Author Topic: Assumption is the mother of all failures  (Read 2323 times)

never give up

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Assumption is the mother of all failures
« on: November 05, 2017, 02:26:07 AM »
Well that subject title was politer than it could have been!

Iíve been on the site for about a month (UK based) and am very conscious that many of the key maths orientated articles are heavily US orientated. Iíve been through the process of minimising costs, am now investing in index trackers and so obviously attention turns to projecting future returns/FIRE dates. As Iíve started to use compound interest calculators, for some reason (just instinct not based of any evidence/fact) I have naturally gravitated to a 4.5% growth rate not 7%. That also makes me think that a 4% withdrawal rate may also be too aggressive.

As a result Iím thinking the only way to model and project future situations is to use a worst case, best case, mid case kind of approach with 7% being the best case. That way Iím covering multiple situations and the chances of being completely wrong are minimised.

From a UK perspective what are peopleís feelings on growth rates, withdrawal rates etc? Not making a political statement but with Brexit, high stock market levels, interest rates starting to rise etc it really is a time of huge uncertainty (although I guess all times are times of uncertainty and a persons propensity to worry magnifies this at a time they are trying to make big decisions).

Monkeytennis

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Re: Assumption is the mother of all failures
« Reply #1 on: November 05, 2017, 03:09:34 AM »
Just have a globally diversified fund and it makes this pretty irrelevant surely?

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  • Bristles
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Re: Assumption is the mother of all failures
« Reply #2 on: November 05, 2017, 03:27:07 AM »
Yes itís possible that some of the more negative articles on UK withdrawal rates are making the assumption that the portfolio is only invested in UK equities. Is there anything around currency risk though if a greater proportion of a portfolio isnít invested in a persons home currency?

If I was in the US I may be completely happy investing 90% of the equity part of my portfolio in US stocks. In the UK though I guess we may want to spread it around a bit more than that.

RetirementInvestingToday

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Re: Assumption is the mother of all failures
« Reply #3 on: November 05, 2017, 04:16:03 AM »
All of my planning is done in real terms (inflation adjusted) where I assume annualised real returns of 4%.  I started on my FIRE journey in October 2007 so I've seen a boom and a bust.  As a comparison over that time I've achieved a nominal 6.9% and a real 4.0%.  UK investor, diversified country and asset classes portfolio.

When it comes to withdrawal rates I'll FIRE at age 45 (just a few months away).  From my readings and research  I've settled on a WR of 2.5% plus I assume I'll never receive the State Pension.  An added advantage of this is that I should be able to live off the 'dividends' meaning hopefully no psychological sell challenges in a bad bear market.  I should be adding to my cash holdings in the good times and drawing down on them in the down times.  Of course it means I've had to work a little longer but I'd prefer that then having to go back to work in 10 years (for me FIRE is all about paid work becoming 100% optional).

I've been blogging very transparently about this stuff since 2009 but I'm most certainly not a paid professional so please DYOR as these are very personal and critical assumptions.
45 years of age, UK based (for now) and FI.  Will FIRE in mid-2018.  A lot more detail on my blog http://www.retirementinvestingtoday.com/

marty998

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Re: Assumption is the mother of all failures
« Reply #4 on: November 05, 2017, 04:33:22 AM »
From my readings and research  I've settled on a WR of 2.5% plus I assume I'll never receive the State Pension.

A withdrawal rate of 2.5% is 40x current spending.

You could have no investment growth for 40 years and still have a pound in your wallet at the end of it. Think about where markets were in 1977 and where they are now. Even if we had a quarter of the growth of the last 40 years in the next 40 you'd easily be covered.

Do you really want to be that conservative?


RetirementInvestingToday

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Re: Assumption is the mother of all failures
« Reply #5 on: November 05, 2017, 04:51:15 AM »
A withdrawal rate of 2.5% is 40x current spending.

You could have no investment growth for 40 years and still have a pound in your wallet at the end of it. Think about where markets were in 1977 and where they are now. Even if we had a quarter of the growth of the last 40 years in the next 40 you'd easily be covered.

Do you really want to be that conservative?
It doesn't work like that.  When you're drawing down on a portfolio it's the sequence of returns over x years that's important and not the average amount of annual growth over x years.  You also need to be adjusting for inflation. 

I'm happy being that conservative.  It's come from UK and US withdrawal rate research I've read over the years.  Of course others might be less risk averse.  For me I want work to be 100% optional post FIRE.
45 years of age, UK based (for now) and FI.  Will FIRE in mid-2018.  A lot more detail on my blog http://www.retirementinvestingtoday.com/

never give up

  • Bristles
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Re: Assumption is the mother of all failures
« Reply #6 on: November 05, 2017, 05:25:29 AM »
Good to see a range of different views here. Thanks for such a detailed response RIT. For me the two absolute worst things about FIRE would be:

1. Running out of money at an age where itís too late to work and do anything about it. I appreciate state pension maybe sufficient though at this age but even so the plan has failed.

