The Money Mustache Community
General Discussion => Post-FIRE => Topic started by: dabears847 on November 06, 2015, 04:41:59 PM
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Questions
What and when is it time to make adjustments in Fire when the market tanks? Is there any topic on this about the steps to take to survive the downturn?
Example
0-10% - Portfolio/Market Tank - Do nothing keep on budget
10-20% - Market Tank - Do nothing keep on budget
20-30% - What to do?
30-40% - Lower Spending x percent,
50% - Lower Spending and side gig etc.
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http://livingafi.com/2014/05/09/drawdown-part-1-the-basics/
I like Dr. Doom's (that's his name on these boards) drawdown strategies outlined in his postings here.
I pretty much don't worry about the extent of the drop, but the duration. In any market correction/crash that lasts under a few months, I would do nothing. At most, I'd cut back on the extras. I'd switch to my bond allocation to pull $ from as they should technically be showing growth if stocks are tanking. Might start using my cash reserves if it was a serious drop and I wanted to leave the investments alone to recover.
If the down market extends into a year, then I'd probably switch over to using my cash reserves (I currently have about 1.5 years in cash). I'd cut back on the extras and live a bit more frugally and hope to wait out the market. Most markets are on the road to recovery by 1-2 years out, so I'd slowly switch back to using investments for living expenses, and replenish my cash reserves after full recovery.
If the crash lingers multiple years, I'll probably considering either slashing my expenses to bare bones, or getting a part time job - depends on what works best when it happens - or even a combo of these.
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I think frankie's girl has some good advice, it really is all about the duration of the market drawdown. Even a 25% drawdown could wreak havoc on your portfolio if the market just reset at that level.
I am not in a FIRE position myself but I plan to have 25 x expenses + a small cash hoard of at least 2 years expenses. It's really no different than saying I have 27x expenses but I would treat the money in different ways. My plan would be to re-fill the cash hoard every couple months by selling investments. In a down market (which is tough to define in advance, I'd play it by ear), I would avoid re-filling the cash and allow it to draw down. As soon as I was in that situation of drawing my cash down I would certainly be doing all I could to reduce expenses as well. If I got to a point where the cash is down to 3 or 4 months of expenses I would start looking for some type of part-time work. I would probably keep working part-time until I was able to at least replenish the cash, probably by pulling money over from the investment side when it recovered. Keep in mind this could last for 5 to 10 years if you hit a really bad patch and if it's before you qualify for retirement benefits.
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Interesting thoughts and will add to the crazy excel sheets I've got for the plan. Market tank would essentially equal portfolio tank as well? Just looking for trigger so the household knows it's time to cut back. Also, if the market is doing its normal ups and downs when do you know it's time? I don't want to freak out with every little daily change.
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I think I would need to know more of your specifics to say what I would do. It depends on how many years expenses you have, how far you are from retirement benefits, whether you have some side income you can fall back on. Also I think I would be focused more on the years of expenses, what that number gets to, rather than how much the portfolio goes down in percentage terms.
If you are 60 and can access government retirement benefits in 5 years, you are probably going to be able to weather a much bigger portfolio draw down without worrying. Even if your stash goes down to 10 years expenses, that is still a healthy supplement to government benefits and might be enough.
If you are 40 it's a different story. If I was retired on 25x expenses, if that number dropped to even 22x and stayed there for more than 3 months I would trim back expenses. If it stayed there or lower for a year, I would just get some side income so I wouldn't have to worry about it. I think 22x is a good number because that will ignore minor pullbacks. I like using years of expenses because if there is a market surge and you suddenly have 30x expenses, it is not unreasonable to avoid panicking if it drops back down to 24x. The market is down but you still have enough funds. If you retire and the portfolio immediately drops to 20x, even though the market dropped about the same amount, I would be cutting back.
But then this is all just me and I am a bit less risk tolerant than most. I also have government paid health care and other decent social safety nets. Your situation may differ.
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When you use a Variable Percentage Withdrawal (VPW) (https://www.bogleheads.org/forum/viewtopic.php?f=10&t=120430), you don't have to worry about a plan. It tells you exactly how much you can safely withdrawal, there is no risk of prematurely depleting your portfolio, and you end up with much more money to spend than simply sticking to the 4% rule.
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When you use a Variable Percentage Withdrawal (VPW) (https://www.bogleheads.org/forum/viewtopic.php?f=10&t=120430), you don't have to worry about a plan. It tells you exactly how much you can safely withdrawal, there is no risk of prematurely depleting your portfolio, and you end up with much more money to spend than simply sticking to the 4% rule.
Yeah, that spreadsheet tells me that me, FIREing at 30, wanting to withdraw until age 99, 100% stocks, should withdraw 5.1% the first year. Yikes.
If I followed that, I guarantee there will be a year or two where I get whiplash from how different my income dives the next year, due to market changes.
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When you use a Variable Percentage Withdrawal (VPW) (https://www.bogleheads.org/forum/viewtopic.php?f=10&t=120430), you don't have to worry about a plan. It tells you exactly how much you can safely withdrawal, there is no risk of prematurely depleting your portfolio, and you end up with much more money to spend than simply sticking to the 4% rule.
Yeah, that spreadsheet tells me that me, FIREing at 30, wanting to withdraw until age 99, 100% stocks, should withdraw 5.1% the first year. Yikes.
If I followed that, I guarantee there will be a year or two where I get whiplash from how different my income dives the next year, due to market changes.
Correct, while it mitigates that affect somewhat by increasing the withdrawal % each year, if you're 100% stocks it won't be able to smooth out the volatility for you. If you started this in the year 2000, your income would have varied from 51k to 21k:
(https://i.sli.mg/Gpsxm2.png)
However, it seems that might have been necessary to avoid portfolio failure, as 100% stocks from 2000-2015 did not fare very well under the standard 4% rule:
(https://i.sli.mg/h1XYDR.png)
If you look at the years where we already know the 4% rule failed, like 1966, VPW fluctuated similarly, but did not fail. The median VPW withdraw for someone who FIRED at 30 years old in 1966 was $47,618. This year (at 79 years old) they'd be withdrawing $57,043 with 75% of their initial capital remaining (all numbers inflation adjusted). Following the 4% rule they would've run out of money years ago. Same with the 1929 starting year.
But that's the worst-case. If a 30 year old FIRED in 1975 with VPW, their income would've fluctuated from 51k to 230k, and this year they'd be withdrawing 137k. Compared to the consistent 40k with the 4% rule.
VPW is great because it forces you to cut back when you need to (when the 4% rule would've failed anyway), it gives you higher withdrawals when the 4% rule wouldn't have failed (the vast majority of the time), and it does so very early in the cycle when you're still young enough to enjoy it. The best part is it gives me the confidence to pull the plug much earlier than I would otherwise. Remember, the 4% rule is a worst-case number. Most years you could get away with a much higher withdrawal. I'd love to FIRE on $800,000 with $40,000 expenses, instead of aiming for $1,000,000 to build up a buffer I might never need. If I choose an unlucky year and ended up needing the buffer, no problem. VPW will warn me very early on, and I can adjust. Even if I choose 1966, a simple 20k side-gig would've more than bridged the gap, and honestly I'll probably be bringing in that money for fun anyway.
As MMM says, "Retirement isn't the end of work, it's the end of mandatory work."
Seems better than working the extra years anyway, just in case.
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There are many things I like about it. I like the idea of a variable withdrawal, and I like spending it all down. I like not running out.
I don't like how dang high it started the WR (5.1% for a 69 year ER from 30 to 99?!). It just makes the income fluctuations too much.
If it had started at, say, 3.8%, risen a bit more aggressively, etc., I'd have been fine with it. I'm curious what a percents the VPW would use if it backtested with spending floors.
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There are many things I like about it. I like the idea of a variable withdrawal, and I like spending it all down. I like not running out.
I don't like how dang high it started the WR (5.1% for a 69 year ER from 30 to 99?!). It just makes the income fluctuations too much.
If it had started at, say, 3.8%, risen a bit more aggressively, etc., I'd have been fine with it. I'm curious what a percents the VPW would use if it backtested with spending floors.
Cfiresim (the old version) has a VPW option, which allows you to set floors and ceilings.
Personally, I LOVE the 5.1% initial withdrawal! The only reason we have a 4% rule and not a 5% rule, is because of the risk of running out of money. VPW eliminates that risk. The way I see it, either income fluctuates, or you risk running out. I'll take the former.
The income fluctuation has been talked about a lot in the VPW thread (https://www.bogleheads.org/forum/viewtopic.php?f=10&t=120430). The best way to lower volatility in any portfolio, is to hold more bonds. If you use 60/40 stocks/bonds with VPW, it will start you off with a 4.0% withdrawal. That might not be a good idea for someone retiring at 30 though :)
The author of VPW has the best answer (in my opinion) for those worried about income fluctuation, he said the proposed withdrawal is really just a ceiling. Feel free to withdrawal less if you wish, but this is the most you can safely withdrawal without risking portfolio depletion. If the calculator tells you it's safe to take out $51,000, but you'd rather take out $40,000 so your income doesn't fluctuate too much, no problem. That's good enough for me.
