again for the estimator link, Eric) and my wife will get a small pension. She’s been a SAHM for 8 years.
I’m currently averaging about 20hours/week in my consulting business, down from an average of over 50 for the last 15 years. I’m not looking for work, but it keeps coming anyway. I raised my billing rate in an effort to weed out the less desirable work!
I intend to keep working some. We get the benefits of business ownership and some income. But I’m slowing it down. Definitely intend to do less business travel and to take off the school vacations.
I guess I’m FI-semi-RE.
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I don't think too many people at the MMM forums have actually FIRE'd yet so probably hard to get real data on the number of them who did it using only the 4% rule. Most people who FIRE'd early (including myself), even if they could do it just on their stash, seem to have something else to fall back on if needed - a working spouse, a side gig, pension, SS at some point - but that doesn't mean they wouldn't be able to retire just using 4% SWR though.
Considering the forum is only a handful of years old, even if users have FIRE'D, there hasn't been a long enough time horizon to know if they had to go back to work or not.
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I don't think too many people at the MMM forums have actually FIRE'd yet so probably hard to get real data on the number of them who did it using only the 4% rule. Most people who FIRE'd early (including myself), even if they could do it just on their stash, seem to have something else to fall back on if needed - a working spouse, a side gig, pension, SS at some point - but that doesn't mean they wouldn't be able to retire just using 4% SWR though.
Considering the forum is only a handful of years old, even if users have FIRE'D, there hasn't been a long enough time horizon to know if they had to go back to work or not.
I don't think that's all that relevant, unless the question was "how many of you FIRE'd on 4% between when you first opened your MMM forum account and now?"
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so he's living a 40k lifestyle, or so, and it's quite luxurious, yes.
My back of the envelope estimation is that 40k a year puts a family better off than ~99.7% of human beings that have ever existed. I'd call that luxurious. Peer group comparison and hedonic adaptation are such a funny thing though -- I don't know how else I can rationalize people breaking out the word "suffering" to describe what would happen to their children if they're denied something only .3% of humans have ever had.
Amen.
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This might be a better question for folks at the EArly Retirement.org where many are in their 50's-60's. YOu would have many more retired people. When I read there it does seem like many people have more then one type of income.
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I expected more concrete examples. I think that few do actually retire on 4% and nothing else. There’s the expected pension from a former employer or military, spouse still working, expected occasional part time gigs, and the ever popular “go back to work for a couple of years” if the market tanks (which it will at some point).
The standard market tanking is covered by the 4% rule. As to whether someone would go back to work, I guess that would be based on whatever their comfort level is. I think you're going to have a hard time finding examples of people who FIRE on 4% but have never managed to earn any other type of benefit (SS, pension, etc.) that will kick in at some point in their life. I don't even know how that would be possible, unless you earned so much money out of the gate that you retired before you earned enough credits for SS. I also suspect many people would end up earning some kind of money in some capacity out of sheer circumstance. I'm planning to FIRE at 32. In order for me to never earn another dollar until I die I'd probably have to go hide in the mountains. I think the "strict 4%" approach throws too many people off the raft.
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I think you're going to have a hard time finding examples of people who FIRE on 4% but have never managed to earn any other type of benefit (SS, pension, etc.) that will kick in at some point in their life. I don't even know how that would be possible, unless you earned so much money out of the gate that you retired before you earned enough credits for SS. I also suspect many people would end up earning some kind of money in some capacity out of sheer circumstance. I'm planning to FIRE at 32. In order for me to never earn another dollar until I die I'd probably have to go hide in the mountains. I think the "strict 4%" approach throws too many people off the raft.
Wife and I are in the position that if/when we FIRE we wouldn't have earned enough credits for SS; this mostly has to do with us spending time outside the country and me spending time in grad school. What that has made me realize is since I'd probably do something to earn money anyways, and I'd want to earn those SS credits, I feel more comfortable about 4%, or FIREing even earlier if we want.. since we figure we'd probably do some kind of money earning gig to get those SS credits (and then later have the SS income).
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To answer the question for OP:
We fired on 5.3% withdrawal rate. Reason: we have two kids in college. Once they graduate, spending associated with them will go to zero. If they want more $, well, tough shit. They'll have to grow their mustaches.
Once they've graduated, we'll be living on 4% - of the assets I project we'll have after spending $ on college. If assets really tank over the next 10 years, we could cut out travel and tighten food spending to get down to 3.5%, or maybe lower. I'm more armchair mustachian than ERE mustachian. But I could be ERE level if I really had to.
In ten-ish years, DH qualifies to receive SS, in twenty, I qualify for SS. We've both worked enough that we're past the second knee in the SS benefits curve, so I expect my monthly check to be $1400 in today's dollars. Not too shabby. By that time our house will be paid off and so expenses will be even lower. So, I'm assuming that if our spending cuts into our savings too much, then SS could pick up the difference when the time comes.
Worst case scenario - I go back to work for a few years. I may want to do that anyway as my discipline around doing my own thing degrades rapidly when I sit down to the computer only to find myself digging out of rabbit holes 5 hours later. Case in point: me right now at this very moment.
I must admit, I'm amazed that our stash supports us so well. Even if the market crashes spectacularly this year, I think we'll be okay, as we've got 33 months worth of cash. I know I know it's a drag on returns. However, I do not want to be in the position of selling low to pay for the utility bill. I am working on lowering the cash on hand to 24 months. But I'm not in a hurry. We've got enough in the market as it is.
Does that answer your question?
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I expected more concrete examples. I think that few do actually retire on 4% and nothing else. There’s the expected pension from a former employer or military, spouse still working, expected occasional part time gigs, and the ever popular “go back to work for a couple of years” if the market tanks (which it will at some point).
The standard market tanking is covered by the 4% rule. As to whether someone would go back to work, I guess that would be based on whatever their comfort level is. I think you're going to have a hard time finding examples of people who FIRE on 4% but have never managed to earn any other type of benefit (SS, pension, etc.) that will kick in at some point in their life. I don't even know how that would be possible, unless you earned so much money out of the gate that you retired before you earned enough credits for SS. I also suspect many people would end up earning some kind of money in some capacity out of sheer circumstance. I'm planning to FIRE at 32. In order for me to never earn another dollar until I die I'd probably have to go hide in the mountains. I think the "strict 4%" approach throws too many people off the raft.
I added an edit to the OP to clarify:
EDIT: I don't mean retire and never earn another dollar for the rest of your lives. I mean rather has anyone retired early intending to withdraw 4% of their portfolio annually, and has no other *regular* source of income or financial or medical benefit? Expecting SS down the road is not counted since most of us will be getting some SS.
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I must admit, I'm amazed that our stash supports us so well. Even if the market crashes spectacularly this year, I think we'll be okay, as we've got 33 months worth of cash. I know I know it's a drag on returns. However, I do not want to be in the position of selling low to pay for the utility bill. I am working on lowering the cash on hand to 24 months. But I'm not in a hurry. We've got enough in the market as it is.
Does that answer your question?
Yes, thanks.
The cash isn't a drag on returns when there are no returns ;-)
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I don't think there is any "cowardly" when it comes to this stuff. It's all an exercise in risk tolerance based on the individual. I'm okay with playing the "4% SWR and safety nets" game. If I hung around for a 2% SWR, I can almost guarantee that my death-bed self would want to kick the living piss out of my current self for wasting those years, because I die a little inside every day I have to go back to my office. Your plan doesn't have to be anyone else's plan but your own. This forum just helped me realize my confidence in my own plan, and I've never been more excited about my future.
+1 to the bold text ^^^. I am keenly aware that every extra day I work in the prime of my life is a huge opportunity cost vs. doing what I really love and working a little bit part-time down the road.
The opportunity cost of a 2% SWR is so incredibly high for me it makes no rationale sense to shoot for that.
I am also not concerned about working a little down the road. The risk of that vs. the certainty of working full-time a decade + to hit a lower SWR is a no brainer for me.
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I've taken the position of 'over compensate' ... meaning, if you look at the hugely rich, and you over simplify the problem; then extrapolate for yourself - it looks something like this;
during our down markets, warren buffet made 18million in dividens just from coke... do you think his lifestyle was impacted when the market dips 40 or even 60%?
This is what I keep in mind, I know the number that will give me the 25-33x my annual expenses... to me, that's my baseline, my zero... I'm free to do what I want.. but doubling that number could help me sustain my annual costs even in a down market without worry and in an up market the investments would grow even though I am withdrawing.. there are many strategies to mitigate... another that people talk about is, they still work part time after they hit their number, so they aren't drawing down their balance... neat idea, you can do anything you find fun and get paid for it, doesn't matter even if it is minimum wage, it's money that isn't coming out of your investments.
So, Yes - I can see a 3-4% withdraw work, but if you're worried, it's all about the safety margins and use the numbers as guidelines, not absolutes ... Just build in a buffer, a
http://www.mrmoneymustache.com/2011/10/17/its-all-about-the-safety-margin/
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There other important point to me is the labor value provided by people who are FIREd. Living on poverty line income while working 80 hours a week to get there is very different than living on the poverty line and having the time to cook all your meals from scratch, do your own work around the house, etc. The justifications of where the poverty line is have essentially no bearing on people who are retired intentionally on that amount.
Agreed. Also big difference when you have a large stash and EF to back up a low passive income in FIRE and no debt compared to someone living on a low income with nothing saved. If you set yourself up before FIRE and have very low" needs" expenses, $25k a year can be Damn luxurious. I live on less than that as a single kidless person and want for nothing.
This! I just stared FIRE at 43 - my first year. I withdrew $36k for 2016 to live on (2.8% WR or so). Yet, the "poorer" I get, the more my expense go down (ACA, Taxes, etc.). Now I keep thinking....what the hell am I going do with $36k!?! - living on $26k is cake. So now I'm thinking....do I step up my lifestyle (travel for instance) and spend the $36k (again, only 2.8% WR or so) or just live comfortably on the $26?? Since this is all new to me, and the CAPE ratio appears "frothy", I think I'll hedge my bet and target a $30k spend rate...which would be about 2.5%.
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The problem with this question is that you are going to get recency bias. The trinity study was only published in 1998. There hasn't been a 30-year period after 1998 so NO ONE can yet tell you if the 4% rule works with "in sample" data.
I'm personally considering a 5% withdrawal rate these days. But I'm willing to go back to work.
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The problem with this question is that you are going to get recency bias. The trinity study was only published in 1998. There hasn't been a 30-year period after 1998 so NO ONE can yet tell you if the 4% rule works with "in sample" data.
I'm personally considering a 5% withdrawal rate these days. But I'm willing to go back to work.
I wasn't asking if the 4% rule works.
I was questioning if people believed in it enough to have actually done it. Answer: lot's of people believe in the 4% rule but hardly anyone has actually done it. Most early retirees here have other incomes, such as a pension, a spouse working or real estate in addition to investments, or retired on a lower withdrawal rate. I think we had two people saying they retired on 4% or more.
This is not data, it's anecdotal, but interesting nonetheless.
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I don't know anyone that retired just on their own $ without another source of income.
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The problem with this question is that you are going to get recency bias. The trinity study was only published in 1998. There hasn't been a 30-year period after 1998 so NO ONE can yet tell you if the 4% rule works with "in sample" data.
I'm personally considering a 5% withdrawal rate these days. But I'm willing to go back to work.
I wasn't asking if the 4% rule works.
I was questioning if people believed in it enough to have actually done it. Answer: lot's of people believe in the 4% rule but hardly anyone has actually done it. Most early retirees here have other incomes, such as a pension, a spouse working or real estate in addition to investments, or retired on a lower withdrawal rate. I think we had two people saying they retired on 4% or more.
This is not data, it's anecdotal, but interesting nonetheless.
Well you did ask how it's working.
But I don't think having pensions or other passive income means you aren't using the 4% rule.
For example, someone who has pension cover 50% of expenses, and relies on drawing down 12.5 times brokerage investments, that's still totally in line with the idea of the 4% rule.
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The problem with this question is that you are going to get recency bias. The trinity study was only published in 1998. There hasn't been a 30-year period after 1998 so NO ONE can yet tell you if the 4% rule works with "in sample" data.
I'm personally considering a 5% withdrawal rate these days. But I'm willing to go back to work.
I wasn't asking if the 4% rule works.
I was questioning if people believed in it enough to have actually done it. Answer: lot's of people believe in the 4% rule but hardly anyone has actually done it. Most early retirees here have other incomes, such as a pension, a spouse working or real estate in addition to investments, or retired on a lower withdrawal rate. I think we had two people saying they retired on 4% or more.
This is not data, it's anecdotal, but interesting nonetheless.
I'm not surprised at all, given how specific the question is. I would consider it the equivalent of asking how many people like 8 oz. peach yogurt cups. If they like 6 oz. or 10 oz. they don't count, and if they like another flavor they don't count either. Plus tastes can change, just like someone who is retired can decide they want to pick up a fun summer job just to do something different. People's lives are messy and constantly changing and so I think trying to catch the "4% invested only" subset of retirees, from an already small subset of early retirees, is tough. I don't think it means no one is actually retiring on 4%, just not many on the very specific flavor you're looking for.
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The problem with this question is that you are going to get recency bias. The trinity study was only published in 1998. There hasn't been a 30-year period after 1998 so NO ONE can yet tell you if the 4% rule works with "in sample" data.
I'm personally considering a 5% withdrawal rate these days. But I'm willing to go back to work.
I wasn't asking if the 4% rule works.
I was questioning if people believed in it enough to have actually done it. Answer: lot's of people believe in the 4% rule but hardly anyone has actually done it. Most early retirees here have other incomes, such as a pension, a spouse working or real estate in addition to investments, or retired on a lower withdrawal rate. I think we had two people saying they retired on 4% or more.
This is not data, it's anecdotal, but interesting nonetheless.
I'm not surprised at all, given how specific the question is. I would consider it the equivalent of asking how many people like 8 oz. peach yogurt cups. If they like 6 oz. or 10 oz. they don't count, and if they like another flavor they don't count either. Plus tastes can change, just like someone who is retired can decide they want to pick up a fun summer job just to do something different. People's lives are messy and constantly changing and so I think trying to catch the "4% invested only" subset of retirees, from an already small subset of early retirees, is tough. I don't think it means no one is actually retiring on 4%, just not many on the very specific flavor you're looking for.
Research shows that you should eat 5 servings of fruits and vegetables a day! Who here eats exactly 5? 4 bananas and a pension doesn't count
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I'm not surprised at all, given how specific the question is. I would consider it the equivalent of asking how many people like 8 oz. peach yogurt cups. If they like 6 oz. or 10 oz. they don't count, and if they like another flavor they don't count either. Plus tastes can change, just like someone who is retired can decide they want to pick up a fun summer job just to do something different. People's lives are messy and constantly changing and so I think trying to catch the "4% invested only" subset of retirees, from an already small subset of early retirees, is tough. I don't think it means no one is actually retiring on 4%, just not many on the very specific flavor you're looking for.
OK. How about this:
Has anyone retired early using an initial withdrawal rate of 4% or more?
Did you have any other income at retirement, such as a company or military pension, or a spouse still working?
How's it working out for you?
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I'm not surprised at all, given how specific the question is. I would consider it the equivalent of asking how many people like 8 oz. peach yogurt cups. If they like 6 oz. or 10 oz. they don't count, and if they like another flavor they don't count either. Plus tastes can change, just like someone who is retired can decide they want to pick up a fun summer job just to do something different. People's lives are messy and constantly changing and so I think trying to catch the "4% invested only" subset of retirees, from an already small subset of early retirees, is tough. I don't think it means no one is actually retiring on 4%, just not many on the very specific flavor you're looking for.
OK. How about this:
Has anyone retired early using an initial withdrawal rate of 4% or more?
Did you have any other income at retirement, such as a company or military pension, or a spouse still working?
How's it working out for you?
Definitely think you'll see more hits with that. Some folks with a pension or SS may not see it for 20 years so really it hasn't played a roll yet in their day to day living beyond being a part of what made them comfortable in retiring on their "4%."