2. At a younger age realising  post FIRE that things arenít going well and I need to go back to full time work. Having retired or gone part time I think my mental well-being would really take a hit here.

As a result I tend to be a bit more cautious myself and am also happy to work part time for longer to cover basic expenses.

poppydog

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Re: Assumption is the mother of all failures
« Reply #7 on: November 06, 2017, 09:13:24 AM »
I'm not going to target a withdrawal rate as such when we retire next year.  Mrs PD and I both have DB pensions that will cover the basics, and the state pension will come along in a few years as well.

Our investment pot (SIPPs and ISAs) will provide the discretionary spending and is invested in a diversified range of income focused Investment Trusts with an overall yield of just under 5%.  I intend to spend the income from these and not touch the capital, for several years at least.

never give up

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Re: Assumption is the mother of all failures
« Reply #8 on: November 07, 2017, 02:16:38 AM »
That sounds like a very safe plan PD. Having read more over the last few days Iím tending to move towards a safer set up myself. One article I read mentioned multiplying living expenses by 1.8 if about 15 years away from draw down I.e. to cover inflation. When I multiply the result of this by 25 my FIRE total seems miles away.

I need to be careful not to build in too many safeguards but struggling at the moment to get a balance between a budget that allows me to cut back if needed, with a solid withdrawal rate and that caters adequately for inflation. Being 40 means a poorly returning stock market over a 10 year period is really going to hamper me.

Iím probably better to just save hard for 5 years and then see where that has got me before attempting to make more concrete predictions/assumptions.

londonstache

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Re: Assumption is the mother of all failures
« Reply #9 on: November 07, 2017, 06:28:32 AM »
I'm not going to target a withdrawal rate as such when we retire next year.  Mrs PD and I both have DB pensions that will cover the basics, and the state pension will come along in a few years as well.

Our investment pot (SIPPs and ISAs) will provide the discretionary spending and is invested in a diversified range of income focused Investment Trusts with an overall yield of just under 5%.  I intend to spend the income from these and not touch the capital, for several years at least.

I think this is the natural and logical approach. Rather than insist on taking 4% regardless of the market conditions, just take the natural yield. This would be my plan...

Playing with Fire UK

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Re: Assumption is the mother of all failures
« Reply #10 on: November 17, 2017, 12:16:34 AM »
Good to see a range of different views here. Thanks for such a detailed response RIT. For me the two absolute worst things about FIRE would be:

1. Running out of money at an age where itís too late to work and do anything about it. I appreciate state pension maybe sufficient though at this age but even so the plan has failed.

2. At a younger age realising  post FIRE that things arenít going well and I need to go back to full time work. Having retired or gone part time I think my mental well-being would really take a hit here.

As a result I tend to be a bit more cautious myself and am also happy to work part time for longer to cover basic expenses.

I'm interested that you think like this.

For me, it would be far worse to decide to work an extra 10 years to go from a 4% WR to a 3% WR and find out I had only weeks to live after 5 years of optional/security work, and that I'd spent FI time in the office rather than doing what I choose.

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Re: Assumption is the mother of all failures
« Reply #11 on: November 17, 2017, 10:37:59 AM »
Quote
I'm interested that you think like this.

For me, it would be far worse to decide to work an extra 10 years to go from a 4% WR to a 3% WR and find out I had only weeks to live after 5 years of optional/security work, and that I'd spent FI time in the office rather than doing what I choose.

Hi Playing with Fire UK,

Yes interesting isn't it. Many of MMM's blogs are around the maths and with numbers and facts a lot of this stuff is fairly clear. However having spent more time on the boards the psychology and varying different opinions is extremely evident, especially regarding attitude to risk. There weren't many replies to this thread but in terms of responses we had (1) 4% is fine, (2) 2.5% is fine (3) just want to use dividends. Quite a variance!

For me running out of money or it becoming obvious I was running out of money and being too old to do anything about it would be far worse than working extra time to achieve some sort of additional feeling of security. However what does this mean? If the work was in a horrible stressful job with the boss from hell then that would be terrible (especially if FIRE had effectively been achieved already). However if someone quite enjoyed their job and the stress levels/downsides were acceptable then is this so bad? I think it depends how much extra time.