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The income fluctuation has been talked about a lot in the VPW thread (https://www.bogleheads.org/forum/viewtopic.php?f=10&t=120430). The best way to lower volatility in any portfolio, is to hold more bonds. If you use 60/40 stocks/bonds with VPW, it will start you off with a 4.0% withdrawal. That might not be a good idea for someone retiring at 30 though :)
It starts you with the lower withdrawal cause bonds don't support as high of a WR as stocks. It's not cause the volatility is lower, but because the expected returns over 70 years is much lower. If anything, if there was a lower volatility you could raise the WR (and higher volatility leads to a lower safemax WR).
The author of VPW has the best answer (in my opinion) for those worried about income fluctuation, he said the proposed withdrawal is really just a ceiling. Feel free to withdrawal less if you wish, but this is the most you can safely withdrawal without risking portfolio depletion. If the calculator tells you it's safe to take out $51,000, but you'd rather take out $40,000 so your income doesn't fluctuate too much, no problem. That's good enough for me.
What's the point of using this then, if I'm making up my own numbers anyways? Like I said, I wish there was a way to set floors/ceilings, or a starting WR (and yes, I know the old cFIREsim does this, but it also doesn't do the "spend down to zero" type idea).
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The income fluctuation has been talked about a lot in the VPW thread (https://www.bogleheads.org/forum/viewtopic.php?f=10&t=120430). The best way to lower volatility in any portfolio, is to hold more bonds. If you use 60/40 stocks/bonds with VPW, it will start you off with a 4.0% withdrawal. That might not be a good idea for someone retiring at 30 though :)
It starts you with the lower withdrawal cause bonds don't support as high of a WR as stocks. It's not cause the volatility is lower, but because the expected returns over 70 years is much lower. If anything, if there was a lower volatility you could raise the WR (and higher volatility leads to a lower safemax WR).
The author of VPW has the best answer (in my opinion) for those worried about income fluctuation, he said the proposed withdrawal is really just a ceiling. Feel free to withdrawal less if you wish, but this is the most you can safely withdrawal without risking portfolio depletion. If the calculator tells you it's safe to take out $51,000, but you'd rather take out $40,000 so your income doesn't fluctuate too much, no problem. That's good enough for me.
What's the point of using this then, if I'm making up my own numbers anyways? Like I said, I wish there was a way to set floors/ceilings, or a starting WR (and yes, I know the old cFIREsim does this, but it also doesn't do the "spend down to zero" type idea).
Yes, the best way to lower volatility and returns in any portfolio, is to hold more bonds. You don't get to lower volatility without also lowering returns.
The point of using it for me, is for all the benefits already mentioned. I'd rather not work extra years if I don't have to. If you want to set a custom starting WR, you can do that in the "Table" sheet (fifth from the left at the bottom). It's just an actuarial table, nothing funky going on here :)
(https://i.sli.mg/iFKSyT.png)
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Yes, the best way to lower volatility and returns in any portfolio, is to hold more bonds. You don't get to lower volatility without also lowering returns.
Sure you can! You just have to think beyond generic stocks and bonds. Here's just one example (http://portfoliocharts.com/2015/09/22/catching-a-golden-butterfly/). Browse the site for more.
FWIW, one very good way to protect yourself from when markets tank is to invest in a truly diverse portfolio that is not so tied to any one market.
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I'm just going to keep reading the posts and make sure it's all sinking in.
I use the Cfiresim and have ceilings in at 40,000 and floors tinkering around with numbers from kids expenses like college etc. 90-100% success with different scenarios. All scenarios set for go date in two more working years.
Goal 2-4 years until FIRE, and 35 now. The portfollio can dip fairly low in the charts which makes me wonder when is it time to get the side gig. If I started retirement with a million and then the portfolio dipped to 500,000 in five years. I would probably get a job to pad the portfolio again.
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There are many things I like about it. I like the idea of a variable withdrawal, and I like spending it all down. I like not running out.
I don't like how dang high it started the WR (5.1% for a 69 year ER from 30 to 99?!). It just makes the income fluctuations too much.If it had started at, say, 3.8%, risen a bit more aggressively, etc., I'd have been fine with it. I'm curious what a percents the VPW would use if it backtested with spending floors.
Agree. Given the potential volatility in income due to VPW I don't think it is appropriate for all FIRE people and is good for base case planning. However, it could be a really good way to go about it for those FIRE people that have a high amount of discretionary spending (i.e. travel, luxury foods, etc) so they have the flexibility to cut those out when times are bad and ramp them up when times are good. But for the FIRE person who is just covering their basic spending (not a lot of wants, just needs as that is all that is needed to make them happy) then VPW would be a disaster as they would be able to cut back.
With all that, I am not sure it matters much - if my spending is $50k and with VPW it drops to $25k one year and $100K another year it is not like I am going to spend the $100k....so what then...put $50K in a cash reserve account for future down years? Too many ups and downs potentially IMO.
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Agree. Given the potential volatility in income due to VPW I don't think it is appropriate for all FIRE people and is good for base case planning. However, it could be a really good way to go about it for those FIRE people that have a high amount of discretionary spending (i.e. travel, luxury foods, etc) so they have the flexibility to cut those out when times are bad and ramp them up when times are good. But for the FIRE person who is just covering their basic spending (not a lot of wants, just needs as that is all that is needed to make them happy) then VPW would be a disaster as they would be able to cut back.
Either your income fluctuates, or you risk running out of money when you're old. Pick your poison :)
It makes sense for me, because as MrMoneyMustaches writes about all the time, we will likely still be making money during our FIRE years. Even if we were 100% stocks and FIRED in 1966 with VPW, a 15k a year side-gig would've bridged the gap, and we only would've needed it for 10 out of the 50 years since then. I find this a much better outcome than outright failing, like the 4% rule would've done. If you don't plan on making any money after quitting the 9-5, then by all means, work the extra years to fill up your nest egg. For us, the small risk it will be needed is well worth the reward.
With all that, I am not sure it matters much - if my spending is $50k and with VPW it drops to $25k one year and $100K another year it is not like I am going to spend the $100k....so what then...put $50K in a cash reserve account for future down years? Too many ups and downs potentially IMO.
That's what some already retired folk in the VPW thread are doing, but I agree, I have no idea what I'd spend all that money on! I'll just use it as a spending ceiling, and keep the rest invested. Is that really any different? Will those of you following the 4% rule really be withdrawing 4%, even if you only need 3% that year?
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Agree. Given the potential volatility in income due to VPW I don't think it is appropriate for all FIRE people and is good for base case planning. However, it could be a really good way to go about it for those FIRE people that have a high amount of discretionary spending (i.e. travel, luxury foods, etc) so they have the flexibility to cut those out when times are bad and ramp them up when times are good. But for the FIRE person who is just covering their basic spending (not a lot of wants, just needs as that is all that is needed to make them happy) then VPW would be a disaster as they would be able to cut back.
Either your income fluctuates, or you risk running out of money when you're old. Pick your poison :)
I'll take the income fluctuations. Naturally one will cut down in a bad year, and not blindly withdraw. This method adds way more than is necessary though, IMO.
It makes sense for me, because as MrMoneyMustaches writes about all the time, we will likely still be making money during our FIRE years. Even if we were 100% stocks and FIRED in 1966 with VPW, a 15k a year side-gig would've bridged the gap, and we only would've needed it for 10 out of the 50 years since then. I find this a much better outcome than outright failing, like the 4% rule would've done. If you don't plan on making any money after quitting the 9-5, then by all means, work the extra years to fill up your nest egg. For us, the small risk it will be needed is well worth the reward.
With all that, I am not sure it matters much - if my spending is $50k and with VPW it drops to $25k one year and $100K another year it is not like I am going to spend the $100k....so what then...put $50K in a cash reserve account for future down years? Too many ups and downs potentially IMO.
That's what some already retired folk in the VPW thread are doing, but I agree, I have no idea what I'd spend all that money on! I'll just use it as a spending ceiling, and keep the rest invested. Is that really any different? Will those of you following the 4% rule really be withdrawing 4%, even if you only need 3% that year?
You're assuming people FIREing miscalculated their expenses by a HUGE margin (only needing to spend 3% of their 4% WR). Of course no one will spend 4% if they only need 3%...but if they needed 3%, then they'd probably have saved 25x THAT number, and it'd actually be 4% of their smaller stache.
More likely to me, they will withdraw 4% that year, and have been planning on withdrawing 4%. That brings up another quibble: this gives you no good target for FIRE. If this method tells them withdrawing 5.1% is the key, year #1, they may save enough to sustain a 5.1% WR, and have that cover their spending. Then, whoops, market drops, and they don't have enough to cover their spending. How do I know what # to shoot for with the VPW?
I'm not trying to criticize, I am legitimately confused. Say my spending is 40k annually. How much do I need to save with the VPW?
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Agree. Given the potential volatility in income due to VPW I don't think it is appropriate for all FIRE people and is good for base case planning. However, it could be a really good way to go about it for those FIRE people that have a high amount of discretionary spending (i.e. travel, luxury foods, etc) so they have the flexibility to cut those out when times are bad and ramp them up when times are good. But for the FIRE person who is just covering their basic spending (not a lot of wants, just needs as that is all that is needed to make them happy) then VPW would be a disaster as they would be able to cut back.