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I'm not surprised at all, given how specific the question is. I would consider it the equivalent of asking how many people like 8 oz. peach yogurt cups. If they like 6 oz. or 10 oz. they don't count, and if they like another flavor they don't count either. Plus tastes can change, just like someone who is retired can decide they want to pick up a fun summer job just to do something different. People's lives are messy and constantly changing and so I think trying to catch the "4% invested only" subset of retirees, from an already small subset of early retirees, is tough. I don't think it means no one is actually retiring on 4%, just not many on the very specific flavor you're looking for.
OK. How about this:
Has anyone retired early using an initial withdrawal rate of 4% or more?
Did you have any other income at retirement, such as a company or military pension, or a spouse still working?
How's it working out for you?
Definitely think you'll see more hits with that. Some folks with a pension or SS may not see it for 20 years so really it hasn't played a roll yet in their day to day living beyond being a part of what made them comfortable in retiring on their "4%."
Don't forget that if someone is in their mid 40s and retire, they have only about 20 years before they can supplement their retirement with social security (or small pensions).
While that might not "fix" a failed early retirement it means you can end that 20 year period of time with considerably lower or no assets than otherwise, depending on what your expected income from them is combined. For many of us, social security will be more than enough income to cover retirement expenses in that worst case scenario.
cFIREsim gives a 79% success rate with a 6% withdrawal rate and 100% equities over a 20 year period. That means that in 4/5 historical cases, you could have covered that bridge period withdrawing 6% of your portfolio every year. Most success periods result in huge amounts of money at the end, too.
Most of the 20% failure scenarios are also pretty obvious that a problem is happening, either ending in the Great Depression or starting around 1970. With a bit of common sense it seems like you could pretty easily identify when you are in those situations and adjust your income (or spend) appropriately.
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Most of the 20% failure scenarios are also pretty obvious that a problem is happening, either ending in the Great Depression or starting around 1970. With a bit of common sense it seems like you could pretty easily identify when you are in those situations and adjust your income (or spend) appropriately.
Agreed. The most obvious one would be a substantial loss right after retirement without a quick recovery or a prolonged period of little to no gains right after retirement. MadFIentist has an excellent post (http://"http://www.madfientist.com/safe-withdrawal-rate/") about the correlation between returns early in retirement and portfolio failure. I intend to FIRE later this year, regardless of what the market is doing. That simply means I'll need to give some attention to returns over the next 5-10 years and if they under perform substantially then I'll probably want to entertain part time work for a few years to ensure my stash goes the distance. I suppose some might call that an RE failure, but the possibility of a few years of part-time work a decade from now beats the pants off of another year of my career.
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I suppose some might call that an RE failure, but the possibility of a few years of part-time work a decade from now beats the pants off of another year of my career.
I'd only be willing to call returning to some easy PT work a FIRE failure if we also call working extra years at the prime of a person's life to get a ludicrously low WR a FIRE failure.
From an opportunity cost perspective retiring early and maybe having to do some PT work during a bad spell in the economy is not worse than 100% chance of working extra years FT saving up for a 2% or 3% WR.
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I suppose some might call that an RE failure, but the possibility of a few years of part-time work a decade from now beats the pants off of another year of my career.
I'd only be willing to call returning to some easy PT work a FIRE failure if we also call working extra years at the prime of a person's life to get a ludicrously low WR a FIRE failure.
From an opportunity cost perspective retiring early and maybe having to do some PT work during a bad spell in the economy is not worse than 100% chance of working extra years FT saving up for a 2% or 3% WR.
I would agree, but I know some folks seem to be more strict in their definitions of things. I suppose it only really matters to the person executing his/her game plan. In my case I'm happy to work a little later, if it means avoiding another year in my career. And that's assuming I don't eventually get into something I like, and get paid as a side effect.
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I would agree, but I know some folks seem to be more strict in their definitions of things. I suppose it only really matters to the person executing his/her game plan. In my case I'm happy to work a little later, if it means avoiding another year in my career. And that's assuming I don't eventually get into something I like, and get paid as a side effect.
Ultimately the only reason defining failure matters is that how a community defines failure steers the collective ship in a specific direction. So if "we" say it's not a failure to squander the most precious recourse known to man....time....especially time during the prime of one's life...then we'll see more people adding belts, suspenders, extra rope, boxes of duct tape, super glue to the already pretty darn safe 4% WR.
If we on the other hand call working too much and saving too much a "failure" then folks who are learning about FIRE methodology will at least have on their radar that there is a real cost to that approach.
This is especially true if in practice few FIRErs actually retire and never earn additional dollars over the course of a 40-50yr retirement. Then they can conceivably "fail" both ways!
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The problem with this question is that you are going to get recency bias. The trinity study was only published in 1998. There hasn't been a 30-year period after 1998 so NO ONE can yet tell you if the 4% rule works with "in sample" data.
I'm personally considering a 5% withdrawal rate these days. But I'm willing to go back to work.
I wasn't asking if the 4% rule works.
I was questioning if people believed in it enough to have actually done it. Answer: lot's of people believe in the 4% rule but hardly anyone has actually done it. Most early retirees here have other incomes, such as a pension, a spouse working or real estate in addition to investments, or retired on a lower withdrawal rate. I think we had two people saying they retired on 4% or more.
This is not data, it's anecdotal, but interesting nonetheless.
Pretty sure Retired Syd did precisely this. http://retiredsyd.typepad.com/ She's got posts from the past about following the 4% SWR, and she retired in early 2008, right before the crash.
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So, the modified query is:
Has anyone retired early using an initial withdrawal rate of 4% or more?
Did you have any other income at retirement, such as a company or military pension, or a spouse still working?
Let's hear about it. How's it working out for you?
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So, the modified query is:
Has anyone retired early using an initial withdrawal rate of 4% or more?
I believe a man known as Mister Money Mustache did this. He has a website about it.
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Pretty sure Retired Syd did precisely this. http://retiredsyd.typepad.com/ She's got posts from the past about following the 4% SWR, and she retired in early 2008, right before the crash.
Thanks for the link to the blog, interesting stuff. But it looks more to me like she went with a 3% SWR (http://retiredsyd.typepad.com/retirement_a_fulltime_job/2008/11/retiring-in-a-down-market-its-not-as-bad-as-i-thought.html) which also had plenty of discretionary spending room to cut...
Alas, although I retired with 33 times the budget for our remodeled lifestyle, the market has since reduced that nest egg to 28 times the retirement budget. So what do we do now? The same thing I did when I decided to retire, the same thing Jacob writes about: reduce the expense budget.
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I believe a man known as Mister Money Mustache did this. He has a website about it.
Did he FIRE on 4%? I haven't read every blog post yet. I seem to remember his wife continued to work and they got medical benefits for the family through her work.
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I've taken the position of 'over compensate' ... meaning, if you look at the hugely rich, and you over simplify the problem; then extrapolate for yourself - it looks something like this;
....
So, Yes - I can see a 3-4% withdraw work, but if you're worried, it's all about the safety margins and use the numbers as guidelines, not absolutes ... Just build in a buffer, a
http://www.mrmoneymustache.com/2011/10/17/its-all-about-the-safety-margin/
Yes. I just got around to reading that blog post. Very good, and it's how I am.
Build in those safety margins. The stock and bond markets will not bail you out.
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So, the modified query is:
Has anyone retired early using an initial withdrawal rate of 4% or more?
I believe a man known as Mister Money Mustache did this. He has a website about it.
I saw his article on accountants though and he appears to be earning well over $100k from this forum. The dude is going to be a multimillionaire.
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So, the modified query is:
Has anyone retired early using an initial withdrawal rate of 4% or more?
I believe a man known as Mister Money Mustache did this. He has a website about it.
I saw his article on accountants though and he appears to be earning well over $100k from this forum. The dude is going to be a multimillionaire.
Dude already is!
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So, the modified query is:
Has anyone retired early using an initial withdrawal rate of 4% or more?
I believe a man known as Mister Money Mustache did this. He has a website about it.
I saw his article on accountants though and he appears to be earning well over $100k from this forum. The dude is going to be a multimillionaire.
Dude already is!
Maybe I should state its going to be getting up to the 10's of millions assuming he keeps spending low.
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But I don't think having pensions or other passive income means you aren't using the 4% rule.
For example, someone who has pension cover 50% of expenses, and relies on drawing down 12.5 times brokerage investments, that's still totally in line with the idea of the 4% rule.
It is, but a pension is all but guaranteed. The markets are not. Having half of retirement income from a pension is a huge advantage.
We recently discovered that my wife will be getting a much bigger pension than we thought: projected to be $48k/year at age 67. Sweet.
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Someone suggested I post this question over at early-retirement.org. I did, and as predicted there were more hits - 7 people so far retired on 4% or more, 3 on less. However, also as predicted, it's an older crowd. Mid to late 50's mainly.
So, interesting, no real conclusions to be drawn.
Messing around with FireCalc using our numbers, cutting SS by 25%, and a 50 year retirement, I get one failure at 4%, zero failures at 3.9%. Our base expenses are easily covered at 3%.
Now I just have to convince DW...
Thanks for all your help, Mustachians.
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It is, but a pension is all but guaranteed. The markets are not. Having half of retirement income from a pension is a huge advantage.
I would be careful there. Personally, I consider a pension to be more risky than the market. Pensions are invested in the market and they are also at the mercy of a company's management of them. If markets fall off a cliff and never come back a pension is no safer than a 401k. And given the way companies have mismanaged pensions over the years, I'd be hesitant to think of them as "all but guaranteed." Sure there are some companies out there that have done right by their employees but ask all the airline pilots how they're liking their pensions these days and you'll get plenty of ugly answers.
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It is, but a pension is all but guaranteed. The markets are not. Having half of retirement income from a pension is a huge advantage.
I would be careful there.
Good point. I had military pensions in mind (thinking of Nords) and my wife's, which is with a great privately owned company. Others won't be so rock solid.
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Good point. I had military pensions in mind (thinking of Nords) and my wife's, which is with a great privately owned company. Others won't be so rock solid.
Even great privately owned companies can suffer from hard times, potential mismanagement (especially with the pension investments, even if not the company itself), lawsuits, etc.
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Even great privately owned companies can suffer from hard times, potential mismanagement (especially with the pension investments, even if not the company itself), lawsuits, etc.
This is true. It's currently well funded. In 20 years who knows?
We're back to that safety margin again.
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Even great privately owned companies can suffer from hard times, potential mismanagement (especially with the pension investments, even if not the company itself), lawsuits, etc.
This is true. It's currently well funded. In 20 years who knows?
We're back to that safety margin again.
I can't remember exactly, and I probably shouldn't say anything without looking it up (no time right now), but when I studied pensions in school I believe there is some of a federal guarantee/insurance behind them. They can't just go away altogether. It's part of ERISA. The case I remember studying was Polaroid. You might want to do some reading/investigating on this and your pension before you discount it altogether and build too much of a safety margin.
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Pension Benefit Guaranty Corporation (PBGC) guarantees private company pension benefits if a private company fails. However, they take over when the plan terminates. So whatever you had you had and you get nothing else. Important to note that they are already paying 826,000 people and there are not a lot of pension plans paying in premiums anymore. Also, this is for private companies. I'll bet the workers in Detroit felt pretty safe about their pensions for a long time before the Chapter 9. Some of them took a 30% hit and healthcare disappeared.
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You might want to do some reading/investigating on this and your pension before you discount it altogether and build too much of a safety margin.
Thanks, but too late for that :-)
We didn't build this pension or Social Security into our plan (OK, alright, we never had a plan). We've just been saving because that's what we do. Make hay while the sun shines, and all that. This pension is another layer of icing.
Now I have to convince DW that more than enough is, indeed, more than enough. So far I've shown her:
1. Firecalc - no failures over 30, 40, 50 years
2. Fidelity retirement report - "On Track"
3. Quicken retirement planner - "Your plan is working!"
She has now at least admitted that "maybe you could work part time...". Progress!
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So, the modified query is:
Has anyone retired early using an initial withdrawal rate of 4% or more?
I believe a man known as Mister Money Mustache did this. He has a website about it.
I saw his article on accountants though and he appears to be earning well over $100k from this forum. The dude is going to be a multimillionaire.
Dude already is!
This development has my wife convinced that MMM is a fraud (she's a founding member of the RP, Retirement Police, without the Internet-part). She considers only two possibilities:
1. MMM set out as a fraud, starting a blog to create a bunch of money and that he never would have been able to retire forever without it.
2. MMM did not set out as a fraud, but the fact that he makes so much money from the blog undermines the whole notion that you can retire early on just savings (pointing out others who have done it without million-dollar blogs does not convince her).
So goes the irony of being one of the first well-known and successful early retirees, I guess.
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So, the modified query is:
Has anyone retired early using an initial withdrawal rate of 4% or more?
I believe a man known as Mister Money Mustache did this. He has a website about it.
I saw his article on accountants though and he appears to be earning well over $100k from this forum. The dude is going to be a multimillionaire.
Dude already is!
This development has my wife convinced that MMM is a fraud (she's a founding member of the RP, Retirement Police, without the Internet-part). She considers only two possibilities:
1. MMM set out as a fraud, starting a blog to create a bunch of money and that he never would have been able to retire forever without it.
2. MMM did not set out as a fraud, but the fact that he makes so much money from the blog undermines the whole notion that you can retire early on just savings (pointing out others who have done it without million-dollar blogs does not convince her).
So goes the irony of being one of the first well-known and successful early retirees, I guess.
Even on the off chance he's a fraud, he's so entertaining and informative it's worth the "price" of admission. And not everyone on this forum can be a fraud- others have done what he claims without the corresponding internet millions
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I wouldn't call him a fraud. And I certainly don't think he's trying to be fraudulent. But I don't think his example really proves that you can FIRE for 50-60 years on 4% wdr of $24k (or whatever it is I don't remember the exact number) per year and provide for a family. Including a child. Sure that was his intention. But the truth is he has a pretty good income from several side hustles. So, when his comes home and needs orthodontics or tuition or soccer money or their health insurance premiums sky rocket or they start to suffer from frugal fatigue or WHATEVER would come around and blow the budget he has his side hustle to protect them. Which also helps with the portfolio longevity.
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Thanks, but too late for that :-)
We didn't build this pension or Social Security into our plan (OK, alright, we never had a plan). We've just been saving because that's what we do. Make hay while the sun shines, and all that. This pension is another layer of icing.
Now I have to convince DW that more than enough is, indeed, more than enough. So far I've shown her:
1. Firecalc - no failures over 30, 40, 50 years
2. Fidelity retirement report - "On Track"
3. Quicken retirement planner - "Your plan is working!"
She has now at least admitted that "maybe you could work part time...". Progress!
If your wife's pension is 48k and you have social security to boot, that's got to be upwards of 100k right there. Unless you spend a phenomenal amount of money, I'd guess you're going to be leaving someone an insane amount of money when you die. If you have businesses to sell/leave to the kids, and savings on top of all that, man alive.....I'd be popping smoke yesterday! Eject! Eject!
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I would say 4% WR is the base line. In my case, it would be nearly impossible for either myself or my wife to NOT earn some sort of additional income throughout our lives after FIRE. If anyone retires on a straight 4% WR, invested in at least 60% stock indexes - they have a very high chance of becoming ridiculously more wealthy just through investment growth alone. Inject some occasional fun income to bring the average WR down, and you have a higher chance of becoming radically more wealthy than you do running out.
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I've ER'd with a 3% WR at 42 a little over a year ago after a layoff. That being said, I'm lookin for work again as ER isn't living up to the dream for me. Finances aren't the issue (3% WR on a 1.25M portfolio), but I feel more comfortable ER'ing in my late 40's or 50. However, I'm acting as if I'm ER'd permanently in case a new gig doesn't come along.
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If your wife's pension is 48k and you have social security to boot, that's got to be upwards of 100k right there. Unless you spend a phenomenal amount of money, I'd guess you're going to be leaving someone an insane amount of money when you die. If you have businesses to sell/leave to the kids, and savings on top of all that, man alive.....I'd be popping smoke yesterday! Eject! Eject!
:-)
SS and the pension is 20 years in the future.
My business is consulting and dies when I stop working. My brother's company I mentioned up thread is a traditional business with plant and equipment and employees and a large customer base. His kids could take over that business. The brother will have to run it till they are able, though, which is at least 15 years in the future. He'll probably need to anyway - him and SiL are big spenders. That's not for me. I'm about done...