At the moment I am working on bare bones, not too bad, ideal and plentiful budgets. I'm finding that a FIRE total providing my ideal budget at 4% WR actually provides my not too bad budget at a 3% WR. Due to this I agree, rather than work 10 extra years (ouch) I would rather use the flexibility in my budget and cut back in down turns to reduce risk. I understand this approach.

I don't know if this is the right way of looking at things. I'm just playing about with budgets and the understanding of how much I can live on and how this impacts what total I need to reach.

shelivesthedream

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Re: Assumption is the mother of all failures
« Reply #12 on: November 17, 2017, 10:54:56 AM »
Nevergiveup, I hear you on running out of money being the worst thing ever. I think we share a lot of money fears! However, there are two prongs to this:
1.   Working for longer to have a bigger stash.
2.   Not operating on the tightest possible FIRE budget with no flexibility.

OMYers tend to emphasise the first over the second to a degree that I find excessive. Yes, I would hate to be looking for a new job at 60 with a fifteen year gap. But would I mind deciding at 60 that I couldnít afford to go on holiday every year? As with the FIRE equation, successful long-term planning involves considering both stash size and possible expense reductions. Lots of people here have tiered FIRE budgets: all-out everything-I-ever-wanted luxury, middle-of-the-road expected spending, and bare bones essentials. You plan for the middle one and have some leeway to adjust upwards or downwards depending on what happens.

When I eventually come to actually planning my permanent FIRE, I intend to write out a specific expenses contingency plan of things I could cut and how it would affect my longer term prospects. Because running out of money wouldnít come out of nowhere unless the actual apocalypse happened. Youíd notice a steeper-than-expected stash decline over a few years and have the chance to change paths accordingly. Maybe the stock market really plummets for several years in a row Ė you make your planned cutbacks and decide to do that for two years and see how it goes. Either things bounce back or itís clear that your stash is still dwindling uncomfortably fast. So you spend a year or two looking for a job or deciding to sell your house and downsize or whatever. Your stash wonít go from fine to zero in six years Ė you have time to see the iceberg and alter your shipís course. And you donít have to wait til itís a disaster in the making Ė if you FIRE and three years later feel uncomfortable living off your stash (even if itís doing fine), you can get a job then. The IRP wonít come and get you!

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Re: Assumption is the mother of all failures
« Reply #13 on: November 18, 2017, 11:50:53 AM »
Thanks sltd. Yes youíre right I have overplayed the chances of running out of money as of course preventative steps would be taken along with continuous monitoring of the situation.

I can also see how the one more year problem could affect someone cautious like me. I think to some extent this must arise from not trusting the plan. Having worked at the same company since Uni it will be difficult for me to leave and when I do it will only be because itís the right time. I would rather have the correct level of safeguards built into the plan and then trust it rather than continuing to work.

As per playing with fire UKís thoughts though itís important the safeguards donít cause an extra 10 years worth of full time employment.

It sounds as though itís prudent to understand different levels of budgets, which is thankfully something I was naturally doing anyway.

ExitViaTheCashRamp

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Re: Assumption is the mother of all failures
« Reply #14 on: November 19, 2017, 12:20:10 PM »
I've often seen the assumption of no state pension, but the odds of that seem truly vanishing small to me. As you know, there are bucket loads of folks who save nothing at all, almost everyone else saves a tiny percentage of their income. Even those lucky enough to have civil service pensions don't generally end up with enough to live on that alone. So the idea that a future evil prime minister curling his pencil mustache taking it away from people who have little to no pension seems basically impossible to me - they certainly wouldn't survive the following general election.

 The only risks I see with it are becoming means tested under Corbyn. However, even that seems unlikely to me to hit mustachians since our pots are not going to be measured in the millions and the income they generate still considered small beer.

 Who knows, maybe I am badly wrong and McDonnell will come and steal all my money with a 99.25% income tax during the UK vs EU war of 2032-5 (as has been seen in WWII) or even the 136% income tax (yes really) from Roy Jenkins. I'm happy to bet against it

shelivesthedream

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Re: Assumption is the mother of all failures
« Reply #15 on: November 19, 2017, 01:41:23 PM »
I also simply do not believe that there will be no state pension unless we reintroduce workhouses. But I expect my expenses (either necessary or desired) to go up as I get old and then elderly. I'm not factoring it into my FIRE plans based on my current lifestyle but I am assuming it will be there to cover some old-person lifestyle inflation, like getting taxis to the supermarket or paying someone to do odd jobs or buying expensive orthopaedic shoes. So I am absolutely assuming it will be there in forty years (in some universal form), but that doesn't mean it's a line item in my FIRE plan.