Either your income fluctuates, or you risk running out of money when you're old. Pick your poison :)
I'll take the income fluctuations. Naturally one will cut down in a bad year, and not blindly withdraw. This method adds way more than is necessary though, IMO.
It makes sense for me, because as MrMoneyMustaches writes about all the time, we will likely still be making money during our FIRE years. Even if we were 100% stocks and FIRED in 1966 with VPW, a 15k a year side-gig would've bridged the gap, and we only would've needed it for 10 out of the 50 years since then. I find this a much better outcome than outright failing, like the 4% rule would've done. If you don't plan on making any money after quitting the 9-5, then by all means, work the extra years to fill up your nest egg. For us, the small risk it will be needed is well worth the reward.
With all that, I am not sure it matters much - if my spending is $50k and with VPW it drops to $25k one year and $100K another year it is not like I am going to spend the $100k....so what then...put $50K in a cash reserve account for future down years? Too many ups and downs potentially IMO.
That's what some already retired folk in the VPW thread are doing, but I agree, I have no idea what I'd spend all that money on! I'll just use it as a spending ceiling, and keep the rest invested. Is that really any different? Will those of you following the 4% rule really be withdrawing 4%, even if you only need 3% that year?
You're assuming people FIREing miscalculated their expenses by a HUGE margin (only needing to spend 3% of their 4% WR). Of course no one will spend 4% if they only need 3%...but if they needed 3%, then they'd probably have saved 25x THAT number, and it'd actually be 4% of their smaller stache.
More likely to me, they will withdraw 4% that year, and have been planning on withdrawing 4%. That brings up another quibble: this gives you no good target for FIRE. If this method tells them withdrawing 5.1% is the key, year #1, they may save enough to sustain a 5.1% WR, and have that cover their spending. Then, whoops, market drops, and they don't have enough to cover their spending. How do I know what # to shoot for with the VPW?
I'm not trying to criticize, I am legitimately confused. Say my spending is 40k annually. How much do I need to save with the VPW?
Yea, I think that's where the disconnect is coming from. I DO believe most people are miscalculating how much they'll need. MMM discusses this in It’s All About the Safety Margin (http://www.mrmoneymustache.com/2011/10/17/its-all-about-the-safety-margin/). The miscalculation isn't related to expenses, it's related to income. Maybe my idea of FIRE is different than most people here, but I genuinely can't imagine not doing anything that generates income for 50 years. Not because I'm a workaholic, but because it seems to be the natural progression of learning new skills. Suddenly you have tons of free time to FINALLY work on the things your passionate about. Maybe you want to write, learn a programming language, design websites, learn photography, build houses (MMM)...etc. Chances are, someone out there is willing to throw money at you to develop those new skills.
I have tons of friends who decided to learn photography. Within a month they were booking paid gigs. Two paid gigs a month, as a beginner doing something they love, is enough to bring you from a 4% withdrawal rate, to 3% on a $1,000,000 portfolio.
I also think a mustachian's expenses don't necessarily rise lock-in-step with inflation. So the 4% rule has another built-in safety measure I don't think we necessarily need in most years. But I don't have enough data on that right now to make a coherent argument.
To answer your question, I'd feel comfortable using VPW with the 5.1% it provides for the first year. If my $800,000 portfolio can only give 30k with VPW this year, and I need 40k to live, on Jan 1st I'll know I need to generate 10k in side-income this year. In the vast majority of years, even in the worst-case scenario, this won't be necessary. I choose that over working 40 hour weeks for the next 3 to 7 years to get my portfolio up to $1,000,000 for the 4% rule that might end up failing on me anyway.
Edit: Forgot to mention Social Security as another addition to income we purposefully don't account for.
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A lot of that makes sense, thanks!
I'm still wondering about this:
I'm not trying to criticize, I am legitimately confused. Say my spending is 40k annually. How much do I need to save with the VPW?
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A lot of that makes sense, thanks!
I'm still wondering about this:
I'm not trying to criticize, I am legitimately confused. Say my spending is 40k annually. How much do I need to save with the VPW?
Me personally? If I were 30 years old with 100% stocks? I'd save up $800,000. But that's a personal choice, based on my personal circumstances. I'm comfortable with that risk, because I'm certain in my ability to bring in extra cash in the low-probability situations where it's needed, and I highly value the idea of not having mandatory work for those 3-7 extra years.
Knowing us, we'd probably (not guaranteed, but probably) not touch the stash for years anyway, as $40k is low for our area (just 20k each for a married couple), and we have so many fun projects we want to work on :)
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A lot of that makes sense, thanks!
I'm still wondering about this:
I'm not trying to criticize, I am legitimately confused. Say my spending is 40k annually. How much do I need to save with the VPW?
Me personally? If I were 30 years old with 100% stocks? I'd save up $800,000. But that's a personal choice, based on my personal circumstances. I'm comfortable with that risk, because I'm certain in my ability to bring in extra cash in the low-probability situations where it's needed, and I highly value the idea of not having mandatory work for those 3-7 extra years.
Knowing us, we'd probably (not guaranteed, but probably) not touch the stash for years anyway, as $40k is low for our area (just 20k each for a married couple), and we have so many fun projects we want to work on :)
Okay. What if I don't want to earn any more money in FIRE?
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A lot of that makes sense, thanks!
I'm still wondering about this:
I'm not trying to criticize, I am legitimately confused. Say my spending is 40k annually. How much do I need to save with the VPW?
Me personally? If I were 30 years old with 100% stocks? I'd save up $800,000. But that's a personal choice, based on my personal circumstances. I'm comfortable with that risk, because I'm certain in my ability to bring in extra cash in the low-probability situations where it's needed, and I highly value the idea of not having mandatory work for those 3-7 extra years.
Knowing us, we'd probably (not guaranteed, but probably) not touch the stash for years anyway, as $40k is low for our area (just 20k each for a married couple), and we have so many fun projects we want to work on :)
Okay. What if I don't want to earn any more money in FIRE?
There are only three variables we have control over:
1. The amount of money we save up for retirement
2. Our income in retirement
3. Our expenses in retirement
If someone wants income in retirement to be 0, then the other variables must shift. Either money saved must increase (more guaranteed years working), expenses must decrease, or they risk a portfolio wipe.
I think it's important to be flexible, especially when retiring in your 30's. I'm careful not to confuse 'retirement expense needs' with withdrawal amount. Expense needs are part of budgeting. withdrawal amount is like an income. When you were working you had a budget and an income. I don't think retirement should be any different. I didn't live paycheck to paycheck during my working years, and I don't want to live paycheck to paycheck in retirement. We always warn people of the risks when living paycheck to paycheck during their working years, but if your expenses are exactly 40k, and you save up exactly 1 million and retire with the 4% rule, that looks very much like living paycheck to paycheck to me. That's more risk than I'm willing to take. The easiest way for me to avoid this, is to increase variable #2, by doing all the fun stuff I'll be doing anyway.
VPW gives me a higher paycheck in the vast majority of years, and a lower paycheck in the rare times when I'm in danger of a portfolio wipe. When my paycheck is lowered, I have three choices. Increase variable #2, decrease variable #3, or risk a portfolio wipe. That's it. The 4% rule is like VPW, but with a fixed paycheck. Sure it's easier to budget, but it's the worst of both worlds. You miss out on the higher paycheck in the vast majority of years, and you still risk a portfolio wipe. It's easy to look at VPW and be afraid of "a lot of variability". But in your working career, if you were offered a 50% raise would you turn it down because it had "a lot of variability"? I like a lot of variability on the upside, I have planned for the variability on the downside.
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A lot of that makes sense, thanks!
I'm still wondering about this:
I'm not trying to criticize, I am legitimately confused. Say my spending is 40k annually. How much do I need to save with the VPW?
Me personally? If I were 30 years old with 100% stocks? I'd save up $800,000. But that's a personal choice, based on my personal circumstances. I'm comfortable with that risk, because I'm certain in my ability to bring in extra cash in the low-probability situations where it's needed, and I highly value the idea of not having mandatory work for those 3-7 extra years.
Knowing us, we'd probably (not guaranteed, but probably) not touch the stash for years anyway, as $40k is low for our area (just 20k each for a married couple), and we have so many fun projects we want to work on :)
Okay. What if I don't want to earn any more money in FIRE?
There are only three variables we have control over:
1. The amount of money we save up for retirement
2. Our income in retirement
3. Our expenses in retirement
If someone wants income in retirement to be 0, then the other variables must shift. Either money saved must increase (more guaranteed years working), expenses must decrease, or they risk a portfolio wipe.
I agree with all that. But you're saying a lot of words without answering my question. :P
So of your options, I'll choose the option I bolded..money saved must increase. Those options make sense, I agree with you, so I pick that one, and realize I'll need to work longer.
I don't want to work again after I FIRE though. My expenses will be 40k. Now... how much, using the VPW method, should I save?
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The 4% rule is like VPW, but with a fixed paycheck.