We're good, just getting used to the idea of FIRE.
Been watching Breaking Bad season 1 on Netflix this week as I work out. Walt and I are almost the same age (he looks older). I don't want to be like Walt!
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Been watching Breaking Bad season 1 on Netflix this week as I work out. Walt and I are almost the same age (he looks older). I don't want to be like Walt!
I don't blame you. Look at all the hassle having a ton of money to deal with is! Poor Walt! That's why 4% SWR + 8 different back up options is more than enough. You don't want to spend your FIRE counting all that money! ;)
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This guy has been living on the 4% rule for 20 years (actually, because of the growth in his account, he's down to living on 1%):
http://www.retireearlyhomepage.com/20year.html
Also, he just published a short little piece on Wade Pfau's recent proclamation regarding current retirees' need to withdraw only 1.7%.
http://www.retireearlyhomepage.com/wadepfau_2016.html
Thank you so much for posting... Great article and update
Best part to me>
Losing a full 1.00% (or more) to an investment adviser is nothing short of financial rape.
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This guy has been living on the 4% rule for 20 years (actually, because of the growth in his account, he's down to living on 1%):
http://www.retireearlyhomepage.com/20year.html
Also, he just published a short little piece on Wade Pfau's recent proclamation regarding current retirees' need to withdraw only 1.7%.
http://www.retireearlyhomepage.com/wadepfau_2016.html
Thank you so much for posting... Great article and update
Best part to me>
Losing a full 1.00% (or more) to an investment adviser is nothing short of financial rape.
"This guy"?!?
Sigh. Nobody appreciates history.
John Greaney is one of the earliest of the ERs, who created RetireEarlyHomePage in the 1990s after The Motley Fool started charging monthly fees for their Early Retirement forums. Among other accomplishments, John's spreadsheet on predicting a safe withdrawal rate led another guy (the founder of Early-Retirement.org) to create FIRECalc.
I know six others who ER'd earlier than John: the Kaderlis, the Terhorsts, a poster named "Jarhead" on E-R.org, and another poster named HaHa. All have more than 20 years of ER (Terhorsts are over 30), and all have more than enough money to live their lives. A seventh is Dory, the founder of E-R.org, but I'm not sure whether John ER'd first. Jarhead hasn't posted for years and I fear that he may have passed on. HaHa must be in his 70s by now. I think the rest are (at least) in their 60s. But all of them (except for possibly the Kaderlis) must be getting pretty tired of writing about the 4% SWR.
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. Unlike many other ERs, I'm still interested in writing about it. Or perhaps the reality is that I can't stop writing.
Which brings up a good point, and I'm going to re-post/edit the text that I put up on E-R.org in the similar thread.
Stop trying to drive the 4% SWR success rate to 100%. Mathematically, it's a waste of time. The 4% SWR works for the vast majority of cases, and the cure for edge-case failures is longevity insurance. But the 4% SWR also has a lot of accidental margin built into it, and that can be exploited by every ER.
Let's rehash the assumptions that the Trinity trio made to simplify their computer simulations:
- 1% expense ratio on investments (mentioned above)
- No Social Security
- No flexible spending
- Conservative asset allocation
So if you go by the 4% SWR, right away you're assuming that you throw away a percentage point every year. (You're giving a quarter of your withdrawals to the financial industry, but I digress.) In my case, with my expense ratio of about 24 basis points, I have an extra 0.76% percentage points of the 4% SWR on my side.
I don't know about a few of you pessimistic skeptics, but I expect Social Security to be available when I turn 70 years old in 15(!??!) years. That's about $12K/year for me and another $12K for my spouse. That's at least a quarter of our spending-- nearly half-- unless we're really blowing it out for travel. It'll certainly buy groceries and surf wax.
Which brings me to the next point: we don't rigidly spend 4% + CPI every year. I don't think anybody does, and we can all cut back during a recession. There's another margin to let a portfolio recover from a bear market.
Which brings me to my final point: you'll never get a 100% success ratio, and statistics indicates that anything over 80% is ludicrous. (See William Bernstein's Calculator From Hell III post, which published well over a decade ago: http://www.efficientfrontier.com/ef/901/hell3.htm) Instead of maximizing your success ratio, eliminate your failure rate by annuitizing a portion of your portfolio to provide a minimal standard of living. Maybe that annuity is SS, or maybe it's another type of deferred annuity, or maybe you buy a SPIA. (In my case it's a military pension.) But once you have that minimum longevity insurance covered, then you can invest in a much more aggressive asset allocation of around 80%/20% stocks/cash.
By the time I'm 70 I'll have lived through 29 of my 4% SWR's 30 years. I'll let you know how it goes while I reset the calendar for a second 30-year retirement. I'm guessing that second 30-year sequence will work out too... at least in terms of having my assets last longer than me.
Luckily, those who are not comfortable with the 4% SWR are the only ones who have to work longer to pad the nest egg until they can sleep comfortably at night. Behavioral finance is at least as important as the math.
There might be a blog post in this discussion, so please share your thoughts on those Trinity assumptions.
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Great post Nords!
I knew HaHa was old, I wouldn't have guessed THAT old. He's so young at heart.
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My business is consulting and dies when I stop working.
I've been there and it can be hard to let go of a business and clients that you've established over many years. In my case, I was forced to stop consulting in order to start a new business, but I don't regret it.
It would not have been possible for me to continue consulting on a part-time basis (due to the nature of my work), but maybe that might be an option for you to segue into FIRE?
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I'm with Bernstein on this one, and have lost interest in 4% threads in general. This one caught my eye, and I thought might be interesting to see what experiences might be shared.
Thanks Nords for the history.
I came across another longterm retiree - Gary Pierce who posts at http://www.frugal-retirement-living.com/ (http://www.frugal-retirement-living.com/) - he retired in 1994. He mentions the 4% rule, but the details of his finances are not posted. According to his website he needed to supplement his income with blog income after 2008. I'm not sure if he planned to retire on 4% or not.
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Sigh. Nobody appreciates history.
We do now. Thanks for educating us.
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. Unlike many other ERs, I'm still interested in writing about it. Or perhaps the reality is that I can't stop writing.
And we're glad that you will still write about it. There's a constant stream of folks just coming across the idea of FIRE. We all need educating.
A question: would you mind saying how much of your initial 4% WR was pension and how much was withdrawals from the portfolio?
Which brings up a good point, and I'm going to re-post/edit the text that I put up on E-R.org in the similar thread.
I'll do the same. You make good points about the Trinity study, except I think the Trinity study didn't include a 1% fee, but that's not important. We have better tools now (cFIREsim and FIREcalc). We can all play around with our numbers and get to feel good, or not.
Instead of maximizing your success ratio, eliminate your failure rate by annuitizing a portion of your portfolio to provide a minimal standard of living. Maybe that annuity is SS, or maybe it's another type of deferred annuity, or maybe you buy a SPIA. (In my case it's a military pension.) But once you have that minimum longevity insurance covered, then you can invest in a much more aggressive asset allocation of around 80%/20% stocks/cash.
We went over SS and pensions in this thread. Made me happy. I've always been stocks plus cash. I can take the volatility.
By the time I'm 70 I'll have lived through 29 of my 4% SWR's 30 years. I'll let you know how it goes while I reset the calendar for a second 30-year retirement. I'm guessing that second 30-year sequence will work out too... at least in terms of having my assets last longer than me.
Luckily, those who are not comfortable with the 4% SWR are the only ones who have to work longer to pad the nest egg until they can sleep comfortably at night. Behavioral finance is at least as important as the math.
Sure.
My plan is a variable withdrawal rate ranging from 2.5% (current base expenses) to 4% or more (charity, big vacations, big ticket items, sports cars, motorcycles, etc). The lower rate when in capital preservation mode in down markets. The higher rate when we're feeling flush. I'm also continuing to work part time, for this year at least. No extra savings required. Social security for me in 18 years, spouse in 21 years, $20K pension for spouse in 19 years. I assume a 25% cut to SS in my calcs, just to be safer.
That all said...I never intended this or the daughter thread on early-retirement.org to be about "proving" the 4% rule of thumb. Both threads have turned into that. My intent was to simply ask if many people had done it, my hypothesis being: lot's of people around here talk about it but not many have done it. It wasn't intended as a scientific study. Just personal interest.
As it turns out, I personally have learned a great deal from both threads and feel even better about FIREing immediately, and for that I thank you all.
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My business is consulting and dies when I stop working.
I've been there and it can be hard to let go of a business and clients that you've established over many years. In my case, I was forced to stop consulting in order to start a new business, but I don't regret it.
It would not have been possible for me to continue consulting on a part-time basis (due to the nature of my work), but maybe that might be an option for you to segue into FIRE?
Part-time is an option, though it will be more like full-time, nothing, full-time, nothing, etc. I was concerned about letting people down - my clients are also friends and/or people I like and respect and trust. As it happens, business seems to be dying off on it's own. A natural death as clients move to other positions or retire themselves. New guys taking their place bring in their own teams. Previously I would market to the new guys and often win their business. I've stopped doing that.
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Part-time is an option, though it will be more like full-time, nothing, full-time, nothing, etc. I was concerned about letting people down - my clients are also friends and/or people I like and respect and trust. As it happens, business seems to be dying off on it's own. A natural death as clients move to other positions or retire themselves. New guys taking their place bring in their own teams. Previously I would market to the new guys and often win their business. I've stopped doing that.
That might make for a nice slow glide path. I certainly understand not wanting to let people down, especially if they've become dependent on you. Best wishes.
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This guy has been living on the 4% rule for 20 years (actually, because of the growth in his account, he's down to living on 1%):
http://www.retireearlyhomepage.com/20year.html
Also, he just published a short little piece on Wade Pfau's recent proclamation regarding current retirees' need to withdraw only 1.7%.
http://www.retireearlyhomepage.com/wadepfau_2016.html
Thank you so much for posting... Great article and update
Best part to me>
Losing a full 1.00% (or more) to an investment adviser is nothing short of financial rape.
"This guy"?!?
Sigh. Nobody appreciates history.
John Greaney is one of the earliest of the ERs, who created RetireEarlyHomePage in the 1990s after The Motley Fool started charging monthly fees for their Early Retirement forums. Among other accomplishments, John's spreadsheet on predicting a safe withdrawal rate led another guy (the founder of Early-Retirement.org) to create FIRECalc.
I know six others who ER'd earlier than John: the Kaderlis, the Terhorsts, a poster named "Jarhead" on E-R.org, and another poster named HaHa. All have more than 20 years of ER (Terhorsts are over 30), and all have more than enough money to live their lives. A seventh is Dory, the founder of E-R.org, but I'm not sure whether John ER'd first. Jarhead hasn't posted for years and I fear that he may have passed on. HaHa must be in his 70s by now. I think the rest are (at least) in their 60s. But all of them (except for possibly the Kaderlis) must be getting pretty tired of writing about the 4% SWR.
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. Unlike many other ERs, I'm still interested in writing about it. Or perhaps the reality is that I can't stop writing.
Which brings up a good point, and I'm going to re-post/edit the text that I put up on E-R.org in the similar thread.
Stop trying to drive the 4% SWR success rate to 100%. Mathematically, it's a waste of time. The 4% SWR works for the vast majority of cases, and the cure for edge-case failures is longevity insurance. But the 4% SWR also has a lot of accidental margin built into it, and that can be exploited by every ER.
Let's rehash the assumptions that the Trinity trio made to simplify their computer simulations:
- 1% expense ratio on investments (mentioned above)
- No Social Security
- No flexible spending
- Conservative asset allocation
So if you go by the 4% SWR, right away you're assuming that you throw away a percentage point every year. (You're giving a quarter of your withdrawals to the financial industry, but I digress.) In my case, with my expense ratio of about 24 basis points, I have an extra 0.76% percentage points of the 4% SWR on my side.
I don't know about a few of you pessimistic skeptics, but I expect Social Security to be available when I turn 70 years old in 15(!??!) years. That's about $12K/year for me and another $12K for my spouse. That's at least a quarter of our spending-- nearly half-- unless we're really blowing it out for travel. It'll certainly buy groceries and surf wax.
Which brings me to the next point: we don't rigidly spend 4% + CPI every year. I don't think anybody does, and we can all cut back during a recession. There's another margin to let a portfolio recover from a bear market.
Which brings me to my final point: you'll never get a 100% success ratio, and statistics indicates that anything over 80% is ludicrous. (See William Bernstein's Calculator From Hell III post, which published well over a decade ago: http://www.efficientfrontier.com/ef/901/hell3.htm) Instead of maximizing your success ratio, eliminate your failure rate by annuitizing a portion of your portfolio to provide a minimal standard of living. Maybe that annuity is SS, or maybe it's another type of deferred annuity, or maybe you buy a SPIA. (In my case it's a military pension.) But once you have that minimum longevity insurance covered, then you can invest in a much more aggressive asset allocation of around 80%/20% stocks/cash.
By the time I'm 70 I'll have lived through 29 of my 4% SWR's 30 years. I'll let you know how it goes while I reset the calendar for a second 30-year retirement. I'm guessing that second 30-year sequence will work out too... at least in terms of having my assets last longer than me.
Luckily, those who are not comfortable with the 4% SWR are the only ones who have to work longer to pad the nest egg until they can sleep comfortably at night. Behavioral finance is at least as important as the math.
There might be a blog post in this discussion, so please share your thoughts on those Trinity assumptions.
I'm gathering as much data as possible and enjoy reading about the 4% with flexible options. I've read on this site so many differing opinions of the 4% less 1% for fees etc. which is it... Is it more like 5% less 1% in fees leaving 4% safe withdrawal or 3%...
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Go read the original study, and subsequent research. It's worth it. :)
It is 4%, minus fees.
But play around with your own numbers, to your comfort level, at www.cfiresim.com :)
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Part-time is an option, though it will be more like full-time, nothing, full-time, nothing, etc. I was concerned about letting people down - my clients are also friends and/or people I like and respect and trust. As it happens, business seems to be dying off on it's own. A natural death as clients move to other positions or retire themselves. New guys taking their place bring in their own teams. Previously I would market to the new guys and often win their business. I've stopped doing that.
That might make for a nice slow glide path. I certainly understand not wanting to let people down, especially if they've become dependent on you. Best wishes.
I was just on a conference call with a client and recommended he use a different outfit for the bulk of the work. I'll get a few days of work out of it instead of a few weeks. A couple years ago I would have been fighting for the business. Glide path in action... :-)
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Go read the original study, and subsequent research. It's worth it. :)
It is 4%, minus fees.
But play around with your own numbers, to your comfort level, at www.cfiresim.com :)
I've been on all the models and prefer the old cfire... thanks for the reference, I'll be searching for the information.
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Which brings me to my final point: you'll never get a 100% success ratio, and statistics indicates that anything over 80% is ludicrous. (See William Bernstein's Calculator From Hell III post, which published well over a decade ago: http://www.efficientfrontier.com/ef/901/hell3.htm) Instead of maximizing your success ratio, eliminate your failure rate by annuitizing a portion of your portfolio to provide a minimal standard of living. Maybe that annuity is SS, or maybe it's another type of deferred annuity, or maybe you buy a SPIA. (In my case it's a military pension.) But once you have that minimum longevity insurance covered, then you can invest in a much more aggressive asset allocation of around 80%/20% stocks/cash.
I just got around to reading the linked article. Very good. His conclusions:
Mind you, this is not a call for wild abandon. The above table constrains the retiree desiring a theoretical 97% success rate (of portfolio survival) from spending more than 3% per year of the initial real amount of his nest egg. Taking the accident propensity of the species into account would allow him to spend about 4%. But if you believe that we’re about to encounter a bad returns sequence or simply wish to leave a few baubles to your heirs, you’re right back to 3% again.
So live a little, and enjoy your money, for tomorrow we may be consumed by the ghosts of Hitler, Lenin, and Attila the Hun. And at withdrawals of 3% to 4% of your nest egg, don’t spend it all in one place.
Many well respected people do "believe that we’re about to encounter a bad returns sequence":
http://www.marketwatch.com/story/john-bogle-says-you-wont-make-much-money-from-stocks-2015-11-05
Bogle...[said] that U.S. stocks over the next decade will return just 4% on average annually. (That's a 2% real return).