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Re: Assumption is the mother of all failures
« Reply #16 on: November 19, 2017, 02:01:40 PM »
I agree. Most on here seem to assume they will get something but donít factor it into their FIRE total which seems sensible to me. Even if it just offsets inflation to some extent it would be useful.

Playing with Fire UK

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Re: Assumption is the mother of all failures
« Reply #17 on: November 20, 2017, 04:38:19 AM »
I don't know if this is the right way of looking at things. I'm just playing about with budgets and the understanding of how much I can live on and how this impacts what total I need to reach.

I suspect that for something like this, the way you think about it is the right way (for you), and the same for me. Even if those things are very different, the things that reassure us are inherently personal.

I agree that the state pension could be means tested, but I don't see it disappearing. I'm confident that there would be many people with bigger problems than me if that happened though, and I think the system would stop short of allowing people to starve in the streets.

Jamese20

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Re: Assumption is the mother of all failures
« Reply #18 on: February 05, 2018, 06:26:49 AM »
Hi guys

Love the fact there is a UK perspective on these things as I am a UKer myself.

I read somewhere that the updated UK specific swr is 3.5% which is still not far off, however I believe it is if you invested in UK only stocks.

I intend to be global as the UK is only 6% of the market so I still feel 4% is good enough and it is somewhat a worse case perspective in itself.

I think one way is to avoid Keep taking the inflation rises ever year, I don't believe really that you feel this every year, like last year inflation was 3% but my costs have remained really the same for the basics.

Even if you just gave yourself a raise every few years you are drastically increasing the chances of survival.

For me, I intend to get to 20  times my expenses in one stash whilst contribute to my workplace pension which is quite generous at the moment as a nice back up boost when I hit 55.. I also factored in Also always paying a mortgage which Will drop off around 60.

I would rather put a couple of safety margin in place than worry about dropping from the worse case scenario of 4% inflation adjusted withdrawals

edgema

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Re: Assumption is the mother of all failures
« Reply #19 on: February 05, 2018, 07:54:15 AM »
As a general point, it is worth remembering that the FTSE 100 is 70% non UK revenues so already is pretty much 'global' exposure. It is annoying for a GBP investor to deal with currency fluctuations in other indices but the FTSE 100 only really hides this for a GBP investor (with a bit of hedging) rather than taking that away. My preference is to be globally diversified as I have no particular belief the UK is set to outperform the rest of the world over the next 20 years (perhaps the opposite).

My withdrawal rate will be about 4.5% so higher than most. The reasoning being that this is the amount covered by our investment properties (c55% stash) and the rest is long term gravy. Yes we have to work a little on managing the properties so it is not true passive income but I like the fact that our total budget comes in the form of yield and then the remaining c45% in equities/cash gets to compound over time and perhaps never get touched.

I understand property has different risks versus equities and also means we cannot move to Japan for a year, but we have young kids so that isn't going to happen anytime soon anyway. There is also a regeneration 'story' around the properties we have bought (£80,000 per flat in Plymouth) which I think will pay off over time.

My problem with all the equity back-testing, modelling and failure rate analysis is that I simply know I would struggle being a seller of shares at the age of 42. The title of this thread says it all, and any calculation of SWR is not only full of assumptions, but then compounds them over decades. You only have one life and for me I don't find it that helpful to know that in 50% of cases I die rich and 5% I am broke at 70 (numbers made up). Small changes in inputs have such huge implications and no amount of modelling can change that. I have build financial models all my career and have a deep wariness over drawing strong conclusions, or making life changing decisions, based on them.

For me at least, all the analysis in the world will not stop me looking forward to the (hopefully long) runway ahead and feel like I am eating into the nest egg the moment the last payslip comes in and I actually have to sell shares. That conservatism would put me into the 2.5% withdrawal type of person and that just feels like working too long for too large a stash. So instead, we have locked ourselves into 1-2 days a week of work split between me and my wife and we get to retire sooner when comparing to building up a monstrous stash on a 2.5% WR.

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Re: Assumption is the mother of all failures
« Reply #20 on: February 05, 2018, 10:20:29 AM »
I'm not going to target a withdrawal rate as such when we retire next year.  Mrs PD and I both have DB pensions that will cover the basics, and the state pension will come along in a few years as well.

Our investment pot (SIPPs and ISAs) will provide the discretionary spending and is invested in a diversified range of income focused Investment Trusts with an overall yield of just under 5%.  I intend to spend the income from these and not touch the capital, for several years at least.

I think this is the natural and logical approach. Rather than insist on taking 4% regardless of the market conditions, just take the natural yield. This would be my plan...