To supplement what Rebs is getting at, the 4% rule's primary function, in practice, is to establish a retirement-readiness indicator for your portfolio. Precisely nobody uses the 4% rule as the basis for a robotic withdrawal algorithm pulling out a constant inflation-adjusted amount of dollars year after year without regard to actual spending needs or market conditions. So, really, almost everyone will end up using some form of variable withdrawal strategy in retirement (albeit usually without strict rules-based parameters set by a specific variable withdrawal plan like VPW) but will have established their retirement trigger using a desired expense multiple derived from the 4% rule (25x, or some higher or lower multiple depending on personal risk tolerance).
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A lot of that makes sense, thanks!
I'm still wondering about this:
I'm not trying to criticize, I am legitimately confused. Say my spending is 40k annually. How much do I need to save with the VPW?
Me personally? If I were 30 years old with 100% stocks? I'd save up $800,000. But that's a personal choice, based on my personal circumstances. I'm comfortable with that risk, because I'm certain in my ability to bring in extra cash in the low-probability situations where it's needed, and I highly value the idea of not having mandatory work for those 3-7 extra years.
Knowing us, we'd probably (not guaranteed, but probably) not touch the stash for years anyway, as $40k is low for our area (just 20k each for a married couple), and we have so many fun projects we want to work on :)
Okay. What if I don't want to earn any more money in FIRE?
There are only three variables we have control over:
1. The amount of money we save up for retirement
2. Our income in retirement
3. Our expenses in retirement
If someone wants income in retirement to be 0, then the other variables must shift. Either money saved must increase (more guaranteed years working), expenses must decrease, or they risk a portfolio wipe.
I agree with all that. But you're saying a lot of words without answering my question. :P
So of your options, I'll choose the option I bolded..money saved must increase. Those options make sense, I agree with you, so I pick that one, and realize I'll need to work longer.
I don't want to work again after I FIRE though. My expenses will be 40k. Now... how much, using the VPW method, should I save?
I see. The 4% rule has a 90% success rate with $1,000,000. In order to replicate the 90% success rate here with VPW, you'd need to save up $1,700,000. With that, VPW would give you a median withdrawal of $85,000, more than double what you need. VPW doesn't look very good for someone who isn't flexible.
I'm also not sure how to compare those two success rates. With the 4% rule:
- 10% of the time you will have completely wiped your portfolio, $0 left. Can't feed yourself.
- The other 90% of the time, you'd be living paycheck to paycheck.
With VPW:
- 10% of the time, you will have had a single year over your entire lifetime where you were a few thousand dollars short, but still had over $700,000 to your name.
- The other 90% of the time, you'd be living with paychecks that give you a 50% buffer.
I'm not sure where the middle ground is, but I think I finally answered your question? :)
-
The 4% rule is like VPW, but with a fixed paycheck.
To supplement what Rebs is getting at, the 4% rule's primary function, in practice, is to establish a retirement-readiness indicator for your portfolio. Precisely nobody uses the 4% rule as the basis for a robotic withdrawal algorithm pulling out a constant inflation-adjusted amount of dollars year after year without regard to actual spending needs or market conditions. So, really, almost everyone will end up using some form of variable withdrawal strategy in retirement (albeit usually without strict rules-based parameters set by a specific variable withdrawal plan like VPW) but will have established their retirement trigger using a desired expense multiple derived from the 4% rule (25x, or some higher or lower multiple depending on personal risk tolerance).
I see, yea, that makes a lot of sense. Thanks!
-
I'm also not sure how to compare those two success rates. With the 4% rule:
- 10% of the time you will have completely wiped your portfolio, $0 left. Can't feed yourself.
- The other 90% of the time, you'd be living paycheck to paycheck.
If by "living paycheck to paycheck" you mean "living on the edge of insolvency," this part is very wrong. Someone using the 4% rule will see their investment growth outpace their spending more often than not, usually by a very significant amount.
-
I'm also not sure how to compare those two success rates. With the 4% rule:
- 10% of the time you will have completely wiped your portfolio, $0 left. Can't feed yourself.
- The other 90% of the time, you'd be living paycheck to paycheck.
If by "living paycheck to paycheck" you mean "living on the edge of insolvency," this part is very wrong. Someone using the 4% rule will see their investment growth outpace their spending more often than not, usually by a very significant amount.
You're right. But the research behind the 4% rule doesn't have a mechanism for increasing spending past the adjustments for inflation. If you restart your calculations for the 4% rule every year, I think you're guaranteed to run out of money early. Part of the reason the 4% rule works, is because it lets your portfolio grow to create a buffer.
If you started with $1,000,000, at what point would you recalculate? $2,000,000? $6,000,000? How are you determining that?
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I like this VWR thing. I like that it guarantees you will not run out of money. I can see if you want to be 100% retired it is not ideal but for those of us who are planning on having a side gig, why not? At least you will know how much your side gig needs to bring in and you can adjust based on that.
I would probably average the last 2 or 3 years portfolio value to smooth things out a bit.
-
I'm also not sure how to compare those two success rates. With the 4% rule:
- 10% of the time you will have completely wiped your portfolio, $0 left. Can't feed yourself.
- The other 90% of the time, you'd be living paycheck to paycheck.
If by "living paycheck to paycheck" you mean "living on the edge of insolvency," this part is very wrong. Someone using the 4% rule will see their investment growth outpace their spending more often than not, usually by a very significant amount.
You're right. But the research behind the 4% rule doesn't have a mechanism for increasing spending past the adjustments for inflation. If you restart your calculations for the 4% rule every year, I think you're guaranteed to run out of money early. Part of the reason the 4% rule works, is because it lets your portfolio grow to create a buffer.
If you started with $1,000,000, at what point would you recalculate? $2,000,000? $6,000,000? How are you determining that?
I personally don't really plan to recalculate at all. Why would I purposely inflate my lifestyle to fit my wallet? Just because I can afford to be wasteful doesn't mean that doing so would lead to greater happiness. Instead I plan to spend as much as I need to live a happy life and donate the bulk of any surplus to charity.
-
I'm also not sure how to compare those two success rates. With the 4% rule:
- 10% of the time you will have completely wiped your portfolio, $0 left. Can't feed yourself.
- The other 90% of the time, you'd be living paycheck to paycheck.
If by "living paycheck to paycheck" you mean "living on the edge of insolvency," this part is very wrong. Someone using the 4% rule will see their investment growth outpace their spending more often than not, usually by a very significant amount.
You're right. But the research behind the 4% rule doesn't have a mechanism for increasing spending past the adjustments for inflation. If you restart your calculations for the 4% rule every year, I think you're guaranteed to run out of money early. Part of the reason the 4% rule works, is because it lets your portfolio grow to create a buffer.
If you started with $1,000,000, at what point would you recalculate? $2,000,000? $6,000,000? How are you determining that?
I personally don't really plan to recalculate at all. Why would I purposely inflate my lifestyle to fit my wallet? Just because I can afford to be wasteful doesn't mean that doing so would lead to greater happiness. Instead I plan to spend as much as I need to live a happy life and donate the bulk of any surplus to charity.
If that's how you meant it, then I disagree. By "living paycheck to paycheck" I do mean "living on the edge of insolvency", as you're living without a buffer. If your expenses unexpectedly increase, your chances of permanently wiping out the portfolio are significantly increased.
-
I'm also not sure how to compare those two success rates. With the 4% rule:
- 10% of the time you will have completely wiped your portfolio, $0 left. Can't feed yourself.
- The other 90% of the time, you'd be living paycheck to paycheck.
If by "living paycheck to paycheck" you mean "living on the edge of insolvency," this part is very wrong. Someone using the 4% rule will see their investment growth outpace their spending more often than not, usually by a very significant amount.
You're right. But the research behind the 4% rule doesn't have a mechanism for increasing spending past the adjustments for inflation. If you restart your calculations for the 4% rule every year, I think you're guaranteed to run out of money early. Part of the reason the 4% rule works, is because it lets your portfolio grow to create a buffer.
If you started with $1,000,000, at what point would you recalculate? $2,000,000? $6,000,000? How are you determining that?
I personally don't really plan to recalculate at all. Why would I purposely inflate my lifestyle to fit my wallet? Just because I can afford to be wasteful doesn't mean that doing so would lead to greater happiness. Instead I plan to spend as much as I need to live a happy life and donate the bulk of any surplus to charity.
If that's how you meant it, then I disagree. By "living paycheck to paycheck" I do mean "living on the edge of insolvency", as you're living without a buffer. If your expenses unexpectedly increase, your chances of permanently wiping out the portfolio are significantly increased.
Again, the 4% rule creates a huge buffer in the majority of scenarios. It has to. The worst scenario in recorded history worked fine with 4%; a more typical period in history would have seen your stash multiply severalfold over your retirement, and the best case is even better than this. In the majority of cases you could have your expenses unexpectedly increase and you would still be fine. You just start to bring your odds of success down from 95+% to a slightly smaller number, depending on how big the increase is and when during retirement it happens.
-
I'm also not sure how to compare those two success rates. With the 4% rule:
- 10% of the time you will have completely wiped your portfolio, $0 left. Can't feed yourself.
- The other 90% of the time, you'd be living paycheck to paycheck.
If by "living paycheck to paycheck" you mean "living on the edge of insolvency," this part is very wrong. Someone using the 4% rule will see their investment growth outpace their spending more often than not, usually by a very significant amount.