In this new forecast, Bogle joins the ranks of notable value investors and market observers Jeremy Grantham, Robert Arnott, and Robert Shiller , whose dim views of stock valuations and future returns are well-documented.
Bogle predicts that a balanced portfolio (roughly half in stocks and half in bonds) should return around 3.5% for the next decade. Adjusted for inflation or in “real” terms, Bogle thinks a balanced portfolio will return 1.5%, barely increasing purchasing power.
Here's my current thinking on this: Bogle is factoring in PE compression, so after 10 years stocks would be in a more normal value range, leading to more normal average returns.
For a portfolio to last 40 years at a 4% WR it has to generate a 2.5% real return. In my own case I want it to last 50 years, but it still works out to about a 2.5% real return due to SS and pension.
Bonds will be a drag on returns. A real 2.5% return should be doable over the next ten years with a portfolio of mainly equities, a mix of US and international and low expenses. After that is anyone's guess.
4% is still looking good.
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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.
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Nords, thanks for the helpful summary. Maybe I missed it, but any discussion of personal 4% SWR should mention he asset allocation-- were you doing 100% stocks or age in bonds or something else?
Totally agree with the expenses minus "guaranteed income" approach to SWR
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He did mention earlier in the thread his belief that:
once you have that minimum longevity insurance covered, then you can invest in a much more aggressive asset allocation of around 80%/20% stocks/cash.
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Nords, thanks for the helpful summary. Maybe I missed it, but any discussion of personal 4% SWR should mention he asset allocation-- were you doing 100% stocks or age in bonds or something else?
Totally agree with the expenses minus "guaranteed income" approach to SWR
He did mention earlier in the thread his belief that:
once you have that minimum longevity insurance covered, then you can invest in a much more aggressive asset allocation of around 80%/20% stocks/cash.
Yep. If I remember correctly, I think the 80/20 asset allocation is at the peak of Bernstein's efficient frontier and also the edge of the AA from the Bengen research & Trinity Study. Or at least going >80% brings more volatility without significantly more return.
Since I have a military pension, personally we keep our portfolio at >90% equities and about 8% cash (in a money market and a ladder of three-year CDs). That "two years' expenses in cash" started as a way to ride out a bear market (and to avoid the sequence-of-returns risk in the first 5-10 years of retirement). Lately, however, it's been creeping up and I think we can gradually cut back to 95% equities/5% cash. Some of the 95/5 ratio would also reflect that our portfolio has grown faster than we're spending it. Our dividend ETF distributions are also growing faster than inflation, so our rising dividends reduce the need for selling shares to fund portfolio withdrawals. The result is a dropping withdrawal rate.
We'd save up during a year or two in order to pay for a really large expense like a luxury cruise or a replacement beater car. Or maybe we'd just sell a few shares of whatever's had the most gains.
I've also recently concluded that we'll probably never sell another Berkshire Hathaway "B" share for the rest of my life...
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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.
I'm going to show this to DH. Lovely.
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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.
I'm going to show this to DH. Lovely.
I also appreciate that Nords detailed this out to better understand how he went about determining FI (50% of expenses covered by guaranteed pension with COLA (core expenses), ~50% expenses covered by equity investments for growth including 2 year liquid emergency fund, and a 20 year planning horizon). It's also interesting to see the common theme as to why most folks value ER so highly. I agree that the traditional American work arrangement is outdated, even if the pay is getting better for professionals. People should be entitled to a favorable work / life balance. In the absence of this, saving for FU money / FI and taking matters into our own hands makes perfect sense. Of course, it doesn't have to be this way, the Scandinavian and most European countries are much more supportive of giving their workers 'a life', and now with Uber, Air BnB, YouTube, blogger, etc., there are new options that don't involve costly startups and having to jump through tricky legal and tax hoops to earn income independently.
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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.
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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.
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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.
Depending on your age (and most of us are younger than traditional retirement age), annuitization leads to more OMY's than less. It's typically a deferred income source for old age, getting the benefit from outliving the actuarial mortality odds.
You can run your own numbers here (https://investor.vanguard.com/annuity/fixed), but for a 42 year old getting a 'pension' with COLA, sole annuitant and lifetime immediate annuity worth $42k/yr starting April 2016, I'd have to pay $1,589,000 today. With 4% SWR I only have to pay $1,050,000... not to mention the many other benefits to investing it outside the annuity, so no, I don't call that a real option for ER.
Also, I have to mention, the annuity provider could conceivably go bankrupt in the 50 or so years I'm receiving benefits, so it's not even that good for diversification.
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annuitization leads to more OMY's than less
Naturally. You're offloading the risk to someone else. Why wouldn't less risk cost more?
for a 42 year old getting a 'pension' with COLA, sole annuitant and lifetime immediate annuity worth $42k/yr starting April 2016, I'd have to pay $1,589,000 today. With 4% SWR I only have to pay $1,050,000...
Yup. But the benefit of having the "guaranteed" (or at least a lot safer, the company can go BK) stream of income may be worth it to some, especially people who oversaved before FIRE. For people who can't stomach the market, it's a valid option, and one a lot better than investing in fixed-rate items like CDs, IMO.
I don't recommend it, but it's a valid option, one plenty of people take.
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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. Arebelspy's response is exactly right, but let me expand on the whole envelope of available responses.
This thread isn't about the military (or about any particular occupation) or about defined benefits pensions. This is about asset allocation. Of course a $40K/year annuity makes it easier to rely on the 4% SWR. Of course it's a lower risk. That's why I have such a different risk tolerance than someone whose annual withdrawals come from their own investments, and everyone can do that. If there's something "unfair" about annuities instead of strictly using portfolio withdrawals, then make it fair. If you feel more comfortable with some annuitized income rather than "just" portfolio withdrawals then give up some of your control over your portfolio and go buy your own annuity.
The response I frequently get to that last paragraph is "Yeah, but annuity prices suck almost as badly as insurance companies". That is probably true in a low-interest environment, and if that's the case then I hope I never see the interest-rate environment which makes annuities a bargain. But again a complaint about a particular type of asset (annuities, stocks, real estate) is an indication that an investor's portfolio is either in the wrong assets or is insufficiently capitalized.
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.
Another asset-allocation option (not part of the Bengen or Trinity or Pfau studies) is the inflation-adjusted deferred annuity provided by Social Security. That may be all the annuity that most retirees need.
I occasionally hear "Yeah, I'd be able to retire too if I had a <insert high-risk career here> pension." Very few of those commenters have the context of any part of the marathon but the finish line. Even fewer consider the inherent "survivor bias", the potential personal disability, the military spouse's limited career options, or the military's 20-year cliff vesting. When those commenters are taken through the actions necessary to obtain one o' them there cushy pensions, it becomes more apparent why so few serve.
It takes a lot of tax dollars to bribe persuade people to stay in an all-volunteer force. Only 1% of Americans serve in the U.S. military, and only 0.17% actually cross the finish line of the military pension marathon. Perhaps the people who come out of the other side of that funnel are so familiar with risk that they're happy to annuitize part of their assets...
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I occasionally hear "Yeah, I'd be able to retire too if I had a <insert high-risk career here> pension." Very few of those commenters have the context of any part of the marathon but the finish line. Even fewer consider the inherent "survivor bias", the potential personal disability, the military spouse's limited career options, or the military's 20-year cliff vesting. When those commenters are taken through the actions necessary to obtain one o' them there cushy pensions, it becomes more apparent why so few serve.
It takes a lot of tax dollars to bribe persuade people to stay in an all-volunteer force. Only 1% of Americans serve in the U.S. military, and only 0.17% actually cross the finish line of the military pension marathon. Perhaps the people who come out of the other side of that funnel are so familiar with risk that they're happy to annuitize part of their assets...
Oh man, preach. Nothing like moving every two years to help a spouse build a solid moneymaking career! LOL.
As a married couple, that pension offsets the risk we took living that life for 22 years. To put it another way, our risk was frontloaded.
It's not really that hard, actually. Just sell some Tupperware to your friends
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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?
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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!
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Got it, that's what I thought, but wasn't sure. Thanks for the clarification. :)
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It's not really that hard, actually. Just sell some Tupperware to your friends
https://youtu.be/ja0jS_toKxk
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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...:)
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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.
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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.
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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.
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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.
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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.
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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.
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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?
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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.
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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?
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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.
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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.
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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.
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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.
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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.
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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...).
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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.)
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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...
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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" (http://forum.mrmoneymustache.com/investor-alley/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.
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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. :)
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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.
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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.
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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.
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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.
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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?
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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.
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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.
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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.
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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.
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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.
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"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!
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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 . . .
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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.
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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.
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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.
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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.
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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.
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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?
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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.
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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?
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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
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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.
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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.
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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 (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.
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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
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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
By my calculations, a Y2K retiree with $1mm in a total stock market fund and using a strict 4% SWR now has about $356k (inflation-adjusted). Definitely not looking so hot. It's following a similar trajectory to a 1973 retiree that technically didn't "fail" by the traditional definition but just barely made it. Scroll down to the "Retirement with a 4% WR" chart here (http://portfoliocharts.com/portfolio/total-stock-market/).
However, putting all of your money in the stock market isn't the only way to invest in retirement. A retiree with a 60-40 portfolio (http://portfoliocharts.com/portfolio/classic-60-40/) split between VTI and BND has $638k. A retiree with the Coffeehouse Portfolio (http://portfoliocharts.com/portfolio/coffeehouse-portfolio/) (also 60% stocks and 40% bonds but constructed differently) has $1.03mm. Someone with the Permanent Portfolio (http://portfoliocharts.com/portfolio/permanent-portfolio/) has $1.04mm. You get the idea.
Not all portfolios have done poorly since 2000, and understanding how safe withdrawal rates actually work (http://portfoliocharts.com/2015/11/17/how-safe-withdrawal-rates-work/) opens up lots of attractive possibilities. IMHO, dismissing passive investing in retirement just because one single investment option is struggling completely misses the point of how diversification and asset allocation works.
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IMHO, dismissing passive investing in retirement just because one single investment option is struggling completely misses the point of how diversification and asset allocation works.
Completely agree.
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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
By my calculations, a Y2K retiree with $1mm in a total stock market fund and using a strict 4% SWR now has about $356k (inflation-adjusted). Definitely not looking so hot. It's following a similar trajectory to a 1973 retiree that technically didn't "fail" by the traditional definition but just barely made it. Scroll down to the "Retirement with a 4% WR" chart here (http://portfoliocharts.com/portfolio/total-stock-market/).
However, putting all of your money in the stock market isn't the only way to invest in retirement. A retiree with a 60-40 portfolio (http://portfoliocharts.com/portfolio/classic-60-40/) split between VTI and BND has $638k. A retiree with the Coffeehouse Portfolio (http://portfoliocharts.com/portfolio/coffeehouse-portfolio/) (also 60% stocks and 40% bonds but constructed differently) has $1.03mm. Someone with the Permanent Portfolio (http://portfoliocharts.com/portfolio/permanent-portfolio/) has $1.04mm. You get the idea.
Not all portfolios have done poorly since 2000, and understanding how safe withdrawal rates actually work (http://portfoliocharts.com/2015/11/17/how-safe-withdrawal-rates-work/) opens up lots of attractive possibilities. IMHO, dismissing passive investing in retirement just because one single investment option is struggling completely misses the point of how diversification and asset allocation works.
Considering that neither VTI nor BND existing in 2000, (they were started in 2006 and 2007 respectively) I don't know how you can reach any conclusion about their value today. I assume you mean Vanguard Total Stock Market Fund and Vanguard Total Bond Market. But, honestly, I'm tad skeptical just seeing fancy charts, and not the underlying data.
When looking back it also important to look at what portfolio options were common and not just what investment options were possible. Vanguard Total Stock market was only started in 1992 and had the only fraction of the assets in 200 it has today. Neither Total Stock Market or Total Bond Market were popular options in 401K in 2000. At the Schwab didn't have total stock market fund until the mid-2000s and total bond market option until 4 or 5 years ago. Total Stock Market is still not an option for the government TSP fund.
The coffeehouse book was written in 1998, and I first heard about despite reading all the investment boards sometime in 2003. I can't imagine any prudent person retiring in 2000 sticking their retirement money in portfolio recommended by an obscure newspaper columnist in a book that had only been out for a year or so.
So for all intensive purpose when people talked about indexing in 2000, that meant A S&P 500 fund and some combination of bond and money market funds, CDs, and Treasuries.
Last I looked (circa 2010/2011) the permanent portfolio, did, in fact, hold up well. As did 50/50 portfolio of Vanguard Wellesley and Wellington, so these were a viable alternative, but far less popular in 2000.
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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
John Greaney also did the math for a Y2K retiree back in his 2014 "Real Life Retiree Investment Returns" update:
http://www.retireearlyhomepage.com/reallife15.html (scroll to the end).
The MPT portfolio was still above water, while the One Fund (VBINX) was underwater, but still had 91% of its original $100k balance. Interestingly, the worst performer was the 75% S&P 500/25% Bonds/Money Market fund, dubbed the "Retire Early Safe Withdrawal Study Portfolio."
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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
So for all intensive purpose when people . . .
intents and purposes -- sorry, pet peeve of mine!
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By my calculations, a Y2K retiree with $1mm in a total stock market fund and using a strict 4% SWR now has about $356k (inflation-adjusted). Definitely not looking so hot. It's following a similar trajectory to a 1973 retiree that technically didn't "fail" by the traditional definition but just barely made it. Scroll down to the "Retirement with a 4% WR" chart here (http://portfoliocharts.com/portfolio/total-stock-market/).
However, putting all of your money in the stock market isn't the only way to invest in retirement. A retiree with a 60-40 portfolio (http://portfoliocharts.com/portfolio/classic-60-40/) split between VTI and BND has $638k. A retiree with the Coffeehouse Portfolio (http://portfoliocharts.com/portfolio/coffeehouse-portfolio/) (also 60% stocks and 40% bonds but constructed differently) has $1.03mm. Someone with the Permanent Portfolio (http://portfoliocharts.com/portfolio/permanent-portfolio/) has $1.04mm. You get the idea.
Not all portfolios have done poorly since 2000, and understanding how safe withdrawal rates actually work (http://portfoliocharts.com/2015/11/17/how-safe-withdrawal-rates-work/) opens up lots of attractive possibilities. IMHO, dismissing passive investing in retirement just because one single investment option is struggling completely misses the point of how diversification and asset allocation works.
MadFIentist has an awesome article (http://"http://www.madfientist.com/safe-withdrawal-rate/") showing how the sequence of returns during the first decade of retirement are by far the biggest factor to the success of a portfolio going the distance. Considering the Y2K retiree hit two recessions in the span of that first decade I would say that qualifies as the definition of "bad timing." If the Y2K retiree retired knowing this info, as soon as the 2008 crash happened he should instantly know that he needs to find supplemental income for a period of time. Just my opinion. Given the historical data we have, I would create some extra income after a first decade in retirement like the 2000's even if my portfolio didn't look too bad (500-600k) because the statistics say that sequence has already thrown me into the highest risk category for portfolio failure and a little extra income will help move me back toward the median of historical outcomes.
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MadFIentist has an awesome article (http://"http://www.madfientist.com/safe-withdrawal-rate/") showing how the sequence of returns during the first decade of retirement are by far the biggest factor to the success of a portfolio going the distance.
The first decade of retirement is also [happily] the timeframe it's easiest to engage in some part-time work should a bad sequence of returns occur.
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Considering that neither VTI nor BND existing in 2000, (they were started in 2006 and 2007 respectively) I don't know how you can reach any conclusion about their value today. I assume you mean Vanguard Total Stock Market Fund and Vanguard Total Bond Market. But, honestly, I'm tad skeptical just seeing fancy charts, and not the underlying data.
Yeah, I sometimes use VTI and BND as shorthand for the total stock market and total bond market. You're correct that the ETF versions are recent inventions, but the fund versions (that have the exact same assets and performance) started in the late 80s / early 90's and other sources provide index data before then. The underlying data can be found here (https://www.bogleheads.org/wiki/Simba%27s_backtesting_spreadsheet).