Makes no difference taking natural yield or selling shares, one is not safer than the other

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Re: Assumption is the mother of all failures
« Reply #21 on: February 05, 2018, 10:52:25 AM »
Quote
I think one way is to avoid Keep taking the inflation rises ever year, I don't believe really that you feel this every year, like last year inflation was 3% but my costs have remained really the same for the basics.

I have started calculating my own personal inflation rate as I think this is an important point. I want to know how my expenses are changing not the headline rate.

Quote
My problem with all the equity back-testing, modelling and failure rate analysis is that I simply know I would struggle being a seller of shares at the age of 42. The title of this thread says it all, and any calculation of SWR is not only full of assumptions, but then compounds them over decades. You only have one life and for me I don't find it that helpful to know that in 50% of cases I die rich and 5% I am broke at 70 (numbers made up). Small changes in inputs have such huge implications and no amount of modelling can change that. I have build financial models all my career and have a deep wariness over drawing strong conclusions, or making life changing decisions, based on them.

Yes selling shares at 42 would seem quite scary I agree but I guess there are a couple of things here. (1) This is a lot less scary if its not the only income stream (2) If someone reached 47 and things weren't going well its not too late to reassess, move somewhere cheaper, get a job etc.

It is very much for each individual to find what they are comfortable with. I've learnt a reasonable amount since starting this thread and for me I have a couple of safeguards that make me feel comfortable. The first is I have three budgets and my FIRE total is based on the highest one. I can cut back on expenses if need be. The lowest budget is about 2.8% WR. Secondly I would like to hit my FIRE total and then work part time. I think it would be a good transition into full retirement and I would still like to be part of a team, have somewhere to go, bit of structure to the week etc. I would have thought 2 or 3 years part time would make a positive contribution to success rates, but with the knowledge you could quit anytime if you weren't enjoying it and wanted to try something else.

edgema

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Re: Assumption is the mother of all failures
« Reply #22 on: February 06, 2018, 06:25:18 AM »
Never give up - As you rightly say, each of us is solving for different personalities, amount and budgets. That said, I think this forum is great for discussing ideas.

For me I know I almost certainly won't have the ability to come back to this career and never want to work for someone else again. I suppose the property management is a 'side gig' of sorts, but I don't really want to be forced into something else. As I say, I am also a worrier. Put all that together and my plan needs lots of safeguards. Luckily I am a high earner so I can earn these safeguards over a relatively short period of time, so I am exchanging relatively small amounts of 'life' for a lot of buffer.

One of my unknowns is how much our lifestyle cost will come down when I FIRE. Presently my life is absurdly expensive as I live in Devon but weekly commute to London. This means trains, rent, fuel and a bunch of other costs (all after 40% tax) which will disappear. Further, my wife is on her own with the kids in the week so fairly stretched with looking after them and running the properties so not living as efficiently as we probably can when we both have more time.

We have been very conservative in our FIRE journey in that we 1) already moved to a lower COL place 2) already made the property investments we think will finance our life. The quid pro quo of that has been high lifestyle costs presently due to our slightly crazy life (4.30 am alarms on Monday morning - sorry but I am going to buy a coffee at the station!).

So I struggle with knowing what my 'lowest budget' is. I am hoping for a big 'dividend' to come from having more time to live life more efficiency, remove all the commuting costs, and pay WAY less tax.... the spreadsheet says these things will happen but I cannot presently live my post FIRE life so cannot bank all those gains.

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Re: Assumption is the mother of all failures
« Reply #23 on: February 06, 2018, 11:08:50 AM »
Yes I agree the forum is a great place for getting different viewpoints and thinking of things from a different angle. I appreciate its difficult if you don't have certainty around expenses. I've spent more time analysing my costs and setting these three budgets than anything else since I found these forums. Knowing my budget has obviously led to my FIRE number and in turn my investment strategy. So they've been core to everything I've worked on.

I tended to look at it as core expenses versus entertainment. Core expenses e.g. food, council tax etc will need to be paid. Entertainment though is something that can be assessed to some extent now and would likely be the first thing cut in tougher times. E.g. If someone budgets for four holidays a year, a season ticket at their favourite football/rugby club, cinema/theatre once a week then there is a fair amount that can be cut back on. Its a tough year market wise, then just have one holiday and only go to the theatre once a month. That may be enough to reduce the withdrawal rate by 1 percent.

Some may not want to cut back though in which case they may only have one budget or their low budget is actually high. Again I've really tried to look at what would I want to do with my time once FIRE'd and how much would that cost. It really all comes down to that balance between time and money, and how much longer does someone want to work to obtain the buffer and safeguards that make them comfortable. It is an interesting topic and not easy to find the right answers.