You're right. But the research behind the 4% rule doesn't have a mechanism for increasing spending past the adjustments for inflation. If you restart your calculations for the 4% rule every year, I think you're guaranteed to run out of money early. Part of the reason the 4% rule works, is because it lets your portfolio grow to create a buffer.
If you started with $1,000,000, at what point would you recalculate? $2,000,000? $6,000,000? How are you determining that?
I personally don't really plan to recalculate at all. Why would I purposely inflate my lifestyle to fit my wallet? Just because I can afford to be wasteful doesn't mean that doing so would lead to greater happiness. Instead I plan to spend as much as I need to live a happy life and donate the bulk of any surplus to charity.
If that's how you meant it, then I disagree. By "living paycheck to paycheck" I do mean "living on the edge of insolvency", as you're living without a buffer. If your expenses unexpectedly increase, your chances of permanently wiping out the portfolio are significantly increased.
Again, the 4% rule creates a huge buffer in the majority of scenarios. It has to. The worst scenario in recorded history worked fine with 4%; a more typical period in history would have seen your stash multiply severalfold over your retirement, and the best case is even better than this. In the majority of cases you could have your expenses unexpectedly increase and you would still be fine. You just start to bring your odds of success down from 95+% to a slightly smaller number, depending on how big the increase is and when during retirement it happens.
The two sentences in bold above contradict each other. If you acknowledge the base odds of success aren't 100%, then you concede the worst scenario in recorded history did not work fine with 4%.
In any case, it seems we both agree the risk increases, we just disagree on the degree. Once you start going down the "Oh, here's another unexpected expense, but it's probably ok right? I mean, the market is doing great!", you're on a slippery slope. In other words, assuming an identical portfolio, intrinsically you'll have the same buffer either way. But VPW is honest about it, indicating there's a buffer to take advantage of during good times (and the majority of times are good), and telling you to pull back when the buffer is gone. The 4% rule hides this from you, tells you to carry on, buffer or not, and you hope it all works out.
As brooklynguy mentioned, the 4% rule is useful as a retirement-readiness indicator, but shouldn't be used to blindly withdrawal from your portfolio. Indeed, the senior author of the Trinity Study explicitly said this in an email response to a user on Bogleheads.org:
The email to Professor Philip L. Cooley:
---------------------------------------------------------------------------
I recently posted this remark and I wonder if you'd care to comment on it, or if you have any papers or aticles that explain more about how you expected your study to be used.
If I've completely misinterpreted you, my apologies. Is the following remark more or less right?
-------
The more I read the Trinity study, the more I think people misinterpret it. The most important sentence is:
"The word planning is emphasized because of the great uncertainties in the stock and bond markets. Mid-course corrections likely will be required, with the actual dollar amounts withdrawn adjusted downward or upward relative to the plan. The investor needs to keep in mind that selection of a withdrawal rate is not a matter of contract but rather a matter of planning."
What the "4% SWR" means is not that you can treat a portfolio as if it were a guaranteed annuity.
I think all the authors meant is that if it is late 2008 and your stocks halve in value, you don't need to halve your spending instantly. It's OK to cross your fingers and continue spending according to the 4%-then-COLAed plan, even though it means dipping into capital, and it's OK to go on doing that for a while. They also meant to warn people against the much higher withdrawal rates that had been formerly recommended by people using simple amortization calculations that didn't take account of the "order-of-returns" effect.
---------------------------------------------------------------------------
The response:
---------------------------------------------------------------------------
You have hit the nail on the head!
I've tried to explain that thought to journalists but they don't seem to get it. You've got it.
Stay flexible my friend!, which is the advice we should give to retirees.
Philip L. Cooley, Ph.D.
Prassel Distinguished Professor of Business
Trinity University
---------------------------------------------------------------------------
Source: https://www.bogleheads.org/forum/viewtopic.php?t=53956
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The 4% number was chosen precisely because it would have worked in every historical 30-year period. Every single one. If you want to cut your spending and/or find some other income during a downturn because you don't necessarily trust the upturn will ever happen, go right ahead. Sounds like a fine plan. So does withdrawing 4%.
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Continuing our example from earlier, here's a breakdown of the difference between VPW and the 4% rule for our 30 year old early retiree, with a starting retirement year of 1929:
VPW is the solid line, 4% rule is the dotted line.
(https://i.sli.mg/EkAERH.png)
We see the 4% rule portfolio was wiped out after 22 years of retirement, while VPW grew to 3.5 million, before completing the drawdown on schedule after 70 years of withdrawals. The last 20 years of withdrawals averaged $400,000 a year.
Starting year of 1966:
(https://i.sli.mg/aai542.png)
We see the 4% rule portfolio was wiped out after 25 years of retirement, while VPW grew to 7 million, and still has 20 years of withdrawals to go.The current-year withdrawal is $400,000.
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I think there are some good points being made here and it seems likely that most people will end up in practice using some sort of combination of swr and vwr without formalising it - I can't believe that many people here would blindly spend the same amount in a 50% market pullback and make no effort to trim or defer expenses or get some additional income.
I like the solution people by Bob Clyatt in "work less, live more." Here he suggests each year you withdraw up to 4% of even 4.5% of the current portfolio value - leaving anything you don't spend to continue accumulating, so it is a vwr methodology. However he suggests that if the amount calculated is less than you spent last year you spend 95% of last year's spending instead.
This seems good to me as it provides a simple guideline to reduce spending in down markets which should make a difference to portfolio survival but isn't so severe as to be a problem - I'm sure everyone could find a 5% saving for a year or two if needed.
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A lot of that makes sense, thanks!
I'm still wondering about this:
I'm not trying to criticize, I am legitimately confused. Say my spending is 40k annually. How much do I need to save with the VPW?
Me personally? If I were 30 years old with 100% stocks? I'd save up $800,000. But that's a personal choice, based on my personal circumstances. I'm comfortable with that risk, because I'm certain in my ability to bring in extra cash in the low-probability situations where it's needed, and I highly value the idea of not having mandatory work for those 3-7 extra years.
Knowing us, we'd probably (not guaranteed, but probably) not touch the stash for years anyway, as $40k is low for our area (just 20k each for a married couple), and we have so many fun projects we want to work on :)
Okay. What if I don't want to earn any more money in FIRE?
There are only three variables we have control over:
1. The amount of money we save up for retirement
2. Our income in retirement
3. Our expenses in retirement
If someone wants income in retirement to be 0, then the other variables must shift. Either money saved must increase (more guaranteed years working), expenses must decrease, or they risk a portfolio wipe.
I agree with all that. But you're saying a lot of words without answering my question. :P
So of your options, I'll choose the option I bolded..money saved must increase. Those options make sense, I agree with you, so I pick that one, and realize I'll need to work longer.
I don't want to work again after I FIRE though. My expenses will be 40k. Now... how much, using the VPW method, should I save?
I see. The 4% rule has a 90% success rate with $1,000,000. In order to replicate the 90% success rate here with VPW, you'd need to save up $1,700,000. With that, VPW would give you a median withdrawal of $85,000, more than double what you need. VPW doesn't look very good for someone who isn't flexible.
I'm also not sure how to compare those two success rates. With the 4% rule:
- 10% of the time you will have completely wiped your portfolio, $0 left. Can't feed yourself.
- The other 90% of the time, you'd be living paycheck to paycheck.
With VPW:
- 10% of the time, you will have had a single year over your entire lifetime where you were a few thousand dollars short, but still had over $700,000 to your name.
- The other 90% of the time, you'd be living with paychecks that give you a 50% buffer.
I'm not sure where the middle ground is, but I think I finally answered your question? :)
That answers it exactly, thanks.
It seems to me, with VPW, I'd save up way too much, and have to work way too long.
I'll absolutely be varying my spending in ER, but not by as much as VPW advocates, as that will lead to portfolio depletion (I know it can't literally deplete, but make my withdrawals so tiny as to be the same) and/or cause my spending to swing way too wildly.
Based on your post, I either need to save up 1.7MM, or (if I FIRE with 1MM, but use VPW) I have a much higher risk of having too small of paychecks, and spending much less than I want, for the majority of my life.
Variable spending is a great idea, but I'm not a fan of this particular implementation.
-
Continuing our example from earlier, here's a breakdown of the difference between VPW and the 4% rule for our 30 year old early retiree, with a starting retirement year of 1929:
VPW is the solid line, 4% rule is the dotted line.
(https://i.sli.mg/EkAERH.png)
We see the 4% rule portfolio was wiped out after 22 years of retirement, while VPW grew to 3.5 million, before completing the drawdown on schedule after 70 years of withdrawals. The last 20 years of withdrawals averaged $400,000 a year.
Starting year of 1966:
(https://i.sli.mg/aai542.png)
We see the 4% rule portfolio was wiped out after 25 years of retirement, while VPW grew to 7 million, and still has 20 years of withdrawals to go.The current-year withdrawal is $400,000.
What asset allocation are you using for this? cFIREsim's default 75/25 allocation would have seen our 4%-rule-following 1929 retiree have their money last until 1976 (47 years, not 22).
Meanwhile, your variable rate retiree would have had to scramble for work throughout most of the Great Depression because the >50% drop in his portfolio would have made his permissible withdrawal throughout the 1930s be about half of what he was expecting before the market crashed. He could maybe allow himself to actually quit working sometime around 1950 when his portfolio got back to 75% of its original value and his remaining life expectancy had shortened enough to permit his withdrawal rate to be large enough to finally cover his expenses.