When looking back it also important to look at what portfolio options were common and not just what investment options were possible. Vanguard Total Stock market was only started in 1992 and had the only fraction of the assets in 200 it has today. Neither Total Stock Market or Total Bond Market were popular options in 401K in 2000. At the Schwab didn't have total stock market fund until the mid-2000s and total bond market option until 4 or 5 years ago. Total Stock Market is still not an option for the government TSP fund.
Jack Bogle started the world's first S&P500 index fund in 1975. If we only limit ourselves to common investments easily available at the time, then no passive indexing strategy can be studied prior to that. I personally don't think such strict interpretation is necessary or even desirable, as there's much we can learn about market conditions from reconstructed indices prior to the invention of individual index funds that track the same markets. Without such data, for example, we wouldn't have the Trinity study and probably wouldn't be talking about the 4% rule right now. ;)
But don't get me wrong -- I'm not trying to push any one portfolio. Everyone needs to decide for themselves what they're comfortable with. I just wanted to point out that diversifying outside of a single stock market index fund can have a very positive effect on retirement performance.
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Paul Merriman recently had an interesting article on an alternative to the SWR, the fixed percentage withdrawal. Yes, this means in down years, you may be drawing a LOT less (and likely having to cover the gap by working, or not traveling, or making some other sacrifice), but it also allows far greater withdrawals (dollar-wise) in up years, and pretty much guarantees you will not run out of money. The charts for the various percentages are pretty amazing. He backtests to 1970, and boy are there some huge finishing balances.
http://www.marketwatch.com/story/the-ultimate-retirement-distribution-strategy-is-here-2016-03-09
Just something to consider.
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MadFIentist has an awesome article (http://"http://www.madfientist.com/safe-withdrawal-rate/") showing how the sequence of returns during the first decade of retirement are by far the biggest factor to the success of a portfolio going the distance. Considering the Y2K retiree hit two recessions in the span of that first decade I would say that qualifies as the definition of "bad timing." If the Y2K retiree retired knowing this info, as soon as the 2008 crash happened he should instantly know that he needs to find supplemental income for a period of time. Just my opinion. Given the historical data we have, I would create some extra income after a first decade in retirement like the 2000's even if my portfolio didn't look too bad (500-600k) because the statistics say that sequence has already thrown me into the highest risk category for portfolio failure and a little extra income will help move me back toward the median of historical outcomes.
Great point. While passive investing is an excellent idea, passive living is not. Spend a little less in the down times and perhaps earn a little more, and you'll be in much better shape than any retirement study indicates. Be smart about it.
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Paul Merriman recently had an interesting article on an alternative to the SWR, the fixed percentage withdrawal. Yes, this means in down years, you may be drawing a LOT less (and likely having to cover the gap by working, or not traveling, or making some other sacrifice), but it also allows far greater withdrawals (dollar-wise) in up years, and pretty much guarantees you will not run out of money. The charts for the various percentages are pretty amazing. He backtests to 1970, and boy are there some huge finishing balances.
http://www.marketwatch.com/story/the-ultimate-retirement-distribution-strategy-is-here-2016-03-09
Just something to consider.
Yes, I liked this article. It made a lot of sense. Especially in the first decade of retirement when your portfolio is the most vulnerable.
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Paul Merriman recently had an interesting article on an alternative to the SWR, the fixed percentage withdrawal. Yes, this means in down years, you may be drawing a LOT less (and likely having to cover the gap by working, or not traveling, or making some other sacrifice), but it also allows far greater withdrawals (dollar-wise) in up years, and pretty much guarantees you will not run out of money. The charts for the various percentages are pretty amazing. He backtests to 1970, and boy are there some huge finishing balances.
http://www.marketwatch.com/story/the-ultimate-retirement-distribution-strategy-is-here-2016-03-09
Just something to consider.
Yes, I liked this article. It made a lot of sense. Especially in the first decade of retirement when your portfolio is the most vulnerable.
Why, yes, a fixed-percentage withdrawal is an absolute guarantee that you'll never run out of money. You might not have enough to pay the bills, but when you get down to that last penny it'll be awfully difficult to withdraw a fixed percentage. Success!
Bob Clyatt of "Work Less, Live More" did the simulator math on his 4%/95% system. It's 4% fixed every year from the portfolio, but if that 4% portfolio withdrawal in a down year cuts your withdrawal amount excessively then you withdraw 95% of last year's withdrawal. The overall portfolio withdrawal for that year may be as much as 5%-6%, but the variability is what saves the Y2K retiree from his rigid 4% SWR.
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Why, yes, a fixed-percentage withdrawal is an absolute guarantee that you'll never run out of money. You might not have enough to pay the bills, but when you get down to that last penny it'll be awfully difficult to withdraw a fixed percentage. Success!
I lol'ed :)
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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
By my calculations, a Y2K retiree with $1mm in a total stock market fund and using a strict 4% SWR now has about $356k (inflation-adjusted). Definitely not looking so hot. It's following a similar trajectory to a 1973 retiree that technically didn't "fail" by the traditional definition but just barely made it. Scroll down to the "Retirement with a 4% WR" chart here (http://portfoliocharts.com/portfolio/total-stock-market/).
However, putting all of your money in the stock market isn't the only way to invest in retirement. A retiree with a 60-40 portfolio (http://portfoliocharts.com/portfolio/classic-60-40/) split between VTI and BND has $638k. A retiree with the Coffeehouse Portfolio (http://portfoliocharts.com/portfolio/coffeehouse-portfolio/) (also 60% stocks and 40% bonds but constructed differently) has $1.03mm. Someone with the Permanent Portfolio (http://portfoliocharts.com/portfolio/permanent-portfolio/) has $1.04mm. You get the idea.
Not all portfolios have done poorly since 2000, and understanding how safe withdrawal rates actually work (http://portfoliocharts.com/2015/11/17/how-safe-withdrawal-rates-work/) opens up lots of attractive possibilities. IMHO, dismissing passive investing in retirement just because one single investment option is struggling completely misses the point of how diversification and asset allocation works.
A lot of interesting sources in this thread. Your charts are amazing, Tyler!
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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?
No, but wouldn't it be a psychological buffer against stock volatility?
Why would you have debt (mortgage) and own debt (bonds), unless the after tax return on the bonds is likely to exceed the after tax cost of the mortgage? Liquidity?
Folks say they have bonds so they can rebalance into stocks during a bear market. But do they, really? Who sold bonds to buy stocks in 2009?
Having a mortgage as uncallable margin to invest in stocks makes some sense for some people. Perhaps it depends on the house value as a percentage of net worth?
In my own case house value is <10% of net worth. Paraphrasing Buffett, it doesn't seem prudent to risk what my family has and needs to try to get what they don't have and don't need.
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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.
Volatility doesn't concern me. Volatility does not equal risk. I believe Berkshire is safe; very low risk when bought at close to 1.2 times book, as it was recently. As safe as bonds, actually.
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Good article relevant to this topic from Scott Burns today (though perhaps more applicable to older retirees than the FIRE crowd?):
https://assetbuilder.com/knowledge-center/articles/live-long-spend-freely
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Good article relevant to this topic from Scott Burns today (though perhaps more applicable to older retirees than the FIRE crowd?):
https://assetbuilder.com/knowledge-center/articles/live-long-spend-freely
That's exactly the problem with working for a 100% success ratio-- it leaves even more money on the table than a 95% success ratio.
And, at the very least, some of Burns' extra cash could be spent on a bare-bones annuity.
Side note: I appreciate the irony of retirement advice from a guy who's stated publicly many times over the years that he never will...
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Nice to see an article addressing life expectancy. As someone who will be retiring older, its very pertinent.
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Does anyone have links to a site where I can determine the probability of living to a given age?
I have found sites where you plug in health, education and lifestyle data and they spit out a target life expectancy (91 in my case) but this does not help so much. What I am looking for is a site that will return something like "90% chance of living to 80, 75% chance of living to 85, 55% chance of living to 90", etc.
This data, combined with the portfolio probability of success data from FIREcalc or cFIREsim would give me the true probability of running out of money at XX age discussed in Scott Burns' article.
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Does anyone have links to a site where I can determine the probability of living to a given age?
I have found sites where you plug in health, education and lifestyle data and they spit out a target life expectancy (91 in my case) but this does not help so much. What I am looking for is a site that will return something like "90% chance of living to 80, 75% chance of living to 85, 55% chance of living to 90", etc.
This data, combined with the portfolio probability of success data from FIREcalc or cFIREsim would give me the true probability of running out of money at XX age discussed in Scott Burns' article.
That question gets back to the probability issues raised by William Bernstein in his "Retirement Calculator From Hell" posts. I'd take your query a step further and figure out how you're going to cover the longevity-insurance aspect of living to 110 years of age. For most U.S. citizens, maybe Social Security is good enough.
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Does anyone have links to a site where I can determine the probability of living to a given age?
I have found sites where you plug in health, education and lifestyle data and they spit out a target life expectancy (91 in my case) but this does not help so much. What I am looking for is a site that will return something like "90% chance of living to 80, 75% chance of living to 85, 55% chance of living to 90", etc.
This data, combined with the portfolio probability of success data from FIREcalc or cFIREsim would give me the true probability of running out of money at XX age discussed in Scott Burns' article.
Provided you live in the US... https://www.ssa.gov/oact/STATS/table4c6.html
Just look at how many of the 100,000 are still alive at the age you want to live to, and then divide by the number of people still alive for you age. Doesn't factor race, environment, work, or any thing else.
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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 (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.
Really interesting discussion on this thread. Thanks for all the great input guys! I am about 5 years out from FIRE, so I'm getting down to the details of my plan and this thread has been helpful.
I'm curious about the SS statement above. How does being out of the workforce for 30 years or so before you file for SS affect your SS checks?
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Does anyone have links to a site where I can determine the probability of living to a given age?
I have found sites where you plug in health, education and lifestyle data and they spit out a target life expectancy (91 in my case) but this does not help so much. What I am looking for is a site that will return something like "90% chance of living to 80, 75% chance of living to 85, 55% chance of living to 90", etc.
This data, combined with the portfolio probability of success data from FIREcalc or cFIREsim would give me the true probability of running out of money at XX age discussed in Scott Burns' article.
Provided you live in the US... https://www.ssa.gov/oact/STATS/table4c6.html
Just look at how many of the 100,000 are still alive at the age you want to live to, and then divide by the number of people still alive for you age. Doesn't factor race, environment, work, or any thing else.
Thanks Mr Green but this table has only limited usefulness. It starts from age 0 and estimates from there. What I am looking for is a table that starts from your current age. For example, if you are already 70 you have a much better chance of living to 90 than if you are a newborn. I have seen this type of analysis before i just cannot find it again.
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What I am looking for is a table that starts from your current age. For example, if you are already 70 you have a much better chance of living to 90 than if you are a newborn. I have seen this type of analysis before i just cannot find it again.
Vanguard has a tool that calculates the probabilities you're looking for (but the footnote indicates that the data is based on actuarial tables from 2000, so it might be somewhat stale at this point):
https://personal.vanguard.com/us/insights/retirement/plan-for-a-long-retirement-tool
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Does anyone have links to a site where I can determine the probability of living to a given age?
I have found sites where you plug in health, education and lifestyle data and they spit out a target life expectancy (91 in my case) but this does not help so much. What I am looking for is a site that will return something like "90% chance of living to 80, 75% chance of living to 85, 55% chance of living to 90", etc.
This data, combined with the portfolio probability of success data from FIREcalc or cFIREsim would give me the true probability of running out of money at XX age discussed in Scott Burns' article.
Provided you live in the US... https://www.ssa.gov/oact/STATS/table4c6.html
Just look at how many of the 100,000 are still alive at the age you want to live to, and then divide by the number of people still alive for you age. Doesn't factor race, environment, work, or any thing else.
Thanks Mr Green but this table has only limited usefulness. It starts from age 0 and estimates from there. What I am looking for is a table that starts from your current age. For example, if you are already 70 you have a much better chance of living to 90 than if you are a newborn. I have seen this type of analysis before i just cannot find it again.
Actually that chart gives you what you need. For instance, if you were a 70 year old male there are 73,548 of you left from the original 100,000 at birth. At 90, there will be only 17,429 of the original 100,000 left. 17,429 divided by 73,548 means you have a 23.69% chance of living to 90. Certainly lends itself to the notion of spending a little more and running the small risk that you die broke, when you only have a 1 in 4 chance of living another 20 years.
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Here's a calculator with some lifestyle inputs: https://www.myabaris.com/tools/life-expectancy-calculator-how-long-will-i-live/
I get a life expectancy (50/50 chance) of 97. Not even halfway done, and life has already been mind blowingly unpredictable! For me personally, I don't think Mr. Burns advice is very helpful. I just simply don't want to run out of money before I die, I would hate to 'beat the odds' only to be a financial burden on others.
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Here's a calculator with some lifestyle inputs: https://www.myabaris.com/tools/life-expectancy-calculator-how-long-will-i-live/
I get a life expectancy (50/50 chance) of 97. Not even halfway done, and life has already been mind blowingly unpredictable! For me personally, I don't think Mr. Burns advice is very helpful. I just simply don't want to run out of money before I die, I would hate to 'beat the odds' only to be a financial burden on others.
Interesting that the calculator doesn't ask any questions about family medical history. Is that not as strong of a predictor as people think?
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Here's a calculator with some lifestyle inputs: https://www.myabaris.com/tools/life-expectancy-calculator-how-long-will-i-live/
I get a life expectancy (50/50 chance) of 97. Not even halfway done, and life has already been mind blowingly unpredictable! For me personally, I don't think Mr. Burns advice is very helpful. I just simply don't want to run out of money before I die, I would hate to 'beat the odds' only to be a financial burden on others.
So you wouldn't increase your spending at all if you were 70, still had your entire nest egg, and statistically had only a 1 in 4 shot of dying at 90? I'm not saying blow the whole wad on strippers and yachts in Monaco but just upping the ante a little bit? It's also worth considering that beyond that 1 in 4 shot you have of seeing 90, you're odds are probably even less that you'll reach 90 with the same energy you have as at 70. Trips will become less frequent, and generally expenses will fall. There is a floor somewhere because medical expenses rise but there's even a cap on that with the Medicare supplement policies that cover all remaining costs not covered by medicare. I don't think Mr. Burns was advocating being reckless, but a straight 4% WR into your grave? Something in me kinda feels like I worked so hard to make that money, I can't imagine there aren't a couple special trips or something that I could take that would go beyond the standard 4% SWR without too much danger.
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I've seen a few relatives live to mid nineties and it seems that they spend very little money. They don't seem to travel, work on their house, buy clothing or even eat very much. In fact I kind of think life after 90 sucks. Worst case is that you need assisted living or full nursing care at that point. Hopefully that is being covered through long term care insurance you purchased a few decades before.
I did know a woman that had watched family and friends quality of life after 90 deteriorate and she decided it wasn't for her. She had a huge party for herself at a country club with all her friends and family. The next week she put on some music, took a bath with a bottle of booze and took a bunch of pills. It was sad, but there is a part of me that thinks she was smart.
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I did know a woman that had watched family and friends quality of life after 90 deteriorate and she decided it wasn't for her. She had a huge party for herself at a country club with all her friends and family. The next week she put on some music, took a bath with a bottle of booze and took a bunch of pills. It was sad, but there is a part of me that thinks she was smart.
I suspect by the time I get to my 80's & 90's we'll have physician assisted suicide. I'm not planning on hanging on until the bitter end. I may change my tune, but I would be surprised if that happened.
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I did know a woman that had watched family and friends quality of life after 90 deteriorate and she decided it wasn't for her. She had a huge party for herself at a country club with all her friends and family. The next week she put on some music, took a bath with a bottle of booze and took a bunch of pills. It was sad, but there is a part of me that thinks she was smart.
I suspect by the time I get to my 80's & 90's we'll have physician assisted suicide. I'm not planning on hanging on until the bitter end. I may change my tune, but I would be surprised if that happened.
Yeah, a few trips to see relatives in the nursing home really opened my eyes.
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Hopefully that is being covered through long term care insurance you purchased a few decades before.
LTC insurance is falling apart. Don't be surprised if it doesn't exist in the very near future. Turns out actuaries do get things wrong occasionally.
Yeah, a few trips to see relatives in the nursing home really opened my eyes.