-
A lot of that makes sense, thanks!
I'm still wondering about this:
I'm not trying to criticize, I am legitimately confused. Say my spending is 40k annually. How much do I need to save with the VPW?
Me personally? If I were 30 years old with 100% stocks? I'd save up $800,000. But that's a personal choice, based on my personal circumstances. I'm comfortable with that risk, because I'm certain in my ability to bring in extra cash in the low-probability situations where it's needed, and I highly value the idea of not having mandatory work for those 3-7 extra years.
Knowing us, we'd probably (not guaranteed, but probably) not touch the stash for years anyway, as $40k is low for our area (just 20k each for a married couple), and we have so many fun projects we want to work on :)
Okay. What if I don't want to earn any more money in FIRE?
There are only three variables we have control over:
1. The amount of money we save up for retirement
2. Our income in retirement
3. Our expenses in retirement
If someone wants income in retirement to be 0, then the other variables must shift. Either money saved must increase (more guaranteed years working), expenses must decrease, or they risk a portfolio wipe.
I agree with all that. But you're saying a lot of words without answering my question. :P
So of your options, I'll choose the option I bolded..money saved must increase. Those options make sense, I agree with you, so I pick that one, and realize I'll need to work longer.
I don't want to work again after I FIRE though. My expenses will be 40k. Now... how much, using the VPW method, should I save?
I see. The 4% rule has a 90% success rate with $1,000,000. In order to replicate the 90% success rate here with VPW, you'd need to save up $1,700,000. With that, VPW would give you a median withdrawal of $85,000, more than double what you need. VPW doesn't look very good for someone who isn't flexible.
I'm also not sure how to compare those two success rates. With the 4% rule:
- 10% of the time you will have completely wiped your portfolio, $0 left. Can't feed yourself.
- The other 90% of the time, you'd be living paycheck to paycheck.
With VPW:
- 10% of the time, you will have had a single year over your entire lifetime where you were a few thousand dollars short, but still had over $700,000 to your name.
- The other 90% of the time, you'd be living with paychecks that give you a 50% buffer.
I'm not sure where the middle ground is, but I think I finally answered your question? :)
That answers it exactly, thanks.
It seems to me, with VPW, I'd save up way too much, and have to work way too long.
I'll absolutely be varying my spending in ER, but not by as much as VPW advocates, as that will lead to portfolio depletion (I know it can't literally deplete, but make my withdrawals so tiny as to be the same) and/or cause my spending to swing way too wildly.
Based on your post, I either need to save up 1.7MM, or (if I FIRE with 1MM, but use VPW) I have a much higher risk of having too small of paychecks, and spending much less than I want, for the majority of my life.
Variable spending is a great idea, but I'm not a fan of this particular implementation.
I was with you up until that last point (in bold). Even in the worst case scenario of 1929, VPW would have you spending less than you want for the first 26 years. The remaining 44 years have an average withdrawal of $73,000, while your 4% rule counterpart lost his ability to feed himself after 22 years.
Similar story for the 1966 investor, where VPW would have you spending less for 22 of those years, but while the remaining years (so far) would have you averaging a $59,000 withdrawal. While your 4% rule counterpart lost his ability to feed himself after 25 years.
The worst case scenarios for VPW have you spending less for about two decades so the portfolio can recover for the rest of your life, while those same years for the 4% rule would have resulted in portfolio wipes. In short, either way you end up working again. VPW has you doing it while you're younger, on a part-time basis, with $700,000 in the bank. The 4% rule has you doing it when you're 55, on a full-time basis, with $0 in the bank.
Pick your poison :-P
-
Continuing our example from earlier, here's a breakdown of the difference between VPW and the 4% rule for our 30 year old early retiree, with a starting retirement year of 1929:
VPW is the solid line, 4% rule is the dotted line.
(https://i.sli.mg/EkAERH.png)
We see the 4% rule portfolio was wiped out after 22 years of retirement, while VPW grew to 3.5 million, before completing the drawdown on schedule after 70 years of withdrawals. The last 20 years of withdrawals averaged $400,000 a year.
Starting year of 1966:
(https://i.sli.mg/aai542.png)
We see the 4% rule portfolio was wiped out after 25 years of retirement, while VPW grew to 7 million, and still has 20 years of withdrawals to go.The current-year withdrawal is $400,000.
What asset allocation are you using for this? cFIREsim's default 75/25 allocation would have seen our 4%-rule-following 1929 retiree have their money last until 1976 (47 years, not 22).
Meanwhile, your variable rate retiree would have had to scramble for work throughout most of the Great Depression because the >50% drop in his portfolio would have made his permissible withdrawal throughout the 1930s be about half of what he was expecting before the market crashed. He could maybe allow himself to actually quit working sometime around 1950 when his portfolio got back to 75% of its original value and his remaining life expectancy had shortened enough to permit his withdrawal rate to be large enough to finally cover his expenses.
You've made a few points now which have already been addressed. It'd be much easier if you read the thread.
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I was with you up until that last point (in bold). Even in the worst case scenario of 1929, VPW would have you spending less than you want for the first 26 years. The remaining 44 years have an average withdrawal of $63,000, while your 4% rule counterpart lost his ability to feed himself after 22 years.
Similar story for the 1966 investor, where VPW would have you spending less for 22 of those years, but while the remaining years (so far) would have you averaging a $51,000 withdrawal. While your 4% rule counterpart lost his ability to feed himself after 25 years.
The worst case scenarios for VPW have you spending less for about two decades so the portfolio can recover for the rest of your life, while those same years for the 4% rule would have resulted in portfolio wipes. In short, either way you end up working again. VPW has you doing it while you're younger, on a part-time basis, with $700,000 in the bank. The 4% rule has you doing it when you're 55, on a full-time basis, with $0 in the bank.
Pick your poison :-P
Only if
1) You ER at literally the worst time to do so, ever, historically, AND
2) You don't adjust your spending with the 4% rule.
1 seems unlikely to me, and 2 seems absurd. For both to occur seems near impossible, to me.
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I was with you up until that last point (in bold). Even in the worst case scenario of 1929, VPW would have you spending less than you want for the first 26 years. The remaining 44 years have an average withdrawal of $63,000, while your 4% rule counterpart lost his ability to feed himself after 22 years.
Similar story for the 1966 investor, where VPW would have you spending less for 22 of those years, but while the remaining years (so far) would have you averaging a $51,000 withdrawal. While your 4% rule counterpart lost his ability to feed himself after 25 years.
The worst case scenarios for VPW have you spending less for about two decades so the portfolio can recover for the rest of your life, while those same years for the 4% rule would have resulted in portfolio wipes. In short, either way you end up working again. VPW has you doing it while you're younger, on a part-time basis, with $700,000 in the bank. The 4% rule has you doing it when you're 55, on a full-time basis, with $0 in the bank.
Pick your poison :-P
Only if
1) You ER at literally the worst time to do so, ever, historically, AND
2) You don't adjust your spending with the 4% rule.
1 seems unlikely to me, and 2 seems absurd. For both to occur seems near impossible, to me.
Agreed. But isn't that the premise?
"I don't want to work again after I FIRE though. My expenses will be 40k. Now... how much, using the VPW method, should I save?"
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I think we're talking past each other. VPW is just much too erratic for me, and leads to one needing to save way too much money. I do like varying spending in ER based on the market, but not via the percents VPW advocates. YMMV, obviously. :)
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You've made a few points now which have already been addressed. It'd be much easier if you read the thread.
I did read the thread, and I don't appreciate being told that I didn't.
I noticed you chose to use a high percentage of bonds for your variable withdrawal scenarios because a lower volatility means you get to withdraw more in a stock market downturn. You didn't spell out what asset allocation you were using for your 4% rule comparison scenarios. You do know that the 4% rule only works with a stock-heavy portfolio, right? Why not test your variable withdrawal bond-heavy portfolio against someone who follows the asset allocation most suited for success under the 4% rule? If you do, you'll find that the 1929 retiree could actually retire in 1929 and make it to 1977 by following the 4% rule.
A 47-year retirement wouldn't be that appealing to a 30-year-old retiree, I agree, but that's why someone retiring at 30 shouldn't blindly follow the 4% rule. They should use a slightly lower withdrawal rate and/or be a little bit flexible. I think we're mostly on the same page here. Blindly withdrawing 4% doesn't work for a retirement lasting several decades. Where we differ is that I think it's absolutely unnecessary for someone to cut their withdrawals in half when the market gets cut in half.
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Commenting to follow.
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http://livingafi.com/2014/05/09/drawdown-part-1-the-basics/
I like Dr. Doom's (that's his name on these boards) drawdown strategies outlined in his postings here.
I pretty much don't worry about the extent of the drop, but the duration. In any market correction/crash that lasts under a few months, I would do nothing. At most, I'd cut back on the extras. I'd switch to my bond allocation to pull $ from as they should technically be showing growth if stocks are tanking. Might start using my cash reserves if it was a serious drop and I wanted to leave the investments alone to recover.
If the down market extends into a year, then I'd probably switch over to using my cash reserves (I currently have about 1.5 years in cash). I'd cut back on the extras and live a bit more frugally and hope to wait out the market. Most markets are on the road to recovery by 1-2 years out, so I'd slowly switch back to using investments for living expenses, and replenish my cash reserves after full recovery.
If the crash lingers multiple years, I'll probably considering either slashing my expenses to bare bones, or getting a part time job - depends on what works best when it happens - or even a combo of these.
Just commenting to say that I really liked this link. Sequence of returns is extremely important when drawing down a portfolio, and having a portfolio that can best produce a steady consistent 6% seems much more valuable when withdrawing your money. Of course when accumulating it also seems appropriate to have a higher risk allocation.
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I don't want to work again after I FIRE though. My expenses will be 40k. Now... how much, using the VPW method, should I save?
I forgot the old cfiresim (http://gator3089.hostgator.com/~boknows/input.php) has a VPW option that allows you to specify a spending floor. I think this will be a much better gauge of "success" compared to the 4% rule. Setting the spending floor to 40k, you get a similar success rate at $1,012,500 saved, supporting an annual withdrawal of about 90k a year (all inflation-adjusted).
(https://i.sli.mg/CN68vQ.png)
I think this is closer to what you were looking for.
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You've made a few points now which have already been addressed. It'd be much easier if you read the thread.
I did read the thread, and I don't appreciate being told that I didn't.
I noticed you chose to use a high percentage of bonds for your variable withdrawal scenarios because a lower volatility means you get to withdraw more in a stock market downturn. You didn't spell out what asset allocation you were using for your 4% rule comparison scenarios. You do know that the 4% rule only works with a stock-heavy portfolio, right? Why not test your variable withdrawal bond-heavy portfolio against someone who follows the asset allocation most suited for success under the 4% rule? If you do, you'll find that the 1929 retiree could actually retire in 1929 and make it to 1977 by following the 4% rule.
A 47-year retirement wouldn't be that appealing to a 30-year-old retiree, I agree, but that's why someone retiring at 30 shouldn't blindly follow the 4% rule. They should use a slightly lower withdrawal rate and/or be a little bit flexible. I think we're mostly on the same page here. Blindly withdrawing 4% doesn't work for a retirement lasting several decades. Where we differ is that I think it's absolutely unnecessary for someone to cut their withdrawals in half when the market gets cut in half.
All charts are modeled after someone FIREing at 30 with 100% stocks, following Arebelspy example.
Agreed, we're mostly on the same page. I don't mind cutting my withdrawals in half during a market crash. You do. Nothing wrong with that :) Luckily the old cfiresim (http://gator3089.hostgator.com/~boknows/input.php) lets us set a spending floor for the VPW calculations. That might be more up your alley.
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I don't want to work again after I FIRE though. My expenses will be 40k. Now... how much, using the VPW method, should I save?
I forgot the old cfiresim (http://gator3089.hostgator.com/~boknows/input.php) has a VPW option that allows you to specify a spending floor. I think this will be a much better gauge of "success" compared to the 4% rule. Setting the spending floor to 40k, you get a similar success rate at $1,012,500 saved, supporting an annual withdrawal of about 90k a year (all inflation-adjusted).
(https://i.sli.mg/CN68vQ.png)
I think this is closer to what you were looking for.
Yes, I've played with the cFIREsim floor/ceiling variable spending models quite a bit. So VPW lets you up your spending quite a bit, and the downside is maybe 10% higher failure rate? That's not too bad. The problem is with no ceiling and floor, but you can always implement one yourself, and ignore VPW. I guess that's sort of missing the point, and back to "why do it in the first place," but it's just another spending model to consider, I suppose. :)
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I don't want to work again after I FIRE though. My expenses will be 40k. Now... how much, using the VPW method, should I save?
I forgot the old cfiresim (http://gator3089.hostgator.com/~boknows/input.php) has a VPW option that allows you to specify a spending floor. I think this will be a much better gauge of "success" compared to the 4% rule. Setting the spending floor to 40k, you get a similar success rate at $1,012,500 saved, supporting an annual withdrawal of about 90k a year (all inflation-adjusted).
(https://i.sli.mg/CN68vQ.png)
I think this is closer to what you were looking for.
Yes, I've played with the cFIREsim floor/ceiling variable spending models quite a bit. So VPW lets you up your spending quite a bit, and the downside is maybe 10% higher failure rate? That's not too bad. The problem is with no ceiling and floor, but you can always implement one yourself, and ignore VPW. I guess that's sort of missing the point, and back to "why do it in the first place," but it's just another spending model to consider, I suppose. :)
Hmm, your post made me look at it another way. 4% rule:
(https://i.sli.mg/mqam2f.png)
VPW with 40k spending floor:
(https://i.sli.mg/ZPUqMz.png)
Not as big of a difference as I'd have thought. I think VPW has a lot to offer, even if only used as a spending ceiling which won't prematurely deplete your portfolio. Which is your preferred spending model? I'm still searching for mine, but this seems to be as good as it gets in my opinion.
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I think VPW has a lot to offer, even if only used as a spending ceiling which won't prematurely deplete your portfolio.
Yes, that's the one use I can think of. But that isn't insignificant, it could be quite helpful for the paranoid who oversave and later aren't sure how much they can raise spending.
Which is your preferred spending model? I'm still searching for mine, but this seems to be as good as it gets in my opinion.
I think rigid spending models are a naive way to look at retirement. Literally zero people pick a spending model before ER and stick to it year after year. Their expenses fluctuate (but voluntarily--more travel perhaps--and involuntary--unexpected home repairs, for example), the market fluctuates, etc. No one says "I picked this spending model a decade ago, so I'm sticking to it hell or high water."
Many people just do semi-ER, so they continue work on a part time basis, and aren't even doing any spending model at all, but are just using the portfolio to supplement earned income (or have the earned income just cover expenses and leave the portfolio to grow until they hit full FI with it).
I think--for someone close to FIRE--it's good to do your best to estimate ER spending (including known unknowns, and a safety margin for unknown unknowns), pick a FIRE number that supports that given potential future inflation and returns, and go with it. Use any and all models you like to simulate ER spending and see how you'd have done, historically, if you followed that model. Then reevaluate as you go along. Check your spending levels, check your portfolio amount as it fluctuates, and decide if your portfolio could handle a raise in spending within your comfort level (or if you even want to spend more), or, if it drops, if you want to drop spending, or think you'll be okay riding it out, or if you want to earn extra income, or whatever.
Looking at all the models is all well and good, but when the rubber hits the road, it's more nitty gritty than that, and it's unrealistic to pick one spending model and think that's the end-all, be-all and that you'll just spend that for all your years of ER. :)
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I like that ER spending attitude, ARS. Sounds like a good flexible plan. How has your initial estimate of spending while full time travelling panned out? Are you over, under, or on plan?
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I like that ER spending attitude, ARS. Sounds like a good flexible plan. How has your initial estimate of spending while full time travelling panned out? Are you over, under, or on plan?
Too early to tell.
Like when someone looks at their annual budget after two months, it may be wildly off (too low if they haven't had any major expenses, too high if they paid a giant annual bill like car insurance), having done a few types of travel (walking the Camino, and now moving a little faster before settling in for the baby) it's hard to project if our current spending is typical or atypical, and, if the latter, if it's higher than it will be or lower.
Our first year or two of travel/baby will sort of set a "baseline," and I'll decide from there if it's sustainable or if we'll need to make changes. I'm positive we're fine for a few years, so we'll see how it goes and evaluate. :)
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I think this method answers 2 really great questions that people have on this forum quite frequently.
1. When is it safe for me to increase my spending.
2. How much side income would I need to supplement in order to quit my job today.
I have attached 2 VPW simulations for 60 year time frames. The first is a Permanent Portfolio at 50% equity/25% bond/25% gold. The second is the typical 80-20 that we all love so dearly (And has better results overall, and a higher standard deviation).
Obviously just like the standard 4% rule, the worst cycles are the ones that start bad. Starting this at the peak of the market still makes you over-estimate how much you should really be initially withdrawing.
Here are a few observations I would make about this VPW:
1. There are 0 cycles where withdraws were lower than 40% of the initial withdraw.
2. This plan is better than the 4% rule because it uses the knowledge that 4% is historically the worst it is likely to be, but the average is much higher than 4%.
3. More than 50% of the cycles start at 4.5% withdraw rate, and by the last 3rd average a 7.8% rate.
4. The absolute worst year among all cycles was a single year where the withdraw rate 1.8%. (The 1906 cycle) (meaning that at $40k expenses, you would only have to find $22k to cover the down time)
Since it is much more likely that many here save more than they need, this is another method to consider when thinking of your overall life plan. It seems to be much more useful for those of us that are looking for a longer period of part-time work, as it gives a nice estimate on how much part-time work you need to cover expenses.
And also for the mustachians that want to know how much they can draw down their portfolio each year and still be safe. This can be a great guide for people who want to start giving away their money before they die, or to or just to feel a bit more at ease in case of rising medical costs later in life.
Mustachians also regularly talk about how if retirement fails early on it will be plenty obvious. I think this can help provide some guidelines to exactly what is still safe to take out during bad times, without having to go back to full-time work. And it also provides an upper-limit for people who want to perhaps have a more spendy year.