More often than not I it sucks. Even if you are one of the lucky few to be in phenomenal health, odds are your friends aren't or they're already dead. But who knows how science may change this. I fully expect that by the time I'm 90 (58 years from now) they'll be able to 3D print new organs using my own DNA and stem cells.
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Hopefully that is being covered through long term care insurance you purchased a few decades before.
LTC insurance is falling apart. Don't be surprised if it doesn't exist in the very near future. Turns out actuaries do get things wrong occasionally.
Interested to know more about this. FIL is finishing paperwork to purchase now (at age 71, which can't be cheap). My own mother bought years ago (in her 50's).
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Some google searches will yield volumes of data. Many insurance companies are finding the cost of premiums set years ago aren't even coming close to covering the cost of care. People are staying healthier and living longer than anticipated, which is to be expected with the advancements in science. I don't know if new policies are any more stable than older ones but some seniors are seeing massive jumps in premiums at a time when they're living on fixed income and some have to make the decision to drop coverage, or cut back the scope of their insurance to keep it affordable. Many insurance companies have gotten out of the business entirely. Definitely do your homework. I think I'd have a hard time trusting a policy that didn't dictate a hard cap on premium costs because people are only going to continue to living longer as our science gets better.
EDIT: I believe it's mostly older policies that are being hit with the extreme premium increases, though that would still give me pause about a new one. What's to say the actuaries are still just as wrong 20 years from now and new policies don't go through the same type of increases?
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Hopefully that is being covered through long term care insurance you purchased a few decades before.
LTC insurance is falling apart. Don't be surprised if it doesn't exist in the very near future. Turns out actuaries do get things wrong occasionally.
Interested to know more about this. FIL is finishing paperwork to purchase now (at age 71, which can't be cheap). My own mother bought years ago (in her 50's).
The industry screwed up. They competed on price (to gain market share), undercut each other, and then more clients held on to their policies than expected while care facility prices rose faster than expected... and then the interest rates on bonds went so low that the insurers took a huge loss on invested premiums.
Case in point: my father purchased a policy in 1992 with a 5%/year inflation rider for 20 years. By the time the 20-year inflation rider expired, the policy cap was $318K and he was already receiving payouts for mid-stage Alzheimer's. Between 1992-2011 (when he filed the claim) he paid approximately $11K in premiums.
The insurance company dragged their feet as much as possible on every aspect of the claim (short of the state insurance commissioner getting involved) and made the whole situation very stressful for the caregivers.
http://the-military-guide.com/2014/12/18/wont-buy-long-term-care-insurance/
I'd like to believe that the newer hybrid policies (LTC + life insurance) are priced more reasonably. Maybe your mother's policy won't raise its rates on her cohort by 30% to save the company's financial stability. Maybe your FIL will get a fair premium (for both sides) just as bonds start to return a higher yield.
I'm skeptical.
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Hopefully that is being covered through long term care insurance you purchased a few decades before.
LTC insurance is falling apart. Don't be surprised if it doesn't exist in the very near future. Turns out actuaries do get things wrong occasionally.
Interested to know more about this. FIL is finishing paperwork to purchase now (at age 71, which can't be cheap). My own mother bought years ago (in her 50's).
The industry screwed up. They competed on price (to gain market share), undercut each other, and then more clients held on to their policies than expected while care facility prices rose faster than expected... and then the interest rates on bonds went so low that the insurers took a huge loss on invested premiums.
Case in point: my father purchased a policy in 1992 with a 5%/year inflation rider for 20 years. By the time the 20-year inflation rider expired, the policy cap was $318K and he was already receiving payouts for mid-stage Alzheimer's. Between 1992-2011 (when he filed the claim) he paid approximately $11K in premiums.
The insurance company dragged their feet as much as possible on every aspect of the claim (short of the state insurance commissioner getting involved) and made the whole situation very stressful for the caregivers.
http://the-military-guide.com/2014/12/18/wont-buy-long-term-care-insurance/
I'd like to believe that the newer hybrid policies (LTC + life insurance) are priced more reasonably. Maybe your mother's policy won't raise its rates on her cohort by 30% to save the company's financial stability. Maybe your FIL will get a fair premium (for both sides) just as bonds start to return a higher yield.
I'm skeptical.
I too am skeptical. I do not know the specifics of either policy. FIL sounds like a hybrid policy as I know he had to name beneficiaries. Mom's policy has raised rates once. She is turning 70 this year.
It sounds like it was a pain to get the claim paid for your father, but based on what I know about alzheimers care he probably still came out ahead as it's very expensive.
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It sounds like it was a pain to get the claim paid for your father, but based on what I know about alzheimers care he probably still came out ahead as it's very expensive.
$11K in premiums for $318K in benefits is a 29:1 payout. But John Hancock's "benefits" center made me spend an hour (or more) every month on the paperwork & tracking.
My father first recognized his symptoms in mid-2008 and by early 2011 could no longer live independently. Today he's still healthy & mobile, maintaining weight and doing all right and generally happy, but he's deep into mid-stage. The progress of the disease is completely unpredictable but his long-term trend of mid-stage has been fairly gradual.
Dad's Denver-area care facility started at $215/day for a semi-private room in 2011. By late 2015 it had risen to $260/day and the new financial manager was predicting price hikes of 4%-6% per year. Dad just moved to a memory-care unit a bit outside of Denver at about $250/day for a private room.
The semi-private vs private issue comes from how comfortable the patient is around other people. In 2011 Dad started out at the care facility with his usual engaging "street mayor" personality and benefited from the social interaction. As his cognition declined he's gradually withdrawn from people. Today he's way too introverted (and confused) to be around a group.
Financially, the payout of a long-term care insurance policy is generally considered non-taxable. (There are exceptions to that generalization.) Of course he was only able to deduct unreimbursed medical expenses, so he was still paying taxes on his pension and investment income and Social Security. Once the LTC payout ended he was able to deduct all of his medical expenses, and he won't pay any more taxes.
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What I am looking for is a table that starts from your current age. For example, if you are already 70 you have a much better chance of living to 90 than if you are a newborn. I have seen this type of analysis before i just cannot find it again.
Vanguard has a tool that calculates the probabilities you're looking for (but the footnote indicates that the data is based on actuarial tables from 2000, so it might be somewhat stale at this point):
https://personal.vanguard.com/us/insights/retirement/plan-for-a-long-retirement-tool
Christ, this is kinda depressing! I have a 12% chance of living until 90, and a 38% chance of living until 85. In other words, there's an 88% probability I'll be dead before 90, and a 62% chance I'll be dead before 85. I'd kinda thought survivor bias would give me better odds at this point in my life (50 years old). Sobering.
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What I am looking for is a table that starts from your current age. For example, if you are already 70 you have a much better chance of living to 90 than if you are a newborn. I have seen this type of analysis before i just cannot find it again.
Vanguard has a tool that calculates the probabilities you're looking for (but the footnote indicates that the data is based on actuarial tables from 2000, so it might be somewhat stale at this point):
https://personal.vanguard.com/us/insights/retirement/plan-for-a-long-retirement-tool
Christ, this is kinda depressing! I have a 12% chance of living until 90, and a 38% chance of living until 85. In other words, there's an 88% probability I'll be dead before 90, and a 62% chance I'll be dead before 85. I'd kinda thought survivor bias would give me better odds at this point in my life (50 years old). Sobering.
Apparently there are new tables, published in 2001, which extend out to 121 years of age.
https://www.kitces.com/blog/outliving-the-end-of-life-insurance-mortality-tables-the-age-100-tax-problem-when-life-insurance-expires/
If we don't like the answers from the older data then we can go find new data...
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...snip...
Apparently there are new tables, published in 2001, which extend out to 121 years of age.
https://www.kitces.com/blog/outliving-the-end-of-life-insurance-mortality-tables-the-age-100-tax-problem-when-life-insurance-expires/
If we don't like the answers from the older data then we can go find new data...
Interesting article Nords but I could not find the actual 121 year in the article. I looked around and found it in Appendix A here: http://www.actuary.org/content/cso-task-force-report
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What I am looking for is a table that starts from your current age. For example, if you are already 70 you have a much better chance of living to 90 than if you are a newborn. I have seen this type of analysis before i just cannot find it again.
Vanguard has a tool that calculates the probabilities you're looking for (but the footnote indicates that the data is based on actuarial tables from 2000, so it might be somewhat stale at this point):
https://personal.vanguard.com/us/insights/retirement/plan-for-a-long-retirement-tool
Christ, this is kinda depressing! I have a 12% chance of living until 90, and a 38% chance of living until 85. In other words, there's an 88% probability I'll be dead before 90, and a 62% chance I'll be dead before 85. I'd kinda thought survivor bias would give me better odds at this point in my life (50 years old). Sobering.
I'm not surprised at all. Though if you look at the data, it really goes downhill at 80. At 80, 50% of males are left. By 90, only 17.5% are left. By 95, 5.5% are left. With the appropriate data set I'm sure you could fine tune survivorship bias better based on someone's health at 80. But there are so many things that can happen that how you age is somewhat of a crap shoot, and being healthy (fitness and eating right) don't guarantee anything. Strokes happen, etc. Hell I just heard of a co-worker who had a brain aneurysm in his 40's (in the hospital right now, who knows if he'll make it).
If there's anything watching older people has taught me it's that mobility is a huge predictor of future health. I have/had 3 grandparents live into the late-80's/early-90's and as they stopped moving you could see the change happen. Weight gain, even less mobility, more health issues. I've burned that into my mind for when I'm old. Never stop moving, even if it hurts a little, and lift weights (even if it's not heavy) for as long as possible.
Some of it is luck, too. My grandfather fell over with a heart afib on Mother's Day almost 7 years ago (at age 82) and thanks to the quick response time of the paramedics and some luck on timing, he survived without incident, only now he has a defibrillator in his chest. I think it's only ever gone off once since but how many folks would typically die from something like that (the overwhelming majority) plus now he has automatic insurance against it happening again (the defib). You'd never get insurance to put in a defib preemptively. This applies to any "old age" problem and whether it gets treated before it kills you. Unfortunately most of the time it is "caught" when it happens and you either die or you get lucky.
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I'm curious about the SS statement above. How does being out of the workforce for 30 years or so before you file for SS affect your SS checks?
http://rootofgood.com/early-retirement-social-security/
Here's a pretty thorough article on it.
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Good article.. I now know what SS will pay me for not working.. its definatley not worth working till 67 thats for damn sure..:)
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I just want to be healthy enough to do something about.. like lift a 9mm pistol.
Of course I say that in perfect health, when I get there who knows if I could do it?
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I just want to be healthy enough to do something about.. like lift a 9mm pistol.
Of course I say that in perfect health, when I get there who knows if I could do it?
Gotta stockpile your oxycodone before the inventory controls are tightened.
Otherwise you'll end up having to do it like another famous submariner, Admiral Chet Nimitz Jr.:
http://www.nytimes.com/2002/01/12/us/with-suicide-an-admiral-keeps-command-until-the-end.html
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I just want to be healthy enough to do something about.. like lift a 9mm pistol.
Of course I say that in perfect health, when I get there who knows if I could do it?
Gotta stockpile your oxycodone before the inventory controls are tightened.
Otherwise you'll end up having to do it like another famous submariner, Admiral Chet Nimitz Jr.:
http://www.nytimes.com/2002/01/12/us/with-suicide-an-admiral-keeps-command-until-the-end.html
Impressive!
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Incentive to retire early? Sad thing about longevity stats is that they don't take into account quality of life. A person could become injured, sick, or become disabled and live for decades longer but have a very poor quality of life stuck in a nursing home or with limited function in their own home. So while someone's particular odds of living a long life my be good, the quality of that live might be poor. Another good reason to retire early!
The flip side is my grandparents are 80+ and in great shape. But many of their friends whom they used to travel with have since died or become too ill to travel, to the point that... they aren't doing that any more.
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I'm curious about the SS statement above. How does being out of the workforce for 30 years or so before you file for SS affect your SS checks?
http://rootofgood.com/early-retirement-social-security/
Here's a pretty thorough article on it.
Thank you for posting. That's a really good article and seems like good news for me. I have not been including SS in my fire cals at all. But it looks like I could consider it a bonus or additional buffer.
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Incentive to retire early? Sad thing about longevity stats is that they don't take into account quality of life. A person could become injured, sick, or become disabled and live for decades longer but have a very poor quality of life stuck in a nursing home or with limited function in their own home. So while someone's particular odds of living a long life my be good, the quality of that live might be poor. Another good reason to retire early!
Amen, sparty!!!
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I just want to be healthy enough to do something about.. like lift a 9mm pistol.
Of course I say that in perfect health, when I get there who knows if I could do it?
Gotta stockpile your oxycodone before the inventory controls are tightened.
Otherwise you'll end up having to do it like another famous submariner, Admiral Chet Nimitz Jr.:
http://www.nytimes.com/2002/01/12/us/with-suicide-an-admiral-keeps-command-until-the-end.html
Great story.
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Gotta stockpile your oxycodone before the inventory controls are tightened.
Otherwise you'll end up having to do it like another famous submariner, Admiral Chet Nimitz Jr.:
http://www.nytimes.com/2002/01/12/us/with-suicide-an-admiral-keeps-command-until-the-end.html
I like it. Nobody is going to live forever and after a certain point it makes sense to have options to end your own life should you wish to. I hope by the time I get there doctor assisted suicide is readily available for competent adults.
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Gotta stockpile your oxycodone before the inventory controls are tightened.
Otherwise you'll end up having to do it like another famous submariner, Admiral Chet Nimitz Jr.:
http://www.nytimes.com/2002/01/12/us/with-suicide-an-admiral-keeps-command-until-the-end.html
I like it. Nobody is going to live forever and after a certain point it makes sense to have options to end your own life should you wish to. I hope by the time I get there doctor assisted suicide is readily available for competent adults.
Although many people see this as an example of a couple taking control of their end-of-life care, there are many more who see this as a control freak coercing his spouse into a suicide pact. You submariners (especially nukes) are familiar with that personality...
Incentive to retire early? Sad thing about longevity stats is that they don't take into account quality of life. A person could become injured, sick, or become disabled and live for decades longer but have a very poor quality of life stuck in a nursing home or with limited function in their own home. So while someone's particular odds of living a long life my be good, the quality of that live might be poor. Another good reason to retire early!
The flip side is my grandparents are 80+ and in great shape. But many of their friends whom they used to travel with have since died or become too ill to travel, to the point that... they aren't doing that any more.
I think lots of people do pretty well in the 70s and also 80s but lots don't. Lots of infirm older people out there. But I often hear people say they don't need to retire early because longevity studies say they will live a long life so no hurry. But most of those studies don't show the difference between an 80 year old out running marathons and an 80 year old confined to a bed in a nursing home. Whole different life and probably greatly different financial needs too.
One of the reasons I'm obsessed with surfing now is that I can also understand the endpoint. Sure, standup paddling, surf skis, kayaks... plenty of assistive tech and alternatives. Rabbit Kekai was still surfing and running his keiki surfing contest up to age 90. However the last few years have not been as kind.
Genetics could be on your side to prolong your life. However joint damage, degenerative osteoarthritis, and other physical recovery issues could make that an exercise in patience, endurance, and futility.
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Genetics could be on your side to prolong your life. However joint damage, degenerative osteoarthritis, and other physical recovery issues could make that an exercise in patience, endurance, and futility.
Indeed. I lead a very active life of rock climbing, ice climbing, mountaineering, ski mountaineering, snowboarding, surfing, working out, martial arts. I know for a fact my window of opportunity for participating in these sports is limited. I hope I've pushed the window out a few years by staying very fit, eating well and working in a pretty low-stress environment, but one never knows where that one major injury could be lurking. The active outdoor life is a physical life, and it comes with its bumps and bruises.
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Spartana: yes by the time my Dad could retire at 54 he was too sick to enjoy it. He lived until 73 and didn't want to because his quality of life was so poor. My Mom kept him home and we bought the house next door so I could help too. She also helped with my boys so it was a win-win. He always told my Mom that they would travel when he retired. Well my Mom had to travel without him. It was one of the reasons I semi-retired at 58. You never know what the future holds. It is also a reason I started to travel in my early 40's. I used to love hiking in the mountains. Then at 50 I developed a few problems that made that no longer possible. I can walk miles/all day if it is semi-flat with no problem. YOu never know when you will lose your ability to do something you love.