Great tool overall! Thanks for showing it to me. I'm having great fun messing with the inputs.
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I've done cfireism calcs with a target of 4% and then set ceiling and floors. I don't see the need for more than $40,000 in my household and can withstand a drop to $30,000 for a few years.
1. Basically be flexible, theory "work less live more" 95% of last year withdrawal but I would be more aggressive and cut 25% with a floor of $30,000.
2. Get a side gig once 4% withdrawal is less than $30,000.
a. So if my portfolio drops from a million to $500,000, 4% would be $20,000 and I would need a side job to cover the gap. ???? Sound correct?
No ceiling/4-5% of portfolio:
I posted another question on this but figured out the answer about two weeks ago. If I draw out more with a ceiling set to no limit, the ending balance is substantially less. However I would enjoy some big living years.
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You've made a few points now which have already been addressed. It'd be much easier if you read the thread.
I did read the thread, and I don't appreciate being told that I didn't.
I noticed you chose to use a high percentage of bonds for your variable withdrawal scenarios because a lower volatility means you get to withdraw more in a stock market downturn. You didn't spell out what asset allocation you were using for your 4% rule comparison scenarios. You do know that the 4% rule only works with a stock-heavy portfolio, right? Why not test your variable withdrawal bond-heavy portfolio against someone who follows the asset allocation most suited for success under the 4% rule? If you do, you'll find that the 1929 retiree could actually retire in 1929 and make it to 1977 by following the 4% rule.
A 47-year retirement wouldn't be that appealing to a 30-year-old retiree, I agree, but that's why someone retiring at 30 shouldn't blindly follow the 4% rule. They should use a slightly lower withdrawal rate and/or be a little bit flexible. I think we're mostly on the same page here. Blindly withdrawing 4% doesn't work for a retirement lasting several decades. Where we differ is that I think it's absolutely unnecessary for someone to cut their withdrawals in half when the market gets cut in half.
All charts are modeled after someone FIREing at 30 with 100% stocks, following Arebelspy example.
Agreed, we're mostly on the same page. I don't mind cutting my withdrawals in half during a market crash. You do. Nothing wrong with that :) Luckily the old cfiresim (http://gator3089.hostgator.com/~boknows/input.php) lets us set a spending floor for the VPW calculations. That might be more up your alley.
I just used your link for old cfiresim, couldn't find the old sight.
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You've made a few points now which have already been addressed. It'd be much easier if you read the thread.
I did read the thread, and I don't appreciate being told that I didn't.
I noticed you chose to use a high percentage of bonds for your variable withdrawal scenarios because a lower volatility means you get to withdraw more in a stock market downturn. You didn't spell out what asset allocation you were using for your 4% rule comparison scenarios. You do know that the 4% rule only works with a stock-heavy portfolio, right? Why not test your variable withdrawal bond-heavy portfolio against someone who follows the asset allocation most suited for success under the 4% rule? If you do, you'll find that the 1929 retiree could actually retire in 1929 and make it to 1977 by following the 4% rule.
A 47-year retirement wouldn't be that appealing to a 30-year-old retiree, I agree, but that's why someone retiring at 30 shouldn't blindly follow the 4% rule. They should use a slightly lower withdrawal rate and/or be a little bit flexible. I think we're mostly on the same page here. Blindly withdrawing 4% doesn't work for a retirement lasting several decades. Where we differ is that I think it's absolutely unnecessary for someone to cut their withdrawals in half when the market gets cut in half.
All charts are modeled after someone FIREing at 30 with 100% stocks, following Arebelspy example.
Agreed, we're mostly on the same page. I don't mind cutting my withdrawals in half during a market crash. You do. Nothing wrong with that :) Luckily the old cfiresim (http://gator3089.hostgator.com/~boknows/input.php) lets us set a spending floor for the VPW calculations. That might be more up your alley.
I just used your link for old cfiresim, couldn't find the old sight.
Works for me. Try again?
Also I'm not sure why to use the old one--the new one lets you set a floor for VPW spending as well.
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No luck for me but I have some questions using the calc and reviewing the results... I'm having much more success with (Cfiresim - old) with lower balances and a ceiling and floor. Please review and provide feedback if I'm on track. Also, if the vpw is a range what amount does it pull annually?
100% success if when:
$650,000 Portfolio
Retire 2016, 30 years, Age 36
Social Security wife and I, 2040year, $36,000 combined
College Loan 2032 4000 annually 20 years
Downsize, Sell House year 2032 cash out for investing $150,000
80% stock 20% bonds low fees
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I've attached the grid of the calculations for more information.
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Also, I've attached the inputs as mentioned. Seems like $650,000 would work with some variable spending, but the spending would cause the portfolio to dip into an uncomfortable zone. The average spending would drop into the lower spectrum of spending often. Thoughts?
Spending Goal: $38,500 but can cut back to $30,000 easily, VPW method used
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i was wondering if you have 1 million cash and the cash earns 5% interest per year and you are 35 years old will it last you an entire lifetime if you spend $35000 per year and at age 65 you will receive 500 per month in social security? This assumes only money in bank and person does not invest in stocks
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i was wondering if you have 1 million cash and the cash earns 5% interest per year and you are 35 years old will it last you an entire lifetime if you spend $35000 per year and at age 65 you will receive 500 per month in social security? This assumes only money in bank and person does not invest in stocks
Not sure if this was for me or others to opine. Without the interest this should last 28 years.
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When you use a Variable Percentage Withdrawal (VPW) (https://www.bogleheads.org/forum/viewtopic.php?f=10&t=120430), you don't have to worry about a plan. It tells you exactly how much you can safely withdrawal, there is no risk of prematurely depleting your portfolio, and you end up with much more money to spend than simply sticking to the 4% rule.
I like this approach and I think it's what we will do. Our expenses I believe could range from 25k to 40k. Of course we could go higher if we decided to go nuts on spending but I can't see that happening.
If the markets tank or if we just don't feel like spending a lot of money we will stick to 25k. If the markets are booming and we need to buy something then we may spend more.
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As a recent FIREee I find this thread to be one of the more interesting rehashes of withdrawal rates that I've read lately, so I'm chiming in with my 2 cents as a way of posting to follow.
My plan is to use the traditional/standard 4% SWR model starting at age 46 with a 90%/10% target AA, rebalancing annually. I also plan to use the POPR (pay-out-period-reset) model, AKA "retire again and again" to increase my withdrawal over time and reduce mean ending portfolio, while keeping portfolio depletion risk roughly constant. In my written plan, I also plan to check my actual spending against my portfolio value twice per year[1] and institute contingency measures if my WR is getting too high. "Too high" is defined as exceeding a 4% withdrawal rate, which is pretty strict. In reality I might wait a little bit to see if the portfolio recovers. In my case, a 4% withdrawal represents about 125% of my typical recent spending, and perhaps 150% of my bare minimum spending.
Even though the above is my official written plan, I think what ARS posted in reply #52 is what really happens - you live your life, spend as life requires, monitor things, and make common sense adjustments if things are going "well" or "poorly". Looking at the graphs up-thread, even though I have more ice in my veins than most, I think I would be between nervous and panicked in about 1932 and 1974 and would be tightening the purse strings as well as filling out the Walmart application regardless of whether my official plan was VPW or 4%.
I also think there is more nuance in particular situations. I've run all the simulation tools with my particular numbers as exactly as I can get them, but my particular-very-specific situation with regards to income, taxes, spending, budget, contingency plans, risk tolerance and so forth is both very unique to me and becomes subjective. Is there a 42.8% chance that my Social Security estimate is too high, or is it more that I've just de-rated it "enough" for my particular situation?
I have been surprised at how much my perspective has changed from hyperanalysis/spreadsheet/98.37%vs99.44% before FIRE-ing to "it's irie mon"/"hakuna matata" after FIRE-ing. And it's only been a few weeks. I used to get annoyed that posts from most FIREees with more experience were fairly generic and vague and laissez-faire and not cut-and-dried "If the market drops between 15% and 30% for between 3 months and 1 year, I will reallocate to 65%/35% and switch to withdrawing from my cash reserves for 7.9 months". I wanted that pre-arranged clarity. Now that I've been FIREd for a little while, I think I understand better where they're coming from and am pretty much feel the same way myself.
As the saying goes, "measure with a micrometer, cut with an axe".
[1] Who am I kidding? I check my WR basically every day to two decimal places. Using yesterday's closing prices I was at 3.56%...
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What ARS advocates (run the numbers a few different ways, be flexible, use common sense) is pretty much what we're doing.
We're currently in year one of semi-FIRE and our budget for 2016 is equal to 4% of our portfolio as of the end of 2015. Because the market went down between when we decided to FIRE and when we ran our numbers (at the end of 2015) we did end up lowering our budget by a few thousand bucks. Specifically we cut our travel budget and our eating out budget by something like 20%.
But if the stock market tanks by 50% next year we're probably not going to cut our budget in half. And if the stock market doubles next year we're not going to double our spending either. We'll adjust, yes, but not too sharply.
4% WR is a good starting place but each December we'll make a judgement call on what to spend the following year.
Time will tell but my hunch is that we'll be fine. We're currently spending under our anticipated ER budget and my hobby-job continues to throw off income.
SIS