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Agreed Nord's. Since you and I both retired around 41/42 and have been retired around 10ish-plus years now we know that there are changes that happen or will to our bodies. While I haven't seen any real health or fitness changes or performance declines between 42 and 52 (and I attribute much of that to being ER) and I think that will remain mostly the same between 52 to 62, but the decades after....probably some physical decline. Don't think that I'll be playing beach volleyball at 62 and older at the same level as I could at 42 no matter how healthy my lifestyle.
I get a lot of stories from veterans, of course, both disabled and less-abled. The trend is pretty clear.
Personally, I've been a lab rat for the last six weeks of filing my VA disability claim. I've gained a keen appreciation of declining margins. I'm still surprised ("chagrined"?) by how hard it's become to stay in shape over the last five years, and these days my "gaining strength" efforts are more about avoiding injuries. It's not fun to review my old exercise logs and try to figure out how to get back up there without causing more damage.
But I think it's pretty clear why financial advisors have so much anecdotal evidence of their clients spending less as they move from their 60s to their 90s.
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YOu never know when you will lose your ability to do something you love.
As an outdoor sports enthusiast this ^^^ is what haunts me in terms of not FIREing as fast as I can.
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I was just thinking on what we as a society value, i.e giving away our best years just to put food on the table and a roof over our heads..:(
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This ongoing recital of grievances regarding the inevitability of death and/or decrepitude seems like a good place to link to the latest so-good-it-has-to-be-mentioned-in-the-forum Wait But Why post (http://waitbutwhy.com/2016/03/cryonics.html) (about cryonics).
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Slightly different take, but the fact is that we will all become infirm at some point regardless of optimization. In my case, beyond doing the best I can do with what nature and nurture has blessed upon me, I planned for enough FI to get hips, knees, (insert elective) procedure early in my advanced age.
Currently, the contingency on why I continue to work is that it does not interfere with my exercise regimen. But I sometimes 'take one for the team' when the company pays business travel, maybe for a few more years. I would never experience many of these things on my own dime, while getting paid extra for the privilege.
Long story short, I think younger workers should leverage that companies generally do want a healthy workforce. Lower medical insurance costs, less sick days, more productive. And if you hang in there long enough, you might even appreciate how well the company treats a spry yet experienced worker.
Also, as a side note, I find it a little counter-intuitive that ER 'saves us' from dying at our desk or getting old. My work enables a 'fast life' where I spend time being productive and challenged and time constrained, *treasuring* limited free time, as opposed to the *luxury* of thinking about and writing articles about the inevitable and immutable downsides to being mortal. A minority of people die at their desk, but even then, it's not like they were wasting time knowing they were going to die. And as a small consolation, their heirs are fortunate - they are well cared for by insurance (as intended).
On the other hand, us ER folks, if we do die early despite our bravado and lower stress; we leave our heirs with nothing 'extra' to cover this (and other) risks.
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On the other hand, us ER folks, if we do die early despite our bravado and lower stress; we leave our heirs with nothing 'extra' to cover this (and other) risks.
Speak for yourself! If I kick prematurely in retirement, my wife gets my robust 401k, a lifetime pension survivor annuity, reasonably priced health care, and my larger SS benefit. She'd be quite well off. She'd be in the serious money if I kick while still working though! (because of my life insurance).
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Agreed Nord's. Since you and I both retired around 41/42 and have been retired around 10ish-plus years now we know that there are changes that happen or will to our bodies. While I haven't seen any real health or fitness changes or performance declines between 42 and 52 (and I attribute much of that to being ER) and I think that will remain mostly the same between 52 to 62, but the decades after....probably some physical decline. Don't think that I'll be playing beach volleyball at 62 and older at the same level as I could at 42 no matter how healthy my lifestyle.
But I think it's pretty clear why financial advisors have so much anecdotal evidence of their clients spending less as they move from their 60s to their 90s.
The evidence isn't just anecdotal! Here's a Yahoo-linked Consumer Reports article out today:
https://www.yahoo.com/news/retirement-savings-big-enough-study-170827603.html
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This ongoing recital of grievances regarding the inevitability of death and/or decrepitude seems like a good place to link to the latest so-good-it-has-to-be-mentioned-in-the-forum Wait But Why post (http://waitbutwhy.com/2016/03/cryonics.html) (about cryonics).
Wow. I had now idea dying was actually such a long process. To think that one day real soon we might be able to revive someone without any brain damage 15 minutes after their heart has stopped is kind of mind blowing. And it sounds like that's just the start of it.
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On the other hand, us ER folks, if we do die early despite our bravado and lower stress; we leave our heirs with nothing 'extra' to cover this (and other) risks.
Speak for yourself! If I kick prematurely in retirement, my wife gets my robust 401k, a lifetime pension survivor annuity, reasonably priced health care, and my larger SS benefit. She'd be quite well off. She'd be in the serious money if I kick while still working though! (because of my life insurance).
But that is the irony, that dying early benefits the non-ER>. So folks keep writing these great posts about how a premature death in the workplace has solidified their ER, but in reality they are just hanging their benefactors out to dry.
I do agree with you though, having done all the work for ER is the best offsetting solution so that dying early (aka life insurance) is not necessary...
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But that is the irony, that dying early benefits the non-ER>. So folks keep writing these great posts about how a premature death in the workplace has solidified their ER, but in reality they are just hanging their benefactors out to dry.
That's some awfully cynical logic. I hope and trust that my beneficiaries stand to benefit more from the presence of an alive and well brooklynguy in their lives than from the survivorship remuneration they would otherwise receive.
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Agreed Nord's. Since you and I both retired around 41/42 and have been retired around 10ish-plus years now we know that there are changes that happen or will to our bodies. While I haven't seen any real health or fitness changes or performance declines between 42 and 52 (and I attribute much of that to being ER) and I think that will remain mostly the same between 52 to 62, but the decades after....probably some physical decline. Don't think that I'll be playing beach volleyball at 62 and older at the same level as I could at 42 no matter how healthy my lifestyle.
But I think it's pretty clear why financial advisors have so much anecdotal evidence of their clients spending less as they move from their 60s to their 90s.
The evidence isn't just anecdotal! Here's a Yahoo-linked Consumer Reports article out today:
https://www.yahoo.com/news/retirement-savings-big-enough-study-170827603.html
Well, that's great, thanks! I've been waiting to see that evidence for years. The big unknown was whether the decades of retirement underspending had a bigger effect than the end-of-life healthcare.
So far so good!
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But that is the irony, that dying early benefits the non-ER>. So folks keep writing these great posts about how a premature death in the workplace has solidified their ER, but in reality they are just hanging their benefactors out to dry.
That's some awfully cynical logic. I hope and trust that my beneficiaries stand to benefit more from the presence of an alive and well brooklynguy in their lives than from the survivorship remuneration they would otherwise receive.
You do have to weigh your ephemeral impact against the cold lasting reality of cash. Call me cynical, but 100+k insurance payout vs. 'my ultimately taken for granted presence'.... well, not everyone has 100k sitting in their bank account....
But I don't even want to think about these things, which was the thrust of my initial posting.
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This ongoing recital of grievances regarding the inevitability of death and/or decrepitude seems like a good place to link to the latest so-good-it-has-to-be-mentioned-in-the-forum Wait But Why post (http://waitbutwhy.com/2016/03/cryonics.html) (about cryonics).
Thought-provoking article, thanks for sharing!
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This ongoing recital of grievances regarding the inevitability of death and/or decrepitude seems like a good place to link to the latest so-good-it-has-to-be-mentioned-in-the-forum Wait But Why post (http://waitbutwhy.com/2016/03/cryonics.html) (about cryonics).
Thought-provoking article, thanks for sharing!
I thought it was a well done article, but it just made me want to advocate for assisted suicide.
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But that is the irony, that dying early benefits the non-ER>. So folks keep writing these great posts about how a premature death in the workplace has solidified their ER, but in reality they are just hanging their benefactors out to dry.
That's some awfully cynical logic. I hope and trust that my beneficiaries stand to benefit more from the presence of an alive and well brooklynguy in their lives than from the survivorship remuneration they would otherwise receive.
You do have to weigh your ephemeral impact against the cold lasting reality of cash. Call me cynical, but 100+k insurance payout vs. 'my ultimately taken for granted presence'.... well, not everyone has 100k sitting in their bank account....
But I don't even want to think about these things, which was the thrust of my initial posting.
But isn't the main point of MMM blog to show that money doesn't equate happiness? I assume that holds true for your heirs as well. Why the big push to work years, maybe decades, longer than you need for the sole reason of leaving a huge pile of money to people who probably won't need it, it may not bring them added happiness compared to the time you spent away from them whike working, and who will probablt be able to earn what they need and more for themselves? I'm sure Nord's spouse and daughter are much happier with dad at home and free to spend time as a family than him working another 25 years and leaving them a bigger inheritance. Especially as neither likely needed it and could be completely self sustaining. I'd bet your family feels exactly the same - as probably most people's lived one do.
I'm sure everyone's situation is different, I know Nords is happy with his decision and it worked out great, I'm just highlighting that ER (especially ER at 30) has the additional complication of leaving your children financially exposed in the eventuality of your untimely demise vs. a helpful life insurance payout at an important time. I'm not arguing to leave a bigger inheritance beyond FI, but the real point of life insurance is to compensate for the lost salary. If you are ER, you should consider that the spouse and kids can stay FI through some tough times without this additional upfront payout. If you are away from your family working crazy hours or hating work, etc., then that there are different trade-offs than what I am talking about.
As for my case, my wife and I have flexibility in our work (or can quit if necessary) and we both like our work to a reasonable degree. Our kids are at school when we are at work, so I don't think they would care if we are home or not, other than probably thinking it weird. In my son's case, now that he is in Jr. High, I take him to school on my way to work and he gets home an hour before my wife and I. Personally, I think he cherishes this hour of 'freedom'.
If all goes according to plan, we will give away our wealth and our kids will make their own way for themselves, but it's nice to know that there's downside protection in the meantime. To each their own.
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4% is safe if you have done your homework. If you have zero debt, if you have saved for education, healthcare, home repairs, etc. Have all your ducks in a row before retirement. The 4% will handle day to day expenses. I'd hate to pay a mortage or car loan out of that 4%.
Doesn't that depend on your expenses and stash amount? 4% of $2,000,000 will pay for a car loan if it fits in your budget/expected expenses. Right?
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I'm not arguing to leave a bigger inheritance beyond FI, but the real point of life insurance is to compensate for the lost salary. If you are ER, you should consider that the spouse and kids can stay FI through some tough times without this additional upfront payout.
Exactly, and I doubt many people would consider themselves financially independent in the first place without having accumulated sufficient assets or income streams to cover all of their applicable expenses (including the expenses associated with supporting any dependents). If you no longer need to pull a salary in order to support your dependents, then salary-replacement insurance (life insurance) is no longer necessary--but if your retirement plan lacks sufficient safety margin to support your dependents (for the remainder of their period of dependency) without counting the value of your own earning potential as a contingency measure, then you might still need life insurance (which still doesn't necessarily require you to delay retirement, but only to factor life insurance premiums into your retirement budget).
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Doesn't that depend on your expenses and stash amount? 4% of $2,000,000 will pay for a car loan if it fits in your budget/expected expenses. Right?
For sure. Some people need 2% of their initial stash to live and have another 2% in optional expenses they can put off - like getting a new car. Other folks need every penny of their 4% WR because they pulled the FIRE pin as soon as possible and may not have budgeted to replace vehicles from it.
Lots of folks talk about 4% WR, but either plan on taking out less than 4% of the initial stash most years and look at the 4% as the max they could WR if needed or plan to work a side gig.
4% SWR is a great shorthand that the person is down with the Trinity Study, but beyond that you need details of their FIRE plan to understand what is going on.
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I'm not arguing to leave a bigger inheritance beyond FI, but the real point of life insurance is to compensate for the lost salary. If you are ER, you should consider that the spouse and kids can stay FI through some tough times without this additional upfront payout.
Exactly, and I doubt many people would consider themselves financially independent in the first place without having accumulated sufficient assets or income streams to cover all of their applicable expenses (including the expenses associated with supporting any dependents). If you no longer need to pull a salary in order to support your dependents, then salary-replacement insurance (life insurance) is no longer necessary--but if your retirement plan lacks sufficient safety margin to support your dependents (for the remainder of their period of dependency) without counting the value of your own earning potential as a contingency measure, then you might still need life insurance (which still doesn't necessarily require you to delay retirement, but only to factor life insurance premiums into your retirement budget).
Nice summary. One of the things about ER that I don't like thinking about are the mortality aspects and contingency plans. This gets easier once the kids are on their own, but I think people may overlook the life insurance angle. I assume most folks estimate FI with themselves at the helm. Obviously if we all knew exactly how long we had (especially in the case of dying early), then ER planning would be easier. But it is a useful exercise, now that I'm doing it, to know how I'd feel if I did go prematurely (say before the kids go off to college in ~10 years). In my case, I'm OK with having not retired before then because I do like my work, but it does make me want to retire and get travelling once that final finance-heavy goal is squared away (I do prioritize paying for both children's college).
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But that is the irony, that dying early benefits the non-ER>. So folks keep writing these great posts about how a premature death in the workplace has solidified their ER, but in reality they are just hanging their benefactors out to dry.
That's some awfully cynical logic. I hope and trust that my beneficiaries stand to benefit more from the presence of an alive and well brooklynguy in their lives than from the survivorship remuneration they would otherwise receive.
You do have to weigh your ephemeral impact against the cold lasting reality of cash. Call me cynical, but 100+k insurance payout vs. 'my ultimately taken for granted presence'.... well, not everyone has 100k sitting in their bank account....
But I don't even want to think about these things, which was the thrust of my initial posting.
But isn't the main point of MMM blog to show that money doesn't equate happiness? I assume that holds true for your heirs as well. Why the big push to work years, maybe decades, longer than you need for the sole reason of leaving a huge pile of money to people who probably won't need it, it may not bring them added happiness compared to the time you spent away from them whike working, and who will probablt be able to earn what they need and more for themselves? I'm sure Nord's spouse and daughter are much happier with dad at home and free to spend time as a family than him working another 25 years and leaving them a bigger inheritance. Especially as neither likely needed it and could be completely self sustaining. I'd bet your family feels exactly the same - as probably most people's lived one do.
I'm sure everyone's situation is different, I know Nords is happy with his decision and it worked out great, I'm just highlighting that ER (especially ER at 30) has the additional complication of leaving your children financially exposed in the eventuality of your untimely demise vs. a helpful life insurance payout at an important time. I'm not arguing to leave a bigger inheritance beyond FI, but the real point of life insurance is to compensate for the lost salary. If you are ER, you should consider that the spouse and kids can stay FI through some tough times without this additional upfront payout. If you are away from your family working crazy hours or hating work, etc., then that there are different trade-offs than what I am talking about.
As for my case, my wife and I have flexibility in our work (or can quit if necessary) and we both like our work to a reasonable degree. Our kids are at school when we are at work, so I don't think they would care if we are home or not, other than probably thinking it weird. In my son's case, now that he is in Jr. High, I take him to school on my way to work and he gets home an hour before my wife and I. Personally, I think he cherishes this hour of 'freedom'.
If all goes according to plan, we will give away our wealth and our kids will make their own way for themselves, but it's nice to know that there's downside protection in the meantime. To each their own.
To the first bolded part: Then get life insurance, and ER, if you're worried about your heirs having enough if you pass away soon.
To the second: Getting salary protection is silly, as your stache should do that.
To the third: Insurance is that protection, if you need it.
The point the person you were quoting was trying to make is a huge lump sum at your death (gained by working many extra years past FI) is probably less valuable than actual time with you. And if you want them to have that huge lump sum, get life insurance, but still ER. Then you can have your cake (ER to spend time with the family) and eat it too (have big payout for them at the end).
That's in addition to whatever is left of the stache (historically, more than what you started with).
If you want to work, keep working. Embrace it! But no need to make excuses to rationalize it. :)
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But that is the irony, that dying early benefits the non-ER>. So folks keep writing these great posts about how a premature death in the workplace has solidified their ER, but in reality they are just hanging their benefactors out to dry.
That's some awfully cynical logic. I hope and trust that my beneficiaries stand to benefit more from the presence of an alive and well brooklynguy in their lives than from the survivorship remuneration they would otherwise receive.
You do have to weigh your ephemeral impact against the cold lasting reality of cash. Call me cynical, but 100+k insurance payout vs. 'my ultimately taken for granted presence'.... well, not everyone has 100k sitting in their bank account....
But I don't even want to think about these things, which was the thrust of my initial posting.
But isn't the main point of MMM blog to show that money doesn't equate happiness? I assume that holds true for your heirs as well. Why the big push to work years, maybe decades, longer than you need for the sole reason of leaving a huge pile of money to people who probably won't need it, it may not bring them added happiness compared to the time you spent away from them whike working, and who will probablt be able to earn what they need and more for themselves? I'm sure Nord's spouse and daughter are much happier with dad at home and free to spend time as a family than him working another 25 years and leaving them a bigger inheritance. Especially as neither likely needed it and could be completely self sustaining. I'd bet your family feels exactly the same - as probably most people's lived one do.
I'm sure everyone's situation is different, I know Nords is happy with his decision and it worked out great, I'm just highlighting that ER (especially ER at 30) has the additional complication of leaving your children financially exposed in the eventuality of your untimely demise vs. a helpful life insurance payout at an important time. I'm not arguing to leave a bigger inheritance beyond FI, but the real point of life insurance is to compensate for the lost salary. If you are ER, you should consider that the spouse and kids can stay FI through some tough times without this additional upfront payout. If you are away from your family working crazy hours or hating work, etc., then that there are different trade-offs than what I am talking about.
As for my case, my wife and I have flexibility in our work (or can quit if necessary) and we both like our work to a reasonable degree. Our kids are at school when we are at work, so I don't think they would care if we are home or not, other than probably thinking it weird. In my son's case, now that he is in Jr. High, I take him to school on my way to work and he gets home an hour before my wife and I. Personally, I think he cherishes this hour of 'freedom'.
If all goes according to plan, we will give away our wealth and our kids will make their own way for themselves, but it's nice to know that there's downside protection in the meantime. To each their own.
To the first bolded part: Then get life insurance, and ER, if you're worried about your heirs having enough if you pass away soon.
To the second: Getting salary protection is silly, as your stache should do that.
To the third: Insurance is that protection, if you need it.
The point the person you were quoting was trying to make is a huge lump sum at your death (gained by working many extra years past FI) is probably less valuable than actual time with you. And if you want them to have that huge lump sum, get life insurance, but still ER. Then you can have your cake (ER to spend time with the family) and eat it too (have big payout for them at the end).
That's in addition to whatever is left of the stache (historically, more than what you started with).
If you want to work, keep working. Embrace it! But no need to make excuses to rationalize it. :)
So far the kids have more than enough time with us. We even tried homeschooling, but moved to a better neighborhood. My wife and I are both products of public school and think that the social aspect is just as important as the academics... but I'm starting to get off topic.
Just wondering, have any ER's looked in to life and disability insurance? They are all basically free to me as an employee so I have never really thought much about if these are difficult or expensive to obtain as a young retiree.
I'm not trying to rationalize working or not working, I understand that we all have different circumstances and priorities make different decisions, I'm just trying to keep what I think is an interesting thought provoking discussion moving forward.
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When we had kids at home we took out a large term life insurance policy for if one of us died. It was cheap since it was term and we were young and healthy. If one had died we wouldn't have to worry abut working.
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Just wondering, have any ER's looked in to life and disability insurance? It is basically free to me as an employee (as are short term and long term disability) so I really don't think much about if these are difficult or expensive to obtain as a young retiree.
Again, most early retirees (who are no longer dependent on a salary) would have no need for these forms of salary-replacement insurance, except to the extent they are relying on their own earning potential in their retirement planning. Term life insurance is relatively cheap for young, healthy individuals. Disability insurance, though, doesn't really make sense in the context of a person who is not earning an income. It is intended to replace a portion of your current income in the event you become unable to continue earning that income as a result of a disability, so it is generally not available if you are not currently earning an income (and, in the U.S., assuming your total work history is long enough to qualify you, you already have disability insurance through Social Security, but there too you will only be eligible for benefits if you meet the recent work history test (again, based on the rationale that disability insurance is intended to replace income you would have been earning but for the disability)).
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So far the kids have more than enough time with us. We even tried homeschooling, but moved to a better neighborhood. My wife and I are both products of public school and think that the social aspect is just as important as the academics... but I'm starting to get off topic.
Of course socialization is an important aspect of growing up, but it is a very old & tired myth that homeschooled children are not socialized.
https://www.youtube.com/watch?v=xJHt-m3VX6o
Even if it were true, a traditional school setting is far from an ideal social environment. My wife attended public school her entire childhood, and is far more committed to homeschooling as many of our kids as possible. There are no absolute answers, however, and due to two of my boys not responding to homeschooling well, we did send them to public school this year to see if a bit of professional training would help. It has not, other than provide my wife more time with the other three. Common Core math method is insane, and we are likely to pull the two boys back out of public school over that subject alone. We are currently considering sending them to a private school next year, despite the cost.
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I'm sure everyone's situation is different, I know Nords is happy with his decision and it worked out great, I'm just highlighting that ER (especially ER at 30) has the additional complication of leaving your children financially exposed in the eventuality of your untimely demise vs. a helpful life insurance payout at an important time. I'm not arguing to leave a bigger inheritance beyond FI, but the real point of life insurance is to compensate for the lost salary. If you are ER, you should consider that the spouse and kids can stay FI through some tough times without this additional upfront payout. If you are away from your family working crazy hours or hating work, etc., then that there are different trade-offs than what I am talking about.
As for my case, my wife and I have flexibility in our work (or can quit if necessary) and we both like our work to a reasonable degree. Our kids are at school when we are at work, so I don't think they would care if we are home or not, other than probably thinking it weird. In my son's case, now that he is in Jr. High, I take him to school on my way to work and he gets home an hour before my wife and I. Personally, I think he cherishes this hour of 'freedom'.
If all goes according to plan, we will give away our wealth and our kids will make their own way for themselves, but it's nice to know that there's downside protection in the meantime. To each their own.
To the first bolded part: Then get life insurance, and ER, if you're worried about your heirs having enough if you pass away soon.
To the second: Getting salary protection is silly, as your stache should do that.
To the third: Insurance is that protection, if you need it.
The point the person you were quoting was trying to make is a huge lump sum at your death (gained by working many extra years past FI) is probably less valuable than actual time with you. And if you want them to have that huge lump sum, get life insurance, but still ER. Then you can have your cake (ER to spend time with the family) and eat it too (have big payout for them at the end).
That's in addition to whatever is left of the stache (historically, more than what you started with).
If you want to work, keep working. Embrace it! But no need to make excuses to rationalize it. :)
Insurance is designed to replace stuff that you can't afford to replace on your own.
When someone decides that they're financially independent, then ideally they wouldn't need life insurance because they're not using their life energy to collect a paycheck. The whole point of FI is that they have other income streams to replace the salary. If they die then their investment portfolio keeps spewing out interest, dividends, and capital gains. Their tenants keep paying the rent. There's no "loss of income" for them to replace with a life insurance claim. If anything, the family's expenses would go down because the dearly departed is no longer eating food or using services or driving vehicles.
If someone ERs and their death would leave their children "financially exposed" (whatever that entails) then they're not financially independent and should not have ER'd. Maybe one edge case would be life insurance to fund a special-needs trust for an adult child who's not capable of living independently after you're gone. But... edge case.
I can see using life insurance as an estate planning tool. But that has nothing to do with financial independence.
I can understand buying an annuity for longevity insurance, but that's merely one way to handle the possibility of portfolio failure.
This is why my spouse and I have no Survivor Benefits Plan insurance and no life insurance. We have enough money for the rest of our lives, we self-insured for the longevity risk with our military pensions & Social Security, and we don't need to do any further estate planning. If one of us dies then that pension stops, but the other one of us doesn't need it.
Our daughter's almost 24 years old, but I'm very happy that I started ER when she was only nine years old. During her teen years (what I think of as "the Danger Years") she would've been ecstatic to come home from school to an empty house. I wasn't in the kitchen baking cookies, but I was there to listen to her vent about her day and discuss all of those impromptu teachable moments which are best handled while the crisis is hot. In other words, I was "there for her" whether she thought it was a good idea or not. Even today she occasionally thanks me for something she learned from us as a teen-- and it's a lot easier to handle those situations when you're (1) home, (2) not crazed from work or office politics, (3) not fully scheduled with domestic chores or parental shuttle duty, and (4) relatively well-rested.
Do I wish that I'd been able to stay home with my daughter for the first nine years of her life? Sure-- what little I remember of those times is being exhausted, sick, and largely overwhelmed. It's amazing how quickly my health bounced back after I recovered from chronic fatigue.
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So far the kids have more than enough time with us. We even tried homeschooling, but moved to a better neighborhood. My wife and I are both products of public school and think that the social aspect is just as important as the academics... but I'm starting to get off topic.]
The kids don't have to quit school just because you ER. The two are not connected in any way. :)
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I'll give my personal example as what I would consider to be the one decent case for term life insurance, post-FIRE. My wife and I took out 30 year term policies in our mid-20s, because the rates were low based on our age and it covered the period where we would have children. Now we're looking at FIRE, using a 4% SWR for roughly 30k of expenses annually. Where I would see the insurance as still valuable is the case where we experience a poor sequence of returns during the first 10 years of FIRE. Say we have two kids and then I die 5-8 years into FIRE, while at the same time it becomes apparent that we're in one of those bad sequences where one of us would have gone back to work for a spell. Well if I just died, it would be difficult for my wife to go back to work because she now has to find a job that covers childcare for a couple kids and still pays some extra money that makes the job worth taking. The term policies completely eliminate that scenario.
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I'll give my personal example as what I would consider to be the one decent case for term life insurance, post-FIRE. My wife and I took out 30 year term policies in our mid-20s, because the rates were low based on our age and it covered the period where we would have children. Now we're looking at FIRE, using a 4% SWR for roughly 30k of expenses annually. Where I would see the insurance as still valuable is the case where we experience a poor sequence of returns during the first 10 years of FIRE. Say we have two kids and then I die 5-8 years into FIRE, while at the same time it becomes apparent that we're in one of those bad sequences where one of us would have gone back to work for a spell. Well if I just died, it would be difficult for my wife to go back to work because she now has to find a job that covers childcare for a couple kids and still pays some extra money that makes the job worth taking. The term policies completely eliminate that scenario.
Smart. I like that.
A 10-year term might be enough, but 20-year term for the more paranoid conservative to help cover the combo "sequence of returns risk & someone dying" scenario.
The odds of both are likely around a percent, depending on their health profile, age, family history, etc. (The odds of bad sequence of returns maybe 30%, the odds of them dying in that first decade if young enough, maybe 5%--I'm just making up numbers and you can run more accurate ones using stock market returns and actuarial tables, but my point is, combo-ing the two makes the odds that both happen quite small), but you can insure against it, for fairly cheap.
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Thanks for the replies all. I'm probably confusing things when I said 'salary replacement', I should have said 'FI insurance'. In my own personal case, since it is 10 years until my wife and kids would be paying for college, I'd like to hedge my absence (or disability) with a chunk of extra cash for a reasonable cost. I'd hate for the market to tank and my spouse to feel like she has to sell equities, so that payout would basically sit in cash to ensure FI (smooth out the sequence of returns).
I could see myself doing the 10-yr term option... once the kids are through college and on their own, things become less complicated.
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A 10-year term might be enough, but 20-year term for the more paranoid conservative to help cover the combo "sequence of returns risk & someone dying" scenario.
You're probably right. We bought those policies when FIRE was just a glimmer in my eye. We did 30-year terms for $500,000 because we knew kids would come later and we wanted to be covered until the kids would be out of the house. They're really cheap if you're in good health and young. We opted for the "return of premium" option, meaning if we don't die within the term we get our money back and it only cost $1200 a year between us. I'd guess a straight term policy is substantially less.
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Thanks for the replies all. I'm probably confusing things when I said 'salary replacement', I should have said 'FI insurance'. In my own personal case, since it is 10 years until my wife and kids would be paying for college, I'd like to hedge my absence (or disability) with a chunk of extra cash for a reasonable cost. I'd hate for the market to tank and my spouse to feel like she has to sell equities, so that payout would basically sit in cash to ensure FI (smooth out the sequence of returns).
I could see myself doing the 10-yr term option... once the kids are through college and on their own, things become less complicated.
Yeah, 10-year term to hedge against the combo of early sequence of returns risk + untimely death doesn't seem unreasonable.
If it's what's needed to get someone over the hump to actually ER (i.e. they have enough, but are just worried about that scenario), it seems worth it.
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Our daughter's almost 24 years old, but I'm very happy that I started ER when she was only nine years old. During her teen years (what I think of as "the Danger Years") she would've been ecstatic to come home from school to an empty house. I wasn't in the kitchen baking cookies, but I was there to listen to her vent about her day and discuss all of those impromptu teachable moments which are best handled while the crisis is hot. In other words, I was "there for her" whether she thought it was a good idea or not. Even today she occasionally thanks me for something she learned from us as a teen-- and it's a lot easier to handle those situations when you're (1) home, (2) not crazed from work or office politics, (3) not fully scheduled with domestic chores or parental shuttle duty, and (4) relatively well-rested.
Do I wish that I'd been able to stay home with my daughter for the first nine years of her life? Sure-- what little I remember of those times is being exhausted, sick, and largely overwhelmed. It's amazing how quickly my health bounced back after I recovered from chronic fatigue.
As a side note, I do appreciate the insight Nords. My wife was stay-at-home when the kids were young which is absolutely the best thing FI has given us so far. She recently went back to work (at our children's school) for personal fulfillment. I'll have to bring this approaching 'danger years' discussion up during our walk this evening and see what she thinks. She'll probably volunteer me to be the stay-at-home this time...
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Yeah, 10-year term to hedge against the combo of early sequence of returns risk + untimely death doesn't seem unreasonable.
If it's what's needed to get someone over the hump to actually ER (i.e. they have enough, but are just worried about that scenario), it seems worth it.
Anyone interested in pursuing this strategy might also want to look into how much portfolio hedging protection (against whatever market scenario would have triggered the decision to return to work) could be bought for the price of the life insurance premiums (as an alternative to purchasing the life insurance). However, given how cheap term life insurance can be (and how expensive portfolio hedging protection seems to be (see this old thread on the topic (http://forum.mrmoneymustache.com/investor-alley/'stash-insurance'-seeking-info-from-derivatives-buffs/))), my guess is that the answer would probably be "not much." But it might be worth pricing it out just to check. Under that alternative, your "insurance premiums" would pay off in the bad sequence of returns scenario alone (even if you don't also suffer a simultaneous untimely death), but I'm not sure if there are hedging instruments available that extend out more than five years into the future.
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.... We did 30-year terms for $500,000 because we knew kids would come later and we wanted to be covered until the kids would be out of the house. T... it only cost $1200 a year between us....
Ok; but thats still $100k total opportunity cost to insure $500k 2016 Dollar. ($100 per month over 30 years with ~6% after inflation stock market yield)
The $36k that you would get back after 30 years are worth less than $20k then. (in case you get 0 yield)
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I never said that. Might want to fix your quote tags.
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($100 per month over 30 years with ~6% after inflation stock market yield)
If 6% after inflation was guaranteed, nobody would need almost any kind of insurance!
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.... We did 30-year terms for $500,000 because we knew kids would come later and we wanted to be covered until the kids would be out of the house. T... it only cost $1200 a year between us....
Ok; but thats still $100k total opportunity cost to insure $500k 2016 Dollar. ($100 per month over 30 years with ~6% after inflation stock market yield)
The $36k that you would get back after 30 years are worth less than $20k then. (in case you get 0 yield)
You were quoting me, and we're actually insuring $1 million 2016 dollars. The $100 per month is both policies combined (they're 500k each). Whatever the opportunity cost is, I can't fix it because I still need term life insurance for a while and now that we're almost 10 years older a regular term policy will probably cost as much as our return of premium policies did in our mid-20's.